EUROPEAN SME CAPEX BAROMETER

GE Capital EUROPEAN SME CAPEX BAROMETER SMEs business sentiment and capital investment in Europe s four biggest economies July 2011 www.gecapital.eu

Contents Introduction Executive summary Capital investment and business sentiment Funding Highlights on asset classes About GE Capital 3 4 6 8 10 13 2

Introduction The importance of small and medium enterprises to the European economy is widely acknowledged. Making up 99% of all European companies, SMEs provide about two thirds of all jobs in the private sector and play a critical role in creating wealth and driving growth: if SMEs flourish, so will the European economy at large. The period of sustained growth European SMEs enjoyed during the first years of the new millennium came to an end with the onset of the recent economic crisis. The new post-recessionary environment poses new challenges for small businesses. Rising cost of credit and conservative underwriting standards have made access to finance more difficult especially for small businesses, which don t have the financial strength of larger corporates putting additional pressure on SMEs needing finance to support their business. In an environment that remains challenging, this report attempts to get a pulse on how SMEs perceive the markets in which they operate, gauging their expectations and measuring their sentiment. Being part of General Electric, one of the largest industrial conglomerates in the world, allows GE Capital to provide SMEs with more than just money, combining financial acumen to an in-depth understanding of the assets they need to run their business. In this report, we focus our attention on investment in five asset classes, assessing SMEs willingness to invest in new equipment and identifying the key motivators behind their capital expenditure. The European SME Capex Barometer is based on 1000 interviews with SME owners, executives and decision makers across Europe s four biggest economies, whom I d like to thank for making this research possible. The first part of the report considers SMEs business sentiment which, although volatile, offers an interesting comparison between four key European markets, and how it relates to their intended spend in the coming 12 months. The second section focuses on how SMEs prefer to fund their investment and which financing sources they are likely to consider, while the final pages consider the survey data concerning investment in specific asset classes and the reasons behind it. We will repeat this survey in six months to monitor SMEs perceptions and changes in behaviour as the economy recovers, with the hope that this research provides a valuable insight into how small and medium enterprises are reacting to the new challenges they are facing. Elmar Lukas Managing Director, Pan-European Leasing GE Capital 3

Executive summary European SMEs are investing to stay competitive SMEs in France, Germany, Italy and the UK see opportunities in the market, viewing efficiency and productivity as the key enablers to succeed. The research highlights three areas where there are interesting similarities across the four countries. First, SMEs appeared relatively optimistic regarding the environment in which they operate. Although the number of pessimistic views varies across the four countries, between 46% and 50% of interviewees had a positive stance in all markets. Second, the top reason driving capital expenditure was to boost efficiency and productivity across the four markets, for almost all the asset classes considered. Third, SMEs prefer to fund their investment in new equipment with company capital. Leasing and rental solutions were their preferred alternatives in all asset classes considered, while loans were the least popular solution in all four markets. The survey also highlights some interesting differences among the four markets, especially concerning how likely SMEs are to consider different financing providers. Germany is leading the way Among all companies surveyed, German SMEs were the most positive in their outlook for the next 12 months and about half of them have a positive view on their business opportunities for the next year. Only 1 of interviewees expressed pessimistic expectations, although among micro-companies those with less than 10 employees the proportion reached 2. Not surprisingly, German companies are intending to invest more, on average, than their counterparts in France, Italy and the United Kingdom: about 120,000 each. This is 20,000 more than French SMEs, which rank second in terms of intended investment. Finally, research findings suggest SMEs in Germany have weathered through the recent crisis better than SMEs from the other three countries we surveyed: in the last year they lost an estimated 9.1 billion due to lack of capital investment, equal to 0.41% of the national GDP in 2010. This is the lowest estimate among the markets surveyed. 4 French SMEs consider new machinery to enable growth The optimism showed by SMEs in Germany is matched almost exactly by French PMEs: 50% of respondents had positive expectations, while negative views were just 18% of the total. The research findings show that SMEs in France will make the second highest investment in new equipment to support their business in the next 12 months: 100,000 each. Their spend in new manufacturing machinery is estimated to be by far the highest among the four countries surveyed. On average, 57,000 will be invested to renew their manufacturing machinery, which is equivalent to 5 of their total intended capital investment for the same period. This value is the highest both as a percentage of the total spend (UK is second at 48%) and in absolute terms (Germany s average spend on manufacturing machinery is 49,000). Such a high spend is only partly due to the deterioration of existing equipment. The top

