Insight May Issue 09

w w w. a m c h a m - s h a n g h a i . o r g

INSIGHT The Journal of the American Chamber of Commerce in Shanghai May 2009

HR FOCUS

Employment Outlook SNAPSHOT

Competitive Intelligence ERP SERIES

Implementation Partners

The Push for Pharmaceuticals China’s pharmaceutical industry looks to continue a growing record of success

INSIGHT May 2009

The Journal of the American Chamber of Commerce in Shanghai

AMCHAM SHANGHAI

COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren

MEMBERSHIP & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

Justin Chan

EDITORIAL ASSOCIATE

Elaine Wu

COMMUNICATIONS ASSOCIATE

Weina Yang DESIGN

Alicia Beebe LAYOUT & PRINTING

Ella Shan Snap Printing, Inc.

INSIGHT SPONSORSHIP MARKETING ASSISTANT MANAGER

Sophia Chen

(86-21) 6279-7119 ext. 5667 Story ideas, questions or comments on Insight: Please contact Justin Chan (86-21) 6279-7119 ext. 5668 justin.chan@amcham-shanghai.org Insight is a free monthly publication for the members of The American Chamber of Commerce in Shanghai. Editorial content and sponsors' announcements are independent and do not necessarily reflect the views of the governors, officers, members or staff of the Chamber. No part of this publication may be reproduced without written consent of the copyright holder.

Shanghai Centre Suite 568 1376 Nanjing West Road Shanghai, 200040 China tel: (86-21) 6279-7119 fax: (86-21) 6279-7643 www.amcham-shanghai.org

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COMMITTEES

Siobhan M. Das

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Karen Yuen

15 The New Competitive Threat in China SNAPSHOT

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DIRECTORS BUSINESS DEVELOPMENT & MARKETING

F E AT U R E S

IMAGINECHINA

PRESIDENT

Brenda Foster

By Laura Mitchelson

Increasing competition from domestic firms means that foreign companies doing business in China will have to step up their efforts in gathering market intelligence.

19 The Outlook for Employment HUMAN RESOURCES FOCUS

By Elaine Wu

Hiring rates may be slowing down in China, but during a downturn companies should still adopt flexible strategies and be on the lookout for the right kinds of talent.

23 Choosing an Implementation Partner ERP SERIES

By Tony Cotterell

The second article in the ongoing series on implementing a global enterprise resource planning (ERP) system looks at how to design a request for proposal (RFP) and how to select an effective implementation partner.

28 The Push for Pharmaceuticals COVER STORY

By Alex S. Dai

China’s is fast becoming a global hotspot for the pharmaceutical industry. Although industry growth rates have slowed, many multinational giants are eyeing China as a prime location to open global R&D centers.

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

3 News Briefs

13 Market Profile

11 Digital Music Revolution FRESH IDEAS

Google’s new, ad-supported music search engine allows users to download free, licensed songs as the company tries to turn China’s digital music scene into a profitable business.

44 Deal of the Month

12 Positive Rebound ANALYSIS

China’s top marketing executives predict that China will pull through the global economic downturn and rebound by 2010.

INSIDE AMCHAM

35 From the Chairman: Advancing Relations 38 2009 Charity Gala

MARCH 2009

41 Events in Review 42 Committee Highlights

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very industry has been affected in some shape or form by the global economic downturn, but some sectors are faring better than others. This month’s cover story examines the growth of pharmaceuticals in China, which has slowed some but remains steady and is still outperforming other regions. Multinational pharmaceutical companies are continuing to make large investments, not just in manufacturing, but increasingly in research and development to access the growing market. As healthcare reform in China continues and knowledge of new products and services increases, demand is sure to rise and allow growth to continue.

JUSTIN CHAN EDITOR-IN-CHIEF

The current economic climate has had a much deeper impact on China’s labor market however, and the hiring outlook in major cities such as Shanghai is weak. Our Human Resources Focus examines the results of a recent employment survey

by Manpower and looks at the steps companies can take to ensure they emerge stronger. Especially in difficult times, companies should have retention policies in place so key staff remain on board and

the infrastructure is in place for growth in better times.

This month’s Snapshot reviews the rise in competition from Chinese firms in the domestic market. Foreign firms have long enjoyed the high-end segment of most markets, but domestic competitors are constantly increasing sophistication and improving on quality, even in these tough times. Competitive business intelligence firm Amber shares advice on why companies must improve their understanding of Chinese firms and how they can learn more about the competition.

Finally, the second article in our five-part series on enterprise resource planning (ERP) looks at the process for preparing a request for proposals and how to go about selecting a suitable global implementation partner. This is another important stage in the ERP implementation process as the implementation partner’s role is absolutely critical to determining the success of a project. Next month’s installment will examine design and testing of a global ERP system.

IMAGINECHINA

News

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

CHINA BUSINESS

Rise in corporate bonds The first quarter of 2009 saw a sharp rise in corporate bonds in China, state media reported. Forty-three corporate bonds, including five issued by central state-owned enterprises were approved, totaling RMB66.73 billion in value. In striking contrast, only 11 corporate bonds received approval for issuance by the National Development and Reform Commission (NDRC), China’s economic planning agency, in the first half of 2008.

The surge in new bonds is intended to support the government’s massive RMB4 trillion stimulus package, of which the central government will shoulder RMB1.18 trillion, with the remainder coming from local governments and private capital. Analysts believe that corporate bond sales will peak in the latter half of the year.

Property investments climb 4.1% Real estate investment in China climbed 4.1% year-on-year in the first quarter of 2009, totaling RMB488 billion, the National Bureau of Statistics reported.

The growth rate is 3.1% higher than the first two months of 2009, but is 28.2% lower than the same period from 2008.

Property prices in China’s 70 major cities also fell by 1.3% in March yearon-year. Sale prices of new residential buildings in some 29 cities saw increases in March, while 41 cities experienced declines. Shenzhen, in China’s southern Guangdong Province, was hit the hardest, with real estate prices down 12.2% year-on-year.

Trade on electronics down 30% Newly released data shows that imports and exports of electronics and information products in China declined by 30% year-on-year in the

China's GDP growth hits ten-year low China’s economy grew 6.1% year-on-year in the first quarter of 2009, according to the National Bureau of Statistics (NBS).The quarterly growth rate was the weakest in 10 years as the global financial crisis continues to take a toll on the world’s fastest growing economy.

China’s GDP growth was 4.5% lower than the first three months of 2008, and 0.7% lower than the previous quarter. China’s Q1 gross domestic product (GDP) totaled RMB6.58 trillion. Retail sales remained strong with a 15% rise to RMB2.94 trillion in the first quarter.The Shanghai Composite Index also reached an eightmonth high to close at 2,557.46 on April 20, the highest since the start of the Beijing Summer Olympics in August last year.The consumer price index (CPI) fell 1.2% year-on-year in March, continuing its downward spiral after it dropped 1.6% in February this year, the first monthly decline since December 2002.

first two months of 2009. Imports fell 36.1% to US$34.1 billion, while exports dropped 26.1% to US$53.6 billion. The combined import and export value was US$87.6 billion from January to February, according to the Ministry of Industry and Information Technology. The export value of processing trade with imported material, which accounted for more than two-thirds of the total export, dropped 25.4% to US$37.9 billion. China’s total exports, a driving force for the world’s third-largest economy, dropped 25.7% year-on-year in February, amounting to the worst decline in more than a decade as global demand deteriorated.

CORPORATE NEWS

Major electronics retailer expands in rural market Suning Appliance Co., China’s second-largest electronics retailer and an active player in the nation’s appliance rebate program, is expanding aggressively in the rural market.

The company will add at least 1,000 new stores in third- and fourth-tier cities over the next five years, said Suning President Sun Weimin. Suning currently operates 812 stores nationwide and announced it would open another 200 in 2009. A recent survey conducted by Suning and a Beijing-based research company found that televisions,

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refrigerators, washing machines and kitchen appliances enjoy the highest popularity in rural areas, while hi-tech products like flat screen televisions, air conditioners, computers and other digital products are becoming new targets among rural customers.

Alcatel-Lucent equips China Unicom with 3G gear French-American telecommunication products maker Alcatel-Lucent will provide China Unicom with third generation (3G) mobile network equipment in some 14 Chinese provinces, the company said. The mobile network will provide services such as media streaming, video sharing and highspeed internet access. Details of the deal have not yet been disclosed. China began offering 3G mobile networks earlier this year when the central government issued licenses to three incumbent operators, China Mobile, China Unicom and China Telecom, making the country a strategic market for 3G mobile networks suppliers. The Ministry of Industry and Information Technology forecasted that 3G services in China would attract RMB170 billion worth of investment in 2009.

Novartis plans more investment in China Despite the global economic downturn, global pharmaceutical giant Novartis AG announced that it will invest further in the Chinese market while pulling back in the U.S. market. The company’s investment scheme is set to build up its overall strength in research and development facilities, marketing and sales, and recruitment in China. Novartis Pharmaceuticals, the company’s pharmaceutical arm, will launch six new products this year. The Swiss drug firm is also eyeing cooperation with the Chinese government in regards to the nation’s medical system, where China recently passed a RMB850 billion reform package. Novartis covers patent drugs, healthcare products and vaccine sectors in China, with 3,500 employees and a total investment of over RMB3.3 billion at the end of 2008.

McDonalds to increase hiring in China Fast food chain McDonald’s will recruit

more than 10,000 people, increase the salaries of existing staff and set up training and development programs for employees this year, said Kenneth Chan, the newly appointed chief executive officer of McDonald’s China. To keep up with rising business growth, Chan said the chain will open more outlets this year, incorporate more performance-oriented metrics and raise employee salaries nationwide by at least 6.3%. Last year, McDonald’s said it planned to open 175 new outlets in 2009 on top of the current 1,000 it has in China, its biggest expansion ever. In 2008, the headcount at McDonald’s China outlets grew by 8.9%, double that of the U.S. and the European Union, making China the company’s fastest growing market in the world.

MACROECONOMICS

China to launch more stimulus investment in Q2 China’s central government will launch its third batch of stimulus investments in the form of large domestic projects in the second quarter of 2009 that will aim to further boost the economy. The government has so far invested a total of RMB230 billion from its RMB4 trillion stimulus package announced last November to shore up the slowing economy. RMB100 billion was spent in the fourth quarter of last year and RMB130 billion was spent in the first quarter of 2009. Quarter two’s investments will similarly be poured into areas that benefit the livelihoods of Chinese citizens, including the health and education sectors, housing for low-income earners, and big infrastructure projects.

The exact amount that will be spent over quarter two has not been confirmed yet, although it could be more than previous quarters, reported state media.

slide compared to a year earlier, making March the sixth straight month where foreign investment has declined. FDI in China experienced a significant drop in January and February this year, down 32.7% and 15.8% respectively. In March, MOFCOM shifted the approval authority for certain foreign investments to provincial governments.

