Insight Magazine July/August 2014

July/August 2014

Eye on America Chinese companies are eager to invest in the United States, and while many find success, others stumble due to poor preparation and other hurdles ALSO INSIDE • Profile of Shokay Founder

• Cyber Tensions

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INSIGHT JULY/AUGUST 2014

The Journal of the American Chamber of Commerce in Shanghai

amcham shanghai President

Kenneth Jarrett

F e atu r e s

9 Priorities for the Chamber

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PRESIDENT’S REPORT

By Kenneth Jarrett

Major Chamber projects in coming months

VP OF PROGRAMS & Services

Scott Williams VP of Administration & Finance

Helen Ren Directors Business development & Marketing

Patsy Li

11 Beauty from the Beast

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SHANGHAI WORKERS

By Jill Petzinger

The founder of Shokay – a company that turns yak fur into accessories

Committees

Stefanie Myers COMMUNICATIONs & PUBLICATIONs

Michael Cole Events

Jessica Wu

14 Cyber Tensions

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opinion

By James A. Lewis

The cyber espionage charges against PLA members in perspective

government relations & csr

Veomayoury "Titi" Baccam Membership & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

Bryan Virasami

26 Eye on America

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cover story

By Joel Backaler

Chinese firms that pursue investment deals in the United States enjoy success along with challenges – both cultural and business related

Senior Associate Editor

Erika Wang communications assistant manager

Ryan Balis Design

Alicia Beebe Printing

I nsig h t sta nd a r ds

5 Movers & Shakers

44 Deal of the Month

Mickey Zhou Snap Printing, Inc.

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

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

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MONTH IN PICTURES

Highlights from Recent Events

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EXECUTIVE traveler

Favorite Miles Program

INSIDE AmCham

40 From the Chair 41 Board of Governors Meeting 45 Government Relations 46 Event Highlights Cover design by Mickey Zhou

Editor's note

T

Bryan Virasami editor-in-chief

here has never been more ways to stay up to date on business news, whether you’re in an office on Nanjing Road or vacationing on a beach in Thailand. That’s why we at Insight feel we must do something different and so we work every month to take our readers behind the breaking news stories in China and the United States. We hope we can tell you what a new law, regulation or policy mean to you and your business. We also want to provide interesting stories about our members and the issues that impact their life. And of course, we’re always looking to interview outstanding political and business leaders passing through Shanghai or the Chamber.

With this in mind, we recently conducted an informal survey that sought to get your views on Insight. I am pleased to report that most of those readers who responded said they are happy with the magazine and feel we’re on the right path.

According to an analyses of the results by my colleague Erika Wang, some 90 percent of the

responders said the magazine is “good” or “great” and those who paid close attention said they prefer research and analyses, which is what we like to hear. Some of you would like to see more articles about the China business environment and we will keep that in mind as we plan future issues.

Summer is nearly here and we hope you learn something from our feature on air pollution that offers some tips on how to stay healthy in the warmer months. We also have an interesting interview with an American who is something of an expert on baijiu – the white liquor that is the source of all kinds of stories – funny, happy and some that cannot be shared. Our cover story

by Joel Backaler examines the rise in Chinese companies investing in the U.S. and some of the challenges they face.

We will return with the September issue that will feature more great articles including one about Chinese travelers changing the tourism industry. Have a great summer.

M o ve r s a n d S h a k e r s compiled by Junling cui

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

GE AVIATION GE aviation group announced the appointment of Xiang Weiming as president of GE aviation group in the Greater China region. Xiang joined GE in 1992 and worked respectively in the aviation and rail transportation group. Under his leadership, the aviation group achieved impressive sales in 2013, selling more than 700 engines.

Before GE, he worked in Aviation Industry Cooperation of China for seven years.

Xiang was the first graduate of GE’s TLP (Technology Leadership Program) in China and also graduated from the GMS (Global Marketing and Sales) program by GE aviation group in the U.S. He is certified in Six Sigma Black Belt.

Private Sector SSOE SSOE Group named Bob Howell the next president and CEO, effective in December.

He will transition from his current role of executive vice president/chief operations officer. Howell moved into an international Bob Howell operations position in late 2008 to assist with SSOE’s expansion in Asia, growing the Shanghai office into SSOE’s second largest office.

Qu Yin

EATON Eaton announced the appointment of Qu Yin as China GM of CPS (Critical Power Solutions) on April 29. She previously served as vice president at Holt Polytron Technologies Inc. She has also worked at Schneider Electric and HP.

Tammy Tang as executive director of industrial services for China. Tang will lead Colliers’ China-based industrial services team and help expand their service and geographical coverage.

OGILVY & MATHER Ogilvy & Mather Shanghai has promoted Tom Wan as managing director of global brand management in Shanghai effective in June. Wan was managing director of OgilvyOne Shanghai, where he led the agency’s growth in customer engagement through digital communications.

government Cao Guangjing was appointed deputy governor of Hubei province at the end of May. Cao previously served as board chairman of China Three Gorges Corporation, a position he was appointed to in January 2010.

CBRE Luke Moffat was appointed managing director for eastern China of CBRE, effective in August. He will be based in the real estate services firm’s Shanghai office.

COLLIERS INTERNATIONAL Colliers International announced in June the appointment of

Xiang Weiming

Lu Junhua

Lu Junhua was named vice governor of Hainan province on May 30. Prior to this appointment, Lu had worked in the State Council General Office since 1991. He was elected to be the director of the third secretary bureau of the State Council General Office in January of 2011.

If your company has executive personnel changes, please contact Junling Cui at junling.cui@amcham-shanghai.org. j u ly / a u g u s t 2 0 1 4

Cao Guangjing

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FTZ DIGEST

Shanghai Oriental Pearl to set up JVs with Sony

Shanghai Oriental Pearl Group said it will set up two joint ventures (JV) with Japan’s Sony Corporation in the Shanghai free trade zone (FTZ) to produce and market PlayStation game consoles in China. One JV will be responsible for the console’s hardware and the other for its software, according to a May 26 filing to the Shanghai Stock Exchange. Shanghai Oriental Pearl Culture Development Company, a subsidiary of the Shanghai group, will own 51 percent of one of the JVs, which will have a registered capital of RMB10 million (US$1.60 million), and 30 percent of the other, which will have a registered capital of RMB43.8 million. China in January lifted a ban on game consoles that it had imposed since 2000, citing their negative influence on youths’ mental health.

China’s central bank launches FTA mechanism

The Shanghai office of the People’s Bank of China (PBoC), the nation’s central bank, last month announced the launch of free trade accounts (FTAs) in the Shanghai free trade zone (FTZ), a highly anticipated move that essentially opens up the country’s capital account within the zone. With FTAs, Chinese free trade companies can seek RMB-denominated funding from offshore markets. Five banks including Bank of China, Shanghai Pudong Development Bank and China Merchant Bank started t he op e r at i ons l ast mont h . T he PB o C a ls o s i g ne d a memorandum of understanding with the Shanghai Gold Exchange to prepare an international board of gold exchange in the FTZ under the FTA mechanism to enable RMBdenominated trading of gold in the zone.

Japan’s Nomura forms JV in Shanghai FTZ

Nomura, Japan’s largest securities firm, signed an agreement in late May with three mainland firms to establish a joint venture (JV) in Shanghai’s free trade zone (FTZ) with a capital of

RMB30 million. According to the agreement, the Japanese investment bank will own 60 percent of the JV, while property developer Shanghai Lujiazui Financial will own 20 percent and Lujiazui International Trust and Shanghai Jiu You Equity Investment Management will each hold 10 percent. Shanghai Lujiazui Financial is controlled by state-owned Shanghai Lujiazui Development Group. Nomura said it plans to provide information on financial markets and products to financial institutions in zone. Shanghai Lujiazui Development said it plans to build a complex of office buildings, entertainment facilities, exhibition halls and shopping centers in Lingang.

Regulator eases red tape for marine insurance

China Insurance Regulatory Commission said it is using the Shanghai free trade zone (FTZ) as a testing ground to streamline the supervision and operation of the marine insurance business. Insurance companies can now apply for approvals for new marine insurance products from the Shanghai Institute of Marine Insurance, an industr y association that includes insurance and shipping companies.

The move marks the first time that insurers can f ile applications with an industry association rather than the regulator. Marine insurance centers and reinsurance companies may now set up branches in the zone without prior approval, which is also no longer required for the appointment of senior executives in branches in the zone.

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To le a rn m o re g o t o w w w. br o o kfi e ldg r s. c o m

PRESIDENT ’S Report

Our Current Work Priorities Rather than provide a big-picture column about current trends in U.S.-China relations, this quarter’s report will focus instead on the behind-the-scenes work of the Chamber’s staff so that you have a sense of what is in store in the coming months. Here goes.

Strategic Plan Review: We are in the final year of our current strategic plan and a steering committee of the Board, together with senior Chamber staff, is working on a successor document that will serve as our guide for the next three fiscal years (April 2015–March 2018). This important exercise will define priorities and shape how we use our human and financial resources. The steering group has reviewed our mission and vision statements, discussed how our external operating environment has changed in recent years and has started to define our top strategic objectives.

There has been extensive discussion of how the needs of our members are changing. For example, the level of understanding of the China market is increasingly sophisticated and member companies have stronger internal capabilities. We must be mindful of this and other trends and ensure that we still provide value to our members.

Washington, D.C. Doorknock: Planning is in full swing for the September 15–17 Doorknock. We have a strong delegation, beginning with our 2014 Chair, Robert Theleen.

We expect calls on a range of government offices (Commerce, USTR, State, Treasury, NSC), members of Congress (if not on the campaign trail), media and the think-tank world. Our focus right now is on our list of asks and the associated talking points. I was in Washington in May with the AmCham China Doorknock and can only say that the importance of the Doorknock is greater than ever as the current mood in Washington toward China is quite negative. The welcome arrival of Titi Baccam as our new director for government relations and CSR will give us more firepower as we prepare for the September visit.

New Website: In the coming weeks we will switch to an updated website that will be easier to navigate and feature a more modern design. In addition to stylistic and functional

improvements, we are working equally hard to enhance the content we place on the website, both in terms of substance and speed. We want the website to be more than just a place where members go to check for information about upcoming events. Taking a page from Xiaomi, the innovative Chinese phone manufacturer, our approach to this initiative will be one of ongoing design in response to user feedback.

When the new website goes live, please let us know what you think.

100th Anniversary Celebration: Next year is our centennial year. This is a major milestone for AmCham Shanghai and an unequaled opportunity to boost our profile and position the Chamber for our next hundred years. We have a team hard at work on the preparations, looking at ways to leverage this anniversary for the benefit of our members. Since the story of AmCham Shanghai is also the story of our member companies, we welcome information, artifacts and vignettes from our member companies about their history in China.

Michael Cole, director for communications and publications, is leading the charge.

Board Elections: Election season will be here before you know it. Eric Zheng is the new chair of the Nominations and Election Committee (NEC). We will issue the call for nominations in late July with a due date of September 5.

Voting will begin October 13 and the results will be announced at the November 6 Annual General Meeting. In order to ensure greater continuity in terms of Board membership, the Board recently voted to switch to two-year terms on a staggered basis, with half the Board standing for election in any one year. Consider Board service and don’t forget to vote.

