Embassy of Sweden No. 3, Dongzhimen Waidajie, Sanlitun

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2 Embassy of Sweden Swedish Chamber of Commerce Business Sweden All Rights Reserved Designed and printed by Elanders Beijing Contact us: Swedish Chamber of Commerce in China Room 313, Radisson Blu Hotel No. 6A, East Beisanhuan Road Chaoyang District Beijing P.R. China Tel: +86(0) ext. 313 Fax: +86-(0) Embassy of Sweden No. 3, Dongzhimen Waidajie, Sanlitun Chaoyang District Beijing P.R. China Tel: +86-(0) Fax: +86-(0) Business Sweden Room 609, 6/F, CYTS Plaza No. 5, Dongzhimen Nandajie Dongcheng District Beijing P.R. China Tel: +86-(0) Fax: +86-(0) Cover photo: Regeringskansliet P2: Cecilia Larsson/imagebank.sweden.se

3 TRENDS AND CHALLENGES 3 Preface China has enjoyed three decades of rapid economic growth since it opened up in Swedish companies and entrepreneurs have been keen to seize the opportunities that the Chinese market has to offer. Swedish companies have performed well and trade with China amounts to approximately 90 billion SEK every year. This makes China Sweden s largest trading partner in Asia. The financial crisis in 2008 has led to sluggish economic growth in the major economies of the world and weakened demand for Chinese goods. However, the Chinese economy continues to grow, albeit at a slower pace. The Chinese government has taken initial steps to reform its financial system and reshape the Chinese growth model from overreliance on exports to domestic consumption and most likely this will lead to a slower economic growth in the short- and medium-term, but Photo: Pawel Flato/imagebank.sweden.se hopefully, sustainable economic growth in the long-term. A sustained increase in domestic consumption will make China a key future growth market for Swedish companies, ranging from the large Swedish multinationals to small and medium-sized companies that can provide innovative and sustainable solutions adapted to the needs of Chinese industry and local consumers. Swedish companies are world leaders in environmental technology and are well positioned to provide pioneering and systemic green solutions to China. The purpose of this report is to increase the understanding of Swedish company performance in China and deepen our appreciation of the opportunities and challenges that the Chinese market poses. In addition, it will hopefully serve as a source of reference in the ongoing bilateral trade dialogue between China and Sweden, as well as for Sweden s international commitments to promote a more open and prosperous business environment for foreign companies in China. I would like to express my gratitude to the companies and persons who have contributed to this year s report. Lars Peter Fredén Swedish Ambassador to China

4 Photo: Lasse Davidsson Executive Summary and Key Findings In general, most companies view the Chinese market as favourable and profitable. However, the overall trend suggests there has been a marginal decrease in the number of companies that have a positive outlook on China compared with the last Business Climate Report in This is evident in areas such as the overall favourability of the Chinese market, profitability, market share, investment climate and the availability of skilled labour. More than half of all the companies are either profitable or very profitable (p.9) Fewer companies are increasing their market shares in comparison with two years ago (p.10) 90% of the companies consider the Chinese market to be favourable or very favourable (p.12) 60% of the companies state that the market favourability has changed in the last two years and 60% of these companies attribute the change to the general market climate (p.12) 60% of the companies are planning further investments in China in the coming two years (p.14) Competition and economic slowdown are the primary barriers to profitability (p.17) Chinese companies are moving up in the value chain and offering goods and services of comparable quality to that of Swedish companies at competitive prices (p.11) Non-transparent governance and infringement of intellectual property rights continue to be substantial trade obstacles (p.20) 63% stated that corruption exists to some extent and 95% of these companies claim that corruption poses a difficulty to their businesses (p.19) Product quality and design are the strongest advantages for Swedish companies, whereas the greatest disadvantages are pricing and government relations (p.18) More than 40% have to some extent experienced difficulties in customs procedures (p.21) Companies think that environmental reforms should be top priority for the Chinese leadership (p.15) The presence of Swedish companies in China has had a positive impact on employment and R&D in Sweden (p.8) 65% of the companies serve customers in China (p.8) Customers to Swedish companies are primarily based in Shanghai, Beijing, Guangdong and Jiangsu (p.8) 37% have noticed increased implementation of CSR and 27% have received increased demands from clients on CSR implementation from customers (p.22)

