German Business in China

Transcription

1 German Business in China Business Confidence Survey 2015 Press Conference

2 China German Business in China Key Developments China has emerged as one of Germany s most important international partner economies. At present, China is Germany s largest trading partner outside of the EU, and an important investment destination. The diversity and strong growth of China s economy has continued to attract internationally operating German companies, and is a market where presence is vital for continuous business success. German manufacturing prowess in traditional German strongholds in automotive, machinery and chemical have been major drivers for investment in China. At present the Chinese economy is transitioning from an extensive period of rapid growth to an era of more moderate growth. The transition will bring new challenges but also opportunities within which German companies are well positioned to remain successful. So far German companies have mostly maintained their optimism, and the Chinese market continues to be a major contributor to their growth. German-Chinese Economic Relations Bilateral trade reached a record high of EUR154 billion in German exports to China have been growing particularly strong. An estimated 5,200 German companies are operating in China as of Foreign direct investment into China continues to be strong. Total invested capital stock accumulated to around EUR48 billion. German companies employ an estimated 1.1 million staff in China. Business Confidence Survey After being resilient during the onset of the economic slowdown in 2014, German companies are beginning to be affected by slower growth. Compared to the previous year, when German business performed extraordinarily well, the overall business sentiment has been revised downward. Overall, companies are expecting business to expand with growth easing to slower levels rather than stalling. The majority of companies remain positive about China s future investment potential and remain committed to the Chinese market despite slower future growth. Economic reforms are still welcomed, but enthusiasm for them has fallen. German companies are already engaging in modern manufacturing and in R&D making them less reliant on low-end manufacturing and exports. A shortage of skilled workers is a major constraint for companies. Other key concerns pertain to the limitations of the internet and China s regulatory framework. Content page Sino-German Trade Relations 2 German Investment in China 3 Economic Environment for German Companies 5 Business Confidence Survey Results Facts and figures of Sino-German Relations 20 Overview of Key Economic Figures 22 1 P a g e

3 German exports German imports German Business in China Sino-German Trade Relations Trade relations between China and Germany have steadily progressed in tandem over the past 35 years. By 2014 bilateral trade between them made up 7.5% of Germany s foreign trade, making China Germany s third most important trading partner. China is Germany s most important market outside of the EU, while Germany is China s most important market within the EU, which is China s largest trading partner. China s rise as a global manufacturing giant and an increasingly important export market has subsequently had ramifications on German trade relations in Asia, which accounted for 17.6% of German trade volume in A main catalyst for the rapid growth in trade with Asian countries has been bilateral trade with China, which has expanded 24-fold since 1990, while trade with Asia as a whole expanded five-fold over the same period. Whereas in 1990 China contributed to only 1 of trade with Asia, it now accounts for 48%, which is similar to its contribution in Chinese share of total German trade with Asia % 47% 48% China Other Asia Source: Statistisches Bundesamt / German Chamber of Commerce in China analysis Note: Asia excluding Arab nations. Since 1990 trade volume has steadily increased by an average of 14.2% annually, doubling nearly every five years. Following a boost in trade volume in 2010, growth has decelerated, but is now starting from a much higher base. Despite China s economic slowdown as well as Germany s low GDP growth, trade volume hit another record, reaching EUR 154bn in Notably, German exports to China have been outperforming imports from China, reducing the current account deficit. While Chinese exports to Germany have been prone to greater fluctuations since 2010, German exports managed to steadily increase and were the main catalyst for growth in trade between the two countries. On average Germany s exports to China increased by 8.8%, while China s exports to Germany only grew by 0.8% between 2010 and Development of German-Chinese trade in bn EUR Source: Statistisches Bundesamt German exports are dominated by automobiles (27.8%) and machinery (23.8%), which together account for more than half of Germany s total exports to China. Electrical products (13.9%), optical equipment (6.9%), and airplanes (4.2%) round out the top five product categories which constitute more than 75% of total export volume. Electrical products (26.5%) and machinery (22.8%) dominate Chinese products imported to Germany. Though similar in product category the predominant imports from China are consumer goods such as personal computers or mobile phones, whereas German products in similar categories tend to have industrial applications. Different textile categories together account for 1, with furniture (4.1%) and shoes (2.7%) completing the top five product groups which altogether account for 63.3% of China s exports to Germany. Top 5 product categories traded 2014 Source: Statistisches Bundesamt / German Chamber of Commerce in China analysis Trade German exports German imports Electronics Machinery/mechanical goods Clothing Furniture Shoes Other Vehicles Machinery/mechanical goods Electronics Optics Aircraft Other 4.1% 2.7% 4.2% 6.9% % 22.8% 23.8% 23.4% 26.5% 27.8% % 5% 1 15% 2 25% 3 35% 2 P a g e

