biz.hk Aug 2011

W INS in ID e& E Di : ne

Journal of The American Chamber of Commerce in Hong Kong

www.amcham.org.hk

August 2011

COVER SPONSOR

August 2011 Vol 43 No 08

Contents

Richard R Vuylsteke

Editor-in-Chief Daniel Kwan

Assistant Editor

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08

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COVER STORY

FINANCE

EDUCATION

CHINA BUSINESS

US Secretary of State Hillary Rodham Clinton gives a pivotal speech in Hong Kong on US policy and diplomacy before an audience of AmCham and Asia Society, highlighting principles for shared prosperity in Asia-Pacific region

Turmoil continues to inflame financial markets worldwide after a credit rating downgrade of the US. What’s Next and Who’s Next? Investors search far and wide for clues

A survey conducted in early summer by the Chamber confirms the lack of international school places, and businesses are worried about the impact on Hong Kong’s competitiveness

AmCham delegation tours Pearl River Delta on a one-day field trip to Zhuhai and Hengqin as China’s 12th Five-Year Plan calls for closer economic integration of the region

Publisher

Kenny Lau

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Advertising Sales Manager Regina Leung

biz.hk is a monthly magazine of news and views for management executives and members of the American Chamber of Commerce in Hong Kong.

Its contents are independent and do not necessarily reflect the views of officers, governors or members of the Chamber.

Advertising office 1904 Bank of America Tower, 12 Harcourt Rd, Central Hong Kong Tel: (852) 2530 6900 Fax: (852) 2537 1682 Email: amcham@amcham.org.hk Website: www.amcham.org.hk Printed by Ease Max Ltd 2A Sum Lung Industrial Building, 11 Sun Yip St, Chai Wan, Hong Kong (Green Production Overseas Group) Designed by Overa Creative Co Rm A, 12/F, Sun Fai Comm Bldg, 576 Reclamation St, Mongkok ©The American Chamber of Commerce in Hong Kong, 2011 Library of Congress: LC 98-645652 For comments, please send to biz.hk@amcham.org.hk

EDUCATION

AMCHAM NEWS AND VIEWS 04 Chairman’s Memo Rob Chipman recaps recent speech by US Secretary of State Hillary Rodham Clinton before AmCham and Asia Society and highlights the issues over the lack of international school spaces in Hong Kong

07 New Business Contacts 65 executives joined AmCham’s business network last month

18 Lack of School Space Hammers Business, Survey Shows Concern over the shortage of international school places in Hong Kong has once again been raised in recent meetings between AmCham and the government

CHINA BUSINESS

44 Mark Your Calendar

23 Hengqin New Zone Sets to Take Off in Five-Year Plan Period

COVER STORY

08 Principles for Shared Prosperity Outlined in Chamber Speech US Secretary of State Hillary Rodham Clinton delivers a pivotal policy speech on American diplomacy and the role of economic power in US foreign policy

FINANCE

14 After the Downgrades, What’s Next and Who’s Next?

AmCham delegation tours Pearl River Delta on a one-day field trip to Zhuhai and Hengqin Island amid plans for closer economic integration in the region

28 The Future of Retail Supply Chain Management Peter Levesque, Chief Commercial Officer of Modern Terminals Ltd, offers his insights into China’s ascendancy, the development of its retail sector and future trends in Supply Chain Management

30 What’s Holding Chinese Brands Back?

Scott Anderson, Director & Senior Economist of Wells Fargo Securities, shares his view and analysis of the US economy as well as outlook on Europe

Branding expert and author of the global bestseller Asian Brand Strategy Martin Roll analyzes the prospect of Chinese brands going global

34 Reflections on Branding in Asia A respected design critic and visionary and principal of FutureBest, Jerry Gelsomino discusses forward-thinking view of producing competitively better products in China

TRADE & INVESTMENT 36 Trade Initiative Delivers Results A report card on promotion of US exports as a result of the Pacific Bridge Initiative, a regional complement to US President Barrack Obama’s National Export Initiative

39 Hong Kong Ideal Place for US Businesses to Trade and Raise Fund In a conversation, Hong Kong Commissioner for Economic and Trade Affairs Donald Tong explains why US businesses should consider Hong Kong as a fund-raising platform

COMMUNICATIONS & MARKETING 42 Understanding Your Employees and Customers Chairman and CEO of Gallup Jim Clifton describes the concept of behavioral economics and how it could be applied to boost business performance

Single copy price HK$50 Annual subscription HK$600/US$90

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COVER SPONSOR

Board of Governors Chairman Robert Chipman Vice Chairman James Sun Treasurer John Sigalos Executive Committee Frank Lavin, Anita Leung Belinda Lui, Charles Wellins Governors Sara Yang Bosco, Brian Brenner, Tom Burns, Janet De Silva, Rob Glucksman, Peter Levesque, Charles Ma, Toby Marion, Ross Matthews, Andrea Richey, Catherine Scown, Leland Sun, Colin Tam, Elizabeth L Thomson, Richard Weisman, Frank Wong, Shengman Zhang Ex-Officio Governor President

David L Cunningham Jr Richard R Vuylsteke

Chamber Committees AmCham Ball Apparel & Footwear Business Briefing China Business Communications & Marketing Corporate Responsibility

Kay Kutt Andre Leroy Don Meyer Wendy De Cruz

Energy Entrepreneurs/SME Environment Financial Services

Sean Purdie Donald Austin Bradley Punu Kuresh Sarjan Catherine Simmons Peter Johnston Hanif Kanji Ross Matthews

Food & Beverage Health & Wellness Hospitality & Tourism Human Capital

Susan Reingold Ed Ahnert

Noble Coker Peter Liu

Information Technology & Telecom Rex Engelking Intellectual Property Alvin Lee Law Eric Szweda Pharmaceutical Stephen Leung Real Estate Brian Brenner Senior Financial Forum Alvin Miyasato Senior HR Forum MaryAnn Vale Sports & Entertainment Ray Roessel Taxation Evan Blanco Trade & Investment Patrick Wu Transportation & Logistics Brian Miller Women of Influence Jennifer Van Dale Lee Georgs Young Professionals Roger Ngo

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Rob Chipman Chairman

Chairman’s Memo

Dear Members,

July and August were a scorcher in every imaginable way. While we endured another sweltering Hong Kong summer, the rhetoric was at an all time high in the US Congress as they wrestled back and forth over the debt ceiling limit. It was not our Government’s finest hour, I think we’d all agree on that, but at least an accord of sorts was reached and the financial markets were spared from the specter of the first ever US default.

As I watched the news and listened to the arguments, I had to think how fortunate I am to live in Hong Kong – the land of chronic budget surpluses. The irony is just too delicious when you think that about this time last year the debate in Hong Kong centered on what do with do with our excess cash! I don’t even think the word surplus is understood any longer in Washington.

If you’d like to hear from a real expert in the economic arena, then read about Dr Scott Anderson’s talk to AmCham and his assessment of the economic outlook for the rest of this year. Scott is the senior economist for Wells Fargo Economics and was the featured speaker at a recent lunch for the Financial Services Committee.

About a month ago, US Secretary of State Hillary Rodham Clinton stopped over briefly in Hong Kong. Madam Secretary was kind enough to take time to speak before an audience of AmCham and Asia Society members on the key role of economic development as a cornerstone of US foreign policy. She also had a few minutes before her speech to say hello to some AmCham past chairmen and other Hong Kong dignitaries. I must say that she was every bit as gracious and charming as you would expect the Secretary of State from our great country to be.

AmCham has for some time now been beating the drum over the lack of international school spaces in Hong Kong. I can now say that our concerns have been taken up by other chambers in Hong Kong and the drumbeat is building up to a crescendo. AmCham has taken positive and assertive action over the lack of school spaces by forming a task force under the guiding hand of AmCham Governor Janet da Silva. Janet and her team have come up with a multifaceted approach to solving this problem, and are about to publish a formal position paper which sets out our recommendations. I thank Janet and her task force members for all their hard work. If this interests you, and it should, I encourage you to read the report that begins on page 18.

Lastly, an AmCham-led delegation visited Zhuhai in July and was fortunate enough to have a meeting with Senior Vice-Mayor Liu Xiaolong. Mr Liu was kind enough to host a dinner for the delegation and lay out the plans for the development of Hengqin Island and the business opportunities it presents.

AmCham Governor Peter Levesque has recently completed work on a very interesting

book that I’d wholeheartedly recommend to all members – The Shipping Point: China’s Rise and its Impact on the Global Supply Chain. Peter has been able to capture in print much of what has taken me the better part of my 20-plus years in Hong Kong to learn through (often painful!) experience. Former AmCham Chairman Dr Steve DeKrey contributes a fascinating and incisive chapter about leadership that really is a “must read.” Peter will be the featured speaker at an upcoming AmCham breakfast on September 1st. I strongly encourage you to join me and attend that event.

I admit to having a personal interest in the emergence (or lack thereof up to now) of indigenous Chinese brands. To me it is only a matter of time before Chinese brands establish themselves in international markets and that day cannot come soon enough. As this develops, and there are early emerging signs that it is happening, I am convinced that Chinese and US interests will converge even more and I believe it will be in the interest of both our countries. If you want to learn more about this, I encourage you to read an interview with Dr Martin Roll and his views on the emergence of Chinese brands and an accompanying piece by our AmCham member Jerry Gelsomino.

That’s all I have to report for this very busy and hot summer in Hong Kong.

Best wishes to my fellow members,

Rob Chipman Chairman

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MEMBERS DIRECTORY 2010/2011

New

Business Contacts The following people are new AmCham members: Academy & Finance Andre-Valery Bordes President & CEO

AIA Group

w w w. a m c h a m . o r g . h k

Paul Groves EVP & Group Chief Marketing Officer Nikhil Advani Group Head of Commercial Marketing

AllianceBernstein Hong Kong Ltd Brian Lo Director of Marketing, Asia Pacific Ajai Kaul CEO, Asia ex-Japan

Asian In-Flight Media Ltd Scott Thoreau Executive Director

Australian Mohtasham International www.amcham.org .hk

Over 500 pages in three major sections, including a complete guide to chamber services, corporate sponsors and AmCham Charitable Foundation. This directory lists nearly 1,900 members from over 700 companies and organizations.

ISBN 978-962-7422-03-7

LC 98-645651

Mahmoud Parastesh Head Master

ENGEL & VĂ–LKERS (VJI Limited Licensed Partner of Engel & Voelkers Asia-Pacific Ltd) Chris Liem Principal

ExxonMobil Hong Kong Ltd Jenny Choy External Affairs Manager

Future Generations Caroline Van Trustee

German Swiss Int'l School Doerthe Kleine-Pollmann Head of Human Resources

Gibson Dunn & Crutcher LLP Oliver Welch Associate Attorney

GoIndustry-DoveBid (HK) Ltd Tony Ho Account Director, Hong Kong & South China

Bank of America NA

Google Inc

Jenifer Rogers General Counsel

Lokman Tsui Policy Advisor

Big Prairie Limited

Hong Kong International School

Vanessa Green Partner

Bloomberg LP Michael McDonough Economist

Kevin Dunning Head of School

Howard Glaser Assistant Manager, Guangzhou

Simson Chan Senior Vice President

Ignite Media Group

Colliers International (HK) Limited Patricia Ooi Manager, Marketing & Communications, Asia

IMS Health Asia

Adrian Huen Director, Finance and Business Admin

Credit Suisse (HK) Ltd Sheel Kohli Managing Director

CSL Ltd Mark Liversidge Chief Marketing Officer

Dun & Bradstreet (HK) Ltd Ruby Tang Head of Risk Management Solutions

Edelman Public Relations Worldwide (HK) Andrew Kirk Managing Director, Hong Kong & Taiwan

EKPAC China Ltd Alvin Chan Chairman

OHL (Hong Kong) Limited Alberto Benki Senior Vice President, Global Ocean Freight

Pacific Packaging Limited John McGrath Managing Director

PPG Coatings (Hong Kong) Co Ltd Horace Wenn General Counsel, Asia Pacific

PR People Consultancy Limited, The Uhi Hui Founder & CEO

Quiksilver Asia Sourcing Ltd

Ruder Finn Asia Ltd

Mark Hammons Managing Director James Wolf Director Kevin McKenzie Director

Chinese International School

Paul Daley Director Anne Churches Senior Talent Acquisition Specialist Kieran Scally Vice President

