Insight Magazine June 2014 by The American Chamber of Commerce in Shanghai

June 2014

PLUS: CooTek CEO on swiping not typing

INSIGHT JUNE 2014

The Journal of the American Chamber of Commerce in Shanghai

amcham shanghai

VP OF PROGRAMS & Services

Scott Williams

F e at u r e s

10 U.S. Tax Compliance Act LEGAL UPDATE

By Jane Cheung

A PwC expert examines a new law that looks to curb offshore tax evasion.

VP of Administration & Finance

Helen Ren

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President

Kenneth Jarrett

Directors Business development & Marketing

Patsy Li Committees

Stefanie Myers COMMUNICATIONs & PUBLICATIONs

14 In Search of Danger

CONSUMER SAFETY

By James Feldkamp

An American in China talks about his product safety organization.

Michael Cole Events

Jessica Wu government relations & csr

Veomayoury "Titi" Baccam Membership & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

18 ‘Chinese Economy is Quite Weak’ interview

By Bryan Virasami

Economist Derek Scissors isn’t sold on China’s reform plans. He explains why he’s skeptical.

Bryan Virasami Senior Associate Editor

Erika Wang senior communications associate

Ryan Balis Design

Alicia Beebe

26 Got a Bright Idea?

cover story

By Anil K. Gupta and Haiyan Wang

Our special look at the state of innovation in China and why it matters to American companies.

Printing

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.

I n s ig h t s ta nd a r d s

5 Movers & Shakers

MONTH IN PICTURES

Highlights from Recent Events

9 Deal of the Month

EXECUTIVE reading Room

Summer Reading List

INSIDE AmCham

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

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

Editor's note

Bryan Virasami editor-in-chief

s China an innovative country? As the world’s second largest economy, many are asking whether the country will transform from a manufacturing base to one creating new technology the world doesn’t yet know it needs. In 2014, it’s easy to forget that China invented some of the world’s most important products including paper, printing, gunpowder and the mariner’s compass – not to forget the folding umbrella, paper money and wheelbarrows. So it’s been a while since China made an original breakthrough contribution to the world but not everyone agrees with this position. Anil K. Gupta of the University of Maryland and Haiyan Wang of the China India Institute offer a succinct analysis into the innovation question. We also have a feature story on Michael Wong who invented the swipe keyboard used on millions of Android phones today. He’s from right here in Shanghai and he has a lot to say about Chinese innovation. We also invited Gary Shapiro, president and CEO of the Consumer Electronics Association, to add his voice to the debate. He argues that China must change its culture and legal system to encourage true innovation.

We dive headfirst into U.S.-China relations with Derek Scissors, resident scholar at the American Enterprise Institute in Washington. Scissors is outspoken and will challenge you to think about what you know about Chinese economic reform, competition, the Trans-Pacific Partnership and U.S. market access. Many expats probably wondered about whether the milk in your fridge is safe to drink. But how about your baby’s car seat or waterproof camera? An American wants to bring honest product testing to the China market and he shares his experience with us starting on page 14. If you’re a loyal Insight reader, we are interested in hearing your thoughts, and if you’re an occasional reader, we want to know how we can make you a dedicated fan. You might have heard about our online survey. If you missed it, we still want to hear from you. Please feel free to share with us your thoughts on how to improve the magazine or the type of stories you want to see more often. Write to Bryan.Virasami@ AmCham-Shanghai.org or visit us at www. AmCham-Shanghai.org/Insight.

M o ve r s a n d S h a k e r s c o m p i l e d b y J u n l i n g c u i a n d e r i k a wa n g

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

HYATT David Udell is Hyatt Hotels Corporation’s new group president for the Asia Pacific region and he will take up the new post on July 1. As group president, Udell will oversee all of Hyatt’s activities in the region, which includes 12 countries, more than 26,000 employees and 61 managed, franchised and owned properties. Udell will also be responsible for the operation of all of Hyatt’s hotels in the region and lead the Asia Pacific development team, responsible for raising the company’s presence in Asia Pacific markets. Udell joined the company in 1982 as a trainee and was previously general manager of the Grand Hyatt Hong Kong and the Park Hyatt Tokyo. He will be based in Hong Kong.

Private Sector WAL-MART Wal-Mart Stores Inc. named Greg Foran president and CEO of Walmart Asia effective June 1. He will be based at the Asia regional office in Hong Kong. Foran, a 30-year retail veteran, previously served as Greg Foran president and CEO of Walmart China, a position he held since 2012. Before his move to Walmart in 2011 as a senior vice president for Walmart International, Foran held a number of roles with Woolworths in Australia and New Zealand. Sean Clarke, a Wal-Mart veteran and previously chief operating officer in China, takes over the China CEO role. KKR CAPSTONE KKR Capstone appointed Matthew Chang managing director in China. Chang was previously global senior partner at Roland Berger Strategy Consultants in Shanghai, where he headed the firm’s Asian operations Matthew Chang and restructuring practices and led its Asia Pacific healthcare practice in Greater China. Chang has also held senior management positions at AlixPartners, Diageo and McKinsey & Company. ACCENTURE Accenture announced that Frank K. Tang, CEO and managing partner of FountainVest Partners, a private equity fund dedicated

David Udell

to investments in China, is now on the company’s board of directors. He joined May 9. Tang will also serve on the board’s finance committee. Before co-founding FountainVest Partners in 2007, Tang was senior managing director and head of China investments at Singapore investment company Temasek Holdings. INTERBRAND Interbrand announced Darren Yao as new general manager of Interbrand Shanghai. Yao served as Strategy Director of Greater China for the past year. In his new role, the company said Yao is charged with leading Darren Yao collaboration across Interbrand’s multidisciplinary approach, managing and growing client relationships and furthering Interbrand’s position in the Chinese market. Prior to joining Interbrand, Yao served as CEO of Revolution Consulting and held senior-level positions at Barcardi, Tetra Pak, TBWA and Leo Burnett.

government GOVERNMENT Lin Nianxiu was appointed vice head of the National Development and Reform Commission (NDRC). Lin was previously the vice chairman of Guangxi Zhuang Autonomous Region, a position he held Lin Nianxiu from 2008 to 2014. Prior to that, he was secretary to Vice Prime Minister Zeng Peiyan.

If your company has executive personnel changes, please contact Junling Cui at junling.cui@amcham-shanghai.org. june 2014

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and coaches to CEOs. Our goal is to make lasting contribution to the growth of clients and candidates alike. Headquartered in both Shanghai and Atlanta, we unite an emerging market culture with a solid global perspective. With some 70 offices in key cities around the world, Cornerstone is big enough to support our clients worldwide and entrepreneurial enough to be flexible. In China and with 7 offices since 1995, we have indepth knowledge of the China market. Awards received in China by Cornerstone include “China Recruitment Firm of the Year” and “Trustworthy HR Service Unit” Cornerstone International Group is: A global recruiter and developer of talent and located in 70 offices across 6 continents. 25 years of successful service to our clients and candidates worldwide. Winner of the prestigious "China Recruitment Firm of the Year" Award. AESC certified A global member of the Association of Executive Search Consultants (AESC), Cornerstone applies the Code of Ethics and Professional Practice Guidelines of the AESC which are recognized as representing the highest level of service in the Executive Search industry

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FTZ DIGEST

Shanghai FTZ banking regulation released

China’s banking regulators released new rules for the banking industry in the Shanghai free trade zone (FTZ) in mid May. The China Banking Regulatory Commission’s document includes a main guideline and outlines requirements for banks in the FTZ. The new rules simplify the entry process for related institutions and top management positions and put forth business risk assessment guidelines and a monitoring and reporting system. The document also asks banks in the free trade zone to conduct self-evaluation and submit a report to the regulators every year before the end of March. The release paves the way for the launching of Free Trade Accounts (FTA) – a key FTZ banking feature that will allow free flows of capital across the Chinese border. Currently, banks only offer domestic account services.

Deutsche Bank opens branch in Shanghai FTZ

Deutsche Bank in early May opened a sub-branch in Shanghai’s free trade zone (FTZ), its seventh in China. Germany’s largest bank said the sub-branch will offer services focused on crossborder transactions, including automated RMB cash sweeping for cross-border lending, two-way RMB cash pooling, structured commodity trade finance, structured trade and export finance. The China Banking Regulatory Commission (CBRC) approved the sub-branch on April 28. In China, Deutsche Bank operates in Beijing, Shanghai, Guangzhou, Tianjin, Chongqing and Qingdao. Other foreign banks, such as Citigroup, UBS, HSBC and Société Générale have already set up branches in the FTZ.

Metlife first foreign insurer in Shanghai FTZ

The China venture of U.S. life insurer Metlife Inc. has become the first foreign-backed insurance firm to receive approval to

set up in the FTZ. The approval was announced in early May by Sino-U.S. United Metlife Insurance Co., Ltd., a 50-50 venture of state-owned Shanghai Lianhe Investment Company and Metlife. Metlife joins two other insurance firms, China Pacific Property Insurance and Dazhong Insurance, in the F T Z . Me t l i fe s ai d w i l l have s i x mont hs to c ompl e te preparations for its FTZ sub-branch. Insurance firms in the FTZ will be allowed to enjoy looser restrictions on offshore investment and RMB-dominated cross-border reinsurance businesses compared with those on the mainland, according to the China Insurance Regulatory Commission.

Shanghai allows raw material exchanges in FTZ

Shanghai will allow exchanges for iron ore, metals and energy in its free trade zone (FTZ), with eight companies approved to set up exchanges in the zone, Bloomberg reported in late April. Among the companies are Baosteel Group Corporation and Shanghai Ganglian E-C ommerce Holdings C ompany. According to a Baosteel spokesperson, the Shanghai-based state-owned company is looking to set up an iron ore exchange. Shanghai Ganglian, which owns China’s largest steel researcher Mysteel.com, and Baosteel are awaiting detailed trading guidelines from the government, the report said. Shanghai already hosts China’s largest metal futures exchange and the only official spot market for gold.

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NORTH AMERICA

CHINA & THE WORLD

ASIA-PACIFIC SIA PACIFIC SOUTH AMERICA

NEPAL: China-made aircraft marks first purchase since 1984 Nepal received its first China-made air carrier in late April, marking the first time that Nepal Airlines Corporation (NAC) has procured new aircraft since 1984. The aircraft, a 58-seater Modern Ark 60 (MA60) manufactured by Xi’an Aircraft Industries Corporation, took off from Kunming and arrived at Kathmandu’s Tribhuvan International Airport. It was the first delivery of six China-made airplanes that the Nepalese government purchased last December. The deal comprises a 19-seater Harbin Y12E and an MA60 on grant, plus three more Harbin Y12E and one MA60 on concessional loan. The aircrafts will be used for domestic flights. More than 80 MA60s operate across Asia, Africa and South America.

MIDDLE EAST

EUROPE ASIA-PACIFIC SIA PACIFIC

AFRICA

KENYA: East African railway deal inked China and Kenya signed a co-financing deal on May 11 to build a railway linking Nairobi to Mombasa. The deal was inked during Chinese Premier Li Keqiang’s recent Africa tour, which included stops in Ethiopia, Nigeria and Angola. Li assured African countries that all equipment used will meet guaranteed quality and Chinese companies participating in the project will be asked to employ locals and provide them with training. Officials said China was offering a US$1.6 billion commercial loan and a US$1.63 billion concessional facility for the Nairobi-Mombasa project, covering 85 percent of that section’s estimated cost of US$3.8 billion.

