Insight Magazine January 2013 Issue by The American Chamber of Commerce in Shanghai

January/February 2013

2013 Previewing the

Year of the Snake Our special guest writers – including Derek scissors, Nicholas lardy and Tom Doctoroff – offer insightful analyses on bilateral relations, china’s economy and consumer trends in the coming year

ExclusivE

Gary locke visits Amcham shanghai U.S. ambassador talks to Insight’s David Basmajian about U.S.-China relations and his top priorities for the year ahead

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INsIGht JANUARY/FEBRUARY 2013

the Journal of the american Chamber of Commerce in shanghai

AmChAm ShANghAI vP oF PRogRAmS & SERvICES

scott Williams

vP oF ADmINISTRATIoN & FINANCE

F e at u r e s

helen ren DIRECToRS

WOrKING IN ChINa

For Some, Glass Ceiling Comes Early

By Bob Fonow

A successful career doesn’t necessarily ensure lifelong success in China, argues an executive.

ISToCKPhoTo

PRESIDENT

Brenda Foster

BUSINESS DEvELoPmENT & mARKETINg

Patsy Li

CommITTEES

stefanie myers INSIghT EDIToR-IN-ChIEF/ CommUNICATIoNS & PUBLICATIoNS

David Basmajian

EvENTS

Jessica Wu govERNmENT RELATIoNS & CSR

steven Chan

INterVIeW

Gary Locke Visits AmCham Shanghai By David Basmajian The U.S. ambassador to China discusses U.S.-China relations and much more during an exclusive Insight interview.

mEmBERShIP & CvP

Kirt Greenburg

INSIghT

22 UFC and China

XINhUA

SmE CENTER

SANDS ChINA

Linda X. Wang

sPOrts BusINess

By Ryan Balis

A senior executive at the Ultimate Fighting Championship says China has huge market potential.

mANAgINg EDIToR

Bryan Virasami SENIoR ASSoCIATE EDIToR

erika Wang

SENIoR CommUNICATIoNS ASSoCIATE

ryan Balis DESIgN

alicia Beebe LAYoUT

tina tian

26 Special 2013 Preview COVer stOrY

See what our six guest writers say about bilateral relations, China’s economy and consumer trends.

PRINTINg

mickey Zhou Snap Printing, Inc.

INSIghT SPoNSoRShIP (86-21) 6279-7119 ext. 5667 Story ideas, questions or comments on Insight: Please contact David Basmajian (86-21) 6279-7119 ext. 8066 david.basmajian@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.

I N s I G h t s ta N D a r D s

5 News Briefs

12 Manager’s Notebook

amCham shaNGhaI IN PICtures

Highlights from December

50 What’s on Your 2013 Reading List? eXeCutIVe reaDING rOOm

INsIDe amCham 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

41 Board of Governors meeting 46 Government relations 47 Committee highlights

CovER ILLUSTRATIoN BY TIAN ChI

Editor's note

he thing about the Year of the Snake is that, for the most part, snakes are scary. The team here at Insight had a tough time coming up with cover art that wasn’t threatening to leap off the page at unsuspecting readers. But maybe an intimidating cover is appropriate given the issues that we’ll be facing in 2013. In this preview issue, we invited China watchers and industry experts to give us their predictions for the coming year. To be honest, it turned out to be a little scary! Tom Doctoroff tells us that developing a vibrant consumer market in China, important to China’s and the world’s economic future, will depend on the new leadership making bold, “farsighted” reforms. Derek Scissors of The Heritage Foundation remarks that for the U.S. to have an effective foreign policy in Asia, we have to get our fiscal house in order. Nicholas Lardy of the Peterson Institute notes that while most in China know reform is needed, increasingly entrenched and powerful vested interests and a weak commitment to economic reform stand in the way. The South and East China seas? Stephanie Kleine-Ahlbrandt of ICG identifies formidable domestic challenges and a new leadership as reasons why China’s current foreign policy path is likely to continue. It looks like leaders on both sides of the Pacific have their work cut out for them in 2013. If after all this you’re looking for reasons to

David Basmajian editor-in-chief/ Director Communications & Publications

President Obama with President Hu in China

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be optimistic, take a look at my interview with U.S. Ambassador to China, Gary Locke, on page 18. Locke believes ties between the U.S. and China are “deep-rooted and strong, despite the occasional disagreements.” He believes the two countries are ever more interconnected. The ambassador notes that U.S. exports to China support 800,000 American jobs and that U.S. investment in China and U.S.-China trade support several million Chinese jobs. Chinese investment in the U.S., which is growing at a rapid clip, will take that interconnectedness to the next level. And finally, the U.S. and China have never been more engaged. Locke cites the 12 meetings Obama had with Hu. Expect that to continue with Xi. Secretary Clinton made seven visits in four years. One hopes a Secretary Kerry would be at least as busy. And the U.S. government is said to have more than 60 ongoing dialogs with China. Perhaps momentum, if nothing else, will keep us moving forward. If you’re looking for something else to look forward to in 2013, consider AmCham Shanghai’s rollout of our digital platform. If all goes as planned, you may be reading this column on your iPad after downloading the new Insight app. Other Chamber publications will be issued as ebooks. And finally, a new AmCham Shanghai website will be launched in early spring 2013. Enjoy, and have a great 2013!

IMAGINE CHINA

News

n ne ew ws s b br r ii e ef fs s

CHINA BUSINESS

Tmall.com, Taobao.com business top RMB1 trillion Turnover of major Chinese online shopping platforms Tmall.com and Taobao.com surpassed RMB1 trillion (US$160.5 billion) as of the end of November 2012, according to e-commerce platform provider Alibaba Group. Clothing and 3C digital products (computers, communication and consumer electronics) were the top preferred consumer products, accounting for 30.3% and 18.6% of the total turnover, respectively. Consumers aged between 25 and 35 contributed to 59% of total turnover. Alibaba split Taobao into three separate companies in 2011: Taobao, a C2C online shopping destination, Tmall, a B2C online marketplace for brandname goods, and eTao, a shopping search engine. Transaction volume on Taobao and Tmall totaled about RMB630 billion in 2011.

China Southern buys A330s China Southern Airlines Co., the country’s largest carrier by fleet size, agreed to buy 10 A330-300 aircraft from Airbus, a unit of European Aeronautic Defence and Space Co. N.V. (EADS), for about US$1.9 billion. China Southern said in a statement that the new aircraft will be delivered from 2014 to 2016. Though the company did not disclose the cost of the purchase, it said Airbus had granted it “certain price concessions.” The catalogue price of one A330-300 plane is US$188 million, but airlines usually pay a lower price for large orders. The deal came after Shanghai-based China Eastern Airlines Corp. said in November it ordered 60 A320 jets for about US$5.4 billion to boost its domestic service.

72-hour visa-free layover in Beijing, Shanghai Beijing and Shanghai are offering citizens from 45 countries including the U.S., the U.K., Brazil, Canada, France, Spain, Argentina, Germany, Japan, Singapore, Italy and Australia a 72-hour visa-free stay from Jan. 1, 2013. Transit without visa (TWOV) applications are open to visitors from these countries who hold third country visas and plane tickets, and can be obtained at Beijing Capital International Airport as well as Shanghai’s Hongqiao and Pudong airports. However, passengers without a valid visa will not be allowed to travel outside the transit cities, and doing so will be deemed illegal entry, the government said. The move is aimed at generating more tourism spending in the cities. Shanghai had already been offering a 48-hour visa-free transit stay to passport-holders from 32 countries. Shanghai police said that nearly 3,000 people enjoyed the 48-hour visa-free period in 2011, an increase of 78.5% from the previous year. The visa-free policy is further expected to be extended to railways and ports in 2013, according to local media reports.

Mobile phone users hit 1.1b The number of mobile phone users in China increased 13.6% year-on-year to reach 1.1 billion in the first 10 months of 2012, figures by the Ministry of Industry and Information Technology showed. Of these, 212.4 million were 3G users. The country’s telecom sector reported RMB893.7 billion in main business revenues during the first

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10 months of 2012, up 9.2% year-on-year. Data also showed that revenues from mobile telecommunication services grew to RMB658.6 billion, which accounted for 73.7% of the sector’s total revenues during the period, up from 72.4% in the same period last year. China is the world’s largest smartphone market, according to U.S. market intelligence firm IDC.

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More provinces to get highspeed rail China started operation of the world’s fastest railway in areas of extremely low temperatures. The railway, which started operation in December, is part of the country’s efforts to revitalize its old industrial base and it will run through China’s northeastern provinces of Heilongjiang, Jilin and Liaoning. The 921-kilometer railway, with speeds of up to 350 kilometers per hour, underwent a two-month testing period during which temperatures dropped to as low as minus 40 degrees Celsius. China has the world’s longest operating high-speed rail network at 8,600 kilometers. Work also started on the first high-speed rail in mountainous southwest China, linking cities including Mianyang, Deyang, Chengdu and Leshan. To be completed by the end of 2013, the 312-kilometer line will cost about RMB40.5 billion (US$6.4 billion). CORPORATE NEWS

China Mobile and Nokia launch new smartphone Finland-based Nokia and China Mobile jointly launched a flagship model in China, the wireless-charging Lumia 920T. The model is Nokia’s first smartphone that supports the Windows Phone 8 system. The deal enables the company to leverage China Mobile’s more than 700 million subscribers, the largest base in the world, to help it regain market position lost to Apple and Samsung in recent years. The Lumia 920T retails at RMB4,599 (US$740) without a contract, cheaper than Samsung’s Galaxy Note II and Apple’s iPhone 5. The company also announced a partnership with Air China to place wireless chargers for the Lumia 920T in its lounges at the Beijing Capital International Airport.

Glencore’s Viterra takeover gets approval Glencore International Plc’s US$6.2-

billion takeover of Saskatchewan-based Viterra Inc., Canada’s largest grain handler, received Chinese regulatory approval nine months after the deal was announced. Glencore, the world’s largest publicly traded commodities trader, agreed to buy Viterra for C$16.25 (US$16.46) a share. The go-ahead by the ministry was the deal’s final regulatory hurdle. Buying Viterra is part of Switzerland-based Glencore’s efforts to expand its agricultural unit and extend its geographical reach. Grain handling and marketing made up 68% of Viterra’s sales in the first 10 months of 2012, with agricultural products accounting for 19% and food processing 13%.

Starbucks hikes café latte, mocha prices Starbucks Corp. has raised prices for five espresso drinks in 12 cities in China to offset higher operating costs. The Seattlebased company added RMB2 (US$0.30) to the price of its Café Mocha, Café Latte, Cappuccino, Café Vanilla Latte and Caramel Macchiato. The price hikes affect outlets in 12 cities, including Tianjin, Chongqing and Dalian. Starbucks said the price adjustment reflected changing operating costs and competitive dynamics, among other factors. The move marked the second time the company raised prices for its drinks in China in 2012. In the fourth quarter of 2012, the company reported lower operating margins in China as it increased spending to support expansion. MACROECONOMICS

China Nov. trade weakens China’s November trade growth dropped sharply despite the economy showing signs of recovery. China reported that export growth in November declined to 2.9% over a year ago from the previous month’s 11.6%, while import growth dropped to zero from October’s 2.4%. The import weakness caused China’s global trade surplus to widen 35% over a year earlier to US$19.5 billion – well

below October’s US$32 billion, the biggest surplus in years. Earlier, the government reported that November factory output grew 10.1% and consumer spending rose 14.9%, while fixed asset investment rose 20.7% in the first 11 months of the year, signs that China is recovering from a slump that pushed growth to a low of 7.4% between July and September of last year.