Richard Truitt Director of Development

IDS Logistics (Hong Kong) Limited

CBI Consulting

Ochre House Asia Pacific

Tim Taylor Managing Director

Shannon Ng Development Officer

Pooja Gurbani Director

Martin Garcia Chief Executive Officer Alison Massey Marketing and Ecommerce Director Ralph Tam Managing Director - Asia Pacific

Hong Kong Philharmonic Society Ltd

ICM

Buy-Rite Ltd

Now Health International (Asia Pacific) Limited

Andy Liu President, Asia Pacific and China

Sharon Liao Senior Vice President & General Manager, Hong Kong and Guangzhou

South China Morning Post Publishers Limited Anne Wong Director of Marketing

Starr International Insurance (Asia) Ltd Georgiana Leung Regional CFO Carolina Chan VP & Regional Manager - Operations & Systems Michael Garrison President & CEO

Tiffany & Co of New York Ltd Rebecca Ip Vice President - Greater China

UBS AG

Jason Flores Senior Manager - Asia Marketing Centre

Timothy Cobb Chief Communication Officer, Asia Pacific Alex Wilmot-Sitwell Co-Chairman & Co-CEO, Asia Pacific

Laserfiche International Limited

Wells Fargo Bank NA

K Line (HK) Ltd

Sean Tang Vice President, International Business

Sean Corrigan Head of Strategic Trade Solutions

Matilda International Hospital

Zurich Insurance Group (HK)

Heidi Chan Insurance Development Manager

McDonald's Restaurants (HK) Ltd Randy Lai Managing Director

Newsweek/Daily Beast Company LLC, The Connie Lam Regional Corporation Partnership Manager - Asia

Dan Bardin CEO Asia Pacific & Middle East Christopher Cron Chief Risk Officer & Regional Audit Director, APAC Brandon Caneer Chief Marketing Officer, Asia Pacific & Middle East Michael Li Head of Marketing, Sales & Distribution Ted Ridgway CEO, Global Life HK Johnny Chen CEO, Asia Pacific, General Insurance

View our other members at:

http://www.amcham.org.hk/index.php/AmChamMembers.html

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COVER STORY

Hillary Rodham Clinton

T

Principles

for Shared Prosperity Outlined in Chamber Speech

By Daniel Kwan

Talks about the decline of US influence have gained much credence in the past years. Pundits debate enthusiastically about ideas such as G2 (that would put the US and China jointly at the head of international affairs), the rise of BRIC (Brazil, Russia, India and China) countries, and how the US recovery is flagging. When US Secretary of State Hillary Rodham Clinton paid a whirlwind tour to Hong Kong in late July, she gave a pivotal policy speech laying out her vision of American diplomacy and the role of economic power in US foreign policy.

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he recent US federal debt impasse between the Congress and US President Barack Obama and the downgrade by Standard & Poor’s of US credit rating have sent shivers down the spine of investors. It was difficult to imagine that the US, which has enjoyed an “AAA” rating continuously since 1917, would be in the same boat with debt-ridden countries like Greece.

When US Secretary of State Hillary Rodham Clinton set off for her five country tour in July, the debt impasse very much unresolved. While in Greece, Secretary Clinton extended Washington’s support to the Greek government to implement an austerity program which would call for a total of 28.4 billion euros of fiscal measures (the package includes spending cuts and tax increases). “Americans know these are difficult days, and again we stand with you as friends and allies,” she said in a press conference in Athens.

The Secretary apparently saved one of the most important messages of her tour for a speech at a luncheon hosted by the American Chamber of Commerce in Hong Kong. US officials say the speech in Hong Kong was one of her three key speeches on US’s foreign policies. She delivered the first one in early July when she addressed a conference organized by the US Global leadership Coalition in Washington. The third one which will be delivered in the fall will focus on economics and America’s strategic choices.

Four principles In her speech at AmCham, Secretary Clinton underscored the importance of four principles that underlie the

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international economic system – openness, free system, transparency, and fairness – and the universal nature of these principles. Moreover, she says that the US is “hard at work” to implement these principles through international institutions such as APEC that advocate a multilateral approach to economic issues in the region.

Acknowledging concern over the US recovery, Secretary Clinton assured the more than 600 business leaders present that the US always comes surging back because the American people “deeply believe in” these principles and the values they represent.

“Every time in history when the United States has experienced a downturn, we’ve overcome it through reinvention and innovation. Now, these capacities are not unique or innate to the people of the United States. They are activated by our economic model, which we work hard to keep open, free, transparent, and fair, a model that has its imperfections but remains the most powerful source of prosperity known to humankind,” she says.

She cautions countries not to take shortcuts circumventing these principles for the sake of possible short-term gains. “Some developing countries—admirably focused on fighting poverty—might be slow to implement at home the same rules they benefit from abroad,” Clinton says. “And a number of nations, wealthy in the aggregate but often poorer per capita, might even think the rules don’t apply to them. “ “In fact, all who benefit from open, free, transparent, and fair competition have a vital interest and a responsibility to follow the rules. Enough of the world’s commerce takes place with developing nations, that leaving them out of the rules-based system would render the system unworkable. And that, ultimately, that would impoverish everyone,” she adds.

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The Secretary says that the US promotes these principles through multilateral and regional institutions and new trade agreements. One such example is the APEC conference to be hosted by President Obama in Hawaii later this year.

Quality deals Secretary Clinton says the Obama administration is pushing for the approval of the Korea-US Free Trade Agreement (KORUS) and passage of the Colombia and Panamanian Free Trade Agreements. She says that such agreements are much more than just “who pays what tariff” – they should enshrine the principles of fairness and transparency, and most importantly uphold standards on intellectual property protection, environment, labor practices and regulatory due process.

Therefore, getting the right deal is more important than clinching more deals. Countries should aim for true regional integration in trade instead of a blind pursuit of trade treaties.

“Asian nations have signed over 100 bilateral trade deals in less than a decade, but many of those agreements fall short on key protections for businesses, workers, and consumers,” Clinton says. “There are a lot of bells and whistles, but many of the hard questions are glossed over or avoided.”

“Beyond that, there is now a danger of creating a hodgepodge of inconsistent and partial bilateral agreements which may lower tariffs, but which also create new inefficiencies and dizzying complexities. A small electronics shop, for example, in the Philippines might import alarm clocks from China under one free trade agreement, calculators from Malaysia under another, and so on—each with its own obscure rules and mountains of paperwork—until it no longer even makes sense to take advantage of the trade agreements at all.”

Using the Trans-Pacific Partnership (TPP) as an example, Secretary Clinton says the US hopes to bring together economies from across the Pacific—developed and developing alike—into a single trading community.

According to her, the US hopes to present the TPP at the upcoming APEC in November.

“Our goal for TPP is to create not just more growth,

but better growth. We believe the TPP needs to include strong protections for workers, the environment, intellectual property, and innovation. It should also promote the free flow of information technology and the spread of green technology, as well as the coherence of our regulatory system and the efficiency of supply chains.”

“We are working to ensure that the TPP is the first trade pact designed specifically to reduce barriers for small and medium-sized enterprises … So, the TPP aims to ensure fair competition, including competitive neutrality among the state-owned and private enterprises,” she adds.

The Secretary of State has a pragmatic view of foreign policy. The bottom line, according to her, is that foreign policy should deliver results for the people: “… ultimately, our progress will not be measured by profit margins or GDP, but by the quality of people’s lives – whether men and women can work in dignity, earn a decent wage, raise healthy families, educate their children, and take hold of the opportunities to improve their own and the next generation's futures.”

Hong Kong example Secretary Clinton last visited Hong Kong about 30 years ago when she accompanied her husband, who was then governor of Arkansas. She said she chose the city to deliver her speech because Hong Kong is a “perfect example of what can be done” and “helps to give shape” to the economic principles she outlined, “showing the world their value.”

“So that’s our agenda, and you can see why I’ve come to Hong Kong to talk about it, because here, we have a perfect example of what can be done and how important it is to lead in the economic realm with the kind of principles that Hong Kong has developed on. Now, we know very well that the future is arriving at a breathtaking pace, and the choices we make today will define what is possible economically for so many millions of people.”

“And so while the specifics are forever changing, many of the ideals that guided us in the 20th century are the same ones we need to embrace in the 21st – a belief that a good idea is a good idea no matter where it comes from or from whom, a willingness to embrace change, a

“Some developing countries - admirably focused on fighting poverty - might be slow to implement at home the same rules they benefit from abroad.”

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culture driven by marriage, faith in the notion that a rising tide of economic growth and innovation can improve everyone’s quality of life whether they live in Hong Kong or Appalachia. It is up to us to translate those enduring principles into common practice, shared prosperity, the opportunity for as many people as possible on both sides of the Pacific to live up to their God-given potential.”

She however says that leadership – both in government and private sector – is essential to put this vision into practice. Indirectly, she praises Chinese leaders for taking far-sighted decisions that have created more than two decades of impressive economic growth in China.

Rebuild enemies The Secretary touched on a personal note when she reminisced over how American leadership after World War II turned the tide and brought decades of economic prosperity not just to the American people but even former enemies.

“I think a lot about George Marshall and Harry Truman and the Marshall Plan. What an amazing decision – to rebuild former enemies with an eye toward the future. And I think about it in very personal terms, because at the end of World War II, my late father had served in the Navy, so when he left service as so many men of that time did and returned to private life, the last thing he wanted to hear his president or secretary of State say was, ‘Guess what? We’re going to still be taxing you to send money to Germany, to Europe. We’re going to rebuild Japan because we believe it is in the best interests of your children’.”

Secretary Clinton, who was widely credited for her mobilizing of support from American businesses and making the USA Pavilion at the 2010 Shanghai Expo a success, praised US businesses and entrepreneurs for rising to the challenge when the country needed them.

“But it wasn’t only our public leadership who sounded that note. It was also our business leadership as well who basically said, ‘Okay, we get it. And we’re willing to do our part as well’,” she says.

Clinton stressed that the US experience shows principles such as openness and transparency hold true for other countries and economies too. “We face a lot of similar challenges today, and we need visionary leaders in both government and business. But those leaders need to be guided by these principles.”

“This agenda is good for Asia, it’s good for America, it’s good for business. Most importantly, it’s good for people. And I absolutely believe it will help us create more a peaceful, stable, and prosperous world for the rest of this century.”

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Meeting in Shenzhen Secretary Clinton packed her less-than-24-hour trip to Hong Kong with meetings. Prior to the AmCham speech, she met with Hong Kong Chief Executive Donald Tsang and four local legislators. In the afternoon, she and her entourage spent more than four hours in Shenzhen meeting Chinese State Councilor Dai Bingguo.

The meeting with Mr Dai – which was not on the Secretary’s original itinerary – allowed both sides to have “productive discussions” on a wide range of issues affecting Sino-US relations. They ranged from North Korea’s nuclear program, a visit by US Vice-president Joe Biden to China in August, upcoming meetings in APEC, the ASEAN Regional Forum, and the needs for more high-level meetings to continue the dialogue.

Best Quotes • “Now, while the US economy and those in the Asia-Pacific are well positioned to grow together, our success – neither of ours – is preordained. Prosperity is not a birthright, it’s an achievement. And whether we achieve it will be determined by how we answer a defining question of our time: How do we turn a generation of growth in this region into a century of shared prosperity?”

• “We in the United States are in the middle of a necessary transition: we must save more and spend less. And we must not only save more and spend less, we must borrow less, as well. Our partners must meet this change with changes of their own. There is no way around it: Long-term growth requires stronger and broader-based domestic demand in today’s high-saving Asian economies. This will raise living standards across the region, create jobs in America, improve business for many in this room, and help stabilize the global economy. “ • “Hong Kong is a testament to the power of transparency, good governance, the rule of law, freedom of the press, an independent judiciary, and a vibrant civil society, all of which help to explain why so many people choose to do business here.”

• “Consistent with the WTO Government Procurement Agreement that we signed, America lets companies from other nations who have signed that same agreement compete for appropriate American Government contracts. We would naturally expect countries that want access to our government contracts to offer our companies genuine access to theirs in return.”

