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

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

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

GREENTECH UPDATE

China Takes the Lead DOING BUSINESS

Risk Management in Second- and Third- Tier Cities MARKET PROFILE

Chinaâ&#x20AC;&#x2122;s E-commerce Boom

Food Inflation Rattles China Double-digit price increases puts taming inflation at the top of the national agenda.

INSIGHT May 2011

The Journal of the American Chamber of Commerce in Shanghai

David Turchetti

9 China’s Digital Marketplace

Karen Yuen Committees

Siobhan M. Das insight editor-in-chief/ Communications & Publications

Linda X. Wang

24 Shanghai’s 12th Five-Year Plan

Shanghai’s 12th Five-Year Plan (FYP) will shape its policy development and map the city’s future progress. What are its goals and what implications does it have for U.S. businesses?

INSIGHT Esther Young

Ashley Cahill

editorial support

Ryan Balis

Takes the Lead in the Global 27 China Greentech Race GREENTECH FEATURE

By Al Beebe The China Greentech Initiative (CGTI) provides an overview of its 2011 Greentech Report, which finds that China’s rapid economic growth, development needs and urbanization provide the foundation for greentech market opportunities.

Design

Alicia Beebe Layout & Printing

Ella Shan Snap Printing, Inc.

INSIGHT Sponsorship sponsorship manager

Sophia Chen

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

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

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

POLICY insight

associate editor editorial intern

China’s plans to reform its healthcare system is comparable, and in many ways more extensive, than healthcare reform passed in the U.S. in 2010. China’s reform will have a significant impact on the rapidly advancing market for medical devices in China.

Events

Helen Ren

By Ashley Cahill

Healthcare Reform and the Medical 19 Chinese Device Sector INDUSTRY INSIGHT

Jessica Wu

Membership & CVP

By Esther Young

China’s bourgeoning e-commerce market is growing at a record pace. What are retailers doing to meet online consumer needs?

David Basmajian

Finance & Administration

By John Merritt

market profile

Directors Business Development & Marketing

imaginechina

v i c e p r e s i d e n t, p ro g r a m s

imaginechina

Brenda Foster

F eatures

imaginechina

President

imaginechina

amcham shanghai

30 Food Inflation Rattles China Cover story

By Ryan Balis

With alarm over food prices that are escalating at a doubledigit clip, inflation-taming has moved up to the top of the national agenda.

I nsight standards

3 News Briefs

8 Manager’s Notebook

doing business

Risk Management in China’s Second- and Third-Tier Cities

Control Risk’s Kent Kedl and Neal Beatty provide an overview of several key challenges that are unique to these cities.

Han, Nutstore and the 36 Zhu Changing Environment for

I N S I D E A m C ham

40 41 42 44

48 Deal of the Month

From the Chairman: Mardi Gras Merriment Board of Governors Meeting 2011 AmCham Shanghai Charity Gala New Member Listing

CHINA PROFILE

China’s Entrepreneurs

Zhu Han’s foray into the cloudcomputing marketplace provides insight into China’s entrepreneurial spirit. 45 Ambassador Huntsman’s Legacy 46 Events in Review 47 Committee Highlights

Inside INSIGHT

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

ith concern over escalating food prices rising faster than the skyline in Lujiazhui, Premier Wen Jiabao has publically vowed that China will “try every means to stabilize prices.” Inflation has been a headline issue over the past few months and it is easy to see why this issue has captured Premier Wen’s attention. As a category, the price of food increased 11 percent in the first three months of 2011. “Strategic” crops such as wheat, rice and corn increased at a double-digit rate. This month’s cover story investigates the reasons for the spike in food prices, what China plans on doing about it and the potential impact on U.S. companies in the food and agriculture industry. While they may have gotten off to a late start, China’s online shoppers are coming on strong. Insight looks at the e-commerce market in China with a focus on Chinese online consumers themselves – all 420 million of them! We also look at China’s online leaders, how China’s ecommerce landscape differs from the U.S. and Europe and we highlight trends that will drive future growth in this booming sector.

If you were anywhere near the Jinmao Tower a few Saturday nights ago, you may have heard shouts of “Mardi Gras Mambo!” and other New Orleans classics emanating from the Grand Hyatt Hotel – transformed for one night into Bourbon Street and the Bayou. AmCham Shanghai held its ninth annual Charity Gala on April 9 and not only was it a lot of fun, this year’s Gala raised over RMB1.2 million for three worthy charities. In this month’s Insight we give you a taste of the action in a twopage photo spread. On April 7, the Chamber said a fond farewell to U.S. Ambassador Jon Huntsman, who officially stepped down from his post on April 30. Ambassador Huntsman addressed AmCham Shanghai members and thanked the Chamber for the important role it plays in shaping the U.S.China commercial relationship. After the speech, the Ambassador hopped on his Harley and took one last tour through the streets of Shanghai with former AmCham Shanghai Board Governor Jim Rice. Insight captures the moment with excerpts from his speech and, of course, photos of Ambassador Huntsman on his “Hog.”

imaginechina

News

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

china business

China becomes No. 3 tourism draw China’s National Tourism Administration announced that China became the world’s third most popular destination for tourists in 2010 as measured by number of trips, overtaking Spain and behind only France and the United States. More than 55 million overnight trips were made by foreigners to China last year, up 9.4% from 2009. Shanghai was the secondmost popular destination in mainland China with nearly six million arrivals, behind Guangdong province. China receives the most number of visitors from South Korea, with Japan, Russia, the U.S. and Malaysia rounding out the top-five. China’s tourism revenue has averaged 15% growth over the past five years. The number of outbound Chinese travelers increased 20.4% to more than 57 million in 2010.

China to become No. 1 PC market China will soon become the world’s largest market for personal computers, according to testimony provided at a special U.S. House of Representatives hearing in San Jose, CA on hi-tech growth policies. Stuart McKee, national technology officer in Microsoft Corp.’s public sector unit, tells the House Committee on Oversight and Government Reform that either this year or next year China will surpass the U.S. in computer purchases. The Microsoft representative says that in China more than 95% of computers use Microsoft Windows operating systems and that more than 85% of enterprises use Microsoft Office software. A top issue for the technology giant is countering piracy in emerging markets where the piracy rate for popular Microsoft products exceeds 80%.

Foreign firms anticipate international board Chinese media are reporting on an internal government proposal that says China’s top securities regulator may initially allow around 10 foreign firms and internationally-listed Chinese companies to list on the Shanghai Stock Exchange’s soon to be unveiled Shanghai International Board. Under a pilot program, candidate firms that could be listed must have a market capitalization of at least RMB30 billion (US$4.6 billion) and have a three-year combined net profit of at least RMB3 billion preceding the listing.The amount of shares listed in Shanghai cannot exceed 5% of the firm’s total listed shares. Firms that have expressed interest include HSBC Holdings Plc., Standard Chartered Plc., Bank of East Asia Ltd. and Proctor & Gamble Co.The international board had been expected to be operational by 2010, but its opening has been pushed back to as early as the second half of this year. An international board is seen as advancing Shanghai’s goal to build an international financial center by 2020.

China’s auto sales rebound China’s Association of Automobile Manufacturers, a semiofficial body, says car sales in China increased 5.4% in March from the previous year to 1.8 million vehicles, up from 4.6% in February, the slowest growth in two years. Despite the rebound, March’s growth rate is 50% less year-on-year. For the first quarter, car sales increased 8.1% year-on-year to nearly five million vehicles, sharply down from 72% growth over the same period in 2010. Several factors are

contributing to slower vehicle sales, including surging oil prices, a slowdown in production in Japan following devastating events there and the Chinese government’s decision to scale back subsidies for car buyers. corporate news

Microsoft, Dongbai Group settle piracy dispute The Business Software Alliance, an international software industry group headquartered in Washington, D.C.,

m ay 2 0 1 1

insight

announced a settlement had been reached in a copyright infringement dispute between Microsoft Corp. and a Chinese department store. Under the settlement, the Fujian Dongbai Group Co. has agreed to pay Microsoft RMB900,000 (US$138,100) and has committed to its using genuine Microsoft software. China has announced an inspection campaign with the goal to ensure that all central government computers are using registered software by the end of May 2011. China’s courts accepted nearly 43,000 cases involving intellectual property rights (IPR) in 2010, up 40% year-on-year.

GE expands Wuxi water factory capacity General Electric Co. (GE) announced it has doubled the capacity of its water manufacturing facility in Wuxi New Zone in a bid to meet greater demand in China for clean energy and water. The expansion allows GE to add several product lines and fulfill orders more quickly for its customers in a wide range of industries, such as steel, energy, petrochemicals and food and beverage. GE’s Wuxi facility provides water treatment chemical products, as well as recycling, filtration and processing technologies. GE has operated its Wuxi plant since 2004, expanding it previously in 2008 to add advanced water filtration technology manufacturing.

GM and Tianjin collaborate on Eco-City General Motors Co. (GM) has signed a memorandum of understanding with the Sino-Singapore Tianjin Eco-City Investment and Development Co., Ltd. to bring GM’s new-energy Chevy Electric Networked-Vehicle (EN-V) to Tianjin’s “Eco-City.” The Eco-City project is a 50-50 joint venture between China and Singapore to build a 30 square kilometer (11.6 square mile) sustainable city in the Tianjin Binhai New Area. The lithium-ion battery-powered vehicle, which was on display at the Shanghai 2010 World Expo, produces zero emissions, and its compact size and distance-sensing technologies are advantages in an urban

insight

environment. The first set of residents is expected to move to a section of the Tianjin Eco-City in 2012, eventually growing to an estimated population of 350,000.

Boeing JV unveils new Tianjin factory Boeing Tianjin Composites Co., Ltd., the China-based joint-venture between U.S. aircraft giant Boeing Co. and Aviation Industries Corp. of China (AVIC), unveiled a new aircraft composite and parts-making production facility in Tianjin’s Binhai New Area. Boeing’s US$21 million investment to establish the 55,000 square meter energyefficient factory will increase Boeing Tianjin’s production capacity by 60% on all of Boeing’s in-production models when full operations begin in 2013. The project will ramp up Boeing’s support services in China, while adding at least 300 jobs to a current workforce of 700. Boeing expects to more than double annual hardware and services spending to at least US$400 million by 2015 in China, its largest buyer of aircrafts. macroeconomics

CPI quickens to 32-month high Data from China’s National Bureau of Statistics (NBS) show the country’s Consumer Price Index (CPI), a major gauge of inflation, accelerated 5.4% in March yearon-year, the fastest increase in 32 months. Food prices, which account for about a third of the index, continue to be a major driver of overall inflation, rising 11.7% in March year-on-year. China’s Producer Price Index (PPI), a measure of inflation at the wholesale level, increased 7.3% year-on-year, up slightly from 7.2% in February. China has ramped up efforts to keep inflation within its 4% target for 2011, raising interest rates two times since the beginning of the year and increasing the percentage of deposits that banks must keep in reserve four times this year.

Yuan hits 17-year high China’s currency, the yuan or renminbi (RMB), strengthened to a 17-year high against the U.S. dollar during the month of

m ay 2 0 1 1

April. Analysts point to expectation that the yuan will further appreciate and be used as an inflation-taming mechanism by the government to cool surging price pressures across China. The yuan has appreciated 1.5% since the beginning of the year and 4.8% since China adopted a more flexible exchange rate system in June 2010. Under that system, the People’s Bank of China (PBoC), China’s central bank, permits a daily fluctuation in the currency exchange rate of 0.5%. Analysts predict the yuan will appreciate between 5% and 6% from current levels over 2011.

China’s FDI increases 33% in March China’s Ministry of Commerce (MOFCOM) announced that foreign direct investment (FDI) in China increased 33% in March year-on-year to US$12.5 billion, up from US$7.8 billion in February. For the first quarter, China drew in 29% more FDI than the same period a year ago, amounting to US$33.3 billion. Investors remain bullish on China, which posted 9.7% GDP growth over the first quarter of 2011, beating estimates of 9.4%. Investment also is pouring into China because of widespread anticipation of further appreciation of the yuan. In Shanghai, quarterly FDI reached a record US$4.7 billion, up 28.2% year-onyear. Reflecting Shanghai’s emphasis on expanding its services sector, 707 of the 769 foreign-invested projects that were approved over the first quarter relate to services. u.s. - china

Renren prepares for U.S. IPO Beijing-based Renren, Inc., dubbed China’s Facebook, has filed with the U.S. Securities and Exchange Commission (SEC) to launch an initial public offering (IPO) on the New York Stock Exchange (NYSE) on May 4, 2011. The Chinese social networking site had a profit of US$7.7 million in 2010 but has raised enough interest to command a US$4 billion valuation. The company plans to

raise US$584 million through its IPO, which already has the backing of Alibaba Group and CITIC Securities Co. Relatedly, competitor Facebook, Inc., which boasts over 600 million users compared to Renren’s 117 million, reportedly has struck a deal with Baidu, Inc. to enter the Chinese market, albeit separately from its popular platform, which remains blocked inside China.

Washington State passes antipiracy law The Washington State legislature passed and Washington Governor Christine Gregoire signed into law anti-piracy legislation that bans the in-state sale of goods produced using stolen information technology. Companies that sell such illegal products or parts in Washington face being sued for damages, and could be prevented from selling such goods in the state. The law also applies to piracy done by companies’ overseas suppliers. Microsoft Corp., along with support from Boeing Co. and Weyerhaeuser Co., pushed for the new law, a similar version of which is on the books in Louisiana. Retailers, such as Wal-Mart Stores, Inc., objected because of possible costly litigation.

Women’s leadership exchange program launched U.S. Secretary of State Hillary Clinton and Chinese State Councilor Liu Yandong announced the launch of the ChinaU.S. Women’s Leadership Exchange and Dialogue (Women-LEAD) initiative to encourage greater people-to-people exchanges between the U.S. and China and promote the development of women’s leadership in all sectors, including business and technology. Women-LEAD will aim to facilitate public-private partnerships for women’s empowerment, increase the sharing of knowledge and expertise and expand exchanges among institutions on gender equality. The Secretary’s Office of Global Women’s Issues and China’s AllChina Women’s Federation will jointly lead the initiative. While visiting the U.S.,

Liu attended the second annual ChinaU.S. Consultation on People-to-People Exchange (CPE) high-level meeting established to boost bilateral exchanges on women’s issues.

Investment funds target China IDG-Accel, the joint venture between Silicon Valley venture capital firm Accel Partners and Boston, MA-based media giant International Data Group (IDG), announced the closing of two new Chinese technology-focused investment funds that amount to US$1.3 billion in assets. The US$550 million IDG-Accel China Growth Fund III will invest in fast-growing technology start-ups in China. The US$750 million China Capital Fund II will concentrate on China-based companies in the later, pre-IPO stage. IDG-Accel raised the over one billion dollars in capital for the two funds simultaneously over a twomonth period. IDG has had a presence in China since the early 1990s and invested in such Chinese companies as Baidu, Inc., Tencent Holdings Ltd. and Ctrip.com International Ltd. government & policy

China advances yuan internationalization China’s aim to internationalize the yuan picked up momentum with the first-ever offshore yuan initial public offering (IPO) launched in Hong Kong. The IPO by Hui Xian Real Estate Investment Trust raised RMB10.5 billion (US$1.6 billion) for the Beijing-focused real estate investment trust. Despite the historical offering, demand is considered weak because of investor concerns that there is too limited a pool of offshore yuan in Hong Kong to support the company’s Hong Kong stock listing in late April. Relatedly, China is considering Singapore’s bid to become an offshore yuan trading center. If approved, Singapore would serve to facilitate yuan-denominated trade settlement for companies in Asia, complementing Hong Kong’s role as a hub for offshore yuan trading.

