Insight Magazine March 2013 Issue

The Journal of the American Chamber of Commerce in Shanghai March 2013

The venture capital climate in China is robust, but for some American investors, capitalizing on investments comes with challenges

INTERVIEW

Meet the 2013 Chair Robert Theleen, AmCham Shanghai’s new Chair, talks to Insight about his priorities and goals

© 2013 United Air Lines, Inc. All rights reserved.

Near, far, and just about everywhere in between.

More than 370 destinations worldwide.

There’s no limit to how far you can go. Especially when there’s no limit to where you can fly. With the most comprehensive route network, we can take you just about anywhere. For more information go to united.com.

Includes destinations served by United Air Lines, Inc., and United Express.

INsIGht MARCH 2013

the Journal of the american Chamber of Commerce in shanghai

AMCHAM SHANGHAI PReSIdeNT

Brenda Foster vP oF PRoGRAMS & SeRvICeS

scott Williams

vP oF AdMINISTRATIoN & FINANCe

F e at u r e s

14

helen ren dIReCToRS

14

CONsumers

The New China Opportunity

By Kunal Sinha

Rural residents are choosing to live closer to home and some figures show a greater appetite for consumer goods.

bUSINeSS deveLoPMeNT & MARkeTING

Patsy Li

CoMMITTeeS

stefanie myers inSight editor-in-ChieF/ CoMMUNICATIoNS & PUbLICATIoNS

David Basmajian

18

eveNTS

Jessica Wu

18

INterVIeW

Meet the New Chair

By David Basmajian

AmCham Shanghai’s 2013 Chair talks about his priorities and his China experience.

GoveRNMeNT ReLATIoNS & CSR

steven Chan MeMbeRSHIP & CvP

Kirt Greenburg

INSIGHT

22 A New Reason to Give Back BusINess aND sOCIetY

22

26

IMAGINeCHINA

SMe CeNTeR

JUNIoR ACHIeveMeNT CHINA

Linda X. Wang

By Erika Wang

See what multinationals and charity groups are doing to help society and their organizations at the same time.

MANAGING edIToR

Bryan Virasami SeNIoR ASSoCIATe edIToR

erika Wang

SeNIoR CoMMUNICATIoNS ASSoCIATe

ryan Balis deSIGN

alicia Beebe LAyoUT

tina tian

26 Betting on China COVer stOrY

By Ian Driscoll

Foreign venture capitalists in China see plenty of opportunities worth their money but over-regulation and red tape remain key obstacles.

PRINTING

mickey Zhou Snap Printing, inc.

INSIGHT SPoNSoRSHIP (86-21) 6279-7119 ext. 5667 Story ideas, questions or comments on Insight: Please contact David Basmajian (86-21) 6279-7119 ext. 8066 david.basmajian@amcham-shanghai.org Insight is a free monthly publication for the members of the American Chamber of Commerce in Shanghai. editorial content and sponsors' announcements are independent and do not necessarily reflect the views of the governors, officers, members or staff of the Chamber. no part of this publication may be reproduced without written consent of the copyright holder.

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

5 News Briefs

44

11 Movers and Shakers

mONth IN PICtures

Highlights From Our Events

50

eXeCutIVe LIsteNING

What’s Your Favorite Podcast?

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

40 41 46 48

From the Chair Board of Governors meeting Government relations Committee highlights CoveR ILLUSTRATIoN by MICkey ZHoU

Editor's note

C

hina’s transition away from exportand investment-led growth to a market driven by consumption and services is considered by many to be critical to future development of the economy. U.S. companies and service providers are at the forefront of this transition and perhaps none more than those in the venture capital and private equity industry.

In this month’s cover story, “Betting on China,” Insight talks to “alternative” investors Gary Rieschel of Qiming Venture Partners, Huoy Ming Yeh of SVB Partners, and others who said they’re eyeing such industries as healthcare, especially biotech and services, information technology, green technology and other “advanced industries” as potential investment targets. Yet, as with any sector in China, there are challenges, not the least of which is profitably “exiting” their investments.

Go to page 26 to learn more about this growing industry in China which Bob Theleen, 2013 Chair of AmCham Shanghai and CEO of

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

4

insight

march 2013

industry pioneer ChinaVest, calls a “vital link in building successful businesses” in China.

Taking another look at China’s economy in transition and the opportunities it offers, Kunal Sinha of Ogilvy & Mather writes of the opportunities for U.S. companies in China’s lower-tier cities, far away from coastal metropolises which have traditionally been the focus. Kunal hints that Western MNC brands, dominant in big Chinese cities, have some work to do in winning over consumers in countylevel cities and towns. His article is an excerpt of a chapter that will appear in the third edition of AmCham Shanghai’s Orientation China Guidebook available this spring.

Finally, AmCham Shanghai’s new Chair, Bob Theleen sits down with Insight to talk about his priorities for the Chamber in 2013.

Bob also provides his advice to U.S. small- to medium-sized businesses looking to enter the China market, his thoughts on China’s new leadership and priorities for the next president of AmCham Shanghai.

xinhua

News

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

CHINA BUSINESS

China’s outbound M&As reach record high China’s outbound mergers and acquisitions (M&As) reached a record high in 2012, with a total volume of US$59.7 billion, according to international financial-data provider Dealogic Holdings PLC. The figure was up 23% from the previous year and accounted for 7% of the global crossborder M&A volume in 2012. For the first time, Canada was the largest target nation of China’s outbound M&As, with US$20.7 billion in M&A deals. The U.S. came second with more than US$10 billion in deal volume, nearly triple from a year earlier. Most of China’s overseas investments continued to be in the energy and resources industries, while finance, mining, leisure and utilities rounded up the top five target sectors.

Chinese steelmakers’ profit drops 98% Profits at China’s large steel mills slumped 98% in 2012 due to slower economic growth and decline in steel demand and prices, according to the China Iron & Steel Association (CISA). Last year, profits reported by CISA members, which include more than 70 large steel mills, fell to RMB1.6 billion (US$257.2 million).

The largest firms account for about 80% of the total steel output in China, which is both the world’s largest consumer and steel producer. Angang Steel posted a loss of RMB4.16 billion last year, while Maanshan Iron & Steel reported a preliminary loss of RMB3.7 billion to RMB4 billion. But China’s largest listed steelmaker, Baoshan Iron & Steel, said its net profit for 2012 likely rose by about 40% to RMB10.3 billion, due in part to asset sales.

China’s largest luxury cruise liner takes to the seas China’s largest luxury cruise liner, the “Henna,” left the southern resort island province of Hainan on Jan. 26 for a three-day maiden voyage from Sanya Phoenix Island International Port to Halong Bay in Vietnam. The voyage marks the first liner from mainland China to formally enter the cruise tourism market. Measuring 223 meters long and 31 meters wide, Henna has 739 cabins for 1,965 passengers, as well as a complete range of living and entertainment facilities.

About 1,200 passengers were on board for the maiden voyage.

Another 39 voyages to Vietnam are planned for its first cruise season from January to April. Starting in May, the ship’s homeport will switch to Tianjin, from where it will start new routes that include Incheon and Jeju Island, South Korea. Originally called the “Jubilee,” the Henna was built in 1986 for British-American-owned Carnival Cruise Lines. The Henna is operated by Beijing-based HNA Tourism Cruise and Yacht Management Company, a subsidiary of HNA Group, one of China’s largest private conglomerates and the parent of Hainan Airlines Co.

Smog boosts sales of air purifiers Online sales of air purifiers soared in January as smog continued to take its toll on air quality. E-commerce company Suning.com reported that sales rose by about 70% month-on-month. Taobao said its search rate for air purifiers in January was up 153.5% year-on-year. Sales of air

march 2013

purifiers on 360buy.com, another major online shopping site, have grown by 600% on average to total more than RMB600 million (US$96.3 million) since January.

Measurements of particulate matter reached more than 1,000 micrograms per cubic meter in mid-January in some parts of northeast China. A reading above 300 is considered hazardous, and the index stops at 500.

insight

5

Consumer mood to gather pace: Nielsen Consumer sentiment in China will improve in 2013, according to a new report from research firm Nielsen that sees consumer sentiment returning to levels from a year ago before the China slowdown started.

Based on a survey conducted in the fourth quarter of 2012 of 3,500 Chinese people, Nielsen reported that consumers in rural China continued to be the most optimistic segment of the population, followed by tiertwo and tier-four cities. In terms of regions, Southern China was the most confident.

According to the survey, high on consumers’ shopping lists this year are personal digital devices (30% of respondents said they plan to buy), followed by home appliances (27%).

CORPORATE NEWS

Huawei eclipses Nokia, HTC, Blackberry Shenzhen-based manufacturer of telecom equipment Huawei Technologies Co. shipped 10.8 million smartphones in the fourth quarter, ranking it the third-largest seller in the world, with a nearly 5% market share, according to researcher International Data Corp (IDC). Meanwhile, Nokia, HTC and BlackBerry (formerly Research In Motion) all fell out of the top five for the quarter compared to a year earlier.

According to IDC, Samsung was the world’s top smartphone vendor, with 63.7 million shipments and a 29% market share in the fourth quarter, followed by Apple Inc. with 47.8 million shipments and a 22% market share. ZTE Corp., also a Chinese smartphone maker, ranked fifth with 9.5 million smartphones in the fourth quarter.

Michelin opens its largest plant in Shenyang French tire maker Michelin Group has invested nearly US$1.5 billion, its largest single investment in China, to open its biggest factory in Shenyang, capital of Liaoning province. The new factory, the

largest Michelin plant in the world, has an annual production capacity of more than 12 million tires for cars, trucks and buses.

China is the world’s biggest market for truck tires, with rising demand for more high-end products along with the rapid development of modern logistics. China overtook the U.S. to become the world’s largest automobile market in 2009. Between 2005 and 2011, car registrations in China rose by 24% annually to reach 14.5 million.

Lenovo hits record sales, profit Chinese PC giant Lenovo said its 2012 third quarter was its best ever, with record numbers for both sales and profit at US$9.4 billion and US$205 million, respectively.

Third quarter revenue grew 12% from the year before, while profit jumped 34% yearon-year. The company also said that its smartphone business in China was profitable for the first time. Domestic sales comprised 43% of overall sales. In China, Lenovo saw US$4.1 billion in consolidated sales in the third fiscal quarter, an increase of 17% yearon-year. Asia-Pacific and Latin America comprised 18% of total worldwide sales with consolidated sales hitting US$1.7 billion.

Banks see cross-border RMB business grow The renminbi-denominated cross-border business of Industrial and Commercial Bank of China (ICBC), the world’s largest commercial bank by market value, exceeded RMB1.5 trillion (US$238.91 billion) in 2012, up nearly 70% year-on-year, with overseas institutions contributing half of the volume. Meanwhile, Bank of China said that its domestic branches conducted RMB1.2 trillion worth of cross-border business last year, up 54% year-on-year. BOC’s 24 overseas branches and subsidiaries moreover processed RMB1.26 trillion in such business during the same period, up 29% from the previous year. According to data from the People’s Bank of China, the nation’s central bank, cross-border RMB trade settlements in 2012 rose 41% while investments settled in the currency surged 153% year-on-year.

MACROECONOMICS

China’s trade up, fuels optimism China’s imports rose 28.8% in January from a year earlier, while exports jumped 25%, according to the General Administration of Customs. Although figures were skewed by the seasonal effect of the early Lunar New Year holiday, when many factories shut down for a week or more, the betterthan-expected trade data fueled optimism that China’s economic growth may be rebounding from the recent slowdown and signaled a recovery in domestic and overseas demand. When adjusted for the holiday-induced differences in the number of working days, the increases were lower at a 12.4% growth for exports and 3.4% higher for imports. Trade surplus for January was US$29.2 billion, beating analysts’ expectations of US$26.6 billion. Separate figures showed that the inflation rate slowed to 2% in January.

China’s manufacturing expands Chinese manufacturing expanded in January, validating the nation’s reluctance to add to policy stimulus amid increasing inflation concern. The Purchasing Managers’ Index was 50.4 in January compared with 50.6 in December, the National Bureau of Statistics and China Federation of Logistics and Purchasing said. A separate gauge from HSBC Holdings PLC and Markit Economics, which focuses on smaller businesses, rose to a two-year high of 52.3 from 51.5.

Readings above 50 indicate expansion. The federation’s PMI is now based on responses from purchasing managers at 3,000 companies in 21 industries, compared with 820 enterprises in 31 groupings previously.

Chinese cultural product exports grow in 2012 Exports of cultural products grew 16.3% in 2012 year-on-year to US$21.73 billion, according to the General Administration of Customs. Exports of visual art accounted for

march 2013

insight

7

the majority of the exports, taking a 65.4% share with a value of US$14.21 billion, up 52.5% year-on-year. Meanwhile, exports of visual and audio media dropped 44.2% year-on-year to US$2.84 billion. Exports to the Association of Southeast Asian Nations (ASEAN) and Africa saw 120% growth from 2011 to US$1.54 billion and RMB1.36 billion, respectively. Exports to Latin America climbed to RMB1.72 billion at a 72.2% growth from the year before.

Customs authorities confiscated 97.18 million goods that violated intellectual property laws in 2012.

U.S.-CHINA

Chinese online portals strike deals with U.S. movie giants Tencent Inc. announced a deal between film.qq.com and U.S. film companies Warner Bros. Pictures, Universal Studios, Miramax Films and Lionsgate to offer their latest releases to Chinese Web users for RMB5 per movie or a RMB20-monthly subscription. The service, Hollywood VIP, offers movies free from advertising with Chinese dubbed voices or subtitles that will go online just two weeks after they are first shown in U.S. cinemas. A separate deal was signed between Paramount and BesTV, a video website managed by Shanghai Media Group. The monthly subscription for BesTV costs RMB15, with the price for a single movie as low as RMB3, but viewers can expect to see Paramount movies at least three months after their U.S. release.