China’s inflation grows 2% China’s Consumer Price Index (CPI), a main gauge of inflation, grew 2% yearon-year in November, according to data from the National Bureau of Statistics. Month-on-month, November’s CPI rose 0.1%. The inflation rate increased from a 33-month low of 1.7% in October. Food prices, which account for nearly onethird of the weighting in the calculation of China’s CPI, rose 3% in November from a year earlier, pushing the CPI up 0.95 percentage points. Meanwhile, China’s Producer Price Index (PPI), which measures inflation at the wholesale level, fell 2.2% year-on-year in November, marking the ninth straight month of decline. However, the decline was smaller than the 2.8-percent decrease in October, indicating a stabilizing economy.

China’s PMIs hit highs China’s manufacturing activity rose again in November, reinforcing the view that the world’s second-largest economy is stabilizing. The official Purchasing Managers’ Index (PMI), a comprehensive gauge weighted toward Chinese stateowned enterprises, rose to 50.6 from October’s 50.2, according to the China Federation of Logistics and Purchasing. A reading above 50 signals expansion in manufacturing. The profits of Chinese industrial companies grew 20.5% for a second month in October. Meanwhile, manufacturing activity at Chinese private and export-oriented companies improved for the first time in 13 months, according to the HSBC Purchasing Managers’ Index, which rose to 50.5 in November from 49.5 in October.

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U.S.-CHINA

GM plans RMB6.6b plant in Chongqing A General Motors joint venture in China will invest RMB6.6 billion (US$1.04 billion) to set up a third plant in Chongqing to keep up with demand for vehicles in the world’s biggest auto market. SAIC-GM-Wuling said construction of the plant is expected to start in 2013 and once the first phase is completed in 2015, it will be capable of producing 400,000 cars and engines. SGMW, which focuses on mini-trucks and microvans, currently operates manufacturing bases in southern Liuzhou, Guangxi region, and eastern Qingdao, Shandong province. The company’s other brands in China include Buick, Cadillac, Chevrolet, Opel, Jiefang and Wuling.

Apple to shift output to U.S. Apple Inc. said it plans to spend more than US$100 million in 2013 to build computers in the U.S., shifting a small portion of manufacturing away from China. The planned investment makes up a sliver of Apple’s US$121.3 billion in cash, and will most likely not have a meaningful effect on profit margins. While Apple didn’t outline where the manufacturing would happen or how much would be produced in the U.S., the company said it will work with partners and that the operations would include more than just final assembly. Many iPhone and iPad parts are already made in the U.S., including their display glass, which is made in Kentucky.

Chinese students add US$5b to economy Chinese-student enrollment in U.S. colleges and universities contributed nearly US$5 billion to the U.S. economy in the 2011–2012 academic year, according to New York-based nonprofit World Education Services. The number of Chinese students enrolled in U.S. institutions of higher education in 2011–

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2012 increased by 23% to 194,000 over the previous year. At the undergraduate level, Chinese student enrollment increased by 31%. The research also found that Chinese students were indexed high in financial resources compared to the overall average. Figures from China’s Ministry of Education show that out of nearly 340,000 Chinese students who studied abroad in 2011, about 320,000 of them relied on personal or family funds to pay for tuition.

Dalian Wanda eyes US$10b spending spree Dalian Wanda Group, the world’s biggest owner of movie theaters, is in talks with leading Hollywood studios to coproduce films and is looking to buy and build hotels in major U.S. cities as the Chinese firm eyes a US$10-billion “soft power” spending spree. Dalian Wanda bought U.S. movie theater chain AMC Entertainment Inc. for US$2.6 billion in September 2012 and said it has earmarked North America for US$10 billion of deals over a decade to promote cultural diplomacy and understanding of China abroad. The group also said it was in talks with U.S. hotel management companies seeking opportunities for mergers and acquisitions as well as with major Hollywood film studios to co-finance and co-produce movies. GOVERNMENT & POLICY

China expands VAT trial China expanded its value-added tax (VAT) program to Tianjin and Zhejiang and Hubei provinces, the State Administration of Taxation announced in December. Shanghai piloted the tax-cutting program, which replaces a business tax with a VAT, on Jan. 1 last year in an effort to decrease overall tax burdens and boost the transportation and service sectors. The pilot program was later expanded to other areas including Jiangsu, Anhui, Fujian, Guangdong, Beijing, Xiamen and Shenzhen. In Shanghai, the tax cut helped reduce enterprises’ tax burdens

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by RMB22.5 billion (US$3.57 billion) in the first 10 months of 2012, according to the administration. The latest expansion extends the tax-cutting program to cover close to one million enterprises across the country.

China eases FDI management China’s State Administration of Foreign Exchange (SAFE) announced it will simplify or cancel as many as 49 procedures regarding the management of direct foreign investment in a bid to encourage trade. As of December 17, 2012, 35 approval procedures have been canceled, including those for account opening, booking, foreign exchange payment and settlement, cross-border transfers under conventional business and re-investment of legally acquired funds by foreign investors in China. Additionally, SAFE decreased the types of direct foreign investment accounts offered, simplified registration and validation procedures, and loosened restrictions on flows of funds under direct foreign investment accounts. The administration said the adjustment will help reduce companies’ costs and improve efficiency.

China pledges RMB350b to fight air pollution China will spend RMB350 billion (US$56 billion) by 2015 to curb air pollution in major cities, the Ministry of Environmental Protection said. Local governments will fund most of the programs aimed at cutting the level of harmful particles in the air in 117 cities by at least 5% between 2011 and 2015. In 2012, China began publishing data about the amount of pollution on concerns from residents that pollution readings were grossly understated. Chinese officials have acknowledged that air pollution in many cities is a growing concern, and cited its ongoing reliance on heavy industry as the reason China failed to meet some of its 2011 air and water pollution reduction targets.

SHANGHAI BUSINESS

ING-BOB opens branch ING Group and Bank of Beijing joint venture ING-BOB Life Insurance opened a new branch in Shanghai which will focus on the bancassurance channel and develop products for high-end clients, the company said. The move is aimed at tapping demand from the city’s growing middle class as ING Group expands business throughout Asia. ING said it aims to make its Shanghai branch one of the top three foreign life insurers in the city by 2015. Netherlands-based ING is under European Union orders to divest its insurance operations before the end of 2018 as one of the conditions it must meet to receive state aid approval. The company announced last October it planned to sell its Malaysia insurance business unit to American International

Assurance Group for about US$1.7 billion.

also cooperate in the launch and sale of souvenirs featuring Shanghai-style snacks, Fosun Group said.

Fosun buys 20% stake in Taiwan pastry maker

City sees solid land sales

Shanghai-based investment company Fosun Group acquired a 20% stake in Taiwan’s pastry maker Vigor Kobo for RMB77 million (US$12.3 million) via its subsidiary Laxton Investment Ltd., marking the first time that a Chinese mainland company has invested in Taiwan’s food industry. Since Taiwan opened its doors to mainland tourists in 2008, Vigor Kobo said it saw exponential growth in its turnover each year to exceed NT$1 billion (US$34.4 million) for the first 10 months of 2012. The company also said it will enter the tourism market on the Chinese mainland with the support of Fosun Group. The two companies will

Land sales exceeded RMB10 billion (US$1.6 billion) in Shanghai last November for the second straight month as abundant supply and a recovery in home sales continued to boost confidence among real estate developers. The city saw 940,000 square meters of land sold for RMB10.6 billion last November, compared with 590,000 square meters sold for RMB10.9 billion the month before, Century 21 China Real Estate said in a report. Nineteen land plots with a combined starting price of RMB16.5 billion were auctioned last December, according to the Shanghai Bureau of Planning and Land Resources.

CHINA & THE WORLD

SOUTH AMERICA ASIA-PACIFIC SIA PACIFIC

MIDDLE EAST

THAILAND: Thai group buys US$9.4b Ping An stake Thailand’s Charoen Pokphand (CP) Group bought a 15.6% stake in China’s Ping An Insurance for US$9.4 billion from global bank HSBC. The deal is among Asia’s largest acquisitions in 2012 and HSBC’s biggest divestment in nearly two decades. CP Group is controlled by Thailand’s richest man, Dhanin Chearavanont, who already holds major business interests in China ranging from agriculture to auto manufacturing. HSBC will make a post-tax gain of US$2.6 billion on the deal. China’s insurance market expanded an average 19% annually in the past decade to become the world’s sixth biggest, according to the China Insurance Regulatory Commission.

ASIA-PACIFIC SIA PACIFIC EUROPE

AFRICA

KENYA: Kenya Airways, China Eastern to code share Kenya Airways announced a code share agreement with China Eastern Airlines, a partnership that will boost the east African national carrier’s expansion into Asia. The agreement provides a framework for China Eastern Airlines to market and sell Kenya Airways’ flights from Shanghai and vice versa. Kenya Airways currently flies direct from Nairobi to Hong Kong and Guangzhou. It will code share on daily services between Bangkok and Shanghai, while China Eastern will code share on daily Kenya Airways service between Bangkok and Nairobi.

UNITED KINGDOM: Jaguar Land Rover, Chery to open Changshu facility British Jaguar Land Rover and China’s Chery Automobile Company Ltd. started construction on a new manufacturing facility in Changshu, eastern Jiangsu province, as part of an RMB10.9 billion (US$1.75 billion) investment that will also include a new research and development center and an engine production facility. The companies’ joint venture, Chery Jaguar Land Rover Automotive Company Ltd., is licensed to manufacture Jaguar Land Rover vehicles and new models for a partnership brand in China. The plant is expected to begin operation in July 2014. China is Jaguar Land Rover’s third largest market.

MIDDLE EAST EUROPE

NORTH AMERICA MIDDLE EAST

QATAR: Doha Bank, China UnionPay announce partnership Doha Bank and China UnionPay announced a strategic partnership to offer China UnionPay cardholders ease of cash withdrawals and balance inquiries on Doha Bank’s network of ATMs in Qatar, as well as the ability to make payments through the bank’s point of sale terminals to purchase goods and services. Shanghai-based China UnionPay has more than 400 domestic and overseas associate members worldwide. According to the China-Qatar Business Council, bilateral trade reached US$5.1 billion in 2011 at an increase of 72% over the previous year.

AFRICA

MIDDLE EAST SOUTH AMERICA AFRICA

NORTH AMERICA

UNITED STATES: Chinese group buys 80% of AIG plane unit for US$4.2b A Chinese group agreed to buy 80.1% of American International Group Inc. (AIG)’s plane-leasing unit, International Lease Finance Corp. (ILFC), for US$4.23 billion, marking the nation’s largest acquisition of a U.S. company since China Investment Corp.’s US$3 billion purchase of a stake in Blackstone Group LP in 2007. The acquisition, which values ILFC at US$5.3 billion, gives the group control of the world’s second-largest aircraft lessor. New York-based AIG said in a statement that the acquiring group, which includes New China Trust, China Aviation Industrial Fund and P3 Investments Ltd., has an option to buy another 9.9%. The deal is expected to close in the second quarter of next year, AIG said.

SOUTH AMERICA

NORTH AMERICA EUROPE SOUTH AMERICA

ASIA-PACIFIC SIA PACIFIC

SOUTH AMERICA ASIA-PACIFIC SIA PACIFIC

AFRICA ASIA-PACIFIC SIA PACIFIC NORTH AMERICA

BRAZIL: CIC eyes logistics market China Investment Corporation (CIC), the country’s sovereign wealth fund, participated in a purchase which will build the largest logistics platform in Brazil. CIC, together with Canada Pension Plan Investment Board, the Government of Singapore Investment Corp. and Global Logistic Properties, will set up two joint ventures to buy two investment portfolios worth US$1.45 billion. One of the portfolios, in which CIC holds a 34.2% stake, involves 34 logistics facilities and a development project. A total of 88% of the assets of the two JVs will focus on developing the logistics market in São Paulo and Rio de Janeiro, which together account for more than 40% of Brazil’s GDP.

