Page 1 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China

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1 Page 1 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China Appreciation in China - Impacts of the development for the German industry Evaluation doing of Impact business in China of Renminbi Appreciation on Business Performance of German Companies in China A study by EAC- Euro Asia Consulting in cooperation with the German Chamber of Commerce in China (GCC) Summarized for WirtschaftsWoche Shanghai/Beijing, March 14 th, 2012

2 Page 2 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China Index 1. Executive Summary 1. RMB Appreciation and Its Impact 3 2. Strategic Implications 4 3. Future Competitive Environment 4 2. Introduction 1. Background on the Study 5 2. Overview of Companies Involved 6 3. Renminbi Appreciation 1. Opinion on Renminbi Appreciation 6 2. Expected Further Renminbi Appreciation 8 4. Impact on Doing Business in China 1. Overall Business Operations 8 2. Procurement Activities 9 3. Financing Activities 9 5. Strategic Implications 1. Measures Taken by German Companies Strategic Measures Financial Measures Localization Strategies 1. Stage of Localization Difficulties due to Localization Improvement of Localization Strategies Advantages of German Companies in China Future Development 1. Market Environment Chinese Enterprises German Enterprises Competitive Environment 19

3 Page 3 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 1. Executive Summary The Renminbi appreciation has been an ongoing topic in the past. The USA is increasing its political pressure and asking for an even further appreciation - and so far China has obeyed and already appreciated its currency (against the US Dollar) by approx. 30 per cent since One question however remains: Does the imposed political pressure have any significant positive or negative influences on companies operating in China? To answer this question, EAC- Euro Asia Consulting and the German Chamber of Commerce in China (GCC) have conducted a study among 30 German companies doing business in China, aimed at identifying the impact of the Renminbi appreciation on business operations in China, especially among German companies, their current operations and future business strategies. 1. Renminbi Appreciation and Its Impact China s Renminbi appreciation is seen as a necessity, which will support the growth of the overall Chinese economy as well as the wealth of its middle class. German companies included in the study appreciate the intervention of the Chinese government to ensure a constant and less volatile development and do not see any impact on their business operations if this development continues in a predictable manner. This is caused by the high localization rate of their business activities in China. China s Renminbi appreciation is seen as a macro-economic factor that can neither be reversed nor stopped due to the global political and economic pressure. This development will help China s economy to further grow and also support the overall target of the Chinese government to transfer China s low value-add industries towards rather hightech ones. Companies interviewed see the appreciation as a chance for the further growth of the disposable income of the domestic middle class and local consumption. They appreciate the intervention of the Chinese government as this ensures a gradual appreciation, which is stable, less volatile and can better be included in their planning processes. When asked about their own business operations in China, companies included in the sample do not see any negative impacts resulting from a further (gradual) Renminbi appreciation. High localization and domestic operations independent from the exchange rate developments are major reasons for that. Such localization does not only include the set-up of strong local footprints but also the adaption of products, go-to-market approaches and pricing concepts to the local requirements and needs.