reasons for investing in new manufacturing capabilities were to enhance efficiency and productivity and build capacity to service growth in new orders and new business. average capital expenditure for Italian SMEs will reach an estimated 89,500, which is a substantial amount but still significantly lower than Germany and France. Italy: it s time to catch up Italian SMEs appear to have lost more business than companies in the other three markets due to lack of capital investment in the last 12 months. By projecting the results of the Italian responses onto the whole market, it appears SMEs in Italy would have turned over 10.6 billion more, had they acquired the necessary equipment. While this number is not far off the estimates for France and Germany, 10.2 billion and 9.1 billion respectively, it is substantially higher in relation to the size of the national economy as it accounts for 0.8 of GDP (vs. 0.63% in France and 0.41% in Germany). Italian SMEs appeared the most likely to seek external financing solutions to fund their capital expenditure. About 48% of Italian SMEs had positive expectations, almost double the negative views (2), positioning Italy as the third most optimistic market behind Germany and France. Will this translate into new investments over the next 12 months? The findings suggest the UK SMEs still lacking confidence? The research indicates that capital investment from UK SMEs in the next 12 months will be the lowest among the four markets, at around 73,800 (equivalent to 85,000). UK SMEs were the least optimistic out for the four countries. Although 46% of respondents had positive views, about one in three interviewees had a negative take on the current environment. This lower consensus around the current economic climate suggests the SMEs perception of a steady recovery is lagging behind the other major European markets. UK SMEs were the most likely to use company capital to fund capex investments (63% of cases). Whether UK companies have a lower need for liquidity or, on the contrary, find it more difficult to obtain credit, is currently object of debate in the UK, where the banking system has been hit harder from the financial crisis. Interestingly, only 4 of UK respondents would consider finance from a traditional bank when looking to finance new assets - by far the lowest score among the four countries surveyed. About this report The European SME Capex Barometer is a report based on a GE Capital survey of 1000 small and medium enterprises in France, Germany, Italy and UK. 250 interviews in each market. Within each market, one third of companies surveyed had between 2 and 9 employees, one third between 10 and 49 employee and one third between 50 and 249 employees. All respondents had buying responsibility in the asset areas covered in the report. Over 50% of respondents were business owners or board level executives. 5

Capital investment and business sentiment German SMEs to make highest investment Average SME capital expenditure in the next 12 months SMEs in Germany are leading the rest of Europe in terms of their intended capex investment over the next 12 months. German companies are planning to spend more than 120,000 on average on equipment to support their business. SMEs in the UK are to invest significantly less, with the average company planning to invest 85,000. 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 120,361 100,181 89,479 85,614 FRA GER ITA UK Is optimism finally back? Almost one in two SMEs in the four markets surveyed were optimistic about growth opportunities for their current business environment. Germany and France showed the most positive sentiment, while the UK data showed a significant degree of uncertainty. How would you describe the levels of confidence/ optimism around growth in your sector currently? 3 18% 33% FRA 50% GER 50% 1 5,830, 9,776, 11% The German economy is growing steadily and 5,279, a slight decline in exports has been offset 6% by a solid internal demand. As consumers buy more, SMEs are regaining confidence and are increasingly willing to invest. Juergen Janz Commercial Leader, Equipment Finance GE Capital Germany 41,689, 49% 2 2 ITA 48% 46% 2 3 UK Positive Negative Neutral 23,040, 2 Average SME investment by country (estimate, euros) France: 100,182 Germany: 120,361 Italy: 89,479 UK: 85,614 Manufacturing Machinery Comm Vehicles IT Hardware IT Software Office Equipment 6060, 6% 8359, 8% 23774, 24% 5052, 56937, 5 8070, 9988, 8% 46088, 38% 7119, 6% 49096, 41% 6,959, 8% 10,499, 1 6,049, 28,137, 31% 37,835, 4 5,830, 9,776, 11% 23,040, 2 5,279, 6% 41,689, 49% 6 Manufacturing Machinery Comm Vehicles IT Hardware IT Software Office Equipment Manufacturing Machinery Comm Vehicles IT Hardware IT Software Office Equipment Manufacturing Machinery Comm Vehicles IT Hardware IT Software Office Equipment Manufacturing Machinery Comm Vehicles IT Hardware IT Software Office Equipment

