Insight Magazine November 2010 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 November 2010

SPORTS FEATURE

Tiger Woods on China MARKETING FEATURE

Evolving Luxury Strategy EXPO FEATURE

A Lasting Legacy

Fast-tracking the Economy The rapid expansion of high-speed rail in China is driving the country forward

INSIGHT November 2010

The Journal of the American Chamber of Commerce in Shanghai

David Turchetti DIRECTORS

BUSINESS DEVELOPMENT & MARKETING

Karen Yuen COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren

MEMBERSHIP & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

Justin Chan

SENIOR ASSOCIATE EDITOR

Tiffany Yajima

ASSOCIATE EDITOR

Esther Young

EDITORIAL INTERN

Ashley Cahill DESIGN

Alicia Beebe LAYOUT & PRINTING

Ella Shan Snap Printing, Inc.

INSIGHT SPONSORSHIP SPONSORSHIP MANAGER

Sophia Chen

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

12 An Answer to Recruiting Challenges

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

By Justin Chan

Recruiting process outsourcing is becoming a popular tool to combat hiring challenges, says global workforce solutions provider Kelly Services.

15 A Lasting Legacy at the Expo EXPO FEATURE

By Ryan Balis

A look back at the six-month run of the Shanghai 2010 World Expo and the legacy it leaves behind for city of Shanghai and the rest of China.

19 A Gold Rush in Luxury MARKETING FEATURE

By Ashley Cahill

The appetite for luxury goods in China continues to grow but brands must adapt their strategies to meet the evolving needs of Chinese consumers.

22 Driving Growth through Engaged Employees HR FEATURE

By Richard Kantor and Beecher Ashley-Brown

Following the example of the Best Employers in China can lead to increased business success and better employee retention and performance.

26 On Course for a Breakthrough SPORTS FEATURE

By Justin Chan

Insight talks to Tiger Woods about the development of golf in China as he returns to Shanghai in search of his ﬁrst tournament win in 2010.

28 Fast-tracking the Economy COVER STORY

By Tiffany Yajima

The rapid development of high-speed rail in China is connecting the country to provide affordable and efﬁcient travel while also driving economic development.

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

3 News Briefs

44 Deal of the Month

9 What’s Next for China’s Logistics Sector MARKET PROFILE

Jeffrey Wong of KPMG provides an overview of China’s logistics sector as the government strives to improve the industry’s reach and efﬁciency.

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

IMAGINECHINA

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

INTERVIEW

HSBC/GETTY IMAGES

Brenda Foster

F E AT U R E S

IMAGINECHINA

PRESIDENT

IMAGINECHINA

AMCHAM SHANGHAI

35 From the Chairman: A Look Back at Expo 37 2010 Washington, D.C. Doorknock 38 2010 CSR Conference & Awards

39 41 42 43

Innovation Forum New Member Listing Events in Review Committee Highlights

INSIDE INSIGHT

JUSTIN CHAN EDITOR-IN-CHIEF

ike time usually does in Shanghai, the past six months have flown by, and the Shanghai 2010 World Expo is now officially over. By most accounts, Shanghai’s Expo was an overwhelming success, as more than 70 million visitors, the majority of whom were Chinese, visited pavilions from more than 240 participants and experienced new cultures and ideas. The Expo was also an opportunity for businesspeople from around the world to develop economic relationships with China. Our Expo feature looks at the legacy of the Expo’s “Better City, Better Life” theme and the Expo’s impact on business in China. We expect the success of the Expo to come to light over the next several months. As more business opportunities materialize and companies try to find the right talent for key positions, China’s human resources challenges will be magnified. Turn to the interview column for a discussion on the benefits of recruiting process outsourcing and our human resources feature for a look at how being a Best Employer can translate to improved business performance, retention and employee engagement.

Luxury retail is a sector that has demonstrated consistent growth for many years and opportunities appear limitless as incomes continue to rise across China. But more and more luxury brands are reviewing their operating strategy as the market becomes increasingly crowded. Our marketing feature looks at how some luxury brands in China are adapting to reach China’s consumers. This month’s cover story examines the rapid development and adoption of high-speed rail in China. Already boasting the longest high-speed rail network in the world, China will double the length of its high-speed tracks by 2012 and connect the country with mode of efficient, affordable and environmentally friendly transport. The article also contrasts development of high-speed rail in the United States, where interest is high, but funding in short supply. Finally, Shanghai will play host this month to the WGC-HSBC Champions golf tournament in Sheshan. Turn to our sports feature, where Insight was fortunate enough to get the perspective of Tiger Woods on golf ’s development in China as he tries to pick up his first victory of 2010.

IMAGINECHINA

News

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

CHINA BUSINESS

ADB reports high RMB bond sales The first-ever RMB-denominated offshore bonds by Manila-based Asian Development Bank (ADB) sold for a total value of RMB1.2 billion (US$180.4 million) as they debuted on the Hong Kong stock exchange on October 22. The sale is an indication of growth of the RMB debt market outside mainland China and signals wider funding options for Asian borrowers, as well as loosening on RMB controls. Several corporations already have issued offshore RMB bonds, including McDonald’s Corp., which raised RMB200 million in Hong Kong to finance its expansion in mainland China. The International Finance Corp., the World Bank’s financing arm, also announced plans to sell RMB-denominated bonds in Hong Kong to finance various private-sector enterprises in China.

China to increase electric vehicle output Seeking to meet demand in the world’s largest auto market, Chinese officials announced plans to increase the annual production capacity of electric motor vehicles to one million units by 2020. Minister of Science and Technology Wan Gang highlighted alternative fuel cars as “key” to the development of China’s auto industry, citing a figure that automobile exhaust emissions account for 70% of air pollution in large Chinese cities. Wan also outlined plans to expand public transportation and overviewed the results of a 2009 project to promote energy-efficient vehicles in 25 Chinese cities. He announced that RMB8.5 billion (US$1.3 billion) already has been invested in the electric car industry

China's interest rate spikes China’s central bank announced it would raise key interest rates by 0.25%, the first time the rate has been changed since it was cut in December 2008.The rate change is the first of several expected interest rate increases over the coming months, as the government continues to withdraw stimulus measures. But the timing of the move was unexpected.The increase, seen as an indicator of a cooling Chinese economy, was followed by the rapid sell-off of stocks, commodities and emerging-market currencies on a global basis.The Dow Jones Industrial Average fell 1.48% the following day, while the FTSE 100 Index in London was down 0.67%. Commodity prices also decreased, with the rate of oil dropping 4% and the price of gold dropping 2.63%.The Shanghai Composite Index, however, rallied, increasing 0.65% the morning after the interest rate announcement.There are indications that Beijing remains confident about China’s economy and is mainly concerned about managing inflation and property prices. and that subsidies of up to RMB60,000 will be paid out to buyers of completely electric vehicles in select cities, including Shanghai, Shenzhen and Hangzhou.

China passes U.S. in wind power capacity Increasing its wind power capacity by an additional 13.8 million kilowatts of energy, China’s wind power growth outpaced the U.S.’s in 2009, according to a joint report by

Greenpeace and the Global Wind Energy Council (GWEC). The report ﬁnds that China’s total wind power capacity reached 30 million kW in the ﬁrst half of 2010, meeting China’s policy targets for 2020 ahead of schedule. In comparison, the U.S.’s wind energy output grew by 10 million kW over the same period. GWEC also reports that China’s wind power capacity is expected to grow nine times from the current level to generate 464.9 billion kW by 2020. China, the world’s largest market

NOVEMBER 2010

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for wind power, continues to invest in wind power generators. Four subsidiaries of Chinese state-owned enterprises recently won contracts to construct wind farms oﬀ the coast of Jiangsu Province.

Shenzhen passes Shanghai as equity market leader Shenzhen surpassed Shanghai in equity market sales, as it raised US$33 billion in listings in the first three quarters of 2010 – more than Shanghai’s US$24.1 billion over the same period. Shenzhen’s figure also tripled in value from last year. Sales were boosted by continued initial public offerings (IPOs) from smaller, privatelyowned enterprises and support from the China Securities Regulatory Commission, which increased the number of IPO approvals in Shenzhen this year. The larger, state-owned enterprises have historically based their IPOs in Shanghai, but the higher total IPO values of smaller, private companies in Shenzhen indicate the importance of private equity flows in China’s economy. CORPORATE NEWS

AIA looks to second- and thirdtier cities in China AIA Insurance has announced plans to expand its market share in China’s secondand third-tier cities, though specific market goals have yet to be announced. Already the largest foreign life insurer in China, AIA has partnered with the Industrial and Commercial Bank of China (ICBC) to develop banking insurance, asset management insurance and investment banking services. AIA also announced its application to go public in Hong Kong on September 9 with an offering of 5.8 billion shares – amounting to 48.6% of its total equity – and it has priced its initial public offering at US$2.54 per share. Total sales from the IPO could fetch as much as US$17.8 billion. AIA, the Asian unit of AIG, was the first foreign insurance company to operate in mainland China, and its total market share in China was about 1% in 2009.

Alibaba and Microsoft launch joint web search The Alibaba Group, which is 40% owned by Yahoo! Inc., and Microsoft Corp. launched a beta version of a new search engine named Etao. The search engine is designed to divert traffic to Alibaba’s retail website Taobao.com. It remains to be seen whether Etao can challenge China’s search engine market leader, Baidu Inc., which dominates 70% of the search market. Other companies, such as Tencent Holdings Ltd. and China Mobile Ltd., recently have entered the web search engine industry. China’s online search market was valued at RMB4.62 billion (US$694.5 million) in the first half of 2010, up 45% from last year, according to Beijing-based research firm Analysys International. Taobao.com enterprise handles 75% of e-commerce transactions in China and is hoping to double the value of its transactions to RMB400 billion in 2010.

Boeing to test biofuel in China As part of an overall plan to decrease its energy consumption and carbon footprint, Boeing Co., in cooperation with Air China Ltd., is planning to test a China-produced commercial jet biofuel made from a locally grown plant. Boeing ﬁrst tested a biofuel on a Virgin Atlantic Boeing 747 jet in early 2008, but the latest biofuel may center around China’s potential as a prime biofuel provider. The biofuel is made from jatropha, a thorny wild green shrub grown in southern China, and will be supplied by China-based oil company PetroChina Co. The demonstration ﬂight will be conducted by May or June of next year, says Boeing executive Al Bryant. MACROECONOMICS

Property prices rebound in Shanghai After a four-month period of decreasing values, property rates in Shanghai rose 0.5% in September from August – the ﬁrst month-to-month increase since May. Home prices in 70 large and medium-sized

Chinese cities in September were 9.1% higher than last year. National property sales rates in terms of ﬂoor space also rose 16.6% from 2009 following a 10.1% decrease in August. Investment in real estate development increased 36.4% to RMB3.35 trillion (US$503.6 billion) in the January-September period from 2009. The increase comes as the central government restricts property ownership and increases limitations on mortgages to cool soaring property values. September has historically been a month of increased property sales in China.

China currency reserves increase China’s foreign exchange reserves increased to US$2.648 trillion at the end of September, jumping US$194 billion in the third quarter of 2010. The increase marks the reserve’s largest ever quarterly gain. The rise of reserves may have been driven by an increased trade surplus and the fall of the U.S. dollar, increasing the value of China’s non-USD reserve holdings. The increased reserves may also add to international pressure for RMB revaluation, as the rate is seen as an indication of government policies limiting RMB exchange rates. China’s foreign exchange reserves are primarily held in U.S. government bonds.

China to continue gradual RMB revaluation The head of the State Administration of Foreign Exchange (SAFE), Yi Gang, announced that the government will continue to support and promote exchange rate readjustment. Yi, also deputy governor of the People’s Bank of China (PBoC), expects that the RMB will rapidly stabilize at “a reasonable level,” but he emphasized that the process will be “gradual.” Yi also touched on plans to stimulate domestic demand by boosting construction in rural medical services, education and infrastructure. The RMB has risen about 2.3% against the dollar since June, mostly in the last two months. The exchange rate will likely face scrutiny

NOVEMBER 2010

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in next month’s Group of 20 summit in Seoul, South Korea. U.S. - CHINA

CNOOC buys stake in Chesapeake Energy China’s state-owned CNOOC Ltd. will invest a total US$2.16 billion over the next two years in Oklahoma City-based Chesapeake Energy Corp.’s shale oil and gas enterprises in south Texas. CNOOC bought a 33.3% stake in the projects for US$1.08 billion and will fund 75% of Chesapeake’s share of drilling and other costs until another US$1.08 billion is paid by the end of 2012. Though it was blocked in 2005 from taking over California-based UNOCAL Corp., CNOOC has made several small investments in U.S. energy assets, including a Statoil ASA deepwater offshore field in the Gulf of Mexico. Consultancy group Wood Mackenzie estimates that Chinese demand for imported liquefied natural gas will increase to 46 million metric tons a year in 2020, compared to the 5.5 million tons imported last year.

China remains top buyer of U.S. Treasurys China’s holdings of U.S. Treasurys increased to US$868.4 billion, adding US$21.7 billion in August, the U.S. Treasury Department announced. Although China has been reducing its U.S. Treasury holdings since last year, the recent surge in purchases indicates that the reduction was part of rebalancing eﬀorts for China’s portfolio to purchase longer-term Treasury notes and bonds. The net total of all foreign investment of U.S. Treasurys totaled US$117.1 billion in August compared to US$3 billion in July.

U.S. and China discuss intellectual property U.S. Attorney General Eric Holder held talks with senior Chinese oﬃcials in Beijing to discuss intellectual property rights (IPR) and concerns over IPR infringement. Holder, meeting with Public Security Minister Meng Jianzhu, is the highest-

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ranking U.S. judicial official to visit China since President Obama took office. During the meeting, Meng outlined China’s plans to protect U.S. IPR and announced that China would launch a six-month campaign against the manufacture and sale of counterfeit goods “no matter which industry or sector.” Meng said violators would be punished to “the maximum extent of the law.” Officials at the meeting also confirmed that Chinese President Hu Jintao would visit the U.S. in January 2011. GOVERNMENT & POLICY

Beijing sets high energy goals As part of China’s twelfth Five-Year Plan, Chinese leaders have set new targets for energy eﬃciency and carbon emission reductions. The previous Five-Year Plan called for a 20% reduction in the amount of energy consumed per unit of GDP, also called energy intensity, resulting in a series of steel mill closures and dimmed traﬃc lights. The new goals call for an additional 15–20% reduction in energy intensity. The twelfth Five-Year Plan also calls for a 40– 45% decrease in carbon intensity by 2020, reinforced by an interim target. To achieve these goals, China is implementing an energy investment plan to boost clean energy usage and spur alternative energy development over the next decade, an industry that could be worth as much as RMB5 trillion (US$752 billion).