PBoC lifts reserve ratio to record The People’s Bank of China (PBoC), China’s central bank, raised the percentage of deposits that China’s large banks must keep in reserve to a record 20.5%. PBoC has increased the reserve requirement ratio four times since the beginning of the year and 10 times since 2010. The latest increase sets aside at least an estimated RMB350 billion (US$54 billion) that banks otherwise could lend. Analysts anticipate additional tightening to occur, as China ramps up efforts to battle inflation that hit a nearly three-year high in March of 5.4%. A February report by a government think tank under the National Development and Reform Commission (NDRC), China’s main economic planning agency, predicts the reserve ratio may reach 23% this year.

China raises gas prices China’s National Development and Reform Commission (NDRC) hiked gasoline prices for the second time in 2011 and the fifth such time since 2010. The move allows the country’s two largest stateowned gas companies, China Petroleum and Chemical Corp. (Sinopec) and PetroChina Co., to increase the retail price of gas and diesel by RMB0.37 (US$0.06) and RMB0.34 per liter, respectively, up about 5% each. Beijing is trying to slow what it views as an unsustainable appetite for oil in the world’s second largest oil consuming country, behind only the United States. The move comes amid higher oil costs, which have topped US$100 per barrel in U.S. prices since the beginning of March 2011. Shanghai Business

Disneyland work begins Walt Disney Co. celebrated the longanticipated ground breaking for the Shanghai Disneyland theme park in Pudong district. Shanghai Disneyland, Disney’s first park in mainland China and its third in Asia, is part of the company’s US$4.4 billion investment to build a Disney resort in Shanghai with two hotels, restaurants and retails shops.

m ay 2 0 1 1

insight

When the park opens as early as 2014, it is expected to draw 7.3 million visitors in its first year, helping to boost Shanghai’s effort to be an international tourism hub. The full project is expected to be complete in 2016. Disney holds a 43% minority stake in the resort project, with the remainder split with the Shanghai Shendi Group Co., Ltd., a collection of three state-owned businesses.

ExxonMobil Chemical unveils Technology Center ExxonMobil Chemical Co., a division of ExxonMobil Corp., unveiled its Shanghai Technology Center in an opening ceremony at Zizhu Science-Based Industrial Park, as ExxonMobil looks to tap the growing demand for petrochemicals in China and the Asia-Pacific region. The US$90 million, 27,000 square meter center is ExxonMobil’s third largest center in the world and its largest in the AsiaPacific region. ExxonMobil will use the center to develop new premium products

insight

tailored for the local market or that can be manufactured or distributed globally. The center will host state-of-the art labs, testing facilities and commercialized product processing equipment. ExxonMobil’s longstanding presence in China has lasted for more than a century.

City tapped for electric car pilot Shanghai was chosen to be China’s test ground for electric vehicle development. Starting in Jiading district, the pilot calls for building the infrastructure to accommodate a target of 10,000 newenergy vehicles in the district by 2012. The effort includes setting up six personal car charging stations by the end of this year, expanding infrastructure to 15 charging stations, 13,000 charging poles and two hydrogen refueling stations next year. The program will be expanded to build 25,000 charging poles in Minhang district, Chongming County, Lingang New City and Hongqiao transport area by the end

m ay 2 0 1 1

of 2012. Shanghai has set a target of 20,000 new-energy cars to be in use by 2012.

Shanghai Electric, India sign wind energy deal State-owned Shanghai Electric Group reached an agreement with India’s KSK Energy Ventures Ltd. to export 125 twomegawatt wind turbines to India. Although details are not publicly known, the deal is the largest overseas sale for Shanghai Electric, which previously exported three fivemegawatt turbines to the United Kingdom and two such units to Thailand. Although Shanghai Electric focuses on thermal and nuclear power generation, its wind power manufacturing plant established in 2006 can produce 1.25-megawatt and twomegawatt wind turbines using German technology and 3.6-megawatt turbines using independently designed technology. India, the world’s fifth largest wind energy market, is expected to account for 50% of Shanghai Electric’s exports.

CHINA & THE WORLD

SOUTH AMERICA ASIA-PACIFIC

MALAYSIA: China, Malaysia pledge stronger economic cooperation During talks in Beijing, Chinese Vice Premier Li Keqiang and Malaysian Deputy Prime Minister Muhyiddin Yassin pledged to cooperate more closely on trade and economic issues. The Chinese Vice Premier called for more high-level visits, greater mutual trust and strategic communication and increased people-to-people exchanges between China and Malaysia. The countries hope to foster new areas of trade, including oil, gas, automobile, fishery and forestry. Bilateral trade between the two countries is strong in commodities, especially palm oil and rubber. China became Malaysia’s largest trading partner in 2009. In 2010, China imported US$50.4 billion in Malaysian goods, up 56.4% from the previous year.

MIDDLE EAST

ASIA-PACIFIC EUROPE

KENYA: Top Chinese official meets with Kenyan Vice President Li Changchun, a member of the Standing Committee of the Communist Party of China (CPC), met with Kenyan Vice President Kalonzo during his visit to the African nation to discuss bilateral relations between China and Kenya. Kalonzo stressed Kenya’s support of the one-China policy. After the meeting, Li and the vice president attended the soft launch of Kenya’s first mobile newspaper, jointly operated by Xinhua News Agency, Kenya’s Safaricom Ltd. and Huawei Technologies Co., Ltd. Over the past half-decade, Chinese firms have established a strong local presence in Kenya, especially in the telecommunications sector. China and Kenya established diplomatic relations in 1963.

MIDDLE EAST EUROPE

FRANCE: Societe Generale to expand in China French bank Societe Generale SA announced expansion plans in China, aiming to double or triple its mainland-based volume of commodities trade financing. The bank is in discussions with China Petrochemical Corp. and China National Coal Group Corp. on overseas energy products. Societe Generale hopes to use its expertise in commodities hedging to better serve its Chinese clients. Societe Generale, the only French retail bank in China, formed an alliance with China’s Everbright Securities Co., Ltd. in 2008 to develop derivative products. The French bank has also announced its intention to expand its derivatives business in China.

NORTH AMERICA MIDDLE EAST

AFRICA

Kuwait: China, Kuwait celebrate 40th anniversary of diplomatic ties More than 500 Chinese and Kuwaiti guests celebrated the 40th anniversary of the establishment of diplomatic relations between China and Kuwait in Beijing. Kuwait was the first of the Gulf Arabic countries to establish diplomatic relations with China. The value of bilateral trade between China and Kuwait totaled US$1.8 billion in 2010. Earlier this year, China gave final approval to Kuwait to build an oil refinery in the southern Guangdong province. The US$9 billion project is a joint venture between Kuwait Petroleum Corp. and China’s Sinopec.

NORTH AMERICA

AFRICA

SOUTH AMERICA MIDDLE EAST AFRICA

UNITED STATES: 83rd Confucius Institute opens in Missouri The University of Missouri became the 83rd American university to open a Confucius Institute. The institute, in partnership with Shanghai Normal University, is the 323rd Confucius Institute in the world. The opening ceremony included speeches, a gift exchange and a Chinese folk music performance by the Shanghai Normal University Folk Music Orchestra. Confucius Institutes, which are sponsored by the Chinese government, are non-profit public institutions that aim to promote Chinese language and culture. The first Confucius Institute was opened in Seoul, South Korea in 2004. The first Confucius Institute in the U.S. was opened in Maryland that same year.

AFRICA NORTH AMERICA ASIA-PACIFIC

SOUTH AMERICA

Suriname: China, Suriname to strengthen military cooperation China and Suriname’s defense ministers have agreed to strengthen military cooperation between their two countries, with China providing technical and medical assistance to the Surinamese National Army (SNL). A Chinese army delegation recently visited Paramaribo, Suriname’s capital, to provide technical assistance at a local military hospital. Other examples of Chinese aid to Suriname include construction of lowincome housing, assistance in renewable energy, an upgrade to the country’s television network and help for shrimp farmers. China estimates that there are approximately 40,000 Chinese in Suriname, out of a population of nearly 500,000.

ASIA-PACIFIC

SOUTHAMERICA AMERICA NORTH EUROPE

m ay 2 0 1 1

SOUTH AMERICA ASIA-PACIFIC

insight

b y H o r a c i o Fa l c ã o

M a n a g e r ’ s N ot e b o o k

The Negotiator Journey to Perfection What is negotiation? Negotiation is a process that happens whenever at least one person is trying to get another to do or not do something for him or her. We negotiate to increase value for ourselves which we could not achieve alone. Value can be time, money, reduced risk, a decision, recognition, status or credibility. Therefore, negotiation is: • Everywhere: every communication between individuals and not just in formal settings. • A process: neither a skill nor a talent, but that to be successful can benefit from both. • Relationship-based, short- or long-term, within which the process takes place. • A choice, not a given. Negotiators choose how to adapt to different situations to increase their likelihood of success. Each choice has potential risks and rewards. Perfect negotiators explore all the facets of a negotiation. They negotiate value, but also process and relationship. They know their choices impact their success and thus choose negotiation moves based on their potential risks and rewards. So when negotiating for more money, they will ensure the other parties also succeed. Doing so reduces their resistance, thus increasing efficiency and their appreciation towards better relationships.

Win-lose The journey to becoming a perfect negotiator for most starts with a win-lose choice. A winlose choice means choosing to use power to win in a negotiation. Interestingly, negotiators often choose to behave win-lose fearing that the other will do the same. This preemptive strategy has risks and rewards. The fear that the other may use power against them has negotiators acting Horacio Falcão is an affiliate professor of Decis ion Sciences at INSEAD, where he teaches mainly on the topic of negotiation. Find out more abou t negotiation at www.valuenegot iation.com.

insight

preemptively to defend themselves. To avoid every risk of losing, win-lose negotiators constantly assume and prepare for worst case scenarios. As a result, winlose negotiators become paranoid, which helps them not be naïve. Not being naïve reduces the risk of losing, but at a cost. A win-lose strategy attempts to win by using power to unilaterally extract value to one negotiator. However, for it to work, the other negotiator has to lose. Since most everyone sees losing as a negative, they will resist it. The negotiation then becomes a competition and consumes resources that could otherwise be invested in a better deal. Consequently, win-lose negotiators are never naïve. They are negative towards others and value creation. Win-lose is an early phase of the journey in which negotiators behave negatively, not naïvely.

Lose-win Some negotiators, surely not all, get frustrated with the negativity of win-lose. Tired of the power/resistance dynamic, these negotiators try to continue with their journey and move on to something better. They seek more positive negotiations where they can collaborate with others and create more value. Unfortunately, win-win intentions without proper training have many of them mistakenly going down the lose-win road instead. Lose-win negotiators forget that being positive is a means to value creation. The intention to treat others well can evolve into a false sense of security. And then, positive becomes nice. Contrary to win-lose paranoia, lose-win negotiators are naïve. They give unilateral concessions on hopes of improved relationships and spontaneous reciprocation. Also known as soft bargainers, lose-win negotiators are positive, but naïve.

Win-win, the value negotiator The poet Ali ibn Abi Talib summarizes: “Do

M AY

not be too hard, lest you be broken; do not be too soft, lest you be squeezed.” Both win-lose or lose-win are but diversions in our journey. To walk the path towards perfection is to develop the knowledge and skills necessary to advance. Win-win is a phase when value negotiators behave positively, not naïvely in a never-ending search for improvement through three strategic principles: 1. Negotiate the relationship and the substance separately – What separates a lose-win from a win-win negotiator is the ability, not the naïve hope, to translate intention into outcome. The ability lies in being positive about the relationship without risking profits. Value negotiators improve the relationship through trust building moves, not by throwing money at it. Perfect negotiators improve substance by understanding interests, generating value creating options and claiming value based on objective arguments. 2. Promote the dialogue pattern – Again Ali ibn Abi Talib guides us: “To make one good action succeed another, is the perfection of goodness.” The win-lose negotiator takes without giving. The lose-win negotiator gives without asking. Neither makes one good action succeed another. The dialogue pattern reminds Value negotiators to be ready to offer something when asking for something and vice-versa. Value negotiators positively promote value creation and claiming exercises for the balanced goodness of all. 3. Proactively diagnose – There is a difference between not being naïve in the win-lose and win-win choices. Win-lose acts on worst case scenario assumptions and risks creating a self-fulfilling prophecy. Winwin learns the real probability of worst case reactions to minimize its risk and be positive safely. While win-lose choice risks being over positive, win-win has positive value moves as imperative and risk as the moderator.

Got an article idea for “Manager’s Notebook”? Contact Insight Editor-in-Chief David Basmajian at david.basmajian@amcham-shanghai.org. 2011

Market Profile

B y E s t h e r Yo u n g

imaginechina

China’s Digital Marketplace

n 2010, China’s online sales hit US$684 billion, up 22 percent from 2009. The percentage of consumers shopping online out of all Internet users increased from 28 percent to 33 percent in less than six months. Despite this rapid growth, online retail shopping only accounted for an unusually low 3.7 percent of China’s total retail sales in 2010’s third quarter, significantly less than the global average. Large market, rapid growth – the combination makes it difficult to ignore the world’s second largest e-commerce market and the massive potential of the Chinese online retail consumer. “About two-thirds of Chinese have been online for three years or less, and half for less than two – and in the past it has taken about three years for an internet user to become an online shopper,” says McKinsey in a recent report. “Tens of millions of new e-commerce consumers could be just around the corner.” According to Deutsche Bank

analyst Alan Hellawell, overall online transactions are expected to grow to about seven percent of China’s overall retail market by 2013. Online retail revenues are expected to grow at 42 percent a year to RMB1.5 trillion by the end of 2014. Retail companies have rushed in to take advantage of this boom, following the lead of companies that have already tapped into the e-commerce explosion. The current online marketplace champion is one of the first: Taobao. com, a singular online marketplace launched in 2003. Taobao is a one-stop shop for multiple retailers, has over 230 million registered users, controlling roughly 28.5 percent of China’s US$15 billion business-to-consumer (B2C) retail market. In 2010, Chinese mid- to high-end fashion ecommerce website Xiu.com, with over two million users, raised US$20 million in funding to bolster negotiating and purchasing power. The growth of Internet e-commerce that took

M AY 2 0 1 1

insight

China’s bourgeoning ecommerce market is growing at a record pace, and companies are racing to claim market share.

