Insight Magazine July-August 2010

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

INSIGHT The Journal of the American Chamber of Commerce in Shanghai July / August 2010

VIP VISITOR

GE’s Jeffrey Immelt ENERGY FEATURE

U.S.-China Cooperation INTERVIEW

CFR’s Richard Haass

Commercial Ties That Bind The U.S.-China trade relationship has a number of challenges that must be addressed, but offers incredible opportunities for each country

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INSIGHT July/August 2010

The Journal of the American Chamber of Commerce in Shanghai

David Turchetti DIRECTORS

BUSINESS DEVELOPMENT & MARKETING

Karen Yuen COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren

MEMBERSHIP & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

Justin Chan

ASSOCIATE EDITOR

Tiffany Yajima

COMMUNICATIONS ASSISTANT MANAGER

Weina Yang DESIGN

Alicia Beebe LAYOUT & PRINTING

Ella Shan Snap Printing, Inc.

INSIGHT SPONSORSHIP SPONSORSHIP MANAGER

Sophia Chen

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

12 The Chinese Medical Device Market

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

HEALTHCARE SERIES

GE

Brenda Foster

F E AT U R E S

IMAGINECHINA

PRESIDENT

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AMCHAM SHANGHAI

By Andrew Chen

Like almost every other healthcare-related sector in China, the medical device market is expanding rapidly. Investment across the country in improving hospitals and medical care centers is expected to drive the market for foreseeable future.

16 Policy Perspective from the Top INTERVIEW

By David Basmajian

As President of the Council on Foreign Relations, Richard Haass has a unique perspective on the U.S.-China relationship. He sees the relationship as being able to define the next few decades of the 21st century.

19 Green Cooperation ENERGY FEATURE

By Tiffany Yajima

One of the key areas for U.S.-China cooperation in the coming years is in the research and development of clean energy. As the two largest consumers of energy in the world, finding a solution to fight climate change must start with the U.S. and China.

23 Innovating for Growth VIP VISITOR

By Justin Chan

GE Chairman and CEO Jeffrey Immelt sits down with Insight to discuss his view of the China market and how he plans to guide GE on a path of strong growth and development for many years to come.

26 Commercial Ties That Bind COVER STORY

By Ryan Balis

Although it is not without its challenges, the U.S.-China relationship is one that has been called the most important bilateral relationship of the 21st century. From a trade point of view, cooperation and engagement stands to benefit each country to an extent it could never reach without the other.

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

3 News Briefs

44 Deal of the Month

10 Getting the Real Picture of China MARKET PROFILE

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

Special thanks to the 2010-2011 AmCham Shanghai President’s Circle Sponsors

When starting out in China, market intelligence is key to understanding how the country works.

INSIDE AMCHAM

33 From the Chairman: The Case for the NEI 38 AmCham Shanghai New Member Listing

39 Events in Review 42 Committee Highlights

INSIDE INSIGHT

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ummer is officially here and although it is usually time for some much needed rest and relaxation, the Shanghai 2010 World Expo continues to draw in visitors at a dizzying pace. As the Expo continues here, the next few months are also shaping up to be an important time for the U.S.-China relationship. Following the Strategic & Economic Dialogue in May and just ahead of the G-20 meeting in Toronto in June, the People’s Bank of China, the central bank, announced that China would resume exchange rate reform and increase flexibility of the RMB.

JUSTIN CHAN EDITOR-IN-CHIEF

The Chinese currency is just one of the many issues addressed in this month’s cover story, which looks at the state of the U.S.-China commercial relationship and includes an interview with U.S. Secretary of Commerce Gary Locke. While China’s decision to de-peg the RMB was welcomed, it is not expected to have any immediate impact on improving the U.S. economy.

One solution that should help is President Obama’s National Export Initiative (NEI), which

aims to double U.S. exports over the next five years.

This month’s energy feature looks at U.S-China cooperation in clean energy development and how U.S. companies are working to take advantage of the massive market opportunities that China offers.

We also had the pleasure of sitting down with GE Chairman and CEO Jeffrey Immelt, who has led GE to double its exports over the past five years and become the second-largest exporter in the U.S. In Shanghai to participate in AmCham Shanghai’s 2010 World Expo CEO Speaker Series, Immelt shared his thoughts on succeeding in China and his plans to grow GE. This issue also features an interview with foreign policy expert Richard Haass, president of the Council on Foreign Relations. Haass discussed his view of the U.S.-China relationship and China’s increasing role on the international stage. Finally, turn to the latest installment of our healthcare article series, which examines the development of the medical devices market in China.

IMAGINECHINA

News

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

CHINA BUSINESS

China to subsidize green cars China’s Ministry of Finance released details of a subsidy program to promote green vehicle sales and to cut automobile emissions. The government estimates it may subsidize at least 4 million vehicles by 2012, increasing green car sales by over RMB400 billion. According to details of the two-year pilot program, the government will provide a subsidy of RMB60,000 on electric vehicles and up to RMB50,000 on certain gasolineelectric hybrids presumably produced in China. The program is set to begin this year in five participating cities: Shanghai, Hangzhou, Changchun, Shenzhen and Hefei. Additionally, buyers of certain fuel-efficient cars nationwide will receive a subsidy of RMB3,000.

China commits RMB700 billion for high-speed rail The Ministry of Railways announced that China will spend RMB700 billion on high-speed rail construction in 2010, equal to the amount spent on railway construction in 2009. Spending this year will contribute at least 4,613 kilometers of new high-speed lines on top of the 10,000 km currently under construction to connect many of China’s major cities.

The government wants to accelerate the laying of new high-speed lines to upgrade its national rail network of mostly conventional track. China has 6,552 km of high-speed rail lines currently in operation but plans for half the country to have high-speed coverage by 2012.

Yuan promoted for trade deals China’s State Council announced the expansion of a yuan-settlement program to 20 provinces and municipalities in

China adjusts currency regime China will gradually adopt a more flexible exchange rate for its currency, the renminbi or yuan, according to an announcement by the People’s Bank of China (PBOC).The PBOC did not provide a timetable or scale for the anticipated appreciation of the renminbi, which has been informally pegged to the U.S. dollar since July 2008.The timing of the move ahead of the G-20 summit in Toronto, Canada follows strong pressure from foreign officials for China to accelerate reform of its currency regime.

China maintains the rationale for the adjustment is in light of “the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China,” according to a PBOC statement.

China in a move to promote the Chinese currency internationally. The program permits Chinese companies to complete foreign import and export deals with Hong Kong, Macau and members of the Association of Southeast Asian Nations (ASEAN) in RMB instead of U.S. dollars or other overseas currencies. The program began in July 2009 and is currently limited to companies in Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan. The expansion could cover Sichuan, Jiangsu, Fujian and Yunnan provinces, though further details have not been released. The program generated a modest RMB44.55

billion (US$6.55 billion) in transactions through May 2010.

total

CNPC kicks off energy pipeline construction The China National Petroleum Corp.

(CNPC) announced the launch of construction on oil and gas pipelines between China and Myanmar. The project is a joint venture between CNPC affiliate Southeast Asia Pipeline Co. and Myanmar National Oil and Gas Co. With an overall length of 1,100 kilometers, the pipelines will run from Kyaukryu, on Mynanmar’s

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west coast, to Kunming in southwest China. Chinese Premier Wen Jiabao and Myanmar Prime Minister Thein Sein were on hand to witness the announcement at a signing ceremony in the Myanmar capital of Naypyitaw. Premier Wen’s visit to Myanmar marked the first by a Chinese premier in 16 years and concluded the Chinese premier’s four-nation tour of Asia, which also included stops in South Korea, Japan and Mongolia.

CORPORATE NEWS

GM, Ford’s China sales zoom Both General Motors and Ford set new sales records for the month of May, as strong growth continues for the American automakers in China. GM reported a record 196,004 units sold in May. The figure includes 83,302 units sold by its Shanghai General Motors venture – a 48.7% increase year-over-year – and 105,395 units sold by its SAIC-GM-Wuling Automobile venture, a 5.2% bump from a year earlier. Although SAIC-GM-Wuling’s sales growth slowed compared to April’s 18.9% jump year-overyear, GM reports its total sales are up 53.9% through the first five months year-overyear. Ford Motor sold 23,742 vehicles in May, a 17.8% jump over a year earlier and the automaker’s 16th consecutive monthly increase in China.

AgBank clears hurdle for massive IPO The Agricultural Bank of China won approval from the Chinese Securities Regulatory Commission (CSRC) and the Hong Kong stock exchange’s listing committee for its much anticipated initial public offering (IPO). AgBank is on track for listing on the Shanghai Stock Exchange on July 15 and in Hong Kong the following day. The IPO is expected to be one of the largest ever and is targeted to raise between US$20 billion to US$30 billion. Meanwhile, AgBank entered into a strategic partnership with Rabobank Group, a Dutch-based financial services provider, to help AgBank expand in China and support its international clients.

Carlsberg raises stake in Chinese brewery Carlsberg announced it will acquire an additional 12.25% stake in Chongqing Brewery with a US$342 million conditional purchase, raising the Copenhagen, Denmark-based brewer’s stake in Chongqing Brewery to 29.7%. Carlsberg is the world’s fourth-biggest brewer and is seeking to expand its presence in what the company anticipates is a rapidly growing beer market in central China. The local government-owned Chongqing Brewery is China’s number six beer producer based on volume, which was 10 million hectoliters (264.2 million gallons) in 2009.

The Chinese brewery commands an 80% market share in the surrounding regions of central China. The transaction must gain approval from authorities and minority shareholders.

MACROECONOMICS

China’s CPI up 3.1% The National Bureau of Statistics says China’s consumer prices accelerated 3.1% in May on a year-over-year basis. The rise in the consumer price index (CPI), the primary inflationary measure, outpaced the government’s 3% target and is above April’s 2.8% increase. Despite the CPI breaking the 3% barrier for the first time in 2010, it is unclear whether the People’s Bank of China, China’s central bank, will raise interest rates. Other economic data signals the economy is slowing. Industrial production rose 16.5% in May, down from April’s 17.8% expansion. Analysts expect inflationary pressures to ease in the second half of 2010 because of lower raw materials prices and the effect of stiff housing rules on the property market.

year-over-year and beating forecasts for 30.2% growth. China’s imports totaled US$112.2 billion, a gain of 48.3% from a year earlier. May’s US$19.53 billion surplus comes on the heels of a slight US$1.68 surplus in April and a US$7.24 billion trade deficit in March, China’s first monthly shortfall in six years.

China’s manufacturing expands at a slower pace Data from the China Federation of Logistics and Purchasing and the National Bureau of Statistics show China’s manufacturing activity expanded for the 15th consecutive month in May but at a slower pace than in April. China’s Purchasing Managers’ Index (PMI) was 53.9% in May, down from a 55.7% reading in April (a level above 50 signals expansion). The data suggests China’s tightening measures are working to cool the economy, according to analysts. Looking ahead, economists forecast China’s economy to expand quickly but at a reduced pace.

U.S. - CHINA

Gap to enter China U.S. clothing retailer Gap announced plans to enter China in late 2010 with four wholly owned stores in Beijing and Shanghai, as well as Internet shopping services in China.

The San Francisco-based retailer operates roughly 3,100 stores worldwide in over 25 countries and plans to offer Gap’s full range of adult, children’s and baby products at the four stores. Each store will occupy 1,100 square meters of space and will be located on high-traffic shopping streets including Wangfujing in Beijing and Nanjing Road in Shanghai. E-commerce company Shanghai Yi Shang Network Information Co. will offer Gap products online.

China records US$19.5 billion trade surplus

Air China to buy 20 Boeing planes

China’s trade surplus soared to US$19.53 billion in May on stronger-than-expected foreign demand for Chinese-made goods.

China Customs data shows China’s exports totaled US$131.76 billion in May, up 48.5%

Air China announced an agreement to purchase 20 new Boeing 737-800 planes in a move that will bump the carrier’s fleet capacity by 5%. The transaction price was not disclosed, but Air China says the jets’

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list price totals US$1.4 billion. Air China says Boeing granted it “significant price concessions” for the planes whose delivery date, in stages, should be between 2013 and 2015. Air China says the purchase will “reinforce” its domestic market share and “increase [the] frequency of flights for a number of domestic and neighboring international routes.” In addition to this latest deal, Air China has roughly 130 planes on order.

Conference features Chinese high-speed rail Chinese rail executives joined representatives from Germany and Spain at a two-day conference in Los Angeles held by the U.S. High Speed Rail Association.

Participants offered their expertise on the potential for a U.S. high-speed rail network. As momentum gains in the U.S. for high-speed rail development, Chinese industry leaders are sharing best practices and helping to deliver a blueprint for development. In January, the Obama administration announced US$8 billion in high-speed rail grants. Such investment may offer promise for China’s Ministry of Railways, which joined forces with General Electric to build equipment in hopes of winning bids for high-speed rail contracts in the U.S. EXPO 2010

Expo passes 10 million visitor mark The 2010 World Expo marked an important milestone on June 5 with the total number of visitors to the Expo reaching 10 million.

Throngs of over half a million visitors packed the Expo site for three consecutive days of pleasant weather in early June which helped boost attendance. On June 8, the Expo welcomed 507,200 visitors, a jump of nearly 200,000 from the number of visitors who attended on June 1. Expo organizers estimate the Expo will host 12 million visitors during June with daily averages between 400,000 and 450,000 and a peak of 600,000 daily visitors. Near the start of June, the Expo generated RMB5 billion

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(US$735.5 million) in ticket sales and close to RMB6 billion in operational profits.

Expo lives up to low-carbon mission The Expo site will be between 60% and 70% carbon neutral by October 31 and fully carbon neutral in four to five years, according to the Bureau of Shanghai World Expo Coordination and Shanghai city officials who made the announcement on World Environment Day. Energy saving technologies in use at the Expo site currently, and slated for application in city construction following the Expo, will help Shanghai reach these voluntary offsets. Officials hope their efforts will create a low-carbon industry and promote a low-carbon lifestyle among individuals and businesses. The payoff of using green technologies at the Expo, as opposed to traditional technologies, is 12,700 fewer tons of carbon emissions in the first month of the Expo site’s operation alone.

