Insight Magazine January-February 2010

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

January / February 2010

SPOTLIGHT

U.S. Business in China LEGAL UPDATE

FCPA Due Diligence MARKET PROFILE

Biotechnology in China

The State of Relations The U.S.-China relationship is poised to take center stage in 2010.

INSIGHT Januar y / Febr uar y 2010

The Journal of the American Chamber of Commerce in Shanghai

AMCHAM SHANGHAI

Karen Yuen COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren

MEMBERSHIP & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

Justin Chan

COMMUNICATIONS ASSOCIATE

Weina Yang

EDITORIAL INTERN

Chantal Grinderslev DESIGN

Alicia Beebe LAYOUT & PRINTING

Ella Shan Snap Printing, Inc.

INSIGHT SPONSORSHIP MARKETING ASSISTANT MANAGER

Sophia Chen

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

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

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

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IMAGINECHINA

DIRECTORS BUSINESS DEVELOPMENT & MARKETING

12 Biotechnology in China

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ZHU XIAOCI

David Turchetti

MARKET PROFILE

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

F E AT U R E S

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PRESIDENT

Brenda Foster

By Andrew Chen

Although still a nascent industry, biotechnology in China is growing rapidly, thanks to constant high demand for new products and outsourcing of research and development work from abroad.

15 An Eye on Due Diligence LEGAL UPDATE

By Mark Bowra

The importance of due diligence when pursuing a merger or acquisition in China is clear, but in light of the poor economic climate, it is important to keep the Foreign Corrupt Practices Act (FCPA) in mind as well.

18 An Optimistic Outlook SPOTLIGHT

Released in December, the 2009 China Business Report highlights the experience and expectations of American companies in China, which when compared to elsewhere around the world, are still very good.

22 The State of Relations COVER STORY

By Justin Chan

2010 is set to be an important year for U.S.-China relations. As the two major economies trying to lead a global recovery, the United States and China must work together to address not only bilateral concerns, but also regional and global issues.

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

3 News Briefs

40 Deal of the Month

8 Staying Competitive in China 15 Partnerships in China MANAGER’S NOTEBOOK

ANALYSIS

More and more expatriates are staying in China after expat assignments. How do they stay competitive?

Foreign enterprises and individuals are now able to establish partnerships in China. Here’s a first look at the rules.

INSIDE AMCHAM

29 From the Chairman: The Year of the Tiger 31 2009 Government Appreciation Dinner

MARCH 2009

34 E&T Conference 36 CSR Conference 38 Events in Review

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JUSTIN CHAN EDITOR-IN-CHIEF

appy New Year! 2010 promises to be an exciting year, with several mega events taking place around the world including the Winter Olympic Games in Vancouver, Canada, the World Cup in South Africa and of course the World Expo right here in Shanghai. As we get closer to opening day, look out for a series of articles in Insight on what we in Shanghai are calling the biggest global event of the year! And when the Expo begins on May 1st, turn to AmCham Shanghai, an official sponsor of the USA Pavilion and the Official Business Chamber Partner, for information on business-related events and programming.

This issue also features highlights of the 2009 China Business Report, which was released in December.

Overall, while 2009 was a challenging year, most American companies in China maintained profitable operations; the China operations of U.S. companies generally fared much better than in other global markets. Despite the difficult economy, U.S. companies in China are more optimistic than ever about the long term business prospects in China.

As we begin the new year, it is a good time to look at what lies in store for the U.S.-China relationship. Against the backdrop of the global economic crisis, the month’s cover story looks at how the relationship continues to evolve and the interdependency between the United States and China. The U.S. continues to call on China to take a more active role on the global stage, more in line with its economic power. At the same time,

This month’s legal update features a primer on due diligence when pursuing mergers and acquisitions.

With many companies experiencing slow business, it is especially important to be mindful of Foreign Corrupt Practices Act (FCPA) violations. Our market profile column examines the development of the biotechnology sector in China. In the coming months, we will also examine other sectors within China’s life sciences market.

given that 2010 is an election year in the U.S., some analysts expect economic and political issues to hamper what has been a steadily developing relationship.

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News

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

CHINA BUSINESS

China leads global auto market China’s 12.7 million cars sold in 2009 marked a 44% increase from 2008 and totaled 2.4 million more automobiles sold than the United States. China first overtook the U.S. in monthly car sales last January, and 2009 was the first time another country has out-purchased the U.S. in cars. The combination of China’s stimulus plan featuring favorable automobile tax cuts and subsidies with artificially low gas prices led to a continued rise in sales throughout the year. In contrast, U.S. sales suffered a 26-year low, but are expected to recover some in 2010. Nonetheless, the very size of the Chinese population could mean that future car designs are more tailored to Chinese preferences. General Motors China designed a new 2010 Buick LaCrosse tailored for the Chinese market. At the luxury end, Lamborghini CEO Stephan Winkelmann expects that within 3-5 years, China will overtake Italy as the second-largest market for Lamborghini behind the U.S.

Huge iron ore deposit in Hebei A 1 billion ton iron ore deposit discovered in northern Hebei Province is the largest found in China in three decades.

According to the head of Hebei Provincial Bureau of Land and Resources, the 6kilometer-long deposit has an unproved reserve estimated at 500 million tons.

Iron ore, one of the primary raw materials required for steel, is a highly sought after commodity in China, which ranks as the largest purchaser of iron ore across the globe. China’s demand for oil and iron ore has increased steadily to support its ongoing economic development. At the same time, there are concerns that steel mill production capabilities in China will outpace available raw inputs, resulting in

China expected to become world’s largest exporter Despite a large decline in overall exports as a result of the poor global economic situation, China is expected to overtake Germany as the world’s largest exporter for 2009. Although total exports fell 16% year-on-year, China’s total exports in 2009 reached US$1.2 trillion, according to the General Administration of Customs. Still, both government officials and economic experts cautioned that China is still not a real trade power, due to its export structure, industry competitiveness and relatively low level of technological innovation. According to the Federation of German Wholesale and Trade, Germany’s exports in 2009 were expected to fall 18% to US$1.2 trillion. According to the Development Research Center of the State Council, exports are gradually transitioning from labor-intensive products to hightechnology products as well as electrical and electronic products; approximately 83% of high-tech exports and 75% of electronic exports were produced by foreign-invested enterprises. steel price instability. Despite government warnings, 32 new capacity expansion projects across the country have begun since August alone.

Wind power firm issues US$2.2 billion IPO Shares in China Longyuan Power Group, Asia’s largest wind power generator, rose 9.4% to HK$8.93 on its Hong Kong Stock Exchange debut on December 10.

Proceeds from Longyuan’s US$2.2billion initial public offering will be used to repay

bank loans and finance new and upgraded facilities. Already the world’s fifth-largest wind power generator, Longyuan became the world’s eighth-largest IPO in 2009.

China aims to derive 15% of its energy supply from renewable sources by 2020 and achieve wind generation capacity of five times the current U.S. capacity.

However, China’s power-transmission infrastructure has not been able to handle the current output of wind-power supplies, with 30% of last year’s wind electricity going unused.

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CORPORATE NEWS

Morgan Stanley to sell CICC stake In early December, Morgan Stanley short-listed bidders for the sale of its 34.3% stake in China International Capital Corp. – China’s first joint-venture securities firm whose largest shareholder is the country’s sovereign wealth fund, the China Investment Corp. Morgan Stanley has plans to enter into a joint venture with China Fortune Securities that would give the firm more management control.

However, Beijing regulators prohibit foreign firms from buying into more than one investment banking venture and caps holdings at one-third of the total.

Although the profitable CICC stake is preventing further action on the China Fortune deal, Morgan Stanley’s attempt to auction its stake in 2008 failed. Morgan Stanley initially purchased the stake 13 years ago for US$37 million, and it is now valued at US$1 billion. The shortlist of first round bidders includes: Taiwan’s Fubon Financial, Bain Capital, Carlyle Group, General Atlantic, TPG and KKR.

Nokia forms JV with New Alliance On December 9, Nokia Corp. announced plans to form a 50-50 joint venture with New Alliance, part of investment and financial services provider Shanghai Alliance Investment, Ltd. The Finnish mobile phone giant plans to bring locally relevant mobile services to Chinese consumers. Nokia is the world’s leading maker of mobile devices while New Alliance focuses on long-term growth projects pertaining to the technology, new energy, pharmaceutical and modern services industries. The venture is expected to start in January and involve 80 people, including local content developers to help bring their applications to market.

have been increasing in popularity, but remain underutilized by established Chinese consumer companies. Li Ning opened its first website last year, but the rapid increase in online traffic convinced the company to hire International Business Machines Corp. to build a new site able to handle large volumes of online transactions.

Online purchases accounted for 1.2% of total retail sales in China in 2009 (vs. 5% in the U.S.), but Credit Suisse estimates that the value of goods sold online is likely to grow 89% this year to US$35.6 billion and reach US$130 billion by 2012. Last year, Li Ning accounted for only 9.5% of China’s sportswear market, compared to the 28.8% share roughly split between Nike and Adidas. While the two sportswear giants are looking to expand their reach beyond large cities, Li Ning already has the most extensive distribution network in China.

The company hopes that the addition of online sales will give it an edge against rivals Nike and Adidas.

BAIC purchases Saab designs In mid-December, China’s fifth largest automaker, Beijing Automotive Industry Co. (BAIC), announced it would purchase the right to produce two of Swedish company Saab’s older car models, the 9-3 and 9-5, as well as turbine engines and gearbox technology. General Motors, which owns Saab, had been trying to sell the unprofitable brand and warned of possibly shutting down the entire brand if a suitable buyer was not found. Despite the relatively dated Saab technology, the Chinese company is eager to own the design for use in its own Chinese models as part of the nation’s aim to raise its global auto industry profile. As part of the deal, Saab will help BAIC develop its own branded cars using the Swedish technology.

MACROECONOMICS

Li Ning goes online After 20 years of operations, China’s leading sportswear company Li Ning, announced plans to engage in online Internet sales, expanding beyond its 6,800 stores nationwide. Among China’s 338 million Internet users, online purchases

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Year-end stimulus impacts Recent statistics revealed a recovering Chinese economy, showing that the damage of the world financial crisis has had limited effect on China’s 2009 economic situation. Nevertheless, the nation has yet

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to return to pre-crisis levels of growth.

China’s November year-on-year industrial output rose 19.2% (the fastest pace in two years), imports rose 26.7% (the first rise in 13 months) and retail sales increased 15.8%. Exports fell 1.2% from twelve months earlier, but given sharp declines in export demands across the globe, China’s numbers compare well to other countries. Due perhaps to stimulus package effects and large government investments, 8% GDP growth is forecast for 2010. However, critics worry that asset bubbles and inflation will soon emerge from continued government stimulus; November consumer prices increased 0.6% for the first time since January.

Job creation ahead of schedule Chinese officials reported that the government’s 2009 goals for job creation were met within the first ten months of the year. Through October, China saw the creation of 9.4 million jobs, nearly half a million beyond original government targets. 4.4 million laid-off workers found new employment, lending hope to the 20 million migrant workers who have lost their jobs since the financial crisis erupted in 2008. A large portion of the new jobs created were a result of the large stimulus package that the central government announced in November 2008.