China to limit rare earth sales China is moving to decrease rare earth exports by 30% in 2011, restricting access to materials that are vital to a variety of hi-tech technological products, from car batteries to radar systems. The quotas have already been reduced this year by 40%. According to the foreign trade section chief with China’s Ministry of Commerce, Chao Ning, the restrictions are because of “strategic, environmental and economic considerations.” The announcement has caused some friction among countries that rely on the exported materials, as China produces 97% of the world’s rare earths. The U.S., a key importer of rare earths, is looking

NOVEMBER 2010

to encourage production and reﬁning of rare earth materials within the U.S.

Government enforces iPad, iPhone customs taxes Several customers bringing Apple Inc.’s iPads and iPhones across the border into mainland China have reported that they were forced to pay taxes, even if the products were already opened and in use. Under Chinese regulatory law, items worth RMB5,000 (US$752) or less are exempt from border taxes, but phones and microcomputers – including the iPad and the iPhone – are subject to taxes and ﬁnes if they are undeclared. Customs oﬃcers in coastal Zhuhai, Guangdong Province, have reportedly found and taxed 446 cell phones and 102 tablets, most of which were Apple products. According to customs regulations, customers bringing iPads and iPhones into mainland China can be expected to be charged a 20% tax – the standard rate for electronic devices. SHANGHAI BUSINESS

Shanghai mayor outlines plan for growth Speaking at the 22nd International Business Leaders’ Advisory Council, Shanghai Mayor Han Zheng outlined a RMB100 billion (US$15 billion) plan for the city to pour investment into key innovative industries in the city over the next three years. The Shanghai municipal government plans to invest in biopharmaceuticals, new energy, information technology and highend manufacturing and seeks to double the output of these strategic industries by 2015. The increased investment is part of a larger plan for Shanghai to become a global ﬁnancial and shipping center by 2020. Mayor Han also outlined plans for an expanded public transportation system by increasing Shanghai Metro coverage to 600 kilometers by 2015, up from the current 420 km.

Shanghai government limits property ownership Seeking to curb soaring property prices,

Shanghai’s municipal government announced that each family with Shanghai residency is limited to one new home, including secondhand homes. The temporary measure also includes new restrictions on mortgages. Banks have already announced that they will suspend loans for third-home buyers in accordance with national policy. The government also stated that it is preparing to impose a property tax, including a land-appreciation prepayment rate between 2–5%.

partnership with the Shanghai Shendi Group Corp., will construct a theme park and other attractions in the Pudong New Area that could cover up to a total of eight square kilometers, making it the largest of Disney’s six amusement parks worldwide. The Shanghai park is expected to cost RMB24.48 billion (US$3.7 billion) and is slated to open in 2014.

million visitors by the close of the Expo. Shanghai municipal authorities anticipate over 70 million total visitors to the Expo. Authorities are considering extending Expo operating times to accommodate the extra traﬃc during the Expo’s ﬁnal days.

2010 WORLD EXPO

Disneyland to start Shanghai park construction

Attendance at the Shanghai 2010 World Expo soared above 65 million, after an extra boost of visitors in the ﬁrst three weekends in October. The total number of visitors to the Expo exceeds the record number of 64.22 million set by Expo Osaka in 1970. Over one million visitors visited the Shanghai World Expo site on October 16, breaking the single day visitor record of 835,832, also set in Osaka. Individual country pavilions have seen heavy traﬃc. The USA Pavilion is expected to welcome over seven

Shanghai Vice Mayor Yang Xiong outlined plans for the Expo site to be developed into an area for “cultural exchanges, high-level exhibitions and public spaces for citizens,” converting the Puxi and Pudong locations into a commercial and public space. Most of the country pavilions will be dismantled and the surrounding enclosures and roads will also be redesigned. The RMB2 billion (US$300.7 million) China Pavilion will remain in place and will likely incorporate an Expo museum that will highlight Expo pavilion designs. The China Pavilion was designed to receive 50,000 people every day, though it now accommodates 52,000 per day.

Project Director Fan Xiping has announced that construction on the new Shanghai Disneyland Park will begin after the last day of the World Expo on October 31. The land for phase one has already been prepared for construction and new roads leading up to the park have been approved. Fan indicated that ﬁnal bids for the support and construction of the park are close to being ﬁnalized. The Walt Disney Co., in

Expo breaks attendance records

NOVEMBER 2010

Authorities plan post-Expo makeover

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CHINA & THE WORLD

SOUTH AMERICA ASIA-PACIFIC

INDONESIA: China considers coal energy and transportation projects Indonesian Vice President Boediono, visiting Beijing and Nanning, extended five development projects to Chinese enterprises seeking to expand bilateral energy cooperation. The five projects include a US$3 billion coal-fired power plant in Central Java and a US$735 million railway track from Jakarta to Soekarno Hatta. The Chinese government also announced during Boediono’s visit that it has dispersed US$240 million for trade and investment under a funding agreement between Indonesia’s ExIm Bank and the Industrial and Commercial Bank of China. Indonesia is the second largest exporter of coal to China, shipping 35.4 million tons of coal in 2009 while also supplying 3 million tons of liquefied natural gas (LNG) per year to China’s Fujian Province.

MIDDLE EAST

ASIA-PACIFIC EUROPE

ZAMBIA: China calls for “swift resolution” of mine incident Chinese Foreign Ministry spokesman Ma Zhaoxu has called for a “swift resolution” to a violent altercation at the Zambian Collum Coal Mine surrounding a pay dispute and emphasized that the Chinese government supports “safeguarding local employees’ rights.” Ma said that the two Chinese managers who were arrested in Zambia for shooting protesting miners had hurt the Zambians “mistakenly,” but also emphasized that Chinese living and working overseas must comply with the laws and regulations of their host countries. The Chinese Embassy in Lusaka has directed the management at Collum Coal Mine to pay the incidental medical bills of the 11 miners who were wounded in the incident.

AFRICA

BULGARIA: China to be biggest investor by 2013 Bulgaria aims for China to become its largest foreign investor by 2013, said Bulgarian Deputy Prime Minister and Minister of Finance Simeon Djankov. After meeting with Chinese Vice Minister of Commerce Gao Hucheng in Soﬁa, Djankov also discussed ways for China to invest in the Balkan nation, including setting up the Bozhurishte industrial zone project near the Bulgarian capital. Chinese companies have already made a number of investments in Bulgaria, including Chinese automaker Great Wall Motor Co.’s US$133 million factory in Lovech that is expected to roll out its ﬁrst car in May 2011. The two leaders also discussed the expansion of bilateral trade, which totaled US$793 million in 2009.

MIDDLE EAST EUROPE

NORTH AMERICA MIDDLE EAST

AFRICA

UNITED ARAB EMIRATES: Foreign Ministers discuss strengthening ties United Arab Emirates (UAE) Foreign Minister Shaikh Abdullah bin Zayed Al Nahyan met with Chinese counterpart Yang Jiechi in Beijing to discuss relations and ways to increase bilateral trade, especially in energy and investment. Sheikh Abdullah said that the UAE is “impressed” with Chinese development and called for a “strategic relationship with China in all ﬁelds.” He emphasized the need to cooperate in the expansion of transportation between the two countries, especially through railways and international ﬂights. China is the second largest supplier of goods to the UAE, with China’s exports amounting to US$13 billion in 2009, constituting 10.7% of UAE’s total imports.

NORTH AMERICA

SOUTH AMERICA MIDDLE EAST AFRICA

UNITED STATES: Chinese President Hu to visit the U.S. In his first state visit to the United States since President Obama took office, Chinese President Hu Jintao will travel to Washington, D.C. in January 2011. Chinese Foreign Ministry spokesman Ma Zhaoxu expressed hope that the visit will smooth frayed China-U.S. relations, especially over U.S. arms sales to Taiwan and the value of China’s currency. The visit is a culmination of several highlevel visits between U.S. and Chinese officials over the past year, including Chinese Premier Wen Jiabao’s trip to the U.S. where he met with President Obama in New York. Before Hu’s visit in January, he and Obama are expected to meet next at the G-20 Summit in South Korea in November. Hu last visited Washington, D.C. to attend the 2010 Nuclear Security Summit in April.

AFRICA ASIA-PACIFIC NORTH AMERICA

SOUTH AMERICA

NORTH AMERICA SOUTH AMERICA EUROPE

CHILE: GM to export Chinese cars General Motors Corp. has announced that it will supply a low-end car developed and built in China to Chile – the ﬁrst time an international brand will use its China operations to export into emerging markets. The New Sail, a compact car designed by Shanghai GM, a venture between GM and China’s Shanghai Automotive Industry Corp. (SAIC), rolled out in China in January 2010 and was priced as low as US$8,540. Pricing in Chile is expected to be in the same range and if successful, GM plans to expand exports to additional markets in South America, North Africa and the Middle East.

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NOVEMBER 2010

SOUTH AMERICA ASIA-PACIFIC

MARKET PROFILE

B Y J E F F R E Y WO N G ISTOCKPHOTO

What’s Next for China’s Logistics Sector

hina’s logistics sector has been developing at an extraordinary rate thanks to the rapid expansion of the country’s industrial base and the rise of domestic consumer markets. Essential to the development of China’s economy, the logistics sector has received much attention from the government and is attracting substantial foreign and domestic investment. The logistics market has grown annually by approximately 14 percent over the past five years. The total value added by the logistics industry reached RMB2.31 trillion in 2009, which constituted a 6.7 percent share of gross domestic product (GDP). Efficient distribution of raw materials and finished products is one of the biggest challenges associated with China’s rapid economic growth. Expenditures on logistics services, encompassing transportation, storage and management functions, reached RMB6.08 trillion in 2009. Challenges faced by those seeking to develop the market include regulatory constraints, local barriers to entry and capital strain. The government has taken positive steps toward addressing those challenges, including opening the sector to foreign logistics companies and introducing institutional reform. The creation of the Ministry of Transport, through the consolidation of a number of government departments in 2008, reflects the determination of the Chinese government to improve administrative efficiency and coordination among departments for policy formulation and execution. With the government’s substantial investments in infrastructure and further liberalization of Chinese transportation and logistics markets, continued

improvement among logistics companies operating in China, accompanied by signiﬁcant consolidation, is being made.

Market overview Growth in the logistics sector has been fuelled by rising domestic demand for goods and services and, on the supply side, by improving transportation infrastructure across China. The logistics market has seen double-digit annual growth in recent years. The total value added reached RMB2.31 trillion in 2009, representing a 6.7 percent share of GDP. Given the current stage of China’s economic development, the majority of business for logistics companies comes from the movement of industrial products. This accounted for around 90 percent of the value of goods moved in 2009. Imported products accounted for 7.1 percent, a figure that may rise further in the years ahead. As a percentage of GDP, logistics costs are around 18 percent, having dropped slightly from 18.8 percent in 2004 to 18.1 percent in 2008. This is still high compared to developed countries, where logistics costs are typically below 10 percent of GDP. This high figure suggests operational inefficiencies exist throughout the market. Although China’s GDP is dependent on industrial sectors to a larger extent than most developed countries, market fragmentation, regulatory constraints and operational challenges have all contributed to relatively high operating costs. The total logistics cost in 2009 was RMB6.08 trillion. Transportation accounts for the largest component of total logistics costs, with around 55.3

NOVEMBER 2010

INSIGHT

China's fastgrowing logistics sector presents challenges and opportunities ahead.

Market Proﬁle provided by

Jeffrey Wong Partner, Shanghai +86 21 2212-2721 jeffrey.wong@kpmg.com

“

Further market liberalization is expected to break down the provincial boundaries and facilitate development of a national logistics market.”

percent (RMB3.36 trillion). The other components are inventory storage costs (RMB1.99 trillion) and management costs (RMB0.73 trillion).

Policies and regulatory environment The government recognizes that certain challenges in the logistics sector are impacting wider economic growth. It continues to address these challenges through a combination of regulatory measures and government investment in infrastructure to provide more favorable conditions for transportation and logistics companies to operate. China’s logistics industry has been growing fast since its accession to the World Trade Organization (WTO) in 2001. The government’s eleventh FiveYear Plan, running from 2006 to 2010, sets out a number of initiatives to establish transportation and logistics markets in support of the development of China’s tertiary industry, as well as the growth of the economy as a whole. A major reorganization at the ministry level was conducted in 2008 to streamline the governance of the transportation system. The reorganization involved integrating a number of transportationrelated government bodies. The functions of a number of government departments regulating civil aviation, postal services, communications and urban public transportation were consolidated into the newly established Ministry of Transport. In response to the global ﬁnancial crisis, the government launched a stimulus package of RMB4 trillion in 2009. A majority of the funding was directed to infrastructure development, and it provided favorable conditions for the logistics industry to grow. Along with the injection of liquidity into the market, the Chinese government introduced the Rejuvenating Program for Logistics Industry in February 2009. The program aimed to support the development of the logistics industry for the three year period from 2009 to 2011.

Competitive landscape As a result of self-management and localized operational footprints, transportation and logistics operations are highly fragmented. The top 20

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NOVEMBER 2010

transportation and logistics companies in China had total revenues of around RMB330 billion in 2008 – about 6 percent of total logistics costs for that year. The competitive landscape is rapidly changing and is driven by the following trends: • Foreign players accelerating their expansion in the wake of market liberalization and improvement in infrastructure • Domestic players upgrading facilities and improving their services to compete with foreign entrants • Foreign-invested manufacturers looking to improve operating efﬁciency along their supply chains Chinese shipping operators are rising quickly with China Ocean Shipping Co. (COSCO) and China Shipping Container Lines Co. (CSCL) ranking among the world’s top 10 ﬂeets in terms of carrying capacity by twenty-foot equivalent unit (TEU).