NORTH AMERICA MIDDLE EAST

MIDDLE EAST EUROPE

ITALY: Shanghai Electric buys US$555m stake in engineering firm Shanghai Electric Group said it has agreed to pay 400 million euros (US$555 million) for 40 percent of power engineering company Ansaldo Energia. Under the agreement, the companies will set up two joint ventures in China to produce gas turbines for the Asia market – which represents 50 percent of the global share – and set up an R&D center in Shanghai. The Chinese conglomerate, which also makes and distributes industrial equipment, will buy the stake in the Genoa-based producer of power plants and gas turbines from state-backed private equity fund Fondo Strategico Italiano (FSI).

AFRICA

United Arab Emirates: China granted rights to develop Abu Dhabi oil fields China National Petroleum Company (CNPC) has established a joint venture with Abu Dhabi National Oil Company (ADNOC) to develop the Gulf emirate’s oil reserves, the state news agency WAM reported in late April. The Gulf emirate issued a law setting up Al Yasat Company for Petroleum Operations Limited Liability Company, in which ADNOC will hold a 60 percent share and the Chinese state oil company 40 percent. The concession award comes after the state-run companies signed an agreement in January 2012 to work on upstream projects in the UAE.

NORTH AMERICA

ASIA-PACIFIC SIA PACIFIC AFRICA NORTH AMERICA

UNITED STATES: Facebook said to open China sales office Facebook Inc. is taking steps to open a sales office in China within a year to serve a growing number of customers in the country despite its service being censored there, Bloomberg News reported in May, citing people familiar with the matter. The Menlo Park, Calif.-based company is in discussions to lease space in Beijing’s Fortune Financial Center, according to the report. Facebook’s office in Hong Kong sells ads to companies that want to reach international users. Asia sales totaled US$354 million, or 14 percent of Facebook’s revenue, in the first quarter.

BRAZIL: Xiaomi to enter in 2014 Chinese smartphone maker Xiaomi Inc. announced that it will start operations in Brazil in 2014. The Beijing-based company said it will be selling its Mi3 model in Brazil and Mexico in Latin America, as well as India, Russia, Indonesia, Thailand, Malaysia, Vietnam, Turkey and the Philippines. Xiaomi’s products are already on sale in mainland China, Hong Kong, Singapore and Taiwan. The head of Xiaomi’s expansion into new markets, Brazilian-born Hugo Barra, has been quoted as saying that Xiaomi will use the same competitive pricing strategy that it uses in China – where it has already surpassed Apple – when it launches its products abroad.

SOUTH AMERICA

ASIA-PACIFIC SIA PACIFIC

SOUTH AMERICA MIDDLE EAST AFRICA

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SOUTH AMERICA NORTH AMERICA EUROPE

ASIA-PACIFIC SIA AMERICA PACIFIC SOUTH

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

Alibaba, Shoprunner to launch China service

hina’s e-commerce behemoth Alibaba Group Holding Ltd. has inked a deal with U.S. retail website ShopRunner Inc. to sell and ship American brands directly to China. The companies will create a “joint brand” in China that will use Alibaba’s domestic logistics infrastructure and is slated for launch later this year, ShopRunner chief strategy officer Fiona Dias told Reuters in early May. The partnership will allow users of Alibaba’s Alipay service, a payment system similar to PayPal, to order goods through ShopRunner, whose partner stores include Neiman Marcus and Lord & Taylor, and have the goods delivered to them in China within 10 days. Once a Chinese consumer purchases a product on ShopRunner, the item will be shipped to a central U.S. location free of charge and then shipped overseas by Alibaba, with cross-border delivery fees charged to the consumer. Alibaba will then deliver the product to the consumer using its China logistics services. Conshohocken, Pa.-based Shoprunner offers its users free two-day shipping within the United States and Canada for an annual membership fee of US$79. The startup, which has more than a million users, has been compared with U.S. e-commerce giant Amazon.com Inc. for its expedited shipping service, which is similar to Amazon’s “Prime” service that is also priced at US$79 a year. Amazon already operates an e-commerce platform in China, though it is focused on Chinese products. Hangzhou-based Alibaba acquired a 39 percent

A screenshot of Shoprunner’s U.S. website

stake of ShopRunner for US$202 million in October 2013. Alibaba’s Taobao marketplace and business-toconsumer website Tmall host an increasing number of U.S. brands like Gap, though counterfeit products have raised concerns among consumers. “The history of U.S. retailers going to China is one that’s fraught with peril,” Dias said. “This is a very low cost way to do it that doesn’t require them to go to China to figure it out.” Representatives at Alibaba were reportedly unable to comment due to a Securities and Exchange Commission-mandated quiet period due to its IPO filing, which it officially submitted on May 6 with a target of US$1 billion, a figure largely seen as a placeholder. Media reports expect that Alibaba will raise from U$15 billion–US$20 billion, with analysts estimating that the company will not only surpass Facebook Inc.’s 2012 IPO of US$16 billion – the largest for an Internet public offering – but even Visa Inc.’s record U.S. IPO of US$19 billion. According to the Wall Street Journal, Alibaba values itself at about US$120 billion. Investor frenzy could reportedly drive its value as high as US$200–US$250 billion when it goes public in the United States. Alibaba commands about 80 percent of China’s e-commerce market, according to some estimates. The company’s revenues for the nine months ending December 31, 2013, were up 57 percent from the year before at US$6.5 billion. Net income over that same period was US$2.9 billion at a 305 percent hike over the previous year.

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l e g a l u p d at e B Y J AN E CH E UNG

Staying on Top of the U.S. Tax Compliance Act

Jane Cheung

The new lawâ&#x20AC;&#x2122;s intention is to fight offshore tax evasion, according to a PwC tax expert

h e n e w Fore i g n Ac c ou nt Ta x C ompliance Act (FATCA) law obliges U.S. persons to declare their non-U.S. financial assets to the Internal Revenue Service (IRS) as part of their annual income tax filing. Many taxpayers have been confused by the filing requirements, and this has translated into additional time spent on filing their tax returns. Foreign financial institutions and foreign governments are also being pulled into this effort to ensure U.S. persons do not hide income and assets offshore. The spirit of FATCA is to combat offshore tax evasion. In 2007 and 2008, news appeared of systematic and potentially criminal tax evasion by thousands of persons with foreign bank accounts. While there have been some prosecutions, with UBS being a significant example, the IRS recognized that offshore tax evasion continues to be an enormous issue. It was determined that additional reporting by individuals, financial institutions and foreign jurisdictions would be effective in increasing compliance, as well as raise additional revenue for the U.S. government. FATCA was introduced to Congress in late October 2009, and it was eventually signed into law in March 2010. The law is far reaching, and this article seeks to summarize the rules in relation to individual taxpayers and their obligations in ensuring that they are in compliance with this law.

The rules: financial institutions Foreign Financial Institutions (FFIs) should register with the IRS and agree to report to the

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IRS certain information about the accounts of U.S. persons. Failure to agree to do so results in a 30 percent withholding tax on certain U.S. source payments made to them. These payments include a n y p a y m e n t o f U. S . s o u r c e f i x e d a n d determinable annual and periodic (FDAP) income and any gross proceeds from the sale or other disposition of any property which may produce interest or dividends. U.S. Financial Institutions (USFIs) will be required to withhold 30 percent on certain U.S. source payments made to foreign entities, if they are unable to document such entities are compliant for purposes of FATCA. This affects primarily FFIs that have substantial businesses in the U.S. or with U.S. persons, and USFIs that have a significant presence outside of the U.S. The IRS has recently announced that the calendar years 2014 and 2015 will be regarded as transitional for purposes of the enforcement and administration with regard to the implementation of FATCA, even though the implementation date was set to be July 1, 2014. This is intended to give FFIs more time to implement the requirements of FATCA, and the IRS will take into account the extent to which FFIs have made good faith efforts to comply with the FATCA requirements.

Governments If a government enters into an Intergovernmental Agreement (IGA) to assist in the implementation of FATCA, the reporting and other compliance burdens on the FFIs in the jurisdiction may be simplified. Primarily, this means that a mechanism will be set up between the two jurisdictions to exchange information on

accounts that relate to their citizens or tax residents. As of May 1, 2014, the Department of Treasury had signed 30 IGAs, and had agreements in substance with another 29 jurisdictions. At this p oi nt , C h i na has ne it he r an IG A nor an agreement in substance with the U.S. Hong Kong signed a tax information exchange agreement (TIEA) with the U.S. in March 2014, to be made effective from July 1, 2014, and is in discussions with the U.S. to enter into an IGA.

Individuals From tax year 2011 onwards, U.S. persons must report information regarding their foreign financial accounts and specific assets as part of their tax returns (on Form 8938) to the IRS. The thresholds for filing Form 8938 can be found at

the end of this article. Because of the relatively high thresholds that apply when a U.S. taxpayer is living outside the U.S., many may not have this Form 8938 filing requirement. However, most would be required to file the Report of Foreign Bank and Financial Accounts (FBAR), which has a much lower threshold of only US$10,000 per calendar year The FBAR filing (which must be filed online effective September 30, 2013) goes to the Department of Treasuryâ&#x20AC;&#x2122;s Financial Crimes Enforcement Network (FinCEN) on Form 114. Therefore, so long as the taxpayer meets the requirements to file based on the individual formsâ&#x20AC;&#x2122; filing requirements, the taxpayer would be required to file the respective forms separately. In many cases, taxpayers will need to file both the FBAR and Form 8938, even though the forms may be providing very similar information.

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The FATCA law wants to know about non-U.S. financial assets of Americans

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“

…The U.S. government is determined to ensure that its taxpayers do not conceal their income and assets offshore to gain a tax advantage…”

There is no additional tax liability resulting from the forms themselves, as they are only an information reporting obligation for those who meet the filing thresholds. However, the income generated from the foreign accounts and assets should be reported on the appropriate forms in the tax return. Failure to file the requisite forms (where required) will very likely attract significant penalties. For 2013, FinCEN Form 114 must be filed by June 30, 2014, and no extension is provided. The instructions for Form 8938 list a myriad of accounts that the taxpayer will need to declare. However, the IRS primarily wants to know the financial assets outside of the U.S., and is not interested (for now) in the amount of foreign real estate, foreign currency, precious metals, foreign personal property or other physical types of foreign property that the individual holds.

Impact for individuals Because of FATCA, some taxpayers have taken actions to minimize their exposure to criminal and civil penalties, including: Responding to the IRS’ calls to come clean

with their taxes and be compliant with their filing obligations. They are using the Offshore Voluntary Disclosure Program (OVDP) in increasing numbers, even though in the days before full FATCA implementation this program was already available. If taxpayers have not correctly reported their foreign income or accounts in the past, the OVDP offers the opportunity for a reduced penalty rate. There is the assurance that if an individual is accepted into the OVDP, then no criminal penalties will apply. Some may also file their tax returns for the past years “quietly” without going through the OVDP process. If the returns are examined by the IRS, there is some risk of a higher penalty being assessed than if entering the OVDP. This option does not relieve the taxpayer from criminal prosecution but assures that the taxpayer is in “t he system.” A “quiet” dis closure is not considered by the IRS to be a “voluntar y disclosure.” Some have decided to simply file their tax returns prospectively. This offers no relief from criminal prosecution for past years’ noncompliance with the ultimate exposure of being identified by the IRS. This option assures that the

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For Outbound Chinese Nationals More and more Chinese nationals are looking to expand their business in the U.S., or to simply lead a different life in the U.S. Many of them, for the ease of travelling into and out of the U.S., want to obtain a U.S. green card. They may not realize that U.S. permanent residence opens the door to the U.S. tax system, and as such, they are subject to U.S. tax on worldwide income and filing requirements similar to that of U.S. citizens. For those who have a large direct ownership of Chinese companies, or have substantial financial assets outside of the U.S., upon becoming a U.S. green card holder, they are required to report to the IRS regarding the affairs of their Chinese companies. In addition, they are required to disclose other foreign financial assets that they own, which in itself will be a potentially onerous process with which to deal. To understand the impact of the tax liability and reporting requirements, they should consult their tax advisor before becoming a U.S. green card holder.