Housing costs too steep The Chinese Academy of Social Sciences (CASS) released a Blue Paper on December 7 indicating that 85% of Chinese families cannot afford housing expenditures, with housing prices 3 to 6 times greater than average incomes. The National Bureau of Statistics published figures indicating that metropolitan home prices rose 5.7% year-on-year in November in 70 major cities, the highest jump in 16 months.

Government officials plan to continue other stimulus measures that increase the supply of low-priced housing and that allow smaller down payments and lower loan rates to first time home buyers.

Property prices have been pushed higher by strong private and investor demands, heightening concerns over asset bubbles.

U.S. - CHINA

China protests arms sales Amid reports that the U.S. government awarded aerospace firm Lockheed Martin Corp. a contract to sell advanced Patriot missiles to Taiwan, China reiterated its longstanding objections to U.S. arms sales to Taiwan. China’s Ministry of Defense called the planned sales a great hindrance to the improvement and development of China-U.S. military ties and reserved the right to take further action, although what action might be taken was not specified.

Spokesman Huang Xueping said, “We urge the United States to sever military links with Taiwan, in order to avoid further damaging relations between the two countries and the two militaries and the peace and stability across the Taiwan Strait.” The contract for the Patriot missiles is a part of a US$6.5 billion deal announced by the Bush administration in October 2008. Analysts expressed concern that the U.S. arms sales to Taiwan could jeopardize the stable expansion of China-U.S. ties and affect the development of military exchanges.

CHINA OVERSEAS

Sinopec teams with ExxonMobil In early December, China’s second largest oil and gas company, Sinopec, secured a deal with ExxonMobil to ship natural gas from Papua New Guinea’s central highlands to the port of Qingdao. The 75% government owned company will purchase roughly 2 million tons of liquefied natural gas annually for the duration of the 20-year deal. Although no financial details have been released, Sinopec rival PetroChina signed a similar deal in August to purchase US$41 billion worth of natural gas from Australia’s Gorgon field. China often suffers gas shortages, particularly in the winter months, and has recently signed multi-billion-dollar oil and gas deals in the Middle East, Africa and Central Asia to meet its increasing demand.

GM and SAIC form India JV General Motors will form a joint manufacturing venture in India with Shanghai Automotive Industry Corp.

(SAIC), its partner in producing small cars and mini commercial vehicles in China.

The new 50-50 venture in India will also make passenger vehicles, including the Chevrolet Spark, and aims to expand the companies’ reach into other emerging Asian markets. India’s auto sales increased 71.9% year-on-year in November. If able to successfully compete with domestic automanufacturing giants like Mahindra & Mahindra and Tata Motors, GM and SAIC could see annual sales of 225,000 over the next few years. As part of the deal, GM is selling 1% of its stake in the very profitable Shanghai joint venture (which produces the fast-selling GM Buick models) to SAIC for US$85 million, effectively giving SAIC a controlling share in the business.

GOVERNMENT & POLICY

China sets binding carbon goal China’s State Council reported the country’s “binding goal” to cut carbon intensity – carbon-dioxide emissions per unit of GDP – by 40-45% by 2020. The statement, released before December’s Copenhagen Summit on Climate Change, marks the first time China has specified goals for carbon emission levels. The goals will be incorporated into medium and long-term development plans. However, critics note that the pledge falls short of capping or reducing total greenhouse gas levels, promising instead a relative reduction in emissions. The cabinet’s most recent emission goals follow in the footsteps of energy policies that called for a 20% reduction in energy intensity from 2006-2010. Still, the World Resources Institute noted that even a 40% reduction could be ambitious; the easiest gains have already been achieved and future potential gains would be smaller.

Stimulus policies to continue The central government recently confirmed that stimulus policies will remain in place through 2010. Proactive fiscal policy and loose monetary policy in 2009 led bank lending and capital expenditure to increase by more than 30%. However, some economists worry that continuing expansionary fiscal and monetary policies

could push up the prices of stocks and housing and result in wasted investment and excess capacity. In response, officials noted the intention to scale back some preferential policies, but will continue to expand subsidies for alternative-fuel vehicles, car purchases in rural areas, older model automobile trade-ins, and low down payments for first-time home buyers.

Electric car incentives Amid green car manufacturer concerns that electrical cars and plug-in hybrids may be cost-prohibitive for the Chinese market, the government announced incentives to encourage private purchase of new-energy cars. Electric car producer BYD Co., which has long advocated such initiatives, has indicated that without subsidies, the RMB150,000 cost of its F3DM hybrid is only price competitive outside China. However, as initial government notices limit buygreen incentives to five yet-to-be identified cities, alternative energy automobile companies find little encouragement that larger-scale rebates will extend their share of the thriving domestic auto market beyond selling to corporate fleet clientele.

New “buy Chinese” rule for state agencies A recently announced notice could potentially restrict government agency purchases of high-technology goods from foreign firms.

The new notice expands on 2006 rules requiring government agencies to favor domestic technology in public procurement, although foreign companies are not entirely precluded from consideration. The new regulation enables enforcement of the rule by creating a national catalog of products that would receive preferential treatment. The consequential curbing of billions of dollars worth of sales to government agencies has met strong opposition from both the U.S. government and companies worldwide.

According to the Ministry of Finance, China’s public procurement (including nontech goods) more than tripled since 2003 to total US$88 billion in 2008.

Planned increase in nuclear plants China presently operates 11 nuclear

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reactors around the country and recently announced plans to start construction on 10 new plants per year. Three-quarters of the nuclear reactors scheduled to be built globally over the next decade will be in China. Although China has sought foreign assistance in the training of nuclear inspectors, concerns remain over the safety of so many new reactors, many of which are near large cities. The August dismissal and detention of Kang Rixin, president of the China National Nuclear Corp, under allegations of a US$260 million bid-rigging construction scandal, emphasized both the dangers involved and the Chinese government’s determination to take safety issues seriously. In late October, Prime Minister Wen Jiabao called for a quintupling of domestic nuclear safety inspectors by 2011.

including Bank of Shanghai and the Shanghai Stock Exchange, participated in a recruitment tour to New York, Toronto and Singapore in December, aimed at high level financial talents, offering salaries ranging from US$71,000 to US$285,000 per year with tax cuts, housing, insurance and education support from the Shanghai Municipal Government. China’s State Council plans to transform the city into a global financial center by 2020 and currently has 116 job vacancies for qualified candidates, particularly in risk management. Although the number of financial professionals in Shanghai has increased fivefold since 2003, less than 20% have internationally recognized financial analyst or financial planner qualifications, while most lack experience with innovative financial products.

SHANGHAI BUSINESS

Dubai financial troubles hit home

Finance sector recruits expats Seventeen Shanghai financial institutions,

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The intended US$220 million construction of a “Shanghai Island” in Dubai has been halted after Dubai hit financial troubles.

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Originally slated to be completed by next year, the resort would have been situated on an archipelago and composed of luxury resort villas as well as a reproduction of Shanghai’s skyline. Having lost only 30% of the US$28 million land price, developer Hu Bin, chairman of Zhongzhou International Group Co., plans to focus his efforts and resources on a 150-villa development located just outside of Shanghai.

Retail sales increase Shanghai’s November retail sales of RMB43.4 billion grew 13.8% year-on-year, slower than the peak purchasing holiday month of October (14.1%). Steady retail sales are considered an economic counterbalance to declining exports. Car sales in the city rose over 23% since last year, while Shanghai restaurants reported a 10% gain in business over the past twelve months. Consumption is expected to show continued growth into the next year, bolstered by continued government stimulus policies favoring automobile and appliance sales.

SOUTH AMERICA ASIA-PACIFIC

CHINA & THE WORLD

MIDDLE EAST

JAPAN Chinese Vice President Xi Jinping met with Japanese Emperor Akihito and political party leaders on December 15. Xi said that exchanges between the National People’s Congress and the Japanese Diet have promoted trust and cooperation between the two countries. The Vice President also commented on the warming relations with the current ruling Democratic Party of Japan, which in September ended a halfcentury of opposition rule by the Liberal Democratic Party. The visit was the first of a four-nation Asian tour for Xi that includes the Republic of Korea, Myanmar and Cambodia.

ASIA-PACIFIC

GHANA The Chinese Ambassador to Ghana, Yu Wenzhe, expressed interest in faster mutual development and economic cooperation. Yu urged Ghana to continue to improve its business environment in order to better attract foreign cooperation and investment. He further suggested that Chinese companies share their business experiences with Ghanaians. At a December 13 ceremony marking the 10th Anniversary of the Ghana-China Friendship Association, the ambassador stated that future China-Ghana relations would necessitate more language and cultural exchanges between their peoples. While at the ceremony, Yu restated China’s development for Ghana and Africa, which was released at the recent Fourth Ministerial Conference of the Forum on China-Africa Cooperation in Egypt.

AFRICA

EUROPE

EUROPE MIDDLE EAST

EUROPEAN UNION Premier Wen Jiabao rejected European pressure to appreciate the Chinese yuan against the euro during a late-November summit with EU leaders in Nanjing. The yuan’s 18-month peg to the weakening U.S. dollar has hurt EU exports to China at a time of high European unemployment. Wen defended the stable exchange rate as contributing to world economic recovery. Noting Europe’s export limits on its highest technologies, Wen equated currency revaluation requests by countries with protectionist policies against China as unfair and an affront to China’s development. Accounting for approximately 20% of China’s exports, the EU remains China’s largest market for export goods.

NORTH AMERICA MIDDLE EAST

RUSSIA Newly appointed Chinese Ambassador to Russia, Li Huion, was formally welcomed by Russian President Dmitry Medvedev during a December 16 ceremony in Moscow. Medvedev noted that the initiation of a Chinese Language Year in 2010 to promote youth exchanges between the two countries would contribute to deeper mutual understanding and cooperation in the future. He also stated that the celebrations in Russia over the past year to mark the 60th anniversary of Sino-Russian bilateral diplomatic ties spoke to the close partnership that has developed over the years.

SOUTH AMERICA

AFRICA

PAKISTAN During a December 10 meeting with China’s Harbor Engineering Co., Pakistani President Asif Ali Zardari praised China’s support for a port project in southwestern Pakistan. Originally opened in the spring of 2007, the Gwadar Port project in Balochistan has stimulated socio-economic growth and will function as an energy corridor for Asia and the Middle East, as well as a transshipment port serving both Pakistan and China. Chinese exports from its western provinces will pass through the port for worldwide shipment. Zardari also indicated that Pakistan welcomes more development and investment projects from China in the future.

NORTH AMERICA

ASIA-PACIFIC NORTH AMERICA AFRICA

UNITED STATES By the end of 2009, American colleges had seen an increase of up to 60% in the number of Chinese student applications to U.S. universities, despite the fact that the average tuition cost for a private university in the U.S. is 10 times the cost in China. Some colleges attribute the dramatic rise to China’s improved economy, better job opportunities for returning expatriates, and dwindling American university endowments.

