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FEATURES P.08Q&A with auto industryexpert Bill Russo
Policy P.14Carl Minzner on China’s political and economic uncertainty
MEMBER NEWS P.24New member profile withPepsiCo’s Ram Krishnan
Join
our W
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The Journal of the American Chamber of Commerce in Shanghai - Insight September/October 2018
INSIGHT
China is the world’s largest market for new energy vehicles. We look at industry development trends, strategic focus, who the main competitors are, and more. We also delve deep into China’s fast-growing EV battery market and explore other areas of future mobility, as well as implications for foreign companies.
N E W E N E R G Y V E H I C L E S
TIMES WHEN OUTPLACEMENT WOULD BE APPROPRIATE
• Realignment of resources requires the adjustment of staff to meet reduced workload.• Economics requires the reorganization of one or more business units.• Leadership recognizes the need to make team adjustments for or function.• Individual or individuals no longer the future corporate direction.
5 REASONS WHY COMPANIES ENGAGE CORNERSTONE
1. Cornerstone provides experienced Career Consultants & Career Transition Manuals in either Chinese or English for affected employees. 2. Increased employee engagement. When the remaining employees see that a company cares for its people the employees perform better. 3. The company reputation goes with the employee and his circle of friends. What will they say about the way they were treated?4. Protection for your company brand in the marketplace. 5. Cornerstone offers a variety of programs to meet an employer’s needs. Programs can include Individual tailored Executive Level Outplacement & Professional Level Outplacement.
CONTACT US:Simon Wan, Chief ExecutiveEmail: [email protected] International Group - Career PartnersWebsite: www.cornerstone-group.com & www.cpiworld.com
OUTPLACEMENTCAREER TRANSITION COACHING
Organizations engage Cornerstone to transition employees out with dignity and coach them through the job search process.
REPUTATION ARE WORTH THE INVESTMENT
Sept
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FEATURES
TIMES WHEN OUTPLACEMENT WOULD BE APPROPRIATE
• Realignment of resources requires the adjustment of staff to meet reduced workload.• Economics requires the reorganization of one or more business units.• Leadership recognizes the need to make team adjustments for or function.• Individual or individuals no longer the future corporate direction.
5 REASONS WHY COMPANIES ENGAGE CORNERSTONE
1. Cornerstone provides experienced Career Consultants & Career Transition Manuals in either Chinese or English for affected employees. 2. Increased employee engagement. When the remaining employees see that a company cares for its people the employees perform better. 3. The company reputation goes with the employee and his circle of friends. What will they say about the way they were treated?4. Protection for your company brand in the marketplace. 5. Cornerstone offers a variety of programs to meet an employer’s needs. Programs can include Individual tailored Executive Level Outplacement & Professional Level Outplacement.
CONTACT US:Simon Wan, Chief ExecutiveEmail: [email protected] International Group - Career PartnersWebsite: www.cornerstone-group.com & www.cpiworld.com
OUTPLACEMENTCAREER TRANSITION COACHING
Organizations engage Cornerstone to transition employees out with dignity and coach them through the job search process.
REPUTATION ARE WORTH THE INVESTMENT
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INSIGHTThe Journal of the American Chamber of Commerce in Shanghai - September/October 2018
FEATURES
Building a Competitive Edge in China’s New Energy Vehicle Sector Analysis of China’s new energy vehicle market and growth strategies
A Conversation with Automobility’s Bill Russo Auto industry expert Bill Russo discusses the future of cars in China
Fast-Moving EV Battery Market: How to Win the CompetitionIn-depth look at China’s electric vehicle battery sector for manufacturers
POLICY PERSPECTIVES
One Era Ends, Another BeginsFordham Law School’s Carl Minzner writes about China’s age of uncertainty
Prepare for the Worst, Hope for the BestSteps for MNC executives to mitigate fraud at their companies
JV Disputes in ChinaHow to address and resolve joint venture disputes
China’s New Negative List On the shortcomings of the new negative list
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MEMBER NEWS
New Member ProfileWith Ram Krishnan, Greater China president & CEO for PepsiCo
Board of Governors Briefing Notes from August’s board meeting
Event ReportRecap of selected events from the past two months
Month in Pictures Selected photos from the past two month’s AmCham events
Esoterica Weekly Briefing bits and bobs
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As this issue of Insight goes to press,
many of our members are laboring under
the added burden of tariffs imposed by
both the U.S. and Chinese governments.