4 German Investment in China Over the past few decades the importance of the Chinese economy for German companies has translated into a steady flow of investment. By 2014 the capital stock invested by Germany in China had grown to around EUR48 billion. Germany has consistently been among China s top ten foreign investors, with FDI flows nearly doubling from its value in 2010 to USD2.1 billion by 2013, a level that was maintained in Investment in recent years was particular boosted by capital intensive investments in the automotive sector. German FDI outperformed overall FDI, increasing by 20.5% on average compared to 6.1% between 2010 and The figures confirm that China has been able to retain its top position as an investment destination for German companies despite changing market conditions. Annual German FDI to China in bn USD German companies in China 5,000 4,000 3,000 2,000 1, ,224 4,350 4,800 5,000 2,454 2,486 2,600 Source: German Chamber of Commerce in China analysis / *forecast 5, * GCC Members total German companies The vast majority of investment continues to be concentrated in China s three main economic centers. Nearly 9 of companies are located within the economic centers around Shanghai (Yangzte River Delta), Beijing (Bohai Economic Rim) or Guangzhou/Shenzhen (Pearl River Delta). Smaller clusters of investments are located in the northeastern provinces of Liaoning and Jilin, around the cities of Shenyang and Changchun, as well as in Sichuan (Chengdu) and Chongqing in the West. In the other provinces German presence remains limited. Companies currently favor the traditional economic clusters and better developed coastal areas, while only slowly making inroads into the country s still developing interior. Distribution of German companies by region 0 Source: Mofcom In total, we estimate that there are around 5,200 German companies operating in China in 2015, with a steady increase in the number of German businesses present in the country. As one of China s biggest foreign investors, German investment accounts for 1.1mn jobs in China. With a focus on high-tech industries and modern manufacturing requiring greater skill-sets of its employees, German investment is well prepared to support China as its economy moves up the value chain, and low skill, low wage industries become less important. The majority of German companies are engaged in technology intensive industries with a strong focus on the Chinese market, rather than using China as a cheap production base for exports. West Northeast 1.8% 3.7% Periphery YRD, Bohai, PRD 6.4% Pearl River Delta (PRD) 12.9% Bohai Economic Rim 18.3% Other 5.2% Source: German Chamber of Commerce in China analysis Yangtze River Delta (YRD) 51.7% 3 P a g e

5 German companies in China 2015 German Business in China 4 P a g e

6 May Jun Jul Aug Sep Oct Nov Dec Jan/Feb Mar Apr May German Business in China Economic Environment for German Companies 2015 German companies have been well positioned to benefit from China s rapid economic growth and over the years have deepened their business footprint in China. Developments in China strongly affect the overall business performance of internationally operating German companies, as China is one of their key markets. As the country shifts from a period of rapid growth to a period of moderate growth, the business environment is also undergoing changes. The slowdown is, however, not unprecedented, and GDP growth of around 7% annually in the world s second largest economy still provides ample room for business expansion. The current structural adjustment accompanying slower economic growth will affect various industrial sectors differently. National industrial data for most of the 41 industrial sectors monitored by the National Bureau of Statistics have been affected by changing business conditions in 2014, and have experienced a further deceleration of growth in the first months of the current year. Whereas key industries for German businesses remained comparably resilient in 2014, the overall conditions have been increasingly affected by slower economic growth. While industrial sectors vital to German businesses mostly outperformed the national average in 2014, industrial production in these sectors dropped below the average in the first five months of Industrial production in China for key German industrial sectors yoy growth rate 14% 12% 1 8% 6% 4% 2% -2% Source: NBS General machinery Special-purpose machinery Motor vehicles Electric machinery and equipment Average After having recorded some of the fastest growth rates in 2014, the industrial output of automobiles saw growth dropping sharply in Reflecting an overall drop in fixed-asset investment growth and a cooling business sentiment, special-purpose and general machinery have seen the sharpest fall in growth in Electric machinery and equipment has performed slightly better than the average. The data suggests that the business environment in 2015 has become significantly more challenging. However, despite the slowdown, it should be stressed that most sectors are still achieving positive growth. Following a very positive year for Sino-German trade, the overall trade volume in the first four months continued to expand, despite the comparatively high base levels following record trade in Imports from China rebounded significantly in the between January and April (+19.3%), reversing last years trend of German export growth outperforming imports for the majority of the year. German exports meanwhile grew 4.2% during the same period. Trade between Germany and China maintained its resilience and has continued to develop contrary to a sharp overall slowdown of Chinese foreign trade with other global trading partners. Monthly development of Sino-German trade growth in % yoy / trade volume in bn EUR Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Source: Statistisches Bundesamt Trade volume (in EUR) German exports (in %) German imports (in %) 5 45% 4 35% 3 25% 2 15% 1 5% -5% German foreign direct investment remained bullish in the first quarter, totaling USD710 million, which was an increase of 21% compared to the same period in As the largest European investor in China, German investment continued to expand as other major investors, including companies from the US and Japan, invested less. German investment in 2015 was particularly driven by continuous investment in the automotive sector. At 5 P a g e