Historically, Chinese graduate students in the U.S. have largely outnumbered undergraduates, but as both continue to increase, the gap between the two enrollment levels is declining.

URUGUAY During a January 4 visit to Beijing, Roque Arregui, president of the Uruguayan House of Representatives, vowed to strengthen legislative ties with China. Wu Bangguo, chairman of the Standing Committee of the National People's Congress, called for multi-tier exchanges to enable both countries to learn from each other’s experiences in building democracy and effective legal systems. The leaders also vowed to cooperate more frequently on global issues. On other issues, Wu reiterated China’s appreciation of Uruguay’s support for its “One China” policy. Arregui returned praise on the economic front, speaking of China’s effective endeavors to deal with the financial crisis and stating that Uruguay looks forward to deepening economic ties.

SOUTH AMERICA

ASIA-PACIFIC

AFRICA MIDDLE EAST

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EUROPE SOUTH AMERICA NORTH AMERICA

ASIA-PACIFIC SOUTH AMERICA

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M A N A G E R ’ S N OT E B O O K

Staying Compitive in China

How to move past the typical expatriate assignments.

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hese days, I often get contacted by foreigners who feel the growing challenge of competing in China’s job market. Many have recently ended an expat assignment, but want to continue to pursue their career and personal interests here. They want to know where the opportunities are for nonMandarin speaking professionals with a solid track record of success, and how they can better attract the interest of potential employers.

When I first moved to Shanghai in March of 1999, it was much different. I remember how wide open China was as a land of opportunity. As an English-speaking, American-born Chinese who lacked work experience in mainland China and whose Mandarin was a far distant second language, I did not feel that I was at a big disadvantage in my ability to compete in this market.

With so many things not being done well or not being done at all, and with so many companies and industries in their early stages of development, it was a time when it was possible to pursue just about any industry or job function.

Certainly, China’s hiring and talent market landscape has changed significantly since then, evolving in favor of mainland professionals who continue to become more bilingual, international, and professionally mature. This is clear in the market today,

Larry Wan g is CEO and found er of Wang & Li Asia Resources , China’s 2008 Rec ruitment Firm of th e Year.

Contact h im at lcwang@w ang-li.com .

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where the preference for local talent is increasingly indicated for many of the middle- to executive-management level searches conducted for global clients. This emphasis will only grow as the training and career development resources, and greater international exposure for mainland professionals continues to increase.

Be flexible and recognize capability gaps As someone whose Mandarin proficiency still has much to be desired (shamefully, I still can’t read or write Chinese, or do business in Mandarin), I am a firm believer that many great opportunities are still out there for foreigners in China. The biggest difference for capturing them today is that instead of opportunities being offered to you through an expat assignment, you need to recognize and target the capability gaps that exist in this market.

For instance, key areas that we still see a shortage of among our clients are the ability to solve problems and deliver solutions, the ability to build teams and lead others, the ability to identify and develop new opportunities, the ability to develop and drive major projects, and the ability to raise standards and capabilities within an organization. For many of the hiring situations we support, there is a consistent demand for those who can respond to and deliver in these areas.

For those looking for opportunities beyond typical multinational companies, it is worth exploring some of the many smallto medium-sized companies and startups that are run by former multinational executives who are much more open to and excited about having an experienced foreigner in their company. Although these platforms do not pay anything resembling the expat package that you may have had

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before (but who is these days?), many offer the opportunity to be a part of something that can grow significantly and that you can potentially hold an equity stake in.

More opportunities, more competition China is still a place where so many companies and industries continue to grow and offer considerable upside. You can still meet many here who are able to get into functions and industries, or even redefine their career, more easily than anywhere else in the world. Many others are handling roles and responsibilities at an earlier age or sooner than what they would be able to do in other markets.

“I could never have imagined several years ago that I would be doing what I’m doing now,” is a line that we hear from many candidates that we work with. Compare this to companies in the United States and Europe that are experiencing much lower levels of growth, if any at all.

From now on, however, working in the mainland means facing a job market reality and environment that is becoming more and more mature and competitive, regardless of whether you’re a local or foreign professional.

It requires all of us who want to continue working here to better understand and deliver in those areas that are most highly valued and sought in this market. Doing this requires a real level of commitment to and investment in building the capabilities and expertise that are needed to help fastgrowing companies succeed here.

If you are able to recognize and respond to the key business and management challenges that companies in China need to address, and are open to employment options beyond the multinationals, then the chances of attracting excellent and interesting opportunities will improve considerably.

RENEW YOUR MEMBERSHIP BY JANUARY 29, 2010 AND

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Free 3-month membership extension for two-year renewal Free 1-month membership extension for one-year renewal For more information, contact our membership specialists: Shirley Huang, (86 21) 6279-7119 ext. 5677, shirley.huang@amcham-shanghai.org Sandra Zeng, (86 21) 6279-7119 ext. 5676, sandra.zeng@amcham-shanghai.org Anita Ye, (86 21) 6279-7119 ext. 5659, anita.ye@amcham-shanghai.org Or, renew online at www.amcham-shanghai.org/Renew to be eligible for the membership renewal lucky draw.

Special thanks to our lucky draw sponsors

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J A N U A RY / F E B R U A RY 2 0 1 0 I N S I G H T 9 * The promotion is open to all members regardless of member category or membership expiration date. * Associate members are only eligible to renew until the expiration date of the company’s Corporate membership.

A N A LY S I S

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Partnerships in China Rules issued allowing foreign enterprises and individuals to establish partnerships in China.

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hina’s State Council formally issued the long-awaited Administrative Measures for Foreign Enterprises and Individuals to Establish Partnerships in China (Decree No. 567 of the State Council) on December 2, 2009.

The promulgation of these measures is the most significant development in this area since the introduction of the Partnership Law in 2006. The measures, which become effective on March 1, allow foreign investors more alternatives for structuring investments in China. Previously, foreign investors have had to set up investments in the form of wholly foreign-owned enterprises, equity joint ventures or cooperative joint ventures.

Key Points • The measures allow a partnership to be established by (i) two or more foreign enterprises

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or individuals; or (ii) foreign enterprises or individuals and Chinese individuals, enterprises or other organizations (hereinafter "foreign partnership"). The measures also allow foreign enterprises and individuals to become partners in a partnership formed by Chinese individuals, enterprises or other organizations.

• The establishment of a foreign partnership only requires registration with the local branch of the State Administration of Industry and Commerce.

• There are no minimum capital requirements for a foreign partnership.

• Foreign partnerships that make investments in special projects or industries that do require special approval should be pre-approved by the relevant authorities.

• The setting up of a foreign partnership whose main business is to make investments may be subject to other rules and regulations.

Observations Partnership capital It is interesting that the measures specifically require that cash capital contributions to a foreign partnership by a foreign enterprise or individual should either be in freely convertible currency or legitimately obtained RMB. The Measures do not specifically mention in-kind contributions by foreign partners as capital to a foreign partnership, whereas the Partnership Law specifically mentions that partners in a domestic partnership may make in-kind contributions as capital to the partnership.

General partner and limited partner The measures do not address whether the foreign investor can be a general partner or a limited partner in a foreign partnership. However, Article 3 of the measures states that the measures should generally follow the Partnership Law, which allows different types of partners (general vs. limited) and partnerships (limited partnership or special general partnership).

Using a foreign partnership to make investment

In light of the recent flurry of activities and press reports around major global venture capital and private equity fund players launching RMBdenominated investment funds in China or expressing an interest in doing so, many firms are exploring ways to set up such investment funds in the form of a partnership and are hoping the measures will resolve the uncertainties relating to direct participation in investment funds set up in the form of a partnership. At this stage, it may be premature to conclude that the measures provide clear guidance on this issue.

According to Article 14, the setting up of a foreign partnership whose main business activity is to make investments should follow the other rules and regulations applicable to investment.

The wording of Article 14 is ambiguous and may lead to different interpretations. One possible interpretation is that investors may need to await further guidance specifically addressing the use of foreign partnerships for investment purposes, and until that guidance is issued, foreign partner direct participation in such foreign partnerships is not allowed. This interpretation would seem to be in line with the official press release on the measures, which appears to grant the government discretion to introduce further guidance on using a foreign partnership as a vehicle to set up an investment fund.

Alternatively, one could interpret Article 14 to mean that in the absence of any rules specifically stating otherwise, a foreign partnership may make direct investments. The latter interpretation may be more in the nature of wishful thinking than a viable alternative interpretation since this is generally not a widely accepted method used by the administrative or judicial authorities in interpreting Chinese laws.

Partnership taxation The Measures provide that foreign partnershiprelated tax matters should follow the prevailing applicable tax rules and regulations. Even though China does not currently have comprehensive partnership taxation rules, Article 6 of the Partnership Law sets out the fundamental taxing principle, which simply states that each partner

should separately pay income tax on its share of income derived from a partnership.

The Ministry of Finance and the State Administration of Taxation jointly issued a circular in December 2008 (Circular No. 159), “Notice on Issues Concerning the Income Tax Levied on Partners of a Partnership” that reconfirms the taxing principle outlined in the Partnership Law that individual and enterprise partners are subject to individual income tax and enterprise income tax, respectively, on income allocable from the partnership in which they are partners.

Challenges While clearly allowing flow-through tax treatment is a significant benefit and a reason to set up a foreign partnership, there are a number of uncertainties in the measures that could create hurdles. It is not entirely clear how the foreign partners should pay tax on income received from the partnership. Circular 159 states that where the partner is an enterprise, it will be subject to enterprise income tax. However, there is no guidance on how a foreign enterprise that is a partnership would compute the tax and whether the after-tax profits would be subject to tax when the funds exit China.

It is also unclear when a foreign partner sells its partnership interest, whether the undistributed after-tax profits would be added to the basis of the partnership interest when computing any gain or loss on the sale. Likely, the Chinese tax authorities may have to issue new rules governing the taxation of foreign partners to provide more clarification. From a practical perspective, foreign investors will need to consider issues such as the foreign currency conversion of capital injected by foreign investors into a foreign partnership investment fund.

Overall, the measures are welcomed, as they offer a new alternative investment vehicle for foreign investors in China, and with the new rules becoming effective in March, the foreign partnership structure is a viable option. Hopefully, the authorities will issue additional guidance that clarifies and resolves the outstanding issues.

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Alan Tsoi, Partner +852 2852 6600 atsoi@deloitte.com.hk Vicky Wang, Partner (86 21) 6141 1035 vicwang@deloitte.com.cn Andrew Zhu, Partner (86 10) 8520 7508 andzhu@deloitte.com.cn

MARKET PROFILE

BY ANDREW CHEN

ISTOCKPHOTO

Biotechnology in China Although still in its infancy, biotechnology is one of the fastest growing sectors in China’s healthcare industry.

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iotechnology in China is expanding rapidly and becoming a major investment hotspot as a result of economic development, improved standard of living, increasing awareness and demand for pharmaceutical biotechnology, as well as regulatory policies that are considered very industry-friendly. The biotechnology market in China has grown at a compound annual growth rate of 21.4 percent over the past four years.

