Insight Magazine, March 2009

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

INSIGHT The Journal of the American Chamber of Commerce in Shanghai March 2009

SNAPSHOT

Expo 2010 Update INTERVIEW

SF Mayor Gavin Newsom HR FOCUS

Strategic Retention

Spending to Save the Economy China’s middle class consumers are set to be a compelling force in driving China’s economic recovery

INSIGHT March 2009

The Journal of the American Chamber of Commerce in Shanghai

PRESIDENT

Brenda Foster DIRECTORS BUSINESS DEVELOPMENT & MARKETING

Karen Yuen COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren MEMBERSHIP & CVP

Justin Chan EDITORIAL ASSOCIATE

Elaine Wu COMMUNICATIONS ASSOCIATE

Weina Yang DESIGN

Alicia Beebe LAYOUT & PRINTING

Ella Shan Snap Printing, Inc.

INSIGHT SPONSORSHIP MARKETING ASSISTANT MANAGER

Sophia Chen (86-21) 6279-7119 ext. 5667

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

23 Forging Stronger Ties

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INTERVIEW

By David Basmajian

San Francisco Mayor Gavin Newsom sat down with Insight to discuss San Francisco and Shanghai’s sister city relationship, his plans for strengthening commercial ties with Shanghai and the future of clean technology.

27 Strategic Retention in China HUMAN RESOURCES FOCUS

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By James M. Rice and Thom Needham

Employee retention comes from more than compensation and benefits. Companies seeking to retain high-performing employees need to look beyond basic benefits and satisfy four core needs of respect, learning, challenge and inclusion.

30 A Fond Farewell VIP VISITOR

By David Basmajian

United States Ambassador Clark T. Randt, Jr., the longest serving U.S. Ambassador to China, shared his experiences in China during his long tenure and his views on the U.S.-China relationship as he prepared to step down from his post.

34 Spending to Save the Economy COVER STORY

By Elaine Wu

As consumer demand falls around the world, Chinese consumers are still spending. The rise of China’s middle class consumers is slated to revitalize China’s slowing economy amidst a global economic downturn.

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

3 News Briefs

12 Market Profile

New Fuel 11 China’s Consumption Tax

48 Deal of the Month

in Times of 16 Fraud Economic Turmoil ANALYSIS

MANAGER’S NOTEBOOK

China’s long-anticipated fuel tax reform presents operational and strategic challenges for different sectors of China’s economy.

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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IMAGINECHINA

INSIGHT EDITOR-IN-CHIEF

By Justin Chan

As Shanghai gears up to host the 2010 World Expo, the largest expo in history expected to draw over 70 million visitors from around the world, fundraising efforts are also underway for the USA Pavilion.

ISTOCKPHOTO

Linda X. Wang

18 Expo 2010 Update

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SNAPSHOT

As pressure from the financial crisis affects businesses and employees, companies must pay closer attention to the likelihood of fraud.

INSIDE AMCHAM

41 From the Chairman: Adapting to the Times

45 Events in Review 46 Committee Highlights

MARCH 2009

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USA NATIONAL PAVILION 2010 THOMAS J. GIBBONS

F E AT U R E S

AMCHAM SHANGHAI

INSIDE INSIGHT

W

ith the holiday season behind us, it is time to move forward with what promises to be one of the most challenging years in memory for business in China. Against the backdrop of the global economic situation, China’s trade and export numbers have slowed as demand for Chinamanufactured goods dropped off significantly. The Chinese government has set its eyes on shoring up the domestic economy by boosting consumption among Chinese citizens.

JUSTIN CHAN EDITOR-IN-CHIEF

The cover story this month looks at the growing number of middle class Chinese that are leading the consumer revolution. They are a group that, despite the current economic conditions, is still spending a significant portion of their disposable income on shopping, dining and entertainment.

A number of recent stimulus measures are taking effect and look to change the traditionally frugal spending habits of many Chinese consumers.

Before stepping down as the longest-serving U.S. Ambassador to the People’s Republic of China, Ambassador Clark T. Randt, Jr. sat down with

Insight in Shanghai to look back on nearly eight years in China and the progress of the U.S.-China relationship.

Back in the United States, the Obama administration is moving quickly to restore confidence in the U.S. economy with a US$787 billion stimulus package, a comprehensive healthcare reform package, and a series of measures that aim to lift financial markets, revive the automotive sector and stem home foreclosures.

An expected focus of the new administration is green technology, a topic that is also a passion of San Francisco Mayor Gavin Newsom. As one of Shanghai’s sister cities, San Francisco recently set up its first foreign trade office in Shanghai to advance economic exchanges between the two cities and to further develop clean technology initiatives.

Back in Shanghai, the countdown continues towards Expo 2010, slated to open on May 1, 2010. Over 200 countries and international organizations are expected to participate in what is expected to be the largest World Expo in history. Turn to our Expo 2010 Update for the latest regarding USA Pavilion efforts.

IMAGINECHINA

News

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

CHINA BUSINESS

Guangdong to aid rural workers Guangdong’s provincial government will spend more than RMB30 billion to help unemployed rural workers find jobs as part of the province’s continued efforts to improve the development of agriculture and rural areas over the next four years.

Improving employment for migrant workers in Guangdong is a top priority for the provincial government following the closure of thousands of factories in the Pearl River Delta. Guangdong will speed up its industrial transfer and urbanization plans in an attempt to create more jobs and help raise family incomes for rural laborers, said the provincial government. Official plans call for an increase in the per capita income for farmers from RMB6,400 in 2008 to RMB9,000 in 2012. A recent Ministry of Agriculture survey revealed that as many as 20 million migrant workers were left jobless as a result of the economic crisis.

China jumps in patent application rankings China became the sixth-largest country in terms of the number of international patent applications in 2008, according to Chinese intellectual property officials. China overtook the UK in the rankings, following the United States, Japan, Germany, the Republic of Korea and France. In 2008, China filed 6,089 patent applications, up 11.9% over the last year, under the Patent Cooperation Treaty (PCT), which is an international treaty that provides a unified procedure for filing patent applications to protect inventions in each of its contracting states. Chinese IT firms Huawei and ZTE Corp. alone contributed one-third of China’s total international applications.

Secretary of State Clinton tours Asia New U.S. Secretary of State Hillary Rodham Clinton wrapped up her first visit to China on February 22, which also marked the end of her weeklong Asia diplomatic mission. During her three-day stay in China, Clinton held a range of high-level talks with Chinese President Hu Jintao, Premier Wen Jiabao and State Councilor Dai Bingguo, and held a joint press conference with Foreign Minister Yang Jiechi.The two sides exchanged notes on issues of common concern covering U.S.-China ties, the global economic crisis and North Korea’s nuclear program, while also agreeing to strengthen cooperation on energy, environment protection and climate change. Clinton also toured a powerplant in Beijing utilizing General Electric technology and spoke with students from Tsinghua University. China was the last leg of her four-nation Asia tour after visits to Japan, Indonesia and the Republic of Korea.

Chinese continue spending amidst financial crisis Figures released by the Ministry of Commerce show that festive spending over the Spring Festival, or Lunar New Year holiday, remained robust, with retail sales up 13.8% to RMB290 billion, compared to RMB255 billion during the week-long holiday in 2007. The increase in spending was helped by major sales promotions

in big cities as well as by government subsidies for farmers to purchase home electronics and appliances. Shopping malls in Guangzhou, Beijing, Shanghai, Jiangsu and Shandong offered promotions, free gifts and lucky draws to lure customers willing to spend during an economic downturn. Food sales at major retailers rose 23%, while beverage sales rose 17.5% and combined sales of cigarettes, liquor and wine increased 14.7%.

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CORPORATE NEWS

McDonald’s to create 10,000 jobs McDonald’s China recently announced that the company was planning to open 175 new outlets in China and create more than 10,000 jobs in 2009, despite the economic downturn. The expansion is the largest of its kind ever made by McDonald’s in the world.

McDonald’s has opened more than 1,050 outlets in China in the last two decades. The fast food chain also announced its decision to launch an RMB16.5 discount meal in China. McDonald’s says the company’s new plans will allow more opportunities for cooperation with other food-related industries in China.

Shanghai Airlines seeks government bailout Shanghai Airlines is in talks for an emergency government capital injection, making it the latest carrier to seek government aid as the economic crisis hits China’s airline industry. Shanghai Airlines had debts totaling RMB13.2 billion at the end of last September, with a debt-to-asset ratio of 91.35%. The Shanghai city government is the carrier’s largest shareholder, owning a 35.7% stake in the airline. According to the Shanghai Securities News, the carrier is predicted to receive between RMB1 and 2 billion in government aid. As China’s airline industry is rocked by dwindling passenger and cargo traffic, other big airlines such as China Southern Airlines and China Eastern Airlines have also announced that they would obtain government cash injections.

Airbus sets up JV factory in China European aircraft maker Airbus signed a deal with the Aviation Industry Corp. of China (AVIC) to build a factory in Harbin which will jointly produce composite material parts and components for the new wide-body A350 aircraft. Under the agreement, the Chinese side will take an 80% stake in the new plant, leaving Airbus the remaining 20% share. The 80% stake will be divided between the Harbin Aircraft Industry (Group) Co. (HAIG),

which will hold 50%, and Hafei Aviation Industry Co., Ltd., Avicchina Industry and Technology Co., Ltd. and Harbin Development Zone Heli Infrastructure Development Co., Ltd., which will each holding 10%. The new plant is scheduled to be completed at the end of 2010.

MACROECONOMICS

China increases textile export tax rebate China will increase the tax rebate rate for textile and garment exports from 14% to 15%, according to the State Council. While the effective date for the new rate wasn’t specified, the move would serve to reduce exporters’ costs and support the textile industry. As part of a national plan to stimulate China’s textile industry, the State Council announced that the government would allocate funds for companies that produce or operate in the textile or fiber industries in order to upgrade technology and develop domestic brands. The government would also phase out obsolete capacity, eliminate energy-intensive, polluting equipment and technology, and encourage textile and garment makers to relocate from southeastern parts of China to central and western areas. This is third time China has raised the export tax rebate for textiles since last August. The last increase in November increased the rate from 13% to 14%.

Manufacturing shrinks for fourth month China’s manufacturing sector contracted for a fourth straight month in January as the effects of the global economic downturn continued to be felt. However, analysts predict that the manufacturing sector will continue to improve with the implementation of government stimulus initiatives. China’s Purchasing Managers’ Index (PMI) of the manufacturing sector rose to 45.3 in January and 41.2 in December, following on the heels of a record low of 28.8 in November.

A PMI reading above 50 suggests expansion, whereas one below 50 indicates contraction.

The accelerated rise of the manufacturing PMI all point to a recovery in China, said analysts from Merrill Lynch.

China’s gold production increases 4% in 2008 China’s gold output rose 4.26% year-onyear to 282.01 tons in 2008, according to the China Gold Association (CGA).

In 2007, China overtook South Africa to become the world’s largest gold producer with 270.49 tons of gold output. Trading volume for gold also reached RMB868.39 billion on the Shanghai Gold Exchange in 2008, up nearly 175% from 2007. The provinces of Shandong, Jiangxi and Henan accounted for the highest levels of gold production, together making up 46% of China’s total production.

U.S. - CHINA

Chinese buyers target U.S. houses Enticed by slumping real estate prices in the U.S., many Chinese homebuyers set off for visits to the U.S. in February to explore purchasing homes, according to reports by China Daily. Chinese real estate website Soufun.com organized a group of nearly 30 people to be the first pioneering group of Chinese homebuyers scheduled to visit the U.S. in mid-February. More than 300 Chinese have registered on the website for the 10-day house-buying trip, which will visit cities such as Los Angeles, San Francisco, Las Vegas and New York. Applicants included real estate professionals who want to investigate the U.S. real estate market as well as parents who were interested in buying houses for their children studying in the U.S.

Chinese auto sales surpass U.S. China surpassed the U.S. to become the world’s largest auto market based on monthly sales in January, according to industry analysts. Although official numbers have yet to be released by China, General Motors estimates that China sold 790,000 vehicles in January, compared to plummeting January sales of 656,976 vehicles in the U.S., a 37% drop from the previous year and a 26-year low. According to a General Motors projection, Chinese auto sales could hit 10.7 million vehicles

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in 2009, nearly a million more units than the projected 9.8 million unit sales in the U.S. for the same period. China overtook Japan to become the world’s second largest vehicle market in 2006.

CHINA OVERSEAS

China bans tainted U.S. peanutbased foods China has banned food imports from 11 U.S. companies whose products have been found to be tainted with peanut butter or paste that contain salmonella bacteria.