“

Consumers in the last few years are searching for more intangible value in their purchases.”

years in the U.S. and other developed nations has taken months in China, with little sign of slowing down. What is behind this growth? Part of the trend may be explained by China’s astonishing economic story over the last decade, with structural developments that have allowed for the intensified proliferation of Internet access and usage, with the government spearheading the construction of infrastructure necessary for Internet networks across the country. But more powerful is how readily and rapidly consumers have taken to the Internet, employing it as a source of information, entertainment, communication and business – a relationship that is intricately related to the success of the e-commerce market. The relationship between the market and consumer, then, has been an extraordinary picture of push and pull, with e-commerce market leaders molding their shopping experience to that of the domestic way of consumption and consumers responding in a way that has secured China’s place as one of the fastest growing e-commerce market in the world. A look into China’s e-commerce boon is a look into the greater China story: one with enormous market growth potential, with unique challenges and opportunities moving forward.

Anatomy of an online consumer To better understand the modern Chinese ecommerce market, one must understand the modern Chinese Internet user. There are an estimated 420 million of them – a third more than the population of the U.S. – with Internet penetration reaching 31.6 percent of the total population. The Internet has become a day-to-day tool: more than 75 percent of users, according to a McKinsey study, indicated that they “could not live” without the Internet. Modern online shoppers are a microcosm of China’s Internet users and if anything, they are younger, more educated and wealthier. The majority of the 145 million online shoppers in 2010 were between the ages of 18 and 35, 53 percent have a college degree and more than half are middle class or above. A majority of them expect their salaries to continue to increase. And they are uniquely poised in the e-commerce market: combined with

insight

M AY 2 0 1 1

an optimistic look towards China’s economy and with rising disposable income to burn, Chinese consumers are more willing and eager to spend their newly acquired wealth. This new generation of online shoppers is also savvy and they are willing to spend more time and effort to get the best-value deal. One in four Internet users will research a product before purchasing it and will stop at multiple retailers in order to do so, making sure they get the most for their money. What they want, however, is not necessarily limited to the cheapest item. Consumers in the last few years are searching more for intangible value in their purchases, looking for products that are safer, higher-quality, or that fit their aesthetic or lifestyle. The online experience seems especially suited for this particular form of shopping, given the Internet’s unique place as a wide net of information. With the proliferation of social media sites, word-of-mouth recommendations and product forums where users can discuss the merits of particular products are gaining capital. Clothing and accessories are the number one purchase, accounting for roughly 36 percent of retail purchases online. It is followed by digital electronic products (a notoriously price-sensitive market), at 29 percent, with many consumers finding that they can get the best price online.

The online shopping challenge Entrepreneurs and retail leaders hoping to cash in on China’s e-commerce trend have needed to adjust to the particular nuances of the Chinese consumer and are seeking to attract those who haven’t made the leap to online purchases. Some of it has translated into challenges for these retailers, as some Internet users are still reluctant to shop online. Because of the search for value, for example, most online shopping remains consumer-to-consumer (C2C) instead of B2C. B2C transactions, where retailers connect directly to buyers, cover only 8.5 percent of total online sales. Taobao.com, though a leader in B2C transactions, is dominated by small retailers operating as middlemen between retailers and consumers, offering offseason, overstock or deeply discounted products, often undercutting retailer prices.

M AY 2 0 1 1

insight

imaginechina

Human Target: Taobao's launch of Taobao Mall allows retailers to meet consumers where they are.

Chinese consumers are also demanding more security and guarantees, and the online shopping experience has been tarnished by episodes of fraud and counterfeits. In November, Taohua. com, Taobao’s publishing marketplace branch, apologized for selling 50,231 pirated e-books from its listings. Chinese consumers may see little incentive of buying online for fear of getting fakes. Given that an estimated 15 to 20 percent of products sold in China are counterfeit according to some Chinese government estimates, many consumers may find it more secure to see the product in-store. In addition, China’s logistics infrastructure is still somewhat underdeveloped. Purchases on Taobao make up over 70 percent of domestic couriers’ daily deliveries, leading to uneven service as the demands of e-commerce outpace the capabilities of local delivery companies. “China’s logistics industry hasn’t caught up with the fast development of ecommerce,” said consumer research consultancy Analysys analyst Chen Shousong. “It may take three to five years for the industry to solve the problem.” As a result, China’s online consumers are still fairly conservative. Despite the market’s rapid growth, online transactions remain low compared to other developing markets.

Adapting to the online consumer Undaunted, many retailers are finding ways to

insight

M AY 2 0 1 1

attract new e-commerce consumers and are building on existing networks and communities to build trust and added convenience. Taobao’s launch of Taobao Mall, its B2C branch accompanied with an RMB200 million advertising campaign, allowed for many B2C retailers to meet buyers where they are. They molded their shopping experience to that which many consumers are used to with the C2C market, with the added benefit of special Internet-exclusive discounts and deals – leading to their 28.5 percent lead in the relatively small-butgrowing B2C market. Retailers in China are rapidly setting up shop on Taobao Mall. Some are even foregoing brickand-mortar retail outlets. Shanghai Qianrui Garment Company sells its popular children’s clothing brands Miss de Mode, MILBoy and Jenny Bear exclusively online and during a twoday Taobao Mall sale event, the company charted RMB10 million in sales. Taobao Mall expects its transaction volumes to quadruple from 2009, postulating that consumers will be fueled by the greater selection. And despite Taobao’s dominance, competition in online retailing is getting fierce. Dangdang.com, starting out primarily as a book seller and recently diversifying into general retailing, saw its revenues jump 56 percent in the first nine months of 2010. Dangdang also raised US$272 million in its New York Stock Exchange IPO last December, making Dangdang’s IPO the third best debut in 2010. Taobao is also stepping up its game. Taobao parent company Alibaba and Microsoft have jointly launched a beta version of their web search platform Etao, with search results diverting traffic to Taobao, providing a convenient search option that more rapidly connects buyers to the products they are looking for. To address the logistical bottleneck that has so far plagued online shopping delivery, Alibaba Group, Taobao’s parent company, is planning to build a logistics network of 52 distribution centers located across China in 2011. It is not just the e-commerce companies that are investing in e-commerce-related logistics. United Parcel Service (UPS) plans to establish a domestic service in China. “The market is just ripe for consolidation,” said Dan Brutto, president of

UPS International. All in all, companies are searching for ways to meet value-seeking consumers by providing a fast, convenient and low-price service. “We started with consumer-to-consumer, and people were attracted by the low prices, the many choices and the conveniences,” Daniel Zhang, Taobao’s chief financial officer, has said. “Now product and service quality have become more important.”

Future growth The developing capabilities of e-commerce has attracted more and more retailers to operate online, building towards a critical mass that may attract even the more hesitant of consumers to peruse and perhaps consider purchasing online. Foreign retailers have especially found that online retail can expand the prominence and prevalence of their products in China – and most are careful to follow the leads of Chinese retailers by adjusting to the particular habits of China’s consumers. American retailer Gap, for example, instead of relying on its direct website as it does in the U.S., recently opened a platform on Taobao.com on the heels of its brick-and-mortar location in Shanghai. “Taobao is complementary to our own ecommerce site and underscores the importance of e-commerce as a platform to help drive our global growth,” says a Gap spokesperson. Wal-Mart, the world’s largest retailer, launched its online store in China this year connected to its Sam’s Club retail branch. Japanese clothing retailer Uniqlo launched an online store last fall. Analysts are also looking to China’s secondand third-tier cities for additional growth. Though some retailers, especially foreign ones, may not have a huge physical presence in these areas, the Internet would allow them to reach consumers there faster and more thoroughly than with just a brick-and-mortar retail model. “Consumers may go online to find the same experiences, services and choice as consumers in first- and second-tier cities,” says Bob Chao, from consumer research firm iResearch. Higher end retailers, for example, are opening online sales in order to tap into non-urban luxury

consumers. Luxury-goods maker Armani launched its online store late November, allowing it to sell handbags and clothing directly to consumers who may already have brand awareness, but not access to its products because of geographic distance from an Armani store. “This is a strategic move that will open up luxury to the entire nation,” says Federico Marchetti, chief executive of YOOX SpA, which created the site for Armani. Consumer analysts are quick to point out that the Internet is not a replacement for physical retail – merely an extension of it. “E-commerce will not replace brick-and-mortar buildings,” says Edward Yu, CEO of Analysys. “But there will be a balance.” Savvy consumers are the winners – as Internet retailers build their presence online, they will have a choice of seeing the physical product, reading about the product online and accessing a directfrom-the-source product while finding the latest and best designs and prices. Some retailers are looking at the next generation of technology for e-commerce, investing in new ways to shop online. Mobile technology, for example, may provide an outlet that takes shopping on the road. Using a handset with 3G capabilities, buyers can browse and pay for products on-the-go. China’s mobile payment market was estimated to top RMB3 billion in 2010, with over 62 million smartphones projected to be sold in China. Taobao launched mobile apps in 2009, reporting that mobile shopping demonstrated “strong potential.” The excitement surrounding the possibilities of smart phone technology indicates that ecommerce will continue to play an important role in China’s unfolding consumer market story. The increasing number of players in the online consumer market promises rapid development with the increased competition. As retailers in China continue to invest in the market, Chinese consumers will have added incentive to participate in the online marketplace, unlocking the potential for enormous market growth.

Esther Young is an Associate Editor of Insight. She can be contacted at esther.young@amcham-shanghai.org.

M AY 2 0 1 1

insight

“

Some retailers are looking at the next generation of technology for ecommerce, investing in new ways to shop online.”

doing business

B y K e n t k e d l & n e a l b e at t y

Risk Management in China’s Second- and Third-Tier Cities imaginechina

t’s a truism that “China is a large country,” but when foreign companies are trying to “capture the China market,” China’s size and scale take on a significance that goes beyond simple descriptions. China is often seen as a single, monolithic market; however, it is more accurate to think of China as a collection of markets and cultures, all sharing certain core characteristics but also differing in important ways. Today, China has 160 cities with a population of one million or more. An HSBC study predicts that by 2020, China will have six provinces with an annual GDP of more than US$1 trillion, equal to six countries the size of Russia, Spain or Canada. Much of this growth will take place in China’s Tier 2 and Tier 3 cities. Already, 53 percent of China’s total imports are accounted for by these cities – almost double the amount of the three better known Chinese mega cities combined: Beijing, Shanghai and Guangzhou. The opportunity for foreign companies in these markets is great; however, so is the risk. It is critical to have an in-

depth understanding of these risks to capitalize on the opportunities. There are many ways to segment the China market but probably the most common today is by city “tiers,” with China’s megacities of Beijing, Shanghai and usually Guangzhou or Shenzhen occupying Tier 1. For the lower tiers, although there is no official definition, it is generally accepted that there are around 10 to 15 Tier 2 cities attracting increasing amounts of foreign investment (places such as Chengdu, Suzhou, Dalian and Qingdao), and another 30 or so Tier 3 cities made up mainly of the remaining provincial capitals. Even among the lower-tier cities, the numbers are without parallel anywhere in the world: eight Chinese cities have a population of more than 10 million, and 93 have more than five million. By comparison, in the U.S., only New York City has a metropolitan population of more than five million. The pattern of foreign investment in China has been changing as companies have moved from investing in Tier 1 cities to exploring rapid growth

m ay 2 0 1 1

insight

There are great opportunities, but businesses must take risks into account when headed into these growing markets.

imaginechina

government connection: A positive relationship with local authorities can help avoid problems later.

in Tier 2 and 3 cities and beyond. After more than 10 years of the government’s “Go West” policy, the PRC’s plan to develop western provinces in China, significant foreign investment is now reaching beyond the coastal provinces, largely because of improved infrastructure and the growing domestic market outside of Tier 1 cities. There are certain core characteristics and challenges that are shared across city tiers in China that are based on a common social, business and political culture. However, these characteristics are often magnified when moving into China’s Tier 2 and Tier 3 cities, increasing the risks and highlighting the importance of proper due diligence and risk management. As a greater proportion of Control Risks’ work for clients has extended into Tier 2 and 3 cities, we have identified several key challenges where China’s lower tier cities differ from the more familiar Tier 1 cities. But how should you address these challenges? Your experiences in China’s Tier 1 cities may not be directly applicable to your new market targets in China; therefore, knowledge of the new operating environment is essential.

All business is local Most foreign companies understand that, throughout China, there is strong government support of – and

insight

m ay 2 0 1 1

involvement in – business. This is a key element of China’s policy of “socialism with Chinese characteristics.” While state-owned enterprises are, by definition, owned by the government, the privately-owned enterprises are also keenly aware of their relationships with the government. These relationships are needed to navigate their way through China’s licensing and regulatory obstacle courses. In China’s Tier 2 and 3 cities, the adage that “all politics is local” should be expanded to read “all business is local”; Chinese companies in Tier 2 and 3 cities will probably have stronger relationships with local regulators than their ties to national ones. Therefore, when doing business with companies in smaller cities, whether as a joint venture partner, an acquisition target or as a competitor, one should make local due diligence a priority. A quick Internet check and a chat with Beijing regulators is not enough to properly assess companies in the outer regions of China; instead, researching local information sources and speaking to people on the ground to get the proper depth of insight on a company is critical. From the very start, building the right relationships with the local officials – no matter what industry you are in – is vital. That includes the police (Public Security Bureau). Although they do not function in quite the same way as in the U.S., there is a far better chance of getting their help when you are in trouble if they already know who you are. Case study: A manufacturing client had a joint venture in Hubei province. The local government had provided tax incentives to promote inward investment into the area. Once the joint venture was operational, our client quickly found themselves running into an increasing number of disputes with the local joint venture partner, who was strongly backed by the local government. The extent of the local government’s direct involvement in the joint venture partner’s business was not known to our client prior to the establishment of the joint venture. These relationships meant it was very difficult for the client to seek any sort of equitable resolution.

Family ties Chinese culture, like others across the world, relies heavily on personal and family relationships, which often overlap with the government relationships noted above. While China maintains a growing regulatory base and legal code that is broadly applicable and enforceable, personal relationships, rather than strict legal enforcement, often have primary sway in Chinese business relationships. This is particularly true in China’s Tier 2 and 3 cities. In many cases, cities in China’s hinterlands have a history of strong families that are involved in business. Aligning yourself with one of these groups can greatly benefit your company and strategy, positioning you to take full advantage of local resources. However, this can be a doubleedged sword, as the strong local relationships which were once a benefit can turn against you in a business dispute. There are numerous examples of JV partners apparently breaking non-compete agreements by producing goods that compete directly with products made by the JV, for example. In such cases, the foreign partners’ ability to resolve the issue may well depend upon the strength of the local partners’ relationships with the local authorities. Case study: A client recently was looking for a business partner in Changsha, Hunan province. The criteria included someone who was very well connected in business and government circles. They found a person who had a vast network of family businesses and was considered one of the leading families in Changsha – a perfect candidate for our client’s strategy in Hunan. However, during the due diligence process, we identified several cases where this individual had used his connections to build his business. We did not find anything overtly illegal but we did identify a pattern of “bullying” based on connections. Our client had to work through various risk mitigation strategies to address the risks associated with any unethical behavior by the potential partner before they went ahead with the deal.