Nonetheless, China's pharmaceutical biotechnology sector accounts for a small share of the overall pharmaceutical industry compared to other sectors such as chemical agents and proprietary Chinese medicines. In 2007, pharmaceutical biotechnology contributed just 8.6 percent of the total sales revenue in the pharmaceutical industry.

Despite the small market share, China's

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biotechnology sector shows promising growth potential. The sales revenue of pharmaceutical biotechnology reached RMB44.6 billion in 2007, a growth of 22.1 percent. Recent healthcare reforms and the central government's push for biotechnology development are expected to boost growth by as much as 30 percent, making it one of the leading growth markets within China's healthcare industry.

In addition, the government has enforced several policies to better regulate the booming biotechnology sector and has also instituted reforms to create a unified regulatory framework.

The risky nature of biotechnology tends to discourage investors, especially in times of financial uncertainty. As a result, many biotechnology companies have yet to raise enough capital to reach the point where they are ready for an IPO. A number of opportunities need to be captured immediately to ensure survival amidst intense competition.

Funding problems Most companies in the biotechnology industry are heavily reliant on external funding to sustain operations, and the recent financial crisis forced many without solid financial support to exit early.

Drug development is a costly business and smaller pharmaceutical companies are often required to partner with capital-rich players such as venture capital firms to conduct research and development (R&D) projects. However, despite a growth in private funding in China, few venture capitalists are willing to invest in risky biotechnology projects that require a significant turnaround time. Therefore, venture capital activity in the biotechnology sector has been limited when compared to other industries such as information technology.

In addition to the inherent risks involved in the industry, the recent global financial turmoil has limited bank lending, and although governments around the world have taken a series of measures to alleviate the financial crisis, the anticipated policy effect of boosting investment remains to be seen in the biotechnology industry.

Industry collaboration In recent times, biotechnology companies have begun to leverage the abundant R&D resources of larger pharmaceutical firms in order to sustain their product pipelines, even at the risk of being targets for a merger or acquisition.

Due to capital shortages and profitability concerns, drug development has become a top priority for biotechnology companies.

Consequently, increased collaboration with pharmaceutical companies is expected, with large pharmaceutical companies likely to approach biotechnology companies more proactively in the next few years. Biotechnology firms will consequently become increasingly dependent on pharmaceutical companies for funding and other support, particularly in late-stage clinical trials of new drugs.

These pharmaceutical companies are then placed in an advantageous position where they can negotiate favorable terms with their biotechnology partners, such as exclusive development and marketing rights. In more extreme cases, some larger pharmaceutical firms may even look to act more aggressively and acquire the biotechnology firms.

Expansion pipeline Mergers and acquisitions are another gateway for large pharmaceutical companies to enter the biotechnology industry and optimize their product portfolios. Biotechnology companies typically reinvest earnings in product R&D in order to sustain product pipelines but as a result of the financial crisis and funding uncertainty, most companies today are prioritizing their R&D expenditures as they seen new opportunities for growth.

While some market players chose to exit certain therapeutic areas, others have dropped selected products from their pipelines to reduce financial risks. Small pharmaceutical and biotechnology companies with mounting losses and debts were the first to drop out from therapeutic areas that are considered unprofitable over the short term. This created immense opportunities for larger players who were both interested and able to invest in

treatments for underserved diseases, as they were willing to take a long-term view on profits that may not appear for some time.

In summary, capital-rich pharmaceutical companies continue their search for potential acquisitions with small, emerging, niche biotechnology companies in order to safeguard themselves from declining revenue as a result of expiring patents and to fill their product pipelines.

Initially used as strategies to reduce cost, mergers and acquisitions in the pharmaceutical industry are now crucial in optimizing pipelines and technology capabilities for large companies.

Outsourcing R&D for growth Many companies continue to outsource R&D to China in order to maintain growth. Increasing R&D and clinical trial costs abroad continue to drive foreign investment in China's pharmaceutical industry, especially when global pharmaceutical companies struggle to maintain profitability.

Pharmaceutical R&D in China continues to gain popularity for its large patient subject pool and abundant labor force. As a result, China has become home to R&D outsourcing centers for several large global pharmaceutical companies. For example, Amgen, the largest biotechnology firm, collaborates with Hong Kong companies to conduct clinical trials. Since October 2008, Sanofi-Aventis and Johnson & Johnson both initiated partnerships with Wuxi PharmaTech, China’s largest contract research organization (CRO), on discovery chemistry and biology, chemical and analytical development services, formulation, pre-clinical and bioanalytical services. In the future, more companies will outsource R&D with the aim to cut down costs and expedite the drug development process.

Government support With a strong interest in developing the domestic biotechnology industry, the central government's support of applied research has driven Chinese firms to develop several new therapies in pioneering fields such as gene therapy and stem cells.

Through domestic firms, the Chinese

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“

Increasing R&D and clinical trial costs abroad continue to drive foreign investment in China's pharmaceutical industry.”

Chinese Government Policies for the Development of Biotechnology Industry Objectives National Long-Term Science and Technology Development Plan

• Confirm the development of biotechnology medicines as the key objective in China’s mid- and long-term plans • Strive to become a pioneering country in biotechnology, with specific focus areas in functional genomics, proteomics, stem cells and therapeutic cloning, tissue engineering and bio-conversion technologies

“Eleventh Five-Year Plan” for the Biology Industry

• Outline the principles and goals for the development of biotechnology in China • Confirm the development of biotechnology medicines as the key research area • Initiate four projects on drug innovation, modern Chinese medicines and biotechnology

National “Eleventh Five-Year Plan” for Science and Technology

• Confirm the development of chemical and biotechnology medicines as the key research area, with specific goals in drug invention, filtering and safety measures • Develop 30 to 40 patented drugs with competitive edge • Advance in drug and vaccine development • Develop 40 diagnostic reagents with high specificity and efficiency, 15 vaccines and drugs, and scientific prevention and treatment programs using Chinese and Western medicines • Establish 10 prevention and treatment technology platforms comparable to those of developed countries • Develop an effective system to prevent and control AIDS and hepatitis

The “Eleventh FiveYear Plan” for the National Science and Technology Support Program

• Focus development of select digital medical devices and Chinese medicines for major diseases • Advance in 20 to 30 target technologies • Develop 10 to 15 conventional equipments and core components, 3 to 5 patented products of high importance, and 8 to 10 treatment programs for major diseases

Guidelines for Key Projects of the 863 Biology and Medical Technology Applications in 2007

• Pioneer in selected technologies • Establish and improve biotechnology systems • Enhance competitiveness of the Chinese biotechnology and pharmaceutical R&D sectors • Focus development programs around identified major diseases • Improve the use of biotechnology applications in clinical practice and industry • Provide guidance to the development of the Chinese biotechnology sector • Increase contribution of biotechnology and pharmaceutical R&D in the national economy

Source: Science and Technology Department, NDRC, Central People’s Government

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government continues its push for R&D of innovative treatments such as gene therapy and stem cells. Examples include the increasing government expenditure in biotech around focus areas that include genetically modified (GM) crops, vaccine development and fermentation technology. China's investment in biotech development is expected to surpass that of the United States, with an estimated total investment of over US$20 billion over the next two decades.

New development potential With stringent rules regulating stem cell research in the United States and many other countries, the commercialization of adult stem cells holds incredible promise in China. Unlike the United States and most European countries where stem cell research is largely considered controversial, China welcomes stem cell research for therapeutic purposes, with adult stem cells being one of the most studied fields followed by umbilical cord blood and embryonic stem cells.

Currently, American, European and some Australian research institutions dominate in stem cell research. However, due to ethical concerns in developed countries, the R&D tasks in this field are highly regulated. Consequently, the actual commercialization process may be held back by rigorous product approval standards. Osiris Therapeutics, a leading U.S. company focused on stem cell research, has not yet applied for any clinical trials for applications of adult stem cells after over five years of research.

However, with a R&D regulatory environment that is considered somewhat loose, China has the potential to emerge as a favorable location for research and product development with regard to stem cells.

With the exception of cloning, China welcomes stem cell research for therapeutic purposes. Companies that are interested in applications of adult stem cells are encouraged to outsource R&D to China for a shorter, cheaper development process.

Andrew Chen is a Manager with Deloitte Consulting in Shanghai. He can be contacted at andrechen@deloitte.com.cn.

L E G A L U P DAT E ISTOCKPHOTO

An Eye on Due Diligence

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n a downturn, the likelihood of fraud increases and financial integrity concerns are more frequently uncovered. In a merger or acquisition, due diligence that includes the use of forensic accountants to assess bribery and corruption risk can help the acquiring company to better understand the risks associated with a target, including its relationships with customers, suppliers, government agencies and officials, and other business partners.

Fraud within an organization takes many forms involving the falsification of revenues or assets, where the collaboration of a counter party is common. These are potential risks that should be considered in the financial due diligence process.

Another risk to consider is the possible violation of relevant bribery and corruptions laws, such as the Foreign Corrupt Practices Act (FCPA). This should be an integral part of target due diligence in light of the current enforcement environment and potential for criminal and civil penalties to be imposed on individuals and corporations alike.

Key areas to probe include the existence, or lack, of anti-bribery and corruption policies and procedures, awareness of applicable bribery and corruption laws and regulations, attitudes and behaviors toward applying anti-bribery and corruption measures, standards within the local operating culture, and the target’s business model as it pertains to interacting and working with government agencies, officials, or state-owned enterprises.

The FCPA is a United States act, but applies to any organization with operations in or transacting business through the U.S. It is being strictly enforced and liability for acts in contravention of the law now includes not only corporations

and executives in charge of operations, but also investors.

Although the U.S. is leading the way with respect to enforcement and prosecution of bribery and corruption, other countries that are signatories to the OECD Anti-bribery Convention are also focusing regulatory efforts to meet the standards they committed to under the convention.

The increased focus on enforcement globally along with a trend to hold individuals liable, either criminally or civilly (as was the case where executives settled with the U.S. Securities and Exchange commission under a theory of Control Person Liability with respect to a foreign operation’s books and records), has focused investors’ minds.

In addition to the trend of prosecuting individuals for violations of bribery and corruption laws, penalties and fines assessed against individuals and organizations are now commonly reaching into the tens of millions of U.S. dollars and in some cases even more.

Organizations that incur penalties and fines for non-compliance with the FCPA may also find that they suffer from a loss of investor confidence, loss of revenue based on illegal conduct that U.S.owned companies cannot condone, and, in some instances, indictments or convictions that put the acquirer at risk of being barred from doing business with federal governments.

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In light of the Foreign Corrupt Practices Act, due diligence is critical when pursuing M&A.

Mark Bowra, Partner Forensic mark.bowra@kpmg.com.cn +86 21 2212 3883 Cindy Cheng, Manager Market Services cindy.cheng@kpmg.com.cn +86 21 2212 2884

Why the FCPA matters Anti-bribery provisions apply to all U.S. citizens and residents and all officers, directors, employees and agents of entities (whether public or private) either having their principal place of business in the U.S. or organized under the laws of a U.S. jurisdiction.