China’s forex reserves slow in Q1 The recent depreciation of the Euro and shrinking foreign direct investment have resulted in a slow rise in China’s foreign exchange reserves. Forex reserves in China stood at US$1.9 trillion at the end of March, up 16% year-on-year, according to China’s central bank. The figure is an increase of US$7.7 billion from the end of 2008, but US$146.2 billion lower than the same period from last year. In March, foreign exchange reserves increased US$41.7 billion, up by more than US$6.7 billion. China’s forex reserves, the world’s largest, have ballooned in the wake of the nation’s trade surplus and the influx of outside investment, but both trade and FDI have suffered a plunge as a result of the financial crisis.

Urban unemployment rises China’s urban unemployment rate is expected to rise to 4.6% in 2009, the Ministry of Human Resources and Social Security announced. The registered unemployment rate in urban areas was 4.1% and 4.0% in 2006 and 2007 respectively. China has 225.4 million migrant workers in rural areas, of which 62%, or 140 million, worked outside of their hometowns, according to the National Bureau of Statistics. Earlier reports from the government said that 20 million migrant workers lost their jobs as a result of the global economic slowdown.

U.S. - CHINA

FDI plummets 20.6% Foreign direct investment (FDI) in China plummeted 20.6% year-on-year in the first quarter to US$21.78 billion, the Ministry of Commerce (MOFCOM) said. In March, FDI in China amounted to US$8.4 billion, the highest monthly amount since October 2008. However, the March figure was a 9.5%

GM to expand in China General Motors Corp. is likely to expand in new products, facilities and technology in China, GM’s Asia-Pacific President Nick Reilly said at the Shanghai Auto Show. Reilly said that GM’s operations in China were profitable in 2008. As the largest foreign

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automaker in China, GM’s China sales figures jumped 25% to 137,000 vehicles in March.

By contrast, GM’s U.S. sales plunged 45%.

Surging demand for GM’s popular Chinese minivan, the SAIC-GM-Wuling minivan, has largely been spurred by the government’s recent subsidies and tax incentives that encourage the purchase of smaller and more fuel-efficient cars. GM expects to double its annual sales in China to over two million units over the next five years.

Auto supplier Delphi sells unit to China Bankrupt U.S. auto supplier Delphi Corp. is selling its suspension and brakes businesses to China’s BeijingWest Industries for US$100 million. Under the purchase agreement, Delphi, a former arm of GM, will sell its machinery and equipment, immovables and intellectual property, as well as hand over customer and supplier contracts to BeijingWest Industrials. The final deal is waiting for court approval, but Delphi expects the sale to go through by the fourth quarter of this year. BeijingWest Industrials was set up in March 2009.

State-owned Capital Iron & Steel Co. holds a 51% stake in the company, while Bao’an Investment and Development Co., a subsidiary under Chinese private auto parts manufacturer Tempo Group, holds a 24% share, and the Beijing municipal government holds the rest.

Alibaba targets the U.S. The business-to-business (B2B) arm of leading Chinese e-commerce website Alibaba said it will double its staff in the United States and invest another US$10 million in its most important market outside of China. The US$10 million investment, one-third of the division’s US$30 million overseas budget, will be spent to boost marketing activities and improve customer services in the U.S., said Alibaba B2B President Wei Zhe. Alibaba, China’s largest online marketplace, has invested actively in Japan and India to serve local ecommerce enterprises in recent years. The group also plans to develop an e-business trading platform in other languages such as French, Spanish and Russian.

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CHINA OVERSEAS

China-ASEAN trade continues rise The Association of Southeast Asian Nations (ASEAN) is likely to become China’s thirdlargest trade partner in the future, said Gao Hucheng, China’s vice commerce minister at a preparatory meeting of the 6th ChinaASEAN Expo, which will be held from Oct. 20 to 24 in Nanning, the capital of Guangxi Zhuang autonomous region.

Trade between ASEAN and China soared from US$105.9 billion to US$202.5 billion from 2004 to 2007, and rose by 14% to US$231.1 billion in 2008, making ASEAN China’s fourth-largest trade partner after the European Union, the United States and Japan. The 10-nation group of ASEAN includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

China Minmetals inks OZ deal Australian miner OZ Minerals Ltd. signed a US$1.21 billion takeover deal with China’s biggest metals trader China Minmetals.

Australian authorities struck down China Minmetals’ original US$1.7 billion buyout of OZ Minerals at the end of March, citing national security reasons. The current agreement was revised to exclude OZ Minerals’ “security-sensitive assets” like its Prominent Hill mine, which is located at a weapons-testing area. The deal, if approved by Chinese regulators, Australia’s foreign investments review body, and OZ shareholders, would leave the company with a cash balance of about US$366 million once its debts are cleared. OZ expects the deal to go through by late-June this year.

Huawei invests in Bangladesh China’s telecommunications equipment company Huawei Technologies, under its corporate social responsibility program, has funded a new US$3 million wireless communications laboratory at the Bangladesh University of Engineering and Technology. The facility will be used for training, research and development for telecoms engineers, and will contribute to the development of the telecoms sector in

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Bangladesh. Huawei Technologies entered the Bangladesh market in 1998. During its 11 years of development, the company has become the biggest telecom solutions provider in the country, employing more than 800 people.

GOVERNMENT & POLICY

CBRC to launch new credit rules The China Banking Regulatory Commission (CBRC), watchdog for the banking industry, is expected to launch a new set of specific rules to regulate the nation’s increasing number of loans, reported the China Securities Journal. The CBRC has drafted four rules, including administrative measures on floating capital loans, administrative measures on fixed asset loans, administrative measures on personal loans, and guidance for the project financing business of banks and financial institutions.

The CBRC is aiming to change the current management in order to crack down on the illegal use and embezzlement of credit funds, and enhance the body’s supervision over the direction of credit flow.

China to revamp medical care China’s State Council unveiled a detailed plan aimed at revamping the nation’s ailing health care system that will include an initial investment of RMB850 billion. The first phase of the plan, which will take place over the next three years, includes expanding medical issuance and building thousands of new hospitals and clinics nationwide, giving priority to the improvement of grassrootslevel medical facilities in rural areas, which are often ill-equipped and understaffed. The reform is reportedly aimed at “solving pressing problems that have caused strong complaints from the public,” as soaring medical costs have made medical services increasingly unaffordable for ordinary people.

New overseas investment fair in November China plans to hold its first Overseas Investment Fair on Nov. 3 and 4 this year in Beijing in a bid to encourage domestic companies to invest in the international market. The fair will be hosted by the

China Industrial Overseas Development and Planning Association (CIODPA), an organization under the National Development and Reform Commission (NDRC). Chinese and foreign government officials, international industrial and commercial leaders, chambers of commerce, companies and professional service agencies will all be invited. Chinese direct overseas investment surged 96.7% year-on-year in 2008, hitting US$52.15 billion, according to the Ministry of Commerce (MOFCOM).

SHANGHAI BUSINESS

Whirlpool closes Shanghai plant The world’s top appliance maker Whirlpool Corp. will shut down its Shanghai washing machine factory and restructure its appliance business in China.

Whirlpool will consolidate its washing machine production lines into an evenshare joint-venture plant set up between Whirlpool and domestic home appliance producer Hisense Kelon in China’s Changxing Economic Development

Zone in Zhejiang Province. Whirlpool announced that the restructuring of its business would result in the layoffs of 600 employees in the Shanghai factory but would create 900 new jobs at the Zhejiang plant, which manufactures washing machines and refrigerators, by the end of 2009. Whirlpool said its China regional headquarters and a research and development center which runs commercial and administrative operations will remain in Shanghai.

HSBC offers credit to Shanghai Electric HSBC China will offer Shanghai Electric Group a global credit limit of US$250 million to help the mechanical and electrical equipment maker ride out the global financial crisis as well as explore overseas markets. The deal will allow Shanghai Electric and its group members to leverage HSBC’s international network and resources to facilitate its growth in overseas markets. HSBC will offer spot and forward foreign exchange transactions, working capital, and import and export services.

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The two sides will also seek opportunities to further cooperation in global cash management, project and export financing, payments and collections, financial advisory and insurance services.

Shanghai to build Asia’s largest silt treatment plant Shanghai will start construction on a major silt treatment facility that will be completed in 2010, announced the Shanghai Urban Construction and Development Corp. (Shanghai Chengtou). The entire project will cost RMB680 million, and will be located in Heqing Township in the Pudong New Area. Once in operation, the facility will have a daily treatment capacity of 204 tons of dehydrated silt. The silt, which will be removed from 2 million cubic tons of sewage treated daily by neighboring Bailonggang Sewage Treatment Factory, will then be used in gardens and landfills after treatment. Major construction work of the plant is due to be finished by the end of this year, according to Shanghai Chengtou.

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CHINA & THE WORLD

ASIA-PACIFIC SOUTH AMERICA JAPAN Japan and China have pledged to work together to provide economic assistance to other Asian nations. Japan’s Prime Minister Taro Aso and Chinese President Hu Jintao met at the end of the Group of 20 summit held in London to discuss regional economic issues. Aso promised to spend US$22 billion for additional trade finance aid over the next two years and to increase the Japanese government’s official development assistance to other Asian economies to US$20 billion. China will also contribute US$40 billion to the International Monetary Fund (IMF), which plays an important role in supporting emerging economies in Asia.

MIDDLE EAST

INDONESIA Indonesia plans to deliver 2.6 million tons of liquefied natural gas (LNG) annually to China for 25 years beginning this year, Indonesia’s oil supervision body BP Migas announced. The LNG will be transported from Indonesia’s Tangguh field in Papua to China’s southeast Fujian Province. The first shipment of gas, originally scheduled for May, was recently delayed until June due to technical problems. Indonesia, the world’s third-largest LNG exporter after Qatar and Malaysia, is now facing dwindling outputs of its old liquid gas wells and is depending heavily on its Tangguh field, which produces 7.6 million tons of LNG per year.

ASIA-PACIFIC EUROPE

ANGOLA Angola has said it would soon obtain more loans from China for home infrastructure construction after a nearly three-decade-long civil war. Angola secured a US$1 billion loan from Beijing in March to support its under-developed agricultural sector. At least US$5 billion in oil-supported loans from China have flowed into Angola since the end of its civil war in 2002. The new loan negotiations with China are currently still in progress, reported Angolan Finance Minister Severim de Morais.

AFRICA

FRANCE China and France have cooperated on a three-year nuclear energy pact, signed between the China Atomic Energy Authority (CAEA) and the French Atomic Energy Commission. The agreement, the tenth of its kind, involves joint efforts in radioactive waste treatment, controllable nuclear fusion and personnel training. The two agencies signed their first cooperation agreement in 1982. China intends to revamp its energy development plans by nearly doubling its nuclear power capacity over the next 10 years, with five nuclear power plants planned for construction this year. This move could reduce China’s dependence on fossil fuels and minimize harmful effects on the environment.