The challenge of dispute resolution The range of options for a foreign company to resolve

problems is also unique in China’s hinterland, and business disputes in Tier 2 and 3 cities are often poorly handled by foreign companies. In general, local resources and local relationships are the best way to solve local problems. One Shanghaiheadquartered company learnt this painful lesson when they tried to dissolve a joint venture in far western China. The joint venture partner refused to give back the capital equipment despite its obligations under the joint venture agreement. Our client sent its Shanghainese lawyers to resolve the issue, thinking that they were covered because “our lawyers are Chinese.” However, when the lawyers showed up at the facility, the joint venture partner called its associates at the local authorities and reported that “some people from Shanghai are here to steal our equipment,” whereupon the Shanghai lawyers were arrested! The key to mitigating this risk is, again, to think local. A Chinese lawyer is not enough; you will need a lawyer from the same town where the dispute occurs.

China – a collection of unique markets Many of the issues that are now faced by foreign investors in Tier 2 and 3 cities in China are the same faced in Beijing and Shanghai two decades ago. The danger is that having run a successful business in the relatively sophisticated coastal areas, foreign-invested enterprises believe that they now understand China completely and so let down their guard when moving inland. China is one big country, but the differences between the regions, and the issues resulting from this, need to be taken into account when conducting a risk assessment for a new venture in the hinterland. Kent Kedl is the managing director of China and North Asia for Control Risks. Neal Beatty is the director of Client Services for Control Risks in Greater China. Control Risks is an independent, specialist risk consultancy, providing advice and services that enable clients to accelerate opportunities and manage strategic and operational risks. The authors can be contacted at Kent.Kedl@control-risks.com and Neal.Beatty@control-risks.com.

m ay 2 0 1 1

insight

“

Personal relationships, rather than strict legal enforcement, often have primary sway in Chinese business relationships.”..”

insight

m ay 2 0 1 1

INDUST RY INSIGHT

B y J o h n P. M e rr i t t

imaginechina

Chinese Healthcare Reform and the Medical Device Sector

n important element of China’s 12th Five Year Plan is reforming the country’s healthcare system. With the objective of establishing basic healthcare coverage for 90 percent of its citizens by 2020, China’s healthcare reform, along with other elements of the 12th Five Year Plan, creates immediate opportunities for U.S. medical device manufacturers (MDMs). While China is more than capable of meeting local demand for low-end devices such as dressings, sponges, drapes and gowns, more than 80 percent of high-end medical devices, i.e. durable goods, equipment, implants and drug eluding stents, are imported. However, China’s healthcare reform plan also has the potential to strengthen the position of

Chinese MDMs. To protect their position in the long run, U.S. companies must develop strategies designed to capitalize on the opportunities and navigate the challenges of this increasingly important and competitive market.

The global medical device market and China The global medical device market is estimated to be valued at US$315 billion. In 2007, the U.S. accounted for 43 percent of the market, the E.U. accounted for 33 percent and Japan 10 percent of the total market. While China represented 20 percent of the world’s population at that time, it made up less than five percent of global demand

m ay 2 0 1 1

insight

The impact of China’s reform will have a significant impact on the rapidly advancing market for medical devices in China.

for medical devices. However, for several years it has enjoyed double-digit growth and the market is expected to grow at 15 percent per year for the next 10 years. In January 2010, Liu Daozhi, vice president of Microport, a leading developer, manufacturer and marketer of medical devices in China, was quoted as saying “By 2020 [China] is expected to become the world’s second largest medical device market, valued at RMB360 million (US$52.71 million).” It is interesting to note that at present, there are more than 12,000 medical device manufacturers in China. But only 60 of these have sales valued at over US$14.6 million. China has a large and established sector of companies manufacturing low-end devices. These low-end, or Class 1, products are manufactured for domestic consumption as well as for export, mostly under private labels for companies like J&J, Kimberly Clarke, Cardinal Healthcare and other major multinational MDMs. On the other end of the spectrum, not only is China not a significant manufacturer or exporter of high-end, or Class 3 devices, most need to be imported to meet growing demand. Chinese generally prefer foreign goods when it comes to these products becuase those imported from America, Europe and Japan are perceived to be

Indexed growth of China healthcare costs % 15 13 11 9 7 5 3 1 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Outpatient fees per person

Hospitalization cost per person

Unban per capita disposable income

Rural per capita income

Source: Source: NBS, MOH, RedTech Advisors

insight

m ay 2 0 1 1

of higher quality. Since the leading producers of high-end medical devices are reluctant to move manufacturing to China due to intellectual property protection and enforcement concerns, they are imported.

Social and demographic backdrop to China’s healthcare reform With the opening up of China and a gradual loosening of control and management of the healthcare sector, Chinese citizens have had to shoulder an increasing portion of their own medical expenses. In spite of the establishment of various insurance schemes and rising incomes, healthcare has become unaffordable for many and in 2006 it was estimated that there were 700 million people in China with no medical insurance coverage. Furthermore, while the urban areas benefited from China’s booming economy, the rural areas have been largely left behind. This has resulted in significant disparities between urban and rural areas when it comes to the quality and availability of medical facilities and services. However, during this time, the need for expanded healthcare coverage in China has only increased. Today, China has 160 million people over 60 years of age, and by 2020 that number is expected to increase to 240 million people. As China ages and becomes more affluent, incidences of cancer are increasingly comparable to the Organization for Economic Co-operation and Development (OECD) average. Ischemic heart disease and stroke are notably higher; most likely due to a changing diet, hypertension and smoking, which is much more prevalent in China than other developed nations. In fact, the number of cardiac patients in China is growing at a 20–30 percent annual rate. Despite mounting health concerns, in 2009 China spent 4.3 percent of GDP on healthcare, less than half the average OECD average. The lack of an effective healthcare system has had economic consequences as well. It has prompted Chinese citizens to save aggressively in order to pay for increasingly expensive healthcare services, a major obstacle to China’s goal of creating a more balanced, consumer-driven economy.

The basic elements healthcare reform

Chinese

China’s healthcare reform is intended to improve public health, bring rural healthcare more in line with the healthcare provided in urban areas and free up personal savings to drive consumption. To achieve these objectives, China has committed US$125 billion to be applied to two major fronts. Funding and harmonization of insurance systems to reduce the number of uninsured in China The multiple insurance systems currently in place will be harmonized and subsidies for insurance premiums for individuals will be provided. Prior to initiation of China’s healthcare reform, there were four social insurance programs in place covering different segments of society. • Urban Employee Basic Medical Insurance (UEBMI) for the urban employed • Urban Resident Basic Medical Insurance (URBMI) for urban residents without formal employment • The New Rural Cooperative Medical Scheme (NRCMS) for the rural population • Tax-financed medical assistance programs targeting the needy in both urban and rural areas It is expected that as a result of reform under way, 90 percent of all urban and rural residents will be covered. Extending coverage to an additional 700 million people will most certainly increase demand for medical devices of all types. Building of Infrastructure In many regards, the basic assets or physical healthcare facilities in China are simply not in place to meet the above objectives. A key component of the government’s plan is to build or renovate some 3,000 hospitals and 29,000 clinics across China. China is primarily served by a three-tiered system of public hospitals, augmented by private hospitals. Range of service, quality of care and products used can vary widely across the system. At the top of the public system are Tier 3 hospitals,

with higher levels of service and care, as well as specialized capabilities. There are roughly 1,000 Tier 3 hospitals that offer general or comprehensive care. Tier 3 hospitals typically have more than 500 beds and they are more likely to offer premium imported devices. At the other extreme are the Tier 1 facilities, which are in some cases hardly more than clinics with extremely limited capabilities, operating on a township or village level serving rural areas. These are small facilities with limited capabilities, providing limited services and more inclined to use lower-cost, domestically produced devices. Many of these facilities have antiquated equipment and old inventories. There are approximately 12,500 Tier 1 hospitals. More and better Tier 1 facilities are needed if adequate healthcare is to be provided to rural areas, and this is a major component of the plan. Tier 2 facilities, hospitals of medium size operating at the city, county or district level with between 100 and 500 beds, fall somewhere in between. There are more than 5,000 of these hospitals. Reform will add a substantial number of beds to the system and dramatically increase demand for medical devices in China. China’s continued GDP growth and ageing demographic will also contribute to significant growth of the medical device market. Building this much infrastructure and harmonizing multiple insurance schemes across a country the size of China is quite an undertaking. However, China’s ability to put large scale infrastructure in place quickly and to develop strategic industrial sectors have been demonstrated more than once.

Looking forward Chinese MDMs can expect to profit from increasing local demand for low end, or Class 1, devices due to an expanding base of hospitals and clinics. In addition, China will also see increased demand for these devices from the U.S. market as a result of U.S. healthcare reform, which will extend coverage to an additional 30 million people. At the high end of the market, leading U.S.

m ay 2 0 1 1

insight

“

Extending coverage to an additional 700 million people will most certainly increase demand for medical devices of all types.”

How Do Chinese Healthcare Reform and U.S. Healthcare Reform Compare? • China is evolving from a government-funded system of healthcare, whereas U.S. healthcare costs have historically been shouldered by the individual who relies on private insurance, often subsidized by the employer. • U.S. healthcare reform aims to extend coverage to an additional 30 million people, while China is addressing the unmet needs of several hundred million people. As recently as 2006, there were 700 million people with no medical insurance coverage in China. • The building of physical assets is a key component of China’s reform package, while there is adequate infrastructure in place in the U.S. to support the anticipated needs of the population. • The U.S. has a mature and harmonized system of pooled risk, while China has an immature, fragmented system of pooled risk and insurance that needs to be harmonized as well as funded.

MDMs can expect to enjoy increased demand for Class 3 devices used in China where imported devices are preferred. But Chinese MDMs will also profit from increasing local demand for high end devices since there are hospitals less able to pay the premium required for imported devices. Furthermore, while servicing this increasing demand, a maturing, more innovative class of Chinese medical device manufacturers may well evolve that could challenge the leading device makers for market share in China and beyond. This is particularly true where major MDMs seem to be complacent, relying on their superior technology and willing to concede the lower part of the Chinese market to local Chinese manufacturers. Their focus today is to simply compete against their traditional, mostly Western or international competitors for that sector of the market that is willing to pay a premium for superior goods. This is a dangerous strategy and can only be successful in the long run if the cost of upgrading quality to meet the demands of the China market drives up the price of Chinese devices to where they approach the price of imported devices. In many cases quite the opposite is more likely, since quality differences

insight

m ay 2 0 1 1

between imported Class 3 devices and locally produced devices are increasingly much less than the difference in selling price. This gap analysis is important since it implies that in some cases, Chinese MDMs could bring the quality of their high-end devices up to par while still keeping their price substantially lower than their international competitors, even if their price increased by 100 percent. Also important for U.S. MDMs to consider is that a key component of the 12th Five Year Plan identifies seven Strategic Emerging industries (SEIs) that are of long-term strategic value to China. These industries will enjoy government support in the form of tax credits or other benefits. Medical Devices are considered a part of the biotechnology sector, one of the seven SEIs, which may impact the competitiveness of China’s MDMs and possibly the ability of foreign MDMs to access the China market. At the same time, China is aggressively pushing for higher quality standards, more robust quality systems and more disciplined compliance in regulatory affairs. This should boost the real quality of Chinese-made devices and subsequently, increase the confidence of Chinese consumers in their own locally produced goods. Given these factors, the migration of manufacturing to China for those Class 3 goods that have traditionally been imported is a strategy many foreign MDMs may have to consider if they are to compete against Chinese Class 3 device manufacturers who are expected to emerge and are increasingly offering comparable quality and performance with lower pricing.

Competitive response is needed A rapid maturation of the Chinese medical device industry poses a threat to U.S. MDMs in the near term as well as in the long term. Leading MNCs manufacturing high-end medical devices would be best advised to look for ways to increase local content and to develop products specifically designed to meet the price performance needs of the Chinese market, or risk missing out on the opportunity to capitalize on this dynamic market

and give the local Chinese competitors time to mature. In fact, by not competing aggressively in China, the leading multinational MDMs could find themselves competing against lower-priced Chinese goods in their respective home markets in the decades to come. To respond to this competitive threat, U.S. MDMs could choose several courses of action: • Development of product better tailored to the unique needs of the Chinese market, shedding unnecessary costs • Utilization of local incubators such as Shanghai Institute for Minimally Invasive Technology, a unique government-funded incubator located in Shanghai • Joint ventures with emerging Chinese firms where synergies exist

• Establishment of local manufacturing strategic acquisitions where possible These are exciting times in the Chinese medical device marketplace. China will be the most dynamic medical device market in the world for years to come with significant opportunities and challenges. To take full advantage of the opportunities and to minimize the threats, an awareness and understanding of both are important, and the establishment of sound strategy in the near and long term is essential.

John P. Merritt is a consultant and a 20year veteran of the international medical device industry. He can be contacted at merrittmyersinc@comcast.net.

m ay 2 0 1 1

insight

“

China will be the most dynamic medical device market in the world for years to come.”

p o l i c y INSIGHT

By Ashley Cahill

imaginechina

Shanghai’s 12th Five Year Plan Through continued reforms, Shanghai’s FYP will help drive its commitment to expand participation in global competition and cooperation.

n late 2010, the 4th General Assembly of the 13th Shanghai People’s Congress approved the 12th Five-Year Plan (FYP) of Shanghai’s Social and Economic Development, shaping the direction of the city’s development for the next five-year period, 2011 through 2015. The FYP focuses on accelerating the internationalization of the city with a “FourCenters” initiative. The ambitious initiative calls for Shanghai to become a global financial, trade, shipping and economic center through innovationdriven development and structural readjustment of the economy. Shanghai’s 12th FYP will likely have major implications for foreign companies operating in Shanghai. Through the city’s promotion of certain industries, encouragement of FDI and promise to improve the foreign business climate, foreign-invested enterprises (FIEs) in the city could enjoy important opportunities during the next five-year period.