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M a n a g e r ’ s N ot e b o o k

Strategies to Secure IP Rights B y J e f f r e y W i ls o n a n d J o s h u a S c h r o e d e r Jeffrey Wilson

esearch and development centers are being set up across China. How can one ensure that the company instead of the employees owns the rights to what is developed? While U.S. investors may be familiar with the concept of “work for hire” – when an employer owns the rights to what employees develop – things are different in China. It may come as a surprise, but in China the employer may not necessarily own all rights and in fact may have to pay the employee extra for these creative works including inventions, software, pictures and Chinese translations. But there may be some ways around this. In China, employers usually own the rights to copyrighted works created by employees, such as software, technical designs and other practical works. The employer will only lose ownership if employees use their own materials or facilities to create works and the works fall outside the scope of employment. One problem that could sneak up on employers is what happens to creative works, such as pictures and music, if employees use their personal equipment and facilities to create the works. If this is the case, the employers only have a

Je ff rey W ils on is co un se l with Jun He Law Offices in Shanghai. Joshua Schroeder wa s a vis iti ng ex te rn fr om Lewis & Clark Law School at Jun He.

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two-year right to use a copyrighted work within the scope of normal business activities of the employer. Even if an employee creates a work to fulfill a specifically assigned task (e.g., taking pictures of an event to be used in an advertisement), the employer may still only get a two-year right. If the employers want to use the works beyond two years, they must obtain the rights from the employees in a contract. The deciding factor can be whether the tools (e.g., computers, pens and paper, cameras, instruments) used to create the work were provided by the employer. An exception to the two-year rule is software. Under Chinese law, the copyright in software generally remains with the employer from the date of creation. Tips for employers to help them capture copyrights: • Require employees to carry out creative tasks using employer facilities and materials; • Sign contracts with employees that cover works created by the employee without use of employer resources; • Consider developing a system to verify the legality of company uses of employee created copyrights. Rights in employee-created inventions (e.g., patents) are also generally owned by the employer. Current regulations allow an employer to adopt a reporting system in which employees can claim inventions they create. An employer may file for a patent on the invention, keep the invention

as know-how or publish the invention. The claiming process should be quick and easy, but the employer does have to lay the groundwork by adopting a claiming policy. Claiming systems in China emulate the German patent system and a new, more enforceable version of it is being considered by the Chinese government. Employers may also have rights in inventions created by employees up to one year after an employee is terminated or resigns. Chinese national regulations, however, require that employers provide monetary rewards when employees claim inventions and pay employees 2 percent of profits and 10 percent of royalties earned from the inventions, although employers may be able to pay lower compensation amounts via company policies or contracts with employees. Pending regulations would increase the compensation requirements in most cases and provide a way for employees to reclaim the rights in inventions they create that are not used by employers. T h e p e n d i n g s e r v i c e i nv e nt i on regulations indicate that employers own the right to know-how created by employees and require that employees be compensated. Such a compensation requirement may pose large burdens on employers because the scope of knowhow could be very broad and result in claims for compensation by employees for developments that are inconsequential to the business of the employer.

Got an article idea for “Manager’s Notebook”? Contact Insight Editor-in-Chief David Basmajian at david.basmajian@amcham-shanghai.org.

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deal of the month B y E r i k a Wa n g

CNOOC Takeover of Alberta’s Nexen Wins Approval Courtesy Nexen Inc .

hina’s largest-ever foreign takeover, a US$15.1-billion deal by China National Offshore Oil Corporation ( C N O O C ) Lt d . f o r C a l g a r y, Alberta-based energy company Nexen Inc., has been approved in Canada. Nexen operates the biggest reserves in Alberta’s oil sands, an unconventional petroleum deposit. The acquisition also gives the Chinese state-owned company Nexen’s 43 percent stake in the Buzzard field located in the U.K. North Sea, the most important contributor to the crude blend used to set the Brent crude price that serves as the international oil price benchmark. The deal “recognizes the long-term economic benefits for Calgary, for Alberta and for Canada,” s aid C NO O C C hai r man Wang Yi lin in a statement. “Our company will also benefit by adding Nexen’s impressive assets and outstanding employees to our worldwide operations.” Federal Industry Minister Christian Paradis also said in a statement that the transaction “is likely to be of net benefit to Canada” under the Investment Canada Act. The CNOOC-Nexen transaction is the biggest in Canada since Suncor Energy Inc. bought PetroCanada in August 2009 for about US$18 billion. The ruling followed months of debate about how much of Canada’s energy sector should be purchased by other countries’ state-owned companies. China’s third largest oil company had already made several commitments to Canada to win support for the Nexen sale, including listing its shares on the Toronto Stock Exchange, establishing Calgary as its base for North and Central America, and maintaining Nexen’s employment levels and capital spending program. But while allowing the takeover, Prime Minister

Nexen’s Buzzard platform in the U.K. North Sea

Stephen Harper defended a strict new approach that restricts state-owned enterprises to minority stakes in Canadian enterprises, saying that his government has determined that “foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada.” Therefore, Canada will not approve state-owned companies taking controlling interests in any more oil-sands projects, save for “exceptional circumstances,” he added. Although Ottawa is yet to define what these “exceptional circumstances” would be, analysts say much of the US$657 billion of investment that Canada will need to develop the country’s largest resource projects over the next decade will have to come from abroad, and cash-rich China is an obvious source. Canada relies on exports for one-third of its output, with energy products comprising nearly one-quarter of those shipments.

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woRKing in ChinA By BoB Fonow

The Glass Ceiling Strikes Early for Some

I Bob Fonow

A successful career doesn’t necessarily ensure lifelong success in China

recently had lunch with a professional Chinese couple in Shanghai and we talked about their career paths and some new challenges. Both of them attended elite Chinese universities and earned MBAs and master’s degrees in the United States. For many years, each surfed the top of the salary and benefits wave while they were employed at prosperous global companies that enthusiastically invested in China’s potential. But these days, they’re facing a new challenge: both are about to turn 40. The woman worked in a large multinational for several years, both in the U.S. and in China, then started her own business, helping investors from abroad find opportunities in the Shanghai construction industry. Her husband returned to China and joined a famous European IT company as a corporate attorney, advanced up the corporate pay scale every three or four years, moved into sales and marketing and finally reached a wellpaid plateau as a mid-level general manager in a large American company. The problem for him is that there are no higher steps for him to climb on the corporate ladder. All the senior-level jobs at headquarters are held by Americans. Due to regulatory constraints, the China operations are not likely to expand much beyond current size, so his chances for executive visibility are limited. At 40, my friend feels that his corporate career is coming to a close. Until recently, he expected to reach the highest cor p orate ranks of a major international

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corporation, but now recognizes that this goal appears unattainable. He understands his predicament but is not prepared for it emotionally or in terms of career progression. And like many people, he is not temperamentally suited to the unpredictability of an entrepreneurial lifestyle, should he contemplate starting his own company or becoming a consultant. He is resentful, feels cheated, and believes that he is failing himself and his family. Regrettably, like many of his age group, he’s not completely up-to-date with the rapid pace of technical developments in his field. He’s Generation X, with Generation Y managers biting at his ankles and the iGeneration – those growing up completely immersed from birth in a digital environment – already making a big impact on international business. Sound familiar? The situation resonates with similar human resource processes that began in the United States in the mid 1980s, accelerating in the 1990s, as mid-management positions were widely eliminated in many corporations and younger computer literate specialists replaced them.

new jobs My friend’s circumstances, and others in his situation, signal the early stages of the career transformation of many f irst-generation, internationally educated managers who are starting to be replaced by the second, post-reform

Climbing the ladder of success is getting harder in China for some

generation possessing new sets of management and technical skills, especially facilitated by new developments in science, technology and social networking. It’s led to a global innovation environment that quickly creates many new jobs in China that didn’t exist five or 10 years ago. What does this mean for the older managers, the younger managers and the human resources departments? As in all market-oriented countries, older managers face several challenges. The first is that management hierarchies are pyramids. The room at the top gets smaller with each promotion. In

the U.S. and Europe, most managers accept this as culturally inevitable and prepare for it throughout their careers. Only very few go on to lead global enterprises. At some point most of us reach a plateau, and decide that our current job or profession won’t fulfill our deepest desires. In the West, built on a foundation of dynamic individualism, some will move to other corporations and resume their upward trajectory, others will return to university to gain new skills. The more adventurous may follow an entirely new path – one reads of middle-aged managers choosing to spend the rest of their careers as social workers, teachers or musicians – perhaps following a desire from an earlier stage of life. Still others, like myself, may figure out what they do best and sell it on the market via a consulting career. I started my practice as a turnaround manager when it became clear to me in my early 40s – and also to my bosses at Sprint Corporation – that my personality, which is suited to the unpredictability of managing distressed companies, is quite unsuited to the tempo and culture of the highly structured environment of the executive suite. Because of what we experience in the West as the “creative destruction” of Anglo-American capitalism, we are emotionally conditioned from early in our careers for numerous and often dramatic career changes. The situation is different for many Chinese managers who have never experienced an economic downturn and have lived in a protected cocoon of prosperity since the early 1990s, exp eriencing only unlimited growth and opportunities. The idea of a “portfolio career” of several skill sets, developed by the British management theorist Charles Handy, may seem culturally anathema to many educated Chinese, especially those from one-child families, many of whom have b een protec ted f rom adversity. The

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At some point most of us reach a plateau, and decide that our current job or profession won’t fulfill our deepest desires.”

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The situation is different for many Chinese managers who have never experienced an economic downturn…”

immediate reaction will be to run for cover. This is best described recently in the numerous reports that indicate a growing number of Chinese graduates from elite universities expressing a preference for joining Chinese state-owned enterprises instead of multinational corporations.

Cultural challenges When I asked a leading recruiting consultant in Beijing about the possibility of a career change to state-controlled corporations for mid-career professionals who have only worked for foreign corporations, her response was predictable. She felt that in most instances the change would be impossible. Most managers would find the lack of individual responsibility stifling, while stateowned enterprises would find foreign trained managers culturally unsuitable for the closed decision loops and top-down controls that are the operating style of many Chinese companies. Still other talent professionals believe that a glass ceiling for Chinese managers is a misleading interpretation. One leading talent spotter for Spencer Stuart believes that many Chinese managers, like those elsewhere, simply reach the limit of their talents in their 40s, a modern Chinese version of the Peter Principle. Perhaps another explanation provides insight. The global economy is in the early stages of huge structural changes, much of it caused by the emergence of China. Leading China observer James McGregor in his recent book No Wisdom, No Followers sees an international economy just beginning to understand the impact of China’s growing economic power. He argues that the unique form of Chinese capitalism is undermining the foundation of the financial and business system that has emerged since Bretton Woods, and indeed, made possible the rapid development of China. O ne ne g at ive i mp a c t is t hat t he s ame multinationals that assisted in the transformation of the Chinese economy are now distressed by the competitive pressure of Chinese state-owned enterprises, leading to the decline of many of the

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corporations that have up to now employed thousands of United States- and European-trained Chinese employees. The result will be fewer opportunities for Chines e workers’ employment in foreign companies, especially in those corporations trying to maintain an identity and corporate culture separate from overwhelming Chinese influence. This is clearly seen in the telecommunications and high-technology sectors in China. Many foreign companies in China already feel the impact of global Chinese competition and are compelled to reach down into a younger age group for new and less expensive talent, reducing fur ther the opp or tunities for mid-career professionals in many international companies. As this happens, the enlightened companies will develop human resources policies that attempt to meliorate the worst consequences of what might be described as the first generation of China’s professional unemployed. As many people in the U.S. have experienced, typified recently in the movie Up in the Air, layoffs of highly trained and experienced mid-career staff can be brutal. Unless done with a particular compassion in China, replacing the first generation of foreigneducated professionals with younger staff will be perceived as highly damaging to a company’s reputation. Smart companies will offer packages that help their highly educated and loyal staff find new employment and career paths quickly and successfully. The lesson for younger foreign-educated employees beginning their careers now is the same in China as it is everywhere else. In the compressed time lines of global business running on social networking time, your only protection is lifelong education and the constant improvement of skills. There is no such thing as job security. Even in China, and possibly soon, especially in China.