11% 24% Investing in efficiency The most common reason for SMEs across Europe to be making capex investments is to upgrade equipment in order to enhance efficiency and productivity. More than 31% of all planned investments are to be made for this reason. This was more common than investments being made as a result of the deterioration of existing equipment with 24% of investments made for that reason. Growth opportunities? More than 19% of capex investments are being made in order to build capacity to service growth in new orders. SMEs in Germany were the most likely to be investing to support new orders, whilst companies in the UK were least likely to be investing for this reason. Italy losing out? Italian SMEs missed out on more than 10 billion of business in the last 12 months as a result of out-dated equipment. In total more than 38 billion of business opportunities were missed out on by SMEs in Europe s four biggest markets over the last 12 months. In relation to the size of the national economy, Italian SMEs lost significantly more opportunities than SMEs in the other three markets. What s the key motivator behind your planned 19% investment? 11% 36% Deterioration of existing equipment 24% 19% To build capacity to service growth in new orders / new business opportunities 36% Deterioration of existing equipment To build capacity to service growth in new orders / new business opportunities Upgrading existing equipment to enhance efficiency and productivity Investing in new types of equipment to support diversification into new product lines Planned expansion in domestic markets All other reasons Upgrading existing equipment to enhance What s the key motivator behind your planned efficiency and productivity Investing new types of equipment to support investment? diversification into new product lines Planned expansion in domestic markets All other reasons 2 20% 1 10% 0% 19% 1 16% Lost opportunities resulting from lack of capital investments by country (estimate, billion) 11 11 10 10 9 9 8 8 7 7 6 To build capacity to service growth in new orders / new business opportunities 10.2 9.1 10.6 9.5 Lost opportunities as a percentage of national GDP* (estimate) 1.0% 0.8 0.8% 0.6% 0.4% 0.63% 0.41% 0.63% 0. 0.0% *GDP source: IMF World Economic Outlook Database 7

Funding SMEs prefer to buy The majority of interviewees declared they would prefer to purchase new equipment outright rather than seeking for external finance. While there are significant variations across the four countries, SMEs would prefer to purchase new equipment using their company capital in 66% of the transactions considered. Leasing and vendor finance, preferred alternative to cash In all markets, leasing and vendor finance were the most popular alternative to using the company s capital, being the preferred funding method for about 26% of the investments. Only in 9% of cases SMEs would opt for a banking loan, making this solution the least popular. Such a high preference for self-funded investments can appear surprising at a time when SMEs are believed to need more credit to compete in a particularly challenging economic environment. It is however important not to confuse preference with what businesses do in reality. An outright purchase may appear to be the best solution, but in fact, external financing is often a better option: with limited available funding, most SMEs could obtain higher returns if they didn t tie up their resources in assets. The challenge for financing providers is, therefore, to offer SMEs financial products for their investment needs that are the best alternative to using their capital. There is a great opportunity for lenders that understand the equipment markets and are able to offer tailored solutions to meet the needs of small and medium enterprises. 100% 90% 26% Elmar Lukas Managing Director, Pan-European Leasing GE Capital 13% 8% 6% 80% Which of these 19% 2 finance options would you be most likely to use? (Total 70% 41% and by country) 60% 50% 40% 30% 20% 10% 0% 9% 68% 70% 66% 53% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 13% 8% 6% 19% 73% 2 68% 70% 41% 53% 73% 8 Securing a bank loan to cover payment Buying outright with company capital Leasing the equipment via a vendor agreement or structured finance Leasing the equipment via a vendor agreement or structured finance Securing a bank loan to cover payment Buying outright with company capital Securing a bank loan to cover payment Leasing the equipment via a vendor agreement or structured finance

Italian SMEs more incline to seek external finance Italian SMEs appeared to be the most likely to prefer leasing and other structured finance solutions (in 41% of cases) alongside outright purchase (53%). They are also the most likely to consider specialist lenders ( of respondents) and financing from the equipment manufacturer (26%) alonside traditional banks (5). French, German and UK SMEs are ownership-driven SMEs in the UK were the most likely to use company capital to fund new equipment (73% of transactions). French and German SMEs as well appeared ownership-driven with a high preference for outright purchase (68% and 70% respectively). UK SMEs less reliant on banks When asked which financing options (high street banks, specialist lenders and finance from manufacturer) they would consider to finance new equipment, a clear of UK respondents simply replied none of the above. Banks emerged as less popular among UK companies by comparison with the other three markets: only 4 of UK interviewees would consider a high street bank for funding new equipment acquisition, well below France (6), Germany (59%) and Italy (5). On a regional basis, this percentage was even lower among companies in London and the South East (40%) and the South West and West Midlands (38%). Availability of liquidity for UK companies is still constrained, hence we expect SMEs to become increasingly reliant on leasing and asset finance in the short term. Jon Maycock Commercial Director, Equipment Finance GE Capital UK When looking to finance new equipment/assets, which of the following financing options have you considered? 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 4 4 59% 59% 6 2 20% 2 19% 20% 2 19% 20% 2 16% 20% 16% UK Germany France Italy UK Germany France Italy 6 5 5 26% 26% 1 1 Traditional high street bank Specialist lender Finance from manufacturer None of the above Traditional high street bank Specialist lender Finance from manufacturer None of the above 9

