1. Doing Business In China Building value for foreign enterprises in Asia

2. Agenda 2 1.Selling to China: Commercial Options The most difficult business issues according to people working in China 2.IP and Relationships The most difficult business issues according to people not working in China 3.Pitt-falls Companies struggling to sell in China a. Case Study I b. Case Study II

3. Selling to China: Commercial Options Opportunistic / Well Executed Opportunistic 3 Business Stage U.S.A.CHINA American Company Agent Distributor Employee American Company Agent Distributor Employee Distributor Distributor 1 Distributor 2 Distributor 3 Market Feedback to U.S. Company #1 Opportunistic #2 Well Executed Opportunistic Treating it like you would another region in the US Market Feedback, Targets, etc.

4. Selling to China: Commercial Options Opportunistically Invested / Strategically Invested 4 Business Stage U.S.A.CHINA American Company Agent Distributor Employee American Company Agent Distributor Employee Your Business Established. Employees Inventory RMB Invoicing #3 Opportunistically Invested #4 Strategically Invested Market Feedback to U.S. Company DISTRIBUTORS Dedicated Employee(s) on-the-ground Market Feedback to U.S. Company DISTRIBUTORS Employee works through an incubator Most likely still no RMB Invoicing.

5. Selling to China: Commercial Options Summary 5 High Low RISK High Low RETURN and/or MARKET SHARE Low High INVESTMENT No Resource in China Resource in China Stage #3 Opportunistically Invested Stage #4 Strategically Invested Stage #2 Opportunistic Well Executed Stage #1 Opportunistic

6. Selling to China: Commercial Options Issues: Stages 1 & 2 6 Second* most cited business issue: Distribution / Channel Management Why??? 1. Highly Fragmented 2. They cannot take much inventory and/or cannot trade in USD 3. Many, many more distribution points 4. If a distribution in the US requires X amount of time training, the Chinese distribution requires 3x 5. Greater instances of opportunistic behavior: Brand, Pricing, Service (Studies show a correlation between aggressively managed distribution and growth/profits) Third most cited business issue (LKS observes) lack of credibility in the feedback channel impacts adjustments necessary in: Product Development, Service, Brand Growth * Per American Chamber of Commerce Survey Top 10 30% U.S.A. Smallest of top 50 is about $100M Top 10 1% China Largest is about $60M Industrial Distribution Market High Low RISK High Low RETURN Low High INVESTMENT No Resource in ChinaResource in China Stage #3 Stage #2 Stage #1 Stage #4

7. Selling to China: Commercial Options Issues: Stages 3 & 4 7 4 jobs, 14x salary growth 3 jobs, 28x salary growth USD Base Annual Salary USD Base Annual Salary Avg. Annual Employee Turnover High Low RISK High Low RETURN Low High INVESTMENT No Resource in ChinaResource in China Stage #3 Stage #2 Stage #1 Stage #4 #1 most cited* business issue: Employee Retention Salary Growth Employee Turnover Todays Ceiling Ben there done that – really expensive People looking for development Ceiling being noticed – Find the Builders * Per American Chamber of Commerce Survey

8. IP & Relationships 8 IP Protection (It-is-Not a reason Not-to-Go) 1. China is one of Luis Vuittons largest markets for knock-offs and also one of its largest for real products 2. The baby carriers market consisted only of Baby Bjorn Knock offs which actually built the brand. It was known, and desired, when the real product arrived 3. Knock offs are not your competitors, they do not win on quality or service 4. But be smart about drawings, etc. Relationships 1. Relationships matter everywhere 2. As in the U.S. Service, Quality and Value will win out 3. The accessible market is growing Dont allow Relationships / Culture to be an excuse for losing 20% Accessible 80% Non-accessible 50% Accessible 50% Non-accessible 20002011 China Industrial Market

9. NYSE listed company selling in China for > 10 years, but yet to achieve scale Company was growing in the low teens Distributors were small and few, highly concentrated near Shanghai Most sales people could not sell enough to cover their costs Employee turnovers was low, but salesperson turnover high Situation Objective: Improve Sales 9 Pitt-falls: Case Study I Situation

10. Our client Co A was not strong anywhere Had poor quality and delivery perception Co X was mentioned most often and owned Brand Awareness Nobody owned after sales service – Negative! Brand Perception User Decision Attributes Why are you asking about quality and delivery, you are supposed to fix Sales! Market Perceptions 10 Pitt-falls: Case Study I Brand Mapping

11. Success Quoting on Business 75% Miss 25% Hit Should be a $50M Business! New distributors signed in last 18 months 3 Passive distribution management Time at End Users New or Current Distributors 75% End Users 25% Generally a Mature Market characteristic Why cant sales increase reach? Sales Function 11 Pitt-falls: Case Study I Sales Effectiveness

