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INSIGHT The Journal of the American Chamber of Commerce in Shanghai July / August 2009

INDUSTRY FOCUS

Logistics and Transportation INTERVIEW

U.S. Rep. Rick Larsen SNAPSHOT

Foreign Investment

Connecting with Consumers Digital and social media provide a host of tools for companies to get one step closer to the Chinese consumer


INSIGHT July/August 2009

The Journal of the American Chamber of Commerce in Shanghai

AMCHAM SHANGHAI

Karen Yuen

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JASON PYM

DIRECTORS BUSINESS DEVELOPMENT & MARKETING

WWW.HOUSE.GOV/LARSEN

David Turchetti

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ISTOCKPHOTO

18 Clearing Up the Confusion SNAPSHOT

V I C E P R E S I D E N T, P RO G R A M S

By Brent Hannon

The rules governing foreign investment in China are straightforward and easy to navigate once the intent behind them is understood.

21 Route to Recovery INDUSTRY FOCUS

COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren

By Lee Perkins and Mark Millar

The Chinese government is aiming to rejuvenate the logistics industry with a wide ranging fiscal package that may impact small- and medium-sized firms but substantial opportunities remain for foreign logistics operators.

24 A Need for Greater Awareness INTERVIEW

MEMBERSHIP & CVP

Linda X. Wang

By David Basmajian

U.S. Representative Rick Larsen (D-WA) sat down with Insight to talk about U.S.-China relations and the recently introduced U.S.-China Competitiveness Agenda.

INSIGHT EDITOR-IN-CHIEF

Justin Chan

EDITORIAL ASSOCIATE

27 Knowledge Transfer and Launch ERP SERIES

Elaine Wu

COMMUNICATIONS ASSOCIATE

Weina Yang

By Tony Cotterell

The fourth article in the ongoing series on implementing a global enterprise resource planning (ERP) system looks at the knowledge transfer and go-live stages of a global implementation.

DESIGN

Alicia Beebe LAYOUT & PRINTING

Ella Shan Snap Printing, Inc.

32 Connecting With Consumers COVER STORY

INSIGHT SPONSORSHIP MARKETING ASSISTANT MANAGER

Sophia Chen

(86-21) 6279-7119 ext. 5667 Story ideas, questions or comments on Insight: Please contact Justin Chan (86-21) 6279-7119 ext. 5668 justin.chan@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.

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

F E AT U R E S

ISTOCKPHOTO

PRESIDENT

Brenda Foster

By Justin Chan

The Internet has revolutionized the way Chinese consumers behave and think, and new media forms have changed the way they interact with brands. Companies must develop new strategies to engage with the Chinese consumers of today.

I N S I G H T S TA N DA R D S

3 News Briefs

11 Manager's Notebook

12 Market Profile

9 A Digital Concert FRESH IDEAS

As part of its interactive Internet marketing campaign, Nokia recently hosted a live online concert that caught the attention of 6.5 million Chinese netizens.

48 Deal of the Month

Effect of Proposed 15 The U.S. Tax Reforms ANALYSIS

The Obama Administration’s proposed international tax reforms may have a significant impact on U.S. companies operating abroad.

INSIDE AMCHAM

39 From the Chairman: Summer of Engagement 41 AmCham Advocacy and Government Relations

43 Events in Review 46 Committee Highlights COVER ILLUSTRATION BY JASON PYM

Special thanks to the 2009-2010 AmCham Shanghai President’s Circle Sponsors

MARCH 2009

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INSIDE INSIGHT

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t’s time to start listening. As the largest online population in the world, China’s netizens are now commanding the attention of marketers, advertising executives, public relations advisors and even research and development scientists. The millions of conversations that take place on the Internet in China over blogs, discussion forums and other social media sites present a goldmine of information for companies. This month’s cover story looks at why companies should be paying attention and what they can learn from China’s netizens.

JUSTIN CHAN EDITOR-IN-CHIEF

The first round of the U.S.-China Strategic & Economic Dialogue takes place later this month in Washington, D.C. and AmCham Shanghai will be paying close attention. We recently had the pleasure of hosting U.S. Speaker of the House Nancy Pelosi (see June 2009 issue) as well as leaders of the U.S.China Working Group, U.S. Representatives Mark Kirk and Rick Larsen. This month’s Interview features a discussion with Rep. Larsen on the U.S.-

China Competitiveness Agenda, a set of four bills that will drive U.S. engagement with China. Foreign investment is another hot topic in China, especially in today’s tough economic times as investment figures are down drastically. The Snapshot column reviews some of the recent activity in inbound and outbound foreign investment. China’s logistics and transportation sector is another area that has been hit hard by the current economy but the Chinese government has a new plan that it hopes will rejuvenate the industry. See the Industry Focus for an article provided by the AmCham Shanghai Logistics & Transportation Committee with more details on the plan. The fourth installment of our enterprise resource planning (ERP) series has taken us to knowledge transfer and finally system launch. In the next issue, we will recap the entire process in the fifth and final article.


IMAGINECHINA

News

N NE EW WS S B BR R II E EF FS S

CHINA BUSINESS

Beijing Olympics profit exceeds RMB1 billion Profits from the 2008 Summer Olympic Games in Beijing amounted to more than RMB1 billion, said China’s National Audit Office. The Beijing Organizing Committee for the Games of the XXIX Olympiad (BOCOG) reported total income of RMB20.5 billion and expenses of RMB19.3 billion. The Beijing Paralympics broke even, with both income and expenses evening out at RMB863 million. Revenue from the Games came mainly from the sale of broadcasting rights, souvenirs, tickets and sponsorships, while the main expenditures included temporary facilities, sports and communications equipment, accommodations and medical services. The profit from the 2008 Olympics will be distributed to the International Olympic Committee, the Chinese Olympic Committee and BOCOG, which will set up funds for sports development, including improvements to public sports facilities and promoting mass sports activities.

China’s auto imports down 30% China’s combined volume of imported vehicles totaled US$4.38 billion during the first five months of the year, a decrease of 30.3% from a year earlier, said the General Administration of Customs (GAC). China imported a total of 116,000 vehicles from January to May, down 31.9% yearon-year. This decrease is partly due to the global economic slowdown as well as the recent purchase tax cut policy for Chinese consumers who buy cars with engines smaller than 1.6 liters, according to the GAC. More than 60% of Chinese imported vehicles were those with engine displacements larger than 2.5 liters.

Swine flu now a global pandemic The World Health Organization (WHO) recently declared the H1N1 virus a pandemic that would likely continue for one to two years. It is the first strain of influenza to reach this status for 41 years. More than 52,000 people have been infected and over 200 have died, as the H1N1 virus has now been reported in 100 counties and territories. In China, more than 700 people have been infected with the virus, and in Shanghai, nearly 70 cases have been reported. China’s Ministry of Heath recently declared that in the case of a rampant spread of the virus in local communities, it would switch to monitoring the “group activities” of each community instead of closely tracking and quarantining individual patients. It also suggested that mass activities in communities could be suspended or canceled. Recently, the WHO said that its figures could not be considered reliable because some countries were no longer keeping total figures while other poor countries did not have the means to reliably detect new cases.

Chinese company picks up Hummer Negotiations are currently underway between General Motors and Sichuan Tengzhong Heavy Industrial Machinery for the purchase of GM’s luxury car brand Hummer. GM expects the deal to be completed by the end of the third quarter, although the sales price has not been

disclosed. Tengzhong, a company with no background in car manufacturing, is looking to enter the auto business and says it will invest in the brand’s R&D capabilities in order to transform Hummer into more eco-friendly, smaller and more fuel-efficient vehicles. A spike in fuel prices and concerns about the environmental impact of SUV models have led to decreased sales of the brand.

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During the first quarter of the year, GM’s Hummer sales dropped 62% to just 5,013 vehicles. Although GM has no authorized Hummer dealership in China, 700 to 800 vehicles have been sold.

substandard production materials and lead to engine failure. BMW has said that it would remodel the gas pipes and replace gas tanks free of charge. MACROECONOMICS

CORPORATE NEWS

China Eastern buys 20 Airbus jets China Eastern Airlines Corp. purchased 20 A320 passenger jets from Airbus in a deal signed in Paris for RMB9.9 billion. The deal will increase the company’s airline capacity by 5% from last year, enhance its competitiveness and meet potential demand increase in the domestic market, said the airline. The aircraft are expected to be delivered between 2011 and 2013. Shanghaibased China Eastern and fellow state-owned carrier Shanghai Airlines have reportedly been in merger talks, and public trading of each airline has been suspended since June 8. Last year, China Eastern reported a loss of RMB13.9 billion, while Shanghai Airlines had a loss of RMB1.25 billion.

PetroChina buys 45.5% of Singapore Petroleum PetroChina Company, the listed unit of China’s biggest oil and gas producer, purchased 45.5% shares of refiner Singapore Petroleum and announced it would make a buyout offer for the rest of its shares. PetroChina will offer S$6.25 per share in cash, valuing the total deal at approximately US$1.02 billion. The deal was signed between PetroChina’s subsidiary PetroChina International (Singapore) and Keppel Oil and Gas Services, a wholly owned subsidiary of Singaporean Keppel Corp.

BMW recalls China cars BMW China recalled 1,694 of its 7series sedans in China beginning on June 25 because of a problem with faulty gas pipes, said China’s General Administration of Quality Supervision, Inspection and Quarantine. The cars, which were produced between July 1, 2008 and May 6, 2009, have flawed gas pipes that could be disconnected due to

World Bank forecasts 7.2% growth The World Bank raised its 2009 forecast of China’s economic growth rate to 7.2% from its earlier forecast of 6.5%, citing that China’s expansionary fiscal and monetary policies have kept the economy growing at a steady rate. In its June China Quarterly Update report, the World Bank projected that China’s GDP will hit 7.7% in 2010. The report, a regular assessment of China’s economy, found that fiscal stimulus is centered on the country’s RMB4 trillion stimulus package, while monetary stimulus has led to a surge in new bank lending. The report also projected that while there are signs of stabilization in financial markets, global growth prospects remain subdued. A rapid global recovery seems unlikely and uncertainty remains, said the report.

China’s May fiscal revenue increases China’s fiscal revenue in May rose 4.8% yearon-year to RMB656.9 billion, reversing the downward trend of the past few months and signaling a recovery in the economy. Aggregate central and local government revenues in the first five months of 2009 totaled RMB2.71 trillion, down 6.7% from last year. Analysts attributed May’s fiscal revenue increase to the launch of numerous projects that are part of China’s RMB4 trillion stimulus package. May’s revenue increase will allow the treasury more room to use additional fiscal measures to bolster the economy, as China aims for 8% fiscal revenue growth in 2009, a modest target compared to previous years. China’s fiscal revenue increased by 18.8% in 2008 and 32.4% in 2007.

Steel price index peaks in May China’s composite steel price index, a general measure of domestic steel prices released

by the China Iron and Steel Association, rose for the first time in three months in May after government-led investment boosted demand. The index rose by 2.7%, up 2.58 points to 98.14 points at the end of May from the previous month, although it was down 58.72 points, or 37.4%, year-onyear. While Chinese government stimulus measures have encouraged domestic demand, global demand for steel remained low and has not yet recovered from the fallout of the global financial crisis, said China’s steel association. U.S. - CHINA

10th Anniversary of China-U.S. defense consultations China and the United States held their 10th annual round of defense consultations on June 23 and 24, focused on building closer military ties and marking the resumption of military exchanges between the two countries. The annual military consultations began in 1997 following an agreement between Chinese President Jiang Zemin and U.S. President Bill Clinton, but were suspended in October 2008 when the Bush administration notified Congress of its plan to sell arms worth about US$6.5 billion to Taiwan. This year, the U.S. military delegation was led by Michele Flournoy, undersecretary of defense for policy, who arrived in Beijing for talks led by Deputy Chief of the General Staff of the Chinese People’s Liberation Army Ma Xiaotian. The two sides discussed bilateral military relations, Taiwan issues, international and regional security issues, and other topics of common concern.

NPC holds 10th meeting with U.S. House China’s National People’s Congress (NPC) held its 10th meeting with the U.S. House of Representatives in Washington under a parliamentary exchange mechanism on bilateral ties, inter-parliamentary exchanges, the global financial crisis, climate change and international and regional issues of common concern. Both

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sides emphasized the importance of the U.S.-China relationship and agreed that the existing parliamentary exchange mechanism has become the most direct and effective platform for communications between the two sides, playing an important role in deepening mutual understanding, building consensus and promoting cooperation. The Chinese side extended an invitation to the U.S. side to visit China in the fall for the 11th meeting under the exchange mechanism.