Expo plays up innovation The Expo’s third theme forum stressed how science and technology innovations improve urban life. Roughly 700 representatives flocked to the two-day forum held in Wuxi. “The most brave and attractive cities in the world are the pioneers who first search for solutions with technology,” says Supachai Panitchpakdi, secretary general of the U.N. Conference on Trade and Development. One of the participants was Yuan Longping, the 80year old Chinese architectural scientist known as the “Father of Hybrid Rice.”

Yuan’s “super rice” produces an average of 800 kilograms per hectare, which is nearly twice the output of other hybrids of rice.

The China Pavilion displays a 10-squaremeter super rice paddy developed by Yuan in its Land of Hope section.

GOVERNMENT & POLICY

Housing prices stall, but policy tweaking continues The National Bureau of Statistics says

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real estate prices rose only 0.2% from April in 70 of China’s large and mediumsize cities, dipping below April’s increase of 1.4%. Transactions declined 70% in both Shanghai and Beijing and 62% in Shenzhen compared to April; nationwide, sales dropped 15.8% from April. To rein in China’s climbing housing prices, up 12.4% in May, the Ministry of Housing and Urban-Rural Development announced that second-time home purchasers as well as applicants who cannot prove one year’s worth of local social security contributions or tax payments must pay 50% of the housing price as a down payment and mortgage loan rates at 110% of benchmark interest rates.

Energy tax introduced in Xinjiang China enacted a 5% natural resource tax that energy companies must pay on the price of oil and natural gas produced in Xinjiang. Beijing intends for the new levy to complement its support of improved economic development in western China.

Under the measure, Xinjiang is expected to gain revenue off natural resources equivalent to five times current levels.

Nearly 30% of Xinjiang’s economic output last year was tied to oil and natural gas production. The tax may hurt PetroChina and Sinopec’s earnings because Xinjiang accounts for a significant stake of the firms’ oil and natural gas outputs. Beijing is expected to eventually expand the resource tax nationally.

China pushes for high-skilled workforce The Communist Party of China Central Committee and State Council jointly unveiled a modernization plan setting out China’s shift from a “labor-rich to talent-intensive” national workforce. The country’s National Medium and Long-term Talent Development Plan (2010–2020) calls for improved domestic education to raise the percentage of Chinese workers with higher education from 9.2% in 2008 to 20% by 2020. Additionally, the plan

aims to attract foreign talent to China with favorable polices and incorporates the 2008 plan to hire 1,000 overseas specialists. In 2009, China attracted 480,000 workers that qualify as foreign talent, which includes workers from Hong Kong, Macao and Taiwan.

SHANGHAI BUSINESS

Green vehicle research center launched Chinese and German scientists launched an electric automobile research center based at Tongji University in northeast Shanghai. The research center will promote collaboration among scientists from six German universities and four Chinese universities and automobile enterprises who will work to develop batteries, engines and advanced technology for new electric cars. China aims to have one million electric cars by 2015, according to Zhang Zhihong, deputy director of the Hi-Tech

Department under the China Ministry of Science and Technology. Shanghai plans to build 400 battery charging stations across the city to promote electric vehicle use and to reduce automobile emissions.

Shanghai’s economy expands despite mild cooling Shanghai’s economy grew in key sectors in May but showed modest signs of cooling due to slower growth in industrial production. Shanghai posted a trade deficit for the third consecutive month in May. The city’s exports jumped 48.1% last month year-over-year to US$14.7 billion, while imports surged 51% to US$15.4 billion. Similarly, retail sales improved 18.9% last month on an annual basis, generating RMB51.2 billion (US$7.5 billion) of sales that benefited from the 2010 World Expo. However, the city’s industrial output slowed slightly to 24.6% growth year-over-year to RMB243.4 billion (US$35.7 billion) in May, down

from a 26.2% rise in April and a 28.2% increase in March.

Shanghai-Taipei direct flight route added Beginning June 14, passengers may fly direct between Shanghai Hongqiao International Airport and Taipei Songshan Airport. The new air route is in addition to direct flights already operating between the cities’ two larger international airports at Pudong International Airport in Shanghai and Taiwan Taoyuan International Airport in Taipei. The 90minute flight time between Shanghai and Taipei will not change, but the airports’ proximities to their respective city centers add convenience for some passengers.

The commute time by car to Taipei’s city center will be cut by 40 minutes, while the distance will be cut by 27 kilometers to downtown Shanghai. A total of 28 flights per week will operate between the Hongqiao and Songshan airports.

Nestled within a 588,500sq.m landscape of lush greeneries and a stunning central lake, Shanghai Pudong Software Park (SPSP) is in the forefront of the newly touted Silicon Valley of Shanghai situated within a 5-minute stroll from Metro Line 2.

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86-21-61821816

CHINA & THE WORLD

ASIA-PACIFIC SOUTH AMERICA

President Hu tours central Asia President Hu Jintao paid an official state visit to the central Asian states of Uzbekistan and Kazakhstan, aiming to enhance China’s partnership with the energy-rich post-Soviet republics.

Hu met with Uzbek President Islam Karimov to discuss boosting energy exploration and development cooperation, as well as increasing technology ties. Bilateral trade between China and Uzbekistan increased 18.9% last year, reaching US$1.91 billion and ranking China as Uzbekistan’s second largest trading partner. During his stay, Hu attended the Shanghai Cooperation Organization (SCO) summit whose members – China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan – discussed strategies for increasing security and cooperation. Following the summit, Hu paid an official visit to Kazakhstan where he signed economic and trade cooperation agreements.

MIDDLE EAST

ASIA-PACIFIC EUROPE

SOUTH AFRICA: China makes mark at World Cup China is making its mark at the 2010 World Cup in South Africa in unique ways. China supplies roughly 90% of the ubiquitous vuvuzela noisemakers heard throughout the games. The vuvuzela craze is expected to generate more than US$20 million for businesses in China. Additionally, Chinese renewable energy company Yingli Green Energy Holding Co. is the first Chinese sponsor in World Cup history. The Baoding-based company has advertisements in both Chinese and English for its Yingli Solar brand at all 64 World Cup matches. Chinese bottler Harbin Brewery Group, owned by Anheuser-Busch InBev NV, also has a presence at the games.

AFRICA

ITALY: Peking opera draws crowd in Milan Over 5,000 spectators were treated to Peking opera at the prestigious Piccolo Theater in Milan.

Roughly 30 students from the Beijing Vocational Institute of Local Opera and Arts School performed the Peking opera “Water Margin” with European co-production assistance. The Italian theater is building on the success it enjoyed staging the Chinese historical opera “Peony Pavilion” in 1998. At the 2010 World Expo, the Piccolo Theater teamed up with the Shanghai Theater Academy for a performance of “Servant of Two Masters” to close Milan Week at the Expo. The Piccolo Theater first toured China in 2002 and has established exchanges with Chinese schools since then.

MIDDLE EAST EUROPE

NORTH AMERICA MIDDLE EAST

AFRICA

ISRAEL: Israel wants Chinese tourists The Israel Ministry of Tourism announced it would push for easing visa requirements that close off Israel to a growing world market serving Chinese tourists. The changes would apply to organized tour groups from major Chinese cities. Chinese tourists account for 5% of the international tourism market, but that share is expected to grow to 7% by 2010. Relatedly, Chinese National Tourism Administration Chairman Shao Qiwei met with his Israeli counterpart, Tourism Minister Stas Misezhnikov, in Shanghai to discuss furthering bilateral tourism cooperation. Their meeting produced an agreement to establish a Chinese-Israeli tourism committee.

NORTH AMERICA

MIDDLE EAST SOUTH AMERICA AFRICA

CANADA: G-20 meets in Toronto Chinese President Hu Jintao and other world leaders of the Group of 20 nations (G-20) meeting in Toronto agreed to a set of aggressive targets to rein in budget deficits and public debt, while also acknowledging that spending cuts should be done cautiously to avoid economic setbacks. In a declaration that was issued, developed countries pledged to cut their annual budget deficit in half by 2013 and to stabilize their overall ratio of public debt to gross domestic product by 2016.

In addition, the agreement encourages countries with trade surpluses, such as China, to increase domestic investments and consumption.

AFRICA NORTH AMERICA ASIA-PACIFIC

ECUADOR: China finances hydroelectric project The Export-Import Bank of China and the government of Ecuador agreed to a US$1.7 billion loan that will help Ecuador finance a US$2 billion hydropower plant in Ecuador. The Ecuadorian government will finance the remaining amount for the plant, and China’s Sinohydro Corp. will construct it under a previous deal beginning in July. At a capacity of 1,500 megawatts, the planned Coca Codo Sinclair hydropower plant will be Ecuador’s largest power plant and will help the nation decrease electricity imports from neighboring Peru and Colombia. Ecuador’s Finance Minister Patricio Rivera believes the deal could spur other major projects with Chinese energy and mining companies.

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MARKET PROFILE

BY NICOLAS PECHET

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Getting the Real Picture of China Understanding the market in China starts with the right principles.

Market Profile provided by

For more information: www.globalintelligence.com info@globalintelligence.com

C

hina, China, China. Hardly a day passes by without a mention of “China” in the conversations of international commercial circles.

It seems that every business from every sector wants to tap its potential. However, being successful and profitable in this huge market requires astute understanding of local dynamics.

How do you capture reliable market intelligence in such a diverse and rapidly developing market so you can understand the potential risks and opportunities and create practical strategies? First, start with five important principles.

Know where to look for the information you need.

In reality, China is not one market but several markets due to its sheer size, uneven development and diversity between its regions. Each of China’s provinces serves a relatively large business community. Hence, market information is often collected and available on a provincial level, rather than on a country level.

To get a good picture of the whole China market, it is often necessary to interview executives from the same company in each of these cities, as each will be

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responsible for and have a view of a different region of the country. Only by talking to people in multiple centers can you get an accurate view of the market.

The information collection process needs to be tailored and targeted to the specific cities or regions where local companies will hold the most information. It is also vital to conduct research targeted at cities that offer the most potential for long-term growth strategies.

Find the most reliable source to start with.

Information sources are often fragmented in China.

Therefore, try to establish which single source, out of the numerous fragmented sources of information, is likely to be the most accurate and comprehensive.

For example, China is a huge producer of padlocks. In China, 60 to 70 percent of padlocks are manufactured in Zhejiang Province. The local industry association in Zhejiang is therefore better informed on production figures and other industry trends than the rest of China’s provinces.

Obtaining and verifying the insights gained from this single source is more important than trying to cover all the disparate trade associations across smaller centers. Concentrating on getting the information right for this one source is useful for extrapolating an accurate view of the whole country’s production and demand trends.

Look into the real impact of regulations.

Intelligence gathering should always allow for discrepancies between official guidelines and reality. This is especially true when clarification is needed in the area of regulations, where the level of enforcement may vary. The way each province interprets regulations also varies.

While information on regulations is readily available through secondary sources, find industry sources that can comment on how far the regulations are enforced or how they are interpreted locally. Both large and small local players operating under such regulations should be interviewed to understand the extent to which regulations are followed and if regulations are equally enforced (or not enforced) between companies of different sizes.

Understanding how long it might take for authorities to effectively enforce regulations, or how

long it will take for certain standards to be legislated, will also provide a better understanding of the short to medium term dynamics of market demand.

A good geographical spread of interviews is also needed to understand any regional variations in regulations and the factors driving differences. For example, regulations governing the installation of windows in China are affected by the government’s overall aim to save energy. These regulations tend to be more detailed and better enforced in northern China, for example, where higher usage of PVC is encouraged because there is greater need for buildings to be heat efficient during cold winters.

Talk to people.

All information obtained from secondary sources should also be cross-checked through primary interviews with industry players and experts. Getting first hand insights and opinions on the industry through interviews is the best way to build on secondary data.

Primary research is really the only way to obtain the most up-to-date information on the market. For example, talking to your main competitors will help to verify current market characteristics and insights can be used to adjust published data that is only valid for the previous year.

All this still needs to be accompanied by the ability to tell what information is reliable and what information is not. If a company is being interviewed about their local sales, depending on the person being interviewed and individual motivations that may not always be evident, sales figures provided can be either over or understated. Researchers need to have the ability to tell which it is, and find alternative sources to cross check any data that may have been distorted by the interviewee.

It is always good to allocate a number of interviews per company and address the same questions to people from different divisions or at different levels to make sure the figures match up. Interviewing external parties is also important to establish good competitive intelligence.

Make time to build important local relationships.

In business negotiations with local vendors or potential business partners, putting time and effort into face-to-face meetings is important for establishing trust between two parties.

For Chinese businesses, establishing this trust is the start of the relationship. The details of a contract can only be built after time has been put into trust-building. Companies need to allow time for visits to the market and face time with local counterparts in the total length of time of an investment.

For partnerships or acquisitions, time should be put into long listing and short listing all potentially suitable companies, and conducting adequate due diligence on them.

Partnerships in China have often failed because foreign companies have chosen to partner with the first Chinese company that came along, without taking the time to check if there is a better partner out there. In China there is always a choice, and investors should make sure they are making the best one.

Today, many multinationals with operations in China have set up market intelligence centers in North Asia. This reflects the focus of interest in the China market, and a strong need for market intelligence to tackle the market size and opportunities here. These five principles will be essential for market intelligence efforts to be fruitful in this land of opportunity.

Nicolas Pechet is Vice President and Head of Global Intelligence Alliance China.

H E A LT H C A R E S E R I E S

BY ANDREW CHEN

ISTOCKPHOTO

The Chinese Medical Device Market Insight’s ongoing healthcare series looks at the market for medical devices in China.