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Filing Thresholds for Form 8938 File Form 8938 if

Individual lives in the U.S.

Individual lives outside the U.S.

Total value of Specified Foreign Financial Assets (SFFAs) during tax year at any time exceeds

OR, total value of SFFAs on last day of tax year exceeds

Total value of SFFAs during tax year at any time exceeds

OR, total value of SFFAs on last day of tax year exceeds

Single/Married Filing Separately

US$75,000

US$50,000

US$300,000

US$200,000

Married Filing Jointly

US$150,000

US$100,000

US$600,000

US$400,000

taxpayer is in the system going forward, but carries no guarantee that the IRS would not inquire and pursue prior year returns and FBARs and assert applicable penalties. An increasing number of taxpayers are giving up their U.S. citizenship or U.S. permanent resident status. In the first quarter of 2014, 1,001 U.S. taxpayers gave up their passport or green card, an increase of 47.4 percent over the 679 individuals that did so in the first quarter of 2013, according to the U.S. Treasury Department. The number is expected to grow to a new record this year. While this may stop future obligations, it does not rectify prior yearsâ&#x20AC;&#x2122; non-compliance issues and the related exposure. It may also result in certain acceleration of income recognition in the year of expatriation. I n s u m m a r y, t h e U. S . g o v e r n m e n t i s determined to ensure that its taxpayers do not conceal their income and assets offshore to gain a tax advantage, and FATCA is the tool used to

ensure compliance. It remains to be seen how effective this can ensure adherence, and how rigorously the IRS will enforce the rules. More changes are likely in the future, but for now, it has created a paradigm that is more uncomfortable for U.S. taxpayers who have significant foreign financial assets.

Jane Cheung is a tax partner of the International Assignment Services group at PwC in Shanghai and focuses on individual income tax planning strategies on U.S. and China taxes. She has significant experience with tax issues related to high net worth individuals and advises multinational companies on cross-border transfers of their global workforce, tax effective compensation and benefit structures and equity compensation. Cheung is a U.S. CPA and has previously worked in New York and Hong Kong.

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c o n s u me r s afe t y BY JAMES FELDKAMP

In Search of Danger

James Feldkamp

n the summer of 2009, my Chinese wife was pregnant with our first child. As with many new couples in China, that meant purchasing and renovating an apartment, buying our first car and stocking up on baby products â&#x20AC;&#x201C; purchase decisions that could put the health and safety of our unborn child at risk. Despite months of extensive research, and talking to friends and family, we were unable to

A consumer advocate talks about his product safety organization and the search for safe, quality products in China

A baby seat being tested

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f i n d any i n d e p e n d e nt e x p e r t s ou rc e s of information that could be relied upon to identify safe, quality products. We started to conduct research, interviewing consumers in five major cities, and confirmed that consumers across China were struggling with the same issues and frustrations. In the United States, I grew up with Consumer Reports, an organization that has been helping American consumers separate fact from hype, good products from bad since 1936. My wife and I felt that consumers in China would benefit from a similar ser vice and together established MingJian. Registered on World Consumer Rights Day, March 15, 2010, MingJian is a social enterprise dedicated to helping consumers make informed purchase decisions and get the best value for money by providing independent, expert research and testing of products. In the same spirit as C onsumer Rep or ts, we ac t exclusively in the consumer interest, independent of manufacturers, and do not accept advertisements. We s t a r t e d t e s t i n g b a b y products first, due to the high potential health and safety risks and heightened consumer concern following Chinaâ&#x20AC;&#x2122;s melamine in infant formula scandal in 2008. For the first 18 months we operated in stealth mode, researching and testing products with www.mingjian.cn launched in the fall of 2011 with more than 30 product categories covering all matter of baby products from cribs

and strollers to diapers, bottles, and first-aid kits. We established a testing center near Hongqiao airport and conducted many of Chinaâ&#x20AC;&#x2122;s first i n d e p e n d e nt t e s t s o f b a by p r o d u c t s f o r consumers, including testing car seats after China adopted a new car seat standard in 2012. Being the first private independent testing organization for consumers in China has not been easy. Two days after we published our first test results, we received a phone call from a manufacturer who was not pleased with our review of their product and demanded that we change or delete it from our website. We invited them to submit their materials and identify any material misstatements of fact. While we received a host of marketing materials, nothing refuted any of the findings in our review. When we left the review unchanged, citing no material misstatements of fact, the phone calls and emails from the company kept coming

and the tone became aggressive and threatening towards our editorial staff. At that point we contacted the general manager of the company and invited him to our office along with the members of his staff. At the meeting we made it clear that we were not a marketing or product p l a c e m e n t c o m p a ny a n d w o r k e d i n t h e consumerâ&#x20AC;&#x2122;s interest. While they would prefer a more flattering evaluation, they agreed that there were no factual misrepresentations in our review and, understanding our service offering, agreed to respect the review as is. That was the first of many such meetings. Over the past four years we have met with manufacturers, government of f icials and university think tanks communicating the value of comparative testing to protecting consumers, improving product quality and safety and reducing environmental impact. Professional testing is expensive and cost

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prohibitive for a small organization to cover a wide range of product categories alone. Early last year, MingJian became the China member of International C onsumer Res earch and Testing (ICRT). ICRT is the only independent inter nat iona l organizat ion for consumer research and testing with members from 36 countries, including Consumer Reports. Since joining ICRT, we closed our Shanghai testing center and all products are now tested overseas in top laboratories in Europe and the United States. The primary advantage of moving the testing offshore to top labs in the United States a n d Eu r o p e i s t h e e x t e n s i v e e x p e r i e n c e

A tablet undergoing tests

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conducting comparative testing that comes from years of collaboration with leading global consumer organizations. Our testing process consists of three steps. First is market research, where we identify the brands and models most popular with consumers or possessing unique features and assign “mystery shoppers” (regular consumers) to purchase the products from authorized retailers. In the second step, we ship the product samples to international laboratories, where ever y product within a categor y is subjected to an identical battery of rigorous scientific and consumer usage tests. The final step assimilates the test results into a product evaluation, where each test criteria is assigned a weighting. The result is a test repor t for consumers consisting of a verbal evaluation, testing scorecard and specifications. As the test criteria is identical for all models, a smartphone, for example, tested in January can b e direc t ly compared relative to another smartphone tested in June. We not only identify the best products and best value, but we also inform consumers about dangerous or poor performing products to avoid. Just how relevant is expert comparative testing in today’s Internet era where free information and online user reviews abound? Where health and safety are a concern, clearly only laborator y testing can tell if food is contaminated or a child’s car seat is safe. We have tested children’s car seats that come free from their mount and fly through the vehicle in crash tests and other car seats containing carcinogenic levels of chemicals on the harness pads, right next to the child’s mouth. For other product categories, like personal electronics, where dedicated product review sites and user reviews are plentiful and safety is less of a concern, consumers may be tempted to think that other available information sources are sufficient to make an informed purchase decision. We recently put the hypothesis to the test for six models of compact underwater cameras. We conducted a search of free Chinese

reviews – including both dedicated product review websites and user posted reviews – and compared them with our lab test results. The review websites and user reviews for all models were overwhelmingly positive; raving about their compact size, convenience for diving trips a n d b e a c h v a c at i o n s . O n l y t w o r e v i e w s mentioned that one of the models had only acceptable photo quality. Our lab tests showed that the low-light photo quality of two models was poor and mediocre for two others. Further, the video microphone sound quality was muffled and poor for one model and mediocre for two others. Most significantly, one model failed to perform its basic duty as an underwater camera, as its screen cracked in our water pressure test. To date, we have tested over 2,500 products

in a wide range of categories. Recently, we added new product categories, including bicycle helmets, infant carriers, electric shavers and electric toothbrushes. Personal electronics are tested monthly with the latest smartphones, tablets, cameras and camcorders sent to the lab within a week of release. We are currently finalizing a large test of anti-wrinkle creams, with some startling results to be released next month.

James Feldkamp is the co-founder and CEO of MingJian, often referred to as the “Consumer Reports of China.” MingJian (www.mingjian.cn) is a private social enterprise funded by the founders and a group of independent investors. Contact the writer at jfeldkamp@mingjian.cn.

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We not only identify the best products and best value, but we also inform consumers about dangerous or poor performing products to avoid.”

interview B Y B R YA N V IR A S A M I

photo: erika wang

‘Chinese Economy is Quite Weak’

Derek Scissors talks to Insight at the JW Marriott Hotel in Shanghai

A top U.S. economist and China watcher throws cold water on the idea that the country is poised to become the world’s largest economy and isn’t convinced about the reform agenda either

hen it comes to the Chinese economy, Derek Scissors doesn’t mince his words or hold back on what he really thinks. He uses words like “nonsense” in response to those who say China is poised to become the world’s largest economy. He also takes issue with the idea that China’s current reform plans will

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transform the country because he’s not sure they will work. His strong opinions are based on more than a decade studying China. Presently, Scissors is resident scholar at the American Enterprise Institute (AEI)in Washington where he specializes in Asian economic issues. He also teaches a course on C hines e e conomy at G e orge Washington University. Before AEI, he was a senior research

fellow at The Heritage Foundation and worked as an e c onom ist sp e c i a li zi ng i n C hi ne s e economy at Intelligence Research Ltd., Courcy’s Intelligence Service in London, for 10 years starting in 1998. Scissors addressed a group of AmCham Shanghai members in early May and sat down with Insight to share his candid opinions on the Chinese economy, U.S.-China bilateral ties, President Xi Jinping’s reform agenda and much more. The following interview was edited for space and clarity.

becoming so important economically because transactions – what you do this year, how many transactions you have, is not a sign of how rich a country is. And I don’t mean per person – obviously China has a big population – I just mean wealth in general. The U.S. has been building wealth, has been a rich country for a long time. China has just become a middle income country, you can’t build wealth that fast. China is pretty big but the gap between the U.S. and China is very large.” Insight: Where are things headed for China’s economy? DS: “Clearly the current government is better t h a n t h e pre v i ou s g ov e r n m e nt f rom my perspective and from an economic perspective. The current government is at least talking about big reforms so that’s better than before. Will they be successful? I think not. What I see on the surface, I don’t see something that makes sense.

Insight: China is the second largest economy and some say it will soon become the largest. You have a different take on this. Why? DEREK SCISSORS: “Well I don’t like gross domestic product as a measurement of economic size. GDP measures transactions in a year, not wealth, so if I’m very, very rich, but I just put all my money in a bank account and I’m ver y t hr if t y and I don’t want to buy anything, it seems like I’m not doing very much but I’m rich. China is the opposite. China spends money on things that don’t have very much value. They build buildings and they tear them down and then they build another building. That boosts the GDP but it’s not really a sign of wealth. So I don’t like the measuring of GDP. “The fuss that happened [in April] was the World Bank making a purchasing power adjust ment of GDP t hat I think is metho dologically ridiculous. So if you use wealth, China is probably still the second largest – a little bit ahead of Japan – only a little. But the U.S. is far, far ahead. And I think the Chinese government knows this. They U.S. Vice President Joe Biden with Chinese President Xi Jinping reject the idea that they’re

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China has just become a middle income country, you can’t build wealth that fast.”