The U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) may assert jurisdiction over non-U.S. entities and individuals and bring FCPA claims if they take or cause any action to be taken in the U.S. in furtherance of a corrupt payment to a foreign official. The DOJ and SEC have been working together for many years under inter-agency agreements to enforce U.S. anti-bribery and anti-corruption laws. In 2009, the DOJ announced it was increasing the full-time staff dedicated to bribery and corruption investigations by another eight FBI agents. Separately, the SEC announced it is forming a special unit that will focus on bribery of foreign officials.

High risk areas continue to include the energy, defense, pharma/life sciences, and telecom industries, as well as companies principally servicing large infrastructure projects in foreign jurisdictions. Additionally, numerous countries within the AsiaPacific region continue to be high-risk jurisdictions and receive increased regulatory scrutiny including China,Thailand,Vietnam, Indonesia and the Philippines.

There has been renewed emphasis on individual culpability and prosecutions.

There is no materiality threshold when considering whether a corporation has violated FCPA provisions.

FCPA and due diligence In the context of M&A, acquirers need to assess the existence and awareness of systems and controls over the following areas: • expense claims, payments and petty cash disbursements • use of agents and outside consultants • entertainment and gifts provided to third parties • contracting with government bodies • fraud response mechanisms • identification and monitoring of relationship development and maintenance with state-owned enterprises and their employees • accurate recording of transactions within the target's books and records • record keeping protocols in respect of transactions recorded in the books and records Based on the information learned through due diligence, a company may decide that the corruption and/or liability risk is tolerable. However, it may decide that the risk is so high that the value of the relationship is significantly reduced. In many instances, the client can then address corruption risks through appropriate contractual rights and contingencies with the counterparty. In other instances, the client may need to undertake further due diligence (or an investigation) and to seek

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assurances from the U.S. Department of Justice regarding possible successor liability.

In some cases, an acquirer may conclude that it is simply too costly (or impossible) to change the target’s embedded culture of corruption.

Assessing FCPA related risks is an important step, but one that should be conducted in isolation from more conventional financial and tax due diligence procedures. Much like these other steps, the findings can play an important part in determining successor liability, revenue estimates and value attributed to goodwill. Fully assessing FCPA risks can require the involvement of legal counsel and forensic accounting resources, alongside conventional transactional advisory support.

Planning is important because it may make sense to adopt a phased approach to FCPA due diligence that includes, among other key steps, risk assessment interviews and identification and validation of red flags. Initial findings may create a case for further due diligence focusing on particular areas, for example relating to specific geographies, third-party relationships, and commission, incentive and compensation structures.

Certain divisions of a business may have particularly strong potential for corruption, particularly if they are cash-intensive business lines or operations involving licenses or contracts with governments, government agencies or state-owned enterprises. Acquisition targets with complex organizational structures, multiple reporting lines and overseas business units exercising a degree of autonomy may also imply that an investor has to deal with multiple cultures and thus has an increased likelihood of corruption and bribery, and financial frauds.

The FCPA provides that a covered company is not only prohibited from offering or making payment directly or indirectly to a foreign official, it is also liable for payments made on its behalf by agents or distributors. Red flags would therefore include excessive reliance on agents as a means of obtaining work, a lack of agent contract terms and monitoring, unusual payment terms and unnecessary third parties performing services (for example, a losing bidder subsequently being hired as a subcontractor).

Routine financial due diligence should be

complementary, as a review of the target company’s financial records should help in determining whether such books, records and accounts accurately and fairly reflect all transactions and expenditures that have occurred and can provide the basis or foundation for further investigations and analysis.

Time to look again In light of the many FCPA fines that have been imposed on multinationals in the past two years, any company with a U.S. nexus should consider the need to evaluate their FCPA compliance efforts.

However, the FCPA is a particular concern for companies considering mergers or acquisitions.

For companies acquiring a company with a portfolio of assets and interests across different emerging markets, the risks are magnified and the value of professionals familiar with local market conditions cannot be underestimated. It is crucial

for acquirers, especially those involved in deals that have high-risk characteristics, to include a forensic FCPA component in their due diligence process.

Early discovery will enable the target and acquirer to adequately resolve the legal and business issues before a deal is completed.

Forensic due diligence such as this should be seriously considered when acquiring not only a distressed asset but also an entity that appears to be performing strongly. Apparently strong financial performance may mask fraudulent activities, and in an environment of change, the likelihood of relationships unraveling or presenting legal and operational risks increases.

Bribery and corruption have traditionally been considered as inherent risks or features of business in many parts of Asia Pacific. But increasing interest in corporate governance and transparency within the region, and the more pervasive reach of legislation such as the FCPA, means that companies can no longer take this issue lightly.

“

The FCPA is a particular concern for companies considering mergers or acquisitions.”

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An Optimistic Outlook The results of AmCham Shanghai’s 2009 China Business Report indicate a bright future ahead.

I

t was the best of times; it was the worst of times.” The first sentence of A Tale of Two Cities by Charles Dickens is an apt description of the business climate throughout China in 2009. For many American companies, it has been “the worst of times” as they struggled with the global economic crisis in their home markets and in China. Other companies, however, have been able to maintain revenue and profit growth, albeit at a slower pace, while taking advantage of the downturn to gain market share and benefit from reduced input costs. A snapshot of 2009 highlights the dynamism of the China market and the growing importance of China in global business.

AmCham Shanghai’s 2009 China Business Report chronicles the diverse business experiences of American companies in China, bringing to light the many challenges and successes of the past twelve months. The China Business Report is based on the Chamber’s annual business climate survey.

First launched in 1999, it is one of the longest running surveys of American businesses in China and allows AmCham Shanghai to identify trends and strategies of American companies over the past 10 years.

The 2009 survey was conducted online in October and November of 2009, and was sent to AmCham Shanghai’s corporate members, all of whom are U.S.-based companies with operations in China. A total of 369 companies completed the questionnaire, yielding a record response rate of over 25 percent. Companies were surveyed on topics ranging from corporate structure to company performance and plans for future investment.

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2009 CHINA BUSINESS REPORT The American Chamber of Commerce in Shanghai

The primary message of the 2009 China Business Report is one of great optimism. Many American companies in China are reporting profits despite the global downturn and believe business is on track to grow in China amidst a business environment that continues to improve and support expansion.

A challenging 2009 Survey results in 2008 indicated that 2009 was going to be challenging. However, no one could have predicted the economic tsunami that swept the shores of every market in the world, and China has been no exception.

China has seen unprecedented growth over the past decade as GDP has grown four times, from just over US$1 trillion in 1999 to more than US$4.5 trillion in 2008. Foreign investment has climbed from US$39 billion a year to US$92 billion per year. Nearly every Fortune 500 company now has a presence in China and many small- to-mediumsized companies (SMEs) are here as well. By 2007, about 88 percent of respondent companies were

reporting increases in year-on-year revenues.

In 2009, however, that number dropped to 47 percent.

Perhaps more importantly, the number of American companies who saw a decrease in revenue jumped to 39 percent, the largest proportion of companies reporting a revenue drop since 1999. Profitability also took a hit in 2009.

The first time we asked about profitability was in 2002, when 26 percent of companies surveyed said they broke even or had a small loss. In 2009, that figured increased to 36 percent.

It is important to note that, even with a poor economic climate in 2009, 65 percent of responding companies were profitable and, relative to their global operations, China was a bright spot for many companies. A decade ago, 58 percent of those surveyed reported that China margins were lower than their worldwide margins. In 2009, this figure was under 30 percent and more than 40 percent reported that China margins were “higher” or “significantly higher” than worldwide margins.

This is good news for American companies with operations in China that are struggling in other markets harder hit by the economic downturn.

Companies who made the strategic decision to focus on China are reaping the benefits today.

New challenges Companies faced new challenges in 2009. In 2008, American companies were struggling with sharply rising costs ranging from raw materials to human resources and were focused on maintaining or increasing margins. While such cost pressures

remained in 2009, they lessened, as raw material costs exerted much less of an influence on margins.

Top challenges in 2009 mainly centered on sales issues: economies of scale, changes in product mix and changes in market pricing. As demand dropped, companies struggled to keep existing customers and find new ones. Competition from domestic Chinese firms increased steadily from 2008 while competition from foreign firms increased at a slower rate.

A silver lining to the economic downturn was the easing of HR challenges. Each year, AmCham Shanghai asks companies to provide their top business challenges and every year since 2006, they have ranked human resources constraints – specifically the ability to attract and retain talented staff – as the most difficult to overcome.

Companies reported that it was much easier to attract managers and other skilled workers and professionals in 2009 than it was in 2008, with 42 percent reporting having had an easier time attracting managers and executives, a dramatic increase over 2008 when only 20 percent reported improved conditions. Overall, while compensation and benefits management remained an issue, companies indicated that it was easier to manage an employee’s salary expectations in 2009 than it was in 2008.

An ongoing and well-publicized challenge for foreign companies in China has been the protection and enforcement of intellectual property rights (IPR). As in past AmCham Shanghai surveys, companies were asked about the importance of IPR and how they felt about the environment for IPR protection. In 2009, nearly 42 percent said it was “very important” and 26 percent said that IPR protection was “critically important.”

Given the challenges of doing business in China and the uncertain state of the global economy, it would not have been a surprise if companies in China had doubts about the future. This was not the case, however, as nearly half the surveyed companies reported that they expect revenue growth in China in 2010. Even more encouraging, an overwhelming majority of American companies were optimistic about the long-term business outlook – more than 90 percent stated that they

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“

A silver lining to the economic downturn was the easing of HR challenges.”

“

More than 90 percent of American companies stated that they were "optimistic" about the next five years, the highest percentage since 2000.”

were “optimistic” about the next five years, the highest percentage since 2000.

Weathering the storm It is clear that American companies were impacted by the downturn, with over 75 percent of respondents saying that the global economic crisis caused some level of negative impact to their business in China. This trend was supported by the large number of companies that reported a drop in revenues and profits, as both indicators were down from previous years. However, it is important not to lose sight of the fact that overall, American companies are still doing quite well in China.

Furthermore, the data strongly suggests that performance will not slow down in the near future.

When asked to assess 2010 and beyond, respondents were quite bullish, with 82 percent forecasting 2010 revenues to be greater than 2009 and 64 percent planning to increase China investment in 2010 and only 5 percent planning to decrease investment.

The number of respondents making a profit in China in 2009 declined just slightly to 65 percent from 70 percent in 2008, although the percentage of respondents with growing revenue was down much more substantially, from 77 percent in 2008 to 47 percent in 2009. That American companies were able to continue making a profit in China suggests that they were able to adjust costs faster in China than they did in their home markets in order to minimize the effects of the economic downturn. This is reinforced by the fact that nearly 60 percent said home and other global markets were hit harder by the economic crisis than China, and only 10 percent said effects were felt stronger in China than anywhere else.

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In China for the China market In 2009, 59 percent of the American companies surveyed said that their primary strategy in China was to access the domestic China market, up from 39 percent in 2008. This data supports an ongoing trend that American companies in China are focused on serving the growing domestic market in China. At the same time, those in China primarily to export to the U.S. market dropped to 16 percent in 2009 from 21 percent in 2008.

