AUSTRIAIN CHINABUSINESS CONFIDENCE SURVEY 2019

COMMITTEDEXPERTS

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China remains one of the most complex markets for Austrian companies. While the continuing slowdown of its economy, recent policy uncertainties and trade tensions weigh on the sentiment of the Austrian business community, key business figures are holding up.

The vast majority of Austrian companies in China feel that the economic climate has not improved over the past year and are only slightly more optimistic for 2020. This in turn has dampened their enthusiasm for the market. Compared to previous years, most are either uncommitted or undecided regarding future investment plans in China. Longing for more certainty, they see an urgent need for often promised economic reform and improvements in fields like predictable economic policies and the rule of law.

Despite these challenges, most Austrian companies are still performing well in China. They have started to adjust their business model, putting less emphasis on China as a manufacturing hub and forming strategic alliances with Chinese partners, especially in emerging Asian markets.

These are just a few findings of this survey, which we conducted among subsidiaries of Austrian companies in China at the end of 2019. Its results feed into our assessment of the confidence of Austrian businesses in the market and our understanding of their views, perceptions and motives. This in turn will help us tailor our services to their needs.

On the following pages, we have tried to present an objective, databased description of the responses received. I would be delighted if this triggered and supported a much larger discussion on the future of Austrian business in China.

Beijing, December 2019

Dr. Martin GlatzCommercial CounsellorHead of ADVANTAGE AUSTRIA Beijing

1. Austrian business in China

1.1. General outlook

With a trade volume of 10,4 bn EUR in the first three quarters of 2019 (2018 Q1-3: 9,6 bn EUR), China remains Austria’s most important trading partner in Asia and its fifth most important in the world.The high relevance of China is also reflected in the fact that more than 650 Austrian companies maintain a subsidiary in mainland China alone.

Whereas business in China has been splendid for Austrian companies over the past years, uncertainty has started to creep in. Despite a steady growth of China’s economy, the vast majority (59%) of respondents now feel that the country’s general economic climate has deteriorated over the past 12 months, a marked acceleration of an existing trend. While 34% think that the economic situation

has remained unchanged, only 7% note that China’s general economic situation has improved.

It will, however, not get much worse. More Austrian companies (46%) expect economic conditions to stay the same in 2020, relegating pessimists (36%) to second place and optimists (18%) to third.

This reversal of sentiment has been noticeable since 2017, when most assessed both the economic status quo and the outlook more positively.

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Cloudy, with asilver lining

Despite the somber mood, business figures of Austrian companies are holding up. The vast majority of them report growth or no change in key areas of their activities in China over the past 12 months. 45% of respondents have even witnessed an increase in their annual turnover as well as of their order level (34%), while most companies’ capital expenditure (52%) and capacity utilisation (50%) have remained unchanged. Still, a third of all respondents report a decline in order levels (34%) and annual turnover (32%).

How would you assess the general economic situation / climate from a business perspective over the…

past 12 months? next 12 months?(%) (%)

has remained the same has deteriorated will improve will remain the same will deterioratehas improved

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Slight optimism prevails among Austrian companies regarding their business figures in 2020. A majority of respondents expect their annual turnover (46%) and order level (43%) to rise over the next 12 months. No change is anticipated in areas such as capital expenditure (54%), number of employees (44,5%) or capacity utilisation (41%).

Business figures better than sentiment

Development of key business figures over the past 12 months

Outlook on key business figures over the next 12 months

0

10

20

30

40

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60

total turnover order level capacity utilisation number ofemployees

capital expenditure

Over the next 12 months (2019) (%)

wi ll increase wi ll remain the same wi ll decrease

Total turnover Order level Capacity utilisation Number ofemployees

Capital expenditure

will increase will remain the same will decrease

(%)

0

10

20

30

40

50

60

total turnover order level capacity utilisation number ofemployees

capital expenditure

Over the next 12 months (2019) (%)

wi ll increase wi ll remain the same wi ll decrease

Total turnover Order level Capacity utilisation Number ofemployees

Capital expenditure

(%)

has increased

0

10

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total turnover order level capacity utilisation number ofemployees

capital expenditure

Over the past 12 months (2019) (%)

has increased remained the same decreasedhas decreased

0

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total turnover order level capacity utilisation number ofemployees

capital expenditure

Over the past 12 months (2019) (%)

has increased remained the same decreasedhas remained the same

0

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total turnover order level capacity utilisation number ofemployees

capital expenditure

Over the past 12 months (2019) (%)

has increased remained the same decreased

Apart from the Sino-US trade tensions, Austrian companies have also identified several other business areas, which continue to pose a significant challenge and in their view need to be improved or reformed. As in previous years, issues related to human resources such as rising labour costs and the lack of qualified staff continue to be of concern. The availability of labour in general seems to be a less pressing issue than in the past. Apart from that, respondents also identify quality matters as a significant challenge that should be earmarked for reform.

