biz.hk Jan 2014

IN

20 14 ’s

CO WH MM O’ UNS WH IC O AT IO NS

Jan/Feb 2014

TIME FOR ACTION PETER LEVESQUE AmCham Chairman

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Contents

Vol 46 No 1-2 Richard R Vuylsteke

18

08

Publisher

34

22

Editor-in-Chief

COVER STORY

TRADE & INVESTMENT

INTELLECTUAL PROPERTY

CHINA BUSINESS

Managing Editor

Peter Levesque, Chief Commercial Officer of Modern Terminals, is the 2014 Chairman of AmCham. He lays out the challenges ahead and stresses that it’s time for action before Hong Kong loses its competitiveness

Acting Assistant Secretary for Global Markets Judy Reinke talks about the recent reorganization of the International Trade Administration of the US Commerce Department and plans to strengthen US trade and investment with China

IP lawyers, brand managers and private investigators share their views about the latest counterfeiting trends in China and what Western brand owners can do to better protect their IP assets

Willy Lam, veteran China watcher, and Stephen Green, Head of Greater China Research of Standard Chartered Bank, share their views on the Third Plenum of the 18th Party Congress and the reform focus of the new Chinese leadership

Daniel Kwan Kenny Lau

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.

04 Editorial

Advertising office 1904 Bank of America Tower 12 Harcourt Rd, Central, Hong Kong Tel: (852) 2530 6900 Fax: (852) 3753 1206 Email: amcham@amcham.org.hk Website: www.amcham.org.hk

07 New Business Contacts

Printed by Ease Max Ltd 2A Sum Lung Industrial Building 11 Sun Yip St, Chai Wan, Hong Kong (Green Production Overseas Group)

COVER STORY

Designed by Overa Creative Tel: (852) 3596 8466 Email: ray.chau@overa.com.hk Website: www.overacreative.com ©The American Chamber of Commerce in Hong Kong, 2014 Library of Congress: LC 98-645652 For comments, please send to biz.hk@amcham.org.hk

AMCHAM NEWS AND VIEWS

TRADE & INVESTMENT 18 Open for Business

While Hong Kong has benefited from China’s breathtaking economic success in the past three decades, the SAR now faces increasing competition as other economies accelerate in development. Hong Kong has spent enough time on studies and consultations and now is time for action – or it will risk losing its competitiveness

20 executives joined AmCham’s business network last month

Acting Assistant Secretary for Global Markets Judy Reinke talks about the recent reorganization of the International Trade Administration of the US Commerce Department and plans to strengthen US trade and investment with China

INTELLECTUAL PROPERTY 22 Fighting Fakes in New China

44 Mark Your Calendar

CHINA BUSINESS 34 Observations of the Third Plenum Willy Lam, veteran China watcher, and Stephen Green, Head of Greater China Research of Standard Chartered Bank, share their views on the Third Plenum of the 18th Party Congress and the reform focus of the new Chinese leadership

38 A Close-Up of Shanghai Free Trade Zone Kristina Klako of the Klako Group in Shanghai provides an update on the pilot free trade zone and the key changes that have happened since September

IP lawyers, brand managers and private investigators share their views about the latest counterfeiting trends in China and what western brand owners can do to better protect their IP assets

BUSINESS MANAGEMENT

08 TIME FOR ACTION Peter Levesque, Chief Commercial Officer of Modern Terminals, is the 2014 Chairman of AmCham. He lays out the challenges ahead and stresses that it’s time for action before Hong Kong loses its competitiveness

28 An Overview of IPR Protection in China Shih Yann Loo of Baker & McKenzie in Hong Kong reflects on his two decades of IP practices and analyzes what are the best IPR strategies for Western companies doing business in the mainland

42 Save Your Business before It Becomes “Too Old” to Change Joseph Grenny, a specialist in corporate training and leadership development, talks about how leaders can effect change and break the inertia shackle in organizations

BUSINESS OUTLOOK 14 Annual Survey Shows Cautious Optimism on Economy AmCham’s annual survey shows cautious optimism on economy as well as worries over rising costs of doing business and quality of life in Hong Kong

32 Perspective of a Hong Kong Lawyer Alan Chiu is a young and promising IP lawyer of Mayer Brown JSM in Hong Kong. He offers a front row perspective of China’s changing IPR landscape

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

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Chamber Officers biz.hk Editorial

BOARD OF GOVERNORS Chairman

Governors

Vice Chairman

Brian Brenner Jones Lang LaSalle

Peter Levesque Modern Terminals Limited

NO TIME TO WASTE

“H

ow many decades can you count in life that are worth living?” This was a famous line in a local TV drama that swept Hong Kong four years ago. Overnight, one could hear people mimicking the tagline at homes, in offices, virtually anywhere one went. It was an instant hit because it resonated with so many people.

Hong Kong’s rise in 20th century is closely linked to China. At the turn of the century, Hong Kong was one of several open ports on China’s coast.

Compared with Shanghai, Hong Kong mostly played second fiddle. The birth of New China in 1949 brought major changes. In the decades that followed, Hong Kong quickly jumped to become the gateway into an isolated China and an East-MeetsWest metropolis that rivaled world financial capitals like London and New York. Shanghai meanwhile lingered in decline.

The Third Plenum of the 11th Central Committee of the Chinese Communist Party in 1978 was a watershed event. It ushered in groundbreaking reforms and moved China out of its decades-long self-imposed isolation. From the 1990s, Shanghai started to regain its position of national economic leadership, but it lagged behind Hong Kong as an international financial center.

History should serve as a reminder that Hong Kong’s continuing good fortune is by no means guaranteed. The Hong Kong people have repeatedly demonstrated ability to adapt in adversity and dexterity in dealing with change. But these talents could still fail to be sufficient today. Attitude is no less important than demonstrated skills.

The bold reforms announced at the Third Plenum of the 18th Central Committee of the CCP last November are evidence that the Chinese leadership is determined to take reforms to the next level in spite of the challenges they face. The reforms are certain to lead to significant changes, and Hong Kong can’t afford to be complacent about the potential challenges to its economy. One shot across the

bow already is the Shanghai Pilot Free Trade Zone.

Close attention to its impact (and possible synergy) with Hong Kong is a reminder that there are competitors out there sharpening their claws.

The Hong Kong Chief Executive’s policy address emphasized poverty alleviation, which is a laudable goal. At the same time, it’s important to remember that while Hong Kong is predominately a service economy, a significant portion of our population is still employed in low-skilled industries – transportation and logistics, construction, retail and trading, to name just a few. To strengthen its competitiveness vis-à-vis cities such as Shanghai, Singapore, and Shenzhen, Hong Kong needs to move up the value chain in many sectors, but at the same time maintains and reinforces sectors that still rely on low-skilled labor to compete. This requires policy support and action.

The Chief Executive pledged financial aid to low-income individuals (and their families) who are willing to work to support themselves. For full success, there needs to be sufficient jobs in the marketplace, particularly in lower-end sectors.

Support for key industries that are the sources of jobs for these prospective workers makes good sense.

For example, Hong Kong’s container terminals hire over 8,000 employees directly (and many more indirectly). A significant number of these jobs are low-skilled. Many of these jobs will be lost if the industry continues to decline because the policy support that it needs in order to compete is not available. As 2014 Chairman Peter Levesque said in his recent inaugural speech: “The Transportation and Logistics industry is a vital part of Hong Kong’s economy. Thousands of working people depend on it. The issues that face Hong Kong’s port have been identified, acknowledged, and studied for years.

AmCham urges the Government to recognize the urgency of the situation and … maintain Hong Kong’s competitiveness in this sector for future generations.”

Hong Kong doesn’t have another decade to waste. It’s time to act.

Walter Dias United Airlines

Treasurer

Janet De Silva Ivey Business School

Executive Committee

Rob Glucksman Witgang Far East Ltd

Evan Auyang The Kowloon Motor Bus Co (1933) Ltd Sara Yang Bosco Emerson Electric Asia-Pacific Belinda Lui Time Warner Inc

Robert Grieves Hamilton Advisors Limited John (Jack) E Lange Paul, Weiss, Rifkind, Wharton & Garrison Ryan Mai Otis Elevator Co (HK) Ltd

Eric Szweda Troutman Sanders Solicitors Colin Tam Crystal Vision Energy Ltd Elizabeth L Thomson Orangefield ICS Limited Jennifer Van Dale Gall Jay Walder MTR Corporation Frank Wong Scholastic Asia Eden Woon Hong Kong University of Science & Technology

Ex-Officio Governor James Sun Charles Schwab HK Ltd

Alan Turley FedEx Express

Jon Parker KPMG

Richard Weisman Baker & McKenzie

Catherine Simmons Citi

Richard R Vuylsteke The American Chamber of Commerce in HK

Food & Beverage

Real Estate

Veronica Sze Wyeth (Hong Kong) Holding Co Ltd

Charles Kelly CBRE HK Ltd

Hospitality & Tourism

Senior Financial Forum

Damien Lee Hong Kong International Theme Parks Ltd

Al Miyasato Intel Semiconductor (US) Ltd

Human Capital

Senior HR Forum

Peter Liu AsiaNet Consultants (HK) Ltd

Jacqueline Algar VF Asia Ltd

Information & Communications Technology

Sports & Entertainment

President

CHAMBER COMMITTEES AmCham Ball Walter Dias United Airlines Inc

Apparel & Footwear Colin Browne VF Asia Ltd

China Business Seth Peterson Heidrick & Struggles Hong Kong Ltd Lili Zheng Deloitte Touche Tohmatsu

Communications & Marketing Charlie Pownall CPC & Associates Oliver Rust The Nielsen Company (HK) Ltd

Corporate Social Responsibility Diana Tsui KPMG

Energy Rick Truscott CLP Power Hong Kong Ltd

Entrepreneurs/SME TBA

Environment Corey Franklin Jones Lang LaSalle

Financial Services Brock Wilson Credit Suisse (Hong Kong) Ltd

biz.hk 1-2 • 2014

Ewan Copeland Citi

Tom Burns Intel Semiconductor (US) Ltd

Courtney Davies Jones Lang LaSalle

4

Donald Austin Austin Pacific Ltd

biz.hk 1-2 • 2014

Rex Engelking CSL Ltd

Insurance & Healthcare Owen Belman Aon Hong Kong Ltd Hanif Kanji Sinophi Healthcare Partners Ltd

Intellectual Property Gabriela Kennedy Mayer Brown JSM Amy Lee Microsoft Hong Kong Ltd

Ian Stirling UBS AG

Taxation David Weisner Citibank NA

Trade & Investment Patrick Wu American Appraisal China Ltd

Transportation & Logistics Jared Zerbe China Merchants Holdings Int’l

Women of Influence

Law

Anne-Marie Balfe Ernst & Young

Clara Ingen-Housz Linklaters

Anna-Marie C Slot White & Case

Pharmaceutical

Young Professionals

Stephen Leung Pfizer Corporation Hong Kong Ltd

Alison Carroll The Economist Group

5

AMCHAM AMCHAM Means Means Business Business

Members Directory

New

Business Contacts

w w w. a m c h a m . o r g . h k www.amcham.org.hk

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

The following people are new AmCham members: AbbVie Limited

JPMorgan Chase Bank

Caroline Johnson General Manager, Hong Kong and Philippines

Derek Berlin VP, International Government Relations

American Express

K&L Gates

Chris Meyrick VP, Human Resources, Asia Pacific

Bureau Veritas Consumer Products Services Rohit Kamat Vice President, Key Account Management

Children's Place (HK) Ltd, The Nga-Yee Chan Director of Sourcing

Over 500 500 pages pages in in three three major major sections, sections, including including aa complete complete guide guide to to chamber chamber services, services, Over corporate sponsors sponsors and AmCham Charitable 1,700 corporate Charitable Foundation.