The 11 blacklisted food manufacturers include the Peanut Corporation of America (PCA), thought to be the original source of the contamination, as well as major food producer Kellogg. Some 400 food items containing PCA butter have already been recalled across the U.S. Salmonella Typhimurium bacteria can lead to diarrhea, nausea, vomiting, cramps and fever.

China biggest investor in Cambodia China finished 2008 as the number one foreign investor in Cambodia based on the number of approved projects, spending nearly four times the capital of secondplace South Korea. China invested US$4.3 billion in Cambodia in 2008, making up 40.14% of the total amount of investment capital in Cambodia, compared to South Korea, who spent US$1.2 billion or 11.39% of the total, said a 2008 report issued by the Cambodian Investment Board. China invested in projects that covered a wide range of sectors including garments, hydropower and agribusiness.

Baosteel cancels Brazilian plant venture China’s Baosteel Group and Rio De Janeirobased Cia. Vale do Rio Doce canceled plans to build a Brazilian steel-slab plant due to a reduced demand for metals as a result of the global economic crisis and because environmental rules blocked the use of mill sites. Both companies will liquidate Cia. Siderurgica Vitoria, a joint venture that was

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intended to set up a US$3.6 billion mill that would produce 5 million metric tons of slabs a year. Baosteel, China’s largest steelmaker, owns 80% of the venture, with Vale holding the remainder. Vale entered the partnership with Baosteel in order to guarantee sales of iron ore from its Brazilian mines, while Baosteel intended to reduce shipping costs.

China reaches oil agreement with Russia After protracted energy negotiations dubbed as “loan for oil,” China and Russia inked a package of seven agreements in mid-February, including two crude oil trading contracts, a pipeline construction project deal, and two loan agreements signed by PetroChina, Chinese banks and Russian companies. China Development Bank, combined with several other Chinese banks, will grant US$15 billion in loans to Russia’s Rosneft for oilfield development and US$10 billion to Transneft for construction of Russia’s Siberian-Pacific pipeline and supporting facilities. Meanwhile, Russia guaranteed an annual oil supply of 15 million metric tons for China over the next 20 years.

Herald. China’s economic growth slowed to 6.8% in the fourth quarter of 2008 as the global financial crisis took a toll on China’s economy.

Government pledges better farm supervision China pledged to increase efforts for stricter quality supervision over farm products in the first document of the year issued jointly by the Central Committee of the Communist Party of China (CPC) and the State Council. Among the points listed, China would prepare for the introduction of the long-awaited food safety law with new and modified regulations on farm product quality, increase coordination efforts between different governmental departments to seek more effective quality supervision systems, accelerate the pace for building testing systems for farm products, while improving quality standards and the certification approval of testing organizations. The document also urged companies to be more responsible for product quality, while also stating that the government would initiate special campaigns to crack down on the illegal use of pesticides and veterinary drugs.

GOVERNMENT & POLICY

Government launches RMB130 billion stimulus plan The Chinese government began a new RMB130 billion economic stimulus plan, the second investment from the central budget following RMB100 billion allocated in the fourth quarter of 2008.

Both investments were included in China’s RMB4 trillion economic stimulus package announced last November. The investment is intended to bolster a slowing economy, followed by additional cash injections from local governments and non-governmental sectors. The RMB130 billion will be used to provide housing for low-income earners; to update public facilities in rural areas, such as electricity; water and road construction; to improve health, education, and environmental protection sectors; and to build new infrastructure, according to plans published in the 21st Century Business

MARCH 2009

Wireless phone service to close Chinese telecom regulators have announced that China Telecom and China Unicom will shut down their wireless telephone services, Xiaolingtong, in the next three years in order to develop China’s first homegrown 3G standard TD-SCDMA. There are concerns that China’s low-cost Xiaolingtong will cause interference with the TD-SCDMA service signals, which has recently been expanded to a frequency band close to that currently used by Xiaolingtong, said government officials. According to official figures, China had 68.9 million Xiaolingtong users in 2008, a decrease of 15.6 million from 2007. In comparison, mobile phone users increased by 94 million to 641 million in 2008.

China to encourage auto mergers Guidelines to revive China’s auto industry

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are under development, with the main focus of plans to encourage mergers and consolidation within the industry. The guidelines encourage major automakers Shanghai Automotive Industry Corp., China FAW Group Corp., Dongfeng Motor Corp. and Changan Automobile to merge nationwide and smaller producers to merge regionally. Measures to improve auto consumption credit, develop a second-hand car market and expand urban transportation systems are also included under the plan. To bolster sagging domestic demand, the government arranged RMB5 billion in subsidies for potential rural auto buyers available from March 1, 2009.

SHANGHAI BUSINESS

Strong rental demand in Shanghai Leasing demand for apartments in Shanghai’s suburban areas remained strong during the week-long Spring Festival holiday despite the slump in Shanghai’s overall housing market in July, according to figures released by Shanghai Centaline

Property Consultants, the city’s largest real estate brokerage firm. Transactions for apartments located beyond the Outer Ring Road rose up to 30% compared to the same period last year, said Centaline.

Industry analysts have attributed the boost in the low-end leasing market to increasing demand from out-of-town jobseekers and falling rent prices. Centaline analysts predict that the mid to high-end leasing market will recover as early as the middle of February.

Disney to build Shanghai park The Shanghai Municipal Government reached an agreement in principle with the Walt Disney Co. to build the first Disneyland on the Chinese mainland, said a statement from Shanghai Mayor Han Zheng. Although most details of the plans under the agreement were not disclosed, the new park is expected to be built in the southeast suburbs of Shanghai’s Pudong area, a 20 minute drive from the Pudong International Airport, according to a Xinhua report. The area of the new park

is expected to be the largest among all of Disney’s theme parks around the world.

Further details of ongoing negotiations are not expected to be disclosed until the agreement is formally signed.

Shanghai upgrades buses The Shanghai government will spend RMB2.6 billion this year on 3,200 new buses to service city routes, said city transport administration officials. Bus routes will also continue to expand into suburban residential areas, salaries for bus crews will be raised and fare discount policies will be enhanced. Since early 2008, Shanghai’s different bus companies have been merging or have been bought by the government. The city’s nine bus companies will all be state-owned and managed, a move which the government believes will make improvements to the system easier.

Last year, local transit buses carried 4.9 billion passengers, accounting for 28% of the total number of people in Shanghai using public transportation.

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CHINA & THE WORLD

ASIA-PACIFIC SOUTH AMERICA

JAPAN China’s trade with Japan reached US$246.2 billion in the first 11 months of 2008, a year-on-year increase of 15.2%. As Japan remains China’s third largest trading partner, trade between the two countries accounted for 10.4% of China’s total external trade for the period. China exported US$106.1 billion in goods to Japan, up 14.9%, while importing US$140.1 billion, up 15.3%. However, farm produce exports dropped 8.3% to US$6.92 billion, largely attributed to concerns over food safety.

MIDDLE EAST

INDIA India imposed a six-month ban on toy imports from China near the end of January. The Indian Directorate General of Foreign Trade did not disclose specific reasons for the restrictions, prompting speculation that the move is an attempt to shield Indian manufacturers from cheaper Chinese products. China-made toys claim over 50% of the market share in the India, valued at over US$500 million in 2007. The Chinese government says it will likely appeal to the WTO to probe the ban. India has recently also curbed the import of steel, chemicals and textiles from China.

EUROPE ASIA-PACIFIC

ZAMBIA China and Zambia signed a series of assistance agreements calling for a series of concessional loans and grants to be given to the southern African country by the Chinese government. The assistance package is to fund construction projects including a modern stadium, a government complex building and international conference facilities. China also pledged to support the agriculture technology in Zambia and experts will be dispatched to provide expertise in irrigation and other agricultural services.

China says it will further strengthen bilateral trade ties and encourage Chinese investment in Zambia.

EUROPE MIDDLE EAST

AFRICA

GERMANY Chinese Premier Wen Jiabao called for China and Germany to forge closer economic ties at the fifth China-Germany Forum for Economic and Technological Cooperation in Berlin. In his address, the Chinese premier expressed that China welcomes exports of advanced technology and investment from Germany and urged expanded cooperation in banking, insurance, telecommunications and logistics.

Two-way trade amounted to more than US$100 billion in 2008. Germany’s technology exports to China from 2005-2008 reached US$14.6 billion, double the amount over the previous four years.

MIDDLE EAST NORTH AMERICA

SPAIN China and Spain will enhance bilateral economic cooperation and cultural exchanges for better mutual understanding, said a joint statement issued during a visit by Chinese Premier Wen Jiabao to Spain. The two countries agreed to upgrade the economic structure to boost trade and cooperate to promote investment in various areas, including infrastructure construction, renewable energy, environmental protection and tourism.

AFRICA

IRAN Top Chinese oil firm China National Petroleum Corporation (CNPC) and the National Iranian Oil Company (NIOC) signed a US$1.76 billion deal in January for the development of Iran’s North Azadegan oilfield. Located in Western Iran, initial surveys estimate an oil reserve of six billion barrels.

The crude output capacity is expected to double when the Chinese-Iranian development project is completed and help stabilize the global oil market.

NORTH AMERICA

NORTH AMERICA ASIA-PACIFIC AFRICA

UNITED STATES In December 2008, China raised its U.S. Treasury debt holdings by US$14.3 billion, raising China’s total holding of treasuries to US$696.2 billion, according to the U.S. Treasury international capital flow report. China has steadily increased its holdings of U.S. treasuries since last summer, when it surpassed Japan as the primary holder of U.S. debt. Despite the current state of the U.S. economy, analysts say U.S. treasuries remain relatively stable in value when compared against other investment products.

CHILE Chilean fruit exports to China surged to US$96 million in 2008, a year-on-year increase of 68 percent, said Chilean Agriculture Minister Marigen Hornkohl. Grapes made up the bulk of fruit exports to China, accounting for 46% of total export volume, followed by apples, cherries and plums which accounted for 21%, 20% and 10%, respectively. Chile, a major fruit exporter across the Southern hemisphere is taking advantage of improved fruit packing methods and maritime transportation advances to tackle the Chinese market.

SOUTH AMERICA

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AFRICA SOUTH AMERICA MIDDLE EAST

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M A N A G E R ’ S N OT E B O O K

China’s New Fuel Consumption Tax:

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Implications for the Chine onomy

arly in January, the Chinese government implemented a long discussed fuel tax reform.

This reform had been in preparation for many years but the recent plunge in global oil prices presented an unexpected window of opportunity to act. How is the reform meant to work and more importantly, what are the potential implications for the Chinese economy?

According to the government, the new reform is predominantly meant to promote energy savings, the healthy development of the oil sector, and to ensure domestic fuel supply and stable economic growth.

Revenues are also expected to raise subsidies to farmers, taxi drivers and aid the fishery, forestry and public transport sectors. This reform has been hailed as a first step towards liberalizing retail fuel prices.

Principle of the reform: more consumption, more tax The new principle is simple: you pay as you fill up the tank. That is to say, the more you drive, the more it costs you and the planet.

The pairing of tax and consumption is designed to eliminate an unfair tax burden among vehicle owners, encourage conservation and efficiency, and provide funds for the central government to help local authorities significantly reduce road tolls. The January 1 reform abolishes six types of road and waterway maintenance and management-related fees which were complex and difficult to administer.

Instead, drivers are paying higher fuel consumption taxes. Gasoline taxes have increased from RMB0.2 to RMB1 per liter while diesel taxes have gone from RMB0.1 to RMB0.8 per liter.

However, the process of introducing a new tax has been relatively painless for consumers as the Chinese government chose an opportune time with overall fuel price reductions to launch the new tax.

Prices at the pump including the higher tax are still lower than previous levels, despite having decreased less than they would have otherwise without the new tax. The government remains committed to regulating domestic pump prices in order to prevent the negative impact of fluctuations in international prices on the domestic market.

Implications for the wider economy Although the fuel tax reform has been largely non-controversial so far, it will present operational and strategic challenges for players in the Chinese economy.

For logistics service providers and transport fleet owners, the implications of this reform will be five-fold: • Logistics companies will need to re-plan vehicle asset registrations and consider migrating from previous “low road-tax city” locations to “operation-based city” locations.

• Since the number of commercial vehicle licenses granted tends to be driven by the size of capital registered in that city, any change in the fleet size would suggest an increase in the registered capital where the business has effectively large operations.

• Logistics companies should calculate potential cost increases or reductions to update financial forecasts and pricing decisions. For some operations, costs may actually increase when migrating asset registrations away from previous locations.

• Logistics companies will need to optimize the use of motorways as the new fuel tax impacts the efficient use of secondary roads and toll-reduced highways.

• Logistics companies should review the service level agreements with subcontractors to reflect optimized routes and transport pricing arbitrage in their performance commitment.

Got an article idea for “Manager’s Notebook”? Contact Insight Editor-in-Chief Justin Chan at justin.chan@amcham-shanghai.org.

