Insight Magazine June 2011 by The American Chamber of Commerce in Shanghai

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INSIGHT The Journal of the American Chamber of Commerce in Shanghai June 2011

INDUSTRY INSIGHT

Gauging China’s Exports MARKET PROFILE

China’s Gaming Market INTERVIEW

CEO of International Paper

Off to See the World Chinese tourists are heading overseas in record numbers – cameras, cash and shopping lists in hand.

June 2011

INSIGHT The Journal of the American Chamber of Commerce in Shanghai

PRESIDENT

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

David Turchetti DIRECTORS BUSINESS DEVELOPMENT & MARKETING

Karen Yuen

INSIGHT EDITOR-IN-CHIEF/ COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren Linda X. Wang

INSIGHT ASSOCIATE EDITOR

Esther Young EDITORIAL INTERN

Ashley Cahill EDITORIAL SUPPORT

Ryan Balis 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 David Basmajian (86-21) 6279-7119 ext. 8066 david.basmajian@amcham-shanghai.org Insight is a free monthly publication for the members of The American Chamber of Commerce in Shanghai. Editorial content and sponsors' announcements are independent and do not necessarily reflect the views of the governors, officers, members or staff of the Chamber. No part of this publication may be reproduced without written consent of the copyright holder.

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

11 Hunting for Gold in China’s Gaming Market

By Esther Young

Games such as World of Warcraft, Angry Birds and Plants vs. Zombies may seem far removed from the story of China’s economic boon, but their popularity provides a snapshot of China’s incredible market potential.

19 A Truer Picture of China’s Export Machine INDUSTRY INSIGHT

By John Horn, Vivien Singer and Jonathan Woetzel

China’s growth depends less on exports than conventional wisdom suggests. Perhaps it’s time to double down on the Chinese consumer.

23 Volunteer Spirit Spreads in China CSR FEATURE

By Ashley Cahill

Well-executed corporate social responsibility (CSR) programs are becoming increasingly important for foreign companies in China. U.S. companies are leading the way in corporate volunteerism.

28 Off to See the World COVER STORY

By Ryan Balis

China has emerged as a top source of international tourists. What does this growth in outbound tourism mean for the travel and tourism industry and the U.S. economy?

INTERVIEW

34 The Path to Global Excellence

By David Basmajian

CEO of International Paper (IP) John Faraci speaks to AmCham Shanghai about making products “in China for China,” the need for sustainability leadership and the difference between an “international” and a “global” company.

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

3 News Briefs

8 Manager’s Notebook

16 2011 U.S.-China S&ED POLICY UPDATE

Former deputy assistant secretary for East Asia at the U.S. Department of Commerce Dr. Ira Kasoff highlights the impact of the bilateral talks.

48 Deal of the Month

26 The Future of Talent Mobility INDUSTRY INSIGHT

Chinese employees have new opportunities to work overseas and across different cities within China. What are the emerging trends?

INSIDE AMCHAM

37 From the Chairman: Ongoing Dialogue is Crucial 38 Board of Governors Meeting 40 2011 Suzhou Government Appreciation Dinner

42 44 46 47

2011 MBC Conference New Member Listing Events in Review Committee Highlights

DISNEY

MEMBERSHIP & CVP

MARKET PROFILE

IMAGINECHINA

COMMITTEES

Siobhan M. Das

F E AT U R E S

IMAGINECHINA

AMCHAM SHANGHAI

INSIDE INSIGHT

DAVID BASMAJIAN EDITOR-IN-CHIEF/ DIRECTOR COMMUNICATIONS & PUBLICATIONS

hat is America’s No. 1 service export to China? New York City, Las Vegas, Disney World, San Francisco and the Alamo! In 2010, more than 800,000 Chinese tourists visited the U.S., and that number is expected to grow to two million by 2015. Perhaps more importantly for the U.S. economy, Chinese tourists are big spenders! The biggest, in fact, spending an average of US$6,200 per trip, approximately US$1,300 more than second-place spenders, Brazil. This month’s cover story talks about why Chinese tourism is up, where people are going and what the U.S. is doing to attract a bigger share. Speaking of U.S.-China exchanges, the third annual Strategic & Economic Dialogue concluded in Washington, D.C. on May 10. Dr. Ira Kasoff, senior counselor at APCO Worldwide and the former deputy assistant secretary for East Asia at the U.S. Department of Commerce, discusses the highlights of the latest round, including the challenges of identifying specific accomplishments and the key to ultimately assessing the success of the talks – how effectively commitments are implemented.

When discussing the state of U.S.-China relations, the imbalanced trade relationship is often cited as a problem. But how imbalanced is it? In this month’s issue, McKinsey & Company offers a “truer picture” of China’s export machine and presents what may be a more accurate way to measure China’s total exports. McKinsey also offers some sage advice for U.S. companies: double down on the Chinese consumer. Angry Birds, WoW, MMORPGs. If these words mean anything to you, then you may be a “gamer.” Or, at least, a “casual gamer.” Online gaming has emerged as yet another booming industry in China, and like most markets here, the numbers are staggering. A McKinsey study reveals that 80 percent of China’s 420 million Internet users play games with revenues expected to top US$8 billion by 2014. But again, like most markets in China, there are significant challenges for those companies that are hoping to compete in China. This month’s Insight touches on the unique aspects of China’s gaming market and how innovative U.S. companies like PopCap Games are getting in on the action.

IMAGINECHINA

News

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

CHINA BUSINESS

Gold fever hits China China overtook India in the first quarter of 2011 to become the world’s largest purchaser of gold, according to data from the London-headquartered World Gold Council. Chinese investors, one class of gold buyers, bought 90.9 metric tons of the yellow bars over the first quarter, a year-onyear doubling of volume. A growing middle class, along with investors looking for a safe asset storage because of inflationary fears, is increasing demand for gold in China. Although China accounts for 25% of gold investment demand, India remains the world’s largest consumer thanks to gold jewelry demand, buying 291.8 tons in the first quarter compared to second-place China’s 233.8 tons. Gold prices have increased 5% in 2011 to nearly US$1,500 an ounce.

Tibet steps up solar power base Tibet Autonomous Region is set to build 10 additional photovoltaic solar power generating plants this year, helping to establish the region as China’s leading solar power base. RMB2 billion (US$308 million) is being invested in the projects, which will have a combined capacity of 100 megawatts when completed. Solar power has become a popular source of energy in Tibet thanks to an average 3,000 hours of solar radiation annually. Tibetan households have put such natural resources to use by installing nearly 400,000 solar stove units. By using the clean energy source, nearly 163,000 tons of coal equivalent were saved in 2010, according to the regional government in Tibet.

Rail trials to begin on Beijing–Shanghai line Trials are scheduled to get under way this month on the muchanticipated Beijing–Shanghai high-speed rail line. A 10-day trial is set to begin June 9, while operators calibrate the timing along the lines.The route is expected to open following the trials and have three service modes, including a direct “capital-stop mode” service between Shanghai and Beijing. The trials come amid Beijing’s scaling back of other high-speed rail projects. In May, construction on the route linking Tianjin and Qinhuangdao in Hebei province was halted and the builder ordered to submit an environmental impact statement. Earlier, operation of the Qingdao–Jinan line, China’s first high-speed passenger rail line, was suspended because of environmental reasons. Meanwhile, China’s rail network has implemented a real ID system for tickets on high-speed “D,” “G” and “C” trains. Passengers may buy only one ticket per valid ID and will be required to present identification upon entering the rail station and boarding the train.

Rare earths exports up 33% Despite new Chinese government restrictions on the rare earths industry, exports of rare earth ores and metals surged 33% year-on-year over the first four months of 2011. Customs data show the industry exported a total of 18,614 metric tons of rare earths over the period. Rare earth minerals, of which China accounts for 95% of the world’s production, are a key ingredient

in technology manufacturing and have military application. In May, China’s State Council, or cabinet-like body, issued new restrictions that expand rare earths export quotas, regulate industrial access and levy higher taxes on the minerals for environmental reasons, as well as to protect the domestic industry. Beijing slashed the nation’s export quota by about 35% over the first half of 2011, driving up prices.

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CORPORATE NEWS

Goldman, Morgan Stanley set up yuan funds Goldman Sachs Group, Inc. and Morgan Stanley have both set up yuan-denominated private equity funds in China, which will help the firms boost investment opportunities and expand their presence in China. Goldman Sachs and its Chinese partner, Beijing State-Owned Capital Operation and Management Center, are seeking to raise RMB5 billion (US$770 million) through the Broad Street (Beijing) RMB Fund. Meanwhile, Morgan Stanley launched its own yuan-denominated fund with partner Hangzhou Industrial & Commercial Trust Co. with hopes of raising RMB1.5 billion (US$231 million). Other yuan funds that either have been launched or announced include those by Carlyle Group, TPG Capital and Blackstone Group LP. Foreign firms that do business in China increasingly are launching yuan-denominated funds raised from Chinese investors because it is believed these carry fewer restrictions than dollar funds raised from foreign investors.

Expedia,Tencent invest in eLong Online travel pioneer Expedia, Inc. and Shenzhen-based Tencent Holdings Ltd., China’s largest Internet company, both invested in Beijing-based online travel company eLong, Inc. Bellevue, WAheadquartered Expedia increased its share in eLong to 56%, up from 40%, by paying US$41.2 million. Tencent acquired a 16% stake for US$84.4 million in what is the company’s first significant travel market investment. eLong holds a 7.3% share in China’s online travel market, making it China’s second-largest Internet ticketing agency behind Ctrip.com International Ltd., which controls nearly half the market. eLong reported first quarter revenue of US$19 million, up US$14.8 million over the same period last year.

Yahoo! expands China R&D Sunnyvale, CA-based Yahoo!, Inc. is ramping up research & development

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(R&D) operations in China, according to the company’s Chief Product Officer Blake Irving. In 2010, Yahoo! added more than 100 people to its Beijing R&D center, which employs hundreds of workers. The Beijing center is the company’s thirdlargest center after those in California and Bangalore, India. The drive comes amid a business transfer dispute involving its Chinese partner Alibaba Group. Analysys International says Yahoo! receives less than 1% of the revenue share of the search market in China, down from 25% in 2005 when the collaboration was formed. Going forward, Yahoo! is betting on attracting young Internet users with a tablet PC, an increasingly popular technology item in China called Livestand.

Ctrip plans to sell train tickets Online travel agency Ctrip.com International, Ltd. said it is working with the Chinese government to develop a plan to sell railway tickets, a new service that could make train travel more attractive to foreigners and prove profitable for the company. Min Fan, the top executive at Ctrip, was quoted as saying that the website, which is available in English and Chinese, will “definitely” sell train tickets on the Internet. At present, train tickets are sometimes difficult to buy at railway ticket offices and a challenge for those unwilling to stand in line. The news comes as China prepares to launch a high-speed rail line that will slash travel time from Shanghai to Beijing to five hours. MACROECONOMICS

CPI eases slightly National Bureau of Statistics (NBS) data show China’s Consumer Price Index (CPI), a major gauge of inflation, slowed to a 5.3% increase in April year-on-year, down slightly from 5.4% in March, which was the fastest increase in 32 months. Food prices, which make up about a third of the index, decreased 0.2% from March’s level to 11.5% year-onyear. China’s Producer Price Index (PPI), a measure of inflation at the wholesale level, dropped to a 6.8% increase in April year-

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on-year, down from 7.3% in March. China continues to move ahead with aggressive efforts to meet its 4% inflationary target for 2011, increasing the percentage of deposits that banks must keep in reserve in May for the fifth time this year.

FDI climbs 15% China’s Ministry of Commerce (MOFCOM) says foreign direct investment (FDI) into China increased 15.2% in April year-on-year to US$8.5 billion. Although FDI decreased from March’s US$12.5 billion, it is up 26% year-on-year over the first four months to a total of US$38.8 billion. Investment continues to pour into China thanks to commitments from companies such as Starbucks Corp., General Motors Co. and Walt Disney Co., which are attracted to China’s growing consumer base. Expectations that the country’s currency, the yuan, will further appreciate are pushing up investment as well.

China records ballooning trade surplus Data from China’s General Administration of Customs show the country’s trade surplus grew to US$11.4 billion in April, up substantially from the US$139 million surplus in March. China’s surplus with the U.S. increased 52% in April year-on-year to US$15.1 billion, prompting U.S. officials to call for faster appreciation of China’s currency, the yuan, during talks at the recent U.S.-China Strategic and Economic Dialogue (S&ED) in Washington. A stronger yuan would help China battle inflation, which raced past 5% year-on-year for the second consecutive month in April, by raising domestic consumers’ relative purchasing power. China has allowed the yuan to appreciate roughly 5% since adopting a more flexible exchange rate system in June 2010. U.S.-CHINA

Yum! bids for Little Sheep chain Yum! Brands, Inc., the parent company of

restaurants such as KFC and Pizza Hut, is offering to up its stake in Chinese hot pot chain Little Sheep Group Ltd. by about two thirds. The bid, which is valuated between US$570.5 million and US$586.3 million in stock, would increase Louisville, KY based Yum!’s share in the Chinese chain to 93.2%. The move is expected to help Little Sheep expand its presence overseas but requires an anti-monopoly review by China. There are more than 450 Little Sheep restaurants across China and 22 overseas. China is a major market for Yum!, whose more than 3,200 KFC outlets in China generate more than one third of the company’s annual revenue.

Marriott to expand in China Marriott International, Inc. will add 27 hotels in China under an expansion plan targeting second- and third-tier Chinese cities. Marriott, which has 57 hotels in China, has not announced when the hotels will become operational. Earlier, competitor Hilton Worldwide, Inc. announced plans to increase the number of its hotels in China from 17 to 100 by 2016. Some analysts point to potential overcapacity for high-end hotels. “There will be oversupply in certain moments. But everywhere that China has created supply, time will always create demand,” says Simon Cooper, president and managing director for Marriott Asia-Pacific. China is predicted to become the world’s top tourism destination in 2015.

Facebook’s Zuckerberg plans new visit Mark Zuckerberg, CEO of social networking titan Facebook, Inc., is planning for a second visit to China this year to look for ways the company can break into the enormous China market. “Our company mission is really clear, which is that we want to connect the whole world,” says the Palo Alto, CA-based company’s Chief Operating Officer Sheryl Sandberg. Zuckerberg previously visited China, which boasts the world’s largest number of Internet users, last December. He met with such Chinese Internet giants

as Baidu, Inc., Sina Corp. and Alibaba Group. The timing of Zuckerberg’s China trip has not been determined, nor has the agenda. GOVERNMENT & POLICY

Beijing publishes spending details Of the 98 departments at the central government level, 88 have published spending reports to be available for public viewing, up from 75 in 2010, according to China’s Ministry of Finance. For the first time, departments will publish how they use public money on overseas travel, official vehicles and receptions. In May, the State Council, China’s cabinet-like body, ordered the central government departments to publish detailed information on their expenses from last year in stressing management of public funds according to law and improved budgetary transparency. “[T]he access to financial budgets still falls short of people’s expectations,” reads a statement from the State Council released in May.