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PORTUGAL China will strengthen judicial cooperation ties with Portugal in order to provide better legal services and improve bilateral relations, said Zhou Yangkang, China’s Central Political and Legislative Affairs Committee secretary. The two sides signed and ratified three treaties on criminal judicial assistance, extradition, and transfer of sentenced persons. Zhou said China and Portugal have made significant progress in political, cultural and social exchanges since they established diplomatic ties 30 years ago. Since then, China has implemented the strategy of rule of law, strengthened legal education for the public and has learned from other countries in the construction of its own legal system.

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EGYPT Egypt is eyeing more Chinese investments to fuel its economy, Youssef Wali, chairman of the EgyptianChinese Friendship Association (ECFA), said during a ceremony to mark the 10th anniversary of ChinaEgypt strategic cooperation relations. China’s total investment in Egypt has hit US$500 million, but the figure is still modest compared to other Arab countries, noted Wali, who expressed hope that the two countries could broaden their economic cooperation. Total trade volume between China and Egypt increased from US$610 million to US$6.24 billion in the last decade. Egyptian exports to China have shot up from US$30 million to US$430 million in the same period and has created some 3,000 jobs in China.

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CANADA Canada is set to open six new trade offices in China to expand its economic relationship with China. The trade agencies are aimed to help Canadian companies take advantage of more business opportunities in the Chinese market. Canada will work to expand two-way investment and cooperation in the fields of science and technology that will benefit both nations. Canada is aiming to triple its bilateral trade with China over the next decade, said Canada’s International Trade Minister Stockwell Day.

ARGENTINA Argentina and China agreed to a three-year currency swap amounting to RMB70 billion, marking China’s first currency swap deal with a Latin American nation. The deal is expected to bolster confidence in the Peso and in the Argentine government’s ability to manage the value of its currency.

The Peso has been declining consistently since mid-2008 and is losing value quickly due to the scarcity of U.S. dollars in the local exchange market. The Argentine Central Bank has placed tightened controls on banks and is monitoring trade to prevent the currency from depreciating rapidly.

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FRESH IDEAS

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n China, the digital music scene is rampant with illegal music downloads that have been responsible for both crippling the legitimate digital music industry and the decision of some Chinese artists to stop recording because piracy made it so unprofitable Google is poised to change all that. In March, Google launched a free Internet music download service that will allow users to search, download and stream millions of songs. Google’s music search engine will offer free links to 1.1 million licensed tracks that include the full catalogs of Western and Chinese music from Warner Music Group, EMI Group, Sony Music Entertainment, Universal Music, and 14 independent labels. Partnering up with Chinese music download website Top100.cn, Google’s new music download service will only be available to users located in China. The company has no plans to offer the service in other markets.

The advertising-supported service, where ad revenue will be shared between Google and its record-label partners, is the first serious attempt to turn China’s digital music field into a profitable, legitimate business. If successful, Google’s download service could curb the wave of digital piracy as well as give it a boost against its main Chinese competitor Baidu, the leading search engine in China. A significant portion of traffic on Chinese search sites such as Baidu is mostly generated by Chinese netizens searching for free songs.

By offering high-quality, licensed music tracks, Google hopes to attract users who are frustrated with the invalid links, slow download speeds and poor-quality songs found elsewhere.

“Google’s new music search has made a great breakthrough in terms of technology, quality of and availability of licensed music, and establishing a new business model. Our search technology is

Digital Music Revolution on the cutting edge,” said Kai-Fu Lee, president of Google Greater China.

Google will soon be improving the technology of its search tools. Users will be able to search for songs by by parameters such as tempo, instruments and date produced. Database expansion is also on the way.

“The 1.1 million songs on offer now are less than one-fifth of the total planned,” said Gary Chen, chief executive of Top100.cn. “We plan to provide users with more free, licensed digital products like live recordings, documentary films and interviews.”

Google's new ad-supported, free digital music download service is the first of its kind worldwide.

Kai-Fu Lee: “Google’s mission is to make information from all over the world more accessible and useful. The launch of Google Music Search is a part of this mission.

Google’s vision is to put music at your fingertips with the help of search technology. In addition to the traditional ways of searching by song or artist names, Google hopes to allow users to search for music in new ways based on musical characteristics. For example, you can search for a collection of new dance music, or if you’re in the mood for tropical beats, you can try to find it by tempo or tune.

Ensuring that consumers have access to legal sources of music is the foundation for our development of Google Music Search. The model creates a win-win situation for both users and the music industry, and allows both Google and Top100 to create a long-term, suitable and healthy business environment for digital music downloads that tailor to our respective strengths.”

Google Music Search

Launched: March 30, 2009

Homepage: http://www.google.cn/music/homepage Chinese partner: http://www.top100.cn/ • Service Features: Free, licensed access to high-quality music • Target Market: Chinese Internet users

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A N A LY S I S

IMAGINECHINA

Positive Rebound Survey of top marketers suggests China will recover from the current downturn by 2010.

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hina’s economy will shake off the effects of the global economic downturn and return to a booming and vibrant state by 2010, revealed a survey presented to multinational and Chinese senior executives at The Marketing Group of China’s (MGOC) second event in Shanghai in April.

The survey, commissioned by MGOC to market research company Millward Brown-ACSR and global communications agency Hill & Knowlton, interviewed 59 chief marketing officers (CMOs) and senior marketing directors to gauge their attitudes on how they were responding to the crisis in China.

The data collected showed that a mood of cautious optimism exists in marketing departments, with 75 percent of those interviewed believing the economy would turn around by 2010. The respondents indicated that China would recover

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more quickly because it was experiencing the crisis in a different manner than the West, where consumers had been affected on a more serious and fundamental level than Chinese consumers.

The findings also revealed that marketers were exploring alternate and more cost effective media channels in 2009, with evidence of a marked interest in digital media and in-store communications.

However, with mounting pressure in boardrooms across the globe to cut costs, marketing budgets are being tightened, and smaller and more focused marketing channels are being cut. This tactic could ultimately be self-defeating from a longterm perspective, warned Jason Spencer, managing director of Millward BrownACSR’s Shanghai office.

“The survey shows that marketers claim to be cutting down on lower-reach channels such as sponsorship and events, which may be somewhat short-sighted especially if they are looking to connect more strongly with their current customer base, as only such targeted channels can,” said Spencer. “The key is to first align the communication objectives and then figure out which media touch point can deliver that most effectively. What may seem cost-effective at first may not always be in the end.”

While marketing cuts are hard to avoid in the current economic climate, companies need to be aware that lowering the priority on getting their messages across can have lasting, damaging consequences, added David Zhao, managing director of Hill & Knowlton’s Shanghai office.

“The findings show that the necessity for effective communications, whether for brand exposure, staff engagement or internal communications, is even higher during times of economic crisis,” said Zhao. “In particular, I believe that companies willing to spend on corporate social responsibility during these challenging times can deliver their desired message in a more powerful manner than would be possible during brighter economic conditions.”

Analysis provided by The Marketing Group of China For more information, please visit www.marketinggroupofchina.com

MARKET PROFILE

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he undeniably strong spending power demonstrated by Chinese consumers both domestically and abroad has caught the attention of all market watchers in the past decade. The new generation of Chinese consumers is more liberal than that of their savings-minded parents. They are trendy, hold white-collar jobs, own apartments and cars and travel abroad extensively. Following these trends, what will the Chinese consumers of tomorrow be like? Will they ride through the economic crisis and continue to spend big?

Chinese consumers today Growing affluence At present, Chinese families generally save or invest a quarter of their total income and spend almost the same proportion on food. Members of China’s generation Y enjoy the most buoyant income growth and tend to splash out more on clothes and entertainment, making them the prime target group for China-bound retailers.

As the Chinese consumer grows more affluent and the government pushes for better quality of life for its citizens and increasing per capita income, the insatiable urge for image and up-market goods will continue to grow. According to Goldman Sachs, China is now the third biggest consumer of luxury goods in the world, following Japan and the United States, accounting for 12 percent globally. Sales of luxury items are growing by 20 to 30 percent annually.

Strong brand loyalty In a 2008 survey of shoppers by McKinsey & Company, 63 percent of shoppers surveyed still

IMAGINECHINA

Chinese Consumers in 2020 enter a shop with a shortlist of favorite brands in mind to purchase. Although this percentage dropped from 73 percent in 2007, getting onto that shortlist remains an essential step for any consumer product trying to gain a foothold in China.

Chinese shoppers are becoming less comfortable about buying unfamiliar products. In 2008, only 18 percent of respondents indicated that they were always willing to try new packaged foods, compared with 29 percent two years earlier. When Chinese consumers try new products, they are twice as likely to grab those introduced under a familiar brand than under an entirely new one. Such reluctance is understandable in China, where many cheaper goods are of poor quality and the consequences of the wrong choice can be drastic, especially with food purchases.

Big internet users The internet has been the gateway for many Chinese to experience the outside world and gain exposure to Western trends and consumer goods. This awareness, heightened by increased knowledge and purchasing power, are powerful ingredients to spurring demand for travel, luxury goods, technological gadgets, cars and housing.

In 2007, China overtook the United States as the country with the most internet users with 180 million netizens. This figure is expected to reach 500 million by 2020, as growth has increased by over 125 percent over the past five years.

Market Profile provided by

Chinese consumers in 2020 Rising standard of living By 2020, China will have a population of more than 1.4 billion people with annual disposable income

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

“

Well-managed companies are in a good position to reap huge profits.”

forecasted to increase to RMB65.4 billion compared with RMB15 billion (US$2.19 billion) in 2008. The China National Bureau of Statistics announced that the country would be considered a moderately affluent society by 2020 if development trends continue. Zheng Xinli, Vice Minister of the central policy research office, said that taking price changes into account, 55 percent of the population will be middle class by 2020, with 78 percent of city dwellers and 30 percent of those in rural areas reaching that status. By 2020, the annual disposable income per household is projected to be RMB98,956.

Mass urbanization An annual average of 12 million people per year will migrate from China’s rural areas to become urban dwellers by 2020. Such mass urbanization, coupled with China’s robust economic growth, will result in a surge in demand for housing – approximately 14.4 billion square feet annually. It is estimated

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that China will need to construct 209 square miles of new urban residential floor space every year until 2020 to keep pace with the estimated annual influx of migrants. Residential developers in China are finding a profit niche building affordable and dream homes for Chinese generation Y couples. By 2020, China’s per capita GDP is expected to reach over US$10,000, comparable to Europe, Japan and the U.S. in the middle of the 20th century.