The impact of this first wave of tariffs –
US$50 billion from each side – may be
limited, but everyone is hobbled by the
uncertainty surrounding what direction
current trade tensions will take. Will we
see more tariffs? Regulatory retaliation by
Chinese authorities? A surprise solution?
At this juncture, it is difficult to discern
how events will unfold other than to state
the obvious – we face an extended period
of bilateral tension and uncertainty. How
long this will last is anyone’s guess. What
is China likely to offer and what is the bot-
tom line for the U.S. government? These
are also key unknowns shaping current
politics.
Neither government is in a rush to reach
a settlement. In the case of the United
States, all indications are that Washington
believes the present stand-off is trend-
ing in its direction. The U.S. economy is
strong, the business community’s protests
about the first $50 billion in tariffs have
been manageable, and popular sentiment
supports President Trump’s actions, even
in farm states getting hit hard by China’s
retaliation.
In Beijing, news about the Chinese
economy may not be as positive, but Chi-
nese leaders have their own reasons to go
slow. They may feel that an accommoda-
tion with the U.S. isn’t possible – particu-
larly regarding Made in China 2025 – and
there is no point in trying to meet them
halfway. They may be waiting for politi-
cal pressures to build in the United States
so that they can get a better deal. Or they
may feel that appearing to cave in to U.S.
pressure will trigger a backlash at home.
Regardless of the reasons, it is evident
that much gaming is underway as each
side assesses the dynamics and consid-
ers its options. This is not good news for
our members, who want a predictable and
stable operating environment.
President Trump and President Xi will
likely have two opportunities to meet in
November – at the annual APEC meeting
early in the month and then at the G-20
meeting later in the month. Many observ-
ers see this as a key opportunity for the
two governments to sort out their trade
differences. By the time of those meet-
ings, the U.S. mid-term elections will
have taken place and we will likely be
operating under the burden of additional
tariffs – $200 billion from the U.S. and
$60 billion from China. This will signifi-
cantly increase the pain, potentially hit-
ting consumers as well, and could create
real pressure for a settlement.
It is against this backdrop that we
prepare for our annual Washington, D.C.
“doorknock,” three intense days of meet-
ings with Administration officials and
members of Congress on September
25-27. This will be our most important
doorknock in many years and perhaps
our most difficult. Important because of
the current trade tensions and the unique
perspective we can offer as the frontline
of American business in China. Difficult
because we differ from the Trump ad-
ministration on how best to address our
differences with China. We do not sup-
port the use of tariffs even if we agree on
the objective of creating a more fair and
equal operating environment in China.
At this stage, however, the use of tar-
iffs is a reality and it has had one salutary
effect – it has gotten Beijing’s attention.
The U.S. government should capitalize
on its new-found leverage and pursue a
strategy that is constructive and produces
the right results. By right results, I mean
an outcome that improves market access
for U.S. companies in China, eliminates
the improper use of industrial policy, and
reduces the opacity of China’s regulatory
regime. Decoupling of the American and
Chinese economies, as some in Wash-
ington advocate, should not be the goal,
even if it were possible, which I doubt.
Rather, we should seek a deepening
of commercial ties between the United
States and China. In an era where U.S.-
China bilateral relations are increasingly
characterized by mistrust, a closer com-
mercial relationship, with tangible benefits
for both sides, could only be a positive
development. The business community
can still play the role of ballast, as we
have often been described in the past.
Our enthusiasm for that responsibility may
be deflated somewhat by the challenges
of working in China, but we are uniquely
positioned to help steady the ship of U.S.-
China relations. That’s our objective when
we visit Washington in late September
and I hope that all our members contrib-
ute to this effort in their own way. I
PRESIDENT’SNOTE
KENNETH JARRETTPresident of The American Chamber of
Commerce in Shanghai
China is now the world’s largest
NEV market with passenger
vehicle sales totaling 777,000
units in 2017, 288.5% larger than
the second placed United States
(200,000). The sector is expected to
continue to be the main growth and
investment story in China’s automo-
tive sector, with total NEV sales (pas-
senger vehicles and commercial ve-
hicles) anticipated to reach 7 million
units by 2025 (CAGR of 34% from 2016
to 2025).
Key drivers of growth include
greater consumer awareness and
acceptance, favorable policies (e.g.
dual credit management regulation
and infrastructure development that
accelerates NEV development), the
emergence of new technologies (elec-
trification, automation, smart solution
and light-weighting) and new business
models (e.g. charging, battery recy-
cling, e-hailing, etc.), which will create
new business opportunities.