Kenneth Jarrett President

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CHINA & THE WORLD

ASIA-PACIFIC SIA PACIFIC SOUTH AMERICA

NEPAL: Chinese firm to build new international airport The Nepal government signed an agreement with China CAMC Engineering Company for the development of the country’s second international airport, Pokhara Regional International Airport. The Himalayan country’s aviation regulator, the Civil Aviation Authority of Nepal (CAAN), and the Shenzhen-listed company signed the memorandum of understanding (MoU) in Kathmandu. Tribhuvan International Airport (TIA) is currently the country’s only international airport and has been for the last 40 years. China CAMC said it will ensure every international standard while constructing the airport, which is expected to take three years to construct.

MIDDLE EAST

AFRICA

EUROPE ASIA-PACIFIC SIA PACIFIC

China Hongqiao to buy bauxite company for US$120m Shandong-based China Hongqiao Group and Winning Logistics (Africa) Company have agreed to buy a company developing bauxite deposits in West Africa’s Guinea for about US$120 million.

Under the terms of the agreement, China Hongqiao, the nation’s largest non-state aluminum producer, will hold 90 percent and Winning will own 10 percent of the unidentified company.

Meanwhile, the target company will hold the right to develop and produce bauxite, a raw material used in the production of aluminum, for 25 years. China Hongqiao said it plans to boost aluminum production by 30 percent to almost 3 million tons this year.

NORTH AMERICA

NETHERLANDS: APG nabs 20% stake in Chinese warehouse operator Heerlen, Netherlands-based pension fund APG Asset Management said it will pay up to US$650 million for about a 20 percent stake in Shanghai-based warehouse operator e-Shang. The Chinese company is backed by private-equity firm Warburg Pincus and provides warehousing services for e-commerce giants including Amazon and China’s JD.com. E-Shang owns more than 1.5 million square meters of projects in China, mainly in Shanghai, Beijing and Guangzhou. The companies also agreed to set up a joint venture focused on warehousing infrastructure in smaller cities. E-Shang said it aims for an initial public offering as early as 2016, either in Hong Kong, Singapore or the United States.

EUROPE MIDDLE EAST

MIDDLE EAST

AFRICA

ISRAEL: Bright Food Group to buy control of dairy firm Tnuva China’s Bright Food Group said it will buy 56 percent of dairy firm Tnuva Food Industries, Israel’s largest food company, for an undisclosed sum. The Shanghai-based state-owned company said it reached a preliminary agreement with Apax Partners LLP. Tnuva has been reportedly valued at about US$2.5 billion. The move is among the latest acquisition overseas for Bright Food, which also bought a 60 percent stake in British cereal maker Weetabix in 2012. Tnuva owns seven food brands in Israel and accounts for more than 14 percent of shelf space in the country’s supermarkets.

SOUTH AMERICA MIDDLE EAST AFRICA

ASIA-PACIFIC SIA PACIFIC AFRICA NORTH AMERICA

NORTH AMERICA

MEXICO: Pemex nears close of US$4b energy deal with Chinese firms Mexico’s state-owned petroleum company Petróleos Mexicanos (Pemex) said in June that it is in the final stages of negotiation with an undisclosed number of Chinese companies to create a US$4 billion investment fund to finance energy projects. In a statement, Pemex said the proposed fund would be the largest Chinese investment fund in Latin America. Some reports have indicated that Pemex is negotiating with Chinese companies including Xinxing Ductile Iron Pipes and SPF Capital Hong Kong. According to data from the U.S. Energy Information Administration, Mexico produced 2.90 million barrels per day in 2013.

SOUTH AMERICA

NORTH AMERICA SOUTH AMERICA EUROPE

BRAZIL: Bank of Brazil opens Shanghai branch Bank of Brazil became the first Latin American bank with a branch in China’s mainland with the opening of its Shanghai branch last month. Brazil’s biggest bank had been operating a representative office in Shanghai since 2004. The bank said it now offers services like foreign exchange, bank accounts and lending and financing to serve companies in both countries. Last year, Brazil exported US$46 billion in goods to China, while China was the largest supplier of imports for the country. A number of large Chinese corporations like Sinopec are already operating in Brazil.

ASIA-PACIFIC SIA PACIFIC

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SOUTH ASIA-PACIFIC SIA AMERICA PACIFIC

Working in Shanghai

Beauty from the Beasts Shokay’s Carol Chyau creates luxurious clothing from yak wool, while helping herder families maximize the potential of their beloved animals

BY JILL PETZINGER

S

oft and fluffy” are not words that immediately spring to mind when we think of yaks. Yet, Shanghaibased yarn company Shokay has been working hard for the last seven years to show the world that yak wool is as luxuriously soft as cashmere, through their community-based business that shepherds the wool from the neck of the yak to the

backs of fashionable women.

Shokay, which means “yak” in Tibetan, was founded in 2006 by U.S.-born Taiwanese Carol Chyau, whose groundbreaking work developing yak yarn, sourced responsibly from poor herder families, earned her a place on the Fortune China 2012 “40 under 40” list of young entrepreneurs. A Harvard Kennedy School graduate, Chyau was looking at economic development in Greater China and wondering how she and her thenbusiness partner could make a social enterprise concept work here.

“In January 2006, we said, ‘let’s go to western China because that’s where the greatest income inequality is,’ and there Shokay knitters near the Chongming Island textile we really saw yaks as the workshop resource,” says Chyau.

“We looked into lots

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NAME: Carol Chyau AGE: 31 HOMETOWN: Houston, Texas and moved to Taipei, Taiwan at age 7 COMPANY: Shokay International TITLE: Founder and CEO

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Yak fur accessories

of UN reports and saw that yak is comparable to cashmere,” says Chyau. They were puzzled as to how the yarn could be so soft and yet so unknown. Their ambition was born to create the same recognition for yak yarn as there is for wool, cashmere and cotton.

the yak and it’s labor intensive, but they don’t hurt the animals,” says Chyau.

She said yaks molt between spring and summer, so the softer down that keeps them warm in the winter is shed then.

“Every year, each yak only has 100 grams of this very fine fiber and it takes about five or six yaks to make a shawl,” she says.

Shokay currently works with around 300 families in the Heimahe Township, but they could potentially work with more.

It is a matter of generating demand at the other end of the chain.

The company also employs 50 women in Chongming to do the knitting and 12 in Shanghai to do the spinning.

The business then splits into two: Shokay collections – the jumpers, shawls, etc. – and Shokay yarns, which involves working with other fashion brands to encourage them to incorporate the yarns into their own collections.

Perhaps unsurprisingly, considering their status as gnarly, shaggy beasts, yak wool is perceived as coarse and rough.

“A lot of people don’t know what yak is, but then they buy it and find it’s the warmest, softest thing in their closet and wear it all winter long. It’s a great gift and, for the expat community, it’s representative of China without being the next pashmina,” she explains.

The mighty yak Yaks have been a vital resource for families in the Qinghai region of China for centuries. In the Heimahe Township, where Shokay first began working with local families in 2007, around 90 percent of the population lives on a yearly per capita income of just over US$300. Access to education and healthcare is scant, and women are only able to earn a little money with sporadic or seasonal jobs.

“Each herder family has about 30 to 40 yaks and in certain areas people have up to 80 yaks,” says Chyau. “They have very little cash income, but the yaks provide them with a mode of transportation; they use their hair to make tents; they mix yak down with wool to make garments; there’s the milk – yaks are part of their family and part of their livelihood.”

The idea of selling yak wool was not new to the herders, who occasionally sold to Muslim traders, at much lower prices, but they had no guarantee that the traders would come back the next year, so they could not rely on the income. Chyau and her team offered the herders a higher price and a guarantee to take their best quality yak fiber each year, something that so far has helped to increase household income in the township by 10 to 30 percent.

“We worked with the Bureau of Animal Husbandry, and trained them as to which body part of the yak we were looking for: are you pulling, are you combing, what’s the most appropriate way to get the highest quality fiber? They use their hands to comb

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A scarf made from yak fur

profiles

Shokay’s target customer is generally 30-plus, a well-traveled, sophisticated woman who likes quality, luxury products but wants something a little unique. Not only are many of the Shokay items hand knit, but they are also labeled with the name of the woman who knit it.

Fashionable beasts Chyau did not envisage Shokay as a fashion label when she founded the company. The initial plan was to buy yak wool and turn it into yarn to sell, before things sort of snowballed.

“We realized that in order to sell knitting yarn you have to have Carol Chyau with Tibetan patterns and if you are going to knit something then you might as well sell the finished good and you need a store,” says Chyau.

A shop in Shanghai’s famous Tianzifang complex on Taikang Road was their first foray into retail. The store was very successful in this location for five years, until Tianzifang became a tourist destination and rents tripled.

“It wasn’t our target audience any more,” says Chyau. “There were a lot of tourists and when you go to a tourist location and things are expensive you feel that you’re being cheated, you go in with a kind of skepticism. But when you go into a high-end mall, you expect things to be higher quality but also a higher price, so there’s not this kind of mismatch in the consumer psyche, so we had to bite the bullet and leave.”

Now Shokay is housed in its own Design & Research Center beside Shanghai’s International Fashion Education Center in the Jing’an area of the city. The clothes are also stocked in boutiques in Europe and Japan. The financial crisis hurt the brand’s chances in the U.S. in 2008, and Chyau decided that it simply wasn’t the right time to launch a new brand stateside.

The threads “The greatest obstacle has been piecing this puzzle together as one independent company,” says Chyau of her biggest challenges so far. “When we’re talking about the development of the industry, think about Cotton Inc. in the U.S., which spends US$17 million a year on marketing, or Woolmark which has a US$4 million marketing budget in China alone.”

herders and the Shokay team in Qinghai in 2012

Her aim is ultimately to make the Shokay trademark as recognized for quality yak yarn as these other big textile brands.

This is no small ambition, and one that Chyau believes can be achieved through using their brand story to communicate their image as a textiles brand with a strong social-responsibility core.

Developing brand values that have universal appeal, such as generosity, warmth and conscious creativity will hopefully engage consumers and designers in what is still a very niche product.

Creative designer Keena Fletcher is one of the key people in the Shokay ecosystem. She first encountered Shokay as a brand development case study during her textile degree course at the Fashion Institute of Technology in New York in 2008.

“I was mostly attracted to the possibilities of what this brand could be,” says Fletcher. “I had a ton of experience from larger brands and really wanted to test my knowledge. It has truly been a great place to grow, as the Shokay team is small but very much a family.

“I’ve worked with Carol for six years – I think of her as my work sister, we have the same aim to really make Shokay a sustainable business.”

Despite the challenges of brand building to become a key player in the textile industry as well as a successful fashion label, Chyau says her commitment to using and improving the quality of yak is part of Shokay’s brand DNA, and will continue to have a tangible social impact within the herder communities.

Jill Petzinger is a freelance writer.

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O P INI O N B Y J A M E S A . L E W IS

Cyber Tensions James A. Lewis

A Washington expert tries to put the U.S. indictments for cyber espionage in context

M

any Chinese were surprised when the U.S. Department of Just ice announce d t he indictment of five members of the People’s Liberation Army (PLA) for hacking into the computer networks of U.S. companies. The indictments really shouldn’t have been a surprise. Cyber espionage was a major topic of discussion between presidents Xi and Obama at the Sunnylands Summit in June 2013.

Unfortunately, there has been little progress on the problem since then. At Sunnylands, President Xi asked for evidence of Chinese spying; some now say that the indictments were President Obama’s response.

