Insight Magazine March 2012 by The American Chamber of Commerce in Shanghai

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INSIGHT March 2012

The Journal of the American Chamber of Commerce in Shanghai

amcham shanghai President

Brenda Foster Directors Business Development & Marketing

Karen Yuen Committees

Stefanie Myers insight editor-in-chief/ Communications & Publications

F eat u res

12 The Chinese Wear Prada

LUXURY MARKET

By Meredith Rodriguez

China is poised to become the world’s largest luxury market, and brands such a Hermes, Louis Vuitton and Chanel are among the most popular.

David Basmajian Events

Jessica Wu Finance & Administration

Helen Ren

Membership & CVP

Linda X. Wang

INSIGHT

18 San Francisco and China INTERVIEW

By David Basmajian

ChinaSF is leading the City’s efforts to build commercial ties with China. Jennifer Matz talks about San Francisco’s successes and challenges.

managing editor

Bryan Virasami Senior Associate Editor

Esther Young

Associate Editor

Ryan Balis Design

Alicia Beebe

24 Going Global COVER STORY

By Bryan Virasami

Chinese companies may be big in scale but what’s stopping them from becoming a preferred global brand?

Layout & Printing

Mickey Zhou Snap Printing, Inc.

INSIGHT Sponsorship sponsorship manager

Sophia Chen

(86-21) 6279-7119 ext. 5667 Story ideas, questions or comments on Insight: Please contact David Basmajian (86-21) 6279-7119 ext. 8066 david.basmajian@amcham-shanghai.org Insight is a free monthly publication for the members of The American Chamber of Commerce in Shanghai. Editorial content and sponsors' announcements are independent and do not necessarily reflect the views of the governors, officers, members or staff of the Chamber. No part of this publication may be reproduced without written consent of the copyright holder.

35 What's Allowed? INVESTMENT

By Matthew Garner

The Chinese government has released the new Foreign Investment Catalog that details the country’s priorities for foreign investment. Plus, see a detailed breakdown of the catalog by Baker & McKenzie.

I nsigh t s tandards

11 Movers & Shakers 40 The Chair’s Letter

34 Deal of the Month 50 Executive Reading Room

I N S I D E A m C ham Shanghai Centre, Suite 568 1376 Nanjing West Road Shanghai, 200040 China tel: (86-21) 6279-7119 fax: (86-21) 6279-7643 www.amcham-shanghai.org

41 Board of Governors 42 New AmCham Shanghai Members 45 Government Relations 46 Inside AmCham Shanghai

Cover design by Marianne Kaulima

Editor's note

David Basmajian editor-in-chief/ Director Communications & Publications

ike many, I visited the U.S. over the Chinese New Year holiday and I was immediately reminded of the differences from my adopted home, Shanghai. One obvious difference is being able to cross the street without having to dodge speeding taxis and city buses because in San Francisco, pedestrians rule the road. But on this trip I noticed something else for the first time – virtually no Chinese brands in U.S. stores. Sure, you might find a Haier mini-fridge here and there and you might even see someone tapping away on a Lenovo PC at a local Starbucks. But finding a cold Tsingtao is next to impossible. Americans can’t pronounce it and they don’t drink it. Got Yili milk? Not a chance. But why is this? By profitability and revenue, Chinese companies rank among the biggest in the world and yet very few Chinese brands have broken into what is still home to the world’s most prolific shoppers, the U.S.A. It seems that all the profit in the world is not enough to transform a company into a household name…

or a global brand. Insight’s managing editor Bryan Virasami tells us why in this month’s cover story. China’s Vice President Xi Jinping also just returned from a visit to the U.S. In addition to a return trip to Iowa and taking in a Laker’s game, Xi met with President Obama, Vice President Biden and congressional leadership and the U.S.-China commercial relationship was center stage. By some reports Xi endured a laundry list of grievances focused on China’s trade practices. But it is worth noting that many U.S. leaders, including the President, also highlighted the potentially historic opportunity the China market offers to American companies and the U.S. economy as a whole. AmCham Shanghai’s 2011-2012 China Business Report, released on February 15 in Shanghai, and reviewed in this issue, catalogs the ups and downs for U.S. companies in China - and trends to watch in 2012. Also be sure to read AmCham Shanghai Chair Ken Jarrett’s take on the Report’s findings and his thoughts on Xi’s visit on page 40.

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News

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CHINA BUSINESS

Nano-tech center opens in Suzhou Suzhou officials and business representatives officially opened a nanotechnology center in Suzhou Industrial Park (SIP) in Suzhou, Jiangsu province on January 30. In a ground-breaking ceremony, attendees celebrated what marked the opening of 24 projects with a total investment of RMB10 billion (US$1.6 billion). The one million square meter center has attracted Chinese social networking site Renren.com’s gaming R&D and operation base, as well as hi-tech research institutes like the Suzhou Institute of Nano Materials at Nanjing University of Technology. Officials anticipate the center will grow to house 100 new projects in 2012 with a total investment of RMB50 billion. The center is expected to add RMB35 billion in hi-tech industrial output for Suzhou.

Number of Chinese online surges China’s Internet population is surging by several recent measurements. Data from the state-run China Internet Network Information Center show the number of Chinese Internet users reached 513 million by the end of 2011, or 38% of the total population. Use of mobile phones to access the Internet was up 17% yearon-year to 356 million users. Daily deals websites particularly are popular with 64.6 million users accessing such sites, up 244.8% year-on-year and commanding RMB11 billion (US$1.7 billion) in transactions. Meanwhile, Chinese microblog users surpassed 250 million in 2011, up 296% from the number in 2010. The recent explosion in popularity of such microblogs as Sina Weibo means nearly half, or 48.1%, of all

U.S. streamlines visa policy in pilot The U.S. Embassy in Beijing recently announced important changes to U.S. visa procedures that are aimed at streamlining visa processing. As part of a new Interview Waiver Pilot Program launched on February 13, 2012, consular officers are permitted to waive interviews for some qualified non-immigrant applicants who are renewing their visa within 48 months (four years) of the expiration of their previously held visa, and within the same classification as the previous visa. According to the Embassy, the pilot is applicable to the following visa holders in China: “In China, many previous holders of B (temporary visitors for business/pleasure), C1 (transit), D (crewmembers), F (students), J (exchange visitors), M (nonacademic students), and O (visitors with extraordinary ability) visas will be able to renew their visas if they have been expired less than 48 months (four years), without another interview.” For further details,visit the U.S. Embassy in Beijing’s website at http://beijing.usembassy-china.org.cn/ or contact AmCham Shanghai’s Corporate Visa Program (CVP) office at 021 6279-7056 or cvp@amcham-shanghai.org. Chinese on the Internet use microblogs.

Alibaba to privatize unit Chinese e-commerce company Alibaba Group Holding Ltd. has plans to privatize its publicly traded corporate web portal, Alibaba.com Ltd. “Taking Alibaba.com

private will allow our company to make long-term decisions that are in the best interest of our customers and that are also free from the pressures that come from having a publicly listed company,” said Alibaba Group Chairman Jack Ma in a statement. Alibaba Group owns 73.5% of the Hong Kong-listed web unit. The

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buyout of the remaining 26.5% of shares is valued between US$2.3 billion to US$2.5 billion. Alibaba Group reportedly has signed a US$3 billion loan to finance part of the buyout.

China to be No. 1 gold buyer China is on track to become the world’s largest gold buyer in 2012, overtaking India. According to the World Gold Council, Chinese gold demand increased to 769.8 metric tons last year, up 20% year-on-year. Of the amount purchased by Chinese, 258.9 tons, or 34%, account for investment demand. In 2012, Chinese gold demand is expected to advance 20% to more than 900 tons. By contrast, Indian interest for the precious metal is weakening on a depreciating domestic currency, sending demand there down 7% year-on-year to 933.4 tons in 2011. Investors increasingly are valuing gold not only as a commodity but as a store of wealth, sending gold prices to a record US$1,920 an ounce last September. CORPORATE NEWS

iPhone for China Telecom Apple, Inc. and China Telecom Corp. reached an agreement for the state-owned wireless carrier to offer the iPhone 4S smartphone in China beginning March 9, expanding Apple’s access to the world’s largest mobile market. China Telecom is China’s third largest mobile phone operator with 129.3 million subscribers at the end of January 2012. Previously, the iPhone was available only on China Unicom (Hong Kong) Ltd.’s network, which has 202.8 million users. China Mobile Ltd., the country’s largest mobile carrier, is in talks with Apple to offer the iPhone to its more than 655.4 million subscribers. Sales of iPhones increased 250% year-on-year in China over the first three quarters of 2011, making China Apple’s second largest market worldwide.

Wal-Mart to take controlling stake in Yihaodian

U.S. retail giant Wal-Mart Stores, Inc. has moved to take a 51% controlling stake in fast-growing Chinese e-commerce site Yihaodian. Yihaodian, based in Shanghai, sells 180,000 products ranging from groceries to consumer goods and has 5,400 employees across China. Wal-Mart, which already has a minority interest in the Chinese site, aims to boost its offerings to Chinese consumers through online shopping and social media, as well as expand its presence in central and western China. Terms of the deal were not disclosed, and Chinese regulators must approve the transaction. In 2011, Yihaodian’s sales more than tripled to RMB2.7 billion (US$432 million). Chinese consumers purchased RMB806 billion worth of products online in 2011, up 55% year-on-year.

GE to build Chengdu healthcare center General Electric Co. (GE) will build a healthcare innovation center in Chengdu, capital of Sichuan province, in a move to expand the company’s presence in China and provide local healthcare products and services tailored for the domestic market. GE plans for the center to go beyond a traditional R&D center by adding marketing functions. It will be located in Tianfu Software Park and has a scheduled opening in 2012. The center aims to help reduce medical costs and improve the quality of healthcare available. According to a November 2011 plan, GE will spend half a billion U.S. dollars on innovation units in China. These include centers in Xi’an and Shenyang in addition to Chengdu.

Adidas leverages ‘Linsanity’ Adidas AG is bringing National Basketball Association (NBA) jerseys worn by New York Knicks breakout basketball star Jeremy Lin to China. As Insight went to press, the German sports apparel company announced the jerseys would be for sale across its 6,700 stores in China in “the next couple of days.” Adidas holds exclusive rights to the making of NBA uniforms. Following a stellar February performance

in helping the Knicks win multiple games, demand for Lin accessories has risen to make his No. 17 the top selling jersey on the NBA online store. Nike currently has Lin under a sponsorship agreement for another year, and Adidas has not signaled whether it has plans to sign Lin. MACROECONOMICS

January inflation rises 4.5% Data from China’s National Bureau of Statistics show the country’s Consumer Price Index (CPI) unexpectedly increased 4.5% year-on-year in January, up from 4.1% in December and 4.2% in November. The main driver of the increase was rising food prices, which accelerated 10.5% year-on-year in January, up from 9.1% the previous month. China’s Producer Price Index (PPI), a measure of inflation at the wholesale level, expanded 0.7% year-onyear in January, down from December’s 1.7% recording. Inflation is accelerating at a faster pace in Shanghai than nationally. The Shanghai Statistics Bureau reported the city’s CPI increased 4.9% year-on-year in January with food prices for the city increasing 11.5%.

FDI inflows decrease Data from China’s Ministry of Commerce (MOFCOM) show foreign direct investment (FDI) into China decreased for the third consecutive month in January to US$10 billion, sliding 0.3% under the monthly value one year ago. FDI from the U.S. increased 29% year-onyear to US$342 million. The ongoing debt crisis in Europe contributed to sending FDI from European countries down 42% year-on-year to US$452 million in January. Meanwhile, Chinese outbound FDI reached US$4.4 billion in January, up 60% year-on-year. In Shanghai, FDI for 2011 was a record US$20 billion, an increase of 32% year-on-year, according to the Shanghai Municipal Commission of Commerce. U.S. FDI into Shanghai amounted to a cumulative value of US$14.8 billion in 2011 with capital intensive and technology intensive projects receiving the largest share.

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Urban dwellers outnumber rural population China’s National Bureau of Statistics announced that for the first time the number of Chinese residents in urban areas outnumbers those in rural areas. According to the Statistics Bureau, 51.2%, or 690.8 million, of China’s nearly 1.35 billion population lives in urban areas, up from 19% in 1979 when economic reforms were launched in China and 10.6% in 1949. In 2011, the number of rural inhabitants decreased 14.6 million. Rapid urbanization is expected to continue going forward, spotlighting demographic pressures like an aging population and concerns over a shrinking labor supply. Consultancy McKinsey & Co. estimates China’s urban population will exceed one billion by 2030. U.S.-CHINA

Hollywood studio coming to China In a landmark deal, Dreamworks Animation SKG, Inc. announced it will build a movie studio in Shanghai as part of a joint venture agreement with China Media Capital, Shanghai Media Group and Shanghai Alliance Investment Ltd. The venture, named Oriental Dreamworks, is expected to become operational later in 2012 with Dreamworks owning a 45% interest. It will focus on developing and producing films both for the Chinese and global markets. Dreamworks has high hopes for the China film market, which generated US$2.1 billion in revenue in 2011. “Our goal is, for five or 10 years from now, to have the leading family-branded entertainment company in China,” Dreamworks Animation Chief Executive Jeffrey Katzenberg is quoted as saying.

China to build U.S.-based biofuel company Smithfield, VA-based Smithfield Foods, Inc., the largest U.S. meat supplier, and Beijing DQY Agriculture Technology Co., Ltd., China’s largest egg producer, agreed to launch a US$1.8 billion joint venture biofuel company in the U.S. Using core

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HELEE technology, the companies will establish a pig farm biogas project operated by Beijing Helee Bio-Energy (HELEE) and Murphy-Brown. The project will be able to produce 7 million kilowatts of electricity and 3.5 million cubic meters of methane per year. The two companies anticipate reducing carbon dioxide emissions more than 21 million tons annually through such initiatives as using waste from more than 2,600 Smithfield Foods pig farms.

China makes record soybean buy A Chinese trade delegation to the U.S. signed US$6.7 billion in deals to buy a record 13.4 million tons of U.S. soybeans, announced the U.S. Soybean Export Council. The agreements, though not confirmed sales, were reached during Chinese Vice President Xi Jinping’s visit to the U.S. Parties included U.S. agricultural giants Archer Daniels Midland Co., Bunge Ltd. and Cargill, Inc. and Chinese state-owned companies COFCO Co., Ltd. and the China Grain Reserves Corp. (Sinograin). China, the world’s largest soybean importer, is expected to buy more than 55 million tons of the commodity in 2012, or 60% of traded soybeans worldwide, to meet growing domestic demand for meat-based proteins in which soybeans are used as animal feed. GOVERNMENT & POLICY

Minimum wages rise Several Chinese cities and provinces are hiking minimum wages, as domestic labor pressures mount, including a quickly aging population and concerns over a shrinking supply of rural labor. Officials in Shenzhen, which borders Hong Kong in southern China, raised minimum wages to RMB1,500 (US$238) beginning in February, up 14%. In Beijing, a minimum wage of RMB1,260 was established on January 1, while minimum wages in Sichuan province were increased 23%. A February government job market plan forecasts a 13% average increase in the annual minimum wage in China by 2015. China’s 12th Five-Year Plan (FYP) released last year calls for increasing

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worker pay as part of its blueprint to boost domestic employment.