Challenges and opportunities China’s logistics sector has a number of challenges to overcome to improve efficiencies. However, with continued government efforts in deregulation, administrative reform and investment in infrastructure, these challenges present opportunities for companies to succeed in this rapidly developing market. The pursuit of logistics efficiency The high ratio of total logistics costs to GDP has drawn the attention of the government and is considered not just an issue for the logistics industry but one of significance to the prospects of overall economic development. A reduction to the ratio has been made a target at all levels of government, and various initiatives have been launched. Further market liberalization is expected to break down the provincial boundaries and facilitate development of a national logistics market. Competition brought about as a result of market liberalization has prompted further investment led by global logistics operators who are establishing regional hubs, upgrading operational systems and training logistics professionals. Domestic logistics operators are, however, catching up quickly, and some are gaining dominant positions at the regional level.

Logistics outsourcing The share of third-party logistics in China’s logistics market is on the rise. It is both a result of government encouragement and the trend towards companies outsourcing their logistics operations to focus on their core business operations and reduce costs. The first batch of third-party logistics operators was logistics departments of multinational corporations or sizable domestic enterprises that were spun off. The success of these third-party logistics operators demonstrated the viability and potential of the business model. As the benefits of this approach become clear, it is encouraging more companies to follow. Development of transportation and logistics infrastructure Transportation and logistics infrastructure have improved significantly in the period of China’s eleventh Five-Year Plan (2006–2010). Although it has yet to achieve the standards of many developed economies, China is far better connected across

counties and provinces than before. With more transportation facilities, such as toll roads built with provincial government funds and private sector investment, it is expected there will be a growing number of projects seeking to raise capital, including through initial public oﬀerings in the near future. Market consolidation China’s logistics market is fragmented and dominated by companies with limited scale or scope of services. With improvements in infrastructure and the government’s policy aim being to nurture a number of large, internationally competitive logistics enterprises, an increased amount of M&A activity is expected in the future. There are a few regional players emerging, but they are still facing obstacles expanding across provincial boundaries. One notable trend is horizontal integration by means of cross-provincial M&A as a means to gain access to bigger domestic markets.

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One notable trend is horizontal integration by means of crossprovincial M&A as a means to gain access to bigger domestic markets.”

I N T E RV I E W

BY JUSTIN CHAN

An Answer to Recruiting Challenges

Recruitment process outsourcing is emerging as a solution to ﬁnding the right talent.

ven as the global economy continues its recovery from the financial crisis, the ability to find and hire quality talent remains one of the biggest challenges facing foreign companies in China. The rapid growth of China’s economy means that suitably qualified employees are constantly in high demand. This persistent difficulty in recruiting has opened the door for service providers to step in with their expertise and experience to help companies find suitable candidates in a more efficient and expedient manner. To gain a better understanding of recruitment process outsourcing (RPO) and the benefits it can provide, Insight spoke to Candy Lewandowski, vice president and global practice lead, and Kumar Bhaya, director and Asia Pacific practice leader, of

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global workforce solutions provider Kelly Services’ Recruitment Process Outsourcing practice.

On the definition and benefits of RPO… Candy Lewandowski: At the highest level, RPO is when a company outsources their recruiting function – either some or all of the processes around recruitment – to a third party provider. There are three factors that make it unique from staffing or executive searches. First, it is about handing over the management, execution and even design of the recruiting process. Second is the ownership of the results; the provider takes ownership of the outcome of the hiring process. Third, recruiting in the RPO sector is under the client’s brand and not under the provider’s brand name. These three things make RPO clearly distinctive from other recruitment solution offerings. Looking at recruitment as an end-to-end process, it starts with an identified need and a requisition for a specific job requirement and it ends when a new employee is on-boarded into the organization. A full end-to-end RPO program would be the outsourcing provider owning all those steps in between and working as an extension of the client’s human resources department. In many cases, the provider’s employee who is managing a particular client’s RPO program reports to the client as if they are employed there. They are very much integrated into the client’s organization. One benefit of RPO is that it provides standardization and optimization of processes that a lot of companies may not have in their recruiting organizations, especially for the larger companies that are decentralized. Another key benefit of RPO – and one of the benefits that we are pushing the most in the market today that draws the most interest from clients – is the ability to find good candidates. As a provider whose core business is

recruiting, we have the experience, exposure and avenues in different channels that a single client may not have. There is also the cost benefit that can’t be missed, although that is really not the number one driver that brings buyers to RPO. On the scalability of RPO… Kumar Bhaya: Scalability is another key benefit of RPO. What we’ve seen in the past 12 to 18 months is the need for several firms to quickly ramp up and reach out to candidates without having to make a major or long term investment in manpower or recruitment infrastructure. RPO provides a flexible, scalable mechanism that allows companies to quickly meet changes in demand. CL: Scalability works both ways and the global financial crisis made that evident. When the crisis hit, a lot of organizations had to lay off a lot of their recruitment staff. Recruiting and hiring is an up and down cycle and it is much more cost effective and efficient for an organization to use an outside provider that can scale up and down quickly. For a lot of the companies that have shown interest in RPO recently, it was a result of the fact that as they downsized their recruiting teams, they knew they would have to rebuild internal recruitment resources once the economy recovered. The scaling down piece is really as big of a factor as scaling up. We can scale to a relatively small client, but realistically, there is a minimum level of hiring activity to be able get the right kind of benefit and value. A lot of the activity over the last 12 months has been from mid-market sized clients. In the United States, where we’ve already got a critical mass of business in the RPO area, 80 percent of new business is from companies with annual hiring in the hundreds. KB: That is not very different from what happens in China. The deciding factor is not how big or small the company is today, but what kind of growth they are looking at for the next 12 months. It could be a multinational that has just come into China but is looking at adding 500 people in the next 12 months, or it could be a mature organization

that wants to increase its organization by 10 or 20 percent off an already large installed base. A search and selection model may be better, for instance, if you have 20 positions with 10 different skill sets to hire. But if those numbers are multiplied, then you’re looking at bulk and repetitive recruiting activity where economies of scale can be brought into the efficiency equation, which also results in cost savings. On the specialization of labor… CL: In our approach to RPO, we’ve taken what was traditionally a full life cycle recruiter model and divided it into three parts so there is specialization of labor. Under the old recruiter model, a company would have recruiters doing everything – sourcing candidates, screening and interviewing to find a match, as well as administrative tasks. The two primary functions of recruiting are hunting, which is going out to find candidates, and relationship management, which is working to help a hiring manager find a candidate that’s right and being the liaison between those two parties. We have created Sourcing Centers of Excellence where we have sourcing recruiters who are focused 100 percent on finding talent. That’s their skill and their passion. They in turn work with the clientfacing recruiter who is the one that owns the relationship of working with the hiring manager and the candidate to make a match. Then we have administrative individuals who focus on the process, hiring logistics and the paperwork, driving everything through. Typically, sourcing is the component that falls apart when you’re in a full life cycle model because no one has time enough time to do it properly. By carving out the sourcing piece, what we’ve done is focus some real attention just on finding talent, which means not just finding the talent that is actively applying for jobs but also those candidates that meet the requirements but may not necessarily be looking for a job. On the obstacles to widespread RPO adoption… CL: RPO is a very different model from having your own employees do recruitment work. Culture change and the whole change management process

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The deciding factor is not how big or small the company is today, but what kind of growth they are looking at for the next 12 months.”

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Companies are recognizing that recruiting is not their core business and that they can look to partner with an outside provider whose core expertise is recruiting.”

are not things that all organizations are very comfortable with at first, especially when they are so used to recruiting in a particular way for many years. I would rate this as the biggest obstacle when it comes to implementing an RPO program. But as the market evolves and the shortage of skills becomes more magnified, companies are recognizing that recruiting is not their core business and that they can look to partner with an outside provider whose core expertise is recruiting, which really enhances their overall ability to attract talent. KB: Compared to some of the other HR functions that are typically outsourced, such as payroll administration and training, recruiting is something that employers have traditionally kept in-house given the strategic impact of talent acquisition to their organizations. To some firms, having an outside provider manage recruiting is perceived as losing control of the recruiting process and outcomes. When we talk to companies about the strategic value of RPO, we’re really sharing best practices in recruiting, both from a process efficiency and candidate sourcing perspective. Companies soon realize that there’s a lot to be gained from this and they still own the strategy and the hiring decision. On the challenges of implementing a RPO program… KB: Change management and execution again are the biggest challenges. With RPO, you’re not just sourcing candidates and providing resumes. You’re really becoming part of the recruitment process and that means fine-tuning and adjusting the processes. For an RPO program to be successful for a company, buy-in is essential at the senior levels to drive higher adoption of the program across the department or company. There is also the day-to-day business to manage and there may be challenges in the adoption of internal processes or compliance with procedures. This can be mitigated through robust implementation of the RPO program involving stakeholders from both the customer organization and the service provider. It involves clear assignment of roles and responsibilities for all parties concerned and

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regular reviews to monitor progress, identify gaps and take measurable steps to fix any problems. CL: It has to be viewed as a partnership and not a buyer-vendor environment. When you talk about becoming one team, you must have a cultural fit between the provider organization and the buyer organization that’s going to work – kind of like a marriage. The first three to six months of any program are about adjusting to each other and establishing how you’re going to work in partnership as one. You also have to anticipate that there’s going to be some things that might not go well – the best laid plans go awry – but it’s having a process in place and being able to quickly address those things that will happen during the initial stages of the program. On the outlook for the RPO industry… CL: Most research says that RPO is the fastestgrowing sector of HR outsourcing. Looking at the market globally, most of the growth projections are fairly significant, probably at a pace of 30 percent annually. Looking specifically in Asia and China, there is a higher growth rate than the rest of the world, as the economies here continue to grow faster. KB: At the Board and CEO level, talent acquisition and the challenges around it have become a key talking point everywhere. This is true even in China where companies cope with increased competition over a limited talent pool. In such an environment, companies are increasingly viewing RPO as a strategic tool as it directly impacts the acquisition of the right talent in key positions. We observe more and more HR organizations across companies in China moving towards RPO so they can gain access to high quality talent, streamline their recruitment processes and achieve their hiring goals. By engaging an RPO provider to focus on recruiting, HR is freed up to deliver other important human resource functions such as employee engagement, performance management, leadership development and succession planning. Justin Chan is Editor-in-Chief of Insight. He can be contacted at justin.chan@amcham-shanghai.org.

E X P O F E AT U R E B Y RYA N B A L I S

A Lasting Legacy at the Expo

Good for business Before the Expo opened its doors, many of the world’s largest companies took notice of the opportunity to reach China’s widening consumer base in an intimate way. It was important for companies to signal the strategic importance of China as a growth market for the future, especially at a time when China is shifting to an inwarddriven model of development. That shift is likely to open opportunities for foreign ﬁrms to compete for market share in the years ahead.

IMAGINECHINA

his year’s World Expo in Shanghai lived up to its billing as a showstopper as memorable as any previous year’s fair. The highly anticipated and largest ever World Expo – the first held in a developing country – featured nearly 200 participating countries and attracted more than 70 million visitors, both event records. At its attendance peak, the Expo attracted a staggering one million visitors in a single day. The Expo was a showcase not only of modern China but also secured Shanghai’s place among the titans of world cities. During its six-month run as host to the world, Shanghai became the go-to destination for world leaders, business executives, technology pioneers, celebrities and throngs of Chinese and international tourists. All descended on China’s financial capital to experience the oncein-a-lifetime opportunity to participate in and experience China’s world debut. The Expo proved to be as advertised: a remarkable success for event organizers, business development, nation branding, face-to-face cultural and informational exchanges and the building of deeper ties between China and the rest of the world. Now that the Expo has officially closed, Shanghai has the opportunity to look back and consider in what ways did the Expo make an impact as one of the most celebrated mega-events of the year?

Some companies went all-in to market their corporate brands. Coca-Cola, Cisco Systems and General Motors’ joint venture with SAIC made a splash by building large corporate pavilions rivaling the size of some national pavilions. “The World Expo is expected to attract 70 million visitors throughout 184 days and we’re taking this opportunity to really connect with every one of them,” Neeraj Garg, general manager of Coca-Cola China’s Expo project, explained to Shanghai Daily. The Expo’s draw was not only good for corporate promotions but also a strong driver for the regional economy. The Expo is expected to generate US$9 billion in income for Shanghai and the Yangtze River Delta area, according to a September 2010 calculation by Global Intelligence Alliance Group, a market intelligence and advisory group. By comparison, People’s Daily reported the shorter Beijing 2008 Summer Olympics generated US$2 billion in direct revenue. China Daily reported that a total of RMB23.6 billion (US$3.6 billion) of Expo franchise commodities were sold by the end of August, the latest ﬁgure available from the Shanghai Municipal Commission of Commerce. Meanwhile, Shanghai’s retail sales in August were up 17 percent year-

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INSIGHT

Insight explores the legacy of the historic Shanghai 2010 World Expo and how the event impacted Shanghai and its residents.

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As the ﬁrst World Expo spotlighting cities, Shanghai's Expo tried to help forwardlooking cities across the globe look for innovative ways to address a host of inevitable urban challenges.”

over-year to RMB51.3 billion (US$7.7 billion), according to the paper. Shanghai’s tourism revenue was forecasted to exceed RMB300 billion (US$45 billion) by the year’s end, according to a 2009 estimate by the Shanghai Municipal Tourism Administration. Forbes reported some large Shanghai hotel companies and operators of popular Shanghai tourist destinations, such as the Oriental Pearl Tower, saw double-digit gains from a year earlier.

Environmental leadership

successful in part due to the Alcoa Foundation’s purchase of 8,250 carbon offset credits for sustainable energy projects in China’s Jiangsu and Gansu provinces. “The USA Pavilion is pleased to put into action our message of sustainability and healthy community building by supporting three Gold Standard-certified projects across China to offset our carbon footprint,” said Ambassador José Villarreal, U.S. Commissioner General to the Shanghai 2010 World Expo, in a press release.