Ford’s sales surge 98% U.S. automaker Ford Motor Co. said its sales in China reached 61,475 passenger cars and commercial vehicles – a 98% rise from a year earlier, led by its best-selling Focus sedan. Passenger vehicle sales surged 135% to 44,439, and commercial deliveries rose 42%. According to the China Association of Automobile Manufacturers, total vehicle sales in China this year, including trucks and buses, are projected to surpass 20 million for the first time as the economy rebounds.

8

insight

Ford sold 296,360 Focus sedans last year, beating General Motors Co.’s Chevrolet Sail and Buick Excelle for the title of top-selling car in China.

Hanergy buys Silicon Valley solar start-up China’s Hanergy Holding Group said it has completed the purchase of Santa Clara, Calif.-based MiaSolé, one of the most promising Silicon Valley solar start-ups, and its technology. Hanergy, which made its money building hydroelectric dams, reportedly agreed to pay about one-tenth of the US$1.2 billion that was initially sought for the company. MiaSolé’s investors, mostly venture capital firms, had put more than US$550 million into the company. More than 90 potential purchasers looked at the company, but it attracted few bidders. The deal has allowed Hanergy to acquire at low cost an array of patents developed for hundreds of millions of dollars of venture capital investments.

GOVERNMENT & POLICY

China gets tougher on food safety China’s food safety watchdog said it plans to introduce tougher regulations on the import and export of dairy products. Effective May 1, imported dairy products that fail to meet safety, health and environmental standards are likely to be destroyed within three months or returned to their country of origin, according to the General Administration of Quality Supervision, Inspection and Quarantine. Meanwhile, China’s Ministry of Health also announced new caps on levels of 13 contaminants in 20 food categories effective June 1. The amended standards limit the content of contaminants including lead, cadmium, mercury and arsenic that can be allowed in food. Food safety has been a hot-button issue in recent years prompted by highprofile cases of tainted baby formula and contaminated pork.

march 2013

Pilot cities selected for smart city project China’s Ministry of Housing and UrbanRural Development said 90 cities have been selected to pilot the nation’s smart cities project, an initiative aimed at providing fast and effective information services in areas such as traffic management, healthcare and environmental protection by using advanced technologies. The pilot cities include 37 prefecture-level cities, 50 districts or counties and three towns. China Development Bank will lend as much as RMB80 billion (US$12.7 billion) towards the project between 2013 and 2015. The ministry will evaluate the projects in the pilot cities after three to five years.

More than 6% imported goods substandard China’s quality watchdog said 6.19% of imported goods inspected last year, out of 4.5 million batches valued at US$952 billion, failed to meet standards. Of 13.9 million batches of goods to be exported, about 0.12% fell short of standards, the same level compared with the previous year. The General Administration of Quality Supervision, Inspection and Quarantine also stopped 4,331 kinds of harmful pests on imported agricultural products from entering China, including 284 types of “especially dangerous” pests.

Of 439 million people exiting or entering borders last year, 2,639 people were found to carry infectious diseases.

New regulations to protect consumers’ information Credit reference agencies must seek consumers’ consent before collecting their personal information and providing bad credit information about them, according to a new regulation approved at an executive meeting of the State Council. The regulation, which will take effect on March 15, is China’s first on the credit rating industry. Among other stipulations, it also states that agencies cannot collect personal income information

on individuals’ savings or real estate without letting consumers know about possible consequences or attaining written authorization. Personal information such as religion, fingerprints or medical history may not be collected. Agencies that do not abide by the new regulations will be fined RMB50,000 to RMB500,000 (US$8,000 to US$80,000).

SHANGHAI BUSINESS

Foreign banks in Shanghai earn RMB12.5b in profits Foreign capitalized banks in Shanghai earned total profits of RMB12.5 billion in 2012, their strongest ever performance, according to statistics from the Shanghai Regulatory Bureau under the China Banking Regulatory Commission. By the end of December 2012, foreign capitalized banks in Shanghai had total assets of RMB1.08 trillion (US$173 billion), total deposits of RMB572.9 billion and a loan book worth RMB424.3 billion.

Foreign currency loans granted by foreign

capital banks in Shanghai made up to 40% of Shanghai’s banking industry as a whole.

Shanghai has 22 foreign capitalized banks, 78 branches of foreign banks, 100 sub-branches of foreign banks and 83 representative offices of foreign banks, according to the Shanghai Regulatory Bureau.

Shanghai sees less trade in 2012 Shanghai posted a contraction in total trade for 2012, the first time in three years, with exports falling 1.4%, while imports continued to increase at 1%, according to the Shanghai Municipal Statistics Bureau.

Combined trade totaled US$437 billion, down 0.2% from 2011. The fall in exports to US$207 billion was largely attributed to decreased orders for a wide range of consumer goods. The service sector replaced trade as the main engine of growth, expanding to RMB1.2 trillion (US$192.8 billion) in 2012 – up 10.6% from a year before and contributing to about 60% of

the city’s economy. The added value of Shanghai’s financial industry was RMB245 billion, up 12.6%.

Shanghai reveals first rapid bus system The Shanghai Municipal Bureau of Planning and Land Resources unveiled the design blueprint of its first Bus Rapid Transit, or BRT system, a faster and more efficient bus service with its own dedicated lanes inaccessible to other traffic. The new system will cover Nanqiao New Town in Fengxian and Oriental Sports Center in Pudong New Area. Expected to serve more than 100,000 residents in the region, the BRT line will cover 33.5 kilometers with 17 stations. The bureau did not say when the construction work will begin. Shanghai traffic has continued to grow with more vehicles and commuting volumes. About 17 million people commute each day on average, of which 45% take buses while 36.6% use the metro.

CHINA & THE WORLD

ASIA-PACIFIC SIA PACIFIC SOUTH AMERICA

PAKISTAN: Gwadar port’s management to transfer to China Pakistan’s Cabinet said it has agreed to transfer the management of Gwadar port on the Arabian Sea from Singapore’s PSA International to China’s Chinese Overseas Port Holdings Ltd. because the former failed to develop the deep-sea port “as desired.” According to PSA’s Gwadar website, no ship has called on the port since November. The port is near the Pakistan-Iran border and the Strait of Hormuz, where some 60% of China’s energy requirements pass through. China provided about 75% of the initial US$250 million in funding for the construction of the port in southwestern Balochistan, a sparsely populated province rich in natural resources but marred with violence, sectarianism and separatist insurgency.

MIDDLE EAST

Microsoft and Huawei to sell smartphones in Africa Microsoft is teaming up with China’s Huawei to sell a low-cost Windows smartphone in Africa, the world’s fastest-growing smartphone market. The phone, called the Huawei 4Afrika Windows Phone, is priced at US$150 and will initially be sold in Nigeria, Egypt, Kenya, South Africa, Ivory Coast, Morocco and Angola. Sales growth of smartphones in Africa averaged 43% annually since 2000, according to industry trade group GSM Association. In sub-Saharan Africa, 10% of the 445 million mobile phone users have smartphones, but that is expected to increase rapidly as operators expand high-speed networks. In Nigeria, the continent’s most populous country, smartphone penetration is projected to reach 30% by 2017.

ASIA-PACIFIC SIA PACIFIC EUROPE

MIDDLE EAST EUROPE

AFRICA

NORTH AMERICA MIDDLE EAST

SWEDEN: Volvo and Dongfeng set up joint venture Dongfeng Motor Group Co. Ltd. and AB Volvo have signed an agreement to establish a joint venture in China’s central city of Shiyan, Hubei province. Volvo will acquire a 45% stake in a newly established subsidiary of DFG, Dongfeng Commercial Vehicles, for RMB5.6 billion (US$900 million). The JV will undertake research and development, production and sales of Dongfeng brand vehicles.

Dongfeng is China’s largest maker of heavy-duty trucks, with a 20% market share. Dongfeng Motor ranked No. 2 in terms of sales in 2012, with 3.08 million units sold. According to Volvo, the partnership will make it the world’s biggest heavy-duty truck maker in annual sales.

AFRICA

UNITED ARAB EMIRATES: Dubai’s largest bank launches RMB accounts Emirates NBD, Dubai’s largest bank and the biggest lender by assets in the United Arab Emirates, said it has launched renminbi-denominated accounts and deposits. The bank said the move is meant to help small and medium enterprises in the Kingdom that do business with China and cut their currency risks, suggesting that use of the RMB is starting to move beyond large companies to smaller firms. Currently, there are around 3,000 Chinese companies doing business in the Gulf state.

Emirates NBD joins a handful of other foreign lenders with operations in the UAE, such as HSBC and Standard Chartered, in offering RMB-based trade financing services.

SOUTH AMERICA MIDDLE EAST AFRICA

NORTH AMERICA

UNITED STATES: Chinese company’s biggest overseas takeover approved U.S. regulators have approved China National Offshore Oil Corporation’s (CNOOC’s) US$15.1 billion bid to buy Nexen Inc., a deal that will be the biggest overseas takeover made by a Chinese company. In a statement, China’s largest offshore oil producer said that the approval from the Committee on Foreign Investment in the United States (CFIUS) means the last major hurdle was cleared. The deal needed U.S. approvals because Calgary, Alberta-based Nexen holds assets in the Gulf of Mexico. The deal has already received approval from the Canadian government and China’s National Development and Reform Commission.

SOUTH AMERICA

SOUTHAMERICA AMERICA NORTH EUROPE

AFRICA NORTH AMERICA ASIA-PACIFIC SIA PACIFIC

BRAZIL: ICBC sets up subsidiary in São Paulo Industrial and Commercial Bank of China Ltd., the world’s largest lender by market value, said in January it has set up a subsidiary in São Paulo, Brazil, Latin America’s largest economy. In a statement, ICBC said that the establishment of the Brazilian subsidiary is another major breakthrough the bank has made in South America after entering the Peruvian and Argentinean markets, primarily forming its service network in South America and further enhancing its global service capability. Brazil’s central bank approved the license on Dec. 19. China is Brazil’s largest trade partner. According to data from Chinese customs, bilateral trade between China and Brazil has grown by more than 40% since 2009.

ASIA-PACIFIC SIA PACIFIC

10

insight

march 2013

ASIA-PACIFIC SIA AMERICA PACIFIC SOUTH

Movers and Shakers c o m p i l e d by j o y c e b i a n

Movers and Shakers highlights major personnel changes within the Chinese government at various levels and senior management-level movements within multinational companies in China.

CBRE Real estate services company CBRE Inc. appointed Ivan Poon as president of CBRE in China effective January 1, 2013. Poon is responsible for the operational performance of the company across all regions in China, working with the company’s China chairman and CEO in setting the strategic direction of the business. He is also responsible for the implementation of corporate initiatives to enhance the business platform and service delivery model operated by CBRE in China. Poon is a seasoned business management executive and has served in senior leadership roles at companies including DHL, Compaq and Kodak.

PRIVATE SECTOR CATERPILLAR Caterpillar Inc. appointed Chen Qihua as its China Operations Division vice president and country manager for Caterpillar in China effective January 1, 2013. Chen is a long-time Caterpillar employee and has served many key management roles since first joining the company in 1994. In his new role, Chen is responsible for interfacing between Caterpillar and key Chinese government leaders, as well as representing the company on industry issues in China.

INTERCHINA InterChina Consulting appointed Patrick Cranley as Director, North America, in January. Cranley will focus on developing InterChina’s business strategy and M&A advisory practices with clients headquartered in the United States and Patrick Cranley Canada. Cranley has held senior executive positions in China and the region since 1988. He was previously China country manager for CIGNA Corporation and managing director of AsiaMedia Ltd. He was also Chair of The American Chamber of Commerce in Shanghai in 2000.

GOOGLE Google Inc. appointed Karim Temsamani head of Asia-Pacific in early January. Temsamani was previously in charge of the company’s global mobile business. In his new role, he will oversee all of Google’s sales and operations in the Asia-Pacific

region, where the company has enjoyed rapid growth as demand for smartphones and tablet computers powered by Google’s Android operating software continues to be strong.

DOW CORNING

Jeremy Burks, Dow Corning Corporation’s Greater China president, has been appointed chairman of the Association of International Chemical Manufacturers (AICM) effective January 2013. Burks has served on AICM’s board of directors since November 2011, bringing extensive Jeremy Burks knowledge of leadership, management and development in the chemical industry to China.

GOVERNMENT Yang Xiong was appointed mayor of Shanghai in early February. Previously, Yang was acting mayor of Shanghai in December 2012 and vice mayor of Shanghai in 2003. He held several key positions in the Shanghai Development Planning Commission. He has also served Yang Xiong as president of Shanghai Airlines Co., Ltd. and chairman of the supervisory board of Shanghai Airlines.

If your company has executive personnel changes, please contact Joyce Bian at joyce.bian@amcham-shanghai.org.

march 2013

insight

11

d ea l o f t h e m o n t h B y E R I K A WA N G

U.S. approves Wanxiang’s US$257m purchase of A123 Courtesy A123

C

hina’s largest auto parts maker Wa n x i a n g G r o u p w o n U. S . government approval to buy the commercial assets of A123 Systems Inc., a bankrupt electric-car battery maker. The Waltham, Mass.-based company was sold in December for nearly US$257 million at a court-supervised auction where Wanxiang outbid Milwaukee-based Johnson Controls Inc., NEC Corporation of Japan and Germany’s Siemens AG. The acquisition was approved by the Committee on Foreign Investment in the United States (CFIUS), an interagency group led by the Treasury Department. The deal includes A123’s automotive, grid and commercial business assets along with their technology, products and customer contracts.

Also included are plants in Massachusetts, Michigan and Missouri; a factory in China; and an equity stake in Shanghai Advanced Traction Battery Systems Co., A123’s joint venture with China’s largest automaker Shanghai Automotive Industry Corp.

Wan x i ang s ai d it pl an ne d to r amp up manufacturing at A123’s facilities in Michigan and Massachusetts, while continuing operations at its

12

in s ig h t

MARCH 2013

existing factories in China. “We are excited to add A123 Systems to our growing portfolio of companies as we continue to expand on our strategy of investing in the automotive and clean tech industries in the U.S.,” said Pin Ni, president of Wanxiang America Corporation.