If the Snowden revelations showed that America went too far in political-militar y espionage, the indictments show that China has gone far too far in commercial espionage. There are hundreds of publicly known incidents of Chinese cyber espionage against companies in more than a dozen countries.

The five indicted individuals are accused of stealing business confidential information such as a company’s negotiating strategy or bottom line, and intellectual property that they then passed on to Chinese companies so that these companies could build a competing product without having to invest in research and development. The result can be immense harm to the victim company, with losses reaching the tens of millions or even hundreds of millions of dollars.

China has denied the charges, saying they are concocted and hypercritical. Unfortunately, the Chinese government always says this, no matter what the accusation. Twenty years ago when the international community asked Beijing to stop selling missiles, the Foreign Ministry first said it was hypocrisy and a double standard. When the U.S. asked them not to sell weapons to regimes

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which violate human rights, they said the same.

No country likes to be caught spying (the U.S. knows this well), but simply denying everything won’t make the problem go away. In both these cases, China eventually adjusted its behavior in missi les and ar ms s a les to comp or t wit h international standards for responsible state behavior; the hope is that they will do the same for commercial espionage.

Governments and companies can no longer ignore cyber espionage. China’s cyber espionage probably costs the U.S. about US$40 billion a year and affects between 100,000 and 200,000 jobs, according to a McAfee report. And this figure doesn’t include the cost of stolen military technology.

It’s been going on for a decade and has gotten worse in recent years.

History of espionage The Chinese do more economic espionage against the U.S. than any other country, according to published reports based on a U.S. government study. The U.S. has been talking to China about cyber espionage for four years at the highest levels, including the presidential level. China hasn’t done anything in response. The indictments are a way to remind China that this is an important bilateral issue that won’t simply go away.

Of all the Chinese ministries, the PLA is the most upset over the indictments; other agencies appear more sanguine.

Despite the fact that all five of the indicted are PLA members, the indictments are not a military issue. The U.S. was careful to select cases that had a trade and economic focus and where there was strong evidence of wrongdoing. This was intentional, to present this as a trade issue, not a military one.

PLA displeasure is one of the reasons China has suspended the bilateral cybersecurity working

“

The indictments are a way to remind China that this is an important bilateral issue that won’t simply go away.”

U.S. Secretary of State John Kerry sits across from Chinese Foreign Minister Wang Yi at a meeting at the Ministry of Foreign Affairs in Beijing in February 2014

group it had with the U.S and threatened various kinds of retaliation against American companies.

There is even some talk of indicting Americans in response, but tit-for-tat exchanges usually didn’t work out well as every country has intelligence officials who could be indicted – hence the U.S. focus in the indictments on trade and economic concerns, to show this was not a battle between militaries or intelligence agencies. These threats are counterproductive, since they inflame the situation without deterring the U.S. The U.S. has had this sort of economic espionage problem before, with other countries.

The way for China to manage and minimize damage to the relationship and to its economy is to re-engage in private dialogue with the U.S. It will be harder for China to manage this problem if there isn’t a return to dialogue and engagement by the time of the bilateral Strategic and Economic Dialogue. Now is not the time to stop talking (even if these discussions are not publicly announced).

C h i n a c h o s e t o j oi n t h e Wor l d Tr a d e Organization, where it agreed to protect intellectual property and treat foreign and Chinese companies on an equal basis. Chinese officials argue that China should not be held as strictly to these commitments because it is still a poor country and the West owes it for the “Century of Humiliation.” These arguments

do not make sense for the world’s second largest economy. China’s size and power bring special responsibilities.

Chinese officials often talk about moving to a “win-win” situation in international affairs; how they deal with cyber espionage will be a good way to test a “win-win” approach. China has returned to a leading role on the world stage, something we all welcome, but it needs to adjust its behavior to fit its new stature.

While there are defensive measures that companies can put in place to protect their data, it is hard to stop the spy agencies of great powers. At the end of the day, this is a political problem. We need agreements among governments on responsible behavior and the rule of law in cyberspace. This is true for the U.S. and its spying, but it is even more for China and Russia. A bilateral discussion between the U.S. and China may be the best place to start.

James A. Lewis is a Senior Fellow and Program Director at the Center for Strategic and International Studies (CSIS). Before joining CSIS, he worked at the Departments of State and Commerce. Lewis is an internationally recognized expert on cyber security and has authored numerous publications.

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h ealt h

BY DR. GORDON PETERS

Living with Bad Air

A

ir pollution in China has become one of the most talked about political and public health issues today. This is a good thing.

The reality is air pollution is on the rise globally and in China this has had an effect on multinational companies and expatriates. To maintain a pool of top international talent, businesses in China need to become more aware of what environmental pollutants are and how to minimize effects and protect staff from them.

Discussion within the business community combined with access to professional sources give us the power to make well-informed decisions on how to maintain a positive lifestyle and healthy immune system – even on the bleakest of days.

Gordon Peters

imaginechina

Heightened concerns about air quality among expats in China can be addressed with knowledge, less stress and a few other tricks

Foreign tourists wear masks in heavy smog

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What is air pollution?

What we know as air pollution is a soup of particles suspended in the air. These particles include gases – ozone, nitrogen dioxide, sulfur dioxide and carbon monoxide – combined with a mixture of solid particles such as lead and liquid droplets.

Identification of these particles is determined by their diameter and penetration.

Coarse particles are measured at PM10 and can come from vehicle emissions, dusty industries, wind erosion or const r uc t ion sites. Fine particles, measured at PM2.5, can be from smoke and haze from industrial emissions and can be formed when gases react in the air.

To help make sense of pollution and the relative levels, there are several air pollution indicators used. The most common one referred

shutterstock

to in China is the Air Quality Index (AQI). This is a scale of air quality that ranges from 0 to 500 and is used in many weather reports. An AQI score of more than 100 is unhealthy.

The effects In terms of physical effects, some people report no reaction to pollution except on the most heavily polluted days; others can be very sensitive to even slight decreases in air quality.

There is no hard-and-fast rule as to who will be affected and who won’t. Some of the common reactions to air pollution include irritated eyes, t h ro at an d lu ng s w it h c ou g hs an d c h e s t tightness becoming more common with higher levels of air pollution.

With increasing media attention, there is also increasing anxiety about pollution’s longterm health effects, particularly among expats

Smoking can add to the dangers of bad air

with children. Now that the WHO has listed outdoor pollution as a carcinogen, expats and their families are increasingly requesting

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“

…Patients who have otherwise had a wonderful experience in China cite air pollution as a major reason they are leaving.”

reassurance and/or tests such as chest X-rays, spirometry and CT scans, none of which are useful screening tests, and some of which may lead to harm.

At the Beijing International SOS Clinic, our patients are proactively engaged in their health, so finding themselves at the mercy of AQI fluctuations is a frustrating and stressful experience. Our clinic patients who have otherwise had a wonderful experience in China cite air pollution as a major reason they are leaving.

Although the effects of air pollution are variable, what seems to be consistent is the concern that it is provoking in the business community. A recent survey from the American Chamber of Commerce in China showed that 36 percent of 244 companies sur veyed experienced difficulties in recruiting senior executives because of air quality issues. Indeed, at International SOS we have experienced a dramatic growth in the number of clients r e q u e s t i n g a i r p o l l u t i o n e d u c at i o n a n d consultancy sessions. This highlights the huge interest at a corporate level in air pollution in China.

A screenshot of a website monitoring air quality

expatriates. Do your research and consider air purifying systems which are appropriate for your space.

W h e n t a k i n g c ov e r i s n o t a n o p t i o n , consider wearing a properly fitting mask.

Always check that the mask is appropriately certified, to a minimum of N95 standards.

There are a lot on the market, so research them carefully.

Managing exposure

Other measures

One of the most widely recommended actions to protect health when the air quality takes a turn for the worse is to limit outdoor physical activities, particularly those which accelerate breathing rates. In other words, sidestep danger days of AQI 200 and above and, where possible, adjust your timing to avoid rush hours when traffic and pollution is at its peak.

How you choose to manage your pollution exposure is up to you, but make sure you are armed with all the information. Decisions around health should not be taken lightly and definitely not ignored. This doesn’t mean we all have to relocate to Antarctica but rather adopt a mindset which is focused on prevention and recognize that even small things can make a difference.

Looking at ways to improve indoor air quality has become a high priority for many

Studies have shown that a diet rich in antioxidants can help to protect the body’s cells and strengthen the immune system. In particular, isothiocyanates, which can be found in cruciferous vegetables such as broccoli and cabbage, have been proven to boost your immune system.

Stress in general contributes to a range of he alt h issues and can make p eople more susceptible to the effects of air pollution.

Balancing work and/or family life can go a long way to improving your health and vitality.

Stress in general contributes to a range of health issues and can make people more susceptible to the effects of air pollution. Balancing work and/ or family life can go a long way to improving your health and vitality.

Stress has direct effects on the body, which in acute situations are beneficial, helping the

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body achieve homeostasis. However, chronic s t re s s i n c re a s e s t h e r i s k of a n x i e t y a n d depression, digestive problems, heart disease, weight gain and other illnesses. Conversely, decreasing stress, whether through better worklife balance, meditation or other healthy means, is associated with less health problems and an increased sense of wellness.

Stop smoking. When in environments where one is a lre ady cha l lenge d by air qu a lit y, smoking only further reduces the quality of your health and the health of those around you.

Cigarette smoke produces 10 times more air pollution and furthermore poses greater health risks to the smoker and those in the immediate vicinity. In a nation such as China with a reported 350 million smokers and 500 million exposed to passive smoke, the health risks posed by air pollution can be greatly enhanced.

Ultimately, however, responsibility lies with

each individual to promote positive changes in our lifestyles and make important rational decisions that can affect our health for the better.

Staying up to date with available information and adopting recommendations from experts is a smart thing to do.

Ask questions and seek answers – after all, bre at hing is imp or t ant, and rememb er – wellness and lifestyle go hand in hand.

Gordon Peters is the north Asia medical director at International SOS. He received his master’s in public health from the Harvard School of Public Health in 1998 and retired from the U.S. Air Force with the rank of Colonel. He specializes in occupational medicine, aviation medicine and travel medicine.

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i n t er v i ew B Y R YA N B A L IS

One Man’s Fire Water…

Derek Sandhaus

taste.

Despite its tear-inducing punch, the country’s high octane alcoholic drink has grown in popularity over the last 5,000 years to become China’s essential social spirit.

Although sales of high-end brands have been hurt by a recent anti-corruption campaign, baijiu continues to be big business in China. Data from the China Alcoholic Drinks Association show RMB501.8 bi l lion (US$81 bi llion) of t he traditional fire water was sold last year, far

outpacing other spirits.

Rather made his baijiu remarks while covering Nixon’s trip to China in 1972, and many foreigners since then have shared the newsman’s horror at the liquor’s taste. However, one Western author is convinced that baijiu is simply misunderstood, and that even those who blanch at chewing duck’s tongues or munching pig’s trotters can learn to love the liquid lightning.

Self-described “reformed baijiu hater” Derek Sandhaus is attempting to help re-educate the masses about the finer points of baijiu through his recently published book Baijiu: The Essential Guide to Chinese Spirits. To research his first-hand guide to the local liquor, Sandhaus devoted years to visiting baijiu distilleries across China.

imaginechina

Author Derek Sandhaus breaks down the finer qualities of baijiu and the liquor’s potential to win a global following

O

ften likened to antifreeze and famously referred to as “liquid razor blades” by former CBS anchor Dan Rather, baijiu is widely regarded as an acquired

There are numerous types of baijiu in China

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Insight interviewed Sandhaus about his new book, the unique qualities of baijiu and the potential for China’s national drink to gain a foothold in foreign markets.

