Growing Footprints of Indian Companies in China Survey-based Report February, 2018
Introduction Growing Footprints of Indian Companies in China, is a survey-based report of 54 Indian companies focused on their investments and operations in China. The report has been developed and published in collaboration with Confederation of Indian Industry (CII). The survey was designed and administered by CII. Evalueserve has collated and analyzed the responses received. The results provide insights into the locations, business activities, investments-made, performance of the 54 Indian companies in China etc. The research covers the 54 Indian companies operating in China, which have presence across multiple industries such as manufacturing, healthcare and financial services. It is a diversified set with their unique perspectives. The first section of this report covers present status of operations,, expectations of business performance and investment plans in 2018 for these participating companies; more importantly it looks at what it takes to run businesses successfully in China. The second section covers insights and analyses of the business operations. It tries to look at different factors which impact businesses in China and its interplay with other parameters. Three points of note: 1. This report is solely based on the responses received from Indian companies. It does not necessarily represent the views of CII or Evalueserve. 2. This report presents a snapshot of the opinions at a certain point of time. In order to glean more in-depth insights, there is a requirement to collect this data over time. 3. The respondents have been kept anonymous. We would like to thank all the companies that have participated in the study. We are also thankful for the contribution they have made to Chinese and Indian economy.
Section - 1 Respondent Profile
Respondent profile Operational Presence in China (1/7) 54 respondent companies collectively cover whole mainland China with their operation centers Number of companies with their operations in respective provinces Less than 5 5-10 Over 10 Most of these companies surveyed are present in eastern China. Shanghai is the most popular investment destination among the 54 companies surveyed, with about 76% investing here. Other cities/provinces where operations are clustered include Beijing, Jiangsu, Guangdong, and Zhejiang
Respondent profile Headquarters (2/7) ~30% of the survey-participants have headquarters in Mumbai; ~37% are involved in manufacturing followed by 17% in healthcare 18 16 14 12 10 8 6 4 2 0 Number of companies with their headquarters (holding company) 16 5 5 3 2 2 2 1 1 1 1 1 1 1 1 1 1 1 Most of the companies have headquarters across cities in India, mainly in Mumbai, Bangalore, and Hyderabad. Some of them have headquarters in other countries, such as the US, Singapore and even China. Indian origin companies: sector diversification* 25 20 20 15 10 10 9 5 6 5 4 3 2 2 1 1 1 1 1 1 1 1 1 1 0 Indian origin companies in China have presence across multiple industries, among the respondents, with majority in manufacturing (37%), followed by healthcare (19%), financial services (17%), IT&BPO (11%), telecommunications (9%), logistics (7%), and business consulting (6%). *includes companies with multiple sector-presence as well.
Respondent profile Type of entity and number of employees (3/7) As their operations expanded, majority of respondent companies increased their employee count in China and changed their entity type with time WOFE 39% At start-up Joint Ventur e 5% Other 4% Repre sentati ve Office 52% Changes in Type of entity WOFE 54% Present Status (2017) Joint Ventur e Branc4% h Office 5% Other 7% Repre sentati ve office 30% More than half of the respondent companies chose to establish a representative office when they first started operations in China. Once they gained a foothold in China, some of the companies changed their entity status to wholly owned foreign enterprise (WOFE) or branch office. Changes in employee numbers At start-up when they first entered the country. As of 2017, around 56% of these companies had more than 50 employees, including three companies with more than 1,000 employees. 50-299 7% 2% less than 49 89% 9999 2% Present Status (2017) 5000 4% >5000 2% Around 90% of the survey participants had less than 300-1999 2000-1000- 50 employees in China 300-999 13% 50-299 37% less than 49 44%
Respondent profile Self-assessment on business performance (4/7) About 54% of the survey participants registered y-o-y growth in 2017 and all of them expect their revenue-growth to be the same or better in 2018 Revenue comparison between 2017 and 2016* Substanti ally Higher (>15%) 26% Lower (- 3% to 15%) 9% Higher (3% to 15%) 28% Almost the same (-2% to 2%) 37% Compared with that in 2016, the performance of 91% of the companies was either stable or positive. ~ 57% of the manufacturing companies rated their revenue substantially higher, while 80% of the companies related to healthcare, pharmaceuticals, and life sciences rated their revenue almost the same or higher compared with that in 2016. Profitability assessment for 2017 For 2017, only 13% of the survey participants reported losses from their business in China. More than half of the companies considered their business profitable or very profitable. Out of the 30 companies that considered their business profitable or very profitable, 12 of them earned revenue exceeding RMB 100 million in 2017. Very few of the responding manufacturing sector companies recorded losses in 2017. Out of the 20 companies, 17 registered profit or reached break-even in 2017. Very Profitable 2% profitable 52% loss 13% Breakeven 33% *Answer to the question asked as - How does your company's expected revenue in China in 2017 compare to that in 2016? ** Answer to the question asked as - How profitable do you consider your China Operation in 2017?