5 About the Survey The business confidence survey is conducted biannually by the Swedish Chamber of Commerce in China, Business Sweden in China and the Embassy of Sweden in Beijing. The purpose of the survey is to further our understanding of how Swedish companies are performing in China, the opportunities and challenges they face and their outlook for the Chinese market. The report will also serve as a source of reference in the ongoing bilateral trade dialogue and Joint Commission meeting in the autumn of 2013 between the governments of Sweden and China. The participating companies in this year s survey are members of the Swedish Chamber of Commerce in China and range from large multinational corporations to small and medium-sized companies (SME), engaged in sectors such as industry, retail and professional services. Approximately 200 companies took part in this year s survey which is a substantial increase compared with the last survey in 2011, giving a more complete picture of the performance and sentiment of Swedish companies. These companies are either based in Sweden, have Swedish stakeholders, are part of a Swedish conglomerate or have some other significant affiliation with Sweden. Therefore, the results of the survey provide a strong indication of how Swedish business in China as a whole is performing and the general outlook on the Chinese market. New topics have been added in this year s survey covering areas such as CSR (Corporate Social Responsibility), customs clearance procedures as well as practices relating to corruption. There are also questions regarding economic reform.

6 6 TRENDS AND CHALLENGES Photo: Jan Olof Yxell/imagebank.sweden.se When was the first of these entities established in China? (n=208) 3% 18% 16% 34% 29% >30y 15-29y 10-14y 5-9y <5y What is the main nature of your business in China? (n=205) Manufacturing: Consumer goods Manufacturing: Industrial products (B2B or infrastructure) Service: Logistics Service: Financial Service: Consulting 4% 4% 5% Swedish Companies in China About the companies The majority of the participating Swedish companies are either based in Shanghai or Beijing, which serve as the major economic hubs in the Chinese economy. Apart from these two major cities, Swedish companies are also based along China s east coast. Over 60% of the participating companies have been present in China for less than nine years and are predominantly engaged in manufacturing and sales of industrial products as well as in professional services. Wholly owned entities account for 63% of the companies. Other frequent types of legal entities are branch offices, representative offices and joint ventures, which account for approximately 10-15% of all companies. Sales: Retail Sales: Industrial products (B2B or infrastructure) Other 3% % What is the number of employees in your company in China? (n=197) 26% The surveyed Swedish companies employ almost 87,000 people. More than 80,000 are local employees, whereas expats account for approximately 5,500 people. More than 85% of the companies employ 250 people or fewer (including locals and expats). Almost half of the companies (44%) stated that they do not carry out R&D activities in China, whereas 40% do; with 34% of the companies controlling their own R&D activities. The statistics indicate that the basic infrastructure and knowledge base is favourable for R&D activities. Number of local employees: Number of employed foreign nationals:

7 TRENDS AND CHALLENGES 7 Why in China More than 40% of the Swedish companies stated that their primary reason for entering the Chinese market is its size and potential. Almost 30% stated that their primary reason is to serve existing customers in China whereas stated that they are in China to serve customers in Europe or in other markets. What is your company s primary reason(s) for being on the Chinese market? (n=197) Market size and potential Part of global strategy To serve existing customers in China To serve customers in Europe 26% 29% 42% Comment: To serve customers in other markets 17% These figures arguably indicate a belief that China s role as a production hub will decrease in the future, but its importance as a significant domestic growth market will increase. For of the companies, the Chinese market accounts for more than 25% of their annual global revenues. However, 25% of the companies have less than 5% of their global revenues in China. In view of the difficult and challenging economic climate in Europe and the US, China is an important growth market for many Swedish companies. Pre-emptive investment What proportion of your company s global revenues was generated in China in 2012? (n=198) <5% 5%-10% 11%-15% 16%-25% 8% 9% 14% 12% 26% >25% Don t know 11% Prefer not to say 14% Photo: Sonia Jansson/imagebank.sweden.se

8 8 TRENDS AND CHALLENGES Photo: CENTEC, Emabssy of Sweden Customer base In which 3 regions are the majority of your company s customers based? (n=132) Anhui 2% Beiijing Chongqing 3% Fujian 5% Gansu 1% Guangdong Guizhou 1% Hainan 2% Hebei 4% Heilongjiang 2% Henan 2% Hubei 1% Hunan 2% Jiangsu Jiangxi 1% Jilin 4% Qinghai 0% Shanghai Shaanxi 2% Shanxi 2% Shandong 16% Shenyang (Liaoning) 6% Sichuan 4% Tianjin 7% Yunnan 1% Zhejiang 11% 36% 47% 61% 70% Around 65% of all the companies stated that the majority of their customers are based in China, whereas more than 30% stated that the majority are located in Europe. Geographically, the customers of the Swedish companies are based primarily in Shanghai (70%), Beijing (61%), Guangdong (47%) and Jiangsu (36%). Note that the respondents were allowed to select a maximum of three provinces when answering this question, which explains the high percentages for the different areas. Comment: The fact that 65% have the majority of their customer base in China attests to the size and importance of the Chinese market and indicates that the majority of Swedish companies are producing goods and offering services targeted for the Chinese market. However, it is uncertain to what extent these companies are suppliers in the supply chain of goods that are eventually exported from China to other markets overseas. The distribution of customers in China may change in the future in line with the Chinese government s plans to spread growth further west. Shanghai may also further increase in importance in the future thanks to the government s ambition to make the city a leading international financial centre by In addition, the Chinese government has declared that a free trade zone will be established in Shanghai. Has your company s presence and business operations in China had an impact on its operations in Sweden in terms of: (n=69) Increased employment in Sweden Decreased employment in Sweden 12% 64% Presence in China impact on Sweden More than 60% of the companies responding to the question stated that they had increased their number of employees in Sweden. More than 40% stated that they had increased R&D in Sweden. Increased investment in Sweden Decreased investment in Sweden 3% 26% Comment: Increased R&D in Sweden Decreased R&D in Sweden Other 0% 22% 41% The figures above possibly contradict a commonly held view that Swedish companies establishing themselves in China have a significant negative impact on Sweden in terms of reduced employment, R&D and investment in general.

