CFOs are turning positive and prioritize business ... · CFOs are turning positive and prioritize business expansion in 2017 China CFO Survey 2017 Q1 6 The upcoming opportunities

CFOs are turning positive and prioritize business expansion in 2017China CFO Survey 2017 Q1

ContentsForeword 1

Our survey 2

Macroeconomics and industrial environment 3

Strategy and operation 7

Expectations 12

CFOs’ role and mandates 16

Conclusion 21

Meet the team 22

Contact details for Deloitte's China Practice 23

CFOs are turning positive and prioritize business expansion in 2017 | China CFO Survey 2017 Q1

1

ForewordIt is our pleasure to present the findings of our 2017 Q1 China CFO Survey, designed exclusively for CFOs to have an opportunity to have their say on the latest hot topics in the market and share the challenges they faced in their role.

While there are encouraging signs of global economic recovery, 2017 is continuously filled with uncertainties, such as Brexit negotiation, changes in the international policy environment, unconventional monetary policy, debt overhang in emerging economies and volatile financial flows. Each of these challenges are keeping CFOs busy as they confront their changing roles. In addition to financial reporting responsibilities, CFOs are now taking up a much bigger role that covers different aspect of a company’s business, including strategy

William ChouNational Managing Partner China CFO ProgramDeloitte China

planning, business transformation, talent development, stakeholder management, and even digital technology adoption.

Deloitte's CFO Program brings together a multidisciplinary team of Deloitte leaders and subject matter specialists to help CFOs stay ahead of these challenges and demands. The Program encompasses a wide range of initiatives with the purpose of helping CFOs manage the complexities of their roles, tackle their company's most compelling challenges, and adapt to strategic shifts in the market. One of the key initiatives is the CFO Survey, which seeks to collect CFOs' opinions on business environment, company priorities and expectations, financial priorities, and personal priorities. Due

to CFO's differing responses and views to prevailing economic conditions, we again have conducted a separate CFO survey in the China market place to gain an understanding of the real challenges faced by CFOs in China and to provide our recommendations and offer a broader perspective on how the Chinese economy and its challenges fits into the global economic view.

This survey, which we hope you find insightful, is only one of the China CFO Program's key initiatives. We will keep you posted about our other initiatives that are coming up in the near future. If you have any feedback about the survey or our Program, please do not hesitate to contact us.


2

Our surveyWe are glad to share the results of China CFO Survey 2017 Q1 conducted by Deloitte China CFO Program, between January and March 2017. There are 132 respondents participated in this survey, among which 66% from MNCs, 24% come from POEs, and 10% come from SOEs. The industries and firm sizes targeted by this survey are widely dispersed as shown in below figures.

Figure 1. Distribution of participating enterprises by industry

Source: Deloitte China CFO Survey 2017 Q1, Deloitte Research

Manufacturing

30%

11% Technology, media & telecommunicaitons

Public sectors 1%

15% Consumer business

7% Energy & resources

Others 16%

11% Financial services

Life sciences & healthcare 9%

Figure 2. Total revenue of participating enterprises in the past financial year (Unit: RMB)


0% 5% 10% 15% 20% 25% 30%

23%

18%

above 10b

5b - 10b

500m - 1b

below 500m

26%

14%

19%

1b - 5b

3

Macroeconomics and industrial environmentCFOs are turning positive towards the macroeconomics environment even though occurring policy and economics concerns



4

While findings from our previous survey – China CFO Survey 2016 Q3 showed a rather concerned outlook (38%), in this quarter the overall sentiments has largely improved with only 25% being less optimistic for going

forward. Further brightening of the outlook is even more evident as 26% have a more optimistic outlook (only 8% in the previous survey).

Figure 3. Perspective towards economic sentiment changed over the last 6 months


Less optimicticMore optimistic No change25%26% 49%


5

Looking at the macroeconomic factors in China, the top 2 concerns of potential impacts arising from government (adverse) measures and larger economic turmoil remain from our study in 2016 Q3, the new risk on the top of mind is now the impact of geopolitical issues (11% up from 5%).

This result of combined elements including the US election results, further clarity of Brexit impacts, uncertainty of some European elections in 2017 and certainly the increased tensions geographically close to China (North Korea).

Currency fluctuations is also a key concern these days, with increased volatility (up and down) of RMB going forward, largely due to external factors (US etc). Finally interesting to note that China CFOs are watching much closer the impact of commodity prices and consider this a much higher risk as before (up from 1%).