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US Consul-General Steve Young (second left) introduces Secretary of State Hillary Rodham Clinton to AmCham Chairman Rob Chipman (second right) and AmCham President Richard Vuylsteke

Secretary Hillary Rodham Clinton chats with Mark Michelson (first right), former AmCham Chairman (1996). In centre is Paul Tse, Chairman of AmCham Macau

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From left to right: Vernon Moore, Group Finance Director of CITIC Pacific, Vincent Lo, Chairman of Shui On Group, Hillary Rodham Clinton, Edith Ngan Chan, Executive Director of Asia Society Hong Kong, Ronnie Chan, Co-chair of Asia Society, and Silas Chou, Chairman & CEO of Novel Enterprises Ltd

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AmCham Chairman Rob Chipman (left) and Asia Society Co-chair Ronnie Chan present souvenirs to Secretary of State Hillary Rodham Clinton

Secretary of State Hillary Rodham Clinton with US ConsulGeneral Stephen Young (second right), his wife Barbara A. Finamore (far right), Chief Executive of Hong Kong Monetary Authority Norman Chan (far left), non-official member of Executive Council Professor Lawrence J. Lau (second left), Executive Council member Marjorie Yang (third left), Chairman of Equal Opportunities Commission Anna Wu Hung-yuk (fourth right), and AmCham Macau Chairman Paul Tse (third right)

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Secretary of State Hillary Rodham Clinton with AmCham Hong Kong senior members: Mark Michelson (far left), Frank Lavin (second left), James Sun (third left), Rob Chipman (second right), and Richard Vuylsteke (far right)

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FINANCE

their dollar assets. Countries have talked about their needs to diversify their currency reserves and there have been calls for an alternative global reserve currency in the future.

After the Downgrades,

What’s Next and Who’s Next?

A

s turmoil engulfs financial markets worldwide, investors search far and wide for clues in making their decisions. To provide members the most up-to-date and practical analysis, AmCham is organizing a series of talks featuring top economists and analysts from around the world. Kicking off the series was Dr Scott Anderson, Director and Senior Economist of Wells Fargo Securities, who addressed the Financial Services Committee in late July. Dr Anderson’s research is widely read by the financial and business community and he has appeared in numerous media including CNBC, Bloomberg, and publications including the Wall Street Journal, New York Times, and Financial Times. He shares his insights and analysis of the US economy and outlook on Europe with biz.hk in the following interview. biz.hk: What are the near- to medium-term impacts of the Standard & Poor’s downgrade on Wall Street?

Anderson: The near-term impact has been to rattle investors’ nerves around the globe as improbable outcomes like risk-free debt now becoming risky, or a double dip recession now seems possible. The impact is most evident in equities as investors pullback on risk and seek safe havens in gold, the Swiss franc, or even perversely US Treasuries.

The markets are wondering what’s next or who’s next, further downgrades of European debt or European banks? The fear of a global growth slowdown and another US recession is currently outweighing the impact of the downgrade on US Treasury yields. Though credit risk has risen for holding Treasuries, credit risk has probably risen across the board for many other bonds as well, reducing the need to move away from Treasuries in the near term. biz.hk: In the longer term, will the US face more downgrades?

Anderson: We cannot rule out further downgrades to US debt, especially if no real progress is made to

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solve our long-term debt problems. The next test will be in November when the deficit commission will reveal their plans to further reduce US expenditures.

If the commission deadlocks, we could be right back to square one again. It goes without saying that if the US enters another recession, it will get far harder for the US to resolve its long-term debt problems even with more aggressive fiscal austerity. biz.hk: If that happens, what does that mean to the global financial system?

Anderson: The inability of the US to get its fiscal house in order will likely accelerate the movement away from the US dollar and US Treasury-centric financial system. Already countries are getting uncomfortable with the weak dollar and fearful that low interest rates and rising inflation could hurt Scott Anderson the long-term value of

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biz.hk: The US and Europe face parallel debt problems. In both cases, there are no signs of any solution in the near future. What does this mean for the global economy? And Asia in particular?

Anderson: Festering debt problems and sluggish growth in Europe and America more than two years since the end of the financial crisis means that growth in Asia will also face new challenges. The rebounds in Asian exports and trade following the sharp declines during the recession have already occurred. Future export lead growth will be more difficult. Asia will need to rely more on domestic demand and inter-Asian trade for its economic expansion. Low interest rates in the US, Europe, and Japan will keep hot money flows coming to Asia’s fastest growing economies, aggravating inflationary pressures and asset bubbles. Global imbalances could worsen rather than dissipate. biz.hk: Do you expect the Euro zone crisis to improve or drag on in the next six months? What are the chances of defaults in Italy or Spain?

Anderson: The Euro zone crisis will drag on like a bad virus. The chances of default rise along with the interest rates that investors demand to purchase their bonds. Just the fear of default or pessimism about the government’s response could be enough to push these countries closer to the brink. More

recently, fears of French and European bank exposures to Italian and Spanish debt have made banks more reluctant to lend to each other and there are rumors that some Asian banks have been reducing their credit lines to some institutions. This is how the Lehman Brothers crisis began, so it bears close inspection.

So far, the extent of the liquidity strains have been mild compared to 2008 and the central banks’ appear to be more proactive in addressing any signs of stress, so the Euro zone crisis will probably just continue to fester rather than come to a boil like the Lehman event did. biz.hk: Corporate profitability seems to be the only current bright spot in the US economy. Can good corporate results last if the country’s economy continues its sluggish growth?

Anderson: Strong corporate profits cannot last forever, but they can continue for some time as US labor costs remain low and global demand and a weaker dollar increases foreign sales. On the other hand, outright declines in real consumer spending that would bring on another US recession would quickly swamp any profit improvement from foreign sales and a weak dollar so that is the largest risk right now for US companies and the sustainability of the US economic expansion. biz.hk: Are you confident that the US economy will achieve its 1.7 percent forecast for growth for 2011?

Anderson: We have scaled back our forecasts for the US economy for 2011 due in part to the large downward revision in GDP growth for the

We have scaled back our forecasts for the US economy for 2011 due in part to the large downward revision in GDP growth for the first and second quarter of the year.

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first and second quarter of the year. US GDP only grew 0.4 percent in first quarter and the 1.3 percent estimate for second quarter growth will likely be revised down below one percent based on June’s worse than expected US trade deficit. We expect US growth to rebound to around a 2.0 percent annualized pace in the second half of 2011, and continue growing at around a 2.0 percent pace in 2012. biz.hk: Official unemployment rate stands at 9.1 percent and the unemployment rate including discouraged workers and under employed is as high as 16 percent. With an election year approaching, what options are available to the Obama administration to spur job creation?

Anderson: It will be difficult for the administration to make a dent in unemployment before the 2012 election. There are basically two policy prescriptions being discussed in Washington these days. The Administration favors an infrastructure bank that could be funded to finance things like roads, bridges, railways among other projects to improve our transportation infrastructure. This would put back to work some of the construction workers that have been laid off in residential housing market. This is not likely to create a significant number of jobs in time for the election or help Obama get re-elected.

Republican’s have talked about a reduction in payroll taxes or tax holidays in order to give employers an incentive to hire more workers over investing in new productivity enhancing equipment that often reduces the need for hiring. biz.hk: With US$1.5 trillion sitting in reserve, what are the chances that the Fed will launch QEIII? Anderson: The Fed has recently committed to keeping interest rates at the current level until at least the middle of 2013. The Fed has also said it is monitoring incoming economic data and discussing further options should they need to be deployed to avoid another economic downturn. There were three voting members of the FOMC that dissented from the decision, a large number given that policy is often made by consensus. This split on the FOMC is a big impediment to another round of large asset purchases, though the door is still open if the unemployment rates get bad enough.

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biz.hk: If not, what are the other options available to the Fed to provide “policy support” or stimulus for the US economy?

Anderson: Ben Bernanke has talked of several alternative options to outright asset purchases that could also stimulate the economy. One is the change the mix of assets on its balance sheet. It could sell short-term Treasuries and buy longer-term Treasuries to reduce long-term rates further. The Fed could also reduce the interest rate on reserves to give the banks more incentive to lend over keeping excess bank reserves at the Fed. Probably the most effective but also the most dangerous policy would be to add more assets to its balance sheet. This would make unwinding the policy more difficult when the time comes and could lead to monetary fueled inflation down the road. biz.hk: This debt crisis has also highlighted the issue of the sustainability of US “fiscal” policy. Can the US continue to print money to finance its debts? What are the long-term consequences in terms of US productivity and competitiveness?

Anderson: High long-term debt, gross government debt above 90 percent of GDP, has been shown in the economic literature to reduce productivity and long-term economic growth in many countries. There is little reason to believe the US is different in this respect. High debt tends to raise interest rates, which can crowd-out private sector investment, reducing productivity and economic growth. biz.hk: Do you expect the Chinese currency issue to surface again in 2012 as rhetoric heats up in Washington over losses of US jobs to China? Will China accelerate the pace of appreciation of the Chinese currency in 2012?

Anderson: It is in China’s interest to accelerate the pace of appreciation of its currency. A rising currency will help tramp down inflation in China as oil which is priced in dollars becomes relatively less expensive. It also should bolster domestic demand and imports from abroad as Chinese global purchasing power and relative wealth increases. This will make trade more balanced with other trading partners. It will also make it easier for China to deflect criticism that its undervalued currency is the main catalyst of high unemployment in countries like the United States.

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EDUCATION

• Does a lack of international school places detrimentally affect your business?

• If the answer to the previous question is “yes”, please identify from a shortlist of how the shortage affects your business?

• Please share your own experience.

AmCham Survey on International School Spaces in Hong Kong

Key findings

Lack of School Space Hammers Business, Survey Shows

By Daniel Kwan Concern over the shortage of international school spaces in Hong Kong has once again been raised in recent meetings between the Chamber and the Government. A survey conducted in early summer by the Chamber confirms that the shortage is most prevalent among lower grades. Businesses are clearly worried that the shortage of quality of education available in Hong Kong is already having an impact on Hong Kong’s long-term competitiveness.

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lmost 70 percent of AmCham members polled in a survey in May indicate that the shortage of international school spaces in Hong Kong affects their business.

And 72 percent say the shortage has harmed Hong Kong’s reputation as a regional hub.

For many years, AmCham has expressed concern over the lack of international school spaces in Hong Kong. In 2007, it took the lead and published a survey of international schools in the territory, warning that the problem if left unattended would undermine Hong Kong’s competitiveness and calling for immediate Government action.

The Government acted on some of the Chamber’s 2007 recommendations. For example, the Education Bureau streamlined the approval process for international schools which sought to expand their premises and increase enrollments.

In addition, a number of vacant government premises were made available to schools seeking

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expansion.

But the space problem has not been resolved and in some instances has worsened. Today, many parents complain about the “near impossibility” of finding school spaces for their children, and businesses report failure to recruit expatriates with children for the same reason. Hong Kong, investors warn, is losing talents to other destinations like Singapore and Shanghai because of this challenge.

In response to the serious concern over this issue in the business community, AmCham has stepped up cooperation with fellow international business chambers and lobbied the Government for more concerted action on the school space problem. To better understand the problem, AmCham formed a special task force led by educator and AmCham Governor Janet de Silva to research possible solutions to the problem, and the Chamber conducted a member survey on the issue in April and May. Of the members polled, 300 responded to three basic questions:

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In analyzing the replies, the Chamber found that: • 68 percent believe the lack of international school spaces is affecting their business • 72 percent believe this issue makes Hong Kong unappealing as a regional hub • 75 percent believe that this makes it harder for them to attract overseas talent • 63 percent have lost good candidates to other markets (i.e. Singapore) Rob Chipman, AmCham Chairman, says: “AmCham has been out front on the issue of school spaces for some time now. This topic is one of AmCham’s top priorities for 2011, so I was very pleased to see the high response rate to the survey and to learn with greater precision the degree to which our members consider the school space issue a serious problem.”

“Clearly, the shortage of school spaces is now a major problem, and it needs to be addressed much more vigorously,” he says. “I am in the executive relocation business so I see, better than most, what are the key concerns of people considering moving to Hong Kong.”

“Housing, air quality, and cost of living are often brought up but nothing sparks greater concern, or presents as big a problem, as schooling for children,” Chipman says. “If executives cannot get their kids into an appropriate school, they will not come to Hong Kong – period. There is very little room to negotiate; very few alternative or options can be considered.”