Bob Fonow is the consulting president of Comrise China and managing director of Revenue Growth International (RGI) Ltd.

intERViEW B y D AV i D B A s M A J i A n

A Growing Relationship The U.S. ambassador shares his views on bilateral ties, his priorities for the coming year and China’s incoming president

U.S. Ambassador Gary Locke at a VIP meeting with U.S. officials and businesspeople in Shanghai

conomic ties between the United States and China are deep-rooted and strong, and despite occasional disagreements between the two nations, this increasingly interdependent relationship will only get stronger and more important, according to U.S. Ambassador to China Gary Locke, who raised these points and others during a speech in early December to more than 450 American and Chinese businesspeople and government officials gathered for the annual AmCham Shanghai Government Appreciation Dinner. Locke said that “getting the U.S.-China relationship right” is a priority for the Obama administration in its second term. Before his speech, the ambassador took time to tour the recently opened AmCham Shanghai SME Center. He recognized the Center for its potential to drive U.S. exports to China – a top priority of his as ambassador. After a short tour, Locke sat down for an interview with Insight to discuss the U.S.-China relationship.

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Insight: What is your perspective on the state of U.S.-China relations today? Can you give us your thoughts on what we can expect in 2013? Gary Locke: “I’m very positive about the future of U.S.-China relations. Of course we in the United States have just finished our presidential election and China has just announced their new leadership for the next several years. But the new leaders of China are people we are familiar with, that our U.S. government officials and business leaders have worked with in a variety of capacities. I think both sides understand just how important this relationship is and how interdependent our two economies are. “We’ve just b e e n c el ebr at i ng t he 4 0 t h anniversary of President Nixon’s historic visit to China. When he first made that trip, trade between the United States and China totaled about US$100 million per year. Today, our trade is US$1 billion per day. Exports from the United States to China support 800,000 American jobs, China trade with the U.S. supports several million Chinese jobs. I believe we have the capacity, if we

work closely together, to solve some of the most difficult problems and issues facing not just the United States and China, but indeed the world. “I firmly believe the world is looking to the U.S. and China for leadership on many of these issues. These issues cannot be solved by the scientists, business leaders and policy makers of one country alone. These are issues that cross borders, that are international in scope, that truly need the leadership of the United States and China. I’m very optimistic about the future of the relationship of the United States and China in 2013 and I think it will continue to grow.” Insight: What are the Administration’s top priorities for U.S.-China trade over the next 12 months? GL: “We’re committed to win-win scenarios. For instance, greater exports from the United States to China not only create jobs for the American people, they can also provide high-quality products and services in great demand by the Chinese people and help the Chinese leaders achieve their objectives of raising the standard of living and quality of life for the Chinese people. Our exports of pork, for example, have grown four, five, six hundred percent over the last several years, which has actually helped to keep the price of pork down in China which has benefited Chinese families. We have so much to offer. Of

course U.S. companies that are here meeting the demand of the Chinese people employ over one million Chinese people at good wages. We in the United States want to further develop the economic relationship, which has huge benefits for American workers back home in the States as well as improving the quality of life for the Chinese people.” Insight: Xi Jinping will be the next president of China. What are your impressions of him? GL: “I think he has a fondness for America. He very much remembers his stay in the United States in Muscatine, Iowa, some 20 years ago. He had a great time renewing acquaintances and friendships a year ago February when he visited the United States. In fact, he hosted several of the families from Iowa in China just a few months ago and so I think he has a deep appreciation and understanding of America. He certainly appears to be a lot more relaxed and casual than some of his predecessors. What his policies will be remain to be seen because, while he is the incoming president, party secretary and in charge of the military, nonetheless he is part of a group of seven, perhaps the first among equals. We have yet to understand what his policies will be at the national level. China faces enormous challenges and what they focus on first we’ll have to wait and see. But we want to work with the new Chinese

The ambassador tours the AmCham Shanghai office

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Just as we have opened our market in the United States to China, China must live up to their agreements under the WTO to open up their market.We will insist on a levelplaying field.”

leaders because we both know the relationship is so critically important.”

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We have 190,000 Chinese students studying in America but only about 14,000 American students studying here.”

Insight: There has been a lot of discussion about America’s “pivot” to Asia. Would you talk about that? GL: “The rebalancing includes greater engagement with China. That’s why President Obama has met with President Hu 12 times. Secretary Clinton has been to China during the last four years seven times. We’ve had visits by Secretary of Treasury Geithner, defense secretaries Gates and Panetta, commerce secretaries – including myself when I was commerce secretary – and we’ve all hosted our counterparts back in the United States. That’s part of our rebalancing or pivot – more attention to the Asia-Pacific region because this region makes up almost 60 percent of the world’s GDP. We’ve long been a Pacific power. Our presence in the Asia-Pacific goes back more than 100 years and many believe our presence here over the past decades has brought the stability which has enabled the region to flourish economically.” Insight: What makes you lose sleep at night regarding Sino-U.S. relations? GL: “Our biggest concern is making sure we don’t have any misunderstandings, miscalculations, i n c i d e nt s t h at c ou l d d e r a i l t h e g row i n g relationship. That’s why it’s so important that our leaders meet, that we have visits at all levels of government – at the national level all the way down to the provincial and local level. “That’s why it’s important to have more exchanges between our military officials. That’s why it’s been great that we’ve had two secretaries of defense and a chairman of the joint chiefs of staff visit China, and reciprocal visits to the U.S. by their Chinese counterparts. “That’s why it’s so important to have exchanges of students. We have 190,000 Chinese students studying in America but only about 14,000 American students studying here. We really need to increase the number of Americans studying the culture, the language, the history, the customs because they’ll be the future policy makers, the future business leaders trying to tackle the most difficult issues facing the planet. Only by having that foundation of cooperation and understanding and good people-to-people relationships will we be able to realize the full potential of the U.S.China relationship.”

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Insight: China was an issue in the recent U.S. election. Some of the things said were true, others not. What would you tell the American public is the most important thing to understand about China and our bilateral relationship? GL: “First of all, just how interdependent our economies are. More than 800,000 American jobs depend on exports to China. That China is the number one export market for what our farmers grow. In fact, agriculture exports in 2012 are 40 percent higher than in 2011. So, Americans need to understand the significance of the China market for U.S.-made goods and services. And also that Chinese companies are operating in the United States alongside German automobile factories and Russian steel mills and South American juice processing facilities. And that Chinese companies, manufacturing in the United States, setting up offices in the United States, hire Americans. We have so many Chinese visitors coming to the U.S.; they spend more per visit than European visitors. Chinese tourists shop in malls, eat in restaurants, book rooms in hotels and support so many American jobs and those [American] workers at Macy’s, at the Apple store, they shop in malls, eat in restaurants, buy cars, remodel their homes and so it supports so many other American jobs. “Clearly the Obama administration will insist t hat C h i na abi d e by W TO ( Worl d Tr a d e Organization) rules. China has benefited substantially since it ascended to the WTO, but with that comes responsibilities and obligations and it’s only fair to ask all countries with which we have trade agreements or have joined the WTO to live up to their commitments of opening up their markets. Just as we have opened our market in the United States to China, China must live up to their agreements under the WTO to open up their market. We will insist on a levelplaying field.” Insight: Chinese investment in the U.S. is on the rise, yet there are some in China who claim the U.S. does not offer a welcoming investment climate for Chinese companies. What can be done to change this mindset? GL: “I think that a lot of the activities that are now being conducted by both AmCham and the embassy and by the consulate here in Shanghai are getting at that issue and debunking the myths and stereotypes of Chinese companies investing in the United States. Everyone remembers how CNOOC wanted to buy Unocal and how that

David Basmajian, Insight’s editor-in-chief, poses a question to the ambassador

didn’t materialize. But not many people in China realize that CNOOC went on to make numerous successful investments in the United States. Many other Chinese companies have established factories and operations hiring thousands and thousands of American workers. That’s why, for instance, we have hosted investment forums, produced a 10-minute video in Chinese with testimonials from Chinese companies that have successfully invested in the United States talking about CFIUS and how it examines only a minute fraction of transactions in the United States and an even smaller percentage of those involve China. “A small percentage of transactions looked at each year are ever modified by the United States government for national security reasons. We also talk about what is the key to successful investment in the U.S. and that’s getting the right set of advisors – whether it’s accounting, legal, financial, PR or management. And certainly AmCham Shanghai members can help provide that valuable expertise to Chinese companies looking to invest in America.” Insig ht: What do you see as one of your m o s t i mp o r t ant a c c o mp l i s hm e nt s s o f ar as ambassador? GL: “I’m very proud of the work of our embassy

and all of our consulates of dramatically speeding up the processing of visas. Right now, the wait time to get your appointment to get your visa interview [for travel to the U.S.] is anywhere from two to four days. When I first came to Shanghai, the wait time was 70 days, over 100 days in Beijing two summers ago. Throughout the course of the year, the average was close to 30 days. Now, for the last 13 months since I’ve arrived as ambassador and made it a top priority, the average monthly wait to get your visa interview has been five days. “This is an important first step in terms of greater business transactions between the United States and China because if a Chinese businessperson has to wait 70–100 days to get a visa interview and can easily go to Canada, Australia or Germany within a matter of weeks to investigate buying a particular product or service, why would they wait that long to go to America? The long time it took to get people in for a visa inter view was actually hurting exports of American products and services to China. That means it was costing us jobs in America. “Shanghai [U.S. Consulate] has processed, within just the last year, 400,000 visas and c o n t r i b u t e d U S $ 2 . 8 b i l l i o n t o t h e U. S . economy from spending in hotels, restaurants, retail shops, the entire hospitality industry and related services.”

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s P O rt s BU s i n E s s B y r ya n B a l i s

UFC Fights for the China Market

Since coming under the ownership and operation of Zuffa, LLC in 2001, Las Vegasheadquartered UFC has risen from largely a fringe appeal to become the world’s fastest growing sports organization and largest pay-per-view provider, media industry data show. Today, UFC programming is beamed around the world to 150 countries and territories in 20 different languages, allowing the UFC to reach one billion homes worldwide. In the U.S., the organization’s largest market, the UFC has brought MMA to a mainstream American audience, signing a seven-year agreement with the Fox Sports Media SANDS CHINA

The Ultimate Fighting Championship (UFC) has grown hugely popular around the world, and now organizers are aiming to win over more fans in this part of the world

n early November, the Ultimate Fighting Championship (UFC) brought 18 of the world’s preeminent mixed martial arts (MMA) fighters to Macao to battle it out before more than 8,000 excited fans at The Venetian Macao. As the first event in Greater China for the UFC, the sport’s largest promotion, the Macao event was a testament to the explosion in worldwide interest in the UFC and the MMA style of fighting, which involves a mix of martial arts disciplines, punching, kicking and various “grappling” techniques like wrestling, takedowns and submission holds.