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hina’s medical device industry is highly fragmented, comprised of approximately 12,000 companies in total and growing by an average of 1,000 new device manufacturers each year, according to industry publication China Medical Device Manufacturer. The industry has seen substantial growth in recent years: the overall market is worth approximately US$11 billion, with a compound annual growth rate of 30.6 percent in revenue and 28.3 percent in profit between 2004 and 2008.

The demand for medical devices in China has remained high over the past few years, and while the supply has been sufficient to meet market demand, the overall growth trend is expected to continue.

The percentage of medical device sales as a part of overall healthcare sales in China has shown steady, positive growth over the past several years, reaching a peak of 9.7 percent in 2008. However, this share pales in comparison to the global average of 40 percent, indicating significant room for growth in China’s medical device market.

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Growth drivers There are four main factors driving China’s medical device market growth, and each presents attractive business opportunities: surging exports, increased government investment in rural healthcare facilities, government support for improving medical insurance plans and product replacement demand in healthcare facilities.

Surging exports China’s medical device market posted a net trade surplus in June 2006 after a long period where the country imported more than it exported.

Since then, exports have continued to expand and outpace imports, the result of strong export momentum created by domestic manufacturers and multinational corporations (MNCs) as well as increasing sales of more expensive, high-valueadded products such as ultrasound, dental and magnetic resonance imaging (MRI) equipment.

The high caliber of China’s research and development personnel and its inexpensive labor force have helped to transform the nation into a major global medical device manufacturer and exporter. China exported almost US$5 billion of medical devices in the first half of 2008. Most of the country’s exports destined for the United States, Japan, Germany and the United Kingdom come from MNCs that have research and manufacturing facilities in China, such as GE Healthcare, Philips and Siemens. Meanwhile China’s domestic device manufacturers are primarily focused on selling their products to developing markets.

Overall, rising global demand for medical devices and the movement to lower-cost manufacturing options should accelerate the growth of China’s medical device exports.

Rural healthcare investment As part of the national healthcare reform program, the Chinese government is increasing its investment in healthcare facilities, especially in rural areas.

The January 2009 guidelines on implementing healthcare reform issued by the State Council and the corresponding 2009-2011 implementation plan call for the government to invest RMB850

billion for the overhaul, with two-thirds of funding allocated to rural area hospitals and community healthcare centers. The development program specifically emphasizes infrastructure improvements in rural healthcare facilities and supports updating medical devices, which would primarily be low- and mid-end devices such as X-ray machines and biochemical analyzers.

Major Medical Device Updates in Select Types of Health Care Institutions Invested by the Government Health Care Institution Focus

No. of Institutions

County Hospital 2,000

Major Medical Devices to be Purchased CT, X-ray, type-B ultrasonic, endoscope, EKG machine, blood gas analyzer, birthing monitor, Aurigo therapeutic equipment, ophthalmologic operation microscope, auto biochemistry analyzer, globulimeter, urine analyzer, ambulance

Traditional Chinese Medicine Hospital

In addition to the county hospital list, TCM therapeutic equipment, physiotherapy equipment, TCM production equipment

Healthcare Center

X-ray, type-B ultrasonic, electrocardiograph, biochemistry analyzer, gastric lavage machine, disinfector, shadowless lamp, operation table, anesthesia apparatus, gynecological examination equipment, globulimeter, urine analyzer, ambulance

29,000

Source: Jinyuan Security Analysis

More recently, several MNCs have been working to increase their share of the midtier market. For example, Philips has a joint venture with local software leader Neosoft to capitalize on the demand for mid-tier devices. Based in Shenyang, the joint venture (JV) focuses on research and development (R&D) and manufacturing of medical imaging products such as CT, X-ray, MRI and ultrasound devices.

New product demand Approximately 15 percent of the medical equipment in the 175,000 healthcare facilities across China date as far back as the 1970s. Much of this equipment needs to be replaced and companies that can quickly respond to this need – both domestic and foreign – should benefit greatly through increased revenues and market share.

Furthermore, with the government’s support for expanding medical insurance coverage to include more diagnostic analyses, healthcare facilities will have to procure additional medical devices to satisfy patient demand.

Value chain analysis Varying equipment tier and hospital class In general, sales to institutions such as hospitals and rehabilitation centers account for the majority of the medical device market in China. Mid- and high-end devices account for 25 percent of the overall market, and 70 percent of this segment is controlled by MNCs such as GE Healthcare, Philips, Siemens and Toshiba. Low-end medical devices comprise the remaining 75 percent of the market, where local players have cost and channel advantages.

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China serves as an ideal location for pharmaceutical and medical device R&D due to its large patient pool, relaxed regulatory control and high acceptance of new technologies.”..”

In China, medical device sales and distribution patterns vary greatly by hospital class which, in turn, is directly related to operational scale and customer segmentation. Class 3 hospitals, which serve major cities at the provincial level, are equipped with high-end instruments, whereas Class 2 hospitals, which serve at the county level, have more basic equipment. Class 1 hospitals, which are rural and community-based, are equipped with very fundamental healthcare facilities.

Almost all medical devices used at Class 3 hospitals are imported, except for a few consumer products.

In contrast, only two-thirds of medical devices are imported at Class 2 hospitals. Most of the domestic medical devices are sold to Class 1 and Class 2 hospitals.

Based on device usage, domestic manufacturers, such as Mindray, which specializes in low-end products, are likely to gain substantial market share in the future as the government improves Class 1 hospitals.

Sino-foreign cooperation China serves as an ideal location for pharmaceutical and medical device R&D due to its large patient pool, relaxed regulatory control and high acceptance of new technologies. Western companies such as Philips, Siemens and GE often partner with Chinese firms to conduct clinical trials and then seek regulatory approval and commercialization by launching new products in China. Data gathered in China may then be used for U.S. or European applications.

In 2004, Siemens established Siemens Mindit Magnetic Resonance (SMMR) as a JV with leading Chinese MRI manufacturer Mindit. The JV is part of the implementation of Siemens’ integrated magnetic resonance strategy and has provided almost all of Siemens’ MRI supplies worldwide. Located in Shenzhen High-Tech Industrial Park, SMMR specializes in the production of MRI systems and hosts Siemens’ MRI Center of Excellence. It is one of the three Siemens MRI bases outside of Germany that offers R&D, manufacturing, sales, technical support and comprehensive services.

Similarly, GE formed a JV in 2008 with a locally listed company Shinva. Based in Shandong, the JV specializes in R&D and manufacturing of Xray devices and components. Through the JV, GE is leveraging its advanced technology and brand

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image while utilizing Shinva’s extensive distribution network and local operation expertise.

Global manufacturing base Globally, the medical device market is worth more than US$33 billion in 2008. Exports from China have increased in recent years and China is emerging as a global manufacturing base for low- to midtier medical devices which require conventional technology and intensive labor. With a relatively large gap in R&D capability between China and western countries, production has focused on lowto mid-tier devices.

Chinese products generally focus on disposable items and small medical devices. The major export products include medical auxiliary materials, surgical instruments, disposable products and ultrasonic and clinical monitoring equipment. Leading Chinese manufacturers, such as Mindray, Yian and Creative, are well-positioned to gain global share in the lowto mid-tier market due to their significant cost advantage, improving quality and increasing price sensitivity in developed countries. MNCs have also begun to change their focus to higher-margin businesses and are developing high quality products.

Intense competition Medical device distributors in China are typically classified by their service coverage: national, regional or local. The majority of distributors in China are regional or local, enabling middlemen to increase profit margins significantly. The distribution system in China is highly decentralized: the ratio between medical device distributors and manufacturers is nearly 12:1, four times the ratio for the pharmaceutical sector. By comparison, distribution of medical devices in the U.S. is dominated by three companies: AmerisourceBergen, Cardinal Health and McKesson, which together make up 90 percent of the market.

Despite the challenges arising from such severe market fragmentation, the medical device sector continues to attract new distributors because market regulation in the sector is rather limited. Distributors are able to increase profit margins for medical devices more so than those for drugs. At the same time, the high profit margin is offset by low sales volume, with sales growth often hindered by high product prices

and inadequate market penetration.

To compete effectively in a market with 12,000 players, distributors must develop and manage efficient distribution channels, while trying to secure exclusive regional dealership rights for current devices. The most successful players adopt a direct sales business model complemented by sub-distributors.

Risk and opportunities Medical device quality and safety issues are now a top priority for the Chinese government. Quality inspections of the medical device supply chain occur at the national and provincial levels, often leading to license revocations. Revised Standards of Inspection and Evaluation for Good Manufacturing Practice Certification were released by the State Food and Drug Administration (SFDA) in 2008, incorporating new rules on personnel qualification, production processes, quality control and validation documentation. The new standards had the effect of raising the quality bar and forced many ineligible manufacturers and distributors to exit the industry.

The SFDA is also revising device registration and approval procedures and is seeking public comments to incorporate into the updated protocols. This revision is expected to significantly revolutionize SFDA’s operations and raise the certification criteria for pharmaceutical and medical device manufacturers.

The government is also encouraging industry consolidation to enhance safety and industry sustainability. Financial incentives are available in certain areas and special R&D subsidies will be available to larger healthcare firms.

Outlook Medical reform has boosted the demand for medical devices in China, especially lowand mid-end devices and diagnostic tools used in Class 1 and community hospitals.

Both domestic and foreign medical device manufacturers have a great opportunity to capture more sales in China under the reform plan, though those positioned in the appropriate sectors will seize greater sales opportunities.

Further growth potential exists for manufacturers of reimbursable devices.

Although only selected medical materials are covered in the national medical insurance catalog and home medical devices such as blood pressure monitors and bloodglucose meters cannot be reimbursed, careful interpretation of the reimbursement policy reveals certain opportunities. Diagnosis and testing using medical devices are mostly reimbursable and certain non-reimbursable medical devices can be covered by medical insurance for in-patients For MNCs to succeed in China, the most essential factor is understanding local practices. In the global context, rising demand for medical devices will also drive foreign medical device manufacturers to China for manufacturing and more recently, R&D. For those interested in entering China’s medical device market, the highly complex Chinese healthcare system – particularly, its reimbursement policies – can make it difficult for new foreign entrants. New foreign entrants may consider forming partnerships with local Chinese companies to understand local practices and leverage their distribution networks.

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

I N T E RV I E W

B Y DAV I D B A S M A J I A N

Policy Perspective from the Top CFR

Insight sits down with Council on Foreign Relations President Richard Haass to discuss his perspective on U.S.-China foreign policy.

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ichard Haass, president of the Council on Foreign Relations (CFR) has held his position since July 2003 during which time he has worked to rebuild foreign relations in a post9-11 world. Headquartered in New York, the CFR is an independent, nonpartisan organization dedicated to the study and dissemination of ideas on American foreign policy.

A preeminent think tank, the CFR includes government officials, business executives, journalists, educators and students, civic and religious leaders, among others, as its members.

As a veteran policy advisor to policymakers on Capitol Hill, Haass has a perspective like no other.

Prior to his appointment as president, Haass held the position of director of policy planning for the Department of State, where he was a principal adviser to Secretary of State Colin Powell. He was confirmed by the U.S. Senate to hold the rank of ambassador and served as U.S. coordinator for policy toward the future of Afghanistan and U.S. envoy to the Northern Ireland peace process. For his efforts, Haass received the State Department’s Distinguished Honor Award. A prolific writer, Haass has authored and edited eleven books on American foreign policy including “War of Necessity, War of Choice: A Memoir of Two Iraq Wars” and a book on management.

In Shanghai to speak as part of AmCham Shanghai’s 2010 World Expo Distinguished Speaker series in May, Haass led a roundtable discussion with AmCham Shanghai President Brenda Foster, Chairman Robert Roche and a group of senior executives from some of Shanghai’s leading American corporations to discuss his views of U.S.-China relations ahead of the May

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24-25 Strategic & Economic Dialogue. After the event, Insight sat down with Haass to discuss his perspectives on the U.S.-China relationship, the renminbi revaluation issue, policy priorities within the U.S.-China relationship and his insight on the implications of the China-Iran relationship and the proliferation of nuclear weapons.

President Obama has called the U.S.-China relationship one of the most important bilateral relationships in the 21st century. How would you characterize the relationship?

Richard Haass: I would agree with that. I think the character of the U.S.-China relationship will go a long way towards determining the character of the next few decades of the 21st century. If the U.S. and China can partner in a particular area it increases dramatically the odds that we will be able to contain some the malign aspects of globalization or some regional threat. Conversely, if the U.S. and China are unable to work together, or worse yet are in opposition, it increases dramatically the chances that problems will fester. In terms of sheer importance it’s hard to exaggerate.

Another way to answer your question is to try to characterize the relationship now. There is no single word for it. By that, I mean that on Monday, Wednesday and Friday the U.S. and China might find themselves cooperating in a limited fashion to deal with one issue and on Tuesday, Thursday and Saturday they may find themselves at cross purposes on something else. We’re not allies, we’re not adversaries. We’re somewhere in between and it varies from issue to issue making for a complex relationship. Managing the relationship is a real diplomatic challenge.

The United States and China will have to figure out how to manage the areas they will inevitably not see eye to eye on and to not let those disagreements spill over and preclude cooperation when cooperation is not just possible but is mutually desirable.

Is that different from the U.S. relationship with other major powers like Russia?

RH: There are some similarities with Russia. On some issues the United States and Russia agree, on some issues we disagree, and on others we’re not even operating in the same space. We’ve got interests that we see very differently. There is an unevenness of agendas just like there is in the case of China.

What you would say about the U.S. and Russia and the U.S. and China is part and parcel of this moment in history. Unlike in the Cold War, which was a fixed moment in international relations – you had fixed relations with allies and fixed relations with adversaries – this is much more fluid. Today, relationships that are hard to categorize are more the norm than the exception.

Revaluation of China’s currency is a big issue on Capitol Hill. Do you think the Administration is taking the right approach regarding the revaluation issue?