Urban development strategies A feature of this year’s Expo was organizers’ laserlike focus on holding a green event that contributed to the ideals of a sustainable urban society and promoted key environmental initiatives, such as cutting emissions, conserving energy and building a society of sustainability conscious consumers. In keeping with the broader event theme “Better City, Better Life,” many clean energy technologies were displayed throughout the Expo. Nearly three dozen 3-megawatt wind power generating units and 4.6-megawatt solar power generators powered the Expo site. Over 1,000 clean-energy buses and numerous electric golf cart-like vehicles zipped visitors around the immense 5.28-squarekilometer grounds. Energy efficient LED fixtures and devices to catch rainwater showed the practical use of green technology in daily urban living. Eco-conscious materials were incorporated into pavilion structures. The thousands of polycarbonate tubes illuminated on the exterior of the Shanghai Corporate Pavilion were made of recycled compact disc jewel cases. The Canadian red cedar that made up the curved frame of the Canada Pavilion was individually fastened so it could be easily disassembled and reused in construction projects. The steel, wood and glass used to make the Luxembourg Pavilion’s structure are also recyclable following its eventual teardown. The 6,000-square-meter USA Pavilion used recycled bamboo flooring and featured a rooftop vegetable garden and a solar water heater. To back up its commitment to sustainable development, the USA Pavilion became carbon-neutral during the six-month duration of the Expo. The effort was

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As the ﬁrst World Expo spotlighting cities, Shanghai’s Expo tried to help forward-looking cities across the globe look for innovative ways to address a host of inevitable urban challenges. Expo organizers pointed out that cities of the future will be confronted with rising population densities. The United Nation’s 2009 World Urbanization Prospects forecasts some 6.3 billion people will live in cities by 2050. That growth approaches a doubling of the urban population in 2005. In China alone, some 350 million people are expected to migrate to cities by 2050, pushing up the Chinese urban population to 1.04 billion. Although urbanization tends to help economies grow, the key challenge for cities is how to balance the wealth of new resources – that is, people – with increasinghousingneeds,overcrowdedtransportation networks, waste removal and pollution needs, among other requirements. What ideas did organizers have on hand for cities of the future? Shanghai’s answer to sustainable urban housing was its carbon-neutral “Eco-House” project. The four-story eco-apartment was powered by renewable energies and featured open skylights, plants and green water containing algae that help with natural ventilate. It also showcased smart technologies to ease daily living, such as an intelligent elevator that adjusts power according to total passenger weight and refrigerators that detect when food spoils. Elsewhere in the Expo’s Urban Best Practices Area, the city of Montreal’s mini-pavilion told the story of how the city turned a landﬁll into a park. Chengdu, the capital city of Sichuan Province,

demonstrated how its Living Water Park purifies rainwater and sewage naturally using plants and soil instead of chemicals. The city of Odense, known as Denmark’s “cycling city,” recounted its decades-long commitment to building hundreds of kilometers of bicycle lanes to promote cycling, thereby cleaning up the city’s air. Germany’s city of Bremen offered a chance to learn about a system of transportation resource sharing in which car owners rent out their vehicles to others, thereby decreasing the number of cars on the road. Finally, a restaurant in London’s zero-carbon pavilion did away with table waste by turning organic biscuits into plates and utensils that diners could eat after finishing their meals. The pavilion was modeled after the Beddington Zero Energy Development (BedZED) in the London borough of Sutton, which made history in 2002 by becoming the first carbon-neutral community in the world.

Post-Expo Although October 31 marked the last official exhibition day, plans continue to emerge on preserving the memory of the Shanghai Expo. Five pavilions, including the China Pavilion, will remain intact as public venues and landmarks following the closing ceremony. The Expo Center, another permanent construction, will be converted into a hall for conventions and events. World Expo Online, the first-ever virtual Expo experience, will remain online as “an everlasting virtual exhibition for future generations,” according to Dassault Systèmes, the French software maker that created the site. Some pavilions, such as the Taiwan and the United Arab Emirates pavilions, will be dismantled and reassembled outside China for local visitors to enjoy. Nearly all other pavilions will be dismantled over the six months following the Expo, as set by Bureau of International Expositions’ rules, but is a requirement that many pavilion operators find unsettling. “Given the overarching Expo theme of sustainability, demolishing the building and digging a debris dump is probably not consistent,” Ambassador Villarreal told China Daily. “Our hope is that we are able to disassemble and transplant

the building and put it to use.”. Many foreign governments are lobbying Chinese officials in hopes that their national pavilion may stay in China. The city of Wuxi in Jiangsu Province, as well as residents in other Chinese communities reportedly also expressed interest in giving pavilion transplants an afterlife outside of Shanghai but have not been given the go ahead, reports China Daily. A debate is underway over what to build on the Expo site following the eventual cleanup. The Shanghai government reportedly has plans to build a World Expo Memorial Hall and World Expo Museum to highlight the Expo’s achievements and spread its message of sustainable development. The local government reportedly also has committed to preserving green space near the Huangpu River. Though no decision has been made public, China Daily reports that some of the Expo grounds may be auctioned off for commercial development. One plan under consideration is to redevelop land on the Pudong side of the Expo Park to extend the Lujiazui Finance and Trade Zone. The sale of land rights would help Shanghai recoup the city’s multibillion-dollar investment to host the Expo. However Shanghai transitions back to life after the Expo, what is striking is that the public’s thirst for everything Expo appears unquenchable. Demand to visit the China Pavilion was so intense that the pavilion will open a second time this December for another six-month run. During the Expo, many hopeful visitors found they could not enter the popular pavilion because of space restrictions and could not afford scalped reservation tickets. It remains to be seen whether urban development of the future will follow the vision presented at the Shanghai Expo. What is certain is that Shanghai advanced the conversation on ideas for approaching sustainable development and, in doing so, put on quite a show. It is this contribution to sustainable urban development frameworks that may be the real legacy of this year’s Expo. Ryan Balis is a contributor on AmCham Shanghai’s communications & publications team. He can be reached at ryan.amchamsh@gmail.com.

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Shanghai advanced the conversation on ideas for approaching sustainable development and, in doing so, put on quite a show.”

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M A R K E T I N G F E AT U R E

BY ASHLEY CAHILL

hina proved its importance to the global luxury industry as Chinese consumers continued to spend on luxury items while their Western counterparts stowed their wallets during the global recession. The backlash against conspicuous consumption in America and Europe was far less apparent in China, which helped luxury firms survive the global economic crisis. As the world’s second largest market for luxury goods, China saw luxury sales rise 12 percent in 2009 to US$9.6 billion, or 27.5 percent of the global market, according to consultancy firm Bain & Co. With predictions that China will surpass Japan as the world’s number one luxury market by 2015, luxury companies are beginning to bolster their Chinese credentials through localization and shaking up local operations. The lure of luxury was brought to China in a big way this year. Prada sent models strutting down a runway on China’s Great Wall, while both Prada and Chanel showed their support of the Shanghai 2010 World Expo with the release of special edition accessory lines. With around 80 percent of the world’s leading luxury brands operating stores in China, diverse sectors of the luxury industry are enjoying growth. In the first half of 2010, China’s luxury car market increased by 91 percent, while diamond imports increased 92 percent. A study by global consultancy McKinsey & Co. found that while only a few years ago Chinese consumers made most of their luxury goods purchases abroad, today 60 percent of purchases are made in mainland China. On average, wealthy consumers in China are 20 years younger than those in the United States and Japan, with 80 percent under the age of 45, compared to 30 percent in the U.S. and 19 percent in Japan. The importance of social status and gift-giving continues to drive China’s luxury purchases.

IMAGINECHINA

A Gold Rush in Luxury

McKinsey recently reported half of luxury goods purchased by Chinese consumers in 2009 were gifts. Men played also a much larger role as consumers in China’s luxury market than in other luxury markets worldwide. Luxury brands must take these diﬀerences into consideration as they try to master their understanding of the Chinese market.

On their own Since 2007, several major industry players have bought back franchise agreements and established wholly foreign-owned enterprises (WFOEs) to strengthen control over operations. The trend is gaining momentum across luxury segments, with consumer-accessible luxury brands like Coach and Polo Ralph Lauren, as well as higher-end luxury brands like Armani, Montblanc and Chloé ending local partnerships. As major luxury retailers gain local market experience, many are reevaluating strategic partnerships with Chinese franchisers and distributers. After 20 years of operating through franchises in China, Burberry bought out its Chinese franchise partner for more than US$107 million in July. The British retailer plans to take over operational management of its 50 franchised stores in China and allow existing franchisees to acquire a 15 percent stake in the business. Burberry expects the transaction to produce more than US$30 million in annual proﬁt by 2012. Why franchise in the ﬁrst place? Franchising is common for brands entering new, unfamiliar markets because it expedites expansion while

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INSIGHT

Luxury retailers are sitting on a gold mine in China, but must compete in an increasingly competitive market.

Marketing Committee Event: Luxury and the Young Chinese Consumer On November 12, AmCham Shanghai’s Marketing Committee will host a panel discussion on the market of luxury goods to China’s younger consumers. The event will be held from 8:00 a.m. to 10:00 a.m. at the J.W. Marriott Tomorrow Square Hotel. John Chattock, partner at KPMG, will discuss ﬁndings of KPMG’s 2010 China luxury report, followed by a panel discussion moderated by JeanMichel Dumont, chairman of Ruder Finn Asia. Also joining the panel will be representatives from Land Rover/ Jaguar and Glamour Sales. For further information please contact Kate Ryge at comm.marketing@ amcham-shanghai.org.

accessing local partners’ market expertise and established distribution networks. But by working alone, companies ensure complete control over brand identity, marketing strategy, inventory management and customer service. Moreover, as China’s luxury market operations continue to grow, independently operated brands are better positioned to enjoy greater shares of rising proﬁts. Franchise partnerships are not without risks, as they often result in sub-par customer service and inconsistent brand image. For these reasons, many luxury brands maintain strict distribution policies and only operate directly owned outlets. French luxury giant LVMH operates Louis Vuitton stores around the world and declines sales opportunities through alternative outlets. By maintaining exclusive control over product distribution, Louis Vuitton ensures consistent product quality and pricing across the world.

A tricky balance Foreign luxury brands are bolstering efforts to connect with Chinese consumers through product adaptation and localized marketing and product launches. Louis Vuitton’s recent collection showed inspiration from 1920s Shanghai and Chanel launched a special product line including a handbag shaped like a Chinese food takeaway carton in recognition of the Expo. Similarly, Prada created an Expo line of tote bags decorated with iconic images from the Shanghai skyline. Localization efforts are not limited to the apparel and accessories industry. BMW introduced a limited, China-only edition of its 2010 M3 called the Tiger to follow the Chinese zodiac. Its vehicles, with longer wheelbases that allow for extended back seats, also demonstrate a keen awareness of affluent Chinese consumers who often employ drivers. Making the biggest splash in its localization attempts, Hermès recently made the unprecedented move of establishing a new brand called “Shang Xia” exclusively for the Chinese market. Operating independently from Hermès, Shang Xia will attempt to capture Chinese elegance and traditional culture through home goods and apparel crafted locally by Chinese artisans.

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But many foreign luxury retailers struggle to maintain a balance between creating products that appeal to the Chinese market while maintaining the signature qualities that deﬁne their brands. Chinese consumers show a strong preference for foreign luxury brands over domestic brands and attempts to localize too strongly can backﬁre because the foreign origins and brand history are important sources of product appeal. Jean-Michel Dumont, chairman of public relations agency Ruder Finn Asia, believes that Chinese consumers are “paying for internationally leading brands in order to satisfy their need for a global premier lifestyle.” He acknowledges that brands must make product and marketing adjustments, but calls it “imperative to keep the international aspect of the brand.” Nevertheless, luxury brands continue to step up their localized marketing campaigns. Gucci, Omega, Rolex and Mercedes-Benz have all targeted consumers through advertisements featuring local celebrities and models. Other luxury brands have utilized innovative campaigns and events. In 2008, the House of Dior hosted an exhibition called “Christian Dior and Chinese Artists” to foster dialogue between contemporary Chinese artists.

The road ahead As luxury items continue to sell well in the Chinese market, a growing number of luxury brands are committing a greater amount of resources to expand into China’s second- and third-tier cities, drawn by rising profits and a seemingly limitless consumer base. Still, there are challenges ahead. High duties on luxury goods, rampant counterfeiting and ineffective brand communication all cause headaches for those trying to succeed in the Chinese market. Recognizing that Chinese travelers are big spenders, luxury brands are making sure their Paris and Milan boutiques have Chinese-speaking staff. Through localized company strategies, the luxury market is changing the common adage of “Made in China” to “Made for China.” Moving forward, there is concern about market saturation in China’s biggest cities. Today, Beijing and Shanghai have the same number of luxury

point-of-sale locations per capita as New York and Chicago. With average disposable incomes predicted to double by 2015, the Chinese market is far from saturated. Still, brands must use different strategies to maintain their relevance. Dumont explains that because “consumers in first-tier cities have been exposed to luxury brands for longer and they travel overseas more frequently, brands will need to address the increasing trend for individualization and consumers’ need for brands to address their individual tastes. This will result in more in-depth segmentation.” Market entry into second- and third-tier cities presents many new challenges for luxury brands, including establishing logistics links, finding qualified staff and educating consumers about the brand. As for the development of domestic luxury competitors, so far, there has been limited success for Chinese luxury brands. Two of the most successful domestic luxury companies in China include Kweichow Mao Tai, the maker of China’s

most famous liquor, and high-end jewelry retailer Chow Tai Fook – both of which are relatively unknown outside the Chinese-speaking world. By contrast, Shanghai Tang, although no-longer Chinese-managed or owned, is a good example of the possibilities for Chinese luxury. The HongKong born brand struck gold through its use of blending traditional Chinese style with a modern, edgy feel to create innovative designs. Through its worldwide outlets, the brand strives to be a “global ambassador of contemporary Chinese Chic.” As the Chinese market becomes more developed and less associated with cheap manufacturing, the rise of Chinese luxury brands is a real possibility. Foreign luxury companies must continue to diﬀerentiate and build their brands in an increasingly competitive market, but the future for China’s luxury goods market looks golden. Ashley Cahill is a contributor to Insight. She can be contacted at ashleyecahill@gmail.com.

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Brands will need to address the increasing trend for individualization.”