Move to establish Hong Kong ETF The China Securities Regulatory Commission (CSRZ) is reviewing an application to establish the country’s first exchange-traded fund (ETF) linked to shares of Hong Kong-listed Chinese companies. If accepted, the ETF managed by Guangzhou-based E Fund Management Co. would be linked to the Hang Seng China Enterprises Index in Hong Kong. The move would fall under China’s Qualified Domestic Institutional Investors program in which a limited number of Chinese financial companies may purchase a quota of shares in overseas listed companies using yuan. E Fund manages RMB126.2 billion (US$20 billion) in assets as of the end of September 2011, making it the No. 3 asset management company in China by value.

China reduces reserve ratio The People’s Bank of China (PBoC), China’s central bank, is cutting the country’s reserve requirement ratio (RRR) by 50 basis points in a move to free up cash for domestic credit and investment demand and boost moderating economic growth. Effective February 24, the reduction is the second such move by the central bank in two months, lowering the percentage of deposits that large banks must hold in reserve to 20.5%. Banks will be free to lend an estimated RMB400 billion (US$64 billion) that otherwise would be kept in reserve. In 2011, PBoC raised the RRR six times to mop up liquidity and combat rising inflationary pressures. SHANGHAI BUSINESS

Longer Chinese visas for some Shanghai officials are working to extend the validity of Chinese visas for foreign employees working in regional headquarters of multinational corporations. “The Shanghai Commission of Commerce is working with the city’s exit

and entry administration to allow foreign employees of multinational corporations’ regional headquarters to have longer visa validity,” Vice Director General of the Shanghai Municipal Commission of Commerce Chen Xianjin is quoted as saying. Currently, foreign workers who hold senior positions and those at large companies may apply for visas longer than one year. Officials are looking for a more generous visa policy to help Shanghai encourage development of its headquarters economy. At the beginning of 2012, 353 multinational companies had designated Shanghai as their regional headquarters.

Car license plate prices hit record The price for private car license plates in Shanghai increased to a record high at the monthly auction held in February. The average price for plates increased RMB2,437 to RMB55,632, according to the Shanghai Commodity International Co. Some 23,391 hopeful buyers competed

for a quota of 8,000 plates set for February, causing frustration among some bidders. Shanghai holds a monthly auction for plates to regulate their distribution, making it China’s only city to allocate plates by auction. The price for second-hand plates is estimated to increase to RMB58,000 following the February auction.

Shanghai is tops with foreign experts Shanghai boasts more foreign experts than any Chinese city, according to recently released data from the Shanghai Municipal Human Resources and Social Security Bureau. The number of foreign experts working in Shanghai increased to 81,000 by late 2011, up more than one third from 2005. The increase means Shanghai is home to one in six foreign experts in China, a category that does not include all legally employed foreign workers whose numbers reached 210,000 at the end of 2010, according to China’s population census. Over the next five years, Shanghai

is looking to attract 1,000 senior foreign professionals with incentives ranging from opening new international schools to streamlining visa requirements.

Zhangjiang gets Litepoint research center U.S. wireless test provider LitePoint, a wholly owned subsidiary of Teradyne, Inc., announced the opening of a new research facility in Zhangjiang Hi-Tech Park in Pudong. The Sunnyvale, CA-based technology company expects the 25square-kilometer research facility to help boost its growth in Asia and to serve the company’s primary customer base. “We feel it’s important that key functions such as product development and business operations be completely local in order to fully support the unique needs of our customers in…distinct markets [in Asia],” said LitePoint Chief Operating Officer Spiros Bouas in a statement. LitePoint also operates facilities in Asia in Shenzhen, Taipei and Tokyo.

CHINA & THE WORLD

SOUTH AMERICA ASIA-PACIFIC

NEW ZEALAND: Court blocks Chinese farmland sale New Zealand’s High Court has halted the sale of agriculture land to Chinese investors on questions whether the New Zealand government had misevaluated the economic benefits of the sale, High Court Judge Forrest Miller ruled. Earlier, the New Zealand government had approved the sale of 16 dairy farms over 19,501 acres to Shanghai Pengxin Group Co.’s Milk New Zealand Holdings Ltd. unit in what marked the first of its kind sale to Chinese investors. Pengxin made a US$164 million offer to outbid Crafar Farmers Independent Purchase Group, a consortium that brought the suit. New Zealand law mandates that foreign investment in farmland bring economic benefits to the country.

MIDDLE EAST

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KENYA: CCTV launches broadcast China Central Television (CCTV) launched an English-language broadcast in Nairobi, capital of Kenya, in what marks the Chinese state-owned broadcaster’s first production center established outside of China. Daily, one-hour programming consists of African news generated by CCTV and outside partners such as wire services. At a launch ceremony, Kenyan Vice President Kalonzo Musyoka said he hoped CCTV will “cast a new image of the [African] continent” to provide an answer to what “is often shown as the continent of endless calamities.” CCTV employs roughly 100 workers at the production center.

AFRICA

PORTUGAL: State Grid gains interest in power operator Secretary of State for Treasury and Finance Maria Luis Albuquerque announced the Portuguese government is selling a 25% interest in power grid operator Redes Energeticas Nacionais SGPS SA (REN) to China’s State Grid International Development Ltd. The US$779 million deal is expected to close in mid-March 2012. As part of the agreement, the China Development Bank Corp. will lend REN one billion euros to help the operator meet its infrastructure expansion plans. The Portuguese government, which owns a 51% interest in the operator, is selling a 15% stake to stateowned Oman Oil. It will sell its remaining 11% holding on the open market.

NORTH AMERICA MIDDLE EAST

EUROPE MIDDLE EAST

IRAN: China, National Iranian Oil reach supply agreement State-owned China International United Petroleum & Chemical Corp., or Unipec, and the National Iranian Oil Co. (NIOC) have agreed to a long-term contract to supply China with crude oil in 2012. Terms of the agreement have not been publicly released. Under 2011’s contract, NIOC supplied the Chinese subsidiary of the China Petroleum & Chemical Corp. (“Sinopec”) with 220,000 barrels of crude per day and 60,000 barrels of light crude. As China’s third-largest supplier, Iran exported 560,000 barrels of crude to China in 2011. Both the U.S. and the European Union have imposed oil sanctions against Iran in recent months.

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CANADA: PetroChina acquires stake in shale-gas asset PetroChina Co., a unit of China National Petroleum Corp., will buy a 20% stake in Royal Dutch Shell Plc.’s shale-gas assets in Groundbirch, British Columbia, Canada. The move by the Beijingbased energy giant will reportedly involve its paying an unconfirmed amount of more than US$1 billion for the interest. 180 million cubic feet of gas per day is produced from the Groundbirch site with the potential of one billion cubic feet equivalent over the next 40 years. PetroChina has set a target to produce one billion cubic meters of shale gas by 2015 as China continues to look to Canada and other world markets to help supply the country’s growing energy needs.

SOUTH AMERICA

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AFRICA ASIA-PACIFIC NORTH AMERICA

BRAZIL: Baidu looks to open office Baidu, Inc., China’s largest search engine, is set to open an office in Sao Paulo, Brazil to expand its search business into the fast-growing Latin American country, according to China’s Ministry of Commerce (MOFCOM). The expansion into Brazil would mean competing against rival Google, Inc., which controls an overwhelming 90% of the search market and employs 500 workers in Latin America. Initially, Baidu will launch a service similar to Wikipedia and employ 20 workers in Brazil. The company has not announced a timeline for launching its search service in Brazil. Baidu, which is listed on the NASDAQ stock exchange, posted 2011 revenue of US$2.3 billion and a profit of US$1.2 billion, surging 83% and 91% year-on-year, respectively.

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M ov e r s a n d S h a k e r s c o m p i l e d by j oy c e b i a n

Movers and Shakers highlights major personnel changes within the Chinese government at various levels and senior management-level movements within multinational companies in China.

VISA Visa appointed Jeff Liao country manager for China in February. Liao is known for his expertise in e-commerce and emerging businesses. He was previously global vice president of Asia-Pacific CrossBorder Trade and CEO of Greater China of eBay. At Visa, he will focus on building Visa’s brand and business, as well as overseeing the company’s strategic development in mainland China. Jeff Liao

PRIVATE SECTOR INTEL Intel Corporation named Ian Yang global vice president and president of Intel China in early February. Yang was formerly vice president of the sales and marketing group and president of Intel China. GENERAL MOTORS/OnStar Diane Jurgens was appointed managing director of Shanghai OnStar Telematics, a joint venture of OnStar, LLC, Shanghai Automotive Industry Sales Co, Ltd and Shanghai GM in January 2012. Jurgens has a strong technology background.

Diane Jurgens

Ian Yang

HONEYWELL Honeywell named Stephen Shang president, Honeywell China in early January. The companies said Shang will focus on driving Honeywell’s core growth strategies in China.

WAL-MART Greg Foran was named president and chief executive of Wal-Mart China in early February. Foran joined the company in October 2011 as senior vice president of Wal-Mart International. Prior to that, Foran had a long career working his way up at the Australian retailer Woolworths Ltd.

Stephen Shang

AVON Avon Products Inc. named John Lin president of Avon China. Lin was previously president of Avon Canada, a position he took up in 2010. GOVERNMENT imaginechina

Xia Baolong

STATE COUNCIL Lian Weiliang is the new vice director of the National Development and Reform Commission. Lian was previously party secretary general of Zhengzhou Municipal Government, Henan province. Also, Wang Baoan was named vice minister of Finance. Wang was previously assistant minister and member of the party committee. Hu Cunzhi was named vice minister of Land and Resources. Hu was previously chief planner of the Ministry. Yin Li was named head of the National Food and Drug Safety Supervision Bureau and he was previously vice minister of Health. Gao Fengtao is now chairman, the Supervision Board for Key State-Owned-Enterprises. Previously, Gao was deputy director of the Legislative Affairs Office of the State Council.

Elsewhere, Li Jiayang was appointed minister of Agriculture in January, three months after being named vice minister. Li previously served as vice president and academician of the China Academy of Sciences. Xia Baolong was named governor of Zhejiang province in January 2012, just six months after he was appointed vice governor and acting governor of Zhejiang. If your company has executive personnel changes, please contact Joyce Bian at joyce.bian@amcham-shanghai.org.

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LU X URY MAR K ET By Meredith Rodriguez

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Tourists line up to buy luxury goods

The Chinese Wear Prada The widespread desire to own a Gucci bag or Rolex watch will soon make China the world’s largest market for luxury brands

he future of the Chinese economy may be uncertain to many people but Chinese consumers – mainly young people – seem to have their priorities straight when it comes to acquiring the glamorous symbols of success, according to a new study. The 2011 China Luxury Forecast showed that a whopping 92 percent of people who took part in a survey said they intend to spend the same or more in order to put a Chanel bag over their shoulders and a Rolex watch on their wrist. That is much more than luxury shoppers in Taiwan, the U.S. and many other countries – a trend that will soon push the Chinese mainland to be the world’s largest luxury market. “We really believe this industry will boom in China. It’s getting really, really hot,” said Elan

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Shou, managing director of Ruder Finn Asia. She spoke during an AmCham-Shanghai event where she presented the firm’s China Luxury forecast for 2011-2012 and later with Insight. She was using figures from 2011 and previous years to make her point. And during the recent Lunar New Year, as most people traveled to reunite with family members and enjoy large feasts, millions skipped a trip home to go overseas - but not to relax on a beach. In January, the World Luxury Association (WLA) gathered in Beijing to release their list of the top 100 luxury brands and reported that 16 percent, or 200 million of China’s population, are now consumers of luxury products, a figure that’s growing at 25 percent annually. The WLA also said the domestic market was valued at US$10.7 billion and poised to grow to

to people her age group, however, Gong considers her self-decorating habits stingy. “A lot of people really spend much more money than they should on things they don’t need for the brand,” Gong said. “People who earn 4,000 or 5,000 yuan a month, they save up for a year to buy something. I think it is a common value among a lot of young people.” Gong falls in the upper middle class category that account for about 70 percent of China’s luxury spending. The wealthy in China are growing at a rate of 15 percent a year, and the very wealthy, 20 percent annually. China’s uppermiddle class account for 12 percent of the luxury goods market, but that figure will grow to 22 percent by 2015. One of the reasons behind China’s love for luxury may have something to do with culture. Logos appeal to the Chinese ancient pictogram language, said Simon Tye, the executive director at the Asia-Pacific branch of Ipsos, a large research group that explores market trends. He adds that it’s a culture that emphasizes humility, fitting in and respecting the rules of society. imaginechina

US$14.6 billion this year and will knock out Japan to become the largest luxury consumer market in the world. The Spring Festival was a good holiday for luxury brands. Chinese consumers spent US$7.2 billion on luxury goods overseas during the Golden Week in January, a 28.57 percent jump during the same holiday period in 2011. Domestically, shoppers spent 1.2 billion during that week in the mainland although sales rose 30 percent in 2011. According to a McKinsey and Co. study released in March 2011, the China luxury market is projected to grow 18 percent annually to RMB180 billion in 2015 or 20 percent of the global luxury market. The study was conducted by Ruder Finn, a public relations firm, and Albatross Global Solutions, an Asian market research institution. It examined key trends in China’s luxury sector for the past three years, but this annual study focused on the Post-80s generation of consumers in Taiwan, Hong Kong, Shanghai, Beijing, Guangzhou and 17 second-tier cities in Mainland China. Although the number of millionaires in the country is climbing at the fastest pace in the world, it is still common for both white and blue-collar workers to tighten months of spending to buy a gift, or use bonuses or additional income to splurge on Chanel glasses, a Louis Vuitton bag or a Cartier watch. More than half of Ruder Finn respondents earned less than RMB180,000 a year and their average income was lower than last year. The report said most luxury consumers here are on average 10 years younger than those in America and Europe, Shou said, and “will save several months salary to buy a bag.”

The enabler Gong Ye, a Shanghai-based headhunter in financial services, owns a collection of luxury European items such as wallets, bags and glasses. Gong, in her 30s, buys what she likes and her parents see it as frivolous as they just possess one or two expensive outfits for special events. Compared

Actress Gao Yuanyuan at a Gucci party in Shanghai in 2010

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Chinese traditionally love tangible products like clothes, perfume and watches, while their Western counterparts spend on houses, cars and family travel.”

“

A big price tag and a logo does not make a product luxury anymore.”

