N E W S L E T T E R September 2007

Story of the Month

Global Retailers Need to Seize China’s Market Nuances China’s consumer market is anticipated to be the World’s second largest after the U.S. by 2015. Therefore, it’s not too late for global retailers to enter the market if they understand the nuances of the market and find the right business models in order to win. Early U.S. giant retails like Wal-Mart and French firm Carrefour have already successfully set up shops in China. Other global retailers are looking to follow in China’s economic boom. “I would say it is still not too late for other global retailers to enter the market,” says Michael Silverstein, senior partner and managing director of Boston Consulting Group. Companies are beginning to avoid the highly concentrated cities like Shanghai and Beijing and are looking to spread into China’s second, third city tiers, and it’s expected to increase demand for consumer goods in those areas.

Understanding China’s landscape and culture is the first step to develop a winning retail strategy. “Winning in the scramble of China’s retail customers will depend on how quickly a retailer, especially one from outside China, understands the economic, geographic, and cultural landscape of its market,” said Hubert Hsu, a senior partner and managing director of Hong Kong office of

Boston Consulting Group. The next step would be to find the right local partner to help foreign players adapt locally. Silverstein says, “The urban, coastal and inland markets in China are quite different and demands different requirements for retailers. Local partners would help foreign players adapt and missing the nuances is to miss the opportunities.” Such diversity calls for customized products and services as well as different product mix from one city to another. “The trick is to find the right balance between uniformity and customization,” Hsu says. Too much uniformity will hurt sales productivity where too much customization will lead to lower margins. Foreign retailers should understand the supplier representative model in China. Retailers act as landlords, where renting floor space to suppliers who handle customer interfaces such as merchandising, sales, and after sales services while jointly managing logistics and promotion with retailers. Foreign retailers should push a business model that combines international and local trade formats,” said Patrick Ducasse, senior partner and managing director of Boston Consulting Group and the global leader of BCG’s Consumer Practice. Although modern trade formats are gaining ground in China, traditional trade formats are still going strong in some sectors. Before global retailers set out to face these challenges in China, they should ask themselves the following questions, according to Hsu. 1. Which format will help us break traditional trades’

strong hold in some sectors? 2. Do we know how to balance the benefits of

customization against scale advantages in China’s fragmented market?

3. Do we know how to seek opportunities in China’s white spaces without sacrificing same store productivity?

4. Do we understand the pros and cons of the supplier representative model for our business?

(Source: China Daily)

NAROS Update NAROS and Raydwell Center for Canada China Business Form Strategic Alliance Los Angeles/Vancouver, July 24, 2007 -- The Vancouver, B.C.-based Raydwell Center for Canada China Business and the North American Representative Office of Shenzhen, P.R. China (NAROS) have entered into a strategic alliance, whereby the two organizations have agreed to work closely together in matters pertaining to bilateral business relations between Shenzhen/China and Canada. NAROS and Raydwell Center have signed a memorandum of understanding (MOU) outlining ways in which they can work together and promote Canada-China business exchanges. For more information, please contact Robert Fraser, NAROS at robertfraser@shenzhenoffice.org, or Edward Wang, Raydwell Center at edwardwang@raydwell.com.

Andrew Pan Speaks at Doing Business in China Seminar On July 24, 2007, representatives from the North American Representative Office of Shenzhen, P.R. China (NAROS) took part in 1st PMF Bancorp's "Doing Business in China”. This was the fourth seminar in a six-part series hosted at the Los Angeles Area Chamber of Commerce (LAACC). Andrew Pan, NAROS Chief Representative, delivered a keynote presentation from an insider point of view on doing business in Shenzhen - and China in general - to an audience of business leaders from the Los Angeles area.

NAROS Attends 2007 China Business Briefing in San Bernardino On August 23, 2007, the North American Representative Office of Shenzhen, P.R. China (NAROS) attended the 2007 China Business Briefing. Organized by County of San Bernardino, this briefing brought together a diverse audience of business professionals interested in doing business in China from the San Bernardino area. The

briefing consisted of fundamental presentations by professionals experienced in China. NAROS staff in attendance included Andrew Pan and Grace Chen. Thanks to Moises Cisneros, International Trade Manager of County of San Bernardino, Economic Development Agency, a flyer of NAROS, "Connecting San Bernardino to Shenzhen, China" was included in the brackets distributed to all briefing attendees.

NAROS Co-Sponsors and Speaks at Marine Digest & Cargo Business News – The 6th China Conference On September 12 and 13, 2007, the North American Representative Office of Shenzhen, P.R. China (NAROS) co-sponsored the 6th Annual China Conference presented by the Marine Digest & Cargo Business News at Port of Los Angeles in San Pedro, California. The conference brought together about 150 business professionals interested in the logistics industry in China. It consisted of fundamental presentations by logistic professionals like Maersk, Matson, COSCO, OOCL, BNSF, ProLogis and Ryder System who currently conduct logistic business with China, as well as Q&A, and productive networking. Andrew Pan, the Chief Representative of NAROS also presented the Shenzhen Port and Logistics Update at the event.