Truck manufacturers will also be impacted by the reform. With a focus on increased usage of the highway network and on encouraging less fuel consumption, vehicle fleet selection is likely to favor fuel efficient and reliable vehicle models. New attributes such as low emissions and greater long-distance performance will be favored, while manufacturers of less fuelefficient and highway-worthy models face the challenges of accelerating the development of better products. The new change in taxation should help international brands improve sales while mandating the accelerated development of local-branded trucks.

For automobile manufacturers, the tax changes introduced are expected to encourage automobile purchases and help reinvigorate an industry hit hard by the global financial crisis. However, those auto buyers who use low rate loans to purchase vehicles while fuel is inexpensive may have to end up parking their cars at home if fuel prices rise.

Finally, with increasing demand for new or replacement vehicles to meet the new requirements and criteria for efficiency, financial service providers must provide relevant products to meet those needs.

More is expected to be done to facilitate and support the transition many businesses are considering.

All of these industry players need to effectively conduct a review of their operational and procurement strategies in order to benefit from the new changes and anticipate the potential impact on their business in China.

Pang, Senior Authors Fushing MacCorkle, Vice Advisor; Jeffrey r vid Artero, Senio President; and Da ter ea Gr e th th wi Associate, are all global strategy China practice of Booz & Company. consulting firm oz.com. tion, visit www.bo For more informa

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MARKET PROFILE ISTOCKPHOTO

Towards Energy Efficient Buildings in China China is developing more energy efficient solutions for its buldings, but must still overcome challenges.

I

n 2007, the growth rate of China’s total energy consumption fell to 7.8 percent, a drop from 9.6 percent a year earlier, according to official statistics.

China’s progression towards greater energy efficiency is not without challenges, however. In 2006, China consumed 2.56 billion tons of standard coal equivalent in total, which was equivalent to about 15 percent of the global consumption of energy by a country that accounts for 5.5 percent of the global GDP. It seems that China still has a long way to go in its quest for energy efficient solutions.

Need for environmentally friendly

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With developers adding 2 billion square meters of floor space each year, equivalent to nearly half of the world’s total floor space, construction is a key contributor to China’s huge energy consumption.

Ma Kai, minister of the National Development and Reform Commission (NDRC), estimates that buildings consume 27.6 percent of China’s total energy and that this consumption has been rising the fastest in recent years.

China lags far behind developed countries in building energy efficiency, and is in need of practical guidelines, stricter enforcement and monitoring systems.

According to official data released in late 2007, 97 percent of all new urban building designs and nearly 30 percent of buildings under construction had yet to conform to national energy saving standards.

Energy-saving housing accounts for only 3.5 percent of all urban residential buildings currently

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in existence in China. Compared to developed countries, China’s energy consumption per unit of building area is two or even three times more than other nations.

Drive to improve energy efficiency Many measures have been introduced over the last few years to help China move towards its goals of improving energy efficiency. In the 11th FiveYear Plan published in 2005 and through other regulations, the Chinese government set out a series of goals to improve energy efficiency by 2010. These regulations include: • Reducing total energy consumption by 20 percent for every RMB10,000 gross domestic product (GDP) value created; • Reducing water consumption by 30 percent for each unit of industrial added value; • Improving city waste water processing rates to no less than 70 percent; • Improving the comprehensive utilization rates of industrial solid water to 60 percent.

Regulations at construction stage

the

design

and

In June 2006, the Ministry of Construction issued the “Administration of Energy Conservation for Civil Buildings” regulations to encourage the development of new energy-saving construction methods and materials. In October 2008, the State Council issued energy efficient regulations for the construction of all state-funded institutions and civil buildings.

Regulations for building materials Energy saving regulations have also been introduced on raw materials such as flat glass and gypsum.

Nearly 70 to 80 percent of all flat glass produced is used in construction. In 2006, the government began issuing polices and regulations to instill more efficient energy consumption practices. One such regulation issued in March 2007, encourages flat glass producers to consolidate to achieve greater economies of scale and to develop safer, environmentally friendly products.

One market leader, China Glass Holdings, has since acquired six domestic glassmakers to become the largest listed domestic flat glass producer. A total of 10 to 15 large players in the flat glass sector who will capture about 70 to 80 percent of the market share are expected to emerge by 2010. A further directive in April 2007 bars any vertical drawing manufacturing methods and Colburn processes or factories with daily melting capacities of less than 100 tons.

Gypsum, a lightweight, fire and shock resistant material, is another popular building material used for acoustic insulation. Demand for gypsum has been growing at double digits in recent years. Improvements in industry practices have been noted in the more efficient use of industrial waste byproducts and lower energy consumption during production.

Two old standards for gypsum use were revised in March 2008 and are pending approval. The new regulations provide stringent technical guidelines on the strength and impact resistance of gypsum plasterboards in China. Such standards will improve product quality and in turn, raise the energy efficiency of the buildings they are installed in.

A mid-term review While greater energy efficiency is certainly on the horizon for China, construction companies and suppliers of raw materials have a big role to play in ensuring that new regulations are adhered to.

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Greater energy efficiency is on the horizon for China.”

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A N A LY S I S ISTOCKPHOTO

Fraud in Times of Economic Turmoil

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s is becoming increasingly evident, the effects of the financial crisis are by no means limited to the world’s large developed economies and there are significant knock-on effects on emerging markets. These effects may be deeper and more widespread than initially thought.

Aside from the very public closures of large numbers of factories and other businesses in mainland China, there is also a hidden danger which companies must pay closer attention to during difficult times. As the pressure increases and emergency measures are put in place, the likelihood of fraud will increase significantly.

While weathering the storm, companies must ensure that they maintain effective controls and processes within and send out a clear message to employees, vendors and customers in dealing with fraud.

Fraud in emerging markets and China Emerging markets are particularly susceptible to fraud for a number of reasons. Firstly, supply chains in developing countries such as China, with its sheer size and geographical diversity, are often more complex and fragmented than those in developed countries.

There is a heavy reliance on distributors, dealers, agents and other middlemen, which can mean that maintaining full control over the production

process from acquiring raw materials to delivery of the end product can be more complex and thus more susceptible to manipulation.

Secondly, particularly in China, there is a strong reliance on the fostering of close personal relationships in order to achieve business goals.

While maintaining good relationships with suppliers and customers is essential for developing a sustainable business in the rest of the world, in China there is a risk that the maintenance of these relationships, or guanxi, can be prioritized above the objectives and achievements of a business.

One reason for this is due to a hangover in the business mindset from the days of the state-run directed economy. As Jack Perkowski comments in his new book, Managing the Dragon, “In essence, the entire welfare system in China had devolved to the work unit…Employees were beholden to the leaders of their work unit for nearly every aspect of their lives. The factory leaders themselves had strong vested interests to protect, and the cultivation of local government officials was one means by which they protected them.”

Oftentimes the only way to get ahead in that period was to cultivate such personal relationships.

It is unsurprising that this mentality has extended beyond the dissolution of the work unit and the opening of the economy.

Thirdly, the growth of China’s economy in comparison to the rest of the world has been unprecedented, and investors have poured capital in with the expectation of sustaining a certain

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As the economic crisis puts pressure on employees and businesses, companies need to be on the lookout for potential fraud risks.

Analysis provided by

Jean Roux – Partner, Forensic Services, Shanghai (86 21) 2323 3988 jean.roux@cn.pwc.com

“

As some companies reduce headcount, control systems can be compromised as companies strive to meet revenue and profit targets at any cost.”

high rate of return. This has resulted in many businesses being extremely revenue focused, and as growth targets are filtered through the organization, this can mean the pressure placed on individual employees to achieve these targets can be immense.

The pace of growth can be so rapid that the effective implementation of systems and controls can lag behind actual expansion. Furthermore, the legal system in place can also lag behind rapid expansion in legislating and bringing perpetrators of white collar crimes to account.

As employees feel their jobs may be threatened and their freedom more restricted as firms cut costs, this could also increase the rationalization for committing a white collar crime. In a downturn many people will be adversely affected financially.

When they are desperate, people’s willingness to take a risk to replace the income or assets lost increases and previously honest people may resort to fraud, soliciting kickbacks or other forms of economic crime.

Specific factors during the financial crisis

The PricewaterhouseCoopers 2007 Economic Crime Survey of 5,400 companies in 40 countries details five common categories of fraud: asset misappropriation, accounting fraud, corruption and bribery, money laundering and IP infringement.

Although the survey reveals that IP infringement was perceived to be the most prevalent fraud in China (23 percent of respondents), there were actually more cases of asset misappropriation reported (25 percent). In fact, only 14 percent of reported frauds were in the area of IP infringement. This highlights a gap in the perception of problematic issues and the actual issues which arise.

The issues that respondents cited most frequently as significant fraud risk issues in China were the perceived complexity of the legal system and the perceived levels of corruption (83 percent and 92 percent respectively).

Bearing in mind that the issues highlighted above are specifically related to emerging markets, China is particularly susceptible to the following methods of fraud: • Corruption or kickbacks (the collusion of purchasing departments and external suppliers to inflate the price and share the excess); • Improper procurement practices involving related party suppliers; • IP infringement and the failure to properly record all royalties / license fees due; • Skimming schemes (not accounting for some revenue and manipulation of records to cover this up); • Bribery and corrupt actions to secure contracts – for example, over specification of requirements

Fraud experts refer to the fraud triangle, which incorporates the three main factors which are generally present when a fraud occurs. These are: the perceived opportunity to commit fraud, the incentive (or pressure) to commit fraud, and the rationalization of the fraud, i.e. how the fraudster can justify the fraud due to a perceived neglect or conflict with them personally.

The perceived opportunity to commit fraud may increase during times of financial difficulty.

As some companies reduce headcount, control systems can be compromised as companies strive to meet revenue and profit targets at any cost or systems may be circumvented to make things happen more quickly. Both of these situations provide the fraudster with increased opportunities to commit fraud.

Globally and in all industries, the difficulties encountered by organizations during a time of financial crisis are likely to significantly increase the pressure on individuals within the organization to meet company and personal targets. This risk is heightened in China as aggressive growth targets and singular focus on revenue can encourage managers to resort to reckless means to achieve their goals.

In a downturn, companies are also under pressure to perform against a backdrop of a market where sales and margins are declining. In these situations, there are instances of management resorting to manipulation of company accounts to deliver the results they want or need.

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Main types of fraud

to favor a close business relationship, or improper tendering processes.

A more recent issue which is particularly controversial in emerging markets such as China is the Foreign Corrupt Practices Act (FCPA). This forbids any U.S. individual or company which is registered in or has operations or funds in the U.S. from paying bribes to government officials anywhere in the world.

This is a particular risk in China, where it is sometimes not so clear what the definition is for “government official,” due to many sectors such as healthcare and energy still being largely state owned.

A kickback or a bribe as a commercial facilitator may well be a contravention of local laws but may have the additional consequence of contravening the FCPA. Many organizations are not fully aware of their responsibilities in this area.

How to mitigate this risk During this difficult period, businesses operating globally and in China need to be extra vigilant with regards to fraud prevention and detection.

As budgets are streamlined to save costs, extra scrutiny needs to be applied to transactions and processes to quickly identify any anomalies.

The tone at the top of an organization must be very clear in order to promote the development of an ethical organization. This includes effectively communicating policies and procedures, having an accessible whistle blowing policy, investigation of fraud, and appropriate and clear retribution of wrongdoers.

While these are all key elements of an effective anti-fraud strategy at any time, they are even more important in the current economic climate.

The way to create real value is clear In this complex global economy, charting your property course is essential. With 15 years of local China experience, Jones Lang LaSalle knows the diverse needs of owners, investors and occupiers – and can add value. On your behalf, we facilitate smoother transactions, faster negotiations and build relationships that last.

You benefit – whether you are a landlord, a tenant or an investor – our comprehensive research, innovative solutions and complete business model improves your ROI and reduces your risk.

Partner with us for a sound strategic direction. You will get proven insight and a collaborative approach to ensure your continuous success. That is how we deliver real value in a changing world. Call us today.

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www.joneslanglasalle.com.cn

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“

Extra scrutiny needs to be applied to transactions and processes to identify anomalies.”

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S N A P S H OT

BY JUSTIN CHAN

USA NATIONAL PAVILION 2010

Expo 2010 Update

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ince the Great Exhibition in London in 1851, World’s Fairs have served as venues to exhibit advances in industrialization and to promote cultural exchange. Today, they are more commonly referred to as World Expos, and have become an avenue for countries to boost national branding with elaborate country pavilions.

Beginning on May 1, 2010, Shanghai will host Expo 2010. Over 200 countries and international organizations are expected to participate, with pavilions located on each side of the Huangpu River encompassing a total land area of 5.28 square kilometers. The event is expected to attract 70 million visitors – the most in world expo history – before its conclusion at the end of October.

