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INSIGHT www.amcham-shanghai.org

The Journal of the American Chamber of Commerce in Shanghai - Insight September 2016

China’s Retail Evolution

Boston Consulting Group on consumer growth megatrends in China and how young, e-savvy shoppers will continue to propel China’s consumer economy

FEATURES P.16

POLICY P.25

MEMBER NEWS P.30

WeChat, the Social Plumbing of China

Latest Developments in U.S. FCPA Enforcement

Member Focus with Cameron Johnson, GM of Sigmatex Asia

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Movers and Shakers CAREER

INSIGHT The Journal of the American Chamber of Commerce in Shanghai - September 2016

FEATURES

amcham shanghai President

Kenneth Jarrett VP of Programs & Services

Scott Williams

VP of Administration & Finance

Helen Ren Directors

Business Development, Marketing & Events

Patsy Li

07

China’s Consumer Boom

12

Managing a Crisis Effectively

14

Bricks and Mortar in the Digital Age

16

WeChat, the Social Plumbing of China

19

Metro in China: Adapting While Growing

Committees

Jessica Wu Communications & Publications

Ian Driscoll

Government Relations & CSR Membership & CVP

INSIGHT Senior Associate Editor

Ruoping Chen Associate Editor

Doug Strub

Insight on crisis management and its reputation-saving responses Counteracting the recent industry shake-up A look into WeChat as a powerful marketing and communications tool Q&A with Jeroen de Groot, president of the China division of Metro AG

POLICY PERSPECTIVES

Veomayoury "Titi" Baccam Linda X. Wang

How young, e-savvy shoppers will continue to propel China’s consumer economy

22

New China Transfer Pricing Rules

24

Stock Connect

25

Latest Developments in U.S. FCPA Enforcement

27

Unplugged

Content Manager

Taxpayers with related party transactions need to determine where they fall under new rules

China’s stock connect has trouble wooing foreign investors Recent developments and priorities in the enforcement of the Foreign Corrupt Practices Act What China’s internet and data restrictions mean for U.S. companies and China’s economy

DEBORAH TANG

MEMBER NEWS

Design

Gabriele Cordioli Printing

Snap Printing, Inc.

INSIGHT Sponsorship (86-21) 6279-7119 Story ideas, questions or comments on Insight: Please contact Ruoping Chen (86-21) 6279-7119 ext. 4583 ruoping.chen@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.

30

Member Focus

32

Board of Governors Briefing

33

Event Report

With Cameron Johnson, GM of Sigmatex Asia, a manufacturer of carbon composite materials

Notes from last month’s meeting

Recap of selected events from last month

34

Month in Pictures

36

Committee Chair’s Corner

38

Esoterica

Selected photos from last month’s AmCham events With Callum Douglas, co-chair of the Business Council for Sustainable Responsibility Baijiu Nights

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

September 2016

Special thanks to the 2015-2016 AmCham Shanghai President’s Circle Sponsors

3

OUTPLACEMENT

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Cornerstone offers a variety of programs to meet an employer’s specific needs. Programs can include Individual tailored Executive Level Outplacement & Professional Level Outplacement.

REPUTATION ARE WORTH THE INVESTMENT CONTACT US: Simon Wan, Chief Executive Email: simon-wan@cornerstone-group.com Cornerstone International Group - Career Partners Website: www.cornerstone-group.com & www.cpiworld.com

Ker Gibbs Chair of the Board of Governors

This summer in San Francisco, two observations struck me. First, I felt liberated to have fast, unfettered access to internet sites, regardless of where they were hosted. Second, I was struck by how many Chinese people work in Silicon Valley. Walking the Google campus seemed almost like touring Baidu or Lenovo or any other high-tech campus in China.

These observations are not new, but why are so many Chinese going abroad now? Is a slowing economy the only reason?

Fostering innovation and building an information-based economy are cornerstones of China’s current economic plan.

The government is also determined to make Shanghai an international financial center. How does a blocked internet figure into this?

President Xi has been abundantly clear about his goals. He unveiled his internet sovereignty doctrine in November 2014 at the World Internet Conference in Wuzhen, and has been pushing like-minded countries to adopt it. His plan describes an internet within China’s borders that is controlled by the government and separate from the rest of the world. He followed this with new rules for data localization and demands for back doors into secured networks and products. The media, according to Mr. Xi, should serve the Party.

AmCham’s recent publication, titled “Unplugged,” encourages China to move in a different direction. “...the (Chinese) government sees the internet as an important battlefield of ideas that must be carefully managed and controlled, not as an open source of ideas that can facilitate innovation and promote China’s economic development.”

Over the years China has aligned with the rest of the world in many ways. On climate change China has committed to common goals that will help save our planet. China has also led by alleviating poverty and eradicating illiteracy. But on the issue of internet and media, we couldn’t be further apart.

China is not America. In America’s system, the media play a critical role keeping our government in check. The internet, ideally, is meant to be free from government interference and controlled by no one. People and businesses have chosen to come to China, and in so doing submit to China’s laws. We are increasingly feel-

ing the pinch. In AmCham’s 2016 business climate survey, 81 percent of respondents cited internet access as among their top business challenges. True, we make more use of foreign websites than our Chinese counterparts do, but internet controls are affecting business results for all of us.

In the end China suffers more. China’s innovators and intellectuals are hobbled without access to the same resources, data and ideas as their global counterparts. Internet policy restrictions are accelerating the outflow of intellectual talent, explaining why Silicon Valley looks like it does today.

For most Chinese, internet controls are not a concern. They can’t use Google, but they’re happy with Baidu. The problem here is internet controls make Chinese society more inward-looking and isolated.

Ironically, this occurs just as China is taking its place on the world stage as a “great power” and Chinese society has a chance to shake off its turbulent history and truly end its decades of isolation. At this crucial time in China’s development as a society, the government’s internet policy cuts its people off from the outside world.

Isolation also deprives us of China’s contributions. China has produced highly successful technology companies that provide amazing services. WeChat, for example, puts simple messaging apps to shame. It’s a great product that should sweep global markets, just as Facebook and Twitter have. Why hasn’t this happened? People typically think barely a nanosecond about where internet services are hosted. Unless that place is China. In China, the government will block, censor, or monitor our data as a matter of policy.

China is not likely to imitate the West when it comes to media. China’s goal has always been to modernize, not Westernize. How will China handle the control of information within its borders? How will it foster innovation and retain talent? Can Shanghai become an international financial center while restricting information available to traders? Mr. Xi holds the answers, and with them the future of China.

I September 2016

Chairman’s Letter

5

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

Private Sector Walmart Dirk Van den Berghe will become president and CEO of Walmart China as well as regional president of Walmart’s Asia business, which includes operations in Japan.

Van den Berghe joined Walmart in Canada in 2014. Under his leadership, the Canadian division expanded its supercenter format, grew its grocery business and launched online click and collect services in Ottawa and Toronto.

Before that, Van den Berghe had worked for Delhaize Group for 15 years, most recently as CEO of Delhaize Group’s supermarket business in Belgium and Luxembourg.

In addition to his retail background, Van den Berghe spent two decades teaching business at leading universities across Europe, Asia and the United States. He also has more than a decade of diplomatic and trade experience as Belgium’s International Trade Commissioner.

Van den Berghe earned a Ph.D. in economics from Sofia University in Bulgaria and speaks seven languages, including English, French and Dutch.

www.amcham-shanghai.org

Microsoft

6

Alain Crozier was named chairman and chief executive of Microsoft Greater China Region. He is responsible for the strategic and operational leadership covering all of Microsoft’s product, service and support offerings across Great China and continuing the company’s transformation into the leading productivity and platform company for the mobile–first, cloud-first era.

Crozier is a 29 year veteran of Microsoft.

He has held various leadership positions globally. Most recently, he was president of Microsoft France. Before joining Microsoft, Crozier worked for Lesieur Alimentaire and

GOVERNMENT Peat Marwick Consultants.

He has a bachelor’s degree in mathematics and social sciences from University Claude Bernard and a business administration degree from Institut Superieur de Gestion.

AIG AIG announced the appointment of Debbie Wilson as chief financial officer for Australia and head of finance for Greater China and Australasia. Wilson joined AIG in 2011 as chief financial officer for AIG New Zealand (NZ). She was acting general manager for AIG NZ from June 2014 to February 2015. Prior to joining AIG, Wilson held positions at Lumley General Insurance (NZ) Ltd, ACE Insurance (NZ) Limited, Marsh Limited, and General Accident Asia Pacific (GAAP). She holds a BBus in Accounting from Auckland University of Technology.

Aetna International Tim Cocchi has been appointed as Aetna International VP, China Market. Based in Shanghai, Cocchi is responsible for all of Aetna’s business in China, including risk and service entities, and has general manager responsibility for all Aetna staff in China.

Cocchi has over 30 years of experience in the insurance industry, which includes over 15 years on overseas assignments. He has served in several cross functional positions and has been responsible for P&L results in over 10 countries and regions in Europe, Middle East and Asia.

Cocchi holds an MBA degree from the University of Connecticut and a B.S. in Finance degree from Western New England College.

Li Qiang was named party secretary of Jiangsu province.

Prior to this, he was the governor of Zhejiang province. Li served as party secretary of Wenzhou, a big city in Zhejiang from 2002 to 2004. After that, he was promoted to be the secretarygeneral of the Zhejiang provincial committee. In 2011, he became vice governor of Zhejiang province.

Liu Xiaoming was recently promoted to be the vice minister of Transport. Liu joined the ministry of Transport in 2014. From 1988 to 2003, he studied and worked at Beijing University of Technology. After that, he held leadership positions at the Beijing municipal commission of Transport, and most recently served as party secretary and director of the commission.

Yang Yue was named vice governor of Jiangsu province.

Previously, Yang was the party secretary of Fuzhou, the capital of Fujian province. He became a standing committee member of Fujian province at the end of 2008. Before that, he was the chairman of the All China Youth Federation and executive secretary of the Communist Youth League’s Central Committee.

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

Movers andFEATURES Shakers

China’s Consumer Boom cover story

How Young, E-Savvy Shoppers Will Continue to Propel China’s Consumer Economy

W Youchi Kuo is a 10-year BCG veteran and leads its China Center for Customer Insight (CCI).

Among other things, the CCI produces an annual review of Chinese consumer megatrends.

Jeff Walters is a partner and managing director at BCG. He joined BCG in 2003 and is a leader of the firm’s Greater China Consumer Goods and Retail practice, and also leads the firm’s Center for Consumer and Customer Insight in Emerging Markets.

hile much of the world focuses on signs of slowing growth in China’s industrial sector, relatively little attention has been paid to a more encouraging development for the nation’s economy: personal consumption continues to grow at a healthy pace. And while the pace of spending will likely cool in the months ahead, the overall trajectory is bullish for the foreseeable future.

Household consumption in China grew by 8.8 percent in the first half of 2016, even though GDP growth slowed to 7.2 percent in nominal terms and financial markets experienced volatility. We project that by 2020, China’s consumer economy will further expand by about half, to US$6.5 trillion—even if GDP growth slows to 5.5 percent, which is below the official target. The incremental growth of $2.3 trillion over the next five years would be comparable to adding a consumer market 1.3 times the size of today’s Germany or the UK to the global economy.

There are several reasons China is likely to remain one of the world’s biggest growth markets for consumer-product companies. One is that incomes continue to rise for China’s swelling ranks of middle-class and affluent consumers — those with annual household incomes of more than $24,000. Even though the rate of growth is down slightly from 2016, average household incomes rose by 8.7 percent in the first half of 2016.

As a result, Chinese consumers are still willing to spend. The most recent consumer-sentiment survey

by The Boston Consulting Group’s Center for Customer Insight found that three-quarters of Chinese consumers plan to maintain or increase their level of spending in 2016 and that two in five expect to “trade up” to higher-value products, particularly for baby products, consumer electronics and financial services.

(See “China’s Consumers Stay the (Slightly Slower) Course,” BCG Perspectives, July 2016.)

Drivers of continued growth Three longer-term megatrends will continue to drive growth in consumer demand in the years ahead.

They are the continued rise of the upper-middle class and affluent households; a new generation of free-spending, sophisticated consumers and the increasingly powerful role of e-commerce. (See Exhibit 1.)

In fact, research by BCG and AliResearch, the research arm of Alibaba, has found that these three great forces of change will transform the nature of consumption in China over the next five years. They are also propelling the emergence of a two-speed consumer economy. Consumption is growing at a high speed in upper-income brackets, among the younger generation and in e-commerce channels, while it is decelerating among lower-income and older-generation consumers and in traditional retail channels. (See The New China Playbook: Young, Affluent, E-savvy Consumers Will Fuel Growth, BCG Focus, December 2015.)

As we will explain below, the rise of e-commerce does not mean that com-

panies should begin to retreat from brick-and-mortar retail stores — they will continue to be important. Rather, success will largely depend on companies’ ability to succeed in an “omnichannel” market in which online and offline retailing complement each other.