Scissors says shiny new buildings are not always a sign of a nation’s economic strength

“You can’t say definitively China’s reform i s n’ t g o i n g t o w o r k . I t h i n k t h e r e’s a considerable risk it isn’t going to work. To me, the state of the Chinese economy is quite weak. There’s a lot of debt, the sources of growth are not very encouraging. Land, labor, capital, innovation – not very encouraging. So, I see the Chinese economy as structurally weakening. And so reform is absolutely a requirement.” Insight: Do you understand what President Xi Jinping means by the “Chinese Dream” and w h a t d o e s i t m e a n f o r U. S . c o m p a n i e s operating in China? DS: “I think it’s probably negative for U.S. companies and here’s why. I don’t care about you cleaning up your environment, I don’t care about your income inequality problems. I don’t care about all those populist issues. You caused this trouble, not us. So the ‘Chinese Dream’ to me is a populist statement. “In c om e i n e q u a l it y i s a l w ay s b a d f or companies if that becomes a big issue because it means that you want to take away resources from people who have been successful maybe because they’ve been successful by cheating –

that may be true – and give them to people who have been unsuccessful. So how do you do that? The only companies that benefit from that are unsuccessful companies, which is not really a great outcome. I think the ‘Chinese Dream’ is a populist expression. Populism is not good for foreign companies.” Insight: You’ve been a China observer for more than a decade. What in your view is the most significant economic reform in China in the last 10 years? DS: “Unfortunately the past 10, 11 years has not been a reform period in my opinion. So the big change in the past 10 or 11 years has been the accumulation of debt. China didn’t use to have a debt problem. China didn’t use to have an imbalance problem with too much investment and not enough consumption. Consumption and investment were pretty balanced in 2002–2003. So in the past 10 or 11 years, the biggest problem has been statism, not reform. “If you stretch back 10 years prior to that, it’s clearly China’s globalization and it’s intensified by the Asian financial crisis in ’97. And China

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…the ‘Chinese Dream’ to me is a populist statement.”

turns to the United States, which at the time had a very strong economy and begins to export on a large scale to the U.S. and says ‘we need to join the WTO to protect our export access to the United States.’ So we had Sino-American WTO negotiations and we then saw China joined the WTO and we had this explosion in Chinese trade and now the follow on effect is occurring which is increasing China’s investment. “Obviously people say that the domestic Chinese economy is more important than its external economic relations. That’s true. But if y o u l o o k at i t ov e r a l o n g t i m e p e r i o d , globalization has been a huge factor in the Chinese economy. If you look at a shorter time period, unfortunately, the lack of reform has been noticeable.” Insight: What’s the most important economic challenge facing the U.S.-China bilateral relationship? DS: “It’s probably intellectual property rights. T h e U. S . c o m p e t i t i v e a d v a n t a g e i s i n innovation. Across all fields, what American firms do best is innovate and when innovations are stolen it takes away the advantage of trade for the American side. So China of course has problems respecting intellectual property. We now have this cyber economic dimension and the U.S. is not blameless on cyber, I don’t mean to imply that for a second. On the economic side, it’s mostly China. There’s another attack on intellec tual prop er ty, s o b ecaus e U.S. intellectual property is not respected, it takes away a lot of the gain from the relationship for the United States’ side and that means the U.S. commitment is weaker than it should be.” Insight: President Obama recently visited several Asian nations. Was it a successful tour and what were the wins and failures? DS: “It’s possible that we can get a U.S.-Japan agreement in the next couple of months but originally President Obama was supposed to go to Japan with the agreement already done. So we’re way behind schedule. We can rescue this but the trip itself didn’t seem to do anything

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much positive. There was a lot of criticism in the U.S. and Malaysia because this has taken so long and it’s exposed these countries to so much domestic criticism because the U.S. and Japan can’t finish it up.” In si g ht : W hat ’s the p o lit i cal climate in Washington these days as far as China goes? DS: “Well the good news is China is not being discussed ver y much because in terms of international economics it’s not really about China – it’s about trade promotion authority, it’s ab out Jap an, it’s ab out t he Trans-Pacif ic Partnership, it’s about the partnership with the Europeans. The bad news is the discussion is very protectionist. It’s not pro-trade and that could spill over into U.S.-China relations. So it’s not that there are a lot of people screeching about currency or China is doing this or violating their WTO commitments or all those things.” Insight: You seem to understand China better than many, including some in lawmakers in Washing ton. You take a skeptical view of China but some people may see this as the typical Western view. What do say to them? DS: “If you really believe that China or any country – the British were like with a protestant work ethic – and we had this before the Asian financial crisis – there was a Confucian work ethic. I mean everybody who was successful suddenly has a work ethic. If you really believe that supply and demand is amenable to cultural factors, that debt means one thing in one society and means another thing in another society, that aging doesn’t affect populations and economies the same way, that you can deplete your environment…this is all absurd from my perspective. “The Western bias is a universalist bias. There are tools in economics that apply everywhere. And the thing is that those tools said that the ’78 land reform was a great idea and the results were fantastic. Those tools said the ’92 southern tour was wonderful and the results were great. Those tools said that Hu Jintao and Wen Jiabao’s statist reversions were bad and that it harmed China and

President Barack Obama talks with Prime Minister Shinzo Abe of Japan at the U.S. Ambassador’s residence in The Hague, the Netherlands in March

it did. So we’re not talking about a bad track record. The track record for using thos e universalist economic tools is accurate. What we’re discussing, to me, is ‘does a foreigner really understand the political process that’s going on now, which will determine whether Chinese economic reform is successful?’ And my answer to that is ‘I would say no.’” Insight: U.S. companies often complain about lack of adequate market access and an uneven playing field. What can Washington do about these challenges? DS: “Chinese reform is going to be driven by China. I don’t think Washington can play a direct role. If I were advising them [U.S. businesses] I would say push TPP because TPP is the way to get China to think that it needs to reform and respond to global changes. It has to be a good agreement, it has to be a dynamic agreement, it’s not going to be easy but that’s the way for the U.S. to influence China. If TTP can be successful, which is a big question, I

think that’s the best way for the U.S. to improve market access in China.” Insight: It seems that there’s a grow th in Chinese investments to the U.S. in recent years. Should there be more and what should the U.S. government be doing to support this? D S : “I t h i n k t he re shou l d b e more on a commerci a l b as is . I don’t t h in k t he U.S. government should get in the way. In fact, I think the U.S. government should be more t r ans p are nt . Wh e n I h e ar f rom C h i n e s e investors, the big thing is they don’t really understand the process. ‘How come sometimes the government gets involved and interferes with the deal and sometimes it doesn’t and you can’t tell why?’ This deal, not this deal. The U.S. government should be providing information to C h i ne s e f i r ms . ‘Are you i nte re ste d i n investing in the U.S.? Here’s information, lots of information. When you have to go to the C ommittee on Foreign Investment in the United States and when you don’t.’”

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China has made inroads in space exploration but its technological innovation is limited

The Innovation Struggle Cultural and educational constraints hinder technological innovation in China BY ANIL K. GUPTA AND HAIYAN WANG

here appears to be a growing drumbeat – almost always by non-Chinese observers – about China’s imminent rise as an innovation superpower. Just in the last five years, leading American media have carried headlines such as “China poised to become innovation leader,” or “Danger: America is losing its edge in innovation,” and “When innovation, too, is made in China.” As China moves closer to rival the U.S. as the world’s largest economy, such drumbeats are almost certain to become even louder.

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China indeed has become an economic superpower. From being the world’s sixth largest economy in 2000, it has now become the world’s second largest. It has also become the world’s largest manufacturer as well as the world’s largest exporter of merchandise. It also boasts several giants in technologyintensive industries such as Huawei, Alibaba, Tencent and Lenovo. Notwithstanding these accomplishments, claims that China is about to also become an innovation superpower are illfounded and suffer from several analytical mistakes.

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First, many observers attribute a halo effect to China as if economic size is automatically correlated with leadership along other dimensions including technological. We find Chinese insiders to be much more discriminating (see box). Senior executives of some of China’s biggest banks and the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) corporations do believe that China will be the dominant economic power in 2025. However, by an even bigger margin, they see the U.S. remaining far ahead of China as a technology power for quite some time. There indeed are some areas – notable examples would be space exploration and telecom networks – where Chinese government labs and private sector companies such as Huawei are among the world’s leaders in technological innovation. However, if we look across the entire gamut of industries, China still has a long way to go before it catches up at the technology frontier. Virtually all of the paradigm-shifting technologies of the last five to seven years (such as smartphones, tablets, wearable computing, autonomous cars, hydraulic fracturing, 3D printing, and stem cell engineering) came from Western rather than Chinese companies and universities.

Unlimited patents

Anil K. Gupta

Haiyan Wang

Anil K. Gupta is the Michel Dingman Chair in Strategy and Globalization at the University of Maryland’s Smith School of Business. He is a member of the World Economic Forum’s Global Agenda Council on Emerging Multinationals. Haiyan Wang is managing partner of the China India Institute, a Washington, D.C.-based research organization. Gupta and Wang are the co-authors of The Silk Road Rediscovered (Wiley, 2014), Getting China and India Right (Wiley, 2009) and The Quest for Global Dominance (Wiley, 2008).

Second, many China observers confuse input with output. As the world’s second largest spender on R&D and as the producer of the world’s largest number of science and engineering graduates, China has indeed become a global leader on input measures. According to R&D Magazine, China’s 2013 share of global R&D spending was 16.5 percent, behind only the U.S.

share of 31.4 percent. However, in output terms, China’s 2012 share of patents granted by the U.S. Patent and Trademark Office (USPTO) and the European Patent Office was much lower – 2.5 percent and 1.2 percent, respectively. Third, they focus on quantity alone with scant focus on quality. If one includes patent applications filed with the State Intellectual Property Office (SIPO) in Beijing, China has already inched ahead of the U.S. H o w e v e r, a s n o t e d b y a Shanghai-based patent attorney qu ot e d by T h e E c on omi st : “Patents are easy to file but gems are hard to find in a mountain of junk.” Every year, China permits the filing of hundreds of thousands of utility model patents that may be sought for any novelty pertaining to the shape and/or structure of a physical product that would have practical use. Applications China’s State Intellectual Property Office hands out patents more than the U.S. for utility model patents u n d e rgo on l y pre l i m i n ar y

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imaginechina

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In terms of a country’s comparative advantage, what truly matters is technological innovation.”

matters is technological innovation. Technologies are global, whereas market-focused innovation is often local. Take, for example, luxury cars. In China, the owner typically sits in the back and the car is driven by a chauffeur. Responding to this local consumer behavior, most luxury car makers have created elongated versions of their vehicles and made the rear seating area – rather than the front – more spacious and luxurious. This type of local product adaptation by foreign or domestic companies is critical to succeeding in China or, for

Domestically driven and tran innovation

The laundry machine, tweaked for the China market, is considered an innovation by some but not by others

examination to ensure that they comply with formalities and that there is no obvious reason for rejection. There is no equivalent of such utility model patents in many Western countries including the U.S. and Canada. The fourth mistake is to assume that market-focused adaptation (such as tweaking the features on a smartphone, an e-commerce site, a messaging application or a washing machine for the local market) is a relevant indicator of global innovation strengt h. Market-fo c us ed innovation is a worldwide phenomenon as prevalent in India, Indonesia or Kenya as in China. Some washing machine companies in India offer voice recognition in local languages so that an illiterate maid can operate the machine in the absence of the homeowners who may be away at work. Kenya has been a pioneer in extra low cost mobile money transfer services. In terms of a country’s comparative advantage, what truly

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courtesy PwC

Question: Which do you see as the main opportunity to grow your business in the next 12 months?