As an emerging, high growth sec-
tor, China’s NEV market is evolving
on many fronts, including customers,
technology, competitive landscape
and industry value chain. Core ca-
pabilities required for OEMs to com-
pete will be different to those in a
traditional internal combustion engine
(ICE) market. In the mature ICE auto-
motive market, OEMs that possess
core technology in engine, power-
train and the ability to produce good
reliable, well-designed products have
a greater competitive edge. Under-
standing the needs of target custom-
ers and keeping a continuous empha-
sis on R&D, product development and
operational optimization are the pre-
requisites for success.
In the case of NEVs, these “tra-
ditional” capabilities are no longer
enough to ensure competitive suc-
cess; the NEV sector calls for a dif-
ferent set of capabilities, systems
and strategic focus to first survive,
then sustain and eventually secure
the right to win in the market. Those
capabilities and systems are driven
by the unique characteristics and de-
velopment trends of NEVs in China as
detailed below.
Focus on customer-centric product and service development/innovation to manage rapidly changing technology and customer needs
Since the introduction of NEVs in
China, customers’ confidence in NEV
products has been plagued by con-
cerns about safety, range, price and
underdeveloped infrastructure (e.g.
charging facilities, battery recycling,
etc.). In the near term, the primary
factor driving customers’ buying deci-
sions will still be NEV manufacturers’
products and services. OEMs need
to adopt a customer-centric product
and service development to ensure
scarce resources are deployed in ad-
dressing key customer concerns and
needs. Primary customer centric de-
velopment areas include:
I) Higher energy density, improved
energy efficiency and cost effec-
tive vehicles
II) Lighter and stronger materials to
improve overall safety and perfor-
mance with longer range
III) Providing innovative solutions to
enrich customer experiences and
convenience
In the longer term, the leapfrogging
development of artificial intelligence
(AI), IoT, autonomous driving and other
technologies is expected to revolution-
ize the mobility/automotive industry.
NEV OEMs’ R&D needs to keep pace
with the rapid technology changes and
embrace innovative solutions in prod-
uct and service development to stay
relevant to customers’ needs and keep
competitive in the market.
By Bill Peng and Tim Wong
China’s New Energy Vehicle Sector
Bill Peng is the lead partner and thought leader for PwC Strategy& consulting in the automotive industry, based in Hong Kong. Peng has published articles and viewpoints in various media, covering NEV, mobility, channel and branding strategies, among other things.
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Leverage brand building coupled with innovative sales and marketing to stand out in the evolving competitive landscape
The competitive landscape of
the NEV market is still evolving.
At the end of 2017, there were 184
NEV automakers with 2,538 vehicle
models authorized by the Ministry
of Industry and Information Technol-
ogy in China. In comparison to the
traditional ICE market where OEMs’
brand positioning and reputation are
well established, strong brands and
market leaders are yet to emerge in
the NEV segment. There still exists a
window of opportunity for OEMs to
leverage brand building to craft re-
spective unique competitive advan-
tages in the market.
For local traditional OEMs, NEV
presents a great opportunity to uplift
their brand image and command a
price premium. BYD positions itself as
an NEV pioneer and strengthens this
image through targeted advertise-
ments on national TV channels such
as CCTV-2, to target highly educated,
more influential high-income groups.
BAIC BJEV participated in the China
EV Rally Qinghai Lake to gain media
exposure and showcase the technical
superiority of its products in a tough
operating environment.
Local new entrants such as NIO,
Xpeng, Weltmeister, Singulato, etc.,
are all disadvantaged due to a lack
of car manufacturing heritage and
capabilities. They are building their
brands ground up to position them-
selves as innovative, cutting edge
car makers who are using the latest
and greatest elements of innovative
internet/digital technology. For ex-
ample, NIO is focusing on leading a
vehicle-mounted AI function named
NOMI, high density VDA square bat-
teries and a three-minute battery
exchanging model, whereas Xpeng’s
sales pitch is its omnidirectional au-
tomatic parking systems and remote
vehicle control systems.
For global players, the main stra-
tegic focus is to quickly gain access
and grow market share. For instance,
well known global NEV brand Tesla
has leveraged its branding as the in-
disputable premium NEV brand with
its high-tech innovative products. It
only took about two years for Tesla
to attain a strong market position in
China from scratch, and this has been
followed by its recent announcement
of building a factory in Shanghai and
ambitious sales targets.
Be responsive to market and customer needs as product renewal duration is shorter and business models are still evolving
Based on recent Strategy& re-
search, China’s NEV customers are:
highly educated, earn high incomes,
are primarily female and younger.