RH: I think Secretary Geithner and the Administration deserve some kudos in how they’ve handled this. They have finessed it well. Not every problem has a short term solution – this is one of those. Given where China is coming from there’s not going to be a float (of the RMB) and there’s not going to be a dramatic revaluation. On the other hand, political pressure in the U.S. calls for some movement above what we’ve seen over the past five to six years. My sense is by kicking down the road this judgment (postponement of the U.S. Treasury Currency Report that was due April 15) about China’s management of its currency, I think the stage is set for successful management of this issue and we’ll probably see some limited revaluation.* Sometimes Congressional pressure can be a useful thing but Congress acting or the Administration acting can be counterproductive so the U.S. needs to be very careful. I also think that people on the Hill need to be sure they’re not exaggerating the effects (of China’s undervalued currency). It’s not a case of “be careful of what you wish for” but even if you got what you wished for my hunch is the consequences would be far more modest than what many people on Capitol Hill expect.

What do you see as the primary U.S. policy priorities within the U.S.-China relationship?

RH: U.S. priorities, in the narrow sense, will be dealing with the two proliferation challenges – Iran and North Korea and, secondly, will be dealing with economic relationship, currency questions and trade questions. More broadly, the U.S. priority is to persuade China to be more of a partner with the United States in dealing with a host of global and regional challenges.

You’ve been quoted as saying the White House needs a more effective policy to counter Iran’s nuclear progress. Do you see China playing a helpful role in this effort?

RH: China’s role has been extraordinarily modest and not always as helpful as it could or should be.

One of the things the United States is trying to do is to get much more muscular sanctions in place against Iran in order to get the government there to rethink its nuclear policy. One dimension is to get the U.N. Security Council to approve such sanctions. I believe we’ll get there but part of the price of getting China’s support will be delay and dilution. The actual content will be far less robust than it ought to be.** What that will do is compel the U.S. to get a second set of sanctions outside of the Security Council with Europe and others. I’m not even confident that will do the trick and I believe before long we’ll be having debates in the United States and beyond whether to use military force to enforce sanctions. If that doesn’t work and Iran continues to go down the path of developing nuclear weapons, the debate about using military force to interrupt Iran’s program will come to the fore both in the United States and Israel.

My own view is the China is overly focused on maintaining access to its energy investments in Iran and maintaining good relationships with the current government of Iran so it doesn’t lose access to Iranian energy which is important to China’s economy. But China ought to think more about Iran’s nuclear ambitions and how the U.S. and Israel might respond to it and the disruptions that may cause. My view is that China should join with the U.S. to support stronger measures against Iran not as a favor to us but as a favor to itself to reinforce that states should not proliferate.

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China should join with the U.S. to support stronger measures against Iran not as a favor to us but as a favor to itself to reinforce that states should not proliferate.”

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I wish the American business community had more of a voice and my concern with the American business community is that it’s not active enough.”

You have said there is a “debate” in China about the direction of China’s foreign policy. Can you tell us more about that?

RH: I think there is a debate now within Chinese foreign policy circles in and out of the government on how to balance China’s desires to continue to develop as quickly as possible, which requires access to raw materials, and on the other hand how to maintain good relationships with the U.S. and, more broadly, to play a responsible role internationally.

I believe China is in the early phases of determining to what extent it defines itself as a “developing country,” in which case foreign policy ought to be the handmaiden of its development, and to what extent China sees itself as an important leading power, in which case it has interests, influence and responsibilities that transcend China’s domestic development. I believe China’s officials and intellectuals are trying to figure out what is the right balance between what are at times competing objectives.

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As a veteran for policy advisor in Washington, can you tell us the best way for the American business community to influence policy in Washington?

RH: I wish the American business community had more of a voice and my concern with the American business community is that it’s not active enough. Not simply in the halls of Congress but publically. I want to see more corporate statesmen, I would like to see the voice of economic openness – more open trade, more open borders, more open investment. Most of the political pressure is coming from the other direction – greater protectionism, opposition to immigration and a backlash against globalization. One of the ways that debate will come out in the right place is if the business community plays a larger, more public role to shape the American public debate. *On June 19, five weeks after this interview, the People’s Bank of China announced that China will de-peg the renminbi from the U.S. dollar and move towards a more flexible exchange rate regime. **On June 10, the U.N. Security Council voted 12-2 to impose a fourth round of sanctions on Iran. China voted with the United States in favor of sanctions.

E N E R G Y F E AT U R E

B Y T I F FA N Y YA J I M A

Green Cooperation IMAGINECHINA

T

he United States and China, the world’s top two energy-consuming countries, are teaming up to fight climate change and reduce environmental pollution by leading the world’s efforts in producing clean energy. In China, the central government is looking outward to forge partnerships with the United States and set an example for global collaboration in clean energy production.

As part of China’s 11th Five-Year Plan (20062010) that is quickly coming to a close, the State Council outlined a series of energy goals including a cut in the national per unit gross domestic product energy consumption by 20 percent of 2005 levels by this year. The central government is also reinforcing its energy-saving and pollutionreduction objectives in all sectors of the economy.

For example, the People’s Bank of China, the central bank, issued a circular in May prohibiting banks from lending to industries which rely heavily on energy for production and manufacturing.

In the push for green technology, China is gearing up for a leadership position in sectors such as wind and solar energy and already leads sector competitors Spain, Denmark, Germany and the U.S. in terms of production capacity. China is the world’s largest producer of wind turbines and already manufactures more solar panels than any other country worldwide. Due to the size and scale of the country’s plans, China is also poised to dominate in the manufacturing of other clean energies like nuclear power.

However, China lags behind its market competitors in many other areas of clean energy production, due to a lack of domestic innovation, product development techniques and advanced technology. With a broader portfolio of green technology development and expertise in many of the areas China covets, the U.S. is a logical choice for a partner as the central government begins to

open the door to foreign cooperation in what were previously tightly controlled sectors.

China will begin to pursue development according to the 12th Five Year Plan next year, in which development of nuclear, wind, solar and biomass energies and clean coal technologies are an integral part. Enhanced environmental cooperation between the U.S. and China is sure to benefit both economies. So long as China leaves the door open to foreign innovation and advanced techniques, American engineers and U.S. clean energy companies are sure to find a number of opportunities in China.

Framework for cooperation At the fourth meeting of the U.S.-China Strategic Economic Dialogue in 2008, then-U.S. Secretary Treasury Henry Paulson, Jr. and Chinese Vice Premier Wang Qishan signed the U.S.-China Framework for Ten Year Cooperation (TYF), outlining goals to foster extensive U.S.-China collaboration on the production of clean energy.

The TYF primarily focuses on the electricity,

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The U.S. and China cooperate to create green energy opportunities.

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China is considered to have some of the largest market opportunities to produce clean energy anywhere and the country’s fast-growing renewable energy market is expected to reach US$100 billion by 2020.”

water, air and transportation sectors as well as the conservation of wetlands and nature reserves, combating climate change and promoting lowcarbon economic growth.

The TYF also commits China’s National Development and Reform Commission to work jointly with the U.S. State and Energy departments to co-chair working groups that assist with meeting and maintaining the TYF’s environmental commitments. The Joint Working Group of the TYF recently held its sixth meeting in Washington, D.C., continuing to drive efforts to foster collaborative efforts in U.S.-China joint technological research, commercialization methods, policy development and initiatives and information sharing.

To further the U.S.-China environmental relationship, Presidents Barack Obama and Hu Jintao signed the U.S.-China Memorandum of Understanding to Enhance Cooperation on Climate Change, Energy and the Environment (the MOU) last July. Recognizing that, “Cooperation between the United States and China is critical to enhancing energy security, combating climate change, and protecting the environment and natural resources through pollution control and other measures,” the MOU reaffirmed the importance of the TYF. The MOU also outlined additional implementation measures to strengthen and coordinate both countries’ respective efforts through, for example, the creation of the Climate Change Policy Dialogue and Cooperation as a platform for discussion and negotiation on global climate change. Obama underscored the importance of the joint-efforts, recognizing that, “As the two largest consumers and producers of energy, there can be no solution to this challenge [of climate change] without the efforts of both China and the United States.”

Last November, Obama and Hu announced the U.S.-China Energy Efficiency Action Plan (the Action Plan) that reaffirmed the TYF and re-energized the working relationship. The comprehensive plan includes the establishment of the U.S.-China Clean Energy Research Center (CERC) and other public-private partnerships on clean energy under the U.S.-China Energy Cooperation Program as well as for U.S.-China

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initiatives for electric vehicle production, an energy efficiency action plan, a renewable energy partnership, clean coal production, developing shale gas resources and helping China build an accurate inventory of its greenhouse gas emissions. Funded by the Department of State and administered under the Department of Energy, the Action Plan reiterates both countries’ commitments to building a strong environmental alliance and reinforces U.S.-China cooperation on clean energy and climate change.

As part of China’s overall commitment to cooperate with the U.S. on environmental initiatives, Hu signed-on ahead of the 15th U.N. Climate Change Conference in Copenhagen, Denmark last December “to work with other parties concerned to help produce positive outcomes out of the Copenhagen conference.” Indeed, China agreed to reduce its carbon intensity emissions by 40 to 45 percent below 2005 levels by 2020 at the conference while the U.S. committed to a 17 percent cut in its emissions from 2005 levels by 2020. Following the close of the conference, Obama expressed hope that the U.S. will lead the world in technological breakthroughs to develop clean energy and added that the U.S. plans to invest in clean energy, research and development and innovation to achieve its target reduction goals.

In early 2010, the U.S. is doing exactly that.

Partnerships for the future Both the U.S. and China have committed extensive resources to environmental cooperation initiatives in order to back up the high-level rhetoric. The newly established and jointly funded CERC now sits atop US$150 million in financing over the next five years to support public-private partnerships between U.S. companies and Chinese partners to develop green technologies and markets. The protocol that formally establishes the CERC gives priority to projects focused on building energy efficiency, carbon capture and storage technologies to improve coal production methods and innovating clean vehicles.

In April, the U.S. Department of Energy announced as part of the CERC initiative US$13.7 million in available funding for American researchers

Hawaii: a new model for clean energy and energy independence

working in cooperation with Chinese scientists on clean energy projects. Under the CERC protocol, the Chinese government and Chinese grantees are to match the same amount to fund the Chinese side of the partnership, creating a total US$27 million opportunity for the development of U.S.-China clean energy projects. “By jointly developing new technologies and learning from China’s experiences, we can create new export opportunities for American companies and ensure that we remain on the cutting edge of innovation,” said Chu in a press release following the announcement. “This partnership will also be a foundation for broader partnerships with China on cutting carbon pollution.”

Adding to the momentum of clean energy goals outlined under the TYF, the MOU and at Copenhagen, U.S. Secretary of Commerce Gary Locke selected China as the destination for the Obama administration’s first cabinet-level trade mission, which occurred just ahead of the second round of the U.S.-China Strategic and Economic Dialogue (S&ED) in May. Executives from some of America’s leading and emerging clean energy companies accompanied Locke to champion exports of U.S. green technologies to China.

Meanwhile, Locke advocated for increased U.S.-China cooperation in clean energy as having the potential to create millions of new high-skill, high-wage jobs for American workers. On its part, China widely agreed that U.S.-China cooperation in clean energy is positive. “As major energy producers and consumers, China and the United States can work together extensively in the clean energy field,” Chinese Vice Premier Li Keqiang told Locke during the trade mission.

Real opportunities The strengths of the U.S. and China are in many ways complementary and the partnership stands to benefit both countries. China is considered to have some of the largest market opportunities to produce clean energy anywhere and the country’s fast-growing renewable energy market is expected to reach US$100 billion by 2020. By comparison, U.S. companies can bring technical capabilities, product designs and innovation. “The U.S. has

During Hawaii Governor Linda Lingle’s June trade mission to China, Insight spoke with the Governor about Hawaii’s Clean Energy Initiative that was initiated in 2008.

In partnership with the Department of Energy, the initiative aims to supply 70 percent of Hawaii’s energy needs with 40 percent renewable energy and a 30 percent reduction in energy usage by 2030.

At the two year mark, Hawaii has made incredible progress. Before the initiative, 95 percent of Hawaii’s energy was created through the burning of fossil fuels. While other U.S. states have nuclear, hydro, coal and a variety of other sources of energy for electricity, Hawaii is abundant in solar, wind, wave, ocean thermal energy conversion, algae biofuels and geothermal energy, Lingle explained. Yet Hawaii is the most oil-dependent state in America.

While reliability is important, the paradigm of importance must shift away from energy reliability to energy security as the state’s top goal because Hawaii is virtually isolated, located 2,500 miles from the nearest land mass.

“There are two problems,” explained Lingle. “First, vulnerability. Second, Hawaii sends up to US$6 billion a year out of the state to buy oil mostly from foreign countries.” While oil is dependable and effective, in the event of an oil shortage or shipping strike, Hawaii would be without the ability to generate its own sources of electricity.

Under the initiative, one of two major regulatory reform pieces deals with a feed-in tariff that required Lingle to campaign for multiple energy producers to enter the market and be paid a set price to produce renewable energy. “There is currently a docket that is investigating legal processes whereby the state will publish a list of tariffs producers will be paid for renewable sources of energy,” she said. “Everyone will know in advance their return per kilowatt hour.” The resulting opportunities for Chinese investors are many, according to Lingle. “The kilowatt rate is so high in Hawaii that the feed-in tariff is attracting tons of new investors.”

To further these efforts, Lingle is looking forward to forging closer ties with China. Next month, Hawaii will be hosting the second annual Asia-Pacific Clean Energy Summit, where the focus will be on China and its role as a leader in green technology. The Governor expects to see many opportunities for Chinese investors in clean energy fields because of the deep cultural and political ties between Hawaii and China. As nearly one in every seven people in Hawaii claims Chinese ancestry, the Governor stressed the importance of forging ongoing relationships with China. In a recent Hawaii-based magazine column Lingle explained, “These partnerships to develop clean and renewable energy sources are particularly exciting because nowhere in the world is economic growth more breathtaking than in China.”