Companies will need a new playbook to capture the coming wave of growth. The strategies of the past will no longer be relevant.

This is how the three great forces of change are transforming China’s consumer market: The rise of the upper-middle class.

China’s consumer economy is entering a new era of demographic change.

Until very recently, growth was mainly powered by what we call the emerging-middle class, households with annual disposable income of US$10,000 to $16,000, and middle class, those with incomes of $16,000 to $24,000.

The new driver is the dramatic rise of upper-middle-class households ($24,000 to $46,000 in annual disposable income) and affluent households (more than $46,000). Such households account for 17 percent of all urban households in China now. But we project that their number will double to 100 million by 2020. They will account for 55 percent of Chinese urban consumption and 81 percent of its incremental growth — or $1.5 trillion — over the next five years. Consumption by upper-middle-class and affluent households is growing more than three times faster than among emerging-middle and middle-class households.

Companies won’t be able to capture the loyalty of upper-middle-class and affluent households by focusing on China’s major metropolitan areas.

September 2016

By Youchi Kuo, Jeff Walters, Angela Wang and Vincent Lui

7

of E-Commerce

COVER STO RY

With 410 million online shoppers in China, e-commerce now accounts for 15% of private consumption, up from 3% in 2010.

Over the next five years,

Five Trends

Transforming China’s Consumer Economy

consumer e-commerce is projected to: [Exhibit 1] Five Trends Transforming China’s Consumer Economy Generate annual revenue growth of 20% per year, compared with 6% growth at physical retail outlets

Account for 42% of all growth in Chinese consumption

Grow from $600 billion in annual sales to $1.5 trillion

Account for 24% of all consumer transactions

China’s Consumer Boom Will Continue

Services Will Drive Growth

Even if China’s GDP growth slows to 5.5%, personal consumption is projected to increase by about half, to $6.5 trillion, by 2020.

But growth is only part of the story: demographic, social, and technological forces will transform China’s consumer economy.

Over the next five years, spending on consumer services is projected to grow by 11% per year and account for 51% of growth in urban consumption.

The Rise of the Upper-Middle Class

Share of Chinese consumers saying they recently spent money on these services.

Emerging-middle and middle class

Households earning more than $24,000 annually will increase their consumption by 17% per year through 2020.

Number of Chinese households earning more than $24,000.

Eating out

100 million 50%

Personal care and fitness

Outbound travel

2015

2020

17%

Share of urban consumption by Chinese born after 1980.

53%

Education

LEGEND: Emerging-middle- and middle-class households = annual disposable income of $10,001 to $24,000.

30%

37%

Upper-middle-class households = annual disposable income of $24,001 to $46,000.

Affluent households = more than $46,000 in annual disposable income.

eight times more likely to be college graduates,

Companies will have to venture beyond the biggest metro areas to capture China’s growth opportunities. More than 300 Chinese cities

twice as likely to have traveled overseas far more brand conscious 2020

The Growing Power of E-Commerce

will have high concentrations of upper-income consumers.

Number of upper-middle-class and affluent consumers outside of China’s top 100 cities.

98

45

million

With 410 million online shoppers in China, e-commerce now accounts for 15% of private consumption, up from 3% in 2010.

www.amcham-shanghai.org

68%

Compared with their elders, Chinese aged 35 and younger are

36%

8

53%

The Continuing Importance of Small Cities

25%

2015

Entertainment

45%

Consumers aged 35 or younger today spend a greater share of their incomes than their elders and are projected to account for 65% of consumption growth from 2015 through 2020.

2010

49%

million

The Emergence of a New Generation

2005

32%

73%

50

These upper-middle-class and affluent households will account for 81% of China’s incremental consumption through 2020.

45%

Upper-middle class and affluent

Over the next five years, consumer e-commerce is projected to: Generate annual revenue growth of 20% per year, compared with 6% growth at physical retail outlets

Account for 42% of all growth in Chinese consumption

Grow from $600 billion in annual sales to $1.5 trillion

Account for 24% of all consumer transactions

million

2015

2020

Number of Chinese cities with more than 100,000 upper-middle-class and affluent consumers.

195 cities

373 cities

2015

2020

To capture the biggest growth opportunities in China, consumer product companies need to develop strategies designed to win over wealthier, younger, more tech-savvy consumers, who are spread across an expanse of cities.

Source: This infographic is based on research conducted

by BCG’s Center for Customer Insight.

Read BCG’s latest insights, analysis, and viewpoints at bcgperspectives.com © The Boston Consulting Group, Inc. 2016. All rights reserved.

To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcgperspectives.com. Please direct questions to socialmedia@bcg.com.

Services Will Drive Growth Over the next five years, spending on consumer services is projected to grow by 11% per year and account for 51% of growth in urban consumption.

sales. This means that e-commerce will account for 42 percent of growth in private consumption. By then, China’s online consumer market will have grown to $1.6 trillion annually — 24 percent of private consumption.

Mobile e-commerce, which already accounts for 51 percent of all online sales in China, compared with a global average of 35 percent, will grow even faster. Chinese households already buy 15 percent of their small appliances, 16 percent of their apparel and household sundries, and 19 percent of their skincare and cosmetic products through mobile devices.

E-commerce drives consumption growth by helping companies overcome distribution challenges associated with reaching a national market and by dramatically expanding the reach of their brands. When we analyzed Taobao sales of several leading premium face-care brands that already have fairly wide coverage in department stores, we found that 45 percent of sales were from the thousands of cities that don’t have those goods in stores. The trend was similar for fashion apparel and baby education products.

Understanding China’s evolving e-commerce market To succeed in a market led by young, increasingly affluent, e-savvy consumers, many companies still need to overcome some major misconceptions, especially regarding the growing role of e-commerce.

One prevailing myth is that online transactions merely cannibalize sales from brick-and-mortar stores.

Others are that online primarily appeals to single young adults and that the main reason people buy online is to find bargain prices.

To understand how Chinese consumers use e-commerce, BCG tracked the consumption of 180 families for one month. We found that, in reality, e-commerce brings opportunities to greatly boost demand for new products. To win, companies need a strong omnichannel strategy that combines both an online and an offline retail presence and that addresses the fast-growing family market. Companies should also recognize

that there is substantial demand for high-quality products with premium prices.

The following are some of our key findings: E-commerce creates new demand. As consumers grow more affluent, their spending on fast-moving consumer goods (FMCGs), such as packaged food and beverage, personal care, and home care products, increases only moderately. Nonetheless, when we looked into consumer online consumption patterns, Taobao data shows that online purchases in these categories increase by 150 percent when Chinese households enter the upper middle class and nearly doubles again among affluent households. (See Exhibit 2.)

[Exhibit 2] Online Channels Stimulate New Demand Packaged F&B Consumption per cap (Index) 5

4

Offline Online

3

2

1

Poor & Aspirant

EMC

Middle class

UMC

Affluent

Personal Care Consumption per cap (Index) 5

4

Offline Online

3

2

1

Poor & Aspirant

EMC

Middle class

UMC

Affluent

Home Care Consumption per cap (Index) 5

4

Offline Online

3

2

1

Poor & Aspirant

EMC

Middle class

UMC

Affluent

Source: BCG China Category Consumption database, BCG China CCI, Taobao sales data, AliResearch

September 2016

The number of such households in huge metropolises such as Beijing, Shanghai and Guangzhou will grow by 10 percent annually and reach 30 million in 2020. But of the 46 million additional upper-middle-class and affluent households that will emerge in China by 2020, half will likely reside outside the top 100 cities. And to reach 80 percent of this market in 2020, we estimate that companies will need a presence in at least 430 cities.

A new generation. People born after 1980 are poised to become the dominant force in the consumer market. Consumption by young-generation Chinese consumers is growing at a 13 percent annual rate — twice the pace of consumers older than 35. The share of total consumption by the young generation is projected to increase from 45 percent to 53 percent by 2020.

Our data show that upper-middle-class consumers aged 35 and younger average 40 percent higher spending, across a range of product categories, than their elders with similar incomes. In a recent BCG global consumer survey, 42 percent of Chinese aged 18 to 25 disagreed with the statement, “I feel I have enough things and feel less the need to buy new ones.” By comparison, 36 percent of U.S. and EU respondents of that age group, 32 percent of Japanese, and only 26 percent of Brazilians offered that response.

Young-generation Chinese also tend to be more sophisticated consumers than those older than 35. They are eight times more likely to be college graduates. They travel overseas twice as much. And they are more brand-conscious than older Chinese and U.S. consumers of the same age.

The growing role of e-commerce.

In 2010, online transactions made up only 3 percent of total private consumption.

The number of Chinese online shoppers has since nearly tripled, to 410 million, as has the amount that the average consumer spends online. Online channels now account for 15 percent of private consumption.

Over the next five years, private online consumption is projected to surge by 20 percent annually, compared with 6 percent annual growth in offline retail

COVER STO RY

FEATURES

9

% of households 100% 6

Online only

2

3 27

80%

28 39

Offline only

60%

40%

Both Online & Offline

mobile devices tend to be around 50 percent higher than what they pay for comparable products in physical retail outlets. The prices of foods and beverages purchased on a PC tend to be 50 percent to 150 percent higher. According to Taobao, average expenditure per e-shopper on online organic and imported food and beverage has expanded eightfold over the past three years.

20%

0%

7

Alcohol

7

8

Personal Household care care

16

10

Fresh Food

17

Packaged Household Food & sundries Beverage

The greater convenience and product choice offered by e-commerce helps stimulate new demand. New service offerings and business models by online retailers, such as delivery on demand, free returns and exchanges, customized services, and innovative social interactions, further boost demand.

Online shopping complements offline retail channels. While it is true that online is quickly penetrating across categories, starting from apparel and baby products to FMCGs or even fresh groceries, for the majority of the categories, consumers still do most of their buying in physical retail stores. In fact, Chinese consumers are true omnichannel shoppers. According to our research, for example, 16 percent of Chinese households use both online and physical retail channels to purchase packaged foods and beverages, while 28 percent do so to buy skincare products and 39 percent do so for apparel.

(See Exhibit 3.)

Consumers still like to go out and shop, but the role of the offline physical store is evolving. The main focus of offline shopping now is less about buying products, and more about enjoying the overall experiences, having fun with friends and families and interacting with the brands and products (e.g., trying out new models, etc.).

Young families are the driving force of e-commerce. Single young adults were the early

28

39

Skincare

Apparel

19

Baby Products

adopters of e-commerce in China.

These days, families with preschool children are the fastest-growing segment of the e-commerce consumer market. That is largely because these households have very busy lifestyles that make it difficult to get outdoors to shop, and therefore place a high priority on convenience. Currently young families are already spending 20 percent of their household discretionary expenditures online, and the ratio will double in five years. We project that by 2020, the 85 million young families with children under seven years old will be spending around US$3.8 trillion annually online, accounting for nearly 40 percent of e-commerce consumer spending.

“Online” does not mean “cheap.”

There is a common misperception that the main motive for Chinese consumers to shop online is to find bargains. In many cases, consumers actually pay higher prices for goods they purchase online, whether through their home PCs or mobile devices. Chinese consumers are also willing to pay a premium for convenience and for higher-quality products they cannot find in local retail stores. Our research also found that this was true for seven of the nine product categories that we tracked.

In household and personal-care products, prices consumers pay for goods purchased through their

Winning in China’s omnichannel market There is no doubt that China must remain a priority, as it will remain one of the world’s most important growth markets. However, China’s consumer market in the digital era will pose both huge opportunities and competitive challenges for companies.

More than ever, companies need to understand the areas where Chinese consumers are eager and willing to spend, because the action is shifting to different product categories, branding strategies and retail channels.

The winning strategies of the past are becoming outdated. To win in China’s new consumer market, companies need a new set of strategies. Nonetheless, the good news is that it is not too late to develop a winning Chinese strategy – the digital behaviors of consumers are still being defined.

In this digital era, many brands and retailers are trying to transform and adapt to the changing consumer needs. Just as no companies are equal, there is no standard transformation model or speed of change. The key to success is to clarify the myths, develop blueprints to long-term strategies and implementation, and be flexible with regard to changes. True leaders in the omnichannel era are those able to adjust their direction and pace nimbly. I

September 2016

[Exhibit 3] Omnichannel Has Become A New Norm To Many Consumers In China

COVER STO RY

FEATURES

11

IMAGINE CHINA

Managing a Crisis Effectively

By Ruoping Chen

www.amcham-shanghai.org

B

12

enjamin Franklin said that “it takes many good deeds to build a good reputation, and only one bad one to lose it.” In an age when news travels almost instantaneously across online and social media portals, the way a company responds to a crisis threatening its reputation can determine whether it survives or sinks.