“These families might well look to Singapore or Shanghai, where school spaces are available. They might well opt for one of these cities, and they will then invest, create jobs, and contribute significantly to the local economy. Hong Kong simply can’t afford to lose out on these opportunities.”

The voices The survey results show that the greatest unmet demand for spaces is at the primary school level.

Almost all primary schools have long wait lists. One surveyed member calls the lists “too long to be meaningful.” A number of the respondents say they had had no choice but to turn to “home schooling,” while their applications make their way through the wait lists – a process that can take six months or longer.

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32% 68%

Affecting Business 68% Not affecting business 32%

75%

72% 63%

31% 32% 14%

Makes HK unappealing as a regional hub 72% Good candidates are lost for key jobs

63%

Hard to attract oversea elites

75%

Staffs move to other countries

31%

Lower rate in staff retention

32%

Other

14%

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Another common complaint among the respondents is the expensive debentures charged by some schools. One respondent wrote that such high levies and fees are out of reach to most small- and medium-sized enterprises. In addition, most respondents are disappointed that the debentures – even if they or their companies can afford them – don’t guarantee acceptance but a place on the wait lists only.

Many survey respondents complained that due to the lack of school spaces their companies had no choice but to delay the transfer of critical staff to Hong Kong. Moreover, good candidates are lost for key jobs. The uncertainty and worries on schooling put extra stress on families who already have to face a host of problems that relocation entails. Very often, the assignees simply turn down the offers to come.

In addition, retention of employees who have started their families in Hong Kong has become an increasing challenge. The problem of school spaces quickly surface once the children of these employees reach school age. Many respondents say they would have to leave Hong Kong when that happens. Some business owners also say they are prepared to close their business in Hong Kong because of the difficulties they faced in finding good educational opportunities for their children. A significant number of respondents express worries that they face increased retention risk if their employees are forced to live apart from their families.

In an interview with biz.hk in April, Education Secretary Michael Suen vowed that the Government takes the issue of school space shortage seriously and additional spaces would soon be available.

“The important message is that there are more [spaces]. There are 5,000 more places coming on stream. That’s the message. We are doing our very best to get more on the drawing board,” Suen said.

Primary shortage But the numbers don’t tell the full story. These 5,000 spaces are mostly in the New Territories, or are coming on stream too late to meet the immediate demand for primary school places on Hong Kong Island.

Relocation professionals consulted by the AmCham task force point out that of the 5,000 new school places, none contribute any additional primary school places on Hong Kong Island. They also observe: • The vast majority of international assignees still choose Hong Kong Island for their residence – particularly new assignees.

• Most international assignees, with primary school children, will turn down a Hong Kong posting if

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AmCham’s recommendations

Examples of respondents’ feedbacks of the 2011 AmCham Education Survey:

• The Government needs to build a comprehensive map of current private and public schools in Hong Kong and also to conduct a public and private audit on these schools to assess the effective utilization of these sites. underutilized premises • Reallocate adjacent to existing international schools and free up other vacant or underutilized sites on Hong Kong Island for immediate development of primary school places.

• Make existing decant schools available to international schools for development into new primary places as they become available.

• Activate a public-private standing committee to monitor demand trends and support long range planning to prevent future supply demand imbalances.

• “We service multi-national/global companies that relocate families throughout the world. Our livelihood relies on individuals and in particular families relocating to Hong Kong. We have had recent cases where schools do not have vacant spaces to take two or three children (a typical family size) in the same school; no places available in specific grades due to 'full' schools. And the family has chosen to relocate to Singapore…”

• “One of our advisory board members, a senior executive with a major investment bank was relocating the entire business from London. The unit should be based in Hong Kong, but, due to difficulties getting school placement in Hong Kong, they chose Singapore as the base for the business.”

• “We had to move three top regional leaders to Singapore when we would have preferred to keep and move them to Hong Kong. The main issues cited by these leaders were cost of housing and lack of school space for their children (ages 7-17).”

• “Staff who have been asked to transfer to Hong Kong later decline the opportunity because they have been unable to find places in schools for one or more of their children. This has happened to our bank three times in the last two years.”

• “We have been unable to relocate key staff from overseas to Hong Kong due to lack of international school places. In addition, staff that was already in Hong Kong, who had pre-school age children when they arrived, left Hong Kong because they could not get their children into international schools of their choice.”

they cannot access schools on the island.

• While there are primary level vacancies at a limited number of schools in Hong Kong, parents are not willing to accept assignments if it means children cannot access their home country curriculum. In particular, American curriculum is in high demand by Americans who represent 59 percent of international assignees.

Erik Dierks, Chief Advancement Officer of Hong Kong International School, notes that there is a trend of more applications for primary spaces and suggests companies are bringing employees out to Hong Kong earlier in their careers, and hiring younger executives with younger children.

“Also, companies may be hiring younger executives without children, only for them to have families in Hong Kong,” Dierks suggests. “This increase in younger families puts an increased strain on applications.”

According to Dierks, HKIS has an average turnover rate of 10 percent – from R1 to Grade 12 – or about 20 students per grade. The percentage has been relatively stable over the years. “Interestingly, 17 per cent of the 192-student strong Class of 2011 had been with HKIS from R1 to Grade 12,” he says.

Dierks says that HKIS does not have a policy of placement priority to Americans. Instead, it has three

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prioritizing categories which the school applies in the order of (1) debenture holders, (2) students coming from an accredited American school, and (3) all others.

“Americans have never had a wholesale priority at HKIS. However, we do place a priority on students who have come from a US accredited school, which might have created this misperception,” he explains. “We are lucky enough to be the American curriculum school of choice and so have naturally attracted a significant number of US passport holders since our creation in 1966.”

“Last year, 58 per cent of [HKIS] students were American passport holders. However, this may not be a true reflection on the number of Americans at the school, since some families have dual citizenship and may choose to register with HKIS under their alternative passport, not their American one,” he adds.

Four recommendations According to Chipman, AmCham’s Education Taskforce has four recommendations for the Government. First, the Government needs to undertake a comprehensive assessment of public and private schools in Hong Kong to determine their

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CHINA BUSINESS

effective utilization. Second, the Government should reallocate underutilized sites for international school use. Third, the Government should make existing decant schools available for international school use.

Last but not least, the Government should form a standing committee comprising public and private sector members to monitor trends in demand and support long-range development as a long-term, ongoing solution. “This will help avoid future supply demand imbalances such as those we now face,” Chipman says.

Dierks of HKIS points out that it is important to fully consider the practical needs of parents and their support in planning new schools. Finding new space near existing facilities is preferable to building new schools in faraway locations.

“There is certainly an opportunity for new schools to be constructed in areas that allow for more space, such as the New Territories,” Dierks says.

“However, there are few well-established schools that could contemplate a move to a different location and

in many cases the neighboring communities have grown around schools.”

“Because of their locations, the growth for these types of schools means that providing adjacent space to existing facilities, or facilitating growth within the existing school footprint, are the most realistic option,” he says.

Dierks stresses that being able to provide quality education is crucial for Hong Kong to attract international talents and maintain its competitive edge as a regional center of business.

“Hong Kong is fortunate to be a preferred location for international commerce,” he says. “As such, it attracts top-level executives and their families.

The style, quality and availability of education will play a significant part when these families make the final decision to move here, or not.”

“To maintain this desirability, and to remain competitive within the region, cooperative efforts must be made between government and international schools to find suitable space and means for accommodating growth,” he adds.

Hengqin New Zone

Sets to Take Off in Five-Year Plan Period

By Daniel Kwan

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ince it was officially published in March of this year, China’s 12th Five-Year Plan has generated considerable interest at home and abroad. With the breathtaking pace of changes happening in the country, the Plan is a valuable roadmap for anyone who is interested in understanding China’s development and future directions.

This is the first time that Mainland planners have included a separate chapter on Hong Kong and Macau in the Five-Year Plans – apparently to underscore Beijing’s support for the two SARs. According to the Plan, how the two SARs can integrate with the Pearl River Delta will be the key in realizing the Central Government’s support for Hong Kong and Macau. Among Delta cities, three “partners” have been assigned strategic duties for the integration: Qianhai in Shenzhen, Hengqin in Zhuhai, and Nansha of Guangzhou.

AmCham HK’s China Affairs Group has been in active discussions with relevant parties to research for new business opportunities and trends in China for

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Chamber members. In July, the Group organized a one-day field tour to Zhuhai and Hengqin Island. The delegates also included a few members from AmCham Macau. The tour included a visit to Gree Electric Appliances (see sidebar) – the world’s largest air conditioner manufacturer – and a dinner reception with Zhuhai Senior Vice-mayor Liu Xiaolong, who briefed the delegation on Zhuhai’s development plans and groundbreaking reform measures for Hengqin Island. (editor’s note: The Chamber is planning visits to Qianhai and Nansha; interested members should contact Lloyd Cheong of China Affairs Department: lcheong@amcham.org.hk).

“It’s encouraging to see AmCham-HK and AmCham-Macau co-operate on a delegation of common interest,” says Philip Leung, chair of AmCham Hong Kong China Affairs Group. “Moreover, this delegation helped improve members’ first-hand knowledge of the latest development in the western PRD, which is taking on increased importance to the Hong Kong business community under the 12th Five-Year Plan.”

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Cool giant

I An artist impression of the leisure and resort facilities of Hengqin Island

Attracting investment Compared with top-tier cities like Beijing and Shanghai, Zhuhai has been relatively low-key in attracting foreign investment. According to information published by Zhuhai Investment Promotion Bureau, by the end of 2010 the city had approved 11,064 foreign investment projects. Thirty-nine of the “Fortune 500” companies such as Philips, Shell, Flextronics, Panasonics, and Bosch have already invested in Zhuhai.

Attention was drawn to Zhuhai in August 2009 when the State Council – China’s Cabinet – approved the Hengqin Overall Development Plan. Approval of the plan means that Hengqin will be able to experiment with reforms that are a nation-wide first at the time – following the same development path as Pudong District in Shanghai and Binhai District in Tianjin about a decade ago.

Hengqin – a delta-like island sandwiched between Macau and Zhuhai – soon received much publicity in the press. Mainland media hailed the new plan as a milestone in Zhuhai’s development. It was advertised as a “Hong Kong-style Free Trade Zone” where

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businesses could enjoy preferential tax policies not available in other parts of China.

In just four months, an official body – Hengqin New District Management Committee – was officially established to take charge of Hengqin’s administrative matters. Early this month, Shanghai Securities News reported that the Central Government has officially approved a set of preferential policies for Hengqin and an official announcement will be made soon.

According to officially published reports, Hengqin’s population is projected to grow from the current 4,000 to 280,000 and its per capita GDP should reach RMB200,000 (US$29,283) by 2020.

While it is too early to say with certainty the future of Hengqin, officials who briefed the delegation expressed optimism that most projects would be completed on schedule.

These projects include a campus for University of Macau, a theme park with resort facilities, and the Shizimen Central Business District.

“Hengqin is a bold experiment in cooperation among Guangdong province, Hong Kong, and Macau to forge a powerful regional economy in the

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PRD,” Leung says. “With developments like the Free Trade Zone, the Shizimen CBD, and the Macau University campus, Hengqin can provide a new venue for growth in service industries, high-tech, manufacturing, and tourism.”

Hengqin positioning In an interview, a spokesman of Zhuhai Investment Promotion Bureau explains that although tourism is also one key industry for Hengqin, the island will play a role different from Macau.

“Hengqin is positioned to become a regional servicing base to support Guangdong, Hong Kong, and Macau,” he says. “Hengqin will build internationally-famed tourism and resort facilities that can complement the development of Hong Kong and Macau.”

He says Macau’s tourism industry focuses on gaming and the SAR lacks land to build large-scale resort facilities. “It is difficult for Macau to build theme parks or leisure facilities,” he says. “But these are the strong suits for Hengqin because we’ve got plenty of land to build high-quality resorts and

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t may not be a household name in the West. But chances are – you and I may be the customers of Gree Electric Appliances without knowing it.

Employing over 80,000, Gree Electric Appliances, based in Zhuhai, is in fact the world’s largest air conditioner manufacturer. Last year, Gree boasted sales revenue of over RMB60.8 billion –with a record profit of RMB4.6 billion (US$720 million).