China-Hollywood collaborations on the horizon To tap into China’s burgeoning film industry, U.S. film studios hope to increase the number of China-Hollywood productions. Currently, only 20 foreign movies can be shown in theaters each year, accounting for less than 40% of the US$630 million made at the box office in 2008. Joint projects would be exempt from the quota, allowing U.S. studios to snag a greater piece of the industry pie. However, foreign pressure alone is not enough, according to Dan Glickman, chairman and chief executive of the Motion Picture Association of America. Glickman said that increased cooperation with Chinese filmmakers would result in local pressure on the government to allow more foreign films and combat piracy, which is still widespread despite measures to curb the illegal practice. CHINA OVERSEAS

CIC to finance Australian property trust China’s sovereign wealth fund, the China Investment Corporation (CIC), will lend A$200 million to Australia’s leading property trust the Goodman Group, the third overseas company in which CIC has chosen to invest since 2007 after buying stakes in Blackstone and Morgan Stanley. CIC will commit to a financing facility with Australia’s biggest investment bank Macquarie Bank, which has sold A$15 million of its exposure. Combined with the CIC’s commitment, the facility totals A$485 million, which will provide

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more liquidity to the Goodman Group and enables it to be more conservatively leveraged and improve its debt structure with sustainable and adequate funds over the next two years. The deal is still pending approval from Australia’s Foreign Investment Review Board.

cubic meters over the next few years. The Sino-Myanmar project will open the fourth route for China’s oil and natural gas imports after ocean shipping, the SinoKazakhstan oil and gas pipelines, and the Sino-Russian oil pipeline. GOVERNMENT & POLICY

China expands power transfer program with Russia Two of the world’s major energy consumers, China and Russia, are preparing to expand their electricity transfer program in a move to enhance energy safety. The two countries are planning on investing billions into building several power transmission lines across shared borders. A long-term deal has been finalized between China’s State Grid and Russia, under which Russia will transfer 3.6 to 4.3 billion kwh of power to China from 2008 to 2010, 18 billion kwh from 2010 to 2015, and 60 billion kwh from then on, said State Grid officials. China’s Electricity Council forecasts that China’s power consumption will increase by 5% in 2009, whereas Russian media predicts Russia will see a 4.5% decrease in its overall power consumption in 2009 as a result of decreased energy demand from the economic downturn.

China to build Myanmar pipeline China will begin construction on pipelines that will transport oil and gas to China from Myanmar in September, said PetroChina. The oil and natural gas pipelines will run parallel, starting from the Kyaukryu port on the west coast of Myanmar and entering China at the border city of Ruili in Yunnan Province. The 1,100-kilometer oil pipeline is expected to transfer 20 million tons of crude oil annually to China, whereas the 2,806-kilometer natural gas pipeline will transport 12 billion cubic meters of gas to China every year. The oil pipeline can reduce the transport route of oil by 1,200 kilometers compared to ocean shipping, as well as reduce China’s reliance on the Straits of Malacca for oil import. The gas pipeline will further increase China’s gas imports, expected to exceed 100 billion

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China sees surge of rail investment China has seen a 120% rise in investment in railway construction in the first five months of the year as part of its RMB4 trillion stimulus package spending on public infrastructure. China has so far invested RMB168.9 billion in fixed-asset investment in railways, up 120% from a year earlier, said the Ministry of Railways. The figure includes RMB149 billion for railway infrastructure construction, RMB3.3 billion for railway upgrading, and RMB16.6 billion for purchasing trains. The country built a total of 1,942 kilometers of new rail lines in the first five months of 2009.

China generates record power in June China’s daily power generation topped 9.76 billion kwh in the first ten days of June, the highest so far in 2009, but down 0.17% over the same period last year, said the China National Power Dispatching and Communication Center. Power generation is considered a key indicator of the country’s economic health, and China’s generation began to decline starting from late 2008, indicating an economic slowdown. In November, power generation dropped 9.6% year-on-year, the biggest fall in a decade. The recent increase in power generation is attributed to a recovery in China’s heavy industries, including cement, steel, iron and coal. In May, the country produced 250 million tons of coal, up 9.6% from the same period last year, and steel output was 57.3 million tons, up 7.4% year-on-year. Analysts expect China’s heavy industries to use more power in the following months as the country’s economic stimulus begins to take effect.


Listed SOEs contribute to Social Security Fund Over 100 state-owned companies listed on domestic stock exchanges will have to transfer part of their state-owned shares to China’s National Social Security Fund as part of the country’s efforts to prepare for an aging society, announced the Chinese government. The measure applies to 131 companies with a current market capitalization of RMB63.9 billion, who must transfer shares to the national pension fund that must amount to 10% of the total in their initial public offerings. The government has not released a list of companies or provided a date for the transfer. The measure is part of ongoing government efforts to finance the country’s social security system and the retirement of an aging population. SHANGHAI BUSINESS

Loans for car buyers up 50% Loans for auto buyers grew fastest in the first five months of the year, said Shanghai’s municipal banking regulatory

commission. At the end of May, loans outstanding for car buyers amounted to approximately RMB17 billion in Shanghai, an increase of 55% compared to the same period last year. China approved its first motor vehicle financing firm in 2004, and since then has launched 10 such companies, including four in Shanghai. China sold 4.96 million domestically manufactured vehicles in the first five months of 2009, up 14.3% year-on-year.

License plate prices continue to soar Vehicle license plate prices in Shanghai continued to climb in June, reaching a record for the year. The average auction price for a car license plate reached RMB30,363, up RMB1,263 from May. The lowest successful price also rose to RMB30,000, up RMB1,500 from last month. A total of 8,000 license plates were auctioned in June, the most this year and 800 more than in May. There were 17,433 bidders, 6% more than last month. The Shanghai Development and

Reform Commission announced that it will not cancel plate auctions before the World Expo 2010, but is considering providing discounts on license plates for small-engine cars. The number of car plates issued this year may rise 35%, said Shanghai Vice Mayor Tang Dengjie.

Fewer tourists visit Shanghai due to downturn The number of tourists visiting Shanghai has dropped due to the global economic downturn, according to tourism authorities. From January to April, Shanghai had 1.94 million inbound tourists, down 11% from the same period last year. Hotel occupancy rates in the city were only 45.9% from January to April, down around 10% from the same period last year. The average hotel room rate in the city was RMB468 a night from January to April, down nearly 19% from last year. Shanghai’s Tourism Administration said that it did not expect the inbound tourism market to recover anytime soon due to the recent upswing in swine flu cases in the city.

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CHINA & THE WORLD

SOUTH AMERICA KOREA ASIA-PACIFIC China opened up a new 234-sea mile long passenger-cargo route linking its eastern coastal city of Weihai in Shandong Province to the Pyongtaek port in the RepublicMIDDLE of Korea. ThreeEAST round trips will be carried out each week. Four shipping routes are already in operation between Weihai and Inchon, Pyongtaek and Kunsan in Korea. RUSSIA China’s trade with Russia fell 39.2% year-on-year to US$13.5 billion in the first five months of the year, the first drop in a decade, as a result of the global economic downturn. Chinese imports from Russia were down 29.3% to US$7.43 billion, while exports to Russia fell 48% to US$6.06 billion. Volatile prices of crude oil, refined oil products, wood and chemical products, combined with slumping demand, has reduced China’s imports from Russia, according to China’s Ministry of Commerce.

ASIA-PACIFIC EUROPE ZIMBABWE

AFRICA

The Zimbabwean government has appealed to the Chinese government for a loan to buy more Chinesemade road construction equipment to help rehabilitate the African nation’s dilapidated roads. Zimbabwe has already purchased US$2.7 million worth of road construction equipment from China, which includes tractors, compactors, water trailers and concrete mixers. The current rundown state of Zimbabwe’s roads is a result of economic challenges that the country has experienced over the past few years, but a shortage of equipment and funds has prevented the road rehabilitation process from moving faster.

MIDDLE EAST EUROPE

IRELAND China and Ireland recently marked the 30th anniversary of the establishment of diplomatic ties between the two countries. Chinese President Hu Jintao and Irish President Mary McAleese exchanged congratulatory messages and reiterated their pledges to enhance bilateral cooperation and trust. President Hu said China-Ireland relations have developed steadily over the past 30 years, with frequent high-level meetings, the expansion of economic and trade cooperation, and fruitful exchanges in the fields of science, technology, education and culture. President McAleese said that the deepening of mutual understanding and cooperation has laid the foundation for an enduring and energetic friendship between Ireland and China.

NORTH AMERICA MIDDLE EAST

AFRICA

AFGHANISTAN China has pledged to enhance its cooperative relationship with Afghanistan in terms of infrastructure construction, trade, investment and anti-drug and anti-terrorism operations. Wu Bangguo, chairman of the Standing Committee of the National People’s Congress (NPC), met recently with Mohammad Yunus Qanooni, speaker of Afghanistan’s lower house of parliament, and hailed China’s 54-year diplomatic tie with Afghanistan and pledged to increase exchanges and cooperation with the country. Wu applauded Afghanistan’s persistent support for China on issues relating to Taiwan, Tibet and human rights, while Qanooni reiterated Afghanistan’s support of the one-China policy.

NORTH AMERICA

MIDDLE EAST SOUTH AMERICA AFRICA

CANADA China and Canada recently signed a plan of action for continued cooperation between the two countries on health priorities of common concern. The new agreement involves the timely sharing of information on emerging infectious diseases, such as the H1N1 influenza virus, and a better understanding of regulatory frameworks in the area of therapeutic products and natural health products, including traditional Chinese medicine, to help ensure the safety and quality of these products. Representatives from both sides also pledged to strengthen and reform healthcare systems, primary health care and to improve food safety.

AFRICA ASIA-PACIFIC NORTH AMERICA

UNITED STATES Some 85% of U.S. congressional districts increased their exports to China in 2008, according to the third annual survey of districts’ exports by the U.S.-China Business Council. The analysis, undertaken by the Trade Partnership, measures U.S. exports to China from 2000, the year before China joined the World Trade Organization, through 2008 from every congressional district in the 111th Congress. According to the report, in almost every district, exports to China for the 2000-08 period grew much faster than exports to the rest of the world.

SOUTH AMERICA

NORTH AMERICA

COLOMBIA China has donated RMB2 million to Colombia for clearing anti-personnel mines which killed hundreds of people last year. The donation will support the implementation of the Integral Action Against Antipersonnel Mines program in Colombia, which will clean up anti-personnel mines and promote social and economic development in mined areas. In 2008, 768 people were killed by anti-personnel mines in Colombia, and 214 people were killed by mines in the first four months of this year.

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FRESH IDEAS IMAGINECHINA

A Digital Concert

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hina’s booming Internet community has become so vocal and popular that its members have been dubbed “netizens” by the media. With Internet use rapidly rising in China, people are increasingly turning to the online world to discuss everything ranging from automobiles to pop culture. Finnish communications giant Nokia has caught on, recently hosting the Nokia 5800 XpressMusic Interactive Concert in April. The three-hour show, which streamed live on video sharing site www.youku.com, was expected to draw only one million users but ended up attracting nearly 6.5 million. “This is a brand new event and nobody has ever done that before. The viewer numbers exceeded our earlier estimations and the event is still being talked about,” said David Tang, vice president of Nokia China, to China Daily. The concert was part of Nokia’s plan to give viewers an interactive experience while promoting the Nokia 5800 XpressMusic touchscreen phone, a competitor to Apple’s successful iPhone. An online poll was conducted to choose the concert’s nine performers, including top Chinese artists Anson Hu and Joanna Wang. Viewers were able to send virtual flowers and kisses and choose from four different angles to view the live show, in addition to voting for the encore performer. An interactive press room was also created where performers answered questions submitted by viewers.

Since 2006, Nokia has partnered with Chinese television stations to organize concerts as part of its marketing strategy. While televised events could reach an audience of up to 200 million, the level of viewer engagement is difficult to measure. Meanwhile, the 6.5 million users who tuned into the online concert were able to engage in the experience and actively participate. “Everyone now has a tight marketing budget. The challenge is how to make that money more effective,” said Koh Yeewee, Nokia’s marketing director for China, Korea and Japan. Although online marketing currently accounts for a small portion of Nokia’s overall budget, the online concert marks the company’s move towards more Internet-oriented advertising. With the recent launch of 3G networks in China, Nokia is expected to run more online marketing campaigns pinpointed at specific demographics. Nokia has already made moves to address China’s Internet population of 298 million, 67 percent of which is under 30 years of age. The company released a series of viral videos starring popular Taiwanese magician Liu Qian as he performs tricks using Nokia mobile phones. Within one week, the video posted on Nokia’s website received over one million hits. The online concert and other Internet-based efforts were “inspired by our understanding of the lifestyles of China’s Internet-generation youth,” explains Koh. “Through this, they can really express themselves – their desire to interact, to get involved, and to communicate.” – Linda Witters

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Continuing the trend of online interaction, Nokia hosts a live Internet concert as 6.5 million viewers tune in.


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M A N A G E R ’ S N OT E B O O K

Why Try So Hard Now?

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Accelerating Your Career in a Down Time

or many executives in China, this is the toughest economic period they have ever faced. They’ve never seen business slow down like this, nor have they been part of a company that needed to control costs so significantly. The tough times right now are having a big impact on their overall mood, motivation and job performance. Of course, it is natural to be more worried about your situation and get caught up thinking about different outcomes and scenarios during this less-than-ideal time. As activity slows, it is easy to slow down and take a wait-and-see approach, or wonder whether it is even worth it to put so much effort into such an uncertain situation.

many are unable to continue to perform well. Instead, it is the more mature, more capable, and more reliable performer who is still able to produce results and who emerges from the crowd in the eyes of top management. “Although business may be off, most companies use down times to improve their efficiency and productivity, and upgrade their capabilities and resources,” says the human resources director of a U.S. electronics company. “Management is more active about trying new things and needs to be more aggressive to maintain the business. They really look for the people who can still make things happen. That makes it a very good time to stand out and be a ‘hero’ in your company.”

