Over the Great Wall: US Company Views & Challenges of Doing Business in China Ryan Ong US-China Business Council “China Emerged—Rethinking Your Global Strategy” University of Kansas March 1, 2013

About the US-China Business Council Private, non-government, non- partisan More than 220 member companies Senior level board of directors About USCBC Founded in 1973 HQ in Washington, with regional offices in Beijing, Shanghai Role as an “honest broker” The United States-China Business Council is the principal organization of US companies engaged in trade and investment in the People's Republic of China.

US Exports to China (US$ billions) Source: US Department of Commerce, cited in US-China Business Council “China and the U.S. Economy: Advancing a Winning Agenda,” January 2013 China’s Market Opportunities: US Exports to China

China’s Growing Consumer Class (millions) Source: InterChina Consulting, cited in US-China Business Council “China and the U.S. Economy: Advancing a Winning Agenda,” January 2013 China’s Market Opportunities: Chinese Consumers

Setting the Stage: China’s Economic and Political Environment in 2013

2012 GDP grew at 7.8% – lower than 2011’s 9.3%... but higher than the March 2012 targeted rate of 7.5% predictions are higher… government target unknown but perhaps around 7.5%. China 2013 GDP Growth Rate Projections China’s Economy in 2013 Institution2013 ForecastForecast Date World Bank8.4%Jan-13 Goldman Sachs8.2%Dec-12 Chinese Academy of Sciences8.4%Jan-13 HSBC8.5%Jan-13 UBS8.5%Feb-13 JP Morgan8.2%Jan-13 IMF8.2%Jan-13 Merrill Lynch8.1%Jan-13 Citibank7.8%Jan-13

Xi Jinping Li Keqiang Zhang Dejiang Yu Zhengsheng Liu Yunshan Wang Qishan Zhang Gaoli China’s New Leadership Lineup China’s Leadership Transition

Timeline for China’s Political Transition November December January February March April Party Congress: New Politburo, Party Leadership National People’s Congress: New Government Leaders, Government Reorganization Assorted changes in provincial governments, some ministries Remaining government changes China’s Leadership Transition

Lower income disparities Increased domestic consumption Balanced regional development Broader social safety net “Clean and green” economy Industrial & service sector modernization Healthcare reform Tax and financial system reform Current Policy Priorities China’s Leadership Transition Domestic priorities may – or may not – link to foreign concerns

China’s 12 th Five Year Plans (FYPs) Broad, aspirational policy document, laying out policies/goals for the next five years ( ) Sets overall social/macro economic direction Accompanied by a series of follow-up plans (nearly 300 and counting) Takeaway: FYPs provide glimpses of government direction, policy goals, and potential opportunities Trends to Watch: China’s 12 th Five-Year Plans

Company Views of the Business Environment in China

USCBC 2012 Member Company Survey: Respondents Profile China United States Other 51% 40% 9% > 20 years 11 – 20 years 5 – 10 years < 5 years 53% 28% 12% 7% Manufacturing Services Ag/Resources Other 51% 40% 9% 15% Company Experience in China Location Sector Strong and Unique Mix of Respondents Company Views of the Business Environment in China Source: US-China Business Council 2012 Member Company Survey

China's Prominence in Overall Company Strategy Source: US-China Business Council 2012 Member Company Survey Company Views of the Business Environment in China

Objectives for Existing and Future Investments in China Company Views of the Business Environment in China Source: US-China Business Council 2012 Member Company Survey

Company Views of the Business Environment in China Are Your China Operations Profitable? Source: US-China Business Council 2012 Member Company Survey

Revenue from China Operations Source: US-China Business Council 2012 Member Company Survey Company Views of the Business Environment in China

Source: US-China Business Council 2012 Member Company Survey Five-Year Business Outlook for China Company Views of the Business Environment in China

Top Company Concerns in Operating in China

USCBC 2012 Survey: Top 10 Challenges 1.Human resources: Talent recruitment and retention 2.Administrative licensing 3.Competition with Chinese enterprises 4.Cost increases 5.IPR: Enforcement 6.Uneven enforcement and implementation 7.Investment restrictions 8.Competition with foreign companies in China 9.Competition with companies not subject to FCPA 10.Standards & conformity assessment Top Operating Issues for US Companies

Top Cost Concerns Source: US-China Business Council 2012 Member Company Survey Top Operating Issues for US Companies: HR & Rising Costs

Project Approvals Business Licenses Checks/Investigations Regulatory Compliance The Administrative “Black Box” - Bureaucratic delays - Lack of regulatory clarity - Inconsistent application of laws and regulations - Conflicts between central & local priorities Administrative Licensing Top Operating Issues for US Companies: Administrative Licensing

Competition with Chinese Companies Chinese companies (SOEs, private) increasing market competitiveness over time, both in China and abroad… …but foreign companies remain concerned that Chinese companies have access to better policies, incentives, and greater/better government access – both in China and abroad. Access to credit and export promotion programs, government procurement projects, inside role in shaping and driving policy, etc. Top Operating Issues for US Companies: Competition

23 Source: US-China Business Council 2012 Member Company Survey How does China’s level of IPR Enforcement limit the activities your company can do in China? Top Operating Issues for US Companies: Intellectual Property Rights

Administrative licensing Standards setting Discriminatory enforcement Subsidies Gov’t pressure to favor Chinese firms Gov’t procurement buy local M&A reviews/ approvals Adjudication in commercial courts Other Not seeing signs of protectionism Signs of Protectionism Source: US-China Business Council 2012 Member Company Survey Top Operating Issues for US Companies: Protectionism

Strategic Emerging Industries SEI Industries Become a world leader in seven developing industries Promote independent self-reliant innovation Comprise 15% of GDP by 2020 Foster industrial sector reform Build globally competitive companies Trends to Watch: Strategic & Emerging Industries

Tracking of policies and plans to position operations and anticipate challenges: short- and long-term Reassessment of global and China operations to adapt to changing markets and operational challenges Need for active engagement and relationship-building with governments and external stakeholders Increased use of Chinese enforcement channels to protect company interests What do these trends mean for companies? Company Takeaways

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