Foundation.This Thisdirectory directorylists listsabout over 1,800 members from from over about700 700companies companiesand andorganizations. organizations. members ISBN 978-962-7422-18-1 ISBN 978-962-7422-20-4

LC 98-645651 LC 98-645651 NON-MEMBER PRICE Local Delivery HK$1500 Overseas Delivery US$195 Shipping costs: Local HK$45 (per copy) US/International HK$50 (per copy)

MEMBER PRICE HK$800 HK$104

Kimberley Nobles Partner

Kroll Associates (Asia) Ltd Ilya Umanskiy Managing Director Jason Wright Managing Director Hoi Lem Lee Director

Morgan Stanley Eli Lilly Asia, Inc Joyce Wong General Manager, Hong Kong and Macau & Singapore

Euler Hermes Hong Kong Services Ltd Chloe Lin Regional Sales & Marketing Manager Francois Bergeron World Agency Regional Director

GP Cellulose Asia Marketing (HK) Ltd Darrel Adams Sales Director

Hong Kong University of Science & Technology Michelle To Assistant Manager, MBA Student Development

Zachary Stern Managing Director

Oldham Li & Nie Solicitors Lucie Igoe Marketing Executive

O'Melveny & Myers Friven Yeoh Partner

Totes Isotoner Corp (HK) Ltd Charles Tsui General Manager

UPS K K Leung President, North Asia District

Hongkong and Shanghai Banking Corporation Ltd, The Sean Moskal Senior Vice President

View our other members at:

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

3753 1208

biz.hk 1-2 • 2014

7

COVER STORY

TIME FOR ACTION

Peter Levesque, Chief Commercial Officer of Modern Terminals, is the 2014 Chairman of the American Chamber of Commerce. A long-time expatriate in Hong Kong, Levesque is a familiar face in the local American community. Last year he was the President of the American Club as well as AmCham’s Vice Chairman. Professionally, he has over 25 years of international transportation and logistics experience and has held senior executive positions in various international logistics firms.

In his inaugural address, on 17 January, Levesque said that the primary theme for AmCham in 2014 is to stress the need to maintain Hong Kong’s competitiveness in the Asia Pacific region. “The threats to Hong Kong’s competitiveness are real, the data is well established, the solutions are within reach, and the time for action is now,” he said. The Chamber’s five priorities are environment, education, financial services, logistics, and intellectual property rights. (For more details, see box) “The American Chamber does not claim to have all the answers for the important issues that threaten Hong Kong’s competitiveness,” Levesque said. “What we do have is a steadfast commitment to this dynamic community and a renewed sense of urgency in making sure that Hong Kong remains a world class international city.”

The new Chairman met for an interview with biz.hk in order to elaborate on his vision for the Chamber and what he sees as the challenges ahead in 2014.

Peter Levesque

Photos: Brian Production Ltd

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biz.hk: What’s your sense of the global economy and Hong Kong in particular?

Levesque: I will have to give you my business school answer on that. It depends. So much of Hong Kong’s economy depends on its interconnectedness with the rest of the world that to get a feel for 2014 locally, we really need to look at the global dynamics in play.

The International Monetary Fund (IMF) just revised its global GDP growth estimate for 2014 from 3.6 percent to 3.7 percent which we can take as some measure of positive news to start the year, but questions remain around the Euro zone’s ability to create jobs and resolve structural issues. The US is expected to experience stronger growth in 2014, and while that’s good news for Hong Kong trade, Federal Reserve tapering could mean a reversal in capital flows out of Hong Kong this year. We are of course fortunate to have China right next door, and projections are for the SAR to experience mainland tourism growth again in 2014 which will in turn drive retail sales growth here.

Overall my sense is that 2014 will be a year of cautious and incremental improvement globally. biz.hk: In your inaugural speech, you emphasized that urgent actions are needed to address challenges businesses in Hong Kong face. What is at stake for Hong Kong?

Levesque: What is at stake for Hong Kong is its regional competitiveness.

The issue is whether or not Hong Kong will fight to win, or simply settle for finding ways not to lose. The key issues around air pollution and education are critical to Hong Kong’s future as a world class international business hub.

Hong Kong has always been able to attract the best and brightest talent from around the globe. But when talented people consider taking a job in Hong Kong, they must decide if the health issues associated with air pollution are worth the risk, and if they have children, they must accept the fact that there may be no international school spaces available. This makes Hong Kong less competitive overall.

My speech was meant to highlight

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the fact that at some point, we need to take what we have learned from the numerous studies and consultations that have been conducted, and execute a plan that takes meaningful action. For example we need an aggressive timeline to implement the Government’s Clean Air Plan, and we need an Emissions Control Area for ocean going vessels in and around Pearl River Delta area. We

need more international school space, as well as specific programs and teacher training for children with special educational needs. Our IPR laws must be updated in line with other regional players, and we need to save the transportation and logistics industry for future generations of workers and their families.

Hong Kong does not have the luxury

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of time to resolve the issues around its regional competitiveness. While Hong Kong struggles to execute on solutions, regional players are becoming more attractive for overseas corporations and their international executives.

It’s not too late for Hong Kong to take action. The Government needs to embrace the conflict and debate that these key issues provoke to generate a

biz.hk 1-2 • 2014

renewed sense of urgency around resolving them. It will be very difficult to attract international businesses back to Hong Kong once they leave. biz.hk: Externally, Hong Kong faces increasing competition from other cities in the region. Singapore, our long-term rival, has been joined by Shenzhen (Qianhai) and Shanghai as

competitors. In particular, the newly established Shanghai Pilot Free Trade Zone poses clear challenges to Hong Kong. Do you feel Hong Kong has recognized the urgency of such challenges?

Levesque: The future success of Hong Kong will depend to some degree on its ability to economically integrate with Guangdong and Macau.

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This is a geographic area comprised of over 114 million people and represents one of the world’s largest manufacturing bases. The development of the Shanghai Pilot Free Trade Zone and its potential competitive impact to Hong Kong lends itself to the development of a Hong Kong, Guangdong, Macau Free Trade Zone that focuses on manufacturing, international trade, and logistics as well as research and development. The potential for Hong Kong to provide what President Richard Vuylsteke calls “Foreign Direct Expertise” into this proposed FTZ would be enormous, including opportunities around the development of infrastructure connectivity. biz.hk: Hong Kong is known for its efficiency and no-nonsense business culture. But the cost of living and the cost of doing business have been on the rise. What’s the impact on businesses?

Levesque: For many years the cost of doing business in Hong Kong was outweighed by the tremendous gains in operational efficiency, ease of doing business, accessibility to China, and the ability to attract world-class talent. As regional players have evolved, companies have more choices about where to locate their businesses and this plays into the need for Hong Kong to take actionable steps to remain a viable choice in the region.

What’s particularly alarming about Hong Kong’s situation is the ever widening income gap and its effect on society in general. With 62,000 low income households – those households making below HK$7,000 a month – it is becoming more and more difficult for many citizens to just get by.

This is where educational policy becomes so critical. English is the language of international business, and the most applicable school subjects for today’s workforce are science and math.

Hong Kong must place more emphasis on teaching students in these key subject areas so that corporations will be willing to hire kids graduating from school in Hong Kong and provide them with better paying jobs.

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biz.hk: Hong Kong has talked much about moving up the value chain in service industries. But a large portion of our population still relies on low-skilled jobs. Do you think sufficient consideration has been given to industries, such as transportation and logistics, so that people who are employed in these fields can survive?

Levesque: Trade and logistics employs over 770,000 people and contributed approximately HK$485 billion in value to Hong Kong’s GDP in 2011. The container terminals alone employ 8,000 employees directly and another 32,000 people indirectly.

These are primarily technical and non-skilled positions that support working class families across Hong Kong. These jobs depend on Hong Kong maintaining its competitiveness in the transportation and logistics sector.

Hong Kong’s initiative to move up the value chain to become an international maritime center is a noble and worthwhile endeavor. But it should not come at the expense of the traditional shipping businesses that have made Hong Kong such a successful international transportation hub.

Non-skilled and technical employees will not be able to cross over into maritime insurance and ship brokering. We must maintain Hong Kong’s core competitiveness in the transportation and logistics sector to ensure jobs for the next generation of workers and their families. biz.hk: For the past 18 years, you’ve called Hong Kong your home. What gives you confidence that Hong Kong can rise to the challenges?

Levesque: I came here for a two-year assignment and stayed for 18 years.

My story is similar to many other expats I’ve met over the years who fell in love with Hong Kong and did everything they could to stay here.

One thing I have learned during my years in Hong Kong is that once this city puts its collective mind to something, it gets done. Whether it’s the creation of world-class infrastructure,

property development, business creation, or investment, there is no other place in the world quite like Hong Kong.

At AmCham we care about Hong Kong’s future, and as citizens we know what needs to be done. If we can achieve a renewed sense of urgency this year around resolving the key issues impacting Hong Kong’s regional competitiveness, then I firmly believe this great city will make successful change happen. biz.hk: AmCham has significantly expanded its activities in China affairs during the past two years. Will China continue to be a focus in 2014?

Levesque: We are fortunate to have Past Chairman James Sun to lead our China Affairs Group in 2014. The Chamber had seven delegations to China last year meeting with highlevel business executives and government officials across the Mainland. We see the incredible value and potential that our China Affairs Group brings to AmCham members, and we look forward to expanding this important advocacy group with James’ leadership in 2014. biz.hk: The American Chamber is the largest international business chamber in Hong Kong. We have about 1,700 members. What key messages do you have for our members in 2014?

Levesque: If “Metcalfe’s Law” is true, then the value of a network increases exponentially with each addition to that network. This formula is what makes AmCham so special.

The more members we have who are actively engaged in Chamber meetings, events and networking, the better it is for our entire membership.

So to our members – we want to see you and hear from you in 2014. We want to know what’s important to you and your industry so that we can better serve you as a Chamber.

So my message is pretty simple.