7 Jan/Feb Mar Apr Mai Jun Jul Aug Sep Oct Nov Dec Jan/Feb Mar Apr German Business in China present, German investment activity to China has not been affected by slower economic growth. Monthly development of German FDI to China in million USD Source: NBS Germany as a Partner for China s Transformation 240 China is currently undergoing significant structural changes as its economy adjusts to slower economic growth and an emphasis on quality over quantity. Services and consumption are beginning to comprise a larger share of GDP, while as a share of GDP manufacturing has already reached its limit. The importance of manufacturing for China, however, will continue to remain of great significance. Whereas most Western countries saw the importance of manufacturing to their economies falling over the years, industrial manufacturing has remained a fundamental cornerstone of the German economy. In 2014 the secondary sector, excluding construction, accounted for around 26% of GDP in Germany, while in China the share presently is 37%. One key to the success of German industrial strength has been a focus on high-tech manufacturing driven by innovation. In order to achieve this, Germany has also undergone continuous transformations to maintain its manufacturing prowess. One result of this process has been that polluting heavy industries are now a thing of the past. Traditional manufacturing has increasingly been replaced by sophisticated manufacturing facilities with higher levels of productivity and are no longer synonymous with pollution. At present, German industry 4.0 is at the center of the drive toward continuous modernization of manufacturing. Education has played an equally important role in Germany s development. In addition to universities with a strong focus on research and development, vocational training is another cornerstone of its education system. Some professions at vocational schools are the source of highly technically skilled employees. Universities and vocational schools focus on different but complementary skill-sets, and are vital in providing companies with the skilled employees they require. Using China as a source for cheap labor is not and has not been the major motivation of German companies operating in China. Consequently massive labor intensive factories have not been a hallmark of German investment in China. Instead, German companies operating here are in need of highly qualified employees to operate high-tech manufacturing as well as to provide sophisticated service. With a focus on advanced industrial sectors German companies provide excellent employment opportunities for Chinese employees. German industry will find a more advanced Chinese economy much more compatible with its operations in the future. In many cases German companies operating in China are already pioneers in industrial upgrading and in many aspects German companies are well positioned to be a partner to China during its transformation. This partnership can go beyond manufacturing, too. Improving the environment is a key issue in China, and Germany is a leader in the use of green technology and reducing its reliance on fossil fuels. In dealing with the consequences of an aging society, German companies are also leaders in health care services and equipment. These are strategic areas with high growth potential. As the Chinese economy shifts to more moderate economic growth, it is being confronted with new challenges, ranging from structural adjustments to changes in society. There is, however, ample room for opportunity to further strengthen and deepen Sino-German cooperation. 6 P a g e

8 Business Confidence Survey Results 2015 The section below reflects the main findings of the German Chamber of Commerce in China s survey among its member companies regarding their general business sentiment in China. Business Outlook The largest group of responding companies (39.2%) anticipates that the growth of the Chinese economy will not change while 33.8% think it will further cool in This is the first time in two years that the general outlook does not anticipate an upturn of the economy, reflecting an adjustment of the companies perception following a more optimistic outlook in 2013 and Companies expectations for the economy have reached levels similar to those of 2012 when GDP growth dropped from 9.3% in 2011 to 7.8% in 2012 and China s economic growth departed from its period of high growth. While in 2013 and 2014 there was still hope for a return of higher growth rates, companies are now adjusting to the new economic realities in China, anticipating more moderate economic growth in the future. The responses reflect a challenging first six months which has seen a persistent cooling of key economic indicators. Evaluation of economy Q10a How do you evaluate the Chinese economy in 2015? from previous surveys. 5 45% 4 35% 3 25% 2 15% 1 5% 42.6% 30.2% 27.2% 47.7% 48.9% 38.3% % 17.5% % 33.8% 27. The survey results also show that companies tend to envision the prospects of their own industries relatively more positively, with the share of companies expecting improving conditions up by a margin of 11.4 percentage points compared to how they view the outlook for the economy as a whole. Despite most companies viewing developments in their own industry more positively, more than a quarter of the companies have a more pessimistic stance, and expect conditions in their industry to worsen in Identifying how different industrial sectors evaluate the prospects for their own industry highlights a great degree of variation. The automotive industry remains the most optimistic sector, with 54.4% expecting conditions to improve. Though still overwhelmingly optimistic, this percentage has dropped considerably from the previous year, while the share of respondents expecting worsening conditions has increased to 22.8%. Companies engaging in services (consulting/legal) have the lowest percentage of companies anticipating conditions to worsen (13.5%) and the highest percentage of respondents expecting conditions to stay as they are (50.). Companies in the chemical, consumer goods, and machinery sectors are about equally split between expecting that conditions in their industries will improve, stay unchanged, or worsen. The mixed outlook in the machinery sector was already noticeable in last year s survey. Optimism for 2015 in the machinery sector has deteriorated further from 2014, as the sector is feeling the pinch of companies holding back on investing in new machinery due to weak business confidence in China in the manufacturing sector. Evaluation of economy and industry in 2015 Q10 How do you evaluate the Chinese economy and general outlook for your industry in 2015? 4 35% 3 25% 2 15% 1 5% % 39.2% 34.1% 33.8% 27.5% improving neutral worsening improving unchanged worsening economy industry 7 P a g e