Your career lasts a long time If you’re having such thoughts, you may want to consider that during your professional career, you are bound to experience economic cycles and downturns that you have little control over. During these down periods, keep in mind the bigger, long-term picture. The capabilities and achievements that you build throughout your career are accumulated during both the up and down, good and bad times. Eventually, things turn around and opportunities again present themselves. When they do, what kind of position are you in to capture them?

The best thing I did for my career The biggest break I ever experienced in my own career happened during another severe downturn, when I was a management trainee at Wang Laboratories. Back then, the IT industry was transitioning from a productselling to a solutions-selling approach, which created huge challenges for big hardware companies. Despite the company’s highly uncertain situation, I developed a very helpful resource document that supported the company’s key technology. Especially in light of the challenges being faced, the contribution caught the attention of many in the company, including my boss. That achievement led to his bringing me to Asia, even though Wang was severely reducing headcount at the time. In the end, Wang Laboratories and the technology that I supported disappeared. But the capabilities and contributions I accumulated then have benefited me throughout my career. I’ve rarely been asked since about Wang Laboratories or its products, but instead about the things I’ve done and how I did them.

Easier to stand out in down times In fact, it is often easier to differentiate yourself in a down time than an up time. In up times, more people are able to be successful. With companies spending, the market more active, and overall business activity high, it is easier to get results. When things slow down, it is no longer a business-as-usual situation. As a result, Got an article idea for “Manager’s Notebook”? Contact Insight Editor-in-Chief Justin Chan at justin.chan@amcham-shanghai.org.

Don’t lose sight of simple truths During downturns, try not to lose sight of simple truths about your career success. Capturing attractive opportunities comes down to the contributions you make and things you are able to do, regardless of what may eventually happen to the company or product lines you work with. There are also high value-added areas that contribute to the success of any company or situation, such as resolving problems and delivering solutions, helping others be more successful, the ability to build a team and lead others, and developing resources. These can be delivered simply by pulling together information or making resources more available to others, sharing your knowledge and expertise, or pursuing solutions that respond to the key issues and needs of your company. So instead of over-thinking those things that you can’t control, like how well your company will manage through this financial crisis, put your energy into what you can control, like making something positive happen in a difficult situation. Ultimately, whatever capabilities and achievements you develop, you carry them forward and benefit from them. The more impressive they are, the better you can compete for those opportunities that you seek later on. These may not be new concepts, but are still ones you want to remember during these more difficult times.

O and Larry Wang is CE & Li Asia g an W of r de foun t him at ac Resources. Cont om li.c glcwang@wan

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MARKET PROFILE IMAGINECHINA

Impact of Global Stimulus Measures A look at the effect of government measures launched to boost economies around the world.

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he global financial crisis, which began in 2007 in the U.S. sub-prime mortgage market, has resulted in the deepest global recession in 60 years. Many governments have introduced massive stimulus packages to kick start economic growth. Furthermore, the effects of the global economic downturn have been more severe in countries that had underlying structural problems, making reforms incorporated into stimulus packages important contributors to longterm growth. That being said, stimulus measures also carry some inherent risks.

Why are stimulus packages important?

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For more information, please call (86-21) 6372-6288 or visit www.euromonitor.com

The world is in the midst of its deepest global recession since 1945. This began with the global financial crisis in the developed world but has spread across the globe and to developing economies. Global real GDP is projected to shrink by 1.3 percent in 2009 and grow by a minimal 1.1 percent in 2010. Experience has shown that recoveries after financial crises typically take longer than other recessions, making government measures to boost growth and help consumers

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and businesses in the form of stimulus packages all the more important. Many stimulus packages are designed to boost confidence through tax cuts, financial aid to companies and investments in transport and infrastructure with the aim of creating new jobs. As well as stimulating employment in the shortterm, investment in infrastructure projects will also boost medium-term growth and competitiveness as better infrastructure improves the business environment, aids mobility of the labor force and helps reduce regional inequalities. Some measures are aimed specifically at increasing consumer spending as consumer expenditure, particularly in developed economies, contributes significantly to GDP. For example, in the UK, VAT was cut in November 2008 by 2.5 percentage points to 15 percent for 13 months. In China, the central government announced in March 2009 that rural residents who purchased automobiles and motorcycles would get subsidies worth 10 percent and 13 percent of the purchase price until January 2013. In Taiwan, the government handed out vouchers worth more than US$100 in January 2009 to every adult citizen in order to encourage consumer spending.


Which regions have stimulus measures?

introduced

What makes the current economic downturn unique is the fact that every region in the world has been affected by the global financial crisis, if not directly then indirectly through the knock-on effects. Amid a worldwide credit crunch, business conditions and confidence have deteriorated severely, impacting employment levels and thus consumer confidence and spending. This in turn has accelerated the decline in global demand for exports, which has further weighed on business profits. While the United States and Europe will bear the brunt of the crisis (Western Europe’s real GDP is projected to decline 4.1 percent in 2009), all other regions will experience slowdowns or contractions in 2009. As a result, the necessity of stimulus measures to boost growth is important across the world.

What notable stimulus packages have been introduced? In April 2009, a US$1 trillion pledge to help the world economy came out of the G20 London summit. Of this, US$750 billion will be made available to the International Monetary Fund (IMF) and a further US$250 billion towards world trade. China’s GDP growth is forecast at 6.5 percent for 2009 and although this is strong on a global level, it is a significant decline from recent years. In November 2008, China announced a stimulus package worth RMB4 trillion with a range of measures that included tax reductions and better access to credit for companies in the country’s ten key sectors including textiles, automobiles, steel, shipping, electronics and the information industry. The U.S. economy is projected to contract 2.8 percent in 2009 from a year earlier. The US$789 billion fiscal stimulus package signed into law in February 2009 includes US$507 billion in spending and US$282 billion in tax relief. The biggest portion of the stimulus, US$116.2 billion, will fund income tax credits of up to US$400 per individual and US$800 for couples to boost consumer spending. Ten percent of the stimulus will be geared towards

supporting job growth through new infrastructure and transportation projects. Japan’s export-dependent economy is also in crisis with a contraction of 6.2 percent forecast for 2009. The Japanese government announced a third stimulus package in April 2009, bringing total stimulus spending to US$270 billion. The government believes stimulus measures will create up to 2 million jobs during 2009-2011.

What are the downsides of such stimulus measures? The immediate problem with stimulus measures is the added pressure they exert on government finances. In countries that have large government budget surpluses or have accumulated funds through export revenues, the ability to introduce stimulus measures is less of a problem. However, in countries which already have significant budget deficits, such stimulus packages are stretching government finances at the very time that economies are under pressure. In the U.S., the general government budget deficit is projected to more than double to -13.6 percent of GDP in 2009 from -6.1 percent in 2008, according to the IMF. In the UK, the general government budget balance will stand at -10.9 percent of GDP by 2010 compared to -5.4 percent in 2008. This will inevitably have to be paid for in the medium-term, which will exert downward pressure on economies even when the global recession bottoms out and recovery begins. In the UK, a new 50 percent tax rate for those earning more than £150,000 annually will come into force in April 2010. Additionally, many analysts dispute the benefits of some stimulus measures. Tax rebates designed to stimulate consumer spending often end up being saved as weak consumer confidence and uncertainty increases consumer saving. Some infrastructure projects are viewed as wasting money for the sake of creating employment by building “white elephants” that are not really needed. However, without such measures to boost employment as well as business and consumer confidence, economic downturns and recessions would be deeper and more prolonged.

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What makes the current economic downturn unique is the fact that every region in the world has been affected by the global financial crisis.”


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A N A LY S I S

EDITED BY AARON GRUNDMAN

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n May 11, 2009, the Obama administration provided a comprehensive description of its tax proposals for the coming fiscal year. This latest budget document describes more than 40 new provisions ranging from additional penalties and information reporting measures to dramatic new tax increases on businesses and estate tax reforms. Overall, the new details reinforce the fundamental structure of the administration’s prior statements on taxation – tax cuts for working families, tax increases for businesses and upper income individuals, reform of international tax rules and the closing of perceived corporate loopholes. The expanded budget package clarifies many of the provisions in the laundry list of proposals included in the budget outline released in February. Of most relevance to U.S. companies operating abroad, several new international reform proposals including provisions to limit earnings stripping by expatriated entities, to prevent repatriation of earnings in certain cross-border reorganizations, to repeal the 80/20 company rules and to repeal the dual-capacity rules were included.

International tax reform The administration has proposed substantial changes to the U.S. international tax regime that, if passed into law, would expand the reach of the federal tax code and raise the cost of doing business in the U.S. These proposals would become effective

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The Effect of Proposed U.S. Tax Reforms

in 2011 and would raise some US$210 billion over 10 years, according to the U.S. Treasury Department. The following is a breakdown of some of the key tax proposals. Business entity classification rules – The administration’s proposal would reform the business entity classification (“check-the-box”) rules for foreign entities. These rules allow a foreign business entity with a single owner to elect treatment as a corporation or as a “disregarded entity” for U.S. tax purposes. Under the proposal, a disregarded entity election would be available only if the foreign entity has an owner that is not disregarded for U.S. tax purposes. Further, the owner must be organized under the laws of the same foreign country as the foreign entity is organized. The proposal specifically would not apply to a firsttier foreign entity wholly owned by a U.S. person, unless U.S. tax avoidance is involved. Specifics about the tax treatment of a conversion by a foreign disregarded entity to a corporation are not set forth in the proposal. Reference is only made to following Treasury regulations and relevant tax principles. These proposed changes would, in effect, overturn check-the-box regulations that were intended to simplify and add

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Proposed tax rules from the Obama administration could affect the operations of U.S. companies doing business abroad. Analysis provided by

Aaron M. Grundman Senior Manager International Tax Services (86 21) 6141-1490 agrundman@deloitte.com.cn


The administration has proposed substantial changes to the U.S. international tax regime that, if passed into law, would expand the reach of the federal tax code and raise the cost of doing business in the U.S..”

certainty to the complex challenge of classifying entity forms under foreign laws for U.S. tax law purposes. The proposal would be effective for taxable years beginning after 31 December 2010, and is estimated to raise US$86.5 billion from 2011-2019. Deferral – The administration intends to restrict the ability of companies to take current U.S. deductions for expenses such as interest or general and administrative costs associated with foreign income until that income is repatriated. Under the proposal, taxpayers would defer deductions for expenses that are allocated and apportioned to foreign-source income to the extent the foreign income is not currently subject to U.S. tax. According to the Treasury explanation, the allocation and apportionment of expenses to foreign-source income would be determined under current regulations. Because interest expenses could make up a large portion of deferred deductions, the proposal could have a significant impact on capital-intensive or highly leveraged industries, such as construction, heavy manufacturing and financial services. The administration’s proposal would be effective beginning in 2011 and is estimated to raise about US$60 billion from 2011-2019. Foreign tax credits – The administration has also provided more details on its proposal to modify the foreign tax credit rules, and has divided it into two parts – one dealing with deemed-paid foreign tax credits and the other creating a matching rule. Claiming that the reduction in tax credit baskets to two has enhanced taxpayers’ ability to reduce U.S. taxes on foreign source income through cross-crediting, the administration proposes requiring taxpayers to determine their deemedpaid foreign tax credits on a consolidated basis. The taxpayer would have to calculate aggregate foreign taxes, earnings and profits of all foreign subsidiaries (including lower-tier subsidiaries) for which the taxpayer can claim a deemed foreign tax credit. The deemed foreign tax credit would then be calculated on the basis of the amount of the consolidated earnings and profits of the foreign

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subsidiary that is repatriated to the taxpayer in the current taxable year. The administration also claims that current law allows taxpayers to inappropriately separate “creditable foreign taxes from the associated foreign income in certain cases such as those involving hybrid arrangements.” In response, the administration proposes the adoption of a matching rule that would prevent the separation of foreign taxes from associated income. However, the administration gives no further detail. The two tax credit components would be effective in 2011 and would raise an estimated US$43 billion from 2011-2019. “80/20 company” rules – Dividends and interest paid by a domestic corporation are generally considered U.S.-source income and subject to withholding tax if paid to a foreign person. An exception to this rule applies when a domestic corporation derives at least 80 percent of its gross income from an active foreign business (an “80/20 company”). In that context, the dividends and interest paid by the 80/20 company are treated as foreign-source, and not subject to U.S. withholding tax. The administration believes that the 80/20 company provisions are subject to manipulation and has proposed to repeal them. The proposal would be effective for taxable years beginning in 2011, and is estimated to raise US$1.2 billion from 2011-2019. Equity swaps – The administration says that foreign portfolio investors are using equity swaps to receive the economic benefits of U.S. stock without being subject to the 30 percent withholding tax on nonresident U.S. taxpayers with fixed or determinable annual or periodic (FDAP) income from U.S. sources. The administration therefore proposes income earned by foreign persons on equity swaps that reference U.S. stock would be treated as U.S.-source to the extent income is attributed to or calculated by reference to dividends paid by a domestic corporation. The administration’s proposal would exempt swaps that: • Do not require the foreign person to post more than 20 percent of the underlying stock’s value as collateral;


• Do not include any provision addressing the hedge position of the counterparty; • Use underlying stock that is publicly traded and the notional amount of the swap represents less than 5 percent of the total public float of that class of stock and less than 20 percent of the 30day average daily trading volume; • The foreign person does not sell the stock to the counterparty at the inception of the contract or buy the stock from the counterparty at the contract’s termination; • Use objectively measurable prices to value the equity to measure the parties’ entitlements or obligations; and • Have a term of less than 90 days. The proposal would apply to payments made after December 31, 2010, and it is estimated to raise US$1.4 billion by 2019. Underreporting of income through use of accounts in offshore jurisdictions – The administration has

proposed a series of measures targeted at enhancing information reporting, increasing tax withholding and strengthening penalties to curb offshore tax evasion. These provisions would raise US$8.7 billion over 10 years. The proposals generally would be effective beginning after December 31 of the year of enactment.

