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INSIGHT The Journal of the American Chamber of Commerce in Shanghai March 2010

AUTOMOTIVE FEATURE

GM Restructuring EXPO FOCUS

Marketing Opportunities VIP VISITOR

U.S. Senator Patty Murray

A New Frontier China-Africa commercial ties are beginning to evolve beyond infrastructure development and natural resources


INSIGHT March 2010

The Journal of the American Chamber of Commerce in Shanghai

David Turchetti DIRECTORS

BUSINESS DEVELOPMENT & MARKETING

Karen Yuen COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren

MEMBERSHIP & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

Justin Chan

COMMUNICATIONS ASSOCIATE

Weina Yang

EDITORIAL INTERN

Chantal Grinderslev DESIGN

Alicia Beebe LAYOUT & PRINTING

Ella Shan Snap Printing, Inc.

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

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

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IMAGINECHINA

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

VIP VISITOR

WH PHOTOSTREAM

Brenda Foster

F E AT U R E S

IMAGINECHINA

PRESIDENT

AMCHAM SHANGHAI

AMCHAM SHANGHAI

By David Basmajian

While leading a visit of the Inter-Parliamentary Group to China, U.S. Senator Patty Murray (D-WA) discussed climate change, and the opportunities and challenges for green technology in China.

19 Standing Out at Expo EXPO FOCUS

By Lauren Hilgers

For the six-month duration of the 2010 World Expo, companies need to find a way to connect with all 70 million visitors, the vast majority of which will be a part of China’s large domestic consumer base.

23 The Road to Profitability AUTOMOTIVE FEATURE

By Justin Chan

As the Chief Restructuring Officer for General Motors, Al Koch played a large role in leading GM through its bankruptcy and restructuring process that has the company’s leaders optimistic about returning to the black this year.

27 Closer and Closer INTERVIEW

By David Basmajian and Justin Chan

William Weinstein, minister counselor for economic affairs at the U.S. Embassy in Beijing, discusses the evolution of the U.S.China relationship and its increasing importance and interrelatedness.

30 A New Frontier COVER STORY

By Chantal Grinderslev

China-Africa ties are increasing rapidly, as China supports infrastructure and industry development in exchange for access to raw materials that support economic growth at home. At the same time, both Chinese and African businesses are building a stronger commercial relationship.

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

3 News Briefs

10 Market Profile

9 Employer Branding

44 Deal of the Month

12 Recent EIT Developments ANALYSIS

MANAGER’S NOTEBOOK

Dhirendra Shantilal of Kelly Services discusses the importance and benefits of building a strong employer brand.

Aaron Grundman of Deloitte shares an analysis of recent changes that could affect the tax administration for foreign investors.

INSIDE AMCHAM

37 From the Chairman: Enhancing U.S. Competitiveness 39 Release of Mother and Infant Care Project Video

MARCH 2009

41 Events in Review 42 Committee Highlights

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fter ushering in the year of the Tiger, it is now time to move forward and look at what lies in store for the rest of the year. In Shanghai, not only is 2010 the year of the Tiger, it is the year of World Expo. Preparations across the city continue in earnest as the May 1 opening day gets closer and closer.

JUSTIN CHAN EDITOR-IN-CHIEF

Although the Expo means many different things to many different people, one cannot escape the fact that 70 million people are expected to descend on Shanghai over the six-month duration. With an overwhelming proportion of attendees expected to be Chinese, participating countries and organizations will have an excellent opportunity to make an impact on impressionable Chinese consumers. This month’s Expo Focus looks at how companies are leveraging the Expo to reach out and connect to Chinese citizens. The cover story of our January/February issue looked at the expectations for U.S.-China relations in 2010. Since then, events such as Google’s announcement that it could close China operations, proposed arms sales to Taiwan, and news of an expected visit to the United States by

the Dalai Lama have shown that this year really will be a test of the strength of bilateral ties. To look at the possible effect on commercial ties, we caught up with William Weinstein, minister counselor of economic affairs at the U.S. Embassy in Beijing. Insight also sat down with U.S. Senator Patty Murray during her visit to Shanghai with the Inter-Parliamentary Group to discuss issues such as climate change, green technology and trade. Back in the U.S., General Motors Chairman and CEO Ed Whitacre recently said that he expects GM to return to profitability in 2010. See this month’s Automotive Feature for the story behind the fourth largest bankruptcy in U.S. history, as we talk to corporate turnaround expert Al Koch, who helped lead GM’s restructuring to return the company to a position for growth. Finally, this month’s cover story looks at the ChinaAfrica relationship. Over the past two decades, China has supported several African nations with economic and developmental support, which has led to broad access to raw materials. While the aid for resources model continues, commercial ties are picking up as bilateral trade and investment increases.


IMAGINECHINA

News

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

CHINA BUSINESS

FDI to China doubles Foreign direct investment (FDI) to China more than doubled in December 2009, marking the fifth consecutive month that FDI has increased. Total FDI in 2009 amounted to US$90 billion, down 2.6% year-on-year due to sharp declines early last year that were instigated by the global financial crisis. The city of Shanghai attracted US$10.5 billion, up 4.5% from the previous year. The quick and rapid increase in FDI marks a return of corporate confidence in and hopes for the China market. After becoming the world’s largest exporter and largest auto market last year, China is predicted to become the largest consumer market (overtaking the U.S.) by 2020, according to Credit Suisse.

High hopes for the wine industry While major wine producers Italy and Spain saw slumps in 2009 production, China’s production over the first 11 months of 2009 grew 21.8% year-on-year. Wang Yancai, president of China Alcoholic Drink Industry Association, noted that China’s wine industry has an opportunity to gain market share at a time when consumers are demonstrating a preference for cheaper wines. China’s wine exports remains small in scale, but the country’s largest wineproducing city, Yantai, is actively courting international interest and will be hosting its fourth International Wine Festival in September. Yantai is currently the only Asian city recognized by the International Office of Vine and Wine (OIV) and expects a total of 50,000 people to attend the festival, including 2,500 attendees from foreign wineries.

Baseball’s new Field of Dreams Baseball players from the Major League Baseball’s (MLB) New York Yankees

Secretary Clinton prioritizes Internet freedom Shortly after Google announced its intentions in January to end censorship of search results on its Chinese-language search engine Google.cn, Secretary of State Hillary Clinton delivered a speech detailing U.S. support for Internet freedom around the world. “The Internet has already been a source of tremendous progress in China, and it is fabulous…but countries that restrict free access to information or violate the basic rights of Internet users risk walling themselves off from the progress of the next century,” said Clinton. She also called on China to conduct a thorough and transparent review of the cyber attacks that led to Google’s announcement. Later, Clinton met with network service providers to discuss business-government cooperation on the issue. More funding for Internet freedom will be distributed, including State Department grants to develop technological tools that reduce censorship barriers. visited Beijing in February, posing for photos and handing out Yankee memorabilia at a shopping mall. The visit was part of a weeklong trip to China, Japan and Hong Kong to promote interest in the sport of baseball and in the New York Yankees franchise, which won the 2009 World Series. MLB has tried to develop the Chinese market for baseball since 2003, when former major league players Jim Lefebvre and Bruce Hurst were sent to coach China’s national team. Only four million people play baseball for recreation in China versus an estimated 300 million who enjoy basketball. Over the past seven years, MLB has spent millions of dollars on

promoting the sport in China, including Play Ball, a program in cooperation with China’s Ministry of Education that organizes tournaments in five cities for 120 schools. Since 2001, only five Chinese players have been signed by major league clubs, although none have made any real impact. A new player-development center opened in the fall of 2009 in Wuxi, with the hopes of finding baseball’s version of basketball star Yao Ming. CORPORATE NEWS

Google threatens China pullout In early January, Google threatened to

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stop voluntarily censorship of its Chineselanguage search engine and close down or curtail its China operations after hackers attempted a sophisticated attack on the company’s security infrastructure. In a separate incident, many users of Google’s free email service Gmail, including several foreign journalists based in Beijing, noticed in late January that their Google email account settings had been altered to automatically forward messages to unrecognized email addresses. While Google threatened withdrawal from the Chinese market, China’s largest search engine, Baidu.com, signed an agreement on February 1 with the government of Shenzhen to build its international headquarters in the city. The location will be used to develop the company’s business in southern China and Southeast Asia. Baidu currently claims 70% of China’s domestic search engine market.

Lenovo profits surge Leading Chinese computer-maker Lenovo reported a profit of US$79.5 million in the third quarter of its fiscal year (ending in December), a drastic improvement from a US$96.7 million loss a year earlier. Lowpriced PCs have fueled industry growth in recent years and Lenovo has shifted its focus to China and other emerging economies. Revenue from China increased 45% to US$2.3 billion to account for nearly half of the company’s total revenue. Now based in North Carolina following its acquisition of IBM’s personal computer division in 2005, Lenovo controls 33.5% of China’s PC market, making it the largest PC maker by shipments. Lenovo COO Rory Read attributed the company’s profits to a higher-priced product mix and strict pricing strategy, despite rising input costs. As consumer demand continues to increase and corporate demand possibly rebounds later in the year, rising component costs are expected to be a primary challenge to Lenovo’s pricing and business strategy.

CNOOC plans expansion State-owned China National Offshore Oil Corp. (CNOOC) announced in early February that it will introduce nine new offshore production facilities this year that

will increase gas and crude output by at least 20% annually. CNOOC plans to boost capital expenditures to US$7.93 billion in 2010, a nearly 30% increase year-on-year that includes US$1.47 billion for exploration, US$4.81 billion for development and US$1.5 billion for production. While CNOOC activities remain focused on domestic assets, the company has assets in Indonesia, Nigeria, Australia, Kenya and Equatorial Guinea. The company is also in talks to acquire 16 more production licenses in Nigeria and may soon work with UK-based Tullow Oil in Uganda. CNOOC aims to produce 275-290 million barrels of oil and gas in 2010, an approximately 25% increase over 2009 to meet a growing China demand. CNOOC’s annual growth target is higher than major international oil companies BP and Royal Dutch Shell, which have scaled back their targets amid falling oil prices. CNOOC gained 70% in trading in the past year, outpacing the 58% increase in Hong Kong’s benchmark Hang Seng Index. MACROECONOMICS

Manufacturing continues growth Two industry surveys revealed that China’s manufacturing sector grew in January despite fears that recent government curbs on bank lending might result in further economic slowdown. The HSBC China Manufacturing Purchasing Managers Index rose for the fourth straight month, while an index issued by the Federation of Logistics and Purchasing and the National Bureau of Statistics indicated a continued 11-month growth trend in manufacturing. Indexes in Taiwan, South Korea and India indicated similar growth trends in manufacturing, suggesting a regional economic recovery. China’s textile industry showed growth throughout the first 11 months of 2009, claiming a 25.4% increase in profits year-on-year. The textile industry has been slow to recover, but owes much of its growth to domestic demand. Garment exports fell by 11.0%, while domestic sales rose 3.2% year-on-year.

Private sector fuels job creation Recent 2009 year end statistics revealed that private sector growth contributed

significantly to China’s 2009 GDP growth of 8.7%. The All-China Federation of Industry and Commerce (ACFIC) released figures indicating that the creation of 11.4 million new private sector jobs last year accounted for over 90% of new employment in urban locales. The ACFIC report noted that despite financing difficulties and relatively weak innovation capacity (especially for small companies), the number of registered private firms grew 10% year-on-year by September of last year. While government stimulus measures encouraging investment and boosting consumption created a favorable market entry environment, the recent curbing of stimulus measures, lending limits and ongoing difficult market conditions have put into question the survival rate of some new entrants.

CASS cautions on inflation China’s leading think tank, the Chinese Academy of Social Sciences (CASS), released a report in January stating that continued stimulus measures could cause China’s GDP to grow by 16% at the risk of inflation and the creation of a large property bubble. Loose monetary policy has already pushed housing prices up, with urban prices across 70 cities rising 5.7% year-on-year in November 2009. CASS recommended government officials tighten monetary policies to avoid the serious economic impact of a burst property bubble. While a complete halt of stimulus measures is estimated to reduce projected GDP growth to 7.7%, a moderate pursuit of stimulus measures could achieve an 11% growth with 2.94.8% inflation by the year’s end, according to CASS. U.S. - CHINA

Ongoing calls for currency appreciation Despite ongoing calls for revaluation of the Chinese currency, Chinese Foreign Ministry Spokesman Ma Zhaoxu insisted the value of the Chinese yuan was not the main reason for China’s trade surplus with the United States. During an early February meeting with

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Senate Democrats, U.S. President Barack Obama indicated that China’s currency policy is a priority and he is considering designating China currency manipulator in the Treasury Department’s semiannual report on foreign currencies due in April. Senators from both parties are demanding a stronger U.S. stance – Senator Charles Grassley (R-IA) has encouraged putting China on the Treasury’s currency manipulator list, while Senator Charles Schumer (D-NY) sponsored legislation imposing sanctions on China. Although Obama indicated that the undervalued yuan places U.S. goods at a competitive disadvantage, he also warned Congress against protectionist measures and emphasized enforcing existing trade agreements. U.S. economists place the undervaluation of the yuan between 25-40%.

still complete crash and emissions testing before it can become the first company to sell Chinese-made vehicles in the U.S., a process that can sometimes take years. The “e6” model that is planned for release is expected to be priced in the US$40,000 range. It will be marketed as a five-passenger crossover vehicle that is powered by a battery that can be recharged by plugging into a home outlet, with a range of 250 miles. Founded seven years ago, BYD is already a giant in battery production for mobile phones and electronics, and aims to be the world’s largest automaker by 2025.

government returned to power in May 2008. Officials also announced plans to increase the number of cross–strait flights during the Lunar New Year. Even amidst closer economic and social ties, military relations remain tense. In February, China announced intended sanctions against U.S. firms involved in the US$6.4 billion military arms deal between the United States and Taiwan. China cited the right to penalize companies acting against China’s core interests and national security, including U.S. companies such as Boeing, Sikorsky, Lockheed Martin and Raytheon.