Despite difficulties with revenue growth in 2009, 25 percent of companies surveyed said that they had plans to expand into second- and third-tier cities, down only 5 percent from 2008. Of these, 68 percent said that their major motivation to pursue expansion was to increase market reach. Chengdu was the top city considered for expansion, as it was in 2007 and 2008, followed by Wuhan, Suzhou, Xi’an, and Chongqing. For the first time in the last two years, Tianjin was in the top ten, while Dalian dropped from the second spot in 2008 to sixth this year.

Interestingly, the top business challenges companies had in second- and third-tier cities were the same as those for the rest of China: “human resources constraints,” “inconsistent regulatory interpretation” and “bureaucracy.” In past surveys, the ranking of top challenges varied greatly depending on whether a company was located in a first-tier city, like Shanghai or Beijing, or in a second- or third-tier city like those listed above.

Shared characteristics of success Despite the economic crisis, a strong majority of surveyed companies were profitable in 2009, a decrease of only 5 percent from 2008. What characteristics did these companies share? An analysis of the 2009 survey data identified the following five factors to be significantly associated with profitable companies: 1. Size – especially those with more than US$10 million in revenue.

2. Experience – especially those with more than five years in China.

3. China revenue relative to global revenue – those companies who derived more than 5

percent of global revenue from China were significantly more profitable.

4. China priority – those companies that set China as their #1 priority in global investment plans were significantly more profitable.

5. China sales footprint – those companies with sales offices in two or more cities in China were significantly more profitable.

The data suggests that the China market takes some getting used to. Lessons learned early-on can help prevent mistakes, which results in better performance as a company continues operations in China and grows in size. The data also suggests that regardless of how long a company has been operating in China, strategic sales expansion across the breadth of the China market, as well as greater corporate commitment to China from global headquarters, will also support good business performance.

Another way to account for performance in the

down economy is to look at how the crisis affected China operations relative to worldwide operations.

The data showed that companies less impacted by the economic crisis in China versus other global markets were more likely to be among those that produce in China to serve the China market. This confirms that focusing on the China market in 2009 was a successful strategy for companies to cushion the blow of the worldwide economic downturn.

For many companies around the world, 2009 has been “the worst of times” and 2010 is only expected to improve slightly, if at all. The 2009 China Business Report reveals a vastly different outlook for American companies in China, and while the current economy may not be “the best of times” as in recent years, many American businesses in China are faring well and looking ahead to further growth.

Please see the 2009 China Business Report for the complete analysis. Visit www.amcham-shanghai.org for more information or to get your copy of the report.

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Focusing on the China market in 2009 was a successful strategy for companies to cushion the blow of the worldwide economic downturn.”

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C OV E R S TO RY

BY JUSTIN CHAN

The State of Relations The stage is set for the U.S.-China relationship to return to the forefront in 2010, as the United States struggles to revive its domestic economy while China is almost back on track. In light of the mid-term elections in the U.S. in November, experts anticipate U.S.-China ties to be a potential flashpoint. Still, as the two leading economies in the world, the two countries must find a way to continue working together to solve not just bilateral frictions, but regional and global issues.

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t the United Nations Climate Change Conference in Copenhagen last December, the United States and China squared off, as the world’s two largest polluters, over binding targets for greenhouse gas emissions reductions and whether China would permit verification of its cuts.

Each country was insistent on its position, with China opposing mandatory emissions cuts and international scrutiny over actual reductions while also maintaining that developed countries had an obligation to provide financial support to developing countries’ climate change efforts.

In the end, China agreed to outline its reduction commitments by the end of January and to share details on its reduction achievements every two years. A proposed 50 percent cut in greenhouse gas emissions by 2050 that was in previous drafts of the agreement was removed. The deal also included a provision to attempt to limit the increase in global temperatures to two degrees Celsius, although specifics regarding how this would be achieved were not documented.

Meanwhile, the United States agreed to a clause that calls for developed nations to provide US$30 billion in aid to developing countries, as well as a goal of channeling

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THE OFFICIAL WHITEHOUSE PHOTOSTREAM

DEALMAKERS: U.S. President Barack Obama and Secretary of State Hillary Clinton meet with leaders from China, India, Brazil and South Africa in Copenhagen last December.

US$100 billion per year to poor nations by 2020 to assist with combating climate change.

While the final Copenhagen Accord was not the aggressive, binding agreement that many had hoped for, many commentators argued that the deal, largely brokered by U.S. President Barack Obama and Chinese Premier Wen Jiabao, was the starting point needed to ensure future success because it included the world’s major emitters, China, the United States and India.

“What is important is that you now have China and India among the world’s largest emitters of greenhouse gas emissions agreeing that it is time to do something,” said Carol Browner, the White House environment and climate change adviser.

More importantly, the accord marked an instance where China partnered with the United States to help shape the agenda on a global issue.

For some time, there have been calls from the U.S. for China to take a global leadership role that is commensurate with its global economic clout, with some going as far as calling for a dedicated Group of Two (G-2) relationship whereby the two countries could consult and solve global issues together.

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Preventing a global recession requires the two countries to join forces, said Robert Zoellick, president of the World Bank, and Justin Yifu Lin, the World Bank’s chief economist. “For the world’s economy to recover, these two economic powerhouses must cooperate and become the engine for the Group of 20,” they wrote. “Without a strong G-2, the G-20 will disappoint.”

But in order to be effective in tackling major global problems, the United States and China must first continue furthering the U.S.-China relationship and address many of the issues that exist there, among others, trade and commercial ties, currency regulation, human rights and food and product safety.

By addressing these bilateral issues, the two countries’ ability to take on multilateral issues will greatly improve. In light of the ongoing global economic recovery and the spotlight on climate change issues, 2010 promises to be an important year for the U.S.-China relationship.

Platform for cooperation At the start of the first session of the Strategic and

Economic Dialogue (S&ED) between the U.S. and China held in Washington, D.C. last July, Obama noted that “the relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world.”

The S&ED, a revamped version of the Strategic Economic Dialogue that began under the Bush administration, expands beyond economic topics to cover foreign policy issues such as nuclear nonproliferation and climate change.

The U.S. government clearly recognizes the importance of engaging China as a partner to solve global issues, and the S&ED is the primary mechanism to push cooperation. Other platforms include the regular Joint Commission on Commerce and Trade and several inter-agency exchanges. Co-chaired by Secretary of State Hillary Clinton and Secretary of the Treasury Timothy Geithner on the U.S. side and State Councilor Dai Bingguo and Vice Premier Wang Qishan on the Chinese side, the S&ED brings together more than 25 cabinet-level officials from each side for faceto-face meetings.

The Strategic track covers four broad areas: bilateral relations, international security issues, global issues and regional security and stability issues. Also falling under the Strategic track are topics such as climate change and clean energy.

Under the Economic platform, the key issues are: economic recovery, market-oriented financial reforms, trade and investment, and international financial infrastructure.

“The S&ED served as a prime opportunity for our senior officials to get to know their Chinese counterparts, a necessary first meeting that allows for more effective engagement on issues over the four years,” said David Shear, deputy assistant secretary for East Asian and Pacific affairs at a House Committee on Foreign Affairs hearing.

“Having our Chinese counterparts understand the Administration’s positions and priorities was one of the most valuable results of the Dialogue.”

Key outcomes from the first round of the S&ED included a memorandum of understanding on climate change, energy and the environment that elevates the importance of environmental issues and enhances cooperation on clean energy, a reaffirmation of the importance of the SixParty Talks aimed at denuclearizing the Korean Peninsula, a pledge to increase military-tomilitary exchanges, as well as China’s commitment to economic policies that will balance growth and

boost domestic demand, the institution of financial sector reforms, and the opening up of the Chinese services market.

“The United States and China may not always agree on economic issues, but the S&ED provides a platform for narrowing our differences and reinforcing our common interests, both bilaterally and in setting the multilateral economic agenda,” said Geithner during the Dialogue. The second round of the S&ED will be held in Beijing in July.

The trade debate As two of the largest and most important economies in the world, the state of commercial ties between the United States and China can impact the global economy. But bilaterally, concerns over the massive trade deficit are pervasive in the U.S. and in the past, anger about the perceived artificially low value of the Chinese currency led to proposed legislation calling for a 27.5-percent tariff on all Chinese imports to the U.S., despite the fact that the U.S. Treasury’s annual Report to Congress on International Economic and Exchange Rate Policies has still yet to designate China as a currency manipulator.

But in light of the current global economic recovery, experts note that it is not only important to have a recovery of growth, but to reshape the composition of growth. “Both the United States and China need to make efforts to level their domestic demand and savings rates. Otherwise, it would be difficult to resolve the trade imbalance,” said Zhou Xiaochuan, governor of the People’s Bank of China, the central bank.

China’s total trade surplus for 2009 is expected to be half of what it was in 2007; meanwhile, the U.S. trade deficit is already half where it was four years ago, according to the Peterson Institute for International Economics.

Today, China has emerged as a top destination for U.S. exports. When China joined the World Trade Organization (WTO) in 2001, U.S. exports to China totaled US$19 billion. By 2008, the value of U.S. goods exported to China grew 270 percent to US$70 billion, according to United States Trade Representative (USTR) calculations. Despite the overall decline in global trade in 2009, China remained the United States’ third largest market for exports behind neighboring countries Canada and Mexico, and the fastest growing market for goods “made in the U.S.A.” Even with such rapid growth in exports to

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The United States and China may not always agree on economic issues, but the S&ED provides a platform for narrowing our differences and reinforcing our common interests, both bilaterally and in setting the multilateral economic agenda.”

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There is growing concern that the pace of economic reform in China appears to have slowed in key sectors, and there are growing indications that China’s movement toward a market economy has stalled.”

China, the United States could theoretically be doing better. According to Ministry of Commerce statistics, the European Union accounted for 11 percent of China’s total imports between 2001 and 2007, versus just 7 percent for the United States.

Nonetheless, the USTR points to several issues where Chinese government intervention could hamper the substantial progress made in liberalizing the China market since 2001. The USTR’s 2009 Report to Congress on China’s WTO Compliance noted that “evidence of a possible trend toward a more restrictive trade regime appeared most visibly in an array of Chinese measures over the preceding two years, signaling new restrictions on market access and foreign investment in China.”

The USTR cites policies such as the use of value-added tax rebates to control exports, unique Chinese national standards that are incompatible with international standards, biased or specific “Buy China” procurement policies, and significant restrictions on foreign investment in China that could result in trade distortion.

A major U.S. industry association is cited as saying that there is “growing concern that the pace of economic reform in China appears to have slowed in key sectors, and there are growing indications that China’s movement toward a market economy has stalled.”

But given that these concerns are cited in an annual report covering China’s overall WTO compliance, resolving these issues would not only be helpful to the U.S. economy, but could benefit the global economy as a whole.

“The U.S.-China relationship must focus increasingly in the future on the wide range of global economic issues rather than the narrow bilateral frictions that we have traditionally emphasized in the past,” said Fred Bergsten, director of the Peterson Institute for International Economics.