Outlook In the immediate near term, little action is expected on these proposals. Congress has a full agenda focused on healthcare reform and climate change legislation. Ultimately, a number of political variables will affect the likelihood and timing of congressional action on these proposals. This article is adapted from an article written by Deloitte’s Washington National Tax Services that was originally published in World Tax Advisor in May 2009.

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In the immediate near term, little action is expected on these proposals.”


S N A P S H OT

BY BRENT HANNON

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Clearing up the Confusion Looking at foreign direct investment in China and China’s attempts to invest abroad.

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he dialogue on foreign investment in China generates a lot of heat, whether it transpires in blogs, bars, the media, or boardrooms, and often the issue appears vast, opaque and confusing. There are several reasons for this. One is the frequent release of new investmentrelated rules and clarifications, some of which are complicated. Speculation and opinion follow in the wake of these releases, further muddying the waters. The high-profile cases that occur every few months are another source of confusion; the latest was Coca-Cola’s rejected attempt to purchase

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Huiyuan Juice Group. Predictably, that case fueled talk of protectionism and speculation that China was turning inward, accompanied by much chatter about what the verdict would mean for foreign businesses in China. But in reality, most of the rules that govern foreign direct investment (FDI) are easy to understand, and even when the rules are complicated, the intent behind them is straightforward. “[The Chinese government] has made it very clear how the foreign investment system works,” says Steven M. Dickinson, a Tianjin-based attorney with the firm Harris & Moure.


Understanding the rules There are two types of FDI in China: greenfield investment, which is fresh investment in new projects and accounts for 70 percent of all FDI in the country, and merger and acquisition (M&A) investment. Of the two, greenfield is more straightforward and generally more welcome than M&A. Both methods of investment abide by the Catalogue Guiding Foreign Investment in Industry. In its four categories – prohibited, restricted, ‘permitted,’ and encouraged – the catalogue provides a clear assessment of which investments are likely to be approved and which are not. Prohibited sectors, such as weapons factories and most forms of media, are never approved, and restricted investments, such as banking and telecommunications, are only selectively approved. Encouraged investments, especially if they are greenfield, are almost always approved, while ‘permitted’ investments are often approved. The sentiment behind the catalogue is a desire to attract and absorb knowledge-intensive services and industries that China currently lacks. Examples include sophisticated logistics and backoffice setups, nuclear power plants and modern factories that produce chemicals, machine tools, diesel engines and the like. “The government is going to be supportive of anything that allows it to get technology transfer,” explains Ben Cavender, senior analyst at the China Market Research Group in Shanghai. “A good example would be energy. China is going through a major reform of its energy system, and they’re investing a lot of money into hydropower, nuclear power and wind power, so a lot of foreign companies have come to China and gotten involved in that.” Difficulties in gaining approval arise when would-be greenfield investors either don’t follow the foreign investment catalogue or attempt to squeeze into a restricted sector. Such attempts typically end in failure, says Dickinson, adding, “If it’s restricted, don’t do it.” But the catalogue does have its problems. For

example, there is no genuine ‘permitted’ category. That category is really comprised of a miscellaneous grouping of all businesses that are not listed in the remaining three categories; the ‘permission’ is only assumed. While permission is often granted, those investments are assessed on a case-by-case basis, leaving a gray area that affects some 5 percent of companies that are covered by neither category nor precedent. In addition, the guidelines can shift or change as the government promotes certain industries and demotes others. “The government is now looking to develop the service industry, and they are looking at areas where there is potential for intellectual capital development,” says Cavender. “You see tech companies doing well because they come in and they create jobs for white collar workers, so the government is going to be very supportive of investments like that.”

M&A framework M&A investment is more complicated, as CocaCola recently discovered. The starting point for would-be M&A investors is still the Foreign Investment Catalogue, but they must also refer to the M&A rules revised in 2006 and the 2008 Antimonopoly Law, while a secondary guide would be the 11th Five Year Plan on Utilization of Foreign Investment. The rules may be complex, but the intent behind them remains straightforward. Understanding that intent means looking at precedent and in China, a pattern has emerged. When it comes to M&A, Dickinson’s experience has led him to observe three unwritten rules. Rule One: companies that are small in size or do not hold a dominant position are permissible targets. Rule Two: a company that is in trouble and needs to be restructured can be acquired if the buyer is willing to invest in fixing it, he says. Rule Three dictates that only minority stakes are permissible in successful or large companies, and even then will only be approved if the buyer brings some other collateral benefit with that minority interest, something that is good for China. Such collateral benefits tend to be either technological

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The sentiment behind the catalogue is a desire to attract and absorb knowledgeintensive services and industries that China currently lacks.”


China has a large trade surplus, and those earnings must be invested overseas in a way that maximizes the return and acquires valuable assets.”

innovations or access to a new foreign market, says Dickinson. Examples are easy to find. Coca-Cola’s planned acquisition of Huiyuan Juice violated rule number three: Huiyuan was too big and too successful, and Coke was trying to buy too much of it. “If you look at what happened earlier this year with Coke and Huiyuan, a big reason for the M&A failure is that the government didn’t want to see a foreign company have that much power in the market here,” says Cavender. However, in mid-June, private equity firm Kohlberg Kravis Roberts (KKR) announced that it had acquired a 20 percent share in Ma Anshan Modern Dairy, one of the largest dairy producers in China. Approval of that deal also conforms to the three rules: the dairy industry is reeling from the tainted milk scandal, and KKR will provide production, food safety and distribution expertise that will benefit the country. The KKR stake is also a modest one, while Coke sought a majority stake. With M&A, problems also often arise when legalistic American companies comb the rulebooks looking for loopholes. That approach is doomed, says Dickinson. “China doesn’t do loopholes,” he says. “They know what they intend the law to mean, and if it is written inadequately and someone finds a loophole, they don’t care; it won’t get approved.”

Looking forward When Chinese companies attempt to buy into companies overseas, they face the same sentiment: an unwillingness to allow key domestic companies or resources fall into foreign hands. The latest example occurred on June 4, when Australian mining giant Rio Tinto pulled out of deal that would have permitted state-owned Aluminum Corporation of China, or Chinalco, to pay US$19.5 billion for an 18 percent share of Rio Tinto, along with stakes in its copper, aluminum and iron mines. That acquisition sparked heavy political opposition in Australia, which helped scuttle the deal. Similar sentiment also crippled China National Offshore Oil Company’s (CNOOC) failed attempt to buy Unocal in 2005.

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Given the macroeconomic dynamics, many more such cases will emerge in the near future. FDI into China declined by US$35 billion in the first five months of the year, compared to the same period in 2008. With exports also falling, the government has loosened some restrictions on FDI and has again embraced FDI as a key pillar of the economy. “The government wants to encourage more FDI because of the recent decline,” says Dr. Wensheng Peng, head of China research at Barclays Capital in Hong Kong. “Only one year ago, China was facing a large balance of payment surplus, and some people were arguing that the FDI inflow was too great. But now the situation has changed because of the weak exports, and FDI has declined, so now the tone has changed and the government has become positive again about FDI inflows.” Such support from Beijing adds to the likelihood that FDI projects will be approved, although it does nothing to help Chinese companies pursue overseas investments. But those attempts will continue as well. China has a large trade surplus, and those earnings must be invested overseas in a way that maximizes the return and acquires valuable assets. “The government is promoting foreign direct investment abroad by Chinese corporations,” says Dr. Peng. “This helps secure the foreign market for Chinese producers, and it is also a way to ensure a supply of resources.” As a result, the two-way tug-of-war will no doubt continue. China’s expanding economy requires immense quantities of natural resources, and Beijing will naturally use its investment clout to secure the resources it needs. As for FDI into China, greenfield investment is likely to remain attractive both to China and to foreign investors, while M&A investment will remain more problematic. But given China’s continuing allure, and its ongoing economic growth, additional highprofile test cases cannot be far away.

Brent Hannon is a Shanghai-based freelance journalist. He can be contacted at in@brenthannon.com.


I N D U S T RY F O C U S

BY LEE PERKINS AND MARK MILLAR

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Route to Recovery

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he global economic slowdown has not spared China’s logistics industry. According to recent statistical data, 40 percent of domestic logistics firms reported a decline in profits over the past year, and several small- and mediumsized enterprises have been forced to withdraw from the logistics market altogether. According to the China Federation of Logistics and Purchasing (CFLP), the Chinese logistics market achieved an overall value of RMB89.89 trillion in 2008, a growth of 19.5 percent from the previous year. Worldwide, these numbers would hardly seem to indicate doom and gloom. Yet given the uniquely high growth rates of the Chinese logistics market in recent times, 19.5 percent growth represents a 6.7 percent decline over the previous year. Given the state of current global demand, little relief from the economic storm is promised for 2009. He Liming, executive vice president of the CFLP, predicts that this year could be the most challenging for China’s logistics industry since the start of the reform era and the dawn of the golden age for China’s logistics market 30 years ago.

Government response With such dire predictions, the Chinese government

has been quick to react, adopting a wide ranging fiscal package meant to rejuvenate the logistics industry. This plan, within which many specific elements remain unrevealed, will nonetheless have a significant effect on both domestic and international players in the market. Within the overall rejuvenation strategy, the government has outlined four principal objectives that will likely have key implications on the industry. These are: to create more globally competitive, international logistics firms; to increase the role and scope of third-party logistics providers (3PLs); to achieve 10 percent growth in added-value within the industry; and to substantively reduce logistics costs as a percentage of GDP. Achieving these goals will undoubtedly simultaneously present challenges and opportunities to foreign-invested companies operating in the China market. According to Wu Yue, director of the Beijing Institute of Materials Research Center, small- and medium-sized companies are likely to be most acutely affected by the plan, while foreignfunded enterprises with more comprehensive networks and mature management systems are likely to benefit the most. One of the primary reasons for this is that within China, under-agglomeration has long been perceived as a problem – one that the

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Understanding the government’s plan to rejuvenate the logistics industry.


Find out more about the Industry Rejuvenation Plan Join AmCham Shanghai’s Logistics & Transportation Committee on Tuesday, July 28 as leading industry speakers and practitioners present and discuss the State Council’s industry rejuvenation plan and the implications for multinational companies that are using and operating logistics services in the domestic market. The event will be held at the J.W. Marriott from 11:30 a.m. to 1:30 p.m. For more information, check the AmCham Shanghai website: www.amcham-shanghai.org

global economic slowdown has only exacerbated. Analysts predict that the rejuvenation package will lead to a sustained period of increased merger and acquisition activity, pushing many smaller firms out of the market entirely. In order to accelerate industry agglomeration and to help modernize and insulate larger domestic players, the state has promised financial assistance to state-owned providers – a move some foreign operators may view as a threat to their competitive advantage in the domestic market. However, the opportunities presented to foreign firms by the changing landscape of the industry remain substantial and varied.