“Four Centers” initiative The internationalization of the city is one of the

insight

m ay 2 0 1 1

clearest themes of Shanghai’s 12th FYP. The plan’s “Four-Centers” initiative provides direction for developing the city into an international financial, trade, shipping and economic center during the half-decade period and beyond. International Financial Center In March 2009, the Chinese government announced a national strategy to build Shanghai into an international financial center complete with mature financial institutions able to offer a wide range of modern and globally competitive financial products and services by 2020. As an international financial center, Shanghai plans to become the world’s center of trading, pricing and clearing of Chinese yuan assets. The initiative will facilitate foreign companies’ growing use of offshore RMB and support the issuance of yuan-denominated bonds. Other incentives include encouraging finance leases, small loan services and financial guarantees for FIEs. International Trade Center As an international trade hub, Shanghai’s development objective is to allocate international and domestic resources to serve an integrated Yangtze River Delta (YRD) region with Shanghai as its anchor, as well as the rest of the country by 2020. Shanghai aims to establish an administrative system to support the global trade center and a “world-class environment for commerce and trade.” The city plans to develop “three ports and three zones” in Pudong, the Hongqiao Business Area and the former Expo site. Additionally, Shanghai will look for ways to attract enterprises that operate on new models of international trade, domestic and international trading organizations, trade promotion bodies and industry associations. International Shipping Center The third center refers to Shanghai as an international transportation and shipping center, expanding on the city’s impressive infrastructure development over the past decade. Under Shanghai’s 11th FYP, the city made huge strides in expanding shipping capacity, building more than 1,100 harbors and adding 10 cross-river facilities on the Huangpu River. The city

hopes to continue building its shipping capacity by attracting more foreign investment in shipping services such as vessel trading, vessel management, vessel financial leasing and shipping brokerages. Shanghai is already taking important steps towards meeting this goal. Last month, Shanghai’s Waigaoqiao Port began operations of a deep-water channel, linking the city’s busiest port to the main navigation channel. International Economic Center The fourth and final piece of Shanghai’s “FourCenters” initiative is an international economic hub, promoting FDI and development of a flourishing services sector. In the first three months of this year, contracted FDI in Shanghai hit a record quarterly high of US$4.72 billion thanks in part to greater overseas investments in the services sector, according to the Shanghai Commission of Commerce. One of Shanghai’s major objectives is to become a “headquarter economy” by attracting multinational companies (MNCs) to set up their global or regional headquarters in Shanghai. By the end of 2010, 305 MNC regional headquarters, 213 investment companies and 319 R&D centers had been established in Shanghai, surpassing all other Chinese cities in each category.

Implications for foreign business On March 9, AmCham Shanghai hosted Huang Feng, vice chair of the Shanghai Commission of Commerce, to discuss Shanghai’s 12th FYP and the implications for foreign enterprises. Huang identified areas of opportunity for foreign business, mentioning the high-end medical industry, education and emerging industries, including new energy and pharmaceuticals. Innovation economy Shanghai is well-positioned to lead the country’s ambition to become an innovation-driven economy. Already, the city has advantages in intellectual and investment capital thanks to hundreds of foreign-invested R&D facilities, MNC headquarters and key innovation centers at Zhangjiang Hi-Tech Park, Caohejing Hi-Tech Park

(CHJ), Hongqiao Linkong Economic Zone and the Yangpu Knowledge and Innovation Zone. As part of the 12th FYP, this year Shanghai’s government will establish a RMB10 billion fund for innovation, research and finance projects. The government plans to build a “smart city” through investment in faster broadband and other information technology (IT) infrastructure, including cloud computing and supercomputer sectors. The plan also focuses on investments in semiconductors, computers, flat display panels, hi-tech electronics for automobiles and nextgeneration telecommunications equipment. FIEs in these sectors can expect opportunities to contribute to Shanghai’s “smart city” development. A more livable city Besides creating economic targets and goals, Shanghai’s 12th FYP builds on the city’s 2010 World Expo motto “Better City, Better Life,” striving to improve the lives of all residents. Environmental protection and resource conservation have become important priorities, with the city working to improve air quality, reduce water pollution and encourage recycling. The 12th FYP also aims to encourage greater investment in social programs, increasing local retirement pensions and minimum wages, as well as pegging wage increases and social assistance for the vulnerable to price hikes and inflation rates.

Final thoughts Shanghai’s 12th Five-Year Plan is an ambitious and far-reaching plan that, if fully implemented, has the potential to dramatically alter the business climate for foreign companies and could significantly improve the quality of life for Shanghai residents. AmCham Shanghai looks forward to opportunities to share best practices and enhance communications with the Shanghai Municipal Government and to provide the perspective of top American business executives that will help advance mutually beneficial development objectives. Ashley Cahill is a contributor to Insight. She can be contacted at ashleyecahill@gmail.com.

m ay 2 0 1 1

insight

Shanghai’s 12th Five-Year Plan identifies six major goals/ targets: • Deepen reform and “opening up” • Accelerate strategic readjustment of the city’s industry mix • Focus on “peopleoriented” social development and management • Promote greater integration between urban and rural development • Strengthen resource conservation and environmental protection • Enforce the national policy of “rule of law” in a comprehensive, effective way

insight

m ay 2 0 1 1

g r e e n t e c h f e at u r e

By Al Beebe E d i t e d b y e s t h e r yo u n g

AmCham Shanghai is a proud partner of the China Greentech Initiative. Founded in 2008, the China Greentech Initiative (CGTI) is the only China-international collaboration of 100+ organizations, focused on identifying, developing and promoting green technology solutions. The China Greentech Report 2009, an analysis of the catalysts and key opportunities of China’s greentech markets, was launched by CGTI at the World Economic Forum in Dalian in September 2009, and quickly became the primer on the industry. With more than 50,000 copies in circulation, thousands of business leaders continue to consult the 2009 report for a broad overview of China’s greentech industry and market. CGTI’s China Greentech Report 2011 was released on April 21 at the Annual Summit for Green Companies in Qingdao.

ithin a few years, China has emerged as a global greentech leader. As predicted in the China Greentech Report 2009, China is now the leader in a number of greentech indicators, but more importantly, China stands at the center of almost every greentech market. No greentech investor or company can ignore China. The 2011 Report – a companion document to the 2009 edition

imaginechina

China Takes the Lead in the Global Greentech Race

– is the culmination of an open source, commercial collaboration of over 100 of the world’s leading technology companies, entrepreneurs, investors, NGOs and policy advisors who participated in the China Greentech Initiative’s 2010 Partner Program. This latest edition provides a view on the world’s fastest growing sector in the world’s fastest growing market, with a focus on why China is emerging as a global greentech leader, how each of the six sectors in which the China Greentech Initiative focused in 2010 are evolving and what prioritized greentech opportunities exist within each of these sectors. “In terms of size, opportunity, need and government support, China’s greentech market is racing ahead of other nations,” says Randall S. Hancock, China Greentech Initiative co-founder. “China’s overall market leadership may not be a surprise to some, but we believe that people will be surprised to learn that many of the biggest greentech opportunities in China exist in not-soobvious areas.”

China’s rapid greentech growth The China Greentech Report 2011 identified five themes that will play a role in the development of China’s greentech market in the coming year: 1. The growth in China’s greentech markets has been dramatic: The stunning growth in China’s

m ay 2 0 1 1

insight

According to China Greentech Initiative’s latest report, China’s rapid economic growth, development needs and urbanization have framed greentech market opportunities.

“

China has adopted major policies to promote greentech as a pragmatic reaction to pressing needs.”

greentech markets has continued, outpacing even the on-going rapid 8–10 percent growth in China’s economy over the past few years. Government policy has spurred the market in every greentech area, and with the recently adopted 12th Five-Year Plan, China’s government has taken its alreadyambitious targets and raised them yet again. 2. Urgent water, energy security and pollution problems compel further action: China has adopted major policies to promote greentech as a pragmatic reaction to pressing needs. In energy security, the country now imports over half its oil, and is now the world’s second largest oil-importing nation. Regarding water, droughts, climate change and human-induced shortages threaten China’s gains in food security, and China’s government has stated that three quarters of the nation’s lakes are polluted. Various Chinese and international organizations estimate environmental problems reduce GDP 3–4 percent annually. Most urgently, pollution kills 750,000 Chinese people per year, according to World Health Organization estimates. These urgent needs mean the government will continue to pursue major policies to promote greentech. 3. Urbanization continues, offering an opportunity for more sustainable growth: China’s dramatic urbanization presents unprecedented challenges, while also offering chances to address problems through policies on eco-cities and efficiency. Over 400 million Chinese people have already migrated to cities, and hundreds of millions more will. How can China’s cities accommodate these new residents while addressing goals for sustainability and energy efficiency? China has already announced 18 eco-cities, low-carbon zones and related projects. Some projects, such as the Liangjiang New Area in Chongqing, stand above the rest in terms of scale. It is an open question whether these eco-cities will live up to their name, but the size of the urbanization trend means the government will have to act to ensure they do. 4. China is an international energy player: China is becoming a major player on the world stage, and energy is a big part of this trend. In carbon and environmental policies, the world has started to recognize that China is capable

insight

m ay 2 0 1 1

of leading through action at home, at least in certain areas such as renewable energy. China’s resource scarcity problems are now the world’s problems. As China’s annual oil consumption approaches half that of the U.S., China must look to imports to meet growing demand. 5. China is poised to capture markets abroad: China has used an aggressive industrial policy to ensure it captures commercial benefits from the worldwide race for energy. Nowhere is this more apparent than in wind power, where China now leads the world in both demand and supply. Thanks to policy support at home, China’s oil, solar, high-speed rail and electric vehicle industries are all poised to expand abroad. These trends translate to opportunity, but not always directly. As China’s greentech market has grown it has become more complex. The five major themes we have noted above, along with our insights for each sector, underline one observation: growth does not always translate directly to opportunity for the private sector or foreign participants. Some of the greatest opportunities are often some of the more surprising ones, representing market niches ignored by most observers.

Opportunities ahead The China Greentech Report 2011 also synthesizes assessments of six greentech sectors: Cleaner Conventional Energy, Electric Power Infrastructure, Green Building, Cleaner Transportation, Renewable Energy and Clean Water. In total, the 2011 Report assesses 19 opportunities, including: • China’s Emerging Electric Vehicle (EV) Ecosystem – The targets for China’s EV market are high and the incentives are strong, but the opportunities may not be as easy to access as some predictions state. The China Greentech Report 2011 explains the challenges facing China’s EV market and why low-speed EVs may be a bridge that will allow China to gradually adopt highspeed EVs on a large scale. • China’s Rural Electrification Potential – Renewable energy has been a focus of China

policy for years now, but most of the focus has been on how renewable energy (wind, solar and hydro, among others) will power big cities via the State Grid electricity distribution system. Rural communities may offer a potentially huge opportunity for renewable energy providers, in that they are often willing and able to be selfsufficient in their energy needs. • Accelerating Green Building Materials Adoption through Supply Chain Practices – CGTI predicts that one of the biggest growth opportunities in China’s greentech markets will be green building. However, the most urgent opportunities lie not necessarily in green building development, but in advanced materials, green building supplies and supply chain management. • Wastewater Treatment Plants Hidden Opportunities – As part of a commitment to confront its water crisis, China built wastewater plants that increased the treatment ratio from 34 percent in 2000 to 70 percent in 2010. While

there are good opportunities in the operation and maintenance (O&M) markets as well as the build-operate-transfer (BOT) markets, a less obvious but significant opportunity lies in converting the wastewater sludge into energy and new revenue opportunities. Companies may be able to partner with public and private entities to tap this relatively underserviced market. The China Greentech Initiative is an example of the collaboration that is needed among diverse stakeholders, both government and commercial, to accelerate our common goal of an environmentally sustainable future for China and the world. During the course of the year, AmCham Shanghai looks forward to working with CGTI and other important stakeholders in the pursuit of that common goal. Al Beebe is the managing director of the China Greentech Initiative. For more information about

m ay 2 0 1 1

insight

“

CGTI predicts that one of the biggest growth opportunities in China’s greentech markets will be green building.”

insight

m ay 2 0 1 1

imaginechina

Food Inflation Rattles China

c ov e r s to ry

B y Rya n B a l i s

With alarm over food prices that are escalating at a double-digit clip, inflation-taming has moved up to the top of the national agenda.

ecently published data by China’s National Bureau of Statistics (NBS) show food prices – and inflation in general – continue to spiral upward at a breakneck pace, adding pressure to an economy that continues to expand briskly. As a category, the price of food increased 11 percent over the first three months of 2011 from the same period a year ago, according to the NBS. Prices of grains, cereals, rice, corn and fresh fruit increased at a doubledigit rate. The price of cotton sprung up 55.1 percent in March year-on-year, while sugar prices increased by one third. A surge in food prices illustrates China’s increasing inflation challenge. Consumers are squeezed not only at supermarket checkout counters but at the gas pump and when taking out a mortgage because of higher borrowing costs and escalating property prices across the country. March’s 5.4 percent uptick on the Consumer Price Index (CPI), a major gauge of inflation driven disproportionately by food prices, means today’s Chinese consumers face the largest jump in prices in nearly three years. Inflation has blown past government targets of three percent in 2010 and four percent in 2011 for eight consecutive months. “China will have to become accustomed to a moderately higher level of inflation in the coming years, due in large part to greater demand stemming from the country’s rapidly increasing wealth, as well as to a fast increase in the quality of goods and services consumed,” writes Andy Rothman, a CLSA strategist in Shanghai, last March. The government has emphasized, repeatedly and more forcefully of late, that easing consumer price inflation is its top and most urgent economic policy in 2011. “We will try every means to stabilize prices,” vowed Chinese Premier Wen Jiabao at an April executive meeting of the State Council, China’s cabinet, according to official media. That effort has involved heightening efforts to stamp

out food inflation wherever it surfaces using blunt administrative measures and providing direct relief and production assistance. It also has involved addressing macro pressures in the background that reduce the purchasing power of the yuan, further pinching consumers. The economics of food is a complicated and sensitive matter in China, which will only increase in significance in the years ahead as large-scale demographic shifts and other challenges add pressure on China to meet its goal of agricultural self-sufficiency. What specific measures has the government taken to cool prices? Is there a role for U.S. agricultural exports as China battles the inflation menace?