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The American and Chinese governments are providing critical aid to create opportunities and spawn innovation.”

advanced technology, and China has a huge market,” said Zhang Guobao, head of China’s National Energy Administration (NEA), regarding the signing of eight energy deals that came out of Locke’s trade mission in May. Applied Materials was among the diverse group of U.S. companies representing various sectors of clean energy production that struck a China deal in May. A memorandum of understanding signed between Applied Materials and China Energy Conservation and Environmental Protection Group (CECEP), a Chinese state-owned enterprise specializing in energy conservation and environmental protection, is expected to accelerate the development and deployment of solar photovoltaic technology.

“With China’s growing energy needs, our relationshipwithCECEPrepresentsagreatopportunity to promote sustainable energy development through the optimal use of renewable energy generation with solar power,” said Applied Materials Executive Vice President and Corporate Technology Officer Dr.

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Mark Pinto in a press release.

In a time of economic recovery when companies are looking to return to profitability, the American and Chinese governments are providing critical aid to create opportunities and spawn innovation.

The US$150 million in financing made available by the CERC along with government-sponsored trade missions that result in concrete business opportunities not only serve to fight climate change and reduce environmental pollution but foster innovation and create new technologies.

U.S.-China cooperation in the clean energy initiatives already under way are a positive step in the right direction and signal that the world’s top two carbon emitters are serious about reducing greenhouse gas emissions by creating green energy.

Tiffany Yajima is an Associate Editor of Insight.

She can be contacted at tiffany.yajima@amcham-shanghai.org.

V I P V I S I TO R

BY JUSTIN CHAN

Innovating for Growth That’s what you have to do to keep a big company growing.”

GE

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n a country like China, where recent economic growth has been largely driven by infrastructure, it is no surprise that a company like GE is flourishing. Driven by a portfolio of infrastructure businesses spanning energy, aviation, transportation, water and healthcare, GE’s China business grew 14.3 percent in 2009 with total revenue of US$5.3 billion. While several of GE’s core competencies are seemingly aligned with China’s established development priorities, building a strong business amid the country’s rapidly evolving market can be a challenge.

For GE Chairman and Chief Executive Officer Jeffrey Immelt, it is an exciting time to be doing business in China. He says he is “humbled” by the remarkable record of growth and rapid pace of change. “Every time I come to China, I learn something new. You have to be ready every time you come here – to change, adjust, learn and then keep going forward in a bold way,” he says.

Through meetings with his local team, partners and government officials each time he visits China, Immelt tries to ensure that GE’s strategy is evolving along with the marketplace.

He refers to himself as a provocateur, with a mandate to take lessons learned in China back to headquarters to “shake it up.” “The job of a CEO is not just to travel, have dinners, meet people and talk a lot,” says Immelt. “The job of leadership is to learn on trips like this and then go back and try to change.”

Since he assumed GE’s top post in 2001, Immelt has focused on driving growth across the company by developing a culture of innovation and risk-taking. He talks about “Imagination Breakthroughs,” which are new business ideas and concepts that business leaders must submit each year. Immelt personally tracks 30 of the biggest ideas and says that “they don’t all need to work, but if half are successful, then we create new revenue.

Competing in China In building its business in China, GE employs a multi-dimensional strategy that encompasses localization, capacity building, partnerships with Chinese companies and reverse innovation, which is Immelt’s term for implementing new business models around the world based on ideas and concepts that were developed in China. At the same time, GE carefully evaluates which business lines to pursue in China, acknowledging that there are certain areas where it cannot be competitive.

In China, one of GE’s top priorities is localizing in order to become “part of the fabric of the economy.” With over 12,000 employees in China, the company continues to localize leadership and decision-making, while also increasing engineering and marketing activities in order to tailor products and services to the local customer base.

China’s healthcare industry, which is embarking on an ambitious overhaul, is one sector where Immelt wants GE to be completely localized and integrated. He describes the market opportunity as “mind-blowing” and envisions China becoming the biggest healthcare market in the world for GE. “We have to think about it in the context of the China healthcare business being bigger than the U.S. healthcare business in the next five years. It can’t just be incremental; it has to be bold and impressive.”

Immelt is constantly thinking about the next generation of capability building, keeping in mind that ideas that were once aggressive will become routine over time. For example, GE opened its

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GE Chairman and CEO Jeffrey Immelt talks to Insight about his strategy for succeeding in China.

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The U.S. must become more adventurous in selling products on a global basis by investing more in research and development to create superior products and seeking global relationships to build new markets.”

US$64-million China Technology Center in Shanghai in 2003 that now houses 1,500 engineers and PhDs who conduct advanced research and development on enabling technologies for GE products and services. “Eight years ago, that was quite bold,” says Immelt. “Now it’s boring and mundane. Everybody has done it.”

Despite the challenging economic environment last year, GE embarked on an aggressive campaign to recruit 1,000 new sales and services specialists across second- and third-tier cities. It is by making such big moves that Immelt expects to drive integration into the local market and continue building GE’s capability in China.

Collaborating to innovate To build local credibility and capability, GE has established a number of high-profile partnerships with state-owned enterprises and government bureaus. “We want to be known as someone who is a good collaborator, a good partner to governments and other companies,” says Immelt. For China’s ambitious C919 airliner project, GE signed an agreement with the Aviation Industry Corp. of China (AVIC) to create a new joint venture that will develop the integrated avionics system for the C919 and two GE joint ventures were selected to develop and supply the aircraft’s engines and propulsion system.

In the energy sector, GE recently announced an agreement with Shenhua Group, a state-owned mining and energy company, to establish a joint venture that will develop industrial coal gasification solutions and advance cleaner coal technology.

GE will provide its expertise in gasification and cleaner power generation technologies, which are already in use throughout China in more than 40 licensed facilities.

GE’s transportation unit recently established a joint venture with China’s CSR Qishuyan Locomotive to develop, build and service locomotive diesel engines. The joint venture will provide China’s Ministry of Railways with the most technologically advanced, fuel-efficient and low-emission locomotives currently available on the market.

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GE also signed a memorandum of understanding with the Ministry of Railways to cooperate on developing high-speed rail opportunities in the United States, pairing GE’s passenger rail technologies with China’s advances in high-speed rail technology. “This is a way of taking technology from China or a business model from China and seeing it implemented in the rest of the world,” says Immelt.

He describes the arc of the past 25 years as localizing western products for other parts of the world. “Now we are taking the circuit back into the developed world with new, improved business models that have low costs and higher quality,” says Immelt. “We are trying to make GE a real innovator around what we call reverse innovation.”

Creating jobs For all of GE’s successes around the world, the company has faced some criticism at home in the U.S. for its decision to shift certain manufacturing operations to China and other locations around the world. Immelt acknowledges that “American businessmen need to create more jobs in the U.S. or else we run the risk that globalization won’t be allowed to continue. It is incumbent on us to understand ways that employment in the United States can grow.”

While he is optimistic about the U.S. economy and believes it is slowly strengthening, he sees the job market as a lingering concern. “We could have decent economic growth and still have high unemployment,” he says.

With decreased consumer consumption in the U.S., Immelt believes boosting exports can compensate. Like GE has done in becoming the country’s second-largest exporter, he feels the U.S. must become more adventurous in selling products on a global basis by investing more in research and development to create superior products and seeking global relationships to build new markets.

Over the past five years, GE has doubled its global exports, the exact objective U.S. President Barack Obama outlined in his National Export Initiative announced in March.

Five years ago, GE signed an agreement with

China’s Ministry of Railways for 300 of its Evolution Series HXN5 locomotives, contributing to its US$1.2 billion in transportation sales in China since 2005.

Last November, GE announced a new deal to provide 300 more HXN5 locomotive assemblies, which will sustain nearly 1,200 high-tech American jobs. The kits are being manufactured in two Pennsylvania facilities and contain components of the diesel engines and locomotive control systems that will be assembled in China.

In addition, GE’s partnership with the Ministry of Railways on high-speed rail will create 150 hightech jobs in the U.S. and has the potential to produce 3,500 more American jobs to support high-speed rail development. The framework agreement also outlines that at least 80 percent of the content of any potential high-speed locomotives be sourced from American suppliers with final assembly to take place in the U.S. The partnership is a clear win-win relationship, which Immelt calls “the hardest thing to do in

China.” While cognizant of other challenges such as protectionist sentiment on both sides of the Pacific, Immelt stresses that GE makes investments in China based on market opportunity with most decisions being five, ten and even twenty-year decisions.

“We’re going to be here for a long time so I don’t get too excited and just have perspective for the long term,” he says.

By aligning with the country’s development goals and partnering with industry champions, Immelt is confident that GE is positioning itself to take on competitors and continue its record of success in China. “I never really worry too much about GE in the context of other companies because China is the one place in the world where you know it is going to be different tomorrow than it is today,” he says. “China is just amazing.”

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

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GE’s partnership with the Ministry of Railways on high-speed rail will create 150 high-tech jobs in the U.S.”

The U.S. and China enjoy a mutually beneficial, and increasingly interdependent, trade and investment relationship that, despite clear challenges which must be addressed, offers tremendous opportunities for the economies of both countries.

S

Commercial

ince China opened its doors to the world in 1978, nearly every meaningful trade metric with the United States has experienced a historic increase. Bilateral trade volume has exploded a staggering 35,789 percent to US$409.9 billion in 2008. U.S. foreign direct investment (FDI) in China has grown from US$49 million in 1982 to US$45.7 billion in 2008, according to the U.S. Bureau of Economic Analysis (BEA). U.S. Census Bureau statistics through April 2010 indicate China has overtaken Mexico as America’s number two trading partner.

American enterprises overwhelmingly benefit from a rising China in the global economy. Official statistics show U.S. exports to China have increased over 260 percent since China acceded to the World

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Trade Organization (WTO) in 2001.

China’s importance for U.S. exporters became clear during the worst period of the economic downturn. In 2009, while U.S. exports fell 18 percent globally, exports to China increased approximately 20 percent from a year earlier.

In 2009, China was a bright spot for American companies in a bleak global market.

Similarly, China’s economic interest in the U.S. has blossomed. Official FDI inflows to the U.S. have more than tripled since 2002, reaching US$1.2 billion in 2008, according to the BEA. AmCham Shanghai’s recent Viewpoint on Chinese FDI in the U.S. finds unofficial estimates ranging between US$3.9 billion and US$6.4 billion in 2009, a 300 percent increase from one year earlier.

C OV E R S TO RY

B Y RYA N B A L I S

Further, according to a Wall Street Journal report, American states and localities are lining up to attract the increasing number of Chinese companies and investors targeting the U.S. In 2009, 28 states had set up 30 overseas trade offices in China – more than in any other country, according to data provided by the State International Development Organizations (SIDO).

At the same time, U.S. business ventures and brands in China, ranging from industrial giants such as General Motors and consumer leaders like Yum! Brands’ KFC, are thriving. A March survey of 218 AmCham Shanghai member companies found that 82 percent forecast a revenue increase for 2010, and nearly two-thirds plan to increase investment in China despite an increasingly

competitive business environment.

Bilateral trade and investment exchanges have complementary effects in both the U.S. and China.

“Freer trade and open markets have created jobs in both our countries, and given Chinese consumers access to new goods and to higher standards of living,” remarked U.S. Secretary of State Hillary Clinton at the opening of the Strategic and Economic Dialogue (S&ED) in Beijing.

Exports to China and other countries are an engine for American job growth. According to the U.S. Commerce Department, “In 2009, exports accounted for 11 percent of [U.S.] gross domestic product, and supported more than 10 million American jobs.” The Commerce Department also estimates that every US$1 billion in exports

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THE OFFCIAL WHITEHOUSE PHOTOSTREAM

Ties That Bind

Insight caught up with U.S. Secretary of Commerce Gary Locke in Shanghai to talk about trade as he led a trade mission to China in advance of the Strategic & Economic Dialogue in May.

On the significance of China as the first destination for an cabinent-led trade mission…

It just underscores the importance of the China market for U.S. companies, especially in the area of clean energy and energy efficiency. President Obama said that the country that leads in the clean energy sector will be the country that leads the global economy. Given the enormous challenge facing our entire planet, it is incumbent on both the U.S. and China to cooperate as much as possible and help solve the dilemma confronting the earth, while at the same time creating jobs for the people back home in the United States.

On China’s Indigenous Innovation policy…

We’re very concerned about the Indigenous Innovation policy and the U.S. government has expressed its concerns to Chinese leaders. In fact, it’s not just the United States but countries all around the world, because indigenous innovation would exclude the technology where the research and development was not conducted here and where the intellectual property was not patented here first. We think that’s actually counter-productive to the long term interests of China, especially in the area of clean energy because China should be seeking the very best technology available.The goals that they have set are so ambitious and so challenging that they should be embracing the very best from all around the world, whether it’s from China, the United States or Europe.

On how President Obama’s National Export Initiative can help U.S. exporters…

The National Export Initiative has three main components. First, is increasing capital and financing available on behalf of exporters through the ExIm Bank and the Small Business Administration. Second, greater advocacy on behalf of U.S. companies, producers and growers by the U.S. government. For us in the Department of Commerce, it is really focusing on the small- and medium-sized businesses. The Foreign Commercial Service officers and trade specialists all around the world including those here in Shanghai exist to help find customers and buyers for U.S.-made goods and services. The Boeings of the world obviously have their own very sophisticated sales forces but we can also help large companies by advocating on their behalf as we meet with high ranking government officials.The third component is helping to break down the barriers that deny American companies free and fair access, things like addressing and raising concerns about indigenous innovation.

– David Basmajian

generates or supports 6,250 manufacturing jobs.

China’s economic reforms, including opening markets to trade, are occurring at a time when more than 500 million Chinese citizens have emerged from poverty. “The rapid growth that has resulted from the series of economic reforms that China adopted as it transitioned from a planned to a market-oriented economy has been central to China’s poverty reduction performance,” according to the World Bank’s 2009 poverty assessment.

As the U.S. economy attempts to rebound, a healthy China will increasingly be turned to for stimulating growth and employment in America.