Most of today’s luxury consumers were children when China’s economic reforms were initiated and they never experienced a recession, the McKinsey report pointed out. “Luxury to them is sort of an enabler,” Tye said. “Chinese with luxury want to first fit in with society and they also want to stand out and show their success.” This exhibition can be seen on Shanghai’s Nanjing Road West, where sleekly-dressed women carry Gucci and Cartier shopping bags. “People are buying more and more,” said Chana Chagan, a sales assistant at Mont Blanc’s flagship store. “For most of them, it’s for the appearance. They want to show off. Some people are rich and don’t care about the price. They will walk in and buy. But a white-collar worker will first search

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Subtle signs The average luxury consumer is changing. Most likely to be found in Tier one cities, elite shoppers have moved from looking for quantity to valuing quality, from searching for the big, flashy logo to honing in on more subtle signs of luxury like texture, color and quality. “What we are beginning to see for first time in our research is understatement is beginning to matter more and more,” said Tye. These shoppers travel and are Internet-savvy people who no longer indiscriminately equate high price with quality. In 2008, 20 percent

The world’s top 10 fashion brands

A giant Hermès bag inside a store in Nanjing

online for the best price or buy something not so expensive, more affordable.”

March 2012

Hermès Chanel Louis Vuitton Christian Dior Ferragamo Versace Prada Fendi Giorgio Armani Ermenegildo Zegna Source: World Luxury Association

of consumers knew that the price in China is significantly more than the price overseas, compared to 66 percent in 2010, according to the 2011 McKinsey study. While they will likely shop around for the best price, they are also not likely to settle for fake products. “A big price tag and a logo does not make a product luxury anymore,” Tye said. “Chinese are beginning to ask themselves, ‘What else do I have beyond just these logos and brands. What else am I buying into?’” For the first time, more Chinese respondents in the Ruder Finn study said last year that they shopped more for their own personal pleasure than for approval from others. “You see this trend in the younger generation,” Shou said. “They care more about expressing their

own personality.” Chinese traditionally love tangible products like clothes, perfume and watches, while their Western counterparts spend on houses, cars and family travel. The top selling products are leather goods and handbags, followed by cosmetics, perfumes and watches. However, the demand for luxury services is growing more quickly than the demand for tangible items, according to the McKinsey study. Twentypercent of respondents said they plan to spend more on travel, spas, food and sports compared to 13 percent who said they plan to spend more on material goods.

Meredith Rodriguez is a freelance writer.

c o m m e n ta ry By Anne-Marie Slaughter

A Perfect Storm?

E Anne-Marie Slaughter

A distinguished Princeton professor says political trends will trump economic issues this year

very few weeks an op-ed or article appears explaining why the Chinese economy is actually in trouble beneath all those breathtaking growth figures. The asserted causes vary: a real estate bubble fueled by the government’s stimulus spending after 2008; the contraction of credit due to efforts to fight inflation that is triggering the collapse of Madoff-like Ponzi schemes in various parts of the country; the difficulty of simultaneously moving up the manufacturing value-chain while still finding jobs for the tens of millions of migrant workers flooding into cities; the continued fraying of the social fabric with the rupturing of traditional family structures due to this same migration; the tens of thousands of rolling protests happening in villages and towns in every province over environmental degradation, corruption and land confiscation, most recently exemplified by the expulsion of all Communist Party officials in Wukan; and overall the dependence of the Chinese economy on exports to the E.U. and the U.S. and the continuing difficulty of convincing Chinese citizens to save less and spend more in troubled global economic times. Notwithstanding these regular tidings of doom, however, somehow the Chinese government manages to adapt, reform, adjust or manage their way out of each crisis. From my perspective, the real trends to watch in China this year are political more than economic, although the two are always interconnected. The political winds blow from both inside and outside China; when one front meets another the result can be a perfect storm. Inside China, rising economic and social expectations mean rising protests. The numbers are hard to pin down, but somewhere between 50,000 and 70,000 protests take place each year in villages and towns all over the country. Citizens mobilize against land speculation and confiscation,

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U.S. Vice President Joseph Biden with Xi Jinping in Beijing last year

environmental degradation, local corruption, food safety, health hazards of every description and many other complaints. Their complaints are often magnified through discussions on micro-blogs, although to date no protests have spread in any unified way from town to town, much less province to province. That is the Chinese government’s nightmare, but as long as it does not happen, it is important to realize that these protests are a form of political expression. In the absence of a free press, regular elections and legal accountability through the court system, they are a means of letting the central authorities know where they need to be paying more attention to local misdeeds. Seen from this vantage point, the fact of protests themselves is not so much a sign of the likelihood of the overthrow of the regime so much as a very crude system of responsive government. Indeed, the protests in Wukan late last year, which resulted in a nasty stand-off between the villagers and provincial police forces for several days, have helped produce a new six-month campaign by the Chinese authorities to improve how police officers behave toward the public. The competence and stability of the Chinese government should thus be measured not only by the number and intensity of protests, but also by the swiftness and effectiveness of the official response. More worrying, in my view, is the external environment. The United States has executed a much publicized “pivot to Asia.” The intent is manifestly not to contain China or to provoke it, but rather to intensify U.S. engagement in a region that will be one of the principal economic and political arenas of the 21st century. Nevertheless, that is not necessarily how many Chinese officials or citizens are likely to see it. Add in the possibility of an accidental or deliberate confrontation between Japanese and Chinese naval forces in the East China Sea, or between

Vietnamese or Filipino and Chinese forces in the South China Sea, and the Chinese government could come under internal and public pressure to respond sharply in a way that underlines its newfound global status. Diplomats in Washington, Beijing, Tokyo, Seoul, Canberra and Southeast Asian capitals have thought through these scenarios and would be likely to defuse them if they were to arise. It is also a year of Chinese leadership transition, which means the forces for stability and calm are strong within China. Still, it is possible that a Chinese government feeling threatened and insecure due to rising domestic protests in a global environment of mass protests uniting to bring governments down could decide to distract domestic malcontents by pressing the nationalist button and deflecting their anger to a foreign target. In that context, a naval confrontation

or even an imagined provocation could blow up into a major crisis. Even a hint of such a crisis would send markets into a tailspin and freeze investment. None of this is to say that the global economy won’t produce plenty of shocks on its own and that China could be less well prepared to ride them out than in 2008. But Chinese economic policymakers can predict and plan for most of the scenarios on the horizon, depending on the state of the Eurozone and the U.S. economy. It is where politics and economics intersect that the whirlpool can happen. And for political watchers, 2012 could turn out to be a very big year.

Anne-Marie Slaughter is the Bert G. Kerstetter ’66 University Professor of Politics and International Affairs, Princeton University and the former Director of Policy Planning, U.S. Department of State

“

…the Chinese government could come under internal and public pressure to respond sharply in a way that underlines its newfound global status.”

i n t e rv i e w B y Dav i d B a s m a j i a n

A Bridge to San Francisco

Deputy Mayor Jennifer Matz at a Bank of Communications ceremony

n a recent trip to China, San F r a n c i s c o’s D e p u t y M ay o r Jennifer Matz met with top Chinese government and business officials to wrap up trade and investment deals between San Francisco and China. Many of those deals were initiated by the city’s trade office in China, ChinaSF. Launched in 2008, ChinaSF is a public private partnership led by the San Francisco Center for Economic Development dedicated to deepening the growing economic and commercial ties between San Francisco and China. Deputy Mayor Matz took time out of her travel schedule that included stops in Shanghai, Beijing and Xiamen, to talk to Insight’s David Basmajian. Here are excerpts. Insight: What are the objectives of this trip? Jennifer Matz: “I do these trips roughly every six months with ChinaSF to help close deals, start important conversations and to move projects along. We have staff in Shanghai and Beijing who work on the key areas that ChinaSF is focused on, which is finance, high-tech innovation, design, education, real estate development, culture and art. Every once in a while it's important for a San

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Francisco government official representing the Mayor to bless the progress we are making in China. This helps open doors. You get to a place where you can’t really continue a conversation until higher level officials can talk.” Insight: How is ChinaSF doing? JM: “I think it’s going incredibly well. We started ChinaSF three years ago and we’ve gotten a lot more strategic in our focus. I don’t think we’ve even gotten our arms around all the opportunities but I think we’re becoming much more discerning about opportunities. “We’ve had concrete success in getting Chinese businesses to San Francisco where they’ve opened up North American headquarters or satellite offices. The Bank of Communications just had their grand opening of their second office in the U.S. in San Francisco (first U.S. office was in New York City). We’ve had four or f ive s olar companies (China Sun Energy, Suntech, GCL and China Sunergy) and we have China Daily in San Francisco. So we have very tangible successes that we can point to that give ChinaSF a lot of credibility and allow us to do some longer term activities like working with China government ministries to create partnerships that allow us to

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do other things, like to go into different regions in China and bring San Francisco-based talent such as architecture services, designers or clean tech companies. The third wave of what we’re doing is to attract Chinese investment into San Francisco real estate opportunities. We definitely see an uptick in interest in what San Francisco has to offer.” Insight: What do Chinese companies want? JM: “Three things. There are Chinese companies who want to come acquire or partner around new technology – digital media or information technology. Around clean technology and energy conservation, Chinese companies want to sell their products. Investors are interested in the U.S. EB5 program and are focused on a couple of major real estate development projects – Hunters Point shipyard and Treasure Island. But we’re also seeing there are individuals and government agencies and companies with significant resources that are just looking for investments.” Insight: What does ChinaSF offer? JM: “Part of the challenge of investing in the U.S. is regulatory, part of it is cultural. In China, the government holds your hand when investing in a way that the U.S. does not. We leave it to private entities to find each other and assume the market will take care of itself. But it doesn’t with Chinese investment right now unless the Chinese investor has a American partner in China first to bring them over. “What ChinaSF offers is a bridge. We have folks both in San Francisco and Shanghai who understand the cultural differences and while we may not have the answers immediately we know how to work it through.” Insight: Why is China investing in San Francisco? JM: “Bank of Communications, China Daily, China Sun Energy, Suntech, GCL, China Sunergy…they all had options where to open offices in the West Coast and beyond. The success is in showing our value proposition that in coming to San Francisco you have a place that is not only good for your business, good for your customer base but it’s a

place that culturally makes sense. That’s what we try to sell – it’s a beautiful city and there is a large Chinese population. We’re also noticing in the current U.S. political climate that there is increasing skepticism around Chinese investment and what it means to partner with China and I think none of that is in San Francisco. It starts from a cultural acceptance. We just elected our first Chinese American mayor. It’s nice to unapologetically say you, your investment and your business will be comfortable here.” Insight: Shanghai and San Francisco have the oldest sister city relationship between the U.S. and China. Has it helped? JM: “It has absolutely helped us. It was our springboard. Mayor Gavin Newsom and my predecessor Michael Cohen came for the sister city anniversary [in 2008]. Michael came back and said that right now we only have cultural exchange – we don’t have any economic exchange. ChinaSF started from there. But without those strong sister city cultural ties, I don’t think ChinaSF would have been able to rise up in as successful of a fashion. The reason we started in Shanghai is because of all of those connections and those strong relationships, which we used to identify potential business partners. Insight: China says it is hard to invest in the U.S. Is it? JM: “It is complicated. It’s complicated to get a level of social comfort that comes with making a major deal in China. I’ve been struck on my trips to China by how much gets done after the ‘big chair’ meeting. You can almost feel the moment when things shift and everyone lets down their guard and you can identify the moment it became clear the project will move forward. I don’t think we do that as much in the U.S. We provide the documents, we run the numbers and then decide whether we want to do the deal or not. “I don’t think the U.S. regulatory scheme is necessarily more difficult for Chinese investors than it is for any other investors but I think that the way we go about our transactions is a little bit more at arms length.”

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“

In China, the government holds your hand when investing in a way that the U.S. does not.”

c h i n a b u s i n e s s r e p o rt

Success in a Maturing Market AmCham Shanghai’s 2011-2012 China Business Report finds U.S. companies performed well in 2011 in an increasingly competitive China market

merican companies in China continue to report positive financial performance despite rising costs, increasing competition and an uneven regulatory environment, according to AmCham Shanghai’s 2011–2012 China Business Report. Three years after the global economic downturn, U.S. companies continued to perform w e l l i n 2 0 1 1 . How e v e r t h e re w e re s om e noteworthy changes. To begin, 78 percent of the more than 300 companies surveyed report they are “profitable” or “very profitable,” roughly matching figures from 2010. Revenue growth also continued although down somewhat from the year before, with 80 percent achieving revenue growth in 2011 over 2010. Highlighting China’s increasingly important role in the global strategies of U.S. businesses, 66 percent report their revenue growth in China exceeded that of their operations worldwide. AmCham Shanghai released the report on Februar y 15 at the Four Seasons Hotel in Shanghai at a luncheon event where more than 100 people attended. The program included a presentation, a panel discussion and news conference with two dozen foreign and Chinese reporters. Despite strong financial performance in 2011, U.S. companies are less positive about their business prospects in China compared to one year ago. But that doesn’t mean optimism is lacking. Jeff Kirwan, managing director and COO of Gap who sat on the AmCham Shanghai panel, said although the clothing retailer is fairly new to the country he sees room to do well. “We plan on having 45 Gap stores open by the end of our fiscal 2012. China is a competitive

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market and is becoming more so as more international retailers enter the marketplace. We are excited about our future in China and the ability to bring American fashion to the Chinese consumer,” Kirwan said. This year’s survey was conducted online and 315 U.S.-based companies participated with a response rate of 20 percent.Respondents represent more than 20 industries, from consumer goods to telecom and from automotive to IT.

China challenges U.S. companies face numerous, well publicized challenges in the China market, including business cha l lenges and lega l/regu l ator y challenges. Companies rate rising costs as the most significant business challenge in 2011, displacing human resource constraints atop the business challenge rankings for the first time since 2006. More than nine in 10 companies said rising costs hinder their business with 66 percent saying price pressures – labor cost increases and lingering Chinese inflation that topped five percent in 2011 – are becoming more severe. Human resource constraints rank second, while increasing competition, both Chinese and foreign, rounds out companies’ top three business challenges. U.S. companies feel these challenges are more pronounced in 2011 than years past. Meanwhile, companies are seeing little improvement in legal and regulatory challenges they face. The top three legal/regulatory challenges impacting U.S. companies in 2011 are similar to

those in previous years: bureaucracy, an unclear regulatory environment and a lack of government transparency. Nearly three quarters of responding companies (71 percent) say the regulator y environment in their industry either has not changed or has deteriorated over the past year, imposing compliance costs and adding risk to doing business in China.