UFC fighters exchange blows at UFC Macao

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UFC

“ Mark Fischer, left, poses with UFC fighters and others prior to the UFC Macao event

Group in 2011 and drawing nine million viewers in its first Fox television broadcast last year. Interest in the UFC also is on the rise in China. The UFC says they have 21 million fans on the mainland, and the organization has one of their three foreign offices in Beijing. During the Macao event, Insight interviewed Mark Fischer, executive vice president & managing director of UFC Asia, who talked about the growing popularity of the sport in China and the organization’s plans for making further inroads. Below are excerpts from that interview, along with a chat with MMA legend and UFC Hall of Famer Chuck “The Iceman” Liddell. Insight: Putting on a UFC event is a major undertaking. Can you talk about what is involved, and how much work it takes to plan and run a UFC event? Mark Fischer: “It’s a lot. We put a ton of detail into our events. We try to have the best production quality, production values of any kind of event anywhere in the world everywhere we go. So, we bring the whole circus over. “Then you have all the tickets, the invitations, the pre-parties and the post-parties. We’ve been

planning and marketing this event ever since we sealed the deal with The Venetian about six months ago.” Insight: Foreign entertainers have many stories to share about working with Chinese authorities and getting permission to perform in China. Why did the UFC choose Macao for the first event in the Greater China region? MF: “Three reasons. One, great facilities here, great arena, hotel, the fact that they’re right together. Logistics are excellent. Two, The Venetian has been a great partner. Not only venue partner but marketing partner, helping us to promote throughout the, really, Hong Kong, Macao, southern China region – the target for this event. “Thirdly, Macao is a destination. It’s within a couple hours of a couple billion people. We had an opportunity to touch a lot of people through this event while other locations wouldn’t quite have the same effect.” Insight: What are some of the challenges to bringing the UFC to mainland China that may be different from other markets? MF: “China is a huge market with great potential

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In 10 years, who knows, but the Chinese market potentially could be as big or bigger than any for us worldwide.” – Mark Fischer

for UFC, yet it is not a single homogeneous market. It’s really many different markets, each with different tastes according to geography and many different levels of development. This presents a couple unique challenges, one being how best to reach and build a fan base among all the potential constituents, and the second to stay focused on priorities. Our first priority is building awareness and educating potential fans about our sport on one hand, and on the other to make sure our fans have full access.” Insight: Can you give me a guess how the sport

will grow and develop in China over the next five to 10 years? MF: “First, UFC needs to continue to build our media exposure and programming for the China market over the coming couple years. We achieved great growth in this so far – now up to about 20 million viewers per week – but we still have a ways to go to achieve mainstream awareness and a critical mass of fans across the country. “At the same time, we need to support the development of Chinese MMA fighters, whose entry and ultimately success in the UFC will make

squaring off with Chuck ‘the iceman’ liddell UFC Hall of Famer Chuck Liddell is one of the most celebrated fighters in UFC history. A former light heavyweight champion, Liddell became an icon of the sport with his devastating knockouts, trademark Mohawk and punishing fighting style loved by fans around the world. Liddell retired from professional fighting in 2010 after a 12year career and today helps promote the UFC as vice president of business development.

insight: Could you talk about how the UFC has changed over the past half decade with the explosion of the sport? Cl: “There’s a lot more fights, a lot more fighters out there. It’s exciting. Like I was talking about earlier, when we first came in and we’re taking guys that were a wrestler and trying to add striking and jiujitsu to him. Or, you take a jiujitsu guy and try to add striking and wrestling to him. “Now, you’re having guys that are starting to come into the sport that have been doing it all from the beginning. They started doing MMA, they started doing the mixing. We were trying to put together how do you train these three together.We’re trying trial and error. ”

SANDS CHINA

insight: What’s it like to be a UFC fighter? Tell us a little about what it takes to become a UFC fighter. Chuck liddell: “Well, it’s a lot of work. I’ve been in this sport for a long time, and in the beginning we went around doing a lot of stuff in the States trying to explain to people that we weren’t just some guys that fell out of a bar and started fighting. “... I’ve done martial arts since I was 12. I wrestled since I was 14. I did kickboxing for five years after wrestling in college ... I fell into doing MMA because someone asked me if I wanted to do a mixed fight because they knew I was a kickboxer and a wrestler. I said: ‘Yeah sure, I’ll try it.’ And just loved it. I started learning jiujitsu and put it all together. “There are three basic parts to it: standing, striking, wrestling – meaning takedowns, throws, ways to change it to keep it standing or get it on the ground – and then jiujitsu, which is on the ground, submission holds, chokes, arm bars, leg locks.”

insight: what did it consist of? Cl: “Cardio work, we’re doing a lot of sprint stuff, we do a lot of tire flipping, pushing wheel barrels, weights up a hill, a lot of bag work, mitts, sparring, training with other people, wrestling – a lot of different strength and conditioning stuff.”

insight: When you were fighting in the UFC, could you talk about your training regimen and what you did to prepare for fights? Cl: “In the beginning, we were trying to figure out how to put it all together and how to train for a fight for MMA. Nowadays, guys have gotten really good at it. Coaches know what they’re doing. How do you put together jiujitsu with the striking and the wrestling and everything.”

“i wrEstlEd sinCE i was 14.”

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Chuck Liddell, right, meets a fan at an autograph session

them local and national heroes and thus really spark passionate interest in the UFC. And finally, we need to bring a major UFC event to one of China’s big cities, which if the first two steps go well I believe we can achieve within two years or so. All of these initiatives will help grow other business segments in China such as sponsorship and merchandising, and brand extensions like UFC Gyms. “If all of these go well, there’s nothing stopping UFC from becoming one of China’s top three most avidly watched and followed sports properties within five years, especially among the 20–40 yearold demographic. We’ve seen this growth trajectory in other major markets globally, and with China’s deep martial arts traditions, there’s no reason the same cannot happen here. In 10 years, who knows, but the Chinese market potentially could be as big or bigger than any for us worldwide.” Insight: How deep is the talent level of Chinese mixed martial arts fighters? How do you develop it further? MF: “As of now the talent level is rather thin, but there are signs of rapid development on the horizon. Martial arts practitioners from other disciplines, and even regular physical education experts, are realizing that MMA is the trend, the place where things are moving in their fields. “There are now two well-established MMA training centers, one at the Xi’an Sports University and one at the Beijing Institute of Physical Education, and several programs have been put in place to train hundreds of coaches in MMA fitness and MMA techniques. Gyms all over are starting to offer MMA instruction and fitness training. “Meanwhile, the UFC intends to establish our own fighter development program, in which we would bring over some of China’s top fighters for elite training in the USA, and by exchange bring over some of our top trainers and fighters to help train their counterparts here. We would also support with equipment and communication of best practices, and possibly our own branded gyms in the future.” Ryan Balis is Senior Communications Associate at AmCham Shanghai.

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SPECIAL 2013 PREVIEW: Once again, we’ve asked six China thinkers and industry experts to tell us what they think will be some of the hot-button issues in 2013 – the Year of the Snake. Tom Doctoroff of JWT kicks things off with a reflective piece on the dynamic consumer market and Derek Scissors of Heritage Foundation shares his thoughts on U.S-China economic relations. We also have forecasts about trade, the South China Sea, risk management and the Chinese economy.

The The Confidence Confidence G tom DoctoRoff is the Asia Pacific CEO for JWT. He recently published his second book on Chinese consumers, What Chinese Want: Culture, Communism and the Modern Chinese Consumer.

he topography of China’s commercial landscape remains consistent from year to year. China is characterized by:

digital universe that pulls a self-expressive yet repressed new generation into its grip. The popularity of new group-chat sites such as Tencent’s Weixin are a testament to the new generation’s intoxication with digital self-expression and connectivity; l Exploding e-commerce that promises to rebalance the power equation between bricks-and-mortar retailers and the buying public, particularly in lower-tier cities; l Luxury and auto brands that command high-price premiums and enjoy consistently high year-on-year growth because they are “tools” of success on the battlefield of life; l Stratospheric media rates driven by a monopolistic (i.e., statecontrolled) sellers’ market; l Steady urbanization that introduces tens of millions of new urbanites to consumerism every year and propels momentum of brands in lower-tier cities; l A preternaturally value-conscious public that gives new dimension to the term “smart shopper.” Each one of these trends will remain intact during 2013. The country’s spending locomotive will not derail – the underlying growth paradigm has not yet expired – but the road ahead will be bumpier.

Reform: no longer a luxury Every educated Chinese realizes the nation’s growth model requires determined, albeit gradual, reinvention. Given increasing

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labor costs, the engine of economic advancement must shift from exports and capital investment – the latter channeled mostly to oligopolistic state-owned enterprises – towards consumer spending and services. The biggest unknown remains consumer confidence. (If soft, media inflation rates will remain “only” in the high single-digits.)

the Us$64,000 question: Will the fifth generation of leadership, led by President Xi Jinping and Prime Minister Li Keqiang, signal that China remains future-focused? Through force of vision and personality, will they make moves to manage intraParty conflicts of interest that, to date, have precluded meaningful political and economic reform? From birth, the Chinese are conditioned to have “patriarchic faith” in their leaders’ intention to orchestrate top-down, incremental reform. The Chinese are expert readers of tea leaves. Deng Xiaoping’s famous 1992 tour to Guangdong province was rightly interpreted as a harbinger of economic liberalization. His proclamation: “To get rich is glorious!” unleashed a flood of foreign and domestic investment. After three years of postTiananmen deep freeze, the Chinese emerged from a collective perch, and decided it was safe to go back into the water. Deng imperially mandated that generation of capital was tantamount to “success,” and the result was 20 years of transformative growth. During the 2008–2009 financial crisis, spending froze – auto sales flatlined, the real estate market ground to a halt – until

SPECiAl 2013 PrEviEW

2013 Previewing t

Year of the Sn

Our special guest writers – including Derek Scissors, Nicholas Lardy and T Doctoroff – offer insightful analyses o bilateral relations, China’s economy consumer trends in the coming year

China’s fifth generation: early signs

Hu Jintao was considered out of touch with contemporary economic realities. The outgoing president’s facial had Garyfeatures Locke Visits Am Cham Shanghai U.S. ambassador talks to Insight’s David Basmajian abo relations and his topof priorities for the year congealed into a Sphinx-like mask, reinforcing theU.S.-China perception an ossified power structure, hence the rush for foreign passports amongst China’s wealthiest businessmen. 2012 was a year in which the Party’s failure to inspire was particularly pronounced. During the lead up to a once-a-decade leadership transition, the show trials of Chongqing supremo Bo Xilai’s wife, Gu Kailai, and whistle blower Wang Lijun harkened back to Cultural Revolution theatrics. The purge of Bo Xilai himself, perhaps justifiable given his narcissistic power hunger, was both ham-handed and extralegal. The shadowy accumulation of assets by leaders and their families, reported in the international press and spread across the country by angry micro-bloggers, reinforced perceptions that corruption trumps meritocracy in 21st century China. Many fear the CCP’s consensus-driven modus operandi, not to mention relentless protection of factional selfinterest, precludes bold experimentation. Many now ask whether the contradictions of society – between rich and poor, urban and rural, young and old, politically connected and “small potatoes” – are approaching the breaking point. While crisis is not imminent, loss of absolute confidence in EXCLUSIV E

Game Game B y to m D o c to R o f f

massive government-mandated investment sent signals of reassuring determination to maintain heady growth. Public confidence in its government’s ability to navigate dangerous shoals remained steady, despite the sudden loss of 20 million factory jobs, mostly held by migrant workers. But faith in the technocratic mastery of central government apparatchiks is not absolute. Today, confidence has eroded.