The reason western consumers know so little about state-owned Gree Electric is because it is an OEM partner for many international brands. Domestically, Gree is a market leader and well-known among Chinese consumers.

Sun Yiqing, President Assistant of Gree Electric, says that the company invests a lot on R&D and takes the protection of its intellectual property very seriously. “Gree Electric succeeded in increasing sales last year because we focused on technological innovation,” Sun tells biz.hk. “We put special emphasis on our core technology and the quality of our products and services.”

At present, Gree Electric has no immediate plans to expand overseas although it has established production facilities in Brazil, Pakistan, and Vietnam. In June, it opened a branch office in Los Angeles.

Benefited by China’s rapid growth in real estate and consumption, Gree Electric enjoyed brisk sales this year. Sales Sun Yiqing revenue jumped 60 percent in the first half of this year, according to official reports.

“The domestic market is of course important to us, but we also hope that Gree products will become more popular overseas,” Sun adds. “We have set up sales points in countries around the world and we hope that consumers will recognize our brands because of the quality of our products.”

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The following are excerpts of an interview with a spokesman of Zhuhai Investment Promotion Bureau with biz.hk: biz.hk: Will more preferential policies regarding Hengqin be announced soon?

Spokesman: We are also waiting for the announcement. These [policies] can cover taxation, Customs, and finance. As the announcement has not been made, I can’t tell you what these policies are. But we can say for sure that policies for Hengqin will be more flexible, extensive, and preferential than policies available elsewhere.

AmCham delegation visits the Hengqin Administration Committee

AmCham President Richard Vuylsteke presents a souvenir gift to Zhuhai Senior Vice Mayor Liu Xiaolong

tourism facilities.”

“We can complement each other,” he adds. “For example, Macau can host exhibitions and conventions which focus on consumer goods.”

“In Hengqin, we can make use of the unique conditions here to organize industry trade shows like aviation, heavy industry, sailing and cruise, printing and publishing, but the trade talks and conventions can be held in Macau.”

“This way, Hengqin can provide the logistic support for Macau’s exhibition and convention business.”

Hengqin New Area Development Plan

Hengqin’s basic facts

Zhuhai

Macau CBD

Customs Service Zone

Area: 106 square kilometers 2011 population: 4,000 Location: 34 km from Hong Kong Connection: Will be linked with the Hong Kong-Zhuhai-Macau Bridge currently under construction

Education Zone

biz.hk: Will Hengqin adopt real estate policies that are different from what’s being practiced in Zhuhai?

Spokesman: At present, it is difficult to say. Based on our information, we believe the differences will not be substantial. However, we can say that the policies are likely to favor compatriots from Hong Kong and Macau who want to invest here. biz.hk: Will these preferences also apply to foreigners who have Hong Kong permanent residency?

Spokesman: Probably yes, if they have Hong Kong permanent residency. biz.hk: What about border and immigration control between Hengqin, Macau, and the Mainland?

Spokesman: The idea is that there will be immigration, border, and quarantine control between Macau and Hengqin. This “first line” of control will also cover security matters such as weapons and classified information. There will be a “second line” between Hengqin and the Mainland. Cargoes will go through Customs clearance here and the transportation vehicles will be inspected. The idea has yet been approved by the Central authorities.

biz.hk: What will happen in Hengqin in the near-term?

Spokesman: Number one will be the announcement of new policies by the Central Government. The second is about infrastructure development, which is gathering pace in Hengqin. We hope to spend about two years to complete a road system in Hengqin and other infrastructure facilities. After that, other projects can begin. The third is about bringing in investment.

We will be selective about the types of investment for Hengqin. So far, we have received visitors from many different countries. In particular, many investors from Hong Kong and Macau, the US, Canada, Japan, and Taiwan have come and expressed interest. biz.hk: Will policies for Hengqin contradict China’s national policies?

Spokesman: Clearly, national policies are national policies and they must be followed by everyone. They cannot be changed. However, my understanding is that the Central government allows specific areas to undertake certain reforms that are pioneering in nature and serve the purpose of providing experiences for the country.

biz.hk: Can you explain the concept of the new Macau University campus in Hengqin?

Spokesman: What it means is that after the campus is built, it will be fenced off from the rest of Hengqin. The campus will be connected with Macau through bridges or tunnels and both entrance and exit are on the side of Macau. There will be no entrance or exit in Hengqin. It will not be connected with the rest of Hengqin. This arrangement is mainly to solve the problem of lack of space for University of Macau.

Hengqin Island

Leisure resort zones

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biz.hk: What are the focuses of those preferential policies?

Spokesman: A key is about providing convenience for Customs clearance. Obviously, the policies will have to be better than [those available in] a Free Trade Port, otherwise they will be meaningless. This means Hengqin can be somewhat like a duty free environment.

biz.hk: Will the new campus be completed as scheduled next year?

Spokesman: Leveling of land for the new campus has been completed. We are optimistic that we can meet the schedule.

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Peter Levesque

The Rise of China and the Future of Retail Supply Chain Management

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hina’s transformation has unquestioned impact on global retail supply chain management. In The Rise of China and the Future of Retail Supply Chain Management, Peter Levesque, an industry veteran and currently Chief Commercial Officer of Modern Terminals Limited, offers his insights into China’s ascendancy, the development of its retail sector, and future trends for Supply Chain Management (SCM). biz.hk interviewed Mr Levesque about his book, China’s future, and what’s in store for the industry. biz.hk: What are the tipping points as China climbs up the global Retail Supply Chain?

Levesque: One of the biggest advances in the China domestic market over the last several years has been the development of Chinese retail brands. Gome Electronics, BYD Automotive, Li-Ning Footwear, Haier, and Lenovo are just a few of the Chinese retail brands that have become popular both domestically and internationally. At the same time western retail brands are turning their attention toward China as an emerging consumer market. These retail initiatives have similar requirements and similar constraints when it comes to domestic supply chain management and product distribution.

The key to successful retailing in China is building a reliable network of logistics service providers that can distribute product efficiently and securely throughout the country. This can be difficult as domestic trucking in China remains an extremely fragmented business, and cross-provincial supply chains can be complex and difficult to manage.

While there are numerous challenges to the growth of retail brands in China, there are also tremendous opportunities. Western retailers who take the time to understand the Chinese market and take the time to develop local and national relationships will be able to build competent supply chain networks capable of capitalizing upon China’s emerging consumer marketplace. biz.hk: With the recent high-speed train tragedy, do you expect Chinese leaders will moderate their views of infrastructure development in the future?

Levesque: It’s important to keep in mind that the infrastructure boom currently taking place in China today is the largest in human history. New airports, roads, rail lines, container ports, and inland waterway projects dot the Chinese landscape, and are a source of tremendous pride

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to the Chinese people. Beijing’s emphasis on maintaining social harmony means that China will need to connect its rural hinterland population with its urban business centers in order to ease the yearly flow of migrant workers moving to the coastal cities.

A critical component of China’s infrastructure development will be to support the shipment of products from newly developed manufacturing zones in the hinterland to container ports and air cargo facilities for export. Government incentives to establish manufacturing facilities in China’s North and West are only as good as the infrastructure that will be in place to support raw material flows to the factory and finished product distribution from the factory. Without this basic connectivity it will be difficult to attract manufacturing and development outside of traditional factory locations.

Unfortunately, the extraordinary pace of infrastructure development creates situations where short cuts can be taken, and where project completion deadlines may take priority over public safety. These situations are not unique to China, but given the scope and scale of China’s development, Beijing will need to insure it maintains strict safety and building code regulations, and that it monitors project construction, project design, and project suppliers closely to insure safety standards and building codes are consistently being met. biz.hk: You and Dr Steve DeKrey have rightly pointed out the importance of human capital in the development of Supply Chain Management in the book. What are the challenges that multinationals face in the area of human capital management as they build their leadership teams in China?

Levesque: As China migrates from a manufacturing economy to a consumer economy, developing a new generation of human capital will be critical to the country’s

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long term growth and success. China’s new generation of human capital will require training and skills beyond traditional manufacturing. Training in areas such as product design, R&D, information technology, and international marketing will become more prevalent.

While many multinational corporations have been able to localize key managerial positions in China, the issue of localizing critical leadership responsibility remains a challenge. The traditional managerial role in China remains a top down transactional type of relationship which can work well in a factory but not so well in other environments. For many MNC’s in China however, finding good managers is not the problem. The struggle is with finding and retaining good leaders.

The recent “reverse brain drain” effect is having a positive impact in the area of developing business leaders in China. In years past many Chinese students would go to the United States for their college education and then remain in the US for their working career. Today many Chinese students are taking their Western education and leadership skills and returning to China for their careers.

This trend should help address the leadership gap in China and will hopefully allow MNCs to localize a wider spectrum of their management teams in the future. biz.hk: In recent years, China has moved towards the development of Free Trade Ports. Would these new “ports” become rivals to Hong Kong? As these FTPs become popular and China’s revenue base grows stronger, will China abolish the Value Added Tax? Levesque: There have been many developments in China around Customs regulations, port development, and service capability over the last several years that have had a positive impact on doing business there. While these developments have helped to reduce the complexity associated with China’s trade regulations, Hong Kong remains a vital player in the region and maintains a competitive advantage in the marketplace.

Hong Kong’s free port status, its geographic location in the region, its world class operational efficiency, and its reputation as an easy and secure place to do business, means that despite the developments in China, Hong Kong will continue to play a vital role in the transportation industry for years to come.

China has been effective in using the VAT mechanism as a means of providing incentives for higher value production. Reducing the VAT refund for toys for example while increasing the VAT refund for mobile phones, encourages manufacturers to produce phones. There have been issues with the implementation and measurement of VAT over the years; however it remains a key driver of export manufacturing behavior.

In theory the development of Free Trade Ports in China should allow for a faster VAT refund to occur since factories may apply for the VAT refund once their product is delivered inside the FTP. Given VAT’s utility in the market, we can expect that it will be around awhile longer. biz.hk: What are the key challenges to Hong Kong in maintaining its lead in supply chain management?

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Levesque: While China has made great strides in becoming more competitive, Hong Kong’s advantage remains its long history of transportation industry expertise, its reputation for operational excellence in logistics and port operations, and its highly skilled supply chain workforce. To remain competitive in the market, Hong Kong must focus on areas that China will find difficult to replicate. The development of new supply chain technologies, innovation in transportation management systems, the training and development of world class supply chain executives, the outsourcing of port development capability and operations management, as well as trade finance expertise, are all areas where Hong Kong can exploit its competitive advantage both in the region and the around the world. biz.hk: What areas Hong Kong need to improve so that it can become the center for international internet fulfillment?

Levesque: What’s interesting about this opportunity is that Hong Kong really does not need to do anything different in order to be more competitive in this area.

Hong Kong already has the ideal transportation infrastructure, customs functionality, and IT capability to facilitate world class internet fulfillment operations.

What needs to change is the willingness of global retailers to try a new fulfillment model.

The traditional supply chain model includes manufacturing the product in China, shipping the product to a distribution center in the US, and then distributing the product to consumers in the US. The problems arise when a company tries to force fit their traditional US supply chain model into the ubiquitous world of the internet consumer, where products made in China and shipped to the US must fly all the way back to Asia in order to meet online consumer demand overseas.

Breaking away from the traditional model is difficult for many retailers to comprehend where a change is perceived as risky. However, being able to distribute online orders direct from the manufacturing point of origin reduces transportation costs, inventory carrying costs, obsolesEditor’s note: cence, and stock outs. Using The author of the book, Peter Hong Kong as an Levesque, will speak at a e-fulfillment center would breakfast event jointly hosted allow retailers to increase by the Transportation and margins and grow internaLogistics Committee and tionally.

China Business Committee on The risk that retailers September 1st at the Chamber should be evaluating is the office. Interested members opportunity cost of not can register through the making a change to the Chamber’s website. The Shiptraditional supply chain ping Point - The Rise of China model to support internet and The Future of Retail sales overseas, and missing Supply will be available at a out on the growth of the discounted price at the event.

Asia online consumer.

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What’s

Holding Chinese Brands Back?

T

Martin Roll

biz.hk: Why is China lagging behind other countries in developing its own brands?

Roll: Many reputed global brand surveys have found that only a few of the top brands originate in Asia.