H R F E AT U R E

B Y R I C H A R D K A N TO R A N D B E E C H E R A S H L E Y- B R OW N

Following the example of Best Employers can lead to business success.

his year’s post summer holiday flurry of visitors from headquarters abroad has delivered a consistent message to leadership teams in China: grow! With the economies of the developed world facing anemic growth prospects at best, multinationals are putting pressure on their China operations to double or triple in size over the next few years. The stakes are high, as are the challenges. Consistently at the top of the list of business challenges facing AmCham Shanghai member companies in China are human resources (HR) challenges. Finding, retaining and motivating talent has been a persistent challenge for several years and continued even in the difficult economic climate last year. The root cause behind these HR challenges is a basic talent supply and demand mismatch. According to Aon Hewitt’s 2010 Compensation and Benefits study, all industries are forecasting significant headcount growth from a net 10.2 percent average headcount increase in the logistics industry to a net 25.5 percent average headcount increase in the auto parts industry. Clearly the demand for talent remains high. The supply side of the equation looks equally challenging. According the U.S. Census Bureau, China’s working age population (those aged 2059) will peak as early as 2016 at 831 million, before starting a gradual decline. With low growth at best

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ISTOCKPHOTO

Driving Growth through Engaged Employees

in the supply of talent, finding and keeping talent in the future is going to get significantly harder. Employees are now spoiled with employment choices and companies are forced to make significant salary increases to stay competitive. According to Aon Hewitt data, salaries grew 8.4 percent in 2010 and are projected to increase to 9.1 percent in 2011. Employee turnover is also being pushed higher by the supply and demand mismatch, as average voluntary turnover rose from 14.2 percent in 2009 to 16.7 percent in 2010, and is expected to continue to trend upward for the foreseeable future. In this environment, it is little wonder that HR remains the top challenge for companies in China. But what can be done? The human capital practices of Best Employers shine a bright light on the path to improved results.

The Best Employers in China 2009 study The Best Employers in China 2009 study surveyed 149 companies and over 30,000 individual employees on their views and perceptions of the organization. An independent judging panel then selected (blind) the top 10 Best Employer organizations in the study. A key part of the study was measuring the engagement level of employees, which is the intellectual and emotional commitment that employees have with the business. The study clearly revealed that Best Employers do a better job of engaging their employees, which is determined

by measuring three key observable behaviors. • Say – Do employees speak in a consistently positive way about the organization to coworkers, potential employees and, most critically, customers (current and potential)? • Stay – Do the employees have an intense desire to be a member and remain a member of the organization? • Strive – Do the employees exert extra discretionary effort and work that contributes to the success of the business? The study found that on average, 71 percent of the employees at The Best were engaged versus only 49 percent at The Rest (the other companies in the study). Based on data from engagement studies of over 1,500 listed companies, this means that Best Employers are high performers that are likely to achieve total shareholder returns above the market average. Conversely, companies where less than 45 percent of the workforce is engaged tend to destroy shareholder value. Simply put, companies with high employee engagement have superior business performance. The study also revealed that organizations with high employee engagement generally have faster revenue and profit growth, lower employee turnover, faster fulfillment of vacant positions and even lower rates of workplace accidents. The discrepancy in performance is not a result of higher wages, as The Best typically pay at the 50th percentile. Engaging employees is about more than just money. Clearly, engaged employees are an important differentiator in successfully fulfilling a growth agenda. Understanding the practices of the Best Employers will help identify the key levers for driving business results through people in addition to revealing how to pull those levers. According to the Best Employers in China 2009 study, The Best excel in the three key areas outlined below.

sticking with them until they reach a point where they create the “flywheel effect” that allows them to maintain momentum and deliver results. Research consistently demonstrates that human capital management systems improve business results. As companies commence work to put these programs in place, they generally experience a slow up-tick in business results. The return on human capital program investment then typically continues at a gradual pace until organizations reach a “tipping point” where a dramatic rise in the return on investment is experienced. The typical pattern of relentless execution can be broken down into three stages: installing (we’ve got that), implementing (we get it) and impact (we’re getting results). In the context of performance management, all the organizations in the study have systems in place to set and align goals. In this sense, all of the participating organizations have passed through the “installing” gate when it comes to performance management. Key differences emerge when we look at how programs are implemented. Best Employers more often balance goals and targets across financial and non-financial measures, set the bar higher in terms of performance ratings, better equip managers to review performance and review performance more frequently. When compared to other organizations, The Best have more than twice as many employees in the “improvement needed category” and fewer employees receiving the “leading performer” rating. The divergence between The Best and The Rest continues as the focus shifts to execution and results. Most notably, Best Employers indicate that the performance assessment process in their company is

“

Organizations with high employee engagement generally have faster revenue and proﬁt growth, lower employee turnover, faster fulﬁllment of vacant positions and even lower rates of workplace accidents.”

Employee Engagement Behaviors – The Best vs. The Rest

Relentless execution Best Employers are more focused and disciplined in reﬁning their human capital programs and

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“

The Best Employers in China achieve greater execution payback through persistent empowerment of managers.”

actually helping to improve performance! The relentless execution demonstrated by The Best is enabled by empowered managers and efficient, effective HR functions. These are the other two differentiators. To completely understand the first area of excellence, it is important, therefore, to take a close look at the other two areas.

Persistent empowerment of managers The Best are deliberate in giving more autonomy to managers. They take a markedly different approach from The Rest in how they allocate roles and responsibilities between senior leaders and managers. They do a better job of equipping managers to perform their roles and they create self-sustaining reinforcement mechanisms. Given the young average age of people managers in China and the fact that managers in China are typically promoted into people management positions from individual contributor positions, it is not surprising that many first-time managers feel out of their depth. The Best Employers in China achieve greater execution payback through persistent empowerment of managers in three areas. Focusing leaders on leading so managers can manage The first step in empowering managers involves clearly differentiating what is expected of managers versus what is expected from leaders. Leaders at The Best are twice as likely as their counterparts in The Rest to consider “providing a vision for the organization’s future” as their top priority. CEOs at The Best are clearer about the kind of organization they want to create and their key promise to employees is that they will “get a sense of purpose and achievement working for this organization,” while The Rest promote “an organization where co-workers talk positively and with pride about the organization.” The vision and promise from CEOs at The Best is clearly finding its mark with 82 percent of their employees reporting senior leaders excite them about the future compared to only half of employees at other organizations. Leaders at The Best are seen by their employees as doing a better

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job of balancing returns and revenue growth agendas. They are seen as being more worthy of trust and more consistently demonstrating organizational values. At the same time, managers at The Best have much more autonomy to recognize solid and top performers, and they are seen by employees as more effective in conducting performance assessments, providing clear direction on future skills required and finding ways for employees to grow. Simply put, leaders at The Best empower managers to manage by getting out of their way. Better equipping managers to do their jobs Best Employers do more than just clarify roles and expectations. They also make sure managers are given the tools, skills and incentives to manage their people effectively and drive performance outcomes. They start by putting money on the table when it comes to equipping managers. They focus a larger portion of their training budget on developing the management skills of people managers. At The Best, the vast majority of managers agree they have the tools and knowledge to drive performance outcomes while at The Rest about half of managers feel that way. It is not just that Best Employers spend more or that managers feel more equipped. What is most important is that employees can see the impact and clearly play a critical role in connecting with the organization’s goals. Employers need to build a pathway for the development of their people that is aligned to the future direction of the organization. Creating Self-Sustaining Reinforcement The third source of differentiation centers on how Best Employers put self-sustaining reinforcement mechanisms in place. Business leaders and HR staff work together to set the organization into a virtuous cycle where strength leads to strength. This is accomplished largely through efforts directed at three factors. Culture that delivers sustainable competitive advantage: Among The Rest, control, bureaucracy, cost reduction and expense management are mentioned with much higher frequency as

Becoming a Best Employer – Get Involved in the 2011 Best Employers in China study!

cultural values and organizational behaviors. This is in contrast to The Best, where the top three most commonly cited cultural values are employee recognition, coaching and mentoring. It’s not surprising that The Rest are twice as likely to cite culture as an obstacle to achieving business performance. The Best have established their cultures largely as they would like them to be, and while there may be some tinkering, there is much more focus on embedding the culture into other systems. Systemic benchmarking and continuous improvement: Put simply, The Rest are not measuring and learning as effectively as The Best. Meanwhile, the Best Employers continue to be hungry for benchmarking data and adopt it with greater impact. CEOs at Best Employers expect HR to be measured and assessed via systemic means, but this is not done from a “control” perspective. On the contrary, there is a clear link between accountability and feeling valued. People want to be accountable because it makes them feel valued and feeling valued then makes them want to deliver the effort that engaged employees demonstrate. This cycle is an example of selfsustaining reinforcement. Rewards that reinforce stretch goals and accountability: Best Employers are significantly more likely to have a pay-for-performance culture. The Best align reward programs with results and behaviors to a much greater extent than The Rest. For example, at The Best, managers are more frequently rewarded for developing highperformers when compared to The Rest and are also much more likely than The Rest to set stretch goals linked to pay. This is just one way they ensure their employees are being challenged constantly and pushed to achieve higher outcomes.

Highly efﬁcient HR functions Best Employers deliver HR services and processes more eﬀectively and typically with fewer resources. While CEOs at all organizations generally agree that the HR function should identify and implement HR strategies and solutions aligned to business needs, CEOs at The Best are much more

The data reveals what Best Employers are doing differently to manage their human capital programs, which in turn drives superior business performance. While the path is clear and perhaps even simple, it is certainly not easy! To start your business on the journey to become a Best Employer and drive real business results through your people, participate in the Best Employers in China 2011 study. The study is being conducted in partnership with AmCham Shanghai and participation is conﬁdential and FREE. Participating AmCham Shanghai members will be eligible to receive AmCham Shanghai member benchmarks and insights in addition to complimentary individual reports. The survey closes mid-December so get started and register your interest today! For more information, please visit the Best Employers website or email bestemployerschina@hewitt.com.

www.hewitt.com/bestemployerschina satisfied with the extent to which their HR teams are delivering. The study results show that the HR function at Best Employers is more efficient and effective in helping the organization position itself for the future. Perhaps surprisingly, the data show that Best Employers deliver HR services with fewer resources. These figures raise questions about whether the HR functions at The Best are using a fundamentally different operating model. In fact, Hewitt’s research has revealed that in HR functions around the globe, significant progress has been made to drive efficiencies in service delivery. Furthermore, in the current climate, many organizations are taking a renewed interest in outsourcing as a cost-savings solution in response to the recent economic situation. Best Employers appear to be leading the way. At Best Employers, CEOs and general staff believe that the HR department identifies and implements human resource strategies and solutions critical to meeting the business’ needs. In other words, at Best Employers, HR is a business partner supporting business strategies and the HR function is better able to deliver against their CEOs’ top requirements of attracting and retaining top talent. Best Employers are better able to retain staff required for success and they experience lower levels of talent shortage particularly in key areas of leadership, project management and client management.

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INSIGHT

S P O RT S F E AT U R E

BY JUSTIN CHAN

HSBC/GETTY IMAGES

On Course for a Breakthrough Tiger Woods aims for a win in Shanghai and shares his thoughts on golf in China.

hen he arrives in Shanghai for the World Golf ChampionshipsHSBC Champions event beginning on November 4, Tiger Woods will be seeking his first victory in 2010. Since he became a professional golfer in August 1996, Woods has not gone a single year without capturing at least one tournament win. He is hopeful for a breakthrough at the Sheshan International Golf Club, where he finished in a tie for sixth last year. Since Woods’ first visit to China in 2001, growth of the country’s golf industry has exploded. New courses are springing up across the country and China is home of the world’s largest golf resort, Mission Hills Golf Club in Shenzhen, which hosted Woods on his first visit to China and boasts 12 courses designed by golf legends such as Jack Nicklaus and Greg Norman. “It is

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fantastic that China now hosts the ﬁnal World Golf Championships of the year and it shows what a force Asia has become in the world of golf,” said Woods to Insight. “I love the enthusiasm of the Chinese golf fans and each year I have returned their golf knowledge has increased tenfold.” The fact that golf will be included in the 2016 and 2020 Summer Olympics is expected to drive interest even farther. “The inclusion of golf in the Olympics is great for golf and will only serve to grow the game and introduce many new nations to golf,” said Woods. In Olympics-crazed China, the possibility of winning additional medals is expected to spur government support of new player development programs and it is only a matter of time before the creation of what Woods calls a “powerhouse” in the sport. As for his own Olympic goals, Woods says that he “would love to play in the Olympics and win a medal for the USA, but that’s far in the future.”

Making the cut For the time being, golf is still very much a recreational activity for the wealthy, with the average greens fee at more than US$150 per round. Especially at a time when there are increasing concerns about land use, conserving environmental resources and the growing disparity between China’s rich and poor, it is diﬃcult to envision the national government backing a game that is enjoyed by only three million Chinese – the number of estimated golfers in China – or 0.2 percent of the country’s 1.4 billion population. Despite the national moratorium imposed in 2004 on the development of new golf courses in mainland China, China Daily estimates some 200 courses have opened in the past ﬁve years to bring the total to more than 500. While there is speculation that the proliferation of golf courses is driven by the motivation to sell lavish villas built within golf developments, the push to drive interest in the game as a sport continues. “I think things are going in the right direction as more and more golf courses are opening and the China Golf Association and HSBC continue to develop programs for junior development,” said

2010 World Golf Championships-

HSBC Champions

Woods. He contends that the top players in the game have a responsibility to spread interest in golf around the world and cites that duty as a reason for playing in international tournaments outside the U.S. whenever possible. “It is also fantastic for aspiring young golfers to get the opportunity to see the world’s best golfers first hand.” In the golf development community, China is clearly the focus of the future. Nicklaus has designed courses in Beijing, Shanghai and Shenzhen as well as in Guangdong, Jiangsu, Yunnan and Zhejiang provinces, and has at least 13 more projects under development in provinces such as Fujian, Guangxi and Jilin. Norman recently closed the only office of his course design company in his native Australia in favor of a sales and marketing office in Beijing. Woods has designed courses in Dubai and Mexico and says that he “will certainly look at opportunities in China sometime in the future.” His contemporary, Phil Mickelson, designed his first course outside of the U.S. in Tianjin in 2009 and has plans to open a golf academy there as well as in Kunming. The China Golf Association also launched the China Amateur Golf Futures Tour last year to stimulate grassroots development.