4 Page 4 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Strategic Implications Being highly localized, many German companies in China have adjusted their China strategies to the local market and do therefore barely see any measures to be taken due to the past, present and future Renminbi appreciation. Due to the growing market in China however, many saw (and still see) the need to not only focus on the high-end market segments anymore, but rather move towards a broader mid-end market. Only 23 per cent of German companies interviewed stated that they are taking specific measures in expectation of a further Renminbi appreciation. The others stated that their localization is implying other strategic approaches that are much more important. In the past, many of the companies included in the sample operated solely in the premium segments. By now, they focus increasingly on the broader mid-range market as well - and are therefore directly competing with local enterprises. This requires those companies to further adjust their supply and value chains in China and adapt their product variety and characteristics. The need for further localization is additionally fueled by a high price sensitivity of the Chinese customers as well as high cost inflation, seen for instance in rising labor and material costs. 3. Future Competitive Environment Overall, German companies talked to are confident that the Chinese market will further grow and their business thus be expanded. However, they also realize that domestic competition will increase significantly, mainly due to a better access to foreign markets and technologies and improved domestic cost structures. Therefore companies involved in the study agreed that they have to become both, more efficient and innovative in the future to stay competitive. 77 per cent of the enterprises included in the study expect to further gain market share in the future and thus take advantage of the still growing domestic market in China. One major development seen in China has been identified as a strengthening competition. Domestic companies have gained in number and size and have also been able to significantly improve their product quality in the past. The Renminbi appreciation forces Chinese enterprises to become more competitive in an international comparison. Made in China can no longer only be competitive based on cost advantages due to rising prices abroad caused by the strengthening Renminbi. Hence, Chinese companies have to increase their efficiency and productivity, make their production processes leaner and improve their product quality. Local companies could also benefit from the Renminbi appreciation by getting cheaper access to foreign technology as well as potential acquisition targets and international markets. For the future, this development implies that both foreign and local companies have to constantly become more competitive and efficient and have to adjust their production processes to those known from operations in developed countries. Besides factors such as process improvements and expansion of currently established business operations, especially innovation will become one of the major differentiators in the future, which is one aspect where especially German companies see a great potential for themselves.

5 Page 5 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Introduction 1. Background on the Study The appreciation of the Chinese currency has been an ongoing topic since 2005 and has been discussed in the media extensively. For many however it seems as though this is a rather politically-driven topic. The USA constantly encourages China to further appreciate the Renminbi against the US Dollar. For them the Chinese currency is still undervalued in order to keep domestic exports more competitive internationally. And China partially complies with this pressure: Since 2005, the Renminbi appreciated by approx. 30 per cent compared to the US Dollar, despite the exchange rate being rather frozen between 2008 and 2010 due to the global financial crisis. In the past 6 months, a further appreciation by 2 per cent could be identified. This however is considered to be insufficient and not fast enough by the US government. Others support China s decision as they fear that a sharper appreciation would have devastating impacts on China s domestic markets, including the significant downsizing of its export business and thus severe increases in unemployment. In the future, China has to continue this development - being looked at by an increasing number of international leaders and governments. Both, Barack Obama and Angela Merkel emphasized on recent visits to Asia and China that due to its rise in economic and political power internationally, China also needs to increase its responsibility and involvement in international markets in a way that everyone can benefit from it. China agrees that the export-driven economic model might not be sustainable for the future. In the 12 th Five-Year Plan, the Chinese government has already outlined certain ambitions to reduce the dependence of China s economy on the exporting business and to rather support the domestic consumerism to become a major factor of China s anticipated further growth in. However with the current economic slowdown in Europe and the US, China s most important export markets, the government has already announced to stop further appreciating the Renminbi if the situation continues to worsen due to the need for a rather stable exchange rate at such times. Based on the above described political discussions and developments, EAC- Euro Asia Consulting in cooperation with the German Chamber of Commerce in China (GCC) wanted to find out the impact of the Renminbi appreciation on the real economy. There are more than 4,000 German companies in China and this study has been conducted to identify strategic and operative measures and approaches that some of those companies are applying in China to stay competitive in the future and ensure China to remain one of their major growing markets.

6 Page 6 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Overview of Companies Involved The sample of companies that EAC has talked to in the course of this study includes 30 companies, covering a broad range of industries as well as company sizes: Industries covered include Machinery, Automotive, Electronics/ Electronical, Life Science/ Chemical, Consumer Goods, Domestic Appliances, Construction, Financial and Logistics Companies involved in the survey can be classified as DAX, MDAX and other enterprises Annual Turnover in China ranged from less than 10 to more than 7,000 mio EUR, 13 per cent of the companies did not openly announce their turnover figures 3. Renminbi Appreciation 1. Opinion on the Renminbi Appreciation All company representatives agreed that further Renminbi appreciation is necessary as it will encourage future growth of the Chinese economy. The exchange rate development however is seen as a macro-economic development introduced by the government that can neither be reversed nor stopped as it is also promoted by foreign government and political decisions. The companies talked to thus consider it to be a natural process that is in line with the value-adding production development. This was also stated by one of the participating domestic appliances companies: It has been an ongoing topic. China has exported a lot of very low-cost products, primarily to the US. Recently, the value of those products has been going up the Chinese have started to increasingly focus on higher-value products, they have invested in more R&D and naturally have seen an increase in wages. Naturally, the currency had to appreciate as well. None of the companies involved could identify any significant impact of a potential Renminbi appreciation on their business operations in China in the near future. 2 major reasons were commonly named for that: Renminbi is still strongly linked to US Dollar. This still rather strong relationship is taken into account by all of the companies operating fully or partially in US Dollar and can even be