• Gl the exi are mo

• Mo pro ser

PwC

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that matter, any market. However, it doesn’t create global advantage which comes from core technologies behind features such as fuel efficiency, reliability, safety and so forth. Local adaptation is easy to imitate. Durable hard-to-imitate comp etitive advantage on a global scale comes f rom technological strength.

Constraints Our analysis suggests that, notwithstanding massive ambition and willingness to spend money, China’s real innovation challenge lies in the very low productivity of its R&D regime. Of course, part of the explanation rests with the current stage of China’s economic development. It is only over the last 10 to 15 years that the country’s leaders have begun to focus on the need to get serious about technological innovation. Productivity of R&D depends not just on what you spend today but also on the depth of embedded technical knowledge that you build on. It will take some time for Chinese universities, government labs and corporate R&D centers to accumulate the depth of technical knowledge comparable to that of their U.S. or European counterparts. Also, some of the underlying constraints are cultural and cannot be cut through easily or quickly. Cultural

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Cultural norms such as a preference for rote learning and obedience to authority discourage breakthrough innovation…”

norms such as a preference for rote learning and obedience to authority discourage breakthrough innovation and will take time to evolve such that creativity, problem-solving and original thinking are also given their due weight. Compounding the challenge, we also believe that some of the government’s policies and practices intended to boost technological innovation are actually counter-productive. We focus on three in particular. First, policy makers need to rethink the wisdom of an obsession with quantity over quality. In a key plank aimed at

Huawei has a large R&D department. Here, a Huawei phone at a launch event.

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SIPO over the five years from 2010 to 2015. Since the people responsible for meeting these targets want to appear successful, the inevitable result has been to loosen the standards for patenting even further and to provide financial incentives to file as many patents as one can irrespective of quality. Second, national funds for R&D are allocated far too heavily on the basis of political connections rather than scientific merit or capabilities. As noted by two deans at Peking and Tsinghua universities in an editorial Innovation labs in China are likely to produce localization R&D and not next for Science magazine, such an approach generation technologies like Silicon Valley seen here not only wastes resources but also weakens the cultural norms that should guide research. Brand-new buildings are not necessarily a good driving China towards becoming an innovation superpower, the indicator of the quality of the research that gets performed on 12th Five-Year Plan targeted a doubling of patents granted by the gleaming equipment inside.

Research and Development Key for China CEOs PwC survey shows innovation a priority There’s no argument about whether China is going full speed when it comes to change and that the countr y’s economic power is growing. When it comes to technological innovation, however, it often depends on the details. One thing is for certain and that is many China CEOs realize the importance of research and development. In the survey conducted by PwC, CEOs around the world including those in China were asked about their opinions about a number of issues. When asked about what areas they plan to grow their business in the next 12 months, 52 percent of China CEOs ticked off the “product/service innovation” box.

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In addition, 38 percent said they’re making changes to business structure and operations to improve “R&D and innovation capacity.” While data shows China is also poised to become No.1 in terms of spending in R&D, many skeptics say spending money will not necessarily produce a marvelous new technology. The 17th Annual Global CEO Survey concludes that China’s CEOs are “confident about the future growth.” Nora Wu, PwC Global Board Member, PwC China Shanghai Senior Partner, said the country is experiencing social transformation that’s creating opportunities and

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Third, policy makers seem to believe that engineering the transfer of technology from foreign corporations to Chinese ones by programs such as indigenous innovation are smart ways to accelerate the rise of China as a technological power. In reality, the effect is exactly the opposite. Contrast China with India. As a country, India spends barely one-sixth that of China’s on R&D. Yet, during 2008–2012, the India-based labs of America’s top 10 technology giants received a significantly larger number of patents from the USPTO than was the case for the China-based labs of these companies. Why the difference? Like China, India also offers a vast pool of highly capable talent and some extremely strong science and engineering focused universities. However, India has nothing even remotely similar to China’s indigenous innovation program which aims to accelerate the rise of domestic technolog y leaders within China by p olicies such as preferential buying by state-owned enterprises and forced transfer of technology from foreign to domestic companies. Also, the government has been content to allow companies to set up R&D facilities without any rules about sharing technology with local partners or the like.

The result has been that the world’s technology giants feel more secure in conducting leading-edge research in their Indian labs than in Chinese ones. In the Chinese labs, the focus remains more heavily skewed towards localization R&D. A number of academic studies have repeatedly concluded that, as in Silicon Valley, innovation clusters exhibit a large spillover effect – i.e., spillover of technologies and ideas across co-located companies, be they foreign or domestic. Thus, the smartest policy to foster technological innovation within the country is to attract the world’s top technology companies to set up research labs and to offer an environment where the companies feel assured that their intellectual property rights would be protected. Indigenous innovation programs such as those in China are more likely to induce localization R&D rather than the development of next generation technologies. We have no doubt that – given China’s talent, scale and ambition – it will eventually emerge as one of the world’s small number of technological superpowers. However, it would be absurd to claim that this reality is imminent. Importantly, some of the government’s policies and practices intended to help China’s rise are actually bottlenecks rather than accelerators.

Innovate and adapt

challenges. “The stable growth of China’s economy, an expanding middle class and China’s increasingly important role in the global arena have created solid fundamentals for companies’ development in the country,” Wu said. “Innovation is now becoming the new driver of growth for both individual companies and the country as a whole, and will contribute t o C h i n a’s e n d u r i n g a n d s u s t a i n a b l e development.”

courtesy PwC

Question: To what extent are you currently making changes, if any, in the following areas?

This adjus dome reflec prog initia focus effici proce in R&

PwC

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Michael Wong, CEO of CooTek, shows off his trophy after winning the Global Champion of GSMA Mobile Innovation Award in Barcelona in 2009

SWIPE AND TYPE Chinese start-up CooTek reinvented touchscreen typing BY JILL PETZINGER

tories about Chinese companies stealing patented intellectual property from Western firms are nothing new. But the script was reversed last year, when Shanghai-based tech start-up CooTek was sued for patent infringement by its biggest competitor, Nuance. The feisty little start-up was so confident in the originality of its technology that it stood up to the U.S. giant, and Nuance had to withdraw its lawsuits in the U.S. district court, after a noninfringement judgment from the International Trade Commission (ITC) meant both companies reached a settlement. In a broader sense, the ITC’s non-infringement judgment was a victory for bona-fide Chinese innovators. CooTek CEO and co-

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founder Michael Wong is philosophical about the three Nuance court cases that were brought against his company. “When I heard the news, I thought that whether or not we survived, it would be a great life experience,” says Wong. “So to some extent I should thank Nuance for giving us the chance to prove ourselves.” “In China the biggest challenge is being copied by the big guys,” he says, laughing. “In the U.S., it’s being sued by the big guys – you will have to face it one way or the other.” CooTek launched in 2008, founded by Wong and three friends in Shanghai. The seed was sown in 2007, when they got a preview of the first Apple iPhone and realized they hated the experience of

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typing on the touchscreen QWERTY keyboard. They set about reinventing a way of typing unchanged since the first typewriter. Their product, an app called TouchPal, allowed people to swipe rather than type, introduced smart predictive text and generally made keyboard use faster and more intuitive. TouchPal first launched in the U.S., then Europe, and a year later, in China. The app now has over 110 million users and has won a slew of awards, including China Telecom’s Mobile Internet Application of 2012 and a Finalist in the Tech Crunch Disrupt awards. Their latest version, the TouchPal X, was rated “best keyboard on Android” by thousands of smartphone users on Google Play last year. Wong was born in the early ’80s and studied electronic engineering at Shanghai Jiao Tong University. After college, he took a job at Microsoft R&D in Shanghai for three years to acquire the management skills he would need to run his own company. “I had offers from Boston Consulting Group and Goldman Sachs, but I decided to give those up as being an entrepreneur might be more interesting than being an investment banker,” he

“

He sees a clear link between innovation and individual values, pointing out that everyone is working purely for money in the new China…”

until it came to the touchscreen, then, boom, everything changed and there was a huge need,” he says. The decision to launch in the U.S. was not driven by the risk of IP theft in the domestic market, but by market fit in terms of the product itself. The challenge of typing on the large Roman keyboard is much bigger than for Chinese language, which meant that debuting in the West made sense. CooTek also needed to monetize the app in the early days (it is now free), which influenced their choice to launch abroad. Rui Ma, venture partner for 500Startups China, says that while less than 10 percent of Chinese tech start-ups launch first in overseas markets, more and more companies are beginning to look to the West when it comes to monetization. Chinese consumers don’t like paying for software and functions, but are more than happy to shell out for extra privileges or services. “If they are trying to monetize directly off consumers, there’s definitely more willingness to pay in the West, as well as less friction in the payment channels, and there’s a long standing habit of paying for things online,” says Ma. “In China the whole society is a pyramid, most of the people are low-income,” says Wong. “The better-educated people in big cities are more willing to pay on iPhone for their apps but they are still on the top of the pyramid. But in the States, it’s like an olive: the middle class is the majority, and they are willing to pay much more that those on the bottom so that’s why it makes a lot of difference in terms of business models.” CooTek has since evolved its business model, and the 100-strong company now makes its money from licensing to phone manufacturers rather than selling individual apps. The

says. “When I joined Microsoft I told my manager that I wasn’t going to work there forever.”

Monetizing The team was up against a raft of challenges, not least the fact that in 2008 there was little similar technology to refer to. As a young company with little money and no angel investment, the entrepreneurs spread their app among the U.S. tech communities and word-of-mouth recommendations began to snowball. “You didn’t need software to enhance the typing experience

Using TouchPal to swipe words on a smartphone

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The app now has over 110 million users and has won a slew of awards, including China Telecom’s Mobile Internet Application of 2012...”

TouchPal is the pre-loaded, default keyboard on, for example, HTC, Huawei, Sony and Alcatel phones. The 2014 Mercedes-Benz S-Class series will come equipped with the keypad on their multimedia dashboard screens, and Sony is incorporating the technology into several digital camera models.

Rui Ma, Venture Partner for 500Startups China, says the whole society in China is a “pyramid.”

Innovation hurdles Yet, despite trailblazing young companies like CooTek, Chinese start-ups continue to battle perception problems overseas in terms of their credibility and innovative abilities. “In terms of innovation, China still ranks distinctly below the West, specifically Silicon Valley, but it is starting to be seen less as just pure copycat, partly because a lot of these straight-up copy cats don’t sell,” says Ma. “I think Chinese entrepreneurs are starting to think less about cloning something thoughtlessly, they’re becoming more thoughtful about what our domestic market really needs.”