Critics from Congress and the U.S. military had asked CFIUS to block the deal on national-security grounds, maintaining that the sale would transfer sensitive technology to China and citing A123's defense contracts. Wanxiang attempted to quell those concerns by excluding from its bid A123’s Ann Arbor, Mich.-based government business and its U.S. military contracts, which were sold separately to Illinois-based Navitas Systems for US$2.25 million.

A123 had been at the center of the Obama administration’s US$2 billion loan program to stimulate the electric-vehicle industry and had received a US$249 million federal grant to spur domestic manufacturing of batteries. But weak demand and technical problems sealed its fate last October. The money raised in the auction will be used to repay the battery maker’s debts of about US$376 million.

The deal is the latest in a series of high-profile acquisitions of North American companies by Chinese firms. Last December, the Canadian government cleared a US$15 billion takeover of energy giant Nexen by the state-owned China National Offshore Oil Corporation (CNOOC). In 2012, Wanxiang completed five mergers and acquisition deals in the United States. The company so far has bought or invested in more than 20 U.S. companies.

Wanxiang generates about US$1 billion in U.S. revenue by supplying parts to General Motors Co. and Ford Motor Co. Its U.S. subsidiary, Wanxiang America, based in Elgin, Ill., has been operating since 1994 and currently has more than 3,000 employees.

IT’S HERE!

The new China Business Report is out.

The report compiles the results of the Chamber’s annual Business Climate Survey. First launched in 1999, it’s one of the longest running surveys of American businesses in China, and provides a detailed and focused look into the current business environment for American companies.

See what the report says about the transitioning China market and find detailed figures about how American executives in China view the business environment here today and their outlook for the coming years.

To see the full report or to purchase a copy, visit www.amcham-shanghai.org.

c o n s u m er s B y K u na l Sin h a

The New China Opportunity Kunal Sinha

Many rural residents are choosing to live closer to home and some figures show a greater appetite for consumer goods in those lower-tier cities

C

hina is a place undergoing enormous change, and the story of its breakneck economic growth has become the most compelling story of our times. But as this growth slows, especially in the coastal and toptier cities, interest in China’s many hundreds of smaller, lower-tier towns and cities has risen.

Many international marketers have discovered that China is vast, internally differentiated and resistant to foreign assimilation. At the same time, Chinese domestic firms have expanded their marketing and local distribution advantages.

As these firms have become increasingly competitive, Western commentators have repeatedly urged international firms to target lower- and middle-income groups outside premium metropolis markets and reach out into the lower tier. So, China’s smaller towns and cities have become the frontier between the past and its future; between urban and rural; between coast and interior; between fastpaced internationalizing markets and the slower, sentimental ways of the rural market town, where norms often remain regulated by the changing of the seasons and crop rotation.

While the affluent coastal regions continue to be important, we are starting to see stronger growth coming from the central and western regions which were previously untapped. For example, in 2011, the total fast-moving consumer goods (FMCG) growth in central/western regions reached 26 percent compared with 2010, while across total China, the growth was below 18 percent.

But it’s lower-tier cities which lead the growth

14

in s ig h t

MARCH 2013

that in turns fuels consumption. According to Kantar Worldpanel China, the volume of FMCG products bought per household expanded by 3.1 percent, 4.8 percent and 5.4 percent in provincial capitals, prefecture-level cities and county-level cities, respectively. The demand in the lower-tier cities remained buoyant to justify a strategy to

Joy City in Shenyang

grow distribution and consumer franchise in those critical growth spots – this, in spite of lower-tier cities having a higher savings rate than the big cities. Clearly, consumers there know how to manage their household budgets well.

Greater expectations The most popular hangout in Shenyang is called Joy City. You might as well rename it as Love City. Love, the handholding, ice cream-cone sharing, agonizing over a T-shirt kind of love, is played out here. In the central arena, huge signs in block English letters, proclaim “I LOVE YOU.” In one of the malls, the owners have reserved a graffiti wall for lovers to write their messages.

Local cafes do not mind if they occupy seats for several hours. The multiplex screens the latest romantic comedy Love in Space, which director Wing Shya called “a brand new type of romantic

story, it might also serve as a palliative for those suffering from a broken heart.” The film’s key message: Love can be found anywhere, even in space. The youth in Liaoning hope that they don’t have to travel as far.

The recent modernization of lower-tier cities – which has led to a proliferation of living, entertainment, employment and leisure options – is helping lessen the urge to migrate.

Ninety percent of the people we surveyed were happy to continue to live in the city of their origin. Residents of third- and fourth-tier cities appreciated the lower levels of pollution, the relaxed lifestyle, as well as the lower cost of real estate and living in their own cities.

While these factors have slowed migration from small towns and cities to big ones, the migration from the rural areas to cities is still a major phenomenon. Traditionally, these migrants thronged to the coastal cities with a concentration

march 2 0 1 3

in s ig h t

15

“

If multinational companies want to win in China, they will have no option but to redouble their efforts in the lower-tier markets.”

of export-oriented industries. However, the slowdown in the Western economies and its impact on the Chinese exports has changed this pattern. Many of the migrants now congregate to inland cities that are closer to home and are now the new centers of industrial activity. With higher d e v e l o p m e nt o f i n l a n d c i t i e s a n d m o r e employment opportunities, residents of smaller cities are more likely to realize their dreams in their hometowns or around.

Brands

130205 AmCham Half Page copy.pdf 1

Walking down the streets of Yiyang, in Hunan province, we encountered sports brand Gui Ren Niao and Anta, male apparel brand Sept Wolves and the bottled water brand Wahaha. Midea and Gree were the dominant brands in home 2/5/13 8:10 AM appliance retail stores.

MNC brands have much lower presence and

16

in s ig h t

MARCH 2013

preference in the smaller cities compared to that of big cities: there were seven MNC brands out of the top 10 most-liked brands in provincial capital cities, six in prefecture-level cities and only four in county-level cities and counties.

This is the result of several factors – including affordability and the lower level of marketing investment from most multinationals thus far in the lower-tier cities. But there is a remarkable parity in what consumers feel about multinational and local brands across the city tiers.

S ome l o c a l br and s are t a k i ng it up on themselves to be innovative. Taking note of the consumer’s closer links to nature, they find it advantageous to proclaim the use of natural ingredients. Youth Fair shampoo features papaya as an ingredient, while Pure Fruit hair color says it is “ecological.” While these local FMCG brands are carrying out their innovation on a superficial level, the brand that tops the charts of consumers’

favorite brands – Haier – is a true innovation champion.

According to Kantar Worldpanel, companies such as Kraft, COFCO, Nestlé, Uni-President and Mengniu achieved strong growth in 2011, with all of them recording faster advancement in lower tier cities than in first tier cities. For example, Kraft achieved three-point penetration growth in capital cities, but eight-point growth in lower tier cities. Nestlé maintained its penetration in firsttier cities, but managed to gain three points in lower tier cities. If multinational companies want to win in China, they will have no option but to redouble their efforts in the lower-tier markets.

In favor of the small cities Tier 2 Tier 3 & Tier 4 Base: All respondents

800

1,400

Not polluted

15 percent

38 percent

Relaxed lifestyle

19 35

Low living cost

11 25

Good public security 25 37 Source: Ogilvy Discovery – TNS study China Beyond – Change & Continuity, 2012

Loving luxury

billionaires who live in tier-two cities.

In Chengdu, Li Xingyi struts through a shopping center clutching a Louis Vuitton bag and wearing a red fur coat. The 25-year-old entrepreneur is one of a growing number of Chinese living outside the booming metropolises of Beijing and Shanghai who can afford to buy expensive designer brands and luxury products.

Li, who is married and has a son, said she spends about RMB20,000 a month – about a fifth of her monthly income – on luxury brands. Consumers in second- and third-tier cities tended to travel abroad less often than those living in tier one cities, and so made their purchases in China.

For U.S. companies entering China, the choice has to be a strategic one. Should you start with the top-tier cities, with its advantages of higher brand recognition and more cosmopolitan consumers with deeper pockets, or would you rather go s t r ai g ht t o a s e c on d - t i e r c it y w h e re t h e competition is likely to be lower and retail space cheaper?

According to the latest Hurun-GroupM Wealth Report, 53 percent of China’s millionaires live outside the top-tier cities of Beijing, Guangzhou and Shanghai; and there are nearly 2,500

Kunal Sinha is the Shanghai-based Regional Director – Cultural Insights, Ogilvy & Mather Asia Pacific.

Retail environment The success of the modern trade format stretches across all tiers, and it is not difficult to find a fair-sized supermarket even in a mid-level county town in China. Walmart operates stores in over 100 cities and towns in China and Carrefour has a presence in over 60.

However, the top home appliance chains such as Suning and Gome have not enjoyed rapid growth. This has compelled manufacturers to invest in self-owned channels to tap into market demand. Through its own chain store Goodaymart, Haier covers 92 percent of the small -town market – the distribution network comprises more than 9,000 stores in tier three and four markets; Changhong has set itself the target of 10,000 chain stores in three years.

This article is a shortened version of a story that will appear in AmCham Shanghai’s new Orientation China Guidebook that will be available soon. Look for the launch event details at www.AmChamShanghai.org.

march 2 0 1 3

in s ig h t

17

in t er v iew B y Dav i d B a s m a j ian

A Talk with the 2013 Chair

AmCham Shanghai’s 2013 Chair shares his thoughts on doing business in China and his priorities for the organization

R

obert Theleen probably knows China t h e w ay f e w o t h e r A m e r i c a n executives do and his background makes him a much sought-after advisor on doing business in this country. Theleen has lived in China for nearly three decades after he started his banking career in Dallas, Texas. He is the 2013 Chair of AmCham Shanghai and Chairman and CEO of ChinaVest, the oldest American merchant banking firm in Greater China.

ChinaVest was founded in 1981, and Theleen and his colleagues have advised many Fortune 500 clients. Theleen is also a trustee of the Asia Foundation and serves on the Board of Beijing Enterprises, a top Red Chip company on the Hong Kong Stock Exchange. The new Chair spoke to Insight’s David Basmajian about his experience here

18

in s ig h t

MARCH 2013

and his priorities for AmCham Shanghai. Here are excerpts from that interview.

Insight: Why did you want to be Chair of AmCham Shanghai?

Robert Theleen: “I guess it’s because I believe in what AmCham Shanghai represents. All the time I’ve been in China, almost 30 years, I’ve worked with American companies. And during that time, AmCham Shanghai has become the voice of American industry in China. For me, becoming Chair is the culmination of all the years I’ve spent here. I’m looking forward to being the ‘chief cheerleader’ for AmCham Shanghai and our member companies in 2013.”

Insight: What initiatives will you push for AmCham Shanghai this year?

RT: “I think there are two major initiatives and they are a continuation of where we started last year. First, is the Chamber’s expansion into the Yangtze River Delta (YRD) region with the YRD Center. We’ve started in Suzhou last year and will continue to expand AmCham Shanghai services and programs into the major cities of the YRD all the way through Jiangsu province. There is a strong, growing community of Americans in the YRD that is building into an American business community that is an extension of Shanghai.

“Another priority will be building out the AmCham Shanghai SME Center. Small- and medium-sized businesses have not been served as fully at AmCham as they should be. What’s really exciting about this initiative is that the center is not only a physical presence right here in the AmCham Shanghai office, there will also be a ‘virtual’ SME Center launched this spring as part of the launch of the Chamber’s new website. I see the SME virtual center as AmCham Shanghai’s ‘first office’ outside the United States because it will extend the Chamber’s services to SMEs in the U.S. who are interested in the China market. Those are two major initiatives I’ll be focusing on this year.

“More broadly speaking, the three things that I want to emphasize in 2013 is how do we leverage ou r k now l e d ge, how d o we l e ve r age ou r relationships and how do we leverage the AmCham Shanghai brand in this transitional period of time for China’s economy to benefit member companies.

China is moving from an economy of industry and manufac tur ing and invest ment to one of consumption and services. I think that’s where U.S. industry really shines and that the opportunity for American companies will be huge.”

Insight: Do you think U.S. companies are doing enough to stay competitive here in China?

RT: “China is different from other success stories in Asia because it’s the first continental economy that’s taken off and really built a large middle class.

Of course India is a large continental economy but it’s behind China. Every economy that’s taken off before China has been an island, a city state or peninsula. Japan, Taiwan, Korea, Hong Kong and Singapore never had the critical mass that would

leverage American company’s strength. The game is on for ‘China horizontal’ – that is, competing for China’s domestic market – and I think that U.S. companies are really starting to gain traction.

“And of course, multinational companies around the world now look at China as one of their most important strategic markets, so American companies are not alone here. We have to compete not only with Chinese companies but with a long list of global competitors. If you’re a multinational company, the battle of the 21st century will be fought first and foremost in China similar to the battle for the U.S. market over the past 25 years.

U.S. companies have to keep pace with branding, innovation and technology and they will have to move faster and better and more innovatively to succeed here.”

Insight: What’s your best advice for U.S. SMEs thinking about exploring the China market?

RT: “I think the most important thing is knowing what your principles of doing business are and not compromising those principles. A lot of companies come here and decide they have to change the way they do business. I don’t believe that. You have to maintain your own corporate principles. Secondly, learn before you leap. Many companies come here, are excited by the opportunities of the China market and make decisions prematurely. We always tell companies to suspend your judgment for a while until you can assess what is best for your company. That can take a while. Also, know that China is about relationships and that’s where AmCham Shanghai comes in. We’re in a pretty good place for a new company to find a safe haven of friendships and relationships that are going to help them. And finally, look at how companies fail as well as succeeded in China. Whether you’re in New York or Chicago or Shanghai or Beijing, learning about failure is just as important as learning about success.”

Insight: As you know, AmCham Shanghai’s president for the past eight years, Brenda Foster, will be leaving us this summer. What are some of the big challenges the next president will have to take on?

march 2 0 1 3

in s ig h t

19

“

If you’re a multinational company, the battle of the 21st century will be fought first and foremost in China similar to the battle for the U.S. market over the past 25 years.”