Their needs, buying criteria and
decision-making processes are
changing fast as the market devel-
ops. Therefore, OEMs will need to
be more responsive, risk taking and
adopt a “trial and error” approach in
defining required business models
and operational tactics (e.g. product
development, sales and marketing,
etc.) to understand market trends
and customers’ preferences to grow
market share.
For instance, BAIC BJEV tested the
market by introducing a new model
named LITE in late 2017. This model
was specifically designed for the 90s
and 80s generations with its smaller
size, but stylish and personalized
accessories. Twelve different colors
are offered and youngsters can even
customize their texting logos in rect-
angular LED screens attached in the
front and back of the car.
NEV technology also reduces the
number of parts and components re-
quired to manufacture a car by nearly
a third. As a result, the four to five-
year product development cycle of a
typical ICE vehicle can be reduced to
two to three years for an NEV. Keep-
ing abreast of technology trends and
customer needs and building more
responsive and faster product devel-
opment capabilities with more fre-
quent product launches is critical to
being competitive.
Buildstrongfinancing capabilities to support required investment and sustain business operations
Building an NEV business re-
quires significant investment in
R&D, production, sales and market-
ing channels and other value chain
related infrastructure and talent.
However, the NEV market is still in
the early stages of development. Its
small market size, lack of economies
of scale and highly competitive envi-
ronment make it difficult for OEMs to
achieve profitability in the near term.
Consider Tesla, which despite
being an early mover in the global
NEV market, even after 15 years
of operation, is still not profitable.
Though it recorded US$2.21 billion
gross revenues for its automotive
business in 2017, it had a net loss of
$2.24 billion, due to high operating
costs, including $1.38 billion in R&D
and $2.48 billion in S&GA related ex-
penses.
In China, BAIC BJEV, which
started its NEV business in 2009,
only achieved profitability in 2016.
Tim Wong is a principal with PwC Strategy& based in Shanghai. He has extensive consulting experience in the automotive and industrial sectors covering strategy, operating model optimization and capability building topics.
Target audience: wealthy, educated, young and female
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Yet, due to subsidy cuts, its net
profit has dropped 50% YOY in 2017
indicating its vulnerable financial
position under the current policy-
driven NEV market. NIO, which was
founded in 2014, aims to achieve
profitability by 2020, after 6 years of
operation. Thus the ability to secure
financing to fund upfront investment
and subsequent operational needs
will be critical to staying afloat, sus-
taining operations and managing
shareholder value.
There are two main sources of
funding, internally generated and/or
capital market financing. Local OEMs
with strong financial positions, such
as SAIC and BYD, can fund NEV de-
velopment and business internally.
New startup OEM brands and smaller
local OEMs will need capital mar-
kets financing. NIO and BAIC have
each raised accumulated funds of
~RMB14 billion to date. Xpeng has
raised RMB4.8 billion and recently
announced the engagement of an
ex-investment banker to lead its cap-
ital markets and investment manage-
ment functions, underscoring the im-
portance of building strong financing
capabilities.
Strengthen positioning along the less mature NEV industry value chain to ensure supply security and technology/cost competitiveness
NEV is reshaping the traditional
automotive supply chain with three
major resulting trends:
I) The Emergence of new tech-
nology and products due to NEV
development. The NEV industry
value chain is less mature than the
ICE value chain. New electrification
related systems such as battery, mo-
tor and control systems are replacing
the engine and cooling systems of
traditional ICE markets. The technol-
ogy and supply landscape for these
new systems are still evolving posing
potential supply risks to OEMs. Qual-
ity suppliers in some areas, e.g. bat-
tery systems, are scarce in China and
dominated by CATL and BYD, for ex-
ample. Securing supply security with
different suppliers is critical.
II) A shift in bargaining power
to OESs who possess core NEV
technology. For NEV, electrifica-
tion related parts and components
constitute more than 70% of overall
cost structure. OESs that possess
core technology in electrification
related parts and components have
more bargaining power in the value
chain, and to a certain extent dictate
the cost competitiveness, hence the
margins of a product.
III) New business models, prod-
ucts and services designed around
NEV. Much of the infrastructure re-
quired for NEV is still underdeveloped,
(e.g. charging facilities, recycling, etc.),
and meanwhile many startups are
emerging, e.g. TGOOD, WANMA for
charging, and GEM，BRUNP Recycling
(held by CATL) for battery recycling.