Three classic brands come from Japan and a fast-growing ambitious brand comes from South Korea: Sony, Honda, Toyota and Samsung. But given the size and volume of Asian business today, it is evident that Asia could build many more prominent brands and capture more financial value from better price premiums and customer loyalty.

There are many reasons why Asian companies and in particular Chinese firms have not fostered global brands until now: • The diversification of businesses spanning many industries with limited overlap and synergies has been a major impediment to building brands in Asia. The prevalent mindset in Asia is based on trading, rather than branding, and the generation of revenues, rather than profits. But it is hard to create a relevant, clear and differentiated brand strategy, and build a corporate brand which encompasses all areas, when a business has its hands dipped in every pie.

• The implications of IP protection in Asia have been a major barrier against building brands. In their own backyards, many Asian companies have

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he rise of Chinese domestic market has drawn the attention of global brands around the world. As foreign brands establish their foothold in the Chinese market, marketers ponder when will Chinese brands rise and challenge the foreign brands not just at home but in the global market although market surveys have shown that Chinese brands still have a long way to go in terms of building a strong reputation internationally. Branding expert and author of the global bestseller, Asian Brand Strategy, Martin Roll, shares his insights on Chinese brands in an interview with biz.hk.

faced rampant counterfeiting and infringement of IP rights. Until and unless legislation and law enforcement get better in the region, it may be a hurdle that prevents a deeper appreciation and respect for intangible asset management in the Asian boardroom.

• But the one reason, more than any other mentioned above, that influences the creation of strong brands is the mindset of the boardroom and the CEO. Branding is a boardroom discipline and successful brands can be built only when the boardroom, led by the chairman and the CEO, understands, appreciates and commits to treating branding as a strategic discipline.

Chinese managers and firms need to step up the efforts to counter this trend, and showcase to the world that China has lots to offer.

Asian cultures have always valued the long-term aspects in almost any aspect of life. Asian boardrooms should use this unique strength to influence them in creating more successful brands – but it requires a different mindset in the Chinese boardroom. biz.hk: Chinese companies are generally speaking less transparent, family-oriented, and their managers are more likely to follow orders than systems and

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rules. In such context, how can the issue of international branding move up the agenda in Chinese boardroom?

Roll: Generally, the trend of branding on a strategic level has gained momentum during the last three to five years across the region. Asian boardrooms are very much aware of the financial power that strong brands can add to their corporations. The outstanding issues are how they can make this happen.

Firstly, education and training of the boardroom directors can bring them up to a common understanding of the discipline, its opportunities and challenges.

Secondly, the company can elevate people with strong marketing and branding backgrounds to the board. Asian brands can indeed challenge the global players, but it requires a new mindset, resources and capabilities.

The responsibility for the success of Chinese firms moving forward depends on their management teams and long-terms strategies. Many companies are short-term focused these days and a differentiating factor to assess future competitiveness is how much the management team is dedicated to the long-term. biz.hk: China is known for manufacturing low-end commodities but not high-end consumer goods.

How can China change such perceptions in the West?

Roll: The face of business in Asia is changing faster than one can blink one’s eyes. Asian companies that used to be back-end workhorses, manufacturing consumer goods cheaply for Western companies, are slowly realizing the benefits of branding. This applies very well for Chinese firms too.

In a market where competition implies slashing prices on their unbranded products, Chinese businesses are slowly becoming more attentive to the power of branding in capturing consumers and returning larger profits on their investments. Firms are realizing that whereas they were wearing themselves down on razor-thin margins to compete with the next supplier, they could increase returns by investing in their brands.

Most Chinese firms, however, still view branding as advertising or logo design. If firms are to benefit from branding, they must recognize that it impacts the entire business – the structure, goals, attitude and

the very outlook of those in the boardroom. Managers will need to see branding not as an appendage to the ongoing business, but rather as an infusion which seeps through the very spirit of the organization, as a healthy return on Return on Investment (ROI).

Asia is still one of the world’s biggest providers of commodity products. At the same time, Chinese manufacturers mostly produce for other companies and the majority of these products are therefore non-branded. In other words, these are volume products without strong brand equity.

The largest part of the financial value is captured by the manufacturers’ customers – the next player in the value chain – primarily driven by strong brand strategies and successfully planned and executed marketing programs. China needs to reverse this trend. biz.hk: CEOs are the public faces of brands. How long will it take before China will have its own army of Richard Branson?

Roll: Brands are not only, if sometimes at all, built from traditional advertising and promotions, but are rather built using a comprehensive range of corporate-wide activities delivered by people throughout the organization.

Therefore, branding can no longer be delegated to the mid-level marketing function in the typical Chinese organization. Instead, the Chinese boardrooms and the CEO must take charge of the brand strategy, lead the brand development, manage its implementation and be fully involved in performance tracking and benchmarking.

The branding process cannot reach its logical conclusion unless the chairman and the CEO buy into it and back it up with the required resources. But merely having the branding knowledge will not suffice.

Leaders need to have a holistic vision and an in-depth understanding of the discipline. One also has to be an excellent business leader and brand marketer with a truly international edge.

Externally, the Chinese business leaders can benefit tremendously by representing and leading their brands by example. Chinese business leaders can help to build their brand portfolios by appearing more outside the boardroom, and acting as the primary spokesperson of the brand strategy and vision, internally and externally.

“To create iconic Chinese brands true to their roots and origin, Chinese managers will have to become trendsetters to a much larger extent than today. ”

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This can add tremendously to the success of the brand and also be cost-effective in many instances. biz.hk: Are there sectors/areas that Chinese companies enjoy advantages in building international brands?

Roll: To create iconic Chinese brands true to their roots and origin, Chinese managers will have to become trendsetters to a much larger extent than today. The future perspective for Chinese businesses is that, in order to be successful, Chinese brands need to capture the spirit of the region and the world, but they also need to lead the way by creating that spirit. Innovation, design and new technology will be the key to success.

It is time for Chinese boardrooms to rid of the inferiority complex towards Western brands and their strengths and focus more on what China and Asia actually have to offer when it comes to brand building.

Asian consumers and Asian manager have for long not valued Asia and its heritage and instead tried to emulate everything from the West. The Asian inferiority complex is diminishing and Asia and all its richness of cultures and content for brands will grow in importance as the key ingredient for brands over the next 10-15 years.

In that context, Chinese firms can build and sustain advantages in almost any industries they like as no global firm will ever have a monopoly from new competition. China will in the future build strong brands in technology, consumer electronics, fashion and lifestyle, transport technology, and hospitality among many other sectors. biz.hk: Is M&A a viable shortcut for Chinese companies to build international brands?

Roll: A quick scan of the business press over the years would reveal one common thread of business activity – mergers and acquisitions (M&A). Companies for a long time now have readily adopted this route to business domination and market leadership.

Examples of glorious and often controversial M&As are galore in the business world – Procter and Gamble’s acquisition of Gillette, Adidas’s merger with Reebok, Mittal Steel’s merger with Arcelor (one of the most controversial mergers that raked up national sentiments amongst the French and even the French government initially opposed the merger), HP’s merger with Compaq and the list goes on.

In spite of such tremendous M&A activity, a recent report by McKinsey claims that only one in every five mergers and acquisitions actually succeeds.

CFO Magazine has stated a 50 percent drop in productivity in the first four to six months following a deal and only 23 percent earn their cost of capital.

M&As have a tremendous impact on brands. The challenge for companies is to devise a system whereby the basic objectives of the M&A are always

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kept in mind so that post-merger confusions and challenges would not drive the new entity from the set path. Most importantly, all strategies for the new entity should be guided by the underlying brand blueprint so that all post-merger decisions are in line with the overall brand vision and is driven by the brand identity. biz.hk: Apart from the mindset change, what else differentiate branding in China from other markets?

Roll: One of the trademarks of a Chinese brand will be its cultural heritage. Not many in the Western markets are very well aware of the Asian and Chinese cultures. Asia, its myths and cultures offer a very mystic and mysterious experience to many Western customers. Chinese brands will have to leverage on such an inherent advantage in its branding strategies.

Asian brands such as Singapore Airlines, HSBC and Banyan Tree have very successfully leveraged the Asian service excellence in offering customers an unparalleled brand experience.

More brands from Asia will have to figure out their unique Asian strengths when they venture onto the global markets instead of just replicating/copying what successful Western brands have already done.

Furthermore, many Asian brands will have to customize their offerings to suit the market so that the brand becomes woven into the local culture and part of the local folklore. Such a strong and wide buy-in by customers would be a strategic win for the brand in newer markets.

A strong brand is defined and characterized by the following 10 dimensions: • A brand drives shareholder value • The brand is led by the boardroom and managed by brand marketers with an active buy-in from all stakeholders • The brand is a fully integrated part of the entire organisation aligned around multiple touch points • The brand can be valued in financial terms and must reside on the asset side of the balance sheet • The brand can used as collateral for financial loans and can be bought and sold as an asset • Customers are willing to pay a substantial and consistent price premium for the brand versus a competing product and service • Customers associate themselves strongly with the brand, its attributes, values and personality, and they fully buy into the concept which is often characterized by a very emotional and intangible relationship (higher customer loyalty) • Customers are loyal to the brand and would actively seek it and buy it despite several other reasonable and often cheaper options available (higher customer retention rate) • A brand is a trademark and marquee (logo, shape, colour etc) which is fiercely and pro-actively protected by the company and its legal advisors

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AFP/Getty Images

Pan Zhuang Xiuhua, CEO of Chinese furniture retailer Da Vinci, answered questions at a press conference in Beijing in July after the Chinese media accused it of selling fake furniture at high prices, causing a stir among consumers. Officials said on July 15 they are probing the Beijing-based company which specializes in luxury furniture, and which is suspected of passing off made-in-China goods as expensive Italian designer items. Da Vinci is a well known high-end brand in China which prides itself for its expensive Made-in-Italy furniture.

Reflections on Branding in Asia

By Jerry Gelsomino Hong Kong-based marketing veteran and vice-chair of AmCham’s Entrepreneurs and SME Committee, Jerry Gelsomino, shares his thoughts on branding in Asia with biz.hk.

A

sian brands represent the greatest potential to offer to the world innovative products, manufactured with quality, consumer-desired features, and at a very affordable price. In most aspects, there is nothing holding back a company from establishing new standards of customer satisfaction.

The situation of state-supported capitalism offers at first a green-light advantage. But now those Asian consumer and business-to-business brand corporations must demonstrate the will and forward-thinking view of producing competitively better products they are proud to label, “Made in China.”

Recently, AmCham has heard the views of two prominent brand experts on the current state of Asian development in innovation and branding.

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Little understood Joseph Baladi, author of The Brutal Truth About Asian Branding, concludes that branding is little understood by decision makers in Asia, with widespread misconceptions and ignorance over the value of brands. Worse still is the lack of desire to understand or fund the process required to build a competitive brand identity.

It was encouraging to hear Baladi respond that once the decision is made, the steps to creating a strong brand are the same as Western marketers have used successfully. No need to be deterred by the excuse, “You can't do that because it's different in Asia.” Tactics and applications need to be tailored to the market, but the need to define a clear mission

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strategy remains the same.

The lack of identifiable, quality Asian brands continues to fuel regional consumers' demands for all things foreign. Furthermore, some companies who do not have the vision or strength of will to compete as Asian brands cloud the issue.

For example, China’s CCTV recently broke a story of two Italian fashion labels, dismissing them as fake global brands. The companies were promoted as of Italian origin, and in one case registered in Italy in January 2001, but three years after it was registered in Hong Kong. The report stated, “The products are not designed or manufactured overseas and are little known outside the mainland, despite being promoted as foreign.”

Experience demonstrates that these missteps only makes legitimate foreign brands more valuable in the consumers' perception, further compromising Asian brands’ ability to compete globally, although their products may be as good as – or even better than – those by foreign manufacturers.

Boardroom discipline Business and brand strategist, and author of Asian Brand Strategy, Martin Roll, believes that success will only come when Asia brands make building branding a boardroom discipline. Roll illustrated his point of view with the example of Creative Technology which developed a far superior and feature packed Mp3 player from Singapore, in an attempt to compete with the Apple iPod. Even though the advanced player was distributed for free, the loyal iPod fans preferred the inherent brand culture and “club-inclusion” offered by the Apple product.

While advanced technology may be an effective argument to get potential buyers to buy in a brand product offering, the emotional lift provided by acquisition of a recognized and loved brand cannot be trumped.