China to subsidize alternative energy & hi-tech Chinese Vice Minister of Finance Li Yong said at a forum in Shanghai that China will promote its renewable energy and hi-tech sectors by offering interest rate subsidies and other incentives. The policy will help China move towards its goal of cutting the country’s carbon intensity by 40% to 45% by 2020, as well as increase its energy mix to include 15% from alternative sources by 2020, up from 8% today. The government also says the policy will help China’s drive to rebalance its economy as called for under the 12th Five-Year Plan (FYP). China’s use of renewable energy subsidies prompted the U.S. to file a complaint with the World Trade Organization (WTO) in 2010.

PBoC lifts reserve ratio to new record The People’s Bank of China (PBoC), China’s central bank, raised the percentage

of deposits that China’s large banks must keep in reserve by 50 basis points to a record 21%. PBoC has increased the reserve requirement ratio five times since the beginning of the year and 11 times since 2010. The latest increase locks up an estimated RMB370 billion (US$57 billion) that banks otherwise could lend. The move aims to mop up excess liquidity and tame inflationary growth, which raced past 5% in April for the second consecutive month. Despite the recent moves, PBoC data show new loans by Chinese financial institutions increased to RMB739.6 billion in April, up from RMB679.4 billion in March.

China continues Treasurys sell-off Data from the U.S. Department of the Treasury showed that China reduced its U.S. Treasury holdings for the fifth consecutive month in March. China’s holdings decreased to more than US$1.145 trillion, a drop of US$9.2 billion. China’s holdings reached a peak of US$1.175 last October. Despite the sell-off, China remains the world’s largest foreign holder of U.S. government debt. Overall, foreign creditors eased their buying of Treasury notes and bonds in March, decreasing to US$26.8 billion in March, US$3.8 billion under February’s amount. Relatedly, China nearly doubled the monthly amount of its purchases in U.S. mortgage and agency debt, increasing to US$3.6 billion in March, up from US$1.9 billion in February. SHANGHAI BUSINESS

Shanghai earns top competitiveness marks Shanghai remains China’s most competitive city for the third consecutive year, according to an annual report by China’s Ministry of Commerce (MOFCOM) and Renmin University in Beijing. Beijing and Guangzhou ranked second and third place, respectively. The Annual Report on Urban Commercial Competitiveness, which MOFCOM launched in 2008, scores China’s cities according to a number of factors, including city infrastructure,

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retail sales, the quality of services and interaction with other cities. One key way Shanghai is advancing its competitiveness is through its “Four Centers” initiative to transform the city into an international financial, trade, shipping and economic center. Shanghai is also rebalancing its economy, aiming for the services sector to account for two thirds of GDP by 2015.

Yangpu, San Francisco ink technology MOU Tang Haidong, vice mayor of Yangpu district, and Jim Wunderman, president and CEO of the San Francisco-based Bay Area Council, signed a memorandum of understanding to open a Bay Area Science and Technology Park in Yangpu district. The Council says the future park will make it easier for Bay Area companies to establish a presence in China. Tang inked the deal during a delegation tour of the Bay Area, which included stops at such companies and institutions as data management company NetApp, Silicon

INSIGHT

Valley Bank, Stanford University, Booz & Co., consultancy Glumac and STUDIOS architecture. The deal comes ahead of Mayor Han Zheng’s scheduled visit to San Francisco early this month.

Virginia opens Shanghai office During his Chinese leg of a two-week promotional mission to Asia, Governor Bob McDonnell announced the opening of Virginia’s new marketing office in Shanghai, expanding the commonwealth’s international reach to a key overseas market. Virginia is hoping the office will help it attract Chinese investors, thereby boosting the local economy in the “Old Dominion” and growing jobs. The office also will enable Virginian and Chinese companies to work together more closely, helping Virginia-based companies match products and services for China. China has moved up to become Virginia’s second-largest export destination after Canada. Virginia’s US$1.2 billion in exports to China last year, up 8% year-on-year, included integrated

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circuits, plastics, synthetic fibers, industrial machinery and aluminum.

United launches direct Shanghai–L.A. route United Airlines launched its first-ever direct service between Shanghai and Los Angeles, helping the carrier expand its U.S.-China network. Chicago-based United, a unit of United Continental Holdings, Inc., will offer daily nonstop flights between its hub at Los Angeles International Airport (LAX) and Shanghai’s Pudong International Airport (PVG). Rival American Airlines, Inc. began operating on the same LAX–PVG route in April. United will have Chinesespecific services available, including movies and food menus in Mandarin, as well as Chinese food choices. United operates the most flights to China of any other carrier, offering 11 daily nonstop flights to Beijing and Hong Kong in addition to Shanghai. United announced the new route last October.

CHINA & THE WORLD

ASIA-PACIFIC

SINGAPORE: NOL to open first container terminal in China Singapore’s Neptune Orient Lines (NOL) will open a two-berth container terminal at the Port of Qingdao later this year. Neptune will invest US$25.8 million in the joint venture with Chinese shipping logistics firm SITC International Holdings and Qingdao Qianwan United Container Terminal. It would be NOL’s first terminal in China and it will add 1.5 million 20-foot equivalent units (TEUs) of annual capacity at the port. Qingdao is China’s fifth-largest container port and the largest in China’s northern region. Neptune is the world’s seventh largest container shipping firm.

D.R. CONGO: China and World Bank to upgrade railway network China and the World Bank launched a US$600 million plan to revamp the Democratic Republic of Congo’s dilapidated railway network. China’s US$200 million contribution will come from the “minerals-for-infrastructure” deal signed between China and the DRC in 2009. Nearly 700 km (400 miles) of rail will be upgraded in the Congo’s southern and central provinces of Kasai and Katanga, part of the country’s copper mining sector. The work is due to be completed by 2015. This is the first joint financing deal between the World Bank and China in Africa.

EUROPE

HUNGARY: Hungarian PM Orban meets with Chinese official Prime Minister of Hungary Viktor Orban met with Hu Chunhua, a member of the Central Committee of the Communist Party of China and the party’s chief of the Inner Mongolia Autonomous Region in Budapest. Orban expressed a desire to promote mutual trust with China, to deepen cooperation in economy and trade, and to promote the development of Hungarian-Sino relations and EU-Sino relations. Hungary wants to become “the gateway to Europe” for China. Bilateral trade between China and Hungary reached US$8.72 billion in 2010, up 28% from 2009, according to statistics from Chinese Customs. China is Hungary’s 7th largest trading partner.

PAKISTAN: China and Pakistan mark 60th anniversary China and Pakistan celebrated the 60th anniversary of the establishment of diplomatic relations in Beijing. China pledged to enhance cooperation and promote bilateral relations. The two sides signed three cooperative documents on economic and technical cooperation. The free trade agreement, signed between the two countries in 2006, has boosted bilateral trade. Bilateral trade reached US$8.6 billion in 2010, up 27.7% from the previous year. In the past 10 years, bilateral trade has been growing at an annual rate of 20%, and is expected to hit US$15 billion in the coming years. China and Pakistan have agreed that the corporate sector should lead the countries’ economic partnership.

NORTH AMERICA

AFRICA

SOUTH ASIA

UNITED STATES: Chinese military officials visit for talks Senior American and Chinese military officers met in Washington D.C. for high-level military talks. General Chen Bingde, China’s Chief of the General Staff, and Admiral Mike Mullen, his U.S. counterpart, exchanged views on relations between the two militaries. Chen and his delegation also met with Secretary of Defense Robert Gates, Secretary of State Hillary Clinton and several members of Congress. U.S. officials showed Chen a Navy ship and flight operations in Norfolk, VA., a tactical live-fire demonstration in Fort Stewart, GA., Nellis Air Force Base in Nevada and the National Training Center in Fort Irwin, CA. Chen and Mullen announced several agreements, including a plan to jointly conduct a humanitarian assistance and disaster relief exercise in 2012. General Chen is the highest-ranking Chinese military official to visit the U.S. in seven years.

Chinese investment in Latin America growing The UN Economic Commission for Latin America and the Caribbean (ECLAC) recently released a report describing Chinese investment in Latin America. The report found that, in 2010, Chinese companies invested over US$15 billion in the region, more than double the amount invested from 1990 to 2009. In 2011, Chinese companies have already invested US$22.7 billion. The main beneficiaries of these additional investments have been Brazil and Argentina, mostly in the areas of energy, minerals and agricultural commodities. Still, the U.S. was the top investor in the region in 2010.

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SOUTH AMERICA

INSIGHT

M A N A G E R ’ S N OT E B O O K

Trust at the negotiating table – who needs it?

t is hard to talk about negotiation and not talk about trust. Trust generates value when it limits fear-based thinking and resistance, thus promoting more information exchange. It can also increase persuasion when it makes negotiators more likely to accept requests made by those they trust. It is no surprise that most people believe trust is needed for negotiations especially when both sides want to succeed through a collaborative process. However, trust also has a dark side. We can trust too much and risk making trust our end goal at the expense of other legitimate goals. It can also send a message of weakness or desperation. Too much trust can have us take for granted what is said without evidence or confirmation. It creates an expectation of collaboration that can reduce our preparation and alertness to risks. Even in win-win negotiation, less preparation means weaker arguments, less ambitious options,

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more ethical traps or manipulation attempts. So do we or do we not need trust in negotiations? Trust, if properly managed, can be a great asset to any negotiator, but it is not needed to negotiate. The need for trust creates a paradox, where the more trust we want, the less we get. The trust paradox happens when our misguided “need” for trust leads us to create a negotiation environment hostile to trust. The trust paradox is based on two assumptions: we believe that only with trust can we negotiate, and it takes time to build trust. When negotiating with someone we do not trust, we use more win-lose moves. Winlose behaviors are commonly aggressive and antagonistic, potentially manipulative and deceitful. If trust takes time to build, how will our initial win-lose behaviors build trust? Actually they won’t. Win-lose behaviors usually create distrust. The trust paradox shows that dependence on trust can actually promote win-lose behaviors and distrust. Though trust has potential benefits, the trust paradox makes needing trust an unnecessarily high risk. So, if we cannot depend on trust to negotiate, is there something we need to negotiate? Negotiators need to improve their ability to work together, not only their trust.

Working together Trust is just one element to strengthen our ability to work together and a welcome byproduct of a good relationship. A good negotiation

B Y H O R A C I O FA L C Ã O

relationship and consequently trust are built through interdependence and unconditionally constructive behaviors. At the early negotiation stage, focusing on interdependence first is recommended. Interdependence exists when two or more parties can achieve something together that they could not do on their own. As two or more people come together to negotiate, there is at least an implicit expectation of interdependence. Otherwise, who would bother to negotiate if they could do better on their own? While trust needs to be built, interdependence just needs to be communicated. More objective and concrete than trust, interdependence quickly and easily conveys the advantages of working together. Reframing the parties’ potentially competitive relationship into a collaborative one raises interdependence awareness. Imagine two colleagues from different departments negotiating how to share a common budget. An interdependence statement could be: “as colleagues responsible for this budget exercise, I am confident that together we can find valuemaximizing solutions for both our departments.” After interdependence is established, the foundations for a good relationship are set. And while we do not need trust, it is still a desirable asset to any negotiation. Here, the best way to build trust is to consistently make every move a trustbuilding move. For that, we need only to follow a simple rule: be unconditionally constructive.

Watch your behavior An unconditionally constructive behavior is any behavior that is simultaneously good for the relationship between the parties, for them and for us, even if they do not reciprocate our action (the “unconditional” part of the strategy). Thus, before making a move, check: • Will it increase trust among the negotiators? • Will they appreciate it? • Will I benefit without sending a sign of or

exposing a weakness? Will I feel good about it even if they do not reciprocate?

The relationship Examples of unconditionally constructive behaviors are to behave rationally with a balanced management of emotions, to understand their point of view and accept their right to be different, to consult them before deciding, to be always trustworthy and to persuade instead of coercing. Constructive behaviors reinforce trust and, when unconditional, also minimize the expectation of reciprocation. This is important because many negotiators make concessions expecting reciprocation, even when the other never signaled or intended to reciprocate. But what happens if they don’t reciprocate? We lose money and the relationship deteriorates. Being unconditionally constructive means doing our share to improve our ability to work together, even if reciprocation does not follow. Trust is a nice thing to have, but it is not magic. Our focus should be to create a good working relationship with or without trust. After all, trust is not the end, but rather the means for a good deal.

Horacio Falcão is an affiliate professor of Decision Sciences at INSEAD, where he teaches mainly on the topic of neg otiation. Find out more about neg otiation at www.valuenegotiat ion.com.

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

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Hunting for Gold in China’s Online Gaming Market

n online Scrabble match seems far removed from the story of China’s economic boon, but China’s US$5 billion online gaming market may provide a snapshot of incredible market potential in China. A McKinsey study reveals that 80 percent of China’s total Internet users play online games, and a forecast of the video game industry in China projects that revenues will top US$8 billion by 2014 with room for growth among China’s 420 million Internet users. These numbers contrast with those in the U.S. market, in which sales fell 22 percent this year. First, a short primer for the game-uninitiated: not all online games are the same. Many games are “casual games,” characterized by simple gameplay

and little commitment, geared towards a mass audience. They include games such as Scrabble or the bird-slinging puzzle game Angry Birds and may allow you to play with a friend remotely on an iPhone. Online games may also include massively multiplayer online role-playing games, or MMORPGs, such as Starcraft or fantasy-based World of Warcraft (WoW), which allow a very large number of players to interact and play with each other on a virtual game interface using virtual avatar characters. WoW recently counted 11.4 million subscribers worldwide. China’s online players engage in the whole range of gaming options and in unexpected ways. Casual games company PopCap’s Asia-Pacific Vice President James Gwertzman, whose company

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China’s online gaming market, like the country’s other markets, holds opportunities for those willing to play the game.

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China’s competitive online gaming market requires a profound understanding of one’s own assets and needs to succeed.”

designed the popular Zombie vs. Plants and Bejeweled games, visited China for a research trip in 2005, and he was surprised to see what games Chinese users were playing. “I saw people playing our games,” he says. “We had not done any special marketing for China, nor had we really distributed in China, yet PopCap had a name out here.” Chinese players are well versed in global gaming trends and seem eager to join their ranks. Strong domestic companies in China have charted remarkable success in the last few years. Tencent, which provides popular online games Dungeon and Fighter and Crossfire along with the popular chat program QQ, owned 40.2 percent of the market share of public online games companies in the third quarter of 2010, and charted US$1.4 billion in sales, followed by competitor Netease at US$749 million. And these companies are growing. Sohu.com recently bought a 68 percent stake in the Web-based games developer Shenzhen 7Road Technology for US$100 million, boosting its capabilities for game development. American companies find the China market hard to resist. In addition to PopCap, U.S. video game giants Electronic Arts and Blizzard are both in China, searching for traction among China’s gaming enthusiasts. However, like most of China’s other markets, the local gaming market is one that requires careful consideration before engagement; it offers opportunities and pitfalls in equal measure. And not unlike how playing World of Warcraft requires cooperation and strategy, China’s competitive online gaming market requires a profound understanding of one’s own assets and needs to succeed.