Asset classes IT Hardware IT investment, the most linked to efficiency and productivity In 4 of cases, investment in new IT equipment was driven by a need for more efficiency and productivity. Although IT hardware tends to become obsolete more rapidly than the other asset classes considered, only about of intended investments in this area was directly linked to the deterioration of existing equipment. Does your company plan to invest in the purchase or hire in the next 12 months? 2 FRA Yes 78% No 18% 1 GER Yes 8 No This was the key motivator behind 50% of intended purchases in Italy, which was the market with the highest percentange of companies planning to invest in IT hardware (93%). About 30% of investment will be backed by external financing sources. ITA 93% UK 8 In general, we ve seen a hesitancy to invest and hence SMEs have been conserving cash. However, both replacement capex and equipment refresh cycle are starting to impact as companies seek to control their operational expenditure and maintain competitive advantage. Jon Maycock Commercial Director, Equipment Finance GE Capital UK What s the key motivator behind your planned investment? 3% 1 13% 2 39% 2 France Italy - IT Hardware 6% - manufacturing Germany - IT HardwareItaly - IT Hardware 8% 34% 24% Base: Respondents who are responsible or involved in the decision making process in IT hardware &/or software investment. Which of these finance options would you be most likely to use? Deterioration of existing equipment Deterioration of existing equipment Deterioration of existing equipment Deterioration of existing equipment Planned expansion Deterioration in domestic of existing marketsequipment To build capacity To build to capacity service growth to service in new growth To orders build in capacity new / new orders business to service / new opportunities business growth in opportunities new To orders build capacity / new business to service All opportunities other growth reasons in new To orders build capacity / new business to service opportunities growth in new ord Upgrading Upgrading existing equipment existing equipment to enhance Upgrading to efficiency enhance existing and efficiency productivity equipment and productivity to enhance Upgrading efficiency existing and productivity equipment to enhance Upgrading efficiency existing and productivity equipment to enhance effic Investing 10 in Investing new types in new of equipment types of equipment to support Investing to diversification in support new types diversification into of equipment new product into to new support lines Investing product diversification in lines new types into of equipment new product to support lines Investing diversification in new types into of equipment new product to suppor lines Planned expansion Planned expansion in domestic in markets domestic Planned markets expansion in domestic markets Planned expansion in domestic markets Planned expansion in domestic markets All other reasons All other reasons All other reasons All other reasons All other reasons 18% 9% Buying outright with company capital 49% 70% 16% 14% 13% Leasing the equipment via a vendor agreement or structured finance Securing a bank loan to cover payment 4% 3% 24% Italy - manu UK - Deterioration of existing equipment 18% To build capacity to 4 service growth in new orders / new busi Upgrading existing equipment to enhance efficiency and pro Investing in new types of equipment to support diversificatio