The Swedish furniture company IKEA earlier this year did a recall in the United States of some of its chests and drawers after toppling accidents killed six children, but it did not initially extend the recall to the China market, saying their products met China’s quality and safety standards. In July, following two weeks of public pressure and rebukes from China’s state media, it belatedly announced a recall of 1.7 million chests and drawers that had been sold to Chinese customers.

IKEA’s attitude and the delay did not sit well with Chinese consumers. Product safety has always been a big concern in this market, and awareness of consumer rights has risen over the past decade, heightened by a long string of incidents, from melaminetainted baby formula and faulty automotive engines to expired meat products. In the minds of many, IKEA had not treated their Chinese customers as fairly as their American customers, and the condemnations of the company’s recall policies spread quickly across social media. At the same time, China’s media lambasted IKEA’s response as both arrogant and a blatant shirking of responsibility. Government organizations in Shenzhen, Nanjing and Tianjin echoed the message with their own statements criticizing IKEA’s decision.

The uproar might have been avoided if IKEA had exercised better judgment in producing an effective response to consumers, says Cindy Tian, Asia-Pacific vice chair at Edelman, a global communications and marketing firm.

“If we look at the statement [IKEA] issued in China and how they made the recall after the government stepped in on July 12, you can see how they broadened the issue itself – meaning they first tried to say that the broader issue was not their own issue,” she says.

In the company’s initial view, the responsibility lay with government regulators. Their customers felt otherwise. The perception gap between how the company viewed the issue and how the customers viewed it resulted in a damaging blow to IKEA’s brand image.

That the IKEA recall was finally extended to China reflects the growing influence of social media. When traditional media was the main source of information, companies had more time to construct an official response. Not so anymore. Today, dissatisfaction with a product’s quality or a company’s policies can be – and is – shared with millions instantaneously.

Crises in the digital age are a challenge that many companies grapple with, and ineffective management of a crisis can negatively impact both reputation and sales. In the latest Global Risk Management Report from the risk management group AON, respondents for the first time ranked “damage to reputation/brand” as the top risk to their companies, above economic slowdown and regulatory/legislative change.

Foreign brands in China are especially susceptible to scrutiny in the media, and the reputational fallout can have a significant impact on the bottom line. In 2014 McDonald’s and KFC were embroiled in a food safety scandal after Shanghai TV revealed that one of their suppliers was supplying the chains with expired meat. Though McDonald’s and KFC quickly apologized and immediately switched suppliers, many customers lost trust in the brands and sales declined sharply in the ensuing months. Yum! Brands, the parent company of KFC, reported a 9 percent decrease in overall system sales and 14 percent in same-store sales for China in the third quarter earnings following the scandal.

Though most companies recognize in a general way the cost of reputational damage, many are inadequately prepared to deal with sudden crises. A recent Deloitte risk management survey of company board members’ confidence in their organizations’ crisis-related abilities found that while almost three-quarters of respondents felt they were vulnerable to a crisis involving corporate reputation, only 39 percent had a crisis plan.

Crisis playbook Crisis management starts with crisis prevention. “Knowing who is engaging with the brand is essential to managing reputation,” says Jennifer Gee, senior director of Asia corporate affairs for Gap Inc. For her company, she says, avoiding a crisis involves a wide range of issues contributing to building a good reputation, including high quality customer experiences, engaged and

First responders One of the most important consider-

ations is how to communicate with the public during a crisis. Brian West, Global managing director for crisis management at FleishmanHillard, highlights two cases that were initially similar, but where very different responses greatly affected how the companies were subsequently viewed by the public.

In 2014, U.S. retailer Target became a victim of a data breach in which 40 million payment card numbers were stolen. A year later, healthcare insurer Anthem Blue Cross had 80 million of their members’ and employees’ personal information stolen from their data center. Target remained silent while investigating the extent of the breach, while Anthem Blue Cross announced their breach immediately, assuring customers that they would make up any financial loss and pay for the restoration of identities that had been compromised.

“It’s an interesting issue, because [Target was] almost considering it as if it’s their data, but in fact it’s their customers’ data,” says West, “and when it all came out about the breach, their share price dropped off significantly and it destroyed trust.” Conversely, by communicating effectively with their customers, Anthem Blue Cross was able to IMAGINE CHINA

committed employees, sustainable supply chains with responsible suppliers, compliance with laws and regulations, and corporate social responsibility programs.

Keeping an open dialogue with stakeholders also helps Gap Inc. to offset the potential for problems by building stronger connections and listening to concerns.

“For example, [at Gap Inc.] we set up a 24/7 customer hotline as one of the channels for customers to give their feedback. For employees, we have an ‘open-door policy’ and other employee feedback mechanisms, such as surveys and in-person sessions to answer questions,” she says.

Even when protective measures are implemented, they may be insufficient to prevent a crisis. There are also added complexities to operating in China, a fastmoving market of highly social consumers.

“China’s market is a complicated market. It’s very big,” says Edelman’s Tian. “So if a product is being sold in many locations, then that is very challenging.”

She cites a variety of difficulties companies may face when in the midst of a crisis in China. Controlling a recall may be a logistical nightmare if the infrastructure is not in place to handle it. Overlapping industry policies from different government bodies (both local and national) can complicate regulatory matters considerably. Keeping up with and effectively countering unsubstantiated, rumor-based reports on social media can be time consuming for a company.

For such cases, it’s important for companies to be prepared for when a crisis does arise. Every industry and every location may require a different set of actions and responses, but in general, corporate crisis management plans typically comprise a similar set of protocols and rules. This includes determining which incidents should be elevated to crisis level; establishing an operational team of executives, HR, public relations, legal and other relevant departments to serve as the crisis management “nerve center”; creating an action plan with prioritized tasks and timeframes for completion; developing a messaging strategy to communicate with key stakeholders; setting policies for employee conduct and the handling of media requests; and monitoring the news and social media for what people are saying about the company, brand or product.

‘Ello, I wish to register a complaint

build trust with them and other stakeholders, and their share price rose.

West believes that trust has to play a starring role in reputation management.

When companies in the midst of a crisis decide to communicate early on and keep communicating with the public, they establish trust that the company is transparent and is holding itself accountable in a responsible way. Social media, though it creates challenges, also presents an opportunity for a company to respond directly to key stakeholders quickly, without being filtered through a journalist’s story lens. This allows the company to control the narrative surrounding a crisis from the outset and all

the way through.

“It’s an opportunity for a company to do things such as put a statement on its website, do a video with the spokesperson on the issue and use social engine marketing to drive traffic to the website to say ‘here is the truth, here are the facts on the matter’,” says West.

The alacrity of one’s response will also impact the way a crisis is perceived. Even when many of the facts surrounding a crisis are still unclear, Tian recommends that companies respond to a crisis within two hours. “When I say response, I don’t mean you have to issue an announcement, but the speed of response and ability to take action should be much faster than ever before.”

A lack of a response, on the other hand, can generate uncertainty and dissatisfaction and create a vacuum for others to fill, while an immediate denial or an admission of guilt will leave a bad impression with audiences. Instead, the better option is to convey a commitment to investigating the issue and finding a resolution.

Though communication strategies will differ from case to case, there are common elements in those responses that are likely to resonate well with audiences. According to Tian, “concern, action and perspective” are the three keywords every company should keep in mind when formulating their responses to a crisis. Companies should express concern and care for the affected people and communities and show willingness to take ownership of the problem. They should also relay what actions they are taking to investigate the situation and ensure that it won’t happen again. Finally, they should offer perspective, a presentation of the whole picture, as audiences are often unaware of all the facts and details.

Nobody wants a crisis to happen. But when one does, companies should meet them head-on. While plans and playbooks can be a great help in navigating through a crisis, it is the company’s leadership who must be seen as taking charge – communicating authentically with the audience and steering the company through its crisis.

“Companies produce annual reports that talk about how important their customers are, how important their staff and all these different audiences are,” says West. “A crisis is an opportunity to bring that to life and make it real so that you’re focusing not just on trying to manage a crisis, but demonstrating leadership in a crisis.” I

September 2016

Movers andFEATURES Shakers

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Bricks and Mortar in the Digital Age Counteracting the recent industry shake-up

By Shaun Brodie

I Shaun Brodie Director, Head of China Strategy Research DTZ/Cushman & Wakefield

Brodie analyzes information and data for all property sectors in China and produces white papers, research reports, and regular

n recent years, the Internet in China, coupled with improving technology has resulted in the ballooning of e-commerce and this has led to online shopping greatly shaking up retail in the region. Not only does it offer a vast selection of goods and products at often lower prices, but it also provides consumers in China with the convenience of shopping from anywhere. On an annual basis, this has given rise to e-commerce commanding a greater and greater slice of the China retail sales pie. All is not lost for bricks and mortar stores, however, and recently they have been staging a fightback. One way stores have been doing this, especially in the country’s first- and major second-tier cities, is to incorporate in-store technology to enhance the customer shopping experience.

DTZ/Cushman & Wakefield property market publications. He is both a chartered surveyor and a chartered builder and is www.amcham-shanghai.org

the chairman

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of AmCham Shanghai’s Real Estate Committee.

The store of the future – interactivity is key For shoppers, it’s all about the in-store experience. If the shopping experience is a memorable and enjoyable one, they are more likely to become repeat customers and spread the word among friends and on social media. Stores in China understand this and many are now effectively executing an omnichannel tactic that is able to create a retail environment which entirely immerses and engages the customer. In the near future, in-store customers in China will be able to swiftly and ef-

fortlessly locate the item they are seeking and gain the answer to any purchase question or query at the touch of a screen.

This interactivity will be one of the major features of the bricks and mortar store of the future. As a result, consumers in China will soon be able to dynamically engage with an instore good or product to gain more knowledge, without the need for a sales assistant.

Technology leads to inventory and sales processing efficiency In-store technology in China will also let consumers view a store’s complete product range.

As such, there will be less need to keep shelves stocked. One physical article can represent all of its size and color variations to offer the look and feel, while the remaining stock can be stored at the back of the store or in an off-site warehouse, set for instantaneous delivery (Figure 1).

Figure 1: In-store technology facilitating inventory efficiency New in-store technology in China

Source: DTZ/Cushman & Wakefield Research

will also be used much more in the future to get rid of long queues at the checkout as item sales are processed. Given the number of active bricks and mortar shoppers in China, this is much needed. In the future, item orders and payment will be processed from a number of different locations in-store, without the need for a sales assistant.

This will greatly add to shopping convenience, make the shopping experience that much more pleasurable and better ensure repeat buying.

Technology – two-way benefit In China today, consumers are spoiled for choice in terms of the amount of technology they have at hand. What’s more, they are not afraid to use it. Another way for bricks and mortar stores in the region to increase sales is to better know their customers, especially their product preferences and their shopping habits. Knowing more about their customers, bricks and mortar stores will be better able to align goods and products to customer tastes as well as better able to launch effective sales campaigns to increase sales.

Today, bricks and mortar stores in China are using technology to best effect to drive potential sales by setting up customised smartphone applications which not only generate an omni-channel experience for the store’s

Movers andFEATURES Shakers

Figure 2: Apps – Providing insight into shopping behaviour

identification, audience measurement can then facilitate a more targeted in-store sales campaign based around the advertising of suggested items to purchase that are more suited to the demographic of the individual shopper at the given time. Once one shopper vacates a particular part of the store and another customer enters, the sales campaign content changes (Figure 3).

Figure 3: In-store technology getting the measure of consumers to increase sales

Source: DTZ/Cushman & Wakefield Research

Audience measurement technology – More targeted sales Audience measurement is another form of new technology likely to be used by more and more retailers in China to further engage consumers within the store and to drive sales. As a customer browses, this technology can and will be used to identify the demographic of the shopper. Immediately upon

Source: DTZ/Cushman & Wakefield Research

Augmented reality technology – cre-

ating an amazing experience Finally, augmented reality is another form of new technology which will be implemented and used more often by retailers to enhance the in-store shopping experience. Augmented reality, when used properly, will add an appealing visual aesthetic to the store and make the overall consumer experience that much more entertaining, enjoyable and memorable. For example, as a repeat customer enters or leaves the store, sensors will be able to recognise the customer. The front window display can then be turned into a message board to personally welcome the shopper as he or she enters the store, and to thank him or her for shopping as the shopper leaves.

Ultimately, it is about producing an intimate and pertinent in-store experience that the customer will remember. Upon doing this successfully, stores in the near future in China will be able to enjoy higher sales and, in doing so, will be able to retake some of the lost ground recently ceded to e-commerce. I

September 2016

shoppers, but, importantly, provide the store with valuable insight into the shopping habits and preferences of its customers (Figure 2).

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IMAGINE CHINA

WeChat, the Social Plumbing of China

By Flora Liu

I

www.amcham-shanghai.org

n first-tier and third-tier cities alike, WeChat has taken over as one of the most important mobile apps in China. While standing in elevators, waiting for public transit or sitting in restaurants, you will see people staring at their phones, and most of them are on WeChat. The numbers tell a compelling story. By the end of March this year, WeChat had about 805 million monthly active users.