GOVERNMENT & POLICY

Panda Express brings home

China and Taiwan signed three trade agreements in late December covering industrial standards, food quarantine procedures and fishery cooperation. The meeting marked the fourth economic discussion between negotiators since Taiwan’s mainland-friendly Kuomintang

China Investment Corp. (CIC), the country’s US$300 billion sovereign wealth fund, purchased US$9.6 billion in shares of American companies last year. According to the fund’s 2009 SEC filing, CIC bought stakes in companies such as Apple, CocaCola, Johnson & Johnson, Motorola Morgan Stanley, Citibank, Visa and Bank of America. The move reflects China’s economic crisis strategy to diversify its holdings when prices are depressed and

On February 5, FedEx safely transported two giant pandas back to China – female Mei Lan, born at Zoo Atlanta, and male Tai Shan, born at the Smithsonian’s National Zoo. Leaving from Washington D.C. in a freighter aircraft dubbed the “FedEx Panda Express,” the pair flew under continuous veterinary supervision for the duration of the 14.5-hour flight. FedEx first transported pandas on the long journey when shipping Tai Shan’s parents in 2000, and again delivered pandas to the Memphis Zoo in 2003. Through “Panda Diplomacy,” China loans pandas out as goodwill ambassadors for 10-year periods at a rate of $1,000,000 per year with the stipulation that any panda cubs born to loaner parents are the property of China and must be returned upon reaching two years of age. It is under these terms that 4.5-year-old Tai Shan and 3-year-old Mei Lan were sent home. Nonetheless, the timing is seen by some as a reflection of increasing US-China tensions in recent months. CHINA OVERSEAS

BYD sets date for U.S. sales Chinese company BYD Auto announced at the Detroit Auto show that it would start selling electric cars in California by the end of the year. However, BYD must

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China and Taiwan boost cooperation

CIC discloses 2009 activity

Tariff Wars • On December 21, the WTO handed down its final ruling declaring that Chinese restrictions on imported films, music and books are illegal. The verdict is likely to liberalize the distribution system currently monopolized by the China Film Group by allowing foreign companies to sell directly to cinemas, but it will not ease national quotas limiting annual foreign film imports to China at 20. • Against protests of inflated prices, the European Union voted on December 22 to extend trade charges on Chinese leather shoes by 15 months (originally established in October 2006). China denounced the decision as protectionist while the European Footwear Alliance estimated anti-dumping duties in place through 2011 would cost EU consumers and businesses hundreds of millions of Euros, while generating US$1.43 billion in tariffs. • On February 2, China’s Ministry of Commerce announced temporary anti-dumping measures on terephthalic acid (an organic compound used in polyester coatings and resins) from Thailand (at deposit rates of 2.4-11.2%) and the Republic of Korea (at 12.2-20.1%). Investigations launched in February 2009 are now being extended six months until August. • China announced anti-dumping duties of up to 105.4% on chicken imports from the United States starting February 13. Specific targets include Pilgrim’s Pride Corp. (80.5% tariff) and Tyson Foods (43.1% tariff). The Ministry of Commerce found that broiler-chicken products are sold below market prices, which hurts local suppliers. In 2008, China imported a fifth of U.S. poultry exports, totaling 584,300 tons, but the new duties could reduce that amount by up to 63,000 tons a month.

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global capital is limited. Buying into large American companies offers an appealing alternative to inflation and debtvulnerable Treasury securities. Investing in corporations also permits China the opportunity to further its economic interests and benefit from companies that plan to serve China’s own large market. For example, in July of 2009, CIC spent US$1.5 billion for a 17% stake in heavilyindebted Canadian mining company Teck Resources, targeting the company’s copper, zinc, and coal production. That stake is now worth US$3.5 billion. SHANGHAI BUSINESS

New research-to-market initiative Shanghai launched its first school and business matchmaking market in Yangpu District in January with an investment of RMB8 million. Less than 10% of technological research and development in Shanghai’s university system has translated to actual production. The

Shanghai Education Commission hopes to bridge the gap by gathering university findings in one identifiable market to give companies a go-to source for new business ideas. The Yangpu market has already integrated the achievements of 600 innovative technology programs and registered 45 education institutions, of which 18 are local universities.

use the city’s Yangshan port as a transfer hub. Shanghai should also increase efforts to attract experienced professionals to the shipping industry just as it currently offers preferential policies to attract professionals to the financial industry. Shanghai’s ports handled 590 million tons of dry bulk goods last year, more than any other port in the world.

Port infrastructure upgrade needed

Housing prices continue to rise

In January, the Shanghai Committee of the Chinese People’s Political Consultative Conference recommended the city improve its financial and logistic services if it is to become an international shipping center. As the city’s top political advisory board, the CPPCC noted that the city has the basic infrastructure and handles large cargo throughput, but needs to upgrade its capacity to function as a good service provider. Shanghai is considering introducing a tax refund to exporters of dry bulk goods on containers departing from Qingdao and Wuhan that

Shanghai’s housing index rose in December 2009 for the tenth consecutive month. Pudong New Area property prices increased the most, jumping 2.13% month-on-month. Of the 70 residential districts tracked by the index, housing prices increased in 59 areas, with only four going unchanged and seven declining. While Century 21 Real Estate noted a 12% decline in property transactions, the average price of those transactions rose 2%. Although stimulus measures for favorable loans and tax policies expired at the end of 2009, analysts expect property prices will continue to rise in early 2010.

Become a President’s Circle Corporate Sponsor and have your company featured at Chamber events, on the AmCham Shanghai website, and in Chamber publications. What’s more, as a President’s Circle Sponsor you will help AmCham Shanghai fulfill its mission - to support the success of American businesses in China. To learn more about the President’s Circle, please contact: Karen Yuen, Director, Business Development and Marketing Tel: (86 21) 6279-8966 Email: karen.yuen@amcham-shanghai.org With special thanks to the 2009-2010 President’s Circle Corporate Sponsors

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CHINA & THE WORLD SOUTH AMERICA VIETNAM Tensions between Vietnam and China are increasing over territorial claims, despite 2010 being declared a “Year of Friendship” for the two countries. In January, China announced plans to develop tourism in the Paracel Islands – an archipelago in the South China Sea. Both the Paracel Islands and the nearby Spratly Islands are rich in oil and natural gas deposits and have been claimed by China, Vietnam and several other regional countries. With Vietnam assuming leadership of the Association of Southeast Asian Nations (ASEAN) in 2010, it is working to assemble international support for resolving the territorial disputes. Such “internationalizing” of issues is seen by many smaller nations as the only way to peacefully bargain with China, which has become more aggressive in claiming disputed areas in recent years.

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AFRICA

EGYPT During the 14th African Union summit from January 31 to February 2, Egyptian officials called for Chinese investment to develop the country’s information and communications technologies sector. Minister Tarek Kamel noted Africa’s continuing struggle to improve infrastructure, including mobile phone and broadband systems. Chinese mobile company ZTE, focused on telecom-switching gear, has already invested heavily in the country and over the past decade has established 10 training centers in Africa for technicians and managers.

EUROPE

GERMANY Chinese Foreign Minister Yang Jiechi addressed the Munich Security Conference in early February, with 2010 marking the 35th anniversary of diplomatic relations between China and the European Union. Yang addressed recent tension in trade ties by noting that future relations should be based on a strategic, long-term perspective that views China’s development as an opportunity, not a threat. He further emphasized that China is undertaking more international responsibilities and urges a renewal of six-party talks with North Korea, supports diplomatic efforts on the Iranian nuclear issue, and pledges support to Afghanistan’s reconstruction process.

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PAKISTAN In January, the Pakistan-China Institute announced plans for a 60-person “friendship caravan” to travel the Silk Road in June before attending the June 25 Kashghar Trade Fair in China. The Institute, opened in October 2009, is the country’s first think tank devoted to China issues and is staffed by an equal number of Pakistani and Chinese scholars. The non-partisan organization hosts forums and a research database to promote economic relations and cultural ties between the two countries. Pakistan has openly encouraged more Chinese investment recently after the success of several China-funded projects.

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IRAQ In late January, a consortium led by China’s largest oil company, the China National Petroleum Corp. (CNPC) won the right to develop Iraq’s 4.1 billion-barrel Halfaya oilfield for the next two decades. CNPC has a 37.5% stake in the project bid with partners Total of France (18.75%), Petronas of Malaysia (18.75%), and Iraq’s own South Oil Co. (25%). The deal marks the third major oil investment CNPC has pursued in Iraq, after projects in the Al-Ahdab and Rumaila oilfields.

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ASIA-PACIFIC NORTH AMERICA

UNITED STATES On January 11, China announced the successful testing of the country’s first land-based missile defense system. Although China emphasized the defensive nature of the system, analysts noted the similar timing of the test with sales of American Patriot air defense equipment to Taiwan. The White House has insisted it is fulfilling a deal initially negotiated under the Bush administration, but omitted the sale of F-16 fighter jets and Blackhawk helicopters, which were included in the original deal. Tensions between the U.S. and China also rose with the expected meeting with the Dalai Lama and the Taiwanese President Ma Ying-jeou’s visit to the U.S. in February.

NORTH AMERICA

PERU The Peru-China Free Trade Agreement (FTA) came into effect on January 15 and is expected to boost two-way trade to US$8 billion within one year. In 2009, trade volume between the two countries totaled approximately US$5.5 billion, with Peru claiming a slight trade surplus with China. The new FTA, while currently excluding “sensitive items” such as textiles, shoes and clothing, was ratified in early January in Peru. China is currently Peru’s second largest trading partner after the U.S., but bilateral trade has grown rapidly in recent years. China runs a trade deficit with Peru largely due to its imports of gold, silver, copper, zinc and tin.

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M A N A G E R ’ S N OT E B O O K

Building a Strong Employer Brand At All Tim for a Sustainable Organization

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mployer branding is a viralbased perception management program that is intended to raise an organization’s image in the marketplace as a wellmanaged business, thereby attracting a steady flow of top quality applicants. Simply put, it provides potential employees with a window into what it is like to work both in and for an organization. Reputation management and employer branding has evolved to become a boardlevel concern and a key component of market value. Employer branding should be viewed as an ongoing process that is at the heart of the employment experience, providing touch points that begin with initial employer brand awareness and continuing throughout the tenure of employment. Even during extraordinary periods of economic growth or downturn, employer branding is crucial as all employees are discerning clients, to be attracted, engaged and retained by organizations and employers. Organizations that seize the opportunity to engage with their current and potential employees will differentiate themselves from those that adopt a defensive stance. In order to differentiate from competitors, organizations should remain upbeat and proactively strengthen their employment proposition as well as the promise they make to their employees.

Balancing employer branding with financial viability Employer branding, like any worthwhile endeavor, needs top management commitment and long-term investment to get it right. By getting the employer brand right, less money is needed to bring good people into the business. No organization can afford to overlook the value provided Got an article idea for “Manager’s Notebook”? Contact Insight Editor-in-Chief Justin Chan at justin.chan@amcham-shanghai.org.

by access to the world’s best and brightest talent. By strengthening its employer brand, organizations are able to focus less on overcoming the talent shortage, significantly enhance their talent pipeline, improve employee retention and increase shareholder value. In a Harvard Business Review study, researchers found that employers who invested more in their employees’ training and development outperformed the stock markets by up to 35%. Since there is an established connection between employee satisfaction and customer satisfaction, branding can increase customer service levels and customer satisfaction, both of which have an established economic value. Examples of traditional metrics that have been used to measure ROI on employer branding activities include cost per hire, time to fill, retention rates and turnover rates. A growing number of organizations are also exploring and adopting forward-looking measures that include promotion readiness rating, external versus internal hire ratio, qualityhire ratio and the performance ratings of newly promoted managers.

Making employer branding a part of the recruitment plan Employees are increasingly behaving like consumers when choosing to join or stay with an employer. A positive employer brand can be a way of differentiating one organization from another and a way of creating a strong, distinctive and attractive identity with which current or potential employees can identify. Today’s leading employers recognize that it is essential to develop good people policies and to communicate these externally as well as internally to attract the best and brightest talent.