The theme of Expo 2010 is “Better City, Better Life,” and represents a common goal to raise the standard of living in urban environments by increasing dialogue that can aid the advancement of sustainable development policies and strategies.

Through both educational and entertainment platforms, expo visitors will experience “Better City, Better Life” through five urban-focused sub-themes that will be represented throughout the expo: the blending of diverse cultures, economic prosperity, science and technology innovations, remodeling of communities, and interaction with rural areas.

A better Shanghai Shanghai’s journey towards Expo 2010 began in 1999, when the central government announced it would back Shanghai’s bid to host the Expo. An Expo Organizing Committee was formed a year later and China officially filed its application in 2001 with the International Exhibitions Bureau in Paris, the global governing body for world expos.

Shanghai was selected as host city in December 2002 over competing bids from cities in Korea, Mexico, Poland and Russia.

In terms of cultural and economic impact, world expos typically trail the FIFA (Fédération Internationale de Football Association) World Cup and Olympic Games. However, expectations for Expo 2010 are high as Shanghai is pulling out all the stops. The city has undergone a steady wave of renovations and infrastructure improvements aimed at preparing for the 60 million domestic visitors and 10 million foreign tourists expected to descend on Shanghai for the Expo.

Official figures estimate direct investment of RMB30 billion for construction and operation of the actual Expo while indirect investment is expected to top RMB270 billion. Significant upgrades stretch across the entire city from public transportation systems and airport improvements

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As Shanghai pulls out all the stops for the 2010 World Expo, organizers of the USA Pavilion are looking to ensure a U.S. presence at the largest Expo in history.

Opportunities to Participate in the USA Pavilion at Expo 2010 As China prepares to host the largest World Expo in history in 2010, the USA Pavilion offers opportunities to: • Present America’s story to 60 million Chinese visitors plus 10 million international visitors over a period of six months.

• Demonstrate U.S. commitment to strengthening U.S.-China relations and engagement in Asia.

• Provide corporate sponsors a high visibility marketing platform.

• Show support for the environmental theme of the Expo.

If your company is interested in participating, please contact Felix Wong, Director of International Marketing & Partnerships, Shanghai Expo USA Pavilion, at ftwong@usanationalpavilion2010.org or (86 21) 6279-7152.

to environmental protection initiatives and new energy resource systems. Consumer-related sectors such as hospitality, retail, and food and beverage will also receive a significant boost as the city develops the capacity to support tourism and increased consumer consumption.

Pushing for participation A large digital clock stands at the waterfront boardwalk along the Bund, counting down the days, hours, minutes and seconds until the start of the Expo. To the southwest at the event grounds, construction activity is beginning along each side of the Huangpu River as national and corporate pavilions are built. With a little over 420 days left until May 2010, organizers of the USA Pavilion are pushing to secure funding from the private sector in order to ensure a U.S. presence at the largest Expo in history.

Unlike most other participating nations, the United States is prohibited by law from using public funds to support Expo activities. Instead, the State Department, through the Bureau of Educational and Cultural Affairs, selects an organizer who is mandated to develop a pavilion theme and design before securing the necessary funds from the private sector to develop, build and operate the pavilion.

In April 2008, Shanghai Expo 2010, a non-profit group led by former Warner Bros. executives Nick Winslow and Ellen Eliasoph, was awarded a letter of intent by the State Department to develop and run the USA Pavilion and to raise the necessary funds.

Most recently, Ambassador Franklin L. Lavin,

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former Under Secretary for International Trade at the U.S. Department of Commerce, was named Chairman of the Steering Committee of the Shanghai 2010 World Expo USA Pavilion. Led by Ambassador Lavin, the Steering Committee will provide the USA Pavilion team with guidance and assistance as they continue efforts to meet fundraising and construction deadlines.

USA Pavilion – Celebration 2030 Sixty million Chinese visitors are expected at Expo 2010. Just as many Americans living in the U.S. have limited knowledge of China and the Chinese people, most Chinese have no firsthand knowledge of America. The stated goal of the USA Pavilion is to provide an opportunity for the people of China to learn something about the “real” America and to experience an emotional connection with Americans.

The theme and design of the USA Pavilion is based on core principles that pavilion organizers believe Chinese and American people share: sustainability, teamwork, health and the values of hard work, innovation and opportunity, which have driven the success of the Chinese community in America. Through an entertainment show and dedicated zones, visitors will be able to enjoy an American experience and have the opportunity to develop an emotional tie with Americans.

Building from the Shanghai Expo theme “Better City, Better Life,” the USA Pavilion “story” provides a glimpse of an American city of the future and describes the path to creating it. Set in the year 2030, guests will experience firsthand the progress that has taken place due to technological innovations developed since 2010. An emphasis on clean energy, healthy living, sustainable farming and green technologies will support the underlying message of the USA Pavilion: that by working together, we can overcome today’s challenges and look forward to a brighter future.

Fundraising efforts According to USA Pavilion officials, the 2008 Beijing Olympics and the U.S. presidential election

distracted American companies normally inclined to sponsor the pavilion, and with the onset of the global economic downturn last fall, fundraising continues to be a challenge. A revised budget calls for US$61 million to fund all costs associated with construction, staffing and operation of the pavilion, in addition to post-Expo demolition and removal.

As Director of International Marketing and Partnerships for the USA Pavilion, Felix Wong is on the ground in Shanghai meeting with prospective sponsors. Wong was the in-market executive of AT&T’s sponsorship of Team USA during the 2008 Beijing Olympics, and he is confident in the USA Pavilion’s ability to attract sponsors.

“This is a historic opportunity for an American company to present itself to the Chinese people and to be associated with such a hopeful message for the future. We’ve seen a lot of interest from American multinationals who want to get involved,” says Wong.

Since the beginning of the State Department’s tender process, AmCham Shanghai has been active in promoting interest in participation and sponsorship of the USA Pavilion by connecting members who wish to contribute with organizers.

“The USA Pavilion will highlight America’s commitment to the U.S.-China relationship and as such is extremely important to the U.S. business community in Shanghai,” says Brenda Foster, president of AmCham Shanghai. “We are delighted to serve as a platform to bring people together who want to be part of this exciting experience.”

Together with the Bureau of Shanghai World Expo Cooperation and USA Pavilion organizers, AmCham Shanghai has held a series of events for members to learn about Expo opportunities.

Under the State Department’s approval process, a percentage of funding must be secured by April in order to meet the May deadline for commencing pavilion construction.

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This is a historic opportunity for an American company to present itself to the Chinese people and to be associated with such a hopeful message for the future.”

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I N T E RV I E W

B Y DAV I D B A S M A J I A N

On San Francisco and Shanghai’s “sister city” relationship…

Shanghai and San Francisco have a formal relationship that goes back more than a quarter of a century and we have had economic and cultural ties for the past 150 years. The sister city relationship was established at a time when the U.S and China had just begun to formalize diplomatic ties. At the time, Shanghai looked to the United States and to San Francisco for inspiration and ideas and saw the added value of establishing an American sister city. Having been to Shanghai myself recently, approximately 25 years later, I see the benefits of the relationship shifting to San Francisco.

The goal of my trip to Shanghai last November was to build on the Shanghai-San Francisco sister city relationship. Our real focus was finding ways to take the relationship to the next level in terms of more firmly establishing the economic and trade relationship.

On San Francisco’s ChinaSF initiative…

During my trip to Shanghai, we opened San Francisco’s first foreign trade office. This is part of

THOMAS J. GIBBONS

I

n November 2008, San Francisco Mayor Gavin Newsom led a delegation to Shanghai to build on Shanghai and San Francisco’s 25-year-old “sister city” relationship. Mayor Newsom participated in the signing ceremony of a major art exchange between the Shanghai Museum and San Francisco’s Asian Art Museum, and launched the Shanghai office of ChinaSF – an economic development initiative to strengthen economic exchanges between San Francisco and Shanghai.

While in Shanghai, Mayor Newsom also gave the keynote address at the U.S.-China GreenTech Summit, highlighting San Francisco and Shanghai’s overlapping interests in the emerging field of clean technology. In February, Insight sat down with Mayor Newsom in San Francisco to discuss his efforts to strengthen commercial ties with Shanghai, his participation in this year’s Davos World Economic Forum, the future of clean technology and his plans to run for Governor of California in 2010.

Forging Stronger Ties

our ChinaSF initiative. We opened it in Shanghai to attract Chinese businesses to San Francisco and we’re especially interested in those companies who want to establish headquarters in North America – we want them in San Francisco.

When you look at the Bay Area, you see strengths in biotech and life sciences, medical device technology, IT, GreenTech and venture capital.

These are areas where San Francisco and the Bay Area have long been leaders but they are also areas where Shanghai is beginning to emerge, where there is tremendous growth and opportunity. It is an opportunity for San Francisco to start recruiting some of these new Chinese companies.

We opened an office in San Francisco as well.

The idea is to not only attract Chinese companies to San Francisco but to create a portal for American businesses who want to go to China. These

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Insight speaks with San Francisco Mayor Gavin Newsom on San FranciscoShanghai ties.

ChinaSF: A Platform for Converting Opportunities into Outcomes ChinaSF will focus on key innovation sectors such as clean tech, biotech, digital media, information technology, and financial, architectural, legal, engineering, design and other professional services. Two offices have been established to create a foundation of services and relationship-building.

One office will be in Shanghai and the other will be in San Francisco. These offices will both be staffed by bilingual English-Mandarin staff. www.sfced.org/international/chinasf San Francisco Office Ginny Fang - Director Phone: +1-415-352-8873 Fax: +1-415-392-0485 gfang@sfced.org

Shanghai Office Lilly Huang - Director Tel: +86-21-5117-5432 Fax: +86-21-5117-5421 lhuang@sfced.org

235 Montgomery Street Suite 1200 San Francisco, CA 94104 USA

989 Changle Road, Suite 2021 Shanghai, 200031 P.R. China

companies now have a place to go where they can enter into direct conversations with people who can help them based on the unique relationships that we have developed in Shanghai.

ChinaSF has established two advisory boards, one in Shanghai and one in San Francisco, to provide strategic guidance and access to networks in both cities. In Shanghai, we have board members like Vincent Lo of Shui On Land, who has been remarkably successful in China, Joseph Chan of Pillsbury Winthrop Shaw Pittman LLP, Gary Rieschel from Qiming Venture Partners, and Dr. Zhengrong Shi, founder of Suntech, one of the most successful green technology companies out there. In San Francisco we have folks like George Shultz, former U.S. Secretary of State, Dixon Doll of Doll Capital Management, and Jim Wundermann of the Bay Area Council.

On the San Francisco side of the equation, we’re representing the entire Bay Area. In Shanghai our focus is on the greater Yangtze River Delta region.

We think these relationships, based upon the history of our respective cities, can offer something unique, and perhaps offer something different than those already existing, long-standing relationships. So that’s the idea – just another portal of opportunities.

On the focus of ChinaSF… We are really focusing on the green tech sector and we were in Shanghai at the U.S.-China GreenTech Summit to identify green tech opportunities in the

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Yangtze River Delta area. This is an industry of real growth and by some estimates, 40 percent of the world’s venture capital in green technology is coming to the Bay Area. So we have a lot to share, but we also have a lot to learn. This is an opportunity to focus on recruiting and exchanging ideas around every component that makes up the green tech sector, be it photovoltaic cell technology, wind or biomass or geothermal energy, new technologies in wave and tides, or opportunities in energy efficiency, storage and generation, and electric vehicles. These are areas we are eagerly focused on.

On keeping the focus on green tech during a recession…

We just announced a US$1 billion investment

by Project Better Place, a company that focuses on the creation of a market-based transportation infrastructure that supports electric vehicles, that will make San Francisco the world leader in electric vehicles and create a strong market in the Bay Area. This investment will support a joint initiative signed with all nine Bay Area counties to create an integrated electric vehicle system which includes an electric vehicle charging infrastructure that will be ubiquitous throughout the Bay Area. We will be rolling this out through 2010 with the expectation that by 2011 or 2012, we’ll see a massive adoption of plug-in hybrid vehicle technology and electric vehicle technology in the Bay Area.

Consequently, we’re less concerned about macro economic trends like the price of oil because what goes up, must come down; and what comes down, often goes back up! I think people are starting to change. Many have decided that they don’t need to go through $4 a gallon gasoline again, it is time to get more prudent and look at plug-in hybrid technology. The Bay Area is an early adoption region and California has always been about disruptive innovation. This is the next phase – hybrids are 10 years old – the new phase is plug-in and zero emission vehicles.

Green technology is a growth area, regardless of the price of oil. That’s why we are really focusing on that area with China because China could be the big game changer for many green technologies.