“

…He is the first president of China [Xi Jinping] who has spent time in the U.S. His daughter is being educated in the U.S., at Harvard, so he has a better feel for the global world.”

RT: “Well, since we can’t clone Brenda we have to look for somebody that will fill her very large shoes. Brenda has done a fantastic job at AmCham.

She taught us the importance of striking a balance between public policy and the private sector. In China, government and business are closely linked and you have to be able to move easily from one sector to the other. We’re looking for someone with strong business skills of course but also with a facility to work in the public sector. We’re also looking for someone who will bring new ideas to AmCham, perhaps someone with a geographically different background, someone who has their finger on the pulse of business around the world.

“The motto today for U.S. industry is ‘in China for China.’ It’s all about making a product or providing a service for the China market. It’s no longer outsourcing, it’s no longer looking at cheap labor. Our new president is going to have to understand things like logistics distribution, supply chain management, and will have to underst and t he s er v ice s e c tor as s er v ice companies start to facilitate this horizontal

development of the China market.”

Insight: Xi Jinping will be named president in March. What is your assessment of Xi and his possible impact on the business climate in China for U.S. companies?

RT: “There are three things about him that are intriguing. Number one, he is the first president of China who has spent time in the U.S. His daughter is being educated in the U.S., at Harvard, so he has a better feel for the global world. Secondly, his background suggests that he is pro business and an internationalist, having served in Fujian province which is a big part of the agriculture business establishment in China. And third, what he has said and who has become his premier, Li Keqiang, who is a known reformer.

“Some people would argue that a report issued by the World Bank and the Development Research Center of China’s State Council, China 2030, is his game plan for the future. That report calls for major reforms in the state owned enterprise apparatus, in the ministries and in the regulatory

Robert Theleen with Huang Qin, then vice mayor of Suzhou, during an AmCham Shanghai event.

Huang is now the vice mayor of Wuxi.

20

in s ig h t

MARCH 2013

system itself. I think he wants to send a message of openness, I think he wants to be a global president and I don’t think it’s controversial anymore to talk about aggressive reform. Will he have resistance? Of course he will but he’s going to have a lot of support too and it’s going to come from the middle class, from the educated class and it’s going to come from those making up the urban society that is rapidly growing part of the Chinese population.”

Insight: What is the role of Shanghai today in China and what does Shanghai aspire to be?

RT: “In 1989 I was in the building when the mayor of Shanghai Zhu Rongji opened the Shanghai Stock Exchange. He said something that seemed strange at the time. He said that in 1940, t his sto ck e xchange had a l arger marke t capitalization than Tokyo’s exchange and that they would do it again. When he said that 25 years ago

everyone sort of smiled and said that’s a nice idea.

But they’re doing it! Today, Shanghai is one of the most modern cities in Asia, it has first class infrastructure, it has a work force that is only to dream about attracting educated people from all across China. And as a financial center, Shanghai has made a lot of investment to attract the best banks in the world.

“By 2020 Shanghai is going to be a major financial center and it has already come a long way. Shang hai’s vision of its elf is a lways surprising. It never looks at itself as if it’s in a regional competition. I remember 10 years ago talking to the mayor of Shanghai and I asked him about competing with Hong Kong and he was quite surprised by that. He said we don’t think much about Hong Kong, we think about London, New York, Tokyo and London. And that is the mindset of Shanghai and it tells you something about what it aspires to be.”

march 2 0 1 3

in s ig h t

21

BUsinEss anD sOCiEty B y E r i k a Wa n g

A New Reason to Give Back setting and community success,” says Tracy Nilles, vice president of global corporate leadership at United Way Worldwide, one of the world’s largest nonprofit organizations.

From a company’s standpoint, a shared value approach involves looking at what its business and philanthropic priorities are and then working with a nonprofit organization to address a societal issue that brings benefit to the company as well as to the community so there is a “win-win” component, she explains.

Compared with traditional notions of CSR, viewed simply as a company’s “duty to give back,”

Courtesy the Dow ChemiCal Company

American companies in China are finding that CSR programs can also be good for the bottom line

A

merican companies that are eager to find ways to engage with local communities through corporate social responsibility programs may now have a new reason to go the extra mile: it’s proving to be good for business.

No longer confined to the altruistic endeavors of the past, a new breed of CSR has emerged that incorporates a “shared value” approach aimed at contributing to society while also driving business growth.

“Shared value is about engaging multiple stakeholders that are focused on long-term goal-

Students from Dow and Junior Achievement’s “Our City” program

22

insight MARCH 2013

Courtesy the Dow ChemiCal Company

Ross Ma, public affairs director for Greater China at The Dow Chemical Company

shared value is part of the core business for a company and aligns with its business plans, Nilles adds. “It’s fundamentally a shift from just giving versus being very strategic and deliver on what they’re investing in.”

What is more, when done properly, this practice provides a b o ost to t he b ottom line of a corporation, she notes. “So making it a company focus, in a sense, is a revenue generator.”

In China, some companies are already realizing the benefits that incorporating a shared value approach into their CSR strategy can bring to their business.

The Dow Chemical Company, for example, has partnered with education nonprofit Junior Achievement (JA) China to implement the “Our City (OC)” sustainability education program, a 10to 12-week course for third- and fourth-grade students that involves 40-minute class sessions plus a variety of events, competitions and workshops designed to introduce students to city life and help them understand the significance of environmental protection and the benefits of a sustainable lifestyle.

Dow provided funding and helped develop the courses, which incorporate Dow’s sustainable city

solutions such as Dow Water Solutions and Dow Building Solutions. Moreover, Dow employees serve as volunteer teachers.

“This is a very unique platform for leveraging D o w ’s s o l u t i o n s a n d t e c h n o l o g i e s a n d communicating its brand image among the younger generation,” notes Ross Ma, public affairs director for Greater China at Dow. “Many of these children may become Dow’s key stakeholders in the future, including customers, employees, government officials, partners or end users.”

Since the program’s launch as an elective course in 2008, the OC program has helped some 56,200 students and involved more than 2,300 volunteers and 1,000 teachers. The first phase of the program that started in 2008 benefited more than 28,000 students from nearly 200 primary schools in Beijing, Shanghai and Guangzhou, with more than 1,300 company and college student volunteers involved and more than 400 teachers trained.

In the second phase, Dow expanded its coverage to second- and third-tier cities such as Suzhou, Zhangjiagang and Chengdu, and it now includes more migrant schools and Project Hope schools – charitable schools for underprivileged students.

Model approach The rewards are clear: 92 percent of students said they enjoyed and endorsed the OC program and would participate again, 81 percent of students said that they would implement the 3 Rs (Reduce, Reuse, Recycle) in their daily life, while 94 percent s ai d t he y u nd e rsto o d t he i mp or t anc e of sustainability to a city’s development after taking the course.

The OC program was moreover selected to be featured as a model of innovative education at an event organized by the China Education Services Center last March. The program was chosen to be exhibited because of its alignment with the Ministr y of Education’s own goals around promoting sustainability and innovation in schools.

From JA’s perspective, the partnership is a winwin situation, too. “Dow and JA China both have a shared mission to improve sustainable development education in China, so collaboration on the OC program fulfills both organizations’ long-term visions,” says Gao Yang, executive director of Junior Achievement China.

MARCH 2013 insight

23

a priority Like Dow, another pioneer in shared value creation is Intel Corp. “Intel has quite a unique business model as our success depends on a vibrant ICT/PC industry ecosystem to thrive,” notes C.Y.

24

insight MARCH 2013

Yeung, CSR director at Intel China.

“When Intel first entered China a quarter century or so ago, there was not much a local PC industry to talk about,” he continues. “What we did from day one was to focus on how to help catalyze a vibrant ICT/PC industry.”

Top among the company’s priorities on this Courtesy intel China

Through close partnership with and expert input from Dow, JA China was able to develop the Our City course into a program that was at once international in perspective while also being closely suited to local needs, she notes.

As the Chinese education system looks to transition from rote learning to a student-centered style, partnerships like that between Dow and JA China will continue to play a key role, she adds.

Besides Dow, JA has also partnered with other multinational companies such as Dell and Goodyear in implementing education programs and initiatives in China. “We collaborate with companies whose vision, culture, innovative nature and dedication to China add value to our programs and result in the provision of stronger education to students across China,” notes Gao. To further create shared value, Dow has also worked with the China State Administration of Work Safety (SAWS) on a multi-year project, the S AWS -D ow Hazard ous C hemic a ls Safet y Management Demonstration Program, to help foster a strong culture of safe and responsible operation across the chemical industry in China.

Launched in 2006, the initial three-year program benefited more than 50 small- to medium-sized enterprises and more than 4,000 hazardous chemical safety regulators and managers through safety training seminars.

Ma explains that it was the company’s own efforts in the area of sustainability that led it to realize the benefits of shared value creation.

Starting in 1996 and for a 10-year period, the company invested US$1 billion to improve its work processes and enhance its energy efficiency and waste management by setting such targets as reducing injuries, leaks, spills and transportation incidents by 90 percent.

“Ultimately this drove more than US$5 billion in savings and efficiencies straight to our bottom line,” notes Ma. “What we learned was that doing good for the world and our community was also good business.”

C.Y. Yeung, CSR director of Intel China

front is educating the next generation. As part of its global Education Initiative to improve science, math, engineering and technology education, the chip giant implemented its Intel Teach Program to help primar y school teachers integrate technology into classrooms and promote studentcentered learning.

Since the program’s launch in 2000, Intel has collaborated with more than 100 universities in China and provided free resources to help train 2.1 million K-12 teachers throughout the country with the support of the Ministry of Education and local governments.

“We believe that the future of China depends on the availability of next generation innovators – that is why Intel has been very much focused on education,” Yeung explains.

Shared value itself takes center stage at Intel China’s Innovation Initiative for Non-profit (IINP), a n o p e n p l at f o r m l au n c h e d i n 2 0 0 9 f o r government, foundations, businesses, media,

Courtesy Junior aChievement China

Students at a Junior Achievement Job Shadow day at Goodyear

academic institutions and nonprofits to collectively promote innovation in the social sector.

IINP helps businesses gain entry and experience in the area of social innovation by allowing them to tap into a network of social sector organizations and providing opportunities for their employees to get involved as skill-based volunteers.

“With increasing social and environment challenges that comes with China’s economic development, we believe what China needs is social innovation in the social sector to grow inclusively and sustainably,” notes Yeung.

Indeed, social innovation in recent years has become an important platform in China for government, private enterprises and nonprofit organizations to share resources and knowledge aimed at alleviating mounting social challenges such as rising income inequality, an ageing population and a growing urban-rural divide.

And as long as businesses and entrepreneurs continue to implement innovative strategies to help tackle these issues, the private sector will play an increasingly important role on this front. Says Yeung: “As China transforms its mode of development to build out its social infrastructure, businesses have a lot to offer to support China’s smart, sustainable and inclusive growth.”

This becomes particularly evident when considering the inherent interconnectedness between society and business, as Nilles points out: “A company cannot be successful if the community is struggling. Making the community stronger benefits the company at the end of the day.”

Erika Wang is Senior Associate Editor at AmCham Shanghai.

interested in getting involved?

AmCham Shanghai’s Business Council for Sustainability and Responsibility (BCSR) offers a unique platform for multinational companies to collaborate and drive thought leadership, explore innovative approaches to CSR programs and impact China’s CSR and sustainability landscape.To learn more, contact AmCham Shanghai Government Relations and CSR Director Steven Chan: steven.chan@ amcham-shanghai.org.

MARCH 2013 insight

25

BETTING ON CHINA

Foreign venture capitalists in China see plenty of opportunities worth their money but over-regulation and red tape remain key obstacles By ian Driscoll

F

oreign visitors to major Chinese cities are often struck by the abundance of European and American brands. Even on a short stroll, they may come across companies as diverse as Apple, Buick, Coke, McDonalds, Prada and Starbucks. It can all feel reassuringly familiar.

Yet multinationals are not the only foreign-owned or managed entities building businesses in China. Less known are the venture capital (VC) and private equity (PE) companies that are investing in nascent local businesses. Whether focused on early-stage investments or minority investments in fast-growing private companies that have progressed beyond the start-up phase, their

26

insight

MARCH 2013

efforts are often unseen.

Yet not only are they building businesses that may later be sold or floated on stock exchanges at a profit, they are also playing a part in developing new areas of China’s economy.

Still, foreign venture capitalists and other alternativeinvestment firms operating in China endure many of the struggles familiar to multinationals. Unlike multinationals, however, which sometimes have deep pockets and patience for the long haul, venture capital and private equity firms are expected to profitably exit their investments within several years.

This often boils down to a focus on industries where corruption and state interference are arguably less common

ISTOCKPHOTO

c o v e r s to r y

“ Gary Rieschel, right, a founder at Qiming Venture Partners, chats with an investor

equity world, particularly on the RMB side more than the dollar side,” says Rieschel, an American.

Robert Theleen, chairman and CEO of ChinaVest, a pioneering company in the China VC industry, agrees that the VC and PE sectors suffer from over-regulation, especially given that the “VC/PE sector is meant to be the highest- risk end of the financial spectrum.”

He says that while the two industries’ combined funding is IMAGINECHINA

or disruptive than in other sectors. Another outcome has been to invest in companies and industries that don’t compete directly with cheaply funded state-owned enterprises (SOEs).

But perhaps the biggest hurdle VC and PE firms today face is not where to invest money, but how to take out profits. With the domestic IPO market somewhere between standstill and sclerotic, and the overseas market for Chinese IPOs muddied by the Sino-Forest scandal, alternative investors are struggling to capitalize on their investments.

Still, whether using RMB or USD funds (see box: “Parallel Universes”), PE and VC firms in China see value and growth in a number of industries, including IT, clean technology and healthcare. What they don’t see is a Silicon Valley-like nexus of innovation and capital, nor do they expect to.