Development opportunities The first such opportunity lies in the fact that within the past decade, the Chinese government has made environmentally sound practices a priority for logistics providers. Despite pressure to achieve economic growth at almost any cost, the importance of utilizing “green supply chains” will only intensify. Foreign firms with a longer history of environmentally sound supply chain management and environmental protection equipment suppliers can only benefit in an atmosphere in which green solutions are deemed increasingly vital. A second major consideration is the rise of crossborder logistics, particularly in consideration of the upcoming China-ASEAN Free Trade Agreement, a measure that will drastically increase economic activity in the Greater Mekong Sub-region. Firms that specialize in cross-border logistics services, or have particular expertise in Asian markets beyond China, will benefit enormously in upcoming years. In an example of the growing importance of the region, the Kerry Asian Road Network (KART)

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recently launched a new road network linking Bangkok with Kunming, the capital of southwest China’s Yunnan Province. KART also plans to launch networks connecting additional cities in China’s Southwest to the Thai capital via Hanoi. Firms able to operate smoothly across the various countries in the region will be highly valued. The growing importance of inland China – in which cities such as Kunming play a role – indicates a third major potential opportunity to foreign logistics providers. According to Wu, the primary field of competition between state-owned and international logistics providers will likely switch to second- and third-tier cities over the period of 2009-2010. China’s hinterland is filled with these cities, located far away from the coastal areas in which the majority of logistics providers are based. While overall development of the government’s rejuvenation plan lies with the central government, actual implementation of many local and regional elements will be under the auspices of local governments, which often lack the fundamental knowledge necessary for the application of statelevel directives. As a result, these local governments have major incentives to outsource elements of the logistics process to outside firms. In addition, these local and regional governments still provide major incentives to attract foreign direct investment, leading to a series of favorable policies for foreign logistics providers willing to operate in more remote areas. These advantages will only increase as the government shifts its emphasis toward continued development in the nation’s interior. Three of the nine new logistics zones being implemented by the central government lie in inland China, ranging from Wuhan along the Yangtze River in the country’s center to Urumqi, the capital of China’s far-western Xinjiang Uighur Autonomous Region. Wu believes there is evidence that the new government plan will benefit foreign players, who can use their investment advantages to make inroads in these zones. Government-mandated objectives to increase not only the overall quality of logistics services within China, but also their geographic scope could prove auspicious for subsidiary service providers.


For instance, the development of a cold chain distribution network, intended to root out excessive produce transport waste, will benefit international players with extensive experience in the field.

The road ahead Foreign firms, like their domestic counterparts, will be forced to adjust to the new government plan, an adjustment that may prove challenging in particular to small- and medium-sized firms. In fact, many insiders in the Chinese government privately conceded that operations may be more difficult for foreign firms in the short term. However, the long-term outlook for foreign logistics operators remains strong. The overall thrust of China’s logistics industry development is towards increased agglomeration, improved coverage in less-developed regions and decreased

reliance on in-house operations for many businesses. While China’s domestic logistics industry has grown considerably in both size and quality, new challenges presented in the current economy will present openings that larger foreign firms will be able to take advantage of. The global economic slowdown has presented enormous challenges to all players in the economy, but has done little to dim the long-term economic forecast for China’s logistics industry.

Lee Perkins is CEO of the China Intel Group. He can be contacted at lperkins@chinaintelgroup.com. Mark Millar is managing director of M Power Associates and Vice Chair of the AmCham Shanghai Logistics & Transportation Committee. He can be contacted at mark@markmillar.com.

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New challenges presented in the current economy will present openings that larger foreign firms will be able to take advantage of.”


I N T E RV I E W B Y DAV I D B A S M A J I A N

WWW.HOUSE.GOV/LARSEN

A Need for Greater Awareness

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U.S. Representative Rick Larsen talks to Insight about the U.S.-China Competitiveness Agenda.

n May 28, AmCham Shanghai and the U.S.-China Business Council hosted a private roundtable with U.S. Representatives Rick Larsen (D-WA) and Mark Kirk (RIL), who headed a delegation to China to meet business leaders and government officials in order to discuss U.S.-China related issues, the impact of the economic crisis on China, and the business climate for American companies in China. Congressmen Larsen and Kirk are the co-chairs of the U.S.-China Working Group, a bipartisan Congressional caucus that works to educate members of Congress on U.S.-China issues, establish a primary diplomatic relationship with China and to develop a comprehensive strategy for the 21st century. In May, the Group introduced the U.S.-China Competiveness Agenda, four pieces of legislation that aim to expand U.S. diplomatic infrastructure in China, increase support for smalland medium-sized businesses, boost domestic Chinese language programs and dramatically expand U.S.-China energy cooperation. Congressman Larsen is currently serving his fifth term in the U.S. House of Representatives, and represents the Second Congressional District of Washington State. He is a member of the House Armed Services Committee, the House Transportation and Infrastructure Committee, the House Budget Committee, and co-chair of

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the Congressional Methamphetamine Caucus. Congressman Larsen is a proponent of better veteran healthcare and has supported legislation against hunger. After the roundtable, Congressman Larsen sat down with Insight to talk about the reasons for his trip, his thoughts on U.S.-China relations, and mutual climate change concerns. On the purpose of his trip to China… The objective of this trip is to make an assessment of the global economic recession in China and the implications for U.S policymakers in terms of further engagement with China, to take a look at what China is doing in response to this recession and what that means for U.S. businesses and U.S. policymakers. On the message he wants to bring to the Chinese leadership… The basic message is that we believe the U.S.China relationship is one of the most, if not the most, important relationships the U.S. will have in this century. We want to convey that our mutual engagement is increasingly important and that we need to work together, along with the rest of the international community, to get through this recession and develop global economic growth. On the U.S.-China Competitiveness Agenda and its biggest challenges… The biggest challenge in getting these four bills passed is the same challenge as getting any bill passed on Capitol Hill and that is to get 215


The U.S.-China Competitiveness Agenda

members to agree with you. That being said, these bills can also serve as vehicles to educate members of Congress about the importance of engagement with China. Not only will passing the Competitiveness Agenda help us achieve that, the Agenda will also help drive important decisions in the federal government and the Administration on areas that will improve engagement with China. On the biggest issue regarding China on Capitol Hill today… There are a couple of ways to look at that. First is that everybody is largely focused on job creation in their own district. It is difficult for members of Congress to look beyond that. Even the Chinese government is focusing on jobs. The three priorities of the Chinese government right now are jobs, jobs and jobs; the top three priorities for members of Congress are jobs, jobs and jobs. But as the economy improves, we will be able to focus on other things and part of the focus needs to be on engagement with China, and the realization that our economies are interconnected and that we need to work together to find mutually beneficial solutions as our economies grow together. The second issue is the climate debate. The climate change issue provides the highest profile opportunity for engagement between the U.S. and China. Thirdly is that members of Congress like Mark (Rep. Mark Kirk (R-Il))and I, who are very much pro-engagement with China, still have to work to educate other members of Congress to see the U.S.-China relationship as an important economic issue. We still need to address that. On the Obama Administration’s proposed changes to international tax laws for U.S. companies operating abroad… Before making any final assessment on the proposal, I would need to talk further with companies in my own district. We have several large companies in my district who do business in China and elsewhere in the world. We should also look at some of the alternatives to address the fundamental issue the President is trying to address, and that is how to improve the

In May 2008, U.S.-China Working Group Co-Chairs U.S. Rep. Rick Larsen (D-WA) and Mark Kirk (R-IL), along with their colleagues U.S. Rep. Susan Davis (D-CA) and Steve Israel (D-NY), introduced four bills comprising the U.S.-China Competiveness Agenda. The following pieces of legislation seek to expand America’s diplomatic infrastructure in China, boost support to small- and medium-sized businesses exporting to the China market, increase funds for domestic Chinese language instruction, and build new cooperative energy ties between the U.S. and China. H.R. 2310:The U.S.-China Market Engagement and Export Promotion Act (authored by Rep. Rick Larsen): • Helps states establish and operate offices in China to promote exports. • Creates a program establishing China Market Advocate Positions in U.S. Export Assistance Centers around the country. • Provides assistance to small businesses for trade missions to China. • Authorizes Small Business Administration (SBA) grants for Chinese business education programs. H.R. 2311:The U.S.-China Diplomatic Expansion Act (authored by Rep. Mark Kirk): • Increases funding for public diplomacy with an emphasis on Internet communications. • Provides funds to build another consulate and establish 10 American presence posts. • Increases funding for State Department student exchange programs. • Increases funding for State Department teacher exchange programs. • Increases funding for Rule of Law Initiatives. • Increases funding for Asia Pacific Economic Cooperation. H.R. 2312:The U.S.-China Energy Cooperation Act (authored by Rep. Steve Israel): • Authorizes a grant program to encourage joint American-Chinese research and development and policy education. • Grants will fund joint energy and climate change policy education programs and/or joint research, development, or commercialization of carbon capture and sequestration technology, improved energy efficiency, or renewable energy sources. • Entities eligible for grant funding are joint ventures comprised of both Chinese and American private business entities, joint ventures comprised of both Chinese and American academics or joint ventures comprised of Chinese and American federal, state, or local governments. H.R. 2313:The U.S.-Chinese Language Engagement Act (authored by Rep. Susan Davis): • Increases Chinese cultural studies and language acquisition for American students through Local Education Agencies (LEAs). • Supports collaborative efforts between LEAs and institutions of higher education and exchanges with academic institutions in China. • Develops programs that include intensive summer Chinese language instruction, connecting Chinese and English speakers and cultural studies. J U LY / A U G U S T 2 0 0 9

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We believe the U.S.-China relationship is one of the most, if not the most, important relationships the U.S. will have in this century.”

opportunities for job creation in the United States. That’s the fundamental driving factor for President Obama and this set of proposals. There are, in fact, some compromises being discussed on Capitol Hill to what the President has proposed. There is an old saying on Capitol Hill, “The President proposes and Congress disposes,” and Congress tends to have its own say on things. I imagine we will do that and we’ll try to, as part of the legislative process, take into consideration the concerns of U.S. businesses and those overseas regarding the impact that this new proposal would have on them.

The U.S. Congress is focused on passing the climate change legislation that is working its way through Congress right now (H.R. 2454 “American Clean Energy and Security Act of 2009). The second thing I’d say is that President Hu Jintao’s comments regarding Copenhagen and the need for cooperation with the United States were very encouraging and will form a basis for discussion about our mutual concerns as well as develop a strong and effective Copenhagen agreement that will truly address this serious issue which impacts both countries. So, I think there is a mutual interest that will provide the basis for an agreement.

On the U.S. and China’s ability to come to an agreement on climate change in the run-up to the United Nations Conference on Climate Change in December…

David Basmajian is Director of Communications & Publications at AmCham Shanghai. He can be contacted at david.basmajian@amcham-shanghai.org.

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ERP SERIES

B Y TO N Y C OT T E R E L L

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Knowledge Transfer and Launch

T

he complexity of a global enterprise resource planning (ERP) system is clear as we move into the fourth in a series of five articles for Insight on global ERP implementation. This installment examines the knowledge transfer, golive and support stages. The next and final article will summarize the entire process of design and implementation of a global ERP system. Knowledge transfer may well become the most important element of any implementation. For a system to be successful and worthwhile, it must be accepted by the people who are going to use it. Too often, we see knowledge transfer translated as training; however, most global implementations

provide for only one to two weeks of training for end users. In order for a system to be effective, users need to understand what they are doing and why they are doing it – just being trained in the outcomes is not sufficient. Effective knowledge transfer begins with defining the right strategy for different user groups. Different groups will require different levels of transfer and training based on their operational requirements. The key user groups are broadly defined below.

Key users The primary users, known as key users or super

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The fourth article in Insight’s ongoing ERP series looks at the knowledge transfer and go-live stages of a global implementation.


Key users will be at the forefront of change in the organization. They will become key people in the new organization because they have the knowledge of the new business processes and systems that the company will be operating under.”

users, should be selected from the up-andcoming next generation of managers. They should understand how the business currently operates, be capable of challenging current operations and be well-respected by their peers. Their current activities should be back-filled and they should be dedicated full time to the project. Key users will be at the forefront of change in the organization. They will become key people in the new organization because they have the knowledge of the new business processes and systems that the company will be operating under. To this end, they need to be given the necessary time to develop the new skills that the business needs: • Process-mapping skills, because processes are dynamic and future processes will continue to evolve. • System testing skills, because changes in processes will need to be tested to ensure they are robust. • User training skills, to be able to train end users in process and system operations. This is important for two reasons – it ensures that key users learn the new system and it establishes an immediate authority for key users over end users. End users will naturally approach key users as the relevant experts. • User support skills, because they will be the first line of support for the company’s new operations. A good implementer will have a mechanism to track how well knowledge is being transferred to key users throughout the project lifecycle and will be able to anticipate common problems.

End users The vast majority of day-to-day users are end users, who will be responsible for transaction inputs, monitoring inventory levels, allocating inventory, processing sales orders, purchasing raw materials and running reports. They need to understand two primary things – how does the process work and what does the ERP system require them to do? The project training materials should focus on the end-to-end process and how these are managed, highlighting activities that are enabled

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by the ERP system. This training must be carried out with sufficient time to allow for training effectiveness to be measured and any corrective or follow-up action to be taken.

Executives Typically not interested in the transactional side of the system, executives focus more on the system outputs. This type of user requires training that will enable them to run the business reports that are needed to monitor business performance. ERP systems contain an enormous amount of data and a very large list of reports. Indeed, many executives do not invest a sufficient amount of time to ensure they get the best out of their system implementations. This is often accepted as the reporting requirements are typically not critical because the daily operation of the business will continue to run whether the executives are running their reports or not.

Ready, set, go Go-live, or cutover, is when the transition from the old system to the new ERP system environment occurs. Typically, this is where final data is uploaded, account balances are reconciled, and system testing and end-user training occur. One typical problem at this stage of a project is the pressure to complete the project and launch on a predetermined go-live date. It is important to keep in mind that slippage of two weeks or a month from the target date is acceptable; the main focus should be on ensuring the system is truly ready for launch.