(Photo: Andrew Pan speaks at the China Conference)

NAROS staff in attendance included Andrew Pan, Grace Chen, and Robert Fraser. NAROS co-sponsored the badges and lanyard sponsorship that included NAROS name and logo on name tags and was recognized at the conference.

U.S./China/Shenzhen Business News IBM May Build Chip Facility in Shenzhen IBM mull over building a chip making facility in Shenzhen, Southern China. A close source to IBM said, "IBM already has a plant in Shenzhen for servers, and early this year senior management discussed whether they could make chips instead of importing them into China to put into their servers." Another source stated that the chips may be sold to outside customers like Huawei Technologies Co. The Shenzhen city government was expected to be key backer of the IBM project and is yet to be finalized.

(Source: Reuters)

Coca Cola Plans Big in China The Atlanta based company, Coca Cola, marks its 80th anniversary of entry in China and announces its major growth plans. China is the fourth biggest market for Coca Cola and one of their most important growing markets. China’s annual sales of Coca Cola surpassed one billion unit cases holding up to 11% of market share on non-alcoholic beverages, and 50% for carbonic drinks. Competing against Pepsi Corp, Coca Cola proposes to triple its distribution within 5 years and enhance cooperation with more retailers and airlines across the country. Coca Cola has heavily invested in China with 30 bottling companies, and 36 plants.

(Source: China Daily)

(Photo: Coca Cola Co. is expanding rapidly in China)

Chinese Sany Plans $60 Million U.S. Facility in Georgia Sany Heavy Industry Co. signed a memorandum of understanding with the State of Georgia to build a $60 million manufacturing facility. The company will acquire 1.06 million sqm of land in Georgia's Peachtree City. Sany’s Vice President, He Zhenlin states, "The project in the U.S. will further boost our competence in the global market, especially in the U.S. which is the world's largest construction machinery market."

(Photo: Sany’s press conference in Georgia) Based in Central China's Hunan Province, Sany is a major player in the country's construction machinery industry. The company exported 400 million yuan last year and the first half of 2007 already exceeded 500 million yuan. This year the company expects 100% growth. The project will become the first Chinese construction equipment maker to own a plant in North America.

(Source: China Daily)

China Automobiles Are to Be Made in U.S. China's third largest automaker, ChangAn Automobile Group will be making light trucks in the U.S. The privately held U.S. truck manufacturer in Dallas, Texas announced to open an assembly plant for China-designed trucks to be produced in Poteau City, Oklahoma. This 112,000 square foot plant will hire 100 employees this year to produce 7,500 vehicles in 2008 and grow to 300 employees by 2009. The plant will begin production of ChangAn's full size pick up truck, Champ, and a medium size truck, Leopard. 20% of the products are certified by the U.S. Environmental Protection Agency and California Air

Resources Board and will be available to the U.S. market. This trend will bring jobs and businesses to the U.S. and also create more job opportunities in the U.S.

(Souce: Xinhua News)

China Auto Parts Provider Holds 30% of American AI Corp. China's largest automobile parts manufacturer, Wanxiang Group, holds 30% with total investment of US$25 million and becomes controlling shareholder of American AI Corp. It plans to increase in parts production and domestic sourcing fields by using AI’s business platform. Wanxiang also plans to lower cost of its partners' manufacturing process to achieve an organic combination of optimal resources. Detroit based AI Company focuses on module assembly and real time logistic management with 12 operation plants in seven states for Chrysler, Ford, and General Motors autos.

(Source: Alibaba)

China - A Key Lab for Chrysler The first Chrysler minivan was completed in a plant in southern China. Chrysler's strategy of expansion deals with outsourcing manufacturing, licensing vehicle productions, and building cars in joint ventures with local partners. Earlier this year, Chrysler made a deal with China's Chery Automobile Co. to sell small Chery made cars under Chrysler's Dodge brand name. These cars could be sold in Latin America and Chrysler is hoping to sell in Russia soon.

(Source: WSJ.com) U.S. Companies Attain Good Return from China Investments U.S. has built 50,000 enterprises in China with actual investment greater than US$54 billion dollars. U.S. invested companies yielded US$80 billion in sales revenue and US$10 billion in profit on China's domestic market last year. According to a survey conducted by the American Chamber of Commerce in China, 73% of U.S. funded companies believe they earn profits, 60% saw their profits increase, and 37% say their profits in China are higher than their average global profits.