9 TRENDS AND CHALLENGES 9 How are Swedish Companies Doing? Earnings and profitability A marginal decrease in profits In 2012, almost a quarter of the responding companies reported total revenues of less than 1 million USD. Revenue streams exceeding 100 million USD were reported by 9% of the companies. In terms of export revenue, almost 37% stated that they had no such revenue in 2012 and 18% stated that they had export revenue up to 1 million USD. Half of the responding companies (50%) stated that their operations were profitable in Although 10% of the companies stated that their operations had been very profitable, 37% stated that they had reported a flat income or even a small loss. In comparison with the previous survey in 2012, the trend indicates an increase in companies reporting flat or negative income. In addition, fewer companies experienced high profitability (10% in 2012 as opposed to 18% in 2010). Moreover, the proportion of Swedish companies reporting flat income or loss hasn t been this high since the year However, this may be due to an increased proportion of start-ups participating in the survey. In terms of profitability by sector, the proportion of companies reporting high profitability in sales or manufacturing of industrial products has decreased significantly since the last Climate Survey in from 30% to approximately 15%. What were the total revenues (domestic in and exports from China) of your China operations in 2012? (n=199) US$ 0-1,000,000 26% US$ 1,000,001 5,000,000 14% US$ 5,000,001 10,000,000 7% US$ 10,000,001-25,000,000 US$ 25,000,001-50,000,000 9% US$ 50,000,001-75,000,000 US$ 76,000, ,000,000 2% 2% US$ 100,000,000 < 9% Prefer not to say 17% No revenue 7% Photo: Melker Dahlstrand/imagebank.sweden.se

10 10 TRENDS AND CHALLENGES 100% 80% 60% 40% 0% 100% 80% 60% 40% Profitability by sector 2013 (n=145) Sales or manufacturing of industrial products (n=75) Professional services (n=57) Sales or manufacturing of consumer products (n=13) Profitability by sector 2011 (n=149) Very profitable Profitable Break even Small loss Large loss Very profitable Profitable Break even Small loss Large loss In the professional services sector, there has been a marginal reduction in the number of companies reporting high profits. However, there are significantly fewer companies making small or large losses whereas the number of companies breaking even has increased. The same trend is possibly also valid for sales or manufacture of consumer products. In this sector, the proportion of companies making profits has increased and fewer companies are experiencing large losses. However, the small number of companies surveyed in this area makes it difficult to draw any definite conclusions. Were your China operations profitable this year, as seen from your parent company s perspective? (n=165) 100% 90% 80% 70% 60% 50% 40% 30% 10% 0% 2000 (n=31) 2001 (n=50) 2002 (n=50) 2003 (n=44) 2004 (n=65) 2005 (n=85) 2006 (n=99) 2007 (n=96) (n=127) (n=133) (n=165) 0% Sales or manufacturing of industrial products Professional services Sales or manufacturing of consumer products Comment: Large loss Break even or small loss Profitable Very profitable The trends in the professional services sector as well as in sales or manufacture of consumer products may be highlighted in the context of China s efforts to rebalance its economy in favour of a more sustainable model which to a greater extent is based on services and increased consumer spending. Market share increase & decrease 2011(n=145) 2013(n=194) Market shares Increased competition for Swedish companies Increased considerably Increased slightly No change 12% 11% 37% 29% 39% 51% The majority of participating companies stated that they have a small market share (less than 5%) whereas 11% of the companies have a high market share (exceeding ). Slight decrease Considerable decrease 8% 8% 0% 5% In general, fewer Swedish companies are increasing their market share compared with the previous survey and an increasing number are retaining their market share. Of all companies, 48% either increased

