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

Number of companies with their headquarters (holding company) 18 16 16 14 12 10 8 5 5 6 3 4 2 2 2 2 11111111111 0

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 9 10 6 5 4 3 5 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

Changes in Type of entity Present Status At start-up (2017) • More than half of the

Joint Joint respondent companies Ventur Ventur chose to establish a e e 5% Branc4% representative office when Other h Office Other they first started operations WOFE 4% 5% 7% 39% in China. WOFE 54% • Once they gained a foothold in China, some of the Repre Repre sentati companies changed their sentati ve ve entity status to wholly office Office 30% owned foreign enterprise 52% (WOFE) or branch office.

Changes in employee numbers Present Status At start-up (2017) • Around 90% of the survey participants had less than 300- 1999 2000- 1000- 50 employees in China 2% 9999 5000 when they first entered the 2% 4% >5000 2% less 50-299 300- country. than 7% 999 13% 49 • As of 2017, around 56% of 44% these companies had more less 50-299 than 50 employees, than 37% including three companies 49 89% with more than 1,000 employees. 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*

• Compared with that in 2016, the Substanti performance of 91% of the companies ally Almost Higher the same was either stable or positive. (>15%) (-2% to 26% 2%) • ~ 57% of the manufacturing companies 37% rated their revenue ‘substantially higher’, Lower (- 3% to while 80% of the companies related to 15%) healthcare, pharmaceuticals, and life 9% sciences rated their revenue ‘almost the Higher same’ or ‘higher’ compared with that in (3% to 15%) 2016. 28%

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. loss 13% • Out of the 30 companies that considered their Very Break- Profitable even business profitable or very profitable, 12 of 2% 33% them earned revenue exceeding RMB 100 million in 2017. • Very few of the responding manufacturing profitable 52% sector companies recorded losses in 2017. Out of the 20 companies, 17 registered profit or reached break-even in 2017.

*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 25-<50 Million 13% RMB 0 -<1 Million 30% RMB 10-<25 Million 13%

RMB 1-<2.5 RMB 5-<10 Million Million RMB 2.5-<5 14% 20% Million 10%

Investment plan for 2018*

Decrease or Increase by 1% close operations to 10% 3% 17%

Increase by 11% to 20% Stay the same 14% 50% Increase by 21% to 30% 5%

Increase by Increase by 31 50% and above to 50% 8% 3%

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

Factors for success in China*

25% 20% 15% 10% 5% 0%

• 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

Less • Among the 54 companies, over 9% 70% claimed they would be More 19% allocating the same or even The same more resources to build or 46% keep good relationship with Chinese authorities. Much less 20% Much more 6%

Percentage (%) of Local Workforce (Chinese Employees) 0% 13% • As of December 31, 2017, out of 54 0-50% respondent companies, 41 (76%) had 11% 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? 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*

For 2018 For the next 5 years Not • ~80% of the respondent Confi confi companies are confident about dent Neutr dent Neutr 2% their operations to be successful in al 63% al 24% 18% the next five years. • Companies involved in manufacturing are most confident

Confi about their future performance. ~ Extre Extre dent 80% have a positive attitude mely mely 67% confid confi toward the possibility of future ent dent success in China, both for next 13% 13% year and the next five years.

Business-growth outlook for 2018**

Worse than • Most of the respondent companies 2017 Same as 2% (43 of 54) are optimistic about their 2017 business and expect to see growth in 16% Much 2018. better than • Only 1 company (in the healthcare 2017 sector) is pessimistic about its growth 15% prospects in 2018. Better than 2017 67%

*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? 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

Years in business and Profitability*

100% 8 15 19 8

80% 63% 63% 53% 60% 47%

40%

20%

0% # of companies profitable ≤5 ≥6, ≤10 ≥11, ≤15 ≥16 (N = 50 companies (N companies =50responded) 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.

Initial Investment and Profitability* 26 4 6 5 100% 80% 67% 100% 50% 60% 42% 40%

20%

0% ≤25 ＞25, ≤50 ＞50, ≤100 ＞100 # of companies profitable (N = 41 companies (N companies =41responded) 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

Profitability in 2017

100%

80%

60%

40%

20% 50% 50% 48% 44%

0% # of companies profitable 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

100%

80%

60%

40%

20% 52% 50% 50%

0% 11% Manufacturing IT & BPO Telecommunications Financial Service # of companies profitable 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. 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 26 23 21 20 16 15

10 6

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.

Major Management Challenges in China**

40 38

30 25 20 14 13 11 10 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

*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 – 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 difficult1

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.

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