Wong understands why people regard China as a country lacking in innovators, but believes this view is wrong and stems from problems in the Chinese education and value systems. “Presentation skills are not as well taught as in the States or Europe so a lot of Chinese students lack communication skills, they are shy and not willing to share their ideas, which makes people perceive them as not very innovative,” he says. “But I’ve been back to the schools and already see a huge change happening in this new generation.” He sees a clear link between innovation and individual values,

The 2014 Mercedes Benz S-Class will come with the swipe keypad from CooTek

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c o v e r s to r y

pointing out that everyone is working purely for money in the new China, and not investing any time or energy into finding their passion in life. “Everyone is shortsighted and only focused on economic benefits, but what is your interest? What is your passion? What is the value of your life? What is your value to society?” He rejects the idea of himself as a role model, and says that in China people put too much emphasis on copying their heroes rather than finding their own paths. “The reason why I gave up all those opportunities, for example, I had the opportunity to go abroad to study, is because I have stronger values of my own, and my ultimate goal is to have a social enterprise that can have business success, but also social benefits to society.”

Future predictions

fundamentally flawed. “In terms of an acquisition, it depends on whether your value is justified and the vision of the company can be supported, otherwise it makes no sense for you to give up your dream.” CooTek is preparing for a future in which the keyboard may go the way of the mouse, by investing heavily into, for example, gesture input research. But Ma says that in general it can be a challenge for companies with a few utility products to enjoy ongoing growth without becoming more of a platform, where, for example, other developers can enhance the original product. “The product can always be a cash cow if you have significant IP that you can continue to license,” she says. “But in general, for most mobile apps with those kind of downloads and that kind of pre-load and freemium service, it’s difficult to grow really significantly, without building a little ecosystem around themselves.”

While CooTek has a large amount of interest from potential buyers, they are in no rush to sell. Wong believes companies who start with their eye on the goal of being bought out are

Jill Petzinger is a freelance writer.

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Is True Innovation Within Head of America’s top electronics trade organization says China’s culture and legal system needs to improve to foster creativity

Gary Shapiro is president and CEO of the Consumer Electronics Association, the U.S. trade association representing more than 2,000 consumer electronics companies, and author of the New York Times best-selling books, Ninja Innovation: The Ten Killer Strategies of the World’s Most Successful Businesses and The Comeback: How Innovation Will Restore the American Dream. His views are his own. Connect with him on Twitter: @GaryShapiro.

undreds of Chinese companies exhibit each year at the International Consumer Electronics Show ( C E S ) i n L as Ve g as , showc as i ng advancements in consumer technology ranging from high-performance audio equipment to energy management systems for the connected home, to cutting-edge gaming. New tech companies are springing up across China every day – a clear sign that bright, domestic minds have a lot to offer the global economy. But are these companies a sign of the country’s thriving innovation culture? Innovation thrives in places where people are allowed to collaborate, exchange ideas, ask questions and tap into the global marketplace. In these ways, China would benefit from looking West to better understand how the United States has built a thriving culture of innovation that fosters start-ups and puts a premium on creativity, while also championing fair

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business practices. Already, China has taken steps toward creating a culture of innovation. Out of last fall’s Third Plenum meeting, a number of new ideas emerged. For one, Chinese leaders expressed interest in improving the country’s intellectual property laws to protect new ideas. They also talked about their desire to play a leading role in revolutionary new technologies across industries and plan to bring foreign researchers to their shores. The Chinese are even creating their own technology incubators – there are already more than 1,000 tech hubs in China – and universitybased innovation labs. More, the Chinese government sets lofty goals for innovation, like its Twelfth Five-Year Plan requiring at least 3.3 patents per 10,000 people by 2017. By 2013, the country had blown past this goal, racking up 4.02 patents per 10,000 people. But thousands of these new patents were weak and underdeveloped, propelled not by innovative thinking but a Chinese culture rooted in respect for authority and meeting goals.

Tradition and respect In education, China is a leader in teaching students how to absorb and retain information; their test scores put the rest of the world to shame. But innovation also demands creativity and a willingness to pose critical and challenging questions. Because Chinese culture is based on tradition and respect, innovation can be viewed negatively. Many Chinese students are not learning to problem-solve effectively or think creatively, focused instead on rote learning. Yes, China has taken great strides in improving education, but curiosity and the pursuit of answers are critical in cultivating an innovative spirit. Perhaps to offset this learning gap, China is increasingly sending its students to U.S. schools, colleges and universities, where they learn innovation firsthand. Between 2012 and 2013, roughly 235,000 Chinese students migrated to the U.S.

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China’s Reach? for graduate-level studies alone. And China has also been working hard to bring the best and brightest of those students back home once they have earned their degrees and learned from America’s innovative culture. Despite this progress, China maintains its support for hightariff barriers under the Information Technology Agreement (ITA) negotiations. No country has benefited from the ITA more than China, whose global share of information and communications technology (ICT) exports increased almost 1,500 percent since the ITA’s inception. But without an expanded ITA that includes next-generation products and components, China is unlikely to produce the next gamechanging product any time soon. Companies don’t grow when shielded from competition by their governments – they suffer. Steve Jobs was able to invent the iPhone because the U.S. culture in which he lived and worked encouraged, promoted and rewarded innovation. He was able to use his early failures as learning experiences and opportunities to improve. It’s that culture more than any government

incentives or business policies that has allowed the U.S. to lead the world on innovation.

IP challenges China has a reputation for thwarting internationally recognized intellectual property (IP) laws. A report released by the Commission on the Theft of American Intellectual Property last year found China is behind 50 to 80 percent of IP theft globally. This is a disincentive for other nations eager to do business with China. International IP theft costs the U.S. alone an estimated US$300 billion per year, preventing the creation of millions of jobs. If China wants to be a true home for innovation, its culture and legal system must evolve. While the Chinese people are intelligent and capable, innovation can’t happen in a restrictive environment. Without a lasting cultural shift, China might be able to continue mimicking innovation, but it will fall short of the real thing.

Rote learning is deemed incompatible with innovation

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AmCham Shanghai New Members U.S. Corporate Membership

Associate Membership

Beijing Hines Property Management Co., Ltd. Shanghai Branch MORRISON James

Abbott Laboratories Trading (Shanghai) Company Limited KISSEL Marie

Blank Rome LLP Shanghai Representative Office, USA SCHORR Adam

Alcoa (China) Investment Company Limited, Shanghai Branch QI Liping

Brennan Industries of Shanghai CARR Joseph

Alsco (Suzhou) Co., Ltd. RODRIGUEZ Anthony TANG Connie

Chemtex (Shanghai) Chemical Engineering Co., Ltd. YANG Patrick Zhu Huyck. Wangner (Shanghai) Trading Co., Ltd. WANG Paul Kilpatrick Townsend & Stockton LLP Shanghai REP. Office (USA) CHANG Kenneth Midwest Rubber-Asia (Shanghai) LLC ZHOU Hongliang

Autodesk Software (China) Co., Ltd., Shanghai Branch YUAN Fang Axalta Coating Systems (Shanghai) Company Limited KAISER Jay Alan Beijing Hines Property Management Co., Ltd. Shanghai Branch HARLE Reubin HRZEK Derek

Primary Color Digital Imaging Technology (Shanghai) Co., Ltd. KAZEMI Ramin

Booz & Company (Shanghai), Ltd. BESSLER Joni Brennan Industries of Shanghai U.S. Associated Corporate Membership LU Wei Nalco (China) Environmental Solutions Co., Ltd. WANG Feng WANG Tim WANG Jason WANG Sean Nordson (Shanghai) Business Consulting Co., Ltd. BIAN Yuemin Cardinal Medical Equipment Consulting (Shanghai) Co., Ltd. Pentair Water (Suzhou) Co., Ltd Shanghai Branch TANG Yuliang CHEN Xia

Rockwell Automation (China) Company Limited XU Ai Ling Sara Beattie Shanghai Enterprise DIBBLE Alexandra Shanghai Eurest Food Technologies Service Co., Ltd. XU Cindy Shanghai Hewlett-Packard Co., Ltd. WANG Wenbin Shanghai International Theme Park and Resorts Management Company Ltd. AI Alan Shanghai Roche Pharmaceuticals, Ltd. LIU Amy Sheppard, Mullin, Richter & Hampton, LLP Shanghai Rep. Office, U.S. XU Cheng Stryker (Beijing) Healthcare Products Co., Ltd., Shanghai Branch ZHANG Yanhua Suzhou Dulwich British International School ALLAN Ross Tektronix (China) Co., Ltd. LANG Qian The Walt Disney Company (Shanghai), Ltd. RAFALSKI Natacha Tishman Speyer Investment Consulting (Shanghai) Company Limited CHENG Angelina

Pentair Water Purification Systems (Shanghai) Co., Ltd. SBABO Pierre

Cintas (Suzhou) Enterprise Services Co., Ltd. YANG Marlin

The Bank Of Nova Scotia Shanghai Branch FU June

Control Risks Group (Shanghai) Limited ZHANG Yifei

KargoCard (Shanghai) Co., Ltd. WONG Donald

DTZ Debenham Tie Leung BENOIT Jomar

GERSUK Gregory KEEFE Daniel

Ferro (Suzhou) Performance Materials Co., Ltd. ZHU Peihong

KOLE Lawrence

Grifols Pharmaceutical Consulting (Shanghai) Co., Ltd. DENG Jie

MOHAMED Najma

Corporate Int’l Affiliate Membership Alsco (Suzhou) Co., Ltd. FORTUNE James China Net Cloud Technology (Shanghai) Co., Ltd. MUSHERO Steve Chiomenti Studio Legale Shanghai Representitive Office (Italy) D’AGNOLO Gianluca DMG International Conference & Exhibition (Shanghai) Ltd. BECKLEY Paul

Individual U.S. Citizen Membership

MEYERS Isabelle

Hershey Foods International Trade (Shanghai) Co., Ltd. YING Li

RUBEL Keagan

HSBC Bank (China) Co., Ltd. ZHOU Dan

SOROCK Abraham

Intralox Conveyor Belts (Shanghai), Ltd. SHUM Lai-Har

SMITH Bria VIDA Tim

Flight Centre Comfort Business Travel Service Co., Ltd. ZHU Helen

JSM Shanghai Representative Office (Hong Kong) SUN Flora

Individual Int’l Affiliate Membership

Genesis Aviation Development Co., Limited JACKSON Christopher

Jun He Law Offices (Shanghai) DONG Ming

COUPE Gwenola

InterContinental Suzhou GUO David

Klako Management Consulting (Shanghai) Co., Ltd. RIVERA Gina

Non-Resident Corporate Membership

O-I (Shanghai) Management Co., Ltd. MARSDEN Paul

Nalco (China) Environmental Solutions Co., Ltd. CHEN Hua

Cowealth Medical Holding Co., Ltd. WANG Joyce

Parkway (Shanghai) Hospital Management Ltd. CHIA Dennicce

Pacific Strategies & Assessments (PSA) BOLLER Jack

State Street Asia Limited CHAN Steven

S.W.I.F.T SCRL YANG Eric

Pfizer Investment Co., Ltd. LIU Hong

Zenith Capital BOVEE David

Shanghai Jiating Service Co., Ltd. WOOD Peter

Primary Color Digital Imaging Technology (Shanghai) Co., Ltd. HUANG Lili

Non-Resident Individual Membership

Suzhou Dulwich British International School TODD John

Prologis China WANG Max

Suzhou Sunny World Real Estate Co., Ltd. Metropolitan Towers Hotel LI Xiaoyan Swire Cold Chain Logistics (Shanghai) Co., Limited CHAN Eric Tishman Speyer Investment Consulting (Shanghai) Company Limited BOTJER Ryan 38