The unique Chinese market Because many online games in China are free, business models that have worked in the U.S., which have historically relied on direct sales and higher-cost subscriptions, must adapt to the unique China market. Pearl Research, a business intelligence firm, reports that one of the drivers of China’s online games market is its affordability, though Chinese companies have found other means of revenue. Users can later pay real money

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for virtual items they can use in free games, such as weapons, magical elixirs or game currency or special access to certain levels of the game. Other games are simply low cost. To play online MMORPG games such as World of Warcraft, users pay a nickel an hour. User retention rates for online gaming are also relatively high. Many of the games foster a community-like environment, which encourages repeat customers. With the entertainment market in China still in development, the cheap-andeasy access of online gaming makes it an enticing entertainment option. Another unique feature of the China market is that the PC remains the leading gaming platform in China, especially because the PC is a high-priority purchase for many households for educational or technical-skill building purposes. The Wii, Xbox 360 and other console-based systems, which do not have a long history in China, remain high-cost and a low-priority purchase for most. A surprising finding is that the overall demographic for gaming – barring the differences between casual games and MMORPGs – is rather uniform and not skewed towards a younger group as the case is in other markets. A McKinsey study on China’s Internet users found that once an individual starts using the Internet, what they do online (most popularly, instant messaging, music/ video streaming and gaming) is spread relatively evenly across all age groups. Foreign online gaming companies must also consider the uniqueness and competitiveness of China’s gaming companies. Local gaming companies are characterized by their diverse interests – few provide only online gaming content. The most prominent example may be Tencent, which originally only derived profit from QQ users paying for premium content or mobile phone services, but now has strong games-related revenue. Shanda Interactive, a leading games developer, recently filed a draft IPO registration of Shanda Literature (under its new name, Cloudary), which is an online publisher of novels, and Netease operates 163.com, a popular web portal. Diversified interests allow these companies to incorporate the creation and branding of games,

tying certain games directly into its in-house social media systems. One report from a recent conference on China’s online game industry indicates that 60 percent of sales revenue from gaming came from games designed in China, with 356 products developed in 2010.

The IPR challenge and other pitfalls The ability to compete in the China market for some foreign companies can also be tricky, especially in regards to IPR enforcement and protection, regulatory compliance and human resource constraints. Gwetzman’s experience during his 2005 research trip gave him a glimpse of the first challenge. Though PopCap had not established itself in China, Chinese players had access to its games through illegal portals. Though the Chinese government has recently cracked down on illegal download sites, many pirated games are still available. Most copies are not even the original game. Many sites specialize in shanzhai games – that is, games that mimic the original and often include modified options, such as Chinese text. Another challenge stems from how online gaming companies are regulated in China. Under Chinese law, gaming companies are considered media companies, and foreign companies entering the Chinese media market must comply with strict commercial laws. They may not, for example, distribute their own content; they must partner with a Chinese company to do so. This status affects even the biggest names in online gaming. When Blizzard entered the China market in 2009, they were quickly entrenched in red tape. First partnering with China’s The9, then with Netease to launch the WoW platform in 2009, the company was subject to several reviews and suspensions in apparent violation of Chinese law. In 2010, after finally gaining approval from China’s Ministry of Culture, the General Administration of Press and Publication (GAPP), another agency with jurisdiction over foreign media companies, ordered Netease not to accept new account registrations, citing “gross violations” of regulations. Some suggest that Blizzard and Netease may have been the unfortunate victims of

PopCap Games It started with a research trip to China in 2005. PopCap Games, worldwide leader in casual games, made its official entrance into the China market in 2008 and today is growing its APAC base in Shanghai. The American creator of Bejeweled and Zuma also announced that it is due to launch a version of Plants vs. Zombies on Chinese social network Renren. PopCap is gaining a good footing in China, so it begs the question – how are they doing it? PopCap faces the same issues that other foreign gaming companies have had to negotiate, including IP infringement, human resource constraints and a complex regulatory landscape. A key factor in overcoming these challenges, it seems, is time. Instead of rushing into the market, PopCap did its homework. They started small, generated a positive revenue flow through partnerships with Chinese companies and grew when demand for its games grew. Instead of the “try before you buy” strategy that PopCap uses in the U.S., PopCap mirrors the strategy of other Chinese companies and offers free versions of its most popular (and most illegally-downloaded) games, using the opportunity to promote its other products. Another key success factor is the company’s profound dedication to its staff and its products. Because experienced online gaming talent was scarce, PopCap developed an extensive training system and provided ample opportunity and autonomy for employees to take ownership of its own games. PopCap’s employee turnover rate is enviously low, and employees are gearing up to release exclusivee only-in-China games, all while retaining the company-wide tenet of “fun.” Not everybody can live the PopCap Cap story, but elements of its strategy – including dedication to research and nd strong employee programs – mayy prove to be valuable advice for anyy Western company that wants to crack the China market.

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Chinese bureaucratic in-fighting as the Ministry of Culture and the GAPP fought for control of the lucrative market. AmCham Shanghai’s 2010–2011 China Business Report identified human resources constraints as a top challenge to American companies doing business in China, and the gaming market is no exception. Because the gaming industry is relatively new in China, those with experience and know-how are in short supply. “It’s difficult to find someone who has been in the business for more than 10 years and who knows and lives the gaming market,” says Gwertzman, who hires locally. Hiring and retaining technical staff with game development experience and management staff to grow the business have proven to be particularly difficult in the online gaming market.

A new business model Online gaming, however, is nothing if not a creative enterprise. While challenges may be daunting, the opportunity in the market has inspired the most innovative foreign companies to find alternative solutions. Like in most consumer markets, research is key to finding success, and redefining the brand or challenges is important to succeed. Gwertzman, for example, sees the pirated games trend as an opportunity instead of a hurdle to overcome. It indicates strong demand for his company’s products and provides PopCap an opportunity to offer the real deal. “Chinese consumers will look for higher-quality originals rather than the knockoffs,” he says. Gwertzman tells the story of a pirated version of PopCap’s Plants vs. Zombies game in China that recreated the original, which garnered negative reviews that characterized the game as a poor knock-off. PopCap took the opportunity to extend pirated software sites original, high-quality games for free, with modified content that promotes other PopCap games. Other companies are taking heed of this trend. Angry Birds creator Rovio partnered with Chinabased mobile gaming portal DownJoy to offer official and free versions of its game for Android devices, with revenue coming from advertising support. Rovio seeks to achieve 100 million free,

advertising-supported downloads of the game, and is looking to develop the Angry Bird games for the Chinese market. There are opportunities for cooperation between Chinese and U.S. gaming companies, as well. Because of the lack of experience in games creation, Chinese companies may look to experienced foreign businesses to improve the quality of their products. They may also look to these businesses for distribution. “The problem with the Chinese market is that the social networks are game developers themselves. There is a conflict of interest. If your games are popular, they [the social network companies] will not help you, and even squeeze you out,” gaming company Rekoo founder Liu Yong has been quoted as saying. Rekoo reached out to Facebook in 2009, learned the ins and outs of social network games and today tops three million daily visitors for its games. If Gwertzman could offer any advice, it would be for companies to take their time entering the China market. “I’ve heard of other companies rushing, coming to China in the beginning of the week, putting together a deal and finishing off by the end of the week,” he says. “Good deals take time.” PopCap is slowly nurturing its brand in China. They took time to find a Chinese partner that gradually and firmly handled regulatory compliance, hired promising talent early and trained their staff in the nuances and art of game creation. There are new frontiers to explore. The popularity of the iPhone and the iPad in recent months only hints at the potential for additional growth. The profitability of their apps indicates that Chinese customers may be more willing to spend on high quality games. Like Rovio, PopCap is developing games exclusively for the China market. “We’re not looking for short term gains,” PopCap’s Senior Director of Business Development for the Asia/Pacific Giordano Contestabile has said. Investing time and effort into China’s online gaming market offers much more than 8-bit rewards. Esther Young is an Associate Editor at Insight. She can be contacted at esther.young@amcham-shanghai.org.

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Gwertzman, for example, sees the pirated games trend as an opportunity instead of a hurdle to overcome.”

POLICY INSIGHT

BY IRA KASOFF

Treasury Secretary Tim Geithner

Impressions from the 2011 U.S.-China Strategic & Economic Dialogue The U.S. and China make tentative strides in their relationship, but how will the talks play out on the ground?

he third annual U.S.-China Strategic and Economic Dialogue (S&ED) was held in Washington, D.C. on May 9–10. The Bush Administration began the U.S.China Strategic Economic Dialogue (SED) in 2006; the Obama Administration made a subtle but important change in the name when it added a separate geopolitical or “strategic” track, chaired by Secretary of State Hillary Clinton, to the highlevel economic discussions that had been chaired by former Treasury Secretary Hank Paulson and are now chaired by his successor, Tim Geithner. At this early stage, it is hard to assess this year’s

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S&ED objectively, as a look at some of the headlines makes clear. They cover the gamut, from “U.S., China clash on rights deepens as talks wrap up” (AFP) to “U.S., China reach ‘milestone’ agreement on security, economic policy” (Washington Post). Further illustrating the difficulty of assessing the results, the Treasury Department, which leads the economic track, issued two “fact sheets” following the meeting: a unilateral U.S. Fact Sheet, “The 2011 U.S.-China Strategic and Economic Dialogue U.S. Fact Sheet – Economic Track,” and a Joint Fact Sheet, negotiated and agreed to with the Chinese (“The Third Meeting of the U.S.-China Strategic & Economic Dialogue Joint U.S.-China Economic

IMAGINECHINA

Vice Premier Wang Qishan

Track Fact Sheet”). Needless to say, the two “fact sheets” differ in content, thus making real outcomes even more difficult to ascertain. But as is always the case in discussions with China, the key will be in how commitments are implemented. And that, of course, will only become clear over time.

Warming relations Nevertheless, it is safe to say that the meeting did produce some results. On the strategic side, probably the most important outcome is that the United States and China committed to improve cooperation in military relations. The People’s Liberation Army cut off ties with its U.S. counterpart in January 2010 after the Obama administration announced a US$6.4 billion arms package for Taiwan, and it rejected a planned trip by Defense Secretary Robert Gates last June. He was finally permitted to visit this past January. The S&ED continued this mild thaw, as the two sides agreed that their top military leaders would meet regularly in a new “Strategic Security Dialogue” as part of the S&ED. Representatives of the Chinese military were already part of the Chinese delegation at this session. In addition, the United States and China agreed to continue some other important bilateral dialogues, including committing to hold the 8th U.S.-China Counterterrorism Consultation this year and to hold the next rounds of the Security Dialogue and the Nonproliferation Dialogue prior to the next S&ED. In the economic track, China pledged to improve its intellectual property rights (IPR) protection and enforcement mechanisms, to strengthen measures to ensure that the software being used by government agencies at all levels is legitimate and to strengthen cooperation on software legalization. China also pledged to de-link government procurement from its “indigenous innovation” policies. While these commitments are important, careful observers will note that they are essentially restatements of commitments made at the December U.S.-China Joint Commission on Commerce and Trade (JCCT), or during the January visit by Chinese President Hu Jintao. Also in this category would be China’s pledge to issue

a measure this year requiring that all proposed trade- and economic-related rules and regulations be published on the State Council Legislative Affairs Office website for a public comment period of at least 30 days. Although this is a reaffirmation of a commitment made at the 4th SED in June 2008, it means China will codify in writing this important requirement, which has been carried out inconsistently at best since 2008. To repeat, the key to assessing the success of talks with China lies in how commitments are implemented – to the extent the reaffirmations of previous commitments, or codifying in writing commitments that had not been honored, move the U.S. and China closer to more effective implementation that can be considered real progress. In addition to repackaging, or fleshing out, prior promises, some other commitments, although positive in tone, are quite vague. For example, China committed to “further open the service sector to U.S. and other foreign involvement and to encourage capital investment in services by both public and private firms.” Sounds good, but what exactly does it mean? It does appear, however, that there were some new commitments in the financial services area. For example, China committed to allowing U.S. and other foreign banks to sell mutual funds in China, and they also pledged to advance towards allowing U.S. and other foreign insurance companies to sell mandatory third-party liability auto insurance in what is now the world’s largest market for automobiles.

Cautious optimism In sum, it is too early to make a thorough assessment of these talks. In this regard, it is interesting to look at the restrained response of key business organizations. The U.S. Chamber of Commerce was cautious in its appraisal, saying in a statement that the agreements reached this week “have the potential to bolster the confidence of American investors” after a year in which businesses have expressed concern about China’s direction. Even the U.S.-China Business Council (USCBC), generally more bullish on U.S.-China

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“

The key to assessing the success of talks with China lies in how commitments are implemented.”

“

It is useful for leaders from both sides to engage in frank dialogue and discuss their differences directly.”

relations, was only guardedly positive, coming out with some frank wording on the difference between promises and results, especially on government procurement, apparent openings in auto insurance and strengthened enforcement of IPR protection. USCBC President John Frisbie said in a statement, “Software piracy has been a serious concern for many American businesses, especially for the innovative U.S. software manufacturers that are members of USCBC. We need to make sure the inspections are done credibly and transparently – if so, greater sales should result.” Based on my own experience (I participated in all of the previous SEDs and S&EDs), from reading the various fact sheets and from an informal readout from participants, the meeting appears to have been somewhat contentious, perhaps more so than in the past. The Chinese are growing increasingly self-confident and less willing to make concessions,

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and the U.S. side feels the pressure to make progress on both the economic front and on the strategic front. But it did lead to some modest results, which could become more than modest if implemented fully in the months to come. And as always, it is useful for leaders from both sides to engage in frank dialogue and discuss their differences directly. Indeed, the existence of the S&ED and other high-level bilateral platforms such as the JCCT are themselves an accomplishment, without which only limited, if any, progress can be made for the most important and complex bilateral relationship of the century.

Dr. Ira Kasoff is a senior counselor at APCO Worldwide and the former deputy assistant secretary for East Asia at the U.S. Department of Commerce.