China has the capacity to master and adapt technologies in a much faster way than the U.S.

China has ambitious goals and I believe they can deliver. I want Bay Area green tech companies competing in Shanghai and Chinese green tech companies here in San Francisco competing in the U.S. San Francisco is a gateway city and California is a gateway state.

On his comment that China could “leave the U.S. in the dust” in green tech…

China has 1.3 billion-plus people. The U.S. population is a margin of error when compared to China but the Chinese are consuming increasingly like Americans. They are looking for the same opportunities Americans look for: to make money, invest and to create a better life for their families.

So when they start scaling up in terms of energy consumption and building their capacity to meet that demand, China has no choice but to look at new green technologies.

If they innovate, develop and fast-track these technologies, they could leave us in the dust in this area. Here in the U.S., it is taking a long time to put green technologies in place. ChinaSF is part of a larger effort to make partnerships and relationships with China now, to start exchanges and to make investments across our shores so that we have an opportunity to take part in this growth.

On participating in the World Economic Forum in Davos…

The mood in Davos was different this year. In so many ways, last year’s Davos foretold the crisis we are in today. Last year, we talked about excesses, we talked about abuse, we talked about market constructs that were being challenged. When you look back, all the clues were there and we seemed to miss them.

This year, you saw this huge shift towards government; the total number of foreign leaders who came to Davos was dramatically higher this year than it was in previous years and much of the discussion was what governments can and should do to resolve the crisis.

I don’t think the free market is in question; it is just abuses within the free market that need to be regulated. I imagine next year will be the aftermath of this year’s over-indulgence in terms of stimulus programs around the world.

Another dramatic difference from past years is that the issue of the environment is now well entrenched. It is front and center. Three years ago, we were struggling and I was literally doing just a few panels on the environment. This year there were seven panels on the environment. It’s a prominent issue at Davos so I see that growth in the greening of our economy.

On running for Governor of California in 2010…

I haven’t formally announced, but I have launched an exploratory committee and we are raising money. I’m launching town halls across the state to learn more about what Californians want from the next Governor so we are moving down that path. I’ll make a decision in the next couple of months but if you ask me today, I do think I am going to run.

I want to do for California what we’ve done for San Francisco. On healthcare, on education, on the environment, on issues of poverty eradication; I want to see these things scale. San Francisco is the only city in the United States with universal healthcare and the only city in the state with universal pre-school. San Francisco’s economy is out-performing the rest of the state and the nation. These are things I want to do, and I see the limitation of being a mayor.

I also believe that this is an opportunity of a lifetime for California. Strengthening commercial ties with China is exactly what the state should be doing. Instead of bickering about the budget, we need to start focusing on identifying our key strengths, and again it’s that culture of disruptive innovation.

California is one of the most innovative places in the world. Our connection to the Pacific, to the East, to Asia, and to China is one of our greatest assets. We are so well positioned if we can get proactive and we engage in a much more robust way. A lot of these things that we are doing at the local level in San Francisco, I’d like to scale to benefit the entire state.

David Basmajian is Director of Communications & Publications at AmCham Shanghai. He can be reached at david.basmajian@amcham-shanghai.org.

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California is one of the most innovative places in the world. Our connection to the Pacific, to Asia, and to China is one of our greatest assets.”

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HUMAN RESOURCES FOCUS

BY JAMES M. RICE AND THOM NEEDHAM

ISTOCKPHOTO

Strategic Retention in China

A

company striving to succeed in China needs to be strategic in finding and retaining key employees at all levels.

Even with the world’s largest population, China cannot fully provide the necessary labor force to supply all its technical and managerial needs. In its 2008 China Business Report, the American Chamber of Commerce in Shanghai again identified human resource constraints as the top business challenge in China.

This was echoed by 600 Asian chief executives in a 2008 survey by The Economist. Human resources is likely to be a concern for foreign and Chinese business leaders for some time to come.

This challenge is not surprising, given a decade of nearly 10 percent annual economic expansion while less than 10 percent of the five million annual college graduates are deemed “employable” by companies, a pool that is further reduced by limited English language skills. The result: a shrinking talent pool with fierce competition that will only get worse before getting better.

In fact, the Shanghai Academy of Social Sciences projects there will be long-term and farreaching constraints at all levels of the labor market from management talent to R&D personnel and technical workers.

While many factors such as the age and

inexperience of the labor force cannot be controlled, companies can assess the factors that make employees want to stay. A partial solution for the talent shortage is for companies to maintain the talent pool they already have, but what else can be done to help retain key employees in the midst of China’s economic growth and in the current economic climate?

This is a huge challenge in China’s competitive job market, and listening to employee perspectives is critical. Raising salaries and inflating titles only goes so far, and employers inevitably must address employees’ real needs.

A common mistake many companies make is believing that employee retention comes from compensation and benefits, which must be set according to market levels. In fact, retention comes from immeasurable parts of the work environment that are only noticeable by their absence.

What employees are really looking for is a workplace that satisfies four basic needs: respect, learning, challenge and inclusion. When all of these attributes exist in the employee-employer relationship, a company’s human capital is more easily retained.

If your company is not addressing these needs, you are failing to do everything possible to retain your employees and they are likely looking for a job and e-mailing headhunters right now. There are plenty of jobs out there, and all other multinational

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Companies in China must look beyond compensation and benefits to retain highperforming employees.

“

What employees are really looking for is a workplace that satisfies four basic needs: respect, learning, challenge and inclusion.”

companies are competing for the same talent.

Consider the other side of the equation: If you are meeting their needs, your employees are staying with you. The company’s institutional knowledge stays, and recruitment costs come down.

The following four factors come from the leadership team’s attitude and style, not from the human resources department.

Respect Everyone wants to feel that they are being treated with respect. Fairness in compensation, communicating in a considerate manner, correcting mistakes with restraint and patience, giving accurate feedback for development and displaying trust are just a few of the ways employees want to be respected.

However, broad disparities in job skills, challenges in cross-cultural communication, the effects of the one-child policy, poor management skills and personality problems easily frustrate the expression or experience of respect. It is all too easy for managers to make associates feel disrespected out of their frustration with employees who have deeply ingrained views of respect as obedience rather than showing initiative, creative thinking, and speaking their opinion to superiors.

On the other hand, employees feel empowered by managers and companies who understand their culture, encourage them and believe in them, as evidenced by an investment of time, money and energy in their development.

A company’s leadership needs to ensure quality interpersonal relationships at all levels of the company. Senior managers can’t hide behind closed doors and expect employees to feel respected and perform at their best. They need to be listening to employees as much as they are directing their work.

In addition, managers have to watch the company’s work atmosphere so negative treatment is kept out.

Local employees expect a nurturing and coaching relationship with their expatriate boss.

Learning What can I learn from my supervisor and company?

Talented employees seeking to advance their

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careers leave companies when their supervisor does not respect them enough to offer new learning experiences. Young, high potential, local employees are eager to broaden their experience and skill sets in order to keep moving up the career ladder.

They know learning is foundational to professional development and future promotions.

At the same time, they are constantly benchmarking themselves against peers outside the company. Whether it is realistic or not, they are looking for a promotion or a new learning experience that is a building block for their long-term career goals. Employers need to provide appropriate learning opportunities through degree programs, training, short-term assignments and on-the-job coaching.

Exposure to expatriate leaders or local managers who bring new learning experiences to the employee are key to retention. One-on-one coaching is another way to help ensure an employee is exposed to the boss and is learning, and it should be the reason why expatriates are working in China in the first place.

Challenge True high-potential local employees are the opposite of lazy, a label often misplaced on them. Simply providing educational and training experiences is not enough. A job that doesn’t provide an opportunity for challenge and putting new learning to work will likely be a job soon vacated. Keeping competitive and capable team members idle will be dangerous to the organization, both for morale and retention. Unfulfilling jobs send the wrong message to other employees, as opposed to stretching the talents of high-potential team members so you can see them grow with the company.

Closely related to learning, a challenging job is also a building block to career advancement that employees desire. Appropriate allocation of job assignments and workloads by the management will ensure everyone is equally busy but that the right people are being challenged to achieve a little bit more.

Included Being included satisfies a basic psychological need for significance. Beyond learning new tasks and

skills, employees want to participate in decisions and have their opinions matter. Employees need to feel valued, respected, and supported. Exclusion can be perceived as tantamount to disapproval and rejection. Employees want to be part of a team.

This can be especially challenging for Western managers in China where the one-child policy has created over-protected children commonly referred to as “little emperors” – employees who often view the workplace as their extended family.

More than lip service is needed for inclusion.

Real inclusion flows from the corporate culture, management structures, and interpersonal relations that an employee has at work. Almost all these factors can be influenced by the general manager and senior directors, but the role of the boss in setting the stage cannot be understated.

Local employees want to feel they are in a supportive organization and their boss is providing the appropriate emotional support, clear expectations,

clear directions and some level of participation. Doing so provides positive momentum for the whole team and a role model for middle managers who cannot create the environment by themselves.

Companies can make a difference in retaining key people even in the midst of China’s rapidly emerging economy and limited talent pool. To do this, however, requires the management team, from the top down, to ensure the availability of adequate resources for employee development, not just for machines and processes.

The result can make a big difference in retention, giving employees a strong basis to stay and contribute when their genuine needs for respect, learning, challenge and inclusion are met.

James M. Rice is vice president and country manager of Tyson Foods, Inc. Thom Needham, Ed.D., is president and senior consultant of Global Executive Resources.

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“

The management team needs to ensure the availability of adequate resources for employee development from the top down.”

V I P V I S I TO R

B Y DAV I D B A S M A J I A N

AMCHAM SHANGHAI

A Fond Farewell

During his final days in China, Ambassador Clark Randt shared stories about his “lifelong pursuit” of China.

A

s the longest serving United States Ambassador to the People’s Republic of China, Ambassador Clark T. Randt, Jr. had what he calls “the best job in the U.S. government” for most of the past eight years.

Upon arriving in China in July 2001, Ambassador Randt was at the heart of what he calls “the most important bilateral relationship in the world,” acting as “the telephone operator” and “the postman” to facilitate frequent communication between then-U.S. President George W. Bush and Chinese President Hu Jintao.

In the summer of 2001, President Bush gave the Ambassador clear and straightforward instructions for the path of U.S.-China relations.

“He wanted a candid, constructive and cooperative relationship with the People’s Republic of China. I think we really have one now,” said Randt as he sat down with Insight in January shortly before the conclusion of his term. “In fact, the Chinese believe that we have gone beyond that. They characterize it as a constructive partnership.”

Ambassador Randt’s long history with China dates back to his first visit in 1974, when he

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attended the Canton Trade Fair in Guangzhou for the National Council for China Trade (now the U.S.-China Business Council).

“Afterwards I went to Beijing where I visited the Chief of the U.S. Liaison Office in Beijing [then the lead U.S. official in China] who was President Bush’s father, President George H.W. Bush,” recalled Randt. Little did he know then that he would take residence in the same house in Beijing some 27 years later.

That first trip had a profound impact on Ambassador Randt. “When I tried to practice my Chinese with people on the street, they would run from me. It wasn’t their job to talk to foreigners.

To buy staples such as cotton and rice, you needed ration coupons,” he said. “It’s a far cry from today, where China has become one of the greatest consumers of luxury goods in the world.”

Even though his term ended on January 20, 2009, Ambassador Randt’s fascination with China and the Chinese people, what he calls his “lifelong pursuit,” will likely continue. He calls China’s rise the most significant development of our age and asserts that the United States welcomes China’s return to prominence.

Over the course of his tenure, Ambassador Randt has stressed that “the way we deal with China today is going to impact our world and the world our children and grandchildren will someday inherit – for better or for worse, and for many decades to come. Both the United States and China share important strategic interests in promoting peace and stability, global health, international energy cooperation and security.”

Common strategic interests As President Richard Nixon wrote in his groundbreaking 1967 Foreign Affairs article that set the foundation for the Sino-U.S. relationship, “Taking the long view, we simply cannot afford to leave China outside the family of nations.”

The United States has largely followed that path over the past eight years, as China has continued to take an active role in becoming integrated in the global system. Ambassador Randt’s sevenand-a-half years in China were bookended by two landmark global events: China’s entry into the World Trade Organization in December 2001 and the Beijing Summer Olympics in August 2008.

However one defines it, the U.S.-China relationship has certainly expanded over the past 30 years and is clearly now one of the most important international relationships. The United States and China now host more than 60 official bilateral dialogues annually, among them the Strategic Economic Dialogue (SED) and the Joint Commission on Commerce and Trade (JCCT), both important mechanisms in developing the relationship and addressing increasingly complicated economic challenges.