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Qualcomm Wireless Communication Technologies (China) Limited Shanghai Branch Office LORBECK Jeffrey Adam SHI Guangming LORBECK Jeff SHI Guangming

June 2014

ACCONGIAGIOCO Eugenio

MORRIS Tricia Educational Membership Kellogg School of Management, Northwestern University GERRARD Jennifer The Ohio State University YOU Phoebe

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.

i n s i d e amc h am from the chair

A New China and New Changes of Governance for the Chamber

Robert Theleen Chair of the Board of Governors

As I mentioned in my column last month, our board, along with our president, Kenneth Jarrett, have undertaken a number of steps which, we believe, will strengthen AmCham, streamline our governance and create greater value for our members in the years ahead. Commencing with this year’s election, we will extend the terms of board membership from one year to two years. We will stagger the election process to insure that half the board will be elected every year to provide our members with opportunities to add to our talent pool at the board level. Even in the few short years that I have become a board member, AmCham Shanghai has grown almost beyond recognition. We have opened an office in Suzhou to serve American companies in the fast-growing Yangtze River Delta. We have created the SME Center and website to reach out to American companies in the U.S. to provide our resources within AmCham Shanghai as well as access to our members to expand the American business footprint in China. We have become much more focused, through our staff and with local government, to help our members access market opportunities as urban China and the burgeoning middle class provide more opportunities for U.S. products and services. In short, we have become a dynamic not-for-profit service provider for our members. These new and expanded services of AmCham Shanghai make it difficult for a new board member in a short time to reach a level of knowledge where he or she can perform the governance tasks required of our board. By the time

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that knowledge is acquired, nearly half the year or more has passed. We feel that the extra year of service will significantly add to your board’s efficiency and its important governance requirements. The next impor tant board initiative relates to the requirements in our by-laws that only U.S. passport holders are eligible to run for the chairmanship of AmCham Shanghai. Many of us believe that this requirement prevents hig h ly qua lif ie d b o ard memb ers f rom e ver re aching the chair’s position. Without naming them, you and I know outstanding individuals who run major American corporations here and who have built their careers with these companies, living and working in the U.S. and throughout the world as global executives or entrepreneurs. What I would like to see is a referendum for you, our members, to vote on a proposal which would modify the qualifications stipulated in the Chamber’s constitution to serve as chair to either U.S. passport holders or the senior executive position of their respective American company. This would mean that in most cases, the legal representative of his or her company would fulfill this important test. This candidate would still have to pass through the election process as any other candidate for the board. I wish to thank everyone involved in our recent annual Food Safety & Sustainability Conference. Once again, it was a great success. Our speakers this year included senior advisors to the Chinese government on food safety and regulation. As for participation, we benefited from the wisdom of leading American and Chinese companies in this critically important industry. Ken Jarrett and his talented staff have found a new location for our Independence Day picnic at the Sofitel Hotel near Sheshan. We are excited about returning to the country green of this area and we look forward to seeing many of you and your families on this special American birthday celebration. Finally, I want to say farewell and best wishes to our outgoing Consul General, Robert Griffiths who will soon be leaving for a new posting in Washington, D.C. In my opinion, Robert followed in the traditions of his outstanding predecessors in Shanghai in serving his country and working very closely with AmCham during the three dynamic years he has held that post. I, like many of his friends, will miss him.

i n s i d e amc h am B O A R D o f g o v er n o r s br i e f i n g

Board Making Plans for 4th of July Celebration and More Highlights from the May 2014 Board of Governors Meeting AmCham Shanghai’s Board of Governors held its monthly meeting on May 13 to make plans for the 2014 Fourth of July celebration, and to review the results of the latest membership satisfaction survey. The board also discussed a number of other issues regarding AmCham Shanghai’s performance and events. Getting Ready for the Fourth During the meeting, board members heard recommendations from President Ken Jarrett as well as other Chamber executives regarding ways to stage a meaningful community celebration for U.S. Independence Day at a cost that remains affordable to the organization. Last year more than 1,500 people, both members and non-members, joined the celebration, making it the biggest event on the Chamber’s annual calendar. However, the event also made a significant dent in the organization’s budget, due to continually rising costs. In order to control costs, the board recommended a number of alternative venues for the event. Membership Satisfaction Survey As part of the monthly report to the board, Marketing Manager

Sandra Sun presented the results of the Chamber’s recent membership satisfaction survey. The results showed that the majority of Chamber members remain highly satisfied with the Chamber’s services and performance. Sparked by the results of the survey, the board members discussed how to provide additional value to members through government relations activities, as well as other enhancements to activities that could help drive member engagement. In addition to the Fourth of July and the survey results, the board also heard about recent meetings with policy makers in Washington, D.C. by President Ken Jarrett and a number of other issues relevant to day-to-day activities. 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

June 2014

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AmCham Shanghai

Congressman Eric Cantor speaks during a roundtable on April 26 at AmCham Shanghai

Bjorn Lomborg, director of the Copenhagen Consensus Center, talks about the economics of energy and climate

Ninan Chacko, left, global CEO of PR Newswire, and AmCham Shanghai Chair Robert Theleen, at a CEO Speaker Series event on May 20

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Speakers at the AmCham Shanghai Workforce 2020 Forum on April 24

Month in Pictures

Corporate Social Responsibility (CSR) 10th Anniversary launch event on April 25

Derek Scissors, resident scholar at the American Enterprise Institute, answers a question from the audience during an AmCham Shanghai talk on May 7

President Kenneth Jarrett delivers remarks at the 2014 The Worldâ&#x20AC;&#x2122;s Investment Summit Shanghai on April 23

Xiâ&#x20AC;&#x2122;an government delegation briefing on May 13

Government Relations Congressional Delegation Visits AmCham Shanghai AmCham Shanghai hosted a U.S. Congressional delegation on April 26 led by Congressmen Eric Cantor (Virginia) and Paul Ryan (Wisconsin). Congressmen Cantor and Ryan were leading the delegation on a trip throughout Asia that included stops in Honolulu, Seoul, Tokyo and Beijing before arriving in Shanghai. The trip, the Congressmen noted, was about better understanding the environments that American businesses are facing, hearing from American businesses and helping to generate trade.

AmCham Shanghai President Kenneth Jarrett speaks during a roundtable with Congressmen Eric Cantor, second from left, and Paul Ryan, left

The Congressional delegation and AmCham Shanghai members discussed opportunities and challenges facing American businesses in Shanghai. The delegation was also presented with copies of the 2013–2014 China Business Report. In addition to Cantor and Ryan, the delegation included Representatives Paul Cook, (California), Kay Granger (Texas), Patrick Meehan (Pennsylvania), Kristi Noem (South Dakota), Aaron Schock (Illinois) and Mac Thornberry (Texas).

Xi’an Delegation Highlights Investment Opportunities Huang Yiqing, deputy director general of the Xi’an Municipal Commission of Commerce addressed Chamber members on May 13. She was joined by leaders from the Xi’an HighTech Industrial Development Zone, Xi’an Aviation Base and Xi’an Qujiang New District. Huang discussed investment opportunities in the area. More than 60 colleges and universities in Xi’an produce some 800,000 college graduates each year, making onetenth of Xi’an residents college graduates, she noted. Xi’an is also a focus of China’s central government as it pushes to create a “Silk Road Economic Belt,” Huang continued. Companies in Xi’an have access to two-thirds of China’s major cities and more than 700 million people within a two-hour flight or an eight-hour train ride, she said. Huang Yiqing briefs members on the benefits of investing in Xi’an

Shanghai CIQ Official Discusses FTZ Role On May 20, the AmCham Shanghai Trade Facilitation Task Force hosted Zhou Hai, deputy director of the Customs Clearance Department at the Shanghai Exit-Entry Inspection and Quarantine Bureau (CIQ). Zhou provided AmCham Shanghai members with an overview of Shanghai CIQ’s role in facilitating international trade both inside and outside of the China (Shanghai) Pilot Free Trade Zone (FTZ). He stressed that Shanghai CIQ fully supports the FTZ and noted that several of the policies that Shanghai CIQ has implemented, or will be implementing, in the Shanghai FTZ will eventually be spread to the rest of Shanghai. Among those, he said, were: the preinspection of goods, third-party inspection procedures, changes in the regulation of the international maintenance business, the negative list for plants, animals and related goods, innovative risk controls for biological goods and a new country of origin system.

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inside amcham

New Director of Government Relations and CSR Joins Chamber AmCham Shanghai welcomes new Government Relations and CSR Director Veomayoury "Titi" Baccam. Previously, Titi was a political officer at the U.S. Consulate in Shanghai. In that role, she was responsible for reporting on political and social trends in the Yangtze River Delta. Before Shanghai, the Iowa native served as a diplomat in Moscow, Geneva and Washington, D.C. Titi has lived in Shanghai for more than nine years and is married with three daughters. On her new role, Titi remarked: “AmCham Shanghai is one of the largest and most influential organizations in Asia. I look forward to working with Chamber members in promoting U.S. business interests and expanding the Chamber’s Government Relations and CSR capabilities.”

Government Relations and CSR Director Veomayoury “Titi” Baccam

AmCham Shanghai Celebrates 10 Years of CSR AmCham Shanghai on April 25 held its Corporate Social Responsibility (CSR) 10th Anniversary launch event, which featured an exhibition of more than 75 photos of CSR engagements from 32 companies and organizations. Proceeds from the photo exhibition will be donated to AmCham Shanghai’s charity gala beneficiaries Chi Heng Foundation, Shanghai Roots & Shoots and Teach For China. More than 80 attendees joined AmCham Shanghai President Kenneth Jarrett, U.S. Consul General Robert Griffiths, Xing Zui Wang, VP of the China Foundation for Poverty Alleviation, and Intel China CSR Director C.Y. Yeung to commence the year’s CSR programs.

From left: CSR Associate Jennifer Kwong, C.Y. Yeung, Intel China CSR director, and Daisy Lu, CSR senior associate

Wang presented the framework and growth of China’s third sector, which comprises registered social organizations, foundations and nonprofits, along with unregistered grassroots organizations. As these organizations continue to grow, transparency and internationalization are increasingly important to make apparent through public disclosure of information and announcing international strategies to stay current with China’s economic growth among the rest of the world, noted Wang. Yeung, who also chairs the Business Council for Sustainability and Responsibility (BCSR) at AmCham Shanghai, noted: “Corporate social innovation is the way forward for businesses to create shared business and social value. American businesses can play a key role to catalyze the movement to shape our business and social agenda under the leadership of AmCham Shanghai.” This year marks the Chamber’s 10th anniversary of CSR programs and commemorates ten years of impact, while looking forward to another decade of driving innovation, delivering leadership and creating shared value for our members in China.

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Event highlights

inside amcham

U.S. SMEs to Benefit from AmCham Shanghai, Commerce Dept. Partnership AmCham Shanghai and the U.S. Department of Commerce’s International Trade Administration (ITA) signed an agreement on May 7 that will help provide more information to small- and mediumsized businesses in the United States so they can explore untapped business opportunities in China. The memorandum of agreement (MOA) with the ITA was described as a strategic partnership that will offer tools and resources to help SMEs take advantage of opportunities around the world, especially China.

President Kenneth Jarrett, front row left, and Judy Rising Reinke, deputy director general of the ITA’s U.S. and Foreign Commercial Service, sign the agreement in Washington, D.C.