7 Page 7 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China taken into account in their yearly planning and calculation processes. Most companies (not purely focused on the domestic market in China) however stated that the majority of their import and export business is done in Euro. Additionally, for most companies the annual results will be consolidated by their HQ in Germany and thus also converted into Euro. As the Euro-US Dollar development (and hence the Euro-Renminbi development) is highly volatile, most companies stated that the weakening or strengthening of the Euro has a much higher impact than the appreciation of the Chinese currency. Especially the automotive industry was highly aware of this problem: Despite the current appreciation, the development of the Renminbi (against the US Dollar) has been very steady, which allowed us to include the expected further development in our planning processes already. We are much more struggling with the Euro currency development, as this has been much more volatile. German companies interviewed for the study are highly localized. They are wellpositioned in the Chinese market and have in most cases established local sourcing and sales and distribution channels and often solely depend on local cash-flows as well. Many stated that they are rather independently from the development of the Renminbi as well as other exchange rates as they are purely operating in Chinese currency. Additionally, the companies implied that they appreciate the involvement of the Chinese government and consider the gradual appreciation of its currency as highly supportive for the growth of the Chinese economy as well as the planning instruments of foreign companies active in China: I am impressed with the continuity of the Chinese currency policy. It is a policy one can plan with and rely on. The Renminbi appreciation might be too slow for the country, but it is the perfect speed for the global economy. (Company Representative of the Consumer Goods Industry) A more sudden and sharp appreciation would lead to severe obstacles in the Chinese market. Companies talked to feared that such development would destroy a large part of China s economy major parts of the export business. They stated that this might eventually lead to a halt of the currently seen wealth development of China s middle class and would thus also lead to problems for foreign companies selling to the domestic market. Even though the US is putting pressure on China, the Chinese government is letting the Renminbi appreciate gradually. A completely free exchange rate would bring severe risks to us, but the current approach is rather stabilizing the domestic market and the world economy. (Company Representative of the Automotive Industry)

8 Page 8 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Expected Further Renminbi Appreciation The majority of company representative talked to expect an annual appreciation of 3 to 5 per cent in the upcoming years. However some also expect the development of the appreciation to be much more volatile, as the following quote by one interviewee of the automotive industry outlines: The direction of the Renminbi appreciation will not remain a one-way direction anymore higher fluctuation is expected, going in both directions. For fixed (yearly) budget calculations and planning, the Euro-Renminbi exchange rate used for at the business entities in China ranges from The majority of companies however is using a Euro-Renminbi exchange rate between Almost ¼ of companies said that they do not have a fixed exchange rate for yearly budget calculations, but rather adjust the exchange rate individually, based on current developments. This has been justified by the fact that most of their trade is being done in Renminbi and thus independently from other currencies. 4. Impact on Doing Business in China 1. Overall Business Operations 70 per cent of companies stated that they cannot identify any or only a marginal impact of the Renminbi appreciation on their overall business activities. Many said that even though imports into China are becoming cheaper, this development is not significant enough to really have an impact on their business activities. Others said they do not believe that such lower prices for imported goods will remain for a longer period in the future: Our company operations are localized and we manufacture for the local market only. Due to a number of imports (that we still have to do because of a lack of those products in China) we are currently experiencing a positive impact. But we do not expect those advantages to be long-term as other developments, such as inflation and rising wages have a much larger impact. (Company Representative of the Automotive Industry)