Respondent profile Investment plans for 2018 (5/7) About 44% of the surveyed companies plan to increase their investments in their operations in China for 2018 Initial investment at start-up stage RMB 10-<25 Million 13% RMB 25-<50 Million 13% RMB 0 -<1 Million 30% RMB 5-<10 Million 20% RMB 2.5-<5 Million 10% RMB 1-<2.5 Million 14% Investment plan for 2018* Decrease or close operations 3% Increase by 1% to 10% 17% Stay the same 50% Increase by 50% and above 8% Increase by 31 to 50% 3% Increase by 11% to 20% 14% Increase by 21% to 30% 5% Out of the 36 survey participants (67%) that expect their business to be better than in the previous year, 50% plan not to invest more in 2018, while 17% plan to invest 10% more than they did the previous year. *Answer to the question asked as - What investments do you plan for 2018 in China?
Respondent profile Factors for success in China (6/7) More than 60% of the survey participants have claimed three key factors of success in China: quality, relationship with Chinese authorities and local workforce 25% 20% 15% 10% 5% 0% Factors for success in China* Among the respondents, 35 (65%) regarded the quality of products and services and a strong management team as the most important factors for success in China. The companies claimed that Guanxi or networking is also important. Resources allocated for Chinese authorities Among the 54 companies, over 70% claimed they would be allocating the same or even more resources to build or keep good relationship with Chinese authorities. The same 46% Less 9% Much more 6% More 19% Much less 20% Percentage (%) of Local Workforce (Chinese Employees) 0% 13% 0-50% 11% As of December 31, 2017, out of 54 respondent companies, 41 (76%) had over 50% of their employees hired locally. > 50% 76% *Answer to the question asked as - What are the top 5 most important factors for your company s success in China?
*Answer to the two separate questions asked as - How confident are you that your operations in China will be successful in the next one year? In the next 5 years? ** Answer to the question asked as - How do you expect your company's businesses to perform in 2018, as compared to 2017? Respondent profile Future Outlook for Business in China (7/7) ~77% Indian companies which participated in the survey are positive about their business growth in China Business performance confidence for future* Neutr al 24% For 2018 Extre mely confid ent 13% Confi dent 63% For the next 5 years Neutr al 18% Extre mely confi dent 13% Not confi dent 2% Confi dent 67% ~80% of the respondent companies are confident about their operations to be successful in the next five years. Companies involved in manufacturing are most confident about their future performance. ~ 80% have a positive attitude toward the possibility of future success in China, both for next year and the next five years. Business-growth outlook for 2018** Same as 2017 16% Much better than 2017 15% Worse than 2017 Most of the respondent companies 2% (43 of 54) are optimistic about their business and expect to see growth in 2018. Better than 2017 67% Only 1 company (in the healthcare sector) is pessimistic about its growth prospects in 2018.
Section - 2 Insight and Analysis
Insight and analysis years in business, initial investment, profitability (1/5) Out of all companies which are older than 10 years, more than 50% of them are profitable (N = 50 comp panies responded) # of comp panies profitable 100% 80% 60% 40% 20% 0% 8 63% Years in business and Profitability* 15 19 8 47% 53% Initial Investment and Profitability* 63% 5 6, 10 11, 15 16 Years in business Profitable Non-profitable Most respondents at the initial start-up stage ( 5 years experience) are generally profitable. Companies that are 6 10 years old tend to be less profitable, with more than half of them reporting either loss or break-even in 2017. (N = 41 comp panies responded) # of compan nies profitable 100% 80% 60% 40% 20% 0% 26 4 6 5 67% 100% 50% 42% 25 >25, 50 >50, 100 >100 Initial investment (in RMB Million) Profitable Non-profitable Among the survey participants, companies that invest more capital at the initial stage of establishing their operations in China tend to be more profitable than those that invest less. All companies that invested more than RMB 100 million in the initial stage reported profit. On the other hand, around 58% of the companies that invested less ( 25 million) found to be reporting break-even or loss in 2017.. *Includes answers to the question asked as - How profitable do you consider your China Operation in 2017?