There are signs of maturity in the ecosystem, some of it led by local entrepreneurs rather than funds.”

regulatory hurdles A formidable challenge for PE and VC firms is the multilayered and often duplicated nature of China’s financial bureaucracy, particularly with regard to RMB funds, says Gary Rieschel, a founder at Qiming Venture Partners, a VC group with offices in Shanghai, Beijing and Hong Kong that controls over USD $1 billion spread across five USD- and RMBdenominated funds.

“There are multiple ministries that vie for control over private equity – SAFE [Securites and Foreign Exchange Commission], the Ministry of Finance, the NDRC [National Development and Reform Commission], the local municipalities, the CSRC [China Securities Regulatory Commission], and last but not least, the tax local authorities. You have a very robust set of institutions all trying to figure out their stake or role in regulating the private

Qiming’s investments include Xiaomi which apparently is the fastest company in the world to reach US$1 billion in sales

MARCH 2013 insight

27

more than US$200 billion, it’s still small when compared to all Chinese risk assets, including shareholders’ funds, long-term loans, short-term loans and the bond market. “Regulators tend to interfere with the innovative and risk-taking process. I would encourage more relaxed rules Brett Tucker of deploying capital in these categories,” adds Theleen.

Another issue – one echoed by other alternative investors and local entrepreneurs – is that state-owned enterprises benefit from cheap loan rates from state-owned banks, giving them a competitive advantage over privately funded companies.

“For a lot of state-owned enterprises, capital has been free and when money is free, you don’t pay much attention to what you do with it,” says Rieschel. “You have a lot of state-owned enterprises entering industries like wind and solar where you have massive over-capacity, and the only way to compete is on price.”

Rieschel says that gross margins for the solar and wind power industries are below 10 percent. “How can you possibly have a healthy industry when there is no margin? You can’t fund your R&D for next-generation products,” he says.

PaRallel UniVeRSeS

the ecosystem While multinational executives and VC and PE heads in China

a look at funds and convertibility

Since their outset, foreign VC and PE funds were denominated in U.S. dollars.

As such, they endured several inefficiencies, such as the complicated and lengthy process of converting USD funds into RMB before investing.

Huoy Ming Yeh

But beginning in 2009, the Chinese government began allowing foreign VC and PE managers to also offer RMB-denominated funds. Many have since done so, sometimes at the behest of private Chinese investors impressed by their track records with USD funds.

Others have attracted Chinese government funds alongside those of individual investors. Competing with them are domestic RMB funds, often established by Chinese citizens who once worked at Western PE and VC firms.

One apparent plus of foreign-managed RMB-denominated funds

28

Executives in the foreign solar industry echo Rieschel’s words, but have often gone a step further. Some blame the cheap funding provided by China Development Bank (CDB) to a variety of Chinese manufacturers as the catalyst for dumping on the worldwide market. Among the more recent beneficiaries is Sky Solar, which in late 2012 received a US$1.6 billion loan package from CDB. “The Chinese strategy is very clear. They are engaging in predatory financing and they’re trying to drive everybody else out of the market. When you’ve got free money you can outdump everybody below cost,” said Bryan Ashley, an executive at Georgia-based Suniva, in a widely circulated 2011 interview with Climate Progress.

Another concern is infringement of intellectual property.

Though a daily worry for Western companies operating in China, VC and PE firms say it also damages fledgling local enterprises.

“Chinese entrepreneurs need to be encouraged to do fundamental innovation – stuff that’s life-changing,” says Huoy Ming Yeh, managing director at SVB Venture Capital Investment Management, a unit of California-based SVB Financial Group.

The trouble, she says, is that few are doing it.

insight

MARCH 2013

was that their onshore nature would allow them access to certain industry sectors previously off-limits to USD funds.

(Though some industries, including coal, media and anything related to defense, were expected to remain off-limits.)

Alas, the exact source (or flavor) of the RMB funds and nationality of co-investors has clouded matters. Indeed, initial optimism about the QFLP (Qualified Foreign Limited Partner) program opening up areas of investment previously off-limits soon dissipated after one large PE fund was informed that its QFLP funds would be treated the same as other foreigninvestment projects.

Where there may be fluidity is when the domestic RMB funds are sourced uniquely from domestic sources, but managed by foreigners. For the time being this remains a legal gray area, though some city government’s have offered de facto support.

Another source of fluidity (and opacity) is the central

c o v e r s to r y

share many of the same concerns, the latter also have to focus on the issue of their “ecosystem.” The age of that ecosystem is one of the major differences between the U.S. and Chinese VC sectors.

“The U.S. industry is more mature as it has been an institutional part of the U.S. economy since the 1960s,” says Theleen.

“A healthy private equity ecosystem needs buyers, sellers, intermediaries and sources of finance,” says Brett Tucker, partner at Baird Capital Partners Asia. “In China one of the biggest things missing today is people who connect opportunities with capital in a professional way, mostly because there is an unwillingness to pay for advice or services.”

There are signs of maturity in the ecosystem, some of it led by local entrepreneurs rather than funds. Rieschel says from about 2005, local entrepreneurs became more selective about who invested in their companies. “Now you have to have knowledge of their industry, and they have to like you,” says Rieschel.

investing Dennis Montecillo, CEO of Hong Kong-based Diamond Dragon Advisors, an alternative asset advisory and fund placement firm, says that China’s attraction for PE and VC funds can be attributed to several factors, including some purely macroeconomic ones.

“In a nutshell, China’s 5-year average growth rate has been

government, with some industry administrators more relaxed about foreign investment than others.

Both Qiming and SVB now run their own RMB funds. Qiming’s two funds, which are open to private investors, attracted some RMB1 billion. Unlike its USD funds, which have a five-year investment period and another five-year management and harvest period, Qiming’s RMB funds are typically invested over two to three years and then managed and harvested over another three. This arrangement suits the expectations of Chinese investors, who are usually reluctant to tie up money for as long as Westerners.

SVB Partners, meanwhile, manages the VC portion of Shanghai’s Yangpu District “guidance” fund. The Yangpu monies are distributed across a fund of funds as well as a direct investment fund. Both aim to take advantage of highgrowth opportunities.

9.3 percent; the U.S. growth rate has averaged 1.7 percent.

People deduce that the chances of making money in private equity opportunities are higher in China than in the U.S. for this reason,” says Montecillo.

Montecillo says that relative per capita income is a factor too, and points to China’s US$5,445 per capita income versus US$48,112 in the U.S. “If you believe in mean reversion and the law of fungible global capital flow, you can easily conclude that resources will chase after the part of the world where the expectation is that the lower GDP figure will grow at a faster rate than the higher figure, thereby creating more investment opportunities,” says Montecillo.

Malcolm Clark, managing director of San Francisco-based Glenvedon Advisors, an advisory firm focused on Asian private equity markets, says that China’s sheer market potential, especially compared to smaller Asian markets, also explains China’s luster within emerging markets as a PE investment destination.

So where are the VC and PE fund heads putting their investors’ money?

Because of the nature of their industries, most managers of PE and VC funds are reluctant to talk about their investments except in general terms. (“It’s called private equity for a reason,” says Rieschel).

Still, it’s evident that the information-technology, healthcare and green-technology sectors are attracting PE and VC money.

For most foreign funds, however, the issue of USD convertibility remains the bête noire of their China business, and one they hope will eventually be resolved.

Walker Wallace of law firm O’Melveny & Myers LLP sees the issue as two-fold. “First, it means that it is hard to pool both RMB sources of capital and foreign sources of capital into a single fund. Instead, you have to have parallel funds that somehow balance returns between the two platforms,” which, says Wallace, can be very complicated. “Second, FOREX restrictions act as a de facto mechanism to enforce China’s restrictions on foreign investment in certain sectors.”

Or as SVB Capital’s Huoy Ming Yeh puts it: “The biggest difficulty is that the RMB is not convertible. No other market in the world has dual currency investment communities; this is really about two parallel universes.”

MARCH 2013 insight

29

IMAGINECHINA

Some say the China Development Bank provides cheap funding to Chinese manufacturers which is a catalyst for dumping on the worldwide market

Indeed, VC firms are investing in a broader range of industries than their U.S. counterparts, suggests ChinaVest’s Theleen.

“The VC industry in the U.S. tends to focus on technology and advanced innovation in IT, biotech, and other advanced industries,” he says. “In China, the VC industry is active across a wider band of industries since the more advanced sectors in China are less developed.”

Given the firm’s Silicon Valley heritage, SVB Capital’s investment in what Yeh calls “the general tech space” is unsurprising. This includes networking, hardware, software and cloud-based information technologies. The firm avoids green technologies because their fund size is small and those investments usually require considerable investment.

SVB is also interested in healthcare, with an emphasis on the hospital services and devices side rather than on biotech. “I believe hospital services is the next big wave in China,” says Yeh. “The population is aging and the hospital infrastructure is a lot less developed than elsewhere. Hospital waiting times can be five hours or more.”

30

insight

MARCH 2013

Rieschel says Qiming is focused among other things on the “inter-sumer,” or “deals which dis-intermediate regular distribution channels” and address distribution inefficiencies.

Those distribution inefficiencies include not just traditional transportation bottlenecks, but also the graft that may accompany them.

One of Qiming’s investments is Xiaomi, “a phone company modeled on Apple. It’s the fastest company in the world to reach US$1 billion in sales, and it’s profitable,” says Rieschel. “It bypasses the normal phone distribution channels and sells phones directly to its customers.”

Besides e-commerce, Qiming invests in cloud-based enterprise solutions, mobile-based applications and data analytics. Another area is healthcare, “We look at outsourced services and devices but also diagnostics and genetic typing – things that are efficiency plays that China can apply a lot of intellectual power to,” says Rieschel.

Other areas include clean technology and energy storage and distribution, including waste-to-value investments. Often

c o v e r s to r y

the technology is imported, says Rieschel, because foreign development teams are still ahead of those in China. Those technologies are then used to address water-and-air-quality issues, for which there is demand in China.

Baird Capital’s Tucker says his firm concentrates on three primary areas: healthcare, manufacturing and business services.

(Investments in the last sector include outsourcing companies, education services, and niche consulting.) Tucker says Baird takes minority stakes, usually somewhere between US$5 million and US$10 million, and expects to be invested for four to five years. Interestingly, Tucker says the kind of investments it makes in China would not ordinarily be available in markets like the U.S. This is because much of the China growth equity market is working capital finance, which is often supplied by banks in developed countries.

“Thankfully, a lot of what’s being financed here would normally be financed by banks elsewhere. But banks here are not engaged in cash-flow lending but rather mostly asset-based lending,” says Tucker. “If you are a small, private growing company and you don’t own your land or buildings it is very difficult to get a loan, so most entrepreneurs turn to private equity.” A further reason for Chinese banks’ apparent lack of interest is that they lend primarily to state-owned enterprises, which leaves a gap for the likes of Baird and others.

So having identified an investment opportunity, what keeps Tucker awake at night? “It’s: ‘Do I know who I am dealing with?

Do I understand the numbers? And are we and the entrepreneur on the same page regarding the future?’” he says.

a chinese silicon valley Many observers of China’s huge technological leaps wonder if it will develop its own Silicon Valley, a sweet spot where software developers and venture capitalists work in close proximity and a pool of engineering graduates from world-class universities is down the road.

Arguably, the Zhongguancun area of Beijing has elements of Silicon Valley, with many software companies setting up near Tsinghua University. Elsewhere, the city governments of Shanghai and Shenzhen have given their imprimatur to efforts to create hubs of innovation and capital, as has Zhejiang with its Science Park.

The effect resembles a crescent of minor hubs stretched along China’s eastern coast. Then again, does China necessarily need to emulate the circumstances that led to Silicon Valley?

“It’s not realistic to recreate Silicon Valley, and it’s not necessary,” says SVB Partners’ Yeh, who thinks that every market is different and that VC and PE ecosystems don’t have to duplicate the one found outside San Francisco.

exiting VC and PE, like other investment classes, are about making money, and that usually occurs when their investments are acquired by larger firms or floated on a stock exchange. The trouble now is that the IPO market for Chinese listings has virtually dried up, whether in China itself or on foreign exchanges.

Overseas interest in Chinese flotations has soured because of a series of accounting and fraud scandals that have affected Chinese stocks, most notoriously Sino-Forest Corp. Caterpillar Inc.’s recent discovery of fraud at its ERA subsidiary Zhengzhou

“

Besides e-commerce, Qiming invests in cloud-based enterprise solutions, mobile-based applications and data analytics.”

Siwei Mechanical & Electrical Manufacturing will only worsen foreign perceptions of Chinese companies. Additionally, the performance of Chinese companies floated on NASDAQ in the past four years has been anemic.

Listings in China are based on government selection. PE and VC executives say several hundred companies have filed to go public and are now being evaluated or have been approved for listing. The trouble is that the poor performance of the Shanghai stock market in recent years has eroded public confidence in stock ownership. It has also made the government more conscious of protecting individual investors.

For VC and PE firms used to the six-month listing in the U.S., the 18 to 36 months it now takes in China can delay their ability to liquidate their investments. And unlike in the U.S., where companies can list without being profitable, “in China there are stringent requirements for revenue and profit numbers, and for growth rates,” says SVB’s Yeh. Of little help, too, was last year’s

MARCH 2013 insight

31

Party Congress, which mired the already slow and hierarchical decision-making process of the Chinese listing authorities.

Where to invest?

“Competition isn’t a big concern,” says Baird’s Tucker, whose investments are relatively small compared to some of those made by large U.S. PE funds. “Because RMB funds are structured very differently due to materially shorter investment periods and fund lives than foreign currency funds, it is a pretty different style of investing and we don’t run into them very often.”

Still, for PE funds investing US$25 million or more, the China-domiciled RMB-funds pose a threat, says one PE industry veteran. With shorter fund lives than those funds managed

by Western firms, it has led, in some eyes, to a bidding up of asset prices. And that’s making it difficult for some Western PE firms, with their longer investment horizons, to compete for investments, says Paul Waide of Amalfi Capital, a long-short hedge fund that trades public Chinese technology stocks.