XINHUA

Xi Jinping and six other members of the Standing Committee

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the future of the country has manifested itself in many ways, from 200,000 local protests to a slowdown in sales of luxury goods, real estate and autos. All eyes are now on Xi Jinping, China’s incoming president. Initial reaction to Mr. Xi has been cautiously optimistic. His “launch speech” on corruption was strongly worded, refreshingly free from kabuki formalism and Party sloganeering. In December,

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Relative to other markets, even in Asia, Chinese shoppers will shell out big bucks for any product that generates ‘face’ – the currency of forward advancement.”

China’s new top leadership called for a reduction in the pomp and ceremony involved in official events – fewer motorcades and welcoming ceremonies, and shorter speeches – and also instructed state media to spend less time reporting on the activities of officials and more on real social issues. Most significantly, Xi Jinping’s first presidential trip, following Deng Xiaoping’s footsteps, was to Shenzhen, China’s most entrepreneurially dynamic city. The excursion has, rightly, been taken as a signal of robust reformist intent. However, until Mr. Xi outlines specific, incremental steps of structural reform – intra-party checks and balances, independent commercial courts, urban residency reform, rural land-ownership reform, further strengthening of the welfare net and other institutional mechanisms to safeguard the economic interests of individuals – consumer confidence will wane. If so, “rebalancing” towards a consumer-driven economy will remain a long way off, and China’s potential under-realized. China will certainly not flirt with Western-style democracy or laissez-faire capitalism. But the Chinese, supreme pragmatists who value stability above all else, know the status quo is unsustainable.

Spending and uncertainty Even during the best of times, middle-class Chinese are torn between “projective” and “protective” impulses. Relative to other markets, even in Asia, Chinese shoppers will shell out big bucks for any product that generates “face” – the currency of forward advancement. From a cup of Starbucks coffee to a new car (usually purchased for more than 100 percent of yearly income, and often involving contributions of extended family members), status is an investment in the future. On the other hand, goods consumed in

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the home – for example, appliances or home furnishing – and other non-essential items are extremely price sensitive. This dichotomy results in stratospheric savings rates in excess of 35 percent of GDP. During periods of uncertainty, the pull between projection and protection becomes even more pronounced. Mid-tier brands, ones neither particularly cheap nor status generators, struggle. So do lower-end luxury items. If consumer confidence continues to drop, value consciousness will be even more acute and pennies will further be pinched. Retailers such as Levi’s and Gap, priced between cheap local labels and more premium brands, will face challenges. So will out-of-home restaurants such as Pizza Hut. The real estate market will also continue to stagnate. According to Ctrip, bookings of mid-level travel destinations such as Hainan Island, usually popular amongst the new middle class, are down dramatically. Job-hopping, perhaps the greatest indicator of economic optimism amongst ambitious Chinese, has slowed, a sign of diffused anxiety. The public is hoping for a blueprint of far-sighted reform. For the sake of continued economic dynamism, not to mention geopolitical harmony, let’s hope the government responds in kind.

The year ahead Given the consensus-driven modus operandi of the CCP, it is unlikely Xi Jinping will command the navigational freedom to outline a comprehensive approach to structural reform during his first year in power. Instead, he will continue to send signals of reformist intent. Therefore, consumer confidence, and the economy overall, will remain in a state of suspended animation. Growth will continue at an “understated” pace. Optimism will not break out. Next year will more or less be a replay of 2012. We can expect: moderate (single digit) media inflation rates – both broadcast and digital – due to suppressed demand of both local and multinational companies; continued investment in “last mile” e-commerce infrastructure, particularly in lower tier cities, a sure bet given the relative dearth of bricks-and-mortar retail alternatives there; cautious middle class and moderate volume increases in “hallmark” categories such as cars, mid-level travel and home decoration; further price competition and downward profit pressure amongst local retail and apparel brands, partially driven by stagnating same-store sales and high real estate costs; limited reform of state-owned enterprises and sustained oligopolistic practices which prevent foreign companies from deeper penetration of service sectors from banks to health care, and, more generally, diffused anxiety that will not boil over into full-blown retrenchment. By year-end, assuming Mr. Xi issues a clarion call for reform, the landscape could brighten significantly. On the other hand, if he fails to grab the brass ring, the Chinese consumer will shift from front to back foot, heralding an era of increased instability, both political and economic.

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Our special guest writers – including Derek Scissors, Nicholas Lardy and T Doctoroff – offer insightful analyses o bilateral relations, China’s economy consumer trends in the coming year

A Need for Rebalancing EXCLUSIV E

Gary Locke Visits Am Cham Shanghai

B y N i C H O lA S r . lA r dy A N d N i C H O lA S B O r S T NiCHOlAS r. lArdy is the Anthony M. Solomon senior fellow at the Peterson institute for international Economics.

conomic reform stands at the top of the agenda as China’s new leaders begin to prioritize new policy initiatives. The 18th Party Congress confirmed that policymakers continue to feel that the current growth model in China is “unsustainable, uncoordinated and unbalanced.” The solution is a more sustainable growth model based on domestic consumption and less energy-intensive growth. This will only be achieved by economic rebalancing that moves China away from the investment-driven growth model of the past. The need for rebalancing is clear, but whether policy makers are willing to take the prerequisite steps is uncertain. Rebalancing the Chinese economy entails reducing reliance on investment-fueled growth, particularly in the real estate market.

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The success of economic rebalancing depends on the extent to which policy makers take action to promote consumption.”

China’s investment share of GDP has increased substantially over the last decade, reaching a super-elevated level of 48 percent in 2011. Much of this investment flowed into the property market and led to dangerous levels of property speculation. Policies aimed at tamping down the property sector have slowed the pace of investment, but residential real estate investment is still unsustainably high. There’s no silver bullet to achieve rebalancing, but there are several polices that would have a significant impact over the medium to long term. The most important polices include a market-oriented exchange rate, ending artificially low deposit and

U.S. ambassador talks to Insight’s David Basmajian abo U.S.-China relations and his top priorities for the year

NiCHOlAS BOrST is research associate and China program manager at the Peterson institute for international Economics.

lending rates, eliminating subsidies for industrial energy consumption, and continuing to build out the social safety net. None of these policy ideas are new; all have been mentioned to varying extents in official government policy documents. Implementation, however, has been slowed by increasingly powerful vested interests and weak commitment to economic reform by the top leadership. The success of economic rebalancing depends on the extent to which policymakers take action to promote consumption. If investment growth begins to decline rapidly without offsetting measures to boost consumption, GDP growth could be pushed down into the low- to mid-single digits.

Consumption Conversely, if Chinese policy makers are aggressive in pushing pro-consumption policies, it is possible to keep growth rates in the mid- to high-single digits. This is also the quickest path towards economic rebalancing because it involves consumption growing much more rapidly than investment. At present, policy makers appear to be muddling through economic rebalancing, making the necessary policy changes slowly and haltingly. Interest rate liberalization, revived in June 2011, is proceeding very gradually. The People’s Bank of China has intervened less in the foreign exchange market over the past year, but a return of pressure for appreciation in 2013 may change that. Price controls for electricity and gas remain in place and the social safety net is improving but still far from complete. The slow pace of all of these reforms means that rebalancing is on track to occur only very gradually. Restructuring an economy, especially one as large as China’s, will be a long and difficult process. China’s leaders have acknowledged the imperative of economic rebalancing, but so far the policy follow-through has been timid. Hopefully the new XiLi administration will have more success in overcoming the vested interests that have been so successful in delaying reform over the past decade. Moving China towards a more sustainable growth model depends upon it.

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Economic Economic Relations Relations inin the theYear Year of of the the By dErEk SCiSSOrS dErEk SCiSSOrS is senior research fellow for economics at the heritage Foundation’s Asian research Center.

e survived an election, a transition, and economic problems on both sides. What will 2013 bring for U.S.-China business relations? Answer: fresh faces, an America that needs to address fiscal problems, and a relatively new issue that could cause serious friction – commercial espionage. On Capitol Hill, an obvious task is confirmation of Cabinet Secretaries. President Obama likely needs to replace Secretary

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Clinton, Secretary Geithner, and others who matter to China policy. New Cabinet members will probably have less China experience than their predecessors. They will learn, but 2013 could see challenges on this score. No matter who the team is, the U.S. must contend with fiscal policy before turning to Asia. The short-term effects of the “fiscal cliff ” are exaggerated – heavy borrowing hardly saved the economy in 2009 and eliminating some borrowing in 2013 will hardly doom it. However, the fiction of imminent disaster may prove useful in addressing America’s long-term fiscal failure. Too much borrowing or the wrong kind of taxation will eventually kill growth. Spending on entitlements must be curbed, the tax system must be less distorting, and changes must be financially and politically sustainable. If the U.S. cannot act, it will continue to tread the Japanese path toward stagnation. This will weaken the American position in Asia and may also make for foreign policy aggressiveness. A weaker America, like a weaker China, would be ill-tempered.

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Our special guest writers – including Derek Scissors, Nicholas Lardy and T Doctoroff – offer insightful analyses o bilateral relations, China’s economy consumer trends in the coming year

is undermining the value of the relationship for the U.S. China’s standard response to American complaints is it needs time, being poorer than the U.S. This is often reasonable, but not EXCLUSIV E

Gary Locke Visits Am Cham Shanghai

U.S. ambassador talks to Insight’s David Basmajian abo U.S.-China relations and his top priorities for the year

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If China-based hackers cannot be prosecuted, restrictions may be placed on firms shown to benefit from hacking.”

Los Angeles Mayor Antonio Villaraigosa with Vice President Xi at the Port of Los Angeles in early 2012

Snake Snake

If the U.S. can slash the budget deficit and improve the tax code, its economy is poised for strong growth, led by private investment and lower energy costs. This would enable a vigorous American foreign policy and reduce domestic pressure for confrontation with China. It would boost the Asia-Pacific economically and relax tension politically. Considering U.S.-China economic relations more narrowly, a break from the electoral cycle should cause the exchange rate issue to recede. Subsidies to state-owned enterprises will, properly, be a point of discussion for the U.S. The same is true for intellectual property. Unfortunately, the related issue of commercial espionage may force its way to the fore. Sino-American economic relations are mutually beneficial. Imports from China help support American jobs and Chinese investment in the U.S. has accelerated sharply this year. China’s government and enterprises insist they want to continue trade and seek more investment. But mutually beneficial exchange occurs only when the rule of law holds. If property rights are violated, there is no exchange – one side just takes. Commercial espionage

with regard to espionage. Greater Chinese competitiveness and more advanced technology are not breeding less theft, they may be breeding more.

Cyber attacks In the past few years, just among large companies, Dupont and Lockheed Martin have been targeted by attacks from China. So have American Superconductor, Coca-Cola, Chesapeake Energy and British Gas. The latter group was actively trying to do business with China. Hackers are targeting companies strongly interested in good Sino-American relations. Beijing’s easy denials are unhelpful. It is not credible that these attacks occur entirely independently of the central government. The Chinese counterparts of targeted foreign firms are usually state-owned. The frequency and sophistication of attacks imply organization and capability that would not be tolerated in an independent entity. American companies subject to Chinese espionage may be asked to disclose this to the federal government on a confidential basis. Documenting the problem will clarify whether the Obama Administration should put espionage at the top of the agenda in bilateral talks. Beijing should address the situation – fewer incidents and more accountability. Failing this, action may be taken against Chinese entities engaged in or benefitting from espionage. If China-based hackers cannot be prosecuted, restrictions may be placed on firms shown to benefit from hacking. If an American company is targeted coincident with negotiations with a Chinese enterprise, the latter might be banned from certain transactions for a time. A pointed U.S. policy response is increasingly likely.