Insight and analysis Revenue and performance confidence (2/5) Most respondent companies in telecommunications and IT & BPO sectors registered revenue growth in 2016 2017; most companies in the manufacturing sector are confident about their performance in 2018 Revenue comparison between 2016 and 2017 Telecommunication 67% IT & BPO 67% Manufacturing 57% Financial Service 44% 0% 15% 30% 45% 60% 75% Two-thirds (~67%) of the manufacturing companies that registered growth in 2017 are expecting a growth rate higher than 15% in 2018. Only half of the companies that registered growth in telecommunications and IT & BPO industries are expecting growth at this rate. Business performance confidence for 2018* Manufacturing 81% Telecommunication 67% IT & BPO 67% Financial Service 56% 0% 20% 40% 60% 80% 100% Among the respondents in telecommunications and IT & BPO sectors that are expecting growth in 2018, 25% are extremely confident about their performance in 2018. However, none of the companies in the financial services sector is extremely confident. *Answer to the question asked as - How confident are you that your operations in China will be successful in the next one year?
Insight and analysis Profitability and investment plan (3/5) The profitability of respondent companies varied slightly with different sectors; the financial services sector has the least number of companies planning to make additional investment in 2018 # of comp panies profitable 100% 80% 60% 40% 20% 0% Profitability in 2017 50% 50% 48% 44% IT & BPO Telecommunications Manufacturing Financial Service Established Years Profitable Non-profitable The percentage of profitable companies within different industries was almost similar in 2017. Investment plan for 2018 # of com mpanies profitable 100% 80% 60% 40% 20% 0% 52% 50% 50% 11% Manufacturing IT & BPO Telecommunications Financial Service Established Years Investment Plan for 2018 Around 50% of the companies surveyed in manufacturing, IT&BPO, and telecommunications industries plan to make additional investment in their operations in China in 2018. However, only 11% of financial service companies plan to invest more.
*Answer to the question asked as - What are the greatest external challenges faced by your company in China? (Choose max 5) **Answer to the question asked as - What are the greatest management challenges faced by your company in China? (Choose max 5) Insight and analysis Internal and external challenges (4/5) Indian companies in China have cited facing multiple challenges; more than 70% of respondents rated finding and retaining talent as their topmost management challenge Major External Challenges in China* 40 36 33 31 30 20 26 23 21 16 15 10 6 0 Among the 54 companies, about two-thirds of the them reported increasing labor cost as the primary external challenge. While 60% considered competition as one of the major external challenges, only around 16% considered it as a primary challenge. 40 30 38 Major Management Challenges in China** 25 20 10 0 14 13 11 10 7 7 7 6 Other primary challenges reported include obtaining required licenses, service and material quality, corporate governance, and distribution problems. Around 46% found understanding regulation an important management challenge, though none of them has rated this point as a topmost challenge.
Insight and analysis Working with local partners (5/5) About two-thirds of the respondents perceived collaborating with local partners as important for business success in China Importance of working with local partners Not important 5 Less important 12 Important 21 Extremely important 16 0 5 10 15 20 25 Ease of working with local partners Very easy 4 Easy 21 Difficult 28 Very difficult 1 0 5 10 15 20 25 30 Among the companies surveyed, about two-thirds cited that cooperating with local partners is important for doing business in China. However, more than half recognized that such collaborations as a difficult task. The major challenges stated were related to communication and language gap, government regulations, uneven understanding/expectation, trust issues, cultural differences, etc.
About CII The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes. CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded in 1895, India's premier business association has over 8,500 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 200,000 enterprises from around 265 national and regional sectoral industry bodies. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues. Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few. As a developmental institution working towards India's overall growth with a special focus on India@75 in 2022, the CII theme for 2017-18, India@75: Inclusive. Ahead. Responsible emphasizes Industry's role in partnering Government to accelerate India's growth and development. The focus will be on key enablers such as job creation; skill development and training; affirmative action; women parity; new models of development; sustainability; corporate social responsibility, governance and transparency. With 67 offices, including 9 Centres of Excellence, in India, and 11 overseas offices in Australia, Bahrain, China, Egypt, France, Germany, Iran, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 355 counterpart organizations in 126 countries, CII serves as a reference point for Indian industry and the international business community. The Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi 110003, India Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: info@cii.in, Web: www.cii.in
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