Employer branding can be done through creating value propositions in the areas of corporate leadership, organizational values, job function and rewards. The most precious asset an organization has is its reputation in the eyes of the public and potential employees. Reputations are painstakingly built up and can be quickly destroyed. Potential employees these days make decisions about accepting a position with an organization based on more than just remuneration. Aspects of the organization’s culture impact both on the initial recruiting success and on retention rates. If the employer brand is right, it will attract staff with a solid cultural fit to the organization, and if the employer brand delivers on its promise, these staff members will be more willing to stay with the company. It is clear from lists such as Fortune’s “Best Companies” that being a good employer is good for business, especially during uncertain times. In a downturn, a strong employer brand can improve employee motivation as well as help to keep top people on board. Ultimately, employer branding is not just about getting more people to apply for a job vacancy. It is about attracting those who are aligned with the organization and believe in it – its vision, values, commitment to employees and clients as well as to ensure employees are a “good fit” with your organization.

al is Dhirendra Shantil nt, ide es pr e vic r nio se Kelly th wi Asia Pacific, re mo r Fo Services. e visit information, pleas n. s.c www.kellyservice

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MARKET PROFILE

BY ERGUN GENC

ISTOCKPHOTO

China’s Impact on the Global Semiconductor Industry

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Market Profile provided by

For more information, please contact: Ergun Genc, Partner, Assurance ergun.genc@cn.pwc.com

hina’s overall consumption of semiconductors continues to grow and now exceeds Japan, North America, Europe and the rest of the world for the fourth consecutive year. As the economy continues to recover after a challenging year, China’s semiconductor consumption will continue to grow faster than the worldwide market. Over the next five years, China is expected to reach 40 percent of the global market for semiconductors, according to a recent PricewaterhouseCoopers (PwC) study. The research explored in detail the overall dynamics of the global semiconductor industry and the various factors that make China’s role in the global semiconductor market unique. Since beginning in 2004, PwC’s annual study “China’s Impact on the Semiconductor Industry” has examined the growth of the semiconductor industry in China. In recent years it has become clear that as opposed to the theory that China’s production volume would contribute to worldwide

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overcapacity and a subsequent downturn, it is China’s consumption that has had more of an influence on the global semiconductor industry. The most recent study reveals that the growth rate of China’s semiconductor consumption has been decelerating in the last four years. The recent slowdown in growth is attributed to a difficult global economic climate as well as the decline in transfer of electronic production to China. From a long term view, it appears as though China’s semiconductor market has passed through its high-speed development period. While future growth will likely be closer to the worldwide average growth rate, China represents an increasingly larger share of the worldwide market. Although slowing, the continued growth will be stimulated by a number of internal and external factors, from further worldwide industry cost and market restructuring and China’s very competitive support infrastructure, to the government’s longer term economic stimulus programs and continuously growing domestic demand. The domestic market is set to grow due to the Chinese government’s response to the economic downturn. Stimulus programs remain in place, such as the subsidy program for rural purchases of electronics that was extended nationwide in February 2009 and is set to drive the sale of RMB600 million worth of home appliances over its four-year duration. Overall, this could translate into RMB1.6 trillion in sales revenue and US$50 billion in semiconductor consumption. A subsidy program for the replacement of home appliances that was announced in May 2009 is also expected to have a positive effect on semiconductor consumption. Meanwhile, longer term stimulus programs targeting rail and air transportation, telecom networks, rural improvements and healthcare reform have the potential to further boost growth in the domestic consumption of semiconductors. There appears to be a strategic opportunity for major multinational semiconductor companies to team with appropriate government agencies in addressing these needs. Despite the current economic environment, electronic systems manufacturers in China continued to increase their consumption of semiconductors at a rate of 3 to 5 times the global average. Semiconductor


Worldwide Semiconductor Market by Region 2003-2008

consumption in this industry is set to grow further in China with the production of electronic products for domestic use projected to reach up to 40 percent of total production over the next five years. This could then increase the likelihood of government measures to develop the industry and reduce its reliance on foreign-owned intellectual property. This growth will also further increase the importance of semiconductor companies developing products to meet the unique requirements of the Chinese domestic market, as well as give companies the opportunity to make use of the situation by exploring acquisitions and partnering opportunities with local design companies who have considerable local intelligence. China’s leading original equipment manufacturers are purchasing a significant and increasing number of semiconductor devices. These players could be important for many of the international semiconductor companies intending to participate in the continuing growth of the Chinese semiconductor market.

Source: PricewaterhouseCoopers

China will continue to drive the next business cycle in the semiconductor industry as increasing consumer consumption and green energy initiatives drive future growth. Companies that have yet to gain a strong foothold in the Chinese marketplace need to ramp up their business development efforts to increase their market share; those who fail to do so will struggle to retain their foothold in the global semiconductor marketplace.

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A N A LY S I S

BY AARON GRUNDMAN, HONG YE AND JING NEALIS

Recent Developments for Non-residents Deriving Income in China ISTOCKPHOTO

A series of SAT circulars have strengthened the tax administration of foreign investors with income from China.

T

he Enterprise Income Tax (EIT) law, which came into effect on January 1, 2008, included many significant changes for foreign investors. These changes affect many non-residents engaged in business activities in China, whether those activities are in the form of cross-border services, exchanges of tangible goods, transfers of intangible property rights or financial assets, sourcing activities, or investments in China enterprises that process goods or perform other business functions. In 2009, China’s State Administration of Taxation (SAT) released a series of tax circulars intended to strengthen the tax administration for non-residents deriving income in China. The EIT law and recent circulars include provisions designed to enforce current tax policy and, in some cases, disregard the legal form of certain offshore structures that the SAT believes are used

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by non-residents for the purpose of eliminating or reducing income taxes on China-sourced income. In an effort to strengthen the enforcement of perceived abusive transactions, the EIT law includes general anti-avoidance rules. These provisions are written broadly and apply to many types of transactions, including non-residents’ use of offshore holding companies to either avoid non-resident tax on equity transfers or to access favorable tax treaties with China that would not otherwise apply. Prior to the EIT, many of these practices were not relevant because the law did not impose withholding tax on passive income sourced in China. Recent tax circulars provide a clear indication that the tax authorities intend to enforce the antiavoidance rules and scrutinize tax treaty shopping arrangements.

Non-resident share transfers On December 15, 2009, the SAT released Guoshuihan [2009] No. 698 (Circular 698), which addresses the transfer of shares by non-resident companies. This circular is the latest in a series issued by the Chinese tax authorities dealing with inbound investment into China and it clearly continues the tax authorities’ recent focus on nonresident taxation and reporting requirements. Circular 698 outlines reporting requirements and taxation guidelines for non-residents’ direct and indirect transfers of China enterprise shares and is effective retroactively from January 1, 2008. It also amplifies the EIT law and its implementation rules, which provide that a 10 percent tax will be imposed on gains from the transfer of a Chinese resident enterprise by a non-resident and, in certain cases, on the transfer of an offshore intermediary holding company that owns shares of a Chinese


resident enterprise. If the buyer is a Chinese enterprise in a direct share transfer, it is required to be the withholding agent. If the Chinese buyer fails to fulfill its withholding agent obligations, the nonresident seller must file a tax return within seven days after the share transfer or the receipt of the consideration, whichever is earlier. Conversely, if the buyer is a non-resident, the non-resident seller has the obligation to file the tax return and remit the tax. The non-resident seller may either fulfill this obligation directly or through a thirdparty agent. It is not clear at this time what the timeline is for the non-resident seller to file the relevant return and remit the tax. The circular also provides guidelines on how to determine the selling shareholder’s investment basis. In the case of an indirect transfer, reporting requirements apply if a transferor controls the transferred offshore intermediary although control has not yet been defined for this purpose by tax authorities. The circular states that if the actual tax burden in the jurisdiction of the transferred offshore intermediary holding company is less than 12.5 percent, or if the jurisdiction of the offshore intermediary holding company provides an income tax exemption for foreign-source income, the non-resident investor will be subject to the documentation requirements. The non-resident seller will also be required to submit all relevant documentation on the equity transfer and an explanation of the relationship between the non-resident and the offshore intermediary holding company to the tax authorities within thirty days after the equity transfer agreement is signed. It appears that the objective of the documentation requirements is to identify potential transactions falling within the general anti-avoidance rules. Any tax liability that could result from such an application to a nonresident seller is not described in Circular 698. Detailed rules regarding the implementation of this circular have not been provided, leaving a number of questions unanswered. For example, consider a direct transfer where a resident agent fails to meet its withholding obligation and the date of the relevant government authorities’ approval (and

corresponding effective date) precedes the date the consideration is paid by more than seven days. Given that the filing is required to be submitted no later than seven days after the earlier of the effective date of the transfer or the remittance of the proceeds, how could a non-resident seller make a determination within seven days of the transaction’s effective date that the Chinese buyer will later fail in its obligation to withhold tax when it remits the sale proceeds? Should the non-resident seller assume that the domestic withholding agent will not fulfill its obligation or should the seller wait until the domestic buyer transfers the proceeds? If the non-resident seller waits and there is a subsequent failure by the domestic withholding agent, the seller will be late in its filing responsibility. In light of the uncertainties, non-residents that are considering a direct or indirect share transfer or have transferred Chinese enterprise equity investments after 2007 should review the transactions to assess the potential tax liability and reporting requirements under Circular 698.

Treaty benefits for non-residents On October 27, 2009, SAT released Guoshuihan [2009] No. 601 (Circular 601), which provides guidelines for determining whether a resident of a contracting state is the beneficial owner of dividend, interest, or royalty income under China’s tax treaties. The circular became effective immediately and supplements other recent circulars focused on strengthening the administration of non-residents claiming tax treaty benefits. A tax treaty is a form of international law that dictates the taxing rights agreed upon by two contracting states with respect to residents of either contracting state deriving income in the other state. The primary objective of an income tax treaty is to prevent residents of the contracting states from being subject to tax in both states on the same item of income. In addition, a tax treaty typically provides reduced rates of withholding tax to the beneficial owner of certain types of income arising from sources in one of the contracting states. Circular 601 provides that the term “beneficial

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Recent tax circulars provide a clear indication that the tax authorities intend to enforce the antiavoidance rules and scrutinize tax treaty shopping arrangements.”


The recent documentation requirements also result in additional compliance and administrative burdens for nonresidents deriving income from China.”

owner” refers to a person who has the right of ownership and control over an item of income, or the right or property from which that item of income is derived. Circular 601 emphasizes that a company claiming to be the beneficial owner must be engaged in substantive business activities. This requirement could cause offshore holding companies without substantive manufacturing, sales, or service activities to not qualify as the beneficial owner of income under a tax treaty with China. The circular also provides that any agent or conduit company will not be regarded as a beneficial owner and sets forth guidance as to the type of entities considered conduit companies. Non-resident investors should review their current structures and consider whether group companies located in tax treaty countries are the beneficial owners of China-sourced income. In making this assessment, it should be noted that the statutory withholding tax rate in China for dividends, interest and royalties is 10 percent and can only be reduced to 5 percent in the case of dividends or 7 percent in the case of interest and royalties accruing to residents of locations such as Hong Kong and a few other countries with favorable tax treaties. Non-residents should consider whether the benefit of obtaining a reduced withholding tax rate under a treaty is significant in light of the compliance requirements described below and the beneficial owner substance requirements described in this latest circular.

Compliance for non-residents seeking treaty benefits As mentioned above, the SAT has intensified its tax administration efforts with respect to nonresidents. This trend continued with the issuance of Guoshuifa [2009] No. 124 (Circular 124) on August 24, 2009. The circular clarifies the procedures and documentation requirements for non-residents attempting to obtain benefits under China’s tax treaties. The circular became effective on October 1, 2009 and applies to two broad categories of outbound payments: passive income (e.g. dividends, interest, royalties and capital gains) and service payments (including payments

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that may or may not be attributable to permanent establishments and payments arising from dependent and independent personal services). Non-residents must obtain formal approval from tax authorities before the Chinese withholding agent can apply a reduced withholding tax rate on China-sourced dividends, interest, royalties or capital gains. The tax authorities will assess whether the applicant is a resident subject to tax in the other contracting state and whether it is the beneficial owner of the income. The approval will be effective for three years (including the year in which the initial application is submitted) for recurring income attributable to the same contract or in the case of dividends, the same shareholder. In addition, non-residents are required to file prescribed documentation with the tax authorities when applying the tax treaty provisions relevant to service payments. The filing requirement must be fulfilled before a tax liability arises or at the time the relevant payment is reported.

Conclusion The recent non-resident tax enforcement measures may have a significant impact on non-resident companies that use offshore holding companies to invest in China and seek tax relief under China’s bilateral income tax treaties, resulting in increased tax risk management challenges. The recent documentation requirements also result in additional compliance and administrative burdens for non-residents deriving income in China. The impact of the recent tax circulars described above should be assessed collectively in light of a non-resident’s business activities in China. We expect that Chinese tax authorities will continue to issue more detailed guidelines in the near future, including Circular 698 implementation provisions and additional guidance on merger and acquisition transactions. Non-resident investors in China should continue monitoring these developments. Aaron Grundman is managing director of the U.S. tax desk, Hong Ye is a senior manager and Jing Nealis is a manager of international tax services at Deloitte Touche Tohmatsu in Shanghai.


Testing

Inspection

CertiďŹ cation

Auditing

Advisory

Outsourcing

Training

Quality Assurance

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V I P V I S I TO R

B Y DAV I D B A S M A J I A N

AMCHAM SHANGHAI

A Strong Partnership

I

U.S. Senator Patty Murray discusses climate change and green technology.

n January, Senator Patty Murray (D-WA) led the InterParliamentary Group (IPG) on a trip to Beijing and Shanghai to meet with top-ranking Chinese legislative officials. The bipartisan Congressional delegation included Vice Chairman of the IPG Senator Christopher “Kit” Bond (RMO) and Senator Roland Burris (D-IL). Senator Murray first traveled to China with the IPG in 2006. Several of the main issues that confronted the delegation then – trade, international security, energy – remain the focus of official discussions today. The debate around trade policy and fair competition reveals changing economic and political environments. In 2006, the Murray’s IPG Congressional delegation warned against Chinese protectionist measures. This year, Murray advised Chinese lawmakers that members of Congress face strong pressure to look after their constituents and enact retaliatory measures in response to China’s indigenous innovation policy. It is clear that the economic downturn has added pressure to the discussions, and Murray herself noted that relative to more relaxed discussions in the past, this year, “passions ran high on both sides.” As the most trade dependent state in the nation, Murray’s own Washington State finds relations with China to be uniquely critical to the state’s economy, businesses, jobs outlook and communities. In January, AmCham Shanghai welcomed Senator Murray to speak with members about U.S.China policy and opportunities for engagement on greentech and clean energy issues. Afterwards, Insight sat down with the Senator to discuss her perspective on the changing state of U.S.-China business relations.