Insight: Authors usually do a lot of hands-on research before they finish a book. Is it safe to say you went through a few bottles of research?

Derek Sandhaus: “It was really important to me that with this book I be able to take something that’s not very well understood by the English speaking world and describe it in terms that they can understand.

My goal was to make baijiu more accessible to people, and to do that I had to drink a lot of it.

“But it wasn’t just drinking that went into the book. I traveled around China, I went to many different distilleries and I interviewed a lot of different master distillers and people at all levels of the baijiu production chain. I also read a lot of

Former U.S. President Richard Nixon toasts Zhou Enlai with Moutai, the most popular brand of baijiu during a state banquet in 1972 in Beijing

technical production manuals and various historical sources about the technical aspects and historic origins of baijiu. A lot of different things went into the project.”

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What’s Your Drink?

With literally hundreds of Chinese baijiu brands to choose from – each different in color, taste and style – where should the baijiu novice begin? Derek S and hau s of fe rs s ome picks in each of the four major baijiu categories.

Strong Aroma: • mid-range: Luzhou Laojiao Daqu or Tequ Light Aroma: • budget: Hongxing (“Red Star”) Erguotou • mid-range: Laobai Fenjiu by Xinghuacun Soy Sauce Aroma: • mid-range: Yingchun Baijiu • expensive: Kweichow Moutai Feitian (“Flying Ferry”) Rice Aroma: • mid-range: Guilin Sanhua Lao Guilin

“

…When you give a bottle of baijiu to your family during the holiday, there is an expectation that you’re going to be drinking that bottle with your family.”

Insight: Is the process for making baijiu different from making other spirits?

DS: “The process for making baijiu is different than almost every other spirit that you can think of except Korean soju or Japanese shochu, which share a common ancestry with baijiu. China uses different fermentation techniques and different distillation techniques. What these do is give it very complex flavors but also the category’s distinctively powerful aroma.

“Because of the way that baijiu is distilled you get a lot of chemicals, very flavorful chemicals that you wouldn’t get in an alcohol necessarily produced in the West, at least not one that’s produced with modern technology. With baijiu, the goal is to get these really powerful flavors and to make sure they’re balanced and they play well on the palate. I think there’s certainly a lot more variety within the baijiu category than you’d find with other hard liquors.”

Insight: Some bottles of baijiu can run upwards of a couple thousand yuan. How much of that cost is attributed to the brand and how much to quality and taste?

DS: “It would be hard to give a percentage for each of those factors. I think the brand image has the most to do with the price. The fact that certain

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brands like Kweichow Moutai and Wuliangye are perceived of as being the top of the line, and thus they have the ability to charge a much higher rate – part of that has to do with supply and demand, especially in the case of Moutai. “ That being said, there is a dif ference qualitatively in the product that you get at the different price points from the same distilleries.

When you are distilling baijiu, you’re using different qualities of fermented grains, and the better the quality of the raw material that you’re using, generally, the higher quality of the baijiu that you get after you distill it. Generally, all baijiu is blended together from several different batches and the more expensive baijiu, or at least the higher quality baijiu, will be the baijiu that uses more of the best-quality spirit in their blends.”

Insight: 300 Shots at Greatness is the name of your blog. What was the inspiration behind the number 300?

DS: “There is a supposed taste threshold for most foods and alcohol, a point at which you go from not liking it to liking it. For beer or whiskey, that’s supposed to be somewhere between five and 10 drinks. But with baijiu, because the taste is so strong, the theory was that it would take 300. That gave me this unique framing device to take my readers shot by shot in my journey to develop a taste for baijiu.”

Insight: I hear baijiu sales jump during major holidays. Do most people buy it for themselves or as gifts?

DS: “I would say both. When you give a bottle of baijiu as a business gift, it might go on the shelf, it might sit there for a few months or years. It might be given as a gift to someone else later. But when you give a bottle of baijiu to your family during the holiday, there is an expectation that you’re going to be drinking that bottle with your family.

“Definitely during the Chinese New Year is when most of the alcohol is consumed in China, and that’s when you see certainly the most baijiu-related hospital visits. You see a very similar scenario in the Western world during Christmas and the New Year.

Those are by far the highest alcohol drinking

periods. I guess when people get together with their families they need plenty of alcohol.”

Insight: There are stories of luxury liquor-maker Moutai buying up real estate in Paris to open new distribution outlets. Are the French dropping wine for baijiu?

DS: “No, I don’t see the French dropping wine for baijiu. But I certainly see baijiu as something that could be added to the many spirits that you’ll find behind a bar.

“It’s not just French people that they’re trying to appeal to right now. They’re trying to appeal to the large, growing population of either Chinese immigrants, Chinese businessmen, Chinese students – people that buy a lot of baijiu in China and are increasingly doing more and more work overseas. I think that’s their first target.”

Insight: Looking ahead, do you see a day when baijiu will be the favored spirit in places like the U.S. and Europe?

DS: “It’s going to be difficult for baijiu to supplant the most popular liquors. I don’t see a group of old suburban men sitting around a country club throwing back baijiu, at least not any time soon. I think Scotch, gin – the standard drinks – are going to remain the standard drinks.

“Before the 1950s, people didn’t really drink vodka that much in the United States. Tequila is an even more recent success story. You have a history of drinks that everyone thought was a weird foreign spirit that became staples of Western bars. I don’t see any reason why baijiu can’t repeat that trend. There’s a lot of high quality baijiu and it’s got something very unique to offer. I believe that it can succeed.”

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Alibaba Chairman Jack Ma during a presentation. The company will soon launch an IPO in New York

BULLISH ON AM As a growing number of Chinese firms seek out investment opportunities in the U.S., many succeed while others stumble due to poor preparation and management issues

BY JOEL BACKALER

Joel Backaler is author of China Goes West: Everything You Need to Know About Chinese Companies Going Global. He is an associate vice president at Washington D.C.-based Frontier Strategy Group and a member of the National Committee on United States–China Relations. Follow him on Twitter @JoelBackaler.

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D

uring my recent tour to promote my new book, China Goes West, I met with senior American business leaders to discuss the current state of Chinese competition, and how much of a threat it poses to their business. These conversations highlighted what I found during my research: the competitive threat Chinese companies pose to American businesses has increased substantially in recent years, both within China and in overseas markets.

However, the threat posed to American businesses varies significantly depending on whether the Chinese firm competes with them in an emerging market compared to a developed market, like the United States. Do Chinese companies really have what it takes to compete with American multinational

imaginechina

co v er s tory

Despite starting from a low base, Chinese investment in the United States has increased 600 percent from 2005 (US$2 billion) to 2013 (US$14 billion). The number of high-profile cross-border acquisitions continues to increase each year as well, and a flurry of little known Chinese firms have moved into the U.S. including WuXi AppTec and Goldwind.

Young companies

ERICA corporations in the United States?

American executives should understand the potential impact Chinese companies entering the United States will have on their businesses, but they should not be running scared – at least for now. We are too early in the development of this phenomenon and Chinese firms have a lot to learn about doing business in the U.S. and, as a whole, are not ready to challenge domestic industry leaders.

That said, American multinational firms are growing accustomed to competing with Chinese companies within China and other emerging markets. Chinese firms are better able to adapt business practices and product offerings for markets similar to China, especially those in Southeast Asia where there are shared cultural backgrounds. However, their success in emerging markets does not necessarily translate to the U.S. where they often face difficulties managing government relations, incentivizing international employees and empowering American general managers of their U.S. subsidiaries.

What happens when Chinese firms do enter the United States? Chinese firms certainly have a strong desire to invest in the United States, which is home to advanced technology, a skilled labor force and established global brands – all reasons why Chinese firms are investing there.

However, there is a big difference between having the capital and desire to expand into the U.S., and actually having the ability to commercially execute. Chinese firms often lack the experience to effectively manage and compete with established American firms in their home market.

Their desire to go global stems from both government ambition and business necessity. While many observers in the West attribute Chinese companies’ going global exclusively to the Chinese government’s zouchuqu or “go out” policy, there is a separate set of very real business motivations for why Chinese companies are looking for new opportunities outside of China.

The government sees overseas markets as the ideal avenue in which to invest its vast foreign exchange reserves, secure natural resources to sustain China’s economic growth and expand its soft power through the development of “national champions” (Chinese firms able to compete globally in key industries). The government has invested so much in developing its domestic

Guo Sheng, CEO of Zhaopin.com, in the New York Stock Exchange in June. Zhaopin was listed in New York last month and reportedly became the ninth Chinese company to go public in the U.S. in 2014.

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WuXi AppTec offices in St. Paul, MN

economy that these are necessary steps to continue to globalize both its firms and involvement in international affairs.

The business case for international expansion is more straightforward. Chinese firms seek advanced technology, international talent, global brands and access to new markets.

Often, these motivations are driven by a desire to make their firms more competitive within China, where costs have increased and competition is heating up across a wide range of industries.

However, despite having a desire to expand internationally, when it comes to the U.S. most Chinese firms have a lot to learn.

There are at least three reasons why Chinese firms are not ready

to compete with multinationals in the United States: inexperience, lack of understanding about how to do business in the U.S. and a limited global perspective at the senior management level.

While companies such as Lenovo, Haier and Wanxiang prove these challenges are not insurmountable – the majority of Chinese companies seeking to enter the United States are not yet ready to so, and will not be challenging American firms’ competitive position in the United States anytime soon.

INEXPERIENCE: Compared to their American counterparts, most Chinese companies have significantly less operating experience both at home and overseas.

Private business did not begin to develop until 1978, when veteran politician and economic reformer Deng Xiaoping pushed China towards a market economy.

Most Chinese companies that make international headlines today did not even exist until the early 1980s.

In many industries, Western firms’ length of experience can exceed their Chinese competitors by decades or even a century.

In contrast, Chinese firms’ rapid growth trajectory means that they are learning how to do business within China while transforming into global industry giants at the same time. As a result, the majority of Chinese companies that aspire to “go global” may not yet have the years of experience and internal

Late Start The following table illustrates Chinese firms’ experience versus their American competitors.

Comparison of Chinese vs. American Firms Based on Years of Experience Industry Home Appliances Athletic Apparel Healthcare Heavy Machinery Beverages

American Company Maytag Nike Johnson & Johnson John Deere The Coca-Cola Company

Founded 1893 1964 1886 1868 1892

Source: China Goes West/Joel Backaler

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Chinese Company Founded Haier 1984 Li-Ning 1990 Mindray 1991 Sany Heavy 1989 Jianlibao 1984

co v er s tory

capabilities to do so.

LACK OF UNDERSTANDING: I moderated a panel in April at the University of Chicago’s Booth School of Business on the topic of Chinese companies going global. Panelist Stephen Markscheid, a former senior vice president at GE Capital, described a cross-border M&A consultancy his friend recently started in China.

“He told me that they had built a team which included several prominent former American diplomats and government officials. When I told him that government does not play as big a role in business in the U.S. as it does in China, he said, ‘I know, but our Chinese clients still think it does. It helps us win business.’” The success of his friend’s firm did not surprise me given the attention many Chinese executives I interviewed for my book placed on government relations when entering international markets.

