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 ofcompanies # ≤5 ≥6, ≤10 ≥11, ≤15 ≥16 (N = responded) = 50 companies(N Years in business Profitable Non-profitable Most respondents at the initial start-up stage ( ≤ 5 years experience) are generally profitable.