You get out of AmCham what you put into it. We’re looking forward to working with all of you in 2014 and the Year of the Horse.

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Five Key Issues In 2014, AmCham will engage proactively with the business community and governments in the region on the following issues: On Environment, AmCham is an active contributor on sustainability issues including the introduction of the ‘carrot and stick’ approach adopted by the Government. We welcome the Government’s Clean Air Plan in addressing air quality, waste disposal, marine pollution, bus route rationalization, and pedestrian friendly walking areas. We continue to urge the Government to take the lead working with Pan-Pearl River Delta Governments in developing an emissions control area (ECA).

On Education, the demand for well educated, internationally minded human capital across Asia Pacific presents enormous opportunities for Hong Kong. Hong Kong should seize the opportunities to develop and deploy talents through a quality education system critical to its long-term success and competitiveness. Issues such as the lack of international school spaces and special education needs support will continue to be our focus.

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On Financial Services, AmCham places significant weight on Hong Kong’s further development as an international financial centre and will continue to uphold the values of corporate integrity and high governance standards. The Chamber will continue to collaborate with US financial institutions, lobbying on issues including Foreign Account Tax Compliance Act (FATCA) and Foreign Earned Income Exclusion under Internal Revenue Code Section 911.

AmCham will continue to broaden the dialogue with Chinese financial institutions in Hong Kong.

On Transportation and Logistics, AmCham is highly concerned about the bottlenecks the industry faced and has taken note that Hong Kong’s container port ranking has slipped from third to fourth in the world. The Chamber urges the Government to take an expeditious approach in approving necessary structural changes.

AmCham believes the aspiration to move up the value chain should not be made at the expense of the traditional shipping businesses which have contributed to the city’s long-term success.

On Intellectual Property Rights, Hong Kong’s current Copyright legislation lags behind other jurisdictions and is inadequate in addressing the operational realities in the digital age. The Chamber urges the Government to adopt a more robust IPR regime and undertake patent reform.

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BUSINESS OUTLOOK

T

o gain a better understanding of Hong Kong’s economic standing among members, AmCham has conducted a survey at the end of 2013 on a number of key issues which are believed to have a significant impact on the local business environment. The survey – in addition to the overall business outlook in 2014 – focused on a range of issues such as the local education system and environmental policy, both of which are named to have a direct impact on Hong Kong’s competitiveness as a city of international commerce.

The format of the survey was also slightly fine-tuned by cutting back on multiple-choice questions and allowing more space for comments and suggestions. In total, 1,544 surveys were sent out while 179 completed sets of response containing hundreds of views and suggestions were successfully processed, marking a response rate of 11.6 percent.

“We had about the same number of survey responses as last year, but the results were even more useful because so many members took the time to write their thoughts on an array of issues from an economic, social and environmental standpoint, and also how effectively AmCham has served its members in the past year,” notes Richard R Vuylsteke, AmCham President.

“My staff colleagues and I are taking these hundreds of suggestions very seriously and are responding to them, including a more streamlined method to communicate more efficiently and effectively,” he says. “Overall, my office colleagues and I appreciate all the comments – and the thoughtful critiques. All of our departments now have much more precise assessments of their services, and that will really help us improve.”

ANNUAL SURVEY SHOWS CAUTIOUS OPTIMISM ON ECONOMY

Business outlook

By Kenny Lau

Respondents in the survey are quite “positive” about Hong Kong’s business outlook in the coming 12 months – seemingly more so than a year or two ago. There is a strong sense of cautious optimism in the local business community despite worries over a slowdown of growth in China and a sluggish recovery in the US and European markets.

However, a small number of respondents are less optimistic about future growth of their business in Hong Kong – partly because of rising costs and increasing competition at the local, regional and global levels.

“The respondents are generally upbeat about Hong Kong in 2014 – 55 percent said they expected their business to expand, 40 percent expected business as usual, and only 5 percent saw gradual reduction. This is in stark contrast to so many places in Asia and the world,” Vuylsteke notes.

While prospects are good, concerns remain over what Hong Kong as a city can provide in the current global business environment and whether it can maintain a competitive edge over other places besides being the freest economy in the world. In fact, many of the issues raised (education, environment and human resources etc) are fundamental to the viability of Hong Kong as an international business hub in the long run.

“Of course, topping the list of concerns again this year were air quality, shortage of international school places as in previous surveys,” Vuylsteke notes. “Given the number and intensity of comments about air pollution, it’s clear that our members are very concerned about the impact on health and overall quality of life.”

Photos: Thinkstock

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“Other continuing concerns are the rising cost of doing business – especially real estate costs for commercial space and housing – and the growing shortage and cost of good talent.” he adds. “There is also a sense that the Hong Kong government was not as proactive and swift on decision-making as Singapore and Shanghai.”

From an economic perspective, skyrocketing costs – particularly in commercial and residential rentals – are by far the “biggest” concern among business leaders and entrepreneurs. It is an issue that nearly everyone says is the most uncompetitive aspect of life in Hong Kong – and an issue about which respondents feel strongest to date.

This is simply “untenable and unsustainable,” one respondent (a top executive of an MNC in Hong Kong for 14 years) says. “While our office here is far from being the most profitable for our company, we remain the most expensive office to operate by a long margin. I am also worried that my staff – which is mostly expats – will decide to pack up and leave due to a 20-30 percent increase in rent [every two years]. This becomes an [extra] cost as we lose talent that we have nurtured.”

What are your company's plans in Hong Kong over the next 3 years?

If you answer "No" to the previous question, does a lack of international school places detrimentally affect your business?

5.4%

Gradually reducing

39.3%

55.4%

Business as usual

Expand business

39.5%

60.5%

No

Yes

Environment Responses to the issue of environmental protection are largely “negative,” particularly in regards to air quality as a large majority of respondents (nearly two-thirds) in the survey say Hong Kong’s new Air Quality Objectives are simply not stringent enough to bring about results in a meaningful way. In fact, many question Hong Kong’s reluctance in the implementation of “bold steps” which would otherwise result in a significant reduction of harmful substances in the air.

“Why doesn’t Hong Kong have the highest standards in the world for vehicular emissions?” one respondent asks. “Specifically, emissions from pre-Euro II vehicles should be substantially reduced. Social costs could be well and easily covered by the benefits gained from cleaner air.”

“It is pretty obvious that Hong Kong is pretty bad when you compare to Singapore,” says another. “We need to get the obvious offenders off the roads.”

Respondents are also equally passionate about the issue of waste management, calling it an “urgent matter” for which Hong Kong could learn much from regions like Taiwan, Korea and Germany, and will need to take action quickly to address the growing problem.

While greater support in recycling is a “no brainer,” many argue for a more holistic approach in which a levy on waste can be a part if adopted in “a smart manner.” With proper measures, “habits can change” – and can change very quickly.

Overall, tougher regulations as well as sensible incentives are said to be key to improving Hong Kong’s natural environment.

Whether it is to reduce deadly fumes from light and heavy goods vehicles running on diesel, to ease traffic congestion through better planning and enforcement, to reduce carbon footprint of the sea-trade logistics sector, to promote international green building standards, or to adopt a cleaner fuel mix for power generation, it will take “a lot of work in the long run to make Hong Kong a more livable city.”

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Are there sufficient international school places in Hong Kong?

7%

26.3%

Not applicable to my business

65.8%

No

Are the new Air Quality Objectives stringent enough?

Yes

29%

7.9%

Yes

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Mixed views

64%

No

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Education The issue on education is two-fold: whether there are sufficient international school places for expatriate families and whether Hong Kong’s local schools are preparing students for a talent pool from which employers can hire quality graduates for their workforce.

In the survey, some 66 percent of respondents say there simply aren’t sufficient international school places in Hong Kong while a quarter find it non-applicable to their business, and only 8 percent believe there are sufficient places. Among those who find a lack of international school places, two-thirds indicate that it detrimentally affects their business because professionals are not willing to relocate to Hong Kong for job assignments unless they can enroll their children into an English-medium school.

At the very least, it makes Hong Kong unappealing as a regional hub, a majority of survey respondents notes. About two-thirds reveal that staffs are simply unwilling to relocate to Hong Kong (66 percent) and that good candidates are often lost for key jobs (64 percent). About a third also find it difficult to retain staff members who require international school accommodation for their children (36 percent), while another third have had to transfer staff to a different region/country (31 percent) due to an insufficient number of international school places.

Furthermore, about 30 percent of all respondents have seen an increase of demand for international schools among their employees, while 24 percent say it’s been about the same and only 6 percent have noted a decrease. The remaining 40 percent find it irrelevant only because they don’t have international assignees working in their companies. An overwhelming majority of executives who employ expatriates also expect to see a growing – or at least a flat – demand in the next 12 months.

In terms of local graduates as a talent pool from which employers can hire to meet their human resources needs, Hong Kong only scores about average, according to the survey. The consensus is that homegrown talents – perhaps with a few exceptions – are neither particularly strong nor weak in their linguistic, critical-thinking and problemsolving skills. It is also apparently so in their knowledge and cultural understanding of the current global environment including that of Mainland China.

“Hong Kong produces good quality graduates for the business community, although they are not as well prepared for the international market as graduates from other premier cities in Asia,” one comments.

“The local education system needs to catch up on nurturing critical thinking, entrepreneurial spirit, and innovation,” another respondent stresses. One suggestion in improving the quality of local graduates is to provide local students in Hong Kong with “more qualified English and Putonghua teachers…and a curriculum where more collaborative work and debate are required” in order to enhance their communication and analytical skills.

Otherwise, a shortage of high quality student graduates could undermine Hong Kong’s competitiveness as an international city and as a gateway to Mainland China where – to a certain degree – students are already “catching up and surpassing” their counterparts in Hong Kong.

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TRADE & INVESTMENT

OPEN FOR BUSINESS

Judy Reinke is the Acting Assistant Secretary for Global Markets with the US Commerce Department. In January, she spoke at the Asian Financial Forum in Hong Kong outlining the prospects and trends of investing in the US. She also talked to biz.hk and explained the recent reorganization of the International Trade Administration of DOC as well as efforts by her team to achieve goals set by President Barack Obama to double US exports in five years and facilitate foreign investment into the US biz.hk: Can you briefly tell us about the missions of Foreign Commercial Service and Global Markets and how they are related to the other units of International Trade Administration?

Reinke: I am the Acting Assistant Secretary of the Global Markets unit – one of the newest units of the International Trade Administration of the Department of Commerce. Within the DOC, ITA is responsible for the broader trade and investment mission of the United States. Specifically, my unit brings together our country’s experts both in headquarters in Washington DC and our US Foreign Commercial Service professionals who are located in over 70 countries around the world.