…Despite having a desire to expand internationally, when it comes to the U.S. most Chinese firms have a lot to learn.”

Building a successful business in China does not necessarily translate to success in the U.S. market. Jianlibao, a Chinese sports drink maker, invested heavily in government relations when it entered the U.S. and failed miserably because it did not spend enough on marketing to American consumers.

Chinese executives have a lot to learn about doing business in the United States, from knowing where to go for advice about marke t e nt r y to u nd e rst and i ng t he l o c a l re g u l ator y environment. They are used to working with various Chinese government agencies when preparing to “go out” including: the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC), the State-owned Assets Supervision and Administration Commission (SASAC) and the State Administration of Foreign Exchange (SAFE). The actual agencies they interact with vary depending on factors such as the Chinese company’s ownership structure, industry of investment and investment type.

Screenshot of 11 Main, Alibaba’s new U.S. website

When they enter the U.S., Chinese firms often look to the American government as their first source of guidance. While government agencies like SelectUSA can emphasize the U.S. is “open for Chinese investment,” it cannot help Chinese firms determine specific states and projects to invest in. As a result, Chinese firms are surprised that they need to instead turn to experienced American professional services firms in the M&A, legal and tax advisory space to get the advice they are looking for. They are often surprised at what it costs to purchase important market entry intelligence from third parties.

Chinese firms have had trouble adapting to the U.S. regulatory environment and they need to partner with experienced advisors to get it right. Take the case of Sinovel, a Chinese wind turbine producer that divested its U.S. operations last July after it was charged in federal court with stealing trade secrets from its former U.S. supplier.

In a separate example, if Chinese telecommunications firm Huawei relied on professional services support in the public relations and branding space when it first expanded into the U.S., it could have proactively shed its negative brand image.

However, years of rumors and media attention about its founder’s past association with China’s People’s Liberation Army have tarnished its reputation for an American audience and eventually led to a 2012 congressional hearing where its products were labeled unsecure for American government and corporate use.

LIMITED GLOBAL PERSPECTIVE: One of the most critical areas for Chinese companies entering the United States is transforming from Chinese-centric to global organizations.

For many firms, this transition can be accomplished with the local personnel they hire, but it requires a shift in mindset at the corporate center that many Chinese firms are not yet prepared to make.

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Senior executives at Chinese multinationals tend to lack personal experience working in the United States, making managing American employees in a completely different business environment and time zone quite challenging. Without understanding the American business operating environment at the senior management level, conflicts can arise with the company’s U.S.-based leadership.

Mark McMillan, former director of design engineering at LiNing, was one of the founding team members of its U.S. operations. In September 2010, one and a half years after McMillan started working for Li-Ning, his U.S.-based boss offered him a promotion to a global product development role based in Beijing. However, the Beijing management team did not agree with the decision and withdrew the offer two months after McMillan accepted and the promotion had already been communicated to his colleagues in Oregon, reported The Oregonian.

Multiple general managers of North America from Chinese companies told me they began their roles excited and optimistic, only to reconnect with me several months later complaining they had virtually zero decision making authority and the corporate office in China had highly unrealistic expectations for the American business. Interestingly, the American general managers were not simply “foreign faces” – the vast majority were industry veterans with years of experience leading bluechip multinational firms in the same sector.

One executive in the home appliance industry told me, “I felt as though I was managing an American business where final decisions were not made until the late evening hours when our China headquarters opened. It was highly inefficient and a frustrating experience.”

This demonstrates that not only do Chinese companies need to hire experienced overseas staff, they also need to employ senior managers at the corporate headquarters who have global managerial experience to set the right expectations across the organization and manage overseas teams.

Until Chinese firms are able to attract and retain top international talent over the long-term and U.S.-based teams are empowered to make business decisions, it is unlikely Chinese firms will pose a competitive threat to American businesses at home.

The phenomenon Whet her Amer ic an f ir ms are af fe c te d by C hines e comp e t it ion v ar ie s by i ndust r y. In t he Inte r net and biotechnology industries, where the entire global industry is relatively new, Chinese firms are also competing with American

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firms in the United States.

Two of China’s largest Internet companies, Tencent and Alibaba, operate in the United States with offerings targeted for an American audience. Tencent, China’s largest Internet firm, opened an office in California to help internationalize its WeChat messaging application.

Given Alibaba’s pending IPO, it is pushing even more aggressively into the U.S. market with the launch of 11 Main, its first direct-to-consumer online shop based in the U.S. Prior to 11 Main, Alibaba launched AliExpress in late 2010 to help American buyers purchase smaller quantities of products online from China. Wuxi AppTec, a leading biotechnology and pharmaceutical outsourcing company, acquired St. Paul, Minnesota-based WuXi AppTec Laboratory Services for US$151 million in 2008 and has operations in four other states.

The time is now to understand the impact of increased Chinese corporate investment in the United States on American business. While there is little to worry about in the short term, Chinese companies are developing and adapting quickly.

Ultimately, many are likely to overcome challenges related to their lack of international experience.

Haier logo inside a Lowe’s

The vast majority of Chinese firms today are certainly not where they need to be, but don’t expect this to be the case for long. Today’s boom in Chinese outbound tourism and international MBA education will boost the English skills and internationalization of future Chinese executives. Moreover, the dramatic increase in the number of Chinese companies entering the United States is providing valuable case studies of practices to adopt and avoid for other Chinese firms thinking about expanding into the United States.

American companies and executives should seek to understand the implications of this trend for their business and identify potential Chinese players in their industry to ensure their competitiveness in the future.

co v er s tory

The Great Frogger Leap Chinese companies entering the U.S. market can be as nerve-racking as playing a video game Brantly Womack is Professor of Foreign Affairs and holds the Miller Center’s CK Yen Chair at the University of Virginia. Recent books include China Among Unequals and China and Vietnam: The Politics of Asymmetry.

BY BRANTLY WOMACK

F

rogger! For those of us who played the classic arcade game, the word can induce stress. In this game, the frog not only has to cross multiple lanes of traffic, timing each jump to avoid trucks in one, alligators in another, but successive lanes moving in opposite directions. And if a frog succeeds, more lanes are added.

Frogger might seem an extreme comparison to the political challenge facing Chinese investment in the U.S., but it has to cross lanes of traffic overseen by local state, congressional and executive monitors. They each move in different directions, and the more success, the harder it gets.

The Chinese frogs are multiplying. As the Rhodium Group said in its reports for the Asia Society and the U.S. Chamber of Commerce, Chinese outward foreign direct investment (OFDI) in the U.S. now exceeds U.S. direct investment in China, and it is diversifying. Now high-tech investments are a quarter of the total, and they are poised to make a leap forward this year.

The trend is hardly surprising given that the U.S. is the chief

market for worldwide OFDI (17 percent of total inflow) and China’s global share has risen to third place (5 percent of world out f low). There is a te c tonic r ubbing of t he op aque interconnectedness of Chinese activities with the complex entrepreneurialism of American politics.

So far, Chinese frogs have been crossing mostly at night, with only a few attracting a public searchlight and even fewer getting gigged. But with the rapid increase in Chinese investments coupled with the IMF projection that this year the Chinese economy will become the world’s largest, political and media dawn is arriving.

Anxieties As Chinese investment grows, the major projects will receive more attention, but it will not be uniform across different levels of government. At the local level, city and state governments are eager for capital and jobs and compete for new opportunities.

But at the national level, Congress tends to reflect (and amplify) American anxieties about Chinese involvement. The executive branch must base its judgments on national interest and security in the context of general American investment policy. Thus, the typical investment frog is enticed by the local level, sideswiped by congressional and media reports, and finally navigates national investment and security policy.

The largest single Chinese investment has been the acquisition of Smithfield Foods, headquartered in Virginia, by Shuanghui International Holdings (now renamed WH Group Ltd.) for US$7.1 billion. The May 2013 offer was the c ulminat ion of four years of discussions, and it resulted in an immediate 28 percent increase in Smithfield sto ck. The de a l was supported by the United Food and Commercial Workers representing The arcade game 16,000 Smithfield

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imaginechina

China’s state-owned oil company had some trouble expanding into the U.S. several years ago

employees and was approved in September by a 96 percent plurality of stockholders. The acquisition merges two of the world’s largest pork processers and marketers. This was a large frog leaping from firm ground, and ultimately it made it across the political road.

The first lane was easy. Virginia stood to gain capital and jobs. Moreover, it has had a rough relationship with Chinese agricultural export markets, suffering under a four-year poultry export ban (due to avian virus) that was lifted only in May. The involvement of China’s “Number One Butcher” should secure and expand Smithfield’s exports to China, 30 percent of its current total exports.

The congressional lane cut the other way. Representative Randy Forbes, whose district includes the Smithfield home office, is founder and co-chair of the Congressional China Caucus. He immediately raised concerns about food safety, antitrust issues and national security, and he was joined by congressmen from Connecticut, Michigan and Iowa.

The link to national security was made most graphically by Senator Chuck Grassley of Iowa, who said: “We are nine meals away from a revolution.” Various special interest groups added their concerns ranging from food safety to the general problems of large-scale pork production.

The final lane at the national level was more complex but positive. The offer was submitted to the Committee on Foreign Investment in the United States (CFIUS), and Forbes asked the

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Justice Department to check for antitrust and unfair practices.

CFIUS cleared the acquisition on September 6, and it was consummated at the shareholders’ meeting later that month.

Behind the crosscutting lanes are crosscutting interests. State governments are eager for OFDIs because they are conspicuous windfalls of investment and employment. There are ribboncuttings and official trips abroad. And a particular opportunity is more likely to support than compete with other possibilities.

Virginia recently landed China’s largest greenfield investment, US$2 billion and 2,000 jobs, and Shandong Tranlin’s new manufacturing operation will be closely linked to agriculture.

If Toyota builds an assembly plant, BMW might follow suit.

Congressional interests are a different story. Even if the delegation of the winning state is friendly, the losers are also represented.

In the case of CNOOC’s failed attempt to acquire Unocal in 2005, congressmen supported by its competitor Chevron played a part. In any case Congress is media-hungry and therefore more attuned to popular concerns. Vis-à-vis China it tends to see its task in terms of vigilance rather than results. Moreover, given the utility of the China specter for high-tech defense spending, there is considerable money riding on continuing suspicion of China. In 2010, Forbes’ top three campaign contributors were defense-related and Smithfield was not among his top 20.

co v er s tory

Case for jobs The national level is necessarily more complicated.

Shuanghui made a plausible case that it would add American jobs by increasing exports to China. China’s problem with food safety is one of the reasons the acquisition makes sense. Chinese consumers trust foreign food products, and much of the fodder for Chinese pigs comes from the U.S. so why not feed the pigs there and just bring in the meat.

The more general national issues of reciprocity, level playing fields and national security did not raise flags for the Smithfield acquisition, but they are always in the background. This is as it should be. Even mutual benefit is a competitive interaction.

Pre s i d e nt O b ama’s 2 0 1 2 bl o ck i ng of a w i nd f ar m development in Oregon is a rather odd case, but it demonstrates that while technically China is under the same rule as others, in fact its status as a potential peer competitor puts it permanently under the microscope. Standard procedures are more likely to be bent against China than for it.