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On China’s role in climate change… Patty Murray: One of the discussions we have been having with Chinese leaders during our trip has been focused on our mutual need to reduce consumption of foreign oil and on our ability to move forward towards the development of new green energy technologies. China is making great progress in this area with many innovations that will be sold internationally and create jobs here in China. Likewise in the U.S., we have a lot of new green technologies being developed and I think we can have a joint effort that will help us move forward and help the whole world. I think we have an obligation to work together. On the opportunities and challenges for American companies in China’s greentech market… PM: It’s interesting; when I came to China for the first time in 1997, I brought Washington State businesses with me. It was Microsoft and Boeing and we faced the traditional trade issues faced by many companies coming to China. This time before I came to China, I met with companies in Eastern Washington and in Spokane, companies that are creating new green energy products and that are working with partner companies here in China. They are facing similar issues that Microsoft and Boeing faced over the years, in particular piracy and intellectual property rights protection. Times have changed in 10 years, in terms of the kinds of companies that are coming to China but they are facing many of the same issues. I see an opportunity for us to work with China in a new way, so that they can understand that some of these old problems are creating new problems with this important joint effort between our two countries to create clean energy. So I think this is a great opportunity. On the U.S. government’s role to promote U.S. exports and enhance U.S. competitiveness in China… PM: When I was first elected to the U.S. Senate in 1992, having grown up in Washington State where we are very trade dependent and know full well the importance of the Pacific Rim countries, I was shocked that whenever I talked about trade,


my counterparts always assumed I was talking about trade with Europe. But I think that has shifted since I arrived in the Senate as more and more people realized the potential in China for products we make in the United States, but it takes an understanding of the trade policies. We need to make this happen and it is a challenge. On the role of the IPG in U.S.-China relations… PM: The IPG was started in 2004 by Senator Daniel Inouye (D-HI) and Senator Ted Stevens (R-AK) and their counterparts in the National People’s Congress (NPC) here in China as a way for us to have a face-to-face exchange. Over time, I have seen that the IPG helps bring a better understanding to members of Congress. I can sit with my colleagues and explain how China sees a particular issue or to highlight an issue that we need to deal with. For China, it is very clear to me being here this week how much importance my counterparts in the NPC place on the IPG.

It has been two years since our last trip and I could feel the tension from some of my Chinese counterparts because we had not done this for several years. I could tell from how they talked to us that they were concerned that we didn’t think the IPG was important any longer. This is the kind of exchange that we need to maintain in the future. Even though as elected officials, we get a lot of press attention for international travel, often not positive, we need to recognize as a country that we need to invest in these face-to-face relationships amongst our elected officials and China’s top government officials if we want the U.S.-China commercial relationship to grow. We need to continue to invest in these kinds of programs. David Basmajian is Director of Communications & Publications at AmCham Shanghai. He can be contacted at david.basmajian@amcham-shanghai.org. Additional reporting by Chantal Grinderslev.

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I think that [China and the U.S.] have an obligation to work together.”


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EXPO FOCUS

BY LAUREN HILGERS

IMAGINECHINA

IMAGINECHINA

Standing Out at Expo

W

ith its extended timeframe and sprawling thematic scope, the 2010 Shanghai World Expo has come to mean many things to many people. At the same time, it is a showcase of sustainability, a gathering of cultures, an architectural playground, a technology fair, and even an ongoing construction headache. Even among the event’s corporate sponsors and global participants, there are a variety of perspectives and definitions. There is one thing, however, where everyone agrees – the World Expo is an unparalleled opportunity for branding in China’s domestic market. During the six-month event, 70 million visitors are expected to descend upon Shanghai, visiting the pavilions and booths of 192 participating countries and 50 organizations. According to Wasim Basir, Coca-Cola’s market activation director for the World Expo, one need only look at the numbers to understand the excitement. “It makes sense that this is a ‘can’t miss’ event,” said Basir. Compared to the Olympics, where international interest was piqued and global audiences tuned

in to root for their countries, the audience for the Expo is largely domestic. Of the 70 million projected attendees, some expect that all but 2 million will be Chinese. It is commonly pointed out that, if the Beijing Olympics were an opportunity to introduce China to the world, the World Expo is a chance to introduce the world to China. “That saying is quite right,” says Debby Cheung, group managing director at Ogilvy Public Relations Worldwide China. While the Olympics attract attention from any country with participating athletes, interest in the Expo is primarily domestic. “We’re really talking about reaching out to a Chinese audience,” said Cheung. “If a [company’s] objective is to reach out to an international audience, I would advise they reassess their strategy.”

A domestic target For companies, the event offers a window into China’s domestic market that has played an important role in China’s relatively quick economic recovery. With expectations high for a continued increase in domestic consumption, the opportunity to reach consumers is well-timed.

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The World Expo is a "can't miss" opportunity to reach Chinese consumers.


The long duration of the Expo demands a different kind of involvement from participants than shorter, more easily televised events.”

According to a series of online surveys conducted by Ogilvy and Millward Brown-ACSR, buzz is building around the event in Shanghai. Forty-two percent of the survey’s respondents from across China indicated a desire to visit the Expo and, excluding ticket prices, visitors plan to spend an average of RMB1,522 at the Expo. Ogilvy also points to growing chatter on the internet to illustrate awareness of the Expo among the domestic Chinese audience. In a survey of more than 13,000 websites, Ogilvy found increasing discussion about ticket prices, promotions and ways to purchase tickets. The survey also noted that many Chinese citizens who are planning to visit the Expo and have already purchased tickets have taken to posting photos of their tickets online. When NBA star Kobe Bryant recently wrote on his Chinese-language blog that he hoped to visit Shanghai during the Expo and make use of Expo tickets he received during his last visit to China, the post received more than 80,000 visits and more than 1,000 comments within days. The long duration of the Expo demands a different kind of involvement from participants than shorter, more easily televised events, says Cheung. “People are really going there, so the brand experience is going to be key,” she said. “The ability to attract people to your space, whether it’s a small booth or a stand-alone pavilion, will be very important.” Word-of-mouth will also be important in building awareness of a company’s presence at the Expo, so “digital becomes one of the most important marketing weapons,” added Cheung. VIP visits will also play a big role in the event. Companies that have sponsored country pavilions will have opportunities to treat their VIP customers to a unique experience. “In this way, the event is more B to B than B to C,” said Cheung, comparing business to business branding with straight-toconsumer branding. In its survey, Ogilvy also discovered that despite initial fundraising difficulties that plagued its development, the USA National Pavilion is the most anticipated sight at the Expo, followed by France, the UK and Japan. Interest is driven largely by the familiarity of visitors with the country as well as the pavilion’s theme.

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Denmark, for example, has generated a large amount of interest after announcing it planned to transport its famous statue of the Little Mermaid, which typically makes its home in the Copenhagen harbor, to Shanghai for the duration of the Expo. “The fact that the mermaid will be here has made Denmark, as a pavilion, stand out,” said Cheung.

Finding an angle Companies sponsoring the Expo, or the different national pavilions, are all taking different angles on the theme of the Expo to build their presence in China, coming up with a number of strategies that reflect the flexibility of the theme, “Better City, Better Life.” For 3M, a sponsor of the USA Pavilion, the Expo offers opportunities as good if not better than the Olympics. “As I understand it, the Olympic Games are to showcase sports and the World Expo is to showcase economic development,” said Patrick Chen, general manager for corporate marketing and public affairs at 3M China. “Hence, events like the Expo make it easier for companies like 3M to get involved.” Chen says that 3M’s decision to become involved in the event was primarily to support the United States’ presence at the event and encourage exchange between the two countries. The good publicity, however, has been more far-reaching and beneficial than 3M had expected. “We happened to be the first sponsor,” Chen says. “Our sponsorship was very well recognized and promoted by local governments and other influential folks – this did help us build a brand image.” During the Expo, 3M plans to stay close to the theme of sustainability. The company will showcase some of its technologies at the USA Pavilion and intends to have 3M leaders participate in a series of Expo seminars about sustainability and green cities. The company also plans to encourage its employees and top clients to attend the Expo, taking the opportunity to fete some clients with a visit to the USA Pavilion. The Expo offers more than one window into China’s domestic market. Cisco Systems, an international supplier of networking systems, is looking to build its name among two different


CISCO

audiences. “We really want to bring our message to any attendee at the Expo,” said Anthony Elvey, director of the World Expo 2010 program for Cisco. “But the people who we really need to understand our message are government officials, developers and urban planners.” This is Cisco’s first World Expo and it is taking the event seriously. The company is a senior sponsor of the Expo and will also be hosting its own pavilion. Elvey boils the company’s enthusiasm down to the importance of the China market as the world’s population continues to flock out of the countryside and into cities. “Over the next five to ten years there is going to be a massive shift of urbanization throughout the world,” said Elvey. Cisco expects its network infrastructure products to play an important role in urbanization. Cisco’s initial Expo involvement began with its decision to sponsor the event. The company agreed to provide networking technology and services to the Expo Bureau, including the infrastructure needed to run the four main Expo buildings. The first sponsorship agreement grew out of the company’s existing commitments in China. “We have commitments to infrastructure projects with the central government, the Shanghai government and many of the utilities and services in Shanghai,” explained Elvey. As Cisco’s commitments grew, however, the company began to consider how the “Better City, Better Life” theme was evolving. “The Expo has some unique characteristics that are important to us,” said Elvey. “The event will be a magnet for people interested in urbanization – the urban best practices area will attract the kinds of attendees that we’d like to talk to.” Soon after, the company decided to extend its investment and stage its own corporate pavilion. Elvey expects the Expo to provide an interesting forum for debate about sustainability and the role of cities in the future, with representatives from the World Trade Organization, the United Nations and the World Bank on hand. “We believe that, for the world to benefit from urbanization, new decisions have got to be made on how those cities are built,” said Elvey. “How can you improve things like healthcare and social order?” The Cisco pavilion will portray the “simulated

true-life story” of a citizen in 2020 living in a “connected world.” Visitors will follow an extended family as they go about their day in a city of the future. The experience will illustrate how city technology keeps the family connected and makes their lives easier. “It demonstrates the kind of values cities will be able to have in the future,” said Elvey, “with a focus on harmonious society.”

Consumer connection Coca-Cola is taking a very different approach to Expo sponsorship, focusing primarily on its established connection to domestic consumers. The Coca-Cola corporate pavilion will focus on one of the company’s core values – living positively. The pavilion will be a place where “visitors will experience the physical, emotional, and spiritual refreshment of Happiness and Optimism to the fullest.” In addition to the pavilion, Coca-Cola is a global partner of the Expo and will be selling drinks inside Expo grounds. “We will have over 100 outlets serving an average of 500,000 drinks a day during the Expo period,” said Basir. For Coca-Cola, the real difference between the Olympics and the Expo is duration. “The activities we’re planning have a longer gestation,” said Basir. Earlier this year, Coca-Cola launched a year-long initiative to send Haibao, the World Expo mascot,

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GREAT EXPECTATIONS: Cisco, as a senior sponsor of the Expo, will have its own pavilion to showcase a "connected world" to visitors.


We wanted to carry the message to a broader base than people who are going to be visiting the Expo. We have to think longer-term.”

and three “happiness ambassadors” on a trip around the world. “This is a great way to showcase China to the world and increase interest in the Expo,” added Basir. Chinese fans will be able to follow Haibao’s trip online and a forum is available for fans to upload their own personal stories of happiness. “We wanted to carry the message to a broader base than people who are going to be visiting the Expo,” said Basir. “We have had to think longer-term.” If branding campaigns are running longer, companies involved in the Expo also expect benefits to continue past the six-month run of the event. “The kind of people we’re talking to, particularly in government and urban planning, they work in long time frames,” added Cico’s Elvey. “They’re going to be seeking help and expertise from companies like Cisco for many years to come – some of the outcomes of this may last three, four or five years.” If companies haven’t become involved with the

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Expo yet, they are arriving a little late, says Ogilvy’s Cheung. Instead, she suggests opportunities outside of sponsoring pavilions or buying on-site advertising space. “There are going to be 20 thousand events during the Expo,” said Cheung. “This will be another opportunity for sponsors to get involved.” Companies could also be looking to “ambush” visitors to Shanghai. “You’re talking about 70 million people in Shanghai and a lot of media coverage nationally.” Airports and train stations are prime locations to reach consumers. Some companies may even venture outside of Shanghai to adjacent cities like Hangzhou, said Cheung. “This is a golden time for companies to be looking at how they could stand out.” Lauren Hilgers is a Shanghai-based freelance journalist. She can be contacted at lauren.hilgers@gmail.com


A U TO M OT I V E F E AT U R E

BY JUSTIN CHAN

ALIXPARTNERS

The Road to Profitability

B

eset by a decade of declining sales and several years of billion-dollar losses, General Motors reported shortly after the collapse of Lehman Brothers in the fall of 2008 that it would run out of cash by early 2009. After securing funds from the Troubled Asset Relief Program (TARP) on December 31, 2008, General Motors went through a tough restructuring assisted by President Barack Obama’s Automotive Taskforce that resulted in a massive bankruptcy filing last June. Soon after revealing its dire financial projections, GM enlisted corporate turnaround expert Al Koch, vice chairman of AlixPartners, a global business advisory firm. As GM’s chief restructuring officer, Koch assisted GM’s top leaders with the development of contingency as well as turnaround plans, looking at ways not only to cut costs but to return what was once the world’s largest automaker to a position for success. Following bankruptcy proceedings where a new GM entity purchased the company’s most profitable assets and trademarks, Koch also became chief executive officer of the “old GM” (officially known as Motors Liquidation Co.), where he is responsible for divesting the remaining assets. With turnaround experience in several industries including manufacturing, construction and retail, Koch helped lead a restructuring that set the stage for GM Chairman and CEO Ed Whitacre to recently say that the company can return to profitability in 2010. During a recent visit to Shanghai, Koch met with AmCham Shanghai members and sat down for an interview with Insight to discuss his experience with GM.