Maturing market Despite a host of challenges, China continues to be a bright spot for U.S. companies doing business around the globe, and companies remain optimistic about the future. China remains a top three investment destination for 69 percent of respondents, and nearly 77 percent intend to increase their China investment in 2012. China has emerged as one of the most competitive markets in the world, and to boost their competitiveness, U.S. companies are localizing their operations and offerings. Localization of staff at all levels in China is a “high” or “moderate” priority for 80 percent of companies polled, and more than half of companies (56 percent) say over three quarters of their senior management are Chinese nationals. A strong majority of companies (71 percent) surveyed say they have designed – or have plans to design – unique products or services for the China market. As identified in previous years, the trend of “in China for China” continues to be strong with 58 percent stating their primary goal is to produce in China for the growing China market. U.S. companies in China are driving U.S. exports to China to serve this fast growing market. This trend may be good for another reason, according to Steve Ganster, managing director at Technomic Asia. “Given the challenges that will emerge in 2012 due to expected slower growth and trade, service companies will be in a good position to help their clients navigate the increased complexities, uncertainties and inevitable difficulties as companies adjust their strategies, organizations and resources to align with a more dynamic

economic environment,” Ganster said. “The ‘in China for China’ trend is here to stay and service firms need to reshape their own priorities to accommodate this critical shift.” Almost two thirds report they import parts or finished goods from the U.S. into China and that U.S. exports make up 32 percent of their China sales by value. This is an increase from 2010 and an indicator of the increasingly important role the China market plays in the U.S. economy, supporting jobs and production at home. “That companies are staying the course, despite the challenges faced, speaks to the importance of the China market to their global strategies and the resilience and commitment of U.S. businesses in China,” remarked Kenneth Jar rett, chair man, Gre ater C hina, APC O Worldwide and AmCham Shanghai 2012 chair. “While there is much work to be done to address business and regulatory obstacles, it is clear that U.S. companies in China have come to expect challenges, have weighed them against the opportunities and have found a way to succeed in China despite them,” added Jarrett. See the full executive summary at www.amcham-shanghai.org. To purchase the full report, email: Joy.Liu@amcham-shanghai.org.

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Global Pursuits There are plenty of giant Chinese companies with massive profit margins but can they produce a superior global brand that consumers seek out? By Bryan Virasami

hina has the fastest growing consumer market, the best high speed trains, is home to companies with some of the world’s most impressive revenue streams, and has declared plans to build a space station. Considering China’s economic might and sky high ambitions, it seems natural to raise a question many are now thinking about: when will China offer a pair of running shoes with the cool factor of Nike, a device as appealing as the iPad or perhaps a beverage that takes some fizz out of Coke? Or will they ever? To some, it’s an irrelevant question considering China’s massive growth, but to others, it’s the only question worth asking given the country’s status on the world stage and the high expectations for coming years. A recently-published study, “BrandZ Top 50 Most Valuable Chinese Brands” from Millward Brown, a major advertising and communications company, is just one of a handful of authoritative reports that confirms the remarkable growth of Chinese companies – some

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prominently mentioned on separate global lists – and six of which appear on the list for the first time, including Ctrip and Hainan Airlines. “The total value of the top 50 Chinese companies occupies more than 5 percent of China’s GDP,” said Doreen Wang, the group account director at Millward Brown in Beijing. The company is part of WPP, a global marketing communications leader with dozens of subsidiary companies, including major advertising agencies. These 50 Chinese brands play a role in the lives of most people in China – rich, poor or middle class – directly or without their knowledge. One version of the story may go something like this: a typical Chinese woman uses ICBC or Bank of China to save her cash, turns on a Lenovo PC and logs on to Baidu to find a Hainan Airlines flight to Sanya, pours a glass of Yili milk at breakfast before she throws on a Septwolves jacket and jump into a BYD-made sedan that takes her to the office. At work, she most likely uses Sina Weibo to check up on friends and blasts a Midea air conditioner to stay cool in the hot

c o v e R s to r y

“If you to talk to Chinese CEOs, many are highly conscious of the negative perception of ‘made in China’ and they want to be the company that changes that image.” -- Jonathan Chajet, China CEO, Dragon Rouge

summer. She may use a China Mobile phone to arrange an after-work gathering with friends where they probably gossip about news they read on Sina.com. And if she has any free time on the weekend, she may put on a pair of Li-Ning athletic pants to do the downward dog. “These are all things within the budget reach of the common man on the street,” said Angelina Ong, AsiaPacific regional managing director at the public relations agency Burson-Marsteller. She noted that the BrandZ companies have a common trait — sheer scale. There is no luxury item on the list, she noted.

Scale These 50 brands make up China’s most valuable brands list which identified China Mobile as the most “valuable” brand with a US$53 billion value. In addition, four banks, an insurance firm, two oil giants and Baidu and Tencent make up the first 10. Following these, several liquor brands, cooking oil, two herbal remedy makers, airlines and dairy companies are on the list, all 50 of which have a total value of US$325 billion, a 16 percent increase over the previous year, according to the BrandZ report.

China Mobile is the most “valuable” brand in China valued at US$53.6 billion

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Haier logo at an NBA game

Thirty-seven of the 50 were each valued higher than US$1 billion and 11 were each valued at US$10 billion or more. This puts them in the position to venture overseas to launch a new product or company. To be clear, many Chinese companies already have a presence in the U.S., Europe and other parts of the world, but global reach is

The Social Exchange

one thing and not the same as being a global brand. So, is there a Chinese company that could emerge with an innovate product that could make them a truly global brand? It’s a question that Tom Doctoroff, the Shanghaibased North China CEO at advertising firm JWT (formerly J. Walter Thompson), has spent much time contemplating. “The question is when will Chinese brands make the transition from having scale and stature — which many of them have now and they didn’t have 10 years ago, so there has been tremendous progress on this front — when will they reach an inflection point so that they are known as innovators and actively preferred brands with long-term customer loyalty based on active preference, and in this case, Chinese brands aren’t there yet and it’s hard to think of one that is directly competing on a bonding level,” he said. He said that Chinese brands now thrive on price value and not because of a “perceived superiority of a specific attribute or benefit.” Yet another benchmark of a global brand is whether they can compete in specific countries without lowering prices. “The definition that counts in terms of multinational brand is to compete in developed markets at a price premium versus American, European and Japanese brands. If you have that as your benchmark, there are no local brands that are ready to do that,” Doctoroff said.

By Greg Paull and Eva Wei

Top companies in China are using social media and celebrities to drive their business

n China, social media and star power matter. Most leading brands today seem to have an active Weibo account and a celebrity spokesperson somewhere in their arsenal. So what impact, if any, do they have on Chinese consumers and how they make buying decisions? To find out, we started a tracking study in 2008 to understand brands and the role of celebrities in China. In this ongoing study, we have spoken to more than 16,500 people in the country’s top 10 cities to get a better insight into the way social media is used (RenRen, Weibo, Kaixin and others) – and the role celebrities

Greg Paull

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are playing both within social media, and in terms of brand preference. While our focus has been on American firms such as Coca-Cola, Johnson & Johnson, VISA, McDonald’s and others, there has been a lot of signs that for the first time, the strongest local companies – including China Mobile, Lenovo and Li-Ning – are trying to more accurately measure their marketing ROI [return on investment]. While American companies are very familiar with Facebook and Twitter, first time visitors to China may be shocked to find that, not only are they unable to access these, but that social media vehicles such as RenRen and Kaixin, and Micro-

Coke has a long history of brand building

“Bonding” measures how consumers embrace and accept certain brands as part of their daily experience, at the exclusion of other brands or even serve as advocates of the brand, according to Wang. Consumers must also have an emotional connection to the brand and feel it delivers on performance.

The challenge Based on this accepted standard, is there a new a Gucci, Nike or a Coke that will rise up in the next few years, or even a decade? The BrandZ report, in fact, said 83 percent of people outside China were unable to name any Chinese brands. Jonathan Chajet, formerly the Asia-Pacific Strategy Director for brand consultancy Interbrand, said a handful of companies such as Lenovo, Haier and Li-Ning are

making visible and concrete efforts to reach U.S. consumers and build up their brand image. Chajet recently joined Dragon Rouge, a French design and innovation consultancy, as CEO of China based in Shanghai. He said most Chinese companies are preoccupied with boosting sales but many are dreaming of the day when they can Li-Ning is trying to compete with Nike shatter the copycat image and other U.S. sportswear manufacturers held about Chinese products. “If you talk to Chinese CEOs, many are highly conscious of the negative perception of ‘made in China’ and they want to be the company that changes that image. They want to be the CEO that changed the image away from poor quality to good quality. They are seeking respect, not necessarily to be better, but as good as anything else in the world,” Chajet said during a recent interview. Doctoroff of JWT, who will publish a book later this year entitled What Chinese Want, has lived in China for at least 13 years and is widely considered an authority on brand building and the desires of Chinese consumers.

Blogs such as Sina Weibo and Tencent Weibo have more than filled their place. In fact, as of December 2011, more people use Weibo globally (currently only available in Chinese for 260 million subscribers) than Twitter (200 million subscribers). Despite the growth of social media, consumer recollection of brands is relatively weak. In addition, with the exception of Yao Ming and Liu Xiang, few celebrities are being associated with brands. You might wonder if Yao Ming and Liu Xiang are the only valuable celebrities or if marketers are not using other celebrities correctly. So what factors make a successful social media campaign work and which companies are best leveraging celebrities to drive results?

Likeability When we asked consumers about brands and their social media activities, Lenovo ranked second behind sports giant Nike. In terms of their perception for corporate social responsibility

an important aspect of brand likeability, that can lead to preference, Lenovo also came in second with China Mobile in the lead. So what were the factors that led to this success? “Micro Charity, Big Difference” tried to leverage individuals across China to make a small donation and collectively, a big difference. People were encouraged to make use of new platforms, such as SNS and Weibo, as well as video sharing web sites. Lenovo also invited Zhangke Jia, one of the most reputable directors in China, to make short films, which attracted more people to participate in this every day. Together with Narada Foundations, Youchang China Social Entrepreneur Foundation and 10 other organizations, they started a micro charity contest. They offered prizes and rewards to consumers, and this triggered more public participation. Lenovo focused on IT support for communications between urban and rural areas, bio-diversity protection activities, promoted low carbon life and carbon footprint reduction, science education activities, supported education in rural areas, and other volunteer services. Within a month, the contest drew 41,000 Weibo messages and the website attracted march 2012

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He suggested that no one is ready for that leap. “I do not believe that it makes sense for local brands to go abroad right now,” he said. What is the ideal global brand? Coca-Cola is probably one of the most recognizable brands on the planet because people in almost every country – whether in a small village in Sichuan province or in an African savannah – have heard of Coke and have seen the Tom Doctoroff logo – even if they don’t like the soft drink. And when people think of jeans, Levi’s probably comes to mind, and when they think of a desirable car, few would disagree that BMW suggests quality. Why are there no global Chinese brands, and what’s keeping them from coming up with a recognizable product? Chinese executives are “ruthless incrementalists” who revere the “concrete,” and as a result, sales figures usually trump marketing, said Doctoroff. He cited cultural issues as another hindrance to brand building and

5,200,000 viewers. No one in China, according to our research, is doing a better job than Nike in leveraging social media. They have achieved it through doing a number of things right. Nike has created more than 18 Weibo company accounts – with niche audiences for each one – football, basketball, tennis, golf and more. Understanding that you have the flexibility to build very unique audience groups and send them specific messages is key in social media. The messages were regular, specific and they offered strong news value (not just “hard sales”), which meant consumers had an interest level they might not have had versus an ESPN site, for example. Weibo is much more than just “build it and they will come” because you need active, constant and relevant messaging to drive traffic and interest. Nike posts more messages than Adidas and Li-Ning combined each day, but also strives to make sure the comments are relevant and clear. Nike still has much more positive association with celebrities such as Liu Xiang which they are leveraging now through social media, as well as through their traditional advertising in China. 28

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Alibaba’s headquarter in Hangzhou

went as far as suggesting that India may produce a global brand before China. “China is chauvinistic and I say this without any judgment whatsoever,” Doctoroff said. “China is focusing on what it’s focusing on right now. But 30 years from now China will need to be culturally relativistic. The Chinese are not the greatest assimilators.” The fact that no company has produced a product with “meaningfully differentiating” qualities at home or build “familiarity abroad” remains a hindrance, industry experts say. Chajet also listed three reasons. “First, most Chinese companies do not have an urgency to go global since China is the growth market in the world right now. Second, operating outside your

Both U.S. companies and Chinese companies can teach each other when it comes to social media. What the U.S. companies win in terms of structure, consistency and messaging, the Chinese companies make up for in terms of promotion, giveaways and rewards. Both can learn from each other to drive a hybrid solution that will connect with consumers.

What works? Based on our research and case studies, Chinese consumers need engagement. When we ask them what attracts them, they told a few things. Rewards matter – McDonalds, Nike and others have set up the tools to build a partnership with their brands through social media. Promotions are important – Coca-Cola has proven that social promotions alone can generate huge traffic. Fun: educating and entertaining at the same time – BMW, with their launch of their 1 Series, has shown how teasers on Weibo can drive interest and awareness. Their recent Weibo campaign was unbranded initially, hinting at crop circles found in the Chinese west – only to later be identified as wheel

home country requires a deep understanding (and investment) in foreign culture. At the moment, Chinese companies lack the skills and margins to make this kind of commitment. And third, a key element of a global brand is awareness — I need to know of you before I can choose you. Still a major problem for Chinese brands,” Chajet said. Interbrand released its own separate list, the “2011 Best China Brands Ranking” that, like the BrandZ ranking, was dominated by the same financial institutions at the top with a few different names. Baidu, which is number six on BrandZ’s China list and 29 on its separate global list, comes in at number 12 on Interbrand’s list. Baidu, the first Chinese company to be listed on the NASDAQ-100 Index, saw its brand value last year climb to US$16.3 billion, a 67 percent rise over the previous year, according to the BrandZ China list. Industry insiders feel some of these companies should be admired for their remarkable ability to grow quickly and stand their ground against foreign competitors. “Baidu is ranked number one for loyalty in the past three years. Baidu really understands the subtlety and delicacy of Chinese consumers,” said Wang of Millward Brown. Wang explained that Baidu has edged out Google even before they closed their China office in 2010 because it understands the nuances of the Chinese language and this is reflected in search requests. Baidu is now setting up an office in Sao Paulo, Brazil

Jonathan Chajet

to compete with Google, a Baidu manager told Brazilian media. They will also launch a Wikipedia style website.