Self-sufficiency challenges Inflation has brought China’s food security policy front and center. At its core, China’s food policy strives for 95 percent self-sufficiency in production of staple crops – i.e., grains like wheat, corn and rice deemed important for national security. China has been largely successful at meeting its ambitious goal, confirms an extensive March 2011 report on Chinese agriculture by the U.S. International Trade Commission (ITC). China achieves food self-sufficiency by supplying domestic growers with subsidized production materials, stockpiling reserves and releasing them as a stabilizing instrument, implementing price controls and controlling particular crop exports when necessary to ensure adequate supplies for the domestic market. China’s imports of key crops are meager and largely opportunistic to shore up supplies around the edges or provide a cushion against price increases. A policy of self-sufficiency has helped to keep grain prices in China relatively stable by insulating China from fluctuations in the international market, points out a May 2010 J.P. Morgan analysis. But maintaining a food self-sufficiency goal is not without major challenges. A

m ay 2 0 1 1

insight

imaginechina

self-sufficient: China produces about 95 percent of its own staple crops.

shrinking supply of farmland, combined with the impact of natural disasters and water scarcity, and rising labor costs have led to stoking inflation. Limited farmland A major demographic shift of rural residents moving to cities by the millions eats away at China’s available supply of farmland, which adds upward pressure on food prices. Small village plots are replaced with industrial zones, while cities swell to include new housing developments and roads needed to support large population increases. The shift has decreased China’s supply of arable land by 20.6 million acres over the past 12 years, according to Chen Xiwen, director of the office for the Communist Party of China Central Committee’s Leading Group on Rural Work. Natural causes such as desertification contribute to a reduction in farmland and hurt crop output. Lester Brown, president of the Washington-based Earth Policy Institute, points out in the Washington Post that some 24,000 villages in northwestern

insight

m ay 2 0 1 1

China have been lost to desertification since 1950. Weather-related disasters cause a loss of 50 million tons of grain each year, according to the China Meteorological Administration. The most recent example of weather’s impact on farmland is a severe drought in China’s northern “bread basket” region. The worst drought in centuries in some parts has impacted more than 40 percent of the country’s plantable area for winter wheat, according to the Ministry of Agriculture. Uneven water distribution that naturally concentrates the bulk of China’s water resources in the south compounds the impact of drought for northern farmers. “[W]ith water scarce in northern areas, sustainability [of output] is worrying,” writes Chen in an essay published by the Chinese Academy of Social Sciences and cited in China Daily. With domestic farmland decreasing, China has looked overseas for agricultural investments in Africa, South America, Australia and most recently in Ukraine. China has purchased rights to grow palm oil on nearly seven million acres in Congo, which The Economist points out is the world’s largest palm-oil plantation (as of 2009). China also has established at least 11 research centers in Africa for the purpose of boosting yields of staple crops and has sent an estimated one million farm workers to Africa. Labor pressure Labor pressures also are pushing up food prices. In Shandong province, which produces China’s largest share of food, seeders now earn a daily rate of RMB40, a third more than a year ago. Greater competition for labor as coastal manufacturers move inland has contributed to a more than doubling of labor costs associated with producing some crops over the past year, according to the Financial Times’ analysis of Shandong’s Agricultural Bureau data. Labor costs to produce peanuts in Shandong shot up 116 percent in 2010 year-on-year, while increasing nearly 50 percent for apples, a relatively high-margin crop in China. Wage inflation is relatively less among the staple, low-margin crops, increasing roughly 16 percent for both corn and wheat. However, labor accounts for around 40 percent of the entire farming cost to produce Shandong’s wheat crop and upwards of 50 percent for other crops. Wages for agriculture work have become

competitive enough that an increasing number of workers forgo the grueling migration from China’s inland provinces in search of factory work. Higher income levels are desirable in many respects as China advances its modernization push, but when coupled with rising costs nearly across the board, from property rates to fuel, the inevitable result is producers have little choice but to raise the selling price of food. Minimum wage laws also are adding inflationary pressure. “With rising rents, the much higher cost of ingredients and now wage inflation, many businesses in the services industries are going to find it impossible not to pass on much higher costs to consumers,” Jade Gray, chief executive of Beijing’s Gung Ho Pizza delivery service, tells the Financial Times. Local and provincial governments across the country have announced minimum wage hikes of at least 12 percent, in line with government aims to reduce the widening income disparity between rich and poor and promote greater domestic consumption. The central government is striving to raise wage levels 15 percent a year to double wages by the end of 2015.

A variety of tools Recognizing that high food prices are a national concern, China is using a number of tools, some unconventional, to keep a lid on overall inflation. Administrative measures Much reporting has centered on the government’s stepping up pressure on Chinese and even foreign companies to keep prices on key essentials level. Both Tingyi, China’s largest packaged food maker, and snack maker Want Want China Holdings deferred to a government request to delay a price increase on their food products, reports the Wall Street Journal. Tingyi, which makes popular instant noodles, says in a statement that its decision is “in alignment with the policy of the State for maintaining the stability of commodity prices.” Similarly, British-Dutch consumer goods giant Unilever is holding off on raising prices for an undetermined length of time. The company had planned to increase its shampoo and laundry detergent prices in China by up to 15 percent to compensate for rising commodity costs, according to Shanghai Daily. The government has closely supervised prices on cooking oil, an essential part of Chinese cooking. Media outlets report that in April the

government effectively extended for two months an earlier four-month price cap applied to several producers in an attempt to stabilize prices. The government also has auctioned off just over a million tons of rapeseed oil in reserve since last October, according to Reuters, as well as millions of tons in reserves of other food staples. In recent months, the National Development and Reform Commission (NDRC), China’s top economic planning body, has worked to check price hikes by liquor and beer producers, according to the 21st Century Business Herald. The Wall Street Journal reports that major producers of flour faced similar requests at the end of 2010. Finally, officials capped certain drug prices at clinics and hospitals across the country in late March, reports Reuters. The government also has targeted so-called hoarders and price speculators of food commodities and daily necessities. Those found guilty of such illegal price manipulation face heavy fines, which have been raised to RMB5 million (US$750,000), up from RMB1 million. Direct support China pledged RMB12.9 billion (US$2 billion) in funds for the country’s farmers in February to boost agricultural production, thereby putting downward pressure on prices. The government will commit US$180 million for equipment purchases and provide small subsidies for wheat-field irrigation and planting, as well as to treat crop disease. NDRC also increased the minimum purchase price on rice and wheat, reports People’s Daily. In April, the Ministry of Finance announced additional farm subsidies that amount to RMB140.6 billion. Subsidies are being aimed at increasing food production and include direct subsidies to farmers, assistance for purchasing supplies and machinery and funding to encourage growth in crop variety. China has committed a total of RMB998.5 billion in farm subsidies for the year, up 15.2 percent year-on-year. At the same time, the government has stepped in to provide relief to industry and the population disproportionately impacted. At the industry level, the State Administration of Grain agreed to supply edible oil producers with 500,000 tons of cooking oil, reports the 21st Century Business Herald. “After the latest price-hike talks, a new round of subsidies is expected to be introduced, but the details have yet to be worked out,” reports the paper in April. The supplies help ease the financial burden on companies because of price controls.

m ay 2 0 1 1

insight

“

China is using a number of tools, some unconventional, to keep a lid on overall inflation.”

“

Bank lending to fund the stimulus surged nationally by 58 percent over 2009 and 2010.”

The government also is proposing tax cuts for lower-paid workers disproportionately impacted by higher food prices. A recent proposal would raise the threshold over which the government collects an income tax to RMB3,000, up from RMB2,000 today. According to a joint Ministry of Finance and State Administration of Taxation statement, 94 percent of Chinese would fall within the lowest two redesigned tax brackets. Banking constrains At the macro level, China is combatting the effects of years of loose monetary policy. A massive, two-year RMB4 trillion (roughly US$600 billion) stimulus launched in 2008 directed capital at infrastructure projects, especially in rural areas, and rebuilding efforts in earthquakehit Sichuan province. Bank lending to fund the stimulus surged nationally by 58 percent over 2009 and 2010, points out Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management, in a recent speech at the Chicago Council on Global Affairs. As stimulus efforts wind down, an excess in domestic liquidity has contributed to fueling an accelerated rate of inflation and, thereby, reducing the purchasing power of the yuan. In response, the People’s Bank of China (PBoC), China’s central bank, has attempted to rein in credit growth by raising interest rates four times since October 2010. In further moves, PBoC has increased the reserve requirement ratio – the percentage of deposits that banks keep in reserve – 10 times since 2010. The latest adjustment in April increased the ratio to a record 20.5 percent for large banks, setting aside at least an estimated RMB350 billion that banks otherwise could lend. But credit growth remains robust despite heightened efforts to slow it. PBoC data show the country’s banks lent RMB679.4 billion in new yuandenominated loans in March, a 34 percent increase from a year ago. The broad money supply, which is the amount in circulation plus deposits, moved up 16.6 percent year-on-year to RMB75.8 trillion, albeit down from a nearly 30 percent expansion last year. A booming market for unofficial “shadow” loans adds to the difficulty in clamping down on credit growth. Strong demand, especially among smaller, private businesses for fast and accessible credit is fueling an alternative lending market that is estimated to stand at RMB2.4 trillion as of the end of March 2010, according to PBoC. There are an estimated 2,000 such private lending businesses

insight

m ay 2 0 1 1

across China. RMB adjustment Although much of China’s inflationary growth can be traced to domestic sources, foreign factors, such as high global commodity prices, contribute as well. The result of global commodity prices that have increased as of the end of March to their highest level since 2008, according to the Thomson Reuters-Jefferies CRB Price Index, means China effectively is importing inflation. The government may consider using the exchange rate as a mechanism to blunt inflation, according to recent comments by Premier Wen who included it on the government’s list of inflation-curbing tools. “There may be a shift under way from thinking about the exchange rate mainly as a variable that affects the competitiveness of exporters to a macroeconomic variable that is part of the management of growth and inflation,” explains Louis Kuijs, an economist at the World Bank in Beijing, to the Wall Street Journal. A rise in the value of the yuan would help to lower the relative cost of imported products, particularly heavily imported commodities in China like oil and soybeans. Although a stronger yuan could impact many of China’s low-margin export industries, it could be a way to cool upward pressure on prices, as well as advance China’s longterm economic rebalancing goal to rely more on inward, consumption-driven growth. Already, the yuan has inched up in value in 2011. The trading value of the yuan reached a 17year high in April and has appreciated over four percent against the dollar since a more flexible exchange rate was adopted in June 2010. Economist Mark Williams of Capital Economics in London predicts the yuan will further appreciate over five percent against the dollar this year.

An export opportunity? One way to relieve China’s inflationary pressures would be for China to import additional quantities of food. Where do such opportunities exist for U.S. food exporters and what could be done to help expand export growth? Outsiders likely will remain largely frozen out from supplying China with staple crops because of the government’s food security policy. China’s large-scale importation of US$367 million in corn last year – 95 percent of which was U.S.-supplied – was an anomaly.

imaginechina

But opportunities for exporting food to China are increasing thanks to rising Chinese spending power, a widening middle class consumer base and growing demand for high quality and highervalue foods. Urban diets are pushing up demand for greater food variety, such as packaged and perishable foods, eggs, dairy, fresh fruits and refined cooking oil. These trends, coupled with the sheer enormity of China’s food market – the world’s largest agricultural economy – quietly have shifted China into a net food importer. China’s agricultural trade deficit has increased nearly five-fold since 2005 to US$30.8 billion in 2010, according to data from Global Trade Information Services (GTIS). U.S. food exports to China dovetail with the country’s growing demand for foreign food, nearly tripling over the past six years to US$17.8 billion in 2010, according to GTIS. The U.S. is China’s largest agricultural supplier, accounting for 27 percent of China’s import market for food. U.S. soybeans, cotton, processed animal feed and animal hides and skin are some of the goods most in demand in China. However, China imports only a few U.S. farm goods on a large scale. Soybeans, for example, accounted for nearly two thirds of U.S. farm exports to China in 2010. Going forward, the U.S. can look to make further inroads by meeting Chinese demand for higher quality consumer-oriented products, meats, animal products and processed foods. At the retail level, the U.S. can leverage a preference in China for brandname products, as well as the perception among Chinese that imported products are higher quality and therefore safer to eat, notes the recent ITC study. A recent explosion in Chinese demand for U.S. pecans is one such example of changing consumption patterns. Chinese confidence in the pecan’s health benefits over other nuts has pushed up demand to such an extent that China purchased one fourth of the U.S.’s entire pecan crop in 2009. According to the Wall Street Journal, China buys more U.S. pecans than the combined volume of U.S. pecan exports to the rest of the world. The U.S. should also continue to engage China to lift trade barriers, including non-tariff measures, that limit U.S. agricultural exports from entering China. Last December’s U.S.-China Joint Commission on Commerce and Trade (JCCT) session resulted in China’s agreeing to reopen its market to U.S. beef in stages. Although a welcome step, much work remains to be done to open China’s market fully to U.S. food goods.

hungry dragon: U.S. food exports to China nearly tripled between 2005–2010, thanks largely to growing demands for soybeans.

The ITC’s recent study, for example, finds that China’s non-tariff measures “effectively prohibit imports of U.S. beef, pears, fresh potatoes, pet food, and strawberries, and significantly restrict imports of U.S. apples and pork.” The ITC calculates that the removal of tariffs and non-tariff measures could have resulted in up to an estimated US$5.2 billion in additional agricultural exports to China in 2009. In addition to exports, China ongoing agricultural modernization could be another opportunity for U.S. companies. “A key objective of China’s recently adopted 12th Five Year Plan is to accelerate agricultural modernization to ensure greater levels of food security,” points out Berenice Voets, director at APCO Worldwide and head of APCO’s Food and Agriculture practice. “Bio-agriculture is included in the seven ‘Strategic Emerging Industries’ identified in the Plan as essential for China’s long-term growth, providing investment opportunities for foreigninvested enterprises.” If U.S. companies are to take advantage of these opportunities, they should have a solid intellectual property protection strategy, adds Voets. With policy tweaks, a more open agricultural trade environment could help to cool pricing pressures in China and result in a win-win for both China and U.S. companies. Ryan Balis is a contributor on AmCham Shanghai’s communications & publications team. He can be reached at ryan.amchamsh@gmail.com.

m ay 2 0 1 1

insight

China Profile

By Diana Tsai

Zhu Han’s story brings insight into why China’s entrepreneurs belong in a category of their own.

n the midst of China’s breakneck economic growth, many opportunities have emerged for those able to apply global business ideas to their local market. This has been especially true in the Internet sector, where forwardthinking, opportunistic, Chinese entrepreneurs have taken tried-and-proven models (Google, Youtube, Facebook) and created their own domestic versions, combining foreign ideas with a strong understanding of domestic consumers’ wants and needs. China’s entrepreneurial environment is fastchanging and fast-moving, with Chinese business leaders such as Jack Ma of Alibaba and Ma Huatang of Tencent leading the charge in the Internet sector. Robin Li, founder and CEO of Chinese search giant Baidu, recently made Forbes magazine’s list of global billionaires. Zhu Han is following in the footsteps of these home-grown web giants, or at least he hopes so. The 28-year-old software engineer is part of the new wave of China tech start-ups. Zhu’s venture is a cloud file-sharing service launched through universities, called Nutstore, set to launch next month on the Shanghai Jiaotong University campus. Zhu’s hometown is Sichuan province, but he has spent more than a decade in Shanghai studying and working. He graduated from Shanghai Jiaotong University in 2007 where his programming skills were recognized by IBM. At IBM, Zhu’s work focused on cloud computing, and when Dropbox, a

insight

m ay 2 0 1 1

imaginechina

Zhu Han, Nutstore and the Changing Environment for China’s Entrepreneurs

U.S.-based file-sharing cloud storage system, entered the market in 2008, he was among the first to sign up for an account. In his own words, Zhu was a “very heavy user.” Dropbox allows users to store, sync and share files online. To date, Dropbox has an estimated four million users around the world. But in May 2010, Dropbox faced the same fate as foreign online services Youtube and Facebook: banishment from the Chinese Internet market. The reported reason behind the government’s ban was a concern that Chinese Internet users would access information otherwise blocked by the “Great Firewall” via Dropbox’s file-sharing service. Zhu’s experience with Dropbox changed his view on cloud computing’s business applicability. “I knew cloud computing had strong business potential, but had no way to demonstrate it. But after Dropbox, I realized I could create a product in order to do so,” he explains. With Dropbox banned from the market, Zhu saw a need for a similar system in China, and thus the seed was planted for Nutstore, a cloud-sharing program. Similar to Dropbox, Nutstore offers users the ability to sync and share files directly on any device. Existing files are always accessible and new, shared files can be easily updated. Zhu’s story is an example of China’s entrepreneurial, and opportunistic, spirit – one that has combined global best practices with the particulars of the Chinese market and the realities of the Chinese regulatory system.