Up and down

Date: November 4-7, 2010 Course: Sheshan International Golf Club 2009 Winner: Phil Mickelson 2009 Attendance: 32,000 For more information, please visit: www.hsbcgolf.com

course in the past and is coming off strong play at the Ryder Cup in Wales. He also finished second at Sheshan in 2005 and 2006 and shared the course record of 64 for three years. “I have been making some swing changes and am feeling good about where my game is at,” said Woods. As the galleries following Woods swelled into the thousands during last year’s event where total attendance neared 32,000, camera shutters clicked in frenzy as he stood over his ball ready to hit, often forcing him to back off. Still, Woods is hopeful the distractions will decrease and downplayed any impact, saying that “Chinese fans create a unique atmosphere and I look forward to seeing them again.” Looking ahead to 2011, his primary goal remains the same – to improve. “I would like to get a win under my belt before the end of this year and then I will be hoping to win a major as soon as possible next year.” Justin Chan is Editor-in-Chief of Insight. He can be contacted at justin.chan@amcham-shanghai.org. HSBC/GETTY IMAGES

In making his fifth visit to China, Woods is looking to turn around what has been a tumultuous year where he has gone winless for the first time on the PGA Tour. Since finalizing his divorce in August, he is adjusting to new living conditions and says he is much more at peace with his life. “All in all it was a long, frustrating year,” said Woods in October at a press event for his year-end Chevron World Challenge tournament. “But in the end it turned out that everything’s headed in a positive direction now.” He believes his experiences have left him more grounded than ever before. “I learned a lot about myself, and I learned how things went wrong, why they went wrong, and had to take a pretty deep and introspective look at myself, and there weren’t a lot of things I liked about it,” he added. “But I had to do it, and I did it and I’m grateful that I did.” Woods has excelled at the scenic Sheshan

WGC-HSBC Champions – one of the four World Golf Championships and the only WGC tournament outside the U.S. – is committed to bringing world-class golf to Shanghai. The ﬁeld consists of winners from leading events all around the world. Total WGC-HSBC Champions prize money has been Asia’s highest since 2005 and is set for US$7 million in 2010.

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INSIGHT

Fast-tracking the Economy Fast, clean and technologically advanced, high-speed rail is connecting China’s cities and accelerating the country’s growth. As the U.S. struggles to drive the American economy forward, U.S. government leaders can look to China’s model of high-speed rail development to spur economic growth at home.

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ooking into China’s recent past, one could hardly foresee the country’s emergence as a leader in highspeed rail development. In 1980, China had just 53,300 kilometers of rail spread across 9.3 million square kilometers of land. The central government’s vision for the transport of raw materials and workers from China’s interior to the east to aid coastal development necessitated rapid expansion of the country’s railway network. In turn, the length of China’s railway network steadily increased, growing from 55,200 km at the end of 1985 to 57,800 km in 1990, 68,700 km in 2000 and 75,400 km in 2005. Today, China is home to more than 86,000 km of railway, ranking second in the world after the U.S. The outlook is even more impressive: China is expected to expand the length of its network to over 120,000 km of track by the end of 2020. As railway coverage extends to the farthest reaches of China’s most remote interior regions, average train speeds

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are rising exponentially. In 2007, the average speed of trains running on conventional tracks reached 70 km per hour, nearly doubling the average speed reached in 1993. Today, the nation’s fastest conventional-track trains attain speeds of up to 350 km per hour, nearly ﬁve-times the average speed reached just three years prior. Pushing the envelope even further, Shanghai unveiled the country’s ﬁrst magnetic levitation (maglev) train in 2004 that transports passengers along a 30.5 km dedicated track from the Pudong International Airport to nearly the city center at 430 km per hour, cutting the 60-minute commute by car down to a breezy 7 minutes 20 seconds. Supporting business commuters and alleviating pressure on inter-city roads are important objectives that represent one side of the metaphorical track. How the central government can support the movement en masse of China’s growing migratory workforce across the long distances that

separate cities of employment and rural China represents the other. Increased passenger rail speeds can substantially reduce passenger commute times across vast distances to connect people and cities, and China has emerged as a leader in high-speed rail development and implementation.

Blueprints for expansion To further develop inter-connectedness between interior and coastal regions and northern and southern China as well as support the country’s high number of migrant workers, the government has outlined an ambitious plan for the development of high-speed passenger designated lines (PDL). The Ministry of Railways’ (MOR) 2004 Medium- and LongTerm Railway Network Plan (the Plan), updated in 2008, outlines the central government’s plans to expand the country’s railway network to 120,000 km by 2020, 110,000 km of which

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any provincial capital by eight hours or less. That would bring high-speed rail coverage to nearly 90 percent of China’s total population, according to People’s Daily.

Accelerating for growth

MOVING THE MASSES: High-speed rail will alleviate pressure on China’s rail network that must transport 200 million people each Spring Festival.

will be built in the next two years. This massive buildout in infrastructure is intended for eight high-speed PDLs that will run along the country’s four main vertical and four main horizontal passages. It will also include three inter-city lines covering the Bohai, Yangtze River Delta and Pearl River Delta regions. Vertically, the government plans to link the country’s main ﬁnancial and commercial hubs of Beijing and Shanghai by extending the existing Beijing-Tianjin high-speed line to Shanghai to create a 1,300 km Beijing-Shanghai corridor. Also planned is the 2,200 km Beijing-WuhanGuangzhou line connecting north, central and south China, the Beijing-Shenyang-Harbin line that brings together northeast China along a 1,860 km route, and the 1,650 km Shanghai-HangzhouNingbo-Fuzhou-Shenzhen line connecting China’s central, eastern and southern coasts. The grid will be completed by the building of four horizontal passages that include the 1,300 km Lanzhou-Zhengzhou-Xuzhou line connecting northwest China to the east, the roughly 800 km Taiyuan-Shijiazhuang-Qingdao route running from east to west, the central to east 2,200 km Shanghai-Hangzhou-Nanchang-ChangshaKunming line, and the 1,900 km ShanghaiNanjing-Wuhan-Chongqing-Chengdu corridor bringing together southwest China. When complete, all provincial capitals will be connected to large cities within their province by a half-hour to one-hour commute, with travel time between provincial capitals reduced to between one to two hours. Ultimately, the build-out in railway infrastructure is intended to lay the foundation for a transportation network that links Beijing to

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China considers high-speed rail as highly specialized tracks that can sustain trains traveling at speeds exceeding 200 km per hour. At that rate, China today is hurtling past most developed nations at previously unimaginable speeds to create the fastest, longest and most technologically advanced PDL railway network in the world. China already has the world’s largest network of high-speed rail lines, with 6,920 km of PDL as of July this year, according to the MOR. Under the Plan, the MOR intends to add another 13,000 km of new high-speed tracks in the next two years, bringing the total length of China’s high-speed rail network to nearly 20,000 km by the end of 2012. Nationwide, China currently has ten high-speed PDLs in operation, 3,600 km of which are capable of reaching 250 km per hour or more. These lines are now only segments of the larger network that will comprise the four vertical and four horizontal lines envisioned under the Plan. In 2008, the central government debuted the country’s ﬁrst domestically developed high-speed PDL built on conventional tracks that linked Tianjin to China’s capital city a full year ahead of schedule and just in time to move spectators between Beijing and Tianjin Olympic venues. Trains cruising along the 30 minute Beijing-Tianjin line hit maximum speeds of 350 km per hour. Meanwhile, the roughly 1,000 km trip from Wuhan to Guangzhou is the fastest in the world for a passenger train built on conventional track that cuts the trip from 10.5 hours to a mere three, reaching operating speeds of up to 313 km per hour along the way. Operated by China Railway High-Speed since December 2009, the Wuhan-Guangzhou line is just part of the 2,200 km-long Beijing-Guangzhou high-speed route under development.

Connecting the country Rail plays a principal role in increasing mobility among China’s vast migrant workforce, is essential to connecting the country’s provinces and main cities and can help boost the economy. The National Bureau of Statistics estimates that there were 230 million rural migrant workers

in China in 2009, 65 percent of whom worked outside of their hometowns, according to People’s Daily. High-speed rail will play an important part in transporting these workers between the cities where they work and their home towns. The Beijing-Guangzhou High-Speed Railway, for example, will be an important link between China’s capital and Guangzhou, its largest manufacturing city in the south. As direct transport between Beijing and Guangzhou is currently limited to the number of passengers that daily commercial air flights can accommodate, high-speed rail will establish an efficient and affordable land-based travel route for Guangdong Province’s estimated 10 million migrant workers. The Wuhan Railway Bureau recently reported a nearly 70-hour reduction in railway travel time between Beijing and Guangzhou, from nearly 90 hours in the past to 21 hours today. By 2012, the Beijing-Guangzhou route is expected to be crossed in a mere eight hours on high-speed rail. This eight hour link is so central to the government’s plan to connect north and south China that Beijing has reportedly called for “intense construction” to complete the project in time for its 2012 unveiling, according to People’s Daily. High-speed rail can also help with the country’s economic recovery. “The acceleration of the massive railroad build-out is playing a key role in China’s recovery,” says David Li, an economist at Tsinghua University, in Fortune magazine. Spending on railways last year led to a huge increase in steel production, according to the National Bureau of Statistics, which helped bolster China’s economy amid a worldwide decline in steel demand. Growth in the railway sector also stimulates the economy through employment opportunities, reports the Beijing Railroad Ministry. The ministry estimates that the Beijing-Shanghai route currently under construction has created 110,000 jobs. The incredible growth of China’s high-speed passenger rail development is sure to stimulate the economy in the short term and fast-track China’s further development. But can the country’s rapid growth in high-speed rail be sustained?

China’s Planned High-speed Rail Network

Rail plays a principal role in increasing mobility among China’s vast migrant workforce, is essential to connecting the country’s provinces and main cities and can help boost the economy.”

Harbin

Changchun

Shenyang

Chengde

Datong

Qinhuangdao

Beijing Urumqi

Tianjin

Shijiazhuang

Taiyuan

Jinan

Lanzhou Xian

Qingdao Xuzhou

Bengbu Nanjing

Hefei Chengdu

Suining

Wuhan Jiujiang

Chongqing Guiyang

Changsha

Nanning

Ningbo Wenzhou

Nanchang

Guangzhou Shenzhen Macau Hong Kong

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Shanghai

Hangzhou

Longyan

Dali Kunming

Dalian

Zhengzhou

Baoji

Financing a high-speed future Most of the country’s high-speed rail in use today is built upon a foundation of conventional tracks with telecommunications signals, traction and power supplies upgraded to support high-speed technology. But ﬁnancing new high-speed rail lines

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to previously inaccessible areas of the country can be expensive, requiring roughly three times the amount of capital than conventional lines. On average, the government estimates that one kilometer of highspeed rail costs RMB100 million to build. Financing for such a massive infrastructure project primarily comes from construction funds and government stimulus money, or is generated from bank loans, bonds issuances and railway profits. The central government has invested heavily in the construction of new tracks with a US$50 billion budget for new high-speed rail infrastructure projects in 2009. This year, the MOR reports that the government’s investment in high-speed rail is expected to double, exceeding US$100 billion, according to Caijing. A projected US$300 billion more worth of investment is expected in the next decade. Financing of China’s high-speed rail is also generated in part by railway construction companies who can help reduce the amount of debt the MOR must take on to finance new projects. In August, for example, the state-owned China Railway Construction Corp. announced plans to sell RMB5 billion worth of five-year medium-term bonds to supplement its working capital. Nevertheless, analysts forecast the MOR to go even deeper into debt to finance railway

Fuzhou Putian Xiamen

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American highspeed rail will beneﬁt from substantial support from the federal government but will likely require signiﬁcant funding from outside investors like China.”

construction. China’s Minsheng Bank reports that 70 percent of the MOR’s high-speed rail fundraising efforts last year focused on bank loans, according to People’s Daily. Given the MOR’s reportedly RMB1 trillion in accumulated debt and 55 percent asset to liability ratio, financing reform looms ahead. Reforming the financing mechanism for highspeed rail projects is one of the policies the MOR must nail in place to sustain further development of high-speed projects. Boosting the number of riders on high-speed rail to raise ticket sales would also ease pressure on the MOR, as ticket purchases can help defray operational costs. Comparatively, the price of a high-speed rail ticket is often more than double that of a conventional train and China’s masses have shown no qualms about sitting idly on a slow train for a fraction of the cost of a high-speed ticket. In search of a cure, the government has taken certain measures to ensure ridership remains high. Caijing reports that after lagging ticket sales following the August 2008 launch of the Tianjin-Beijing highspeed line, the government halted service on all slow-trains along the same route to nudge costconscious passengers onto high-speed trains. Although the Tianjin-Beijing line encountered initial resistance, the more popular routes among migrant workers may prove that the challenges of changing consumer preferences can be overcome. The Economist reports that over a million passengers rode the Wuhan-Guangzhou high-speed line in the first 26 days of the 40-day period around Chinese New Year this year, and People’s Daily reports that nearly 270,000 passengers rode the WuhanGuangzhou train during the three-day May holiday.