Also belaboring the foreign VC and PE communities is

government intransigence, an unstable investment framework, and an absence of international standards for inward investment (see box: “A Lawyer’s Perspective”).

But there are positives. The advent of RMB funds, though heralding competition from local PE and VC funds, has meant that foreign firms can now attract local capital rather than just their traditional investors, such as U.S. state pension funds. For example, SVB Capital, through an RMB fund, now manages the VC portion of Shanghai’s Yangpu District’s guidance fund. And despite the rise of RMB funds, USD investing continues.

So where and how should VC and PE firms invest in the future?

ChinaVest’s Theleen believes that China’s transition from a tangible-asset to an intangible-asset economy offers opportunities for these early-stage investors. “For the first 35 years of reform, basic industrial development, such as light and heavy manufacturing, infrastructure and retails services have been at the heart of China’s miraculous growth,” he says. “Today growth must turn to sectors which are intangible in value. By that I refer to innovation in technology, advanced service sectors, both retail

ISTOCKPHOTO

Zhongguancun in Beijing is often called the “Silicon Valley of China”

32

insight

MARCH 2013

c o v e r s to r y

a lawYeR’S PeRSPeCTiVe

Healthcare is a high potential investment

and industrial services and, finally, brand development. These are the hallmarks of advanced economies in the West and where China is surely heading if it is to avoid the so-called ‘middleincome’ ceiling.”

For anyone thinking of investing in China today, Theleen offers a simple maxim: “Invest in brainpower rather than brawn.”

For foreign VC and PE firms, that sounds like good news.

Because even if they bridle at certain industry sectors remaining off-limits, being channeled into emergent areas like information technology may yet bring rewards.

“The first really global Chinese firm will be a high-tech one,” adds Waide.

Walker Wallace, a partner in the Shanghai office of O’Melveny & Myers LLP, points to several areas of the law that he believes hinder the work of PE and VC firms in China. Improvements would not only make the lives of alternatives investors easier, he says, but might also lead to greater wallace walker foreign investment.

One of Wallace’s concerns is the variable interest entity (VIE), a common legal structure used for offshore listings of Chinese companies, often because it lets overseas investors avoid restrictions on foreign investment in China. One benefit is that it allows for a simple consolidation of the company’s accounts into the financials of a listed entity. The trouble, says Wallace, is that it’s a fundamentally unstable structure, one from which a Chinese CEO can walk away.

Another hurdle Wallace identifies is the multitude of barriers to Chinese companies restructuring themselves for offshore listing as “red chips.” Instituted by the Ministry of Commerce and the State Administration of Foreign Exchange, these barriers have met with varying degrees of compliance.

“The current barriers reward people who are willing to break the law and act as a penalty for people who try to comply with the law, because they have to go to considerable legal and tax expense if they want to restructure to allow themselves to list overseas and attract foreign investment,” says Wallace.

Wallace also said China lacks a legal regime that facilitates international standards of inward investment. “If you want to invest directly into a Chinese company to do a PE/VC deal, you have to use joint venture laws. These were never designed for PE/VC-style investment; they were designed for greenfield manufacturing-style investment in the early days of China’s growth, when the Chinese needed to be really protective of industry.”

He says that many of the traditional features of typical PE/ VC transactions – preferred shares, redemption features, preferred dividends, etc. – are absent in China because of the limitations of joint venture laws. Wallace credits the PE and VC industries for having been vocal with their concerns. And he gives credit to various Chinese government agencies for implementing legal reforms that have benefitted investors.

After some eight years of government discussions, he now senses “rumbles that VIE is not sustainable.”

Still, he says, “China has made meaningful incremental legal reforms, but there’s a lot more it could do to boost foreign investment.”

ian Driscoll is a freelance writer based in Shanghai.

MARCH 2013 insight

33

intERviEW B y D av i D B a s m a j i a n

The Food Safety Conundrum A top food safety official in Shanghai talks about what’s safe, what’s risky and how the city is cracking down on unsafe practices

A hotpot meal

A

t t he end of 2012, Shang hai proposed tough new laws that would blacklist firms caught breaking the city’s food safety regulations. Businesses found to be using banned substances in food, producing food from inedible ingredients or illegally making, selling or using banned food additives may find themselves barred from operating in Shanghai.

It’s the latest in a string of new laws and regulations announced in the wake of the melamine baby formula scandal of 2008 starting with the Food Safety Law. Yet the actual impact of these far-reaching new policies is unclear. What we do know is that regulating China’s fragmented food industry is a monumental challenge and that local regulators have a tough task ahead of them.

Gu Zhenhua is on the front lines of the battle

34

insight

MARCH 2013

to clean up Shanghai’s food business. He’s the deputy director general of Shanghai’s Municipal Food Safety Committee (SHFSC). Gu sat down with Insight to talk about the reality of enforcing food safety laws in Shanghai, what you should look out for as a consumer in Shanghai and highlighted a few of his recent successes.

He re are e xc e r pt s f rom ou r i nte r v i e w with Gu Zhenhua, deputy director general of the Office of Shanghai Municipal Food Safety Committee.

Insight: In China, consumer confidence in the safety of food has been a concern. What advice would you give to consumers in Shanghai to ensure that they eat safe food?

Gu Zhenhua: “Concern of food safety reflects a reality that Chinese consumers have moved from

having food to eat to asking for quality food. There are three indicators of food safety used around the world. First, the qualified rate of food sampled for inspection. In 2005, Shanghai established a sound system to inspect food and monitor food supply channels. Every year, we qualify food based on 300,000 pieces of data. In 2012, the qualified rate was 94 percent.

“Second, the occurrence rate of food-borne illness. In China, reporting of incidents of foodborne illness is not legally compulsory and therefore there might be unreported incidents. In 2012, the occurrence rate of collective food safety incident involving 10 people or above in Shanghai was 0.63 for every 100,000 people.

“Finally, public awareness of food safety knowledge. In 2012, the rate was 80.1 percent, which means the average consumer surveyed knows up to 80 percent of the answers of the yearly survey questions.”

Insight: What is your biggest challenge when enforcing food safety regulations? Is there a par ticular par t/categor y of food that’s most challenging?

GZ: “For a city of 23 mi l lion consumers consuming nearly 1,000 tons of food daily, there are a few challenges we see. The source of the food in Shanghai is the first. Eighty percent of food consumed in Shanghai comes from outside of Shanghai. That means food that is supplied to the city may have already been contaminated when farmed or grown. While we have increased sampled inspection, as a regional authority, it is not possible for us to inspect all food that is supplied to the city from outside in the way that a nation would do with imported food. This is a big challenge for us.

“Second, in Shanghai, a lot of food manufacturers are still small- and medium-sized companies. The awareness of food safety enforcement among some of the manufacturers is low and there is no rarity of manufacturers violating food safety regulations.

“Third, the mere number of food manufacturers also poses a challenge. This might be different than in the U.S., where companies are more selfdisciplined. In Shanghai, the government has to spend a lot of effort educating, regulating and

monitoring food manufacturers.

“In terms of food that’s more risky, most daily consumed food, such as staple food, vegetables and meat has a high qualified sampling inspection rate. However, farm-raised freshwater seafood is relatively of high risk. A lot of uncertified medicines are being used when being farmed or transported and this is a threat to the health of the consumer. Another challenge is the illegal use of food additives. Even non-food additives are being used, such as chemicals. Finally, prepared food that is provided by some small vendors that are for direct use without being further processed is of relatively high risk as well.”

Insight: Can you talk about a specific case where SHFSC cracked down on a manufacturer that had a food safety violation?

GZ: “I have two examples. Recently, a hotpot restaurant was found recycling soup base and using it multiple times. The case was found through a whistleblower who worked at the restaurant. Practices of this kind are not easily found by regulators because they are done backstage. We investigated and indeed ascertained the malpractice and, surprisingly, the restaurant

Gu Zhenhua, deputy director general of the Office of Shanghai Municipal Food Safety Committee

MARCH 2013 insight

35

“

…Farm-raised freshwater seafood is relatively of high risk. A lot of uncertified medicines are being used when being farmed or transported and this is a threat to the health of the consumer.”

“

The awareness of food safety enforcement among some of the manufacturers is low and there is no rarity of manufacturers violating food safety regulations.”

had been in operation for a relatively long time.

Given that the restaurant had seriously violated China’s Food Safety Law, we revoked its license and also reported the case to Shanghai Public Security Bureau for criminal prosecution. As of now, the people liable for the malpractice have been arrested.

“Another example is the case of a dair y producer. The producer has several production lines that are automated pipelines interconnected with each other. When one production line was shut down for routine cleaning, the others were still in operation and theoretically they should not have been affected. However, because the valve inbetween snapped due to the high pressure from the pipeline being cleaned, the alkaline detergent used for cleaning leaked into the rest of the pipelines without the company’s knowledge. Once found and reported by the consumers, we investigated. The company was cooperative and it identified and recalled the batches of cartoned milk that were produced during the leak that lasted 10 minutes.”

trying to read published information?

GZ: “In addition to the Shanghai Food and Drug Administration (SHFDA) and SHFSC, companies should also look out for updates on food safety information from relevant government bodies such as the Shanghai Bureau of Quality and Technical Supervision, Shanghai Bureau of Industry and Commerce, Shanghai Agriculture Commission and others. Another channel is to use the 12331 hotline. It is an effective way to keep up to date with regulations on food safety in Shanghai. In addition, since we’ve established contact today, your members could also look for information through email exchanges with us. (guzhenhua@smda.gov.cn).”

Insight: How do you educate the public about food safety?

GZ: “To ensure food safety, there are three important key components.

Insight: How does Shanghai compare with other cities in China on food safety?

GZ: “It’s difficult to draw a conclusion by simple comparison since China’s regional governments have le e way to come up w it h t heir lo c a l regulations while on a national level any law or regulation supersedes regional governments.

However, there are a few things I would like to highlight about Shanghai. First, Shanghai was the first to introduce a local food safety law in China.

Second, Shanghai was the first to start a hotline for food safety inquiries, food safety violations and complaints. Finally, Shanghai was also among the first ones to establish relatively sound food safety risk monitoring and assessment systems.

“Despite this, there are still areas that Shanghai could learn from other cities. But I am confident to say that as far as food consumers purchase from certified food providers or supermarkets, the food is safe.”

Insight: Many of our members are in the food and agriculture business in China and Shanghai. What would you say is the best way for American companies to abide by the regulations other than

36

insight

MARCH 2013

Vegetables are often tested for illegal products

Farm-raised freshwater seafood are “high risk,” says a local official

“First, the responsibility of government including establishment of laws, rules and regulations, monitoring system, law enforcement and sampling for inspection. Second is how food manufacturers carry out their business activities following food safety laws and regulations to produce food of good quality. And finally, the consumers should consume discernibly and report to authorities when incidents of food safety violation take place.

“Public food safety education in Shanghai is conducted through the following ways. Every year, we have several public food safety education campaigns through the media, including TV, radio, newspaper, websites, etc. We also hold trainings that include on-site info sessions in communities, rural areas, construction sites, factories, schools and organizations of all kinds.

We publish and distribute food safety knowledge

materials and hold food safety knowledge contests. In 2012, we also had an online food safety knowledge contest.”

Insight: Is there anything you would like to tell us about SHFSC or is there anything that AmCham Shanghai could do to enforce or improve food safety in Shanghai?

GZ: “Shanghai Food Safety C ommittee is an organization of the Shanghai Municipal Government that coordinates the efforts of multiple government organizations that are involved in food safety regulations. We welcome AmCham Shanghai and American companies to share with us the best practices of the U.S. in food safety regulation and provide suggestions on food safety regulations. We would be glad to learn and take them into full consideration in the future.”

MARCH 2013 insight

37

l e g a l u p d at e

By Eric Meng

Agency Simplifies Transaction Rules Foreign investors welcome move to drop 35 foreign exchange regulations

F

oreign investors and businesses no longer need direct approval from the Chinese government to conduct several foreign exchange transactions, according to new rules that took effect in December. The changes are expected to slash the amount of time needed to process such transactions, experts say.

Investors who wish to open bank accounts, transfer money and use profits earned in China for further investment will be able to do so under these changes. In essence, instead of seeking approval from the State Administration of Foreign Exchange (SAFE), the national agency which promulgated the new rules, foreign investors and businesses can now just register

38

insight

March 2013

transactions with their banks.

The changes were announced on November 19, 2012, in the “Circular on Issues Concerning the Further Improvements and Adjustments of Administration Policies of Directly Invested Foreign Exchange” published by SAFE. It ended 3 5 fore i g n - e xc h ange approv a l r u l e s an d simplified others, and may significantly reduce the workload needed for applications.

“Previously, companies dealt with SAFE d i re c t ly, an d t h e re we re b a ck - an d - for t h communications with SAFE officers,” says Yi Lu, a partner in the Shanghai office of law firm Paul Hastings. “If SAFE asked them to see five necessary documents, they’ll need the five documents, but there will be less substantive review.”

The new rules may signal yet another step by the Chinese government to improve t he foreign investment climate, some say. “This shows that the government realizes that bureaucracy and redtape are a hindrance to business in general,” said Maarten Roos, manag ing p ar t ner of R&P China Lawyers, a foreign-managed Chinese law firm based in Shanghai.

T h e ch ange s c ome a s fore i g n d i re c t invest ment in C hina de cline d in 2012.

According to Ministry of Commerce data, FDI fell 3.7 percent to US$111.7 billion, the first time inbound investment declined for a full year since the height of the economic problems in 2009.

“The general trend last year and this year has been to ease restrictions and procedural requirements for foreign investments,” says Lu. In addition to SAFE, other agencies have announced changes intended to facilitate foreign investment. For example, in September, the State Council directed agencies to reduce administrative approvals, following its August directive modifying or removing 314 examination or approval items.

“We predict further simplifications in the coming years,” says Roos, referring to the inaugural speech delivered by Communist Party General Secretary Xi Jinping.