Underlying the difficulties at the national level is a subtle but profound shift in the American evaluation of China’s rise. As long as China was merely a super-sized developing country prospering by becoming more like us, we could cheer its progress. But as it becomes our size economically and remains communist politically, Americans get worried. We do not want

China to become less prosperous, but increasingly what counts for us is its relative gain.

Win-win is still nice, but who wins more, and does it make us more vulnerable? Political tensions are also likely to rise. As China gets eye-to-eye with us, in disputes it will be more tempted to respond with eye-for-an-eye.

But this is far from a rerun of the Cold War. The bilateral relationship is crucial to both economies, and both are enmeshed in the same globalized world. China may not quite play by our rules (after all, they are our rules), but we both play in the same sandlot. Moreover, China is still a developing country, and at an equal GNP its per capita productivity is only one-fourth of ours. The disparity between China and the U.S. will continue to create rich opportunities for mutual investment like the Smithfield acquisition. In many areas each has what the other needs.

So what should rich Chinese frogs do? Local, opportunitydriven encouragement is real, and when the road is crossed it will provide the environment of the enterprise. But it is prudent to anticipate the crosscutting concerns of Congress and the media as well as the bureaucratic and political dynamics at the national level. While the high growth rate of Chinese OFDI will increase concerns, there will be a better sense of risk on both sides as the experience and bulk of successful investment grows.

imaginechina

Wan Long, right, then chairman and CEO of Shuanghui International, and Charles Larry Pope, president and CEO of Smithfield Foods, hold a ham at a press conference in Hong Kong last year

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AmCham Shanghai New Members U.S. Corporate Membership Amerihome (Shanghai) Trading Co. FU Ming FLEX - N - GATE CHINA CHEN Bing Hu Business (Shanghai) Co., Ltd. PAN Youdong Jones Lang LaSalle Surveyors (Shanghai) Co., Ltd. ODETTE Daniel Lexicon Global Relocation ZHOU Chun

Litzler-Foudy Machinery & Equipment (Shanghai) Co., Ltd. URBAN William

Shui On Development, Ltd. CHAN Bryan ZHANG Ye

Associate Membership

Silicon Valley Bank Shanghai Rep. Office JAZDOWSKI Oscar JONES Dave LUM Harvey

Aramark Service Industries (China) Co., Ltd. Shanghai Branch KENNEDY Geoff Aramark Service Industries (China) Co., Ltd. Shanghai Branch LIANG Arthur Best Buy (Asia Pacific), Ltd. CHEN Yen-Ju

Smucker International, Inc. Shanghai Representative Office PAWLOWSKI John Southworth (Shanghai) Lift Table Co., Ltd. LOMBARD Robert Steelcase Trading (Shanghai) Co., Ltd. D’HAUTEVILLE Ambroise Tweddle Group China Co., Ltd. LI Li VOA Architecture Design (Beijing) Co., Ltd. Shanghai Branch FAWELL Richard Harris

CEIBS AUSTIN-MARTIN Marcel Changshu Artisan Leather Goods Co., Ltd. LIN Ronin CVG Vehicle Components (Shanghai) Co., Ltd LAMB Carlton TOMLINSON Lincoln eBay CBT China HU Vvivi

General Electric (China) Co., Ltd. FENG Jianmei

General Motors (China) Investment Company U.S. Associated Corporate Limited Membership TREME Robert Beijing Starr International Investment Greenberg Traurig LLP. Shanghai Representative Advisors Limited Office DONG Ying SHENG Jill Dow AgroSciences (China) Co., Ltd., Hong Kong Yuen Tai Securities Limited Shanghai Branch ZHOU Sara PINA José Intel Asia-Pacific Research & Development, Ltd. Halla Visteon Climate Control (Shanghai) Co., Ltd. YANG Albert CHENG Jay Jie Intel China Ltd. Swagelok (China) Fluid System Technologies Ltd. HU Yanhong MA Adam WU Yanlai ZEP Solar Trading Ltd. Johnson & Johnson China, Ltd. HSIEH James DING Bob QI Yan Corporate Int’l Affiliate Membership

Changshu Artisan Leather Goods Co., Ltd. SCHWARZ Jeffrey

KPMG LIN Wei

CVG Vehicle Components (Shanghai) Co., Ltd. PERICH Geoff

MulvannyG2 Architecture (Shanghai) Consulting Co., Ltd. JIANG Jack

Esko-Graphics Shanghai Trading Coompany Ltd. MILLER Chris

Owens Corning (China) Investment Co., Ltd. HAAS Kristen

Fervent Industrial Development (Suzhou) Co., Ltd. HU Robert

PAC Project Advisors Shanghai Ltd. ROELOFS Robin

Havas Worldwide SEHNAOUI Alexander

SASCO (Shanghai) Electrical Engineering Consultation Co., Ltd. WANG Karen

Hong Kong Yuen Tai Securities Limited TANG Haofu Hyatt Regency Suzhou CHAN Gary

SBA Stone Forest Corporate Advisory (Shanghai) Co., Ltd. BOYLE Rita

Smucker International, Inc. Shanghai Representative Office TO Sandy VOA Architecture Design (Beijing) Co., Ltd. Shanghai Branch WANG Claire Whirlpool (China) Investment Co., Ltd. VAUGHN Deborah Yum! Restaurants Consulting (Shanghai) Co., Ltd. HUANG Ching Shuan Individual U.S. Citizen Membership COMSTOCK Alexandra FISCHER Jacob LEE Edwin MILLER Duncan PAN Feng ROBERTSON Rob SHEI Edward SYZDEK Nicholas TSAO Tony WALLACE David

Individual Int’l Affiliate Membership KINEX HEBNAR Jan HOW Yap Weng INOUE Naohide KIRCHNER Jutta MILCAMPS Olivier QI Richard REGGIANI Francesco SIEBERT Hans

Non-Resident Corporate Membership JOC Group Inc. ZHU Qi Non-Resident Individual Membership CONE Mensah GREENBERG Scott HERBERT Michael LIM Poey Keng WIBLE James Small Business Membership International Sports Group (ISG) Co., Ltd. YANG Shang Jen Mike JGB Systems & Services BERTRAND Jacques

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

Conference Sheds Light on Latest China Food Safety Issues

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ore than 120 people turned out for the fourth annual China Food Safety and Sustainability Conference on M a y 2 2 at t h e L e R o y a l Meridien Hotel in Shanghai including business leaders, food science professionals, government officials and key opinion leaders from the food manufacturing, packaging, distribution and retail industries.

The event, organized by AmCham Shanghai’s

Food, Agriculture & Beverage Committee, provided a platform for open dialogue regarding the current state of food safety issues in China, existing challenges and the significant improvements by government and industry that have been made in recent years.

Keynote speaker Chen Junshi, senior research professor and chief advisor at the China National Center for Food Safety & Risk Assessment, stressed the importance of training in combating food-borne illness and overall food safety

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Panelists discuss food safety issues in China

Chen Junshi of the China National Center for Food Safety & Risk Assessment addresses the audience

measures, especially in regards to inspectors and producers. Jiang Peizhen, secretariat of the Shanghai Food Safety Joint Commission, shared insights on food safety improvement directives.

“The food safety challenges in China are many, but I’m proud to say that U.S. companies are an important player in the effort to promote food safety standards in this market,” said AmCham Shanghai President Kenneth Jarrett. “American food companies can and do contribute innovative, world-leading technologies and practices that

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help to meet the growing demand of Chinese consumers for safe and reliable food products.”

Also speaking at the event were executives from Yum! Brands, Danone Group France, WalMart, Jiangsu Sushi Food, Ecolab, Abbott China, Banyan Tree Hotels & Resorts, Brunswick Group and UTOP Communications.

The Conference also hosted a panel discussion on supply chain integrity and traceability as well as breakout sessions on consumer education and an interactive crisis management simulation.

Conference Sponsors:

Supporting Organizations:

Exclusive Networking & Cocktail Sponsor

Media Partners:

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SPONSORED CONTENT

inside amcham from the chair

Women and the Board As we move into the long, hot summer months in Shanghai, I would like to leave you with a few topics to consider when we return to a full complement of Chamber activity in September. On top of my list is the role of women in our Chamber. Therefore, I wish to speak directly to our women members.

I have had the privilege in my years on the Board of Governors of working closely with many talented professional women, including from our AmCham staff and on our Board. However, the sad reality is that we do not have enough of you to run for office.

Recently, Ken Jarrett, Eric Zheng, Andrew Au and I were invited to attend a meeting of AmCham Shanghai’s Women’s Executive Network, an initiative AmCham launched to enhance engagement and promotion of senior executive women leaders within the Chamber. There were approximately 20 women executives in attendance, representing a broad range of professions and industries.

One of the objectives of this meeting was to encourage participation of senior executive women in AmCham Shanghai’s Board election.

Developing diversity in our Board reflects the diversity of our membership and trends in corporate governance globally. I strongly support all women interested in a leadership role in the Chamber to participate in this important initiative.

I was thoroughly energized by the questions, comments and enthusiasm expressed by our women members. Let me assure all of you that the process of running for the Board will expand your network, build significant friendships and expose yourselves to some of the best minds in China. The process of running for our Boards will begin in September. I hope that we will have many women members take up our invitation for you to run.

We are pleased to have a special guest speaker on July 24. Maurice R. “Hank” Greenberg, the legendary CEO of AIG and now the Chairman and CEO of Starr Insurance Companies, has agreed to speak to our membership over lunch that date. This is a chance to hear a remarkable American’s journey through the American financial services industry and his pioneering achievements in China which began more than 40 years ago.

Have a wonderful summer with family and friends and we look forward to a vibrant fall lineup of AmCham events starting in September.

Robert Theleen Chair of the Board of Governors

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

Board Approves New Membership for the NEC Highlights from the June 2014 Board of Governors Meeting AmCham Shanghai’s Board of Governors held its monthly meeting on June 10 to approve new membership for the Nominations and Elections Committee (NEC), to welcome a new director of government relations and to review plans for upcoming events, including a visit to Shanghai by Secretary of Commerce Pritzker.

The proposed new membership of the NEC, which will be chaired by board member Eric Zheng of AIG, was passed unanimously by the board. The NEC is responsible for supervising the implementation of AmCham Shanghai’s annual elections for the board and its officers. Members of the 2014 NEC are: Eric Zheng (chair), Sarah Kochling (Dragon Rouge), Dan Krassenstein (Procon Packaging), Yvonne Pei (Disney), Russell Scoular (Ford) and Dan Whitaker (individual member).

In addition to the approval of the new NEC, the board welcomed the Chamber’s new Director of Government Relations, Veomayoury Baccam, who takes over the position that Steven

X. Chan vacated earlier this year. Baccam joins the Chamber after a 12-year career in the U.S. Foreign Service, including an assignment at the U.S. Consulate General.

Among the key upcoming events discussed by the board, the visit by Secretary Pritzker received the greatest attention.

Secretary Pritzker will be visiting China from July 6 to 8 for the Strategic and Economic Dialogue, and will hold a brief meeting with members of AmCham Shanghai’s board during that visit to discuss U.S.-China business relations.

About AmCham Shanghai’s Board Meetings To ensure that the Chamber is an effective voice for American business in China and that members receive maximum benefits from AmCham Shanghai’s events, programs and activities, the Board of Governors meets monthly to plan strategy and review the Chamber’s performance. These notes are provided as a way to keep all members updated on the Board’s discussions.