More than just a great communication channel, WeChat is an intricate network of

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useful tools that connect people, services and businesses. Through its integration of chatting and useful everyday features such as digital wallets and bill payment, the application is capable of handling almost all of a user’s online and offline needs.

Try to imagine an agglomeration of Facebook, Instagram, Snapchat, Groupon, Yelp, WhatsApp, Skype, Twitter, Uber, Tumblr, Amazon, Paypal, Flipboard, news, games, travel booking and utilities payment. With so many easy-to-use features, WeChat has

also evolved from a personal to business platform. In many ways it has become our second business communication inbox.

That’s why WeChat can be classified as a new type of utility. Its functions have become an integral part of our modern lives that we can no longer function without. It is the social plumbing of China.

The diagram below helps to visualize the full breadth of WeChat services.

Movers andFEATURES Shakers

WeChat is an incredibly powerful and effective sales and marketing tool, and many companies already place it at the center of their consumer connection strategy. Not only does WeChat have a lot of users, but each user spends a significant amount of time on WeChat each day. According to the latest WeChat Social Influence Report released by its owner, Tencent, 61 percent of WeChat users open the app more than 10 times a day and 61.4 percent of users check their Moments feed each time they open WeChat. And WeChat is now the second-most-popular news distribution channel (second only to news blogs), overtaking both news websites and TV combined.

Brands also find it easier to “close the loop” and drive sales on WeChat because people trust the platform and have become comfortable spending money on it. For instance, over 70 percent of all users consistently spend more than RMB100 per month on WeChat. That is a proven market of roughly 534 million people.

But most importantly, WeChat allows brands to directly engage and delight customers in real-time. At the same time, its private permission-based nature gives consumers complete control over how and how much they interact with brands. If a brand consistently pushes uninteresting and irrelevant content, its followers can easily “unfollow” it and end the relationship.

The opportunities are huge, but there are challenges For all the reasons listed above, WeChat is becoming a major marketing channel in China. According to Tencent, 64 percent of official accounts invested in their accounts last year, and 8 percent of them spent more than RMB100,000 on account development and operations. While most foreign companies know that WeChat is a must-have channel in their marketing roadmap, few of them have a clear idea regarding execution.

The most daunting challenge is

making the mindset shift from pushing outbound content to delivering responsive experiences. WeChat grants users instant gratification, thus it is important to take the time to create relevant and valuable services.

For example, when an unattractive offer sends subscribers a push notification, it can result in immediate unfollows. Constant platform updates and changes also make it difficult to keep a company’s campaigns up-todate and relevant.

The other great challenge facing WeChat marketers is technical. Tencent is virtually a black box when it comes to account data and analytics, which makes it very difficult to track, measure and optimize marketing efforts. As a result, many companies are unsure about measuring success and return on investment (ROI) for WeChat. Additionally, most well-known marketing platforms that work well in a company’s other global markets do not support WeChat, which means that proven effective strategies and campaigns cannot be easily localized for the China market.

How WeChat actually works as a marketing tool WeChat is a communication channel between friends and family, and its unique selling point is its ability to integrate brands into these conversations.

Chat app marketing is still a relatively recent development, but it offers a new type of experience: one-to-one, on-demand, and dynamic. There are three key phases of WeChat marketing based on an organization’s readiness and investments. I call this progression the Social Marketing Maturity scale.

Social 1.0: Basics

• Campaigns • Content Marketing • Links to Website & Ecommerce • Default Platform

Most companies of all shapes and sizes begin their WeChat marketing campaign at the 1.0 phase. Generally speaking, companies venture into this realm with limited human and technical resources. They only use the official WeChat backend to access most basic features such as content publishing, simple campaigns and menu links.

As they move into the 2.0 phase, companies begin to work with data and social CRMs. They now have more resources to track follower behavior, integrate data warehouses, and conduct simple segmented marketing. In this phase, companies begin to integrate services or build WeChat specific features such as loyalty programs and customer service.

Finally, upon reaching the 3.0 phase, companies will fully capitalize on WeChat’s powerful features.

They will create truly personalized customer experiences, collect and analyze user-generated data, bridge the O2O gap, and offer conveniences such as lead nurturing and e-commerce support. Leading brands are beginning to plan and move in this direction, but they are still in the early stages.

Examples of successful WeChat strategies Successful WeChat strategies deliver value to followers by doing one or more of the following: 1. Make life easier 2. Offer fun and entertainment 3. Provide instant gratification 4. Free giveaways 5. Build communities

Social 2.0: Data Foundation Building

• Follower Action Tracking • Campaign Integration • Content Tagging • Community Building • Stystems Integration • SCRM Platform & Analytics

Social 3.0: Personal Connection

• Fully Integrated Campaigns • Fully Segmented Content Marketing • Personalized Customer Experiences • Single Customer View SCRM

September 2016

WeChat as a marketing and sales tool

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Flora Liu

Liu graduated

McDonald’s does a spectacular job of delivering all of these value areas through WeChat. McDonald’s uses WeChat’s QR code feature to give out coupons to use in stores (O2O), take orders (provides useful services) and delight customers with the “Design your own McDonald’s burger” feature.

label posted a limited edition small Lady Dior for sale on WeChat, which

Dior Image!

McDonald’s Image!

from the University of Pennsylvania’s Wharton School and has spent the past four years in Silicon Valley and Shanghai

Lady Dior Valentine’s Day Sale

3!

working with cutting-edge tech startups.

1!

McDonald’s O2O Coupon Campaign

www.amcham-shanghai.org

Nike takes a different approach with their RunClub WeChat community. They operate a successful loyalty program on this account, which includes online engagements, lucky draws, and membership cards. The account also keeps followers up-todate with Nike events such as sponsored competitions, celebrity athlete partnerships and new product launches.

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Nike Run Club

Dior recently became the first brand to successfully sell luxury handbags directly through WeChat.

For Chinese Valentine’s day, the luxury

sold out in just two days. According to the 2015 China Luxury Forecast, 36 percent of Chinese respondents said that they would like to buy luxury products online, a rise from the previous year’s 24 percent. Thus WeChat, the most-used mobile app, is an increasingly valuable e-commerce channel for luxury brands in China.

The key to the success for all these campaigns was the ability to deliver targeted value at the right time to their customers.

costs, WeChat will continue to be the dominant social app for the next two to three years, which is a lifetime in China. Moreover, mobile messaging apps are new and their full marketing potential is only now being explored. Chat apps make connections and communication extremely fast and efficient between brands and consumers, and China is leading the world in realizing their powers.

As consumers will continue to value speed and convenience, there is very little risk, and a lot of upside, to investing in WeChat. We are already seeing a lot of success in delivering customer service, e-commerce, marketing campaigns, content marketing and community building on WeChat. More innovative successes will develop in the future. I

The future for American companies on WeChat As of now, most companies, American or Chinese, are not fully utilizing WeChat’s tremendous powers. But many American companies have begun to put Social Marketing, Data and CRM teams in place to understand and utilize WeChat. As a result, many of the best-run WeChat accounts come from American brands.

We are often asked whether WeChat is a worthy long-term investment for American companies.

A few years from now, will consumers still be using WeChat in a way that is meaningful for brands? Given the fact that this is China, a rapidly changing socioeconomic entity, it is difficult to predict what will happen five or ten years from now. But along with most of our customers, we believe that, given the high switching

Aaron Chang is CEO and founder of JINGdigital, a company that helps leading brands create connections with consumers on WeChat. Chang worked in advertising in New York with McCann Erickson, before finding his true calling in the web during the dot.com boom in Seattle. He moved to Shanghai in 2006 and in 2013 launched JINGdigital. JINGsocial is a WeChat marketing automation and analytics platform that works with Fortune 1000 companies.

Movers and Shakers

Q &A

Metro in China: Adapting While Growing

By Ian Driscoll

How many stores do you have in China now?

We have 83 stores in 58 cities. We opened in China in 1996, exactly 20 years ago, and the first one was here in Shanghai.

What factors does Metro consider when deciding to enter a new country?

There’s a feasibility team that goes into a country to look at the potential of the market and customers that are relevant to Metro. We consider the competitive situation, the development of the economy, the investment opportunity, political stability, access barriers. There are many factors you consider when you open a new market. The feasibility team will spend half a year studying the market, and

then there is quite some time spent in preliminary set-up work. You can’t start with one store, you have to start with five or six. Sometimes you cannot find the right locations or the feasibility study is not accurate. We start a teasing advertising campaign one month before we open.

Can you describe the typical Metro customer in Shanghai?

Metro has two dimensions of customers. One is professional customers like independent restaurants, independent shop owners, companies, offices, canteens. In China we are quite unique: there are no legal restrictions preventing us from opening our doors to private customers.

In that group, we have a clear target: a younger, wealthier Chinese customer who takes care of their health and cares about quality and safety for them and their family; often a car owner of above average income and middle to affluent middle-class.

Within that group, of course, there is big differentiation.

What motivates your customers to shop at Metro?

In China it is very clearly because we have built a very strong position and reputation on reliability, quality

and food safety. It is recognized by customers as well as by the government. I dare to say that Metro is the leader in this field. We have never had a major issue or even a minor issue, because we take a lot of measures to mitigate risks with quality.

For B2B customers, we have built a food catering academy downstairs (at the Zhenbei Lu location). We have a food service delivery organization that is focused on big customers.

One aim is to support them to become more successful in their business. We estimate that more than 50 percent of store sales are private sales, but we don’t ask at the checkout whether the sale is business or private.

A lot of middle-class Chinese are concerned about food safety. At the farm level, how do you know that your vegetables are grown without overuse of fertilizers or pesticides?

Every farmer who wants to deliver to Metro or is selected by our Offer Management department has to agree to cooperate with our internal StarFarm department. They will be assessed on their processes, and we either train their staff in how to improve their current practices or we work with third parties like Bayer

September 2016

J

eroen de Groot is President of the China division of Metro AG, the Germany-based cash-andcarry food company. His past roles include serving as the company’s managing director in Poland, Hungary and Russia. He holds a degree in business administration from the University of Amsterdam. De Groot spoke to Insight about selling food in China, the power of WeChat and the disruptive force of Internet-based food suppliers.

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Crop Science for pesticide use or with another company on seeding technology. We try to really improve the production process from the beginning. All the different steps are then recorded in a system called StarFarm.

A total of 3,500 products are traceable back to the farm, including knowing how it’s grown and how much fertilizer is used, and we do regular unannounced checks on these farms. People who do not persistently follow the rules will not be a supplier for a long time, but if people forget to wear a mouth cap it’s not considered a grave incident.

www.amcham-shanghai.org

WeChat is an increasingly important tool for marketers in China.

How do you use it to engage with your current customers or to generate new customers?

For 50 years, Metro communicated with customers every two weeks through Metro Mail, a printed promotional tool. In China we sent out 1.7 million physical printed mails to customers in our database who fit certain buying criteria. We found that there was no impact, so we stopped printing the mailers and started building a WeChat platform that opened in 2014. In January 2015, we had 16,000 followers, now we have 3.3 million. It’s the most important communication platform that Metro has.

WeChat is replacing – almost –

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Jeroen de Groot

our website. The loyalty program that Metro runs is done over WeChat.

You can see your buying history, the number of points you have collected, you can see what you can redeem.

Our offers and store information goes there. We have a store WeChat and a corporate Wechat and together they have about five million WeChat followers. The website still has more than one million unique visitors a month, but not many people key in the URL. Visitors land either through WeChat, a QR code or other ways.

The death of the brick-and-mortar store has been talked about for some time. Has Internet use in China changed the way you operate?

We are mainly in the food business, and about four to five percent is now done on e-commerce platforms.

I think the Internet has changed people a lot: They are more informed, and prices are completely transparent, online and offline. E-commerce initiatives from new companies offer incredible service and very low prices. Of course, there’s not a clear earning model behind it, but they have changed the behavior and expectations of customers.

Whereas in the past a next-day delivery was normal, it’s now outdated. People are used to getting their order within one hour. No one can deliver within one hour profitably, but as long as there are venture capitalists funding these initiatives, it will change people’s expectations. The impact here has been huge, even if the offline business is still very big in the food area.

Will the online-ordered grocery market continue to grow?

I have seen scenarios for [online ordered and delivered] food that range from 31 percent to 10-15 percent. It depends a bit on how much is indeed invested into models that don’t make money. As long as venture capitalists and private equity want to invest in these companies, it will continue. But companies need to earn money – we need to earn money because we have sharehold-

Cash and carry comes to China

ers. We have looked at these companies to see if we should partner with them, but their burn rates are shocking, and it’s not very easy for traditional companies to maneuver in these kinds of environments. There will be a moment of rationalization, but I don’t know if it will be in five years’ time or two years’ time.

But the fact remains that e-commerce has taken an important place in the lives of people. Expectations have changed and we have to deal with that. We are constantly adapting our e-commerce and we have to be more relevant for customers e-commerce-wise, so you cannot say we are a typical brick-and-mortar store.