9 With 50.6% of companies expecting to either exceed or achieve their business targets, the overall sentiment of German companies remains positive. This is down by 10.5 percentage points, reflecting an adjustment from 2014 when German companies remained largely unaffected by a slowing market environment. For 2015 more companies expect to mostly achieve (rather than exceed) their business targets (+6 percentage points), while the share of companies expecting to only partly achieve or not achieve their targets has risen by 4.7 percentage points. Expectations on reaching business targets Q11 To what extent were you able to achieve your business targets in 2014, and what are your expectations for 2015? 4 35% 3 25% 2 15% 1 5% 22.3% 12.8% 38.8% 37.8% 19.5% 25.5% exceed achieve mostly achieve % 14.2% 5.1% 6.4% partly achieve not achieve The downward adjustment is also reflected when looking at growth expectations for turnover, profits, investment and employment, all of which have shifted to lower growth expectations compared to However, after the strong performance in 2014, the adjustment is moderate and does not reflect a sharp decline. As for profits and turnover the majority of respondents anticipate increases. The majority (45.9%) plans to keep investment stable, while the majority (45.3%) still plan to increase employment. The changing market conditions contribute to more Share of companies expecting increases for key business indicators 2012 to 2015 Q12 Please indicate your expectations for 2015 to 2014 for your company in the following areas (turnover/profit/investment/employment) from previous surveys. Expectations on key business indicators 2015 Q12 Please indicate your expectations for 2015 to 2014 for your company in the following areas (turnover, profit, investment, employment). A closer look at the development of turnover in various industrial sectors between 2012 and 2015 underpins the fact that the majority of German companies are still hesitation towards expanding investment and employment, achieving growth, and that the adjustment reflects an with the share of companies planning increases falling easing to lower levels of growth rather than a dramatic slightly. This is a natural adjustment in which companies correction. Clearly German companies are being affected are acclimatizing their growth strategies to accommodate by slower growth levels across the Chinese economy, but lower growth expectations in the future, a tendency which for the most part they are relatively resilient and was already observable last year. Compared to 2014 the weathering the adjustment well. share of companies expecting decreases has gone up for the four indicators monitored, reaching levels similar to those of % % 48.4% 54.2% 69.7% 60.8% 73.6% 59.8% 50.2% 47.6% 45.3% % 51.2% 45.3% 38.7% turnover profits investment employment 14.7% 17.5% 15.5% 16.6% 20.8% 64.5% 31.4% 51.2% 45.9% 38.7% 38.1% 45.3% turnover profit investment employment increase similar decrease 8 P a g e

10 Share of companies expecting increasing turnover by industry 2012 to 2015 Q12a Please indicate your expectations for 2015 to 2014 for your company in the following areas (turnover) from previous studies % 69.4% 59.3% 85.5% 63.2% 60.2% Market Conditions 83.3% 79.2% 77.3% 77.6% 65.9% 57.8% automotive machinery services For the majority of globally active German companies the Chinese market is either a top market or among the top three. China s importance has steadily increased in the years following the global financial crisis, leaving China as the only major market achieving significant growth. Compared to 2014, China s market importance in terms of its contribution to global turnover and profits has fallen for the first time after years of increases. In part this has to do with stronger growth in the US as well as improving conditions in the EU. The Chinese market continues to be a vital market for globally active German companies, and next to the US it has established itself as a second crucial market outside of the EU for German companies, which provides them with a broader base to balance their international operations and makes them less susceptible to regional fluctuations. Market importance of China Q13 What status does your company s local business have within your mother company s global turnover and profits? 4 35% 3 25% 2 15% 1 5% 11.8% 11.5% 36.6% 30.3% top 1 market among top 3 markets % low priority 31.7% 29.7% one among many 13.2% 14.5% not applicable The main reason that German companies give for operating in China is the sales potential of the market (92.7%). This is followed first by having a presence in the Asian market (86.1%), then by companies following their key accounts (70.6%), and fourth by the ability to adapt products to the Chinese market (63.9%). Lower production costs have continuously remained at the lower end of the motives for German companies. This perception reflects the focus of German companies in China and is important to understand how German companies will be affected by the ongoing restructuring of the economy. The rankings of these motivations have remained stable since monitoring began in Motives for market presence Q14 How important are the following reasons for your company s presence in China? Sales potential Presence in Asian market Following key accounts Ability to adapt products to local market Cooperation with local companies Lower sourcing/procurement costs Proximity to suppliers Lower production costs R&D % 14.5% % 25.5% 46.1% 39.9% 24.8% 61.2% 33.8% 33.3% 31.8% 29.1% 38.4% 30.7% 30.1% 29.4% 40.1% 30.1% 26.7% 28.9% 31.5% 18.8% 25.5% 33.5% % 11.3% 19.1% 26.2% 24.7% 27.5% 10.6% 10.5% very important important neutral not important This is also reflected when considering where the main markets are: for 75.3% of companies the Chinese market is the most important, while only 24.7% regard export destinations as their most important market. German companies operate in China to serve the Chinese market. The relevance of exports has continuously fallen from 36.5% in 2012 when it was first measured. As of 2015, however, this percentage has stabilized at levels comparable to those reported in 2014, indicating that the adjustments which occurred over the past few years have come to a halt. 2.6% turnover profits 9 P a g e