11 TRENDS AND CHALLENGES 11 their market share slightly or considerably in comparison with 63% in In sales or manufacturing of industrial products, Swedish companies have only marginally lost market share in Today, 44% of the companies have a medium-sized market share (6%-), while in 2011 the corresponding figure was 50%. In professional services, companies have also kept their market share. However, in sales or manufacture of consumer products the proportion of companies with a medium-sized market share (more than 5%) has decreased significantly. In terms of market share by company size (annual revenue), a significantly higher proportion of the largest companies (100 million USD or more) have a smaller market share in comparison with In this segment, there are 13% fewer companies with a high market share as well as 13% fewer with a medium-sized market share. In 2012, 84% of the companies in this revenue bracket had either a medium-sized or high market share. The corresponding figure today is 58%. This trend indicates that Swedish companies are facing fiercer competition in the Chinese market. Market share by sector 2013 (n=122) 19% 25% Sales or manufacturing of industrial products(n=64) 22% 28% Sales or manufacturing of industrial products(n=67) 0-5% % 7% 15% 33% 56% 78% 67% Professional services (N=46) Market share by sector 2011 Professional services (N=54) Market share by company size 2013 (n=126) 0-5% % Sales or manufacturing of consumer products (N=12) 0-5% % 6% 50% 49% 74% 50% Sales or manufacturing of consumer products (N=12) Among the smallest companies (annual revenue less than 1 million USD), the proportion of companies with low market share (0-5%) has increased from 83% to 91% since In the other revenue brackets, Swedish companies in general have roughly the same level of market share as in US$ 0-1,000,000 (n=36) US$ 1,000,001 25,000,000 (n=52) US$ 25,000, ,000,000 (n=23) US$ 100,000,000 < (n=15) 39% 92% 71% 15% 13% 48% 13% 47% 27% 27% 6% 3% Comment A view that may sometimes be held based on the above is that Chinese companies are moving up in the value chain and offering goods and services of comparable quality to that of Swedish companies at competitive prices. One general concern is that state-owned enterprises (SOE) have been receiving advantageous financing arrangements and subsidies from the Chinese state, which possibly enable them to undercut the prices of their competitors. Efforts have also been made to incorporate China into the international export credit regime. Market share by company size 2011 US$ 0-1,000,000 (n=23) US$ 1,000,001 25,000,000 (n=63) US$ 25,000, ,000,000 (n=18) 0-5% % 93% 62% 21% 17% 44% 44% US$ 100,000,000 < (n=12) 17% 42% 42% 13% 4% 11%

12 12 TRENDS AND CHALLENGES Views on the Chinese Market, Expectations and Plans How do you perceive the Chinese market? (n=197) 2011(n=146) 2013(n=197) 68% 71% 23% 18% 8% 11% 2% 1% Very favourable Favorable Un Very unfavourable How do you perceive the Chinese market today in comparison with 2 years ago? (n=197) Views on the Chinese market and sector outlook More than 70% of the companies consider the Chinese market to be favourable. In addition, almost of the companies consider the market to be very favourable. An increased proportion of the companies (60%) believe that the market has changed - either that it is more favourable or less favourable (29% and 31% respectively). More than 60% of the respondents consider the general market climate to be the reason for the changes in market prospects rather than structural changes and policies. A further attribute the change to government policy. 5% Much more 29% 34% More Unchanged 31% Less 1% Much less Almost 40% of the companies believe that the market will be equally favourable/unfavourable over the next two years. Compared to last year s survey, a greater proportion of companies believe the market will be equally favourable. In addition, a smaller proportion of companies believe To what primary reason do you attribute the change of perception of the Chinese market? (n=131) 63% 18% 14% 5% General market climate Government policy Increased/ decreased competition Other Compared to the year 2012 how do you expect your business to perform during the following two years, i.e ? 2011(n=148) 51% 2013(n=197) 39% 39% 26% 14% 6% 9% 15% 1% 1% Much more More Equally Less Much less How important will China be in your company s overall global strategy in the next 2 years? (n=197) 46% 44% Increasingly important Same level of importance 5% Declining in importance 5% Don t know