The new rules will impact foreign investors, foreign-invested enterprises and foreigninvested holding companies. The changes will no longer require foreign-invested enterprises to obtain SAFE’s approval to increase their registered capital with reser ves and undistributed profits or to convert registered foreign debt into registered capital. They will also not need permission to transfer certain proceeds to foreign shareholders. Holding companies no longer need SAFE’s approval to wire money for reinvestments in China, and subsidiaries of holding companies in China no longer require SAFE’s approval to wire profits and dividends back to their holding companies within China.

Certain districts have already started to implement the new procedures, according to Roos. And banks, especially foreign-invested b an k s , are “ve r y wel l-pre p are d for t he changes” and have had internal training and updated IT systems and forms so that they are ready for implementation, says Lu. But even with recent reforms, foreign

Xi Jinping

investors still face a host of regulatory obstacles.

In contrast to the United States, where foreign investment is only subject to specific approvals such as for national security and environmental compliance, investment projects in China need to not only pass specific approvals but also a general project approval and a foreign investment approval.

“Foreign exchange is only part of the broader approval regimes,” says Lu Ning, counsel in the Beijing office of law firm Covington & Burling, which recently published a report on the foreign investment approval process in China with the U.S. Chamber of Commerce.

March 2013

insight

39

“

The new rules will impact foreign investors, foreign-invested enterprises and foreign-invested holding companies.”

inside amcham from the chair

A Challenging Yet Exciting Year Ahead

Robert Theleen Chair of the Board of Governors

A

s the incoming Chair for 2013, I wish to begin with a heartfelt thanks to Ken Jarrett, who led us through a remarkable 2012 for AmCham Shanghai, and to our President, Brenda Foster, whose skills, energy and wisdom have been the foundation of the Chamber during her presidency for the past seven years. She has built a talented and dedicated professional team that will serve us all well in the years ahead. The board will have a challenging task of finding her replacement.

In 2012, the United States government formulated its “pivot to Asia” foreign policy initiative, recognizing the importance of resetting our international priorities to the Asia-Pacific region. Some would argue that this shift might reflect a growing concern about the rise of China, both economically and politically. I believe it reflects an optimism that China and the Asia Pacific, as a whole, will continue to grow and to integrate regionally.

The Year of the Snake promises to be both challenging and exciting for AmCham Shanghai as we build upon important projects begun last year. It will mean a deeper commitment to the expansion of American business into the Yangtze River Delta in Suzhou. We also launched our innovative SME Center designed to provide smaller American businesses access to information and advisory services available within our membership.

These two projects reflect the transition of China’s economy to the consumer and to the fast-growing service sectors of the economy.

Our members remind us of their “in China, for China” strategies.

40

insight

March 2013

We also know that one way China is responding to America’s pivot to Asia is by the increasing number of Chinese investments in the U.S. AmCham Shanghai will be seeking to understand the links between Chinese investment in the U.S. and greater market access for our members here in China.

At our annual Shanghai Government Appreciation Dinner last December, Ambassador Gary Locke delivered a strong message of furthering the bonds between the U.S. and China. He mentioned new policies taken by his embassy and consular teams to improve the visa approval process for Chinese visitors. These measures follow the success of AmCham Shanghai’s very popular visa program that expedites approval for Chinese applicants sponsored by our members.

He also spoke of encouraging Chinese investment into the U.S. The next challenge is to further develop programs and platforms that provide our members greater access to the rapidly expanding Chinese marketplace. We have witnessed so many of our members who have developed innovative distribution and supply-chain management strategies. AmCham Shanghai will be exploring and assisting our member companies to unravel the “DNA” of this marketplace. We are concerned about the growing regulatory issues foreign companies face that limit access to customers. We will also be building on the relationship drive with local governments and local companies that was begun by Brenda and her team over the past several years.

In areas of advocacy, AmCham Shanghai will continue to be a powerful voice of the American business community in both Beijing and in Washington. Our style is to focus on pragmatic uses of our substantial network of relationships, such as what we have begun in the Yangtze River Delta. Last year, AmCham Shanghai was visited by 16 American mayors and governors who see our organization as an important touchstone in furthering economic and trade relationships.

The conclusion of national elections and selections of leadership in both countries brings hope that further reforms will create more opportunities for you and your companies here. It should also translate into more confidence in Washington in building bolder and more creative policies in the Sino-U.S. spectrum of interaction.

As such, we will be seeking to leverage our brand, our knowledge and our relationships for our members.

And finally, this edition of Insight will focus on my industry: venture capital. This industry is a vital link in building successful businesses which helps companies in understanding risk and accessing sources of capital for growth.

All of us on the Board and on the staff of AmCham Shanghai are grateful for your participation in areas of importance to you. I hope you will continue to inform us, to enlighten us and, where necessary, to be our constructive critics in making this organization even better in 2013.

inside amcham B OARD o f g o v e r n o r s b r i e f i n g

Highlights from the January 2013 Board of Governors Meeting President Search The Chair provided a status report on the search for a new AmCham Shanghai president and informed Board members that the search is moving forward as planned. While specifics on applicants were not provided, the Chair provided a general overview of the backgrounds of applicants and said that he would come back to the Board with a more detailed description as the search progressed.

Medical Benefits Program Scott Williams, vice president of programs and services, provided an overview of the improvements coming to the AmCham Shanghai Medical Benefits Program. Scott reported that while the Chamber has had this service for several years, it has been underutilized. Goals for a revised program were discussed including improved member choice, an improved health service platform and, once the program is established, to launch informative workshops for interested members and other efforts to ensure the benefits of the program are well-understood by the membership.

Appointments The Chair named Curt Hutchins Vice Chair, Marie Kissel was approved to serve as Secretary and Eric Zheng is Treasurer.

501(c)(6) Status Update John Leary, partner at the Shanghai office of White and Case, updated Board members on the status of discussions regarding the establishment of 501(c)(6) status in the U.S. John highlighted the specific rules that need to be complied with for such status, provided an overview of the benefits and reviewed the costs of compliance significant. The Board discussed the need to work with Deloitte, the Chamber’s auditor, to determine tax implications of forming at 501(c)(6) before a final recommendation and set of options can be made to the Board.

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

The AmCham Shanghai 2013 Board of Governors Governors

Chair

Andrew Au Citibank China

Jimmy Chen FedEx Express

Sherman Chu Cisco Systems

Keith N. Cole General Motors

Kenneth Jarrett APCO Worldwide

Marie Kissel Baxter Asia-Pacific

Chen Lienjing Pratt & Whitney

Peter Sykes Dow Chemical

Eric Zheng AIG Insurance

Robert Theleen ChinaVest

Vice Chair

Curtis Hutchins Eaton (China) Investments

March 2013

insight

41

AmCham Shanghai New Members U.S. Corporate Membership Abbott Laboratories Trading (Shanghai) Company Limited BIRD Roger Armor Mechanical Equipment (Shanghai) Company Limited AHAUS Frank

PricewaterhouseCoopers Management Consulting (Shanghai) Limited WU Nora

Zetland Corporate Services, Ltd., Shanghai Rep. Office LUO Phoebe

Systems Union (Shanghai) Limited ZHU Qinghua

Storewars Consulting (Shanghai) Co., Ltd. THAIN Gregory

Corporate Int’l Affiliate Membership

Starrett Tools (Suzhou) Co., Ltd. LEME Emerson

Asana (Hong Kong) Limited LING Ka Him Samuel

Apple Procurement and Operations Management (Shanghai) Co., Ltd. Suzhou Industry Park Branch CUI Yushan Bingham McCutchen LLP, Beijing Rep. Office BEGLIN Brian Microsoft (China) Co., Ltd., Shanghai Minhang Branch SUNDARESAN Prakash

U.S. Associated Corporate Membership

Cytec Surface Specialties (Shanghai) Co., Ltd. IYER Sivaramakrishnan Ramaswamy J.D. Power Commercial Consulting (Shanghai) Co., Ltd. MEI Songlin Protiviti Shanghai Co., Ltd. LOW Christopher

BK Giulini Performance Products (Jiangyin) Co., Ltd. TENG Yun CPA Australia (Shanghai) Co., Ltd. GU Ella

Covington & Burling LLP Shanghai Representative Office (USA) WANG Eva Emo-Trans, Inc., Shanghai Rep. Office WANG Jia

Ascott Property Management (Shanghai) Co., Ltd. SOONG Sandy

Dezan Shira & Associates Shanghai Branch CANT Richard Reed Smith LLP, Shanghai Rep. Office YAN Jay Jun Twelve at Hengshan, A Luxury Collection Hotel, Shanghai KATEMOPOULOS David Devicor Medical Device (Shanghai) Co., Ltd. XU James EIPM China Limited SARRAT Xavier STORA ENSO China Co., Ltd. ZHANG Cindy Bracalente Metal Products (Suzhou) Co., Ltd. TANG Jack Glamour Sales (Shanghai) Limited LIND Thomas Jeffrey

Advantest (China) Co., Ltd. XU Yong BP (China) Holdings Limited KING Thomas Michael Corning Display Technologies (China) Co., Ltd., Shanghai Branch DOWDELL Alan Henry Schein Trading (Shanghai) Co., Ltd. SHEN Jane Shaw Carpet (China) Co., Ltd. HOWELL Nolan

Anthony Technical Glass (Shanghai) Co., Ltd. ZHEN Liqing Danone Asia-Pacific Management Co., Ltd. XIONG Ling DaVita Hospital Management Consulting (Shanghai) Co., Ltd. LEE Kenneth InterContinental Hotels Group (Shanghai) Ltd. BARR Keith PricewaterhouseCoopers Consultants (Shenzhen) Co., Ltd. Shanghai Branch WU Nora

42

insight

TRANSEARCH (Shanghai) Ltd. WADE Jeffrey Associate Membership Albemarle Management (Shanghai) Co., Ltd. KNIGHT Chris APCO (Beijing) Consulting Company Ltd. Shanghai Branch CAO Michelle Aramark Service Industries (China) Co., Ltd. Shanghai Branch CLOUSER Mike BK Giulini Performance Products (Jiangyin) Co., Ltd. HUANG Yan Eaton (China) Investments Co., Ltd. LOU Jennifer ZHOU Joyce Graco H.K., Ltd., Shanghai Rep. Office GARGANO Anthoy HSBC Bank (China) Co., Ltd. ADAMS Jenni ITW (China) Investment Co., Ltd. SCHROEDER Jeffrey Paul

Kunshan Su-Soft Technology Co., Ltd. MA Wan-Chieh

Johnson & Johnson Medical China Ltd. LI Ming XING Tao ZHOU Hanyi

M&C Saatchi Advertising (Shanghai) Limited HSU Angela

KPMG GAO Wen

Sino-Singapore Guangzhou Knowledge City Investment and Development Co., Ltd. TAY Jason

Laird Technologies (Shanghai) Ltd. CHEN Julia

Weldon XIE Philip Chao Non-Resident Corporate Membership

Univar China, Ltd. LI Tianwen

The People at Work Pte., Ltd. TAY Chin Koon

Toy Industry Association Inc. DESMOND Edward Yingke Law Firm LLC TSE Athena

LG Sourcing, Inc., Shanghai Rep. Office NI Ella Parsons Brinckerhoff Engineering Technology (Beijing) Co., Ltd., Shanghai Branch LEONG Kelvin NG Terrence Protiviti Shanghai Co., Ltd. KOSTEK Brian

Reed Smith LLP, Shanghai Rep. Office CHIANG Ivan

DONG Zack TAN John Shek Non-Resident Individual Membership U.S.-China Business Development Consultancy COOPER Ben

Saatori, Ltd. LAVALLEE Michelle

Small Business Membership

Synergy Health (Suzhou) Sterilization Technologies, Ltd. TANG Jing

Concordia International Forwarding Corp., Shanghai Rep. Office WANG Leighton March 2013

Wal-Mart (China) Investment Co., Ltd. YU Yolin

AmCham Shanghai New Members Advantest (China) Co., Ltd. LIN Yuefei Apple Procurement and Operations Management (Shanghai) Co., Ltd. Suzhou Industry Park Branch LEW Sandra Bingham McCutchen LLP, Beijing Rep. Office CRAIN Michael David YE Leah Dawn Xiaowei BP (China) Holdings Limited REN Grace WANG Wailiam YANG Hengming Broadcom Singapore PTE Ltd. Shanghai Rep. Office MCCARTY Dana John Cisco Systems (China) Networking Technology Co., Ltd. Shanghai Changning Branch TAO Di Cytec Surface Specialties (Shanghai) Co., Ltd. GONG Zhen Dacheng Law Offices, Chicago Office, Ltd. BEN-YEHOSHUA Amit ExxonMobil (China) Investment Co., Ltd. BOST Patricia Lynn Federal Express (China) Co., Ltd., Shanghai Branch SEAN Kuan-Thye Fredrikson & Byron. P.A. Shanghai Representative Office (US) QI Yan YANG Lanbo Jones Lang LaSalle Surveyors (Shanghai) Co., Ltd. BROWN Warner CHEN Yonghua HO John JOHNSON Greg LEI Ting LUO Louise O’BREIN Neill ODETTE Daniel STONE Joshua WHITE Parker WIJAYA Joshua Lend Lease Project Management & Construction (Shanghai) Co., Ltd. DOWNS John WIPPELL Angus WONG Walter Microsoft (China) Co., Ltd., Shanghai Minhang Branch LU Yaping Momentive Specialty Chemicals Management (Shanghai) Co., Ltd. SHAN Susan PricewaterhouseCoopers BARRETT Robert HAI Steven HUI Patrick SHEK Kenny VETTORETTI Robert