The AmCham Shanghai 2014 Board of Governors Governors

Chair

Jeremy Burks Dow Corning

Jimmy Chen FedEx Express

Chen Lienjing Pratt & Whitney

Michael Crotty MKT & Associates

Jun Ge Intel China

Ker Gibbs BW Ventures

Cecilia Ho International Paper Asia

Curtis Hutchins Eaton (China) Investments

Eric Zheng AIG Insurance

Robert Theleen ChinaVest

Vice Chair

Sherman Chu Cisco Systems

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AmCham Shanghai

Panelists and attendees at the fourth annual Food Safety and Sustainability Conference on May 22

Staff from Netspring Social Enterprise at the second annual electronics donation drive at AmCham Shanghai on June 10

Author Anil K. Gupta addresses members on June 19

Vijay V. Vaitheeswaran of The Economist, right, and AmCham Shanghai Chair Robert Theleen debate the future of U.S. companies in China

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Month in Pictures

Wen Wanli of the Shanghai International Economic and Trade Arbitration Commission, left, with AmCham President Kenneth Jarrett on June 17

An attendee poses a question to AmCham Shanghai and Strategy& at a China consumer trends event

Members at a briefing on SHIAC’s role in the China (Shanghai) Pilot Free Trade Zone (FTZ)

Pierre Cohade, right, advisor at ChinaVest, and Steven Veldhoen, senior partner at Strategy&, discuss China consumer trends on June 19

Women’s Executive Network (WEN) event on building successful corporate boards on May 27

deal of the month B y E r i k a Wa n g

Chow Tai Fook buys U.S. jeweler Hearts on Fire for US$150m imaginechina

C

how Tai Fook Jewellery Group, the world’s largest jewelry retailer by market value, said in June it will acquire B oston, Mass.-b as e d diamond jeweler Hearts on Fire Company for US$150 million, a move aimed at expanding its high-end product line.

The purchase will be made in cash and is Chow Tai Fook’s biggest acquisition since it raised US$2 billion to go public in Hong Kong in December 2011. The deal is expected to be completed by the end of September, with Chow Tai Fook opening a store in Hong Kong and in Shanghai by March 2015.

“The acquisition is in line with the Group’s strategy to optimize product mix and promote higher value products to match the spending profiles of consumers,” said Kent Wong, managing director of Chow Tai Fook, in a statement.

Hearts on Fire reported audited net sales of US$104.8 million last year, up 5.5 percent from US$99.3 million in 2012. About 75 percent of the company’s sales in 2013 were priced in the US$1,000 to US$10,000 range, with the rest from

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more expensive items.

Hearts on Fire was established in 1996 by Glenn and Susan Rothman and is present in more than 500 locations in 31 countries, including two stores in the United States and nine in Taiwan.

Chow Tai Fook, which has a market value of US$15 billion, was founded in 1929 in southern China’s Guangzhou city and is owned by tycoon Cheng Yutung.

Net income for the fiscal year ended March 31 climbed 32 percent to US$942 million, helped by strong demand for gold products early last year, according to Chow Tai Fook’s latest earnings statement. Gem-set jewelry sales accounted for 21 percent of total revenue and sales of gold products contributed 61 percent, the company said.

Chow Tai Fook operates more than 2,000 stores, having added 241 last fiscal year, with most outlets located in mainland China’s smaller cities.

The company said it plans to open 200 points of sale annually, mainly in China’s lower-tier cities where economic growth is strong and to meet demand from a growing middle class.

Government Relations State Dept. Official Kin Moy Visits Chamber AmCham Shanghai hosted a discussion on May 23 with U.S. Department of State Deputy Assistant Secretary (DAS) for East Asian and Pacific Affairs Kin Moy. Moy was visiting China to discuss the U.S.-China Strategic and Economic Dialogue (S&ED), held in Beijing in early July. He noted that the development of the relationship between the U.S. and China has been substantial since he first visited China in 1978. He added that the goals of discussions like the S&ED along with other forums like the Joint Commission on Commerce and Trade (JCCT), is to create a platform where the U.S. and China can face their challenges in an open and honest forum and that ensures a dialogue between the two.

An attendee poses a question during the event

Jasmine Liang, manager of corporate citizenship & corporate affairs for IBM China, introduced the three key principles IBM follows to create shared value: alignment, expertise and collaboration. She illustrated the principles with an example of the Smarter Cities Challenge (SCC), where they dispatched 600 experts to over 100 cities to deliver innovative solutions and services for clean water, healthcare, sustainable transit and public safety.

Timothy Hui, director of Global Reporting Initiative (GRI) Greater China Office, noted a recent trend of integrating sustainability reporting as a core part of CSR and corporate communication strategy. He also explained how to use the new “G4” framework to measure the environmental and social impact of businesses.

Kin Moy, U.S. Department of State Deputy Assistant Secretary, addresses AmCham Shanghai members

Shared Value Series Kicks Off AmCham Shanghai held the first session of its Creating Shared Value (CSV) Series: Shaping Business Opportunities, a CSR 10th Anniversary Event, on May 30. As a cutting-edge trend in the CSR field, creating shared value through sustainable business models and social innovation has become a new CSR arena to explore. Around 60 representatives including business executives, CSR professionals and NGO leaders attended the event.

Veronique Rochet, regional sustainability manager for H&M, presented on how H&M shares its value with suppliers and customers to achieve economically, socially and environmentally sustainable business practices. Beyond monitoring and auditing the supplier factories through compliance activities, H&M’s Supplier Ownership Initiative has enabled them to reshape the management strategy, take initiatives to increase efficiency and capacity and advance the welfare of workers.

This year, AmCham Shanghai celebrates its 10th anniversary of CSR programs and commemorates 10 years of impact, while looking forward to another decade of driving innovation, delivering leadership and creating shared value for our members in China. For more information, contact CSR Senior Associate Daisy Lu at daisy.lu@amcham-shanghai.org.

Donation Drive Yields 400 Electronic Devices AmCham Shanghai on June 10 collected more than 400 electronic devices including computers, cameras and other related items from more than 19 companies and individuals at its second annual electronics donation drive, organized in collaboration with Netspring Social Enterprise. All collected items will be refurbished and distributed to create computer classrooms in elementary schools throughout rural villages in China as part of Netspring’s Green IT Classrooms program. Any unusable items will be disposed of properly. If you were unable to participate this time and would like to donate items, please contact Ally Qin at yiqin@netspringworld.com to schedule a drop-off or pick-up.

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Event highlights

inside amcham

‘Rise of Digitization’ Key in Consumer Market Survey AmCham Shanghai and Strategy& (formerly Booz & Company) released key findings June 19 from a research report on Company Strategies in Response to Consumer Trends. Now in its fourth year, the research provides insights on the priorities of executives of both MNC and Chinese consumer-facing companies operating in China, and how they view key trends in the market.

Respondents ranked the “rise of digitization” and “changing perception of value” as the two most important trends influencing their China strategy, noted Adam Xu, partner at Strategy&, who presented the results alongside AmCham Shanghai Committees Director Stefanie Myers.This is the second consecutive year that “rise of digitization” was ranked as the top influencing trend for China’s consumer market. Both MNCs and Chinese companies report greater preparedness to respond to these two trends, with Chinese companies reporting more confidence on their readiness.

Adam Xu, partner at Strategy&, presents findings on China consumer market trends

consumer market, said Xu. Despite this, MNCs are lagging behind their Chinese competitors in entering business areas where digital has the greatest opportunity to create value. The digital landscape is considered a “white-space” in China and globally, with no “one size fits all” success formula.

Consumer Companies Respond to Key Market Trends

“Digitization” was defined as rising e-commerce penetration and The survey found that compared to MNCs, Chinese companies Key Trendsintegration Influencing themedia China Consumer Market increasing of social into the day-to-day lives of are more aggressively investing in and developing online channels, the consumers dramatically impacting the interaction between • Consumer companies continue to view the “Rise of digitization” and “ changing perception of value” as the two with higher expectations and belief in the strategic importance of most important trends influencing their China strategy. [Exhibit 1] companies/brands and consumers. “Changing perception of digital channels to their business. In addition, MNCs are lagging • Both MNCs and Chinese companies report greater preparedness to respond to these two consumer trends, value” was defined as increased importance placed on “value for with Chinese companies reporting more confidence on their readiness. behind their Chinese competitors in entering business areas money” (no longer just low price but also reliability, functionality, • MNCs and Chinese companies have different views on the importance of some trends. For example, “health where digital has the greatest opportunity to create value. safety, etc.) will change how consumers evaluate their choices and wellness” is viewed as more important by MNCs than by Chinese companies, while Chinese companies Further, a perceived advantage of MNCs – global digital and buy. view “consumer choices” higher in importance than MNCs. capabilities – is waning, as companies report their ability to • Some trends – “Evolution of the Family Unit” – appear to be ‘volatile’ in their importance with rankings leverage global resources is decreasing, with 20 percent of MNCs fluctuating over the past four years, while others such as “increasing connectivity among different city tiers,” The survey reveals that consumer companies clearly understand suggesting their global resources provide no leverage at all, have declined in relative importance. the major disruptive impact of digitization for the China compared with just 5 percent reporting the same last year.

This could reflect the local Exhibit 1 The Importance of Key Trends in China’s Consumer Market: 2011–2014 and fast-moving nature of China’s digital market and 2012 2011 2013 2014 Rank ecosystem and the need for locally relevant digital models.

1

Rise of “Digi+za+on”

Changing Percep+on of Value

2

Increasing Connec+vity Among Different City Tiers

3

Exposure to and knowledge of Foreign Markets

Rise of “Digi+za+on”

Rise of "Digi+za+on"

Exponen+al Growth of Consumer Choice

Changing Percep+on of Value

Changing Percep+on of Value

Rise of “Digi+za+on”

Exponen+al Growth of Consumer Choice

Health & Wellness

4

Work-­‐life Balance

Health & Wellness

Evolu+on of Family Unit

Exponen+al Growth of Consumer Choices

5

Evolu+on of Family Unit

Increasing Connec+vity Among Different City Tiers

Health & Wellness

Rise of Importance in Shopping Experience

6

Health & Wellness

Social Media

Exposure to and knowledge of Foreign Markets

Ask for More Transparency

7

Exposure to and knowledge of Foreign Markets

Increasing Connec+vity Among Different City Tiers

Increasing Connec+vity Among Different City Tiers

8

Evolu+on of Family Unit

9

Work-­‐life Balance

Evolu+on of the Family Unit

About the Survey: 4 6 i n s i g h t J U LY / A U G U S T 2 0 1 4 • The American Chamber of Commerce in Shanghai (AmCham Shanghai) and Strategy& (formerly Booz & Company) “Business Response to Trends in China’s Consumer Market Survey” (the Survey) seeks input from executives of consumer-facing companies operating in China, including Western MNCs, Chinese and other Asian companies. The Survey provides an understanding of how companies are responding to key trends in

Full results of the 2014 survey will be published online by AmCham Shanghai and Strategy& in the near future.

For more information on the project, please contact Committees Director Stefanie Myers at stefanie.myers@ amcham-shanghai.org.

Event highlights

inside amcham

China Experts Debate Future of U.S. Companies Two of Shanghai’s most colorful and engaging China hands – Robert Theleen and Vijay V. Vaitheeswaran – faced off in a lively debate about the fate of multinational companies in China during AmCham Shanghai’s monthly member briefing on June 10.