13 TRENDS AND CHALLENGES 13 the market will be either more favourable or much more favourable. The trend appears to be that a growing number of companies view the market as equally favourable or less favourable. Almost half of the companies (46%) stated that China will be increasingly How would you describe the business outlook for your sector in China within the next two years ( ), in terms of: (n=197) Optimistic Neutral Pessimistic N/A important in their overall global strategy in the next two years while 44% Growth 60% 35% 5% 1% stated that it will be equally important. Nearly 5% of the companies claim that China will decline in importance. In terms of business outlook with Competition Profitability Productivity 12% 30% 35% 44% 53% 51% 43% 15% 7% 1% 2% 8% regard to different sectors, 60% of the responding companies are positive Access to labour 19% 49% 27% 5% with regard to growth in their respective sectors. In terms of profitability and productivity, a relatively significant proportion of the companies are Labour costs Access to intermediate inputs Raw materials 6% 8% 8% 24% 50% 25% 68% 7% 31% 3% 36% 36% positive (30% and 35% respectively). Respondents are most concerned with competition and labour costs - 43% and 68% respectively. Comment: In view of the stagnant economic conditions in Europe and the US, China continues to be an important growth market for Swedish companies. The statistics regarding labour costs statistics hint at how China s economic expansion is increasingly pushing labour costs higher. Ms. Lena Ek, Swedish Minister for Environment Mr. Zhao Yingmin, Director General, Department of Science, Technology and Standards, Ministry of Environmental Protection Sino-Swedish Seminar on Environmental Technologies for Future Cities May , Ritz Carlton, Beijing Photo: Liu Ping

14 14 TRENDS AND CHALLENGES How large was your company s total investment in China by the end of 2012 (counting from your establishment in China)? (n=198) US$ 0-1,000,000 US$ 1,000,001 5,000,000 US$ 5,000,001 10,000,000 US$ 10,000,001-25,000,000 US$ 25,000,001-50,000,000 US$ 50,000,001-75,000,000 US$ 76,000, ,000,000 US$ 100,000,000 < 61% Prefer not to say 1% 1% 1% 6% 6% 6% 16% 39% 29% Does your company plan further investments in China over the next 2 years? (n=194) 36% From your company s perspective, how do you envisage the investment climate in China for the next two years? 1% 2% Much more 2011(n=148) 19% 12% More 58% 56% Equally 2013(n=197) 21% 29% Less 1% 1% Much less Investments - Continued willingness to invest Around 36% of the companies had a total of less than 1 million USD invested by the end of 2012 and 16% had an investment between 1 and 5 million USD. A smaller group of 6% had a total investment of more than 100 million USD by the end of More than half of the companies (56%) envisage that the investment climate in China in the coming two years will be equally favourable. Almost 30% believe the investment climate will be less favourable, compared to 21% in the previous survey. The trend indicates a less favourable investment climate in the coming two years. A little more than 60% of the respondents are planning further investments in the coming two years. However, those who are planning further investments are not planning any reductions in the existing level of their investments. Of the companies that are planning further investments, a majority of the companies - 60% - are planning a moderate increase of investments, 14% are planning a major increase and 26% are planning to maintain their present level of investment. Comment: In comparison with earlier years, commitment to further investment resembles that of pre-financial crisis levels in This trend also indicates the confidence in continued growth and expansion in the Chinese market among the companies that are considering further investments. 100% 90% 80% 70% 60% 50% 40% 30% 10% 0% Yes No (n=72) (n=100) (n=110) (n=108) (n=142) (n=147) (n=118) Only a handful of the companies that are not making further investments in China are scaling down their operations. Only a small proportion of these companies are considering shifting current or planned investments in China to other markets. Major increase Moderate increase Maintain present level Moderate reduction Major reduction

15 TRENDS AND CHALLENGES 15 Views on the new Chinese leadership and reforms Environmental reforms should be the top priority for the Chinese government More than 70% of the respondents rank reforms in the area of environmental protection and development as top priority for the Chinese government. Other prioritized areas are promoting a more fair and competitive playing field for all businesses (64%) and improving government efficiency (39%). With regard to the new Chinese leadership, inaugurated in March, 30% of the respondents said that they were sure that it is able to carry out the reforms that the companies believe to be of top priority whereas 50% said that they were not sure. Comment The current Chinese leadership is still fresh and what path they will take is still uncertain; whether it s a path of reform or status quo. However, the Chinese government has signalled a resolve to make necessary reforms by taking initial steps to reform its financial sector in the summer of What in your opinion should be 3 top priorities for the new Chinese leadership? (n=193) Improving environmental protection (water, air ) 72% Promoting a more fair and competitive playing field for all businesses 64% Improving government efficiency 39% Improving Chinese social welfare 29% Boosting domestic consumption 28% Loosening the regulatory requirements for foreign invested enterprises (FIEs) 24% Addressing the economic slowdown 18% Opening up government procurements to foreign companies/entities Other (Please specify): Promoting multi-lateral trade 13% 9% 6% ExhibitionTranspo May 15 maj 2012, Beijing Photo: Mikael Salomonsson