The FCS traditionally promotes US exports and more recently supports inbound investment. By merging our market access unit with our trade promotion unit, we have created a unit that provides solutions to all American companies approaching any markets in the world. The way I described it is that the market is like a door. If the door is closed, we’ll kick it open. That’s market access. If the door is opened, then we’ll drive a truck filled with goods and

Judy Reinke

Photos: Silver Image

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services through the door – that’s our trade promotional role. We do both.

The FCS is one of the three major programs under Global Markets. The other two are SelectUSA and the Advocacy Centre of the US Government.

We also have two other units in ITA and they are the Industry and Analysis unit which consists of our industry specialists for all industries. The goal of I&A is to ensure that American companies are competitive and the specialists review the competitive market situations for American firms in markets around the world. We work very closely with that unit. They help determine best prospects in markets around the world.

The third one is the Enforcement and Compliance unit. It is [about] the enforcement and compliance with international trade laws. Traditionally, you might think of import administration such as enforcement of anti-dumping duty, countervailing duty and also compliance with trade law and export regulations. So this unit ensures that foreign markets comply with their WTO commitment, FTA commitments and other national commitments that might affect trade. In other words, it covers both import and export compliance.

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information on the US. We provide information at the federal level on all the regulatory issues that may affect investors and help them to navigate through that process. Finally, we provide an ombudsman role – by ombudsman it means that we try to help the foreign investors resolve any regulatory and other issues in order to successfully conclude their investment.

As for SelectUSA, it is a government-wide coordinating body for inbound investment at the federal level of the US government. It was established by Executive Order of the President in 2011. Secretary of Commerce Penny Pritzker is empowered to ensure co-ordination among all federal government agencies that touch on the issue of attracting and supporting inbound investment into the US. The specific unit that’s under my supervision consists of specialists in the field of investment and they provide a variety of support services. First, they serve economic development organizations across the US – states, locality, municipalities and regions – that are trying to attract investment.

SelectUSA is state-neutral but it is able to provide guidance and advice on how to create an investment attraction plan, and helps to educate them on which markets are providing sources of investment and handles enquiries about investment in the US. For investors in Hong Kong or China, SelectUSA serves as a source of information on states in general. Again, SelectUSA maintains geographically neutral but we can provide broad

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biz.hk: As a government agency, what’s your plan to increase US exports to China and attract more Chinese investment into the US? Reinke: Through Global Markets, we’re working to integrate our expertise in market access issues and trade policy with our traditional trade promotional roles. You are going to see a deeper relationship between our specialists in the Commerce Department and American companies. Our goal is to deepen our relationship with American firms.

For instance, if a company has both trade promotion objectives and issues about trade barriers or policy, we can work closely together to develop a strategy for each market that the company is addressing rather dealing with that as a one-off transactional engagement.

In the background, we are also working to upgrade our online readyaccess information for all American exporters so that a lot of companies can ‘self-service’ or get basic information they need online rather than relying on the counselors. The counselors offer more in-depth services like building relationship and solving specific market issues, finding partners and achieving success. We are building more IT resources in the background to facilitate better client relationship. biz.hk: I can imagine that IPR would be one area that can benefit from the services provided under the new Global Markets unit.

Reinke: That’s a great example. In our offices overseas, we generally have been doing everything. We’ve been doing a mixture of market access and trade promotion activities with over half of our US client or partner companies. Now, this

becomes much more part of our performance matrix or part of our mission – not just an auxiliary part of our relationship. In China we have some dedicated experts in the area of IPR. We have three officers in Beijing, Guangzhou and Shanghai who are from the US Patent and Trademark Office. Those individuals are integrated in our team so that they can provide counseling to companies on how to safeguard intellectual property. biz.hk: Growth of the Chinese economy is expected to slow. What measures will the ITA take to boost US exports in order to achieve the export targets set by President Barack Obama under the National Export Initiative?

Reinke: Obviously China is not the only market in the world for US exports.

We are not relying solely on the speed of which the Chinese market expands. I am heartened to see that the European market has stabilized and is turning around. That’s providing some support for American exporters. The macro economics move around a lot.

In the case of China, the market is expanding though. If it’s seven percent [growth], it’s still expanding and there are more than enough opportunities.

Our goal is in reaching out into the US and having more American firms to be aware of the value of exporting – that’s something you don’t see here on the ground. Our offices are always busy with American firms that are new to Hong Kong or to China. We are continuing to build a pipeline of American firms who are being educated on the value of going global, and on how being an exporter and a part of the global economy can actually strengthen them at home, strengthen their competitiveness and feedback into their own product and service development. So China alone is not going to be the answer to achieving the goals of President Obama under the NEI. It will certainly contribute a lot though. biz.hk: What will your office do to attract more Chinese investment into the US?

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Judy Reinke at Asian Financial Forum

Reinke: Right now the US is a very attractive destination to prospective Chinese investors. The Rhodium Group says that Chinese investment into the US is the fastest growing segment. In many ways the US market is transparent, open and predictable. In the US, concluding an investment is very straight forward. Companies have to do due diligence of course and know what they are doing but the process is straight forward. A.T Kearny has rated the US the number one foreign direct investment destination.

We need to educate the Chinese investors to ensure that individual company is aware of the rules and the environment. Basically, the “USA 101” – we need to help them to understand who the US is and what it is like to do business in the USA. To be successful actually means you have to understand culturally the kind of environment you are working with as well as the rules and regulations, and the financial environment.

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biz.hk: Specifically, what is being planned by your headquarters to enable the specialists and trade professionals in different cities to do a better job in attracting Chinese investment into the US? Reinke: We are building the industry snapshots of the US that is raw information on where the industries are clustered, and what strengths of the various states are. That will be available through our website which is SelectUSA.gov. Much of that is already there.

We also have the Industry and Analysis unit doing much more in-depth market research reporting on what are the industrial strength and clusters around the US and industry trends so that investors can learn more about where they might want to explore investment opportunities.

Another example is the SelectUSA Investment Summit held in Washington DC last October (2013). It really

helped to tell the world that we mean it when we say we want foreign investors to consider the US and we are open for business. It shouldn’t be an after-thought and I don’t want there be any lingering thought as far as foreign investment goes. This administration and the US government in general warmly welcome foreign investors to invest in our market.

When you see news about Chinese investors such as the Dalian Wanda Group which has invested in an important chain of entertainment and movie theatres called the AMC, that’s an important step. Thousands of jobs were maintained and sets of services that are extremely popular would continue. I can say that questions about foreign ownership [of US assets] are not there anymore and Americans understand we are a globally-linked economy. The administration and the President himself certainly welcome foreign investors.

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INTELLECTUAL PROPERTY

I

FIGHTING FAKES

n his seemingly disorganized office in Kavowras’s adventures may be entertaining to Causeway Bay, private investigator Ted read but anyone who has knowledge of the world of Kavowras points to a TV monitor and fakes in China and its masters behind would tracks his movement in a video footage of appreciate the risks entailed. Counterfeiters don’t an undercover anti-counterfeiting operalike investigators who help facilitate their impristion he carried out a few years ago in Beijing. onment.

“Look, the police came in the hotel room now, and behind them were the drug safety inspectors,” he tellingly points out. Then, like a chess master A decade or so ago, the idea of litigation of who has just made his checkmate, he puts his arms intellectual property cases in Chinese courts was a across his chest and says: “Yes, we got those bad quixotic one. Most Western brand owners would guys. Those counterfeiters are going to jail for simply write off the losses associated with counterselling fake drugs.”

That episode was one of the many successful operations pulled off by the former New York City policeman to help Western brand owners bust counterfeiters in China.

Kavowras – who founded Panoramic Consulting in Hong Kong more than a decade ago – specializes in collecting evidence by posting as a foreign buyer to “procure” fakes from the forgers.

“I do all sorts of things,” Kavowras says of how he wins over the trust of his targets.

“It’s all acting. I even do magic tricks, and I have a lot of fun of what I do.”

Photos: AFP / Getty Images Like any good private eyes, Kavowras uses whatever means A US Customs officer at Long Beach, California displays counterfeits of available to get close to the high-heel shoes originating from China counterfeiters who trust no strangers: fake business cards, feiting as part of their cost of doing business in the fax machines that can hide his true location, country. The battle against fakes in China was lost, hidden cameras, mini-recorders the size of wrist and the counterfeiters won, many Western corpowatch and disguises used in Hollywood movies – rate executives concluded at the time. you name it. He even has an Olympic torch to Things in China are slightly different now. impress his targets. “I bought it on e-Bay, and they Litigations are now possible (not all cases are [counterfeiters] believed me,” he says. successful, of course), sales of counterfeit goods are not as blatant, and law enforcement agencies are much easier to work with. Practitioners consensually agree that IPR protection in China has come a long way compared to three decades ago when China first opened its doors to foreign brands.

Changing landscape

IN NEW CHINA

In old China, imitation used to be a highly regarded form of art. In modern day world, theft of intellectual property is simply a crime. In recent decades, China – a manufacturing powerhouse – has earned a bad reputation as the “kingdom of fakes,” a country in which counterfeiters have become more sophisticated and have essentially gone global in recent years.

Daniel Kwan talks to IP lawyers, brand managers and private investigators to learn more about the fast changing landscape of counterfeiting

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US Ambassador to China Gary Locke said in November at an IPR roundtable in Beijing, “China’s enforcement regimes are clearly moving in the right direction. And, there are more developments in China’s Intellectual Property Rights landscape every single month.” What’s driving China to change? Pressure by foreign governments, particularly of the US and European Union, is clearly having an impact. Since the launch of the high-level S&ED dialogue in 2009 between China and the US, IPR protection has always been a key agenda item. Similarly, European leaders have also raised the issue in their annual meetings with Chinese officials.

Legal advances are another reason behind supporting IPR protection. Chinese courts are no longer the black hole they once used to be. Public notaries can now be hired to accompany investigators like Kavowras to document evidence (photographs, videos and invoices, etc) for use in courts. In May, a new Trade Mark Law will come into effect, granting owners better protection of their trademarks.

Chinese law enforcement agencies are also more “cooperative” in working with foreign brand owners now, says Alan Chiu, a partner at Mayer Brown JSM in Hong Kong. The Administration of Industry and Commerce (AIC) – one of the principal agencies in charge of dealing with counterfeits in China – is now more willing to go after forgers than ever before.

According to Chiu, local AIC offices in some major Chinese cities have compiled special protection lists for major international brands, and they would initiate anti-counterfeiting actions even without having brand owners file complaints.

“This is a very positive change for the local authorities,” says Chiu.

At the same time, Chinese consumers are becoming more sophisticated and are demanding genuine goods only. Douglas Clark, a barrister specializing in IP law in China and Hong Kong for almost two decades, says foreign luxury brands have strengthened their distribution channels in China reaching out more directly to Chinese consumers who have deep pockets to spend.

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Photos: AFP / Getty Images

Private investigator Ted Kavowras puts on a mask in his office in Hong Kong to show how he carries out undercover operations in China

Besides generating sales, the opening of boutique stores in China by these luxury brands has proven an effective strategy. “The message is that if you buy from anywhere else, they are probably fakes,” Clark says.