9 Page 9 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Procurement Activities 70 per cent of companies also do not see any significant impact on their procurement activities. 23 per cent of all companies interviewed identified a positive impact of the Renminbi appreciation on their procurement activities. Out of that share, only one company said that they are pro-actively taking advantage of this development, all other companies implied that they are taking away the additional profit but do not change their purchasing activities or strategy in any way: Cheaper imports have a short-term positive impact, but we do not change any of our strategic decisions. We do not like to do any kind of speculations and rather stock our warehouses based on cost optimization. (Company Representative of the Automotive Industry) 3. Financing Activities None of the companies could identify any current impact on their financing activities. One company stated that it might have a future impact with a strengthening Renminbi they might soon have to better justify their investments as the HQ in Germany could ask for higher ROI due to higher risk factors. Currently however this cannot be noticed.

10 Page 10 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 5. Strategic Implications 1. Measures Taken by German Companies Most companies (77 per cent) said that they are not taking any measures in expectation of a potential further Renminbi appreciation. 2 further reasons for this decision were named by the interviewees: As previously stated, the majority of companies involved in this study do not identify significant impacts of the development of the Chinese currency on their business operations. Our HQ in Germany is doing certain types of hedging. But for us, operating in China and trading in Renminbi this is not necessary. (Company Representative of the Electronics/ Electronical Industry) Many companies are already including a strengthened Renminbi in their yearly forecasts and calculations. 2. Strategic Measures Only 6 per cent of companies stated that they are applying any strategic measures due to the appreciation of the Renminbi: One company in the domestic appliances industry stated they have increased their imports and filled up their warehouse in China to exploit the stronger Renminbi and weaker Euro: We have increased the imports to take advantages of the weaker Euro until the additional warehousing costs were lower than the savings by doing so. As this however has been fully exploited by now, imports are at a regular level again. One company in the automotive industry admitted that they are already assessing other markets in South East Asia to become their next potential procurement market as China cannot be used as a reliable source for cheap products much longer. They however also stated that such measures can only be realized if no high investments had been done in China previously, but if one had rather only relied on external suppliers. It had further been said that price was the only motivator to enter the Chinese market initially and that they are aware that they will not be able to take advantage of the growing Chinese market if they will move their supplier base to other countries: We are already assessing different locations, but it is a very long process. It will be difficult to get to know detailed information on various business requirements/ processes and potential risks, but we still consider it to be a valuable alternative to further extension in China even if this will imply that we might lose potential further customers in China.

11 Page 11 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 3. Financial Measures German companies talked to do not like to get involved in risky operations or speculations but focused on basic forms of hedging, such as forwards (e.g. raw materials, large contracts) and currency options. Many said that often the costs for hedging are just as high as relying on the gradual appreciation of the Renminbi without any further actions. This was often named with regards to the possibility of forwards for contracts agreed on in US Dollar when securing the company against future Renminbi appreciation. Offshore Renminbi -accounts (e.g. in Germany) are not used by any of the companies that participated in the survey. It has been considered by a number of companies already, however none of them could see any significant benefits for their business. Companies also stated that they tried to rely on natural hedging as their greatest protection against currency risks. Most companies try to position and establish themselves in the Chinese market in a way that they source, manufacture and sell as much locally as possible: We have fully localized our supply chain in China we purchase, manufacture and sell everything here, in Renminbi this is the greatest form of hedging we can do. (Company Representative of the Electronics/ Electrical Industry) This allows all major transactions to be done in Renminbi and decreases the risk of losses due to exchange rate developments. It further improves the efficiency and adaption of foreign companies in the Chinese market. 6. Localization Strategies 1. Stage of Localization The majority of German companies in China that are included in the study are highly localized. 70 per cent of all companies are manufacturing locally primarily for the domestic market. Those companies have set-up a strong local footprint and have highly adapted their products, go-to-market approaches and well as their pricing strategies. 13 per cent import products (primarily from Germany), which are then sold to Chinese customers. Those companies are operating almost exclusively in the premium and luxury market.