Figure 4. Potential high-impact risks CFOs worry most


Detrimental government policy/regulation

Furthur economic turmoil/recession

Geopolitical issues

Currency fluctuation

Worsening capital availability/ cost

Trade protecionism

Rising commodity prices

Investment/execution missteps

Inflation

0% 5% 10% 15% 20% 25% 30%

28%

20%11%

10%

8%

7%

6%

6%

4%


6

The upcoming opportunities in the next 3 years as seen by the CFO’s focuses clearly on China changing economic model towards a consumer based economy. Also the continued urbanization and upcoming use of new

technologies (artificial intelligence) is top of mind and are likely to influence the allocation of resources of the companies operating in China.

Figure 5. Potential opportunities impact business growth most in the coming 3 years

Consumption upgrading

Urbanization

Artificial intelligence

The Belt and Road initiative

Sharing economy

Aging population


0% 5% 10% 15% 20% 25% 30% 30%

33%

25%

17%

10%

10%

5%

7


Strategy and OperationMarket expansion and revenue growth are becoming the top interests under the challenges of talent, industry regulation and competition.


8

The main challenges similar to our 2016 Q3 survey recognize that China continues to have regulatory challenges as well as market competition being the key issues managed to be successful. The talent agenda has risen compared to previous survey becoming the first key topic to CFOs and their organizations.

The regulatory issue is to be understood in connection with a domestic market access as well as sector specific regulations that is hindering companies from a faster market expansion. Combined with a contraction in available and suitable talent pool, is likely to make more difficult to companies to achieve revenue growth in the short term.

Figure 6. Industry challenges score


Mergers and acquisitions

Input prices

Overcapacity

Changing cost structures

Pricing trends

Market growth and structure

Competition

Industry regulation / legislation

Talent 10

9

8

7

5

4

2

1

1


9

Figure 7. Business focus in the coming year


0% 5% 10% 15% 20%

17%

16%

14%

13%

11%

11%

8%

6%

4%Introduce strategic partners

Financing

Increase productivity

Introduce new products and services

Cost control

Focus on core business

Revenue growth

Market expansion

While the growth ambitions remain strong and top of mind, resetting focus to core business and ensuring efficient resource spending are also now key topics to the CFOs in China.Such shift combining growth and efficient resource allocations (cost reductions / effectiveness) is more

than likely to dominate the CFO's focus in the coming periods, with an overall market, although bigger, but slowing down.


10

Source: China CFO Survey 2017 Q1, Deloitte Research

Although far away from market expansion and revenue growth, financing is always a necessary part in business development.By large CFOs are focused on ensuring that cash flow is sustained and monitored appropriately. Interestingly only 10% state that they use bank acceptance notes schemes and similar tools to foster operational cash flow,

while 15% note that their customers are offering such payment schemes more often.Also, with China financial markets eventually maturing and enabling financing solutions outside the classical bank lending, only 13% indicate that to be looking at domestic fund raising solutions.

Figure 8. CFOs' description for 2017 financing and cash flow expectation

27%

20%

15%

15%

13%

10%

0% 5% 10% 15% 20% 25% 30%

We are reviewing the use of Chinese capital markets to raise debt (Bonds)

We are receiving increased volume ofcustomer payments through

bank drafts / acceptance notes

We have excess cash in China andplan to distribute more dividends

We have excess cash in China and plan to use this for investments and innovation


11

Business are facing multiple risks in the coming year as shown in Figure 9. Government regulations, increasing operation cost and currency fluctuation are the factors that CFOs

Figure 9. Top three business risks in the coming year


concern most in the three highest levels. Besides, foreign competition and interest rate also matter.

0% 10% 20% 30% 40% 50%

1st Chioce 2nd Chioce 3rd Chioce

12


Expectations Management and leadership

In order to get a deeper understanding of the expectations regarding manag ement and leadership, this survey asked questions about the CFO's attitude towards potential risks, board issues and investors relationship.


13

Higher returns vs above-normal risksThe risk levels companies will face in pursuing higher returns vary for different respondents. Regarding the risks they have to deal with when pursuing higher returns, more than 40% CFOs believe the risks can be managed because they believe they won't take above-normal risks. While more than 30% CFO's believe above-normal risks are inevitable in pursuing higher returns.