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1.2. Market challenges, improvements and reform

Trade tensions between China and the US are one of the main reasons for the dampened economic climate and lackluster business outlook. Back in late 2018, survey respondents were not yet affected by the hick-hack, which is now starting to hit them. They report negative impacts in nearly every business indicator, with investment plans and component costs suffering most. It is worth

noting that a significant number of respondents claim that the trade conflict has had positive effects on their local and global competitiveness.

Sino-US trade conflict generates uncertainty

How do the Sino-American trade tensions affect which aspect of your business?

(%)

2 0 0 0 0 0 2 3.5

2530

21

11

25 27

4550

59 61

72 7368 68

50

43

149 7

16

7 5 3 3.5

0

10

20

30

40

50

60

70

80

Customers'demand

Cost of rawmaterial

Cost ofcomponents

Investment plans Turnover Supply chainmanagement

Globalcompetitiveness

Localcompetitiveness

very positively positively negatively very negatively

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When it comes to the regulatory framework and government related matters, a desire for predictable economic policies (70%) stands out. This is partly due to the often delayed or sudden execution of new regulations, leaving foreign companies frustrated or unprepared. In the context of the uncertainty due to the Sino-US trade conflict, political stability (50%) comes second on the list followed by legal certainty (45%), further emphasizing a need for efficient measures to protect foreign stakeholders’ rights on the Chinese market.

Desire for stabilityand reform

Which 3 market related issues have the most urgent need for reform?

(%)

Which 3 key areas in public administration have the most urgent need for reform?

0

10

20

30

40

50

60

70

80

Predictableeconomicpol icies

Poli ticalstability

Legal certainty Taxes andexcise duties

Combatingcorruption and

crime

Publicprocurement

by tender

Employmentlaw

Less red tape Publicsponsorship

Other

Which key areas in public administration should be earmarked for reform? (2019)(%)

OtherPublicsponsorship

Less red tapeEmploymentlaw

Publicprocurement

by tender

Combatingcorruption and

crime

Taxes andexcise duties

Legal certaintyPoliticalstability

Predictableeconomicpolicies

Availability of local suppliersPurchasing power

Other

Productivity of the workforce

Quality standards Payment practices Cost of raw materials

A highly trained workforce Labour costs Quality of local suppliers

Access to credit-and capital markets

Infrastructure

Availability of labour

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Regarding their operational set-up, the majority of Austrian companies describe their current or potential role in a cooperation with a Chinese company outside of China as that of a strategic partner

(29%), followed by that of a supplier (20%), buyer (16%) and consultant (3%). The fact that most respondents consider themselves in such a strategic partnership reflects the growing involvement of Austrian companies in third markets, especially in countries participating in

the Belt & Road Initiative, where they have started to cooperate with quickly globalising Chinese companies.

In China for the world

1.3. Investment outlook & operational set-up

A trend of growing caution, which can be traced back to 2013 when numerous political campaigns and China’s “New Normal” were stirring up the economic debate, is now peaking. For the first time

since the initiation of this survey, the majority (36%) of respondents are not planning any China investments within the next two years, a significant change of commitment compared to previous years. Nevertheless, 34% expect to increase their investment in China,

with another 30% not having made up their minds yet. The almost equal distribution of the three camps of respondents may reflect the overall lack of direction as to the country’s future economic development.

Uncertainty dampens investment sentiment

Are you planning any major investment in your Chinaoperations within the next two years?

(%)

2. Method

This Austrian Business Confidence Survey was conducted in the fourth quarter of 2019 in the form of a quantitative online survey comprising ten questions in total. Both open and closed questions were asked, with the possibility to add comments to specify answers. Managers of Chinese subsidiaries or offices of Austrian companies across a wide range of industries were invited to participate.

3. Profile of participants

48% of respondents stated that their main activity in China was to act as a subsidiary of an Austrian company distributing Austrian products or services. 29% identified themselves as manufacturers, down from 44% in 2017, suggesting that China is becoming less important as a manufacturing base for Austrian companies. 23% of respondents identified themselves as providers of services in China.

What is your current or potential role in a cooperationwith a Chinese company outside of China?

7

29

2016

3

32

2019

Strategic partner Supplier Buyer Consultant N/A

29

2016

3

32

2019

Strategic partner Supplier Buyer Consultant N/A

(%)

What is the main activity of your company in China?

3945

4844

36

29

17 1923

0

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60

2017 2018 2019

Subsidiary distributing Austrian products or services

Local producer

Service provider

3945

4844

36

29

17 1923

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40

50

60

2017 2018 2019

Subsidiary distributing Austrian products or services

Local producer

Service provider

3945

4844

36

29

17 1923

0

10

20

30

40

50

60

2017 2018 2019

Subsidiary distributing Austrian products or services

Local producer

Service provider

39

4548

44

3629

17 1923

0

10

20

30

40

50

60

2017 2018 2019

Subsidiary distributing Austrian products or services

Local producer

Service provider

(%)

WORLDCLASSPARTNERS

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ADVANTAGE AUSTRIA BeijingAustrian Embassy – Commercial Section2280 Beijing Sunflower Tower, No. 37 Maizidian Street, Chaoyang DistrictBeijing 100125, PR ChinaT +86 10 8527 5050F +86 10 8527 5049E peking@advantageaustria.org

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