12 Page 12 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China Another 10 per cent of companies is manufacturing in China and mainly exporting those products to Western markets. Such products often include items that are highly price-sensitive even though a certain quality level has to be ensured, the manufacturing process generally is not as advanced as for high-tech machinery. 7 per cent of companies talked to are not manufacturers of goods but service providers. Those companies target their services to both local and foreign customers. 2. Difficulties due to Localization With an increased degree of localization, a greater number of difficulties specific for the Chinese market have to be dealt with. Such obstacles can generally be categorized as follows: Cost factors Demographic factors Factors regarding the Chinese business environment The greatest problem was identified as rising labor costs 87 per cent of the German companies talked to are currently facing this problem in China. Many companies implied that this problem has even worsened in the past: As stated by many, this development requires a very strong increase in efficiency improvements as well as automation of processes. One company representative of the automotive industry summarized the problem as follows: It is starting to become a fierce problem. It could be rather easily dealt with some years ago due to the significant growth in China, but this is now putting an ever increasing pressure on efficiency increases.

13 Page 13 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China Such efficiency improvements however can only be realized by most German companies up to a certain degree. Since entering the Chinese market, many have tried to implement efficient process cycles known from operations in other markets already. This often provides them with a competitive advantage compare to local enterprises, however it now also provides less opportunities for even further enhancement. A company representative from the domestic appliances industry also stated that point: Rising labor costs can be compensated by increased efficiency, however only up to a certain degree. German companies are often much more automated already and thus there is only limited room for improvement. Chinese companies on the other hand often are just now starting to improve their processes and can still gain much more through increased efficiencies. Inflation is still considered a large problem by half of all companies talked to, mainly because it is considered to be the major reason for rising material costs in China. Almost 40 per cent of all companies interviewed are also experiencing a significant cost pressure from Chinese competitors. According to those companies this mainly is cause by overcapacities of Chinese competitors. This results in those local companies to offering prices at only minimal profits to receive more order. Another big problem has been identified in finding highly qualified labor and retaining them in the company. Those problems have been identified by companies throughout all industry segments. Major arguments for this problem were identified in the lack of adequate training and there thereof resulting gap between capabilities and working experiences of German and Chinese employees: Finding qualified employees is a big problem, many workers are still not trained well. There has been an improvement seen in the past years (since there are many international companies, which improve the educational standard), but nevertheless it can still be said that 10 years of working experiences in China can be compared to approx. 3 in Germany. (Company Representative of the Logistics Industry) It is very difficult to find employees capable of a certain job for a reasonable salary. The speed and independence workers should show still is very different in China. Especially the management still has a lot of room for improvement. The experiences they have, their efficiencies and their leadership skills are still very different. (Company Representative of the Automotive Industry) The business environment in China still shows several obstacles. Examples can be seen in the overall market environment not being very transparent, discrepancies between different provinces, governmental support for local competitors as well as IPR protections. Further specific examples given by the individual companies can be seen below. Laws are still often "subject to interpretation". (Company Representative of the Domestic appliances industry) Government still has too many restrictions such as limiting the M&A activities. In addition, certain key industries are still considered to be closed segments, even though they are much more open in other emerging countries (e.g. energy and infrastructure sector). (Company Representative of the Automotive industry)