I N D U S T RY I N S I G H T B Y J O H N H O R N , V I V I E N S I N G E R A N D J O N AT H A N WO E T Z E L

IMAGINECHINA

A Truer Picture of China’s Export Machine

s China’s economic growth largely dependent on exports, or is it becoming more domestically led? That’s a question economists are vigorously debating and an important one for policy makers and executives alike. An increasingly consumptionand investment-focused Chinese economy could improve the chances of more balanced trading relationships with developed economies. At the same time, businesses operating in China or planning to enter it could find greater opportunities as the economy accelerated its transition from a manufacturing center to a key consumer market. Arguments over the true nature of China’s economic reliance on exports have been rooted in the difficulty of appropriately measuring the export sector. The traditional measure governments and most analysts use is the growth of total exports as a share of GDP growth. This measure indicates that export growth has accounted, on average, for almost 40 percent of the total growth in real GDP since 1990—rising to almost 60 percent since 2000. Yet these numbers, portraying a dominant and growing role of exports, are at odds with the fact that China was one of the few countries that escaped the great 2008–09 global downturn without a major economic slowdown, suggesting that internal growth played an important role. That’s one

reason other economists have used a very different measure: growth in net exports (total exports minus total imports) as a share of GDP growth. By that metric, exports contributed only between 10 and 20 percent of China’s annual 10 percent GDP growth in recent years. We contend that both measures are misleading. Using total exports neglects the fact that many of China’s export shipments include a fair number of imported goods that are reassembled, combined with domestic content, or otherwise modified before being exported. Failing to remove these imports from the total export figure overstates how much value exports contribute to GDP. On the other hand, a strict net export measure (exports minus imports) underestimates the contribution of exports to GDP because many imports aren’t used in assembly and exported but rather sold to Chinese consumers and businesses. We developed a new way of measuring the role of export growth in China’s overall economic expansion. We found that exports have been a major driver, but not one as dominant as commonly believed. Indeed, there are clear signs that a shift towards domestically driven economic growth is well under way. The picture that emerges of the Chinese economy has implications for the growth and supply chain strategies of businesses in China and elsewhere.

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China’s growth depends less on exports than conventional wisdom suggests. Perhaps it’s time to double down on the Chinese consumer.

A different way to measure exports

Exports, consumption and strategy

We calculated a measure we call domestic valueadded exports (DVAE) to assess more accurately the role of exports in GDP growth. DVAE is what you get after subtracting from total exports only those imports used in the production of goods and services that are subsequently exported. In automobiles, for example, finished imports such as the Lamborghinis on display at Xintiandi in Shanghai are not subtracted from our measure of exports. But engine parts imported to manufacture motor bikes for export would be. Governments usually don’t break out total imports into those used domestically (for production, investment and consumption) and those used for exports, and China is no exception. So, we estimated the country’s DVAE by using data from three different sources, each with its own strengths and limitations. The results were remarkably consistent and collectively shed a powerful light on the evolution of supply chain strategies, Chinese consumption and Chinese economic performance during the global downturn.

We also applied our DVAE analysis to reassess the contribution of exports to GDP growth in the years for which we have overlapping data among our three metrics. We found that China’s export sector contributed 19 to 33 percent of total GDP growth between 2002 and 2008 (Exhibit 1). That’s only about half of the export contribution indicated by traditional total exports measures. In other words, DVAE analysis suggests that exports have been an important driver of China’s growth, but not the dominant one, and that most common wisdom overestimates the role of exports while underestimating the role of domestic consumption for China’s growth. Any Chinese or multinational company that currently manufactures goods in China and primarily exports them to other countries should ask itself whether it needs to scale up its domestic strategy to get a bigger piece of the pie. This involves developing a more granular understanding of the Chinese market, making products that appeal to the Chinese consumer and finding ways to market and distribute them effectively, all while contending with increasingly formidable Chinese competitors.

Supply chain shifts

Traditional measures overestimate the contribution of exports to China GDP growth Growth in real expors as % of GDP growth 64

60 33

33 19

2002

2006

2008

Total exports Domestic value-added exports (DVAE)

On average, our analysis suggests that imported goods accounted for 40 to 55 percent of the value of total exports from 2002 to 2008. Put another way, roughly half of China’s exports represent domestic value added. Concurrently, DVAE’s share of exports generally has risen over time, suggesting that China has become less of a pure assembler of imported goods, a publicly stated government policy goal. That has implications for many companies’ supply chains and business models. If your company is a manufacturer in China that is primarily processing intermediate components for reexport – a Taiwanbased original-design manufacturer (ODM) of household goods, for example – it’s probably time to consider alternative locations for the assembly work. With China moving up the value chain and beginning to export more skill-intensive goods and services, chances are that pure assembly will soon be less costly in other parts of Asia.

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China’s “downturn” and the road ahead A comparison between DVAE’s contribution to growth and that of other major macroeconomic components shows that DVAE topped private consumption, but was less important than investment, over the 2002–07 period. In the downturn years, 2008 and 2009, exports contributed much less to growth than other factors did, which explains why the Chinese economy could not fully match its GDP growth rates in the earlier part of the decade. However, the shift to a greater role for private consumption, investment and finished imports explains how China could weather the downturn well and indicates movement towards a domestically focused economy, even though exports will probably continue to play an important role when the global economy picks up.

Of course, continued changes in the value of the renminbi in the coming years will also affect the evolution of Chinese trade. The more value-addedfocused export sector suggested by our DVAE analysis implies that a greater share of exports will consist of higher-priced goods that compete more directly with those of developed nations. That, coupled with an appreciating Chinese currency, points to the creation of more balanced trading partnerships with the rest of the world and an important shift in context when businesses consider future strategic moves in China. John Horn is a consultant in McKinsey’s Washington, D.C. office, Vivien Singer is a consultant with the McKinsey Global Institute and Jonathan Woetzel is a director in the Shanghai office. A version of this article appeared in the September 2010 edition of McKinsey Quarterly.

About the research To estimate domestic value-added exports (DVAE), we took three approaches, using data from three different sources. First, we applied a sector-based approach, using data from IHS Global Insight, which provided Chinese import data for more than 30 industries. We classified them as industries producing finished goods (such as food and beverages), intermediate products (industrial chemicals, for example), or raw materials (such as the mining industry). We then assumed that all intermediate products and raw materials were used for creating exports, while none of the finished-goods industries accounted for exports. The second approach applied input-output measures at the industry level, using data from a working paper from the U.S. International Trade Commission’s Office of Economics. The third metric came from China’s official customs data on reexports – products whose parts are imported, assembled and then exported. We assumed that all such reexports were made from imported goods, while all other exports were made from domestic content only. Removing the reexports left us with our third proxy for DVAE.

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CSR FEATURE

BY ASHLEY CAHILL

ell-executed corporate social responsibility (CSR) programs are becoming increasingly important for foreign companies in China. U.S. companies have led the way in localizing CSR efforts in the China market, especially in the form of corporate or employee volunteerism. These efforts support local communities they operate in and provide opportunities for foreign company employees to participate in on-the-ground CSR initiatives. Corporate volunteerism has surged as companies recognize that locally-focused volunteer projects demonstrate their commitment to the community, utilize and showcase their employees’ skills and build loyalty among staff. Companies are being more strategic about their volunteering, focusing on initiatives related to the organizations competitive advantages and building stronger, deeper partnerships with local non-governmental organizations (NGOs). Corporate volunteering efforts range from encouraging individual employees to volunteer on their own to higher-level initiatives led by highly skilled volunteers on company time. In China, global and local partnerships with NGOs are an essential element of corporate volunteerism. The right NGO can help a company develop sustainable projects and use resources more effectively. These

DISNEY

Corporate Volunteer Spirit Spreads across China

organizations are customizing events and arranging open activities to make it easier for companies to send their staff to volunteer. AmCham Shanghai’s CSR program supports employee volunteerism in China through the Make a Difference Corporate Volunteer Alliance program, which brings together companies and qualified NGOs to share best practices and provide opportunities for engagement with local communities. Their experiences may provide guidance for any company seeking to start or build its corporate volunteer programs.

Benefits and challenges Corporate volunteerism is a highly visible form of CSR, which can bolster a company’s corporate image. However, a strong CSR program contributes to a more engaged workforce and has been proven to increase employee job satisfaction, corporate culture and has the potential to boost the recruitment and retention of talented employees. Corporate volunteerism also strengthens employees’ understanding of the local culture and often help to build professional and personal skills, raise their ability to organize and manage projects and improve their understanding of how to set and meet work goals while achieving personal satisfaction. Of course, there are many challenges in implementing a strong corporate volunteerism

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Implementing an effective corporate volunteerism program in China provides great benefits for companies and their employees.

Six Steps to a Corporate Volunteer Program 1. Develop a vision for corporate citizenship and obtain support from senior leadership. 2. Organize a cross-functional planning team to develop a Corporate Employee Volunteering Policy. 3. Conduct a needs assessment and prioritization identifying employees’ interests, business needs and the needs of community stakeholders. 4. Define and develop an organizational structure, which can include a corporate volunteer committee/council, a designated coordinator, an employee volunteering club and/or an external consultant. 5. Develop and implement the program, which requires clear goals and strategies, the identification of resources and potential projects and the recruitment and training of employees. 6. Evaluate and report the program’s progress and track indicators that the corporation and stakeholders value. Communicate the results externally and internally. program. The organization must have a strong interest in setting up and participating in the program at all levels. Without buy-in from all levels of management, employee-driven corporate volunteer programs are difficult to sustain. Unlike some other forms of CSR, the benefits of volunteerism programs can be hard to measure quantitatively.

On the ground Increasingly, companies are doing their part by providing staff with paid time off to participate in volunteer activities and setting aside more resources for employee volunteer organizations. While the majority of employee volunteering is unskilled, there are more exceptions. Intel’s staff brings its employees’ technical skills into its CSR efforts, helping the disabled in Chengdu improve their computer skills, building first-aid systems for migrant children’s schools in Shanghai and training NGOs on social media and cloud computing trends. “We want to use technology and the talent of our employees to contribute to economic social and green growth and communicate our progress through our reporting,” says C.Y. Yeung, Intel’s China CSR director. Microsoft operates under a similar philosophy, with its employees regularly participating in the company’s Unlimited Potential Community Technology Skills Program (CTSP). Through the program, employees participate in efforts that include training people in Sichuan to apply IT skills to develop small eco-agriculture and eco-tourism businesses and teaching migrant workers to use computers and the Internet to improve job opportunities and access information related to health and labor rights.

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Aligning values Often, multinational companies align their CSR strategy with the company’s greater mission. Bob Iger, CEO of the Walt Disney Company, a leader of corporate volunteerism in China, explains that Disney seeks to synch its CSR programs to the company’s overall pursuit of quality. “[Disney strives] to be the most admired company in the world: as admired for the quality of our products, the integrity of our people and the way we behave as a corporate citizen as we are for the entertainment experiences we create,” says Iger. For Disney, this means actively contributing to local communities through public service initiatives and outreach and volunteering programs. In China, Disney’s VoluntEARS program has built schools in Yunnan and Sichuan, in cooperation with the China Youth Development Foundation. Companies are also increasingly aligning volunteer efforts with their respective industry focus, reflecting their organization’s comparative advantages. In the food, agriculture and beverage sectors, American companies Cargill and Kraft Foods have been especially active in these types of efforts. Kraft Foods donated RMB5.5 million to build 100 Kraft Hope Kitchens in 100 Project Hope primary schools in five provinces: Jilin, Hebei, Anhui, Hunan and Yunnan. 6,000 hours of employee voluntary service have already been provided to the first 100 Kraft Hope Kitchens. At the schools, Kraft volunteers hand out food to children, provide baking lessons, paint classrooms, donate books and sports equipment and teach children about nutrition and health. In 2009, Cargill launched the Water Saving Irrigation Improvement Plan for rural areas in China to improve irrigation solutions, save water and increase crop yields. It is also providing farmers with training on water-saving irrigation, scientific planting and animal nutrition courses. In Chongqing, Cargill volunteers are working with local schools to promote an environmental awareness campaign through a photo exhibition and Digital Video competition. In Inner Mongolia and Harbin, volunteers are planting trees around Cargill facilities and cleaning up lakes.

Make a Difference Volunteer Alliance

Corporate

For companies looking to grow their corporate volunteer programs, AmCham Shanghaiâ&#x20AC;&#x2122;s Make a Difference Corporate Volunteer Alliance is a valuable resource. The Alliance is a self-organized coalition formed by foreign-invested enterprises operating in China with the aim of fostering volunteerism in the business community and developing and improving the quality of voluntary aid programs and community outreach activities. The Alliance provides a platform for events, projects and initiatives that strengthen cooperation between its

members and partners and furthers the exchange of best practices. 2011 programs include opportunities for underprivileged children to visit the Shanghai Zoo and local museums, a wheelchair donation project with the Wheelchair Foundation China and community revitalization projects around Shanghai. For more information, please visit www.amchamshanghai.org/volunteer, or contact Corporate Social Responsibility Associate Susan Lawrence at susan. lawrence@amcham-shanghai.org. Ashley Cahill is a contributor to Insight. She can be contacted at ashleyecahill@gmail.com.

AmCham Shanghai would like to thank our media partners for their contributions to the 2011 Charity Gala and other CSR projects.

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on key issues driving the mobility of Chinese talent, offers some clues. Over 100,000 employees took part in this global survey, with 9,986 from China-based companies (including MNC’s) from 13 different industries and 30 different cities within China). The results offer a snapshot of a dynamic and changing workforce, one that is increasingly willing to relocate both within and outside of China, to take on more domestic and global responsibilities.

The migration of Chinese talent overseas

Talent on the Move Chinese and multinational companies are offering Chinese talent new opportunities and incentives to work overseas and across different cities within China. What are the emerging trends?

hina’s overseas investment activities are ushering in a phase of fast growth, and in the next five to 10 years, the country’s total foreign investment is expected to reach a similar level with inbound foreign capital investment. Chinese enterprises are pressed to successfully manage their overseas assets and conquer cultural and language differences. At the same time, the number of available domestic professional managers capable of handling international assignments is limited. In addition, overseas jobs have become an increasingly important way for foreign enterprises in China to attract and retain talented personnel. Chinese employees have the opportunity to handle a wide range of tasks – in some cases with major responsibilities in Asia-Pacific nations. Closer to home, both Chinese and foreignowned enterprises are expanding into second- and third-tier markets in China. However, the supply of talent (specialized talents, medium- and highlevel executives) in second- and third-tier cities continues to be a challenge. To shed light on these issues and more, the 2011 Kelly Services Global Workforce Index Survey, focusing

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China’s overseas investment has been increasing rapidly and supported by favorable government policies to “Go Out.” In 2010, China invested US$59 billion overseas and ranked fifth in the world, and this growth has propelled the emerging trend of Chinese working abroad. The survey found that 34 percent of domestic Chinese workers are interested in an overseas assignment, in contrast with the global average of 30 percent. In order to attract talented personnel and retain existing staff, companies often promise career development opportunities in the form of work abroad programs. An overseas posting offers the opportunity to enhance an employee’s knowledge and skills and to better understand their jobs in a cross-cultural context. Europe is the most favored overseas destination and identified as their top choice by 48 percent of survey respondents. Countries in the Asia-Pacific region ranked second at 23 percent and North America third at 16 percent. There seems to be several key factors driving these choices. According to Mark Hall, General Manager in China for Kelly Services Professional & Technical Division, one of the first factors is the direction of economic investment. In 2009, 13,000 Chinese enterprises made investments in 177 countries and regions throughout the world. The Asia-Pacific region ranked first as an investment destination, followed by Europe and Africa. The rapid economic growth in the Asia-Pacific region and range of opportunities there may account for the strong interest among Chinese employees to work in this region. The quality of life, cost of living, safety and

taxation policies may also be factors. Second, the industry an employee works in also impacts their choice of international destination. For example, employees working in the green energy and environmental sector are more inclined to choose Europe, and IT professionals choose the U.S. as a favored working destination. Those in the petrochemical industry choose Africa and those working in the mineral industry tend to chose Africa, Latin America and the Asian-Pacific region – destinations that have been the beneficiaries of substantial investment in this field. Third, industry sectors are likely to encourage migration overseas. China’s drive to invest globally to secure energy resources, for example, is inspiring talent in the energy sector to work abroad, especially those with knowledge and expertise in petrochemical engineering. China continues to lag in the development of a domestic service industry. The gap between China and the world’s leading service based economies is still quite wide. As a result, China’s government has made the development of a modern service industry a priority. Chinese service providers in sectors such as education, management, marketing, human resources, finance and logistics have responded by sending their staff to work abroad to improve their skills. Countries in Europe and North America tend to be leaders in the service industry, and can provide valuable training in this field. At the same time, workers are attracted to places where they can pick up new and advanced skills, a better quality of life and better work experiences.