We want everything Any commodities that are associated with providing quality of life and meeting consumer needs will be in great demand as Chinese consumers mature into sophisticated and educated shoppers. Wellmanaged companies are in a good position to reap huge profits as China’s 1.3 billion increasingly affluent consumers exercise their collective economic clout to purchase enormous quantities of every conceivable consumer product.

S N A P S H OT

BY LAURA MITCHELSON

IMAGINECHINA

The New Competitive Threat in China

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ost successful foreign invested businesses in China have invested signiďŹ cantly in understanding Chinese consumers and end users.

Without an awareness of purchasing behaviors and trends, businesses risk losing market share and missing opportunities for increased sales.

The various motivations and aspirations of the Chinese consumer are well documented. All but the newest of foreign managers here understand the regional and generational dierences between dierent consumer groups in China and the need to stay ahead of consumer trends in order to

maintain market share. This applies as much now in business-to-business (B2B) sectors as it does in the business-to-consumer (B2C) world.

Until recently, this understanding of consumers and end users has been enough to drive most businesses. Once it was understood what enduser segment they were selling to, businesses have been able to market to these groups successfully by relying on the increasing spending power in China to carry growth.

For most foreign companies, there was limited competition from local Chinese businesses.

Foreign companies generally sold on quality, the strength of their foreign brand name or product

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Chinese companies are getting increasingly competitive on their home turf and gaining intelligence in China is more important than ever.

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Checklist for information and intelligence on competition: • Consult a wider range of sources in China than you would in markets with better information infrastructure.

• Assume that 80 percent of insights will come from primary sources – Chinese ones!

• Constantly cross-check information and verify where information sources are looking for data and statistics.

• Be watchful for your Chinese competitors in other emerging markets where they are often in a better competitive position (South America and Africa in particular).

• Check the historical background of companies to distinguish the new players from those with more experience in the market. Many industries are still highly fragmented and unsophisticated so new players can gain (or lose) market share both domestically and globally very quickly.

• Be wary of using information gathered from sales teams. Although they are the frontlines of a business, they are incentivized to sell, not to influence policy.

sophistication and have had the high end of the market to themselves. Domestic competitors were content to focus on the lower end of the market, winning only the customers whose budgets or spending power was lower.

But the Chinese market is changing fast.

Chinese companies are becoming more sophisticated and moving up the value chain.

Chinese consumers with more spending power are more willing to consider high quality Chinese brands and products. Trends and developments in many markets are now driven by Chinese customers, Chinese purchasing managers, Chinese distributors and Chinese sales tactics.

It is becoming more and more important for multinationals to understand and track their Chinese competitors’ capabilities and strategies.

It doesn’t matter if you are selling high-end men’s wallets, an online travel service or pressure gauge equipment to the gas industry; businesses all over

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the world are now at more risk of losing customers to a Chinese competitor than ever before.

As recently as the last decade, it was rare for foreign businesses in China to be too concerned with the activities and investments of mainland Chinese competition. But today, multinational and domestic companies are increasingly competing for the same customers.

What has changed?

Strengths of Chinese companies International best practices have been adopted successfully by many Chinese businesses, including manufacturing process technology, supplier consolidation, logistics and customer service. Some businesses have built strong teams on the backs of staff trained by multinational companies and many hire non-Chinese employees with international experience in senior positions.

In the regulatory environment, Chinese companies may enjoy both formal and informal support for their activities, giving them an edge over foreign companies in key state-owned industries and in competitive bid situations.

Achieving competitive advantage for foreign businesses used to be straightforward – it was simply a matter of persuading end users that the quality advantage was worth paying for. That is no longer the case and in some sectors, local competitors have become more expensive than the multinationals and in some cases taken significant market share.

Only five years ago, the pharmaceutical companies with research and development operations in China were conducting clinical trials and tabulating results from research done in other countries. Now, those same companies are just as likely to be working on drug discovery and improved manufacturing processes.

Due to the economic downturn, the business environment has become tougher for all businesses in the past year, both foreign and domestic. Chinese companies are often better able to manage the transition to lower margins and leaner operations than foreign companies because they are often leaner to begin with.

Over the past few years, Chinese companies have made rapid changes in their organization and strategic direction. These changes may be less researched and less sophisticated in some ways than foreign businesses are used to, but the whims of the Chinese consumer and rapid changes in the B2B market demands this pace.

However, the rapid rate of change within some Chinese companies also means that it is more challenging to understand their strategic plans and approaches.

Because of the current economic environment, many foreign companies are finding themselves competing in markets that were traditionally the domain of mid-size, Chinese competitors.

Oftentimes, little is known about their strengths and weaknesses.

Challenges to learning more One of the main challenges to foreign managers in China is understanding their Chinese competition.

There are no reliable company profile services, very limited demographic statistics, almost no sophisticated business research panels, very low customer loyalty program penetration, as well as very few details of company strategy listed on the websites of most Chinese companies. It is often difficult to even find the names of a company’s senior management from its website.

The scale of China’s business environment is also a challenge. According to the State Administration for Industry and Commerce in China, there are around 9.7 million companies registered in the country. This can make keeping track of your key competitors a daunting task.

However, there are ways to counter these challenges. Because China has very limited information infrastructure, companies should regularly consult a wider range of information and intelligence sources than they normally would in a more developed market.

When trying to understand the competition, consider expert input. Use researchers, either internally or externally, who have first-hand experience conducting primary research in China and who can read between the lines and make

sense of what they are hearing, seeing or reading.

It is vital to have skilled researchers who can ask questions that solicit concrete answers and who systematically cross-check to ensure market information is accurate.

There are always time lags in information and statistics, especially with official statistics in China. A delayed reaction in many industries in China means that it is essential to double check official growth or trend figures against the predictions of those within the industry and among your competition. It is also important to ensure that all team members are aware of any historical contexts or trends that may be important to understanding an industry analysis or developments with a competitor.

Using sales teams If your sales team is empowered to keep you ahead of your local competitors, then you have nothing to worry about. If the sales team is unmotivated or poorly trained however, then important market developments or information about competitors will not find its way back to management and decision-makers.

While sales teams may not be the most proficient at evaluating key information about market trends or competitors, they are on the frontline of business and can report on the latest developments in the industry.

The depth of experience, knowledge and local market understanding of your team in China makes the difference between winning and losing customers.

Steps to improve market intelligence • Ensure that the business strategy and other information is being communicated effectively from top management to employees.

• Reward employees who make an effort to improve information flow.

• Build a core team of information management experts based on their insight into the market and ability to measure your competition.

• Offer employees concrete examples of where improved business intelligence and knowledge-

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“

The rapid rate of change within some Chinese companies also means that it is more challenging to understand their strategic plans and approaches.”

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Build a core team of information management experts based on their insight into the market and ability to measure your competition.”

sharing within the company has led to improved sales or to better customer retention.

• Ensure that intelligence needs of everyone in the organization at all levels are clear.

• Make sure everyone knows how to use the Internet to maximum effect and that everyone has the proper understanding of what is strategically important, something that is not a given in an environment where cultural values and background play an important role.

• Appoint a steering group of senior managers to offer guidance on the organization’s continuous business intelligence function and to manage the overall process.

• Include business intelligence gathering in the job descriptions of all your mid- and seniorlevel managers.

• Consider an external competitive intelligence consultant to work alongside your own teams

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for a defined period to train employees who are in a position to gather information on your competition.

With the right approach, Chinese competitors are not difficult to understand and the value in understanding them is repaid in spades. But what happens when “the China effect” isn’t managed?

The risk of surprise looms.

Surprise normally means shrinking revenue for a period of time while a company tries to figure out how to redesign its approach in light of a new competitive threat. Eliminating this element of surprise increases profitability. It’s that simple.

Laura Mitchelson is managing director of Amber, a competitive business intelligence firm. She can be contacted at lmitchelson@amberinsights.com.

HUMAN RESOURCES FOCUS

BY ELAINE WU

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s China’s economic development rocketed during the last three decades, foreign companies rushed to enter the Chinese market and began hiring employees at record rates. However, the global economic downturn has severely impacted the hiring plans of most companies in China, with many companies freezing headcount, although some companies are continuing to expand into developing interior regions.

China is now facing the weakest hiring climate in four years, where employers are increasingly cautious about hiring employees, according to results from a recent Manpower employment survey. Manpower, a leading global employment service provider, released findings from its quarter two 2009 Employment Outlook Survey in March, which suggests that as the global economic crisis continues to take its toll, hiring prospects in mainland China will continue to wane throughout the second quarter of the year.

As China’s economy slowed to its weakest growth rate on record, 6.1 percent, in the first quarter this year, Manpower’s recent findings suggest that the global financial crisis has affected China’s employment market to a significant degree. Globally, Manpower found that 23 of the 33 countries and territories surveyed also reported the most limited hiring plans since Manpower established surveys in those locations.

In China, hiring intentions have become more conservative since quarter one. Out of 4,419 employers surveyed in mainland China, 14 percent said they would increase headcount in the second quarter, while 11 percent forecasted a decrease in hiring and 56 percent predicted no change, according

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The Outlook for Employment

to the survey. However, results indicate that there will be some slight headcount gains overall.

“It’s clear that most [companies] are just kind of waiting to see how everything pans out. People aren’t necessarily pessimistic about the current economic situation, but they’re uncertain and looking at the economic trends to see what they should do rather than making any hasty moves,” says Lucille Wu, managing director of Manpower Greater China.

Regionally, the most favorable hiring climate is expected in Chengdu, followed by Qingdao, Xi’an and Wuhan, where employers are still hiring at a steady rate. The forecast for hiring is among the weakest in Shanghai and Dalian. As the Chinese government focuses development efforts on the central and western regions, many foreign and domestic companies are now expanding their presence in those regions to take advantage of competitive labor costs. As a result, more talent is also starting to move from coastal cities into second- and third-tier cities in pursuit of greater opportunities, Wu notes.

The China talent paradox Despite the currently weak hiring climate that suggests more talent is readily available for hire, China’s employment market has been hampered for years by difficulties that include a critical talent shortage, especially among middle and senior management level positions. This talent shortage

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The global economic downturn has impacted the hiring prospects of many companies, but organizations should still be on the lookout for talent and implement flexible strategies.

“

With the current economic situation, it is more important than ever for organizations to have retention strategies in place, because you don't want to be losing your talent when things turn around.”

has become a problem for domestic and foreigninvested companies who are working to expand their businesses in China. There are several reasons for this dearth of talent: older employers who were already working age during the Cultural Revolution lack the necessary education and training to serve as senior executives, and the majority of younger Chinese do not have the adequate English proficiency required by many companies.

Many come from state-owned enterprises with traditional values, and therefore have not had the insights into or familiarity with Western culture and systems of management. In addition, China’s Confucian values and relationship-based way of doing business can oftentimes be at odds with Western management styles, and can present problems for managing business relations.