But, as China’s economy matures and grows more integrated with the global economy, there are important issues that need to be resolved.

The major sources of friction include the push to revaluate China’s currency, the large (but narrowing) bilateral trade imbalance and barriers that restrict foreign access to China’s domestic and government procurement markets. What needs to happen to resolve the inevitable challenges that result from a deepening commercial relationship between the world’s two most important economies? What are the opportunities to

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shape the relationship moving forward?

RMB buzzkill China has operated a tightly regulated currency system over much of its modern economic reform period. A likely undervalued yet stable currency has benefited China’s export-driven economy, which has recorded an annual trade surplus for 16 consecutive years, according to reports citing China’s General Administration of Customs. But as the U.S.-China trade deficit surged, the exchange rate increasingly became a source of tension in Washington.

Certain U.S. policymakers and business representatives allege that China enjoys an unfair trade advantage because of a currency that economists at the Peterson Institute for International Economics estimate is undervalued by 24 percent. (A definitive value is unknown because the exchange rate of the yuan – or renminbi (RMB) – is not market-determined.) An artificially low yuan, they maintain, allows China to sell its products cheaper in overseas markets but at the expense of domestic economies.

China receives heavy pressure to implement currency reforms to raise the value of the yuan against the dollar. “Reform of China’s exchange rate is critically important to the United States and to the global economy,” said U.S. Treasury Secretary Timothy Geithner in testimony before the U.S. Senate Finance Committee in June. In 2005, 67 senators approved a procedural motion to impose a 27.5 percent tariff on all Chinese goods in an effort to compel revaluation. Similar bills to penalize China for its currency policies routinely surface.

Many lawmakers have pushed the U.S. Treasury Department to brand China a so-called currency manipulator in its semi-annual Report to Congress on International Economic and Exchange Rate Policies. Such a label would mean the U.S. Commerce Department could take into account China’s currency value when investigating illegal trade subsidies under U.S. trade law.

China for years has resisted large-scale currency reform. China rebuffs arguments that a weak yuan is the cause for its trading partners’ sluggish economies and large trade deficits. Instead, China long has insisted it would introduce reform at its own pace. “A country’s exchange rate policy and its exchange rates should be decided by its national economic situation,” said Chinese Premier Wen Jiabao at a March press conference.

China’s leaders brushed off currency adjustment in light of a plunging euro and financial difficulties in Europe. A weak euro means Chinese products in Europe, which is China’s largest export market, are less competitive because they are more expensive.

But an unpleasant public showdown on currency revaluation appeared likely at the fourth Group of 20 (G-20) summit in Toronto, Canada in June.

A week before G-20 members met, the People’s Bank of China (PBoC) announced China would gradually adopt a more flexible exchange rate. The central bank left open a timetable and scale for any appreciation to occur but stressed “the basis for large-scale appreciation of the RMB exchange rate does not exist.”

The Obama administration responded favorably. President Obama said he viewed China’s June 19 announcement of a return to its phased-in, market-based approach to the RMB as a “positive step.” “The initial signs were positive, but it is too early to say whether it is enough to allow for the rebalancing” to occur, he said. However, legislators on Capitol Hill were less impressed. Sen. Charles Schumer (D-NY), the co-author of Senate bill 3134, which would require Commerce Department

investigations of currency-as-subsidy allegations in countervailing duty petitions on imports from China, indicated that he remains prepared to move forward on seeking passage of the bill.

The surprise timing of the policy change returns China to a managed floating exchange rate system adopted from July 2005 to July 2008. Over this time period, the reform resulted in the yuan’s appreciation of 21 percent against the dollar. In July 2008, China reapplied the dollar peg in an effort to mitigate the effects of the global economic downturn domestically.

A stronger yuan means added purchasing power among Chinese businesses and consumers and, therefore, improves the competitive value of U.S. exports. It also supports China’s longterm plans to shift from an export-driven growth path towards developing services and expanding consumption. But a contraction in certain Chinese domestic sectors, such as foreign tourism and retail exports, could be expected.

Although a stronger yuan is generally desirable for U.S. exporters, any anticipation of an immediate and significant trade rebalance by pushing up the price of Chinese goods entering the U.S. is thought by many to be unrealistic.

First, economists anticipate only a small and gradual appreciation. The yuan “needs to remain broadly stable, so whatever happens it will be modest and take place over time,” said Yukon Huang, former country director for the World Bank in China, to the Carnegie Endowment for International Peace. The Royal Bank of Scotland Group forecasts a three percent appreciation by the end of 2010, reports Bloomberg.

Second, Americans’ appetite for Chinese products is not likely to wane significantly, especially as U.S. consumer spending picks up.

Cato Institute trade analyst Daniel Ikenson points out that the U.S. increased Chinese imports by 38.7 percent (US$94.3 billion) during the period in 2005-08 when the yuan appreciated.

Trade balance battle According to official statistics, the bilateral trade deficit between the U.S. and China was US$226.8 billion last year, down 15.3 percent from a record US$267.8 billion deficit in 2008. Early data for 2010 indicate a further narrowing. February’s US$16.5 billion shortfall was the lowest monthly deficit since March 2009.

Despite this, America’s trade deficit with China is a

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Although a stronger yuan is generally desirable for U.S. exporters, any anticipation of an immediate and significant trade rebalance by pushing up the price of Chinese goods entering the U.S. is thought by many to be unrealistic.”

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Undermining trade links with China would not likely result in increased production in the U.S. for the bulk of the mediumand low-end items imported from China.”

persistent source of tension and remains a challenging issue for U.S. elected officials, especially during a down economy. Some Washington politicians have focused on the trade deficit as a scorecard that tells which side is winning the trade game, and the numbers lead some to an oversimplified conclusion that the trade gap with China directly threatens U.S. economic and job growth.

U.S.-China trade also faces pressure from the U.S. labor community, which many feel perceives trade as a zero sum game – one that their members are losing. They point to declines in certain U.S. manufacturing sectors that cannot compete with low-cost Chinese goods. But undermining trade links with China would not likely result in increased production in the U.S. for the bulk of the mediumand low-end items imported from China.

As the U.S. has moved up the value chain over recent decades, U.S. industry has largely shifted away from producing labor-intensive goods that most Americans import today. Instead, the U.S. provides modern services and sophisticated manufactured goods that are in high demand in overseas markets like in China. The U.S. manufacturing sector remains the largest in the world, according to the National Association of Manufacturers (NAM).

The likely result of tinkering with the trade balance by reducing imports from China is those imports would find their way to the U.S. through other countries with emerging markets. The trade deficit reflects the reality that China serves as the final assembler and exporter in an integrated manufacturing supply chain. Imports that previously came from other East Asian countries instead come in shipping containers marked “Made in China.”

Looking ahead, there is evidence that the U.S.’s trade relationship with China will likely become more balanced without adopting measures to restrict import flows. Official statistics show U.S. exports to China increased 9.8 percent over 2007 to 2009, while U.S. imports of Chinese products decreased 7.8 percent over the same period. Several reasons suggest a balancing trend will continue.

First, China is a focus of President Obama’s National Export Initiative (NEI) to double U.S. exports in five years. The president’s objective is ambitious, but China is a key market in which to expand exports – and, therefore, to reduce the politically thorny trade deficit. In fact, the volume of U.S. exports to China did more than double in a five year period between 2004 and 2008.

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China’s Ministry of Commerce forecasts the country’s consumer market to become the world’s biggest by the end of 2015. That growth offers tremendous promise for U.S. exporters, especially small- and medium-sized enterprises (SMEs).

Moreover, an increasingly prosperous China means a growing need for personal and business services from the U.S. Despite a competitive business environment, American companies are prospering in China already. In recent testimony to Congress, Secretary Geithner reported that in the first quarter of 2010, U.S. exports of goods and services to China rose almost 50 percent compared to the same period in the previous year, which is about double the rate of growth in U.S. exports to the rest of the world.

Second, the U.S. and China are making slow but steady progress towards signing a Bilateral Investment Treaty (BIT). A BIT would help improve access to the Chinese market and increase U.S. businesses’ confidence in the security and fair treatment of their Chinese investments, among other protections. Leading business organizations and thought leaders in global trade and investment are urging a successful negotiation.

Third, reform efforts underway to overhaul the U.S.’s stringent yet dated export control regime will help to provide more opportunities for American companies in China, which has the potential to reduce the trade deficit. The U.S. Department of Defense’s “blueprint” plan announced in April calls for consolidating the U.S. government’s export control functions into “a system where higher walls are placed around fewer, more critical items,” describes U.S. Defense Secretary Robert Gates.

China wants to import more U.S. products, especially dual-use and hi-tech items such as supercomputers and satellites. But concerns over export controls force China to source technologies and products from U.S. competitors, such as Germany, France, Japan, Korea and Canada, whose exports face less scrutiny. Modernizing export controls on commercially available technology could result in annual gains of US$64.2 billion in real GDP by 2019, according to a 2010 Milken Institute-NAM study.

Unequal footing A top concern among U.S. officials and businesses operating in China are the Chinese government procurement and “indigenous innovation” policies that potentially favor homegrown companies and

exclude foreign rivals. Equal access to China’s massive and growing procurement market for government contracts, officially valued at US$88 billion in 2008, rose to the top of the agenda at the S&ED held in Beijing in May. “We are asking that China give American firms the same opportunities to compete in China that Chinese companies enjoy in the United States,” said Secretary Geithner. “At the S&ED, I spoke forcefully about the impact these [indigenous innovation] policies may have on U.S. companies and the need for China to revise its policies,” reported U.S. Commerce Secretary Gary Locke in testimony to the U.S. Senate Finance Committee following his trade mission to several Chinese cities and participation in the high-level dialogue.

U.S. officials pressed China over procurement policies that require priority be given to goods, engineering and services developed in China except in limited circumstances. Indigenous innovation policies aim to promote China’s development of technology and innovation capacity but threaten to restrict opportunities for non-Chinese firms to compete fairly on government programs.

A circular issued in November 2009 officially declared that products awarded national-level indigenous innovation status and those to be included in the government procurement catalog had to contain Chinese intellectual property or original trademark registration in China. Many foreign enterprises objected to the policy as one they considered discriminatory and a backdoor method for China to acquire technology, know-how and trade secrets without a formal requirement.

Draft rules released in April propose easing the most contentious eligibility requirements for the national level indigenous innovation accreditation system. But uniform application of procurement rules across all levels of government organs remains an important issue for the American business community in China.

The challenge is that the U.S. has little legal recourse to stop unfavorable procurement policies because China has not yet signed the Agreement on Government Procurement (GPA).

The voluntary treaty applies WTO standards to government purchases from the private sector and China’s membership would address complaints of discrimination by ensuring no less favorable treatment of overseas products and services.

China agreed to join the GPA “as soon as possible” when it became a WTO member. But China’s initial 2007 accession offer was inadequate,

and China missed its 2009 self-imposed deadline to submit a revised offer. China pledged to submit another revised offer to join the GPA by mid-July.

Going forward The U.S.-China commercial relationship is strong and becoming more important as U.S. companies look to the growing China market. But thorny issues remain for the two countries to iron out.

An election year in the U.S. virtually guarantees that China’s currency exchange rate value and the bilateral trade imbalance enjoy sustained coverage.

Fair access to China’s lucrative government procurement market emerged late last year as a major challenge, though China has pledged to retract some of the most contentious elements of the policy and has committed to discussing the issue further.

Despite a set of challenges, maintaining healthy trade ties and a spirit of positive engagement are in both countries’ interests. Both China and the U.S. are richer and better off because of deepening trade and investment relationships.

In this view, recurring high-level meetings at the S&ED and Joint Commission on Commerce and Trade (JCCT) provide forums for resolving disputes and for ensuring that U.S. enterprises operate on a level playing field in China. In addition, the U.S. and China should focus on furthering cooperation in low conflict, high reward areas that offer opportunities for mutual gains.

Meanwhile, the U.S. will need to look inward for policy tools on the biggest set of commercial challenges. Helpfully, the Obama administration has introduced several policies to strengthen economic ties with China and to remove barriers to trade.

These include President Obama’s pledge for his attention and that of relevant cabinet-level agencies to expand trade promotion aggressively through the NEI. Moreover, the administration’s push led by Secretary Gates to reform the U.S.’s export control system has a chance to produce meaningful improvements. Finally, the U.S. is committed to continuing talks on a U.S.-China investment treaty.

Taken together, these policies present a constructive strategy to improve U.S. competitiveness in China and, at the same time, add support to steady development of closer and more robust long-term commercial ties.

Ryan Balis is a contributor on AmCham Shanghai’s communications & publications team. He can be reached at ryan.amchamsh@gmail.com.

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Despite a set of challenges, maintaining healthy trade ties and a spirit of positive engagement are in both countries’ interests. Both China and the U.S. are richer and better off because of deepening trade and investment relationships.”

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INSIDE AMCHAM FROM THE CHAIRMAN

The Case for the NEI

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s unemployment hovers stubbornly around 9 percent in the U.S. and Congress continues to debate the best way to create American jobs, policymakers should take a hard look at one cost effective way of stimulating U.S. job growth – fully implementing President Obama’s National Export Initiative (NEI), a plan to double U.S. exports in the next five years and create two million new American jobs.

It is estimated that every US$1 billion in exports creates or supports 6,250 manufacturing jobs. But, for years, the U.S. has been punching below its weight when it comes to exports. The U.S. ranks behind almost every developed country in the world in terms of exports as a percentage of Gross Domestic Product (GDP), a position that is inconsistent with America’s place in the world. In 2009, exports made up approximately 12 percent of our GDP versus more than 40 percent of Germany’s.

Robert Roche Chairman AmCham Shanghai

The NEI, America’s first ever government-wide strategy for promoting exports, is a critical first step towards developing a bold, ambitious trade policy, and for the first time, an export infrastructure that will drive sustained economic growth and job creation in the U.S. for decades to come.

For years, the U.S. has been punching below its weight when it comes to exports.