Beginning with his work at the U.S. Embassy in Beijing from 1982 to 1984, then heading the China practice of a leading international law firm and taking on leadership roles with the American Chamber of Commerce in Hong Kong, Ambassador Randt has spent much of his career improving the business climate in China for U.S. companies. As ambassador, Randt was a staunch supporter of the U.S. business community and always played a key role in AmCham Shanghai’s annual Government Appreciation Dinner. In 1979,

the two-way trade between the U.S. and China amounted to US$2.5 billion. In 2008, that figure reached US$409 billion, making China the United States’ second-largest trading partner after Canada and its fastest-growing export market.

Dialogue between the two countries has expanded from trade and commerce to cover a broader range of regional and global issues such as human rights in Sudan and Burma and joint efforts to fight pollution and global warming. As Ambassador Randt observed, the U.S. and China now also work together on security issues outside the relationship between the two countries such as in North Korea and Iran.

Meanwhile, people-to-people contact between the two countries has also been enhanced tremendously. When Ambassador Randt first visited China in 1974, exchanges were rare if not non-existent for the average American or Chinese.

In 2007, the U.S. Embassy processed more than 400,000 non-immigrant visas and more than 56,000 student visas. Meanwhile, 11,000 American students currently study in China, while 57,000 Chinese students are studying in the United States.

Ambassador Randt has stated on several occasions that high-level communications between the U.S. and China is necessary to maintain cordial relations. That fundamental belief is illustrated by the number of meetings between U.S. and Chinese leaders at the highest levels during his tenure.

Before 2001, no sitting president had traveled to China more than once during his term. President Bush, on the other hand, made four trips.

Both progress and challenges Ambassador Randt often refers to the U.S.-China relationship as a mature, complex, multifaceted relationship that embraces significant common strategic interests. At the same time, there remain important differences that present challenges to the relationship.

Among the most challenging issues during Ambassador Randt’s tenure has been human rights.

“The U.S. and China have different histories.

We come from different cultures, different national circumstances and different values, so that makes

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“

The way we deal with China today is going to impact our world and the world our children and grandchildren will someday inherit.”

“To serve our great nation and our President as the representative of the United States of America to China, the world’s most populous and fastestgrowing developing country, is both a rare privilege and honor, as well as a humbling responsibility. The experience has reinforced for my family and me the importance and power of our American values. I and the fine men and women of our China Mission team have an opportunity today to shape the world our children shall inherit tomorrow.”

– Ambassador Clark T. Randt, Jr.

human rights a difficult issue,” he said. However, he notes that today most Chinese enjoy a greater degree of freedom in their personal lives than ever before and the U.S. and China maintain an ongoing dialogue.

With the global economic crisis and slowdown of China’s economy, Ambassador Randt listed bilateral trade as another issue that will become increasingly important. The World Bank expects global trade to contract in 2009 for the first time since 1982, giving rise to protectionist pressures around the world.

Key to the trade relationship moving forward is continued efforts to maintain open markets and the development of the rule of law in China, said Ambassador Randt. “As Treasury Secretary Hank Paulson recently said, neither China nor the United States can protect our way to further prosperity,” Randt said in a recent speech describing the U.S. position on trade. “Rather, we have pushed for further opening of China’s markets, more effective enforcement of China’s IPR laws and we’ve encouraged China to adopt a more flexible exchange rate regime.”

Ambassador Randt believes that there are numerous areas where China has made significant

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progress in the past few years, of which two of the most crucial are in energy and the environment.

China is now the world’s second largest consumer of energy and the largest emitter of greenhouse gases.

From Randt’s perspective, that puts pressure on the environment but also creates an opportunity and a market for American clean energy equipment and technology. No global solution to the challenges of energy, security and climate change can succeed without including China.

“The areas where both countries share common interests are numerous, but it starts with energy and the environment. I think in this area we’ve made great progress and this subject is of increasing importance to both countries,” said Randt. “This is a global issue that will affect everybody who breathes and drinks water on the planet. The Chinese people are well aware, as Americans are, of the importance of this issue. I think this cooperation will continue to grow. It’s very much a “win-win” for both countries.”

A lifelong pursuit Before becoming a U.S. Ambassador, a recognized expert on Chinese law and a fluent mandarin speaker, Randt was pushed to study Chinese by his father, a university professor, while growing up in Cleveland, Ohio.

“My dad told me that if he were going to college when I was, in 1964, he’d study Chinese. If I were a Chinese son,” laughed Randt, “I would have listened to my father and my Chinese would be much better today! But, being an American son, I ignored him and I studied English literature.”

After college, however, China proved too hard to resist. “I was in the Air Force and they were looking for volunteers to learn Chinese and nobody volunteered. I remembered dad saying that knowing Chinese would be important someday, so I broke the cardinal rule of serving in the military – I volunteered! I was hooked right away. I was and still am fascinated by China, its history and its people.”

Ambassador Randt’s legacy as ambassador lies in his work to broaden the U.S.-China relationship and to elevate the importance of the relationship for both countries.

“There is now recognition on both sides that the U.S. and China are interdependent in more and more areas. I’m pleased that going forward we’ll really have the facilities and the diplomatic platform for increased engagement in the 21st century. How we work together and how this relationship develops will play a very important role in the future,” said Ambassador Randt.

Memories of China “There are so many!” exclaimed Randt. “The comparisons and changes from when I first visited in 1974 to today are stunning. I never really have gotten over the magnitude of the changes. In 35 years, which is not a long time in terms of the development of most countries, China has become a completely different world – particularly in the urban areas. There are 172 cities in China with over one million people, probably more. Compared to what you would have found in 1974, I’ve been

impressed by how worldly the urban Chinese have become. There has been a big change in attitudes and general knowledge.”

Perhaps the best way to sum up Randt’s views on the U.S.-China relationship is a quote from a speech he gave at the University of Southern California in April 2008: “Thirty years after the beginning of market reform and normalized relations with the United States, China is considerably more prosperous, and offers many investment opportunities and markets that provide jobs for millions of people in both nations. There are natural differences between the United States and China, but the biggest mistake would be to become overly focused on those gaps in our values and policies. The U.S. wholeheartedly welcomes China’s emergence on the world stage.”

“

There are natural differences between the U.S. and China, but the biggest mistake would be to become overly focused on those gaps in our values and policies.”

David Basmajian is Director of Communications & Publications at AmCham Shanghai. He can be contacted at david.basmajian@amcham-shanghai.org.

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BY ELAINE WU

Spending to Save the Economy As China tries to turn itself into a consumption-based economy, the signs are hopeful: China’s growing middle class is turning into a formidable base of consumers, and becoming the targets of foreign retailers seeking to buoy themselves from a sinking global economy.

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C OV E R S TO RY

IMAGINECHINA

L

ynda Gao has been saving for months to buy a Louis Vuitton handbag that sits in a window display she walks past every day on her way to work.

“I’ve been thinking about buying it for over a year. If I see something I really like, I’m going to buy it, even if I have to wait,” says Gao, 29, who is a human resources manager for a mid-sized company in Shanghai. Dressed in a stylish sweater and skinny jeans, Gao, who makes less than RMB10,000 a month, has prolific shopping habits and harbors a love for brands like H&M, Zara, Miu Miu and Shiseido.

Gao represents a fast-growing segment of China’s population likely to become the next great hope of the country’s economy: young, urban, largely white-collar, middle class consumers who are starting to buy on credit.

By most measures, China’s economy is slowing down. China’s gross domestic product growth

slowed to 9 percent at the end of last year, the slowest pace in seven years. Export volumes dropped 17.5 percent and unemployment rates jumped sharply as businesses closed. To boost its flagging economic growth, China is turning to its 1.3 billion consumers.

Chinese officials have said that China needs to stimulate consumption to offset the slowdown and to compensate for slumping exports. Doing so will not only help to solve its own economic woes but stabilize a world economy whose biggest consumer – the United States – is now in recession.

For years, American consumers have been the drivers of the global economy. But with falling home values, a credit crisis and disappearing jobs, Americans are tightening purse strings, the opposite of what Chinese consumers are being told to do. Although getting Chinese consumers to open up their wallets has traditionally been no easy feat – on average, Chinese save nearly a

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“

The middle class are going to be the people really pushing growth in the first place, and it’s what they’re doing or not doing that’s important.”

third of their incomes compared to Americans who save 1 percent – there are promising signs that the country is slowly shifting from an exportbased economy to a consumer-based one and that China’s historically frugal middle-class consumers are beginning to spend like their American counterparts.

Of China’s 11.4 percent GDP growth in 2007, growth in consumer spending (4.4 percent) accounted for the largest share. Still, consumer spending makes up only 38 percent of China’s overall GDP, in contrast to the United States, where retail spending constitutes 69 percent of the economy.

Government Stimulus Measures While consumer demand in China, as measured by retail sales, has remained relatively resilient, increasing 21.6 percent in 2008, this growth remains at odds with a slump in key sectors such as automobiles, electronics, slowing wage growth, and a 24.6 percent jump in household deposits over the year.

“In reality, Chinese household consumption has likely been weaker than the official retail statistics suggest,” a recent report published by JPMorgan concluded. In the face of such a slowdown, Chinese policymakers are taking an aggressive approach to boosting consumption. Interest rates have been slashed five times since September.

Last November’s RMB4 trillion stimulus package announced by the Chinese government, which included measures directed towards immediate monetary easing and investment in large-scale infrastructure projects, was only the beginning of a larger campaign to stimulate consumer growth.

The majority of the government stimulus policies have been targeted towards the nation’s lower-income, rural residents, who traditionally save much of their income due to weak healthcare and other social service systems. In February, the Chinese government announced plans to create jobs, improve product quality and availability, and lower distribution costs in the rural retail sector.

These plans include establishing 150,000 stores in the Chinese countryside this year in order to create 775,000 new jobs by 2010 and to enable rural residents better access to consumer goods.

In January, the Ministries of Finance and Civil Affairs distributed a total of RMB9.7 billion to 74 million of the nation’s poorest residents, and raised pension benefits for retirees of state-owned

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enterprises by 10 percent.

Other consumption boosting measures implemented by the government include a rural subsidy program for household electronics and appliances that is expected to increase spending

by RMB1.6 trillion over four years, halving the purchase tax on cars with engines below 1.6 liters, and issuing consumption coupons to low-income citizens over the Chinese New Year holiday. The Hangzhou tourism authority recently announced that it would issue RMB40 million in shopping coupons to local residents. The State Council recently approved plans to spend RMB850 billion by 2011 to implement a basic universal healthcare system in a move to address the lack of a comprehensive social safety net which many believe has encouraged high savings rates.

China’s New Consumer Class Although government stimulus measures may be focused on getting the country’s 700 million rural residents to spend, many analysts believe that it is people like Gao who are the real engines of China’s economy. Rural residents, with average annual per capita incomes of less than RMB5,000, simply do not have the spending power to significantly boost consumption growth.

“The middle class are going to be the people really pushing growth in the first place, and it’s what they’re doing or not doing that’s important,” says Ben Cavender, a senior analyst at China Market Research Group (CMR).

Scott Minoie, managing partner of the popular Shanghai restaurant chain Element Fresh, describes these consumers as “a new generation eager to prove that they are not a part of their parents’ generation.

“They’re hip and trendy, they tend to be people who want to experience new things and want to be a part of something bigger and global. It’s important to them to show that they are part of the new and open China – to distance themselves from the older generation,” says Minoie.

China’s new consumers, many of whom grew up in one-child families and often live at home until marriage, tend to have a reserve of disposable income and the willingness to spend it.

“For the younger consumers, we are actually seeing a savings rate close to zero percent. There’s very much a ‘want it now’ attitude in the way that they spend, and they don’t have the same concept of saving up to buy that their parents did. That’s

Cautious Optimism It is Gao’s generation that has also expressed the most confidence in China’s economy. In a recent survey of urban, middle-class Chinese consumers done by CMR, 60 percent of those surveyed said that they would spend as much or more in 2009 than they did in 2008, except in the auto and real estate sectors. Findings from the Nielsen Company’s most recent Global Consumer Confidence Survey indicate that 72 percent of Chinese consumers, nearly twice that of the global average, are optimistic that their country is not in a recession. China’s overall Consumer Confidence Index (CCI) has remained relatively stable at 96, well above the global CCI of 84.

“I would say people are more cautiously optimistic. Relative to other countries, China is still doing really well, but there is some caution in the wind,” says Joe Mueller, vice president of Accenture’s Greater China practice. “[Chinese

IMAGINECHINA

a huge shift between different generations,” says Cavender.

On an average month, Gao saves about a quarter of her income and spends the rest on clothing, makeup, restaurant meals with friends, and entertainment activities like KTV. “My parents tell me that I should do the opposite and spend only a quarter of my income, but I don’t know why I should do that. They are worried about retirement and health, but my generation isn’t so concerned with these things. I am still young and I can still earn money, so why should I save so much?” Gao asks.