“China’s economy has grown incredibly fast in the past 30 years, but the development of [talent] hasn’t caught up yet. There’s a definite gap between the supply and the demand,” says Wu. “The most important thing a company can do right now is to select the right people and retain its core workforce. To do that, you need to create an environment from where your employees can learn from. You need to have the right leaders and role models in place for them to learn from. You need to have an organization that has solid values and culture built into it that your employees can identify with.”

A 2008 Manpower white paper on “The China Talent Paradox” concluded that retention is much more cost-, time- and business-effective than recruitment. Most Chinese employees are looking beyond a large compensation and benefits package to opportunities for advancement and development, and for quality leadership and management. To retain employees, Western organizations based in China need to find new ways of approaching and understanding employees’ needs and expectations, take into account Chinese values and culture, and resist the urge to impose Western management practices onto Chinese employees, advises Wu. “With the current economic situation, it is more important than ever for organizations to have retention strategies in place, because you don’t want to be losing your talent when things

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turn around. Companies are realizing that the old pace of working and the old strategies aren’t necessarily working anymore. Many companies are streamlining their operations, doing internal alignments and restructuring for more efficiency,” says Wu. “You need to put the infrastructure in place in order to prepare for the opportunities to come.”

Manpower’s Workforce Optimization Model suggests that the five main practices companies should adopt to attract and retain talent include creating a learning organization, appointing competent leaders, establishing an appropriate organization and culture for China, providing competitive compensation and benefits packages, and selecting the right people.

A flexible strategy In addition to maintaining retention policies to keep the right talent, companies should also consider adopting other strategies in the face of troubling economic times. This might be the right time for an organization to bring in some new people with fresh ways of thinking since more talent might be readily available for hire given a slowing job market, or to implement a “flexible employment” strategy as an alternative to

downsizing, suggests Wu. One of the most popular models of flexible employment is temporary staffing, which covers everything from satisfying needs for extra people during peak business seasons or on special projects, to covering temporary vacancies created by maternity or sick leaves. China’s Labor Contract Law identifies four different types of flexible employment: employment specified for completing a certain job, part-time labor, temporary staffing and outsourcing services.

At a time when companies are faced with headcount or cost-cutting issues, flexible employment can provide an organization with flexibility in meeting business needs and strategies through the ability to add and subtract staff accordingly. It can be used to increase an organization’s responsiveness to business needs, minimize human resources costs, decrease redundancy, mitigate constraints created by permanent headcount issues and even help

prescreen and grow talent before permanently hiring them. Fundamentally, a temporary employment strategy enables an organization to satisfy its talent needs in any given situation, allowing it to adapt to an uncertain, changing environment without compromising its core business.

While hiring may have slowed in China, companies should consider adopting strategies that focus on retention and flexibility, and continue to watch for suitable talent.

“Just because a company says it is not going to increase headcount does not mean it won’t be hiring. There are still lots of business opportunities in China and people are generally quite positive about the future,” says Wu. “But one thing is for sure – [companies] need to start working smarter and thinking differently.”

Elaine Wu is an Editorial Associate at AmCham Shanghai. She can be contacted at elaine.wu@amcham-shanghai.org.

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Companies need to start working smarter and thinking differently.”

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ERP SERIES

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

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Choosing an Implementation Partner

E

nterprise resource planning (ERP) systems are an increasingly popular method to integrate information company-wide in order to improve eďŹƒciency, productivity and communication.

In the second article of a series of ďŹ ve articles for Insight on global ERP implementation, we look at how to design a request for proposal (RFP) and how to select an implementation partner that can deliver the optimal results.

After determining the parameters of a successful project as discussed in the last article, the next step is issuing an RFP to choose an implementation partner. Some companies seek

external assistance in compiling RFPs and in the subsequent evaluation of vendors. This is often done with presumption that expertise is required to select the most appropriate partner.

Some companies may also want to lessen the blame if it turns out that the wrong implementer is chosen.

However, many of the vendors chosen for this review will examine ERP options from a purely technical perspective when in the fact the selection of the appropriate vendor is a business decision and more importantly, a relationship issue. Assuming that all top-tier ERP implementers who are capable of global implementations have similar technical

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The second article in Insight's ongoing ERP series examines how to successfully choose an implementation partner.

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The critical question becomes how well an ERP implementer understands a company's business and goals.”

capabilities, the critical question becomes how well they understand a company’s business and goals.

How will they design and implement the system? How well do they understand different global markets? What is the value to be delivered versus price and the challenges to be met?

How comfortable are you in working with this implementer? External agencies often cannot answer these questions.

Designing the RFP Most RFPs typically request information on implementers that is superfluous and irrelevant.

An implementer that is a US$10 billion company is little different from a US$15 billion company and 50 finance consultants is hardly different from 100. All are large enough and capable enough.

What is more important is the availability of these resources when needed, especially when looking at a long-term delivery timeframe.

No implementer can promise such resource availability years in advance and many global ERP implementations can take years to progress to the Asia-Pacific region. The number of consultants now compared to two years from now in a fastgrowing but also high turnover market will not help in determining a suitable partner.

Just because a company boasts hundreds or even thousands of consultants does not mean they are all available for implementation, nor do they necessarily have the business skills required to implement effectively.

A better indicator of suitability may be how long the implementer has been in a given market and its growth rate in the particular region. Growing practices of a reasonable size will still be in the market two years from now.

Another key consideration is the distribution of the RFP to candidate firms. RFPs are often sent to ten respondents without any thought to the implied cost in money and resources. For global implementations, the only companies capable of truly implementing in a global nature are the top-tier consulting companies, so it may not be necessary to look beyond those firms.

Simple internet research on company

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backgrounds and size can define the most likely four to five candidates. This can include a secondtier company for the sake of providing a different perspective and view of cost.

The internal cost of wading through ten responses, each typically over 100 pages in length, is also an enormously draining exercise. Decisionmakers should not have to wade through ten different proposals during the selection process. A long, drawn out review and selection period will only detract the reviewers from giving the decision the desired level of attention.

Selection criteria One of the most important elements of the RFP is the selection criteria that outlines the requirements and basis for choosing the implementation partner.

Many companies will tell an implementer that “it is about a successful implementation and that cost is not an issue,” when in fact cost is always a major issue.

The selection criteria should provide the right level of importance and clarity to all requirements, including cost, so that implementers can adequately respond.

When IT departments control the RFP, the focus is typically on cost. This is because IT is often viewed by businesses as a cost center and not as a value driver, so if ERP is seen as an IT project, it will be evaluated on the basis of cost.

When an RFP is controlled by the business (with IT as a key advisor), the focus shifts to a businessrelated decision more likely to be evaluated on the basis on value, return on investment and when that return will be realized.

A large ERP implementation is actually an investment in the future and should drive value for the business. At the completion of the project, this value should be measured and reported on.

Indeed, if value is truly understood and defined, then a cost-sharing arrangement can be agreed with the implementation partner that will also realize higher benefits to both the implementer and the business.

In this situation, there is a joint focus on making the business run more efficiently, as the

The China Factor When the concept of looking beyond available consultants is applied to a country like China, an established implementer should be expected to be growing annually at around 40 to 50 percent. If there is an established growth pattern spanning many years, then the implementer can be considered stable and is more likely to be in business in the future when you need them. While some tier-two companies have a presence in China, they are often not well represented and rapid growth numbers could be coming off a very small base.

outweigh the costs.Traditionally, ERP implementations yield significant labor savings, but in China, where labor is less expensive, there is insufficient labor arbitrage to outweigh the initial cost of the implementation. In this case, much of the decision to implement becomes one based on the expected efficiencies derived from having standardized processes to support future growth.The major quantifiable savings will be derived from better inventory control, higher inventory turnover, less material wastage and improved manufacturing planning.

For many businesses, China is a market with the greatest growth and the faster an ERP system can be implemented, the sooner the return on investment is realized and the better the operations will be able to support the future growth of the business. In terms of the implementation timetable, two years is a long time in China, where the environment can change overnight.

It is important to understand where the China deployment fits within the global timeline when selecting a vendor for a global implementation. Multinational companies often leave China for later stages by arguing that the U.S. or European markets are larger and therefore more important, even though China is usually the market with the fastest growth.

The real consideration should be which market is under the most pressure.

Regulations and policies surrounding business operations may change quickly so it is important to have an implementation partner that has the capability to keep abreast of the changes that occur regularly and is able to adapt accordingly. Over the past two years, there have been significant changes to accounting, tax, customs and business rules that greatly affect businesses, from the Labor Contract Law and the Enterprise Income Tax reforms to accounting standard revisions and value-added tax rebates.

Defining a solid business case is often difficult in China because there are times when the quantifiable benefits may not

implementation improvements will benefit all stakeholders.

When contemplating implementation price, the same general rule applies: you cannot expect to get the best quality at bargain-basement prices.

This does not imply that the best value will be derived from the highest priced implementation, but that the more fees are cut from the budget, the more an implementer will look to cut corners and save internal costs during the implementation.

Business is business, and the need to make a profitable return is the same for implementers as it is for manufacturers, retailers, or service providers.

Making a business case

In most cases, China is growing at a much faster rate than other markets and current local China systems are usually straining to keep up with that growth. If China is going to be placed towards the tail end of a deployment, then the business assumptions related to China could become irrelevant as the market changes, as could initial business requirements, legal requirements and tax structures. The implementation partner must possess the capabilities to cope with changing requirements in China during the course of the project and ensure that any changes are built into the global template.

business case to support the implementation. A strong, well-structured business case is crucial as the foundation for negotiations and discussions around project value to be delivered and costsharing arrangements, with payments based on future benefits delivered by the implementation.

A good business case should include the obvious costs and benefits from an implementation (both internal and external) as well as understand the non-quantifiable benefits. It should be measured over a period of time, using net present value, weighted average cost of capital and internal rate of return analysis to determine whether the project represents a better investment than an alternative project.

Global capabilities Even as some global ERP systems cost tens of millions of dollars, most don’t have an effective

All of the tier-one ERP implementers will back

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DELOITTE

GLOBAL MODEL: The recommended governance structure for a global ERP implementation strikes a balance between the need for global control and regional execution.

global capability claims with statistics about the number of resources and clients in each country and details on a global structure. While this proves that the implementer has a global presence, it does not make them global, nor prove that they think and act globally.

The true measure of whether a firm is global is its grasp on local market conditions. What are the differences and challenges that will be encountered in a particular country? How do they go about acting in a global manner? Being global is not a matter of structure or presence, it is a mindset. Truly global firms think and act globally in a seamless way that is transparent to their clients.

Firms will often also claim to have global tools as another argument in support of being global.

Although many firms do indeed have global strategies, there is little value in having a global toolset to manage and control a project if it is not used the same way in all markets.

Companies should seek proof from their proposed implementers that global tools are utilized in the same way across different regions

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in a global implementation.