11 Main markets Q15 Please indicate the most important market in terms of revenue generation for your company s local operation. Main regions in China Q16 Which regions are the most important for your business? (multiple answers possible) % 16.8% 7.9% China EU Other exports Yangtze Delta 81.7% Bohai Rim 53.8% Pearl River Delta 45.9% Southwest 20.7% Central 15.5% North 14.8% Other South 7.2% West 6.6% Of the companies stating that China is their most important market, the main economic centers are by far the most important regions for their business. The Yangtze Delta (81.7%) dominates in importance, followed by the Bohai region (53.8%) and the Pearl River Delta (45.9%). Southwestern China, mainly focused around Chengdu and Chongqing, is the most important region outside of China s traditional economic centers, emphasizing the potential of the region. Central (15.5%) and northern region (14.8%) follow at some distance, while other southern provinces (7.2%), Fujian and Hainan, as well as remote western regions (6.6%) are important only to a small minority of companies. The data strongly suggests the continuous relevance of China s traditional clusters in the coastal areas which are by far the most developed and have the most economic clout. Despite higher growth rates, regions in China s interior are only slowly gaining in prominence. However, this also shows the growth potential of China s economy as the regional economic distribution becomes more balanced. Note on regions: Yangtze Delta (Shanghai, Zhejiang, Jiangsu), Bohai Rim (Beijing, Tianjin, Shandong, Hebei, Liaoning), Pearl River Delta (Guangdong), North (Heilongjiang, Jilin), Central (Shanxi, Anhui, Jiangxi, Henan, Hunan), Other South (Fujian, Hainan), Southwest (Sichuan, Chongqing, Guizhou, Yunnan, Guangxi), West (Inner Mongolia, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang). According to the vast majority (73.6%) of German companies, competition from Chinese companies continues to increase. Only a small minority (4.8%) does not face Chinese competitors in the market. The second strongest competition is from other European companies, though a considerably smaller share (30.4%) expects European competition to increase. Competition from the US and from other Asian economies is less intense, with fewer respondents expecting the competition to intensify. The data, however, also suggests that China is a highly competitive market. Origin of competition Q28 Please evaluate the origin of the competition faced by your local operation % 2.7% 18.9% 73.6% 10.6% % 27.6% 29.2% 6.6% 4.4% % 49.5% 50.8% 55.5% 31.4% 35.3% 3.8% 54.1% 5.7% 42.1% 1.6% 49.5% 48.4% 16.3% 15.6% 15.3% 10.7% 9.5% 7.9% China Europe Japan Korea US Taiwan Hong Kong increasing unchanged decreasing not a competitor Other 10 P a g e

12 German companies have a comparative advantage in goods higher up the value chain. The vast majority believes that they will be able to maintain their technological leadership ahead of Chinese competitors in their fields despite increasing competition. 47.2% find it very unlikely or unlikely that Chinese competitors will evolve to become innovation leaders within the next five years. Nonetheless German companies are also recognizing the increasing abilities of Chinese companies: 29.8% think that Chinese companies becoming innovation leaders is likely in the near future. The technological gap has been closing fast, and Chinese companies have been gaining ground in the lower and mid-market level in particular, with many eager to further advance their capabilities. Depending on the industry and market segment, German companies will need to adjust their strategies in order to maintain their competitive edge. Innovation leadership by Chinese competitors Q29 Do you think Chinese competitors can become innovation leaders in your industry within the next 5 years? Supply chain Q34 Does your local supply chain source goods from outside of China? no, do not source 17.16% no, China only 15.38% yes 67.46% Evaluation of importance of international supply chain Q35 Please evaluate the importance of other regions for the supply chain of your local operation, compared to your Chinese supply chain. Germany Other EU very likely 4.4% very unlikely 11.2% Malaysia Thailand Indonesia likely 25.4% Philippines Vietnam Other ASEAN unlikely strongly increasing increasing unchanged decreasing strongly decreasing not used neutral 23. The majority of companies (67.5%) source goods from outside of China, mostly from Germany (96.4%) and other EU countries (85.3%). 15.4% of respondents only source from within China, while ASEAN countries are of significantly lesser importance. The data also does not indicate that this is likely to change much in the coming years meaning that the supply chain German companies use to operate their business in China mainly relies on Europe and China itself. 11 P a g e

13 Business challenges Human resource related issues remain the biggest challenge for German companies operating in China. Finding qualified staff was reported as a problem or major problem for 82.4% of companies, an increase of 8.3 percentage points. Finding qualified staff has replaced increasing labor costs, which has not increased significantly as a problem since 2014, as the biggest challenge facing German companies. These issues were followed by problems with retaining qualified staff, which eased slightly amid higher uncertainty in the labor market as the economy cools. The prominence of challenges related to finding and retaining qualified staff is an indication of the shortage of skilled professionals and workers in China, which can be identified as a key obstacle in transforming the Chinese economy. Perceived currency risks are named as a challenge by 59.1%. Challenges pertaining to administrative hurdles (57.2%), domestic protectionism (42.8%), legal insecurity (48.1%) and protection of intellectual property (48.1%) underline the fact that the regulatory environment in China still remains a major challenge for German companies. Internet speed (56.6%) and internet censorship (51.6%), which was added this year, have established themselves as another area of concern. The anti-corruption campaign seems to have made an impact: corruption has dropped out of the top 10 business challenges for the first time since the German Chamber began conducting its business confidence survey. On the upside, with few exceptions, a lower share of companies are reporting any of the 23 items monitored business challenges as being a major problem or problem. Whereas in 2013 all items in the top 10 had values greater than 5, in 2015 it was only 7. This reflects a trend suggesting that German companies are increasing their ability in dealing with business challenges in China as well as improvements in the market environment. Top 10 business challenges Q17 Please evaluate your current business challenges. Note: a question internet censorship was added in Bureaucracy/administrative hurdles Protection of intellectual property Reforms Finding qualified staff Increasing labour costs Retaining qualified staff Currency risks Slow internet speed Internet censorship Domestic protectionism Legal insecurity 51.6% 48.2% 48.1% 48.1% 62.2% 59.1% 57.2% 56.6% 82.4% 75.8% Generally, the announced reforms continue to be largely welcomed by German companies for their very positive or positive impact. However, the initial enthusiasm recorded in 2014 has been scaled back due to a lack of noticeable progress. The continued anti-corruption drive (60.3%) was identified as having had a noticeable positive impact, but it was also the only item which was evaluated more positively compared to last year. The most welcomed area of reform continues to be plans to boost domestic consumption (61.) which also relates to increased urbanization (49.7%). A sharp drop has been recorded in the impact of improved environmental protection, decreasing by 19 percentage points. Areas pertaining to the financial regulations where reforms have been making the biggest advances are of less relevance to German companies. Evaluation of reform items Q18 Please evaluate the impact of the central government s economic policies on your company. Expanding domestic consumption Anti-corruption drive Improved rule of law Increased urbanization Increased role of markets Improved environmental protection Reduction of red-tape RMB exchange rate liberalization Interest rate liberalization Reducing industrial over capacities % 52.1% 49.7% 49.4% 46.7% 40.8% 37.6% 31.4% 24.1% P a g e