Risky relationship Despite Obama’s vision for transcendent U.S.China ties this century, some are cautious about the state of play in 2010. According to global political risk research and consulting firm Eurasia Group, the U.S.-China relationship takes top spot in its annual Top Risks ranking of geopolitical issues.

While cementing the U.S.-China relationship’s position as possibly the most important bilateral relationship globally, Eurasia Group asserts that despite an understood mutual interdependence and a desire to maintain strong ties, rising tensions could reverberate globally.

“Simply put, 10 percent unemployment in the United States plus 10 percent growth in China THE OFFICIAL WHITEHOUSE PHOTOSTREAM

HAND IN HAND: As Shanghai moves to become an international finance hub, it is also aiming to become an international shipping center.

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does not equal 20,” write Eurasia Group President Ian Bremmer and Head of Research David Gordon in a client note. “There’s been an enormous effort by the leadership of both governments to keep a functional U.S.-China relationship in place… but with the world’s principal actors under less immediate strain, there’s less pressure to keep up appearances. This year, the gloves start coming off.”

China will not take the active and assertive international role that the U.S. desires, while Beijing will not find the U.S. as attractive an economic partner as in years past, according to Eurasia Group. As a result, deterioration in ties will play out over the issues of “nuclear proliferation, reform of rules of the road for international trade and commerce, cyber-security and security in Afghanistan, Iraq and beyond.”

Meanwhile, the U.S is not welcoming China’s ongoing recovery model of using stimulus to steadily boost domestic demand while also shoring up its flagging export sector. Some protectionist policies against Chinese exports have already been implemented, such as a 35 percent tariff on Chinese-made tires last September and recent duties on Chinese steel-piping imports, with more potentially on the way, setting the stage for possible escalation of protectionist measures from both sides.

With mid-term elections coming up, Eurasia Group expects the U.S.-China relationship to be highly politicized on Main Street across the United States. Despite Obama’s public assurances to Chinese President Hu Jintao that the United States in fact welcomes China’s rise, public opinion in the United States may be different, where China’s rise is assumed to be faster, or even complete.

According to a 2009 poll by the Pew Research Center and the Council on Foreign Relations, 44 percent of surveyed Americans named China as the world’s leading economic power, while just 27 percent named the United States, a reversal from 2008, when 41 percent of the public said the U.S. was the leading economic power while only 30 percent named China.

As the global financial crisis took its toll on the U.S. last spring, China publicly expressed concerns over the soundness of its U.S. treasury holdings and suggested the global economy was too reliant on the U.S. dollar.

“Internal debates [in China] are raging over the resiliency of U.S. economic power and the appropriate course for 2010 economic policies,” says Nicholas Consonery, an Asia associate with

Eurasia Group. A relatively stronger China coupled with a perceived weaker United States “has made the Chinese more assertive in emphasizing their interests – particularly on the value of the dollar and the soundness of the U.S. fiscal condition – and in noting where intractable issues exist.”

Some experts point to Copenhagen as China’s most recent demonstration of its assertiveness. For a round of meetings designated for heads of state, China sent Deputy Foreign Minister He Yafei; at the final meeting where an accord was finally reached, it was Premier Wen, not President Hu, meeting with President Obama and other state leaders.

Nonetheless, the interdependency between the United States and China is clear, and while there may be shifts in the state of the bilateral relationship, the fact of the matter is that the United States and China are very closely linked and must find a way to work together on global and regional issues.

“We no longer have the luxury of not getting along with China,” said John Podesta, president and chief executive officer of the Center for American Progress, a Washington, D.C.-based think tank and former White House Chief of Staff under President Clinton. “We cannot meet today’s most pressing global challenges, be they climate change, nuclear proliferation, grinding poverty or deadly viruses, without its pivotal participation – not only in implementing solutions, but also in devising them.”

Justin Chan is Editor-in-Chief of Insight. He can be contacted at justin.chan@amcham-shanghai.org.

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PROTECTIONIST POTENTIAL: In September, President Obama opted to impose a 35 percent tariff on tires from China.

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INSIDE AMCHAM FROM THE CHAIRMAN

The Year of the Tiger

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appy New Year and welcome back from what I hope was an enjoyable holiday season spent with family and friends.

2010 is the Year of the Tiger and Chinese tradition indicates those of us born in the Year of the Tiger possess a certain amount of bravery, every bit of which is going to be required for me to wear red underwear!

Not only is it the year of the Tiger, 2010 is the year of the Expo.

As many of you know, AmCham Shanghai is a sponsor of the USA Pavilion at the Shanghai World Expo. The Expo will be a cornerstone of AmCham Shanghai’s activities in 2010. The city of Shanghai is going all out to prepare for what will be the largest world exposition ever, spending more than US$45 billion to transform itself. The Expo will host pavilions from more than 200 countries and attract 70 million visitors to Shanghai including leaders in politics, culture, society and business.

Robert Roche Chairman AmCham Shanghai

Not only is the year of the Tiger, 2010 is the year of the Expo.

There will be a multitude of businesspeople coming to the Expo to either start or deepen their business relationship with China. As the USA Pavilion’s Official Business Chamber Partner, AmCham Shanghai will act as the men kou (门口) or gate through which these businesspeople will pass. The Chamber will develop business programming that will enable members to capitalize on their Expo experience.

In addition to maximizing the benefits of the Expo, I will focus on three key areas during my tenure as Chairman.

First, being a lifetime “serial” entrepreneur, I want to focus on the bottom line for our members and ensure that the economic benefit of being a member of AmCham Shanghai far outweighs the cost of the membership dues.

Second, I plan to increase opportunities for interaction among the Chamber’s diverse membership.

And finally, I want us to take a leadership role in working to enhance the global competitiveness of the United States. AmCham Shanghai, situated at the world’s commercial, industrial, financial and innovative center, is well-positioned to lead this effort.

The Tiger is the third sign in the Chinese Zodiac cycle, and it is a sign often associated with bold action. I look forward to working with all of you to seize the unique business opportunities the Expo will bring and to boldly advance the great progress the Chamber has made over the past 30 years.

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

Highlights from the December 2009 Board of Governors Meeting Membership The Board approved 64 new member applications.

Finance Report

Helen Ren, Director of Finance & Administration, presented an update on the Chamber’s year-to-date financial performance.

With strong cost controls, financial performance remained on target with budget projections.

USA Pavilion Update

Mark Germyn, chief operating officer of the USA Pavilion at the 2010 Shanghai World Expo, presented an update on the status of preparations for opening day. He reported that construction of the pavilion is ongoing and the development of programming and operations procedures has begun.

Fundraising is in the final stages and programs for volunteers are under development. A formal sponsorship agreement between AmCham Shanghai and the USA Pavilion was also finalized; AmCham Shanghai will also be designated the Official Business Chamber Partner of the pavilion.

AmCham Shanghai Charity Gala

The President announced that the 2010 AmCham Shanghai Charity Gala will be held on April 10, 2010, and will be cosponsored by the American Women’s Club.

Certificates of Appreciation

The President thanked the Board of Governors for their service to AmCham Shanghai over 2009, and presented each Governor with a certificate of appreciation. The Chairman also thanked the Governors for their support and leadership over the past two years.

IN ATTENDANCE Governors: Pierre Cohade, Norwell Coquillard (Chairman), John Grobowski, Minda Ho, Ted Hornbein, Murray King, Diane Long and Chris Wurzel.

Attendees: David Basmajian, Jeffrey Bernstein, Phil Branham, Justin Chan, Siobhan Das, Brenda Foster (President), Dean Ho, Jay Hoenig, John Leary, Helen Ren, Robert Roche, David Turchetti, Kevin Wale, Linda X. Wang and Jessica Wu. REGRETS Eddy Chan, David Gossack, James Rice and Matthew Targett.

AmCham Shanghai 2009 Government Appreciation Dinner

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.S. Ambassador to China Jon M. Huntsman, Jr. was joined by the AmCham Shanghai Board of Governors, AmCham Shanghai President Brenda Foster and more than 400 chamber members to express appreciation for the Shanghai municipal government’s efforts to creating a steadily improving business climate for American businesses in Shanghai.

AmCham Shanghai was honored to welcome Vice Mayor Tang Dengjie, Deputy Secretary General of the Shanghai Municipal Government Sha Hailin, Chairman of Shanghai Municipal Government Foreign Affairs Office Li Minjun, and more than 100 Shanghai officials in attendance at the event.

AmCham Shanghai was also delighted to host the Ambassador’s wife Mary Kay Huntsman and his ten-year-old daughter Gracie Mei, both of whom made their Shanghai debut at the event.

The event highlighted the ongoing commitment of the American business community to Shanghai and the important role American companies play in Shanghai’s economic development. In 2008, two-way trade between the U.S. and Shanghai was US$53 billion and cumulative American direct investment in Shanghai reached US$9.5 billion.

American companies in Shanghai have played a key role in supporting the upcoming World Expo by raising funds to build and operate the USA Pavilion. Leaders discussed ways in which the American business community can continue to work with the Shanghai Expo Bureau and USA Pavilion organizers to support a successful Expo next year.

AmCham Shanghai board members also expressed their interest in supporting Shanghai’s ambitious development goals and establishing an enhanced partnership with the municipal government as the city sets its sights on becoming an international trading center by 2020. (Dec 1)

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AmCham Shanghai 2009 Government Appreciation Dinner The American Chamber of Commerce in Shanghai would like to thank the following sponsors for their generous support of the 2009 Government Appreciation Dinner.

Platinum Sponsors

Corporate Table Sponsors

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WANG GANGFENG

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AmCham Shanghai 2009 Education & Training Conference AmCham Shanghai’s 2009 Education and Training Conference,WorldClass Training: Defined, brought together top human resources experts and practitioners to discuss the primary challenges of their field. The distinguished roster of speakers emphasized company training expectations, organizational considerations and frameworks for implementing changes in behavior. Participants also divided into smaller workshop groups where they discussed various approaches to effective and efficient training.

While a general consensus placed ownership of responsibilities and outcomes as the keystone to good training, much debate centered on how to appropriately integrate this concept into a company’s structure.

Lorna Davis, vice president and managing director of Kraft Foods China, stated that training in a company is not strictly an HR function – it is a “non-negotiable” element of company operations that allow for both consistent delivery and progress.Testing must be an integral part of training programs to ensure that employees do not just attend a session, but engage in and understand the training in order to apply it to their work.

Grant Mosey, vice president and director of Coca-Cola China’s CocaCola University, agreed that aligning employee and employer objectives is a key end-goal of development programs. Mosey urged “organizational readiness” or a willingness and capacity to change and adapt. In discussing the evolution of Coca-Cola’s development programs, Mosey advocated a company structure that facilitates the rapid identification and amelioration of training gaps both unique to company divisions and common across company functions. He stressed regular market and company needs analysis that takes into account both current and desired business capacity.