On the corporate turnaround process… Al Koch: There are really three stages of a turnaround for any company. First, you need to stabilize operations and provide a mechanism for liquidity to get through the turnaround. Second, you need to fix the core business because companies get into trouble for a reason, and if you deal only with the capital structure and don’t also deal with fundamental underlying issues that got you into trouble, the only question is when you will be back at the table again. Lastly, you position the company for organic growth in order to successfully participate in the economy going forward. On the decline of GM… AK: The rapid decline and bankruptcy was a result of the catastrophic failure of the global financial sector, but GM’s structural problems had been there for a long, long time. In fairness to the company, the American consumer is enormously fickle about the kind of vehicle that they want to buy. When oil prices went up and gas went to US$4 per gallon, nobody would touch a truck or SUV. The reporters said, “Look how stupid GM is to

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Insight talks to Al Koch of AlixPartners on the restructuring of General Motors.


IMAGINECHINA

POLE POSITION: General Motors' Buick nameplate is one of the leading brands in the China market.

be building these big vehicles when nobody will buy them.” But when oil prices went back down, hybrids and small vehicles were sitting on lots. Without a consistent energy policy in the United States, it is really a guessing game on the part of auto executives. The business plan depends on the size of the market, the company’s market share and where oil prices are. Plus, it’s a “slow clock-speed” industry so if you want to make a change, it cannot be done quickly. First, you’ve got to sell what you’ve got and it takes a long time to design and do everything that is needed to bring out new vehicles. For many years, the “Big Three” auto companies, Ford, GM and Chrysler, were all selling SUVs and pickup trucks and making lots of money because oil prices were low. That tends to blind you to the fact that someday, things may change. You have to make what people will buy, and what people are willing to buy with gas at US$4 is very different than what they will buy with gas at US$2.70. You would think it shouldn’t make that much difference but it does. There are certainly some long-term systemic issues that had caused the decline over a long period of time but hopefully we’ll have a more

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consistent energy policy and GM will now be able to focus with fewer brands and be in position to meet customer demands no matter what happens to oil prices. On securing funding to survive… AK: In September of 2008, Lehman Brothers filed for bankruptcy and the world changed overnight. Credit markets around the world seized up and it was very clear that GM needed cash in order to survive. GM went from having a cold to getting pneumonia overnight and it did not have a lot of time to react. In November, the CEOs of the Big Three all went to Washington, D.C. to appear before Congress to make a plea for public financing to tide the companies through the difficulty. The threat of running out of money was real and not something that was being conjured up. It appeared that Congress was going to come through, but it was very political. One day, the deal was on, and the next day, it was off. We really reached a point where it honestly was not clear what was going to happen. After the hearings, the CEOs were sent back to develop a viability plan to present to Congress


in early December. GM went to work over Thanksgiving, bringing in three shifts of analysts who were literally working 24/7 in order to develop a plan. In December, that initial viability plan was presented to the Senate Banking Committee and the House Financial Services Committee. One of the first things that I did was work with GM on developing a possible “go dark” strategy. The company made payments to parts suppliers once a month and if Congress didn’t come through, GM wouldn’t be able to pay vendors on January 4. If that occurred, GM would need to shut down every single plant and only keep essential workers. At what was nearly the last moment, President George W. Bush, who was about to leave office, appeared to decide that if GM failed, it would not be on his watch. He approved TARP funding for GM in order to tide the company over until President Barack Obama assumed office. Following the completion of the loan agreement, the Federal Reserve was kept open on December 31 to transfer money to GM so that supplier payments could be made on January 4. On figuring out a way to save GM… AK: Two of the Automotive Taskforce members, Harry Wilson and Matthew Feldman, became the face of the GM restructuring. As soon as they were appointed, they went into high gear to vet the business plan that had been prepared by GM and the different options as to how a restructuring might occur. One of the issues was that almost every problem on its own appeared insurmountable. The elephant in the room that we were dealing with was that money was being borrowed from the U.S. government and if all we did was replace bond debt with government debt, we would still have a capital structure that could not be supported. At the same time, GM also needed to satisfy bondholders and reach a labor and healthcare agreement with the United Auto Workers (UAW). Efforts to refine the business plan continued to move forward and in April, the Automotive Taskforce laid out its restructuring plan for GM. I thought it was the perfect solution because the government would buy the “good” assets from GM and put them into a new company under

a Section 363 sale, which is a section of the bankruptcy code that permits a judge to authorize the transfer of assets without going through a plan of reorganization. The government would also convert a significant portion of debt to equity. That was the telling moment to me, which said, “This is not a company that is going to be on life support going forward. This is a company that’s going to successfully restructure.” After reaching agreements with the bondholders and the UAW, GM filed for bankruptcy on June 1. The company also announced around that time that the Pontiac, Hummer, Saab and Saturn brands were going to be sold or discontinued. The sale of assets from “old GM” to “new GM” was approved on July 5, 2009 and closed on July 10, 2009, just 39 days after GM filed for bankruptcy. It was quite remarkable. I remember the lawyers saying there’s no way we could it, but somehow, we did it. On working with the U.S. government… AK: A lot of people ask about the involvement of the U.S. government, if that was a good thing or if it would have been better to let GM fail – absolutely not. If GM had been allowed to fail, it would have taken down the world automotive industry. Many large suppliers could not withstand not getting paid and we would have begun to see rolling bankruptcies and unemployment coming through the automotive sector. If you’re manufacturing a car, you either have all the parts or you don’t, and if you don’t have all the parts, you can’t make the car. There isn’t a manufacturer in the world that wouldn’t have had a part that it needed from somebody, somewhere, that it couldn’t get. So had the industry gone down, it would have pushed the world into a deep depression, as opposed to having the terrible recession that we had and the huge financial pain that we all went through last year. It would have been much, much worse. The Automotive Taskforce was comprised of private sector people who left what they were doing to come into the government and work for government wages. They worked very hard, completed a very tough deal, and they did a great job for the government. Bottom line, GM should be poised for success today. The company, together

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If GM had been allowed to fail, it would have taken down the world automotive industry.”


What you have to count on is that you learn your lesson when you go through something like this.”

with the Automotive Taskforce, got something done in just a few months that would have taken a far smaller company two years to do. On the future for GM… AK: I am very optimistic for a couple of reasons. One, the company now has a terrific capital structure. For years, it was burdened by debt obligations that were really crushing the company. Second, GM is now focused on four core brands while before they were trying to support seven brands. Chevrolet, which has a large market share in the U.S., and Cadillac, which has been revived very nicely, are the two primary brands. They are supported by Buick and GMC, which both appear to be quite profitable. It will be important for the company to stabilize its market share because you can’t lose market share forever, but now GM has the capital structure to try and do that. When you have new management, you tend to look at the world differently. When I moved to

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Detroit in 1981, GM was the king of the hill and over the years, they were too slow to recognize that the world was changing in some areas. What you have to count on is that you learn your lesson when you go through something like this. I believe they have, and I believe they will be very vigilant going forward. Prospects for the China market… AK: What we will see in Asia is the increasing importance of the Chinese market. I think GM and its partners in China are well-positioned to have a significant share of the market. In that sense, as a leader, to be the number 1 or number 2, in a great market is exactly where you want to be. The American market is going to have slow growth or even no growth at best. The Chinese market is going to grow exponentially and I think GM is positioned to take advantage of that. Justin Chan is Editor-in-Chief of Insight. He can be contacted at justin.chan@amcham-shanghai.org.


I N T E RV I E W

B Y DAV I D B A S M A J I A N A N D J U S T I N C H A N

THE OFFICIAL WHITEHOUSE PHOTOSTREAM

Closer and Closer

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espite an increasingly close relationship marked by regular engagement and communication, U.S.-China ties are widely considered to be experiencing some growing pains. Whether regarding currency, Taiwan arms sales, internet freedom or chicken feet, 2010 will be a test of how the United States and China address and overcome difficult issues. Since U.S. President Barack Obama took office last year, he has met with his counterpart Chinese President Hu Jintao five times, in addition to instituting the Strategic and Economic Dialogue (S&ED) while continuing the Joint Commission on Commerce and Trade (JCCT) and reinstituting a dialogue between the National Reform and Development Commission (NDRC) and the State Department. Such a strong commitment

to engagement means that the two countries will be able to overcome any bumps in the road, says William Weinstein, minister counselor for economic affairs at the U.S. Embassy in Beijing. In fact, such difficulties are to be expected in a relationship as deep and complex as the one between the U.S. and China, he adds. As minister counselor for economic affairs, Weinstein works with an Embassy-Beijing inter-agency team that represents nearly every major economic agency, including the State, Commerce and Energy departments, the U.S. Trade Representative and the Food and Drug Administration. His staff works on everything from macroeconomic reporting and developing the S&ED to issues such as outward foreign investment and global resources. For a closer look at economic relations between the U.S. and China,

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U.S. EmbassyBeijing’s Minister Counselor for Economic Affairs William Weinstein talks about the increasing interrelatedness of U.S.-China ties.


With such a large, robust trade relationship that is so engaged, there will be conflicts; the test of the relationship is how conflicts are addressed.”

Insight recently sat down with Weinstein to discuss the state of play and issues such as indigenous innovation and green technology. On the state of the U.S.-China relationship… William Weinstein: Through the S&ED and the JCCT last year, we established a very close and frank conversation with the Chinese government on economic and trade issues. Cooperation during the economic crisis was very effective in coordinating government policies in a way that truly impacted the whole world. But coming out of that crisis in an environment where stimulus is the driving focus of the economy both in the United States and in China, there will be imbalances because the market isn’t functioning in its purest way. We have a large and complex relationship and there are going to be bumps in the road. Looking historically, there have been cycles of great convergence of our interests as well as divergence. We are now hitting a few bumps in the road, but because China is a World Trade Organization (WTO) member and we are in a rules-based international system, these bumps in the road are not about breaks in relations or even breaks in communications. They are about cases brought through the international legal architecture on trade. While the Chinese government has come out and warned against protectionism and claimed that several U.S. anti-dumping and countervailing duties (AD/CVD) cases amount to foreign protectionism, I would argue that they are part of the rule-based system. Looking at Chinese actions at the WTO over the last few years, they have also brought many AD/CVD cases against the U.S. and other countries. The value of the cases brought between the U.S. and China are a very small part of our total trade. Although there are disputes in certain areas, the talk about trade wars is really overblown. Even during the recent tire case – brought under the special remedy that China agreed to in its WTO accession – the U.S. had ongoing consultations with China. They were very forthright and even though there has been a bit of a drumbeat about protectionism and dissatisfaction on the Chinese

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side, both sides came to the table with the idea to solve the problem. Unfortunately, we just couldn’t find a way within the WTO rules to do it. Just because of where we are in the world economic system, I expect a bumpy road in 2010. Still, there has been no interruption in our communications. Planning continues for the next JCCT, the dialogue between the State Department and the NDRC, and the next S&ED. With such a large, robust trade relationship that is so engaged, there will be conflicts; the test of the relationship is how conflicts are addressed. We are at the stage in a mature U.S.-China relationship where we can deal with these issues honestly and get through them calmly. The dialogue is deeper and more sophisticated and it is a signal of China’s emergence. It is also recognition by the U.S. government of the importance and interrelatedness of the relationship. On potential changes in the United States’ China policy… WW: President Barack Obama has shown a way forward since the beginning of his administration, from Secretary of State Hillary Clinton’s first trip to Asia to the fact that he has met with Chinese President Hu Jintao five times in less than one year. We are on a good path with an established conversation where we can deal with different issues – no single issue is going to take us off track. What we’re seeing is a policy of engagement; deepening that engagement and moving towards partnership is an evolution. You set a policy and then you work through the events that happen because no one can predict what will happen even the following week. On potential issues of concern… WW: Certainly the situation in the United States with high unemployment and the elections in November are going to be a focus of policy in Washington, D.C. The situation in the U.S. will push policies carried out by the Embassy in a certain direction, but the question is how different those policies will be from current policies. For instance, because we have 10 percent unemployment in


the U.S., protecting intellectual property rights in China might seem more important or more urgent now than it was five or six months ago. But the conversation is still the same. Across the board, our policy is to engage China on regulations and other regulatory actions that affect U.S. companies, whether it is companies that are exporting to China or companies that are invested in China. We have a consistent policy that addresses the interests of our businesspeople and our companies. I don’t see us wavering from that. On indigenous innovation product accreditation… WW: We have consulted Chinese officials about the indigenous innovation product accreditation system and it is not just the United States that is concerned. The European Union, Japan and Korea have also made their opinions known. Such a universality of concern from the international business community towards this policy is something that is hard for the Chinese government to ignore. The policy itself is a list that has to be codified into a policy, which hasn’t happened yet. What we’ve seen from the test markets in Shanghai and Beijing is that very few U.S. companies have qualified under the test regimes on indigenous innovation to list their products. Does this mean that if implemented, no foreign invested company will be able to bid on tenders or be at a disadvantage? It is hard to say. In some cases, there might not be a suitable Chinese product or they might find themselves with inferior technology. We are in favor of and encourage innovation in China. Many of our companies have invested in research and development (R&D) here and continue to invest in R&D in a big way. China has an interest in technology transfer in order to move up the value chain. As can be seen from the President’s trip to China and then the climate change negotiations in Copenhagen, another big interest is in creating technology together. For that, the U.S. and China have a memorandum of understanding on joint research in clean energy. There are lots of ways for China to advance and our position is that the indigenous innovation accreditation policy isn’t the most efficient way.