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President Obama presents a gift to King Bhumibol Adulyadej of Thailand during their meeting at Siriraj Hospital in Bangkok, Thailand, Nov. 18, 2012. The gift is a photo album with photos of the King with U.S. Presidents and First Ladies dating back to President Eisenhower.

A Sea of Tensions By STEPHANiE klEiNE-AHlBrANdT STEPHANiE klEiNEAHlBrANdT is the northeast Asia Director and China Adviser at international Crisis Group in Beijing.

hina heads into 2013 with a new set of leaders under Xi Jinping and much talk about domestic reform, but no plan to alter its foreign policy. Little wonder then that poor relations between China and its neighbors, fueled by disputes in the East and South China seas, look set to continue. The leadership in Beijing has settled on a tactic in maritime border disagreements that turns perceived provocation by rivals claiming territory into a chance for changing the status quo in its favor. According to one Chinese analyst, the aim is to “turn crisis into strategic opportunity.”

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This approach could be seen in China’s reaction to the Japanese government’s purchase of three of the disputed Diaoyu/Senkaku islets in September; in its actions immediately after Vietnam passed a new maritime law covering the contested Spratly and Paracel islands in June; and in measures taken against the Philippines after a clash in the Scarborough Shoal in April. In all of these cases, China’s disproportionate reaction gave it the upper hand over its rivals. But China is also taking steps independent of external provocation. The government has started issuing new passports with maps displaying several disputed territories within China’s borders, sparking protests from Vietnam, the Philippines and India. In November, the Hainan provincial government announced maritime regulations that allow its law enforcement vessels to inspect, detain or expel foreign ships illegally in Chinese waters. While the regulations may apply to ships within Hainan’s 12-nautical-mile maritime boundary, there is language that could allow China to increase policing zones up to the infamous 9-dashed line, the large swath of sea it contests with many of its neighbors. The unwillingness of Beijing to publish the regulations also creates the impression that its sovereignty and long-term national interests are more important than smooth

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Our special guest writers – including Derek Scissors, Nicholas Lardy and T Doctoroff – offer insightful analyses o bilateral relations, China’s economy consumer trends in the coming year

Congress in November. Three weeks into the new administration, the Defense Spokesman said Chinese action in maritime disputes is necessary for “safeguarding the country’s legitimate sovereignty rights and interests.” Gary Locke Visits Am Cham Shanghai On the same day, Xi Jinping gave a speech venerating theDavid Basmajian abo U.S. ambassador talks to Insight’s relations and his top priorities for the year “Chinese dream” of a “great revival of the ChineseU.S.-China nation. ” While visiting the South China Sea fleet in mid-December, he specified that this “Chinese dream” included “the dream of a strong military.” Such language risks encouraging domestic nationalism will only raise tensions and uncertainty in the region. Indeed, Beijing seems to have strayed significantly from previous policy that it “will always be a good neighbor, good friend and good partner of other Asian countries.” After years of dedicated confidence-building with ASEAN countries, Beijing has managed in just the last several years to divide the organization and alienate several members with its approach to maritime disputes. The irony is that these actions are pushing countries into the arms of the United States, whose rebalancing toward Asia has become a near obsession within foreign policy circles in Beijing, where most believe that the U.S. aims to encircle China. Beijing’s EXCLUSIV E

relations in the region.

... most in Beijing seem blind to the danger that China’s behavior is undermining regional stability and harming its own strategic interests.”

Growing pessimism In the East China Sea, after announcing baselines to demarcate its territorial waters, China started to regularly send law enforcement vessels to patrol in disputed waters around the Diaoyu/Senkaku islands. The intention is to establish overlapping administration with the Japanese vessels that had solely patrolled the area for four decades. Air patrols were added in mid-December when a Chinese plane penetrated Japanese airspace over the islands, the first such intrusion since 1958. Japan responded by sending fighter jets. While neither Beijing nor Tokyo desires a major conflict, their tacit agreement to set aside the dispute has been broken and there is deepening pessimism on both sides over the prospects of a peaceful settlement.

‘Maritime power’ Such actions can be seen as part of China’s overall policy to develop from a land-focused economy into a “maritime power,” as underlined by Hu Jintao in his final policy report at the 18th Party

approach is also creating strange bedfellows among its regional neighbors. Philippine Foreign Minister Albert del Rosario went so far as to say that he would welcome it if former colonial power Japan rearmed in order to balance the region. Despite all this, most in Beijing seem blind to the danger that China’s behavior is undermining regional stability and harming its own strategic interests. Rather, the Chinese foreign policy elite largely blame rival claimants for starting the troubles. To those expressing surprise about the tough response in moments of tension, they say the world has underestimated China’s resolve to safeguard its interests. With little sign of critical self-reflection in Beijing on the handling of territorial disputes, and with formidable domestic challenges looming, the new leadership is unlikely to alter course on foreign policy. On top of that, nationalism is spiralling, ASEAN is weak and divided, and emboldened rivals stand more ready than ever to challenge China on border issues. Expect heightened tensions over territorial disputes in the South and East China Seas to continue to rattle the region in 2013.

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Risks: The Enemy is Complacency By kENT d. kEdl kENT d. kEdl is managing director for Greater China and North Asia at Control risks.

hina has always been a complicated environment for successful businesses, yet we continue to see investment and growth because the opportunities are so great. However, against a backdrop of slower growth and a crowded marketplace in China, there are several critical trends in 2013 we are focusing on that will be key challenges for foreign companies in China. Companies that look ahead and plan to deal with these can realize some significant competitive advantage; those that fail to do so risk further weakening their position in China.

1. if your operations are not healthy, your growth goals will be at risk. Thankfully, China is still a

vibrant market and, despite a noticeable slowdown in the Chinese economy, foreign companies are still forecasting growth opportunities in their China operations. And given the slowdown in M&A in China, companies will most likely look to organic strategies to grow their China businesses rather than buying companies and trying to bolt them on. In order to grow organically, companies need a solid foundation of good business processes, well-trained staff and fully-vetted third parties (vendors, distributors, etc.) who you know will do quality work in an ethical manner. Creating a culture of integrity is one of the largest challenges our clients face, evidenced by the greater attention to compliance

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efforts over the past year that will continue into 2013 to drive sustainable business practices. One CEO recently commented to me, upon hearing rumours of bribes and kickbacks amongst his distribution network, that he “can’t run on a broken leg” and achieve double digit growth. Another client of ours was looking to grow a 2,000-strong distribution channel another 50 percent. But when he started looking closely at his existing distributors, he started finding examples of bribes being paid to customers and collusion with some of his sales staff who were giving “special discounts” to certain distributors. He had to go back to his headquarters and tell them that, not only could he not give them the growth they were looking for, but he had to do a complete assessment of his existing channels and, very likely, needed to let some of them go. Needless to say, this was not a happy conversation. Those who want to grow organically in 2013 will need to ensure that they have robust processes in place to prevent, investigate and respond to business integrity issues.

Even the ‘simplest’ of fraud cases should be seen as a potential crisis that could quickly spin out of control unless it is contained.”

2. Situations of “simple” fraud may rapidly devolve into extortion and/or violence. Those

who have worked in China for any amount of time are all too familiar with fraud and corruption. China still has, unfortunately,

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Year of the Sn a well-deserved reputation as a market where bribes, kickbacks, collusions and conflicts of interest are quite common. However, we are concerned that companies’ familiarity with managing such business risks can breed complacency when just the opposite response is required. In 2013, slower growth in China with increasing pressure to perform will continue to require companies to restructure business relationships and operations, which often uncovers hidden conflicts of interest, fraud and corruption issues, resulting in disputes, u n re s t a n d i n s om e c a s e s outright extortion. Even the “simplest” of fraud cases should be seen as a potential crisis that could quickly spin out of control unless it is contained. Many of our integrity-related investigations in 2012 were complicated by the unseen vested interests of third-party stakeholders who were motivated to cause trouble once the bribes and kickbacks stopped (including exposing the company to illegitimate claims of malfeasance with Chinese regulators, negotiating in a coercive environment and, in rarer cases, hiring thugs to physically abuse management). We think this may increase in 2013. If you hear about a fraud or corruption issue, or need to restructure your business, convene a crisis leadership team, conduct scenario planning and proactively communicate and influence your stakeholders – plan recovery options and don’t discount the inevitable (we’ve seen it happen!).

3. you will need to find a way to compete against local companies using commercial practices that you cannot use. In the latest AmCham

Shanghai Business Climate Survey, 76 percent of member companies said that “domestic competition” was a big challenge for them, so much so that this was the No. 3 business challenge overall. One of the biggest complaints we hear is that local competition is not subject to the same compliance rules as foreign companies and foreign managers believe that local companies will often use

Our special guest writers – including Derek Scissors, Nicholas Lardy and T Doctoroff – offer insightful analyses o bilateral relations, China’s economy consumer trends in the coming year

EXCLUSIV E

Gary Locke Visits Am Cham Shanghai

U.S. ambassador talks to Insight’s David Basmajian abo U.S.-China relations and his top priorities for the year

dodgy commercial practices such as bribes and kickbacks to win business. However, when pressed for details on just what their competition is doing, most foreign managers have no idea. They just “know that it is happening and don’t know what to do about it.” You need intelligence on your market and your competitors in order to compete against them. What is their route-to-market? What types of distribution do they use? What are the mark-ups along the distribution chain? What is the end price to customers? What types of bribes/kickbacks are used? Where are they used and how much? Do they steal intellectual property of competitors? Are they politically exposed? How do they manage risks? Only when you fully understand what you’re up against can you find a way to compete. Though the China market is slowly maturing, there are still massive challenges for foreign companies. In 2013, we see the issues above becoming more complex, not less. Only those properly paying attention will be able to handle them.