Quaker Chemical (China) Co., Ltd. MA Jun WU Yanchu Shape/NetShape China Auto Parts Co., Ltd. SHEN Cindy Textron Trading (Shanghai) Co., Ltd. JARAN Chris Baxter (China) Investment Co., Ltd. SHI Wei Cargill Investments (China), Ltd. QIAN Haohua Covington & Burling LLP Shanghai Representative Office (USA) LI Weishi Crocs Trading (Shanghai) Co., Ltd. WU Wendy Edelman Public Relations Worldwide (China) Co., Ltd. Shanghai Branch CHU Onie Edelman Public Relations Worldwide (China) Co., Ltd. Shanghai Branch JESSICA Sukhita Intel China Ltd. CHEN Joanna InterChina, Shanghai Office SINCLAIR James John Portman Associates, Inc., Shanghai Rep. Office HUYAN Ting Kunshan Su-Soft Technology Co., Ltd. GLOECKNER Franziska PepsiCo Asia Research & Development Center Co., Ltd. DEWI Tjin PricewaterhouseCoopers Consultants (Shenzhen) Co., Ltd. Shanghai Branch CHONG Jenny GILBRAITH Mark TAM Terry WANG Lillian YAM Alan Shanghai Delta Hospital ZHU Jasmine Sheppard, Mullin, Richter & Hampton, LLP Shanghai Rep. Office, U.S. GAO Harris Storewars Consulting (Shanghai) Co., Ltd. DOAN Lien The Washington University - Fudan University Executive MBA Program LU Yanyan

Kloeckner Pentaplast (Shanghai) Co., Ltd. FRANK James Christopher Parham SAGE Electronchromics, Inc ZHU Catherine Siemens Limited China CARPENTER Kevin The Parthenon Group REEB Adam Worthington Industries COTTER Patrick John Flextronics Technology (Shanghai) Co. Ltd. STAUFFER JR. Christian N/A LEE Peter Dalian Kaiser Construction Co., Ltd. Qingdao Branch FLESHER Kevin Hurco DOAR Will N/A DOUGHERTY Chris Russell-BDGZ Group TERRY Benjamin Individual Int’l Affiliate Membership Kloeckner Pentaplast (Shanghai) Co., Ltd. CHANDONNAY J.C. Patrick Alain Knight Frank CHUNG Nicholas LEYFORDS Strategy International Limited LO Thamis DeGang Chemical Technology Development Co., Ltd. RING Horst Wolfgang N/A CLODINE-FLORENT Jimmy Opus One Asia FONT Alex Executive Presence for Leaders FAHY Warwick John Husite Oilfield Equipment BUTLER Edouard Kurt Salmon ZHAO Qi George N/A SAKATA Yuichi WANG Jeff StonCor Group Inc., Shanghai Rep. Office FEWTRELL Paul

Individual U.S. Citizen Membership POLOSKY Quentin Kapronasia KAPRON Zennon

Do you want to share more information about your company? Contact Patsy Li at (86 21) 6279-7119 ext. 8966 or patsy.li@amcham-shanghai.org for a “Standout Listing” opportunity in the New Members Section.

AmCham Shanghai

U.S. Deputy A Affairs Atul K Panelists discuss regional economic integration and results achieved at the 2012 U.S.-China Joint Commission on Commerce and Trade at a monthly member briefing

Panelists discuss results achieved at the 2012 U.S.-China Joint Commission on Commerce and Trade during a monthly member briefing Panel of marketing industry leaders discuss the value of Chinese brands

Financial Services Committee event on RMB internationalization

Guests at a Women in Business Group networking cocktail evening Brian Pilley from M Moser discusses creative workspace design 42

insight

NOVEMBER 2012

Month in Pictures

Assistant Secretary of State for APEC Keshap

AmCham Shanghai annual staff dinner

Here is a selection of snapshots captured in the past month.

Participants share insights during an event on accelerating leadership development at AmCham Shanghai’s Conference Center NOVEMBER 2012

insight

43

Government Relations U.S. Congressional Delegation Visits AmCham Shanghai

Zhang Weiwei describes the planning behind the first China (Shanghai) International Technology Fair

Rick Larsen, center, with AmCham Shanghai President Brenda Foster and 2013 Chair Robert Theleen

AmCham Shanghai and the U.S.-China Business Council (USCBC) on January 26 co-hosted a congressional briefing led

by U.S. Representative Rick Larsen (D-WA), co-chair of the U.S.-China Working Group, on the business climate for U.S. companies operating in China. AmCham Shanghai Chair Robert Theleen noted that for many U.S. businesses, being profitable in China is increasingly critical to their global operations.

At the briefing, AmCham Shanghai’s Director of Communications and Publications David Basmajian presented initial findingsfrom the 2013 Business Climate Survey. Key trends include growth in services and retail, rising local competitors and a growing number of U.S. companies “in China for China.” The Chamber will publish the annual business climate survey results with key analyses in late February. USCBC Shanghai Chief Representative Julie Walton presented USCBC’s business environment survey results, which also identified common trends and challenges faced by U.S. companies.

Chinese Commission of Commerce Briefing AmCham Shanghai hosted a Chinese government briefing on January 30 led by Zhang Weiwei, deputy director of the exhibition department at the China (Shanghai) International Technology Fair (CSITF) Organizing Committee Preparatory Office. The first CSITF will be held in Shanghai from May 8–11. Organized by the Shanghai International Technology Exchange Centre, the event is sponsored by the China Ministry of Commerce, Ministry of Science and Technology, State Intellectual Property Office and Shanghai Municipality.

46

insight

March 2013

Zhang provided an overview on the planning of the CSITF, including the development of a Professional Services Pavilion and forums focused on intellectual property, technology transfer, innovation and other creative industries. Zhang noted this event will serve as a springboard for the China Technology Trade Platform, an online venue for intellectual property protection and trade facilitation beyond CSITF.

New CSR Team at the Helm AmCham Shanghai has announced a new Corporate Social Responsibility (CSR) team. Senior CSR Associate Daisy Lu, a Shanghai native, graduated from Shanghai Jiaotong University and has organized CSR activities as brand manager for a Chinese chemical company and participated in various volunteer projects.

CSR Associate Jennifer Kwong, from Washington state, previously worked as a program advisor for an interning abroad program and did volunteer work in Latin America.

“We are excited to have a dynamic CSR team in place to support and drive the Chamber's CSR initiatives, including the Business Council on Sustainability and Responsibility, CSR Conference and Awards, Charity Gala, and other training and workshop programs,” noted AmCham Shanghai Government Relations and CSR Director Steven Chan.

Daisy Lu, left, Steven Chan, center, and Jennifer Kwong form AmCham Shanghai’s CSR team

March 2013

insight

47

Committee highlights

i n s i d e amc h am

Financial Services Committee RMB Internationalization to Follow Chinese Economy Closely: PBoC

Shi Liya discusses China’s plans for RMB internationalization

The renminbi cross-border policy will closely follow the strength and needs of the Chinese economy, said Shi Liya, deputy director of the RMB Cross-Border Business Department of the People’s Bank of China, the nation’s central bank. Shi spoke during an AmCham Shanghai Financial Services Committee event on January 20. Shi noted that a gradual and measured reform has so far helped develop pilot projects that were started in 2010 into a comprehensive international cross-border transactions program for the RMB.

The RMB as a fully-convertible global currency is a part of Shanghai’s transformation into an international financial center (IFC). The ultimate goal would be for Shanghai to become a home-currency IFC similar to New York City, Shi said. The event was part of a Financial Services Committee series that fosters discussion around the topic of Shanghai’s plan to become an IFC.

Human Resources Committee Discussion on Leadership Development in Asia AmCham Shanghai’s Human Resources Committee hosted a discussion on January 15 featuring Mano Ramakrishnan, head of research at the Singapore-based Human Capital Leadership Institute, and Paul Van Katwyk, vice president & APAC regional director of consulting solutions at PDI Ninth House.

Based on research comparing Asian leaders and their Western counterparts, Van Katwyk said that Asian leaders were better at showing drive and Mano Ramakrishnan shares insights on leadership development initiative while they struggled when using financial data or thinking creatively. Asian leaders were also seen as having a stronger work focus, competitiveness and attention to detail, but still lacking micro-management skills, being too passive-aggressive and tending to be egocentered. Taken as a whole, Van Katwyk said that although Asian leaders are seemingly well-equipped to be effective leaders, critical gaps are still visible that need to be addressed.

To help managers lead their team and foster a healthy business environment, Ramakrishnan suggested: never wasting a crisis, letting people fail, instilling humility, modeling authentic leadership, balancing breadth and depth of opportunities and harnessing relationships inside and outside of an organization.

48

insight

March 2013

Committee highlights

i n s i d e amc h am

Marketing & Media Committee Top 50 Most Valuable Chinese Brands

Jason Spencer presents findings on China’s top 50 most valuable brands

China Mobile is the most valuable Chinese brand, said Jason Spencer, managing director of Millward Brown, during a Marketing & Media Committee event on January 22 in which he presented findings from the third annual BrandZ Top 50 Most Valuable Brands report commissioned by WPP. Industrial and Commercial Bank of China (ICBC) ranked second, followed by China Construction Bank. Technology companies such as Baidu and Tencent, which rounded up the top five, were among those that appreciated the most in value. Seach engine Baidu appreciated by 40 percent and social media giant Tencent appreciated by 60 percent.

While strategic state-owned enterprises (SOEs) continue to dominate the value share of the top 50, privately held companies comprised around 27 percent of the top 50 companies’ total brand value, up from 22 percent in 2011. Though overall value of the top 50 has decreased along with China’s economy slowdown, Spencer showed that brand importance is rising. As Chinese consumers become increasingly sophisticated and more reliant on brands when making purchasing decisions, brand strength has a larger impact on company value and can buoy companies in a slower economy, he noted.

During the panel discussion that followed, Jonathan Chajet, CEO of Dragon Rouge China, and Edward Bell, head of strategy & planning at Ogilvy Shanghai, shared insights on issues impacting Chinese consumer trends, such as trust erosion in food and baby products.

Successful brands must aim to relate to consumers in an emotional way, the panelists agreed, and pointed out the advantages of tierspecific marketing in China.

Design & Construction Committee Workspaces for the Creative Industries The Design & Construction Committee on January 24 held an event on workspace design led by workplace design firm M Moser’s Sean Moran, business development manager, and Brian Pilley, head of the Shanghai office, to discuss how the unique needs of the creative industries present opportunities to break the rules of traditional office design. Using their award-winning redesign of advertising giant JWT’s Shanghai office as a case study, Moran and Pilley showed how the workplace is becoming an increasingly collaborative and mobile environment.

Left to right: Sean Moran, Michael Nicholls, Design & Construction Committee vice chair, and Brian Pilley discuss creative workspace design

M Moser’s “food for thought” themed design features nontraditional collaboration areas and open workspaces set up in a more linear layout in order to increase headcount while creating space for interaction and movement. M Moser also decided to bring the café environment to the office after learning that JWT’s employees often left the office to brainstorm, contemplate and collaborate at local cafés. In fact, from the chandelier at the entrance to the long tables and countertop in the reception hall, the new JWT office gives the spacious and relaxed feeling of a high-end café.

For more information on AmCham Shanghai’s 22 industry-specific committees, please email committees@amcham-shanghai.org.

March 2013

insight

49

Executive Listening What’s your favorite podcast?

We asked executives what podcasts they enjoy listening to at home or on the go. Here are their top picks.

Rob Abbanat, CEO, Ivy League English Remarks:“I am a closet economics junkie, so I’m a big fan of the Freakonomics radio podcast (www.freakonomics.com/ radio). The podcast gives a deep look into what really makes the world go ‘round, examining the economics behind every aspect of life and decision making. If you want to understand “cheating teachers, bizarre baby names, self-dealing realtors and crack-selling mama’s boys,” this is the place.

John D. Van Fleet, Assistant Dean, Marshall School of Business, University of Southern California; Executive Director, USCSJTU Global Executive MBA in Shanghai (GEMBA) Remarks: “I listen to radio/ podcasts all the time. I love good radio and want more people to listen.” Favorites:

Gregg Pinick, Head of Concordia International School Shanghai Remarks: “I have two podcasts that are my favorites when I exercise. The Catalyst (www.catalystspace.com/content/ podcast). This podcast comes out about every two weeks and provides great leadership talks from some of the most innovative and creative people in the U.S. today. “ Passion City Church (www.passioncitychurch.com/ watch): The main speaker is Louie Giglio. Louie is in touch with today's young people (HS and college), and I value what he says to encourage this generation. As a head of School, his messages are timely and appropriate for me and my work at Concordia.”

NPR 2007, by Stephen Voss

Chris Dexter, Vice President of Operations, Wyndham Grand Plaza Royale Hotels China Remarks: “As a hotelier, any podcasts regarding social media are of interest. AmCham China’s “Making Weibo work for your company” ( amchamchina.org/article/10507 ) and VOA N e w s ’ “ N e w r u l e s f o r S i n a We i b o u s e r s i n C h i n a” (learningenglish.voanews.com) were of particular interest. It’s such a fast-paced medium and stretches from marketing your product to receiving complaints. It’s moving so fast that even nonusers need to be aware of how it can affect your organization.”

Michele Norris, host of NPR’s All Things Considered

Denise Ofelia Mangen

BBC (www.bbc.co.uk/podcasts) - Witness: First-person accounts of momentous events.

- Hard Talk: Sacker confronts interviewees, to our benefit.

- World News: Great source for current global news.

APR’s Marketplace (www.marketplace.org/marketplace-podcasts): Great business-oriented programming – Shanghai correspondent Rob Schmitz creates some of the best radio in the world these days.

NPR (www.npr.org/rss/podcast/podcast_directory.php): - All Things Considered: Great, highly literate news programming.

Justin F. Flowers, Lateral Link, Principal, International Placements Remarks: “TEDTalks Business (www.ted.com/talks/tags/ business ). It’s a unique opportunity to see (it’s a video pod) leaders in various fields discussing everything from their particular strengths and areas of focus to random observations or formative experiences. An engaging 20 minute break here and there.”

50

insight

March 2013

George Dawes Green hosts “Dial M For Moth: Thriller Stories”

Grace Liu, Managing Director, Asianera Ltd. Remarks: “I have many favorite podcasts. I guess if I had to choose, it would be The Moth (themoth.org). These are life-experience stories told live in front of an audience. Modern-day storytelling at its best. Sometimes hilarious, sometimes deeply moving, inspirational, or all of the above. Always entertaining.”