China should not go through with this, but instead enter into consultations with us so we can find a different model that won’t have the impact that we predict this might have. On greentech opportunities in China… WW: The United States has the latest and best in green technology and there are Chinese companies producing a lot of greentech that is probably a generation or two behind. That gives the U.S. an advantage in the marketplace that we should take advantage of, but it also gives us great opportunities to partner with Chinese companies here. We should take the competitive advantages of U.S. and Chinese companies and put them together to create the conditions to address climate change. China has come out with goals on clean energy and the U.S. has something to contribute. On the impact of the Copenhagen Accord… WW: In any of these large international meetings, there are big goals in the beginning and then the participating countries must find a way to achieve an outcome. Typically that outcome is going to involve a lot of compromising. U.S. negotiators went into the Copenhagen summit in December knowing that what they wanted ultimately was probably not attainable at this one meeting. We see this as a process and we look forward to seeing what all countries commit to and how we can monitor the progress. The fact that the Chinese came with a proposal was significant and we will continue to engage them on their proposal and present our aims and goals as well. Both the U.S. and Chinese governments understand that this is one of the most important, if not the most important, issue facing our generation. There are hard political decisions to make but we can find a way forward. These are the kind of things that may be construed by the media as being able to stop the relationship in its tracks, but in fact, these are the issues that test our ability to have a constructive relationship. You have to look at the long term view and I’m optimistic. Everybody is looking at goals for clean energy and the discussion isn’t about if, it is about what and when.

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Everybody is looking at goals for clean energy and the discussion isn't about if, it is about what and when.”


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C OV E R S TO RY

B Y C H A N TA L G R I N D E R S L E V

A New Frontier Over the past seven years, annual Sino-African trade growth has averaged over 40 percent, as China recently became the continent’s second-largest trading partner, as well as its largest lender. The number of Chinese enterprises doing business in Africa has doubled since 2006 to nearly 1,600 and it is China that has built the transportation infrastructure that connects many of the African supply chains. While many consider China’s push into Africa as a mission for natural resources, the evolving China-Africa relationship is one of expanding trade flows and business investments.

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lthough many attribute China’s presence in Africa to a desire to secure energy resources to feed its industrial and economic growth, China’s expanding presence now includes infrastructure projects, small-scale entrepreneurship and even financial institution concerns. Specifically, China’s Africa involvement and “Go Global” policy prioritizes access – access to commodities, global production networks and markets – with a strategic eye to long term development. China’s surging growth requires increasingly large amounts of raw materials and Africa has become a focal point of Beijing’s quest to source necessary supplies. China imports roughly 40 percent of its oil supply, one-third of which comes from Africa. Although Africa claims just 8 percent of the world’s known oil reserves and accounts for only 11 percent of world production, 85 percent of the world’s new oil discoveries between 2001 and 2004 were located in western and central Africa. The 71 percent increase in Chinese oil imports from the continent between 2003 and 2005 makes the extent of Chinese interest in securing productive relations with African nations hard to overlook. Over the past two decades, China’s ventures in Africa have merged business, economic and political interests to obtain broad access to natural resources. China has willingly played the role of both competent colleague and financial friend, funding development where needs align with Chinese interests and objectives. China has twice forgiven debt

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RESOURCE GRAB: In December, Nigeria’s presidential adviser on energy said that Chinese companies proposed oil purchases worth up to US$50 billion.

to African countries, first more than RMB10 billion in 2002 and again after hosting the first ChinaAfrica Summit in 2006, when another RMB10 billion owed by 33 African countries was cancelled. While in Egypt last November for the China-Africa Summit, Chinese Premier Wen Jiabao pledged to forgive more debts owed by poor African nations in addition to providing US$10 billion in cheap loans over the next few years.

Aid for resources China’s economic assistance to Africa primarily comes in the form of export credits and concessionary loans, which Beijing appears to favor over simple grants. As exhibited in recent deals with the Democratic Republic of the Congo and Sudan, China regularly accepts oil as collateral for loans. China’s Export-Import Bank (ExIm Bank) calls this the “Angola Model” where resources are exchanged for infrastructure, following a US$2 billion loan for infrastructure projects to Angola in 2004 that was guaranteed by oil. “[China] can use these loans as leverage over recipient nations. Evidence suggests that if countries build closer political and economic relationships with China, Beijing then forgives loans on an orderly timetable,” said Josh Kurlantzick, former scholar in the Carnegie Endowment's China Program. “When nations have asked China for grants instead of loans, Beijing generally has refused.” Moreover, loans are often made with a certain expectation that a portion of newly funded contracts will be awarded to Chinese companies. Some 70 percent of contracts resulting from the 2004 Angola loans were reserved for Chinese firms,

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employing more than 2,500 Chinese workers. On the whole, Chinese funding has financed projects that make Africa more conducive to doing business – with Chinese companies. To date, Chinese loans to the continent have been focused on financing infrastructure, primarily in hydropower and transportation. Of the estimated US$33 billion worth of Chinese assistance and investment projects in Africa from 2002 to 2007, 54 percent was spent on infrastructure-related projects. Notably, a total of 70 percent of Chinese infrastructure financing in Africa was allocated to the oil-rich nations of Angola, Ethiopia Nigeria, and Sudan. Overall, infrastructure construction has played a central role in both Chinese strategy and business success. In 2006, Chinese contract labor in Africa increased to US$9.5 billion from less than US$2 billion in 2001, accounting for a full 31 percent of China’s offshore contracted projects. In earlier research on China-Africa ties, Kurlantzick found that Chinese construction firms could complete major construction projects at less than a quarter of the price quoted by Western firms. In Botswana, Chinese firms have won 80 percent of contracts up for bidding. Analysts cite competitive advantages such as a track record of efficient and timely project completion in Africa, low labor costs from using Chinese engineers and technicians, and a willingness to accept lower profit margins as the reasons why Chinese construction companies routinely win work. At the same time, critics posture that many Chinese firms forgo profit margins and underbid project costs to ensure contract wins and market entry.

Increasing commercial ties Although recent increases in China’s trade with Africa reflect soaring oil and mineral imports, there is some evidence that trade flows are changing as China seeks to develop overseas markets for Chinese products. Between 2001 and 2006, Africa’s exports to China increased by an average of 40 percent each year while African imports of Chinese goods grew by an average of 35 percent. In 2008, total bilateral trade jumped 45.1 percent year-on-year to a record US$106.8 billion. Oil, gas and mineral resources continue to dominate African goods flows into China, accounting for 82 percent of exports in 2008 exports. In recent years however, exports have become more diversified as African countries


gain the capability to produce and manufacture products, often with the help of China. “China is expanding its business in infrastructure constructions, manufacturing, hydro power, solar energy, wind energy, medical research and equipment, and water treatment,” according to Dr. Jean Marie Cishahayo, expert and advisor of the United Nations China-Africa Business Council. Even with steady growth, Chinese officials are keen to further expand Sino-African business. The government has instituted measures ranging from exempting import tariffs for more than 190 preferential commodities (food, minerals, natural resources and raw industrial inputs) to offering master classes on how to do business in Africa. In addition, both the China-Africa Development Fund and the China ExIm Bank actively support joint ventures with private equity firms. Large, promising Chinese companies in a strategic position to enter the global market can count on favorable loans from the Chinese government for international expansion. According to management consulting firm Accenture, the China Development Bank offered leading telecommunications giant Huawei a low-cost US$10 billion loan in 2004 to fund expansion into overseas markets. Within two years, Huawei had won US$400 million in contracts for the provision of mobile phone services in Kenya, Nigeria and Zimbabwe. In 2008, Huawei’s contract sales grew 23 percent in Sub-Saharan Africa and 40 percent in North Africa and the Middle East. Today, Huawei is the largest provider of CDMA mobile phone technology in Africa. “Huawei's technology is advanced, allowing Africa to keep up and in some cases lead in the adoption of value added services globally,” said Abi Adisa, president of alternative asset company Oridun Capital Management, which operates in West Africa. By lowering operating costs for carriers, Huawei has lowered the costs of communication and increased access and availability. Mobile phone ownership is quickly becoming the primary means of internet access in Africa while broadband connections remain sparse and unreliable. Expanded mobile phone service has “increased productivity at all levels,” said Adisa. “Going forward, mobile phones will drive internet usage in Africa as access on phones becomes faster and cheaper.” By funding training programs and partnering with local universities to develop technical skills programs, Huawei has demonstrated its commitment to Africa. Chinese investment and

skill sharing “are helping establish industries, jobs, and wealth for local populations,” said Adisa. On the other hand, Chinese managers have complained that skilled labor is difficult to find, particularly in technical sectors such as engineering and energy. Many Chinese companies have resorted to importing their own workers, managers and equipment, resulting in occasional outpourings of discontent among local African communities. As the industries and markets develop in Africa, experts expect an increased demand for local knowledge transfer and in-country production in coming years, potentially further complicating labor relations.

Reaching African consumers In sharp contrast to the media image of a Beijingled push behind all Chinese activities in Africa, the United Nations Conference on Trade and Development (UNCTAD) contends that up to 80 percent of Chinese investments in Africa are by small- and medium-sized enterprises (SMEs). SMEs are expanding more rapidly than state-owned enterprises and penetrating both urban and rural areas alike. These businesses have thus far received minimal government support and range from entrepreneurial small goods importers to local Chinese restaurants and services established to support larger company activities on the ground. Recognizing the astuteness of small companies in identifying business opportunities, the Chinese government began offering assistance to SMEs in 2007. The government began creating special development zones in areas where Chinese businesses have already concentrated in Africa. Such zones endeavor to facilitate SME access to credit and government channels and assist companies in finding suitable partnerships, while also enabling Beijing to keep better track of smaller Chinese players on the continent. A number of Chinatowns have sprouted across Africa, from Dakar to Khartoum, reflecting increased Chinese immigration to the continent. Over the past decade, an estimated 750,000 Chinese citizens have moved to Africa. Many smaller Chinese entrepreneurs are engaged in manufacturing and trade, further playing into China’s Go Global and market adaptation policies. Price-sensitive African households welcome the cheap daily use Chinese goods that satisfy constrained budgets. At the same time, cheap consumer goods have even given work to the unemployed in poor countries like Senegal, where

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Chinese investment and skill sharing are helping establish industries, jobs and wealth for local populations.”


Chinese businesses are increasingly viewing Africa as a new destination market for their goods.”

“street merchants” sell Chinese products at a minimal profit margin to earn a living. According to Cishahayo, more than 90 percent of Africa’s imported consumer goods are made in China. Chinese businesses are increasingly viewing Africa as a new destination market for their goods. Since the 1990s, most investment outside of resource extraction has been aimed at the machinery and equipment sectors, where China now claims an estimated 70 percent of the local market. Whether automobile parts, computer hardware, cosmetics, furniture, machinery or stationary, Chinese products often dominate their categories in many African markets. To produce goods for the local market, several major Chinese companies have opened production facilities in Africa, including Haier Group in Tunisia, Shinco in Nigeria and Hisense in South Africa. Even South Africa’s Nelson Mandela Bay Stadium, site of the 2010 World Cup, has seats supplied and assembled by a leading Chinese sports equipment company – Zhejiang Dafeng Sports Equipment Co.

Evolving trade environment Despite rapid facility expansion, Chinese firms remain wary of sunk investments in difficult African marketplaces. A primary complaint by Chinese officials and businesses is that the business environment in African countries – with inefficient burdensome approval processes, poor infrastructure, corruption and an uncertain regulatory climate – is not conducive to commercial activities. Yet, in countries with better business environments such as South Africa, there is rapid expansion and progression of bilateral trade. China became Africa’s second largest trading partner after the United States in 2009. At the same time, South Africa bypassed resource-rich Angola, which is Africa’s largest oil producer, to become China’s largest African trading partner a mere 10 years after establishing diplomatic and trade relations. For the past decade, much of Africa has imported Chinese machinery, electronics, textiles, apparel, high-tech and finished goods. Yet, over the past several years, companies in South Africa have started to export some of the same goods back to China. South Africa now ships raw textile materials, mechanical, electronic and agricultural products to China, in addition to more typical goods such as minerals, jewelry and metals. This reverse in trade flows emphasizes that China-

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Africa trade is based not only on country needs, but also on comparative trade advantages. As opposed to trade with the U.S. and Europe, where increased flows reflect preferential trade agreements such as the U.S. African Growth and Opportunities Act, Chinese trade increases reflect complementarities with African business. Shifts in trade result from increased efficiency and productivity between the partners. Such an economic arrangement makes African markets both a practical extension of Chinese supply chains overseas, and an ideal destination market for Chinese goods, both low- and high-tech. In this light, Chinese investors appear to show a willingness for long term engagement in promising markets. Although most Chinese corporations have built factories in Africa in order to take advantage of low costs and the vast market for Chinese goods, some companies have used their Africa facilities to circumvent certain Western countries’ restrictions on Chinese goods. By shifting production, the new origin of their products can maneuver around EU and U.S trade barriers to Chinese goods, or in some cases, even benefit from trade agreements that permit duty free entry “made in Africa” products. Interestingly, China is the primary source of counterfeit products on the world market, while Africa has become the number one transit point for such goods entering the American and European markets.