We have our Metro Mall connected to our stores and we sell quite a bit through T-Mall. A pure brick-andmortar store does not exist anymore.

What is the largest difference between your stores here and those back in Germany?

Physically, not much. Of course I see big differences, but the general customer won’t. The stores in Europe are generally bigger because they were built in a time when offline shopping was important. About 90 percent of our products in China are sourced locally, so these are Chinese products in our Chinese stores. Our international products are sourced for Chinese consumers.

How do you see the market in China changing? How will you survive here?

China is about customer focus

Movers andFEATURES Shakers

That’s how WalMart became so good – because they had a huge domestic market and could expand and expand and get better at what they did.

We have always had to go outside of our own market.

You were previously in Russia. Did anything about Russia better prepare you for the role you have here?

I have worked in 13 different countries and managed seven different countries at Metro. The whole experience builds you as a manager and as a person and enables you to understand foreign cultures more quickly, to see commonalities in the cultures.

There’s no country that prepares you for another country.

Since opening the first China store in 1996, can you name any strategic or operational mistakes that you have made and since corrected?

Alongside market changes, we are always modifying strategies, but this should not be considered as correction of mistakes. For instance, be-

fore 2014, we focused on many areas.

We were doing a good job in most of those areas and we wanted to be a generalist. But we are now focusing on five channels because we believe dedicated focus will make us into multi-channel experts and leaders to achieve faster growth.

How much has your industry been affected by the economic slowdown and rising rent and labor costs?

We are very confident about China’s economy. GDP growth rate at 6 or 7 percent by the world’s second largest economy will generate huge market opportunities. Of course, there are challenges like those you mention, but there are more opportunities as well, like the growing middle class, who will create more demand for safe and high quality foods, import foods etc. I

September 2016

and, more and more, about agility.

Agility is the key to surviving in a market like China. Ten years ago, 15 years ago, when I worked in a market, I knew how it would look in five years’ time. There was a common pattern.

If you asked me now how China will look in five years’ time, I’d have to say I have no clue. Even Chinese colleagues won’t dare say, change happens so fast. You can only say that you will be agile, adaptive to developments, and try to jump on the right trends or develop the trends. You cannot sit still and do what you did the last 50 years. That is what makes China challenging compared to other countries. The rest of the world is much more structured.

Yes, [the West] has Amazon, Uber and Airbnb, and they disrupt markets and industries. But the speed in China is faster. To give you an example, Didi Kuaidi is doing more trips in Shanghai than Uber is in the rest of the world. The scale of the market is so big that domestic initiatives can succeed so much more quickly.

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New China Transfer Pricing Rules 9 August 2016

By Jeff Yuan, Paul Tang and Deborah Li

Jeff Yuan and Paul Tang are based in Shanghai and are the Greater China transfer pricing leader and transfer pricing partner with PwC China, respectively.

Deborah Li is based in Hong Kong and is a transfer pricing senior manager with PwC Hong Kong. PwC China and Hong Kong’s transfer pricing practice has over 200 full time transfer pricing professionals with coverage

www.amcham-shanghai.org

across 26 cities.

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ew transfer pricing rules mean that China taxpayers with related party transactions will need to determine if they fall under the new rules. For transfer pricing purposes, a commonality of 25 percent shareholding or control is generally sufficient to designate entities or persons in China as related parties.

What are the changes to the existing transfer pricing rules?

On 29 June 2016, China’s State Administration of Taxation (SAT) issued the Public Notice Regarding Refining the Reporting of Related-Party Transactions and Administration of Transfer Pricing Documentation (SAT Public Notice [2016] No. 42, hereinafter referred to as “Public Notice 42”). Public Notice 42 provides new transfer pricing compliance requirements in China, including annual reporting forms for related-party transactions (RPT Forms), Country-by-Country Reporting (CbCR), and Transfer Pricing Documentation (TPD), all of which are substantial changes to the existing rules.

Public Notice 42 replaces the provisions on related-party reporting and transfer pricing documentation in the previous China transfer pricing rules (known as Guo Shui Fa [2009] No. 2, Implementation Measures of Special Tax Adjustment (Trial) and Annual Reporting Forms for Related-Party Dealings of Enterprises of the People’s Republic of China (Guo Shui Fa [2008] No. 114)).

The number of RPT Forms has increased to 22 tables (from 9 tables), including the CbCR, while the TPD requirement has adopted a three-tiered approach, including master file, local file and special issue file (previously, only the local file was required).

What are the thresholds, deadlines and critical items for the transfer pricing compliance requirements?

Below is a summary of the thresh-

olds, deadlines and critical items for the different transfer pricing documents that China taxpayers will need to submit to the local tax authorities, in respect of the year ending 31 December 2016:

Document

Threshold (Notes 1 and 2)

Due Date

Critical Items

31 May 2017 (submit as part of annual corporate income tax return)

Various disclosures on the entity including organization structure, departments, reporting line, related party tax information, effective tax rate, preferential tax treatments, profitability of sales from RPTs and non-RPTs, etc

Annual RPT Forms

No threshold

Local File

• Transfer of tangible assets (RMB200m+) • Transfer of financial assets (RMB100m+) • Transfer of intangible assets (RMB100m+) • Other transactions in total (RMB40m+)

30 June 2017 (submit upon request)

New and additional elements include value chain analysis (e.g. financial report of participating entities, analysis quantifying and attributing local specific advantage, principle of profit allocation), taxpayer contribution to group’s overall profits, intragroup equity transfer (e.g. target’s details, due diligence report), outbound investment, etc

Master File

• Cross-border RPTs and belonging to a group which has prepared master file; or • Annual RPTs > RMB1b

Within 12 months after fiscal year of ultimate holding company (submit upon request)

Provide details on the overall group including value chain drivers and entities’ principal contribution to value creation, as well intangibles, financing activities, service arrangements and transfer pricing policies, business restructures and financial and tax positions (e.g. consolidated group financials), etc.

Special Issue File

• Cost-sharing agreements • Thin capitalization

30 June 2017 (submit upon request)

Cost sharing – allocation method, calculation of anticipated benefits, etc Thin capitalization – demonstrate that the financial terms, amount and interest rate are comparable to independent party terms, etc

CbCR

• The ultimate parent is a Chinese tax resident enterprise and the group consolidated revenue exceeds RMB5.5b • The ultimate parent is a non-Chinese tax resident enterprise but the China taxpayer is nominated as the CbCR reporting entity

31 May 2017 (submit as part of annual corporate income tax return)

Various information regarding country operations including financial and tax information, headcount, principal business activities, etc

Note 1: RPTs under an advance pricing agreement in execution may be exempt from the Local File and Special Issue File requirements, and their amounts may also be excluded from the thresholds for these files.

Note 2: Taxpayers with only domestic RPTs may be exempt from the Local File, Master File and Special Issue File requirements.

Movers POLICY and PERSPECTIVES Shakers

What are some of the specific considerations for a US-parented MNC with a China entity?

While both the U.S. and China belong to the G20 group of countries that instigated the

OECD’s base erosion and profit shifting (BEPS) initiative, the application of OECD BEPS principles in each jurisdiction is ultimately governed by domestic tax law and international treaties ratified by each government.

This means that U.S.-parented MNCs with operations in China should assess their current transfer pricing structure holistically under the rules in China, United States, and any other countries in which they have intercompany transactions, in order to ensure alignment and identify any potential internal conflicts or inconsistencies between countries. While a U.S.-parented MNC may prioritize the requirements of the U.S. transfer pricing regime, it may be required to accelerate certain aspects of their group transfer pricing documentation required by countries such as China, in order to properly assess, document and ensure alignment of group policies and results disclosed to the various tax authorities.

Some examples of differences between the U.S. and China in the timing and implementation of their domestic TPD rules include: • RPT forms and Local File – The China RPT forms and Local File have complex requirements (e.g. value chain analysis, local specific advantages and contribution to excess profits) that extend much further than that required by the OECD’s master file or the U.S. local transfer pricing documentation report. The value chain analysis covers transactions for the group and not just those related to China, while other disclosures are comparable to the specific and detailed queries historically encountered in a query or audit situation.

• Master File – Some countries (e.g. selected European countries) have adopted the OECD’s guidance on Master File “as is” while other countries, like China, have incorporated the OECD’s guidance and included additional information disclosures under local transfer pricing legislation. Other countries, like the U.S., have not released any transfer pricing requirements on the Master File. However, U.S.-parented MNCs may need to prepare certain documents such as the Master File in order to meet the local transfer pricing requirements of China and its other overseas operating affiliates, even though the IRS does not explicitly require this document of the U.S. parent. U.S.-parented MNCs should pay attention to their Chinese entities with annual domestic and cross border RPTs exceeding RMB 1 billion and develop a practical solution on Master File preparation.

• CbCR – In respect of CbCR, debates re-

garding the definition of items, alignment of reporting periods, filing locations, etc, are ongoing. Taking timing as an example, the IRS will require U.S.-parented MNCs to complete CbCR via a new reporting form (Form 8975), which is applicable for financial years beginning on or after 30 June 2016, whereas the SAT requires China-parented MNCs (or U.S.-parented MNCs that nominate their China entity to file the CbCR) to complete the CbCR via its reporting forms (G114010, G114011, G114020, and G114021) for the financial year beginning 1 January 2016. This discrepancy creates a “gap year” in which some U.S.-parented MNCs have considered voluntary filing of Form 8975 for the period on or after 1 January 2016 and before 30 June 2016.

Practically, for Chinese subsidiaries and affiliates of U.S.-parented MNCs, there is no need to file the CbCR in China, unless the U.S.-parented MNC has nominated one of its Chinese subsidiaries and affiliates as a reporting entity for the CbCR (which is highly unlikely).

The new transfer pricing rules in China and the U.S. are in a state of flux. The U.S. and China are the world’s two biggest economies, and their views and actions will profoundly impact BEPS initiatives. We have observed competing views of both tax authorities on the interpretation of the arm’s length principle (e.g. implementation of intragroup services) and other international taxation matters (e.g. indirect equity transfer).

U.S.-parented MNCs are likely to face greater uncertainties in terms of transfer pricing management in China and the U.S., resulting in higher demand for mutual agreement procedures and bilateral advance pricing arrangements in order to eliminate double taxation issues. For instance, these uncertainties may arise out of enhanced scrutiny in China on outbound service fees and royalty payments, and stricter guidelines in the U.S. on exhaustion of remedies by the taxpayers for foreign tax credit purpose related to transfer pricing adjustments initiated by overseas tax authorities.

U.S.-parented MNCs should continually monitor their business operations in China, and consider the impact on the financial results and the overall transfer pricing model, given that China’s economy is cooling down.

For more information on tax and transfer pricing matters in China, MNCs can visit http://www.pwccn.com/home/eng/taxlibrary_cn.html I

September 2016

What is the impact for taxpayers?

Taxpayers already subject to China’s existing transfer pricing regime for documentation will need to prepare additional documentation and disclosures in support of their transfer pricing arrangements. Taxpayers that previously fell outside the documentation thresholds under the old regime should reassess whether they need to comply with the new requirements of Public Notice 42.

As a result of the increased disclosures under the new transfer pricing compliance requirements, taxpayers in China with cross-border transactions will likely be under greater scrutiny when tax authorities process the annual corporate income tax returns. It is expected that tax authorities will rely on the new information in the new RPT forms to select investigation targets using their big data analytical technology and systems. Big data is an initiative implemented by the SAT across all levels of tax authorities, and aims to create a systematic process to analyze the relevant tax exposure and identify potential tax investigation targets.

Immediate next steps for multinational corporations (MNCs), especially their China entities, include collecting and preparing the information for submission to the tax authorities.

Some of this information may not be under the management or control of the local China accounting and finance function, and extend to confidential information which may only be held by other local functions such as human resources and commercial operations (e.g. headcount, R&D arrangements, etc), or held at group headquarters level. MNCs should plan (or have already planned) to meet the local transfer pricing requirements of China and any other relevant jurisdictions.

The flow-on effect, which has a much greater and pervasive effect on the group’s long term strategy, is that MNCs may experience increased pressure under a challenging economic and regulatory environment to ensure that all aspects of their intercompany arrangements, or at the minimum the allocation of profits to each legal entity, are aligned with the functions performed, assets owned, and risks borne by the same legal entity. In some circumstances, double taxation issues may arise and need to be settled via the competent authorities of each country under the double tax treaty framework.

23

China’s Stock Connect Has Trouble Wooing Foreign Investors

By Noah Shaw

W Noah Shaw works at APCO’s Beijing office and supports APCO’s MNC clients in the ICT sector. Prior to joining APCO, Shaw worked at the Paulson Institute in their Chicago office.

He has also interned at the U.S. Securities and Exchange Commission and the Beijing International

www.amcham-shanghai.org

Society.