For example, Deloitte uses the same implementation methodology, Enterprise Value Delivery, in the Asia-Pacific region, the United States and Europe. This allows an easy understanding of the project cycle and what deliverables should be expected when.

The same process mapping tools are also used in China as are used elsewhere in the world. This allows consultants in the region to understand how processes should be designed and documented, even though the documentation language may be different.

Global governance The aspect of governance comes back to whether an implementer truly has a global mindset.

Often, once a project has been awarded, the implementer forgets about being global and retreats to a European, or U.S.-centric view of the project.

Thus the Asia-Pacific region may not be involved in further project discussions until it

is time for deployment. By this time, it is likely conditions will have changed dramatically, given that Asia-Pacific is the fastest-growing region in the world. The regional and local management will also be unaware of how the project may have evolved since it first began.

It is important to understand how an implementer intends to govern the project and to design a governance structure that includes a steering committee consisting of client and implementer representatives from all regions.

This ensures that all regions are aware of progress and kept up to speed regarding any significant developments in the project. This should not add significant cost to the project as the steering committee meetings can be held virtually, with periodic face-to-face gatherings where all members are brought together.

Ultimately, when selecting a global

implementation partner, it is important to be as thorough as possible. Whenever possible, talk to potential implementers; don’t just take their word for it.

If an implementer is serious about a bid, they will have regional representatives on hand to discuss the needs of a particular region. Understanding how long they have been in the region, challenges they typically face in that region and their previous regional experience are all critical to the selection process.

The onus is on the company to question the validity of any “global promises” that an implementer may make.

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

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The onus is on the company to question the validity of any 'global promises' that an implementer may make.”

The Push for Pharmaceuticals 28

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Like most other sectors of the economy, China’s pharmaceutical industry has not been immune to the poor economic climate. However, pharmaceuticals remain an overall growth sector for China and the five-year outlook for growth is very promising.

T

he effects of the global economic downturn on the Chinese economy are now clear.

China reported gross domestic product (GDP) growth of 6.1 percent for the first quarter of 2009, down from 6.8 percent during the fourth quarter of 2008 and down 10.6 percent yearon-year. Likewise, China’s pharmaceutical industry has seen slower growth and a leveling off of investment, but overall, international investment remains steady. China is widely expected to become the world’s fifth largest pharmaceutical market next year.

“Although the economic crisis hasn’t negatively affected the pharmaceutical industry as seriously as it did financial markets, companies will no doubt be more cautious in their future investment plans,” says Xia Qian, an analyst with Orient Health Ecommerce, a Beijing-based research company.

However, pharmaceutical companies contacted by Insight denied any changes to investment plans as a

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The tight budgets for R&D may encourage the big international players to move R&D operations to China, since the cost in China is much lower than in the U.S. and Europe.”

result of the economy. On the contrary, in April, Swiss pharmaceutical giant Novartis announced plans to boost research and development (R&D), sales, and marketing funding in China.

“Despite the global recession, Novartis saw continued growth in China in 2008,” says Dr. Daniel Vasella, chairman and CEO of Novartis.

“We are committed to sustaining our investment in China. We believe that especially in economically uncertain times, it is important to keep the course and demonstrate a clear commitment to the country.” Novartis increased sales in China last year to RMB3.3 billion and plans to launch eight new drugs this year.

Similarly, Switzerland-based pharmaceutical company Roche Group also did not reduce global R&D investments due to the economic recession, said company spokesperson Dr. Claudia Schmitt.

In fact, the recession may actually favor pharmaceutical investment in China, say some experts. “The tight budgets for R&D may encourage the big international players to move R&D operations to China, since the cost in China is much lower than in the U.S. and Europe,” says Wang Xi, a pharmaceutical analyst at brokerage Industrial Securities.

Growth levels off Pharmaceutical industry sales revenue totaled RMB111.7 billion in January and February 2009, up 19 percent compared to the same period last year but lower than the 22 percent overall annual growth rate in 2008, according to data from China Investment Consulting.

Sales growth rates remain significant but are showing signs of slowing down. Novartis’s RMB3.3 billion of sales in China in 2008 was an increase of 29 percent over 2007 figures. However, sales in 2007 jumped 33 percent over 2006.

Profit growth increases in the industry have declined as well, although they are still high relative to other industries. China’s pharmaceutical industry profits reached RMB10.3 billion during the first two months of the year, up 20 percent compared to the same period last year, but down from the overall annual growth of 26 percent in 2008.

Nonetheless, the performance of major pharmaceutical companies in the Chinese market continues to far outpace results elsewhere in the world. “Generally, the growth of the Chinese

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pharmaceutical market has been much less affected by the global economic crisis than in the United States and Europe,” says Wang.

For example, UK-based GlaxoSmithKline reported a 28 percent increase in sales revenue in China in 2008 versus a global increase of just 2 percent. Roche saw China sales revenue jump by 30 percent last year, compared to a 10 percent increase globally. Meanwhile, British and Swedish company AstraZeneca reported an increase of 25 percent in China sales revenue as global sales rose by only 7 percent.

Mergers of giants Despite consistent performance and rising profits in China, the state of the global economy means that most companies are taking active steps to increase efficiency and reduce costs.

At the same time, current market conditions are providing an opportunity for well-performing companies to pursue acquisitions of weaker competitors. As a result, the decline in R&D projected by analysts could be a result of cutting redundancies and merging overlapping projects.

“Since the crisis, more mergers and acquisitions of pharmaceutical companies are under discussion in order to reduce costs,” says Xia. In January, Pfizer acquired Wyeth Pharmaceuticals for US$68 billion in cash and stock. In March, Merck & Co. announced a US$41.1 billion offer to buy Schering-Plough, and Roche closed a US$46.8 billion deal to buy the remaining 44 percent of biotechnology firm Genentech that it didn’t already own.

Still, speculation exists that the projected decline in R&D spending is due to some companies quietly shutting down or postponing projects, but avoiding public announcements to avoid negative publicity.

R&D is crucial for the growth and development of a pharmaceutical company and any speculation or negative news about projects may affect the stock price for a listed company, say analysts.

However, even as large companies continue to invest heavily in China, some smaller firms may start to feel the pinch from the economic downturn.

“Big pharmaceutical companies still have enough cash to make investments,” says Matthew Chervenak, founder and CEO of Shanghai-based consulting company General Biologic. “But it might be harder for small companies because they

IMAGINECHINA

don’t have enough cash and financing has become more difficult.”

Growth factors China's pharmaceutical R&D industry has grown rapidly over the past few years as a result of China's lower cost base, a liberal research and investment environment, government support and incentives, which have all served as effective methods for most companies to establish a significant presence in the Chinese market.

“Pharmaceutical companies can access or participate in China’s R&D landscape in a number of ways,” says Chervenak. “They can outsource to China’s contract research organizations (CROs).

They can engage innovative companies and institutes in collaborations and other strategic relationships. And they can set up their own R&D centers in China where they can internalize some of these cost advantages and create their own innovative engine in the country.”

Roche first opened its China research center in Shanghai in 2004. In 2007, Roche relaunched its Shanghai pharmaceutical development center, making it the company’s first fully functioning drug development center in Asia, with all components required to conduct clinical development.

“This is the first time that all the components required to develop a product from start to finish in the clinical development phase have been brought to the Asia-Pacific region,” says Roche's Schmitt.

This includes development capacities which span from innovative early exploratory clinical development strategies to efficient late-stage clinical development programs.

In Shanghai’s Zhangjiang High-Tech Park, 16 multinational companies (MNCs) including Novartis, Roche, Pfizer, GlaxoSmithKline and Lilly, have set up R&D centers in a cluster called the Zhangjiang Pharma Valley.

The Zhangjiang Pharma Valley is currently working to establish a complete pharmaceutical R&D chain that will not only serve as a base for drug manufacturing but as an engine for pharmaceutical innovation. Additional favorable tax breaks are under discussion with the local government to attract even more companies to set up R&D operations in the area.

Some companies are also exploring different ways to cooperate with Chinese partners through project milestone-based outsourcing, direct buyout

models or partnerships that may involve joint drug ownership and split revenue arrangements.

“There is a rapid growth of multinational pharmaceutical companies’ commercial operations in China, so it is natural for companies to invest more heavily in a country where they are experiencing success and see future growth,” says Chervenak.

Market innovation Innovation has been a largely neglected area of drug discovery research in China, where Chinese pharmaceutical companies have a long history of producing generic versions of drug products developed abroad.

However, recent government measures which support the innovation of new drugs and discourage the production of generics are expected to help pharmaceutical R&D grow and lead to the discovery and development of new drugs in China.

In January, the State Food and Drug Administration (SFDA) issued a new policy designed to encourage new drug innovation.

Under this policy, new drugs that have not previously been marketed in China may apply for special approval during clinical trials and

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CHINA FOCUS: Novartis grew China sales to RMB3.3 billion in 2008 and will launch eight new drugs in China this year, says Chairman and CEO Daniel Vasella.

GROWTH SPOT: Pfizer has invested over US$500 million in China in R&D, manufacturing, and regional corporate functions and expects to continue investment in 2009.

the commencement of SFDA review of these applications will be accelerated to within five working days.

“The Chinese government has also realized the importance of discovering entirely new drugs to really promote the development of the Chinese pharmaceutical industry,” says Xia. Meanwhile, foreign firms are finding that Chinese regulators are actively seeking partnerships and cooperation.

“We have been in discussions with the Chinese government for quite some time and we intend to further strengthen our cooperation,” says Vasella, who has also been a member of Shanghai Mayor Han Zheng’s International Business Leader Advisory Council (IBLAC) since Novartis entered China in 1996. “Naturally, the government is supporting our investment in R&D and understands the importance of providing the right environment for innovation.”

Roche also cites government policy as a determining factor in deciding whether to open a R&D facility in China. The company opened its fifth global R&D center in China in 2004, partially due to the favorable environment for R&D investment created by the central government, says Schmitt. “We are completely aligned with the Chinese government's vision of the future – that R&D investment will drive growth.”

The excellent network of academic and research institutions, hospitals and the intellectual potential of Chinese scientists were also important factors.

“Thanks to the promotion of natural sciences

and biomedical research by the Chinese government, we now have a substantial number of excellent scientists ready to join the industry, which is really a precondition for any investment in R&D,” adds Vasella.

While concerns about intellectual property rights (IPR) remain, the domestic legal climate is continuing to improve, making China an increasingly stable destination for research.

Nonetheless, there are many different methods to protect sensitive and valuable IPR. “Some companies pursue a strategy whereby very few people know the chain of innovation,” said Chervenak. “But that’s not only for China.

It’s a common global strategy. On the other side, many MNCs have partners in China that they have a great deal of trust in. This has changed quite a bit from just several years ago.”