Against all odds Has there been real progress in the protection of intellectual property rights in China? The answer is a mixed one. Globally speaking, counterfeits remain a growing malice. In 2011, the Business Action to Stop Counterfeiting and Piracy (BASCAP) under the International Chamber of Commerce estimated that counterfeiting trade worldwide would grow at 13 to 15 percent per annum and account for 2 percent of world’s GDP by 2015 – a staggering number in the current world economy of sluggish growth.

Figures from law enforcement agencies in Europe and the United States likewise confirmed that counterfeiters in China are getting a lot smarter about how to profit in a global marketplace as they “go global” just like their legitimate enterprising counterparts. For example, many counterfeiters are shipping through Hong Kong instead of

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Mainland ports to evade inspection. EU figures showed that seizures of counterfeit goods originating from Hong Kong have risen from 1 percent of total share in 2006 to about 7.8 percent in 2012.

Meanwhile, those from Mainland ports have dropped in the same period.

According to Mayank Vaid, Chair of the European Brands Protection Council, the seizure figures are a “red flag” about Hong Kong but should not be taken as a guilty verdict. It indicates that more counterfeiters recognize the “competitive advantage” that Hong Kong offers to their business. Not only does the SAR boast a worldclass transport and logistics infrastructure, it also has a clean reputation to boot. Counterfeiters are well aware that if they ship from Hong Kong, they stand a much better chance of sneaking into countries like the US and EU unnoticed.

“You have a shell company and a bank account in Hong Kong. Money comes in and goes. No one can trace it. All you need to do is to get your counterfeit goods into Hong Kong from Shenzhen.

Once your goods are in Hong Kong, you are playing a very good game. You can be sitting comfortably in Beijing, Dubai, Singapore, Bombay, and you can carry on [with your business] undetected.”

But Hong Kong also offers the best line of defense for Western brand owners, says Vaid who works for a luxury European brand in Hong Kong.

“The Customs in Hong Kong is probably among the most responsive in tackling the IPR issue,” he says. “Go to the Customs and tell them about your problem, 10 people will come and meet with you.”

“What they need is more resources – budgets and manpower – to do more checks and inspections,” he adds.

China challenge China is increasingly becoming a difficult market for foreign brands, and IPR is one issue.

Clark says the IPR protection in China has improved but there is a long way to go. Forgers in China have become more sophisticated and difficult to catch.

“The top-notch counterfeiters know all the tricks,” Clark says. “Until the police get seriously involved in anti-counterfeiting, it’s going to be a real problem.”

Shih Yann Loo, an IP veteran with Baker & McKenzie in Hong Kong, says companies need to have a clear strategy about technology transfer and safeguards against theft of commercial secrets when they enter the China market.

“This is what China does very well. They know you want to come into the Chinese market, but why

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Alan Chiu

Photo: Silver Image

should they let you? If you only want to come, make money and take away everything, then what’s the point from China’s perspective?” Loo says.

“There has to be some form of technology transfer in that you bring in your technology, set up your factories and train the local people including managers and engineers.” (see story on page 28) Clark agrees that China is leveraging more on IPR in recent years as part of its industrial policies.

For example, there has been progress in China until 2008 especially in areas such as patents and copyrights.

“Things improved a lot till about 2008. Since then, it’s become harder and harder to enforce patents. A lot of them have been found invalid. It’s almost a government policy to make it difficult for foreigners to report that in China,” says Clark.

“It’s believed that they’ve extended too much patent protection years ago, and now they are trying to do what they can to limit it and to encourage what they call ‘indigenous innovation,’” he explains, referring to a campaign by Chinese authorities to promote domestic technology by imposing artificial market barriers on foreign competitors. “Copyrights law has also been weakened and it’s very hard to enforce. It’s a weak area.”

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Implication of e-Commerce Just like in other areas, e-Commerce poses the biggest challenge for foreign brands who are trying to penetrate China, a market of vast appeal as the world’s fastest growing consumer market. Already a highly competitive and complex environment, China’s rapidly growing e-Commerce space is also a lucrative marketplace for counterfeiters betting on secrecy and high volume of traffic. In addition, counterfeiters also see the advantage of selling online – difficult to trace, easy to deliver in a relatively safe environment.

Mayank Vaid

Chiu of Mayer Brown JSM says counterfeiters are increasingly shipping their goods by post – which has made inspection and tracking much more difficult, given their small volumes. “Fakes don’t come in by containers but by small packages now,” he says. “Many of my clients have complained to me that the rise of e-Commerce has made their enforcement work much more difficult.”

In the fight against counterfeits, big multinationals generally fare better than small- and medium-sized firms. For example, Chinese Customs require brand owners to verify the goods seized and pay the necessary bonds within three working days – a tall order for most small businesses to satisfy.

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Vaid who has many years of experience in dealing with the issue says that while big firms have the headcounts to afford examiners like him to support the policing effort, small companies struggle to do so.

“These examiners have to be trained professionals. This is not something common with SMEs,” he explains. “If you only have a team of three people in Hong Kong doing everything from sales to supply chain and distribution, you cannot afford it.”

While foreign businesses are in a better position in China today than they were a few decades ago, the odds of being able to protect their IP remain unpredictable. Chinese counterfeiters have upped their game significantly and they are no longer going after simple cartoon figures or sneakers but far more sophisticated, high-value goods.

After all, the solution has to be one of domestic in nature.

Sophistication among Chinese consumers and improvement of business ethics will come slowly but surely. Chinese consumers used to devour whatever products with a foreign label attached.

Today, they are much more demanding and global in terms of taste and preference. Similar change will occur in the IPR space as a result.

Loo of Baker & McKenzie comments on e-Commerce in China, “It’s going to be a process.

If I am running an e-Commerce business, I will also want people to have a sense of security that they are getting the genuine goods when they shop at my website. It’s an education process as well as a knowledge process. Overtime, it will slowly weed itself out.”

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AN OVERVIEW OF

PROTECTION IN CHINA

Shih Yann Loo is an intellectual property lawyer at Baker & McKenzie in Hong Kong with over two decades of experience covering Mainland China and Hong Kong. Early in his career, Mainland cases made up only 40 percent of his portfolio. Today, he spends more than two-thirds of his time on IP litigations and other legal work in China – a reflection on the growing importance of intellectual property rights in the country. Loo in the following interview discusses the past and present trends of IPR protection in China

biz.hk: How would you describe IPR protection in China?

Loo: When I first started, counterfeiting in China was really about low-value stuff – such as knockoffs of T-shirts and other simple consumer goods.

The trend has gone from low-end items (where the margins are thin) to technology-intensive items.

There are now [counterfeited] parts for industrial use – everything from oil rigs, computer servers to medical equipment. It’s the stealing of commercial secrets in the technology era and a problem that is actually much bigger and deeper. IP is really about technology (and the knowhow) – who’s got the technology and how to make use of it.

The situation has generally improved. There are more emphases by the Chinese government.

China is like Taiwan and Japan in the early 1960s and 1970s. When Taiwan and Japan went through similar phrases of development, they also relied on those copied technology but were able to move away from that by developing their own technology.

The big difference is that Japan and Taiwan back in those days were not the major manufacturing centers for everyone. China today manufactures for the whole world. So, naturally, there are more issues and complaints [about counterfeiting].

China realizes it cannot sustain growth by solely copying others’ technology – which served its purpose in the early days of providing jobs. China is now moving away from low-end manufacturing to high-end technology. China last year filed the most patents in the world, more than Japan and the US.

Loo: Companies are aware that once their most sensitive technology is transferred, it will be gone. There’s no doubt about it. Hence, companies typically don’t transfer their latest and most sensitive technology. Japan is a good example in that their most technologically advanced products are still being made in Japan while more basic Loo Shih Yann versions are made in China and elsewhere.

I always say to my clients that China is extremely smart about IP policy and what IP can represent in terms of leveraging. A good example would be the audio/video standards including those for mobile technology for which western and Japanese companies have most of the core patents.

Chinese companies have to pay a license fee to use these patents. But if I pay you the license fee, then I can’t make my products at my price point and I can’t make a sale. So there is always this tension.

Of course, there are always people doing it without paying license fee and for that you get into IPR issues. What do they do? They create their own standards. And, if you want to come to China, you use China’s standards or you can’t sell.

biz.hk: Could many of those patents filed by China be what people called “junk patents?”

Loo: While some patents are obviously not as innovative, I wouldn’t call them junk patents. I don’t think that’s a fair comment. The level of development in China now is quite high, and almost every big multinational company is setting up R&D centers in China. When they spend money on R&D, they also look at where the talents are and decide where the resources should go – virtually everyone comes to China.

biz.hk: How should people approach IPR protection today?

Loo: The rules of the game cannot be dictated by western countries alone. I’ve met some clients who are very innovative in their thinking. What’s the value of patents? With a patent, you can keep other people out of the market when you create a product which hopefully you will be able to sell.

Some companies are starting to develop patents in China jointly with Chinese universities or Chinese technology companies. They then either give the patents away or have free cross licensing arrangements. Because the patents are created and developed in China, the products can enter the Chinese market first so they have a head start.

biz.hk: How real is the challenge of technology transfer and the risk of thefts of commercial secrets?

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Because they know exactly what the patents are, they can plan ahead for their own markets and what products will then contain those essential patents.

To me, that’s a very strategic forward thinking, compared with ‘If you want to use my patent, pay me or you can’t use it.’ biz.hk: How are courts in China different in dealing with IPR cases?

Loo: You can win in a Chinese court but remedies you get are quite different. In developed jurisdictions, injunctive relief is a key component for protection for IP disputes. You can stop someone from copying your products. Preliminary injunctions are very difficult to obtain (if not impossible) in China. If you are able to obtain an injunction, the question then becomes one of enforcement. In China, there is no contempt of court for disobeying a Court Order. So, an infringer can continue doing it. What can the court do? Not much. You will have to take new action and perhaps a court will grant more in damages. There is no imprisonment for contempt of court which is one of the primary sanctions for ensuring compliance with a Court Order in most countries.

Some companies see counterfeiting as part of the cost of doing business in China. It still happens. My advice is that when you go to China, the first thing is to make sure that your IPRs are registered and protected. That’s a starting point.

If you have no registration, then you can’t do anything about counterfeiting. Make sure your patents, trademarks or even copyright have been registered. Ideally, this should be done before you start doing business in China and not as an afterthought. biz.hk: How is e-Commerce having an impact on the fight against counterfeiting in China?

Loo: That’s one of the more difficult issues facing companies now – both Chinese and foreign.

E-Commerce has opened up a whole new world of easy transportation and sales of counterfeits online. Anyone can log in – and they may or may not know what they are buying. It’s easy to ship. You are talking about limited quantities, not containers.