“

By targeting universities, Zhu’s strategy differentiates Nutstore from the remaining competition.”

Nutstore’s advantage: The university factor Part of Zhu’s path as an entrepreneur was pinpointing his target market. As a recent graduate, he was highly sensitive to student needs, and saw a market for a service that would allow university students to sync and share files. “At Shanghai Jiaotong University, many students are native Shanghainese and go home on the weekends. It’s frustrating to have your documents on your desktop at school, have to save it to a disk, or your iPad, and then move it to your home computer. It’s better if you can have one source where you can find all your files, whether on your laptop, home computer, iPhone or iPad,” Zhu explains. Beyond personal synchronization, Zhu sees a need for file-sharing at school. “Students need to share assignments with teachers; teachers need to share PowerPoint presentations with students.” While Dropbox has been eliminated as a competitor, courtesy of the Chinese government, that doesn’t mean Zhu has the entire Chinese filesharing market all to himself. Shenda, Tingsoft and others have their position in the market staked out as well. By targeting universities, Zhu’s strategy differentiates Nutstore from the remaining competition. Nutstore’s revenue during its first few years will come directly from service contracts with universities, starting with Shanghai Jiaotong University. Zhu is betting that, since professors will use Nutstore for class material, students will automatically defer to the university’s standard out of convenience, allowing Nutstore to gain loyalty among top university students who will eventually become paying customers themselves, once they graduate. To Zhu, the university years have the potential to dramatically impact consumers’ product choices later on. Students, especially, have the leisure time and motivation to test out Nutstore. “The more professional someone is, the less he’s willing to waste time looking for new things to try,” says Zhu. Another logical reason to target students stems from privacy issues that concern many consumers. “When we were determining our consumer market,

insight

m ay 2 0 1 1

we found that business people did not like that their privacy would not be protected completely.” Zhu realized early on that to avoid the same fate as Dropbox, Nutstore would have to abide by Chinese law, which has the potential to impact consumer perceptions on privacy protections, or lack thereof, afforded by Nutstore. However, Zhu believes that students, in contrast to business professionals, care less about privacy and more about the efficiency of the product. He cites Google’s e-mail service, Gmail, to back up his reasoning. When Google first launched Gmail, business professionals were skeptical because Gmail seems to infringe on their privacy (Google said it would select advertisements for a user’s home page by scanning texts of e-mails). However, college students were willing to give Gmail a chance, and among this peer group, the reception was phenomenal. According to Zhu, “that’s how it became so popular!” Like Gmail, student support of Nutstore will propel it to the forefront of necessary tech applications for future generations.

An edge in logistics and financing Zhu’s choice to launch Nutstore through universities offers users higher speed services than other cloud-sharing services because Nutstore servers will be placed on the partner university’s network. Theoretically, this kind of network connection should be up to 10 times faster than a standard Internet connection, allowing for the millisecond time efficiency gains that differentiate the winners from the losers in the online marketplace. His university partnership should also provide a way to more easily meet government regulations. “The problem with Dropbox was the anonymity of the user,” says Zhu, “with universities; you have real identities that are trackable. Since we’re working with colleges, the consequences for violations by individuals of Chinese regulations will be enforced by the universities themselves.” Nutstore, in other words, does not have to act as a policing entity. It is Zhu’s willingness to consider government regulation in his business plan that may protect Nutstore from the same fate as its predecessor, Dropbox.

Getting started A notable change in China’s entrepreneurial landscape is how start ups like Nutstore find capital. Traditionally, business ventures in China are funded through loans from friends and family, a result of the guanxi-based business culture. In Zhu’s case, he is turning to angel investors to fund his Nutstore venture. What motivated Zhu to seek out angel investors? “We have a very strong counterpart internationally, so international investors will understand us very well.” Nutstore is seeking US$300,000 in total investments for hardware, bandwidth and team development. With this investment, Zhu expects to support his growth over the next 12 to 18 months. It is easy to see that Zhu is excited and optimistic about his plans for Nutstore and he epitomizes the go-getter mentality of the most passionate entrepreneurs everywhere. And like

any great entrepreneur, he has an appreciation for the challenges ahead – not only for himself, but for other entrepreneurs in China. “Traditional Chinese culture does not promote entrepreneurialism as much as in the West,” he says. “But China has been developing very quickly, and startups have succeeded despite challenges. As a young person, having just graduated, the main challenge to starting your own company is that the family may not accept your idea. At IBM, I discovered big companies weren’t quite right for me, and I wanted to try something on my own. So I did.” Zhu’s parting words truly capture the universal spirit of startups. “To me, being an entrepreneur is like walking where you cannot really see the path, and suddenly you come up against a big wall. So you either dig a hole or jump the wall.” Diana Tsai is a contributer to Insight. She can be reached at paediax@gmail.com.

m ay 2 0 1 1

insight

“

Zhu’s willingness to consider government regulation in his business plan that may protect Nutstore from the same fate as its predecessor, Dropbox.”

inside amcham from the chairman

Mardi Gras Merriment!

n Saturday, April 9, AmCham Shanghai hosted its ninth annual Charity Gala. This year’s Gala celebrated the rich culture of New Orleans and the “Big Easy” was on full display! More than 400 guests enjoyed a night of jazz, dancing, Creole food, a real live Dixieland parade and dance performances.

But this year’s Gala was not only a great time had by all. More than RMB1.2 million was raised for three worthy charities. The Soong Ching Ling Foundation’s Mother and Infant Care Program supports healthcare for women and infants in rural Guizhou, Guangxi and Yunnan provinces. The Heifer Foundation provides livestock, training and necessary resources for rural families to generate income and become self-reliant. The newest beneficiary, the MarineDream Foundation, an environmental conservation organization, focuses on the world’s oceans. On behalf of AmCham Shanghai, I’d again like to thank the donors and sponsors whose generous contributions to the 2011 Charity Gala will ensure the success of this year’s charitable programs. The Charity Gala and AmCham Shanghai’s extensive CSR program are great examples of successful programs that contribute to the vitality and strength of the American business community in Shanghai and create value to AmCham Shanghai members.

Eric S. Musser Chairman AmCham Shanghai

[T]he strength of the Chamber lies in its strong and diverse membership.

And while we are pleased with the success of AmCham Shanghai as an organization, the Board of Governors and Chamber staff are always looking for ways to improve the organization. At the end of 2010, the Chamber, in coordination with McKinsey & Co., conducted its annual membership satisfaction survey. We were pleased with this year’s survey results, and we are excited about the opportunities identified to improve and enhance AmCham Shanghai programs and services. I’m happy to report that more than 95 percent of members believe AmCham Shanghai is meeting or surpassing the objectives laid out in the Chamber’s mission statement: to support the success of our members by promoting a healthy business environment in China, strengthening U.S.-China commercial ties and providing high-quality business information and resources. Perhaps as a result, a similarly high number state that they are satisfied with their AmCham Shanghai membership. As we at AmCham Shanghai already know, the strength of the Chamber lies in its strong and diverse membership. We weren’t surprised to hear that more than two thirds of the membership believes that the statement “AmCham has many members who know China well that I can learn from” describes the Chamber “very well” or “perfectly” and that they feel that it is easy to get involved in AmCham Shanghai. More than two thirds report that AmCham Shanghai provides valuable services to members, including the Corporate Visa Program and the Medical Benefits Program, and find that Chamber publications and the website provide “content that is useful to my business.” Every year we learn something actionable from the membership survey and in 2010 a majority of respondents reported they would favor “more events segmented for different groups of members” such as HR managers, R&D practitioners and C-suite executives. Also coming in loud and clear was the membership’s desire for more high profile speakers to present on specific topics relevant to them. The Board and staff will continue efforts to develop programming in both these areas.

insight

m ay 2 0 1 1

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

Highlights from the April 2011 Board of Governors Meeting Financial Report Helen Ren, Finance & Administration Director, reported that AmCham Shanghai finished fiscal year 2010-2011 in good fiscal health. Board Treasurer Eric Zheng added that all financial indicators look positive for the Chamber. Board members discussed the Corporate Visa Program (CVP), its important contribution to Chamber revenue and ways to maintain and augment the CVP service. Review of Chamber Bylaws and the Nominations and Election Committee (NEC) process The Board amended AmCham Shanghai’s Bylaws and NEC process in order to clarify procedures and update current practices. Bylaw amendments include clarifying the role of the Audit Committee, annually updating the Chamber’s Financial Management Manual and the number of signatures required for disbursements. Amendments to the NEC process include reducing the number of required references a Board candidate must provide to the NEC from five to two, allowing the NEC to determine whether to interview a candidate and ensuring that the NEC fields a slate of sixteen candidates

President’s Report Brenda Foster, President of AmCham Shanghai, reported on a number of issues, including an update on the recently completed Small Business Committee meeting held on March 29, 2011, highlights of the President’s April 22, 2011 speech to the Jiangsu province sub-council of the China Council for International Trade (CCPIT) and the upcoming AmCham Shanghai Washington, D.C. Doorknock to be held September 19-22, 2011.

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

The AmCham Shanghai 2011 Board of Governors: Chairman

Governors

Andrew Au Citibank China

Matthew Targett Bayer Technology and Engineering

Ted Hornbein Richco

Eric S. Musser Corning China

Immediate Past Chair

Robert W. Roche Acorn International

Paul Brown International Paper Asia

Kenneth Jarrett APCO Worldwide

Eddy Chan FedEx Express

Marie Kissel Baxter Asia-Pacific

m ay 2 0 1 1

insight

Kevin E.Wale General Motors China Group

Eric Zheng Chartis Insurance

AmCham Shanghai was pleased to host the ninth annual Charity Gala, themed “Mardi Gras,” on April 9 at the Grand Hyatt Hotel. This year’s Charity Gala celebrated the rich culture of New Orleans with a night of music, dance and culture in the company of friends and associates, all for a good cause.

2 0 1 1

AMCHAM

The 2011 Charity Gala raised a record amount – over RMB 1.2 million – for three worthy charities. The Soong Ching Ling Foundation’s Mother and Infant Care Program, a fourth-year beneficiary of the AmCham Shanghai Charity Gala, supports healthcare for women and infants in rural Guizhou, Guangxi and Yunnan Provinces. The Heifer Foundation, a fourth-year beneficiary, provides livestock, training and necessary resources for rural families to generate income and become self-reliant, with a focus on towns and villages affected by the 2008 Wenchuan earthquake. The newest beneficiary is the MarineDream Foundation, an environmental conservation organization with a focus on the world’s oceans. This year’s charity grant will support MarineDream’s Action!Blue Sustainable Leadership Program, which trains Chinese high school students to become tomorrow’s sustainable leaders.

SHANGHAI

The Grand Hyatt was transformed for one night into the home of jazz, Creole culture, the French Quarter, Bourbon Street and the Bayou, featuring a Dixieland parade, dance performances and live music late into the night. The Grand Hyatt chefs regaled guests with gourmet food and snacks and New Orleans-themed drinks were served all night long. A spectacular array of one-of-a-kind items in the live and silent auctions were available to guests, including sparkling jewelry, vacation getaways, spa treatments and other decadent treats. The raffle draw featured first-class, round trip tickets to the U.S. from American Airlines. C H A R I T Y

The annual Charity Gala is an important part of AmCham Shanghai’s ongoing corporate social responsibility (CSR) program and we would like to thank the donors and sponsors whose generous contributions to the 2011 Charity Gala will ensure the success of this year’s charitable programs. We would especially like to highlight our Patron’s Circle Sponsors, Johnson & Johnson, who donated RMB1 million to this year’s Charity Gala, and Eagle Ottawa, who donated RMB120,000.

G A L A

insight

M AY 2 0 1 1

Patron’s Circle Sponsors

Platinum Sponsors

Corporate Table Sponsors

Exclusive Naming Rights for Gift Shop Sponsor

Exclusive Shopping Bag Sponsor

Exclusive Silent Auction Networking Sponsor

In-Kind Sponsors

MU HOME SPA·MASSAGE

SHOKAY

M AY 2 0 1 1

SHOKAY

insight

AmCham Shanghai New Members: March - April 2011 U.S. Corporate Membership

Associate Membership

Exide Technologies (Shanghai) Company Limited LU Luke Axesstell (Shanghai) Ltd. HONG Liang Carlton Forge Works, Shanghai Rep. Office LU Krista Citystar Entertainment, Ltd WU Fei INTL Universal Commercial (Shanghai) Co., Ltd. LAMBERT James Park-Ohio Industries (Shanghai) Co., Ltd. HE Wei

Accenture (China) Co., Ltd. WADDEN Michael Beijing Cadence Electronics Technology Co., Ltd., Shanghai Branch GUAN Jiao LI Qiang Booz & Company (Shanghai), Ltd. BUTLER Sarah Bristol-Myers Squibb (China) Investment Co., Ltd. ENDES Gyorgy CB Richard Ellis Property Consultants, Ltd. Shanghai WU Regina Dow Corning (China) Holding Co., Ltd. REESE Herschel DuPont China Holding Co., Ltd. WANG Jian Ecolab (China) Investment Co., Ltd. CHENG Michael EMC Information Technology Research & Development (Shanghai) Co., Ltd. HE Ning HSBC Bank (China) Co., Ltd. GIBBS Ker Intel Asia-Pacific Research & Development, Ltd. MI Zhuoqi Kraft Foods Corporate Management (Shanghai) Co., Ltd. WANG Haiyan Lucent Technologies Nanjing Telecommunications Co., Ltd. LIU Jianxin McKinsey & Consulting Co., Inc., Shanghai HERMSEN Teun HUANG Catherine Pacific Strategies & Assessments (PSA) E Luna PolyOne-Shanghai, China MARTENS Tony PricewaterhouseCoopers Information Technologies (Shanghai) Co., Ltd. LENG Weiwei Right Management China, Ltd. DINEEN Sean The Walt Disney Company (Shanghai), Ltd. RAWFORD Mike Wyeth Pharmaceutical Co., Ltd. SUI Jinguo AGCO (Changzhou) Agricultural Manchinery Co, Ltd. RICE Fred Anderson & Anderson LLP WEBER Thomas D. Bureau Veritas Consulting (Shanghai) Co., Ltd. LEMKE Gisbert Corning Cable Systems (Shanghai) Co., Ltd. LEE Chuo-Sheng Dover Corporation Regional Headquarter CHEN Bin Jiang Dura-Bar Manufacturing (Changzhou) Co., Ltd. HE Li Edwards Lifesciences World Trade (Shanghai) Co., Ltd. WANG Tianhong ZHANG Zhi Yi