Valuable and best Before settling on the 50 Chinese brands, Millward Brown evaluated 1,000 Chinese brands using 34 categories, reviewed each company’s financial data and interviewed 35,000 consumers, Wang said. In order to make it

Both U.S. companies and Chinese companies can teach each other when it comes to social media.” Chinese hurdler Liu Xiang at a Nike promotional event in Shanghai last year

marks for their new car. There are five things U.S. companies in China investing in social media should consider. The first is no selling. While companies are there to sell, consumers are there to learn story to achieve a balance. Meaningful interactivity: Lenovo has used their Weibo to help prospective customers learn about the benefits of being online. Think about the right ways to connect. Ideas that spread virally: Let people do the marketing work for you – Adidas’ new brand campaign leveraged local and foreign talent to drive high awareness

Emotional involvement: P&G used Weibo to promote their “Hope Schools” promising to open more based on messages being re-tweeted. Finally, there should be something for the end consumer. To sum up, as a new marketing tool, social media and Weibo will revolutionize marketing in China. U.S. companies and Chinese companies alike have jumped in – but right now, it’s the U.S. firms applying more advanced analysis to measure their impacts. All companies need to allocate the resources to compete effectively and realize the consumer is now king and that they are able to talk back. Greg Paull is principal and Eva Wei is a senior consultant at R3 (www.rthree.com), a Shanghai and Beijing marketing consultancy. march 2012

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to the top 50, she said a brand must “bring value” to the consumer and “strong financial value” to stakeholders. The BrandZ list uses a set of measurements to produce their China list. Others like Interbrand’s, rely on slightly different requirements. When it comes to a global brand, however, the rules are quite clear. “A truly global brand is first present in many markets around the world, not just its home country,” said Chajet. Doreen Wang “While China Mobile is a huge company with huge revenue, it is not a global brand and may never be depending upon its business vision.” So what can they do to achieve this? “Beyond having a multinational presence, I think a global brand must stand for important universal values that are relevant in a diversity of cultures,” said Chajet. “BMW stands for performance no matter where it operates, and performance is a concept valued by consumers around the world. Other brands, like KFC, are so distinctively branded in different places around the world that even though it shares the same brand name in many

countries, it feels less global in nature. Essentially, being a global brand must be a global business, but being a global business does not necessarily make it a global brand.” There are other lists compiled including global rankings that included Chinese brands but not all of them. Interbrand, which also issued its 2011 global ranking list that measured the role, strength and financial performance of brands, did not find any Chinese company worthy of its list of 100 of the “Best Global Brands” while Millward Brown’s list included 12 Chinese brands. In addition, BrandZ’s global list named Apple the most valuable global brand and included other wellknown icons such as Google, Amazon.com, Citibank and ExxonMobil. Interbrand’s “best” global company in 2011 was Coca-Cola and Apple came in at number 6. Other notable ones, such as Fortune’s 2011 list of the world’s 500 top brands, included 62 Chinese brands, including many state-owned oil giants and banks. Industry insiders identified several obstacles that Chinese companies, particularly state-owned enterprises and even some trendsetting e-commerce entities, must address before they can become a company capable of developing a product or brand that could be a truly global player. “They should think about how to provide something unique that will resonate with consumers and get followership,” said Wang. “That’s important for the future growth of Chinese brands.”

A Global Mindset

Lenovo’s Chairman and CEO Yang Yuanqing holds up an IdeaPad YOGA at the Consumer Electronics Show in Las Vegas in January

Hainan Airlines was established in 1989

The niche market With an office in midtown Manhattan and other foreign cities, Haier has 70,000 employees worldwide and sells in more than 160 countries. It had global revenues of about US$23.3 billion last year and is working hard to improve the reputation of Chinese brands with new and innovative products, said a company executive. Zhang Tieyan, the director of Haier’s CMI Branding and Marketing Department, said in an interview that their original push to enter the U.S. was not a simple one

eijing-based Lenovo became the world’s second biggest personal computer maker late last year. Although the brand is not universally well-known, Lenovo made headlines in late 2004 after it purchased the PC division of IBM, and has been reporting strong sales results for many quarters. Lenovo spokesperson Angela Lee, who is based in Hong Kong, responded to a few questions from Insight about the company’s push to go global. Here are excerpts. Insight: Lenovo is considered one of the few Chinese companies taking aggressive steps to expand globally. Did the purchase of IBM’s PC unit help you move towards this goal and could you provide some insights how this has helped the company grow in the U.S. or other developed countries?

Angelina Ong

in 1990 since Haier, at that time, was just six years old and faced competition from various new companies that churned out cheaper products. So they knew they had to think outside of the box to make a name. A decision to market a compact size refrigerator for U.S. college students in dormitories met the company’s “strategy of differentiating,” and critics lauded the move, she said. The dorm fridge also came with a unique feature: a built-in device that can be extended out and used as a computer table. “It was designed for a specialized group of consum-

Angela Lee: “Lenovo's purchase of IBM PCD [personal computer division] six years ago was a significant and bold move for our company. And certainly, we believe we have helped blaze a new trail for entrepreneurial Chinese companies with global aspirations. We have now climbed to number two in worldwide PC sales, and have the strongest momentum and clearest strategy in the industry. The acquisition of IBM PCD has helped Lenovo build a unique company -- a next generation global enterprise with a global mindset, incredibly diverse worldwide team, and growth in every market, segment and product line. Our success with recent JV and M&A activity, like NEC in Japan and Medion in Germany, respectively, demonstrates that we have a core competency in bringing companies and cultures together to drive success. We are very satisfied with our results, our progress and our long term position in the industry.” march 2012

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John Quelch

ers so we did not come to the market with just a cheap price and people were thinking this is something different,” Zhang said. Zhang said that Haier would indeed love to produce a

We believe we have helped blaze a new trail for entrepreneurial Chinese companies with global aspirations…”

product that takes the company to the next level. “I think it’s time for Chinese brands to be globally recognized,” said Zhang, admitting it won’t happen overnight or even in a year. “That’s our goal and we will go forward.” There are other unique factors that are either hurting or helping Chinese companies with this effort. For example, state-owned firms enjoy a government safety net, including banks, so it’s difficult to measure their ability to compete with brands from developed countries which are generally not state owned and have experience with competition. At the same time, Chinese companies are known for executing decisions expediently and can customize products to fit specific markets much faster than American companies, according to Wang. Ong of Burson-Marsteller said a lack of trust and mutual understanding also stands in the way of Chinese companies. At the same time, she believes they shouldn’t judge whether a brand has become global by using the U.S. market as a benchmark. She said misperception is also a problem. “Misperception is a two way street and the world has a misperception of China and China has a misperception of the world,” said Ong. “Chinese companies tend to think or believe that certain markets, be they bigger markets like the U.S. or Europe, have a certain level of scepticism of Chinese products or Chinese brands and therein lies the misperception already. Likewise, markets like the U.S. or Europe sees a one-dimensional image of Chinese products, which is ‘low cost’.”

Insight: People wonder whether there will ever be a major Chinese brand such an Apple or Samsung that comes out of China. Is Lenovo interested in this idea and do you think this will happen in the IT or technology field? Lee: “Although very well-known in China, Lenovo aspires to build one of the world's most recognizable ‘power brands’ -- a brand that is instantly recognizable and identifies Lenovo as a company that is known, admired, respected and desired around the world for years to come. “Lenovo last year introduced a new worldwide brand campaign, built upon the concept that Lenovo is the company ‘For Those Who Do.’ Lenovo's brand campaign is intended to build upon the company's worldwide market momentum. Although very well-known in China, Lenovo's brand 32

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campaign will help carry Lenovo's story as a global technology leader to a worldwide audience as well. Insight: Does Lenovo have any other plans to expand in the U.S. or acquire any other companies that you can tell us about? Lee: “Our business in North America is doing well. According to the latest IDC preliminary figures, Lenovo reached a historical high market share of 7.3 percent in the U.S. PC market in the 2011Q4 calendar year, with the strongest growth among the top six vendors at 38.9 percent. “Globally, Lenovo continues to drive growth through organic and inorganic expansion. We will continue to look for more deals, and not only for hardware, sales channels or supply chain efficien-

the company is “riding the IBM wave.” A Lenovo spokeswoman, however, said the company is pleased with the results of the IBM deal and the road There are exceptions. Herborist, a Chinese company forward. that makes high-end, herbal-based products, is succeed“The acquisition of IBM PCD has helped Lenovo ing in France where the company sells a line of natural build a unique company — a next generation global enskincare products, said Chajet. Natural herbal remedies terprise with a global mindset, incredibly diverse worldand other culturally-inspired products, such as silk and wide team, and growth in jade, are authentically Chievery market, segment and nese to consumers around product line,” said Angela the world, and engender immediate trust that can Misperception is a two way street Lee, Lenovo’s director of overcome negative ‘made- and the world has a misperception of corporate communications, in an email. in-China’ perceptions. China and China has a misperception In essence, a Chinese Computer manufacentrepreneur who invents turer Lenovo, China’s larg- of the world.” a brand new product that est computer maker, made fixes a problem or fills a headlines in 2004 when it — Angelina Ong, Burson-Marsteller void stands the best chance acquired IBM’s PC business of building a preferred for US$1.25 billion, a strategy intended to boost Lenovo’s brand, said John A. Quelch, the dean of the China Eureach in the U.S. and in other countries. The deal pushed rope International Business School (CEIBS) in Shanghai Lenovo from the eighth largest to the third largest PC and former senior associate dean at Harvard Business maker in the world at the time. School. While the verdict is still out on whether it will be able He said entrepreneurs are born out of a strong desire to become truly global, Lenovo surpassed Dell for the to fix a common problem. first time last year to become the world’s second largest “Frustration that you can’t find the right information PC maker. Hewlett-Packard is at the top. spawns entrepreneurs to find solutions and that will be Doctoroff called the Lenovo-IBM 2004 deal an “exthe genesis of a global Chinese brand,” said Quelch. periment which ultimately didn’t work,” and Wang said

No shortcuts

cy, as we have done recently. This is about keeping our competitive edge sharp in a rapidly shifting environment, and we are constantly on the lookout for opportunities that make both business and financial sense for our stockholders, customers and employees, and help us achieve our objective of continued profitable growth worldwide.” Insight: What’s the main challenge for a company like Lenovo to expand in the U.S. or other countries and become the “Apple” of China? Lee: “Innovation in the technology industry seems to move at ‘light speed’ and one of the biggest challenges that we will face is trying to stay ahead of the innovation race. Innovation in our products is at the core of all that we do, and we have a very strong R&D team in place throughout what we call our ‘Innovation Tri-

angle,’ with engineers and designers in Yamato, Japan; Raleigh, North Carolina; and Beijing.” Insight: How does Lenovo feel about being on the BrandZ top 50 list and what do you think is unique about Lenovo? Lee: “We are very proud to be included in this list. With our strong recent performance, great products and a unique place in the industry, the world is starting to notice Lenovo. We know future growth will be fuelled by consumers and small businesses. We know that there are new competitors and more choices out there. Strong brands do better and are more profitable, while creating an emotional connection with their audience. With our roots in China and our worldwide capabilities, we have a unique place at the center of these ideas. This is who we are — and it is who we want to be.” march 2012

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D E A L O F t h e M ONTH B y E s t h e r Yo u n g

Louis Vuitton Gets a Brand New Bag istockphoto

French luxury giant Louis Vuitton is expanding in China

iving a vote of confidence to China’s bourgeoning apparel market, a private-equity fund backed by French luxury brand LVMH Moet Hennessy Louis Vuitton SA bought a 10 percent stake in Chinese casual-wear company Trendy International Group. The private equity group, L Capital Asia, is banking on the Guangzhou-based midrange casual wear company to solidify LVMH’s stake in the world’s fastest growing retail market, according to published reports. Trendy International Group oversees four clothing brands, including its largest, Ochirly, and

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manages over 800 franchise locations. Ochirly, aimed at young, professional women, is valued at US$2 billion. The deal with L Capital Asia is estimated at US$200 million. The luxury giant’s deal comes at a strategic time. China’s apparel market is projected to top RMB800 billion by 2015, and is set to account for 30 percent of the global fashion market’s growth in the next five years. In 2011, Chinese shoppers spent about US$73 billion on clothing, up 15 percent from last year. Especially enticing is the opportunity to get a physical foothold in the Chinese mid-range apparel market. Though well-known Western mid-range brands, including Zara and H&M, have charted robust sales in China, the number of branches foreign brands hold is still dwarfed by those of Chinese brands. By the end of 2010, Zara had 65 branches in China, and Japanese brand Uniqlo held 64. Meters Bonwe Group Shanghai, one of China’s largest apparel companies, boasts 3,938 stores by comparison. “Industry tycoons like LVMH merely need a Chinese brand that is full of potential that they can reshape and operate in a Louis Vuitton style, a plan that has been put into effect successfully in China,” Yang Qingshan, chairman of the China Brand Strategy Association and secretary-general of the China Brand Wealth Forum, tells China Daily. Huang Hanji, a managing director at L Capital Asia, said that LVMH would be involved in Trendy’s brand strategy, helping it develop and manage its image, but did not describe in detail what further participation LVMH would have. Other private equity groups have made similar deals in the past. IDF Capital Partners last year invested US$30 million in high-end menswear designer Beijing Eve Fashion, which manages more than 500 franchises in China.

IN V E ST M E NT B y M at t h e w Ga r n e r

Is it Allowed or Just Restricted?

hina’s National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) published the latest official draft of the Catalogue for Guiding Foreign Investment in late December 2011 and became effective January 30. The catalogue outlines the industries China considers especially important to its development and it works as a guide for regulations relating to investment in those industries. Specifically, the guide is “applicable to the projects sponsored by Chinese-foreign joint ventures, Chinese-foreign cooperation businesses and foreign invested businesses on Chinese territories or foreign invested projects in other forms.” In step with China’s 12th Five-Year Plan (FYP), the catalogue stresses increased opening up of

the Chinese market (e.g. moving foreign invested healthcare entities from “restricted” to “allowed”), upgrading of the manufacturing base, introducing emerging technologies and promoting the growth of China’s service sector. What is the bottom line for U.S. companies? For one it means lower taxes and rebates for manufacturers of high-end equipment and service-related companies that are willing to set up operations in China. It also means that those with operations already in China that are no longer “promoted”, like auto OEM’s, will have to upgrade or restructure their manufacturing processes to compensate for decreasing subsidies. China is becoming a more informationintensive economy. Thus, judging from the importance of measuring devices and data processing in the catalogue, knowledge, as well

The latest Catalogue for Guiding Foreign Investment outlines China’s investment priorities

Highlights from the Investment Catalogue A summary of the major changes in each category of the catalogue, according to Danian Zhang and Howard Wu of Baker McKenzie

Healthcare is among the industries China wants to support

The new Catalogue for Guiding Foreign Investment encourages foreign investment in 354 industries (a slight increase from the 2007 Catalogue), restricts foreign investment in 78 industries (fewer than the 2007 Catalogue) and prohibits it in 38 industries (about the same). Foreign shareholding restrictions have been removed in about 10 industries. The New Catalogue seeks to encourage foreign investment in high-end manufacturing, high and new technologies, modern

services and new energy, energy-saving and environmentally friendly industries. This higher-value-added and greener focus is in line with the April 2010 State Council Opinion on Further Improving Utilization of Foreign Investment (“2010 State Council Opinion”) and the priorities in China’s 12th Five-Year Plan.