A debate between human resources experts Eric Carlson, competency development director, DuPont China, and Marjorie Woo, CEO, LMI China, ranked returns on investment as the most important business consideration for efficient and effective training programs, while many conference presenters recognized on-the-job training and guided project management as practical and economical ways of developing employee skills and confidence. (Dec 10)

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CONFERENCE & AWARDS

AmCham Shanghai 2009 Corporate Social Responsibility Conference and Awards

Themed “CSR for Any Economy - Solutions for Businesses of Every Size,” AmCham Shanghai’s 2009 CSR conference aimed to facilitate idea exchanges on best practices that are applicable to companies of all sizes. AmCham Shanghai also recognized exemplary CSR programs with awards for company and individual efforts as well as collaborative initiatives between companies and non-profit organizations.

Prominent among challenges cited during the day’s workshops was the importance of quantitative measurements in business and the unquantifiable nature of CSR’s impacts. Keynote speaker Ernst Coppens, CFO of Bayer Greater China, noted that although the effects of CSR are intangible, they are nonetheless integral to the success of businesses. Likening CSR to brand equity, Coppens spoke of the positive rippling effects both internally, in corporate and employee morale, and externally, in embedding a business in the countries and communities of its clients.

Workshops on effective volunteering programs addressed the social capital advantages gained in the workplace as employees engage with each other and their communities. Healthcare consultant Cindy Keung noted that in addition to the direct effects of increased cooperation, employee satisfaction and workplace morale, greater workplace cohesion can translate to both greater productivity and lower employee turnover. Yet, as noted by Rebecca Branham, managing director of B&L Group, CSR is not exclusive to large companies with the resources to devote a department to the purpose. Even a company of 20 employees can engage with people and both influence and impact their communities – the key is the mindset and the personal connection.

Likewise, a panel of senior executives noted that it is important to for companies to engrain CSR into their business identities.

The panel featured Jeremy Burks (Dow Corning), Ernst Coppens (Bayer Greater China), Jun Ge (Intel China), and Brenda Lee (Coca-Cola China). Ge emphasized that CSR can and perhaps should be approached as a business itself; it must be integrated into the day-to-day operations of a company and be viewed as a long term strategy. He also stated that Intel’s desire to be both a technological leader and a social leader make educational programs and technology access in rural areas a logical CSR extension. For Coca-Cola, Lee noted that the company’s dependency on water for its products prompted its action on water stewardship, engaging with the World Wildlife Foundation to conserve some of the world’s most important freshwater resources, including the Yangtze and Mekong Rivers. (Nov 19)

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Event Highlights

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RECENT AMCHAM HAPPENINGS

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CSR Committee NGOs Meet Businesses To encourage partnerships between the business and non-profit communities, AmCham Shanghai’s Corporate Social Responsibility Committee recently hosted its biannual “NGOs Meet Businesses” event. Representatives from five NGOs shared their programs, which covered a range of projects both in Shanghai and in China’s rural areas.

CereCare Wellness Center Shanghai is a residential facility offering physiotherapy and education to children with cerebral palsy; it currently treats 31 children between the ages of 2 and 9. Joey Ou, vice president of the Center’s Executive Committee, shared CereCare’s need for volunteers, tuition sponsorship and renovation project funding. She revealed the Center’s future plans to establish CereCare facilities in China’s rural areas and to build a new residence which will house and treat 150 people.

Peilin Cheng, senior program manager with Heifer International, explained how Heifer helps individuals achieve sustainable livelihoods by providing livestock and training that allow them to increase their incomes by an average of 30 percent over four years. To date, Heifer China has implemented 117 projects across 16 provinces and assisted 68,000 families. It is currently seeking corporate volunteers to visit project site villages, assist in fundraising and donate to Sichuan earthquake rehabilitation projects.

Environmental NGO Marinedream runs online programs to educate children about pollution, climate change and biodiversity. One game featured on its website allows kids to donate trees when they achieve a certain score; companies can sponsor the trees and in turn receive online acknowledgement. Further initiatives include shark protection, beach cleanups and a program aiming to encourage 25 restaurants in Shanghai to serve sustainable seafood on their menus. In 2010, Marinedream will launch a Yangtze River Project where its founder Julie Adams and crew members will travel down the Yangtze and encourage 280 schools, local government and media to contribute to environmental protection.

Shanghai Jingguang NGO Service Center cooperates closely with the Jing’an local government to support grassroot non-profits with volunteer training and management, registration issues, running and publicizing activities and identifying corporate sponsors. Cherry Allsop, Project Manager, introduced some of the NGOs that Jingguang supports, including Green Ribbon, which runs confidence boosting activities for migrant children; Smiling Library, which provides libraries for underprivileged youth; and Grassroots Community Association, which runs community environmental protection, legal services and educational IT programs.

Shanghai Young Bakers is an innovative organization that provides vocational training in traditional French baking to Chinese orphans between 18 and 22 years of age. Celine le Cotonnec, project coordinator, said SYB is open to any kind of assistance companies can offer – weekend activity volunteers, legal advice, in-kind support for events, partners for logistics and food ingredients, and sponsors to support students’ tuition and build a new baking center. (Dec 7)

A panel of China market veterans reviewed the findings of the 2009 China Business Report and discussed what the results mean for American companies with operations in China. Brenda Foster, President of AmCham Shanghai, moderated the panel discussion which included J. Norwell Coquillard, 2009 Chairman of AmCham Shanghai and most recently president of Cargill Investments in China, Pierre Cohade, President, Asia-Pacific Region of the Goodyear Tire & Rubber Co., Michael Klibaner, National Director and Head of Research at Jones Lang LaSalle, Shanghai, and Kent Kedl, General Manager of Technomic Asia. (Dec 9) For more information on the 2009 China Business Report, please turn to page 18.

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ZHU XIAOCI

2009 China Business Report Launch

INSIDE AMCHAM

AmCham Shanghai Signs Sponsorship Agreement with the USA Pavilion AMCHAM SHANGHAI

Marketing Committee Is Bling Still In? The Evolving Chinese Luxury Market

As the Official Business Chamber Partner, AmCham Shanghai will host a series of business-focused programs during the 2010 Shanghai World Expo.

On December 8, AmCham Shanghai signed a sponsorship agreement with the USA National Pavilion to advance its active support of America's participation in the 2010 Shanghai World Expo. As part of the agreement, AmCham Shanghai was also named the Official Business Chamber Partner of the USA Pavilion. Moving forward, AmCham Shanghai will develop a series of programs to facilitate business between AmCham Shanghai members and visiting businesspeople and government officials.

AmCham Shanghai programming will include conferences, seminars, training sessions, government roundtables and a CEO speaker series.

Since 2007, when Shanghai was selected to host the Expo, AmCham Shanghai has been an active participant in promoting the importance of U.S. participation in the 2010 Shanghai World Expo and sponsorship of the USA Pavilion. The Chamber has focused on connecting members who wish to contribute to the Pavilion with organizers and providing logistical and communications support to the USA Pavilion team. The agreement, signed by AmCham Shanghai Chairman J. Norwell Coquillard and USA Pavilion President Nick S. Winslow, was also cosigned by USA Pavilion COO Mark Germyn.

With companies increasingly looking to China for future growth, participation in the Shanghai World Expo is an opportunity not only to showcase American business, culture and values but an opportunity for companies to connect with millions of Expo visitors in the world's fastest growing market. AmCham Shanghai looks forward to continuing its work with the USA Pavilion team to ensure a successful event in 2010.

China is already a major luxury consumption market and many marketing experts believe the pace of luxury goods consumption in China will continue to increase. The 2009 China Luxury Forecast, a study conducted jointly by Ruder Finn Asia and Albatross Global Solutions, interviewed 1,000 luxury consumers in China with an average annual income of RMB 240,000. By analyzing consumer confidence, purchasing power, purchasing behavior, consumer intention, as well as the information channels that influence decision making, the report aims to help marketers better understand the prevailing behaviors among Chinese consumers and foreseeable trends in luxury consumption over the next year.

AmCham Shanghai’s Marketing Committee recently held an event that highlighted findings from the study. Speakers JeanMichel Dumont, chairman of Ruder Finn Asia, Christophe Caïs, executive director of Albatross Global Solutions, and Dr. Pierre Xiao, professor at Fudan University’s School of Management, explained how China makes up 6 percent of luxury sales in the world, yet only 15 percent of luxury stores open in China. In general, luxury consumers in China tend to be much younger and more internet savvy compared to their counterparts in the rest of the world, said the speakers. As a result, this has a large impact on advertising and marketing channels luxury brands utilize, and more are turning to e-media platforms to strengthen the “word-of-mouth” effect that has become crucial for luxury brands to enhance and maintain their reputation.

(Nov 23)

Events highlights written by Anna Bartram, Chantal Grinderslev and Brian Seifert.

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DEAL OF THE MONTH IMAGINECHINA

China and ASEAN adopted a Free Trade Agreement to create the world's largest trade bloc.

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Regional Free Trade

fter 19 years of discussions, China and the Association of Southeast Asian Nations (ASEAN) officially adopted a Free Trade Zone on January 1, 2010. The Free Trade Agreement (FTA) between China and the ten Southeast Asian countries that make up ASEAN creates the world’s largest trading bloc by population, covering 25 percent of the world’s population, and the third largest in terms of trading volume. China-ASEAN trade increased six-fold over the past decade, totaling almost US$200 billion last year and accounting for 10 percent of China’s total trade, making ASEAN China’s fourth largest trading partner. The FTA is expected to further boost regional growth in the short term and increase trading efficiencies and production levels in the long term.

Phased tariff reductions on over 7,000 traded goods began in 2005. Under the FTA, China, Indonesia, Thailand, the Philippines, Malaysia, Singapore and Brunei will eliminate nearly all tariffs in 2010. The four newest ASEAN members – Cambodia, Laos, Vietnam and Myanmar – will gradually decrease tariffs until adopting a full zero-tariff policy by 2015.

Despite provisions to phase in tariff reductions, industry sectors in some nations have advocated further delays of duty decreases. Notably in Indonesia, ASEAN’s largest economy with 40 percent of the ASEAN population, the textile, farming and steel industries lobbied to delay the FTA’s implementation, citing concern for the competitiveness of the country’s domestic sectors.

The Indonesian Textile Association estimates that

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domestic textile market share could be halved by cheaper Chinese imports. Free trade supporters assert that economic hardships in the short term will catalyze market and production shifts to optimize comparative trading advantages.

As economies adjust to produce and develop a niche advantage in goods and services, domestic economies will better complement each other and improve trade efficiencies, making the region more competitive in global markets.

The FTA draws economic potential from complementarities, such as China’s need for ASEAN raw materials and ASEAN desires for cheap, daily use items and electrical and mechanical goods. As trade liberalization reduces prices, Chinese enterprises may move factories abroad to take advantage of lower costs. On the other hand, companies may also be encouraged to retain economically beneficial value-adding production processes within China’s borders, merely importing cheaper raw materials from abroad.

Some analysts note that the FTA could offer China access beyond the ten ASEAN member countries. As China makes inroads to Malaysia, an emerging hub of Islamic finance, links with Islamic interests and nations, as well as political influence, are anticipated to increase as well. The possibility of stronger competition from Southeast Asian agricultural goods in China’s market has already been raised in India. As the FTA raises tensions between international economies and domestic politics, most laud the efforts for regional integration, although the depth and duration of the FTA’s impact remains to be seen.

– Chantal Grinderslev

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