U.S. Associated Corporate Membership ADM (Shanghai) Trading Co., Ltd. ROIG Ismael Akzo Nobel (Asia) Co., Ltd. SEIERO Jorn Avery Dennison (China) Co., Ltd. LI Dagang FARO International (Shanghai) Co., Ltd. LU Cheng Agape Package Manufacturing (Shanghai), Ltd. LUO Leeshawn Lawson (Shanghai) Software and Technology Co., Ltd. XU Charlie Levi Strauss Commerce (Shanghai) Limited YEUNG Kwok Kuen Sunny Shanghai AB Sciex Analytical Instrument Trading Co., Ltd. SHEN Jing Shanghai Representative Office of Merichem Hong Kong Ltd. HENNEKES Robert James

Non-Resident Individual Membership SMITH Mark

Corporate International Affiliate Membership Luxembourg Swiss Re International SE, Shanghai Rep. Office WAGNER Martin Ascendas Shanghai Co., Ltd. ZHANG Yang eFinancialCareers Pte., Ltd., Shanghai Rep. Office WANG Sophia R3, Inc. ANKETELL-JONES Anneka Shanghai Sudler-MDS Healthcare Communications Co., Ltd. LIU Linda The University of Nottingham- Ningbo MILES Nick

Finisar Shanghai Incorporation LAN Fahua General Mills Trading (Shanghai) Co., Ltd. CHEN Roger Honeywell Fire & Security Systems (Shanghai) Co., Ltd. LI Qun Insurance Company of North America, Shanghai Rep. Office SONG Feili Nike Sports (China) Co., Ltd. HUNG Kwok Hing Panduit Network Connectivity Distribution Co., (Shanghai), Ltd. PARTRIDGE Ronald K. Pepsico (China) Limited, Shanghai Branch CHANG June SONG Xianjun Pepsico Investment (China) Limited CHENG Shunling MAO Xiaowen RR Donnelley (Shanghai) Commercial Co., Ltd. SHEN Heng YE Yi Verigy (Shanghai) Co., Ltd. LIU Chang

Individual U.S. Citizen Membership Avia-Tek, Ltd. SIENA Jeremiah Todd Broadnet Technology Inc. CHEN Amy Dr. Debi Yohn Inc. YOHN Debi Global Fine Chemicals (Shanghai) Co., Ltd. NG Winston LeanTech Consulting/ China Center for Operational Excellence DEANS Christopher R FIEDLER Eric POTTER Andrew Studley Inc. LI-BURNETT Yin Wells Group Limited YOU Frances Hamilton Sundstrand (Shanghai) Management Co., Ltd. ZHAO Guoquan Hella Shanghai Electronics Co., Ltd. TUNG Edward Nortek (Shanghai) Trading Co. ROWE Douglas Arthur

Individual International Affiliate Membership George Food Enterprises Co., Ltd. KWUN Shirley CHOUTEAU Rene Bereder-Siad-Suzhou Institute of Architectural Design BEREDER Frederic Four Seasons Hotel Shanghai JASON Stinson State Government of Victoria YIN Bei

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

Ambassador Huntsman

A Look at Ambassador Jon M. Huntsman’s Legacy

n April 30, Jon M. Huntsman officially stepped down as U.S. ambassador to China. In his 18 months as ambassador, Huntsman won praise from both the Chinese Foreign Ministry and the U.S. business community for his contributions to the U.S.China relationship. When he was nominated, Huntsman called China “the most important bilateral relationship” for the U.S. Since then, Huntsman has formed a positive, constructive relationship with AmCham Shanghai through his participation at AmCham Shanghai events and his support of the Chamber’s mission to promote American business interests in China. The relationship continued through the last months of his tenure. In addition to Insight’s April issue interview, he was the featured speaker at the sixth annual Barnett-Oksenberg lecture. At the event, Huntsman spoke about areas of successful cooperation between the U.S. and China happening all across mainland China today. Increased cooperation and relationship building are necessary. When crises strike, the eyes of the world turn to the U.S. and China, says Huntsman

the world with more potential to do good, or, if we let opportunities pass us by, to disappoint. The next morning, AmCham Shanghai held a farewell breakfast for Huntsman to show appreciation for his strong support of the organization over the past two years. Huntsman praised the American business community for its continued efforts in promoting Corporate Social Responsibility (CSR), lauding American corporate culture and calling it an extension of our American ethos. After the breakfast, Huntsman joined former AmCham Shanghai governor Jim Rice and a group of Harley Davidson motorcycle enthusiasts for a ride through the streets of Shanghai. Though it was still morning, the cooperative ride was a glorious send off into the sunset for the ambassador, and AmCham Shanghai wishes him the best in his future endeavors.

Looking to the future, Huntsman gave four pieces of critical advice, including advising leaders to invest in people-to-people interactions and calling for China and the U.S. to humanize the bilateral relationship, highlighting the mutual benefits of cooperation and bringing this highly complicated relationship down to earth. Huntsman said he was leaving China more certain than ever before that there is no other bilateral relationship in

M AY 2 0 1 1

insight

event highlights

inside amcham

April Monthly Members’ Briefing: U.S. Consulate Update

U.S. Consul General Camp discusses recent Consulate activities.

AmCham Shanghai was pleased to host Beatrice A. Camp, U.S. Consul General in Shanghai, and Kristin Hagerstrom, Consular Chief of the U.S. Consulate Consular Section, to speak at the Chamber’s monthly members-only briefing about Consulate activities in Shanghai and ways the Consulate is working to improve visa facilitation for Chinese citizens. AmCham Shanghai’s monthly briefing is an exclusive opportunity to hear from top government officials and issue-area experts on current events and political-economic trends impacting business in China. Consul General Camp briefed members on recent Consulate activities, including Ambassador Huntsman’s visit, attendance at provincial and municipal meetings of the Chinese People’s Political Consultative Conference (CPPCC) and the People’s Congresses in Jiangsu province, honoring International Women’s Day, and celebrating the Peace Corps’ 50th anniversary. The Consul General also joined ground-breaking ceremonies for the New York University (NYU) Shanghai-based campus and the long-anticipated Disneyland park. The Consulate supported Treasury Secretary Timothy Geithner’s attendance at the “High-Level Seminar on the International Monetary System” held in Nanjing on March 31. Secretary Geithner met on the sidelines of the seminar with his Chinese counterparts in advance of the 2011 U.S.-China Strategic and Economic Dialogue (S&ED). Consul General Camp praised departing U.S. Ambassador to China Jon Huntsman as a “much admired ambassador” and noted that new Ambassador-designate Gary Locke is not expected before June. Next, Kristin Hagerstrom spoke about the Consulate’s initiatives to facilitate visa processing for Chinese citizens. The Consulate will be adding visa officers to meet strong demand in Shanghai for U.S. visas. New areas to improve efficiency include prescreening applicants for group leisure travel to the U.S. The Consulate also is testing a pilot program that offers expedited business visa interviews for employees of China Council for the Promotion of International Trade (CCPIT) member companies.

John V. Faraci discusses the needs of a growing marketplace and a greener world.

CEO Speaker Series: Chairman and CEO of International Paper John V. Faraci AmCham Shanghai was pleased to host John V. Faraci, chairman and chief executive officer of International Paper (IP), as part of the Chamber’s CEO Speaker Series. Faraci spoke to AmCham Shanghai members about IP’s expansion and growth into China since its market entry in 1995. Faraci also talked about IP's focus on environmental management in China and the importance of being “in China, for China.”

Faraci spoke about how IP has stepped up efforts in the China marketplace in the last decade and the importance and functionality of working with local players in China. Through IP’s 2006 joint venture with Sun Paper of Shandong province, for example, both companies were able to exchange best practices. Sun Paper’s understanding of the local Chinese market was critical to the success of the venture. Faraci noted that we must remind those in the U.S. that investing overseas is necessary because we must be “where the customers are.” He noted that less than one percent of IP’s China-produced products were exported to the U.S., as most was produced for the domestic market. Faraci also discussed the importance of environmental management, noting IP’s reliance on natural resources. IP has done well in this respect and was identified by Forbes magazine as No. 1 most admired company in its industry in 2010. IP has focused on progressive management and transparency to reach its goals. IP said Faraci, continues to expand, increasing geographic coverage and broadening the employee consumer base while always expanding value for consumers.

insight

M AY 2 0 1 1

committee highlights

inside amcham

Marketing & Media Committee CEO of Continuum: Creating a Culture of Innovation AmCham Shanghai’s Marketing & Media Committee recently hosted Harry West, CEO of Continuum, who gave a presentation to members on “Creating a Culture of Innovation.” West said that while innovation has not naturally been a part of China’s plan in opening up, development of a consumer-driven economy will mean that creativity, design and innovation will become increasingly sought-after qualities in companies doing business in China.

CEO of Continuum Harry West speaks about ways to create an innovative corporate culture.

To foster an innovative workplace, West said, companies must eliminate internal hierarchies, which stifle new ideas and creativity. Instead of adopting a traditional company structure, West recommended that consumers be at the top of the structure. Companies should make consumers the top priority when undertaking new projects. West emphasized the importance of looking for certain skills and qualities when hiring new employees, including: critical thinking, intense creativity and a yearning for “the new.” He also emphasized the need for executives to play a role in the innovation process, underscoring their importance when trying out ideas and maintaining the right pace of progress. Following his presentation, attendees had the opportunity to ask questions and engage in a dialogue about innovation in the workplace.

Logistics & Transportation and Sourcing & Procurement Committees Effective Process Management: Implementing SCOR AmCham Shanghai’s Logistics & Transportation and Sourcing & Procurement Committees were proud to host Joseph Francis, executive director for the Supply Chain Council, an independent, not-for-profit trade association. Francis spoke to members and guests about the benefits and effectiveness of SCOR (Supply Chain Operations Reference), a Joseph Francis discusses the framework designed as a diagnostic tool for supply chain management. Mr. benefits of SCOR in the Francis began his detailed presentation by underscoring the importance of supply chain. supply chain management, indicating that some companies can potentially have up to 20,000 unique supply chains, representing anywhere between 60 to 90 percent of organizational costs. With this much to keep track of, the SCOR framework offers the benefit of simplifying the supply chain by giving managers a comprehensive view of their suppliers, their own organization and their customers. Following Francis’ presentation, he was joined in a panel discussion by Alan Huang, director at PRTM, one of the founding companies of SCOR. Huang and Francis discussed case studies of companies who had successfully implemented SCOR in their China operations. They noted that many companies are unwilling to openly discuss the matter because it is considered a trade secret. They also noted that SCOR can be implemented in-house with little or no assistance from outside companies. Events and Committee Highlights are reported by Ryan Balis, Ashley Cahill, Eli Gervais, Kate Ryge and Esther Young

M AY 2 0 1 1

insight

deal of the month imaginechina

China, Brazil Ink Deals at Summit

China became Brazil’s top trading partner in 2009.

hina and Brazil have vowed to deepen cooperation on bilateral trade, joint investments and cultural exchanges. Brazilian President Dilma Rousseff ’s first official state visit to China ended with the pledge of major trade deals between the two countries, including an order for Brazilian aircraft worth up to US$1.5 billion. Presidents Hu Jintao and Rouseff signed a joint communiqué promising greater cooperation on areas from global governance to bilateral trade. The leaders also signed more than 20 agreements in areas ranging from agriculture to nanotechnology and vowed to continue discussion on issues ranging from food safety to animal and plant quarantine. The China-Brazil trade relationship has become increasingly important in recent years, with total bilateral trade tripling in the past five years to US$62.6 billion. China became Brazil’s top trading partner in 2009. China is playing a bigger role in Brazil’s development, investing about US$17 billion in the country last year. In 2010, Brazil’s exports to China totaled US$30.79 billion, up 46.5 percent from the previous year. But not all is rosy in this bilateral relationship. Last year, China reported a US$12.6 billion trade deficit with Brazil, mainly due to large commodity imports. Brazil has pushed to diversify exports to

insight

M AY 2 0 1 1

China away from raw materials, complaining that China’s investments have been skewed towards Brazil’s commodities sector, due to China’s strong demand for raw materials such as iron ore. Brazil is also a major food exporter to China, becoming the country’s biggest soybean exporter last year, with soybean exports totaling US$7 billion. In 2011, Brazil expects to export more agricultural and farming products to China. During the summit, China approved 25 new Brazilian chicken processing plants and five new beef refrigerators for export. China only recently granted Brazilian pork exporters access to the Chinese market, but it is hoped that these meat deals will help Brazil achieve some diversification in bilateral trade. The summit also pushed forward cooperation in non-trade-related areas. During the high-level visit, the State Grid Corporation of China (SGCC) announced a joint venture with Electrobras, a major Brazilian power utility company, that will use China’s leading ultra-high voltage (UHV) transmission technologies in a hydroelectric dam project in Brazil. China has also expressed interest in exploring opportunities in high-speed rail construction in Brazil between the cities of Rio de Janeiro and São Paulo. In turn, Brazil agreed to speed up its recognition of China as a free-market economy. -Ashley Cahill

We’ll satisfy your appetite for trouble-free facilities.

Save time, trouble, and money with SSOE. As a U.S. engineering, procurement, and construction management (EPCM) firm, we offer global expertise and experience that allow us to make promises other firms won’t. We’ll deliver better quality with significant savings. And we’ll quantify and document these savings on your project.

What enables us to deliver greater value: t Over 60 years experience with Fortune 500 firms globally t 23 offices worldwide including Shanghai, Beijing, and Tianjin t China design license (in-house engineering) t Green design expertise: global LEED AP staff t Experts in cost reduction approaches including BIM and Lean Manufacturing Contact Rob Benedetti at rbenedetti@ssoe.com.cn or go to www.ssoe.com/china M AY 2 0 1 1

making clients successful by saving them time, trouble, and money

insight

2011 Bundle Tickets on Sale! Weâ&#x20AC;&#x2122;re keeping the feel-good vibe going! Choose two or three round-trip tickets in Executive First Class or Economy Class and travel to your favorite Canadian or the US destinations.

Executive First Class Western Canada / U.S.A.

2 round-trip tickets

40,000

Our Executive First Suites are designed to provide you with your own personal space. Ideal for a good nightâ&#x20AC;&#x2122;s sleep, each Suite features a lie-flat bed that fully reclines at the touch of a button while you remain seated. Western Canada / U.S.A.

3 round-trip tickets 54,000 Eastern Canada / U.S.A.

3 round-trip tickets 75,000

Eastern Canada / U.S.A.

2 round-trip tickets

56,000

Economy Class Western Canada / U.S.A.

2 round-trip tickets

8,200

Western Canada / U.S.A.

3 round-trip tickets 11,400 Eastern Canada / U.S.A.

3 round-trip tickets 13,500

Eastern Canada / U.S.A.

2 round-trip tickets

9,600

The special fares exclude applicable tax and airport fees. Terms and restrictions apply. Air Canada reserves the right of interpretation of this promotional message.

Cities in Western Canada: Vancouver/Calgary/Edmonton Cities in Eastern Canada: Toronto/Ottawa/Montreal Cities in Western U.S.A.: Los Angeles/Portland/Seattle/San Francisco Cities in Eastern U.S.A.: Atlanta/ Boston/Chicago/Cleveland/Dallas/Houston/Orlando/Miami / New York/Philadelphia/Raleigh Durham/Washington

Air Canada China Call Center 400 811 2001 www.aircanada.cn