Preferred Destination

% 60 50

China

Changing trends in China’s cross-city migration In recent years, the shortage of migrant workers in China’s first-tier cities has become a significant problem as opportunities for these workers in their home towns, mostly second- and third- tier cities and beyond, have improved. However, the survey shows that outward migration of key talents (specialized and managerial personnel) from firsttier cities to inland areas is still much lower than the nationwide average. Survey results indicate that 48 percent of Chinese employees are willing to take jobs in other cities in China. But key talents in Shanghai, for example, show the least inclination (18 percent) to relocate domestically, followed by Beijing (22 percent), Chengdu (25 percent), Dalian (27 percent) and Tianjin (28 percent). Although notable progress is being made in second- and third-tier cities in regards to quality of living standards, salary and other important aspects, first-tier cities still enjoy an absolute advantage in terms of career development opportunities and salary level for key talents. Consequently, secondand third-tier cities continue to suffer from a lack of key talent as inland cities endure a much higher proportion of outward migration of key talent than those on the east coast of China. However, this phenomenon may be changing. Driven by government policy to develop provinces in western China, multinational companies (MNCs) in the manufacturing sector in China are expected to continue their active expansion into these regions. As a result, the economic outlook in the west is strong, and some second-tier cities are witnessing higher pay than first-tier cities, attracting more key talent from coastal cities.

Worldwide 40 30 23

16 10

2 2

1 3

Middle East

Africa

0 Europe

AsiaPacific

North South America America

Kelly Services, Inc. is a leader in providing workforce solutions. Kelly offers a comprehensive array of outsourcing and consulting services as well as world-class staffing on a temporary, contract and permanent basis. Kelly was voted “Best Headhunting Company in Greater China 2010-2011” by Human Capital Management Magazine. Visit www.kellyservices.com.

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Top Five Sectors and Positions Attracting Talent from First-Tier Cities: 1. Manufacturing (52 percent) 2. Retail (47 percent) 3. Engineering (46 percent) and logistics (46 percent) 4. Medicine and medical device (45 percent) 5. Commercial service (43 percent)

Top Five Positions: 1. Engineers (53 percent) 2. R&D (49 percent) 3. Marketing (48 percent), sales (48 percent) 4. Customer service (45 percent) 5. Finance (44 percent)

Off to See the World

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C OV E R S TO RY

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China has emerged as a top source of international tourists. What does this jump in outbound tourism mean for the U.S. travel and tourism industry?

fter decades of limited travel outside mainland China, the Chinese are playing catch-up at a stunning pace. In 2010, Chinese took a record 57.4 million trips outside the mainland – a 20 percent jump from 2009 and a more than fivefold increase over the number who traveled abroad in 2000. China, which became Asia’s largest source of outbound tourists in 2002, is set to have another banner year in 2011 with outbound trips growing to 65 million, projects the China Tourism Academy (CTA). High growth is expected to continue in the years ahead. China could boast an estimated 100 million outbound tourists by 2020, if not earlier, according to the oft-cited forecast by the U.N.’s World Tourism Organization (UNWTO). “We can expect to see China become the number one country in terms of both receiving and sending tourists in the next five to seven years. It is simply [a] natural development,” UNWTO Secretary General Taleb Rifai told Spanish state television network RTVE last January. China’s interest in travel and tourism – international as well as domestic – is exploding as more Chinese become better off, consumption patterns change and spending power increases with the help of a stronger Chinese currency. International travel, which was largely closed off to the average Chinese until the early 1980s, is now not only open to a much larger extent but is within reach of a greater number of Chinese than ever before. The dream of overseas tourism has come even to those of relatively modest means compared to other foreign travelers because travel agencies leverage large group bookings to lock in rock-bottom prices. Although the bulk of China’s international travel is

concentrated in Asia, Chinese are flocking in large and increasing numbers to such faraway destinations as the U.S., Europe, Australia and, to some extent, Africa. In the U.S., Chinese demand for overseas tourism has proved to be a tremendous windfall. In 2010, the U.S. welcomed more than 800,000 visitors from China, a 53 percent jump over 2009. Both the U.S. Department of Commerce and CTA project the number of Chinese visitors to the U.S. will race past two million around 2015. China is now the U.S.’s fastest growing market for international visitors and the nation’s 11th largest source market by number of arrivals, up from 17th place five years ago. Chinese departure data add further perspective to the strong growth trend. The U.S. was the seventh most visited international destination for Chinese travelers in 2010 and the most popular individual country destination outside Asia (collectively, Europe receives more than two million Chinese visitors each year, or roughly double that of the U.S.). The U.S. attracts more outbound Chinese travelers than neighboring countries Thailand, Singapore and Russia. China’s importance not only for the U.S. but for the global outbound travel market is only expected to increase in the years ahead. Competition to attract the ballooning number of international Chinese travelers is intensifying as tourism promoters maneuver for the billions of dollars that Chinese generate. How substantial is the economic impact from Chinese tourists – and what explains it? How is the U.S. competing for the flood of outbound Chinese tourists?

An economic boon As some of the world’s top-spending international travelers, the Chinese are playing an increasingly

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China’s Outbound Travel Market

U.S. Tourism Receipts from China

Top 10 destinations in 2010 for outbound travellers

Five-year average growth among top 10 source markets

1. Hong Kong (22.1 million) 2. Macao (16.1 million) 3. Japan (1.97 million) 4. South Korea (1.97 million) 5. Taiwan (1.66 million) 6. Vietnam (1.21 million) 7. U.S. (1.08 million) 8. Thailand (1.01 million) 9. Singapore (830,000) 10. Russia (710,000)

1. China 2. India 3. Brazil 4. Canada 5. France 6. Australia 7. Germany 8. Mexico 9. United Kingdom 10. Japan

Source: China Association of Travel Services/China Tourism Academy/China Daily

Source: U.S. Bureau of Economic Analysis

27.6% 22.8% 22.2% 13.1% 7.6% 7.5% 5.1% 1.1% -1.5% -2.1%

important role in driving growth in the lucrative outbound travel industry, which the U.S. Travel Association (USTA) values at US$889 billion worldwide. Chinese travelers overall have ranked as the fourth-largest international spenders since 2009, behind German, American and British travelers. In 2010, China’s worldwide outbound travel and tourism receipts increased about 10 percent to US$48 billion, a figure CTA forecasts will increase to US$55 billion this year and US$100 billion in 2015. Worldwide, about one out of every 20 tourism-related dollars generated abroad comes from China. In the U.S., Chinese visitors generate billions of dollars in sales for the domestic tourism industry. U.S. Bureau of Economic Analysis (BEA) data show Chinese visitors spent a record US$5 billion in the U.S. last year, up from US$2.1 billion in 2006. Since 2006, China’s travel and tourism receipts in the U.S. have grown an average of 27.6 percent – the quickest pace of any of the U.S.’s top-10 source countries and moving China up to seventh place overall as of 2010. Chinese are the largest per capita spenders in the U.S. by a wide margin. BEA data from 2010 show the average Chinese traveler to the U.S. spent more than an eye-popping US$6,200, which is over US$1,300 more than the average visitor from second-place Brazil. Despite the worldwide economic downturn in 2009, the average Chinese traveler that year spent 72 percent more on U.S. products and services than any other foreign national, according to the USTA. The upswing in travel and tourism receipts

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from China reflects not only expanding U.S.-China people-to-people exchanges but the country’s growing role as a key destination for U.S. exports. China’s travel and tourism spending, which for statistical purposes is counted as a U.S. export, accounts for about a quarter of the US$20.1 billion in services the U.S. sells to China, according to the BEA. Tourism is the U.S.’s largest services export to China and the rest of the world, amounting to a worldwide total of US$134.4 billion in 2010. The U.S.’s growing tourism exports to China have significant employment benefits domestically as well. Since 2004, China’s share of U.S. tourism exports has increased roughly threefold to a 3.7 percent share in 2010. That share translates into China’s supporting 44,400 of the 1.2 million U.S. jobs that the Commerce Department says all combined international travelers supported last year.

Shop ‘till you drop One sure reason why Chinese travelers have such a large economic impact on national economies has to do with individual consumption patterns. Not only is the sheer number of Chinese who go abroad soaring but the average traveler from China spends like no other foreign national. “Chinese like the idea of ‘poor at home but rich on the road’ which means being frugal when at home but not hesitating to spend when travelling,” point out the authors of a 2009 report on Chinese international travelers released by the Bangkokheadquartered Pacific Asia Travel Association (PATA). When abroad, Chinese dedicate a major part of their trips to shopping, and they budget a disproportionate amount for it compared to entertainment, dining or lodging expenses. Shopping is such a priority that it accounts for more than 70 percent of Chinese travelers’ outbound consumption, according to Switzerlandbased Global Blue, a provider of tax-refund and shopping services. “We are here for shopping, not for tourist activities,” one Chinese tourist visiting Japan tells the Associated Press. In Japan, where hundreds of thousands of well-off Chinese travel to shop, Chinese can spend thousands of dollars in one visit on high-end Japanese goods. “I’ve never seen any foreign tourists spend as much as Chinese,” an electronics salesman in Tokyo adds. Luxury shopping is particularly in high demand

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thanks to a perception among Chinese that the authenticity of well-known brands sold overseas can be guaranteed and the fact that prices tend to be lower than in China. A 2008 Nielsen Company report finds more than half of Chinese who visit North America purchase luxury brand goods. Worldwide, the average Chinese traveler spends US$900 on luxury purchases, according to the report. “Chinese consumers these days are more informed and sophisticated and luxury brands offer quality and project a certain high social status,” points out Dr. Grace Pan, head of Travel and Leisure Research at Nielsen China in Shanghai.

Governments’ courting frenzy At the government level, many countries are scrambling to attract travelers from China in recognition of the substantial impact Chinese have on national and local economies. A key starting point for countries interested in receiving Chinese travelers usually involves lobbying the Chinese government for Approved Destination Status (ADS). China’s granting of ADS facilitates group leisure travel and allows tourism promotion within China to those countries with which it has a bilateral arrangement, effectively opening the outbound Chinese travel market to those with the designation. As of 2009, 139 countries, according to the UNWTO, have bilateral ADS agreements with China since the scheme was introduced in 1995. The U.S. and China signed an ADS agreement in December 2007. Since being implemented in 2008, the agreement has played a key role in generating the recent wave of Chinese visitors to the U.S. Several countries have simplified visa procedures – or waived the visa requirement altogether. For example, Thailand’s cabinet in April approved a visa waiver program for Chinese tourists. Individual tourists have been allowed to visit Japan since 2009 and may be allowed individually into Taiwan by the end of June. European countries, which already allow entry to 24 countries in Europe on a 90-day Schengen visa, are working to address visa bottlenecks by introducing procedures to reduce wait times and make the application process easier for Chinese. Countries also are initiating aggressive promotional campaigns in what is a heavily competitive market to attract Chinese tourists internationally, as well as domestically among localities within countries.

India’s tourism office in Beijing, for example, has held dozens of cultural road shows across China under its “Namaste India” campaign. Hungary is promoting a “Nihao Project” (meaning hello in Mandarin) to promote its market and help Chinese feel welcome. Australia, which along with New Zealand was the first non-Asian country to hold ADS, will host the Australia-China Tourism Summit 2011 in Queensland this month to strengthen bilateral tourism ties. In the U.S., Hawaii is one such state that has been stepping up efforts to lure Chinese visitors to its famed islands, which have long been a “dream” attraction for Chinese and the fifth most visited state by all international travelers in 2009, according to the Commerce Department. In 2010, the Hawaii National Tourism Authority invested nearly US$450,000 to promote the state during “Hawaii Week” at the Shanghai 2010 World Expo. The promotion included a celebration of Hawaii inside the popular USA Pavilion and featured Linda Lingle, the governor of Hawaii. Lingle has led four tourism and economic missions to China as governor. Hawaii’s effort at attracting Chinese tourists “will bring back a lot of jobs if we’re successful at bringing it about,” Lingle said at a news conference after one such mission in 2009. Such efforts seem to have paid off. Earlier this year, Hawaii welcomed about 775 passengers from China on the first-ever batch of direct charter flights to Hawaii. San Francisco, which consistently ranks as one of the top-visited U.S. cities by international arrivals, showcased itself, along with 3,500 other exhibitors from the U.S., to an international audience, including Chinese, when the city hosted USTA’s

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BIG SPENDERS: Chinese tourists bring back hundreds of dollars, or more, in luxury goods bought overseas.

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HAWAIIAN PARADISE: The “Aloha State” is one of many U.S. states pushing hard to attract Chinese tourists.

International Pow Wow exhibition last month. Pow Wow, which is the largest travel industry trade show in North America, attracted some 120 tour operators, meeting planners and journalists from China. USTA estimates that San Francisco will reap US$350 million in tourism spending over the next three years thanks to the event. States and localities are so attracted to Chinese travelers that even officials in Connecticut, not known as a major tourism destination for Chinese, are hoping additional Chinese visitors can rejuvenate the state’s tourism industry. In May, federal, state and local officials met with Chinese tour directors to promote southeastern Connecticut. The region boasts vineyards and Indian-run casinos, among other attractions, that could appeal to Chinese visitors and provide a boost to the region. Repeat Chinese visitors to the U.S. are especially fond of states that offer an experience of “real America” – or destinations that boast unique cultural attractions. New Mexico is one such draw because of its Native American mystique. “The Chinese are just fascinated by the cowboy and Indian culture,” Jennifer Hobson, ecotourism director of the New Mexico Tourism Department, tells CNNGo. “When they see the pictures of the Wild West, they want to go.” U.S., state and city governments also are committing dedicated resources in China for tourism promotion. Around 30 U.S. states or cities have opened trade offices in China that cover tourism, according to the Shanghai-based Council of American States in China (CASIC). In 2006, San Francisco became the first U.S. city to open its second tourism promotion service in China, adding an office in Beijing to complement

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an existing marketing presence in Shanghai. At the federal level, the Commerce Department’s U.S. Commercial Service plans to offer assistance with a number of promotional activities. The agency plans to promote specific U.S. destinations, locations for industry needs and theme-based tourism, says Keenton Chiang, a Shanghai-based commercial officer for the U.S. Commercial Service who specializes in travel and tourism. The agency is also planning to extend its promotional efforts to China’s second- and third-tier cities. Finally, the Commerce Department is working with the private sector to encourage a greater number of tourists to come to the U.S. The Commerce Department provided a federal grant to help launch the U.S.-based National Tour Association’s (NTA) Visit USA Center last November in Shanghai, notes David Yu, the trade organization’s chief representative in China. The Shanghai center, which is located within the U.S. Commercial Service’s facilities, “will educate the Chinese trade about the diversity of travel opportunities in the United States, provide marketing programs and services to the U.S. trade and offer venues to connect the U.S. and Chinese trade for business development,” according to NTA’s website. More broadly, the Commerce Department will help promote international tourism by overseeing the Corporation for Travel Promotion. The public-private partnership created in 2010 by the U.S. Congress is tasked with using a US$200 million budget to market the U.S. as a brand around the world.