12. Co A 5 weeks (Imports) Delivery VOC 1 week Co X 3 days Co A 2 weeks (China) Warranty % 0 0.5 1 1.5 2 2.5 3 3.5 4 JanFebMarAprMayJun % Complaint w/ abuse Complaint w/o abuse 4.5 5 Sales training, incentives and structure will not solve this problem! Perception vs Reality 12 Pitt-falls: Case Study I The Fundamentals

13. Leadership: Someone with credibility in the home country Poor sales is usually a symptom of something other than a poor sales team / structure / incentive We see a lot of industries where Service is still an open attribute Dont be distracted by FCPA, Sales Pressure, Retention Issues: Dont forget the Fundamentals! Dont let an export driven factory forget to measure domestic performance Summary 13 Pitt-falls: Case Study I Summary

14. Selling in China for > 10 years, but was not satisfied with sales performance Sales people focused on finding and signing new distributors Sales were 30% Standards, 70% Specials Their share of Specials was <0.1% in China Situation Objective: Improve Sales…Again 14 Pitt-falls: Case Study II Situation

15. Like every other country, the client was focused on Standards Market Situation Specials vs Standards 75% Miss Specials: Fastest Growing Segment Competitor Concentration Global Majors had the Majority of the Market Specials 10% Standards 90% Others 40% Major Global Players 60% This client is good at Specials Specials are ignored by the biggest companies Specials sales require time at end users identifying and solving problems Distributors prefer to sell standards 15 Pitt-falls: Case Study II Product / Competitor Concentration

16. Specials: End User Pull Model Standards: Catalog Sales Sales team was recruited from the global major competitors that had already been established in China Distribution network was set up just as in the US or as the other major competitors had done in China Nobody in the China organization understood how to build a network, or sales plan, focused on Specials Distribution Situation Distribution model and salesperson DNA need to fit your positioning Distribution model and salesperson DNA need to fit your positioning 16 Pitt-falls: Case Study II Distribution Model

17. If late to the market, you may grow faster, and more profitably focusing on your niche items If you build the organization around a niche, the bulk will eventually come – if you want it to! Be open to positioning your brand differently in China Dont necessarily recruit from the same industry, recruit from the same business model Moving production etc. can ameliorate some of the delivery and cost issues, but not always Summary 17 Pitt-falls: Case Study II Summary

18. Capital of Liaoning Province and established as a major heavy industrial base 5 th largest city in China Large companies in the city include: Brilliance China Auto, Shenyang Aircraft Corporation, Neusoft Group (the biggest software company in China), BMW, Toshiba Elevators, General Electric, Michelin (Tires), Coca-Cola, BASF Typical industries in the city include: Automotive, Aerospace, Software Quick Facts: Area: 13,308 km2Population: 7.86 million GDP: 501.7 B RMB (81 B USD)GDP Growth: 14.1% Imports: 3.78 B USDExports: 4.08 B USD Many businessmen have said that the business environment can be challenging and more bureaucratic than East China. This is related to the higher proportion of state-owned enterprises than elsewhere in the country, and the relative lack of experience in international business practices. However, Shenyang is in the process of reforming its 280 SOEs 18 Shenyang Overview

19. Doing Business in China Summary Know your strategy Is this opportunistic or strategic? What is your positioning? Dont be overwhelmed by culture, FCPA, bureaucracy etc. and remember the fundamentals are the same anywhere. Be flexible when building your positioning Your brand positioning or even product use may be different than in the US. (KFC - menu, MD – dating, Go-Thru, Gas Pumps, Micrometers) Include the China team If you are not going to listen to their feedback, dont hire them Relationships They matter everywhere – build them – dont use them as an excuse 19

20. Lancaster Consulting Management Team 20 ALEX CLAYPOOL / Managing Director Alex has started-up, turned around and grown businesses in the US, China, Japan, Singapore and Belgium for US Fortune 500 corporations (Danaher Corporation, The Stanley Works) and US private equity firm portfolio companies. Alex attended Rikkyo University (Tokyo), the London School of Economics, has a BA from Washington & Lee University and an MBA from the University of Michigan. He is an advisory board member of XnI Consultancy Services Pvt. Ltd. a consulting firm in Delhi, India, and is an active member of the American Chamber of Commerce and Australian Chamber of Commerce in Shanghai. He has lived eleven of the last thirteen years in Asia and Europe, and currently resides with his wife and two sons in Shanghai. aclaypool@lancasterholdings.com LI XIAO / General Manager Li Xiao has led the establishment of over fifteen foreign businesses in China and has thirteen years of experience working for US, European and Indian multinationals. Prior to joining Lancaster, Li was responsible for the establishment of manufacturing operations and management of commercial operations for WIPRO Hydraulics China. Li has a BA from East China University of Science and Technology and a diploma from the Swedish Institute Management Program with a focus on Corporate Social Responsibility. Li currently resides with his wife and daughter in Shanghai. xil@lancasterholdings.com