Theleen, founder and CEO of ChinaVest and AmCham Shanghai chair, took the optimistic view arguing that the best is yet to come for U.S. companies in China. He noted that China’s increasing urbanization and rising middle class will drive the next phase of U.S. multinational companies. The ability to move goods, products and services across a landscape to an educated population is the sweet spot for American countries, said Theleen, citing figures from the World Bank of 190 cities with a million people and a middle class comprising 800 million.

Vaitheeswaran, an award-winning correspondent and China business & finance editor for The Economist, was less optimistic and listed several reasons why MNCs are up for a harder time in China. He argued that the “Golden Age” for MNCs in China is drawing to a close. At the macro-level, the period of double-digit growth has ended, and China is now entering a middle-income squeeze that puts a ceiling on the growth of most sectors, he pointed out.

The journalist said the double-digit increase in labor costs along with stricter environmental standards and regulations, intended to raise the standard of living, are also concerns. He also pointed out that competition from Chinese brands could give MNCs a hard time. Huawei and Xiaomi are actually making products that people want, he said, and they’re challenging foreign brands’ value proposition. It’s not enough just to be foreign anymore, but MNCs will have to justify their premiums, he stressed.

A final reason that Vaitheeswaran argued put a damper in U.S. companies’ ongoing prospects in China is that consumers are growing incredibly sophisticated. They not only have access to the world’s best brands, their social commerce, e-commerce trends are perhaps the leading edge in the world, he said.

In response, Theleen agreed that costs in China are indeed going up, but took issue with that by pointing out that cost is for income, which is growing at 10 percent annually – 30 percent faster than the country’s GDP rate. Theleen also acknowledged that while the competitive environment has increased, U.S.

companies are actually doing better in a consumer-led economy than a production-led economy, driven by infrastructure, urbanization and the middle class. American companies this year reported sales of US$290 billion, he noted.

Asked by moderator Phillip Branham, president at B & L Engineering Consulting Co., about what Chinese innovation holds for multinationals in China, Theleen said much of the innovation that is coming out of China is from entrepreneurs in the private sector, as was the case, for example, with Alibaba Group, further strengthening his case that the private sector is indeed gaining ground over SOEs. But Vaitheeswaran said that examples of Chinese innovation such as Weixin by Tencent, Alibaba and Xiaomi, are largely from the Internet and tech areas, sectors that are fundamentally not dominated nor deemed strategic by SOEs. Vaitheeswaran further noted that in the area of innovation, concerns over intellectual property from foreign companies continue to be serious, though nevertheless it is a risk that many MNCs are willing to take to do business in China.

SSOE Executive Discusses Site Selection AmCham Shanghai on June 6 hosted Robert Benedetti, business director at SSOE, as a part of the Small and Medium Enterprise (SME) Center’s Orientation China Guidebook Author Series.

Benedetti discussed issues covered in AmCham Shanghai’s Orientation China Guidebook chapter titled “Developing a Facility,” including industrial park location planning, construction and development of suitable facilities. A networking activity that followed featured Shanghai Premier Investment Co. The SME Center is very active in the field of cross-border investment. Recently, the virtual platform successfully paired a major Shanghai investor community with a large EB-5 development project in the northeast of the U.S. Many companies have already encountered success from posting their business opportunities on the virtual SME Center, including over US$220,000 in contracts in the last 60 days.

To learn more about this webinar and how the SME Center facilities cross-border investment, visit the SME Center at http://sme.amcham-shanghai.org.

For more information on AmCham Shanghai’s 23 industry-specific committees, please contact committees@amcham-shanghai.org.

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Event highlights

inside amcham

Shanghai Official Briefs Members on FTZ Arbitration Wen Wanli, vice chairman and secretary general of the Shanghai International Economic and Trade Arbitration Commission (SHIAC), on June 17 briefed members on the recently launched government body, its role and the policies it has in place for the China (Shanghai) Pilot Free Trade Zone (FTZ). As the Shanghai FTZ continues to develop, trade will certainly increase, but this will also lead to an increase in the number of disputes between parties, said Wen. The Shanghai FTZ will also increase the complexity of dispute resolution, he added.

The structure of the SHIAC, according to Wen, is based on international norms and is guided by international standards. English is prominently used throughout the SHIAC and 32 percent of the arbitrators are from countries besides China, he noted. Moreover, in agreements that are resolved in SHIAC, parties can agree to use other arbitration centers’ rules (such as Singapore). Wen also explained the roles of arbitrators and mediators, as well as awards and application procedures.

Wen Wanli of the Shanghai International Economic and Trade Arbitration Commission briefs AmCham Shanghai members

Women’s Executive Network Explores Building Successful Corporate Boards Nearly 80 senior-level executives on May 27 attended AmCham Shanghai’s Women’s Executive Network (WEN) event on building successful corporate boards. Gladdy He, senior client partner with Korn Ferry International Shanghai, shared findings from the firm’s research and experience in board search.

Panelists discuss successful corporate boards at a Women’s Executive Network event on May 27

Korn Ferry’s research shows that Greater China leads among Asian countries on women representation in corporate governance, she noted. Further, women’s representation on boards of local Chinese companies surpasses that of multinationals in China, due in part to the fact that most of these are family-owned companies with a high appointment of relatives.

A founding member of the Hong Kong 30% Club and board advisor to the Women’s Foundation, Keith Pogson, senior partner of financial services at Ernst & Young Asia Pacific, emphasized the importance of a diverse board for innovative and effective decisionmaking. Successful companies are looking for ways to best utilize top talent to cultivate diversity in background, experience and thought, including drawing members from different segments, especially the technology industry, he noted.

Nora Wu, lead partner and east cluster human capital leader at PricewaterhouseCoopers, discussed her role and shared her experience as a “double minority” – a representative from an emerging market and one of only two women on the board. Wu stressed the value of diverse perspectives in helping to shape the strategic direction of the company and understand and communicate with stakeholders.

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Committee highlights

inside amcham

Talk Focuses on E-Commerce Platforms AmCham Shanghai’s Marketing & Media, IT, and Small Business committees on May 22 held a joint event on how to set up an e-commerce platform in China featuring Patrick Deloy, founder and executive director of Bluecom Group, and Eric Rongley, CEO and founder of Bleum.

Deloy and Rongley discussed key considerations, including market entry options, customer acquisition techniques, operations and logistics, website integration with customer demands and social media, and strategically evaluating ROI. Deloy focused his presentation on key issues when choosing a marketplace versus a standalone site. From the customer perspective, standalone e-commerce sites are a premium destination with high customer acquisition costs and short-term sales potential of 5–10 percent of a brand’s e-commerce sales, though long-term sales potential is high. For platform stores (e.g.,Tmall), this option is an outlet or clearance channel with low customer acquisition costs, heavy markdowns (up to 70 percent), very limited integration with POS and CRM, and shortterm sales potential of 50–70 percent of a brand’s e-commerce sales.

Rongley shared his insights on the continuum of market entry options in China, including Tmall plus mono branded and retail, Tmall plus mono branded hybrid, to enlarging your own home site. The many microfacets of managing your e-commerce platform include site management, daily merchandising, media/marketing integration, logistics integration, SEO and China search, wholesale/inventory management and logistics inward and outward, he noted. If you are choosing a Tmall or mono branded strategy, you will need to set up your China entity with the proper business scope in China, which encompass choosing WFOE and/or JV setup, your business license, banking requirements, import/export issues and regulatory compliance, he said.

Speakers agreed that brands should match their strategy to budgetary and operational abilities; consider offline to compliment online; create strategies to target tier 3 and 4 cities where e-commerce is most relevant; be open minded to try new things; plan your mobile strategy; and expect things to change quickly and adapt.

Standard & Poor Official Discusses Corporate Ratings AmCham Shanghai’s Financial Services Committee on May 16 hosted Susan Chu, senior director for corporate ratings at Standard & Poor’s Ratings Services. Chu shared her insights on roles and operations of ratings agencies, as well as the China outlook.

Chu explained what a credit rating is versus what it is not. She noted that a rating focuses on the relative risk of a company and that the ratings system used by Standard & Poor’s in China is very similar to the rating system used in the U.S. Chu continued with a discussion on how S&P ranks the creditworthiness of companies and their internal governance and control mechanisms that are taken before a rating is issued before moving on to an outlook for China.

Susan Chu of Standard & Poor’s Ratings Services

According to S&P, there are three top risks to China.The lack of transparency and ease of mispricing make shadow banking a top risk. Chu noted, however, that not all shadow banking is bad, arguing that there is room for shadow banking in the formal economy. Current trends in corporate credit and recent public defaults are another concern.The third concern highlighted was government support of defaulting organizations. Another concern mentioned was liquidity challenges should GDP growth fall below a certain baseline percentage. briefs members

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Executive traveler Which airline offers the best frequent flyer program for executives based in China?

JP Sharp, CEO China, TMF Group Prefers: Air China – PhoenixMiles Remarks: “Every month I travel extensively between our offices within China. Air China’s PhoenixMiles frequent flyer program has taken on most of the features of leading Star Alliance partners by offering online check-in, seat selection and mobile-ready boarding passes. This offers us frequent travelers more convenience, flexibility and gives us back more time in our busy schedules. Since becoming a member of Star Alliance, Air China’s on-time takeoff performance has been on par with better predictability, in comparison to often unpredictable conditions within domestic China travel.”

Gilles Saintonge, VP Technology, Commercial Aircraft Platform, AVICSAE Prefers: Delta Air Lines – SkyMiles Remarks: “This is the airline I used to fly with when I was in the U.S. because of geographic reasons. I am a Diamond level member and have been at that level for years. Given D elt a’s p ar t ne rs i n C h i na (China E astern and China Southern), I thought that being a Sky Miles member would be very convenient. However, although I fly to the U.S. and Europe many times a year from China, I will lose my Diamond status next year because of the new rules of the SkyMiles program.”

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Lucy Lei, Managing Director Asia at Beaulieu International Group and President of EPWS Prefers: KLM and Air France – Flying Blue Remarks: “Va lue for mone y to Europ e an destinations. Combined with both airlines under one mileage program, nearly all European destinations are covered.”

Richard H. Fawell, Managing Principal, VOA China Prefers: United Airlines – Mileage Plus Remarks: “My favorite program was United Airlines Mileage Plus and I had been a loyal United Flyer for decades but recently switched to Hainan Airlines for flights to and from our main office in Chicago and anywhere in Southern China because of their service and United’s decline in service.

But I still think United has the best frequent flyer program. The United representatives on the phone are always a cut above and they really strive to help when one is trying to book travel using frequent flyer miles.”

Dennis Foo, VP & GM, ConAgra Foods Lamb Weston Prefers: Delta Air Lines, China Eastern – SkyTeam Remarks: “What I have now is SkyMiles Delta Airline. China Eastern is also a Shanghai-based airline so it is more for convenience, frequency, more options etc., and they are also part of the SkyTeam alliance. I can use the airport lounge, faster check-in and boarding, etc.”

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William Jones, Vice President Operations – East Asia, IDEX Technology (Suzhou) Prefers: United Airlines – Mileage Plus Remarks: “I fly United the majority of the time. Their online app is wonderful and the number of partners are great, giving you many options for awards travel.”

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Stefano Ritella, Director at HLD Events Prefers: China Eastern – SkyTeam Remarks: “I have been accumulating miles with China Eastern since 2007. China Eastern and SkyTeam provide me with a sufficient number of options to fly within China, to the States and to Europe while earning miles.”