24

ith the Shenzhen-Hong Kong Stock Connect slated to come online by the end of 2016, now is a good time to consider some of the major challenges in China’s most recent attempt to open markets to foreign investors.

This moment of reflection is brought into sharper focus by China’s handling of the bursting of the stock market bubble a year ago. China’s initial attempt to open up the mainland stock markets, the Shanghai-Hong Kong Stock Connect, had a very high level of trading volume in early-mid 2015.

But since then usage has dropped dramatically due to seeding concerns about China’s efforts to internationalize its markets.

The Shanghai - Hong Kong Stock Connect was announced by Chinese Premier Li Keqiang with much fanfare in April 2014. The purchase of class-A shares, denominated in RMB, had previously been limited to only a handful of selected foreign organizations that had obtained “Qualified Foreign Institutional Investor” (QFII) status. The wider opportunity to directly purchase Chinese shares was welcomed around the world. Any investor with a stock account in Hong Kong can now purchase selected class-A shares on the Shanghai Stock Exchange (SSE), and any mainland investor with over RMB 500,000 in an account can now purchase certain Hong Kong-listed shares.

The Connect got off to a rocky start in November 2014 when its opening was delayed by a month amid pro-democracy protests in Hong Kong and concerns that international investors were given insufficient notice regarding the tax and custody obligations involved. But once open, investments began to slowly increase both north-

bound – Hong Kong and international money flowing into the China markets – and southbound – Chinese money flowing into the Hong Kong market.

By early 2015, average daily trading neared the fixed daily quota of RMB 10.5 billion for the southbound leg and RMB 13 billion for the northbound leg.

But following China’s stock market turbulence in mid-2015 and again in January this year, trading volume has dropped. Since mid-2015, the monthly northbound average daily volume hasn’t even hit half of its quota.

Why has trade volume dropped significantly? Global investors have been scared off by the government’s handling of the stock crash and its aftermath. Margin trading, which grew at a fast pace in late 2014 and early 2015, along with encouragement from state media, contributed to the bubble burst in July, after a run that saw the key China stock indices more than double in just eight months. After a massive sell-off, Chinese regulators temporarily suspended trading of many shares and placed strict limits on the sale of shares by institutional investors, large investors, listed company executives and board members.

In the first weeks of 2016, months after the initial crash, a newly-installed circuit breaker system, designed to halt trading if the market fell by a certain amount in a day, was triggered multiple times in just one week and was quickly scrapped. The Chinese authorities also invested a huge amount of money to prop up the market.

International investors rightly became wary of markets so prone to bubbles, manipulation and sudden restrictions of selling. While opening the markets to overseas investors is important, so are fair rules that all players understand. There were questions

raised about the ability of the Chinese regulators to manage the markets and their willingness to relax their grip over the market. That led, amongst others things, to the decision by the Morgan Stanley Capital Index (MSCI) to yet again decline to include A-shares in its global indices.

Another concern for investors is the recent devaluation trend of the RMB which fuels the reluctance to hold too much capital in RMB-denominated assets. Chinese Premier Li Keqiang and PBOC Governor Zhou Xiaochuan have repeatedly stated over the past few months that China has the tools to avoid significant devaluation, but the RMB has dropped by more than 6 percent against the dollar since late 2015. Traders are troubled by the requirement that all trades involving the Connect are settled in RMB. In the past year there have been signs of backsliding on the internationalization of Chinese markets.

While investors may be eager to get their hands on class-A shares of tech stocks, likely available once the Shenzhen-Shanghai Connect comes online, this comes as international investors are increasingly wary of Chinese stock markets as a whole. Even if China continues to open equity markets to foreign capital, the lack of transparency and an unclear legal framework will continue to serve as barriers to investment.

China hopes to achieve market economy status from the WTO in December of this year. Providing foreign investors increased access to the Shenzhen and Shanghai stock exchanges could be important for China’s image as the EU and the United States decide whether to go ahead with affirming China’s market economy status. I

Movers POLICY and PERSPECTIVES Shakers

Latest Developments in U.S. FCPA Enforcement

By Scott L. Marrah and E.W. Gentry Sayad

Scott L. Marrah is the coleader of the government enforcement & investigations team at Kilpatrick Townsend in Atlanta. A former assistant United States attorney in the Southern District of New York, he conducts FCPA investigations and training for multi-nationals.

He is a frequent speaker on anti-corruption topics in China.

Focus on China While the U.S. is aggressively enforcing the FCPA around the globe, much attention remains focused on Asia and China specifically. There are approximately 25 current open investigations of possible FCPA violations related to activity in China. This number does not include investigations that have not been publicly reported, involving private companies and/or new investigations.

There have also been a number of recent resolutions with the U.S. government related to activities in China. For example, on July 11, 2016, a U.S. technology multinational agreed to pay US$14 million to the SEC to settle FCPA allegations related to its Chinese subsidiary. Similarly, on March 23, 2016, a large pharmaceutical company agreed to pay the SEC $25 million to settle alleged FCPA violations involving its use of third parties in China. In the last five months, seven com-

panies have paid $88 million to the U.S. government to resolve FCPA allegations related to activities in China.

Focus on individuals The DOJ has recently emphasized individual accountability (as opposed to solely corporate accountability) for FCPA violations. On September 9, 2015, the DOJ issued a new policy (referred to as the “Yates Memo”) on individual accountability, including under the FCPA. The policy provides, in part, that: (1) to receive cooperation credit, a company must turn over all relevant information on the wrongdoing of individuals; (2) all DOJ investigations will focus on individual wrongdoing from the onset; (3) individuals will not be released from civil or criminal liability absent extraordinary circumstances; (4) corporate actions should not be settled without a clear plan to resolve individual cases; and (5) civil attorneys should evaluate whether to bring a suit against an individual based on consideration beyond the individual’s ability to pay. This focus on individual accountability will have a significant impact on the resolution of future FCPA allegations and investigations.

Establishment of Pilot Program On April 5, 2016, the DOJ announced a new FCPA enforcement Pilot Program. The DOJ stated that the Pilot Program is intended to deter FCPA violations, encourage implementation of anti-corruption com-

pliance programs and increase prosecution for individuals whose conduct may have gone undiscovered. Under the Pilot Program, a company can receive up to a 50 percent reduction off the bottom of the U.S. Sentencing Guidelines fine range if the company voluntarily discloses misconduct, fully cooperates and takes timely and appropriate steps to remediate the issues discovered. In one recent matter, while the company agreed to pay the SEC US$14 million in civil penalties, under the Pilot Program, the DOJ declined to pursue criminal charges. Similarly, under the Pilot Program, in June 2016, the DOJ also closed inquiries regarding two other companies for alleged misconduct by their Chinese subsidiaries (though one paid approximately $322,000 and the other paid $672,000 to resolve matters with the SEC).

Increased government resources and collaboration The U.S. government is also committing more resources to investigating and pursuing potential FCPA violations. The DOJ’s Fraud Section has increased its FCPA unit by more than 50 percent by adding ten federal prosecutors. The FBI has established three squads of special agents devoted to FCPA and related investigations. In addition, the DOJ has noted that approximately ten FBI agents are currently stationed outside of the United States investigating FCPA and related crimes. The SEC's Enforcement

September 2016

E

nforcement of the Foreign Corrupt Practices Act of 1977 (FCPA) remains a high priority for the U.S. Government.

The U.S. Department of Justice (DOJ) is responsible for criminal enforcement and the Securities and Exchange Commission (SEC) handles civil enforcement under the FCPA. Most U.S. companies and multi-nationals are all too familiar with the staggering costs of investigating and resolving these matters. Below we summarize the recent developments and priorities for FCPA enforcement and offer guidance regarding complying with the FCPA.

25

E.W. Gentry Sayad

is the co-chair of the Asia Practice at Kilpatrick Townsend. He is the legal advisor to AmCham’s Board of Governors and is the vice chair of the Legal Committee. His practice focuses on M&A, compliance and other issues for US and Chinese

www.amcham-shanghai.org

companies.

26

Division has also instituted a specialized unit committed to FCPA enforcement.

In addition, the DOJ has been strengthening cooperation with foreign governments. In September 2015, after President Xi visited with President Obama, the Chinese Foreign Ministry announced that China and the U.S. “agree to enhance practical cooperation in corruption prevention . . . [and] combating transnational bribery.”

As part of the Pilot Program, the DOJ noted that it is “strengthening its coordination with foreign counterparts in the effort to hold corrupt individuals and companies accountable.”

What to do?

As news reports reflect almost daily, Chinese authorities are also prioritizing combating corruption.

Given the DOJ's and SEC’s con-

tinuing focus on FCPA misconduct, specifically in China, and the increased focus of Chinese authorities, companies must take action to ensure compliance. It is imperative that all U.S. and multinational companies have in place compliance programs to prevent and detect potential FCPA violations. While the breadth and scope of a compliance program is unique to each company’s risk profile, in general, companies should: (1) institute or update compliance and anti-corruption policies; (2) emphasize the importance of compliance and empower compliance professionals within the company; (3) routinely analyze risk and perform FCPA and anti-corruption risk assessments; (4) train all atrisk employees (including senior management and boards) and third parties (including, for ex-

ample, agents, representatives, joint-ventures, licensees and vendors); (5) monitor employees and third-parties; and (6) conduct FCPA due diligence before transacting with third-parties or purchasing or partnering with another company. In this climate of aggressive enforcement, it is critical to implement effective and efficient risk-based anti-corruption policies, procedures and programs and to diligently monitor compliance. I

Movers POLICY and PERSPECTIVES Shakers

Unplugged: What China’s Internet and Data Restrictions Mean for U.S. Companies and China’s Economy

Business barriers E-commerce and digitization have transformed the Chinese economy and made the internet a core issue for American companies doing business in China.

Companies need the internet to access information, connect to their offices around the globe, engage with customers, and access innovative programs and software to improve productivity. American ICT companies also play a large role in China’s massive ICT market. In the past

few years, however, the Chinese government has increased its scrutiny of the internet and introduced many draft regulations and restrictions on internet content as well as the hardware that supports the internet. New draft regulations and rules also affect how companies manage data.

For many member companies, China’s internet restrictions are more than an in-

per Shanghai’s goal of becoming an international financial center by 2020 and a science and innovation center with global influence by 2030. Financial, science, and innovation centers require the free flow of information. Banks are investing heavily in financial technology and Singapore and Hong Kong are becoming hubs for innovation in this area. For Shanghai to play a sim-

convenience. Often they pose significant barriers to doing business in China. The impact on large companies may be limited as they often have dedicated trunk lines that ensure unfettered internet access. However, internet restrictions can limit these companies’ ability to provide seamless service to customers. Most small businesses cannot afford dedicated trunk lines and are more vulnerable to internet limitations. Some cannot use popular software programs based outside of China that require the use of a VPN. While there may be equivalent Chinese programs, companies should have access to cloud-based solutions on a global basis, no matter where those solutions are hosted or headquartered. Companies should be able to make these decisions based on business needs and not because of government mandates.

After all, Chinese companies operating in the United States can freely use cloudbased solutions based in China.

ilar role, it needs a fast and open internet.

Companies also rely on accurate and balanced information. Important sources of financial news and analysis include The Wall Street Journal, Bloomberg, The Economist, Reuters, and The New York Times, yet all are blocked in China. Shanghai will struggle to compete with cities like Hong Kong, Tokyo, and Singapore that have faster and more open internet systems.

Development challenges AmCham Shanghai supports the Chinese government’s efforts to develop its economy. American companies are active in China and benefit from a strong, innovative Chinese economy. Many American companies conduct R&D in China and all seek to improve productivity. But a restricted internet interferes with these goals and is harmful not just for American and Chinese companies but also for China. A freer and more open internet can support and accelerate China’s economic development.

Current internet restrictions also ham-

Recommendations To improve the business climate and support innovation, we recommend that the Chinese government take the following actions: 1. Eliminate “secure and controllable” requirements for procurement of IT infrastructure products. Instead, ensure a secure cyber economy through policies that encourage competition and customer choice, are open to non-indigenous technologies, and involve dialogue between industry and government.

2. Reconsider data localization requirements.

3. Continue to solicit input from the private sector on draft regulations.

4. Eliminate restrictions that block access to information on the internet.

This policy can first be introduced in the Shanghai FTZ and then extended throughout China. I This is an excerpt from AmCham Shanghai’s Viewpoint of the same name. To read the full report, visit AmCham Shanghai’s website.

September 2016

I

nternet access, restrictions and quality is a growing challenge for U.S. companies operating in China. In AmCham Shanghai’s 2016 China Business Report, this issue was named by 81 percent of respondents as a top business challenge, ahead of unfair regulatory treatment, intellectual property rights protection and investment restrictions.

Requirements for local data storage and proposed regulations mandating the use of “secure and controllable” technologies in certain industries - banking, insurance and healthcare - are also a concern. Collectively, these limitations and restrictions limit the ability of American ICT companies to expand in China and hurt the productivity of small and large American companies.