The good news from Roll is that, "The growing emphasis on brand strategy to drive shareholder value and competitiveness is moving up the boardroom agenda and becoming one of the most prominent value drivers in Asia in this century."

This is the potential opportunity that awaits those with Western brand development experience.

To enage and collaborate with Asian product and service providers, to elevate the heritage, features and demonstrate the competitive advantages of the regionally produced brands to both the domestic and global marketplace. Beware, however, that you are not drawn into the practice of becoming a “charlatan brand practitioner,” adds Baladi, whereby you are complicit in creating a false brand story just to get the job. Sometimes the bait is tempting.

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Winning trust The results are often a public relations nightmare.

Recalls of Chinese pet food and toys shipped to the United States, and deaths of Chinese children from melamine-tainted mild products don't contribute to national pride or trust in Asian products. Nevertheless, one corporate and government organization is going to attempt to market a product that will be a truly exciting attempt to view or participate in: China’s first jumbo commercial jet.

The country recently showcased a jetliner with 200 seats intended to boost the country's fledgling aviation industry. Positioned to compete with Boeing and Airbus SAS, the single-aisle C919 plane is scheduled to take its maiden voyage in 2014 before being delivered to buyers after 2016. The new design will include technological and manufacturing advances learned through component assembly experience with Western aircraft. In addition, even nearer completion are a number of regional aircraft, seating 70 to 100 passengers.

Manufactured and marketed by the Commercial Aircraft Manufacturers of China (COMAC), it will become a case study of Asian brand development.

Can the company build a brand culture for an air-worthy airplane that passengers can trust with their life?

About

The Author Jerry Gelsomino, principal of FutureBest, a respected design critic and visionary who makes it his business to track emerging consumer behavior in search of the next big trend. While bringing to his clients extensive brand development experience as well as the ability to interpret successful techniques across product, merchandise and service categories, in all his endeavors, he is focused on creating the very best experience for shoppers, visitors, tenants and guests.

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TRADE & INVESTMENT

Trade Initiative Delivers Results

By Daniel Kwan

W

hen US Assistant Secretary of Commerce Suresh Kumar visited Hong Kong in November 2010 to sign the Pacific Bridge Initiative (PBI) statement of intent with the Hong Kong Trade Development Council, he explained what makes this place tick: “Trade and investment are areas where this Special Administrative Region excels,” Kumar said. “They are also the ingredients for prosperity and the palpable energy that all of us see here.”

Kumar is scheduled to meet his HKTDC counterpart Fred Lam in Washington in December as a follow-up to last November’s kick-off. In the upcoming meeting, he will be happy to learn that the palpable energy he mentioned is indeed working.

PBI scorecard In 2009, Hong Kong was the US’s 13th biggest export market. A year later, the city reached the 12th position with an export volume of US$26.6 billion, up 26.2 percent from the previous year – partly thanks to increased re-exports from Hong Kong to Mainland China and an exchange rate advantage in favor of US products. The momentum continues this year and statistics show that PBI plays a part in the increase. According to HKTDC figures, US company participation in PBI activities show an 89 percent increase compared with a year ago.

The PBI is a regional complement to US President Barrack Obama’s National Export Initiative (NEI). Andrew Wylegala, Chief Commercial

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National Export Initiative (NEI)

Consul, at the Commercial Service of the American Consulate General, Hong Kong and Macau, says so far the NEI (see Box 1) has achieved impressive results since it was announced two years ago.

“The Commerce Department just issued an update on the NEI and the prognosis at the two-year mark is encouraging: the US remains on track to double its exports in five years,” he says. “And while growth of the US economy has been relatively anemic, exporting was revealed in the report to be one of the bright spots, contributing as much as 50 percent of total US GDP growth over recent quarters.”

Unlike other promotional efforts, PBI targets nine priority sectors (see Box 2) and it makes use of road shows, trade and business missions, as well as new communication tools such as web portals to bring together importers, exporters, service providers, and investors from across the Pacific. In addition, it seeks out government support – for example, the USCS Certified Trade Fair program – to help US businesses to take part in trade fairs.

A number of events have been organized under the PBI banner since the program was officially launched last November. Eco Expo Asia was the first industry fair to benefit under the program and it was the first time the HKTDC granted the US “partner country status” at any Hong Kong trade show.

According to HKTDC, the program helped drive the US presence from one company and zero export successes in 2009 to 30 companies and six successes valued at over US$700,000 last year.

FILMART 2011

Greater success was achieved at the 2010 FILMART – Asia’s premium film and television trade fair. This year’s extravaganza was the 15th edition since the event was launched in 1997. It now ranks alongside major industry fairs in Cannes, Santa Monica, and Berlin. In 2010, 23 American exhibitors took part with 57 sales valued at $1.5 million. This year – boosted by the first ever US Pavilion – attracted 30 exhibitors who signed 100 sales worth over $5 million.

In an interview with the HKTDC, the leader of the

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• Exports contributed greatly to growing the US economy in 2010, and supported over 9 million US jobs. US exports of goods and services in 2010 increased nearly 17 percent over 2009 – the largest year-to-year percentage change in over 20 years.

Exports comprised 12.7 percent of US GDP • in 2010, up from the 11.4 percent in 2009.

The US$1.83 trillion total in 2010 exports of US goods and services represents the second • highest annual total on record.

The momentum continues in 2011. Overall, in the first five months of the year, exports are up 16.4 percent compared to the same • period last year. show an 89 percent increase compared with a year ago.

Box 1

US delegation, Jonathan Wolf, Executive Vice-president of the US Independent Film & Television Alliance (IFTA), says Hong Kong is well positioned to host industry fairs like FILMART. “The Asian marketplace is growing,” he says. “If you look at the global demographics, the America and Europe tend to age but the demographics in Asia just say this is the growth engine for the coming decade.”

“There are film markets in Cannes, Berlin and in Hollywood during the fall. The industry has been going to these [markets] for many years but Hong Kong has now set a market that is really working well.”

“For a long time Hong Kong was a gateway to China,” Wolf says. “But for the film industry, this is not about a gateway to China – this is about an efficient place to do business.”

With buyers and distributors coming from around the world, Wolf says Hong Kong has become the place to be for any film and television producers who want to sell internationally.

“For 30 years, buyers and sellers made three long-haul trips to go to trade shows in France, Germany, and the US every year,” he says. “What I started to hear was that it was time for the buyers and sellers to make long-haul trips to the [Asia] region.

The economy here has been growing. The sellers have to travel to buyers and that is what FILMART is all about.”

Participants at FILMART testify to that as well. A representative of Maya Entertainment – a Los Angeles-based independent content distributor – says: “We exhibited in the first-ever US Pavilion at FILMART 2011 in Hong Kong. It was a great show

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PBI Priority Areas

Jiangsu delegation and an excellent platform for us reaching out to Asian buyers … We will definitely come back next year to expand our reach into still more export markets.”

Also promoted under the PBI banner was the Asian Aerospace show held in March. This year, 55 US exhibitors including Boeing and Gulfstream took part in the show and deals worth over US$10 billion were signed.

Tripartite formula One event that didn’t receive the publicity it deserved was a technology investment mission organized by the HKTDC and supported by the US Commercial Service to Boston and Los Angeles in May. Twenty Chinese companies and government agencies from Jiangsu Province took part in the four-day event. What set the Jiangsu mission apart from other Mainland business delegations was the participation of Hong Kong professional service providers in the business discussions.

“The Hong Kong professionals have the knowledge of both sides,” says Joe Leung, Project Manager of HKTDC, “They understand issues like intellectual protection in the US and business practices on the Mainland.”

“The presence of the Hong Kong professionals greatly helped facilitate the business discussions,” he adds.

The HKTDC has used the “Tripartite” arrangement in other trade missions to Europe but it was the first time to apply it in a US-China setting.

“We provide the platform as matchmaker,” says Leung. “Whatever the deal is – partnership, buy-out, or merger and acquisition – it doesn’t have to be in Hong Kong.”

Busy October According to Wylegala, the PBI has a packed busy schedule for the rest of 2011, signaling greater efforts by all parties involved to do even better. Top on the agenda is a bio-technology trade mission to be led by US Under Secretary for International Trade Francisco Sanchez to Beijing and Hong Kong in

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• Renewable energy, environmental, water resources technology • Healthcare, medical and biotechnology • Value-added food products, including wine and spirits • Information and communication technologies • Financial services • Creative and entertainment industries • Education and training services • Testing/certification services • Licensing and professional/business services Box 2

October. The biotech mission includes site visits to biotech industrial parks and government meetings. In addition, participants will have the opportunity to interact with US Commercial Service specialists and State Department officers covering intellectual property rights issues and biotechnology to discuss industry developments, opportunities, and sales strategies.

“The Commercial Service has partnered principally with Hong Kong Biotechnology Organization (HKBIO) and the Innovation and Technology Commission in preparing for the mission,” Wylegala says.

“The agenda promises to be a tight one, as we are eager to facilitate the maximum number of one-oneone meetings between US delegates and the rapidly growing cluster of clinical research and related biotech firms located in Hong Kong.”

Another major show to watch will be the Eco Expo Asia 2011 to be held at Asia World Expo from October 26 to 29. As in last year, a US Pavilion is being organized to give US firms greater visibility and support.

“The US Pavilion is again fortunate to count on the backing of the Green Export Enabler Program, or GEEP, a Commerce Department-supported initiative to assist especially new-to-market firms, from California across the US, to do business in this sector and this part of the world,” Wylegala says.

“With unique incentives made available by GEEP and HKTDC, US firms have access to a leading regional platform at a fraction of the costs of standard booth rental and visitor lodging for this show.”

Editor’s note: AmCham members who are interested in the biotech mission should contact Min Bookbinder (email: min.bookbinder@trade.gov) of US Commercial Service in Hong Kong. Members who want more information about Eco Expo Asia 2011 can contact Olevia Yim (email: olevia.yim@trade.gov) of USCS.

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Hong Kong Ideal Place for US Businesses to Trade and Raise Fund

D biz.hk

onald Tong, Hong Kong Commissioner for Economic and Trade Affairs in the US, visited AmCham in July. In an interview with biz.hk, Tong explains why US businesses should consider Hong Kong as their fund-raising platform and take advantage of the city’s growing importance as China’s offshore international financial center.

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biz.hk: Hong Kong is now the foremost offshore centre for Renminbi business. What benefits does that bring to US companies who want to trade with China especially in a volatile market?

Tong: US companies can now choose to settle cross-border trade transactions in RMB through Hong Kong with enterprises in 20 provinces and cities in the Mainland. The switch to RMB for trade settlement could help US companies offset somewhat the risk of exchange rate fluctuations and provide more certainty to their businesses, particularly if RMB continues to appreciate against the US dollar. US companies could open RMB banks accounts easily through banks in Hong Kong or Hong Kong branches of designated American banks. biz.hk: The emergence of the so-called “dim sum” bonds has generated considerable interest among investors. What types of US businesses should consider “dim sum” bonds, and why?

Tong: All types of US companies could consider issuing RMB bonds, nicknamed “dim sum” bonds, in Hong Kong to finance their projects or activities in the Mainland. This would help US companies reduce the cost of financing their Mainland businesses as generally the coupon rates of the dim sum bonds are significantly lower than that of the interest rates on RMB loans chargeable by the banks in the Mainland. US companies should obtain prior approval from the Mainland Government to transfer the RMB to be raised through “dim sum” bonds into the Mainland.

US companies like McDonald’s and Caterpillar Financial Services Corporation have already issued “dim sum” bonds, so have other foreign financial institutions, and multinational organizations and companies. The growth of the “dim sum” bond market in Hong Kong has accelerated and is expected to remain very strong this year. biz.hk: Hong Kong is a key international financial centre. IPOs have flourished in the past year. From a fund raising perspective, why should US companies consider Hong Kong ahead of other financial centers?

Tong: Hong Kong was the most active market globally in terms of IPO funds raised in both 2009 and 2010. Overseas companies including US ones are attracted to Hong Kong due to our market’s liquidity, attractive valuations, access to investors from around the world, particularly Asia, and a

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regulatory regime aligned with international standards. The advantages are magnified for overseas companies which have business operations in Asia, especially in the Greater China region.