Encouraged • Mining: exploration and development of

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“

The biggest disappointment is still nothing new on financial services, and this is particularly essential for Shanghai whose goal is to become an international financial center by 2020…” --Dr. Qian Liu, Economist Intelligence Unit

•

• •

as knowledge about knowledge (knowing how to utilize increased amounts of data), is becoming necessary factors for China’s future development. Finally, China’s past promotion of auto OEM and chemical production created a market glut as local economies competed for the same investment sources, leaving them to be moved out of the “promoted” category. Just the same, there will most likely be another market glut in the near future of those industries currently deemed promoted, such as auto components or new materials. Foreign invested projects in China are classified into four categories: promoted/encouraged, allowed, restricted and prohibited. Foreign invested projects that fall into the categories of encouraged, restricted and prohibited are listed in the catalogue. Foreign invested projects that are not classified as encouraged, restricted or prohibited (“allowed”) are not listed and should be considered permitted. What does it mean to be a “promoted” industry? In theory, manufacturers that fall within categories deemed “promoted” by the NDRC, such as environmentally safe fertilizers, are subject to certain incentives and benefits,

unconventional natural gases like shale gas and submarine gas hydrates (limited to equity and cooperative joint ventures) have been added to the encouraged category. Food processing: production of natural food additives and ingredients is no longer subject to foreign shareholding restrictions. Storage of vegetables, dried and fresh fruits, livestock or poultry products has been removed from the encouraged category. Textile manufacturing: the scope is narrowed through a more detailed description of qualified projects with an energy-saving and environmentally friendly focus. Leather products manufacturing: use of recycled leather has been added. Chemicals: several types of manufacturing are removed, such as ethylene, basic organic chemical industrial raw materials and mass coal chemical industrial products. More examples are used to more clearly define the scope of certain encouraged industries, in particular manufacture of

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•

including income tax incentives (usually at a rate of 15-17 percent versus the average 25 percent) for the company and workers with related skills, property incentives, rebates for establishing R&D centers among others. Specific incentives and policies are at the discretion of provincial level offices. The catalogue itself acts as a more tangible guide to the goals outlined in the 12th FYP, identifying specific industries that the state wants to develop and local investment promotion bureaus can use as a reference for establishing new economic zones or attracting investment. For review, the 12th FYP first identifies China’s goal to drive growth through more domestic consumption and less exporting. Two, it identifies seven pillar industries that the state hopes to develop, specifically: clean energy, new communications, biosciences, advanced manufacturing, new energy, new materials and new energy auto. Furthermore, the 12th FYP states the importance of growing China’s tertiary sector with more service-based companies. Fourth is the balancing of China’s western region’s economy with that of the east, which will be

engineering plastic and plastic alloys and supporting raw materials for synthesized materials. Pharmaceuticals: some projects (e.g., manufacturing of contraceptives, Calmette-Guerin vaccine and poliomyelitis vaccine) were removed, with a focus on development of new products. Non-metal mineral manufacturing: new projects have been added, with an emphasis on developing new technologies, energy-efficient products and environmentally friendly processes. General machinery manufacturing: new projects for the manufacture of high-precision, high-strength and complex equipment and components have been added. Specialized equipment manufacturing: environmentally friendly projects have been added (e.g., manufacture of air pollution control equipment and recycling of waste electrical products). Automobile and equipment manufacturing: manufacture of

addressed specifically in a forthcoming “Western Region Foreign Investment Guidance Catalogue.” This also reflects a strategy shift from quantity to quality in terms of FDI, using foreign investment more efficiently. In this regard, the catalogue identifies specific categories and technologies the country desires and is thus willing to provide incentives to foreign companies that either want to get into the China market or lower their own production costs through outsourcing. Dr. Qian Liu, the deputy director of the China Forecasting Service at the Economist Intelligence Unit in Beijing, pointed out that the catalogue did not include anything new about financial services. “The biggest disappointment is still nothing new on financial services, and this is particularly essential for Shanghai whose goal is to become an international financial center by 2020. There will probably be incremental liberalization there over the next few years within the existing catalogue guidelines,” she said.

Big to small Component manufacturing and design for

•

Auto companies are mentioned in the catalogue

industrial products such as auto, rail, watercraft and electricity generation, in contrast to OEM production, has still been given favored investment status. Even before the new catalogue was published, members of China’s MOFCOM indicated a desire for increased domestic production of auto components in December at the Dialogue Between Chinese Enterprises and the Fortune 500 conference in Ningbo, Zhejiang province. Inner areas like Chengdu have also begun to open industrial zones to attract component manufacturing and after-sales services over OEM production. Other categories are new materials and precision molding. This translates to market opportunities for U.S. manufacturers with bestpractice equipment with plastics and polymers (PTT, PHA and PETG), composite materials and synthetic fibers, ceramics, films/membranes and

assembled automobiles has been removed, but manufacture of key components for new energy vehicles has been added, with detailed specifications of covered components. Textile manufacturing: the scope is narrowed through a more detailed description of qualified projects with an energy-saving and environmentally friendly focus. Electrical machinery and apparatus manufacturing: equipment for nuclear-power plants over one million kilowatts has been removed. Communications and other electronic equipment manufacturing: digital camcorders, digital audio equipment, digital cinema production, editing and projection equipment have been removed. High-definition digital video cameras and audio equipment and touch systems (touch screen, touch components, etc.) have been added. Service industries: logistics information consulting services, intellectual property services, and domestic services, and the establishment of venture capital enterprises have been added.

• Education: training projects for vocational skills have been added.

Restricted • Pharmaceutical: distribution and retail of pharmaceuticals have been removed (and so is now in the permitted category). The 2007 Catalogue requirement that the Chinese party hold a majority stake in a retail pharmaceutical company with over 30 pharmacies selling different products no longer applies. • Food processing: manufacture of carbonated beverages has been removed. But the 2007 Catalogue requirement for the Chinese party to hold a controlling interest in projects for processing of edible soybean and rapeseed oil has been expanded to expressly, include processing of all edible oils including cottonseed, peanuts, tea seed, sunflower and palm oil. • Wholesale and retail: commercial companies engaged in franchising, entrusted operations and business management

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new textiles as well as high-end metal processing equipment. It also means that those with lowerend production methods for those categories will face more market pressure from domestic competitors. It should be noted that the catalogue refers to production and design of this equipment, not necessarily importation of original equipment. However, there are likely to b e domestic manufacturers willing to import said equipment for their own production and process upgrading.

Cleaning things up Infrastructure and manufacturing upgrades have also become a priority. Since the introduction of t he 12t h FYP, t he cent ral gover nment h a s p r o m o t e d t h e u p g r a d i n g o f C h i n a’s manufacturing and transportation infrastructure, replacing its traditional manufacturing base with more information intensive and value-added production processes. This stems from a need for more precision, less waste and thus less laborintensive manufacturing methods to mitigate rising production costs. As a result, the catalogue lists promoted

• •

•

have been removed, and distribution of audio and video products (limited to cooperative joint ventures) is no longer subject to the requirement that the Chinese party must hold a controlling interest. Construction and operation of large scale wholesale markets for agricultural products has been added. Financial services: financial leasing companies have been removed. Real estate development: construction and operation of villas have been moved to the prohibited category, reflecting government efforts to cool the real estate market and control inflation. Education: ordinary upper secondary educational institutions (high schools) are more tightly restricted, with now only cooperative joint ventures allowed (not equity joint ventures). Hygiene and social security: medical institutions have been removed from the restricted category, and so are now permitted. This is consistent with a November 2010 State Council circular which permits eligible foreign investors to

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categories like the aforementioned new materials, modern metallurgical and agricultural equipment, au t o m at i o n , a e r o n au t i c a l t e c h n o l o g i e s , biochemicals and techniques. In addition to upgrading existing processes, the catalogue also lists several emerging technologies like new energy auto components, digital broadcasting equipment and IT communications equipment based on the IPv6 standard. The other aspect has been dealing with China’s internal challenges. One is the need for modern healthcare. The index for one has moved foreign invested medical entities out of the “restricted” technologies category to the “allowed” category; also encouraged are modern medicine and medical equipment production like 3D ultrasound and MRI scanners. Another is cleaning up the environment. This includes new energy related equipment, recycling and reprocessing equipment (both natural and industrial waste), new fertilizers and environmentally friendly chemicals. It also includes analogue and measuring devices for things like environmental measurement (air and water), transportation/smart grid controls, food

establish wholly foreign-owned medical institutions on a pilot basis and gradually removes equity restrictions.

Prohibited • Postal services: domestic courier services for letters are added, in line with the 2009 PRC Postal Law, which allows only China Post (which is also the industry regulator and pricing authority) to deliver letters posted within China. • Media: the 2007 Catalogue prohibited foreign investment in news websites, network audio and video programme services, Internet access service venues and Internet cultural operations. The New Catalogue specifies that music is excluded from that prohibition.

Danian Zhang is the chief representative and partner and Howard Wu is a partner of Baker & McKenzie Shanghai Office.

and chemical inspection, healthcare devices and geological measurement. The third focus is improvement in the service industry with encouraged items (an increase of nine service-related items) like mineral exploration, entrepreneurial services, financial consulting and services, technical/vocational training, environmental cleanup services and IPR consulting, among others. Consulting services in China, while encouraged, are still limited to partnerships with a Chinese partner, with the exception of non-compulsory education technical/vocational training. Quan said the ser vice industr y may see something positive in this report. “There are a few new and interesting bits to the guidelines, but possibly the most exciting aspect for AmCham Shanghai readers is the emphasis on services. It’s a useful recognition of the fact that foreign companies are setting up in these sectors

– especially training, consulting and medical treatment,” she said. The catalogue itself represents goals stated in the 12th FYP to promote clean, value added manufacturing, new energy, more sophisticated measurements and inspection, new materials and clean chemicals. It does not list specific plans or incentives related to the listed industries. It just lists the industries which are “promoted,” “restricted” or “prohibited.” Companies should check with their local government contacts about what specific types of incentives are available for an investing company and confirm whether or not those policies are in line with the general policies of the central government to avoid future complications.

Matthew Garner is a government relations associate at AmCham Shanghai.

inside amcham from the chair

Progress and Challenges

he Year of the Dragon could prove to be a challenging one for U.S.-China relations. As the results of AmCham Shanghai’s just released China Business Report on the local business climate indicate, American business in China continues to prosper and grow, but companies are less positive about their prospects in 2012. This is a significant change from past surveys. Adding to the uncertainty of this year are the presidential election in the United States, which could lead to heightened campaign rhetoric against China, and China’s own leadership transition, a critical turnover that only happens once every 10 years. Fortunately, as was evident from Vice President Xi Jinping’s visit to the United States, leaders from both governments are determined to keep the bilateral relationship on solid ground and find ways to deepen and broaden U.S.-China relations. Chinese officials spoke of a “trust deficit” before the visit and designed Xi’s visit with this problem in mind. Xi’s return to Iowa, where he visited as a young party official in 1985 to learn about American farming, and his presence at an NBA game in Los Angeles were clearly an effort to help Xi connect with the American people and put a friendly face on China’s presumed next leader. Similarly, the protocol accorded Xi’s visit was one way to demonstrate to the Chinese people that the U.S. treats China with dignity and respect. The visit resulted in some progress on commercial issues – market access for U.S. companies to sell auto insurance was one example – but more important was the effort of both sides to set a constructive tone for future discussions with China’s next leader.

Kenneth Jarrett Chair of the Board of Governors

High-level visits provide important opportunities to address bilateral trade issues, but can only go so far. The results of the latest China Business Report, based on responses from 315 Chamber companies, are a useful reminder of the challenges U.S. companies face in China. The top three concerns for U.S. companies are rising costs, human resource constraints and increased competition from Chinese and foreign firms. In addition, companies are seeing little improvement in the legal and regulatory challenges they face. Clearly, this new survey reinforces the view that China is a maturing market. But it is also a market where U.S. companies continue to do well. Despite the challenges, last year remained a good one for American companies, with strong profits, revenue growth and solid profitability. We should keep that in mind even as we worry about clouds on the horizon. Where does AmCham Shanghai fit into all of this? The answer is quite straightforward. This is your Chamber and our core mission is to help member companies succeed in China, as the Chamber has worked to do since its return to China 25 years ago. During this 25th anniversary year, we will continue to provide our members with a rich offering of special speakers, networking events, committee activities and policy analysis. In addition, over the course of this year, you will see tangible progress on our three-year strategic plan, as we roll out the SME Center, establish a presence in Suzhou and step up our policy advocacy. As always, the Board of Governors welcomes your input. Let us hear from you so we can do an even better job of positioning the Chamber for the next 25 years.

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inside amcham B OARD o f g ov e r n o r s b r i e f i n g

Highlights from the February 2012 Board of Governors Meeting CRM Project Proposal Representatives from KPMG, the Chamber’s advisor on the CRM (Customer Relationship Management) project, provided an overview of their vendor recommendations resulting from a due diligence process. With a focus on identifying the most appropriate vendor to meet the business process needs of the Chamber, an RFP was sent to 11 vendors. Seven vendors responded and four were selected to provide product demonstrations to AmCham Shanghai’s internal task force for review. Board members discussed the benefits of each proposed option and objectives of the overall project. Board members asked that the CRM project be put on the agenda for the March 6, 2012 Board meeting for further discussion. China Business Report David Basmajian, director of communications and publications, presented highlights of the 2011-2012 China Business Report in preparation for the report launch event on February 15, 2012. Board members discussed the report findings and key messages of this year’s report.

