RMB Survey 2012

Page 1 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China Appreciation in China - Impacts of the development for the German industry doing business in China A study by EAC- Euro Asia Consulting in cooperation with the German Chamber of Commerce in China (GCC) Summarized for WirtschaftsWoche Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China Shanghai/Beijing, March 14th, 2012 Page 2 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China Index 1. Executive Summary 1. RMB Appreciation and Its Impact 3 2. Strategic Implications 4 3. Future Competitive Environment 4 2. Introduction 1. Background on the Study 5 2. Overview of Companies Involved 6 3. Renminbi Appreciation 1. Opinion on Renminbi Appreciation 6 2. Expected Further Renminbi Appreciation 8 4. Impact on Doing Business in China 1. Overall Business Operations 8 2. Procurement Activities 9 3. Financing Activities 9 5. Strategic Implications 1. Measures Taken by German Companies 10 2. Strategic Measures 10 3. Financial Measures 11 6. Localization Strategies 1. Stage of Localization 11 2. Difficulties due to Localization 12 3. Improvement of Localization Strategies 14 4. Advantages of German Companies in China 15 7. Future Development 1. Market Environment 16 2. Chinese Enterprises 16 3. German Enterprises 18 4. Competitive Environment 19 Page 3 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 1. Executive Summary The Renminbi appreciation has been an ongoing topic in the past. The USA is increasing its political pressure and asking for an even further appreciation - and so far China has obeyed and already appreciated its currency (against the US Dollar) by approx. 30 per cent since 2005. One question however remains: Does the imposed political pressure have any significant positive or negative influences on companies operating in China? To answer this question, EAC- Euro Asia Consulting and the German Chamber of Commerce in China (GCC) have conducted a study among 30 German companies doing business in China, aimed at identifying the impact of the Renminbi appreciation on business operations in China, especially among German companies, their current operations and future business strategies. 1. Renminbi Appreciation and Its Impact China’s Renminbi appreciation is seen as a necessity, which will support the growth of the overall Chinese economy as well as the wealth of its middle class. German companies included in the study appreciate the intervention of the Chinese government to ensure a constant and less volatile development and do not see any impact on their business operations if this development continues in a predictable manner. This is caused by the high localization rate of their business activities in China.  China’s Renminbi appreciation is seen as a macro-economic factor that can neither be reversed nor stopped due to the global political and economic pressure.  This development will help China’s economy to further grow and also support the overall target of the Chinese government to transfer China’s low value-add industries towards rather high- tech ones.  Companies interviewed see the appreciation as a chance for the further growth of the disposable income of the domestic middle class and local consumption.  They appreciate the intervention of the Chinese government as this ensures a gradual appreciation, which is stable, less volatile and can better be included in their planning processes.  When asked about their own business operations in China, companies included in the sample do not see any negative impacts resulting from a further (gradual) Renminbi appreciation. High localization and domestic operations independent from the exchange rate developments are major reasons for that.  Such localization does not only include the set-up of strong local footprints but also the adaption of products, go-to-market approaches and pricing concepts to the local requirements and needs. Page 4 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Strategic Implications Being highly localized, many German companies in China have adjusted their China strategies to the local market and do therefore barely see any measures to be taken due to the past, present and future Renminbi appreciation. Due to the growing market in China however, many saw (and still see) the need to not only focus on the high-end market segments anymore, but rather move towards a broader mid-end market.  Only 23 per cent of German companies interviewed stated that they are taking specific measures in expectation of a further Renminbi appreciation. The others stated that their localization is implying other strategic approaches that are much more important.  In the past, many of the companies included in the sample operated solely in the premium segments. By now, they focus increasingly on the broader mid-range market as well - and are therefore directly competing with local enterprises.  This requires those companies to further adjust their supply and value chains in China and adapt their product variety and characteristics.  The need for further localization is additionally fueled by a high price sensitivity of the Chinese customers as well as high cost inflation, seen for instance in rising labor and material costs. 3. Future Competitive Environment Overall, German companies talked to are confident that the Chinese market will further grow and their business thus be expanded. However, they also realize that domestic competition will increase significantly, mainly due to a better access to foreign markets and technologies and improved domestic cost structures. Therefore companies involved in the study agreed that they have to become both, more efficient and innovative in the future to stay competitive.  77 per cent of the enterprises included in the study expect to further gain market share in the future and thus take advantage of the still growing domestic market in China.  One major development seen in China has been identified as a strengthening competition. Domestic companies have gained in number and size and have also been able to significantly improve their product quality in the past.  