But those of us who work every day to sell American goods, services and commodities see the NEI as a critical opportunity to get the U.S. back into the game in the increasingly competitive global export market.

American companies produce the best products, employ the best workers and are the most innovative in the world. China is the perfect example of a market that, despite its challenges, offers tremendous export opportunities that the U.S. must develop in order to advance its export economy. In fact, our exports to China more than doubled between 2004 and 2008 and since China joined the WTO in 2001, American exports have jumped more than 260 percent.

However, American companies are facing stiff competition in China from the EU, Japan, Korea, Canada and other nations that have well-established, aggressive and government-backed trade promotion programs. While our growth in exports to China is impressive, unfortunately, our biggest competitors in China are outperforming us, limiting America’s ability to take full advantage of the world’s fastest-growing market.

Why is this happening? To start, our competitors’ longstanding commitment to trade advocacy begins at the highest levels of government. For example, German Chancellor Angela Merkel regularly travels with a full delegation of German CEOs who pitch German goods and commodities to top leaders in government and business.

Simply put, more aggressive U.S. trade advocacy is essential to compete. The NEI would enhance U.S. trade advocacy by requiring focused attention from the president and relevant cabinet-level agencies on aggressively expanding exports. A good first step was the Obama administration’s first cabinet-level trade mission in May. Focused on clean energy technology, the American Chamber of Commerce in Shanghai was pleased to host Commerce Secretary Gary Locke in Shanghai as he led a delegation of more than 25 American companies that also stopped in Hong Kong, Beijing and Jakarta, Indonesia.

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INSIDE AMCHAM FROM THE CHAIRMAN

Another key component of the NEI is to make the U.S. export control regime more agile, transparent, predictable and efficient – a weak spot that America’s competitors have been all too happy to take advantage of. Up to now, many sales that U.S. firms should rightfully win are lost and potential buyers driven away because of an outdated export control system. According to a 2010 Milken InstituteNational Association of Manufactures study, modernizing export controls on commercially available technology could result in annual gains of US$64 billion in real GDP by 2019.

The NEI would also boost export financing by improving access to credit markets using the ExportImport Bank and help ensure that American exporters have the same access to export financing as their competition, even when private financing is unavailable. This is critically important to SMEs who make up a large majority of America’s exporters. Today, Canada, with an economy less than 1/10 the size of the U.S. economy, spends almost four times the U.S. on export financing to support Canadian companies.

As Congress begins to determine funding priorities for the next fiscal year, members of American Chambers of Commerce all across China are reaching out in unison to show our support for funding the full federal investment requested by the Obama Administration for the NEI for FY 2011 and beyond. I look forward to personally carrying that message to Washington as part of a senior delegation later this summer.

On behalf of the more than 4,000 companies represented by American Chambers in China, I urge Congress to fully implement the National Export Initiative.

The AmCham Shanghai 2010 Board of Governors: Chairman

Governors

Andrew Au Citibank China

Murray King APCO Worldwide

James Rice CSM Global

Eddy Chan FedEx Express

Diane E. Long UBS International

Matthew J.Targett Bayer Technology and Engineering

Pierre E. Cohade The Goodyear Tire & Rubber Co.

Eric S. Musser Corning China

Kevin E.Wale General Motors China Group

Robert W. Roche Acorn International

Vice Chairman

John V. Grobowski Faegre & Benson LLP Shanghai

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

Highlights from the June 2010 Board of Governors Meeting

Committee Briefings Matt Chervenak, chair of the Healthcare Committee, and Robert Benedetti and Adam Michel, chair and vice chair of the Design & Construction Committee, briefed the Board on their committees’ annual agendas, recent activities and development plans.

Membership Update

77 new member applications were approved over the past month, with 25 percent of new members joining under new membership categories.

CSR Sichuan Project

The President noted that a trip to Sichuan Province has been scheduled for the middle of June to visit projects supported by AmCham Shanghai’s CSR programs. Sponsor companies and other contributors have been invited to participate.

IN ATTENDANCE Governors: Andrew Au, Eddy Chan, Pierre Cohade, John Grobowski, Diane Long, Eric Musser, James Rice, Robert Roche (Chairman), Matthew Targett, Kevin Wale and Chris Wurzel.

Attendees: David Basmajian, Robert Benedetti, Jeff Bernstein, Justin Chan, Matt Chervenak, Norwell Coquillard, Siobhan Das, Brenda Foster (President), Adam Michel, Helen Ren, David Turchetti and Linda X. Wang.

REGRETS David Gossack and Murray King.

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AmCham Shanghai’s Human Resources Committee hosts annual 2010 HR Conference This year’s HR Conference focused on organizational agility and business endurance.

AmCham Shanghai’s Human Resources Committee recently hosted the 2010 Annual Human Resources Conference. This year’s HR Conference, named Organizational Agility – Business Endurance, focused on the agility of human resources as it pertains to a company’s success and overall business fitness. Speakers and participants explored how to strengthen the relationship between a company’s core business strategies and its HR functions, examined business leaders’ expectations of strengthened human capital and provided attendees insight into HR’s function as “the business of people.”

Andreas Amrein, general manager and head, Asia Pacific, of Abbott Diabetes Care, opened the Conference with the keynote speech highlighting core topics including how to manage people in an operations setting, the importance of organizational culture, the challenges of sparking a culture of innovation and the strategic importance of a flexible HR strategy. On the second day of the Conference, Best Buy’s Asia CEO Kal Patel discussed the HR challenges and lessons learned from the company’s China market entry process, including its acquisition of Chinese electronics retailer Five Star.

Morning, afternoon and breakout sessions over the course of the two-day Conference covered how and why HR professionals should learn to speak the language of business while business leaders learned about HR’s critical role in facilitating successful business operations.

Held in conjunction with the HR Conference, the annual HR Fair provided an excellent opportunity for conference attendees to network and share ideas with HR professionals. Exhibitors from HRrelated fields discussed HR tools and trends with conference and fair attendees in a series of “Uncover & Learn” sessions that covered case studies and tactical HR-related topics. Held at the InterContinental Puxi, this year’s HR Conference and HR Fair drew more than 300 attendees. (Jun 9-10)

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Organizational Agility – Business Endurance 2010 Annual AmCham Shanghai Human Resources Conference & HR Fair Platinum Sponsors

Gold Sponsors

Exclusive Luncheon Sponsor

Exclusive Internet Workstation Sponsor

Exclusive Name Badge Sponsor

Exclusive Conference Bag Sponsor

Exclusive HR Fair Map Sponsor

A

Conference Binder Full-Page Ad Sponsors

In-kind Sponsors

AmCham Shanghai New Members – May/June 2010 U.S. Corporate Membership

Corporate International Affiliate Membership

Central Purchasing of China, Inc., Shanghai Office CHAU Lapyan Cormark Store Fixturing & Display Co., Ltd. CONWAY Thomas Michael Hallmark Cards (HK) Limited WEISE Paul Herbert Luminex Trading (Shanghai) Co., Ltd. SHENG Haigang Shanghai Emptoris Software Co., Ltd. LI Yuxin Shanghai ITW Plastic & Metal Co., Ltd. WANG Xunbiao SID Tool Co., Inc., Shanghai Rep. Office GETTLEMAN Steven Thorlabs (Shanghai) Trading Co., Ltd. RUBIN Shmuel

Agility Logistics (Shanghai), Ltd. ZHU Richard Auralog Software Development (Beijing) Co., Ltd. KY Ge Infogroup/ORC LIAO Calvin Regalia Hotel Management Group Co., Ltd. WANG Rose Talent2 Shanghai Co., Ltd. LINDSAY Alison Universal Precision Machining (Zhejiang) Co., Ltd. YANG Daisy Yuanyuan Yew Chung International School of Shanghai RANDALL Peter

U.S. Associated Corporate Membership Aramark Service Industries (China) Co., Ltd. Shanghai Branch TSO Kun Connections Restaurant Management Co., Ltd. CHEN Sophia Ecolab (China) Investment Co., Ltd. HSU Sam Hong Kong Wyndham Hotel Asia Pacific Co., Ltd., Shanghai Rep. Office PUGSON Desmond Lenovo (Shanghai) Co., Ltd. WANG Zhonglin Microtune Shanghai, Ltd. RONG Xue Newell Rubbermaid Products (Shanghai) Co., Ltd. LOWE Kevin Shanghai Successfactors Software Technology Co., Ltd. YUAN Hong Softtek Shanghai GU Brown Timken (China) Investment Company Limited, Wuxi Branch FANG Leong Timken Wuxi Bearing Co., Ltd. HOWES Christopher UPG (Suzhou) EPZ Co., Ltd. OPIELOWSKI Thomas John VSC Ryerson Global Trading Co., Ltd. MUNOZ Frank Zurich Insurance Brokers (Beijing) Co., Ltd., Shanghai Branch HU Karen

Small Business Membership Keystone Group (Shanghai), Inc. ZHANG Linda Shirokane Partners Limited GAIN Erik Ronald

Educational Membership Kennesaw State University MORRIS Barry James

Non-resident Corporate Membership Asialimo, Inc. KAO T.J. California Travel and Tourism Commission XU Lei International Business Training Association, LLC. LI Yaping

Associate Membership Aramark Service Industries (China) Co., Ltd. Shanghai Branch CAO Bin ROSENDAHL Gerald Blue Frog (Shanghai), Ltd. LIU Huiqing CEIBS PARR William Chris CH2M HILL Constructors (Shanghai) Co., Ltd. ZHANG Wenfu LIN Zhi Hong Charles Mo and Company WEE Seng Hwat Control Risks Group (Shanghai) Limited FANG Fanny Corning Shanghai Fiber Optics Co., Ltd. BALL Steven Craig Deutsche Bank (China) Co., Ltd., Shanghai Branch NELSON Michael Dow Corning (Shanghai) Management Co., Ltd. BURKS Jeremy VAN VOOREN Marie-France SU Wen Eastman (Shanghai) Chemical Commercial Co., Ltd. Jingan Branch TORA RODAMILANS Eduard Ecolab (China) Investment Co., Ltd. CHAN Vincent Foster Wheeler Energy Management (Shanghai) Company Limited LOZANO Arturo Tomas General Electric (China) Co., Ltd. WANG Todd JPMorgan Chase Bank (China) Company Limited Shanghai Branch MOK Colin Linde (China) Forklift Truck Corp. Ltd. Shanghai Branch FAY Daniel

Menlo Worldwide Logistics (Shanghai) Co., Ltd. HUANG Nadine MRI WORLDWIDE FENERTY Brian NCH Chemical Co., Ltd. COFFIN Benjamin Pricoa Consulting (Shanghai) Co., Ltd. XU Rochelle HU Ying Regalia Hotel Management Group Co., Ltd CHUNG Carey Resources Global Enterprise Consulting (Beijing) Co., Ltd. Shanghai Branch Company WANG Sharon Shanghai Korn/Ferry Human Capital Consulting Co., Ltd CAO Miao RAO Russ Universal Precision Machining (Zhejiang) Co., Ltd. XIA Leon Washington University - Fudan University Executive MBA Program, The GAO Joanne Yum! Restaurants Consulting (Shanghai) Co, Ltd. MILLER Donald

Individual U.S. Citizen Membership 2dunet JIANG Wei Immense LIANG Steve S. T. J.D. Power Commercial Consulting (Shanghai) Co., Ltd. GEORGE Jacob M+R Spedag Group SCHLAKS Avram MInfo, Inc. GRAYLIN Alvin Plasseraud IP Limited SEIN AYE Ellen Shanghai Colorcon Coating Technology Co., Ltd. TASKER Simon Trident Multimedia Technologies (Shanghai) Co., Ltd. CHANG Kevin WA Health Technology (USA), Inc. KOOK Timothy Wuxi Hsianhua Machinery Manuf. Co., Ltd. CAI Aiping POLLOCK Randy

Individual International Affiliate Membership InChina Training INCH Jason Liu & Wang, Attorneys at Law (Shanghai Office) LIU Nanping Shanghai Dongjin Business Consulting Co., Ltd. GEREMIA Carlo Shanghai Dongjin Business Consulting Co., Ltd. NGAI Kwok Foo Francis Synergy Health (Suzhou), Ltd. TOWNSEND David HOFFMANN Eberhard SCHANEN Charles

Non-resident Individual Membership Cammax International (Asia), Ltd. LIEBERMAN Jonathan

3 8 I N S I G H T J U LY / A U G U S T 2 0 1 0 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.

Event Highlights

INSIDE AMCHAM

RECENT AMCHAM HAPPENINGS

Secretary Clinton calls for a “win-win” solution for U.S.China trade

AmCham Shanghai President Brenda Foster introduces U.S. Secretary of State Hillary Clinton.

“American companies want to compete in China,” said Secretary of State Hillary Clinton before hundreds of members of the American business community in Shanghai at the Boeing Shanghai plant in Pudong in late May. “They want to sell goods made

by American workers to Chinese consumers with rising incomes and increasing demand.” Secretary Clinton highlighted the need for China to further open its markets to American companies and said America is seeking a “win-win” for both the U.S. and China.

Secretary Clinton was introduced by Brenda Foster, president of AmCham Shanghai who hailed Secretary Clinton for her leadership, vision and dedication in working with the business community which, “ensured not only a national pavilion at the Shanghai 2010 World Expo, but one that showcases our diversity, highlights our optimism and conveys the friendship of the American people.” After the speech, Secretary Clinton boarded a plane for Beijing where she joined Treasury Secretary Timothy Geithner and other senior U.S. officials for the second round of the Strategic & Economic Dialogue held in Beijing from May 24-25. (May 23)

June U.S. Consulate General Briefing The June briefing featured special guests Philip Leung from AmCham Hong Kong and Minister-Counselor for Financial Affairs David Dollar from the U.S. Embassy in Beijing. Dollar discussed the economic portion of the Strategic and Economic Dialogue (S&ED) held in Beijing in May, describing it as a “friendly and frank” exchange of viewpoints.