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Trade issues with China are likely to remain steady in 2013

China, China,Trade Trade and and the the Next Next Four FourY By Ed GrESSEr Ed GrESSEr directs the Progressive Economy research program at the GlobalWorks Foundation in Washington, d.C. The opinions here are purely his.

promised a different, more confrontational approach. President Obama defended his policy as working well. If election results are a guide, Romney’s ideas didn’t attract much interest. The administration’s approach from 2009 to 2012 will likely guide the second term as well. l Second, we’re likely to see trade policy activism elsewhere. Apart from China, the two candidates’

or those tracking U.S.-Asia trade policy, the 2012 elections probably have two messages:

First, expect continuity in China policy. Governor Romney made a strong critique of l

the American trade relationship with China and

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trade policy differences were surprisingly narrow. Governor Romney promised to create a “Reagan Zone” of enthusiastic freetrading countries apart from the WTO. The name was his own, but in practical terms the idea closely resembles the Obama administration’s two main ideas for the coming years – the conclusion of a Trans-Pacific Partnership agreement with 10 other countries in Asia and the Americas, plus a negotiation of a trade

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Our special guest writers – including Derek Scissors, Nicholas Lardy and T Doctoroff – offer insightful analyses o bilateral relations, China’s economy consumer trends in the coming year

the current trade-negotiation round of the World Trade Organization (WTO), have left a powerful sense that China and the other “BRIC” powers, though important and “rising,” are unenthusiastic about major new international agreements and, at least in the short term, are unlikely to join theGaryUnited Locke VisitsStates Am Cham Shanghai U.S. ambassador talks to Insight’s David Basmajian abo U.S.-China relations and his top priorities for the year in concluding them. EXCLUSIV E

Thus both the Obama administration and the Romney campaign ended up with exportminded trade programs premised on negotiating around the BRICs.” On track

rYears Years agreement with the European Union. In effect, both candidates promised more ambitious agreements. But both also were implicitly pessimistic about reaching new agreements with China, India, and Brazil – and the likely result for the next two or three years is a policy that works around them. What explains this? On one hand, Americans have emerged from the financial crisis much more cautious about shopping, spending and home-buying than they were before. This has meant consumption does less to support growth and employment, and both parties have concluded that the U.S. needs exports more than we did after earlier recessions. On the other hand, the Obama administration’s bruising experience in the 2009 climate-change negotiations and the Bush administration’s with the Doha Round,

Thus both the Obama administration and the Romney campaign ended up with export-minded trade programs premised on negotiating around the BRICs. The most likely path of American trade policy for the next four years is that the administration will try hard to finish the Trans-Pacific Partnership, will probably win support for it at home if it succeeds, and then take a year to convince Congress to pass it. China policy, at least for a while, will most likely remain on the same track of the last four years – that is, focused on implementation of WTO commitments and the so-far-frustrating efforts to settle arguments over intellectual property, currency, cyber-security and other topics through the Strategic & Economic Dialog (S&ED) or some other U.S.-China bilateral forum. And then the next presidential campaign will be under way. This does not, of course, mean that trade and investment themselves will slow or stagnate. Though there haven’t been many splashy post-crisis agreements, American-Chinese trade in goods and services has nonetheless grown by US$150 billion since 2008. Steady growth in telecom and shipping capacity makes this likely to continue in the next four years, barring some unexpected crisis. Conclusion of TPP, or of new intra-Asian trade agreements, would shift trade and investment trends a bit, but probably not fundamentally. The open question is whether there will be some interesting new idea from China that could give multilateralism some brighter prospects. (A push to reopen the Doha Round? Innovations on financial architecture? An environmental program?) If so, the calculations of American officials and Congress might change, making a more China-centered policy appear more attractive. If not, the program for the next four years seems set.

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U.S. Ambassador Addresses AmCham Shanghai’s GA Dinner

.S. Ambassador to China Gary Locke talked about the increasingly interdependent economic relationship between the United States and China and the importance placed on the relationship by the Obama Administration at AmCham Shanghai’s Twelfth Annual Government Appreciation Dinner, held on December 3 at the Shanghai Marriott Hotel City Centre to celebrate the longstanding partnership between the U.S. business community, the U.S. government and the Shanghai Municipal Government. “O ne s i mply c an not ove re st i mate t he imp or t ance of t he U.S.-C hina e conomic relationship. More than a billion dollars of goods and services flow between our two countries every single day, compared to 100 million per year when President Nixon first came to China 40 years ago,” he said to an audience of more than 450 U.S. and Chinese businesspeople and

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government officials. Addressing the same audience, Shanghai Vice Mayor Ai Baojun said that by the end of 2011, U.S. companies had accumulatively invested in 6,940 projects in the city. Ai also reiterated S h a n g h a i’s c o m m i t m e nt t o f o s t e r i n g a n investment environment that welcomes foreign businesses in the city. “Much of the credit for Shanghai’s success is due to the hard work and vision of the city’s leadership and government officials, many of whom are with us tonight,” said Kenneth Jarrett, 2012 chair of the AmCham Shanghai Board of Governors. During his visit, the ambassador also toured the recently launched AmCham Shanghai Small and Medium Enterprise (SME) Center and met with Jarrett, AmCham Shanghai President Brenda Foster, U.S. company executives and Shanghai Vice Mayor Ai Baojun to discuss the business climate for U.S. companies in Shanghai.

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CORPORATE TABLE SPONSORS

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Perkins Eastman Architectural Design Consulting (Shanghai) Co., Ltd. ZHANG Kelly

ALC Advisors HO Dean Tse Wah

PricewaterhouseCoopers NOLING Zach

AstraZeneca (Wuxi) Trading Co., Ltd. SHAHEEN Elizabeth

Synergis Holdings Limited KELLY Patrick Boniface

Azon Polyurethane (Shanghai) Ltd., Co. ZHOU Liang

Baxter (China) Investment Co., Ltd. BUCCILLI Marielle

Carlson TGI Friday’s Restaurant Management (Shanghai) Co., Ltd HSU Joseph

Consumer Electronics Association LI Wei

Tellabs Communication Technologies (Shanghai) Ltd. BARR Kevin

Advantek (Shanghai) Electronic Packaging Co., Ltd. WEI Qi Allegis-BN Human Resources Consultants (Shanghai) Limited HU Julia

Exponent Science and Technology Consulting (Hangzhou) Co., Ltd. HAYES Troy Allyn G&W (Shanghai) Electric, Ltd. SOLARI James SAE Industrial Consulting Services (Shanghai) Co., Ltd. SCHKADE Gary Scott SilkRoad Technology WANG Johnny

CTPartners Commercial Consulting (Shanghai) Co., Ltd. LUO Train TSAMADOS Dimitri Cummins Engine (Shanghai) Trading & Services Co., Ltd. TANG Steven DCM Education Information Consulting (Shanghai) Co., Ltd. COOK Laurence FRECKLINGTON Shane

Textron Trading (Shanghai) Co., Ltd. SCHULTZ William The Martec Group WANG Ying VF China Limited, Shanghai Branch UHLAND Jacob Lee

Individual U.S. Citizen Membership ATLAS-China ABRAHAM Sorock

Dell (China) Co., Ltd., Shanghai Branch WANG Tsai Pai U.S. Associated Corporate Dow Chemical (China) Investment Co., Ltd. Membership PAN Rui Kendrion Binder Magnetic (Suzhou) Co., Ltd, DuPont Agricultural Chemicals, Ltd., Shanghai WEISSHAAR Juergen LI Kelly VF China Limited, Shanghai Branch eBaoTech Corporation HONG Liang QIAN Jing Exponent Science and Technology Consulting Corporate Int’l Affiliate (Hangzhou) Co., Ltd. Membership JIN Xiuying

Cepheid HE Lifeng

E-Technology (Shanghai), Ltd. GONG Simon

G&W (Shanghai) Electric, Ltd. CAO Geoffrey

N/A ZEIGLER Scott

Jumeirah Himalayas Hotel ANG Renato Sanchez

Gallup Research Co., Ltd., Shanghai Branch LI Xinyue

Redhorse Automotive Shanghai JOHNSON Benjamin

Synergis Holdings Limited FAN Cheuk Hung

Hertz Equipment Rental Company LIU Summer

USA NUTS FONTENOT Mark

Yue Shanghai Hotel HUI Doris

Honeywell (China) Co., Ltd. XU Katie

Knowles Electronics (Suzhou) Co., Ltd. ZHANG David Non-Resident Corporate Membership Consumer Electronics Association KELLEY John

Lateral Link China Consulting GOSELAND Nick LIN Annie

Mercer Consulting (China), Ltd. LEONG Kwong Yee Small Business Membership XIA Siren Lateral Link China Consulting Novus International Trading (Shanghai) Co., Ltd. FLOWERS Justin HANG Yan Otis Elevator Management (Shanghai) Co., Ltd. LING Bella Associate Membership

Dalian Kaiser Construction MITCHELL Brandon Ivie HUCKELS Robert Jinti (Shanghai) Information Technology Co., Ltd. ZHAO Jin N/A BROWN Zach

Individual Int’l Affiliate Membership GM Capital Investment HONG Hui JRB Consulting Limited BRADLEY Jonathan N/A LO Violet

Special Membership Charitable Organization Operation Smile JORGENSON Julia

Active-Semi (Shanghai) Co., Ltd. TAM William

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J A N U A RY / F E B R U A RY 2 0 1 3

Do you want to share more information about your company? Contact Sophia Chen at (86 21) 6279-7119 ext. 5667 or sophia.chen@amcham-shanghai.org for a “Standout Listing” opportunity in the New Members Section.

i n s i d e amc h am B O A R D o f g o v e r n or s br i e f i n g

Highlights from the December 2012 Board of Governors Meeting

Approval of Search Firm for Next President Ken Jarrett, Board Chair, reported on the interviews with the five search firms that responded to the RFP to conduct the search for AmCham Shanghai’s next President. After a discussion of each of the firms, the Chair made a motion to select the firm of Spencer Stuart. It was also decided that prior to the start of the search, AmCham Shanghai’s management team would brief the Spencer Stuart search team on AmCham Shanghai’s current programs and activities so that the search team would have an understanding of the Chamber as it is today and where it hopes to position itself for the future. Certificates of Appreciation Certificates of appreciation were presented to all 2012 Board members with special recognition given to those members completing their term on the Board and to Ken Jarrett for his service as the 2012 Board Chair. Ken did not run for 2013 Chair but was elected to serve as a governor on the 2013 Board.

Government Appreciation Dinner Recap President Brenda Foster reported on the successful Twelfth Annual Shanghai Government Appreciation Dinner. In initial conversations held with members and sponsors, most appeared to be pleased with the event. Brenda recognized the staff for their hard work in organizing the dinner.

In Attendance Governors: Andrew Au, William Brekke, Ted Hornbein, Kenneth Jarrett (Chair), Dan Krassenstein, Eric Zheng, Lienjing Chen, Jim Mullinax, Jim Rice, Robert Theleen, Peter Sykes Apologies: Eddy Chan, Marie Kissel Attendees: Brenda Foster (President), David Basmajian, Steven Chan, Kirt Greenberg, Patsy Li, Helen Ren, Jonathan Shyu, Scott Williams, Jessica Wu, Sherman Chu, Curtis Hutchins, Keith Cole

The AmCham Shanghai 2013 Board of Governors

Governors

Chair

Robert Theleen ChinaVest

Andrew Au Citibank China

Chen Lienjing Pratt & Whitney

Curtis Hutchins Eaton (China) Investments

Eric Zheng AIG Insurance

Jimmy Chen FedEx Express

Keith N. Cole General Motors

Kenneth Jarrett APCO Worldwide

Marie Kissel Baxter Asia-Pacific

Peter Sykes Dow Chemical

Sherman Chu Cisco Systems

J A N U A RY / F E B R U A RY 2 0 1 3

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AmCham AmChamShanghai Shanghai Ambassador Gary Locke and guests at AmCham Shanghaiâ&#x20AC;&#x2122;s Twelfth Annual Government Appreciation Dinner

Andrew Banks, chairman of Talent2, during a CEO Speaker Series event

Here is a selection of snapshots captured in the past month. Members of AmCham Shanghai with NFL Hall of Famer 4 2 i n s i g h t J A N U A RY / F E B R U A RY 2 0 1 3 Barry Sanders, second from left, at an NFL event 42

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NOVEMBER 2012

Month Monthin in Pictures Pictures Participants at the 2012 AmCham Shanghai Regional Manufacturing Conference in Suzhou, Jiangsu Province

Panel discussions and networking sessions during the 2012 CSR and Sustainability Conference

Guests at the Interchamber Christmas Mixer

AmCham Shanghai member Phil Branham greets Yao Ming at the Special Olympics Unity Gala Dinner J A N U A RY / F E B R U A RY 2 0 1 3 i n s i g h t NOVEMBER 2012

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