Chinese Travelers Face Unique Apart from obtaining an overseas visa, there are a number of unique challenges facing Chinese when they travel abroad. Language barriers top the list as the most common challenge. While most organized tours provide sufficient language assistance, Chinese tourists inevitably find the need to communicate with locals when shopping, dining or to understand certain instructions. Despite the fact that more and more young Chinese speak English now, Chinese tourists find their travel experience abroad is often confined to their native language. Cultural norms in China sometimes are significantly different than those found in Western countries. For example, tipping is not a rule in China but generally

The big opportunity The growth in Chinese outbound tourism presents an enormous opportunity for the U.S. to export travel and tourism services to visiting Chinese, thereby boosting the U.S. economy, supporting jobs and magnifying America’s image overseas. The challenge with China’s rapid growth in international travelers over such a short period is the surge in demand for U.S. visas. The number of visa applications in Shanghai alone has increased roughly 15 percent annually over the last five years, according to the U.S. Consulate. In 2010, the Consulate in Shanghai processed more than 230,000 visa applications, up 40 percent over 2009, a down year because of the worldwide economic crisis and H1N1 fears. The result is an understandable backlog in obtaining U.S. visas. According to the USTA, the U.S. visa process can take up to 120 days in China, which “put[s] the United States at an alarming disadvantage when it comes to competing in the international travel market,” notes the group in a May 2011 report. “The U.S. is the No. 1 aspirational destination in the world. People want to come here. But getting your visa just makes it so hard that they’re going elsewhere,” Roger Dow, president and CEO of the USTA, tells CNBC television. The USTA estimates that the U.S. lost more than a total of 60 million international visitors annually over the last decade. In response to stronger demand, the U.S. Consulate in Shanghai has implemented several

programs to facilitate visa processing. In addition to adding visa officers, the Consulate has implemented an innovative program to facilitate visa appointments for group leisure travel (GLT), which has provided travel agencies a more orderly and predictable way to make their trip plans. The GLT program in Shanghai allows U.S. tour operators and their Chinese counterparts to book a set of visa interview slots months in advance. Since coming online at the end of December 2010, the GLT program has assisted more than 200 groups, according to Chiang of the U.S. Commercial Service whose agency plays a supporting role by facilitating communication between the travel industry and the U.S. Consulate’s visa section. “As a result, more than 11,000 Chinese travelers now have visas to travel to the U.S., providing more than US$70 million in exports to the American economy,” he adds. Going forward, the potential for ever-larger numbers of Chinese to travel abroad is great considering the infancy of the outbound market. Meanwhile, China’s economy continues to advance at a brisk rate, producing an emerging middle class that will help drive international consumption over the years ahead. As demand for international tourism soars in China, the U.S. should make it a priority that it receives a larger share of those Chinese travelers who go abroad.

“

The U.S. is the No. 1 aspirational destination in the world.”

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

Challenges Abroad is expected in North America and Europe. A lack of knowledge on generally accepted rules, behaviors and etiquette in a destination culture sometimes causes Chinese tourists to encounter unpleasant experiences. Safety and security issues are legitimate concerns. Chinese tourists, known for carrying bundles of cash while travelling instead of using credit cards, tend to expose themselves as targets of attack or robbery. In response to the increasing number of security-related cases filed by overseas Chinese tourists, China’s Ministry of Foreign Affairs established a China-based Consular Protection Center in 2007 to beef up existing consular protections and services available to Chinese abroad. Finally, there are logistical hurdles. One consequence of the increasing number of Chinese choosing individual instead of group travel is travelers must arrange their own transportation. This becomes a

considerable challenge in destinations with limited or nonexistent public transportation networks and inadequate Mandarin services. Adding to the logistical challenge, it is often not convenient to obtain a SIM card abroad, making it difficult for Chinese to use a mobile phone to seek assistance while on the go. But U.S. and foreign tour operators, hoteliers and other service providers can mitigate some of the key challenges that Chinese travelers face. Although efforts are being made, additional services to assist Chinese travelers would greatly improve their comfort level and overall experience abroad. These could include Mandarin language and cultural knowledge assistance, safety tips, logistical support and services tailored to Chinese tastes. Those providers that strive to accommodate the specific needs of Chinese travelers would encourage greater numbers of Chinese to their destination. – Joyce Bian JUNE 2011

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The Path to Global Excellence CEO of International Paper John Faraci talks making products “in China for China” and the need for sustainability leadership.

nternational Paper (IP) first entered mainland China in 1995 with a single sales office in Shanghai. Today, IP Asia consists of 30 manufacturing operations with approximately 8,600 people in nine different countries. In 2006, IP entered into a joint venture agreement with Sun Paper, which has helped the company to become the second largest producer of folding box board in China and along with Sun Paper, they comprise China’s fourth largest paper company. In 2010, IP acquired SCA Packaging Asia, making IP the largest producer of corrugated packaging in China. In March, IP signed a deal to acquire majority share in one of India’s leading paper producers, giving it a strong position in that growing market. For the fifth straight year, IP was named one of the most ethical companies in the world by The Ethisphere Institute, which is dedicated to the advancement of business ethics, corporate social responsibility, anti-corruption and sustainability. Fortune Magazine has listed IP the most admired company in the paper and packaging industry in the last eight of nine years. CEO John Faraci has lead IP since 2003 and has taken it from an “international” company to a truly “global” company, a distinction that Mr. Faraci explained when he sat down with Insight prior to his speech before the AmCham Shanghai membership. International Paper just raised its dividend for the third time in 12 months. What makes you so confident in the future of International Paper?

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We have had a “V” shaped financial recovery in a “U” shaped financial environment. So we’re fairly confident, but we’re not naïve that the world is without problems. The U.S. economy is recovering but it is far from recovered. We’re planning on changing the profile of our cash flow in the next three to four years. We see 2011 as the year we were supposed to have in 2009 before the recession hit. So it’s a reflection of our interest to give our shareholders a return up front, not just down the road and a reflection of our confidence in the company. But don’t expect our dividend to go up three times next year! In AmCham Shanghai’s 2010-2011 China Business Report, we found that a majority of member companies are here to serve the China market vs. assembling or manufacturing products for export to the West. Is that IP’s strategy in China as well? It is. It’s the orientation for International Paper everywhere. More than 20 percent of the product that we make in the U.S. gets exported somewhere, so we’re one of the poster companies for the U.S. effort to increase exports. Less than one percent of what we make in China, Russia, Morocco, Turkey, Brazil and Spain gets imported back to the U.S. So yes, we’re here to serve local customers. When we move outside the U.S. it’s to access an attractive market, not to access low-cost manufacturers. Human resources, attracting and retaining talent, is a major challenge for U.S. companies in China. How has International Paper addressed that challenge? It’s a challenge everywhere but I think we can attract talent with the best of them. Every time I come here I’m impressed with the talent we have. The challenge is to keep that talent, but I think we do a pretty good job at that. There are opportunities at International Paper for young people to learn, develop and grow. At the end of the day, you can always find a job with better pay if you’re good but the opportunity to learn, develop and grow will keep a lot of people. We work really hard at people development to show that if you’re good, you are not limited to a function or a business or geography. We also set high expectations so if you’re not good you’re encouraged to look elsewhere. But there’s a war for talent out there,

whether it is in Russia, the U.S. or China. I think that our Chinese colleagues notice the fact that International Paper operates in 30 countries with 60,000 employees around the world and yet we have less than 30 expatriates running our businesses worldwide. They see we want local managers running the businesses, and that’s what we have in China. If you’re a Chinese employee at International Paper, you know you can rise to the top. Another advantage we have is that our employees know they can go to work in other places around the world. The opportunities in China’s market have been well publicized. So have the challenges. What do you see as the risks of the China market for U.S. companies? China is our most competitive market in the world. You have to be very good at what you do to be consistently profitable, so that’s one challenge. You also have to realize that you’re competing in a market that is not your own and sometimes the playing field does not feel quite level, and that’s a challenge. How do you find the local competition in China? How do you compete with them and do you see Chinese companies as increasingly competitive? We see mostly local competition in our key market, packaging. One advantage we have, like many MNCs doing business in China, is that the market knows us, they know the quality and the service reliability that we provide all over the world. Chinese customers, at the end of the day, recognize the name International Paper. What I think is also true in China, as well as in India, is that customers are only going to pay for what they need and want. But as the economy develops, customer’s requirements and expectations are only going to go up–from the quality of goods and services, to the quality of packaging, to the quality of automobiles–and we have the capability to move up that ladder. But we also have to be very cognizant that customers are only going to pay for what they want. You can’t take your U.S. specifications and product line into a market like India or China and expect them to say “this is better, I want it.”

You have been quoted as saying there is a difference between being an “international” company and being truly “global.” What do you mean by that? We’ve been International Paper for the last 110 years, but it’s only in the past decade that our company has become truly global. Our core market and leading cash generator is still North America – but over the past several years, we’ve selectively and strategically invested in markets where demand was growing and cost structures were good. For us, this meant expanding into Brazil, Russia, China and just this month – India. However, there’s a big difference between a company that has international operations – and one that operates in a global sense. At International Paper, the benefits of globalization are evident, especially in our people practices. It’s not uncommon to begin a career at our Mogi Guacu Mill in Brazil, move to our facility in Courtland, Alabama, make a jump to operations in Svetogorsk, Russia and eventually head back to Brazil. Building an individual’s leadership and management capabilities, stretching people with assignments that help them learn, develop and grow, being great with execution, world-class operations and customers: that is what will keep us ahead of our competitors for years to come. At International Paper, no matter where we operate, the three success drivers remain the same: people, customers and operational excellence. You serve on the Brazil-U.S. Business Council. As Brazil and China are both “BRIC” countries, how do the two countries compare, and can you talk about IP’s operations in Brazil as compared to China? They both have the characteristic of relatively high growth and they both have the challenges of relatively high growth – strong currencies, inflationary tendencies. They’re vastly different business models in terms of how the government participates in business, but I’d say the government has a hand in both. Obviously, there is a firmer, more pervasive, stronger hand in China. Every market we operate in is competitive, but China

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“

We work really hard at people development to show that if you’re good, you are not limited to a function or a business or geography.”

world’s leaders in the development of sustainable, renewable, continuous improvement forestry, and we have sponsored third-party certification of how forests are managed to ensure that it is transparent. I think that’s how we got the reputation of being good stewards of the land when we owned it and really caring about how land is managed even though we no longer own it.

A GLOBAL FACTORY: Internation Paper expands operations to markets where demand for their products is growing.

would stand out, it is so competitive. 50 percent of what we make in Brazil we export out to the region. It’s a regional strategy we are taking in Brazil. But here we’re in China to serve the China market. You have been quoted as saying International Paper’s goal is “smart, well-defined sustainability leadership.” How do you define that? We start from what we do. We’re in the renewable resource business. We don’t own trees anywhere but Brazil. We sold all of our forestry assets in the U.S. But we’re still the largest consumer of fiber anywhere in the world, so we consume a natural resource that is renewable and sustainable and is something that everyone cares about whether you’re in Brazil, the U.S. or China. Over the past decade, International Paper has reduced fossil fuel use by 42 percent in the U.S. and corresponding greenhouse gas emissions by 40 percent. Our water usage continues to decline, and we return about 90 percent of water to the environment after use and treatment. More than 73 percent of the energy in our U.S. mill system is derived from renewable sources. Many of our customers also have their own pressures around sustainability. When Starbucks wants to do something around recycling, they come to International Paper. We want to be the subject matter expert, the go-to person for our customers to get input on how they can be viewed as more sustainable, and we do that. International Paper has been one of the

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What is International Paper doing in terms of sustainability in China? In China, we’ve partnered with the Chinese State Forestry Association to share best practices to help them learn to help create sustainable forestry. We’ve had a cooperative agreement with the China State Forestry Association to exchange knowledge and practices in farm forestry and sustainable fiber growth. In 2010, IP Asia donated 12,000 trees, nearly an entire forest, to the China Green Foundation in hopes of fighting sandstorms and soil erosion in the Beijing area. It is interesting to note that the Chinese packaging market, in terms of corrugated packaging that is used to ship goods from point A to point B, is basically a recycled market. The recycled fiber comes from the U.S. and Europe. In the U.S. market, not a lot of it is recycled; most of it is virgin fiber. The Obama Administration has made increasing U.S. exports a priority initiative. What could the U.S. government do to support the competitiveness of U.S. companies? I think they’re doing a pretty good job on that. By and large, I think the Administration is doing the right things. It is easy for us to criticize the Administration. None of us is in that job, and once you’re there it gets a whole lot harder! The problem is, exports are such a small part of the U.S. economy so the impact in the near term on getting sustainable, higher level growth out of the U.S. economy is relatively low. But if we can double exports in the next five years it will still have an impact, and that will be a good thing. But exports are only part of the answer to creating an environment where we have a U.S. economy that is growing at a rate that will start to bring down unemployment.

INSIDE AMCHAM FROM THE CHAIRMAN

Ongoing Dialogue is Crucial

he third annual U.S.-China Strategic and Economic Dialogue (S&ED) concluded last month on May 10 in Washington, D.C. As Ira Kasoff, Senior Counselor at APCO Worldwide and former deputy assistant secretary for East Asia at the U.S. Department of Commerce notes in this month’s Insight, it is difficult to determine the specific accomplishments of the latest round so soon after its completion. What is safe to say is that the S&ED continues to play an important role in the ongoing engagement between our two countries and as a Chamber, AmCham Shanghai was pleased to see a number of issues addressed and advanced. Positive developments include China’s commitment to implement President Hu Jintao’s pledge made during his January U.S. visit to de-link China’s innovation policies from government procurement, a US$100 billion market that U.S. companies are well positioned to compete in. Eric S. Musser Chairman AmCham Shanghai

Also encouraging was China’s commitments to loosen restrictions on the ability of U.S. services firms, in particular financial service firms, to operate in China. China pledged that U.S. financial services firms would be allowed to sell mutual funds and mandatory third-party auto insurance and that U.S. banks would be allowed to underwrite corporate bonds. The principle of equal treatment for foreign enterprises in China, with a focus on addressing advantages enjoyed by China’s state-owned enterprises (SOEs) was also discussed in Washington. Needless to say, this was also welcomed as an important step that will lead to a more level playing field in China. Also noted was China’s pledge to improve intellectual property rights protection and enforcement and their promise to strengthen measures to ensure that the software being used by government agencies at all levels is legitimate. To quote Ira Kasoff, “the key to assessing the success of talks with China lies in how commitments are implemented.” We couldn’t agree more and look forward to active follow through on promises made.