Chinese companies and China’s economic development also suffer. Becoming a more innovative economy is a high priority for the Chinese government. Innovation dominates the 13 th Five Year Plan, the country’s development blueprint for 2016-2020. China has spent billions of dollars on special investment funds, subsidies, and incubators to spark domestic innovation. However, slow internet speeds, blocked access to important websites and resources, and restrictions on where data can be stored and on what equipment, impede innovation. China wants to exploit the power of the internet, but government policy limits how China can benefit from it.

27

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29

Member Focus Cameron Johnson, a member since 2003, first came to China when he was 19 years old. Beginning in 2002, he has lived here full time, working for Microsoft, Costa Coffee and now at Sigmatex, a manufacturer of carbon composite materials.

What did you learn at Microsoft that you apply to your current work?

shift time. In this situation a bridge needed to be built, but also a

Working in China and/or Asia is complicated and far different from

solution found that satisfied both sides while resolving the problem.

the West, whether it’s culture, business-style or expectations. At

The factory eventually ordered a machine to do the task, and the

Microsoft, we dealt with multiple reporting lines (U.S., China, Hong

workers were placed elsewhere. Production time decreased per

Kong, Taiwan), and learned how to balance wildly different expec-

part, driving factory efficiency, and the centering of the ‘s’ was re-

tations, KPIs and business needs between different organizations,

solved for the brand. The result pleased everyone.

cultures, and management (some of whom were not related to the

business but wanted their say regardless).

Sigmatex carbon fibers are used in products like Formula One

Twelve to sixteen-hour days were common, with the expectation

racing cars, lightweight bicycles, yachts and aircraft. How do

that you didn’t leave until the boss left, which was around 12 a.m. or

you transform the fibers for these uses?

even 2 a.m., and that you were back at work by 9 a.m. You had to be

Our products are converted from a fiber into a fabric or pre-form, cus-

focused and efficient to get home at a decent time. I later learned

tomized by weight, length, width, pattern, material, etc. Our custom-

that one needs a champion/mentor to help guide, consult and give

ers then either infuse it or put it through a resin impregnation process,

functional feedback for both your personal and career development.

which can then be used to mold into a part. Some products that use

our material are hockey sticks, bicycles, the Audi RS8 and McLaren P11.

Costa Coffee is owned by a British firm. Can you tell us about the good and bad of operating at arm’s length from head office?

Being at arm’s length has the benefit of being more independent and flexible to run the business. On the other hand, successes and challenges may not be seen or truly appreciated. With this, communication and managing expectations is critical on both sides. For example, issues that the West sees as major are seen as insignificant or not worth much attention in Asia.

You had an interesting experience involving coffee lids. Can you elaborate?

Costa Coffee ran a large portion of their supply chain through a company called Tiger Global, which produced and sourced products in China. One challenge was to get the coffee lid supplier to

Bicycle

www.amcham-shanghai.org

line up the ‘s’ in Costa with the lid’s mouth opening. In the UK, it is

30

seen as a branding issue and critically important to the product; in

What advantages do your carbon products have over traditional

China, the manufacturing staff thought it was annoying to have to

carbon fiber?

constantly center the hole. Their attitude was that people could still

We have a large R&D team that works with customers to cater the

drink and use the lid, so who cares?

material to their needs, something few in the industry do. There are

The lids were produced by someone who stood and manually

standard products in the industry that we produce as well, but most

punched lid after lid. The workers were tired, bored, or both, and

customers want a specialized material to fit their process, cost, de-

this caused production errors. The centering of the mouth hole took

sign, etc. We are now working with several automotive companies

several seconds per lid, which added up to a significant amount of

that use specialized carbon material designed by our R&D team to

MoversMEMBER and Shakers NEWS

suit their performance and process needs. They are the first in Asia

as closing the deal.

to do this, and it is driving technology in the industry in our region.

Carbon composites have a higher energy-absorption rate than

How do you protect the IP of your most sophisticated products?

steel, enable greater fuel efficiency and work well with materials

We don’t bring it into China and are not connected to any com-

like fiber, plastics, metals, wood, and concrete. They are suitable for

pany servers outside of China, so the risk of hacking or losing IP is

complex designs, have superior fatigue properties, high heat toler-

lower. We have specialized IP we would like to bring, and are cur-

ances and are corrosion-resistant. The strongest carbon fiber is 10

rently designing a system to protect it, but this takes significant time

times stronger and five times lighter than steel.

and resources to ensure it is secure and even then, the risk is always there.

What are your primary markets in China and Asia? In Asia, our

products are used in sporting goods, automobiles, aerospace and

You mentioned that your industry is known for fake supplies.

marine applications. For example, we recently signed an agree-

How do you sell against these? Are foreign buyers more willing

ment with Reebok for one of our products to be used in ice hockey

to purchase from you than Chinese manufacturers?

sticks. The special carbon fabric is 20 percent lighter than traditional

Our industry is driven largely by raw material cost, so our competi-

carbon fiber fabrics and has a high strength-to-weight ratio. Alibi, a

tors in the black market do not pay duty, VAT or other taxes. Some-

Thai manufacturer of catamarans, also uses Sigmatex products as

times they also substitute materials or lower invoice values in order

do several European auto manufacturers.

to pay less. To combat this, we have implemented full traceability

From our Shanghai facility, we produce a customized material

based on AS9100C requirements (an aerospace version of ISO9001)

for the RX1E airplane in China, which is the world’s first electric pas-

so that customers can trace material back to the original manufac-

senger plane. There are also several large OEMs that use Sigmatex

turer. Foreign and local customers want that security of knowing

material in China which is then is exported to the U.S. and Europe.

where the material is coming from and that what they are buying business. It also helps us with suppliers as they are confident that

startups. Is it the same in your industry?

customers are buying “real” products from us. We also have a focus

We face two strong headwinds. First is the large black market,

on using our “foreign” expertise in product and process design to

which industry figures estimate is as much as 80 percent of the

help our customers gain an edge; this helps against the competi-

total market. The second headwind is new entrants entering the

tion as most producers will not do this.

market every year. Our work is very similar to companies that use

glass fiber material for wind blades, boats, etc., so when the market

Staff retention in China is difficult. What do you do to reduce em-

in glass is down, they can jump into other composite markets to fill

ployee turnover?

business. Some already have very close relationships with automo-

We show appreciation for work, allow flexibility when family issues

tive or aerospace companies so a large part of their business will

arise (several pregnancy issues have arisen and we give time off

be built already. Part of the challenge as a foreign company is to

to deal with these), and offer training outside employees’ defined

become integrated into the supply chain locally, and viewed as a

roles. We give direct responsibility to section heads, allowing them

“local” supplier with foreign expertise, instead of a “foreign” supplier

the flexibility to run the business with little interference. We also

that’s trying to enter the local market.

have twice weekly meetings to review issues and strategy, giving

employees a voice while at the same time training them.

China wants to support domestic high-end manufacturing. Will

this put you at a disadvantage to local manufacturers that may

You spoke about advocating for women in the workforce. Do you

enjoy state support?

see a glass ceiling in China for women?

Definitely, but it is also a chance for partnership. Our industry is some-

The talents of women in China are underappreciated and under-

what niche, with not too many large players, given the high barriers to

utilized. In our Asia business, two women run large portions of the

entry for many products due to cost, machinery and lack of local ex-

business. They are entrusted not only with staffing, operations and

pertise. But with the push for high-speed trains, light-weight cars and

finance but also with ensuring that the company is protected from

buses in the new five-year plan, companies already in the market with

mistakes (such as mine).

close ties to the government are winning contracts. This is a chance

A few months ago, a decision was made on a commercial issue.

to work with those companies, supply chains and industries that have

Our finance manager came in a few hours later and said “that’s a

state support and/or state projects, but need foreign expertise.

bad decision, we should do this instead.” A local manager might have

The industry is still young in China, and having the chance to form

reprimanded her, but we try to foster an environment where feed-

those key partnerships in the beginning and integrate into the process

back, ideas and critical thinking, even if tough to receive, are valued

and projects is a blessing. This is something many companies miss

and considered. And she was right! We were saved from a horrible

because they view the end game/profit instead of the process. China

decision. No man in the team saw it, but she did! That different view-

and Asia are places where the relationship business model is important,

point and perspective is essential not only to running a company but

meaning the relationship and process is just as important, if not more,

also for having foresight and strategic planning in the business. I

September 2016

is real and will perform as expected, and our traceability helps win Foreign companies face considerable competition from local

31

Board of Governors Briefing Board Gets Update on Membership Drive, Budget and NEC Highlights from the August 25, 2016, Board of Governors Meeting

NEC Committee Approval The board unanimously approved the appointment of Han Lin, Laurie Underwood, Shirley Zhao and Dan Krassenstein to the Nomination and Election Committee. Jimmy Chen had previously been approved as the committee’s Chair.

Board Chair Selection Process Board members discussed the pros and cons of having the Board select the Chair rather than having the Chair directly elected by the members. This would require an amendment to the Chamber’s constitution, and there was support from the board for including such a proposal in the upcoming general election.

Washington Doorknock (Sept. 19-21) The board received an update on topics to be addressed on the Washington Doorknock. These include support for the BIT and TPP and also emphasizing the benefits of Chinese investment in the U.S. While providing a balanced look at the business environment in China, the delegation will also raise member concerns, particularly around cyber security and data localization

in the financial services sector reform.

2016 First-half Budget Report The president reported that despite the current membership drive, revenues remain below target. Corporate Visa Program revenue, in particular, was below target. Staff are taking cost-cutting measures and working to realize the break even budget put in place for 2016.

MEETING ATTENDANCE Present: Jimmy Chen, Mike Crotty, Ker Gibbs (Chair), Cecilia Ho (by phone), Tim Huang, Ning Lei, Glen Walter, Cameron Werker, Vincent Yang, Helen Yang, Eric Zheng Apologies: Aina Konold, Nancy Leou Attendees: Kenneth Jarrett (President), Gentry Sayad, Helen Ren, Titi Baccam, Patsy Li, Linda Wang, Jessica Wu

The AmCham Shanghai 2016 Board of Governors CHAIRMAN

Ker Gibbs

www.amcham-shanghai.org

ChinaBio

Jimmy Chen

Michael Crotty

Timothy Huang

FedEx Express

MKT & Associates

Bank of America Merrill Lynch

Aina E. Konold

Ning Lei

Glen Walter

GAP Inc.

Lei & Company

Coca-Cola

Helen ChingHsien Yang

Vincent Yang

Eric Zheng

SKF

AIG Insurance

Vice Chair

DuPont

Cecilia Ho 32

GOVERNORS

International Paper Asia

MoversMEMBER and Shakers NEWS

Event Report

Winners and judges of the Future Leaders of the Year Awards

Workshop Series: Creating an Effective GR Program AmCham Shanghai held the first session of the Government Relations Workshop Series on Creating an Effective Government Relations Program on July 13. Jim McGregor, chairman of Greater China for APCO Worldwide, provided an overview of how companies structure their GA teams and shared strategies and best practices for creating an effective GA program.

The workshop also included a panel discussion which was moderated by McGregor and included Nina Wang, vice president of Government Relations at Johnson Controls Inc, Sarah Crawshaw, managing director of Taylor Bennett Heyman, and Jimmy Chen, the regional vice president at FedEx Express.

The speakers agreed that the GA function plays an increasingly important role in China’s “New Normal”. While there are different GA structures within companies, the speakers agreed that it was important for the GA function to have access to decision makers within the company and not to be limited to the legal department. To succeed, GA practitioners need to have a good understanding of China’s policies such as Made in China 2025, Internet Plus, and One Belt, One Road and be able to explain these policies to company leaders.

The speakers also emphasized the importance of building good relationships with both local and central government officials through maintaining regular contact and providing these officials with information and assistance on meeting their goals. For example, companies can provide officials with industry best practices or strategies on difficult issues. They recommended against raising problems or complaints during the first meeting with an official as this would not be effective in resolving the problem and not lead to a strong long-term relationship..

“How To” Workshop Series: How to Get Your “Chinese Brand Name” Right Foreign brands coming to China are faced with the unique and difficult challenge of successfully developing an appropriate Chinese name. AmCham Shanghai’s latest “How to” Workshop Series, which focused on getting your Chinese brand name right, was hosted by Jerry Clode, Director of SMART @ Resonance China.

Clode said that failing to adopt a Chinese brand name is a “marketing deathblow” and provided a blueprint for the process of creating a name. He also highlighted several issues that one should avoid.