14 Investment climate Despite lower enthusiasm, the reform agenda is widely seen as contributing to a more positive investment climate (50.3%), just behind growth of companies respective industries (57.8%) and economic growth (57.6%). This means that, as China leaves its period of high growth, companies are adjusting their expectations accordingly and still view the evolving economic conditions with moderate growth as largely positive. Items pertaining to internet and modern IT infrastructure, however, are largely regarded as having a negative impact. Another area of concern is foreign companies being targeted by regulators and tax authorities. The most negative impact however is attributed to air quality, which 58.8% of responding companies identify as harming the investment. Effect on investment climate Q21 Please evaluate how the following have affected the investment climate. Growth of your main industry Economic growth Economic reforms Access to cloud computing 14.5% Regulators targeting foreign companies 9.7% Air quality 8.7% Taxation issues targeting foreign companies 8.5% Internet speed 8.1% Internet restrictions4.3% 57.6% 53.6% 50.3% 41.1% 32.5% 43.6% 33.6% 39.1% 41.4% 27.4% 25.2% 44.4% 49.3% 58.8% 44.1% % 56.5% % 5.3% positive neutral / no impact negative Despite shortcoming in the regulatory framework German businesses report that the local governments they deal with create a general business friendly environment. The vast majority (51.4%) of responding companies consider local authorities to be generally business friendly. Only 7. consider local authorities as being unfriendly towards their business. This perception has remained largely unchanged over the past two years. Business friendliness Q19 How friendly do you consider local authorities towards your business operation? 5 45% 4 35% 3 25% 2 15% 1 5% 8.5% 42.9% 41.7% 5.8% 1.2% very friendly friendly neutral unfriendly very unfriendly Companies generally evaluate the future attractiveness of their current location positively for all fields of business. Sales (73.4%) and services (65.) are evaluated the most positively. When considering the future attractiveness for production and R&D, a simple look at the aggregated data may leave a distorted impression, as it discounts the relative attractiveness found in first-tier and lower tier cities. More than 5 of companies located in first-tier cities consider their location very attractive or attractive for R&D in the future, as their locations attract the talent required. The view of companies in lower-tier cities on the attractiveness for conducting R&D is more mixed. Compared to companies in first-tier cities slightly fewer hold a positive view (45.9%), while nearly a quarter hold a negative view compared to 15.8% in first-tier cities. In contrast, 69.6% of companies in second-tier cities find their location attractive for manufacturing in the future while only 36.2% of companies in first-tier cities say the same for their location. Future attractiveness of current location Q20 Please rate how attractive your current location will be in the future to your company for the following business fields. Sales/Marketing Services 33.9% 25.4% 39.6% 39.5% 16.5% % 25.7% 7.9% 1.5% Sourcing/Procurement % 33.7% 8.3% 1.7% Trading 21.1% 34.5% 35.6% % Production related engineering 12.4% 36.9% 36.9% 10.6% 3.2% R&D 17.6% 31.5% 32.6% 11.1% 7.2% Production 16.8% 31.8% 27.3% 18.5% 5.6% very attractive attractive neutral not very attractive not attractive at all 13 P a g e