Follow through on commitments made will determine the success of the third annual S&ED.

Closer to home, AmCham Shanghai held the 2011 Manufacturers’ Business Council (MBC) Conference, entitled “Productivity: the New China Challenge,” on May 12 at the Four Seasons Hotel in Shanghai. This year’s MBC Conference highlighted best practices to address the new challenge for foreign manufacturers in China – the need to enhance productivity in the face of rising costs of operations. I was pleased to take part in the conference as I firmly believe that manufacturers are core to the success of AmCham Shanghai as an organization. Manufacturers are being challenged like never before to improve efficiency, productivity and effectiveness. The conference provided concrete responses to what continues to be a very competitive business climate in China. A full range of solutions to boost productivity was discussed, including capital expenditure and automation, managing human resources for greater efficiency, relocating within and outside of China to capture cost savings and investing in automation to boost productivity. I’d like to thank the members of AmCham Shanghai’s Manufacturers Business Council, the conference Platinum sponsors – International Paper, Kingdee, Lend Lease and SSOE - as well as conference participants, for making this year’s MBC conference a great success.

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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 May 2011 Board of Governors Meeting Financial Report Helen Ren, Finance & Administration Director, reported that AmCham Shanghai had a good start to the 2011-2012 fiscal year. Cost controls have been effective and revenues have been in line with expectations. Overall, new member count and renewal revenue is above budget and net revenue is on track. Review of the 2010 AmCham Shanghai Membership Survey Rajesh Parekh, Partner of McKinsey, delivered a presentation titled Understanding Membership Satisfaction which outlined the results of the 2010 AmCham Shanghai Membership Satisfaction survey. Key takeaways included an overall increase in member satisfaction rate and that a majority of respondents view an AmCham Shanghai membership as increasingly important to build their professional network. Looking forward, corporate members are particularly interested in topics focused on “Human Resources” and “Manufacturing.” Review of proposed amendments to Chamber Constitution, Bylaws and the NEC Process The Board amended language detailing the Chamber’s Nominations and Election Committee (NEC) process with a focus on defining proxy voting and updating NEC bylaw text.

The Board also reviewed proposed changes to the Chamber Constitution and will be presenting suggested changes to the membership for a vote at the 2011 Annual General Meeting. President’s Report Brenda Foster, President of AmCham Shanghai; Eric Musser, Chair; and Board members thanked Governor Paul Brown, President of International Paper Asia, for his valued service to AmCham Shanghai. Governor Brown will be leaving China to assume the role of President of International Paper India and will be overseeing the company’s recent acquisition of one of the largest paper producers in India.

IN ATTENDANCE Governors: Paul Brown, Ted Hornbein, Kenneth Jarrett, Jim Mullinax, Eric Musser (Chairman), Matthew Targett and Eric Zheng Attendees: David Basmajian, Siobhan Das, Eric Fiedler, Brenda Foster (President), Helen Ren, David Turchetti, Linda X. Wang, Rajesh Parekh (guest) APOLOGIES Andrew Au, William Brekke, Eddy Chan, Marie Kissel, Robert Roche and Kevin Wale

The AmCham Shanghai 2011 Board of Governors: Chairman

Governors

Andrew Au Citibank China

Ted Hornbein Richco

Matthew Targett Bayer Technology and Engineering

Eric S. Musser Corning China

Immediate Past Chair

Robert W. Roche Acorn International

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Paul Brown International Paper Asia

Kenneth Jarrett APCO Worldwide

Eddy Chan FedEx Express

Marie Kissel Baxter Asia-Pacific

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Kevin E.Wale General Motors China Group

Eric Zheng Chartis Insurance

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The First Annual Suzhou Government Appreciation Dinner AmCham Shanghai was pleased to host its first annual Suzhou Government Appreciation Dinner on the evening of Wednesday, April 27 at the Pan-Pacific Suzhou, in the heart of Suzhou’s historic old city. AmCham Shanghai Chairman Eric Musser, President Brenda Foster and U.S. Consul General in Shanghai Beatrice Camp were joined by over 100 AmCham Shanghai members to commend Suzhou for creating a positive business climate for U.S. companies and to discuss ways to work together to develop future business opportunities. Suzhou Mayor Yan Li attended the dinner along with government representatives from the Suzhou-Singapore Industrial Park (SIP), Suzhou New District (SND), the Suzhou municipal government and other surrounding industrial parks, representing a wide variety of government services and bureaus. “Tonight’s dinner demonstrates our appreciation to Suzhou officials for their ongoing support of U.S. companies and recognizes Suzhou as an increasingly important destination of U.S. foreign direct investment,” said Musser in remarks to attendees. “We look forward to finding ways to maintain and improve the business climate for our members and to find new ways U.S. companies may contribute to Suzhou’s economic development.” “AmCham Shanghai values our partnership with the Suzhou municipal government and we are proud of the progress we have made together,” said Foster. “We look forward to enhancing and deepening our valued partnership as we work together to achieve Suzhou’s ambitious and mutually beneficial development goals.” The Suzhou and greater Suzhou area hosts more than 200 American companies that have helped Suzhou develop into

Chairman Eric Musser, Consul General Beatrice Camp toast Vice Mayor Huang Qin.

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the city with the fifth largest municipal GDP in China at more than RMB8 billion in 2010. U.S. companies bring valuable multinational experience, technology and industrial expertise to Suzhou as it sets its sights on attracting hi-tech, service-based industries to the area. AmCham Shanghai’s Suzhou Committee, formed by these U.S. companies, is one of the most active committees at the Chamber. It is led by Committee Chairman Brian Noll of Bibixi Communications and supported by vice chairs Bill McEathron of Mercury Marine, Catherine Zhou of Solatube and Michael Sehnert of Rogers Corporation. The Committee hosts monthly roundtables to discuss pertinent business and operations issues and plan for future programming. Topics covered last year include human resource supply issues, electricity grid integrity issues, rising commodity costs and local taxation. The Committee also recently cooperated with DUSA, an independent organization servicing European organizations in Suzhou, in conducting a comprehensive salary survey among European and American multinationals. On Thursday, April 28, following the dinner, AmCham Shanghai members toured the new Su-Tong Science and Technology Park (STP), an industrial park with joint investment and cooperation from China Suzhou Singapore Industrial Park, Nantong Economic and Technology Development Area and Jiangsu Agribusiness Group. The tour included a networking lunch with STP officials, followed by a short tour of the park, as well as a question and answer session with STP officials at the STP Showroom. For additional information about the Suzhou Committee, please contact Jonathan Shyu, Committees Liaison at jonathan.shyu@ amcham-shanghai.org

AmCham Shanghai President Brenda Foster shakes hands with Suzhou Mayor Yan Li.

Platinum Sponsors

Corporate Table Sponsors

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The 2011 Manufacturers’ Business Council Conference - Productivity: the New China Challenge AmCham Shanghai held the 2011 Manufacturers’ Business Council (MBC) Conference entitled “Productivity: the New China Challenge” on May 12 at the Four Seasons Hotel in Shanghai. This year’s MBC Conference highlighted best practices to address the new challenge for foreign manufacturers in China – the need to enhance productivity in the face of rising costs of operations. AmCham Shanghai Board of Governors Chairman, Eric Musser, CEO of Corning, called manufacturers “core to the success of AmCham Shanghai as an organization.” As they are faced with rising costs and a difficult regulatory environment, manufacturers are being challenged like never before to improve efficiency, productivity and effectiveness. Panelists discussed a full range of cost factors including labor, logistics, land and regulatory policies and shared solutions to boost productivity, including capital expenditure and automation, managing human resources for greater efficiency, relocating within and outside of China to capture cost savings and investing in automation to boost productivity. In his keynote speech, Paul Brown, president of International Paper Asia, identified four manufacturing trends in China: robust, but slowing market growth, rising inflation, the idea that best practices can come from anywhere and the national focus in China on promoting a harmonious, happy society. The conference’s first panel session, “The China Manufacturing Economy,” built on these ideas. Peter Thom, manufacturing director of General Motors (GM) China, told the audience that GM has begun to apply its best practices from its China operations to other developing markets. He said that in the last few years China has begun to lead product development for the company, through innovative solutions and products created for the Chinese market. Panelists addressed the utilization of automation to increase operational productivity. Ted Hornbein, managing director of Richco in Asia, discussed the company’s decision-making process to replace automation in China. He cited the reasons the company chose to increase automation in its operations. These include China’s New Labor Law, expected wage inflation, a poor labor pool because of high turnover and weak commitment and Human Resources management frustration. Hornbein noted that local competitors are not automating as much, but will be forced to embrace a higher level of automation to remain competitive. Moving operations to capture cost savings was another major focus of the conference. This panel highlighted case studies of manufacturers that either relocated or, following a detailed cost-benefit analysis, ultimately decided not to move. Cary Bean, president of Eagle Ottawa China, shared some of his company’s key reasons for not “going west.” Although labor costs would be cheaper, the payback would be insufficient in the face of challenges like underdeveloped transportation and logistics infrastructure, and the risk of a new management team. The conference was wrapped up by Karel Eloot, director and head of Greater China Operations for McKinsey, who discussed the future of manufacturing in China. He spoke about China’s key sources of competitive advantage in manufacturing and the challenges the country faces in maintaining its leadership in this area.

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Platinum Sponsors

Gold Sponsors

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AmCham Shanghai New Members: May - June 2011 U.S. Corporate Membership

Small Business Membership

Axesstell (Shanghai) Ltd. HONG Liang Carlton Forge Works, Shanghai Rep. Office LU Krista Citystar Entertainment, Ltd. WU Fei INTL Universal Commercial (Shanghai) Co., Ltd. LAMBERT James Park-Ohio Industries (Shanghai) Co., Ltd. HE Wei Brown-Forman Worldwide (Shanghai) Ltd. ACCARDO John Lord Mechanical (Shanghai) Co., Ltd. HAUGHEE Todd Matson Shipping (Shanghai) Co., Ltd. GAO Qiang Morgan Stanley Management Service (Shanghai) Ltd. YANG Hao Shanghai UOP, Ltd. TAN Chee Hong Volumecocomo (Shanghai) Apparel Co., Ltd. CHANG Christophe

Euro-Asia Medical Limited CAO Jun Lancaster Investment Consulting (Shanghai) Co. Ltd. CLAYPOOL Alex

U.S. Associated Corporate Membership Agape Package Manufacturing (Shanghai), Ltd. LUO Leeshawn Lawson (Shanghai) Software and Technology Co., Ltd. XU Charlie Levi Strauss Commerce (Shanghai) Limited YEUNG Kwok Kuen Sunny Shanghai AB Sciex Analytical Instrument Trading Co., Ltd. SHEN Jing Shanghai Representative Office of Merichem Hong Kong Ltd. HENNEKES Robert James Albemarle Chemicals (Nanjing) Co., Ltd. HE Zhemin Chiquita Brands China FOO Dennis Chrysler Asia Pacific Investment Co.,Ltd. CLARK Eric Imagination Shanghai Ltd. FEI Nina IMW Compressors (Shanghai) Co., Ltd. KAN Winston Kuehne & Nagel Limited WONG Dennis Leggett & Platt (Jiaxing) Co., Ltd. MAO James Matrix Pharma Group (Xiamen), Ltd. CHOUDHURY Sandip MITAC Information Technology Ltd. WU Robert Momentive Performance Materials (Shanghai) Trading Co., Ltd. KAWAMURA Hajime Newell Rubbermaid Trading (Shanghai) Co., Ltd. LOWE Kevin Nike Sourcing (Guangzhou) Co., Ltd., Shanghai Branch NEET Roger Rieke Packaging Systems (Hangzhou) Co., Ltd., Shanghai Branch Company HE Qin Timberland Trading (Shanghai) Co., Ltd. XU Hui Vesuvius Advanced Ceramics (Suzhou) Co., Ltd SHAO Yi

Non-Resident Individual Membership American Chamber of Commerce in France STOCK Brad

Non-Resident Corporate Membership Hawaii Visitors and Convention Bureau MURRAY James Michael

Corporate International Affiliate Membership Ascendas Shanghai Co., Ltd. ZHANG Yang eFinancialCareers Pte., Ltd., Shanghai Rep. Office WANG Sophia R3, Inc. ANKETELL-JONES Anneka Shanghai Sudler-MDS Healthcare Communications Co., Ltd. LIU Linda The University of Nottingham- Ningbo MILES Nick AWECO Appliance Systems (Shanghai) Co., Ltd. FRAUNHOFFER Heinz Kyosay Global Limited, Shanghai Rep. Office ANDERSON Jon B. PSS China Sourcing Ltd., Shanghai Rep. Office D'INNOCENZI Thomas Standard and Poor's Information Service (Beijing) Co., Ltd., Shanghai Branch CHEW Ping

Individual Int'l Affiliate Memberhsip Bereder-Siad-Suzhou Institute of Architectural Design BEREDER Frederic Four Seasons Hotel Shanghai JASON Stinson State Government of Victoria YIN Bei CBC MarCom & Market Research BACHMANN Peter Lieberman Research Worldwide SHAH Pritica WALTHER Mario Shanghai Peace Hotel Co., Ltd. NAAMANI Kamal Shanghai Vertical Business Management Co., Ltd. YE Zhen

Associate Membership AGCO (Changzhou) Agricultural Manchinery Co, Ltd. RICE Fred Anderson & Anderson LLP WEBER Thomas D. Bureau Veritas Consulting (Shanghai) Co., Ltd. LEMKE Gisbert Corning Cable Systems (Shanghai) Co., Ltd. LEE Chuo-Sheng