Office equipment Does your company plan to invest in the purchase or hire in the next 12 months? For many SMEs it s time to replace old printers Italian SMEs appeared the most likely to invest in new hardware, with 84% of respondents saying they will be sourcing items such as new multipurpose printers, scanners or faxes in the next 12 months. Across the four markets, 7 of transactions are likely to be financed with company capital. This is the highest percentage of self-financed investments across all asset classes surveyed. The main reason for investing in this area was by far the deterioration of the existing office equipment. 24% 2 FRA 76% UK 7 20% GER 80% 16% ITA 84% This trend was consistent across all markets, ranging from 36% of all OE investments in France and 40% in the UK. Base: Respondents who are responsible or involved in the decision making process in office equipment investment. What s the key motivator behind your planned investment? 3 4% France 6% Italy - office - manufacturing equipment Germany - office equipment Italy - office equipment 18% 36% 8% 8% 1 39% Deterioration Deterioration of existing equipment of existing equipment Deterioration of existing equipment Which of these finance options would you be most likely to use? 3% 3% To build capacity To build to service capacity growth to service in new To growth orders build in capacity / new new orders business to service / new opportunities growth business in new opportunities To orders build capacity / new business to service opportunities All growth other in reasons new To orders build capacity / new business to service opportunities growth in new Upgrading existing equipment to enhance efficiency and productivity Upgrading existing equipment to enhance Upgrading efficiency existing and productivity equipment to enhance Upgrading efficiency existing and productivity equipment to enhance Upgrading efficiency existing and productivity equipment to enhance Investing in new types of equipment to support diversification into new product lines 11 Investing in new types of equipment to support Investing diversification in new types into of equipment new product to support Investing diversification in new types into of equipment new product to support Investing diversification in new types into of equipment new product to sup lines Planned expansion in domestic lines markets lines Planned expansion in domestic marketsplanned expansion in domestic markets Planned expansion in domestic markets lines All other reasons Planned expansion in domestic markets 16% 1 28% 7 13% 14% 13% Buying outright with company capital Leasing the equipment via a vendor agreement or structured finance Securing a bank loan to cover payment Italy - m U 40% Deterioration of existing equipment To build capacity to service growth in new orders / new Upgrading existing equipment to 10% enhance efficiency an Investing in new types of equipment to support diversif Deterioration of existing equipment Planned expansion Deterioration in domestic of existing markets equipment

Manufacturing machinery Does your company plan to invest in the purchase or hire in the next 12 months? Investment in manufacturing significantly reliant on leases About 43% of the intended investment in manufacturing machinery will be funded with external financing solutions. This was the highest percentage across all asset classes. Leasing was the preferred funding method for 34% of transactions while only in 9% of cases SMEs would consider a banking loan. The main reason for investing in manufacturing equipment was to enhance efficiency and productivity. In Germany and the UK more than one in four intended investments was due to the deterioration of the existing equipment. 2 FRA 78% 1 ITA 88% GER 79% 19% UK 81% Italian companies were the most likely to invest in this area, although the intended average spend in Italy ( 37,835) was the lowest among the four countries. Base: Respondents who are responsible or involved in the decision making process in manifacturing machinery investment. Which of these finance options would you be most likely to use? 9% Buying outright with company capital 34% 5 Leasing the equipment via a vendor agreement or structured finance Securing a bank loan to cover payment What s the key motivator behind your planned investment? 13% 19% 1 34% Italy 6% - manufacturing France - manufacturinggermany - manufacturing Italy 6% - manufacturing UK - 9% 28% 2 2 11% 2 Deterioration of existing equipment To build capacity to 31% service growth in 20% new orders / new busi Upgrading existing equipment to enhance efficiency and pro Deterioration Deterioration of existing equipment of existing equipment Deterioration of existing equipment Deterioration of existing equipment Planned expansion Deterioration in domestic of existing markets equipment To build capacity to service To growth build in capacity new orders to service / new growth business in new opportunities To build capacity to service growth in new orders / new business opportunities To orders build capacity / new business to service opportunities All growth other reasons in new To orders build capacity / new business to service opportunities growth in new orders Upgrading existing equipment to enhance efficiency and productivity Upgrading existing equipment to enhance Upgrading efficiency existing and productivity equipment to enhance Upgrading efficiency existing and productivity equipment to enhance Upgrading efficiency existing and productivity equipment to enhance efficie 12 Investing in new types of equipment to support diversification into new Investing product in new lines types of equipment to support diversification into new product lines Investing in new types of equipment to support Investing diversification in new types into of equipment new product to support diversification into new product Investing in new types of equipment to support d Planned expansion in domestic lines lines markets Planned expansion in domestic marketslines Planned expansion All other in reasons domestic markets Planned expansion in domestic markets Planned expansion in domestic markets All other reasons 13% 13% Italy - manu Investing in new types of equipment to support diversificatio

About GE Capital One of Europe s largest commercial and consumer lenders, GE Capital operates at the very heart of European business, with over $80 billion in assets, 19,000 employees, more than five million customers and operations in 19 countries. For more information on GE Capital s presence in Europe please visit www.gecapital.eu Equipment financing solutions as unique as your business Combining GE s industrial heritage and GE Capital s financial expertise sets us apart from traditional banking institutions. GE Capital s dedicated European team of leasing experts helps businesses to drive growth by acquiring the assets they need to achieve their goals. GE Capital offers manufacturers and resellers of IT, office equipment and industrial equipment with tailored vendor finance programs designed to address the specific needs of their customers. For more information on GE Capital s Equipment Finance offer please visit www.gecapital.eu/equipment Contact us To get in touch please visit www.gecapital.eu/contactus 13

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