Figure 10. Higher returns vs above-normal risks


35%

30%

25%

20%

15%

10%

5%

0%2%

25%

32% 31%

10%

Strongly agree Agree Neutral Disagree Strongly disagree

Growth and margins

Strategy and leadership

Products/services expansion and innovationAbout 60% CFOs agreed that they will expand the range of their products or services. Also more than 50% CFOs chose to develop new offerings than to evolve current ones. As a result, the expansion and innovation of their products/services will be the future focus and companies will invest more into products/services development and innovation.

Figure 11. Products and customers


Strongly agreeAgreeNeutralDisagreeStrongly disagree

35%

40%

45%

50%

30%

25%

20%

15%

10%

5%

0% 0%7%

33%

48%

12%


14

Market expansionAccording to the survey, companies are more interested in new customers. More than 60% CFOs believe they will focus more on new customers than to existing ones.

Investment and costsIn order to achieve their expansion and innovation target, 36% CFOs believed that investing in intangible assets is more important while 30% CFOs value tangible assets more. The industry difference, strategy difference, operating status are all the reasons that lead to this big difference.

Figure 12. Investment on intangible assets vs hard assets


35%

40%

30%

25%

20%

15%

10%

5%

0% 4%

26%

34%

29%

7%


Prices and costsSlightly more CFOs (31%) are willing to raise the prices for most of their offerings considering their growth and profitability while still about 25% CFOs may try to lower the price to achieve their strategy. In responding to the question about cost management, about 35% CFOs are more willing to cut direct costs while around 26% CFOs want to focus more on overhead costs.

Figure 13. Prices raising for offerings


35%

40%

45%

50%

30%

25%

20%

15%

10%

5%

0% 5%

20%

44%

26%

5%



15

Figure 14. Hiring more people


Talent

Hire more staff vs let staff goThe need for talents is vital to achieve the growth target. 53% CFOs agreed or strongly agreed that they will hire more people than they let go to keep the stability of their human resources and help promote the business development.

Highly-skilled staff vs lower skilled staffFurthermore, the CFOs are keen to hire more highly-skilled staff to help improve their staff structure. 71% agreed or strongly agreed that they will hire more highly skilled staff rather than lower-skilled staff.

35%

40%

45%

50%

30%

25%

20%

15%

10%

5%

0% 4%

20%23%

45%

8%


Figure 15. Hiring more highly-skilled staff


35%

40%

45%

50%

55%

60%

30%

25%

20%

15%

10%

5%

0% 0% 7%

22%

54%

17%



16


CFOs’ role and mandatesTitles of the respondents varies in their organizations. Among them, around 70% have a title of Chief Financial Officer or Finance Director and they are highly responsible for companies’ finance related functions.

Figure 16. Titles of the respondents

Chief Financial Officer (CFO) 45%

Others 7%

Finance Director 25%

4% Financial Controller

8% Finance Manager

11% Vice President



17

Figure 17. Functions respondents have responsibility for

Being at the heart of their companies, the responsibilities of the respondents differed in some aspects. Over 50% respondents are responsible for accounting/reporting, tax, treasury, FP&A, corporate finance, and risk/

20% 40% 60% 80% 100%

86%

82%

77%

71%

69%

52%

48%

43%

38%

28%

27%

26%

23%

17%

14%

10%

8%

5%

2%

0%

Others

Customer service / Support

Marketing / Sales / Pricing

Real Estate

Human Resources

Procurement / Sourcing

Legal

Regulatory / Policy

Investor / Public Relations

IT / Systems (general / corporate)

Internal Audit

Corporate Development

Strategic Planning

Risk / Compliance

Corporate Finance

FP&A

Treasury

Tax

Accounting / Reporting

compliance. Among them, accounting/reporting takes up to 86% of the respondents, Tax takes 82% and Treasury 77%.



18

From CEO’s perspective, the role played by CFOs can be reflected by their responsibilities. Since accounting/reporting is the most recognised responsibility of CFOs, 87% of the CEOs believe they should be fact

Figure 18. Roles of CFO from CEO's perspectives


providers, then cost czar, challenger, and capital manager prior to other roles, such as tracker, risk hawk etc.