(Source: China View)

More Mainland Companies Reach Global 500 List Results published for 2007 Fortune Global 500 List added three more mainland companies from the United

States business magazine show. Now, a total of 22 mainland companies are listed on the world’s 500 largest companies. Sinopec, China had the highest ranking and broke the top 20 at 17th. Sinopec reached $131.64 billion in revenue in 2006. China Minmetals and China National Offshore Oil entered the top 500 for their first time.

(Source: China Daily)

Doing Business in China China May Become Major Player in IT-BPO Industry With domestic market potential, extent educated workforce, and a strong government, China has potential to develop a large IT-BPO industry and may become competitive or potential partners for India. IT software and services estimated US$12.2 billion in terms of revenue in 2006. The total value of IT software and services of the Chinese economy estimated US$1.8 billion in 2006, a growth of 41% over the previous year.

(Source: China View)

A New Approach in China Investment Recent changes to the rules of governing partnerships in China may be the bigger game changer. The revised Partnership Enterprise Law (PEL) took place on June 1, 2007 to provide greater flexibility in structuring pooled investment vehicles, end the double taxation of partners, and streamlines registration procedures. This is expected to have significant implications for the long term growth of the private equity (PE) and venture capital (VC) sector in China. The MOFCOM is also working on the Administrative Measures on Foreign-Invested Partnerships (FIPs) to extend these benefits to foreign invested partnerships. The revised PEL and related FIPs regulations will have major implications for foreign investors as well, mainly affecting the estimated 250-300 foreign PE firms in China today.

(Source: Deloitte)

The Impact of China’s New Anti-monopoly Law On August 30, 2007, China passed the final version of the new anti-monopoly law, 13 years after the first draft of this law had been presented. The law will take effect on August 1, 2008. The new law has ignited heated discussions, both inside and outside of China, regarding its potential impact. The new anti-monopoly law contains similar provisions as those often seen in the U.S.

and European anti-trust laws, such as regulations on mergers and acquisitions, restrictions on price fixing and penalties on abuses of dominant market positions. Some experts believe that this new law is fairly neutral and could be used to pursue conventional anti-trust cases and to bring more competition and openness to the Chinese economy. However, this new law also contains provisions requiring foreign acquisitions affecting “national security” to obtain special approvals. Even though such provisions are also often seen in the U.S. and European countries, such as those used by the U.S. to block CNOOC’s acquisition of Unocal in 2005, some experts worry that the Chinese government will use these provisions to effectively block foreign investments in order to prevent takeovers of the “crown jewels” or the elimination of Chinese brands. Also, this new law provides state-run companies with exemptions. Some experts believe that these exemptions will be used to push industrial policies that would benefit state-owned companies at the expense of private and foreign companies. The Chinese government, however, believes that certain protections for Chinese companies are necessary in order to provide Chinese companies in certain industries a chance to consolidate and to be more competitive.

(Source: Schechter+Chou, Inc.)

Shenzhen Facts � An “all in one” call center is expected to

formally launch around October and November this year. This will provide 24 hour service for the public, whom can dial one number, 12345 and deal with any of the 44 bureaus or departments for inquiries or complaints. The city government promises waits no longer than 15 seconds to be answered.

� Foreigners can’t teach in Shenzhen unless they

have a bachelor’s degree, plus a minimum of two years’ teaching experience, according to a local regulation passed by the Shenzhen Municipal Personnel Bureau.

� Shenzhen Airlines will launch the first

commercial flight from Shenzhen to Tibet this year, after a successful trail flight to Lhasa in

2006. The trial flight took three hours and 20 minutes to reach the 3,570 metre high Lhasa Airport and included a stopover in Chongqing.

� The Paris French Kiss in Shekou, Shenzhen is an

up-market nightclub with a trendy crowd. You can start with dinner at the restaurant, then dance the night away. Latino Parties are held the first and last Thursday of each month.

� Lowenburg Brauerei and Restaurant is a unique

German microbrewery and restaurant in Shenzhen with its very own resident German brew master. Try their specialties of homemade sausages and crispy pork knuckles. With the package, an all female Filipino band sings a variety of soul music, rhythm and blues.

� At The Terrace in Shekou, Shenzhen, you can

find a talented Filipino band and a Canadian musical director, Leon Durupt, who has been singing in China for seven years. This authentic Thai restaurant brings music with gourmet Thai food and American foods.

North American Representative Office

Of Shenzhen, P. R. China

中国深圳市驻北美经贸代表处中国深圳市驻北美经贸代表处中国深圳市驻北美经贸代表处中国深圳市驻北美经贸代表处

350 S. Figueroa Street, Suite 288 Los Angeles, CA 90071 Tel: (213) 628-9888 Fax: (213) 628-8383

Email: info@shenzhenoffice.org Website: www.shenzhenoffice.org

If you have any questions or would like to subscribe/unsubscribe to the newsletter, please contact Grace Chen at newsletter@shenzhenoffice.org or 213-628-9888.