“By working together to help small and mediumsized companies succeed in China, our two organizations can help make the China market more accessible to thousands of firms across the U.S.,” AmCham Shanghai President Kenneth Jarrett said about the memorandum. Acting Under Secretary of Commerce for International Trade Ken Hyatt issued a statement of his own on the importance of the deal. “We’re pleased to welcome the American Chamber of Commerce in Shanghai as a partner in our efforts to strengthen the U.S. economy and support local jobs through expanding U.S. exports,” he said. “With more than 95 percent of potential customers living outside U.S. borders, it’s imperative that American companies of all sizes consider the benefits of selling their products abroad.” The MOA opens the door for AmCham Shanghai to cooperate with ITA and its affiliated offices around the world on marketing, education programs and events utilizing both their expertise to help U.S. businesses do more to tap foreign markets. The ITA said the MOA calls for other joint activities including building awareness through outreach at trade shows, as well as collaborative press and digital communication outreach.

AmCham Shanghai Attends Alibaba Buyer-Seller Conference AmCham Shanghai’s Vice President of Programs & Services Scott Williams and several AmCham Shanghai members attended the First China Purchasing Directors Summit, which was held from May 8–9 in Wenzhou, eastern Zhejiang province. The event attracted buyers from across China and the world to meet Wenzhou-based sellers with the goal of aligning efficient ways of supporting purchasing opportunities. The event centered on utilizing Alibaba’s O2O methodology that intermingles online and offline platforms, including Alibaba’s 1688.com portal. The event also featured speakers from Wenzhou government and the Investment and Trade Promotion Center. AmCham Shanghai’s recently formed strategic partnership with Alibaba promotes two-way support of buyers and sellers in line with SME needs. AmCham Shanghai members and SME Center Premium Subscribers can enjoy expedited registration on Alibaba’s buyer and seller platforms, personalized buyer and seller matchmaking, as well as expedited access to Alibaba’s online services. To learn more, visit the SME Center at sme.amcham-shanghai.org.

JUNE 2014

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Committee highlights

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Forum Explores Ways to Manage Globally Competitive Talent AmCham Shanghai on April 24 held the Workforce 2020 Forum, an executive-level human resources leadership event that discussed the latest trends in how companies are planning to develop skill sets for globally competitive talent in the future, manage China’s foreign-educated workforce and attract and integrate recently returned graduates into companies. Georgia Tech President G.P. “Bud” Peterson noted the differences between the three work age generations today: Boomers, GenX and Millennials. He said that they are strikingly different in the way they view work, process information and communicate. For example, Boomers prefer face-to-face chat or phone calls, GenX emails or instant messages, while Millennials just want to send and receive text messages. A discussion panel explored ways to attract talent in a competitive environment. Glen Walter, CEO of Bottling Investments Group China at The Coca-Cola Company, noted that giving employees aspirational goals and making them feel part of a community is essential. James Liang, Ctrip.com CEO, added that organizing staff into smaller teams can motivate ingenuity. Other speakers included President of Eaton China Joe Tao Zhou and Shelton Chan, managing director of AP Advancement at Georgia Tech Institute of Technology. Workforce 2020 closed with a conversation around the most important employee skill sets in the future from the employer perspective. Leaders agreed that communication skills are paramount, while possessing inspirational leadership ability and entrepreneurial zeal can make the difference between workplace ingenuity and professional stagnation.

CEO Speaker Series Go Out and Find Your Audience: PR Newswire CEO

Ninan Chacko, global CEO of PR Newswire, briefs members on trends in the new media environment

In today’s new media environment, the way audiences are reached needs to be broadened, while the content itself must be atomized, noted Ninan Chacko, global CEO of PR Newswire, during an AmCham Shanghai CEO Speaker Series event on May 20. Chacko discussed PR and content marketing trends in the new media environment and presented on the status of the press release distribution industry.

With attention spans dramatically dropping, audiences only want to see and engage with information that’s relevant to them, noted Chacko. Audiences moreover play an active role in the media landscape, with an increasing number of people getting their news from social media, he said, adding that this trend has further contributed to an explosion in mobile media consumption. According to Chacko, PR Newswire’s website gets close to five million page views per month, and in the last year or so passed the million-page views per month on its mobile site. China likewise is embracing the evolution to go digital and showing a strong trend of mobile media consumption, with more than 900 million registered users across microblogging networks, 820 million in social networking services and 340 million in instant messaging, he said. To succeed in this new media environment, Chacko advised PR and marketing companies to align campaigns to specific business outcomes and measure those outcomes with the use of metrics such as traffic, number of shares and search rank. Another strategy to drive success is to create compelling content by finding the brands’ stories and storytellers. Compelling content generates the right social engagement, he said. Moreover, Chacko noted that it is no longer enough to post content on owned channels, but it is imperative to go out and find your audience by driving content discovery through different distribution channels. The old model of fuzzy measurement, PR “stunts” and print media pick-up is giving way to a much more repeatable, structured, measurable process, Chacko said.

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Committee highlights

inside amcham

Tackling Global Warming, Smart Solutions and Bad Policies AmCham Shanghai on April 30 hosted Bjorn Lomborg, former director of the Environmental Assessment Institute of Denmark and director of the Copenhagen Consensus Center, for a talk on the economics of energy and climate, energy poverty and developing smart solutions through innovation. Lomborg noted that indoor air pollution, rather than outdoor, is actually the biggest environmental problem, as this affects nearly three billion people worldwide who burn poor fuels such as dung, twigs and other biofuels without proper ventilation. Solving this involves getting people out of poverty, he added. Bjorn Lomborg, director of the Copenhagen Consensus Center, speaks during an event at AmCham Shanghai

While more renewables will become available, the issue of global warming cannot be solved by 2035 with current policies in place, he said. To effectively tackle climate change, governments worldwide need to cut emissions, focus on green R&D, adopt “geo-engineering” and adapt to new environments, Lomborg pointed out.

Report Highlights China’s High-tech Surge in U.S. Chinese firms are investing in America’s high-tech industry more than ever, according to an Asia Society report released at an AmCham Shanghai event on April 22 at the Four Seasons Hotel in Shanghai. Nearly 100 business leaders and media representatives turned out for the event and panel discussion featuring the launch of the Chinese language version of Asia Society and Rhodium Group’s report High Tech: The Next Wave of Chinese Investment in America. Thilo Hanemann, one of the authors of the report, introduced highlights from the report’s findings via a video and pointed out that before 2010, there was little activity of Chinese investment in high-tech sectors in the U.S. However, Hanemann named 2014 “a breakthrough” year for further investment activity. As Chinese companies become motivated by gaining market access, acquiring assets and increasing efficiency, sectors such as renewable energies, aerospace, biotech and pharma, medical devices, as well as software and IT services can expect to see increased investment, according to the report. In addition, Chinese investment has created or sustained more than 25,000 jobs in the U.S. through both greenfield projects and M&A investments as of 2013, the report said. The report dismissed a theory that Chinese companies investing in U.S. technology sectors want to relocate companies back to China. Instead, as Chinese companies are investing in innovation-intensive industries, they need highly qualified U.S. employees such as engineers and R&D professionals. Following the report overview, a panel discussion analyzed key findings and shared insights. Seagull Song of Blank Rome moderated this discussion and was joined by panelists Mark Horn of East West Bank, Gavin Pathross of Deloitte, Ken Petrilla of Wells Fargo and Ken Wilcox of Silicon Valley Bank. Panelists noted that most investment transactions are focused on establishing collaborations and longterm partnerships, as evidenced in the biotech sector. Also discussed were the size of the Chinese companies doing the investment and how small- and medium-sized enterprises (SMEs) differ from state-owned enterprises (SOEs). As with biotech, many Chinese SMEs conducting transactions are searching for a U.S. partner, however their main motivating factor is in purchasing market access. The panelists agreed that Chinese investment to the U.S. will continue to grow. To download the report, visit AsiaSociety.org/ChinaHiTechInvestment. For more information on AmCham Shanghai’s 23 industry-specific committees, please contact committees@amcham-shanghai.org.

JUNE 2014

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Executive Reading Room We asked executives to share with us what’s on their summer reading list. Yan Xuan, President, Nielsen Greater China Recommends: JC Penny – How to Fail in Business While Really, Really Trying by Jennifer Reingold (on Fortune.com) Remarks: “One of the most recent spectacular failures in attempted business transformations is former Apple executive Ron Johnson’s efforts to reinvent the venerable U.S. retail giant J.C. Penny as its CEO. It did not end well. During Johnson’s 16-month tenure, J.C. Penny’s sales plummeted 36 percent, it ran out of cash and was on the verge of bankruptcy.”

Steven X. Chan, VP of Regulatory, Industry & Government Affairs, Asia Pacific, State Street Books: A Fighting Chance by Elizabeth Wa r r e n , T h r i v e b y A r i a n n a Huffington, Hard Choices by Hillary Clinton Remarks: “Getting my inspiration from these tough female leaders!”

Dav id War th, VP of Asia Operations, Emerson Climate Technologies; GM, Suzhou Emerson Climate Book: George Clinton and the Cosmic Odyssey of the P-Funk Empire by Kris Needs Remarks: “I discovered this book (and read an excerpt) in a UKbased Classic Rock magazine on a recent flight. Clinton was a musical genius and the story of how Parliament and Funkadelic formed and performed is wild. I have a beach trip planned late June, and this book will be out just in time.”

Coralie Danks, President and COO, Blue Horizon Hospitality Group Remarks: “With my six-year-old twins about to start primary school, I’m curious to read Amanda Ripley’s The Smartest Kids in

the World: And How They Got That Way . I’m also going to pick up Forgotten Ally: China’s World War II by Rana Mitter. Of the books I’ve read

about China, none have been dedicated to China’s experience in World War II. Given the war’s lasting effect on the Chinese psyche, I’d like to understand more about the period, and this one has received rave reviews across the board.”

Feng Ma, APAPC President, IEWC Book: Tibet and Its History by Hugh E. Richardson Remarks: “I’m very interested in the history and I did travel to Tibet in 2012. This book is the only complete history of Tibet in English in the early ’50s; a lucid and straightforward history of the country from its beginnings in the sixth century A.D. to the early ’50s.”

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JUNE 2014

Jenny Chan, Managing Partner, Advisory Greater China Risk Practice, Ernst & Young Book: The Firm: The Stor y of

McKinsey and Its Secret Influence on American Business by Duff

McDonald Remarks: “This book gives a fascinating story of the formation and rise of McKinsey. It also provides great details over why some key decisions were made and how they impacted the successes or challenges faced by the firm.”

David Litteken, Managing Director, China and APJ for BI WORLDWIDE Books: The Gate by Francois Bizot and The Cambodian Book of the Dead by Tom Vater Remarks: “Our family enjoyed a relaxing, yet reflective holiday in Cambodia this past April. We left the country wanting to learn more about the plight and resiliency of the Cambodian people. I plan to start with Bizot’s gripping memoir on a business trip to London, followed by Vater’s exuberant detective mystery when in the USA in June for a board meeting.”

John W. Sullivan, Asia/Japan Ops Legal Director, Texas Instruments Books: Rise to Rebellion and The Glorious Cause by Jeff Shaara Remarks: “Shaara’s two volumes on the American Revolution are on my summer reading list since his books are highly engaging, loaded with detail and suspense and have served to provide me with always welcome perspective on living here in China and working in China and elsewhere throughout the Asia region.”