Exiting the slow track As China leaps past the U.S. in its development of a national high-speed rail network, the U.S. has the opportunity to step back and examine China’s plans for its own high-speed expansion. “We can learn a lot from our friends in China from what they’ve done in their own country,” says U.S. Secretary of Transportation Ray LaHood in the June issue of Insight. The U.S. currently has 735 km of high-speed track, compared to China’s 6,920 km, and is desperately far behind in the development, planning and ﬁnancing of high-speed rail projects nationwide. The U.S. High Speed Rail Association, a non-proﬁt organization dedicated to advancing high-speed rail, envisions America’s high-speed

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trains to travel at 350 km per hour; although what is considered high-speed rail by the Federal Railroad Administration (FRA) is any railway that tops 180 km per hour. Based on the FRA’s standard, Amtrak’s Acela Express is the only high-speed rail line in the U.S. That line is capable of hitting 240 km per hour, but averages an operational speed of only 85 km per hour because it shares tracks with slower trains and is limited by overhead electric lines along the Boston to Washington, D.C. route. LaHood believes that despite America’s strong overall transportation program, the U.S. lacks a comprehensive passenger rail system. “The gamechanger,” he says, “is President Obama’s vision for connecting America with high-speed inter-city rail.” Obama’s April 2009 stimulus plan called for US$8 billion in high-speed railway funds to be allocated by 2012, which was boosted by a grant for US$1 billion more each year for the next five years to develop high-speed rail in America. The plan, aptly named “Vision for High-Speed Rail in America,” was outlined by the Obama administration and the Department of Transportation as having the potential to develop ten 100 to 600 mile (161 to 965 km) corridors of railway in the U.S. In reality, plans for the new rail lines will likely be derailed. “No one expects we are going to begin, let alone complete, the high-speed rail system with US$8 billion,” says FRA spokesman Warren Flatau in Fortune magazine. By way of example, 40 states submitted 278 pre-applications for stimulusfunded high-speed rail projects last year, totaling US$102.5 billion. California’s proposed high-speed link between San Francisco and Los Angeles alone is expected to exceed US$40 billion but has federal backing of only US$2.25 billion. With the US$13 billion of federal money dedicated to funding highspeed rail projects over the next five years, states have no alternative but to pursue financing on their own. American high-speed rail will benefit from substantial support from the federal government but will likely require significant funding from outside investors like China. To garner support, the U.S. government has engaged China on upping its level of participation in American high-speed rail projects. In June, Secretary LaHood led a delegation to China to meet with the MOR about American high-speed rail projects and potential areas for cooperation. “There are a lot of potential opportunities for Chinese rail businesses to invest, to partner and to provide expertise in the American high-speed railway market,” says LaHood. “If you can take the innovation created in China, bring it

IMAGINECHINA

to America, put American workers back to work and use American facilities, you’ll have some strong partners in America.” Following LaHood’s lead, California Governor Arnold Schwarzenegger led a mid-September trade mission to China to gain traction for California’s high-speed rail projects. He hopes for Chinese investors to bring their experience and know-how in high-speed rail construction – and their cash – to ﬁnance and build the state’s high-speed rail system. “We want the Chinese to invest in highspeed rail, participate in the bidding process and to help ﬁnance high-speed rail in California,” said Schwarzenegger at an AmCham Shanghai and Bay Area Council co-sponsored event in September. Following the Governor’s speech, the Bay Area Council inked a memorandum of understanding with the MOR to provide assistance and consultancy services for the MOR to partner with California companies and bid for California highspeed rail projects. “There is great potential to increasing trade and partnerships between China and the U.S.,” exclaimed the Governor. It is clear that high-speed rail is essential to fast-tracking a slow economy. High-speed rail not only has the potential to increase mobility, connect people and cities and reduce dependence on oil, it can also stimulate the economy and create jobs. As a leader in high-speed rail development, China can

lend its experience to the U.S. while showcasing its innovation abroad. The U.S. has the opportunity to look to China for its accomplishments in developing a comprehensive nation-wide network of high-speed rail lines, as well as for ﬁnancing and construction support. If the U.S. and China can come together to work on both sides of the track, the U.S. economy is sure to take-oﬀ toward high-speed growth.

CONSTRUCTION KNOWHOW: China can turn its rail construction expertise into another exportable asset.

Tiffany Yajima is Senior Associate Editor of Insight. She can be contacted at tiffany.yajima@amcham-shanghai.org.

China’s High-speed Rail Network Route Existing lines Beijing-Tianjin Jinan-Qingdao Hefei-Wuhan Hefei-Nanjing Shijiazhuang-Taiyuan Ningbo-Wenzhou Wenzhou-Fuzhou Wuhan-Guangzhou Zhengzhou-Xi’an Fuzhou-Xiamen Lines under construction Shanghai-Shenzhen Shanghai-Chengdu Beijing-Shanghai Beijing-Guangzhou Harbin-Dalian Shanghai-Kunming Qingdao-Taiyuan Xuzhou-Lanzhou

Length (km)*

Design speed (km/h)

Commencement of operation

120 394 350 166 212 268 302 1,069 458 276

350 250 250 250 250 250 250 350 350 250

August 2008 December 2008 April 2009 April 2009 April 2009 September 2009 September 2009 December 2009 January 2010 April 2010

1,650 1,900 1,300 2,200 950 2,300 800 1,400

350 200-350 350 250 300-350 250 250 250

2011 2011 2012 2012 2013 2015 2020 TBD

*Distances are approximate Source: Beijing Review

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NOVEMBER 2010

INSIDE AMCHAM FROM THE CHAIRMAN

A Look Back at Expo

fter an exciting and frantic six months, the Shanghai 2010 World Expo came to a close on October 31. By most accounts, the Expo met and exceeded all but the wildest of expectations. More than 70 million visitors attended the Expo and the sustainable urbanization theme of “Better City, Better Life” provided all of us with a promising glimpse of a more sustainable future.

Shanghai’s World Expo has certainly met the standard of a “World’s Fair.” Tens of millions of Chinese citizens have been introduced to the cultures, values and traditions of more than 194 nations. Where else could a shopkeeper from Chengdu or a farmer from Hunan have enjoyed the passion of Spanish ﬂamenco dancing, witnessed the beauty of 13th Century Czech architecture or experienced honest-to-goodness Texas barbeque all in one day?

Robert Roche Chairman AmCham Shanghai

The USA Pavilion’s theme at the Expo – Rising to the Challenge – told the story not only of the American spirit of perseverance, innovation and community, but the actual experience of ensuring an American presence at Expo 2010.

If there was any doubt about Shanghai's place as one of the world's leading cities, all uncertainty was swept away by the success of the Shanghai 2010 World Expo.

The USA Pavilion averaged 45,000 guests per day and on October 23 welcomed its 7 millionth visitor, well over projected numbers. However, 18 months ago the Pavilion’s dramatic success was far from certain and we all owe a debt of gratitude to everyone who made American participation in the Expo possible. Secretary of State Hillary Clinton’s contribution has been well documented. Without the Secretary’s leadership and active participation, it is arguable whether the dream of the USA Pavilion could ever have been realized. Secretary’s Clinton’s appointment of Jose Villarreal as U.S. Commissioner General was crucial and his tireless fundraising efforts and management of the development process were critical to the Pavilion’s success. He and the dedicated staff, volunteers and student ambassadors of the USA Pavilion deserve our deepest appreciation. I would also like to recognize Nick Winslow and Ellen Eliasoph, co-founders of the USA Pavilion who took up the challenge of leading the fundraising effort from its inception and through the successful May launch of the Pavilion. U.S. Consul General Bea Camp, Consulate Public Affairs Ofﬁcer and USA Pavilion Deputy Commissioner General Tom Cooney and the entire Consulate staff also deserve our greatest thanks for their hard work in ensuring an American presence at Expo 2010. From the moment Shanghai was awarded Expo 2010, AmCham Shanghai viewed the Expo as a critical opportunity to demonstrate America’s commitment to U.S.-China relations and as a once in a lifetime business opportunity for both our membership and American companies wishing to explore the China market. I would like to thank the current and previous AmCham Shanghai Boards of Governors, as well as AmCham Shanghai President Brenda Foster, for their vision and leadership in helping to make the USA Pavilion a reality. During the Expo, AmCham Shanghai held more than 30 events featuring high proﬁle speakers ranging from Secretary Clinton to GE’s Jeffrey Immelt and 3M’s George Buckley. Provincial forums connected AmCham Shanghai members with Chinese government and party leadership

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INSIDE AMCHAM FROM THE CHAIRMAN

from the provinces of Hubei, Hunan and Sichuan and from the cities of Chengdu, Chongqing and Xi’an. AmCham Shanghai conferences, including Sustainable Green Cities and the Innovation Forum held last month at the USA Pavilion, also focused squarely on Expo themes. If there was any doubt about Shanghai’s place as one of the world’s leading cities, all uncertainty was swept away by the success of the Shanghai 2010 World Expo, which really showcased Shanghai’s role as the commercial, industrial and ﬁnancial capital of the world’s fastest growing economy. And just when we thought 2010 couldn’t get any more interesting, this month features the U.S. midterm elections! During the AmCham Shanghai Washington, D.C. Doorknock in September, we got a front row seat to the political battles being fought in D.C. and found China to be a top campaign issue. The ups and downs of the U.S.-China relationship will continue and as we approach President Hu Jintao’s visit to Washington in January, I’m looking for the last two months of 2010 to be just as exciting as the ﬁrst ten. But however it goes, there is one thing for certain – no more waiting in long lines!

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

Highlights from the October 2010 Board of Governors Meeting

Committee Brieﬁngs Aaron Chang, co-chair of the Small Business Committee, and Debbie Delaney, chair of the Education & Training Committee, briefed the Board on their committees’ annual agendas, recent activities and development plans. Membership Update

48 new member applications were approved over the past month. Washington, D.C. Doorknock

Phil Branham, Chairman of the 2010 Doorknock gave a recap of the delegation’s visit to Washington, D.C. from September 26-29. Nearly 40 meetings were held on Capitol Hill, with Administration ofﬁcials and think tanks. The staff is now working with consulting ﬁrm BGR on a list of action items for follow up. Board Elections

Voting for the 2011 Chairman and Board of Governors is underway, with online voting running through November 1. The last chance to vote will be on November 4 at the Annual General Meeting, where results will also be announced. All votes cast go directly to election auditor PricewaterhouseCoopers.

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IN ATTENDANCE Governors: Andrew Au, Pierre Cohade, John Grobowski, Murray King, Diane Long, Jim Mullinax, Robert Roche (Chairman), Matthew Targett and Kevin Wale. Attendees: David Basmajian, Jeff Bernstein, Phil Branham, Justin Chan, Aaron Chang, Siobhan Das, Debbie Delaney, Brenda Foster (President), John Leary, Helen Ren, David Turchetti, Linda X. Wang and Jessica Wu. REGRETS Bill Brekke, Eddy Chan, Eric Musser and James Rice.

AmCham Shanghai launches latest Viewpoint – U.S. Export Competitiveness in China – on the 2010 Washington, D.C. Doorknock

From September 27 to 29, a delegation led by AmCham Shanghai Chairman Robert Roche and President Brenda Foster and met with members of the Administration, Congress and other key decision makers during the 2010 Washington, D.C. Doorknock. Comprised of representatives from Fortune 500 companies, SMEs as well as entrepreneurs in addition to representatives from AmCham-China and AmCham Southwest China, this year’s Doorknock delegation engaged top U.S. ofﬁcials on important issues concerning the American business community in China with a focus on enhancing U.S. export competitiveness. A key objective of the 2010 Doorknock was to engage policy makers on the importance of trade with China. This year, armed with the latest issue of its Viewpoint series, U.S. Export Competitiveness in China – Winning in the World’s Fastest Growing Market, AmCham Shanghai took to Washington, D.C. the message that improving U.S. export competitiveness in China is crucial for sustained economic growth and job creation in the U.S. Driven by a fast-growing middle class and expanding consumer base, the China market offers tremendous unmet demand for U.S. exporters to satisfy. The Viewpoint ﬁnds that, while the U.S. has increased its exports to China by 330 percent since 2000, the U.S. still punches below its weight in comparison to overseas competition. In the second quarter of 2010, U.S. goods exports to China were up 24 percent from last year – but exports from Germany, South Korea and Japan all outpaced the U.S. over the same period at 53 percent, 39 percent and 29 percent, respectively. “The key to tapping China’s potential as a leading export market for U.S. job creation and economic growth is to increase the export competitiveness of the U.S.,” says AmCham Shanghai Chairman Robert Roche. Throughout the three-day Doorknock, delegates also engaged premier organizations that included the U.S.-China Business Council, the Brookings Institution and the Peterson Institute for International Economics. The delegation also met with U.S. Trade Representative

Ron Kirk and Deputy USTR Demetrios Marantis to discuss market access, U.S. Secretary of Commerce Gary Locke to reiterate support for President Obama’s National Export Initiative, as well as with top Congressional leaders that included Senator Daniel Inouye (D-HI) to discuss the potential impact of pending currency legislation. One of the key messages the delegation conveyed is that, while revaluation of the renminbi is an important piece of the puzzle, the key to creating and September supporting high-paying jobs 2010 in the U.S. requires increasing U.S. export promotion in China while continuing to press China for full market access. For more information on U.S. Export Competitiveness in China – Winning in the World’s Fastest Growing Market, please visit the AmCham Shanghai website at www.amcham-shanghai.org.

NOVEMBER 2010

U.S. Export Competitiveness in China

Winning in the World’s Fastest-Growing Market

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China Trends

CSR: At the Core of Business Success AmCham Shanghai’s 6th Annual Corporate Social Responsibility Conference and Awards Ceremony November 18, 2010 – The Renaissance Shanghai Zhongshan Park Hotel

CSR

CONFERENCE

Learn to integrate the principles of CSR into your business strategy this year at AmCham Shanghai’s Sixth Annual CSR Conference. CSR: At the Core of Business Success will provide hands-on educational seminars and training workshops on implementing CSR programming throughout a company, from corporate governance and human resources to external outreach and communications. Attending the Conference will: • Give your organization the tools to develop a strong anticorruption policy • Teach you how to achieve socially responsible supply chain operations • Help your business prepare for successful community service partnerships • Show you effective strategies for communicating CSR efforts to different stakeholders • Offer you opportunities for debate, discussion,and networking Experts from Bayer, BHP Billiton, Cisco Systems, Control Risks, the Fuping Institute, Junior Achievement China, PricewaterhouseCoopers, Safe Kids China, Students in Free Enterprise (SIFE), Squire Sanders Dempsey and the United Nations Educational, Scientiﬁc and Cultural Organization (UNESCO) will share insight and real-world examples of CSR in action. The annual AmCham Shanghai CSR Awards Ceremony will be held immediately following the Conference.