14 Page 14 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China Government favors local companies. It seems as if foreign companies are often tolerated, but not welcome. (Company Representative of the Domestic appliances industry) Business conditions start to become more normal. China can now be better compared to other international operations (in emerging countries) based on standards and business processes. (Company Representative of the Automotive industry) 3. Improvement of Localization Strategies Despite the previously described obstacles of German companies operating in the Chinese market, they still see a significant market potential in China. For this reasons they have continuously tried to adapt themselves to the local market conditions. Such adaptions have also been necessary. 60 per cent of all companies stated their adjustments to the Chinese market environment have helped them to better cope with the specific characteristics of the local business practices even though the overall situation of doing business in China did not improve at all. 27 per cent of all companies were able to partially identify improvements seen of the Chinese macroeconomic environment and 13 per cent said that they could not name any improvements and still face the same obstacles as in the past. Two Examples for adaptions to the local business environment were named by a great number of companies: Increase in local management Programs for labor retention We have tried to introduce a number of programs to retain employees, such as improving the working environment and conditions, developing a sense of belonging to the company, introducing compliance with labor laws etc. but none has really prevented us from high employee fluctuation. Certain measures, such as reducing over time work has even worsened the situation, as employees told us they rely on those additional hours to earn more money. For now, a highly competitive salary seems to be the best solution. In addition, for a small number of employees we have introduced a special training and education program, which has been highly successful in retaining those employees within the organization. (Company Representative of the Domestic appliance industry) We have introduced a number of seminars and educational courses to our employees even more than we do in Germany. And even though the impact has been much lower than in Germany, we are sure that without those programs, the situation would have been much worse in the past. (Company Representative of the Automotive industry)

15 Page 15 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 4. Advantages of German Companies in China Despite being highly localized in China and an often fully localized supply and value chain, almost all companies still identified specific advantages due to their German heritage and business culture. Generally, German companies are, among other characteristics, associated with high quality, service & reliability, high brand image, technological know-how and innovation:

16 Page 16 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 7. Future Development 1. Market Environment Overall, German companies talked to in the course of this study are highly confident that the Chinese market will further grow. For this reason, they are also aiming to further expand their business operations locally. For many, this further expected growth in China is fueled by an increased demand from Chinese customers. 70 per cent expect a growing demand, either due to the Renminbi appreciation or overall growing economy and increasing wealth. The latter argument will especially be advantageous for German companies, which are often known for products of higher quality, but also higher prices. This has also been confirmed by a company representative of the machinery industry: Demand from Chinese market will increase significantly. With rising living standards of the Chinese population, they will increasingly focus on high quality products and are also willing to pay a premium for that. 2. Chinese Enterprises Local Chinese companies have constantly improved their products. Almost all German companies included in the survey identified that development in the recent past. The only company that did not see such improvement is one that is solely operating in the luxury market environment. 17 per cent of companies even said that by now, there is no difference anymore between products manufactured by Chinese competitors compared to German ones. But in general, many German companies involved in this study still see themselves ahead of local competitors by at least 2 years and up to 10 years depending on the industry:

17 Page 17 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China Local companies are getting better and better (often through trial and error) and also more innovative. They have managed to greatly improve their quality level already, but nevertheless, foreign companies still are about 2-3 years ahead. If however, German (along with other foreign) companies do not adjust to local demand, the Chinese competitors might catch up much faster. (Company Representative of the Life Science/ Chemical Industry) China will gradually move away from its image of being a low-cost/ low-wage country, and will increasingly develop towards a country focusing on R&D and innovation. Hence, over the long-term, China will catch up, for now however, made in Germany still wins. (Company Representative of the Automotive Industry) When looking at highly specialized products, foreign companies are still far ahead of the competition. Even though the Chinese are developing rapidly, the gap between foreign and local competition will still remain for a rather long time given that the foreign company will keep its innovation power and constantly improves and increases its product portfolio. (Company Representative of the Automotive Industry) Four main reasons for the improvement of Chinese companies have been identified: Natural process of quality adaption and increased efficiency due to increasing experiences. Improved educational system. The educational level also is increasing China s top engineering graduates are by now comparable to those from German universities. (Company representative of the Electronics/ Electrical industry) Upgrade in technology and machinery of Chinese companies. With the appreciation of the Renminbi, access to such foreign technologies, which are often imported, are becoming cheaper for local companies. The motivation to buy such machinery has always been present, now those investments are becoming also affordable. By now, our local competitors buy the machinery form the same source as we do and thus acquire more and more of the know-how we have as well. (Company representative of the Domestic appliances industry) Local companies are increasingly investing abroad. This helps them to get access to international markets and is again supported by the strengthening Renminbi as acquisition targets are becoming more affordable as well. Local competitors have looked at a number of different technologies abroad and have applied them to their own processes afterwards. (Company representative of the Electronics/ Electrical industry)

