VDMA Business Climate Survey China November 2016 Survey Results All Members’ Edition | Richard Hinz, Daniel Yoo

Agenda Part I: All members‘ section Participants benefit more General economic outlook About the survey Basic findings Main implications Participants benefit more Benefit from participation How to participate VDMA Business Climate Survey China November 2016 | Richard Hinz, Daniel Yoo Jan. 2017

Part I: All members‘ section The following results are available to all VDMA member companies. Part I: All members‘ section VDMA Business Climate Survey China November 2016 | Richard Hinz, Daniel Yoo Jan. 2017

General economic outlook (1/3) Turnover of the mechanical engineering industry in China – incl. VDMA member companies and other foreign-funded companies – to increase by 3% in 2016 in real terms. In nominal terms growth is only 2% due to low producer price indices, especially at the beginning of the year. For 2017, VDMA economists, currently, also expect 3% growth in real terms. Lately, industrial producer prices have been on the rise again, mainly due to higher prices of major raw materials. Increasing prices for certain raw materials might function as a stimulus for related mechanical engineering sectors. Despite existence of overcapacities concerning public infrastructure as well as residential or commercial property in some areas, government promotes further urbanization (e.g. „Jing-Jin-Ji“ project). VDMA Business Climate Survey China November 2016 Photo: Nonwarit - Fotolia | Richard Hinz, Daniel Yoo Jan. 2017

General economic outlook (2/3) Some industries in China might also rely on government‘s efforts concerning international development and traffic ways („One belt, one road“ project) Many industries require further automation and high- technology in order to enhance productivity and satisfy customer needs But currently, private investment in fixed assets is still growing at low rates, partly compensated by higher government investments Private consumption not yet tapped its potential Growing middle class Differentiating consumption patterns Rising awareness for quality goods Government willing to support private consumption in order to compensate for lower investment dynamics and reduce dependancy of exports VDMA Business Climate Survey China November 2016 Photo: Nonwarit - Fotolia | Richard Hinz, Daniel Yoo Jan. 2017

General economic outlook (3/3) Chinese exports might be at risk not only in case of low global demand, but also in case of frictions with USA concerning tariffs or currency policies Negative effects to all Chinese economy and beyond might also evolve in case of serious imbalances in the financial sector, though that case does not seem very likely because government reacted quickly in similar situations in the past VDMA Business Climate Survey China November 2016 Photo: Nonwarit - Fotolia | Richard Hinz, Daniel Yoo Jan. 2017

About the survey Survey duration: 4 - 30 November 2016 791 top executives of affiliates of VDMA member companies in China were adressed If an affiliate is active in more than one mechanical engineering sector, participants were asked to answer for as many of these sectors as possible Furthermore, participants were asked to provide answers for as many of their companies‘ customer industries as possible 105 participants completed the survey (response rate: 13,3%)  112 datasets concerning mechanical engineering sectors  131 datasets concerning customer industries VDMA Business Climate Survey China November 2016 Photo: pressmaster - Fotolia | Richard Hinz, Daniel Yoo Jan. 2017

Current business situation 48% of the participating affiliates consider their current business situation as normal, while 35% of them answered clearly positively and 17% clearly negatively. VDMA Business Climate Survey China November 2016 | Richard Hinz, Daniel Yoo Jan. 2017

Current utilization of production/service capacities The results concerning the current utilization of the affiliates’ production or service capacities are quite similar to the current business situation. The share of “normal” is 7 percentage points higher, while the “high” and “low” shares are slightly smaller. VDMA Business Climate Survey China November 2016 | Richard Hinz, Daniel Yoo Jan. 2017

Expected turnover 2017 (compared to 2016) For 2017 a majority of 59% of the participating affiliates expect an increase in turnover. Only 8% expect their affiliates’ turnover being lower than in 2016. VDMA Business Climate Survey China November 2016 | Richard Hinz, Daniel Yoo Jan. 2017

Expected number of employees in 2017 (compared to 2016) Only 7% of the affiliates are planning to reduce staff, whereas 36% expect an increase in headcount. VDMA Business Climate Survey China November 2016 | Richard Hinz, Daniel Yoo Jan. 2017

Changes to the preceding survey (June 2016) In order to compare the results to those of the preceding survey, we use the balances of the positive and negative shares in the participants’ answers to the questions. Current business situation: balance is now 18 percentage points, which is an increase by 9 pp from the preceding survey (9 pp). Current capacity utilization: balance up 5 pp to 15 pp now. Expected turnover: balance up 26 pp to 51 pp now. Expected number of employees: balance up 8 pp to 29 pp now. VDMA Business Climate Survey China November 2016 | Richard Hinz, Daniel Yoo Jan. 2017

Main implications Business climate according to survey participants has improved significantly in comparison with the preceding survey Especially, expectations for the near future quite optimistic now Increase in business climate is clearer than expected by VDMA economists In some mechanical engineering sectors more optimism is certainly justified due to the impulses from the investment and consumption side described on the first pages Nevertheless, results should still be interpreted with caution due to short track record of the survey VDMA Business Climate Survey China November 2016 Photo: Nonwarit - Fotolia | Richard Hinz, Daniel Yoo Jan. 2017

Participating companies benefit more. The purpose of the survey is to make use of the insights of executives working in China. Therefore, all VDMA member companies that have subsidiaries/affiliates in China can take part through their local executives. Through their active participation in the survey participants help us to ensure a high degree of validity of the statistical figures and provide specific analyses for various kinds of mechanical engineering products/services as well as customer industries Participating companies benefit more. VDMA Business Climate Survey China November 2016 | Richard Hinz, Daniel Yoo Jan. 2017

Benefit from participation A more comprehensive edition of this report („participants‘ edition“) is sent out to all Chinese affiliates that take part in the survey. That edition features additional analyses concerning Origin of expected turnover – with customers located in China vs. outside China Impact of economic drivers consumption and investment on customer industries Impact of economic drivers consumption and investment on mechanical engineering industry Please refer directly to your company‘s Chinese affiliate in order to get that report or find out whether or not the affiliate participates in the survey. VDMA Business Climate Survey China November 2016 Photo: everythingpossible - Fotolia | Richard Hinz, Daniel Yoo Jan. 2017

How to participate The survey is conducted twice a year. All data collected is treated confidentially and results are reported in aggregated form only. Invitations featuring a link to the web survey platform are sent out via email. For any questions, please contact Daniel Yoo Phone: +86 21 6249 0188 Email: d.yoo@chinavdma.org VDMA Business Climate Survey China November 2016 Photo: pressmaster - Fotolia | Richard Hinz, Daniel Yoo Jan. 2017

Your contact. Daniel Yoo Chief Representative VDMA China – Shanghai Representative Office Phone: +86 21 6249 0188 Email: d.yoo@chinavdma.org Richard Hinz Economist VDMA Economic and Statistic Affairs Phone: +49 69 6603-1389 Email: richard.hinz@vdma.org VDMA Business Climate Survey China November 2016 | Richard Hinz, Daniel Yoo Jan. 2017