Takeaways included the need to maintain open trade and investment, financial sector reform, work on the international financial architecture and the need for rebalancing of economies. During the Q&A period, David Dollar, minister-counselor for financial affairs (right), Dollar emphasized market access as a means to addresses AmCham Shanghai members. remedy trade imbalances, noting that U.S. exports to China in the past six months were up 42% while exports to the rest of the world remained flat, and highlighted the joint announcement to increase the number of student exchanges between the U.S. and China.

Acting Consul General Chris Beede spoke about the strategic portion of the S&ED, noting energy security, Sudan, Iran and North Korea as principal areas of discussion. He thanked AmCham Shanghai for its support during the May visits of Transportation Secretary LaHood, Commerce Secretary Locke, and Secretary of State Clinton, while noting that Energy Secretary Chu’s planned May visit was postponed due to the Gulf of Mexico oil spill. (Jun 1)

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Event Highlights

INSIDE AMCHAM

Expo CEO Speaker Series: Jeffrey Immelt Jeffrey Immelt, chairman and CEO of General Electric, recently addressed an audience of AmCham Shanghai members and Chinese officials at the USA Pavilion on the grounds of the Shanghai 2010 World Expo. Immelt discussed a broad range of subjects, including his viewpoint on the global economy, where he sees the engines of growth shifting to emerging markets, especially as the U.S. continues its recovery and several economies in Europe experience volatility. He discussed his view of business in China through his experience running GE, and how the company is adapting to the fast-moving nature of the marketplace.

Immelt also discussed President Obama’s National Export Initiative, which aims to double U.S. exports over the next five years. “It’s the right goal,” said Immelt, but noted that a demonstrated commitment from the president is needed for the initiative to truly succeed. (Jun 2) GE Chairman and CEO Jeffrey Immelt

For an exclusive interview with Jeffrey Immelt, turn to page 23.

Expo Distinguished Speaker Series: U.S. Senators Feinstein, Hagan and Udall AmCham Shanghai was pleased to host a luncheon with U.S. Senator Dianne Feinstein (D-CA) in June as part of AmCham Shanghai’s ongoing Shanghai 2010 World Expo Business Series. Joining Senator Feinstein were Senator Mark Udall (D-CO) and Senator Kay Hagan (D-NC). “China is the most important bilateral relationship for the U.S. in the world,” remarked Senator Feinstein. The Senator discussed a wide range of topics ranging from her first visit to China as San Francisco mayor in 1979 to developing a sister city relationship between San Francisco and Shanghai with then-Shanghai Mayor Jiang Zemin. She discussed her profound personal and political experiences developing a working relationship with Jiang and emphasized the importance of forging long-term relationships with China’s political leaders based on mutual-understanding and friendship. Senator Feinstein applauded Ambassador Jon Huntsman for forging a consistent dialogue between the U.S. and China, warning that in the absence of regular interaction, understanding can be threatened.

U.S. Senator Dianne Feinstein

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On American business concerns in China, Senator Feinstein called for renewed leadership among the American business community in Shanghai to engage in a mutually productive relationship with China and applauded AmCham Shanghai for leading the effort. (Jun 4)

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Hawaii Governor Linda Lingle

Expo Distinguished Speaker Series: Hawaii Governor Linda Lingle

As part of the ongoing AmCham Shanghai 2010 World Expo Distinguished Speaker Series, AmCham Shanghai recently hosted Hawaii Governor Linda Lingle, who spoke to Chamber members about Hawaii’s Clean Energy Initiative. Governor Lingle discussed the initiative in partnership with the Department of Energy as a model for other states to use their natural resources to reduce their dependence on foreign oil. The initiative aims to transform Hawaii into a world model for energy independence and sustainability with the goal of meeting 70% of Hawaii’s energy needs with clean energy by 2030.

To reach this goal, the state is aiming to produce 40% renewable energy and increase energy efficiency by 30%.

“We are truly transforming how we approach energy,” she said, and by capitalizing on Hawaii’s abundant solar, wind, wave and bio- and geothermal energy, “we can use technology to transform Hawaii’s economy.” (Jun 7)

INSIDE AMCHAM

Texas Governor Rick Perry

Expo Distinguished Speaker Series: Texas Governor Rick Perry

AmCham Shanghai was pleased to host an evening with Texas Governor Rick Perry and a delegation of 30 Texas-based companies and communities visiting the Shanghai 2010 World Expo in June to fortify and strengthen the state’s trade, tourism and business linkages with China. “Salute to Texas Week,” held from June 13-19 at the Expo, showcased the economic development, business and tourism opportunities that Texas has to offer. Texas has a strong and longstanding trade relationship with China, said Perry. In 2009, Texas exports to China increased 5.7% to a total of approximately $8.9 billion, ranking it third in comparison to other states’ exports to China. China is Texas’ third largest export destination, just after Mexico and Canada, and Texas sits as one of the top five U.S. states with imports from China, totaling an estimated $16.3 billion in 2009. (Jun 16)

AmCham Shanghai Chairman Robert Roche Joins USA Pavilion Board American Chamber of Commerce in Shanghai (AmCham Shanghai) Chairman Robert Roche was recently named to the USA Pavilion Board of Directors at the Shanghai 2010 World Expo. Roche will serve on the Finance Committee, bringing his experience as the founder and director of Acorn International, one of the largest direct response TV companies in China. “I am honored to help promote American ingenuity, sustainability, technology and business that embody our great country’s spirit and look forward to serving on the Finance Committee,” said Roche, a current member of the USA Pavilion Steering Committee. “I am proud to bring together AmCham Shanghai and local American business participation at the Expo,” he added.

Roche has served on the USA Pavilion steering committee for the past year and has been focused on developing partnerships with the business community to support the construction and operation of the Pavilion.The popular USA Pavilion, which opened on May 1, welcomed one million visitors within its first month in operation.

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Committee Highlights

INSIDE AMCHAM

NEW IN COMMITTEES

Panelists from the NFL, MLB and NBA discuss how to build sports leagues in China.

Marketing Committee

Sports Marketing in China: Trials and Triumphs of Building Sports Leagues

AmCham Shanghai’s Marketing Committee hosted Michael Marone of Major League Baseball (MLB), Michael Stokes of the National Football League (NFL) and Adam Antoniewicz of the National Basketball Association (NBA) to discuss the successes and difficulties of developing professional sports leagues in China. Marone initiated the panel discussion with an overview of MLB’s market development in China. He described MLB’s efforts in creating passion for baseball and raising the level of play through school leagues, college clubs, national team development and a road show. Stokes described the NFL’s focus on media partnerships to further its market entry goals in China by focusing on males age 18-30 in first-tier cities. He discussed how the NFL is using regional media partnerships, customized content production and grassroots efforts such as university flag football, social events and celebrities to increase awareness of the traditionally American sport among Chinese. In contrast to the MLB and NFL, the NBA is more established in China, according to Antoniewicz.

While NBA basketball has been broadcast in China for over 23 years reaching an estimated 1.4 billion viewers from 2008-2009, the company has focused its most recent efforts on driving deeper consumer engagement in China through social media. The NBA is spearheading merchandising with an NBA store at the Shanghai 2010 World Expo and is also currently pursuing arena development and social responsibility, he said. (Jun 4)

Corporate Social Responsibility Committee

Underprivileged Kids Enjoy Dream Day at Shanghai Zoo Volunteers from AmCham Shanghai and Chamber member companies were excited to lead 150 children on a special tour of Shanghai Zoo. Co-organizer Shanghai Charity Foundation reached out to a number of disadvantaged kids, including migrant, orphaned and physically disabled groups who all gathered on a sunny Saturday afternoon in the zoo gardens to meet their tour AmCham Shanghai volunteers pose for a photo with children at Shanghai Zoo. guides. Many AmCham Shanghai member companies sent employee volunteers to help take the children around the zoo including Disney, Starbucks, Deloitte, Citibank, Ashland, 3M, Best Buy, CH2M, Synopsys and Parsons Brinckerhoff.

Volunteers and kids enjoyed seeing the animals, took in sea lion and elephant shows and finished off with a lively stage performance by acrobats, a man on stilts and songs performed by the Wuxi AppTec chorus. Dream Day at the Zoo was organized by the Shanghai Zoo, the Shanghai Charity Foundation and AmCham Shanghai and was supported by Disney. The event was a part of the Chamber’s “Make a Difference Corporate Volunteer Alliance” which fosters employee volunteerism in corporations. (Jun 5)

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INSIDE AMCHAM

Manufacturers’ Business Council members tour a factory in Wuxi.

Manufacturers’ Business Council

MBC Members Tour Manufacturing Facilities in Wuxi Members of AmCham Shanghai’s Manufacturers’ Business Council (MBC) recently participated in a one day factory tour to Wuxi to visit three manufacturing facilities: Bodycote, a U.S. company specializing in thermal processing treatments for aerospace, auto, construction and other industries; Pneumatech, a U.S. manufacturer of compressed air dryers, filtering equipment and auxiliary pressure control units; and White Swan, a Chinese manufacturer of home appliances. Participants reported keen interest in the White Swan facility which provided an excellent opportunity to see first-hand how China’s manufacturers are improving and developing their facilities and processes, and served as a reminder to all that excellence in manufacturing and process development is crucial to success in China. A group discussion held at the end of the day focused on the “Foxconn Problem” and the potential impact this is having both on the labor markets in South China and in the electronic and auto industries. Most participants reported they had yet to feel any direct effects, but that most were actively monitoring the general situation in China and paying close attention to their own facilities to stay on top of potential labor issues. The MBC has committed to continue to focus on this issue and provide support to its members. (Jun 11)

Financial Services Committee

Panelists discuss Chinese FDI in the U.S.

Chinese Outbound Investment in the U.S.

In conjunction with the launch of the latest issue of its Viewpoint publication Chinese FDI in the U.S. - Causes, Case Studies and the Future, AmCham Shanghai hosted a seminar focusing on Chinese outbound investment in the United States. A panel of experts including Bob Theleen, CEO and chairman of ChinaVest, David Gossack, principal commercial officer at the U.S. Consulate in Shanghai, and Joseph Chan, partner with Pillsbury Winthrop Shaw Pittman LLP, presented key trends and issues surrounding Chinese FDI to the U.S. Zennon Kapron of Kapronasia gave an overview of the Viewpoint and Kim Woodard of Technomic Asia moderated the panel discussion. “We expect Chinese outbound investment in the U.S. to continue to increase,” said Theleen who opened with a discussion of FDI trends and active target industries in the U.S. “While investments may be relatively small in scale, they will be diverse with a focus on resources, clean energy, technology, agribusiness and biotechnology,” Theleen added. Chan discussed the regulatory challenges, both perceived and real, for Chinese companies making acquisitions in the U.S. while Gossack presented on U.S. government programs that promote Chinese investment in the U.S. and how to get involved in the growing trend of Chinese FDI in the U.S. (Jun 24)

Event and Committee Highlights are reported by Anna Bartram, Jonathan Shyu and Tiffany Yajima

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DEAL OF THE MONTH ISTOCKPHOTO

Pfizer’s Pharmaceutical Sale Pfizer trades swine-flu vaccine for anti-monopoly clearance.

T

he US$68 billion merger between Pfizer and Wyeth made headlines last year when the Anti-Monopoly Bureau of China’s Ministr y of Commerce (MOFCOM) conditioned approval on Pfizer’s divestiture of a local business to an approved third party. After a lengthy bidding process, Pfizer completed the sale of its swine-flu vaccine last month to China’s Harbin Pharmaceutical Group Co., which manufactures and distributes generic drugs in China. The US$50 million divestiture is believed to be the first deal in which MOFCOM required a foreign business to sell its locally based business to comply with China’s Anti-Monopoly Law. Harbin Pharmaceutical is said to have offered the highest price for the vaccine business, beating out rival bids from Switzerland’s Novartis AG, U.S.’s Eli Lilly & Co., Germany’s Boehringer Ingelheim and Australia’s Agenix.

Since its Anti-Monopoly Law went into effect in 2008, China has emerged as a major cross-border regulator along the lines of the European Union and the U.S. Over the past two years, five out of six deals involving foreign entities have conditionally passed Chinese anti-monopoly review while only one has been blocked outright. However, legal analysts worry that China’s exercise of jurisdiction over the Pfizer merger could open the door to similar rulings in the future, even where China’s market share is minimal, to protect emerging domestic industries.

Pharmaceuticals are a high-profile sector in China and the animal vaccine market is expected to increase by 20% annually. Pfizer’s swine-flu vaccines

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account for 38% of the market in China and reached US$9.3 million in 2009. In its pre-merger review, MOFCOM determined that Pfizer and Wyeth combined would hold 49.4% of the market compared to 18.4% for Holland’s Intervet, the next largest producer.

Acquiring Pfizer’s technology is expected to help China gain ground in the research and production of high-end animal vaccines, especially in light of China’s growing need to protect animal health and promote food safety. Pork is an important staple of the Chinese diet and China produces more pigs than any other country, nearly half a billion each year, compared with 66 million in the U.S. The divestiture includes all assets and intellectual property related to the RespiSure and RespiSureOne vaccines in China, both of which protect against mycoplasma hyopneumoniae (MH) in pigs, and includes access to a Pfizer facility in Nebraska, where Harbin Pharmaceutical expects to send up to 20 of its technicians for training.

Pfizer will continue to provide Harbin Pharmaceutical with technical assistance for up to three years to facilitate the transfer of intellectual property rights. Outside of China, Pfizer will continue to hold intellectual property rights to the MH vaccine; post-merger it will only sell Wyeth’s MH vaccine in China which holds a nominal 12% of the market share. Harbin Pharmaceutical has yet to obtain production certificates for the vaccines. In the meantime, Pfizer will continue to produce and sell the vaccines until Harbin Pharmaceutical can produce qualified products.

– Tiffany Yajima

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Testing

Inspection

CertiďŹ cation

Auditing

Advisory

Outsourcing

Training

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Quality Assurance