16 16 TRENDS AND CHALLENGES How would you judge the availability of skilled labour on the Chinese labour market relevant for your company s oeprations in China? (n=194) 2% Very good availability 19% Good availability Does your company have difficulties in attracting foreign nationals due to: (n=24) Tax reasons Increasing/high costs Visa issues Finding schools for children Food and general product safety Environmental concerns Other 47% Sufficient availability 0% 8% 13% 27% Poor availability 21% 21% 4% Very poor availability 54% 58% Employment and Human Resources (HR) issues Companies are less keen to hire Of the responding companies, 65% are planning to increase the number of local employees in the coming two years. Only 19% are planning to increase the number of foreign employees. In general, most Swedish companies are not planning to decrease the number of employees. Less than 10% of the companies stated that they were planning to decrease the number of local or foreign employees. The fact that Swedish companies are more inclined to hire locals than expats indicates not only that locals are advantageous from a cost perspective, but possibly also reflects the increasing level of expertise and management skills among the Chinese labour force. There is also a growing tendency among the companies not to change the number of employees, which may be due to uncertainty about the future business climate and expectations of an economic slowdown. 42% 69% Finding relevant employees Top HR challenges 2013 (n=194) 2011 (n=124) 19% 14% 9% 8% 9% 7% 8% 8% Educational level of employees Cultural differences between Chinese and foreign employees Cost of employees, including social insurance etc. Retention of employees Almost 50% of the respondents think that there is sufficient availability of skilled local labour in China as compared with slightly over 50% in the previous survey. Today, 27% of all companies consider the availability to be poor whereas in 2011 the corresponding figure was 21%. In addition, 88% of all companies stated that they had no difficulties in attracting foreign nationals to their companies. In terms of HR, finding relevant employees is still clearly the top challenge for more than 40% of the respondents compared to 69% in the previous survey. Other areas that have increased as top HR challenges are cost and retention of employees, currently at 18% and 14% respectively. Areas that fewer companies classify as top HR challenges are the education level of employees and cultural differences between Chinese and foreign employees. Comment The statistics suggest that there is a healthy supply of expat labour for Swedish companies based in China, as 88% of the respondents had no difficulties in finding expat labour. However, the data from the survey doesn t indicate to what extent foreign expats are dispatched to China by their companies. This figure is likely to be fairly high. The companies that do have difficulties list environmental concerns as one of the key reasons why it is difficult to attract foreign nationals.

17 TRENDS AND CHALLENGES 17 Lars Freden, Swedish Ambassador to China Annika Rembe, Director General of the Swedish Institute Dr. Ewa Björling, Swedish Minister for Trade Prof. Chen Jining, President of Tsinghua University Xu Yongji, Deputy Director General of International Affairs, MOE Prof. Yuan Si, Vice President of Tsinghua University Innovative Sweden exhibition September , Tsinghua University, Beijing Photo: Liu Ping Challenges and Opportunities for Swedish Companies in China Barriers to profitability Competition is the key barrier to profitability The top barrier, according to one quarter of the companies, is competition. Economic slowdown also ranks as a fairly high barrier to profitability at about, which is proportionately higher than two years ago. However, it is not comparable in magnitude to the level of 2009 when an excess of 40% of all companies rated economic slowdown as the top barrier to profitability. High taxes and customs duties as a barrier to profitability have also increased in proportion, which may be due to unclear tax regulations, a lack of transparency and arbitrary application of regulations in customs procedures. What do you perceive as the top barrier to profitability? (n=197) 100% 90% 80% 70% 60% 50% 40% 30% 10% 0% (n=69) (n=94) (n=102) (n=134) (n=146) (n=197) Competition Economic slowdown High costs High taxes and customs duties Market access restrictions Market development

18 18 TRENDS AND CHALLENGES Advantages and disadvantages vs local competitors In general, Swedish companies consider product quality to be one of their greatest advantages (82%). Other areas where Swedish companies consider themselves superior are brand recognition, product design and management. The statistics indicate that Swedish companies have a competitive advantage in markets where products of high quality and design are favoured. According to over 60% of the respondents, the greatest disadvantages that Swedish companies have in relation to local companies are primarily pricing and government relations. Nearly a third (30%) of the companies stated that they are at a disadvantage when it comes to access to subsidies/tax incentives. The results suggest that Chinese companies profit from being able to foster closer ties with various government agencies, which, in China, can be crucial to the successful and profitable outcome of a business venture. Comment: Photo: Ulf Lundin/imagebank.sweden.se China is facing increasingly stronger calls for reform from overseas to level the playing field for local and domestic companies, which may increase in intensity due to an impending economic slowdown that stresses profit margins. In what area(s) do you see your strongest advantages compared with Chinese companies? 40% 35% 30% 25% 15% 10% 5% 0% Product quality Product design Brand recognition Management Access to labour Access to subsidies/tax incentives Access to financing Access to raw material Economies of scale Government relations Pricing Strongest advantage (n=163) Strongest advantage (n=568) Strongest disadvantage (n=133) Strongest disadvantage (n=462)