Approval of SME Center Name Kirt Greenburg, program associate of AmCham Shanghai’s Small & Medium Enterprise Program, presented naming options for the AmCham Shanghai SME Center to be launched in 2012. Board members discussed name and tagline options and reached consensus on the title and slogan: The AmCham Shanghai SME Center – Resources and Referrals for Small Business. Board members agreed that the title and slogan capture the key objectives of the initiative: to provide services to U.S. SMEs and to create business opportunities for AmCham Shanghai member companies and service providers. In Attendance Governors: Eddy Chan (by phone), Lienjian Chen, Ted Hornbein (by phone), Marie Kissel, Dan Krassenstein, Peter Sykes, Robert Theleen and Eric Zheng Apologies: Andrew Au, William Brekke, Kenneth Jarrett (Chairman), Jim Mullinax and James Rice Attendees: David Basmajian, Brenda Foster (President), Kirt Greenburg, Helen Ren and Jessica Wu

The AmCham Shanghai 2012 Board of Governors Chair

Governors

Andrew Au Citibank China

Eddy Chan FedEx Express

Chen Lienjing Pratt & Whitney

Ted Hornbein Richco

Marie Kissel Baxter Asia-Pacific

Daniel M. Krassenstein Procon Pacific

James Rice CSM nv China

Peter Sykes Dow Chemical

Eric Zheng Chartis Insurance

Kenneth Jarrett APCO Worldwide

Vice Chair

Robert Theleen ChinaVest

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AmCham Shanghai New Members: March 2012 U.S. Corporate Membership

HATCO Corp. Foodservice Equipment (Suzhou) Co., Ltd. WU John

Calix Network Technology Development (Nanjing) Co., Ltd. WANG Coco Cummins Engine (Shanghai) Trading & Services Co., Ltd. GOTOH Yoshinobu Marc Export Now (Shanghai), Inc. WEI Phil HAVI Logistics Services (Shanghai) SHORTELL Troy Reed JDA Software (Shanghai) Co., Ltd. MCNULTY Stephen Langfang MK Foods Co., Ltd. JOHNSON Jeff Midrex Metallurgy Technology Services (Shanghai) Limited MCENENY Jeffrey William

Hilite Automotive Systems (Changshu) Co., Ltd., Shanghai Branch SMITH Richard James HQTS QA International Services Co., Ltd. WANG Warren

Merck Chemicals (Shanghai) Co., Ltd. JELFS Alasdair

Shercon Rubber (Hangzhou) Co., Ltd. ENNIS Keith

Synergy Health (Suzhou) Sterilization Technologies, Ltd. TOWNSEND David

Stephen Gould of China, Inc. ZHAO Jie

The Nielsen Company (GZ), Ltd., Shanghai Branch YAN Xuan Tvilum Representative Office ERIKSEN Rudi

DEUCHEM (Shanghai) Chemical Co., Ltd. CAO Yongsheng DHL Global Forwarding (China) Co., Ltd. BRUNOEHLER Brad Fellowes Office Products (Suzhou) Co., Ltd. HARKIEWICZ Justin Conway GE (China) Research & Development Center Co., Ltd. CHUAI Fang Getinge (Suzhou) Co., Ltd. EVANS Mark 42

Non-Resident Individual Membership Financial Planner VAN LERVEN Frank

ONE Energy Investments Ltd. VESCO Daniel

Shanghai Ogilvy & Mather Advertising Ltd. YUAN Yong

CST (Shanghai) Biological Reagents Co., Ltd. DONG Jay

GHSP Shanghai Automotive Co., Ltd. WU Chonggao

Korn/Ferry (Shanghai) Human Capital Consulting Co., Ltd. CHAN Diana

SCSI (Suzhou) Quality Service Co., Ltd. THURMAN Matthew Conor

Audatex Information Systems (Shanghai) Co., Ltd. SHAH Nasir Ali

Sales Institute-China LAU Charles

Octopus Innovation PIERAGGI Christiane

Plastics News HILGERS Lauren

AAM Investment Management (Shanghai) Co., Ltd. PROCTOR Steve

FUCHS Lubricants (China) Ltd. SIEGEL Bernd

Jacobs Projects (Shanghai) Co., Ltd. MOLONEY Dan

Northrop Grumman Sperry Marine Trading (Shanghai) Co., Ltd. YANG Shuo

U.S. Associated Corporate Membership

Keystone Group (Shanghai), Inc. ZHANG Linda

Valspar (Shanghai) Management Co., Ltd. TAY Derrick Ling Kuan VMware Information Technology (China) Co., Ltd., Shanghai Branch TANG Ruixin Vocus, Inc. LEVINSON Daniel

Zenith Global Solutions, Inc. BOVEE David

InterChina, Shanghai Office WOODARD Kim InterContinental Shanghai Puxi BELTOISE Didier Keylogic (Beijing) Consulting Co., Ltd. YANG David Keyrus (China), Ltd. LI Francois

Element Materials Technology GREGG Joshua

Klako Management Consulting (Shanghai) Co., Ltd. KOEHLER Kristina

Orient Best Investment Limited YU Weili

Corporate Int’l Affiliate Membership

Manchester Business School Worldwide Limited FU Sherry NFL International LLC, Beijing Rep. Office YOUNG Richard

Applus (Shanghai) Quality Inspection Co., Ltd. JESSEPH Blaire Ashley

NJRBS China, Ltd. CAO Bo

Aqua Space Investment & Consulting (Shanghai) Co., Ltd. CHANG James

OC&C Strategy Consultants (Shanghai) Co., Ltd. DANNENBERG Daniel

Auralog Software Development (Beijing) Co., Ltd. GE KY

Ormita Barter Limited NGO Knut

Beijing Brunswick Consultancy Limited CAI Jinqing

Small Business Membership Aperian Global (Shanghai) Consultancy Limited DUONG-GRUNNET Shiu-Jene

CLS Communication (Shanghai) Co., Ltd. FAES Florian

China Sage Consultants (Shanghai) Co., Ltd. WINGO Chris

Diakrit Internet Technology (China), Ltd. Shanghai LOOI Florence

Dxcel International Trading Company LIN Deane

Digital Publishing Co., Ltd. ZHENG Jun

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Improved Piping Products Ltd., Shanghai WORDER Dan

Non-Resident Corporate Membership

Camtek Imaging Technology (Suzhou) Co., Ltd. WANG Jenny

Hong Kong Ogier Services (Asia) Limited, Shanghai Rep. Office CALVERT Kristy

ICIS China FLOOK Christopher David

eHi Car Service CAI Leo EMG China Co., Ltd. HAN Helen

PM Architectural Engineering Consulting (Shanghai) Co., Ltd. O’LOUGHLIN Niall PRD Shanghai Landscaping Consulting Co., Ltd. ZHAO Yan reallyenglish WONG Christina Sage Software (Shanghai) Co., Ltd. CHEN Oscar Savino Del Bene (Shanghai) Co., Ltd. LEPORATI Marco Shanghai CBI Event Co., Ltd. YE Dengfeng Shanghai Pudong Kerry City Properties Kerry Hotel Pudong BREA Ed.

MARCH 2012

Do you want to share more information about your company? Contact Sophia Chen at (86 21) 6279-7119 ext. 5667 or sophia.chen@amcham-shanghai.org for a “Standout Listing” opportunity in the New Members Section.

StepStone Solutions (Shanghai) Limited WIJSMA Hans

Werner Global Logistics (Shanghai) Co., Ltd. BAUTISTA Juan

Studio San Architecture Design METZ Jeremy

ADANGBA Eric

TACK Business Consulting (Shanghai) Co., Ltd. CHEN James

ENRIQUEZ ROMANO Talya FAN Flora SCHONEVELD Frank

The Economist Group (Asia/ Pacific), Ltd., Shanghai Rep. Office CEN Janet

Associate Membership

T-Systems P.R. China, Ltd., Shanghai Branch HUANG Bryan

AAM Investment Management (Shanghai) Co., Ltd. JOSEPH Donald

Venetian (Zhuhai) Hotel Marketing Co., Ltd. ZHANG Sally

ADP Business Services (Shanghai) Co., Ltd. XU Abraham

World Anti-Aging Company MUHS Derek

Advanced Micro Devices (Shanghai) Co., Ltd. LIANG Gang

ZhongMei Investment & Management Consulting Co., Ltd. STIEFEL David

Individual Int’l Affiliate Memberhsip AsiaCan Limited ZHANG Colin Blue Pacific Flavors (Suzhou) Co., Ltd. TEW Jack Crownline Shanghai AD Co., Ltd. MIZUNO Katsuhiko CTA Consulting Company Limited/ Finex YEUNG Desmond Demag Cranes & Components (Shanghai) Co., Ltd. HERRMANN Rainer Demag Cranes & Components (Shanghai) Co., Ltd. TAO Xuening Emerging Asia Group HUSAIN Adil JETLAG SCHOOFS Vincent Knight Frank ZINK Graham Management Logix Consulting WU Lloyd Manchester Business School Worldwide PAWLIK Adriana Suzhou OfficeStar Business Services Co., Ltd. TANG Hui

Advanced Micro Devices (Shanghai) Co., Ltd. ZHANG Michael Tao Air Products & Chemicals (Shanghai) Gases Co., Ltd. LV Lucy Aperian Global (Shanghai) Consultancy Limited ROEHLING Darcy Apple Procurement and Operations Management (Shanghai) Co., Ltd. LEE Lawrence Audatex Information Systems (Shanghai) Co., Ltd. LI Yin Bank of America, N. A., Shanghai Branch YIN Ling Bryan Cave LLP, Shanghai Office CHEN Zhengjun Bryan Cave LLP, Shanghai Office HUANG Ling Cabot China, Ltd. JOHNSON Aaron Calix Network Technology Development (Nanjing) Co., Ltd. DU Chris Calix Network Technology Development (Nanjing) Co., Ltd. XIA Charlotte Caterpillar (China) Investment Co., Ltd., Shanghai Branch LI Liz Caterpillar (China) Investment Co., Ltd., Shanghai Branch MA Rong

Citibank (China) Co., Ltd. MUR Deborah

Jabil Circuit (Shanghai) Limited ONG Kay Chong

Citibank (China) Co., Ltd. REKATE Jason

JPMorgan Chase Bank (China) Company Limited Shanghai Branch NELSON Michael

Colgate Sanxiao Co., Ltd. GE Ronghao Corning China (Shanghai) Regional Headquarter WANG Tina Cushman & Wakefield (Shanghai) Co., Ltd. LEE Jason Cushman & Wakefield (Shanghai) Co., Ltd. LINDBERG Joshua Eaton (China) Investments Co., Ltd. LI Gina Edelman Public Relations Worldwide (China) Co., Ltd. Shanghai Branch TAN Kok Kuan Ernst & Young ALLGAIER David FMC Asia Pacific, Inc., Shanghai Rep. Office DECLEENE James FMC Asia Pacific, Inc., Shanghai Rep. Office XU Gordon

Jun He Law Offices (Shanghai) CHEN Luming Jun He Law Offices (Shanghai) CHENG Julie H. Jun He Law Offices (Shanghai) XIE Natasha Jun He Law Offices (Shanghai) ZHOU Hui Knowles Electronics (Suzhou) Co., Ltd. ZHOU Xiaoyang Korn/Ferry (Shanghai) Human Capital Consulting Co., Ltd. CHAU Josephine Korn/Ferry (Shanghai) Human Capital Consulting Co., Ltd. HE Gladdy Korn/Ferry (Shanghai) Human Capital Consulting Co., Ltd. JIANG Steve Korn/Ferry (Shanghai) Human Capital Consulting Co., Ltd. LARM Simon

Ford Motor (China), Ltd. SCHOCH David Linden

Korn/Ferry (Shanghai) Human Capital Consulting Co., Ltd. LIM Jack

Haimen Tyson Poultry Development Co., Ltd. ORDAZ SABAG Juan Luis

Korn/Ferry (Shanghai) Human Capital Consulting Co., Ltd. WU David

Hamilton Sundstrand (Shanghai) Management Co., Ltd. CHEN Wendy

KPMG TAN Edmond

Hamilton Sundstrand (Shanghai) Management Co., Ltd. CHEN Yao Hamilton Sundstrand (Shanghai) Management Co., Ltd. JARZYNKA Jeffrey Heidrick & Struggles International HUANG Shannon Heidrick & Struggles International LIN Bill Heidrick & Struggles International SYMONDS Cheng Yin Honeywell (China) Co., Ltd. XU Kane Inductotherm Industries (Shanghai), Ltd. WANG Rui

MARCH 2012

Lee Kum Kee (China) Trading Ltd. LI Na Lend Lease Project Management & Construction (Shanghai) Co., Ltd. SUN Sammi Manpower China DE YRIGOYEN Francois Menlo Worldwide Logistics (Shanghai) Co., Ltd. WU Jane Metro (Suzhou) Technologies Co., Ltd. WILSON Anthony Richard Metro (Suzhou) Technologies Co., Ltd. ZHANG Jeffrey NSF Shanghai Co., Ltd. WU Sarah

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AmCham Shanghai New Members: March 2012 O’Melveny & Myers, LLP, Shanghai Office (USA) HILDEBRANDT James O’Melveny & Myers, LLP, Shanghai Office (USA) PAN Wendy O’Melveny & Myers, LLP, Shanghai Office (USA) TAI Sean O’Melveny & Myers, LLP, Shanghai Office (USA) WU Charles O’Melveny & Myers, LLP, Shanghai Office (USA) ZHANG Yan Panduit Network Connectivity Distribution Co., (Shanghai), Ltd. LIU Ningjun Personnel Decisions International Shanghai Co., Ltd. WERTHWEIN Rosa Philips (China) Investment Co., Ltd. CHEN Rong

CDG Retail Management ALSHAB Melanie

Shanghai Matsu Furniture Co., Ltd. KARFS Jeremy Francis

SPS (China) Co., Ltd. PISTONO Steve

Crown Plaza Lake Malaren Shanghai, China RENNIE Richard

Shanghai Property Consulting Inc. HOENIG Magan

The Nielsen Co. (Shanghai), Ltd. ZHU Haobo The Nielsen Company (GZ), Ltd., Shanghai Branch ZHU Haobo The Stanley Works (Shanghai) Management Co., Ltd. CHAN Donny The Washington University - Fudan University Executive MBA Program LIU Fiona U.S.A. Keller and Heckman LLP, Shanghai Rep. Office HU Chen U.S.A. Keller and Heckman LLP, Shanghai Rep. Office LI Jenny Valspar (Shanghai) Management Co., Ltd. KAROL Darice

Philips (China) Investment Co., Ltd. LIANG Yan

Vocus, Inc. AYLWARD Peter

Philips (China) Investment Co., Ltd. YAO Luqian

ZhongMei Investment & Management Consulting Co., Ltd. ZHANG Eric

PM Architectural Engineering Consulting (Shanghai) Co., Ltd. ZHOU Andy PPG Management (Shanghai) Co., Ltd. HORTON Michael PPG Management (Shanghai) Co., Ltd. ZHANG Qi PrimeVest Group/ Hongjing International Education STEELE Hector Rockwell Collins (Shanghai) Avionics Trading Company Limited WANG Chen-Yang

Individual U.S. Citizen Membership Abacare Group Limited BARBER Jason Alexandermann Solutions KWOK Linnet Arcade Marketing, Inc. SHANBERGE Janet Ascend International BURKE Bob Asian Arts Connection LUO Sophia

RTKL Architectural Design Consulting (Shanghai) Co., Ltd. CAO Bin Shanghai Huatek Software Engineering Co., Ltd. LIU Ren Shanghai International Theme Park and Resorts Management Company Ltd. YEUNG Raina Solutia International Trading (Shanghai) Co., Ltd. QURESHI Nadim Zulfiqar Ali 44