0% 20% 40% 60% 80% 100%

Others

Inorganic growth catalyst

Project leader

Marco liaison

Organic growth catalyst

Stakeholder manager

Mobilizer

Investment manager

Risk hawk

Tracker

Capital manager

Challenger

Cost czar

Fact provider 86%

77%

75%

74%

72%

71%

67%

58%

55%

51%

49%

48%

34%

2%


19

CFOs balance their time on being a catalyst, strategist, steward and operator. Being a good cost czar, CFOs spend 22%, on average, of their time to be a catalyst, driving timely execution of changes in the finance function and the company, such as enterprise

cost reduction and other process improvements. They also locate their time evenly to be an operator, steward, and strategist in order to operate an efficient and effective finance.

Figure 19. Time allocation of CFOs


Strategist 18%Provide financial leadership in determining strategic business direction, M&A, financing, capital market and longer-term strategies vital to the future performance of the company

Steward 25%Protect and preserve the critical assets of the organization and accurately report on the financial position and operations to internal and external stakeholders

Operator 35%Balance capabilities, talent, costs and service levels to fulfill the finance organization’s core responsibilities efficiently

Catalyst 22% Catalyze behaviors across the organization to execute strategic and financial objectives while at the same time creating a risk intelligent culture


20

As a good fact provider, CFOs believe the top challenge for finance department is providing metrics, information and tools need for a sound business decision, which has the highest score of 16. They also believe the finance department has difficulty

Figure 20. Challenges for finance department (average score)


in influencing business strategy (10), followed by forecasting and reporting business results (8) and processes efficiency (7).

05 10 15 20

Supporting a major infrastructure orbusiness initiative

Currency movement

Addressing changes in accountingstandards and/or tax laws

Ensuring funding,liquidity and acceptable costs of capital

Supporting a major transaction(e.g.merger, acquisition, divestiture)

Aligning budgets and capital expendituredecisions with priorities / strategies

Ensuring initiatives achieve desiredbusiness outcomes

Forecasting and reporting business results

Providing metrics, information andtools needed for sound business decisions

05

16

10

8

7

7

6

6

5

5

4

3

3

2

1


21


ConclusionEven though facing policy regulations and geopolitical concerns, CFOs are becoming optimistic towards the economy and believed that consumption upgrading will be the most important driving factors for the business growth.

Respondents in this survey emphasized that expanding market and increasing revenue will essentially come through product range expansion, product promotion further accelerated with highly-skilled staff hiring. Also, finance department led by CFOs realized that they should increase their ability to provide metric, information and tools needed for sound business decisions and to influence business strategy. As a result, new technologies, new processes and new systems are the immediate concerns of the CFOs and their teams.

In conclusion, the roles that CFOs play can be characterized as Catalyst, Strategist, Steward and Operator in the development of business. We, Deloitte China CFO Program, are experts to take the CFOs through the career journey to set a path for their goals and objectives through the transformation process ~ The Lab™.


22

William Chou Emily LeungNational Managing PartnerChina CFO ProgramDeloitte China

National Program Senior ManagerChina CFO ProgramDeloitte China

Tel: +86 10 8520 7102Email: [email protected]

Tel: +852 2852 1686Email: [email protected]

Peng Li Jennifer Xu Jens EwertSOE Sector LeaderChina CFO ProgramDeloitte China

POE Sector LeaderChina CFO ProgramDeloitte China

MNC Sector LeaderChina CFO ProgramDeloitte China




Editor

Deloitte Research Team

Contact

Meet the team

About Deloitte China's CFO Program

China CFO Program brings together a multidisciplinary team of Deloitte leaders and experience professionals to help CFOs stay ahead in the face of growing challenges and demands. The Program harnesses our organization's board capabilities to deliver forward thinking and fresh insights for every stage of a CFO's career – helping CFOs manage the complexities of their roles, tackle their company's most compelling challenges, and adapt to strategic shifts in the market.

For more information about Deloitte China's CFO Program, visit our website at: www.deloitte.com/cn/en/chinacfoprogram.html

Sitao Xu

Chief Economist and PartnerDeloitte ResearchDeloitte China

Tel:+86 10 8512 5601 Email: [email protected]

Lydia Chen

Director Deloitte ResearchDeloitte China

Tel:+86 21 6141 2778Email: [email protected]

AcknowledgementWe would like to thank all participatng CFOs for their support in completing the Survey.

Jens EwertMNC Sector LeaderChina CFO ProgramDeloitte China



23

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CFOs are turning positive and prioritize business ... · CFOs are turning positive and prioritize business expansion in 2017 China CFO Survey 2017 Q1 6 The upcoming opportunities