The Renminbi appreciation forces Chinese enterprises to become more competitive in an international comparison. “Made in China” can no longer only be competitive based on cost advantages due to rising prices abroad caused by the strengthening Renminbi. Hence, Chinese companies have to increase their efficiency and productivity, make their production processes leaner and improve their product quality.  Local companies could also benefit from the Renminbi appreciation by getting cheaper access to foreign technology as well as potential acquisition targets and international markets.  For the future, this development implies that both foreign and local companies have to constantly become more competitive and efficient and have to adjust their production processes to those known from operations in developed countries.  Besides factors such as process improvements and expansion of currently established business operations, especially innovation will become one of the major differentiators in the future, which is one aspect where especially German companies see a great potential for themselves. Page 5 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Introduction 1. Background on the Study The appreciation of the Chinese currency has been an ongoing topic since 2005 and has been discussed in the media extensively. For many however it seems as though this is a rather politically-driven topic. The USA constantly encourages China to further appreciate the Renminbi against the US Dollar. For them the Chinese currency is still undervalued – in order to keep domestic exports more competitive internationally. And China partially complies with this pressure: Since 2005, the Renminbi appreciated by approx. 30 per cent compared to the US Dollar, despite the exchange rate being rather frozen between 2008 and 2010 due to the global financial crisis. In the past 6 months, a further appreciation by 2 per cent could be identified. This however is considered to be insufficient and not fast enough by the US government. Others support China’s decision as they fear that a sharper appreciation would have devastating impacts on China’s domestic markets, including the significant downsizing of its export business and thus severe increases in unemployment. In the future, China has to continue this development - being looked at by an increasing number of international leaders and governments. Both, Barack Obama and Angela Merkel emphasized on recent visits to Asia and China that due to its rise in economic and political power internationally, China also needs to increase its responsibility and involvement in international markets – in a way that everyone can benefit from it. China agrees that the export-driven economic model might not be sustainable for the future. In the 12th Five-Year Plan, the Chinese government has already outlined certain ambitions to reduce the dependence of China’s economy on the exporting business and to rather support the domestic consumerism to become a major factor of China’s anticipated further growth in. However with the current economic slowdown in Europe and the US, China’s most important export markets, the government has already announced to stop further appreciating the Renminbi if the situation continues to worsen due to the need for a rather stable exchange rate at such times. Based on the above described political discussions and developments, EAC- Euro Asia Consulting in cooperation with the German Chamber of Commerce in China (GCC) wanted to find out the impact of the Renminbi appreciation on the real economy. There are more than 4,000 German companies in China and this study has been conducted to identify strategic and operative measures and approaches that some of those companies are applying in China to stay competitive in the future and ensure China to remain one of their major growing markets. Page 6 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Overview of Companies Involved The sample of companies that EAC has talked to in the course of this study includes 30 companies, covering a broad range of industries as well as company sizes:  Industries covered include Machinery, Automotive, Electronics/ Electronical, Life Science/ Chemical, Consumer Goods, Domestic Appliances, Construction, Financial and Logistics  Companies involved in the survey can be classified as DAX, MDAX and other enterprises  Annual Turnover in China ranged from less than 10 to more than 7,000 mio EUR, 13 per cent of the companies did not openly announce their turnover figures 3. Renminbi Appreciation 1. Opinion on the Renminbi Appreciation All company representatives agreed that further Renminbi appreciation is necessary as it will encourage future growth of the Chinese economy. The exchange rate development however is seen as a macro-economic development introduced by the government that can neither be reversed nor stopped as it is also promoted by foreign government and political decisions. The companies talked to thus consider it to be a natural process that is in line with the value-adding production development. This was also stated by one of the participating domestic appliances companies: “It has been an ongoing topic. China has exported a lot of very low-cost products, primarily to the US. Recently, the value of those products has been going up – the Chinese have started to increasingly focus on higher-value products, they have invested in more R&D and naturally have seen an increase in wages. Naturally, the currency had to appreciate as well.” None of the companies involved could identify any significant impact of a potential Renminbi appreciation on their business operations in China in the near future. 