It is hard to track by Customs. What e-Commerce needed is traffic. People are attracted to websites because of the variety of goods available.

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We do a lot of work with e-Commerce sites in China – Taobao and Alibaba etc. These sites have all set up in-house legal departments to deal with the issue of counterfeits. All brands would tell you that they do take-downs, and the websites are taking actions. But the number of listings is enormous. It’s not something that you can just turn off overnight. You can’t say to the websites, ‘let’s ban all postings of brand X.’ It’s impossible. biz.hk: Can you share some experience in dealing with Chinese websites on the issue of sales of counterfeits online?

Loo: Every month we do thousands of these takedowns. Websites are becoming more stringent and more careful now, and they want some evidence.

It’s a big challenge. So we have to build trust with the websites. With us, they know that we’ve done our due diligence before we actually bring a complaint. So there is more trust in there. We help them and they help us. biz.hk: What new phenomenon have you seen in recent years?

Loo: One interesting phenomenon is what’s called the “OEM exception.” For example, Chinese Customs can stop goods leaving China if they think the product is not licensed. But, Customs in some areas in China are beginning to say that if the goods are made in China for export and not for domestic sales and if they are going to a country where the brand owner doesn’t have the trademark registered in that country, then they will allow the goods to leave. This is so even if the goods use a trademark registered by the brand owner in China.

Legally, this OEM exception is difficult to understand. The traditional legal view is that if your trade mark is registered in China, the manufacturing and sale of goods bearing that trademark without permission by the trademark proprietor is an infringement. By law, Chinese Customs should seize those exports. But Customs and even some courts are applying this “OEM exception.” I think when the Chinese economy was slightly down, Chinese authorities tended to create ‘exceptions’ and they would find a reason not to apply the law.

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Alan Chiu

PERSPECTIVE OF A HONG KONG LAWYER

s one of the youngest and most promising partners at international law firm Mayer Brown JSM in Hong Kong, Alan Chiu has good reasons to be bullish about IPR protection in China. As the Chinese economy took off in the past decade or so, IPR cases involving foreign brand owners have multiplied. Although he only joined the law firm about 10 years ago, he already has accumulated substantive experience in dealing with IPR litigations in China and Hong Kong and has handled over 130 cases of seizures as of today – also a sign of China’s growing determination to combat the issue.

Chiu who studied IPR laws at the City University was one of those local elites drawn to the field.

Before he graduated from City University, Chiu took a year off to study at the King’s College in London to deepen his understanding in IP laws and technology crimes issues. He continued his education in IT forensics at the University of Hong Kong after his return to Hong Kong.

Chiu says you learn most from day-to-day practice as IPR lawyers because law schools can only teach you the basics. Chiu is fighting at the frontline of the counterfeit battle, and he learns on the job every day.

“In law school, we study the concepts and law enforcement channels. But real life is totally different,” says Chiu. “This is especially true in China where enforcement of the law is very different. If you lodge complaints in China, what you need to consider is quite different from places like Hong Kong.”

Chiu’s first encounter with an infringer as an IP lawyer was a telephone call to a company in Guangzhou after issuing a “Cease & Desist” letter to stop infringement and demand compensation to his client. Recalling the “good old days,” Chiu says that it was easier to deal with counterfeiters then.

“They would panic if they received letters from lawyers. They would fear that you might actually sue them, and the follow-up phone calls could be quite effective. Nowadays, infringers know all too well that you may not be serious about taking them to court, and they don’t even answer your phone calls,” he says.

Chiu believes IPR protection has definitely improved in China in the past decade. Having

spent much time working in the field, Chiu has seen “counterfeit villages” in China where almost every villager was involved. “No one would listen to you even if you filed a complaint because it would ruin the whole village if they were to close down the factory,” he says.

On the positive side, Chiu says the newly amended Trademark Law is one example of greater legal protection for IP owners. It improves transparency and raises the ceiling of damages.

Passed by the Chinese government in August, the new law will come into effect in May. Weak penalty in China has always been criticized for failing to deter infringements. Under the new law, the maximum damages will be increased from RMB500,000 to RMB3 million.

Moreover, the law also reduces the burden of proofs on plaintiffs in assessing damages. For example, an infringer may be ordered by court to disclose its account books or other information for the purpose of assessing damages. “If the infringer fails to do so, the amount of damages may be determined with reference to the amount proposed by the trademark owner,” Chiu explains. “This is a very positive change.”

However, Chiu says it remains to be seen how the new law would be implemented and if the Chinese government would introduce transitional arrangements before May when the new law comes into force. Questions such as whether the new law will be applied for IPs registered on April 30st have yet to be answered by the authorities.

Looking back, Chiu says much of his work has to do with advising clients on their IPR strategy instead of digging into law books. As a Hong Kong Chinese, he has the added advantage of being more in tune of the local culture and practices. China, he says, is going through the same process like other OEM economies in the 1970s and the government is doing what it can to raise public awareness.

“A key part of my job is not just to inform my clients that you have these numbers of channels to enforce your rights,” Chiu says. “I do well if I can evaluate for my clients – in terms of their business needs and objectives – how to prioritize their resources in dealing with different counterfeiting cases and which are their best options.” – Daniel Kwan

Photo: Silver Image

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CHINA BUSINESS

O B S E R V A T I O N S OF THE THIRD

Byy Kenny Lau

I

n modern Chinese politics, a plenary session (plenum) is a yearly – and sometimes twice yearly – meeting of the Communist Party’s Central Committee. The third of such meeting of each five-year “Party Congress” is particularly significant because it marks a time when a national agenda over the next five to 10 years is rolled out – after new leaders take office and establish their power base in the first and second plenums.

The protocol dates back to 1978 when paramount leader Deng Xiaoping launched a series of unprecedented economic reforms and adopted an open-door policy, steering China towards the direction of a more open, socialist economy. Jiang Zemin and thenPremier Zhu Rongji in 1993 introduced broad market reforms drastically reducing the role of China’s stateowned sector, while Hu Jintao in 2003 “perfected” the socialist market economy that is now the world’s second largest.

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Third Plenum 2013 In his first Third Plenum, which concluded in November 2013, President and Communist Party General Secretary Xi Jinping – like his predecessors – has laid out a roadmap of economic and social reforms – some of which appear to be “decisive” and “forceful” albeit nothing overly radical in political terms.

“It is a work in progress and will serve as a policy guideline for China’s senior administration until the 20th Party Congress comes into office in 2022 [as Xi is expected to lead the 19th Congress in a second term starting 2017],” Willy Lam, Adjunct Professor, CUHK’s Center for China Studies, points out at a recent AmCham luncheon on the subject.

“The challenge this time is that they are coming across steep resistance of vested interests including

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PLENUM different major clans at the top of the party and SOE conglomerates, whereas Deng Xiaoping in 1978 kickstarted reforms more or less with a clean slate,” he adds.

A key development announced at the Third Plenum is the formation of a “Central Leading Group on Comprehensively Deepening Reforms” and a “State Security Committee” – a move largely seen as a consolidation of decision-making power to facilitate implementation of reform by “circumventing” vested interests.

“President Xi is someone who believes in strong party leadership and centralized control, and emphasizes a balance between development, stability and reform,” Lam notes. “Implementation will be carefully calibrated and rolled out under his supervision. His top priority will be about maintaining social stability and the status of the CCP as a perennial ruling party.”

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Overview Other than a rough target year of 2020 by which said reforms are to be achieved, details of a timeline on implementation remain unclear. “The lack of a timetable is one disappointment in the Third Plenum document Willy Lam which has listed some 60 major areas for reform,” Lam says. “Nevertheless, it is the most comprehensive package of reforms since Deng’s in 1978, and we’ll have a better idea in March when Premier Li Keqiang delivers the government work report at the National People’s Congress.”

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Reforms announced in the Third Plenum appear to gear towards a more pro-market stance and a re-balancing of many social issues in need of change in order to drive economic growth. Firstly, China will ease its highly unpopular one-child policy, abolish its controversial re-education through labor penal system, and move towards a more integrated, centralized judiciary system.

Farmers in rural areas will be allowed to sell their non-agriculture land (which are now owned collectively) on an individual basis in the market. The current “Hukou” household registration system – in place to prevent a massive influx of rural migrants into cities and an overload of social infrastructure by limiting access to social services on a locale basis – will also be loosened up to expedite urbanization.

“The leadership has indicated that it would make it easier for farmers to monetize their construction land and to use it as collateral to raise money from banks. This can make it easier for farmers to move to cities,” Lam points out.

“Both President Xi and Premier Li are keen on urbanization – which today stands at roughly 53 percent and is targeted to rise by 1 percent every year,” he says. “It is because urbanization is an important driver of consumer spending. When farmers move to a city, they need to spend on an apartment, some furniture and maybe a car.”

“However, I haven’t seen too many new policies that would encourage consumer spending, which only makes up about 36 percent of GDP [versus the nominal of roughly 60 percent in most developed nations],” he adds.

“And, despite of an indication of allocating more revenue from SOEs for social security payouts, we don’t have a definite commitment to an increase in social welfare spending.”

“But again we have no timetable. So far, only two banks – one US-based and another Singapore-based – have been allowed to operate in the FTZ in Shanghai,” he cautions. “We are not sure whether top leadership can handle opposition coming from the banking sector or the regulatory authority.”

Nevertheless, China will very likely push forward a reform package to allow further liberalization of the financial sector – which has already been in progress gradually and is being or will be tested in Shanghai’s FTZ – in terms of its interest rate policy and currency convertibility. If implemented according to market expectation, it will create a much wider access for

their revenue from land sales,” Lam notes. “In spite of the obvious fact that the Chinese real estate market is getting to a dangerous level, the state of affairs will likely continue in the foreseeable future.

“In fact, state injection of money into the economy has been the most important driver of growth in recent years.”

Economic outlook “We recognize there are lots of issues out there, and there are lots of things that can make you worry about China,” says Stephen Green, Head of Greater China Research, Standard Chartered Bank, also a speaker at the

Market-driven State-owned enterprises are dominant players in key sectors such as banking, telecommunication, transportation, and energy – a monopoly often tied to inefficiency and impeding growth. Many SOEs were subject to an overhaul to improve productivity under the leadership of Zhu Rongji in the mid-90s, and will now be put to further liberalization from which domestic and foreign private companies will be allowed to compete in sectors currently labeled off-limits.

“The only concrete information available is that these lucrative SOE conglomerates within 10 years will have to pay 30 percent of their after-tax revenue to the state, [up from 10-20 percent currently],” Lam points out. “Otherwise, our understanding is that some SOEs might go through ambitious restructuring or privatization, while SOEs on the ‘negative list’ will not be tempered with.”

“This will allow more foreign enterprises, particularly in the financial sector, into the market, and there could be more Free Trade Zones similar to the one in Shanghai right now,” he adds.