Dover Corporation Regional Headquarter CHEN Bin Jiang Dura-Bar Manufacturing (Changzhou) Co., Ltd. HE Li Edwards Lifesciences World Trade (Shanghai) Co., Ltd. WANG Tianhong ZHANG Zhi Yi Finisar Shanghai Incorporation LAN Fahua General Mills Trading (Shanghai) Co., Ltd. CHEN Roger Honeywell Fire & Security Systems (Shanghai) Co., Ltd. LI Qun Insurance Company of North America, Shanghai Rep. Office SONG Feili Nike Sports (China) Co., Ltd. HUNG Kwok Hing Panduit Network Connectivity Distribution Co., (Shanghai), Ltd. PARTRIDGE Ronald K. Pepsico (China) Limited, Shanghai Branch CHANG June SONG Xianjun Pepsico Investment (China) Limited CHENG Shunling MAO Xiaowen RR Donnelley (Shanghai) Commercial Co., Ltd. SHEN Heng YE Yi Verigy (Shanghai) Co., Ltd. LIU Chang Air Products & Chemicals (Shanghai) Gases Co., Ltd. XU Jiyun Allen & Overy, LLP, Shanghai Representative Office (UK) CHENG Helen Baxter (China) Investment Co., Ltd. CHEN Charles Bayer Technology and Engineering (Shanghai) Co., Ltd. SHI Lei Black & Decker (Suzhou) Co., Ltd. BRADDOCK Charles Kerwin Cartus Management Consulting (Shanghai) Co., Ltd. QU Maggie Celanese (China) Holding Co., Ltd. TEO Sin Yew ChinaVest (Shanghai), Ltd. O'HAGAN Liam Coca-Cola Industries Management (Shanghai) Co., Ltd. LIU Huawei SU Yan Corning China (Shanghai) Regional Headquarter LOHSE Douglas Damco China Limited WANG Yizhong Dow Corning (Zhangjiagang) Co., Ltd. BRINSON Jonathan Ashley Duke Global, Inc. SOMMERS-KELLY Jane Eaton (China) Investments Co., Ltd. SHEN Tong Emerson Climate Technologies (Suzhou) Co., Ltd. JOHNSON Amy Goodyear Tire Management Co., (Shanghai), Ltd. ROTHSTEIN Jason WANG Jenny

Jacobs (Suzhou) Vehicle Systems Co., Ltd. WANG Wei Kingston Technology (Shanghai) Co., Ltd. YANG Yanwen Lend Lease Project Management & Construction (Shanghai) Co., Ltd. SUN Xudai WONG Huey Lucite International (China) Chemical Industry Co., Ltd. CORDINGLEY Nick Matrix Pharma Group (Xiamen), Ltd. CHAI Jeffrey Melaleuca (China) Wellness Products Co., Ltd. DONG Jiawei Methode Electronics (Shanghai) Co., Ltd. EL IDRISSI Sadek Mettler-Toledo International Trading (Shanghai) Co., Ltd. LIM Kwee Heng Microsoft (China) Co., Ltd., Shanghai Branch CHENG Shi MSA (China) Safety Equipment Co., Ltd. LUO Yuehai SU Hong Newell Rubbermaid Products (Shanghai) Co., Ltd. KREMER Gerrit Newell Rubbermaid Trading (Shanghai) Co., Ltd. KREMER Gerrit Panduit Network Connectivity Distribution Co., (Shanghai), Ltd. WOO Kee Yong Park Hyatt Shanghai WANG Hua PRTM Management Consultants Shanghai Limited TZOU Lillian Wang Sensata Technologies China Co., Ltd. ZHANG Rui Shanghai Accessen Group Co., Ltd. YU Shengliang Shanghai Hewlett-Packard Co., Ltd. DING Tina ZHENG Helen Shanghai Howard Johnson Hotel Management Co., Ltd. GARCIA Andrew The Executive Centre (Shanghai) LI Alan United Airlines Shanghai Office JIA Sarah

Individual U.S. Citizen Membership Hamilton Sundstrand (Shanghai) Management Co., Ltd. ZHAO Guoquan Hella Shanghai Electronics Co., Ltd. TUNG Edward Nortek (Shanghai) Trading Co. ROWE Douglas Arthur Berdan Financial Consultants TURRIN Richard Encompass Medical Supplies Inc., Ltd. WANG Nicholas COPELAND Greg KU Jame Ossur SASIKUMAR Ajay Procon Packaging Trading (Shanghai) Co., Ltd. KRASSENSTEIN Daniel YK Pao School JACCAC Tony

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

May Monthly Members’ Briefing: Rob Schmitz on the Japan Earthquake and the Impact on Global Supply Chains

Rob Schmitz from APM’s Marketplace speaks to members about the Japan earthquake.

AmCham Shanghai was pleased to host Rob Schmitz, China Bureau Chief of American Public Media’s Marketplace, to speak at the Chamber’s May Monthly Members’ Briefing. Schmitz spoke to members about his recent reporting on the effects of the recent Japan earthquake and tsunami on multinational corporations’ global supply chain strategies. Schmitz discussed the business implications of the disaster as well as the massive destruction in Sendai, the city closest to the earthquake epicenter, showing pictures of pages of homework in the rubble and a school clock frozen at the time of the earthquake.

Schmitz explained that although they are often overlooked, small businesses serve as the backbone of Japan’s economy as sources for Japanese business titans like Hitachi and Toyota. Many of these small businesses specialize in the manufacturing of small components. The damage done to these smaller operations has resulted in major supply chain disruptions in the automotive and electronics sectors. Schmitz gave a few notable examples of these types of sourcing problems. Japan is a major supplier of air flow sensors, an important component in fuel injection systems in vehicles. Hitachi’s sales of these air flow sensors account for 60 percent of the global supply. The destruction of sensor factories has created a supply shortage, leading to major production problems for Japanese and American automakers. Schmitz explained that the global economy is a network, often relying on small players who can play a big role. (May 10)

CEO Speaker Series: Thomas Siebel on the Computer Revolution AmCham Shanghai welcomed founder of Siebel Systems and chairman of First Virtual Group Thomas Siebel at the Four Seasons Hotel, where he discussed the rapid growth of the informational technology industry, the present state of innovation and opportunities for the future. Siebel was accompanied by a delegation of Siebel Scholars, a community of talented students in leading graduate schools of business, computer science and bioengineering, who were in China to meet China’s business, government and cultural leaders. Siebel highlighted the unprecedented growth of the information technology sector in the last three decades, which made remarkable leaps from basic mainframes to the PC to the Internet. He emphasized that this volume of innovation was correlated with a supportive environment – government investment, efficient capital and an overall strong economy. However, he said, the environment has changed for the IT industry, with venture investment and support dropping. IT growth fell from a historic 12 percent rate to about a one percent growth rate post-2000. Support for innovation is key for growth, says Siebel, and this trend has implications for some of the present day’s most pressing needs. Energy is a bourgeoning area with global consequences: 85 percent of the world’s energy needs, growing at exponential rates, are still met with hydrocarbons. To meet these needs and to battle climate change, the solution is to invent alternative solutions. To support this type of innovation, Siebel has partnered with several high profile companies and individuals for the “C3” project to drive innovation in IT and policy, seeking to enable organizations to maximize profitability and cash flow by maximizing their energy strategy. Former Secretary of State Condoleezza Rice, Siebel and Yale President Richard C. Levin are among C3’s board members. Siebel also founded the Siebel Global Energy Prize, which rewards projects that promise to deliver meaningful progress in energy utilization and significant economic impact. (May 16)

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Committee Highlights

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Design & Construction Committee LEED Experiences: Learning from the Nike China Logistics Center LEED panel discusses conservation best practices.

CSR Committee Chinese Consumer Perspectives on Corporate Social Responsibility AmCham Shanghai hosted its first-ever online webinar with Chris Coulter, Senior Vice-President at Globescan. AmCham Shanghai members logged in from their homes and offices to hear Coulter’s insights on Chinese consumers’ attitudes toward corporate social responsibility (CSR), gleaned from Globescan’s annual global surveys of consumer attitudes. Overall, Coulter said, Chinese consumers are more trusting and more positive about corporate social outreach efforts than consumers in other countries. Almost 98 percent of employed Chinese consumers surveyed agreed that “CSR increases my motivation and loyalty” to a company. Chinese survey participants defined CSR primarily as “treating employees fairly,” “making products that are safe and healthy” and “being ethical and honest in business dealings.” However, corporations must increase communication about CSR efforts to reap the full benefits. Almost 93 percent of Chinese survey participants agreed that “my company should communicate CSR more.” Coulter ended with a note that the ideal CSR strategy should be to “differentiate, integrate and communicate.” (May 6)

AmCham Shanghai’s Design & Construction Committee held a discussion on LEED (Leadership in Energy and Environmental Design) experiences from the design and construction of the new Nike China Logistics Center (CLC) located in Taicang, Jiangsu province. Paul Barnes and Neil Yang from Nike, and Laurent Cochet from Capgemini Consulting delivered a presentation of the challenges faced in the building of the CLC as well as the specific initiatives that were taken to achieve LEED standard. They were later joined by Paul Bergman of “The Freshary,” China’s first certified organic ice cream and baked goods producer and retailer, for a panel discussion. Planning, designing, and building the CLC involved 25 professional companies, spanning 10 countries. Challenges to building the CLC included getting support from Nike’s board, additional funding for LEED initiatives, crosscultural project management and communication issues across various organizations. Management also had to balance the implementation of sustainable solutions for the CLC early in the design process with a focus on return on investment and management of brand image. The LEED certification led to many initiatives that conserve energy. Nike first conducted extensive due diligence into site selection, searching for a consolidated hub with a central geographical location, performing geothermal tests on the site and negotiating with the government to preserve the local environment. Simple initiatives that contributed to savings included bicycle sheds with charging docks for employee use, saving water through water collection ponds and low water consumption vacuum systems/pumps. Some 97 percent of construction waste was recycled. The building used 30,000 tons of recycled concrete and various amounts of recycled steel, glass, and aluminum. (May 19)

Events and Committee Highlights are reported by Ashley Cahill, Susan Lawrence, Kate Ryge, Jonathan Shyu and Esther Young

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Marketing & Media Committee Reality Check: Do Chinese Consumers Really Care if Companies Go Green?

Kunal Sinha speaks about consumer perceptions.

AmCham Shanghai’s Marketing & Media Committee was pleased to welcome Kunal Sinha, Ogilvy China’s Chief Knowledge Officer, to share findings from Ogilvy & Mather’s recent ethnographic and quantitative study of Chinese consumers called “Get Going with Green: Closing the Sustainability Gap.” He spoke to members about consumer behavior and perceptions of environmental sustainability in Shanghai, Tianjin and Wuxi. Sinha explained that a “sustainability gap” is the difference between planned and actual behavior. The two major barriers to consumers engaging in more sustainable purchasing behavior are time and cost. The survey found that 53 percent of respondents think that green options in the marketplace are too expensive and 55 percent are driven by convenience in purchasing. Additionally, Chinese consumers are confronted by an overload of “green” claims and certifications that they feel cannot be trusted. Sinha discussed areas of opportunity for firms trying to overcome these purchasing barriers. Ogilvy’s survey found a willingness to act among respondents, with 67 percent believing their efforts did count. Also 69 percent said that if environmentally-friendly products were around the same price point as other goods, they would make the purchase. According to Sinha, “Green is not just a reputation opportunity for corporations; it is a marketing opportunity in itself.” Sinha also spoke about mainstream behaviors of the Chinese that should be recognized and promoted as “sustainable, green” behaviors.These include sleeping on straw mats in the summer, cycling and using reusable water bottles. All attendees at the event received a complimentary copy of OgilvyEarth’s new 106-page Get Going with Green report, as well as a link to a parallel study done by OgilvyEarth in the United States. (May 13)

Legal Committee Foreign Corrupt Practices Act (FCPA) Enforcement Trends and Insights: An Insider’s View AmCham Shanghai’s Legal Committee hosted Steven A. Tyrrell, former Chief of the U.S. Department of Justice (DOJ) Fraud Section at the J.W. Marriott Hotel. Tyrell, who is currently co-chair of Weil, Gotshal & Manges’ White Collar Defense & Investigations Group, offered a brief overview of the Foreign Corrupt Practices Act (FCPA), a unique insider’s perspective on the methodology employed by enforcement agencies and what the DOJ expects from companies facing FCPA issues. Steven Tyrrell speaks about the FCPA.

Tyrrell began by reviewing the FCPA. He spoke about accounting violations and the practice of bribing foreign officials. Though the FCPA’s wording is relatively straightforward, its broad nature and wide reach means compliance could be complex. A company may be subject to the FCPA, for example, if its employees, partner or a third partner acting on the company’s behalf, commit an act in the U.S. to further a bribery scheme, even if it is not a U.S. company or issuer. A “foreign official” may also include employees of state-owned enterprises or entities acting on behalf of a government. It is generally up to the prosecutor whether the FCPA pursues charges, Tyrrell said, but aggravating factors include the pervasiveness of unlawful conduct and the absence of an effective compliance program. Willingly coming forward with indiscretions and cooperating with investigators are mitigating factors. Tyrrell also highlighted some key steps that companies can take to limit FCPA liability, including performing extensive due diligence on any potential partner or joint venture (JV) investment and including FCPA compliance provisions on any business agreements. After Tyrrell’s speech, Peter King from Weil Gotshal & Manges provided an overview of the U.K. Bribery Act of 2010 that will be in force from July 1, 2011 and which may affect companies working through or in the U.K. (May 20)

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DEAL OF THE MONTH IMAGINECHINA

First Solar, China Power Sign Strategic Agreement CPINE and First Solar sign deal to explore new markets.

merican solar panel maker First S olar, Inc. and China Power International New Energ y Holding Ltd. (CPINE) will work together on projects in the U.S., China and other international markets. The “strategic cooperation framework agreement” will expand First Solar’s commercial presence in China’s growing solar sector. First Solar will help China Power, a subsidiary of state-owned China Power New Energy Development Co., Ltd., explore investment opportunities outside China. China Power will also benefit from the U.S. solarpanel maker’s technolog y advantages and expertise in building utility systems. According to China Power, the two companies will cooperate in the investment, construction and project management of photovoltaic power plant projects, technology introduction and the manufacturing of thin-film photovoltaic modules. The two companies are working to finalize plans for solar projects in China and abroad. The project timeline has not yet been set. China Power has a goal of developing two gigawatts (GW) of solar power in its domestic market by 2020. First Solar has 2.4 GW planned in North America. Arizona-based First Solar is the world’s least expensive thin-film solar module and the largest solar company by market value. First Solar’s cooperative ventures in China are

INSIGHT

JUNE 2011

part of the company’s diversification strategy. In January, First Solar signed a memorandum of understanding (MOU) with China Guangdong Nuclear Solar Energy Development Co. to build a solar plant in northern China’s Inner Mongolia region. Negotiations continue, but a construction date has still not been set. First Solar has agreed to supply solar modules and provide engineering services for a 30-MW solar plant. The U.S. company’s stated goal in China is “to bring the world’s most advanced, cleanest and most affordable solar technology to China and help China achieve its carbon emission goals.” First Solar reported that first-quarter earnings in 2011 fell 33 percent from the previous year because of a slowing European market, higher costs and a 14 percent decline in solar panel prices. The European market for solar energy, which accounted for more than 80 percent of solar-panel demand in 2010, continues to slow. As this occurs, companies are increasingly looking to China for new growth opportunities. In March, the Chinese government set a 15 percent target for use of renewable energy by 2020. Non-fossil fuels currently account for eight percent of the country’s energy use. Still, the market for solar panels looks strong, with global demand more than doubling last year to about 17 GW. Analysts predict global demand will reach 21 GW next year. -Ashley Cahill

JUNE 2011

INSIGHT