The cutover plan This is the predefined process that an ERP launch will follow. It is usually defined two to three months before cutover is actually undertaken and provides a very detailed view of every activity that needs to be carried out during cutover, including system backups, training, any final testing and most importantly, every item of data to be uploaded, in the sequence it needs to be uploaded, and


The China Factor – Knowledge Transfer It is common for key users to be requested to undertake ERP projects while being expected to simultaneously continue with their regular job requirements. If a company is willing to spend millions of dollars implementing an ERP system, it is also important to consider spending resources on backfilling positions that will relieve pressure on key users and help to ensure success. Not enough time is spent on ensuring that the different levels of users each receive the degree of knowledge transfer that they need in order to be effective. People in China will welcome training but the training needs to be measured to ensure that it is effective. In some cases, organizations are moving from archaic manual systems to

the expected time duration of the upload. Good practice is to test this data upload sequence and timing up to two weeks before the actual cutover date. This will ensure that the plan and timetable is realistic, that it is ordered in the correct sequence and that the data is complete enough for uploading. Any major issues here, particularly around data quality, will delay the project go-live.

Support The go-live plan should also include the mechanism for ongoing support of users to meet both the short and long-term business support requirements. This support organization or structure is defined, usually within two months prior to go-live, and should be included in the end user training materials so that users can understand the process to follow when they encounter a problem. Usually, the project team key users are divided into two teams, one that joins the consulting team in the “war room” (usually in place for the first one or two months after cutover) and the other that will “floor walk” the office floors to provide first line support to users who encounter problems.

Launch Decisions The cutover plan should also include specific dates over the last two weeks to report to the Steering

modern ERP systems and users cannot be expected to manage the transition with only a two-week training window. Training materials should always be translated into Chinese. While the project team may be comfortable with operating in English, it is less likely that end users, particularly in purchasing, warehouse and shop-floor production activities, will have a good enough grasp of English. Training materials become the key resource document for users when they encounter ERP problems. The cost of translating end user documentation represents a very small project investment and is highly effective in ensuring that the system is properly used and accepted.

Committee on the progress of cutover and the readiness of the organization to go live with the ERP system. These are called “go/no go” decision points, should be held the day before cutover and should be the final decision on whether or not to go live. In order to support this decision, the project management should have a readiness checklist that identifies the following: Major issues – problems that have not been resolved and that could present a danger to the ability of the system to operate effectively after cutover. It is impossible to close all issues but there should be no high-risk issues left unresolved. Risks and mitigation plans – major risk and their associated mitigation plans should be in place in case something happens, such as power failure, system crash and corrupt data. Training completion and acceptance – all users should be trained and their level of training measured and acceptable to the organization. Hardware and desktops ready – in a global sense the hardware should already be in place. Desktop computers for all end users should be ready for use, providing access to the ERP system and necessary printers. Networks and printers should have been tested and found to be working OK from within the ERP environment.

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The China Factor – Go-live and Support At this stage of the implementation, some projects are often driven by timeframes and dates, and not enough by good reasoning. If end users cannot operate the system adequately, then there should be a decision to delay go-live until they are ready. Projects often pay very little attention to ensuring the system delivers value. Due to time constraints, planning for cutover is incomplete and prior testing of data uploads often do not happen.

Local language support Typically in China, ERP implementations fail to comprehend the importance of local language support. The support structure is often predicated on a single 24x7 support offering usually set up in a low-cost country such as India. This model, if properly handled, can provide support for the majority of the world where English can be used as the support language. In China, unless you build an English language interface between your users and the support team or have a user base that is fluent in English, then a single location support structure is not going to work. What will probably happen is this: Chinese users will call the support center in a language they are not altogether comfortable with and try to explain a complex problem they are having with their ERP system. The wrong message will be sent and therefore the wrong solution will be developed. The Chinese user will feel guilty and embarrassed at their inability

to communicate effectively and in the future will not call. Instead they will start to develop local "work-arounds" to solve the problem. Data ceases to be consistent, undermining the very simple standardized processes and reporting that ERP was implemented to provide.

Data In China, there is still one item which often single-handedly delays the whole implementation: data. Data is kept in many different places and is commonly not cleansed, so bad data is often loaded into the new system. This data is not consistent and can be found in local systems, locally built databases, excel spreadsheets and on pieces of paper – generally "all over the place." Even if all other aspects of the project are ready, data is the most important and is required for the processes to start. Many global projects do not understand the need for data to be uploaded in both English and Chinese. Financial reporting to the government requires Chinese language outputs. Purchase orders to suppliers probably need to be in Chinese as it is unlikely that all suppliers will understand English fluently. Sales orders from customers will generally be in Chinese, and many of the people in the warehouse or the shop floor will need Chinese language screens and data. Chinese language screens and data also support the training materials that will be developed to train end users and will become their operating manual in the future.

Support – Support structure should be in place, and everyone should be aware of who to call or how to log an issue. Support issue logs to capture issues should be set up and operational. User readiness - Lastly, users should all be notified of their user ids and initial passwords.

Benefits tracking This is the implementation stage that proves to be the most worthwhile. Typically productivity will go down for the first two to three months of a project and then pick up and surpass the previous levels. This is simply a learning curve that all users need to go through before they become

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efficient. Benefits tracking is very important because in order for the project to be successful, it must deliver value. In order to do this, the business must understand what the previous benchmarks were, what the future targets should be within given timeframes, and lastly, how data is to be collected and measured to prove the implementation value. Once the project is live, benefits tracking should begin.

Tony Cotterell is a partner with Deloitte Consulting in Shanghai. He can be contacted at tcotterell@deloitte.com.


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C OV E R S TO RY

BY JUSTIN CHAN

Connecting with Consumers Millions of people are talking and it’s time to tune in and start paying attention. The social nature of today’s Internet means that millions of Chinese netizens are redefining the way companies reach consumers across the country. By listening to what consumers are saying about brands, products and services, companies can begin understanding their customers’ opinions and preferences and develop offerings that will cater to their customers’ emerging needs.

I ILLUSTRATION BY JASON PYM

t was no surprise when China’s online population surpassed that of the United States in June last year to become the largest in the world. By January of this year, the Internet penetration rate in China surpassed the global average of 21.9 percent and over 298 million Chinese citizens had access to the World Wide Web, a 42 percent year-on-year increase. But the story in China is not simply about the number of Internet users, but rather what they are doing when they go online. The Internet has presented the Chinese consumer with a welcome alternative to the traditional mainstream media of television, radio and print that was extremely influential in shaping opinions and decisions. At the same time, consumers are no longer simply on the receiving end of media – they can now create, publish and share their own content via the Internet. “Previous consumer-brand relationships were one-way,” says Claudia Sun, account director of the Marketing Communications practice at public relations firm Hill & Knowlton Shanghai. “Now, consumers play a more active role so brands need to reflect this change by treating their consumers as equal partners in a sophisticated relationship.” The

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myriad online tools available for companies – such as blogs, discussion forums and social networking sites – make it possible for companies to interact with consumers, learn about their tastes and concerns, and share new products and ideas. While the Internet is now a major channel to connect with netizens, companies must examine their communications strategy and rethink how they go about engaging Chinese consumers. “Digital and traditional media are both likely to play a role,” says William Moss, a director in the Beijing office of public relations consultancy BursonMarsteller. “An organization that communicates effectively will use the right mix of online and traditional media in ways that complement and reinforce each other.” Brands that are able to stand out from the crowd and create a positive and memorable online experience will be the most successful in building lasting relationships with the consumer.

Development trends “While the Chinese Internet is becoming ever more complex, Chinese netizens are still going on the Internet for the same reasons they did three years ago: to find information and especially to make friends and be entertained,” says Sam Flemming, founder and CEO of Internet word of mouth research firm CIC.

For several years now, blogs and discussion forums (also known as BBS or bulletin board systems) have been extremely popular in China. The total number of Chinese netizens with blogs today, 162 million, exceeds the total number of Internet users in China just three years ago, according to a January report by the China Internet Network Information Center (CNNIC). Although the number of users who actively update their blog on a regular basis drops to 105 million, the proliferation of blogging and forums has simply been phenomenal. Today, 91 million netizens participate actively in online discussion forums, up from 53 million in 2006, according to the CNNIC report. Even with new platforms today such as social networking sites Facebook and leading Chinese site kaixin001.com, microblogging services Twitter and Chinese counterpart fanfou.com, or video sharing sites such as YouTube or youku.com, “basic BBS discussion forums still dominate the social media landscape in China,” says Adam Schokora, head of Edelman Digital in China. “I’m not sure that will ever change.” Although Chinese netizens are still primarily using blogs and forums for entertainment purposes, companies are realizing there is more and more business value in monitoring blogs and forums to gauge consumer opinions and preferences. Forums exist for virtually any category or segment, from

ONLINE ACTIVITY: Chinese consumers, especially the younger generation, are spending more and more time online.

IMAGINECHINA

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1 298 41.9 China’s ranking in terms of total Internet users

Companies today have a truly unique opportunity to observe online discussions about their brand, products and services. “Never before have companies had access to so much naturally occurring feedback,” says Schokora. Each blog entry or forum post represents an excellent market research data point for companies to gain insight into what consumers are really thinking and what they are really after. Another key benefit of monitoring online media is the ability to see crisis situations coming ahead of time and being prepared to respond appropriately in a timely manner. “The Internet has established itself as a key medium for citizens to air their grievances,” says Jeremy Goldkorn, Beijing-based publisher of Danwei.org, a website covering media and advertising in China. There are plenty of horror stories in China about how blogs, forums and more recently, video sharing sites have caused or magnified major public relations crises. The reach and velocity with which the Internet can deliver information around the world mean that companies must be positioned to respond genuinely in a prompt manner. Therefore, it is also very important to ensure any online outreach is in line with the company’s business goals. “The online world changes so rapidly that it is easy to make one of two mistakes,” cautions Moss. “Jumping in too quickly because

million

%

Year-on-year increase in Internet users

72.5%

Digital surge

China’s total number of netizens

China’s Internet penetration rate (percentage of population with access to the Internet)

The U.S.’s Internet penetration rate

China’s ranking in terms of Internet penetration

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car owners and cat owners to new mothers and food critics. On one mobile phone discussion forum, detailed reviews and comments can be found on new products within days of release, outlining new features, design elements, production quality, bugs, troubleshooting solutions and the users’ overall experience. In the automotive sector, CIC analyzes over 10 million consumer forum comments written by hundreds of thousands of unique users each month. The way people are blogging has also changed, adds Schokora. Personal blogs are growing beyond simply vanity and diary-type blogs, and knowledgeable netizens who previously contributed to the Internet community through BBS forums may now use a blog as their own personal platform. “There is now a more robust blogosphere of experts and opinion leaders on different topics,” he says.

22.6%

105 91 87

million

million

59.1%

Netizens who use discussion forums

82.5%

Netizens who actively update blogs

Netizens who think “the Internet strengthens contact with friends”

Netizens who engage in e-commerce

24.8%

Netizens who think “life would be very monotonous without the Internet”

Netizens who access Internet video content

67.7%

Internet users by age

Under 19

Age 20-29

Age 30-39

40 and above

35.6% 31.5% 17.6% 15.3% SOURCE: Statistical Survey Report on the Internet Development in China, J U LY / A U G U S T 2 0 0 9 I N S I G H T 3 5 January 2009, China Internet Network Information Center


IMAGINECHINA

SOCIAL SITE: Tencent’s QQ.com is one of China’s largest Internet portals complete with blogs, forums, video sharing and social networking.

there is pressure to “be digital” without thinking about what it really means to the business; or hanging back so long that competitors move in or customers move on.” To structure an approach that properly supports a business, Moss advises spending time to research and understand the online environment in the context of the business or particular stakeholder and then devising a meaningful strategy. Every brand will have a different posture for its online activities depending on its target consumer and price range, says Ed Tam, director of invention in the Shanghai office of Mindshare, a global media agency. “Luxury brands for instance, are all about what they represent, so a one-way website is ideal,” he says. “But as you work down the demographic and price continuum, brands tend to be a lot more conversational and that is when you need to have a more interactive socially driven presence.”