15 The share of companies planning to invest in new locations in China has remained stable at around 3. A nearly equal share of companies are considering new investments (29.1%), gaining slightly over The highest percentage (40.5%) stated that they do not have any intention to invest in new locations within China, but this figure has fallen from 45.7% in The figures are consistent with other findings of this year s study, indicating that hesitation to further expand investment in China has increased amid the shift to more moderate growth. Investment intentions in new locations in China Q22 Is your local business operation planning any new investments at new locations in China within the next 2 years? % 35.3% 17.2% 45.7% 30.4% 23.9% yes no maybe 40.5% 30.5% 29.1% The most common motivation for investing in new locations is following key customers (60.3%), while regional diversification (34.) and cost reduction (33.) are considered major motivational factors for considerably fewer responding companies. Investing in new manufacturing facilities (55.7%) remains the most common type of new investment. Of the companies considering new investment in production facilities, 65% of companies are from the automotive, machinery, and chemical sectors, underscoring the commitment of German companies to modern manufacturing in China. Motivation for new investment Q24 What are your major motivations for the new investment? (multiple answers possible) Type of investment considered Q25 What types of investment are you considering? (multiple answers possible) % 42.3% 33.5% 19.1% Production Services Sales/Marketing R&D As in previous years, the main economic centers in the Yangtze Delta, Bohai Rim and Pearl River Delta continue to be the favorite investment destinations of German companies, together accounting for 73.8% of the investment destinations named. Western China is again featured, with Chengdu (7.6%) and Chongqing (4.7%) in the top ten, while Wuhan (3.7%) is the third city outside of the main economic centers. Compared to the previous years there has been little change in the cities listed in the top 10, with the exception that Shenyang has dropped out for the first time since Top 10 investment locations Q23 If you are planning any new investments within the next 2 years, please specify the top 3 cities you consider to be the most likely locations. Following key customers 60.3% Regional diversification Cost reduction Investment incentives 12.9% Better qualified staff 11.9% Following key suppliers 6.7% Other 10.3% The overwhelming majority (68.8%) or respondents have no intention to shift investments to ASEAN countries. Only a minority of 1 plan to shift investment within the next two years, while 21.2% are considering doing so. These figures, however, should be seen in context. German 14 P a g e

16 investment in recent years has seen a heavy concentration into China while investment flows to other emerging markets of rapidly growing ASEAN countries are still at a very low base. The data does not imply that investments will be relocated outside of China, but that companies are looking for investment strategies within ASEAN as part of their Asia strategy. The main reasons for shifting investments are following key customers (51.) and regional diversification (48.1%). It is also natural that companies are on the lookout for newer cheaper investment locations to achieve cost reductions (45.2%). Intentions of shifting investments to ASEAN countries Q26 Is your company planning to shift investments to ASEAN countries in the next 2 years? yes 10. maybe 21.2% no 68.8% Research and Development Considering responses from all companies, 40.8% already engage in or plan to engage in some form of R&D in China in the next 24 months. When only considering companies which actually engage in R&D elsewhere, the share increases to over 5. While it needs to be recognized that the scope and depth of R&D will vary greatly, it is worthwhile to note that a substantial share of German companies in China already operate in R&D or are considering to do so. Looking at the industrial sectors of companies with global R&D, consumer goods (68.2%), automotive (64.9%), machinery (59.1%) and chemical (56.5%) have the highest share of companies engaging or considering engaging in R&D in China. This reflects that it is especially the technology and knowledge-driven sectors which are already active in research. It is, however, also noteworthy that 99% of the R&D interested companies note that finding qualified staff is their top business challenge. This issue again highlights the obstacles companies face if they wish to engage in a knowledge driven economy in China. Share of companies with R&D or intentions Q30 Do you already conduct R&D in China or do you plan to establish R&D activities in China in the next 24 months? 10 Intentions of shifting investments to ASEAN countries Q27 If you are considering to shift investment, what is your major motivation for investments in ASEAN countries? (multiple answers possible) no 50.4% Following key customers Regional diversification Cost reduction 48.1% 45.2% maybe 8.8% yes 40.8% Investment incentives 22.1% Better qualified staff 20.2% Following key suppliers 9.6% P a g e

17 Motivation for R&D activities Q32 Does your company engage in R&D at other global locations? Reasons for not engaging in R&D activities Q33 Please evaluate your decisions not to engage in R&D in China. (multiple answers possible) yes 47.1% no 52.9% focus on German R&D 72.2% intellectual property concerns 70. lack of local technical expertise 63.8% no need for local R&D 56.3% HQ restrictions 55.1% unfavorable research environment 47.5% The main motivation for companies to engage in R&D is the need for local adjustments as well as the competitive environment in China. On the other hand, next to a focus on R&D in Germany, companies that do not plan to engage in R&D in the near future are most concerned about the protection of intellectual property (70.) and the lack of local expertise (63.8%). Motivation for R&D activities Q31 What best describes your motivation for R&D activities in China? (multiple answers possible) need for local adaptation 89.8% need for local innovation 76.5% competitive environment 74.1% cost reductions 64.3% legal requirements 37.8% P a g e