18 Page 18 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 3. German Enterprises As previously described, German companies interviewed have gradually adapted and modified their operational processes as well as their products to meet the local demand. They have thereby become more efficient and have also been able to adapt locally required product characteristics. For this reason, whereas in the past, they often were competing solely in the premium and luxury segment, those companies are now also broadly focusing on the mass market by targeting their products to a much larger segment of customers. The competitive environment also proofs that - with 83 per cent of the companies included in the sample already competing with local companies in China. With such efforts, most companies talked to are also strongly focusing on further increasing their market share in China. They all see a huge growth potential of the Chinese market, want to be a part of it and further profit from such development. More than ¾ of all companies interviewed intend to further increase their market share, and only 6 per cent see their market share declining in the future. Another 17 per cent does not expect their market share to change. Those are mainly companies operating in the luxury segment, where market shares generally are too low (often below 1 per cent) to be considered a sustainable indicator for future growth). A company representative of the machinery industry has summarized the expected future development as follows: We expect strong competition and consolidation but are confident to gain more market share. As long as the market is growing, foreign companies are growing with the market. In order to realize such goals, a number of strategies measures have been introduced by the companies included in the survey. In fact, many enterprises talked to in the course of the study realized that in the past they have not always worked on constant

19 Page 19 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China improvement of their China strategy. For many years, the operations in China grew simply based on the significant economic growth in China. With rising operational costs described earlier however, those companies have in the past 2 3 years again focused on China as their major growth engine. This process has also been described by a company representative of the machinery industry: We have been in this market for more than 10 years already, but didn t really focus on actively growing until the last 3 years. Now we have a real strategy and are trying to achieve an annual growth of about 20 per cent. Such strategic measures include a variety of different attributes, covering aspects of local adaption, process improvements and expansion: 4. Competitive Environment As described in previous parts, there has been a strong quality improvement of local companies in China, which is also expected to be continued in the future. Globally, all companies included in the study also expect a much fiercer competition than seen in the past for two reasons: Companies agreed that a strengthened Renminbi will increase the global competitiveness of domestic companies. Initially, the low-value/ low-quality product strategy of many Chinese exporters has been very successful. The Renminbi appreciation however led to a constant price increase of such products overseas so that they no longer were perceived to be cheap

20 Page 20 Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China products made in China. Hence, many of those companies are no longer able to compete on a price-driven basis and are thus forced to significantly improve their quality and efficiency as otherwise they might not stay in the market much longer anymore. By increasing their product quality and often also product attributes, they will increasingly start competing with Western companies focusing on higher-quality products as well. Investments of Chinese companies abroad will increase significantly to get more presence in and access to international markets as well as to acquire more technology and know-how. The foreign competition is also expected to increase in China. The interviewed company representatives expect growing foreign investments in the Chinese market. Many however also see the market saturated to a certain extent already. Generally, 2 developments are expected to be seen in the future: Costs of entering the Chinese market will become much higher. Those companies that are not yet operating in the Chinese market will find it even more difficult to enter as operating costs will go up and entry barriers become fiercer. This view has also been shared by many company representatives talked: Slowly companies that are not operating in China already will realize that China is no hidden gem anymore. Market entry barriers have increased and much higher investments are necessary now compared to just a few years ago. (Company Representative of the Consumer Goods Industry) The price for entering China has become much more expensive. For many industry segments, the market is not that young anymore and players are well established already. (Company Representative of the Machinery Industry) Investments of well-established companies will grow significantly as they want to extend their business activities in China. They will use their current presence and brand image and take full advantage of the still massively growing Chinese market: Those that are already here will further invest in China - significant amounts, because they want to be part of China's future growth. (Company Representative of the Automotive Industry) Additionally, it was stated that the development of foreign companies in China will no longer be a one-way street. It is expected that in the future, there will not only be a great number of foreign companies entering China, but also a certain number of foreign companies moving out of China again. This is due to the fact that their primary reasons for entering China cheap labor and production costs can no longer be realized.