2 major reasons were commonly named for that:  Renminbi is still strongly linked to US Dollar. This still rather strong relationship is taken into account by all of the companies operating fully or partially in US Dollar and can even be Page 7 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China taken into account in their yearly planning and calculation processes. Most companies (not purely focused on the domestic market in China) however stated that the majority of their import and export business is done in Euro. Additionally, for most companies the annual results will be consolidated by their HQ in Germany and thus also converted into Euro. As the Euro-US Dollar development (and hence the Euro-Renminbi development) is highly volatile, most companies stated that the weakening or strengthening of the Euro has a much higher impact than the appreciation of the Chinese currency. Especially the automotive industry was highly aware of this problem: “Despite the current appreciation, the development of the Renminbi (against the US Dollar) has been very steady, which allowed us to include the expected further development in our planning processes already. We are much more struggling with the Euro currency development, as this has been much more volatile.”  German companies interviewed for the study are highly localized. They are well- positioned in the Chinese market and have in most cases established local sourcing and sales and distribution channels and often solely depend on local cash-flows as well. Many stated that they are rather independently from the development of the Renminbi as well as other exchange rates as they are purely operating in Chinese currency. Additionally, the companies implied that they appreciate the involvement of the Chinese government and consider the gradual appreciation of its currency as highly supportive for the growth of the Chinese economy as well as the planning instruments of foreign companies active in China: “I am impressed with the continuity of the Chinese currency policy. It is a policy one can plan with and rely on. The Renminbi appreciation might be too slow for the country, but it is the perfect speed for the global economy.” (Company Representative of the Consumer Goods Industry) A more sudden and sharp appreciation would lead to severe obstacles in the Chinese market. Companies talked to feared that such development would destroy a large part of China’s economy – major parts of the export business. They stated that this might eventually lead to a halt of the currently seen wealth development of China’s middle class and would thus also lead to problems for foreign companies selling to the domestic market. “Even though the US is putting pressure on China, the Chinese government is letting the Renminbi appreciate gradually. A completely free exchange rate would bring severe risks to us, but the current approach is rather stabilizing the domestic market and the world economy.” (Company Representative of the Automotive Industry) Page 8 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Expected Further Renminbi Appreciation The majority of company representative talked to expect an annual appreciation of 3 to 5 per cent in the upcoming years. However some also expect the development of the appreciation to be much more volatile, as the following quote by one interviewee of the automotive industry outlines: “The direction of the Renminbi appreciation will not remain a one-way direction anymore – higher fluctuation is expected, going in both directions.” For fixed (yearly) budget calculations and planning, the Euro-Renminbi exchange rate used for at the business entities in China ranges from 8.0 – 9.0. The majority of companies however is using a Euro-Renminbi exchange rate between 8.3 – 8.5. Almost ¼ of companies said that they do not have a fixed exchange rate for yearly budget calculations, but rather adjust the exchange rate individually, based on current developments. This has been justified by the fact that most of their trade is being done in Renminbi and thus independently from other currencies. 4. Impact on Doing Business in China 1. Overall Business Operations 70 per cent of companies stated that they cannot identify any or only a marginal impact of the Renminbi appreciation on their overall business activities. Many said that even though imports into China are becoming cheaper, this development is not significant enough to really have an impact on their business activities. Others said they do not believe that such lower prices for imported goods will remain for a longer period in the future: “Our company operations are localized and we manufacture for the local market only. Due to a number of imports (that we still have to do because of a lack of those products in China) we are currently experiencing a positive impact. But we do not expect those advantages to be long-term as other developments, such as inflation and rising wages have a much larger impact.” (Company Representative of the Automotive Industry) Page 9 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 2. Procurement Activities 70 per cent of companies also do not see any significant impact on their procurement activities. 23 per cent of all companies interviewed identified a positive impact of the Renminbi appreciation on their procurement activities. Out of that share, only one company said that they are pro-actively taking advantage of this development, all other companies implied that they are taking away the additional profit but do not change their purchasing activities or strategy in any way: “Cheaper imports have a short-term positive impact, but we do not change any of our strategic decisions. We do not like to do any kind of speculations and rather stock our warehouses based on cost optimization.” (Company Representative of the Automotive Industry) 3. Financing Activities None of the companies could identify any current impact on their financing activities. One company stated that it might have a future impact – with a strengthening Renminbi they might soon have to better justify their investments as the HQ in Germany could ask for higher ROI due to higher risk factors. Currently however this cannot be noticed. Page 10 – Evaluation of Impact of Renminbi Appreciation on Business Performance of German Companies in China 5. Strategic Implications 1. Measures Taken by German Companies Most companies (77 per cent) said that they are not taking any measures in expectation of a potential further Renminbi appreciation. 2 further reasons for this decision were named by the interviewees:  As previously stated, the majority of companies involved in this study do not identify significant impacts