Roadmap to engage Companies who are not committed to the digital and social media space and are not focused on what consumers are saying online about them are in big trouble, says Schokora. “There is just so much online content in terms of conversations and discussions about companies and their brands, products and services, it is essential for companies to pay attention and participate.” The Internet allows for unprecedented selfexpression and consumers today have more and more avenues to express their thoughts and opinions. They can be virtually anything they want

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to be online: critics when posting product reviews, or artists when submitting designs for a contest, or rock stars when posting a music video. This is the case especially for the younger demographic in China, which considers digital technology an essential part of life and feels that the Internet is an outlet for a “second life,” according to research on Chinese youth conducted by advertising agency JWT and internet firm IAC. “It has become crucial for brands to change their media approach to become more engaging by exploring social media to create real relationships with consumers,” says Sun. While the first step to engaging online consumers is simply to learn how to listen to what consumers are saying about a company, there are many different approaches to building actual connections. For some companies, a corporate blog could be the right approach to start, although Chinese internet users have proven to be scrupulous in spotting heavily polished and edited entries posing as the CEO’s viewpoint. Instead, experts recommend writing in a human voice so readers feel like they are having a conversation. For larger corporations, it is often effective to have rankand-file employees blog so that the company has a human face. “Netizens are very receptive to any type of content that adds value to their online experience,” says Schokora. “If companies want to participate, they need to do so in a meaningful way that brings value to their key audiences. Otherwise their key audiences just won’t listen or perhaps will just be put off.” Another method companies have used in the past to engage online audiences is to establish relationships with “efluencers,” which is what CIC calls the people most passionate about brands and products that are driving conversations online. Keeping these knowledgeable bloggers and forum administrators informed and developing a meaningful relationship with them can pay dividends when other consumers seek their opinion and knowledge about a company. They typically go to great lengths to share their opinions and in the process often influence other consumers. However, there is a fundamental issue that makes it very difficult for corporations to really get involved with the social Internet, says Goldkorn. “The marketing staff will go home at the end of the day, while bloggers and forum writers stay up till the wee hours putting love, hate or just a lot of effort into their online activities.”


Broad-reaching tool “Most major consumer products companies in China understand the importance of online marketing and communication, and in many cases are using it aggressively,” says Moss. But that does not mean companies whose primary business isn’t selling to consumers cannot use the Internet to their advantage as well. These companies can still harness the benefits of digital media to engage other stakeholders such as investors or partners and develop their corporate reputation. “These areas will drive fewer headlines and perhaps fewer outrageous viral videos, but they can be just as essential,” adds Moss. Although China’s younger generation is leading the Internet push, from spending the most time online to feeling the most engaged online, the array of digital tools available means a very wide audience can be reached. “Even when looking at broader and older demographics, the Internet can be a highly effective way to communicate,” says Goldkorn. “If you know what you’re doing, it is a lot cheaper than any other media.” Another straightforward way for companies to manage perceptions of their brand and to maximize exposure is through organic search engine optimization, which involves improving a website so that it ranks high in search results and helps potential customers find the site. “Most consumers’ digital experiences with a company’s brand or product starts at a search engine,” says Schokora. When a consumer is trying to find out about a certain company or product, the starting point is often the results page of search engines such as Baidu, Google or Yahoo. “Companies should have in place the appropriate search engine optimization to make sure that their online visibility is maximized and the first page of search results gives the desired image,” adds Sun.

The big picture The Internet is changing the way the whole world communicates. For companies looking to engage consumers in China, where the Internet plays such an important societal role, it is important to recognize the paradigm shift taking place today. “We are seeing a shift in the communications approach of brands from pushing things out, towards enticing consumers to put things into

their brand to create a fully interactive and mutually rewarding relationship,” says Sun. In today’s interconnected world, there are very few communications objectives that cannot be achieved digitally. But no matter the medium, whether traditional mainstream media or online, companies must find out what audiences want and need and then find the best way to provide it. “It is also important to remember that consumers are not receptive to media but the content that it carries. Media and content are symbiotic in nature and marketers need to remember that,” says Tam. Companies certainly have the tools to begin learning about what consumers want and need. As social media continues to gain popularity, the reach of Internet word of mouth will only continue. It will fall on companies to have a pulse on current trends in order to engage consumers. “The key is listening to consumers’ Internet word of mouth, figuring out what they want and then creating campaigns that really connect to them,” says Flemming. “The buzz will naturally follow after that.” While experts agree that the online environment is one that should be engaged within the proper context as a part of broader communications strategy, there is no denying that the Internet has empowered consumers in China. Although there is certainly some criticism of companies and products online, there remains a massive opportunity to harness the passion that Chinese netizens have for particular companies, brands or products. “The source of a hot trend is just as likely to come from a 16-year-old netizen sitting in his dorm room in Gansu Province as it is from the creative mind of an advertising executive being paid thousands of dollars a year,” says Sun. However, the dynamic and complex nature of the Internet means that each company will have to spend the time and resources to understand the online environment for its particular business and what digital tools would be most effective. There is no single best solution to connecting with consumers online. “Remember that all of the digital ad agencies and social media gurus – every single one of them – are making it up as they go along,” concludes Goldkorn. “There is no proven formula to advertising or corporate communications on the Chinese Internet.” Justin Chan is Editor-in-Chief of Insight. He can be contacted at justin.chan@amcham-shanghai.org.

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As social media continues to gain popularity, the reach of Internet word of mouth will only continue. It will fall on companies to have a pulse on current trends in order to engage consumers.”


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JUNE 2009


INSIDE AMCHAM FROM THE CHAIRMAN

A Summer of Engagement

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ummer is here and for many of us, it is usually a time for some rest and relaxation with our families. But for the U.S.-China relationship, July will be an important month, as the first round of the U.S.-China Strategic and Economic Dialogue under the Obama administration takes place. The two sides will discuss a broad range of bilateral, regional and global issues during the week of July 27 in Washington, D.C. AmCham Shanghai looks forward to the next chapter of the deepening U.S.-China relationship and will be following the talks closely. In recent months, AmCham Shanghai has been active in making sure that the Voice of American Business in China is being heard. In May, we were very pleased to welcome two separate delegations led by Speaker of the House Nancy Pelosi and by U.S. Representatives Mark Kirk and Rick Larsen. Each delegation was eager to learn about the experience and perspective of U.S. businesses on the ground in China and both left very enthusiastic about the business community in Shanghai. We also recently held a meeting with Acting Under Secretary of the Treasury for the Bureau of Industry and Security Daniel Hill, who shared with us the latest on export licensing and technology trade issues.

J. Norwell Coquillard Chairman AmCham Shanghai

We are actively making sure that the Voice of American Business in China is being heard.

Last month, I also led a delegation of 26 AmCham Shanghai members to attend the 8th China International Consumer Goods Fair in Ningbo, Zhejiang Province, the largest international consumer goods fair in China. While there, we met with officials from the Ningbo Municipal Government as well as the Zhejiang Provincial Government to discuss opportunities for U.S. business in the region. One business sector that has been growing rapidly for many of our members is energy and environment. AmCham Shanghai is a Founding Partner of the China Greentech Initiative, a collaboration of the world’s best-in-class green technology companies. The Initiative is now working on the China Greentech Report, a comprehensive report to be released in the fall that will define and create business opportunities in China’s greentech sector. Led by the efforts of our Environmental Committee, AmCham Shanghai has been recognized as a leader in the green technology and sustainable development fields and we will continue to work with our members to drive development of the sector that will make a positive contribution to China’s environment.

The AmCham Shanghai 2009 Board of Governors: 2009 Chairman

J. Norwell Coquillard President Cargill Investments (China), Ltd.

2009 Vice Chairman

2009 Governors Eddy Chan

Ted Hornbein

James Rice

Head of China and Senior Vice President FedEx Express

Managing Director for Asia Richco, Inc.

Vice President & Country Manager Tyson Foods, Inc.

Matthew J.Targett

Pierre E. Cohade President, Asia-Pacific Region The Goodyear Tire & Rubber Co.

Head of Innovation Management Bayer Technology and Engineering

Murray King Managing Director Shanghai APCO Worldwide

Minda Ho John Grobowski Managing Partner Faegre & Benson LLP Shanghai

Executive Vice President Praxair (China) Investment Co., Ltd.

Diane Long JU NE 2009 Director

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Warren Wisnewski


INSIDE AMCHAM B O A R D O F G OV E R N O R S B R I E F I N G

Highlights from June 2009 Board of Governors Meeting Membership The Board approved 50 new members. Door Knock Report The Chairman reported on the Door Knock trip to Washington, D.C. led by AmCham-China (Beijing), which included appointments with 60 members of Congress. Delegates focused on the Kirk/Larsen bills, U.S. visas and bilateral dialogues such as the Strategic and Economic Dialogue (S&ED) and Joint Commission on Commerce and Trade (JCCT). President Brenda Foster will attend the Asia-Pacific Council of American Chambers (APCAC) Door Knock later in June and the week of September 21 has been proposed for the AmCham Shanghailed Door Knock to Washington, D.C.

Finance Report Board Treasurer Matthew Targett reviewed the Chamber’s finances, noting that financial performance is on target with budget projections. Audit partner Deloitte’s preliminary report on Fiscal Year 08/09 financial performance is in progress and will be reviewed by the Audit Committee. U.S.-China Clean Energy Forum The U.S.-China Clean Energy Forum held in Beijing in late May was a great success and the congressional delegation led by Speaker Pelosi was very enthusiastic about the Shanghai business community and efforts on clean energy in Shanghai. The President also reported that AmCham Shanghai members were very well represented at the Forum.

AmCham Shanghai 7th Annual Charity Golf Tournament

IN ATTENDANCE Governors: Chris Beede, Eddy Chan, Norwell Coquillard (Chairman), David Gossack, John Grobowski, Minda Ho, Ted Hornbein (by phone), Murray King, Diane Long, Matthew Targett and Warren Wisnewski. Attendees: David Basmajian, Jeffrey Bernstein, Justin Chan, Siobhan Das, Brenda Foster (President), John Leary, Helen Ren, Linda X. Wang and Karen Yuen. REGRETS Pierre Cohade and James Rice.

SA VE DA TH TE E !

Friday, August 28, 2009 Shanghai Silport Golf Club

Come and play golf for a good cause!


AMCHAM ADVOCACY & GOVERNMENT RELATIONS

AmCham Shanghai Tour to the 8th China International Consumer Goods Fair in Ningbo

A delegation of 26 AmCham Shanghai members and staff attended the 8th China International Consumer Goods Fair (CICGF) in Ningbo, Zhejiang Province from June 8 to 10. Led by AmCham Shanghai Chairman J. Norwell Coquillard, the delegation included representatives from member companies such as Cargill Investment, Shanghai United Family Hospital,The Bank of Nova Scotia, Scan Global Logistics and the Grand Hyatt Shanghai. The CICGF, which is approved by the State Council and co-sponsored by China’s Ministry of Commerce and the Zhejiang Provincial People’s Government, is the largest professional international consumer goods fair in China, ranking second only to the Canton Fair among all the exhibitions sponsored by the Ministry of Commerce. The delegation participated in a series of activities including visiting the CICGF, touring the Beilun Deepwater Port, meeting with Beilun district officials on the development of Ningbo port and port supporting industrial facilities, and visiting two U.S.-invested companies in Beilun, the Prince Castle Co. and Dow Chemical. Members of the delegation were also invited to a welcome dinner hosted by the Ningbo Municipal Government and met with Ningbo Assistant Mayor Mr. Lin Jinguo, as well as officials from the Ningbo Foreign Trade and Economic Cooperation bureau. On June 8, Chairman Coquillard and a few members of the AmCham Shanghai delegation met with Mr. Gong Zheng, the vice governor of Zhejiang Province, to discuss investment opportunities in Zhejiang. Vice Governor Zheng gave an introduction to Zhejiang’s most important industries and spoke about his views on the business environment and foreign investment in Zhejiang.

Thank you to Sofitel Wanda Ningbo, the accommodation sponsor for the tour.

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Is your Membership due for renewal?

Renew now & stay a part of the largest and most active AmCham in the Asia-Pacific Region: AmCham Shanghai!