Looking forward Although the China-Africa relationship is still clearly developing, experts continue to debate the level of Chinese commitment to the continent as a whole. After the uncertain global environment following the financial crisis, some Chinese companies shied away from riskier investments and suspended large projects in Africa. Vijaya Ramachandran, senior fellow at the Center for Global Development in Washington D.C., points out the potential volatility of Chinese investment, citing that a downfall in 2008 commodity prices caused Chinese investors to abandon mines in Zambia and leave workers unpaid. Some mines are new reopening with better copper pricing forecasts, but the greatest detriment has been to labor relations and a resulting atmosphere of mistrust surrounding the reliability of Chinese investment. Such incidents notwithstanding, there is strong evidence that Africa plays a central role in China’s long term business strategy; the economic crisis


energy and green development. According to Adisa, the African green market is ripe for Chinese investment. “It has few barriers, remains untapped, and has a history of unmet demand for power,” said Adisa. “Recently, solar power generation portfolio company, CES Africa, partnered with a Chinese manufacturer to install commercial and residential solar power systems across Africa.” Ramachandran sees clean energy as the most cost-effective way of addressing electrical power gaps for much of Africa. In a series of enterprise surveys conducted throughout Sub-Saharan Africa, Ramachandran found that half of all private sector firms in Africa rank infrastructure, particularly unreliable electricity and power grids, as the worst constraint to business. With the success of greentech ventures, the investment returns for Chinese businesses and the productivity impact for Africans could be enormous. Speaking at a Standard Bank Africa Forum in Johannesburg last year, Africa-China trade expert Dr. Martyn Davies, who is executive director of the Centre for Chinese Studies at Stellenbosch University in South Africa, noted, “China sees Africa as an emerging market while the U.S. and the EU see us as a preferential market.” With its renewed interest in Africa, China has both the desire and ability to pursue counter-cyclical investment with an emphasis on access to Africa’s commodities, production networks and markets. After all, Africa and China have growing, unsaturated markets that, combined, serve 35 percent of the world’s population. As business interests fluctuate in response to the changing advantages and needs of both countries, commercial links will continue to adapt and evolve. Chantal Grinderslev is a contributor to Insight. She can be contacted at c.grinderslev@gmail.com.

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may have actually boosted China’s competitive edge. The global recession produced bankruptcies that left China’s Industrial and Commercial Bank of China (ICBC) as the world’s largest bank by market capitalization and cleared the way for competitive Chinese companies with financial backing to enter the global market. China’s high liquidity levels escaped the recession unharmed, putting China in the position to promote its own economic interests and those of its champion companies. China’s largest investment on the continent to date was ICBC’s US$5.46 billion purchase of a 20 percent stake in South Africa’s Standard Bank, finalized in 2008. Last year, the banks announced their first joint investment in the US$1.6 billion Morupule B power station construction project in Botswana, just one of 65 ICBC financed projects in Africa. “The combination of low commodity prices, tight global liquidity and falling demand in the rest of the global economy, puts China in the perfect position to acquire overseas resources assets,” said Victor Yu, managing director of Standard Resources China in Shanghai, a Standard Bank unit focused on cross-border advisory services. China does have competition in Africa, however, as investors in the Middle East diversify their portfolios across regions and sectors. For example, two Gulf banks – First Community Bank and Gulf African Bank – were recently licensed and established in Kenya. India is also expanding its presence on the continent, as Indian financial institutions extend credit to their counterparts in Africa. Although other nations’ financial institutions are beginning to focus on Africa, none are doing so as extensively and aggressively as China’s. China has stated its broad goal of having Chinese companies occupy 10 percent of the Fortune 500 by 2012 and Africa is widely seen as an experimental market for Chinese goods and research. In early 2010, the US$55-million Chinese Agricultural Technology Research Centre opened in Mozambique with the purpose of modernizing agricultural sectors and increasing the country’s rice production five-fold. Chinese President Hu Jintao has pledged 10 such centers for Africa, aimed at solving issues of food shortages that have led both China and India to buy and cultivate land on African soil. Cooperation between Chinese businesses and African businesses is also increasing. Last November, the city of Capetown sent a delegation to China to discuss cooperation on renewable

STRATEGIC SUPPORT: The African Union Conference Center in Addis Ababa, Ethiopia, is fully funded by China and under construction by the China State Construction Engineering Corp.


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INSIDE AMCHAM FROM THE CHAIRMAN

Enhancing U.S. Competitiveness

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aving lived in Asia since 1983 as a student and businessman, I’ve noticed that American economic policy has always centered on moving around obstacles as opposed to removing them. Over these 27 years, I’ve heard U.S. Presidents call for all kinds of programs and policies meant to create economic growth and American jobs, but President Obama’s State of the Union address was the first time trade has taken such prominence in job creation. For years, the U.S. has been punching below its weight when it comes to exports. The U.S. ranks behind almost every developed country in the world in terms of exports as a percentage of gross domestic product. So my response to the President’s call to double American exports in the next five years? It’s about time!

Robert Roche Chairman AmCham Shanghai

Enhancing U.S. competitiveness is a key initiative that I will focus on during my tenure as Chairman and I am well aware that there are clear, ongoing challenges to doing business in China. The Chamber will continue to focus on addressing IPR, transparency, market access issues, and now, China’s proposed indigenous innovation policy. In the past, I’ve felt that U.S. government programs to increase American exports were either insufficient or not sustained enough to make a difference. This has been as much or more of an impediment to enhancing U.S. competitiveness as any of the issues above.

Increasing U.S. exports to China is key to enhancing U.S. competitiveness abroad and keeping the U.S.-China commercial relationship on track.

During AmCham Shanghai’s 2009 Washington, D.C. Doorknock, it was painfully obvious to our delegation that most members of both houses of Congress and from both sides of the aisle had very little understanding of the important role exports to China play, or could play, in the economies of their home state or district. This is unfortunate. Since 2000, American exports to China have grown more than 300 percent. Nearly every state in the U.S. has seen its exports to China grow by triple digits. China is now America’s third largest export market behind only Canada and Mexico and it looks like the growth trend will continue. According to U.S. trade figures, U.S. exports to China hit an all-time high of US$7.3 billion for the month of November and December exceeded this record by more than US$1 billion. At the same time, China’s exports to the U.S. totaled more than US$26 billion in December 2009. We need to continue to grow American exports if we have any hope of balancing our commercial relationship with China and keeping up with Germany, the UK, Japan, Korea and others who have their sights set squarely on the China market. Moreover, a steady increase in U.S. exports to China would be a positive development in the U.S.-China commercial relationship, much needed at a time when protectionist voices in Washington are growing louder. Don’t get me wrong, we still need the U.S. government to fight for a rules-based trade relationship and a level playing field. However, we also need to take advantage of opportunities as they are presented to us and make progress where we can. When detailing the Administration’s National Export Initiative last month, U.S. Secretary of Commerce Gary Locke made it very clear: increasing exports will be a key focus moving forward. “Consider that if we just boosted our exports to Asia – where China is the biggest market – by 1 percent, that would support another hundred thousand new jobs in the United States,” he said. I couldn’t agree more. Dramatically increasing exports is key to enhancing U.S. competitiveness abroad and keeping the U.S.-China commercial relationship on track. I look forward to working with you to advance this goal.

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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

Board of Governors Meeting Highlights January 2010 Approval of Board Officers

The Board approved Eric Musser as Secretary and Matthew Targett as Treasurer of the 2010 Board of Governors.

Membership

The Board approved 40 new member applications.

Charity Gala and Golf Tournament Beneficiaries

The Board approved three charity projects as beneficiaries of funds that will be raised at the annual Charity Gala and Charity Golf Tournament. The Chamber will continue to support the Shanghai Soong Ching Ling Foundation’s Mother and Infant Care Program and Heifer International’s Community Rehabilitation Program in Sichuan Province, while also supporting A Dream Night at the Shanghai Zoo in partnership with the Shanghai Charity Foundation.

AmCham Shanghai 2010 Calendar

The President noted that the 2010 Charity Gala will be held on April 10, in cooperation with the American Women’s Club of Shanghai, while the Independence Day celebration will be held on July 3. IN ATTENDANCE Governors: Andrew Au, Eddy Chan, Pierre Cohade, David Gossack, John Grobowski (by phone), Murray King (by phone), Diane Long, Eric Musser, Robert Roche (Chairman), Matthew Targett and Chris Wurzel. Attendees: David Basmajian, Phil Branham, Justin Chan, Patrick Cranley, Siobhan Das, Brenda Foster (President), John Leary (by phone), Helen Ren, David Turchetti, Linda X. Wang and Jessica Wu. APOLOGIES James Rice and Kevin Wale.

February 2010 AmCham Shanghai 2010 Calendar

The President reported that no U.S. Consulate Briefing will be held in March due to the Barnett-Oksenberg Lecture. The next U.S. Consulate Briefing will be held in April. Preparations are underway for the Independence Day Celebration, and several venues are already under consideration. 2010-2011 Budget The President reviewed the Chamber’s strategic plan for the 2010-2011 fiscal year and presented a draft budget for Board discussion. Initiatives for the new fiscal year include new programs and platforms for members, leveraging the Expo to enhance the Chamber’s position and expanding the regional footprint around the Yangtze River Delta area. IN ATTENDANCE Governors: Andrew Au (by phone), Eddy Chan, John Grobowski, Murray King, Robert Roche (Chairman), Matthew Targett and Kevin Wale. Attendees: David Basmajian, Justin Chan, Siobhan Das, Brenda Foster (President), Helen Ren, David Turchetti, Linda X. Wang and Jessica Wu. APOLOGIES Pierre Cohade, David Gossack, Diane Long, Eric Musser, James Rice and Chris Wurzel.


CSR FOCUS

Release of AmCham Shanghai’s

Mother and Infant Care Project Video

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ince 2006, AmCham Shanghai has partnered with the Shanghai Soong Ching Ling Foundation to support improving healthcare conditions for women and infants in rural China. AmCham Shanghai President Brenda Foster and then-CSR Committee Chair Murray King (of APCO Worldwide) spearheaded efforts to support the Mother and Infant Care program that has played in important role in improving birthing conditions in Guizhou Province and allowed nearly five thousand babies to be delivered under professional care. Since the AmCham Shanghai Charity Gala in 2007, more than RMB2.3 million has been raised to support the project. AmCham Shanghai continues to support the Mother and Infant Care program by assisting with program design, proposal and site screening, as well as progress evaluation and reporting. For AmCham Shanghai members, a short film documenting a site visit to Guizhou Province to tour communities and facilities supported by the Mother and Infant Care Project is enclosed in this issue of Insight. It is easy to see how grateful the local people are towards the efforts of American companies in supporting their communities. The video will also be accessible on the AmCham Shanghai Corporate Social Responsibility website. Please visit www.amcham-shanghai.org/csr for more information. AmCham Shanghai Guidelines on Supporting the Mother and Infant Care Program • The program must address the primary need of the community. 1) To improve the level of community healthcare; 2) To build service capacity for central county clinics; and 3) To equip local medical staff with up-todate diagnosis and medical device operation knowledge. • The program is designed to follow business community practices. It should provide flexibility in participation scale and permit diverse participation. Sponsorship amounts can vary from several thousand to several million RMB. Corporate sponsors can choose to support the program through establishing birthing centers, training medical staff and the public, donating ambulances or sponsoring medical students. • The program is in line with the priorities of the Chinese government by prioritizing medical reform in rural China. It is designed to leverage government resources, provide supplemental solutions and thus is able to create an even bigger impact with limited resources. • The program is designed to create measureable impact. Indicators include the number of babies born in supported birthing centers, infant mortality rate, the number of medical staff trained and usage of medical devices, as well as macro level feedback from all stakeholders. • The program also focuses on sustainability and innovation. By donating medical devices and training medical staff, the program builds long term capacity at all levels of the rural healthcare system. With a special focus on mothers and infants, the program has greatly improved the overall operation of central county clinics.

AmCham Shanghai Support At a Glance • October 2006 – Pilot project implemented in Xuanwei County, Guizhou Province • 2007 – Ten birthing centers and two training programs sponsored • 2008 – Established the Shanghai Soong Ching Ling Medical and Education Scholarship at the medical schools of Fudan, Jiaotong and Tong Ji universities • 2009 –Two more birthing centers, seven ambulances, four equipment and training programs were funded in Guizhou, Yunnan and Guangxi provinces • 2010 – Aiming to build more birthing centers, supply additional ambulances and fund more training programs

Impact of the Program • ZERO maternal mortality rate at 13 project sites • 10% decrease in neonatal mortality rate – 21 newborn lives saved • 50% increase in hospitalized childbirth rate from 56% in 2006 to 84.1% in 2009 • 7 ambulances have been deployed in Guizhou, Guangxi and Yunnan provinces, helping to save the lives of mothers suffering from severe pre-birth complications • 60 medical students from disadvantaged families have received three-year scholarships and will volunteer at projects to improve rural China healthcare conditions • 91 villages have been equipped with basic medical devices for infant and young child healthcare • 800 medical staffs have received relevant medical training • 4,800+ babies have been safely delivered in 12 U.S. business community sponsored birth centers since 2006 • 7,750 women received free gynecological health check-ups

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Renew now & stay a part of the largest and most active AmCham in the Asia-Pacific Region: AmCham Shanghai! How to renew: Simply log onto www.amcham-shanghai.org/renew and enter your details in the online renewal form. It takes less than 5 minutes to complete and you will be INSTANTLY notified if you have won one of the terrific lucky draw prizes on offer. Renew your AmCham Shanghai Membership now and have chance to win one of the below prizes. Round-trip air ticket from Shanghai to the U.S. provided by United Airlines RMB 500 gift voucher provided by American-Sino OB/Gyn/Pediatric Services RMB 1560 Body check voucher provided by Essential Healthcare Network RMB 800 Dental care card provided by Kowa Dental One-night accommodation in a studio at Pudi Boutique Hotel RMB 500 SPA voucher provided by QUAN SPA Half a case of Santa Digna Merlot wine provided by Santa Fe Relocation Services 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 free subscription of the Wall Street Journal newspaper (PDF) * * * * * * * * *