19 TRENDS AND CHALLENGES 19 Corruption In total, 48% of the companies stated that corruption is either common or very common in their respective sectors. Almost 19% of these companies stated that corruption is very common whereas 18% stated that corruption is non-existent. Almost half of the respondents (47%) that believe that there is some degree of corruption (either rare, common or very common) stated that corruption poses a moderate difficulty to their company s business. Corruption poses a great difficulty for 22% of the companies whereas 26% claimed it s a minor difficulty. Do you think corruption exists in your company s sector? If so, please specify how common? (n=192) 19% Very common 29% Common 47% 16% Rare 18% None 19% Don t know To what extent do you feel that corruption poses a difficulty to your company s business? (n=122) Comment: Of the respondents, 64% claim that there is some degree of corruption, and 95% of these companies also state that this poses a difficulty to 22% Great difficulty Moderate difficulty 26% Minor difficulty 5% No difficulty their business. These figures show that corruption is a real problem that has negative impact on a great number of Swedish companies doing business in China. Photo: Sonia Jansson/imagebank.sweden.se

20 20 TRENDS AND CHALLENGES Trade barriers Among the general obstacles, 33% of the companies were negatively affected by lack of compliance in standards in Furthermore, 32% of the companies stated that regulations on trading rights also constituted an obstacle to trade. Other trade barriers of equal note are delays in payment due to extensive documentation requirements by banks and authorities and regulations on trading rights. Among the more specific trade barriers, the most prominent ones were non-transparent governance (complicated or conflicting regulations or unclear government decision making), infringement of intellectual property rights, unfair pricing competition from domestic companies (e.g. through government subsidies or export credits) as well as discriminatory regulations. The relatively high proportion of discriminatory regulations and unfair pricing competition as well as non-transparent governance arguably indicates that the conditions for doing business are different for local companies in comparison with foreign companies, and that foreign companies are subject to or affected by discriminatory practices. Trade obstacles that companies have encountered (completely or partially agree) 2013 (n=192) 2011 (n=139) Import and export procedures 41% 46% Complying with local standards Non-transparent governance 33% 31% 32% 44% Tariffs (import tax) Delays in payment due to extensive document requirements Infringement of intellectual property rights 31% 32% 30% 32% 35% 36% Unfair pricing competition from domestic companies 28% Regulations on trading rights (right to export and import) Discriminatory regulations on distribution of goods and services Restrictions on profit repatriation 18% 25% 24% 23% Obtaining government approvals Discriminatory government procurement procedures Capital, location or volume requirements for the investment Joint-venture requirements 14% 13% 13% 16% 17% 19% 19% Export quotas 8% 11%

21 Trends and Challenges 21 Customs In general, less than half of the companies (more than 40%), neither agreed nor disagreed as to whether they had been negatively affected by import and export procedures. More than a quarter of the respondents stated that they had been negatively affected and 15% claimed they had been affected to some extent. More than 60% of the companies consider the procedure for customs clearance for imports and exports not to be consistent, predictable and timely. The majority of these companies stated that the customs clearance for exports and imports in general is inconsistent and unpredictable, as opposed to being related to specific procedures, goods or customs districts or other government agencies. Paperless customs clearance exempts applicants from having to submit documents such as invoices, consignment notes, certificates of origin etc during the customs clearance procedure. Only stated that they are paperless. More than 40% of the handful of companies that are subject to paperless customs clearance claimed that this requirement is consistently applied in all customs districts. My company was negatively affected by import and export procedures (complicated or timeconsuming administration) when doing business in China in (n=156) 42% 11% Don t agree at all 6% 2. Neither agree nor disagree 15% 26% 4. Agree completely Do you consider the procedure for customs clearance for imports and exports to be consistent, predictable and timely? (n=129) 64% 36% Yes Please specify whether customs clearance for exports and imports in general are inconsistent and unpredictable, or if difficulties relate to specific procedures, goods or customs districts? (n=83) 71% No More than 80% claimed that it is not possible to defer payment of charges, whereby companies don t have to make full payment of customs duties, taxes and other miscellaneous fees required in connection with the declaration of goods. Almost 70% claimed it is possible to attain notification in advance (preliminary decision comparable to EU s BTI) with regard to classification of goods and other issues. However, more than 65% of these companies claimed the procedure not to be simple, speedy and transparent. Comment: Since the last survey in 2011, Swedish and Chinese customs authorities have signed an action plan for where some of the key cooperation areas are paperless customs clearance, management of economic operators and self-service facility for customs. In the autumn of 2012, a Customs Attaché was appointed to the Embassy of Sweden in Beijing to enhance and facilitate cooperation between Swedish and Chinese customs authorities. The increased level of cooperation led to a bilateral expert-level workshop in May of 2013 in Gothenburg on paperless customs clearance. General 7% Specific customs districts 8% 8% Specific procedure Goods 1% 4% Other Agree government completely agency