Domestic partners

IMAGINECHINA

It is not only the government that has been eager to interact and cooperate with the pharmaceutical industry. Many MNCs are looking for local partners and the trend is increasing fast, according to an October 2008 study released by the Kauffman Foundation, an organization devoted to entrepreneurship founded by pharmaceutical executive Ewing Kauffman.

Several companies have fostered important research collaborations with domestic Chinese companies and institutions. Novartis has a research partnership with the Shanghai Institute of Materia Medica to identify and test traditional medicines for pharmacological properties, in addition to partnerships with the Chinese University of Hong Kong, the National Institute of Biological Sciences and the Kunming Institute of Botany.

Chinese companies also stand to gain significantly from working with foreign partners.

“Cooperating with leading foreign companies is a good choice because it will bring Chinese scientists more knowledge of this sector and shorten the distance between China and other developed markets,” says Xia.

Future growth areas IMAGINECHINA

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While major pharmaceutical companies continue to establish R&D and manufacturing operations in China, other emerging segments for growth are in the fields of contract research and drug discovery.

In particular, Chinese CROs stand to benefit from the global recession as multinational drug companies may outsource even more research, experts say.

Companies most often look for savings in laboratory research, but China is also a lower cost place to do pre-clinical testing and clinical trials.

In addition to greater ease and speed in recruiting patients for testing, some estimates put the cost of clinical trials in China at just 22 percent of the cost for similar tests in the United States.

The Alliance of Bio-Box Outsourcing China, a national organization for local biotechnology CROs, reported that over 30,000 orders for contract services were made in 2008, bringing in a total revenue of RMB500 million, an increase of over 65 percent from the RMB300 million in revenue in 2007.

New CROs continue to emerge to meet the growing demand. The Zhangjiang Pharma Valley reports over 30 CROs within its ranks. CROs in the United States and Europe, which have long dominated the contract research market, are even considering outsourcing some work to Chinese companies in addition to establishing their own operations in China.

The brain gain Although input costs are continuing to rise, China's cost base – particularly in terms of salary and material costs – is still lower than in developed countries, experts say.

“The salary for a Ph.D. from a top school in China will usually be just a quarter of the salary [of a Ph.D.] in the U.S.,” says Chervenak. “The price – the labor cost – has certainly gone up over the last five to ten years. But in some areas, such as in biology, competition for talent is not as intense as it is in others, such as chemical synthesis, and costs vary accordingly.”

In China, some of the most talented drug scientists are those who have studied abroad and have returned to China to establish their own businesses in the country. With the economic crisis deepening and more layoffs occurring overseas, more Chinese scientists could soon be returning to China.

Plenty of opportunities will be available for experienced scientists in overseas pharmaceutical companies, contract research and in drug discovery. These returnees, in turn, will be expected to help train and educate the new class of

Chinese scientists on working with international organizations.

“The most important factor is that the scientific talent pool is increasing,” says Vasella. “Many scientists trained in the West are happy to return to China as they see the need and the opportunities.”

However, the growing sophistication of the pharmaceutical industry in China also has a downside: it is driving up the cost for talent very rapidly, says Vasella.

Next steps In February, Germany's Bayer Schering Pharma announced plans to invest EUR100 million over the next five years to build a global R&D center in Beijing. With the new center, China will join Germany and the U.S. as the only countries where Bayer Schering has a global R&D center.

Investment in China from multinational pharmaceutical companies is expected to continue, with the combination of lower research costs and preferential government policies coupled with the vast potential of the Chinese market.

The number of CROs will also continue to increase as the pharmaceutical market grows in sophistication and specialized R&D is required.

Kewen Jin, general manager of research firm Charles River China, expects the Yangtze River Delta area to be the largest contract research cluster in the world by 2015.

According to Jin, 2,000 new patents will be filed annually in China and the life sciences industry will account for 10 percent of China's GDP by 2015. Today, 100 new patents are filed every year and the pharmaceutical industry is responsible for just 5 percent of China's overall GDP. Analysts expect that steadily increasing demand will push the drug manufacturing market to grow by 20 percent this year, while the overall pharmaceutical market in China will grow by 12 to 15 percent this year. Currently, China’s share of the global pharmaceutical market stands at less than 2 percent.

The outlook for pharmaceuticals in China is optimistic, and will only continue to improve as healthcare reform continues and access to new medications and treatments is improved. The companies who are making inroads now will be well-positioned to capitalize.

Alex S. Dai is a Shanghai-based writer. He can be contacted at alex.dai@tromblyltd.com.

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China’s cost base – particularly in terms of salary and material costs – is still lower than in developed countries.”

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INSIDE AMCHAM FROM THE CHAIRMAN

Advancing Relations

S

pring is in the air, which means it is time for this year’s Washington, D.C. Door Knock.

The annual trip is a core component of AmCham Shanghai's government advocacy efforts that span a wide spectrum as we work to present the views and opinions of our members to both Chinese and U.S. government leaders at various levels. Members and AmCham Shanghai staff meet regularly with Shanghai leaders, visiting delegations from other provinces and officials at the national level. Advocacy efforts with the U.S. Government include the extensive work we do with visiting delegations from Washington and various states and our annual Washington Door Knock. This month, several AmCham Shanghai leaders will accompany a delegation led by AmCham-China (Beijing) to Washington, D.C. to engage and update U.S. policymakers on the environment for U.S. business in China. In the fall, AmCham Shanghai plans to lead a second group to further engage U.S. leadership.

J. Norwell Coquillard Chairman AmCham Shanghai

On the sidelines of the G-20 Summit in London last month, President Obama met with President Hu to establish the new Strategic and Economic Dialogue. The first round of talks will be held in Washington this summer, with separate strategic and economic tracks that emphasize the growing importance and depth of bilateral ties. While in London, President Obama also accepted an invitation from President Hu to visit China in the second half of this year.

A continued strategy of engagement and dialogue is critical to the ongoing development of a strong U.S.-China relationship.

AmCham Shanghai welcomes the advancement of relations between the U.S. and China. In the current economic climate, resisting protectionism and maintaining the open trade relationship should be a priority for both the U.S. and Chinese governments. A continued strategy of engagement and dialogue is critical to the continued development of a strong U.S.-China relationship. As the Voice of American Business in China, we will continue to ensure that both governments are aware of U.S. business success stories and understand the primary concerns of U.S. businesses on the ground in China.

I also want to take this opportunity to thank everyone who attended AmCham Shanghai’s 2009 Charity Gala on April 18, especially all of the sponsor companies for their valued contributions. The event was an incredible success and the funds raised will go far in improving the lives of senior citizens in Sichuan Province.

The AmCham Shanghai 2009 Board of Governors: 2009 Chairman

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

2009 Vice Chairman

2009 Governors

Eddy Chan

Ted Hornbein

James Rice

Head of China and Senior Vice President FedEx Express

Managing Director for Asia Richco, Inc.

Vice President & Country Manager Tyson Foods, Inc.

Murray King

Matthew J.Targett

Managing Director Shanghai APCO Worldwide

Asia-Pacific Technology Director INVISTA

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

Warren Wisnewski Minda Ho John Grobowski Managing Partner Faegre & Benson LLP Shanghai

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

Diane Long M AY 2 0 0 9 I N S I G H T Director ALC Advisors

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Director and Vice President, Asia-Pacific Operations Eastman Kodak Co.

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

Highlights from the April 2009 Board of Governors Meeting Membership The Board approved 48 new members.

Nominations & Elections Committee The Board approved revisions to the Chamber’s Bylaws and nominations and elections process as recommended by the Nominations & Elections Committee (NEC). Term lengths for Board Governors will revert to one year terms, for up to four consecutive terms.

2009 Charity Gala Funds

The Board approved the use of funds raised at the 2009 Charity Gala on April 18 to equip and support a senior citizen activities center at Minle Village in Mianzhu City, Sichuan Province. AmCham Shanghai will cooperate with AmCham Southwest China and the China Foundation for Poverty Alleviation on the project.

2009-2010 Committee Chairs

The Chairman appointed the 2009-2010 leaders of AmCham Shanghai’s 21 industry committees. The leaders of the committees will serve from April 2009 to March 2010.

IN ATTENDANCE Governors: Chris Beede, Eddy Chan, Pierre Cohade, Norwell Coquillard (Chairman), John Grobowski, Minda Ho, Ted Hornbein, Diane Long, Murray King, James Rice and Warren Wisnewski.

Attendees: David Basmajian, Phil Branham, Justin Chan, Brenda Foster (President), John Leary, Helen Ren and Linda X. Wang REGRETS David Gossack and Matthew Targett.

Is your Membership due for renewal?

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

Renew your AmCham Shanghai Membership now and have chance to win one of the below prizes.

• Oral SPA voucher provided by Arrail Dental • RMB570 Treatment voucher provided by Body and Soul Medical Clinics • First-aid kit provided by Shanghai East International Medical Center • RMB500 Hair dress voucher provided by Grace Hair & Aesthetics • RMB800 Tooth care card provided by Kowa Dental • One-night accommodation in a studio at Pudi Boutique Hotel • One-night weekend stay in a Deluxe Room at the St. Regis Shanghai • One-night stay in Executive one-bed room at Union Square, Shanghai Pudong - Marriott Executive Apartments • Three-month free subscription of the Wall Street Journal newspaper (PDF)

Special thanks to the prize sponsors:

MEDICAL CLINICS

AmCham Shanghai held its seventh annual Charity Gala, themed “Shanghai Grooves,” on April 18 at the Pudong Shangri-La Hotel. Nearly 400 guests enjoyed a live performance by the Rolf Becker Band, silent and live auctions, casino games and a night of rock ‘n’ roll and dancing at the 2009 Charity Gala.

Proceeds from the Gala will be used to establish a senior citizens activity center in earthquake-stricken Minle Village in Sichuan Province. The center will provide senior residents with preventative healthcare, cultural and recreational services.

“Last May’s earthquake displaced families and destroyed social networks that had supported rural communities throughout Sichuan Province for generations. This had a particularly devastating effect on senior citizens, many of whom not only lost family and friends, but lost their homes and livelihoods as well,” said AmCham Shanghai President Brenda Foster. AmCham Shanghai will use the funds together with its Charity Gala partners, AmCham Southwest China and the China Foundation for the Alleviation of Poverty, to build, equip and support the daily operations of the senior center.

During the evening, the Rolf Becker Band entertained guests with rock and roll classics from the 1950s through the 70s, while guests enjoyed taking photos on an authentic Harley Davidson motorcycle at the Photo Corner and tried their luck at popular casino games like Blackjack, Roulette and Texas Hold’em Poker.

A series of silent auctions that offered luxury hotel stays, jewelry, photographs and a Harley Davidson leather motorcycle jacket was followed by a live auction that featured a pair of American Airlines round-trip first class tickets for travel to the U.S. and a Westin Heavenly Bed. The annual Charity Gala is an important part of AmCham Shanghai’s ongoing corporate social responsibility program. The 2008 Charity Gala was a tremendous success, raising approximately RMB600,000 for the Shanghai Soong Ching Ling Foundation’s Healthcare and Education Fund. The proceeds from the 2008 Gala benefitted a new Medical Scholarship Program which funds medical scholarships for students from rural areas attending three medical schools in Shanghai.