For further information, please contact the AmCham Shanghai membership department: Tel: (86 21) 6279-7119 ext. 5676, 5659, 5677, or 7124 Fax: (86 21) 6279-7643 Email: renew@amcham-shanghai.org Special thanks to the prize sponsors

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Event Highlights

INSIDE AMCHAM

RECENT AMCHAM HAPPENINGS

January U.S. Consulate Briefing Deputy Consul General Christopher Beede began the January briefing by introducing the Consulate’s new Nanjing Affairs Outreach Officer, Deputy Consul General Camille Purvis Dawson, who joins the Christopher Beede Consulate from the Public Affairs Section at the U.S. Embassy in Beijing. Brent Christensen, the Environment, Science, Technology and Health (ESTH) Counselor at the Embassy in Beijing, spoke about December’s climate change negotiations in Copenhagen. He described the historic commitments by dozens of nations to cut emissions, due in large part to concerted efforts by U.S. President Barack Obama. Negotiations will continue towards reaching a final comprehensive binding agreement in Mexico in December 2010. Consulate visitors in the past month included Ambassador Huntsman and USTR General Counsel Tim Reif, who met Shanghai WTO Affairs Center scholars to discuss trade dispute resolution and related issues. Officers from the Customs & Border Patrol (CBP) also visited Shanghai to discuss import security issues. On the Expo front, actor Jackie Chan and USA Pavilion Commissioner General Jose Villarreal rode on Shanghai’s Rose Bowl Parade float January 1, generating much stateside publicity and approval in China. The USA Pavilion organization (a non-governmental entity) is recruiting staff and volunteers (please visit USAPavilion2010.com/jobs). The Consular Section set new records in visa issuance in 2009, culminating with more than 18,000 visa issuances in December, the highest one-month total ever recorded in Shanghai. The State Department ‘s new online non-immigrant visa (NIV) application form (https://ceac.state.gov/genniv/) will be implemented in Shanghai in early 2010. (Jan 5)

AmCham Shanghai President Addresses Government Academy AmCham Shanghai President Brenda Foster was invited to speak at a key policy summit hosted by the China Executive Leadership Academy Pudong (CELAP) for up-and-coming Communist Party officials. Held on January 16, the “Yangtze-River-Delta (YRD) Summit: Kunshan 2010” aimed to identify key opportunities and challenges for YRD development. Participants included senior government officials, multinational and national CEOs, influential Chinese academics and diplomats. Foster was one of two foreigners invited to speak at the two-day event, reflecting AmCham Shanghai’s long-standing partnership with YRD provincial and municipal governments for economic development. Recognizing that YRD cities figure prominently in the expansion of many American companies, Ms. Foster highlighted the importance of regional integration in facilitating business expansion in the area. More consistency in the region’s policies on education, labor, intellectual property rights, taxation and transportation would yield attractive economic synergies and commercial efficiency.

February U.S. Consulate Briefing Deputy Consul General Christopher Beede began the February briefing by introducing two new consular officers, Meg Young and Richard Blackwood. Richard joins the Consulate from the consular section in Guadalajara, Mexico while Shanghai is Meg’s first post.The U.S. Embassy in Beijing’s Minister-Counselor for Trade Affairs Chris Adams provided brief remarks on bilateral trade relations and invited member comments on the business climate in Shanghai. He noted that while this will likely be a bumpy year in the U.S.-China trade relationship, the relationship is durable and has proven its resiliency. He noted the role WTO mediation has played in resolving trade disputes and highlighted the value of both the Joint Commission on Commerce and Trade (JCCT) and the Strategic and Economic Dialogue in U.S.-China trade relations. State Department China Desk Deputy Director Bill Klein responded to questions regarding the U.S. sale of defensive weapons to Taiwan. He noted that the U.S.-China bilateral relationship is sufficiently deep and broad that individual issues will not derail overall cooperation and collaboration between the two countries. Preparations for Expo continue quickly. In late January, USA Pavilion CEO Nick Winslow and Deputy Commissioner General Tom Cooney spoke to a media round table hosted by QQ.com where questions focused on the pavilion’s content, the average American’s interest in the Expo, and the status of the fundraising effort. The Consular Section continues to see record visa volume, having processed 80% more non-immigrant visas in January 2010 than in January 2009. Businesses and travelers were reminded that wait times are expected to climb in May as the busy summer season gets underway, so all are encouraged to make their visa appointments as soon as possible. Due to a complete refurbishment project, the Consular Section will be closed for visa issuances March 5-15. American Citizen Services will be closed on March 5 and 15 with limited hours March 8-12. Beginning March 1, all NIV applicants in China will be required to use the new online application form (https://ceac. state.gov/genniv/). (Feb 2) Due to another scheduled event on Tuesday, March 2, the next Consulate briefing will be held in April.

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Committee Highlights

INSIDE AMCHAM

NEW IN COMMITTEES

IT and Technology & Innovation Committees

High-Tech Compensation Trends for 2010

T.R. Harrington, darwinmarketing.com.

Marketing Committee

Getting Found: China Search Engines T.R. Harrington, co-founder and CEO of darwinmarketing.com, took on several “myths” about the Chinese Internet sector during a recent AmCham Shanghai Marketing Committee meeting. Harrington focused on the role of search engines and their unavoidable importance to a company’s brand and their overall China strategy. Harrington stressed that the primary obstacles to foreign firms penetrating the Chinese Internet market remain an accurate analysis of the target market and an appropriate tailoring of one’s strategies and products. Chinese Internet users have very different demographics and habits than their Western counterparts. Many of China’s public internet companies are based in entertainment and communication, which reflect the habits of a populace with limited daily media choices. Of 351 million Chinese Internet users, 81.4% (vs. U.S. 40%) use instant messenger, 72.4% use it as a main news source, and 59.3% (vs. U.S. 10%) play online games. “In the U.S. you hear of having a ‘second life’ online, but in China you have multiple worlds,” noted Harrington. According to Harrington, many established U.S. companies have tried and failed in the rush to dominate China’s market – Yahoo! (vs. Alibaba), eBay (vs. Taobao), and Google (vs. Baidu). Companies have either improperly characterized the consumer population, failed to tailor their strategy to their target market, or hired the wrong people to guide the company in doing so. Harrington proceeded to note the strategies and innovative habits of highly successful Chinese companies. Focusing on the Baidu/Google competition (China search share – 71%, 23% respectively), Harrington emphasized Google’s attempted transplant of a U.S. strategy to the Chinese market. Google’s U.S. success depended on word of mouth in a society permeated by Internet access. Baidu’s marketing strategy included targeting 3rd tier cities for billboard ads and cooperating with universities who put the icon on their school desktops; the goal was to encourage familiarity and habit. (Jan 20)

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Mercer Senior Consultant Echo Qin shared her analysis of IT industry trends in compensation and benefits during a presentation to AmCham Shanghai’s IT and Technology & Innovation committees. In recent years, the IT services market has been the fastest growing segment of the high-tech market and is expected to achieve 18 percent CAGR from 2008 to 2013. For the past 18 months, however, employees in the IT sector endured lay-offs, job uncertainty, and increased pressure and responsibility. With increased government and telecom demand helping to prevent market stagnation, an expected market upturn in 2010 will raise employee expectations of salary increases and compensation. In contrast, the trend of salary freezes stemming from global economic conditions will continue to affect compensation into 2010. According to a Mercer industry survey, while 72.4 percent of respondents indicated that all Chinese employees would get a bonus for FY 200910, most bonus payouts would be lower than targeted amounts. Some companies even indicated that bonuses would be reserved for key talent only. Qin encouraged companies to design appropriate HR strategies that both identify and manage employee expectations. She encouraged HR executives to seek an understanding of market priorities and company personnel needs, as well as employee demographics and preferences. Only then can they design a compensation package, merging both employer and employee needs, that is able to drive company success in the current market conditions. (Jan 26)


INSIDE AMCHAM

Automotive Committee and Manufacturers’ Business Council

CEO Speaker Series: Al Koch

Al Koch, AlixPartners

CSR Committee

Consumer Food Safety There is no such thing as completely safe food, according to Dr. Robert Ma, former vice president of supply chain management at McDonald’s. Ma, together with Aude Lesage, national quality and food safety director of Carrefour China, and Judy Jiang, national quality assurance manager of Metro, spoke at recent panel event on food safety issues organized by AmCham Shanghai’s Corporate Social Responsibility Committee. Sources of food produce that enter Shanghai cannot always be identified and it is impossible to test for all contaminants in food products as they are not always known to have entered the food chain. Consuming genetically modified organisms (GMOs) is unavoidable in China; generally speaking they are safe, but long-term effects are still not clear. China’s food industry has improved over the past 2030 years, according to Jiang, but the high cost of monitoring means only the large suppliers carry out checks and label their products accordingly. Lesage introduced Carrefour’s “Direct Purchase Initiative” where it sources produce directly from Chinese farmers, aiming to increase the farmer income and ensure product freshness while lowering prices. Lesage and Jiang both also explained their supermarkets’ quality crisis management procedures to recall food if it is suspected to be unsafe. (Jan 19) Event and Committee Highlights are reported by Anna Bartram and Chantal Grinderslev.

At a joint even hosted by AmCham Shanghai’s newly formed Automotive Committee and its Manufacturers’ Business Council, Al Koch, Vice Chairman of AlixPartners, spoke to over one hundred AmCham Shanghai members about his experience as former General Motors Chief Restructuring Officer and current CEO of Motors Liquidation Co. Koch emphasized the basic need to stabilize, fix, and position the company for success. While asset sales proved more difficult than cost reduction, Koch pointed beyond funds to a driving need to address underlying company issues that led to GM’s decline. Among other challenges, Koch addressed the difficulties and pressures of negotiating debt-forequity swaps with bondholders, trying to sell discontinued brands, and negotiating with the United Auto Workers. Lending personal insight and perspective to the government’s response and working with the Automotive Taskforce, Koch shed light on the past, current and future of the auto industry. For more information on the restructuring of General Motors, turn to page 23’s exclusive interview. (Jan 21)

CSR Committee

Corporate Responsibility & Sustainability: What’s Next? Chris Deri, executive vice president and global leader of Edelman’s CSR and sustainability practice recently talked to an audience of CSR practitioners at an AmCham Shanghai Corporate Social Responsibility (CSR) Committee event. Despite the economic downturn, Deri reported that sustainability issues have increased in importance for many of Edelman’s clients. Businesses are held as equally accountable as government organizations for causing and solving social and environmental problems and companies face new pressure to make corporate responsibility a fundamental part of their business strategies. Compared to 10 years ago, when enterprises were reluctant to admit their misconduct and the overriding perception of CSR was of a company having to defend its actions, today, companies are the first to report their mistakes and provide crucial information to their stakeholders before it can be found elsewhere. Social media outlets such as Facebook and Twitter provide powerful platforms that push CSR issues to the forefront of consumers’ attention. Deri noted that it is in a business’s best interest to identify those who are most influential in the discussion, observe their opinions and engage them, thus changing the way an enterprise listens to its critics. The standard corporate communications press release does not get the CSR message out as effectively as a debate, suggested Deri. Ideally, a company should balance these stakeholders’ expectations and be prepared to “influence and be influenced.” (Jan 19)

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DEAL OF THE MONTH ISTOCKPHOTO

Resource Riches

Resourcehouse links up with China's CPOI for Australia's largest-ever export contract.

A

f ter mont hs of acr imonious statements and political jabs between Australia and China, relations are thawing as two firms are finalizing the largest export contract in Australia’s history. Australian firm Resourcehouse plans to sign a 20-year deal estimated to be worth US$60 billion with China Power International Holding (CPI) to supply coal to Chinese power stations. Coal extraction from open-cast and underground mines in Australia is expected to start in 2013 and supply CPI with 30 million tons of coal annually for the next two decades. To facilitate transportation, Resourcehouse will connect the mining complex to be constructed in Queensland’s Galilee Basin with a 500-kilometer railroad to the coast. Resourcehouse’s US$8.9-billion mining complex will be funded in part by US$5.6 billion from the Export-Import Bank of China. The company is also planning an IPO in Hong Kong later this year to raise additional funds. Resourcehouse will also award a US$8 billion engineering, procurement and construction management contract for the mining complex to the Metallurgical Corp of China (MCC). Under the tentative deal, MCC will buy a 10 percent stake in the project and as well as a minority stake in Resourcehouse. In December 2008, Resourcehouse paid just US$140 million to acquire the project’s underlying coal assets.

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Most of China’s power stations rely on coal and demand has risen sharply as industrial production levels respond to government stimulus efforts. China accounted for 40 percent of global coal consumption with 3 billion tons of coal used in 2008, a 232 percent jump from 2000 levels. Coal has consistently supplied around three quarters of total power generation in China. Despite China’s strong need for coal sources, attempted deals between China and resource-rich Australia have struggled, often complicated by political clashes. Rio Tinto scrapped plans to accept a US$19.5 billion investment from Chinalco, a state-owned company, opting instead to raise money from shareholders and form a joint venture with Anglo-Australian BHP Billiton. However, the continuous pursuit of natural resource deals has shown that the economic interests of both parties take priority. Critics note that Australia is too reliant on its nonrenewable mineral resources and China’s growing demand to sustain and grow its economy. China is Australia’s largest trading partner with bilateral trade worth US$68 billion annually. Australia supports China’s production activity with coal, iron ore and liquid gas and the strength of China’s demand greatly contributed to Australia’s ability to avoid an economic recession during the global downturn. Perhaps ironically, the new Resourcehouse coalmining complex located in Australia’s heartland will be aptly named “China First.” – Chantal Grinderslev


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Insight Magazine March 2010