After outlining the fundamental concerns regarding a Chinese character’s sound, meaning and appearance, Clode walked through his “10 Mantras” for the process. Key among these was to avoid simply translating your company or product name, which can accidentally lead to strange or inappropriate meanings, and instead focus on a name that “communicates your brand essence.” Perhaps most important of all, Clode stressed the importance of testing the name with locals and checking it against at least the major regional Chinese dialects to ensure that its meaning isn’t misunderstood by customers from different regions or those with different backgrounds. He also stressed the importance of thinking about the defining elements of a company that it would hope to communicate through its name, as well as considering any potential problems or misunderstandings. I

September 2016

Future Leaders of the Year Awards Ceremony AmCham Shanghai announced the winners of the 2016 Future Leaders of the Year Awards at the Four Seasons Hotel on August 2. The awards celebrate the contributions and value of investing in young talent.

Kim Xu, chief digital officer and vice president of digital sales at IBM Greater China, delivered a keynote speech with advice and hope for future leaders. “We came together today because we hope to find common interests and value systems. We can all associate with a higher purpose and as a catalyst, we can change the world as future leaders,” she said. Xu also spoke about the sacrifices needed to become a leader. “The difficult moment [in becoming a leader] is when you disagree with everyone and you are willing to put your badge on the table. [It’s when] you’re willing to sacrifice and give up everything for what you believe,” she said.

After reviewing a large pool of nominations, a panel of judges used a strict set of criteria to select winners in three categories: the Future Leader of the Year Award, the US/China Business Exchange Award, and the Entrepreneurship Award. In addition to being recognized on stage, all winners received RMB10,000 in AmCham Shanghai training credits.

Zhen Xi Zhong, executive director at Shanghai Roots & Shoots, was awarded the Future Leader of the Year Award. Roots & Shoots is a program designed to educate youth about environmental issues and humanitarian values with a special focus on group interaction.

The Shanghai branch of Roots & Shoots was founded as a volunteer organization in 1999.

Ray Wang, director of marketing at Harcros Chemicals, was awarded the US/China Business Exchange Award. Harcros Chemicals is a distributor and manufacturer of both industrial and specialty chemicals.

Eric Loh, CEO of Vocinno Technology Inc., was awarded the Entrepreneurship Award. Eric Loh founded his mobile applications development company, Vocinno Technology, which focuses on helping Chinese teenagers’ mental health. His company launched a social app in 2014 called “Bengjiujie.” The app aims to help address and create a forum for emotional and social issues facing Chinese youth.

33

Future Leaders of the Year Awards Ceremony

AmCham Shanghai

A panel discussion on retaining startup talent

Paul Leinwand discusses successful business strategies at an Author Series event

A briefing on attracting and retaining talents for startups

The winners of the Future Leaders of the Year Awards

U.S. National Security Advisor Susan Rice at a roundtable event

A panel discusses how to create an effective GA program

Month in Pictures Members network at the Future Leaders of the Year Awards Ceremony

Jerry Clode discusses how to create local Chinese brand names

Chairman of APCO China James McGregor at a GR event

Committee Chair’s Corner A Chat with Callum Douglas We talk with Callum Douglas, director of corporate responsibility at PwC China and Hong Kong. He is the co-chair of the Business Council for Sustainable Responsibility (BCSR).

What are the top challenges facing CSR programs in China?

to respond to the pollution issues in China and to engage with

Companies trying to run responsible businesses are still faced with

the various stakeholders causing and affected by that pollution,

public trust and corruption issues across China, and this happens at

which resulted in the environmental law being passed in January

many levels. Whether working towards checking the many layers

2015. There has been a focus on harmonious society since then

of suppliers in your supply chain management programs, running a

and companies have been keen to refer to this in their programs.

multi-stakeholder community program, or just going about business

Through this, we see many companies engaging with migrant

in an ethical way, I still see this as the number one challenge. Secondly,

workers and communities supporting the urbanization of China

amongst the general public, CSR is still not very well understood and

but who struggle to be accepted in society.

many practitioners still struggle to explain their roles to people. In addition, while there is growing evidence of CSR programs being

Supply chain management arising from food safety incidents

linked to core business and strategy, it doesn’t happen across the

and threats must continue to be a huge part of CSR programs

board, and many practitioners struggle to engage their leadership

for companies which have supply chain risks, and more recently

and get them to really integrate CSR into the business. Finally, for

a strengthened focus on the reputation and conduct of Chinese

those companies engaging with foreign NGOs as part of their CSR

businesses operating overseas, particularly in African nations. So

programs, there is now the additional navigation and understanding

while a lot of this did come to a head around 2008, the government

required because of the new Foreign NGO Law.

has continually pushed new and relevant policies and plans which have helped CSR progress rapidly in China.

In which industries do you see the most impressive CSR programs being implemented?

A growing number of private philanthropic foundations have

There are some companies taking the lead, but I don’t think we see

been established by wealthy Chinese in recent years. But

one industry really standing out among the group across all areas

philanthropy is not as common as it is in the U.S. What would

of CSR. The companies doing well are the ones that see the value

make more wealthy Chinese donate?

CSR brings to their company and grow their business accordingly.

One development which I hope will be an enabler for this

I think some of the best efforts are from companies that are

is philanthropy trust funds as highlighted in the new China

embracing innovation to tackle social problems. Increasingly

Philanthropy Law. This will help make it more straightforward and

these are coming through as new - and viable - business models

efficient for wealthy people to transfer their wealth to charities.

rather than as philanthropy. When innovation and philanthropy

There is still a question of people being concerned about their

come together, there are great results to be had.

financial security rather than having money to donate. These are not unusual attitudes for a country where wealth and disposable

www.amcham-shanghai.org

Some say the Sichuan earthquake in 2008 marked a change in

36

income are relatively new compared to the U.S.

Chinese attitudes towards CSR, generating an unprecedented number of donations. Do you think that event prompted the

Do you see more emphasis on CSR programs at state-owned

government to promote CSR programs?

enterprises or private multinational companies?

I think there are several catalysts over the past decade that led

We see a difference in the kind of programs run by different types

the government to push CSR programs, and in a much broader

of enterprises. SOEs have had to report more formally on CSR due

sense than disaster relief and humanitarian efforts. The Sichuan

to regulations, but this tends to be compliance-based, whereas

earthquake may have been one, especially for donations and

the private companies may be coming from either more of a

willingness to volunteer. However, there has also been the need

‘do the right thing’ angle or are driven by stakeholder demand,

MoversMEMBER and Shakers NEWS

and believe that what they are doing also brings value to their

programs they can get involved in. Many MNCs are quite rightly

company. But as CSR is still relatively young, it can be difficult to

ensuring that their CSR and values feature prominently in their

tell the differences beyond a superficial look. This will change as

graduate recruitment websites and campaigns. It helps show

the market and expectations mature.

young people, for whom a job is not ‘just a job’ anymore, that there is a whole lot more to working at these companies than what is

The concept of “going green” was one of the pillars of China’s

detailed on their job descriptions.

13th Five Year Plan. Do you believe the added emphasis on sustainability will be borne out in results?

What can professionals do to ensure that senior company

Yes, absolutely. We have the 13th Five Year Plan and also the

officials take CSR more seriously?

Paris Agreement and the Sustainable Development Goals [a U.N.

Make it matter to them. Show them the value that CSR programs

initiative] coming through, all in a very short space of time. In the

bring, what benefits managing supply chain and reputation risk

recent Global CEO Survey which PwC conducted, we see that 74

brings, that demonstrating strong governance, innovation and

percent of Chinese CEOs are making changes in how they minimize

engaging with stakeholders brings value. It’s important to show

the social and environmental impacts of their business operations

the value as perceived by your stakeholders and value for the

in response to changing stakeholder expectations. I think we’ll

business too. CSR adds value to organizations on so many levels,

see a lot of movement in this space, and a lot of opportunity for

including increased brand reputation, attracting, developing

companies that are able to innovate and provide services which

and retaining good people, risk mitigation – the list goes on. But

can bring about sustainable solutions for business.

often this needs to be pointed out using specific examples so that leadership can really grasp them. In the PwC CEO survey,

Some Western companies use CSR to attract graduates.

research shows that 72 percent of CEOs in China say that in five

Do young Chinese really care about CSR?

years’ time, corporate responsibility will be core to everything they

Yes, young Chinese do really care about CSR! More broadly than

do. Statements like that are hugely encouraging to me in general,

that, interest in CSR is typical from millennials who don’t just care

and a great tool for engaging leadership. I

September 2016

about salary - they also care about values, quality of life and CSR

37

MEMBER NEWS

Esoterica Baijiu Nights

www.amcham-shanghai.org

By Ian Driscoll

38

The best examples are said to be sorghum-based. Alcohol content generally hovers between 40 and 60 percent, which explains its considerable impact on the unwary as well as on the long-term health of dedicated drinkers. ＼

IMAGINE CHINA

Most foreigners who live in China learn not to tangle with China’s most notorious and widely-drunk form of alcohol, baijiu. Some acquire this knowledge vicariously, the less-fortunate through hard-bitten experience.

Run-ins with baijiu have left friends in hospital, others close to comatose, and in the case of one Briton, prone in the aisle of an aircraft. His route to inebriation was not atypical: an extended lunchtime banquet following the inking of a power station financing deal in the mid-1990s.

The Brit was an accomplished drinker but late-night negotiation sessions had weakened him, and anyway baijiu has a kick all of its own and can catch the uninitiated unawares. By the time he and his colleagues escaped the banquet for the airport they were already losing ambulatory function. The cabin crew, obviously alerted in advance by local authorities, laid him in the aisle – ready for takeoff. He was still lying there when the plane landed.

Westerners’ efforts to avoid baijiu could fill a thick book. The colorless firewater, usually served at banquets in deceptively small glasses has been discretely tossed over shoulders, poured onto carpeted floors, emptied into hidden bottles, surreptitiously tipped into soup tureens or watered down on the sly in between toasts. Some of the most hardened “Old China Hands” have invoked alleged cancer conditions, esoteric liver diseases, religious restrictions and pregnancy to escape the bitter side-effects of a determined effort by the Chinese members of the banquet party to get everyone plastered in the shortest time possible. A serious baijiu session, often unavoidable in certain parts of the country, can leave you sweating noxious fumes for days.

It is of course subjective, and there are clearly those who like the drink, but for me baijiu’s only redeeming quality is that every glass tastes better than the last.

Depending on who you believe, baijiu (literally “white alcohol”) has been around for anywhere between 600 and 5,000 years.

Made from fermented grains, there are thousands of varieties with different tastes.

Different labels, same effect

Shanghai and the coastal regions to the south have traditionally generally passed on baijiu, preferring the more mild huangjiu (“yellow rice wine”), which is made of rice. In the north and the west and in more remote areas, however, baijiu remains a mainstay of both recreational and official entertaining. In some places baijiu has thankfully largely been replaced by grape wine at banquets, or at least offered as an alternative. But the choice of either baijiu or red wine is often a polite feint, and your Chinese hosts may really want you to allow them to drink their local variety of baijiu. Depending upon where you are in negotiations that might be the wise thing to do.

Spare a thought, however, for the officials who have long borne baijiu’s brunt. Shackled by cultural mores, there is often no escape.

A Western former journalist recalls working with some officials in Gansu and Inner Mongolia a decade ago who are now dead because of the stuff. An unintended consequence of President Xi’s crackdown on government entertainment is that it may save others. I occasionally wonder about the longevity of the two Chinese gentlemen who introduced me to baijiu.

I was flying from Beijing to Qingdao in the

summer of 1999, and I was the only laowai aboard the plane. Foreigners in China were still something of a novelty, and two fellow passengers befriended me. After landing, they drove me to the city center, found me a hotel room, and offered to take me to a harborside restaurant for dinner. It was downhill from there.

Xu Ximao, Deputy Section Chief of the Foreign Enterprise Department of the Qingdao Council for the Promotion of Overseas Investment (I still have his name card), was proud of Qingdao’s beer, and ordered bottle after bottle, all of which we drank. We raised our glasses to friendship, to our respective countries, to the fraternity of nations, to international harmony, to the Allies’ defeat of Japan, to the port of Qingdao, to the Foreign Enterprise Department, and so on. Each celebration was punctuated with a cry of “ganbei” and an upending of glasses. Somewhere between these liquid inhalations we ate seafood. Then Mr. Xu asked the waiter for a bottle of baijiu.

Moments like these are tipping points.

The wise veterans know what lies ahead and retreat. Neophytes press on, emboldened by the alcohol and an inflated sense of self-worth. After two hours of camaraderie and back-slapping I felt as if I had single-handedly erased the Chinese memory of the Opium War; that any further AngloChinese rapprochement would be traced back to this very evening. The baijiu could only make things better.

Two shots were enough to ratchet up the evening’s tempo. The baijiu tasted like hell but I didn’t care. Mr. Xu and his colleague stood on their chairs and sang revolutionary songs. I responded with barely remembered English hymns. The other diners watched more closely as the antics degenerated. With each additional glass, Mr. Xu became more animated, his inner Bacchus unleashed. Soon he invited the neighboring diners to share a drink with us. Next, arms spread wide like a benevolent Caesar, he began summoning all the other patrons. Table by table they marched up. Shot-by-shot, yet another laowai passed into the void. I