Renew your AmCham Shanghai Membership now and have chance to win one of the below prizes. • Oral SPA voucher provided by Arrail Dental • RMB570 Treatment voucher provided by Body & Soul Medical Clinics • First-aid kit provided by Shanghai East International Medical Center • RMB500 Hair salon voucher provided by Grace Hair & Aesthetics • RMB800 Dental care card provided by Kowa Dental • One-night accommodation in a studio at Pudi Boutique Hotel • RMB500 SPA voucher provided by QUAN SPA • Half a case of Santa Digna Sauvignon Blanc Reserve wine provided by Santa Fe Relocation Services • Two-nights accommodation at Sofitel Sheshan Huanghe Resort Hotel • One-night weekend stay in a Deluxe Room at the St. Regis Shanghai • One-night stay in a one bedroom apartment at Union Square, Shanghai Pudong - Marriott Executive Apartments • Three-month subscription to The Wall Street Journal newspaper (PDF version)

Special thanks to the prize sponsors:

MEDICAL CLINICS

上海黄河佘山索菲特大酒店 Shanghai Sheshan Huanghe

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Event Highlights

INSIDE AMCHAM

RECENT AMCHAM HAPPENINGS

Acting Consul General Simon Schuchat began the June briefing by noting that U.S. Consul General Beatrice Camp would discuss her productive Washington consultations during the July briefing. He highlighted President Obama’s nomination of Utah Governor Jon Huntsman as the next U.S. Ambassador to the People’s Republic of China, noting that confirmation hearings have not yet been scheduled. Treasury Secretary Timothy Geithner addressed Chinese concerns about the U.S. economy in his meetings with President Hu Jintao, Acting U.S. Consul General Simon Schuchat (center) Premier Wen Jiabao and other senior Chinese addresses members at the June U.S. Consulate Briefing. financial officials in Beijing on June 1 and 2, while also announcing a series of senior level appointments. A late-July date for convening the Strategic and Economic Dialogue in Washington was also announced. Schuchat then reviewed the successful late-May visits to China of Speaker of the U.S. House of Representatives Nancy Pelosi (CA); U.S. Senator John Kerry (MA); Representatives Mark Kirk (IL) and Rick Larsen (WA); and Director of the State Department Policy Planning Staff Dr. Anne-Marie Slaughter. Acting CG Schuchat also outlined Shanghai authorities’ actions to contain the spread of H1N1 influenza. The Consulate’s website, http://shanghai.usembassy-china.org.cn, has current information on this important health issue. He then reminded the membership that the American Citizen Services unit in the Consular Section has now shifted to an online appointments system. Schuchat closed his presentation with an update on recent significant donations made to fund the USA Pavilion at Shanghai Expo 2010, lauding the new momentum that the project has achieved and the support of Secretary Clinton, although much remains to be done in a very compressed timeframe. (Jun 2)

Governor Tom Ridge

Managing Risk Before It Manages You

AMCHAM SHANGHAI

AmCham Shanghai was pleased to welcome Governor Tom Ridge, the former governor of Pennsylvania and former U.S. Secretary of Homeland Security, for a discussion on the importance of risk management for businesses and organizations around the world. “It’s time for companies to move to a new paradigm in which risk management is viewed as an investment rather than a cost,” said Governor Ridge, who served as Governor of Pennsylvania from 1995 to 2001 and who on January 24, 2003 became the United States’ first Secretary of Homeland Security. He explained how as organizations expand their international footprint and presence, they must strike a balance between staying secure and staying connected with customers, suppliers and employees around the world. He likened this balancing act to the U.S. government’s efforts after the September 11 attacks to secure the country without developing a fortress mentality to the rest of the world. Governor Ridge, who currently runs the strategic consulting firm Ridge Global, pointed out that supply chain security is an issue of particular concern to international companies in China, and it is difficult to validate the quality of the supply chain once you get past first tier suppliers without an investment in product safety and quality control. He emphasized that producing quality products and services are more important than ever for a company’s long-term business success and that investment in risk management can help ensure that quality. (Jun 10)

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AMCHAM SHANGHAI

June U.S. Consulate Briefing


AmCham Shanghai members can enjoy up to 3 FREE standard job postings every month.

In addition, we also provide 20 Candidate Invitations at RMB500: full access to our resume database and send up to 20 invitations to your target candidates.

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For more information, please contact Ms. Elaine Yang at (86 21) 6279-7119 ext. 5664 or elaine.yang@amcham-shanghai.org


Event Highlights

INSIDE AMCHAM

RECENT AMCHAM HAPPENINGS

AMCHAM SHANGHAI

Acting Under Secretary for Industry and Security Daniel Hill

U.S. Acting Under Secretary for Industry and Security Daniel Hill

AmCham Shanghai was pleased to welcome Tom Doctoroff, Area Director of North Asia and CEO of JWT Greater China, at a recent event focused on the science of digital media and online marketing. Chinese youth are using the Internet to express their individuality, allowing them freedom from a society that stresses conformity, said Doctoroff. The Internet offers a chance for one to “fit in” and find acknowledgement, but at the same time stand out among a population of 1.3 billion. With Internet use skyrocketing in China, Chinese teenagers in particular are embracing the opportunities offered by the virtual world. Doctoroff pointed to the success of Nokia’s recent virtual concert as an example of China’s growing online population. The April event, which was streamed live on video sharing site www.youku.com, allowed the 6.48 million viewers the option to throw virtual flowers and kisses at singers. It is therefore no surprise that the number of young Chinese who admit to having a second life on the Internet far surpasses that in the United States and Western Europe, said Doctoroff. Unlike Western societies, China has always clung to a collectivist ideal, and the Internet is both a release from the demands of everyday life and a place to find a like-minded Tom Doctoroff, JWT community, he said. (Jun 24)

AMCHAM SHANGHAI

The U.S. Commerce Department’s Acting Under Secretary for Industry and Security Daniel Hill joined AmCham Shanghai members for a private lunch to discuss critical issues facing U.S. companies with operations in China. Chamber members from high tech firms in IT and electronics, chemicals, aviation, advanced materials/metallurgy, power systems, and software industries had the opportunity to share their views on important subjects with the Under Secretary. Hill was pleased to receive the feedback and requested follow up information on a number of issues. Continued discussion and further communication on key topics was promised. Under Secretary Hill is responsible for export licensing of high technology dual-use goods sold in China and works on other key issues critical to U.S. businesses including administrative processing for U.S. non-immigrant visa applications. He will also be meeting with Chinese officials in a number of ministries and agencies including the Ministry of Commerce. (Jun 8)

Journey of the Second Life: Marketing in the Digital Universe

AmCham Shanghai Releases Position Paper in support of the USA Pavilion AmCham Shanghai recently released “The USA Pavilion at Expo 2010 Shanghai - A business case for sponsorship,” highlighting the importance of the USA Pavilion to the U.S. business community in China. The position paper also outlines opportunities for Pavilion sponsors to advance their company’s China strategy and provides an overview of specific benefits provided to sponsors by the organizers of the USA Pavilion. For more information, please visit: www.amcham-shanghai.org/positionpaper

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Committee Highlights

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NEW IN COMMITTEES

AMCHAM SHANGHAI

Shanlian Hu, Fudan University

Healthcare Committee

China’s Healthcare Reform – Healthcare in the Community

AmCham Shanghai’s Healthcare Committee recently hosted an event on healthcare in the community, the first program in the Committee’s ongoing series of events on China’s healthcare reform initiative. Speakers Shanlian Hu, director general of the Shanghai Health Development and Research Center at Fudan University, and Jiawen Cao, from Shanghai’s No. 6 Hospital, discussed community healthcare and the provisions that aim to improve and build a comprehensive system which will extend healthcare to rural areas of China. Healthcare reform efforts in China are largely focused on developing community healthcare services, explained Hu. China has been developing community health centers and health stations in order to improve the quality and access to healthcare for its rural populations. In order to transform healthcare services, the healthcare sector will continually improve service levels, take initiative in new services and try to increase household visits, said Hu. Professor Cao spoke more in depth about tertiary level hospitals, which handle complex and serious diseases. Referral channels have been undertaken to allow tertiary and secondary hospitals to work together to promote patient health and to efficiently process patients, said Cao. Shanghai’s Municipal Government has also begun programs to increase the number of tertiary hospitals as well as upgrade secondary hospitals into tertiary institutions. (Jun 5)

The Obama Administration’s Proposed Tax Reforms

Ken Harvey, KPMG (left), Aaron Grundman, Deloitte

The AmCham Shanghai Tax Committee’s recent event addressed a range of President Obama’s proposed international tax reforms. Speakers Aaron Grundman, senior manager with Deloitte, and Ken Harvey, seconded tax partner with KPMG, discussed the details of the reforms and their potential impact on business operations in China. Among various measures, Obama’s proposed international tax reform limits the “tax deferral” of foreign subsidiary profits by U.S. corporations. Under current law, U.S. companies must pay tax on income earned abroad, but tax on the earnings of foreign subsidiaries is imposed only when earnings are repatriated. Generally, U.S. tax on foreign subsidiary earnings can be deferred for as long as the foreign earnings are held in foreign subsidiaries. Under the proposed law, beginning in 2011, companies must defer deductions for expenses incurred in the U.S. that support foreign investment until foreign earnings are repatriated. The Obama plan also restricts the use of “check-the-box” rules which provide classification determinations on foreign U.S. entities for tax purposes. Currently, certain U.S. foreign entities can elect to be disregarded for U.S. tax purposes, but under this proposal, these foreign corporate entities would have to be treated as corporations.The administration also wants to implement changes designed to limit the ability of individuals to hide investments in offshore accounts by increasing penalties, tightening reporting standards, and extending the statute of limitations. Grundman noted that these proposals were likely to be a part of a long legislative process and there is no guarantee that the proposals will be passed into law, although he urged members to be aware of these possible changes. (Jun 15)

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AMCHAM SHANGHAI

Tax Committee


INSIDE AMCHAM

AMCHAM SHANGHAI

Manufacturer’s Business Council MBC Jiading Factory Tour

AmCham Shanghai’s Manufacturers’ Business Council hosted a half-day factory tour to the Jiading Industrial Park on June 23. AmCham Shanghai members from companies such as Polymer Technology & Services, H.B. Fuller Consulting, Konica Minolta, Rohm and Haas, and Carlisle Trading attended the tour.

Dupont Performance Coatings

International Paper

The first stop of the tour was Dupont Performance Coatings Shanghai, where Peng Fakui, the factory manager, presented the factory site, the company’s business and key performance index, and the strict safety measures Dupont undertakes to achieve an outstanding safety record. The AmCham Shanghai delegation also visited International Paper, a new 65,000 square meter corrugated cardboard plant. Huang Qingping, general manager of the plant, introduced the company’s business and explained how International Paper’s Jiading plant was set up through a joint venture arrangement with the Jiading Development Zone. Following the factory visits, the AmCham Shanghai group attended a lunch hosted by officials from the Jiading Industrial Zone, including Wang Jie, deputy director of the Shanghai Jiading Industrial Zone Administration Committee. Wang spoke to members about the different services the Jiading Industrial Zone could provide to companies that relocate to the zone. (Jun 23)

Marketing Committee

Connecting with New Consumers Outside of China’s Major Cities AmCham Shanghai’s Marketing Committee was pleased to welcome Kunal Sinha, executive director of discovery at Ogilvy & Mather Greater China, at an event addressing the needs and behavior patterns of consumers in China’s lower-tier cities. Sinha shared insights from a recent Ogilvy & Mather study into the drivers in consumer needs, aspirations and purchase decisions in China’s lower-tier cities. Before companies can target consumers or develop relevant marketing strategies, they have to consider a variety of factors that can significantly impact marketing strategies, said Sinha. For example, in lower-tier cities, the family, rather than the individual, is the predominant consumption and decision-making unit, and parents strive to give their children the very best. Results from the study indicated that nutrition and education are two “hot buttons” for impulsive purchasing and investment by lower-tier Chinese consumers. Lower-tier cities also have a huge diversity of local cultures, which make them the perfect vehicles for experiential marketing, explained Sinha. He warned companies to be on the watch for counterfeiting because high-end counterfeiters may take advantage of the lack of product knowledge and understanding of English in lower-tier markets. Companies must take measures to “fakeproof ” their products from the beginning to avoid the loss of reputation in their brand, advised Sinha. (May 13)

Event and Committee Highlights are reported by Patrick McNally, Kate Ryge, Brian Seifert, Linda Witters, Elaine Wu and Weina Yang.

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DEAL OF THE MONTH IMAGINECHINA

A reversal of fortunes Bain Capital signs an investment agreement with Chinese electronics giant Gome for US$418 million.

C

hina’s top electronics retailer, Gome Electrical Appliances, has signed an investment agreement with U.S. private equity firm Bain Capital that will raise at least US$418 million in convertible bonds and new shares. Under the agreement, Gome will issue US$233 million worth of seven-year convertible bonds to an affiliate of Bain Capital, at an interest rate of 5 percent per annum. Gome will also issue up to 2.48 billion new shares in an open offer to shareholders on the basis of 18 new shares for every 100 existing shares held. These new shares will be priced at HK$0.67 each, which is a 60 percent discount on the price before the suspension of trading on Gome shares in Hong Kong last November. Bain will fully underwrite the new shares, and will hold approximately 23 percent of Gome's enlarged issued share capital once the deal is completed. In addition to its stake, Bain will have the right to nominate three non-executive directors to Gome’s Board. The transaction is expected to be completed by the beginning of August. The deal, which is one of the largest American investments in a Chinese company, is expected to stabilize and help the electronics giant ride out the financial crisis and the recent scandals that have rocked it. Gome’s founder and ex-chairman, Huang

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Guangyu, was arrested last year on corruption charges. China’s state-controlled media reported that he was being detained for “economic crimes,” and although he was suspended from his duties as chairman, Huang still holds a 35.5 percent stake in the company. Gome’s stocks plummeted more than 70 percent last year, and trading was suspended on November 24. Trading resumed in June after announcement of the deal and stock prices have jumped nearly 70 percent on the news. Despite the pending investigation, Gome is still China’s largest electronics retailer with over 800 retail outlets throughout China and over RMB3.05 billion in cash and cash equivalents at the end of last year. In 2008, it had a 6.7 percent share of the sector’s retail value and 11.8 percent of total sales, according to Euromonitor International. “The enduring strength of Gome’s business during a challenging period is a testament to the power of the Gome brand and its leading franchise in China," said Bain managing director Jonathan Zhu in a statement. Bain Capital competed with private equity rivals Kohlberg Kravis Roberts & Co. and Warburg Pincus to buy a stake in Gome. Bain’s other China investments include shopping mall operator Jinsheng International, chemicals maker Feixiang and media advertising operator Sinomedia. – Elaine Wu


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Insight Magazine July-August 2009