22 22 TRENDS AND CHALLENGES Does your company have a division for Corporate Social Responsibility or equivalent in China? (n=204) 77% Has your company increased demands on its Chinese suppliers regarding Corporate Social Responsibility (CSR) over the last 2 years? (n=193) 13% Don t agree at all 23% Yes 4% 2. 53% Neither agree nor disagree 10% 19% 4. Agree completely Has your company noticed increased implementation of Corporate Social Responsibility (CSR) in China over the last two years? (n=193) No CSR The majority of the companies, almost 80%, do not have a division or equivalent for CSR in China. This is probably due to the fact that companies don t have a comprehensive approach to CSR. However, this does not necessarily indicate that companies are not concerned about CSR. The responsibility for CSR may be delegated to purchasers and other functions within a given company. Over the last two years, a relatively small proportion of the companies (16%) have received increased demands for compliance with CSR standards from clients and 11% have received increased demands to some extent. Furthermore, 19% of all companies claimed that they had increased demands on Chinese suppliers regarding CSR whereas 10% agreed to some extent. On the question of whether companies had noticed increased implementation of CSR over the last two years, 16% agreed completely and 21% agreed to some extent. Comment: 9% Don t agree at all 5% 2. 50% Neither agree nor disagree 21% 16% 4. Agree completely The fact that more than one third of the companies have noticed increased implementation may be thanks to efforts of SASAC (Stateowned Assets Supervision and Administration Commission) to promote CSR in China during the last few years. CSR was only introduced in connection with the last Five-Year Plan by association with the phrase the harmonious society. At that point there was limited awareness and bringing about increased awareness can be a lengthy and gradual process. Companies may also be compelled to implement CSR due to demands from foreign clients in order to stay competitive. Photo: CSR Center/Embassy of Sweden, Beijing As issues such as workers rights and responsible corporate governance are receiving increased attention in China, CSR and CSR methods have grown in importance as a way to bring about improvement in the working conditions for the Chinese labour force and further corporate accountability.

23 TRENDS AND CHALLENGES 23 Sweden in China Trade & Promotion Sweden is well represented in China by its diplomatic missions, other official organizations and the Swedish Chamber of Commerce that aims to promote Sweden in China. The Embassy of Sweden in Beijing, the Consulates General in Shanghai and Hong Kong, Business Sweden and Growth Analysis actively work with Swedish companies to increase awareness and understanding of the Chinese market, as well as assisting and providing leverage for Swedish businesses with issues such as market access, IPR and customs issues. Corporate Social Responsibility, Innovation and Creativity, Sustainability, and Safety are overarching Swedish concepts that we together try to promote. Since 2011, official actors and industry have been especially focusing on promoting Sustainable Transportation Solutions, Life Science and Environmental Technology. The Swedish Chamber of Commerce in China organises networking events and seminars with the purpose to increase understanding of the Chinese market and generate productive relationships. Other official Swedish actors in China are Growth Analysis and VisitSweden. Growth Analysis carries out reporting on various subjects such as economic reforms in China. VisitSweden promotes Sweden as a tourist destination. Photo: Samansa, Elanders Beijing

24 Stay informed on current issues and events in China Newsletter on Trade & Promotion The Embassy of Sweden issues a monthly newsletter on trade and promotion in China in cooperation with the General Consulates of Shanghai and Hong Kong, Business Sweden in China, Growth Analysis and Visit Sweden. To become a subscriber, please send an to embassy.beijing.economy@gov.se The Swedish Embassy is active on: Weibo: Instagram: SwedenInChina Embassy of Sweden No. 3, Dongzhimen Waidajie, Sanlitun Chaoyang District Beijing P.R. China Tel: +86-(0) Fax: +86-(0) ambassaden.peking@gov.se General information on Sweden (Chinese): Persons involved with the Business Climate Report: Mathias Hultgren, Project Manager, Embassy of Sweden Oliver Turner, Author & Project Coordinator, Embassy of Sweden Jakob Kiefer, Embassy of Sweden Björn Lundberg, Business Sweden Sammi Wang, Business Sweden Yvonne Chen, Swedish Chamber of Commerce Fredrik Ektander, Swedish Chamber of Commerce Swedish Chamber of Commerce in China Room 313, Radisson Blu Hotel No. 6A, East Beisanhuan Road Chaoyang District Beijing P.R. China Tel: +86(0) ext. 313 Fax: +86-(0) Business Sweden Room 609, 6/F, CYTS Plaza No. 5, Dongzhimen Nandajie Dongcheng District Beijing P.R. China Tel: +86-(0) Fax: +86-(0)