To secure your place at the 2010 CSR Conference, please visit www.amcham-shanghai.org/csrconference 38

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AmCham Shanghai 2010 Innovation Forum Using the historic Shanghai Expo as a backdrop, AmCham Shanghai’s 2010 Innovation Forum brought together industry leaders to discuss the state of innovation in China and key ways to incorporate China’s strengths into innovation success. The Forum, held on October 18 on the grounds of the Shanghai 2010 World Expo, was a chance to illuminate both the vision and the practicalities of innovation. To highlight the vision of innovation in China, AmCham Shanghai took attendees on a VIP tour of three Expo pavilions that showcase American innovation – the Cisco Pavilion, Coca-Cola Pavilion and GM-SAIC Pavilion. Participants were then guided to the VIP room at the USA Pavilion for the Forum. After an introduction by AmCham Shanghai President Brenda Foster and Vice President of Programs David Turchetti, Dr. Max von Zedtwitz, director of the GLORAD Center for Global R&D and Reverse Innovation kicked off the Forum by describing how foreign and domestic Chinese companies are developing R&D capabilities in China. He discussed China as an attractive R&D base, allowing companies to tap into talent from an increasingly science and technology-focused student population. After his presentation, von Zedtwitz was joined by CEO of Mozilla Online Li Gong, who spoke about the obstacles that China must overcome to fuel innovation, from both foreign and domestic forces. Industry leaders then highlighted what their companies were doing to foster innovation in China. Lorna Davis, China chairman and president for Kraft Foods, spoke about the corporate culture and work environment that allows Kraft to innovate in China, describing how innovation-focused management can nurture new ideas. John Zhang, vice president of strategy and corporate development of Corning described how his company has a long history of commitment to R&D, while Mike Liang, head of display and platform products for Google, explained how all Google’s employees were encouraged to develop their own projects. Representing the grassroots level, Greg Lindsay from Fast Company magazine then discussed China’s “shanzhai” economy and how high-tech counterfeiting can be “a natural way to innovation.” He spoke about the customizable, rapid concept-to-production rates and how shanzhai product designers’ familiarity with the manufacturing process may give them an edge in product engineering. After the Forum, attendees were able to continue the conversations started at the Forum with cocktails at the USA Pavilion. – Esther Young

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AmCham Shanghai New Members: September - October 2010 U.S. Corporate Membership

Small Business Membership

Shanghai Accor Services Co., Ltd. SHEN Jackie

COOK (China) Medical Trading Co., Ltd. LIU Rebecca

Asianera, Ltd. LIU Grace

Shanghai Hewlett-Packard Co., Ltd. DUAN Xuejuan

Crane International Trading (Beijing) Co., Ltd., Shanghai Branch WONG Eddy

CognoLink, Shanghai Rep. Ofﬁce WANG Wei

Shanghai United Family Hospital. Inc. CHIN Meika

John Portman Associates, Inc., Shanghai Rep. Ofﬁce BARNE Lell Kirkland & Ellis International, LLP, Shanghai Rep. Ofﬁce LI Chuan Newport Opto-Electronics Technologies (Wuxi) Co., Ltd. LIN Wilson Weicheng

U.S. Associated Corporate Membership

Corporate International Afﬁliate Membership

Shanghai Accor Services Co., Ltd. CHEN Echo

Individual U.S. Citizen Membership

Associate Membership

Action Learning Associates, LLC. MILLER Scott

Blizzard Software Development (Shanghai) Co., Ltd. RYAN Colleen Chengdu Huawei Symantec Technologies Co., Ltd. ONDERHAAR Michelle

Briggs & Stratton (Shanghai) International Trading Co., Ltd. SPLETTER Robert

Dow Corning (China) Holding Co., Ltd. ROCHLITZ Kay

CognoLink, Shanghai Rep. Ofﬁce KRITZLER Britt Wilhelmina

Fairchild Semiconductor (Shanghai) Co., Ltd. TAN Benjamin

DTZ Debenham Tie Leung WEI Chao Ying

Guangdong Valspar Paints Manufacturing Co., Ltd. MEI Hsiao Tung

Eli Lilly Asia, Inc., Shanghai Rep. Ofﬁce BLANCHARD Kerry

Rohm and Haas Shanghai Chemical Industry Co., Ltd. QIAN Mae Shanghai ACT Industrial Repair Services Co., Ltd. PREPHAN Richard Scott Shanghai Morton's Food and Beverage Management Co., Ltd. NING Mandy

Xizi Otis Elevator Co., Ltd. TAYLOR James

Big Bear Safety + Security Management SCHOLZ Charles

Beijing Berlitz Language Training Co., Ltd. Shanghai Branch SAKHAEE KASHANI Mahmond SONG Saraid YUAN Richard

NVIDIA Semiconductor Technical Service (Shanghai) Co., Ltd. YU Ko

Weber Shandwick Worldwide-Interpublic Marketing Services (Shanghai) Ltd. YU Hui-Chun

Fairchild Semiconductor (Shanghai) Co., Ltd. SONG Sophie General Motors (China) Investment Co., Ltd. BRAUN Jeffrey

Element Fresh, Inc. MINOIE Scott GHF Group MCFARLIN Kate SinoDiamond LED SUNG Michael DIAZ-DULANTO Jorge HICKMAN Randy LINVILLE John SHAY Peter SHEA Jinni

Individual International Afﬁliate Membership Nemak RADA GARZA Jorge Alberto Winnington Capital CHUNG Brenda

IBM Global Services (China) Co., Ltd. FRIED Andrew Kirkland & Ellis International, LLP, Shanghai Rep. Ofﬁce HORVICK Mark LI Xiaoyang Knowles Electronics (Suzhou) Co., Ltd. SHAO Yiqian

Shanghai Roche Pharmaceuticals, Ltd. WAN Penny

Do you want to share more information about your company? NOVEMBER 2010 INSIGHT 41 Contact Sophia Chen at (86 21) 6279-7119 ext. 5667 or sophia.chen@amcham-shanghai.org for a “Standout Listing” opportunity in the New Members Section.

Event Highlights

INSIDE AMCHAM

The East-West Center Recognizes AmCham Shanghai President Brenda Foster

AmCham Shanghai President Brenda Foster was recently recognized by the East-West Center as the Center celebrated 50 years since its founding with 50 stories of alumni. The feature appears in the East-West Center’s 50year anniversary publication, East-West Center: Fifty Years, Fifty Stories. Foster was recognized for her work promoting U.S.-China business ties. Since 1960, the East-West Center in Honolulu, Hawaii has played host to a vast network of trailblazers who have influenced change and shaped the future of the AsiaPacific region. The profiles of these 50 individuals showcase the EWC alumni’s contributions to global understanding, building an Asia Pacific community and shaping the future of a region undergoing dramatic transformation.

October U.S. Consulate General Brieﬁng

(L-R) Consul General Bea Camp, Brenda Foster, Phil Branham

At the October brieﬁng, Consul General Beatrice Camp announced that the USA Pavilion at the Shanghai 2010 World Expo had already exceeded six million visitors and expected to receive seven million visitors by the end of the Expo on October 31. U.S. passport holders can now enjoy “Easy Access” entry to the USA Pavilion until the end of the Expo. September brought a cavalcade of U.S. VIPs: President Carter met with Shanghai Party Secretary Yu Zhengsheng and Mayor Han Zheng; Ambassador-at-Large for Global Women’s Issues Melanne Verveer gave a keynote address at the International Forum on Women in Urban Development; Ambassador Huntsman focused on IPR in his speech at the Alibaba Netrepreneur Summit in Hangzhou; California Gov. Schwarzenegger met with Party Secretary Yu and Washington Gov. Gregoire spoke at the AmCham Shanghai Sustainability Conference. The consulate also supported trade missions led by Gov. Gregoire, Minnesota Gov. Pawlenty and Chicago Mayor Daley. The Shanghai visa surge continues; the consulate processed 20,000 visa applications in September – a 36 percent increase from September 2009 – and has instituted a double-shift program and additional hours to process the extra load. The CG also noted that future consulate brieﬁngs will be on a quarterly schedule, with expanded participation of consulate staff in AmCham Shanghai committee meetings and other activities. AmCham Shanghai Washington, D.C. Doorknock Chair Phil Branham followed with a brief overview of the trip that took place from September 26-29. Candidates for the 2011 Board of Governors were introduced and members had an opportunity to meet the candidates to learn about their election platforms. (Oct 12) John Holdren (center) discusses technology and innovation in China.

U.S. Government Delegation: Dr. John Holdren, Director of the White House Ofﬁce of Science and Technology Policy

AmCham Shanghai was pleased to host Dr. John Holdren, Assistant to the President for Science and Technology, Director of the White House Office of Science and Technology Policy and Co-Chair of the President’s Council of Advisors on Science and Technology (PCAST) for a breakfast briefing to discuss issues affecting AmCham Shanghai member firms in the area of technology development, indigenous innovation and green technology. Holdren was joined by a delegation that included representatives from the Treasury and Commerce departments. Holdren reviewed his recent meeting in Beijing as part of the U.S.-China Innovation Dialogue, where his delegation met their Chinese counterparts from the Ministries of Health, Trade and Commerce, among others, to discuss China’s indigenous innovation policies. Holdren called the dialogue an opportunity to lay out U.S. concerns for indigenous innovation and exchange ideas on how policy regulation can foster innovation in China. (Oct 15)

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Committee Highlights

INSIDE AMCHAM

Tax Committee U.S. International Tax Reform Update The Tax Committee was pleased to host Aaron Grundman, U.S. Tax Services managing director, of Deloitte, and Terry Tam, partner, of PricewaterhouseCoopers, who presented on recent U.S. tax reforms and reporting requirements. Grundman opened with a presentation on the impact of new U.S. tax laws that may signiﬁcantly impact multinational corporations by raising the costs associated with outbound investment by U.S. companies. Aaron Grundman overviews recent U.S. tax reforms. H.R. 1586 is arguably one of the most important pieces of tax legislation today, reported Grundman. H.R. 1586, more commonly referred to as the Education Jobs and Medicaid Assistance Act, includes provisions that intend to prevent multinationals overseas from splitting foreign tax credits from income subject to foreign tax thereby reducing U.S. taxes on foreign income that remains overseas. It also eliminates unintended tax incentives for U.S. companies moving assets abroad. As a result, common cross-border corporate structures that provide beneﬁts to multinationals will no longer be viable, said Grundman. Tax Committee Vice Chair Jessica Tien of Ernst & Young moderated a brief Q&A discussion before Tam discussed the Foreign Account Tax Compliance Act (FATCA) and the Schedule Uncertain Tax Positions (UTP) statement. FATCA provisions fall under the March 2010 Hiring Incentives to Restore Employment Act (HIRE) and are intended to help the IRS identify U.S. tax evaders abroad by imposing more stringent reporting requirements on multinational corporations overseas. (Oct 12)

Sourcing and Procurement Committee Event Stay or Go? The Future of Sourcing and Manufacturing in China AmCham Shanghai’s Sourcing & Procurement Committee recently hosted Martin Lehnich of McKinsey & Co. to discuss crucial factors and processes in supply chain decision making in China. Lehnich delineated a process which decision makers use to decide on the optimal location of their supply chain headquarters. Using the process outlined, Gregory Otte, engagement manager at McKinsey, presented a detailed comparison of inland China, Vietnam and India to baseline coastal China and illustrate a Gregory Otte (left) and Martin Lehnich (right) scenario requiring the decision of whether to “build and defend” existing present on supply chain decision making in China. baseline supply chains or to “hunt for greener pastures.” Through rapid growth and economies of scale in coastal China, value chain engineering can lead to a rapid rise in productivity, offsetting aggressive regional labor cost increases from 2010-2015, explained Lehnich. Increasing tax policies and enforcement, as well as government reduction of low-value and polluting industries can also be important factors to consider. Finally, one must take into account the ASEAN Free Trade agreement with tariffs in the ASEAN region approaching zero by 2015, making it cheaper to ship goods port to port than via trucking inland, according to Lehnich. After a discussion on trends and macroeconomic factors, Otte presented a detailed analysis process to breakdown the macroeconomic trends discussed and reach a decision for supply chain location. He segmented his analysis into various industry archetypes, such as process, capital investment, labor-intensive and knowledge-based industries. Macroeconomic factors were then broken down into various quantitative measurements and analyzed. Among the measurements considered for each locale were the ease of doing business, labor costs and infrastructure. (Oct 21) Event and Committee Highlights are reported by Jonathan Shyu, Tiffany Yajima and Esther Young NOVEMBER 2010

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DEAL OF THE MONTH ISTOCKPHOTO

China and Ghana make a joint bid to snatch-up American oil holdings in Africa.

Finding Fuel for Growth

n part of China’s ongoing search for energ y assets to support economic growth, the China National Offshore Oil Corp. (CNOOC) and the Ghana National Petroleum Corp. (GNPC) have jointly bid US$5 billion for Texas-based Kosmos Energy LLC’s Ghana oil assets in an all-cash, fullyfinanced offer. The Kosmos holdings in Ghana include a highly coveted 23.49 percent stake in the offshore Jubilee Field, one of the world’s largest recent oil discoveries that holds an estimated 1.8 billion barrels of crude oil. The proposed deal follows a failed US$4 billion bid from Exxon Mobil in 2009 that fell apart without Ghanaian government approval. GNPC is also reportedly holding preliminary talks with Statoil ASA, Norway’s largest oil company, to become a third partner in the Kosmos bid and add its expertise in deepwater oil production. Earlier this year, British oil giant BP also considered taking part in the joint bid. Kosmos and its U.S. private equity owners, Blackstone and Warburg Pincus, have not formally responded to CNOOC and GNPC’s joint bid. In addition to the Jubilee Field that was discovered by Kosmos and its partners in 2007, Kosmos has discovered three additional oil blocks in Ghana. Following the September 2007 failed Exxon deal, Kosmos began discussions on an initial public offering with Citigroup and Credit Suisse that

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NOVEMBER 2010

would value the company at US$5 billion. As one of China’s largest state-owned energy companies that include rivals Sinopec and PetroChina, CNOOC recently agreed to pay US$1.1 billion for a 33.3 percent stake in a U.S. shale oil and gas field in Texas. CNOOC shares rose 31 percent this year in Hong Kong trading as the company saw a doubling of profits in the first half of the year. CNOOC maintains that its future growth will be driven by international expansion. The company holds assets in Latin America, Nigeria, Kenya, Indonesia and Australia. China has a positive investment relationship with Ghana, recently loaning US$13 billion to the West African nation for the development of the country’s oil and gas industry, agricultural sectors and infrastructure development. Ghana, which only recently discovered oil in the waters off its shore, is set to become Africa’s newest oil exporter by the end of this year. Over the past decade, state-backed Chinese companies have made significant investments in commodity-rich African nations. China’s demand for oil continues to grow dramatically and by some calculations is growing at ten times the rate of global supply growth. Reuters reports that Chinese firms have completed ten overseas oil and gas deals worth US$18.6 billion so far in 2010, surpassing the US$15.8 billion in all of 2009. – Ashley Cahill

NOVEMBER 2010

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Testing

Inspection

CertiďŹ cation

Auditing

Advisory

Outsourcing

Training

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NOVEMBER 2010

Quality Assurance