In another sign of a widening generational gap, Gao and her contemporaries are starting to adopt Western-style habits of spending – including accruing debt. Although Chinese consumers are culturally known as conservative spenders who are reluctant to buy on credit, and less than 5 percent of the population owns credit cards, a growing number of Chinese are juggling multiple credit cards, consumer loans and installment plans to buy more cars, houses, vacations, and to shop online.

The nation’s major domestic banks all offer credit services to consumers in China, more of whom are paying back loans over time. In 2005, there were 13 million credit cards in China; today there are 115 million, and that number is expected to hit 250 million by the end of 2013, predicts CMR.

consumers] are not getting a clear direction about what they should be doing, so many of them are questioning whether they should wait things out and asking if they really need to purchase something.”

For those who are cutting back, non-essential items such as vacations and holidays, out-of-home entertainment, technology and new clothes are purchases that are the first to go, according to the Nielsen survey. In addition, nearly a third of surveyed consumers will look to reduce their gas and electricity bills, a quarter say they will switch to cheaper grocery brands, and the same number plan to cut down on takeaway meals.

“People are taking a step back, and they are deciding there are certain things they can go without for the time being, but there are other things they will still spend money on if it is important enough. There is not nearly the sense of fear in China as there may be in the U.S.,” says Cavender.

Another reason why Chinese consumers may be feeling more insulated than their American counterparts is because middle-class Chinese have little savings tied up in the stock markets, unlike the U.S. where the investing segment includes much of the middle class. Even though the Ashare market tumbled in China in 2008, a limited number of Chinese lost significant portions of their savings.

“Chinese are incredibly practical consumers.

In a time like this, people are looking for brands that are familiar, that add value to their lives and can deliver multi-functionality. They might be

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STILL SHOPPING: Most Chinese comsumers have said they would maintain their spending habits in 2009.

looking to smaller pleasures, but they’re not going to eliminate those pleasures,” says Sarah Kochling of ?What If!, an innovation consulting company.

“Things are not that bad here. In terms of growth forecasts, we are still in the positive territory.”

Retailers Look to China

AGGRESSIVE GROWTH: Retailers like hypermarket chain Carrefour are continuing their plans for expansion in China.

As business in home countries freeze up, foreign retail companies are increasingly starting to focus their strategies on emerging economies with huge consumer populations like China and India, places responsible for some of the only positive growth seen on the balance sheets of many global retailers.

In China, consumer spending hit nearly RMB9 trillion in 2008, according to Euromonitor International. Market research firms like CMR retain positive outlooks for retail growth for this year, projecting 16 to 18 percent retail growth in 2009, although forecasts for the first and second quarters of the year remain challenging. “[Retail] growth may be slower than last year but it’s still extremely healthy growth. If there is anywhere that is going to weather the storm, it is going to be [China],” says Cavender.

A slowing retail sector has caught some retailers overextended and forced them to consolidate, but others, like retail giants Carrefour, WalMart and Yum! Brands Inc., are forging ahead with expansion in China. French hypermarket Carrefour has plans to open 28 stories in China this IMAGINECHINA

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year, compared with 22 in 2008, and expects sales to grow more than 15 percent in 2009. Wal-Mart, with more than 110 outlets in China, said it would be growing in emerging markets like China, and Yum! Brands, China’s largest restaurant chain with nearly 2,500 KFCs and 416 Pizza Huts, announced it would be aggressively expanding in China after fourth quarter profit growth of 18 percent in 2008 and a record number of new store openings over the quarter.

“There are a lot of companies looking at China as a place that can save them because they might have a presence here and they’re looking to expand that,” says Cavender.

Mid-tier restaurants like Element Fresh are also finding that it is the right time to expand. With falling lease prices and readily available space, now is the time to go forward, says Minoie. Element Fresh is currently looking to open additional restaurants in Shanghai and Beijing, and is also scouting potential venues in Hong Kong and Singapore.

“Our strength lies in the value of our brand.

The last thing people want to do right now is to compromise on their favorite salad or juice because it’s part of their routine, and they know they can get that [from us],” says Minoie. “They might not be going out and trying a completely new place but they are still coming here on weekend mornings for brunch just as they’ve done every week for the last two years.”

A Time for Innovation While China may remain a bright spot for some retailers, a dampening Chinese economy, shrinking profit margins and more cautious consumers are forcing other companies to rethink their marketing strategies.

“Many companies are being more careful about their investments and seeking to expand their existing brands rather than launching totally new brands,” says Kochling.

Some department store chains like Parkson Retail Group are slashing prices as a result of weak fourth-quarter sales growth. Home improvement chains such as Kingfisher, owner of the B&Q franchise and Europe’s biggest homeimprovements retailer, are among the types of retailers being hit the hardest in the wake of a sluggish real estate sector.

Kingfisher’s China sales fell by one-third late last year, and the chain expects to see more store

closures, an abrupt turnaround from 2007, when B&Q sales growth in China was at 40 percent and the company had plans to open 8 to 12 stores annually.

The problem most home improvement retailers have during an economic downturn is that they are designed primarily to fit out a new home, which is an once-in-a-lifetime experience for most Chinese consumers and is happening less frequently now, says Mueller. During a downturn, many stores must resort to driving sales by reducing prices, lowering inventory and cutting costs.

“These are quick, short-term fixes. In the longterm, consumers lose confidence in products and companies lose price leadership because consumers know they are willing to cut prices,” says Mueller.

“In order to have a business built to last, retailers need to structure their businesses to work in good and bad times. They need to have a complete shopping experience with a range of services and products that are appropriate in good times and bad, because when you hit tough times, taking these tactical measures might bring temporary sales relief but it isn’t typically sustainable.”

Many analysts believe that companies should look at the economic downturn as an opportunity to develop new marketing techniques and push into new territories.

“The rules of the marketplace have changed.

Businesses are realizing that they need to start thinking very differently about their businesses and that they can’t continue business as usual,” says Sal Pajwani, chief executive officer of ?What If!.

“When you have a fundamental change in the landscape like you have now, people need to understand their consumers and what they are doing differently better than ever,” says Kochling Consequently, companies are taking more innovative approaches to reach a broader audience and to market their products in ways that are cheaper, faster, and more efficient. Retailers are moving away from traditional marketing mediums such as print and television to alternative media forms, targeting social networking sites, forms of online entertainment, and moving their products online.

Online shopping sites like Alibaba’s Taobao.com are seeing more traffic than ever before. Online shopping rose 128.5 percent in 2008 to reach RMB120 billion, according to a joint report published by research firm iResearch and Taobao.com.

“This is the year we are going to be seeing ecommerce happening. More young people are

going to places like Taobao.com and looking for a deal there rather than going out and buying it in a shop, as they are getting more comfortable with [buying online],” says Mueller.

Savvy Shoppers At a time when China’s internet population has hit nearly 300 million users, overtaking the United States as the country with the most netizens, Chinese consumers are also becoming more sophisticated. “[Chinese consumers] have reached a much higher level of sophistication pretty rapidly in the past few years. The internet is really pushing the dissemination of information. People are spending so much time online that they are really sharing a lot of information about buying products and how to use those products,” says Cavender.

It is consumers in China’s second- and thirdtier cities who are quickly moving up the ranks.

More than 70 percent of online shoppers last year came from secondary and tertiary cities, said the iResearch report.

While consumers in first-tier cities like Shanghai and Beijing remain trend leaders for brands and products, consumers in lower-tier cities are evolving into increasingly sophisticated shoppers as they travel, are exposed to new types of marketing, or browse the internet.

“There are a lot of opportunities in the secondand third-tier markets. Rather than staying in a market where it might be difficult to stand out, [companies] should be looking at these markets to build a stronger presence and shore up a part of those markets for themselves,” says Cavender. “It’s a good time for a company to be really looking at China and investing in the right kinds of marketing and long-term objectives for growing a business here. Now is the time to really move ahead of the pack.”

In the meantime, the hopes of many are pinned on Gao and her peers, whose purses and wallets are staying open during an economic downturn.

For now, Gao remains optimistic about her current situation.

“I’m not going to change my spending habits anytime soon,” she shrugs. “But who knows? I might have to.”

Elaine Wu is an Editorial Associate at AmCham Shanghai. She can be contacted at elaine.wu@amcham-shanghai.org.

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“

When you have a fundamental change in the landscape like you have now, people need to understand their consumers and what they are doing differently better than ever.”

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INSIDE AMCHAM FROM THE CHAIRMAN

Adapting to the Times

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he beginning of 2009 has been a continuation of the difficult times that began last fall, as China’s trade and export statistics continue to show less than stellar economic growth.

Within China, there is some hope that the RMB4 trillion stimulus plan will succeed in propping up the economy, as reflected by the recent 24 percent rise in the Shanghai Composite Index since January.

With progress on domestic economy programs in the U.S., the Obama administration is turning its attention towards trans-Pacific relationships. Secretary of State Hillary Clinton’s first trip abroad brought her to Asia and not the traditional destination of Europe, with stops in Japan, Indonesia, Korea and China. While in China, Secretary Clinton reiterated the interconnectedness of the U.S. and China, saying, “We are truly going to rise or fall together,” as bilateral trade topped US$400 billion in 2008 and China continues to purchase debt that is funding stimulus spending in the United States. AmCham Shanghai looks forward to continuing its role in facilitating business to government interaction for members with both the U.S. and Chinese governments.

J. Norwell Coquillard Chairman AmCham Shanghai

It is clear this is a challenging period for all of our businesses but it is times like this when you should take advantage of your AmCham Shanghai membership. We recently launched the China Manufacturing Competitiveness 2008-2009 study, together with Booz & Company, which revealed that although the challenges brought on by the global economic downturn are clear, multinational manufacturers remain committed to China and are increasingly dedicating resources to innovating and improving efficiency.

AmCham Shanghai is tailoring its programming to ensure timely and topical information reaches members.

At another recent Chamber event, Deputy Government Secretary of Shanghai and Chairman of the newly established Shanghai Municipal Commission of Commerce Sha Hailin emphasized Shanghai’s goal of enhancing its status as a world-class economic and financial center and promised to continue working closely with American companies. AmCham Shanghai is committed to participating in this development and to help our member companies develop their businesses in the city.

These events are part of AmCham Shanghai’s efforts to provide practical information that can help your business in these tough times. We are tailoring our member programs and services to meet the rapidly changing economic situation and we will continue to ensure that events and other programming offer timely and topical business information.

The AmCham Shanghai 2009 Board of Governors: 2009 Chairman

J. Norwell Coquillard President Cargill Investments (China), Ltd.

2009 Vice Chairman

2009 Governors

Eddy Chan

Ted Hornbein

James Rice

Head of China and Senior Vice President FedEx Express

Managing Director for Asia Richco, Inc.

Vice President & Country Manager Tyson Foods, Inc.

Murray King

Matthew J.Targett

Managing Director Shanghai APCO Worldwide

Asia-Pacific Technology Director INVISTA

Pierre E. Cohade President, Asia-Pacific Region The Goodyear Tire & Rubber Co.

Warren Wisnewski Minda Ho John Grobowski Managing Partner Faegre & Benson LLP Shanghai

Executive Vice President Praxair (China) Investment Co., Ltd.

Diane Long J A N U A RY / F E B R UDirector A RY 2 0 0 9

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Director and Vice President, Asia-Pacific Operations Eastman Kodak Co.

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

Highlights from the January 2009 Board of Governors Meeting Approval of Board Officers

The Board approved Murray King as Secretary and Matthew Targett as Treasurer of the 2009 Board of Governors.

Membership

The Board approved 51 new member applications.

Ethics Committee

Diane Long resigned from the Ethics Committee following her election as a Governor. Following a secret ballot, Phil Branham was elected to serve on the Ethics Committee.

U.S. Government Visits

According to the U.S. Consulate, senior U.S. government official visits are expected to resume following appointments in the Obama administration. The Consulate looks forward to resuming business-togovernment visits through AmCham Shanghai.

Charity Gala Funds

The Board approved a proposal to cooperate on a joint project with AmCham Southwest China and the Beichuan Civil Affairs Bureau to equip and support a senior citizens’ activities center in Sichuan Province using funds raised at the 2008 Charity Gala.

IN ATTENDANCE Governors: Eddy Chan, Pierre Cohade, Norwell Coquillard (Chairman), John Grobowski, Minda Ho, Ted Hornbein, Murray King, Diane Long, James Rice, Matthew Targett and Warren Wisnewski.

Attendees: David Basmajian, Phil Branham, Justin Chan, Brenda Foster, Helen Ren, Linda X. Wang and Oliver Yang.

APOLOGIES Chris Beede and David Gossack.