Southco (Shanghai) Co., Ltd. WU Stefan M

ASSA ABLOY Hospitality (SH) Limited SHORE Dolores Margaret

Dalian Software Park MOXLEY Justin

Shanghai Virtual Communications Co., Ltd. BARRON Alexander

Dazhong Insurance Co., Ltd., of China MATTHEWS Ross Edward

Smile Dental NESS Douglas

Ensign Freight BURT Jonathan

SunGard DRISCOLL Tim

Grant Thornton WEI Jack

Symantec Corporation HAN Ling

HSJC KONG Thalia

TX iTech LIANG Liang

In Vivo BVA (Shanghai) Market Research Company Limited LEE Yeeli

University of Shanghai for Science & Technology TARLIN Jennifer

Ininifty Solar Ltd. TU Harrison

Velcro Asia ELLIS Andrew

Interfax LORE David

W&H Law Firm CHANG Jason

IPAI Auction Co., Ltd. WANG Jon

CHENG Jade

JUCCCE KEMPER Deb Leo Burnett Ltd. BRADLEY Jeffrey Carl Molex incorporated RODRIGUEZ Ana

ENG Steven Siu San EVANS Mark FUNG Freda GIBSON Chris HARRIS Brittany HOLDEN Geneva Linscott

Muraya DCE- Design, Construction, Engineering RICHTER Elizabeth

HOOTON III John Robert

Nunergy Control Inc. SUN John

KELLY Matthew

Oshkosh-JLG (Tianjin) Equipment Technology Co., Ltd., Shanghai Branch BAILLIE Christian Oshkosh-JLG (Tianjin) Equipment Technology Co., Ltd., Shanghai Branch TRUAX Todd Pacific Epoch KOBRICK Gregory

HOUSER Eric

KRAUGHTO Keith LAW Paris LESKER Laura MESAROS Shawn NEAL J.P. QIAO Jeffrey ROPSKI Daniel SUSSMAN Jeffrey WARD Duane

BAR Architects CHOU Shaowen

Pinsnent Masons SCOTT Brian

Beijing Alan Business Solutions, Inc. YI Jae

Quest onthFRONTIER XIANG Sam

Blu Inc Media TURCHETTI David

Revitalization-LLC MCDONALD Roger

Education

Cannon Design TUNKEY Michael

RIM Logistics, Ltd. GOTTLIEB Michael Evan

Hult International Business School LU Stella

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WILLIAMS Lee YUAN Frank Tien Hu

GoverNment Relations Shanghai Customs Taskforce Distributes 2012 AmCham Shanghai Trade Satisfaction Survey The AmCham Shanghai Customs Taskforce distributed its annual 2012 Trade Satisfaction Survey in March, with the goal of collecting input on Shanghai customs and quarantine policies from members engaged in trade-related capacities. This includes thoughts on export-import processing policy developments, use of bonded/free-trade zones and challenges with declaration and clearance, among others. The results of the survey will be reported to Shanghai Customs and the Shanghai Entry-Exit Inspection and Quarantine Bureau (CIQ) as a resource for improving clearance efficiency. 2012 marks the seventh year of the survey. As one of the only customs surveys from a foreign business community in Shanghai, the survey has already helped the AmCham Shanghai Customs Taskforce to establish a cooperative dialogue with Shanghai Customs and helped Shanghai, the world’s busiest port, become more efficient. Please contact us if you want to know more about the taskforce or the survey by emailing Government Relations Associates Lydia Li at lydia.li@amcham-shanghai.org or Matthew Garner at matthew.garner@amcham-shanghai.org.

Suzhou Committee Holds End-of-Year Reception with SIP Administrators

Suzhou Committee members meet SIP officials

AmCham Shanghai’s Suzhou Committee held an end-of-the year reception with Suzhou Industrial Park (SIP) officials at the Suzhou Intercontinental. In attendance were both member companies located in and around SIP and SIP administrators. The reception marked the end of a year of increasing communication and collaborative activities between the two groups, including the first Suzhou Government Appreciation dinner last April and a meeting last September with Barry Yang, vice chairman of the SIP administrative committee, to give companies an overview of the SIP’s 12th Five-Year Plan and its impact on American companies. (Dec. 13)

Chen Xianjin speaks with AmCham Shanghai President Brenda Foster

AmCham Shanghai Hosts Official from the Shanghai Municipal Commission of Commerce

AmCham Shanghai hosted Chen Xianjin, vice director general of the Shanghai Municipal Commission of Commerce, to brief members on recent foreign direct investment (FDI) trends in Shanghai and the outlook for FDI going forward. Chen spoke on Shanghai’s remaining an attractive destination for foreign investment. In 2011, Shanghai received a record US$20 billion of FDI, a 32 percent increase over 2010. FDI flows increased the largest in the financial services, business and commerce services, culture and entertainment and property market industries, as well as the retail sector, which accounted for 85 percent of foreign investment in Shanghai in 2011. The U.S. accounts for a significant share of FDI in Shanghai, amounting to a cumulative value of US$14.8 billion in 2011. Among the 7,000 U.S.-invested projects in Shanghai, U.S. companies mainly are investing in capital intensive and technology intensive projects, as well as developing regional company headquarters in Shanghai, said Chen. Chen’s speech is available for download at the AmCham Shanghai website. (Feb. 7)

AmCham Shanghai to Lead Regional Business Delegation – Chengdu, Sichuan Province, March 22-24 As part of AmCham Shanghai’s continuing collaboration with China's Ministry of Commerce's (MOFCOM) Go West policy regarding development of China’s western provinces, AmCham Shanghai will be leading a delegation of businesses to Chengdu, Sichuan province from March 22-23, with an optional city tour on the 24th. Representatives from the Sichuan Provincial Government and the Chengdu Municipal Government will be on hand to discuss the region’s development and industries. Of particular focus will be a discussion on the policies and incentives regarding auto component manufacturing and after-sales services as well as healthcare and IT. Chengdu is already home to Auto OEM manufacturers like FAW-Volkswagen and Volvo and high-tech firms like Intel. Optional factory tours to some of the region’s top foreign operations, including FAW-Volkswagen, Volvo Car and Kanghong Sagent Pharmaceutical, will be arranged for this business delegation. AmCham Shanghai hopes the business program will be a good opportunity for members to gain a better understanding about Chengdu and allow participants to build partnerships with local officials. If you are interested in joining this delegation, or if you have any questions, please email Linda Wang at linda.wanglin@amcham-shanghai.org. MARCH 2012

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Event highlights

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January Monthly Member Briefing: Prospects for U.S.-China Relations in 2012 AmCham Shanghai hosted Kenneth Jarrett, chairman for Greater China of APCO Worldwide and 2012 AmCham Shanghai chair, and Shen Dingli, professor of international relations at Fudan University, marking the Chamber’s first Monthly Member Briefing in 2012. AmCham Shanghai’s monthly briefing is an exclusive opportunity to hear from top government officials and issue-area experts on current events and political-economic trends impacting business in China. Professor Shen predicts 2012 will be a great year of prosperity for both the U.S. and China despite challenges ahead stemming from the U.S. presidential election and leadership change in China. China’s aim to import US$8 trillion in goods by 2015 means opportunities for the U.S. to boost exports to China. Increasingly, more Chinese are interested in the U.S. for economic opportunities, including investment and education. Meanwhile, areas of dispute, which Shen believes the media exaggerate, are manageable thanks to a “super stable” U.S.-China bilateral relationship in which two-way trade reached US$400 billion in 2011. The two countries need to continue to engage each other, working together to build trust and win-win solutions, said Shen. Jarrett sees a more challenging year ahead, which will have an impact in the business community. Heated rhetoric in the U.S. presidential elections and sharp statements from the Obama administration concerning China will only intensify. Trade disputes are a source of tension, and America’s “Pivot to Asia” to emphasize a U.S. military presence in Asia may cause suspicion in China about U.S. actions in Asia. Despite a potentially rough 2012, Jarrett sees the challenges as manageable. Both the U.S. and China view the bilateral relationship as critical, and there is an effort on both sides to maintain open channels. (Jan. 10)

Prof. Shen Dingli, Kenneth Jarrett and Brenda Foster discuss U.S.-China relations

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IT Committee IT Committee Examines IT Compensation Trends for 2012 AmCham Shanghai’s IT Committee hosted Elley Cao, a consulting director with Mercer’s Shanghai office, to speak on the “Outlook for Compensation in IT in 2012.” The presentation began with an outlook for 2012 on the economic and labor market and was proceeded by a look at compensation and benefit trends. In terms of China, the highest turnover in IT has been in the high-technology industry. Looking forward in 2012, China’s 12th Five-Year-Plan (FYP) will emphasize innovation by incentivizing companies to establish their research and development (R&D) facilities in China.

Elley Cao speaks on IT compensation

Changes around compensation and benefit trends in 2012 are largely influenced by the incentives of the 12th FYP and its influence on the high demand for talent in the high-tech industry. The highest rate of voluntary staff turnover has been in the high-tech industry, which is due to the high demand in this industry and an increase in diversification of benefits and compensation packages. Ways that companies are creating effective reward programs in retaining talent in R&D centers are through career development, the employee’s base salary, long-term incentives, short-term incentives and training opportunities. The key advice for companies in China looking to retain their employees is through providing unique and different benefits such as housing programs of Alibaba and Ren Ren that offer fresh graduates something different than other employers recruiting at universities in China. (Jan. 12)

Marketing & Media Committee A New Generation of Luxury AmCham Shanghai’s Marketing & Media Committee hosted Elan Shou, managing director for Ruder-Finn China, who presented the firm’s Third Annual China Luxury Forecast. Jointly executed with Albatross Global Solutions, this year’s report draws conclusions from a survey of over 1,000 respondents in mainland China, Hong Kong and Taiwan. With two-thirds of respondents hailing from Tier-2 and Tier-3 cities and half being under the age of 30, this survey has unique and surprising implications for China’s luxury market. Despite the ongoing global economic slowdown, the future looks bright for luxury for a number of reasons. First, the overwhelming majority of respondents say they plan to spend the same if not more on luxury items in 2012 than they did in 2011. Further, luxury buyers’ motivation has shifted from “buying for face” to buying for self satisfaction, which Ruder-Finn analysts believe will be a lasting trend in the coming years. Finally, China is poised to overtake Japan as the largest luxury market worldwide by sales volume. What does this mean for marketing and media industry professionals in the luxury sector? With points-of-sale consistently ranking No. 1 as buyers’ preferred source of information for luxury brands – and ultimately, luxury purchases – the in-store experience needs to remain a high priority for successful brands. Digital media should also be kept in view as 64 percent of respondents report regular visits to luxury brands’ official websites and blogs like Weibo have grown considerably as trusted sources of information. (Jan. 17)

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Legal Committee Labor Arbitration in China AmCham Shanghai’s Legal Committee welcomed four attorneys to speak on “Labor Arbitration in China.” The presentation was divided into two sections with the first section covered by speakers Lesli Ligorner and Gordon Feng of Paul Hastings, followed by Jeffrey Wilson and Zhao Fang of Jun He Law Offices. Appealing to the court for a labor arbitration case is easy for employees, requiring a small fee; however, court hearings are only conducted in Mandarin Chinese, making it difficult for foreign employees to prevail in labor arbitration cases. The publicity that labor arbitration cases bring to a company’s name makes consultation and negotiation crucial in a case. Employees have the right to ask someone else to negotiate on their behalf, and often do. If a settlement is agreed upon, it is binding and cannot be brought to court. If it is not, then the case is brought before the labor arbitration court. Labor arbitration cases often involve unfair termination, salary issues or injury. Evidence is a crucial part of labor arbitration cases given that the timeline for appeals is 45 days from the filing date and can only be extended 15 days with a judge’s approval. Burden of proof must be collected quickly given the short timeline of these cases through emails, audio recordings or witness statements obtained legally. Overall, key takeaways are to not rush termination, establish solid evidence and ensure HR procedures are followed. (Jan. 17)

Panelists discuss legal arbitration in China

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Healthcare Committee AmCham Shanghai Healthcare Committee and JCCT Subgroup Leads Meeting

U.S. Commercial Service representatives consult healthcare leaders

To ensure that a broad range of relevant industry stakeholders is consulted in the U.S.-China Joint Commission on Commerce and Trade (JCCT) process, Commercial Service Shanghai's Sarah Fox and Lynn Jiao coordinated a meeting of the AmCham Shanghai Healthcare Committee and JCCT subgroup leads. AmCham Shanghai leadership, Foreign Commercial Service officers and key industry leaders in the pharmaceutical, medical devices and services industries were able to communicate directly with the Medical and Pharmaceuticals JCCT Subgroup leads in Beijing and Washington, D.C. Issues discussed at the meeting included the upcoming China Active Pharmaceutical Ingredient (API) Workshop Proposal and Agenda, which will take place in Shanghai later this year, the JCCT Procedures Document Form for industry training proposals and Draft Agenda for the 2012 Combination products workshop. Future regular meetings are proposed between the AmCham Shanghai Healthcare Committee, CS Shanghai and JCCT subgroup contacts to continue to represent healthcare industry issues to U.S. and Chinese government policy makers. (Jan. 18) Reporting by Ryan Balis, Christine Francois and Krisanna Oopik

MARCH 2012

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executive reading room Aaron Wininger, Partner/Beijing Representative, Perkins Coie LLP Book: The Windup

Girl by Paolo Bacigalupi

Remarks: “As a patent attorney, I love science fiction. This books details a dystopian future in Thailand with engineered food and people. The main protagonist searches Bangkok's market for fruits thought to be extinct due to bioengineered plagues and falls in love with a Japanese engineered woman grown in a creche.”

Constantino Flores, Director of Operations, Mission Foods Co. Ltd, Shanghai Book: The

Growth Map by Jim Neill

Remarks: “The book is quite interesting, a very easy read and anybody that has a vested interest either as an executive or entrepreneur in China can find something of value in it. I found most interesting his arguments as how China is very rapidly evolving from an export-oriented economy into a true domestic consumer-oriented economy.” Bradley Fueling, CEO, Kong and Allan (Shanghai) Consulting Book: Great

by Choice by Jim Collins

Remarks: “Haven't read it, but know a little about the research and I am confident it will be a good follow up to Good to Great.” Edwin Williamson, Vice President and Managing Director, Asia Pacific, Eastman Chemical Company Book: China

Cuckoo by Mark Kitto

Remarks: “It’s an impressive story of a Brit who came to China in the 1990s and never looked back.”

Also on Edwin Williamson's reading list: Book: Winning the War for Talent in Emerging Markets: Why Women are the Solution by Sylvia Ann Hewlett and Ripa Rashid Remarks: “The book has an interesting premise: Women in emerging markets are generally well educated, careeroriented, ambitious (but not terribly interested in office politics) and loyal. That’s a powerful set of attributes for employers who are challenged to find and keep talented employees.” Book: Getting

China and India Right by Anil Gupta and Haiyan Wang

Remarks: “Because my job depends on it.” Book: The

Redbreast by Jo Nesbo

Remarks: “This is a Scandinavian crime thriller supposedly every bit the equal of The Girl with the Dragon Tattoo.”

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MARCH 2012

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