All types of business are welcome to raise funds in Hong Kong. In Donald Tong the past few years, the variety of industries conducting IPOs in Hong Kong has been growing quickly, ranging from finance (AIA Group Ltd), hotel resorts (Wynn Resorts), natural resources (UC Rusal), and consumer products (Samsonite) to commodities trading (Glencore International) and luxury brand (Prada). biz.hk: Many US companies now go direct and invest/trade with China. Hong Kong is now often described as “the Chinese city”. In your view, has Hong Kong lost its uniqueness to US businesses? Is Shanghai a key competitor to Hong Kong as the SAR establishes itself as China’s offshore financial center?

Tong: Hong Kong remains an attractive and unique place for US companies as we operate different legal, economic, and social systems from the rest of Mainland China. We are underpinned by the rule of law, a simple and low tax system, pro-business governance, free market principles, and free movement of capital, talent, information and goods.

We provide a level playing field for all and do not have foreign ownership restrictions.

These qualities would continue to appeal to the US which tops the list of countries with offices in Hong Kong.

Hong Kong faces a number of competitors in the region. The relationship between Hong Kong and other Chinese cities including Shanghai however is synergy, not a zero-sum competition.

There is room for Hong

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Kong and other Mainland cities to thrive as China continues to prosper. Shanghai is China's onshore financial centre and Hong Kong is China's offshore financial centre. Differences in geographical coverage, legal system, tax codes, financial regulations, and connectivity allow the two places to complement each other in the journey of developing China's financial systems in full. biz.hk: Through your exchange with US businesses, what areas they are most concerned about doing business with Hong Kong? Intellectual property protection, international school space, or air quality?

Tong: Hong Kong remains a very attractive place for Americans doing business in Southeast Asia.

Like other cities, Hong Kong is not perfect and we do hear from time to time suggestions from US businesses, encouraging us to do more in areas like international school space and air quality.

To address the increasing demand for international school places, the Government is taking a three-pronged approach to promote the development of international schools, including allocating vacant schools premises and Greenfield sites for the development of international schools, and facilitating in-situ expansion of existing international schools. A total of about 5,000 additional international school places will be made available in the coming few years, increasing the total existing provision of international school places by about 14 percent.

A number of measures have been put into place, leading to improvement in our air quality.

The measures undertaken recently include for example mandatory implementation of Building Energy Codes, promoting cleaner fuels for local electricity generation, tightening emissions caps on the power generation sector, greening road transport, and plans to turn waste

into energy. We will continue to enhance such efforts, working also in collaboration with the Guangdong Government to improve the regional air quality.

US businesses are generally content with our intellectual property regime and its associated legal framework, giving them a high degree of confidence in exporting products with high IP content into Hong Kong. It is in our own interest to protect IPR and we will continue to work hard in this regard. biz.hk: Few US companies export. In your experience, which states in the US have shown the strongest interest to export to Hong Kong and China now?

Tong: California, New York, Texas, Washington, and Louisiana States are amongst the top export states to Hong Kong and Mainland China in 2010.

Hong Kong is a major services economy. We rely heavily on imports from around the world, particularly Mainland China and the US which are our top two trading partners, to meet our merchandise needs and to sustain our economic growth. American exports to Hong Kong grew 26 percent from 2009 to over US$26.5 billion in 2010, making Hong Kong the 12th largest export destination for US products.

With the Mainland fast emerging as the world’s economic powerhouse and the US National Export Initiative’s recommendation of deepening US trade ties with high-growth Asian markets, Hong Kong would remain a key export destination in itself for US products and as a gateway for American re-exports to enter other Asian markets, particularly Mainland China. biz.hk: In the coming 12 months, if you have a magic wand, what will be your three top wishes that will help facilitate further strengthening of trade and commerce between Hong Kong and the US? Tong: Our trade and commercial links with the US would benefit from the continuation of a stable and positive relationship between China and the US, further development of off-shore RMB business in Hong Kong, and influx of new American companies and investments into Hong Kong.

“We provide a level playing field for all and do not have foreign ownership restrictions.”

biz.hk

8 • 2011

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COMMUNICATIONS AND MARKETING

Your Employees and Customers – the Gallup Approach

J

im Clifton, Chairman and CEO of Gallup, visited Hong Kong in July and gave a lively talk at an AmCham breakfast meeting. Long a leader and household name in public opinion research, Gallup has – under the leadership of Mr Clifton – extended its reach into consulting. Unlike other agencies, Gallup applies the principles of behavioral economics to help businesses boost their performance. In an interview, Clifton explains the concepts of behavioral economics and shares his thoughts on Chinese business environment, American entrepreneurship, and the US economy.

biz.hk: Gallup is the standard of opinion polls. What sets Gallup Consulting apart from other business consultancy services?

Clifton: Gallup is the best in the world at workplace and marketplace sciences – that is employees and customers. Gallup has been studying human nature and behavior for more than 75 years, and uses this study to help organizations boost growth within the industry and the region. We are different from most consulting companies. We have different views on how leaders should be developed, how employees are managed, and how employees and customers are mathematically connected to drive organic growth.

The core of Gallup’s approach is the use of principles of applied behavioral economics to optimize business performance. biz.hk: Can you explain this concept of “behavioral economics” and how this can help businesses to achieve higher growth and profits?

Clifton: Behavioral economics has a direct connection with decision-making. Decisions made by leaders, employees, customers, citizens and students.

Decisions are made as the result of both rational and emotional factors. Neoclassic economics studies the rational aspects of decision-making, while behavioral economics is concerned with how human behaviors impact market decisions.

The theory is that when you deal with the statesof-mind “before” decisions are made, you can create

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Jim Clifton

strategies that are to the left of financial results. Financial results are trailing indicators of the growth of a business. Yet, we tend to mix and match these trailing indicators until we can explain behaviors and transactions that we could have easily identified in the “before”. Behavioral economics are the “before”.

Nobel Prize-winning psychologist Daniel Kahneman calls Behavioral Economics the study of “choice”, Alan B. Krueger, the Bendheim Professor of Economics and Public Affairs at Princeton University and the former chief economist at the US Department of Labor, calls it the intersection of economics and psychology. I call it the mathematical explanation of the role human nature plays in everything.

For years business leaders have struggled to comprehend the apparent irrationality of employee and customer behavior and the impact it has on business performance. In today’s globally competitive business environment, the key to driving higher levels of growth and profitability lies in understanding, measuring and managing the powerful role human nature plays in the marketplace and in the workplace.

The more we understand and stimulate the emotional drivers of employees and customers, the more we can positively impact the business outcomes. biz.hk: You are a classic American entrepreneur.

How would you compare entrepreneurs of your generation with the Y- or Internet generation entrepreneurs now?

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8 • 2011

Clifton: I don’t think there is any difference. The core driver of American entrepreneurship is freedom.

Freedom to dream and build anything you want. And upon creating your own enterprise, whether it is a small chain of pizza stores or Apple computer, you experience the ultimate individual freedom in the world. It is not, and has never been about the money.

It is about expressing yourself and improving something you see, and the feeling of freedom that comes with it. It is also why the best organizations in the world create environments wherein people are their own bosses and can build their own enterprises.

American “intrapreneurs” are incalculably important in this thinking as well. Rainmakers and builders of successful business models are far more valuable than innovators and inventors, because they create the almighty customers. biz.hk: Any plans to bring more of Gallup services to China? What are the challenges?

Clifton: Gallup has been playing a strategic role in the region by partnering with China-based global organizations. China is a very different market than the West, and Gallup’s challenge is that its mainstream consulting services are built for highly competitive environments both workplace and marketplace.

To be brutally direct, Chinese businesses have only recently entered the real competitive world.

Their workplaces may be still back from the 60’s. And because of what I would call “convenient monopo-

biz.hk

8 • 2011

lies”, the competitiveness of some of China’s industries may have years to catch up.

However, with the growth in the region, Gallup believes China will leapfrog and catch up with the rest of the developed world. With major Chinese companies gaining international footing and the entering of international companies into China, Chinese businesses are quickly absorbing the latest management practices and making them their own. Gallup is well positioned to tackle this growth with a strong presence in Beijing, Shanghai, Guangzhou and Hong Kong. As companies in China become more sophisticated, we are ready to provide the unique insights and capabilities to help them become more competitive than their Western counterparts. biz.hk: You have seen how the US became the Superpower, the Internet bubble and its boom and bust, and now the financial crisis. What does that tell us about the American society and values?

Clifton: We have lived outside our means for long and allowed citizens of the country to live outside their means as well. Too much of our huge GDP was ballooned up by debts – debts by government and citizens. So it is easy to conclude that the whole country has suffered from a very serious values crisis that begins and ends with not living within our means. One can only spend more than one has for so long. Americans, both within and outside the country, need to cultivate and nurture the value of living within our means.

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Sep Driving Business Execution through Integrated

07

Talent Management

Murray Sargant Vice President, Asia Pacific and Japan SuccessFactors Business execution requires getting people to do what is needed to achieve the company’s strategic objectives. Companies that consistently demonstrate business execution are ones that get the right people doing the right things in the right way to drive sustainable profit and growth.

Murray Sargant, Vice President Asia Pacific and Japan for SuccessFactors, will draw on experience working with hundreds of companies to explain what business execution looks like when it is done well, how it relates to integrated talent management, and how to get your company to the next level of business execution impact.

Sargant will cover the following details: • Defining strategy: figuring out what you need to do to succeed.

• Managing assets: securing the capital & resources required to support the strategy.

• Driving business execution: Building and managing the workforce to effectively leverage company assets to deliver strategic objectives.

Sep US Foreign Account Tax Compliance Act (FATCA)

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Jim Calvin Asia-Pacific Regional Leader – FATCA Deloitte

Sep AMCHAM 3 CLUB GOLF CHALLENGE

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The Hong Kong Golf Club, Deep Water Bay

The Sports & Entertainment Committee cordially invites you to this delightful short course which provides an excellent challenge for your short game. This time you can use any three golf clubs – but only three! Make sure not to miss this fun event! Parking space available at the Golf Club. Maximum 27 players - registration is first-come, first-served.

Package

Format and Prizes

Includes: • green fee (inclusive of trolley and locker) • breakfast (sandwich + coffee/tea/chilled juice) • lunch • prize-awards (The easiest way to reach the Club is by taxi, but please note that No. 260, 6A and 6X buses run from the terminal in Exchange Square and stop at Admiralty and pass Deep Water Bay. Drinks and caddy service are additional.)

Time: 8:00am-9:30am (light breakfast included) Fee(s): Member Fee: HK$150 Non Member Fee: HK$250 MEDIA WELCOME

Venue: AmCham Office 1904 Bank of America Tower, 12 Harcourt Road, Central Time: 12:00pm-2:00pm (sandwiches & beverages included) Fee(s): Member Fee: HK$250 Non Member Fee: HK$350

Venue: Hong Kong Golf Club Deep Water Bay Time: 9:00am - 2:30pm Fee(s): Member Fee: HK$780 Non Member Fee: HK$880

Flights of three. First tee-off at 9:30 am Holes 1-6 : Take the best score on every hole Holes 7-12 : Take the best 2 scores on every hole Holes 13-18 : Take the best 3 scores on every hole

For information, see website: www.amcham.org.hk Tel: (852) 2530 6900

Fax: (852) 2537 8824

Email: sanlee@amcham.org.hk

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2011 September

On March 18th, 2010 Foreign Account Tax Compliance Act (“FATCA”) provisions were included in the Hiring Incentives to Restore Employment (“HIRE”) Act. The purpose of the legislation is to prevent a perceived tax abuse by US persons through the use of off-shore financial accounts, and US owned foreign entities.

Join us for this informative Taxation Lunch Seminar as Jim Calvin, Deloitte’s Asia Pacific Regional Leader, outlines and explains the implications of FATCA. Jim Calvin is the Asia-Pacific Regional Leader – FATCA for Deloitte. He is responsible for determining that Deloitte’s specialists are properly deployed on a regional basis to serve clients as FATCA is implemented. Calvin has written and presented extensively on the FATCA provisions, including private sessions to banks, brokers, and asset managers in the United States, London, Hong Kong, Singapore, and the Caribbean.

He is also the Global Tax Managing Director for Deloitte’s Asset Management practice.

Venue: AmCham Office 1904 Bank of America Tower, 12 Harcourt Road, Central

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