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Party slogans displayed at Tiananmen Square

foreign investment in China as well as for Chinese private investment in other countries.

Likewise, local governments – which are responsible for some 80 percent of total government spending on social welfare and pension but are only entitled to about 50 percent of the “tax pie” – can now issue municipal bonds to raise revenue. The fiscal measure is deemed critical to addressing the increasing debt of local governments across China totaling RMB17.89 trillion (US$2.95 trillion) as of mid-2013.

While land sales are expected to play a lesser role as a source of income of local governments, “it is true that some governments at the county level could get half of

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same AmCham luncheon on the Third Plenum. “China at the moment will look more like Japan in 1968 rather than 1988. We remain cautiously bullish [about China’s prospects in 2014.]”

“The Third Plenum raised a lot of expectations.

We now have what looks like a consolidated leadership team, and the guys in charge seem very keen on reforms,” he says. “What China intends is to begin a de-leveraging process slowly by slowing down credit growth and to pursue reforms to get real productivity growing again.

“This year is when we need to see the details. If we still don’t see that by this time next year, there will be

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some much bigger questions about China’s economy.”

Green expects an annual growth rate at 4-5 percent in the years following as laid out through 2020 in the Third Plenum document. For the coming few years, it will likely be roughly 7 percent, given the current circumstances. “This year, a Stephen Green 7-percent growth shouldn’t be too hard,” he said, predicting a slightly slower rate of 7.4 percent in 2014 over 7.6 percent in 2013.

“The cost of borrowing from banks will likely stay the same. China’s FX will go up and will hit US$4 trillion by the end of the year,” he forecasts. “China’s trade surplus is getting bigger, which means – assuming a good year in 2014 – it will continue to grow.

Inflation will be around 4 percent. We’ll also see continuous appreciation of the Renminbi.”

On the positive side are: urban and rural household income growth which rose considerably in the third quarter of 2013, stronger demand from the US and EU amid a slow global recovery, and a turn towards growth in China’s industrial cycle in which production was up 10 percent year-on-year in November.

“China’s export growth should accelerate as recovery continues in the US and European markets,” Green says. “Manufacturing and production outlook is better than last year as we now have a turning inventory cycle whereas the manufacturing sector had overcapacity and sluggish sales in the last couple of years.”

On the negative side are: slower credit growth as a response to concerns over a rapid increase of debt in the past five years, slower fixed asset investment growth which could cause a “cash crunch” in government spending on infrastructure, and more headwinds in the housing market.

“Real estate is a very important sector that drives commodities, consumption and government infrastructure,” Green explains. “We think it will be an OK year. While there are lots of inventories in the top 50 cities – which account for 20 percent of China’s real estate market – prices aren’t falling. The issue is mostly in the smaller cities.

“Overall, we might see corporate insolvencies, bankruptcies and defaults. The bet is we can contain those risks. There will be scary headlines but should not be too big of a problem when reforms are taking place.”

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A CLOSE-UP OF SHANGHAI FREE TRADE ZONE

The establishment of China Shanghai Pilot Free Trade Zone last September has garnered much interest among investors worldwide. The free trade zone is basically a merger of the four bonded zones currently located on the eastern side of Shanghai. As such, it has a total land area of 28.78 square kilometers – roughly one-third the size of Hong Kong Island.

Kristina Klako is China Director of Klako Group in Shanghai. She has more than a decade of experience advising clients on complex business matters such as cross-border transactions and tax issues in China, Hong Kong and Singapore. She shares with biz.hk her observations about the free trade zone as well as key changes that have happened since September

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biz.hk: Is the Shanghai Pilot Free Trade Zone (SPFTZ) more about hype or real reform?

Klako: In my opinion it is a real reform.

There have also been some major changes since September on some administrative and taxation issues.

Foreign companies in the Shanghai FTZ will be treated the same as domestic investors from the start of their business activities in China, unlike outside the FTZ in other parts of Mainland China.

We should also see much simplified approval procedures for businesses applying for registration in the Shanghai FTZ, with a “suspension” of previous procedures for foreign investment projects. Normally, it takes a minimum of six months to establish a company in China. According to the new regulations, this will be significantly shortened to five to 10 working days. However, due to a backlog of applications (over 900 within

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one month of opening), the process is taking much longer than anticipated – and could be as long as six months.

Taxation is another major area: certain types of taxes can now be paid by installments. Other tax benefits include export tax refund for goods that financial leasing companies or their subsidiaries lease to their overseas customers. There have been a lot of talks that the Enterprise Income Tax for businesses established in the Shanghai FTZ would be lowered to 15 percent from 25 percent.

This, however, has not happened.

One question, though, is how many businesses can actually be set up in the FTZ, an area of only 29 square kilometers in size. When registering a company in China, a physical office space

– purchased or rented – is required. With the number of companies – especially banks – registering, I would be keen to know how much real estate space would be left to small and medium-sized companies. There are rumors that the authorities may allow “virtual offices’ – similar to what you have in Hong Kong – but no formal regulation on this has been issued. biz.hk: Is the FTZ a real “free trade” zone or just an expanded bonded warehouse? What is the “Negative List” about?

Photo: Getty Images

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Klako: The goal is that it will be developed over a three-year period. It’s therefore not realistic to expect much dramatic changes in the beginning. I do believe, however, that there will be further changes and developments in coming three years leading to real free trade.

The Shanghai FTZ will use a “Negative List” approach – this is the first in China – for incoming investment. What it means is that any sector not specifically prohibited by the list will be permitted, and the business concerned will only be subject to a simple filing with the authorities. The list now mainly follows the restricted and prohibited industries originally listed in the “Catalogue of Industries for Guiding Foreign Investment.” So in my opinion, they have just put the catalogue under a different name.

The Ministry of Industry and Information Technology issued a notice on January 6 concerning the opening of the Value-Added Telecom Service Sector towards Foreign Investments in China’s Shanghai Pilot Free Trade Zone. According to the notice, with the exception of data centers, foreign companies can engage in business such as information service, online data processing, and call centers. The question now is: What actual procedures foreign companies would have to follow in order to establish in the FTZ? We will have to wait for the implementation rules on that. biz.hk: Do you expect Renminbi businesses to take off in the Shanghai FTZ? Klako: Financial reform is one of the key reforms anticipated by investors for the Shanghai FTZ. However, the original Notice only mentions generally the free conversion of capital-account Renminbi and liberalization of interest and exchange rates without giving any details or schedule for implementation. biz.hk: What are the other industries that enjoy preferential policy support in the Shanghai FTZ? Klako: A number of industries will enjoy special preferences in the Shanghai FTZ. The shipping and logistics industries are two important ones. For example, the Shanghai FTZ intends to

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eliminate the equity restriction for foreign capital for vessel transportation companies.

Wholly foreign-owned international vessel management companies will be permitted to be established within the zone. biz.hk: It appears that significant steps have been taken to strengthen Shanghai’s competitiveness in the logistic field.

Klako: Yes, majority share ownership is one example. Foreign majority ownership is now allowed for foreign companies setting up in the Shanghai FTZ although the companies established must be joint ventures.

Another major step is the transfer or transshipment of cargoes by shipping companies. What it means is that Shanghai will become a consolidating point for goods bound for other ports. This will put pressure on overseas ports that currently handle such transshipment traffic. For example, South Korea stands to lose considerable volume if goods no longer need to travel to Busan or Incheon to be transshipped before going to northern China. Hong Kong will also be affected. The same principle will apply to air cargo transshipment currently being handled by the Pudong airport. The rule even allows international transit of passengers without a Chinese visa.

Meanwhile, foreign ships will be allowed to ship from Shanghai FTZ to other domestic ports. Currently, only Chinese-owned vessels can operate between domestic ports.

Within Shanghai FTZ, Customs procedures will be greatly simplified.

Currently, border clearance is performed according to each individual waybill. Inside the Shanghai FTZ, border clearance may be done by monthly or even quarterly clearance of waybills. Goods can be delivered directly to your warehouse in the FTZ without having to wait for clearance.

This is especially important for fresh food.

The current wait time of a couple of weeks will be eliminated, and the goods can go directly to a temperature controlled warehouse. The goods will still need to be cleared before being shipped outside of the FTZ but it is expected that the clearance time will be shortened to two to three days.

Perhaps the biggest impact on the supply chain is that the Shanghai FTZ will now become a much more attractive proposition as an international shipping hub. Goods can be delivered to the zone and be held in inventory without paying Customs duty. Only when an item is shipped domestically will the duty be paid.

Items bound for other countries will not be subject to Customs duty or to go through China’s complicated Customs procedures.

One specific application related to the last point is worth highlighting here: e-commerce. Under the new rules, e-commerce fulfillment can be completed entirely within the FTZ. Foreign goods can be imported, but the duty deferred until the item is actually ordered. Even international orders could be fulfilled from Shanghai. At present, the Chinese e-commerce company Alibaba and another Chinese company are setting up such operations. It is anticipated that this e-commerce business will eventually be opened up to foreign companies although it is still in a trial phase with local companies. biz.hk: Do you expect more FTZs in other cities across Mainland China soon?

Klako: Timing in China is always an issue so to answer whether it will be “soon” is difficult. There have been applications made by districts of different cities such as Qianhai in Shenzhen, Hengqin in Zhuhai, Nansha in Guangzhou, Pudong in Shanghai and Binhai in Tianjin.

Qianhai in Shenzhen has been in action even before the establishment of the Shanghai FTZ and it is expected to be completed by 2020. The mission of Qianhai is about implementing financial reforms. I believe that if Shanghai is successful, then Qianhai will implement the same policies as practiced in Shanghai.

As for the other cities, I believe it will just be a waiting game. biz.hk: Will the Shanghai FTZ pose a serious threat to Hong Kong’s standing as a financial center?

Klako: In 2014 Hong Kong is once again set to take the leading role in the region’s financial services. Hong Kong ranks third in the latest Global Financial Centre

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Index which chooses 75 of the world’s major cities and measures their state of competitiveness in the financial sector.

Hong Kong remains the leader of the pack in terms of jurisdictions in Asia to establish, whether it is for start-ups, SMEs or large multinationals and financial institutions.

I think investors should think how Hong Kong could rise with Qianhai in forming an even greater financial and services hub for East Asia in the years to come. Qianhai does have competition in itself – the Shanghai FTZ. There are already reports that some companies that have planned to invest in Qianhai are reassessing their options and maybe moving to Shanghai instead.

Given Beijing’s way for slowness and tight regulations, it remains to be seen just how fast China’s stated currency, interest rate and capital account reforms will occur. Given the experience of many emerging markets of late, there is a legitimate worry among the Chinese leadership that loosening currency controls on the capital account will leave China more vulnerable to sudden and potentially destabilizing inflows and outflows of investment capital than it would like to have. Officials have promised that the Renminbi will be fully convertible, but most observers are convinced that it is highly unlikely to happen in the near-term.