18 Profile of responding companies The regional distribution of responding companies has remained relatively stable over the history of the survey. Over 2/3 of companies are located in the first-tier cities Shanghai, Beijing, Shenzhen or Guangzhou. The majority of the remaining companies are clustered around the key economic hubs in the Yangtze Delta, the Bohai Economic Rim and the Pearl River Delta. Taken together over 9 of responses come from companies located in China s main economic centers. A small pocket has been established around Shenyang in the north east while the number of respondents from other areas in China accounts only for a minor sample. Greater China presence Q2 Where in Greater China does your company have additional branches? 5 45% 4 35% 3 25% 2 15% 1 5% 49.1% 27.2% 16.6% 3.2% 22.1% China Hong Kong Taiwan Macau None Regional distribution Q1 In which city is your company located? Shenzhen/Guangzhou 10.4% Other North 10.6% Other South 7.1% Shanghai 41.9% Shanghai (36.4%) and Beijing (12.4%) are the most popular destinations for companies Greater China or Asia headquarters, accounting for nearly 5. Outside of mainland China, Hong Kong (11.1%) and Singapore (4.8%) are ahead of other first-tier cities in the south of mainland China. SMEs with a less diverse presence in China mainly maintain their regional headquarters in secondary cities. Greater China or Asia headquarter Q3 Where is your company s Greater China or Asia headquarter located? Beijing 14.6% Other East 15.4% Nearly half of respondents maintain multiple operations throughout mainland China. The diversification within China is mostly concentrated in the established economic centers, while companies are only slowly progressing to central and western regions. Over a quarter of companies maintain offices in Hong Kong, while 16.6% have an additional presence in Taiwan. Only a small fraction of companies have an additional presence in Macau. The share of companies with only one operation throughout the Greater China region has, however, fallen from 26% in 2013 to 22% in % 3 25% 2 15% 1 5% 36.4% 12.4% 11.1% 4.8% 2.3% 2.3% 16.2% 14.6% Wholly foreign owned enterprises (WFOE) are the most common legal form for German companies following a relaxation of the regulatory framework in China. The share of companies registered as WFOEs (69.9%) has increased progressively since 2007, when only 52. were registered as such and a higher share of companies were registered as representative offices (27.1%). After the shift in recent years the distribution of types of legal forms has remained relatively steady since P a g e

19 Legal form Q4 Please describe the legal status of your company. Turnover Q6 Please indicate your local operation s annual turnover for 2014 in RMB Other, 4.3% Rep Office, 6.3% Holding, 7.1% Joint Venture, 12.4% WOFE, 69.9% million 7.6% million 10.9% >999 million 15.2% <5 million 15.7% 5-50 million 25.3% million 25.5% Reflecting a strong presence of the German Mittelstand, 66.6% of companies local operation have under 250 employees. 21.5% have between 251 and 999 employees, while 13.9% have more than 1,000 employees. The distribution underlines the fact that German companies in China have less emphasis on labor intensive industrial sectors which rely on low wages. Similarly, the turnover of individual operations in China reflects the small to medium sized nature of German companies, with about 2/3 of companies achieving a turnover of under RMB250 million. Number of employees Q5 Please indicate the number of employees at your company s local operation % % > % < % The top five industries account for 67.5% of the responding companies. A more diverse industrial distribution, with each individual industry accounting for less than 5% of the total, makes up the remainder. Reflecting Germany s industrial strength in engineering, machinery and industrial equipment (25.8%) dominate, while automotive (14.9%) and consulting/legal services (13.4%), which include technical consulting and certification services, follow at some distance. Consumer goods and chemicals each account for over 5% of responding companies, closely followed by electronics and plastic and metal products with just over 4%. The industrial distribution has seen only minor changes in recent years, with changes in the sample only affecting the ranking of the industries following the top three, which have been unchanged since the German Chamber first began conducting its business confidence survey in Industrial composition Q7 Please specify the main industry of your company Machinery/Industrial Equipment Automotive Consulting/Legal Services Consumer Goods Chemicals Electronics Plastic/Metal Products Construction Finance/Insurance Tourism Environmental Products/Services Medical Supplies Logistics IT/Telecommunications Aerospace Pharmaceuticals Other 7.1% 6.3% 4.3% % 2.5% 2.5% 2.3% 1.8% 1.8% 1.3% 0.8% 3.8% 14.9% 13.4% 25.8% 5% 1 15% 2 25% 3 18 P a g e

20 The largest percentage of companies, 49.2%, maintains production facilities. This has slightly increased over the years despite continuous worries of China losing its competitive edge in manufacturing. Services (48.5%) and sales (41.7%) are the other main fields of business in which the responding German companies are active. Other areas of business are of significantly less importance. However, 16.2% of companies state that R&D is already part of their main field of business. Main field of business Q8 Please indicate your local entity s main field of business (multiple answers possible) % 48.5% 41.7% 17.4% 16.2% 15.9% 15.7% China is maturing as an investment destination for German companies, with most companies (59.8%) having already been operating in the country for over 10 years. This reflects the tremendous importance of China s market for German companies, with the majority of companies moving into the market as its economy increasingly opened up to foreign investment. However, the 14.2% of companies which have operated at their location for less than 3 years reflects that there is a steady influx of new investments throughout China. Overall, the majority of German companies have gained significant experience in the market and have been able to position themselves accordingly. Years in China Q9 For how many years has your company been physically present in China? 4-6 years 8.9% 7-10 years 17.2% 2-3 years 9.1% < 2 years 5.1% years 26.1% About the survey >15 years 33.7% Since 2007, the German Chamber of Commerce in China s annual business confidence survey has been a key gauge for measuring the business sentiment of German companies operating in China. As of 2015 the German Chamber of Commerce in China has over 2,600 member companies, representing about 5 of German companies operating in China. This year s survey was conducted between May 11 th and June 12 th, In total the survey comprises 38 questions, focusing on business outlook and performance, market conditions and investment climate. The survey was conducted online among our member companies. After controlling the dataset for quality, valid responses from 439 member companies were collected. In order to be representative of the total of 5,200 German companies in China at a 95% confidence level with a tolerated margin of error of 5%, a minimum required sample of 358 respondents was required. The sample also satisfies the distribution of region, company size, and industry resulting in a representative and statistically significant sample for the analysis of the German companies in China. 19 P a g e