Highlights from the February 2009 Board of Governors Meeting Membership

The Board approved 55 new member applications.

Nanjing Outreach

AmCham Shanghai will sign a memorandum of understanding with Nanjing focused on enhancing the environment for U.S. businesses in the city. AmCham Shanghai will look to increase activities and better service member companies in the city.

Washington, D.C. Door Knock

Given the rapidly changing economic situation and ongoing appointments in the new administration, AmCham Shanghai will conduct two joint Door Knocks in cooperation with AmCham-China (Beijing).

The first joint Door Knock will be led by AmCham-China in May while AmCham Shanghai will lead a second joint delegation to Washington, D.C. in September.

IN ATTENDANCE Governors: Chris Beede, Eddy Chan, Norwell Coquillard (Chairman), David Gossack, John Grobowski, Minda Ho, Ted Hornbein, Murray King, Diane Long, James Rice, Matthew Targett and Warren Wisnewski.

Attendees: David Basmajian, Justin Chan, Siobhan Das, Brenda Foster, Helen Ren, Linda X. Wang, Jessica Wu, Oliver Yang and Karen Yuen.

APOLOGIES Pierre Cohade

Is your Membership due for renewal?

Renew now & stay a part of the largest, most active AmCham in Asia: AmCham Shanghai!

MEDICAL CLINICS

2008/09 AmCham Shanghai Membership Satisfaction Survey The American Chamber of Commerce in Shanghai recently launched the 2008/09 AmCham Shanghai Membership Satisfaction Survey. This year’s survey continues to focus on members’ personal experiences with AmCham Shanghai products and services. Results will allow the Chamber to enhance understanding of member needs and expectations, and better tailor future development. Thank you to all the members who have taken the time to complete this important survey.

Special thank you goes to the lucky draw prize sponsors:

Two economy class round-trip airline tickets from Shanghai to U.S. Premium card set

RMB500 dining voucher to be used at all hotel outlets

RMB500 Food and beverage coupon

A complimentary voucher worth RMB 1,000 at Lawry's The Prime Rib Shanghai

Voucher of one stress-releasing acupuncture treatment

Voucher for two-night weekend stay in Ocean View Room with ABF for two

Free subscription of six issues of the Chinese National Geography magazine

5.0 megapixel digital camera; 7.0 megapixel digital camera; 7" swivel screen portable DVD player & wireless headphones; 10.4" digital photo frame

Buffet brunch at Windows for Three

Voucher for one-night weekend stay in Deluxe Room; RMB500 Radisson money for Sundy brunch for two persons

Weekend seafood dinner buffet for two persons at the Café

One-night Saturday stay in Club Floor Suite with Sunday Brunch for two

Voucher of one-night stay in Executive Deluxe Room with buffet breakfast for two

Voucher for dining at Tables for two

For more information regarding the survey, please contact Sandra Sun at (86 21) 6279-7119 ext. 5670 or 44 INSIGHT MARCH 2009 sandra.sun@amcham-shanghai.org.

Event Highlights

INSIDE AMCHAM

RECENT AMCHAM HAPPENINGS

AMCHAM SHANGHAI

January U.S. Consulate Briefing Consul General Beatrice Camp noted that January 1 marked thirty years of bilateral diplomatic relations between the U.S. and China. Events to mark the occasion in Beijing drew many historic figures, including former President Carter, who is continuing on to Shanghai for a 30th anniversary celebration here.The CG discussed the upcoming transition in Washington and the presidentelect’s support for high-level economic dialogue between the U.S. and China. She also noted a Consulate Warden Message regarding avian flu, alerted members to a planned February visit to Shanghai by the FDA Country Director for China, and summarized several points in Mayor Han Zheng’s new Shanghai Work Report. CG Camp concluded by reviewing developments in creating and funding a USA Pavilion at the Shanghai Expo 2010, particularly the design team’s meetings in Shanghai during the previous week and the new timeline for private sector funding commitments. (Jan 13)

Ambassador Randt bids farewell to AmCham Shanghai members.

U.S. Ambassador Clark T. Randt, Jr. Speaks at Farewell Breakfast Event AmCham Shanghai was honored to host United States Ambassador Clark T. Randt, Jr. at a farewell event before he stepped down from his post on January 20. AmCham Shanghai members thanked Randt for his years of service and asked him questions about his 30-year career working in China.

For more on Ambassador Randt, please see page 30.

February U.S. Consulate Briefing

CG Camp concluded with a brief review of progress on Expo 2010 and the development of a new narrative, budget and timeline by the USA Pavilion team led by Ellen Eliasoph and Nick Winslow. The remainder of the briefing was turned over to Eliasoph and her new Director for International Marketing & Partnerships Felix Wong, who previously handled projects related to AT&T’s Olympic sponsorship, to present their current proposal for the design and funding of the USA Pavilion. (Feb 10)

Chairman of Shanghai's New Municipal Commission of Commerce Speaks on 2009 Goals AMCHAM SHANGHAI

With the new Congress in place, Consul General Beatrice Camp noted that official delegations are beginning to schedule trips to Shanghai; beginning with a Senate Finance Committee staff delegation and the Coast Guard’s Pacific Commander on maritime safety issues.

The CG called attention to a recent WTO ruling against China on an IPR case initiated by the U.S. and reported that the Consulate has found provincial authorities in the region more eager to discuss IPR in recent months.

The CG predicted that environment and energy cooperation will gain increasing attention within the Obama administration and also reported on the recent creation of an Energy Efficiency Steering Group to advise the U.S. government on its programs to promote energy efficiency in the industrial sector in China.

AmCham Shanghai hosted Sha Hailin, Deputy Government Secretary of Shanghai and Chairman of the newly established Shanghai Municipal Commission of Commerce (SCOFCOM) at an event to discuss the role of the new commission and the Shanghai Municipal Government’s strategies for 2009. Sha emphasized how important China-U.S. trade was to the city of Shanghai and pledged to work together with U.S. companies to develop the business climate during his term. SCOFCOM’s 2009 plans aim to encourage more foreign investment in the city while growing the city’s modern service industry and transitioning towards a service-based economy, developing advanced manufacturing, investing more capital into environmental protection and energy savings, expanding investment channels and encouraging foreign investment in infrastructure development. Another important goal was to streamline government functions to better serve the business community.

The Shanghai Municipal Commission of Commerce is responsible for overseeing foreign trade and investment, overseas business management and domestic trade management in Shanghai, consolidating the management of domestic and foreign trade under a single government authority for the first time. (Feb 18)

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Committee Highlights

INSIDE AMCHAM

NEW IN COMMITTEES

China Manufacturing Competitiveness 2008-2009 Launch Manufacturers’ Business Council AMCHAM SHANGHAI

Environmental Sustainability in Design and Construction

Suzhou Committee

AmCham Shanghai, in conjunction with management consulting firm Booz & Company, recently launched the second annual China Manufacturing Competitiveness study. The 20082009 survey of foreign invested manufacturing companies operating in China found that rising costs, declining rates of domestic growth, and decreased demand for Chinese exports are pressuring multinational corporations that operate in China. However, the study also found that the global business community increasingly views China as an essential player in an eventual turnaround. As a result, multinational manufacturers have strengthened their commitment to China as a key base of operations for Asia.

Ted Hornbein, managing director for Asia of Richco, Inc. and an AmCham Shanghai Governor, was joined by Ron Haddock, vice president, and Edward Tse, managing partner for Greater China, of Booz & Company, to share the survey findings. Despite the challenges of the downturn and steadily increasing manufacturing costs, the MNCs surveyed were fairly optimistic about China’s efforts to position itself as a world-class manufacturing center.

The study also found that nearly 25 percent of respondents were upgrading their facilities in China with state-of-the-art technology, while best practices such as advanced statistical forecasting, lean systems and optimized product flows were more prevalent than ever. Finally, the most successful MNCs harness the dual opportunities of China as a source of exports as well as a huge domestic market. (Feb 20)

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Green building and energy conservation consultant Stefanie Smith spoke on the LEED (Leadership in Energy and Environmental Design) rating system at an event hosted by the AmCham Shanghai Suzhou Committee at the Shanghai Pacific Energy Center in January. Smith discussed some of the challenges many “green” projects face in getting accredited and completed, as well as some of the financial implications of going green.

China’s demand for green buildings is likely to increase five-fold over the next two years. As the country’s demand for green building increases, choosing more environmentally sustainable buildings makes sense from both a productivity and financial standpoint, said Smith. For a start, green buildings typically enjoy an 8 to 9 percent decrease in operating costs and a 7.5 percent increase in building value. Green building occupants also enjoy gains in work productivity through decreased sick days and increased health, she explained. (Jan 19) For more information on how to get involved in the Suzhou Committee, please send an email to: comm.suzhou@amcham-shanghai.org

INSIDE AMCHAM

AMCHAM SHANGHAI

2009 Economic Outlook for China Financial Services Committee

China’s economy in 2009 will remain challenging in the short-term, but the overall outlook is optimistic, said Dr. Tao Wang, head of China Economic Research for UBS Securities, at an AmCham Shanghai Financial Services Committee event. Dr. Wang spoke about China’s economic growth during the global economic downturn and addressed some of the challenges and risks that lie ahead for 2009. She attributed China’s current economic slump to two key factors: the decline of China’s housing construction sector and the collapse of external demand reflected by the rapid decline of China’s exports. UBS has forecasted 2009 GDP growth of 7 percent for China and consumer price index (CPI) growth of 0.8 percent.

Dr. Tao Wang UBS Securities

However, Dr. Wang predicted that while China’s growth will slow, there are several reasons why the country is in sound shape to weather the financial downturn. She noted that China is not as export-led as people believe, that the country has no credit bubble, and the nation’s banks have plenty of liquidity. The recent RMB4 trillion economic stimulus package will do much to support the economy through the construction of infrastructure, providing jobs and fueling demand for commodities such as steel, she said. Dr. Wang also warned that fiscal spending alone was not going to be enough; rather bank lending and rallying consumer confidence would be critical to stimulating economic growth. (Jan 14)

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DEAL OF THE MONTH IMAGINECHINA

Overseas Resources State-owned aluminum firm Chinalco’s US$19.5 billion investment in Rio Tinto reflects China’s continuing demand for strategic resources.

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ustralian mining giant Rio Tinto unveiled a plan to accept a US$19.5 billion cash infusion from China’s state-owned Aluminum Corp. of China (Chinalco) in mid-February.

Pending regulatory and shareholder approval, Chinalco’s investment would mark the largest-ever foreign corporate investment by a Chinese company.

It comes at a time when China is looking to secure supplies of energy and natural resources and Chinese companies are eyeing overseas acquisitions.

Under the proposed investment, Chinalco would invest US$12.3 billion across Rio Tinto assets in aluminum, copper, bauxite and iron ore in Chile, Australia and the U.S. The remaining US$7.2 billion would be for convertible bonds that could eventually be converted into Rio Tinto shares. The total investment is roughly equivalent to an 18 percent stake in Rio Tinto, and Chinalco is reportedly seeing a board seat.

Chinalco already owns 14.99% of Rio Tinto’s Londonlisted stock and also owns a joint 9 percent stake of Rio Tinto’s Sydney-listed shares with Alcoa, Inc. Chinalco’s investment in mining assets means it would receive minority shares in some of Rio Tinto’s top producing mines, including Chilean copper mine Escondida, Australia aluminum mine Weipa and iron ore unit Hamersley, and American copper mine Kennecott. Xiao Yaqing, then-Chairman of Chinalco, called the partnership with Rio Tinto “a milestone for Chinalco and a chance for Chinalco

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to become the world’s leading resources company.”

Shortly after the announcement, Xiao stepped down from his post as Chairman to join the State Council as deputy secretary general.

Proceeds from the investment are expected to assist with paying down Rio Tinto’s US$38.9 billion debt. The announcement of the Chinalco agreement came on the same day when Rio Tinto announced a 50 percent drop in net revenue, primarily due to a US$7.9 billion write down in the company’s aluminum division.

Several state-backed Chinese companies have followed Chinalco’s lead to invest during the current economic climate as an opportunity to boost their overseas presence. China’s Minmetals disclosed its US$1.7 billion offer for Australian Oz Minerals, Ltd, the world’s second largest zinc miner, in addition to a 70 percent stake it is taking in Macarthur Minerals’ Australian iron ore project. Yanzhou Coal Mining is in talks with Felix Resources for a deal worth over US$1 billion that would provide China with access to new coal supplies. Recent reports have also suggested that the China Investment Corp. is exploring additional investment opportunities in energy abroad.

These moves are indicative of China’s drive to secure natural resources and energy around the world. As a major importer of metals and minerals, China buys an estimated 50 percent of its iron ore, 60 percent of its copper and 40 percent of its zinc, from Australia and Brazil.

– Teresa Yan

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