Even if the Renminbi were to become a fully convertible currency and Qianhai grew into a thriving financial services hub, both foreign companies entering the Chinese market as well as Chinese companies expanding overseas would still want the assurance of Hong Kong’s strong legal framework, transparent markets and financial know-how.

Financial centers become international hubs only when investors perceive they provide a level playing field. This requires transparency, an independent legal system, and a willingness to adopt international norms. None of this is in place today in China. Having said all that, if China’s financial and legal systems do eventually become mature enough to satisfy foreign businesses and investors, Hong Kong will certainly have to step up its game to stay competitive.

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About the author Kristina Klako Kristina Klako has worked in the Chinese legal and accounting industry since 2003 as Klako’s China Director. She advises and represents Western clients with their business interests in China, Hong Kong and Singapore. She has worked on numerous complex transactions and frequently advises on and represents foreign clients in tax, accounting and trade related matters.

Kristina is co-author of Klako’s monthly magazine, ChinaInvest.biz – which provides insight into investment, tax and operational issues for foreign companies entering and expanding throughout Asia.

She frequently holds presentations around the world.

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BUSINESS MANAGEMENT

SAVE YOUR BUSINESS BEFORE IT BECOMES “TOO OLD” TO CHANGE

What’re your New Year resolutions? Read more books? Shave 10 pounds by year end? How about restructuring your division if you are a manager? While pushing for change in a business anywhere is never easy, it’s more so in Asia where seniority takes precedence. As a company “grows old,” a culture of risk averse takes over – forming a habit of avoiding risks and binding to “unwritten rules.”

Joseph Grenny is co-founder of VitalSmarts, a specialist in corporate training and leadership development. In the following interview, he shares his insights on how leaders can effect change and break the inertia shackle biz.hk: “Written rules” are often in the form of mission statements and core values whereas “unwritten rules” are what really dictates how an organization is run – in terms of avoiding risk, deferring to the boss and staying in your silo. Is this some something common across cultures, especially here in Asia where many cultures empha emphasize seniority?

Grenny: Anything that keeps people from offering their best ideas and communicating clear expectations of their colleagues undermines the performance of an organization. The problem of deference to authority, avoiding conflict and avoiding “crucial conversations” plagues all organizations – and is especially pronounced in cultures where hierarchy is revered.

Photo: Thinkstock

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biz.hk: Can making better written rules solve the problem? Is strengthening supervision the solution? Can top-down instructional “DOs” and “DON”Ts” cure the problem?

Grenny: Writing down values and publishing codes of conducts accom accomplishes nothing by itself. It is only the beginning of a leader’s work to influence healthy behavioral norms – not the end.

Too many executives labor in retreats and workshops for months, agonizing over the proper wording of their mission and values statements. They naively believe

that creating consensus on how things ought to be is enough. Influencing behavioral change is a full time job and is the essence of leadership. It requires constant attention to many sources of influence that shape people’s choices. biz.hk: How can individuals be motivated to embrace personal change?

Grenny: “Organizations” can’t motivate anyone but “leaders” can. They do it – at least in part – by modeling the very behavior they hope to influence. People don’t believe in your values until you sacrifice for them. When they see leaders willingly sacrifice time, ego, money and other priorities on behalf of the values they espouse, then they begin to believe the words are maybe more than rhetoric.

When a leader, for example, sacrifices ego, by publicly acknowledging a mistake, followers begin to feel safer that their own acknowledgements might be supported rather than attacked. When a front line worker takes a risk to give negative feedback up the chain of command, if the leader humbly listens, others take note, and begin to hope their own fledgling efforts might be welcomed. biz.hk: How can leaders of an organization or business foster a culture of honesty without having to worry that such openness would undermine their

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authority, especially in an environment where people of different nationalities work together?

Grenny: Leaders invest an enormous amount of time listening and soliciting feedback in order to convince people that openness and candor are truly valued.

Wise executives get out of meetings and offices and walk the halls, connecting with people. They convene skip-level meetings with those of distant locations, functions and authorities. When they hear important information, they follow up – and let others know that their input is critical to influence positive change. Consistent actions like these create a sense of efficacy in employees – helping them realize that they can have influence if they take a risk in speaking up. biz.hk: In economies like Singapore, Hong Kong, Taiwan and China where family businesses are common, accountability at the senior level may be more an exception than the norm. How can “outsiders” working in such organizations drive accountability without creating the “fear” of aggression or power struggle?

Grenny: There are two sides to this problem. The first is the responsibility of leadership. Family owners must decide whether their highest value is family loyalty or mission success. If it is the former, they can never hope to have a high functioning organization. They must sacrifice family pride in the interest of a meritocracy of ideas and competence if they truly want to build an excellent organization. You can’t have both.

The second is the responsibility of every professional.

They must develop skills in raising emotionally and politically risky issues in ways that are both 100 percent candid and 100 percent respectful. It is possible to do both. In many organization leaders are hungry for candor and healthy dialogue – but employees don’t possess the skills and confidence to practice it. In this case individuals must invest in their own

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development – and the organization must provide the opportunities to do so. biz.hk: In Asia, bosses loathe to get their hands dirty. They delegate to staff functions. Is such idea obsolete in today’s competitive marketplace? How can that be changed?

Grenny: That’s a tough question.

Organizations suffer more from micro-management as they do from leadership detachment. It’s important for leaders to have enough visibility into day-today issues that they can provide mentoring and hold people accountable. The health of organizations is a function of leaders having the capacity to solve the critical problems an organization faces. If they don’t get their hands dirty on solving these, then the organization suffers. However, every other class of problem should be delegated and there is no risk in leaders fully trusting staff to solve them. biz.hk: Typically in the beginning of the year, people make “resolutions” to change – but they give up once they encounter obstacles. What are your tips in overcoming these setbacks?

Grenny: The key to change is to take control of the things that control you. We are all powerfully shaped by sources of influence that are often invisible to us. So when we fail to change our habits, we beat ourselves up – blame ourselves – and attribute our failure to a lack of will power. In fact, the problem is rarely a lack of will power – it is far more often that a lack of skills, negative social pressure, unhealthy incentives or the physical environment we inhabit – or combination of these influences – that undermine our best intentions.

Wise changes use these subtle forces in an Joseph Grenny intentional way to help them overcome setbacks and maintain progress.

About VitalSmarts and True North Leadership Asia: In Hong Kong and Singapore, True North Leadership Asia is the exclusive licensee for VitalSmarts. It currently offers Crucial Conversations®, Crucial Accountability™, Influencer Training™ and Change Anything Training™ – tools that build teams, enrich relationships and improve end results. True North Leadership Asia also offers keynote speaking, on-site consulting and executive and management team development.

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2014 Feb

Mark Your Calendar How to Handle Internal Investigations?

Feb The Key Steps to Conducting an Effective Investigation

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Greg Hallahan, Senior Director, FTI Consulting Internal investigations often present a number of difficult challenges to management.

In addition to being disruptive, time-consuming and costly, an internal investigation can have far-reaching ramifications for an organization if not handled extremely carefully. This presentation will explore how best to respond to initial indications of fraudulent activity. It will then cover putting together an effective action plan that increases the chances of the investigation’s success, whilst minimizing the associated risks to the company.

Some of the key considerations in planning an internal investigation are: • Understanding and making the best use of the available resources • Sequencing the key activities • Securing key information, both electronic and documentary • Maintaining confidentiality for as long as possible • When and how to interview witnesses and suspects

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

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Greg Hallahan is experienced in leading and conducting a wide variety of business intelligence, due diligence and corporate investigations throughout Asia Pacific, in addition to developing a portfolio of clients across the region across a variety of industry sectors, in particular financial services, mining and manufacturing. He has also prepared both corporate governance and compliance strategies to assist clients respond to UK Bribery Act, FCPA and AML regulations. He started his career as an auditor with a global accountancy firm in the United Kingdom, and has also worked in Italy and the Czech Republic.

Feb

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How to Run an e-Business without Sacrificing Your Day Job Chris Geary, Founder, BSD Code and Design Academy Nickey Khemchandani, Course Director & Co-Founder, BSD Code and Design Academy In this workshop, we will cover:

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

How does an e-Commerce website work?

• Pre-made platforms (Shopify, etc) and their pros and cons • Fundamental parts of an E-Commerce website and how they work • Why aesthetics are important?

• Marketing with SEO/SEM & Social Media

Time: 12:00 - 02:00pm (Sandwiches & beverages included)

Developing the business model • Creating a business plan (market analysis, operations & funding etc) • Time management • Setup of managed and automated processes on a fixed schedule

Fee(s): Member: HK$280 Non-member: HK$380

Chris Geary is an entrepreneur based in Hong Kong, with a focus on driving growth across diversified investments in 6 companies and one social venture foundation. His businesses range across consultancy, research, IT and design education, product design and development, jewelry and investment and are based in Greater China and ASEAN. On the social venture side, he focuses on youth development and education through the use of creative arts and technology.

Nickey Khem is the Course Director for BSD Code and Design Academy and has been in the digital industry for over 7 years. Prior to co-founding BSD, he worked at various design and media agencies, producing tailor-made products for clients in industries spanning F&B, publishing, entertainment & lifestyle, and luxury goods. A self-taught digital guru, he wants to impart the message that the web is not something that needs to be learned through a computer science degree.

Low Cost Carrier and Full Service Airline Competition,

Feb Globally and in Asia

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Adam Cowburn, Vice President, ICF International In the early days of Low Cost Carriers (“LCCs”), new entrants sought to stimulate new travel demand and capture leisure travelers through the introduction of lower fares, leaving Full Service Airlines (“FSAs”) to focus on business travelers. However, over time the distinction between the two segments around the world has grown increasingly blurry.

LCCs are now offering connecting services, forging partnerships, and engaging in other behavior that drives higher costs and puts them closer to FSAs. In Asia, as the LCC market has matured a number of relatively unique and remarkable developments have emerged, including: a greater degree of experimentation with long-haul LCCs; highly localized LCC service characteristics; and general acceptance of the LCC multi-national franchise model.

With the convergence of business models, the future will likely bring an increasingly competitive environment.

Adam Cowburn leads ICF SH&E’s business development and project execution activities in the Asia-Pacific region. He has provided advice on strategic planning, new business development, mergers and acquisitions, business and asset valuations, financial modeling, and geographic expansion planning to clients in Asia as well as North America, the Middle East, Latin America, and Europe. He has extensive experience with business plan development and market analysis, in addition to regulatory and operational assignments.

For information, see website: www.amcham.org.hk

Tel: (852) 2530 6900

Fax: (852) 2810 1289

Venue: AmCham Office 1904 Bank of America Tower 12 Harcourt Road, Central, Hong Kong Time: 12:00 - 02:00pm (Sandwiches & beverages included) Fee(s): Member: HK$280 Non-member: HK$380

Email: kalau@amcham.org.hk