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Event Highlights

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RECENT AMCHAM HAPPENINGS AMCHAM SHANGHAI

AmCham Shanghai President Voices Continued Optimism for FDI in China AmCham Shanghai President Brenda Foster met with government officials in Xi’an and expressed interest in working closely together to spur investment and economic development in the region at the 2009 Xi’an Investment Environment and Projects Cooperation Conference and the 13th Investment and Trade Fair for Cooperation between East and West on April 5 and 6 in Xi’an province. Foster met with Xi’an City Party Secretary Sun Qingyun to discuss how several AmCham Shanghai member companies were interested in Xi’an as an investment destination. AmCham Shanghai would work to facilitate cooperation between its member companies and the Xi’an municipal government, said Foster. (Apr 5)

During an economic downturn, companies must develop new marketing strategies in order to understand shifting consumer segments and spending habits, said Professor Prof. John Quelch John Quelch of the Harvard Business School and visiting professor at the China Europe International Business School (CEIBS) at a recent AmCham Shanghai event. Professor Quelch noted that there were many considerations to make when marketing in a downturn, such as taking into account changing consumer segments and being sensitive to consumer sentiments. Professor Quelch also recommended that now would be a good time to invest in market research because the longer the downturn lasts, the more likely consumers will retain the new spending habits that they have adopted.

However, Professor Quelch warned that there were some marketing techniques that should not change in a recession. Companies should not try and compete on price but should consider other value propositions, such as lowering the quantity of the product packaging. Quelch used selling soda as an example. Selling an 8-pack of soda at a lower cost will win you more customers in a downturn versus maintaining the price of a 12-pack of soda, but adding four cans to the package. Companies should avoid the temptation of delaying product launches because this will only delay the launch of the next product, putting a company at a disadvantage to its competitors when the market rebounds, said Professor Quelch. (Apr 8) Chairman Norwell Coquillard and President Brenda Foster presented Mr. Morris Lin, country manager of ABM AMRO Bank, with two roundtrip tickets from Shanghai to the U.S. provided by American Airlines. Lin won the prize by participating in the 2008/09 AmCham Shanghai Annual Membership Satisfaction Survey.

Ambassador Randt bids farewell to AmCham Shanghai members.

AMCHAM SHANGHAI

AMCHAM SHANGHAI

Marketing in a Recession: How to Maintain and Expand Market Share in a Downturn

U.S. Consul General Beatrice Camp (center)

April U.S. Consulate Briefing U.S. Consul General Beatrice Camp began the April briefing with comments about the G-20 summit in London, the meeting between U.S. President Barack Obama and Chinese President Hu Jintao, and Obama’s acceptance of an invitation to visit China later this year. She mentioned recent Consulate trips to Changzhou, Hefei, Lianyungang, Xuzhou, Tongzhou, Nanjing, Hangzhou, Ningbo and Shaoxing during which officers and staff encouraged students to study in the United States, toured U.S.-invested projects, explained U.S. policies and society to university audiences, and met with local regulators to promote U.S. exports. After a slow period following the elections and change of administration, visitor levels to Shanghai are picking up with four groups of Congressional staffers on NGO-organized trips and the President of the Dallas Federal Reserve coming on a brief weekend visit. CG Camp announced two upcoming IPR programs, one in Hangzhou on April 22 on protecting and enforcing patents, and another on May 11-15 in Shanghai on IP protection of medical devices and semiconductors. The CG concluded the briefing with an update on the Shanghai Expo, reporting that Secretary Clinton recently issued a strong letter of support to the authorized pavilion organizers and noted interest from Washington on green themes. USA Pavilion co-chair Ellen Eliasoph was also on hand to present the latest news on the development of the pavilion concept, successful meetings at the State Department in March, and progress in fundraising. (Apr 7)

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Committee Highlights

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NEW IN COMMITTEES

AMCHAM SHANGHAI

The FDA in China: Strategies and Status Healthcare and Corporate Social Responsibility Committees

Dr. Chris Hickey, China Country Director of the U.S. Food and Drug Administration (FDA), discussed the FDA’s upcoming plans and its future mission in China at a joint event hosted by AmCham Shanghai’s Healthcare and Corporate Social Responsibility Committees. The FDA has set up offices in Beijing, Shanghai and Guangzhou this year, the first foreign offices to be opened outside the United States. The FDA works in cooperation with China’s State Food and Drug Administration (SFDA) and the General Administration for Quality Supervision, Inspection and Quarantine (AQSIQ) to inspect Chinese goods imported into the United States including house ware, human and animal foods, cosmetics, electronics, medicines and medical devices. Despite the progress the FDA has made so far in China, there are several challenges that still remain, according to Dr. Hickey. For instance, the country’s rapid growth has led to a hybrid hyper-export-oriented system; consumer protection is weak; many industry regulations are not sciencebased; provincial regulating bodies rarely report to central authorities; and there is a lack of coordination between ministries, said Hickey. (Mar 31)

Dr. Chris Hickey, U.S. FDA

AMCHAM SHANGHAI

Impact of China’s New Patent Law on Multinational Companies Legal Committee

China’s new Patent Law, which was passed in December 2008 and is set to go into effect on October 1, 2009, is an important part of China’s national intellectual property strategy and a key component of the government’s efforts to build an innovation society, said Tony Chen, a partner with Jones Day’s Shanghai office at a recent AmCham Shanghai Legal Committee event. Chen was joined by A panel of intellectual property experts discuss the James Kellerman, senior patent counsel at GlaxoSmithKline; new Patent Law at a Legal Committee event.

Joseph Rogers, director of intellectual property at Alcatel Lucent; and Mark Cohen, counsel with Jones Day’s Beijing office, for an overview of the new legislation, which significantly updates China’s patent regime.

Among the new requirements of the newly amended law is a new rule regarding a foreign filing license for inventions completed in China.

Companies seeking to first file their patents outside of China must submit a filing to the State Intellectual Property Office (SIPO) for a state secrecy review. Many foreign companies are worried about this provision, which may impact their global research and development practices, said Chen. However, examination guidelines for patents have yet to be released by SIPO and there remains some uncertainty about how the new law will impact research and development activities prior to its implementation date. (Apr 7)

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Event and Committee Highlights are reported by Anna Bartram, Patrick McNally, Kate Ryge, Brian Seifert and Elaine Wu.

INSIDE AMCHAM AMCHAM SHANGHAI

Matthias Fargel, Psyma Group

Global Doctors Survey Results Healthcare Committee

AmCham Shanghai’s Healthcare Committee hosted Matthias Fargel, CEO of the Psyma Group, a global market research firm, to present the findings of the Global Doctors Survey, a unique barometer of doctor drivers in countries around the globe. The Psyma study sought to identify various motivators of doctor behavior including research methods, hours worked, professional and personal image, and satisfaction. Fargel’s presentation focused on the results of U.S. and Chinese survey participants in an aim to shed light on the thinking patterns of this leading intellectual sub-group, and how companies can harness this information to their advantage.

One of the questions focused on the most frustrating professional hurdle or challenge doctors face. While the global results indicate that doctors feel most hindered by bureaucracy, this was not so for Chinese doctors, many of whom reported that the lack of insight into the disease process and dealing with fatally ill patients were most challenging. Fargel explained that this was due not only to the developing nature of China’s healthcare system, but also to the fact that most Chinese doctors are significantly younger than the global average and are not yet accustomed to the realities of sickness and fatality. The study also found that while the vast majority of doctors around the world feel professionally satisfied within their profession, 51 percent of Chinese doctors do not feel fulfilled with their choice to become doctors.

Chinese doctors are also the least satisfied in terms of overall happiness. Fargel suggested that this was due to a number of important factors, including a labyrinthine bureaucratic structure in China, dramatic changes within the healthcare system and, perhaps most critically, the shrinking income of Chinese doctors. (Apr 16)

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DEAL OF THE MONTH

ISTOCKPHOTO

Latin American Loans China has struck major deals with several Latin American countries, demonstrating a long-term commitment to the region.

I

n recent weeks, China has been making significant inroads to securing natural resources and building up relationships in Latin America. As the United States attempts to rebuild its strained ties to the region, China has invested billions of dollars into countries struggling with slowing economies and restricted credit access. China’s most recent deals with Latin America suggest its interest in engaging in a long-term commitment to the region.

China has recently negotiated deals that include doubling a development fund in Venezuela to US$12 billion, lending US$1 billion to Ecuador to build hydroelectric plants, providing Argentina with access to more than US$10 billion in Chinese currency, and lending Petrobras, Brazil’s national oil company, US$10 billion.

China’s trade with Latin America has grown exponentially in the last decade, now making it the region’s second largest trading partner after the U.S. As the global economy slows and prices plummet, China is aggressively pursuing longterm access to natural resources and commodities in Latin America like oil, iron ore and soybeans, while also looking for an alternative to investing in U.S. Treasury bonds.

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China’s US$10 billion arrangement with Argentina is a move to boost liquidity during the global financial crisis and provide an alternative to U.S. dollars in bilateral trade. The deal would cut trade costs associated with currency exchanges by allowing Argentine importers to buy Chinese goods directly in RMB, and vice versa, and might pave the way for the RMB to be used eventually as an alternative reserve currency.

Brazil’s Petrobras is expected to use China’s US$10 billion for offshore oil exploration, and in return has agreed to export as much as 100,000 barrels of oil a day to China. In addition, China’s foray into a country like Venezuela marks a push into places where the U.S. has very little influence.

In February, Chinese Vice President Xi Jinping traveled to Venezuela to meet with President Hugo Chávez , where they announced the establishment of a Chinese-backed development fund that would increase from US$6 billion to US$12 billion.

The deal would give Venezuela access to hard currency, and in exchange would increase China’s oil shipments from Venezuela from around 380,000 barrels a day to one million barrels a day. While China’s agreement with Venezuela has come under criticism, Venezuela maintains that China’s loan differs from other multilateral loans because it comes with few preconditions, such as scrutiny of internal finances.

In Ecuador, China’s US$1 billion loan will be used to finance some of the country’s energy and infrastructure projects, including building hydroelectric power plants, roads, ports, airports and refineries. Ecuador will repay most of the loan through oil shipments to China.

China’s recent deals in Latin American hints at a deeper plan of influence in the region, especially in the face of diminishing U.S. influence, say analysts. “This is how the balance of power shifts quietly during times of crisis. The loans are an example of the checkbook power in the world moving to new places, with the Chinese becoming more active,” David Rothkopf, a former U.S. Commerce Department official in the Clinton administration, said recently to The New York Times.

– Elaine Wu

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