Partnering with these new service
providers are ways for OEMs to not
only fulfil regulatory requirements
and meet basic customer needs but
also differentiate in the market by pro-
viding an “end-to-end” approach. For
example, BAIC BJEV cooperates with
TGOOD, a leading EV charging com-
pany, to provide a 95% discount on
charging fees to its customers.
Given the above, it is critical for
OEMs to strengthen their positions
along the value chain. Key motives
are to ensure supply security, cost
competitiveness and gain access
to required technology. This could
be achieved in multiple ways: in-
ternal development, equity in-
vestment (e.g. by forming a JV)
or business partnership. For ex-
ample, SAIC has formed JVs with
CATL for batteries and Infineon for
IGBT (insulated gate bipolar tran-
sistor) to strengthen its position-
ing in core NEV technology areas.
For downstream services, BYD is
now recycling outdated lithium
batteries through its distributor
networks. The company will re-
cycle some into energy storage
cells and disassemble the rest
for further re-use. This strategic
move not only allows BYD to cre-
ate synergies with its energy stor-
age business but also enriches its
service portfolios.
Conclusion China is resolutely accelerating
the development of its NEV market
to propel its competitiveness in the
global automotive industry and, to a
certain extent, address environmen-
tal concerns. The strategic focus of
automotive industry executives must
therefore shift from “should we focus
on China NEVs” to “what capabilities
should we build to win the China NEV
race.” With the large capital invest-
ment required, underdeveloped in-
frastructure, market driven demands
and highly competitive operating
environment, China’s NEV sector is
not for the faint-hearted. However, a
greater awareness of the five key ca-
pabilities systems required can help
automotive executives better navi-
gate the risks and devise a strategy to
build a longer term, sustainable and
profitable NEV business in China. I
It’s bigger on the inside
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How will Tesla’s entry into the
market impact other foreign auto-
makers, and will they rethink their
joint venture agreements?
Tesla is going to have to come
to market with a value proposition
that’s differentiated for people who
are shopping for cars for their own
personal use. The fact that they have
taken the first step toward a wholly
owned foreign enterprise is precedent
setting for foreign auto companies in
China; they are taking full advantage of
the policy change for EV companies to
own their own business. It remains to
be seen whether companies with al-
ready established ventures will follow
a similar path, but I think it will be quite
challenging for companies with Chi-
nese partners to step out of that and
create something entirely new.
Ford has created an EV venture
with Zotye, but it’s mainly targeted
at the mobility as a service segment,
which is targeted at fleets. Tesla will
be watched by the rest of the indus-
try to see if it’s a path they want to
travel on. It’s a function of whether
their local partners with whom they
already have a relationship are will-
ing to allow them to do that. If you
want to move in another direction
the policy will allow more flexibility to
allow foreign automakers to control
their business ventures, but it may
not be the most pragmatic or practi-
cal way to expand the market.
Looking at China and the broader
world, has any company taken the lead
in autonomous vehicle technology?
How do Chinese companies compare
to their Western peers in autonomous?
This is an area where China is still
hungry for foreign technology and in-
novation. The Chinese don’t have as
many years of experience as Google
does with its Waymo program; Baidu
has Apollo, but it’s a relatively recent
development and they have just had
some changeover in leadership, and
this may set it back a little.
What Chinese companies do have
is access to a larger market, a more
experimental mindset, and a robust,
disruptive internet economy that is
willing to invest in trial and error inno-
vation. They also have a government
that is more willing to invest in infra-
structure and to promote technologies
and the commercialization of those
technologies it believes are advancing
the competitiveness of its domestic
economy. The gap might be in the in-
novation pipeline, but the advantage
is in the willingness of the market to
allow for experimentation and learning
from that implementation, as well as
co-investment and co-innovation with
leading global technology partners.
You don’t have to invent it all in China,
you just have to allow it to scale here.
Technology platform companies need
ultimately to commercialize their prod-
ucts, and China is the place to do so.
The number of purported NEV com-
panies seems to be anywhere from
50 to a few hundred. How many true
NEV companies are there?
Someone has posted that there
are over 400 electric vehicle mak-
ers in China. The truth is that in the
development of any new business,
there’s a pattern of market fragmen-
tation followed by concentration and
consolidation. It’s particularly true in
China, but it’s also true elsewhere that
whenever a new industry forms or a
new technology manifests, it creates
a whole lot of startup activity. How do
you count NEVs? Is an electric bicycle
a new energy vehicle? There are prob-
ably a few dozen companies trying to
get a license to produce electric cars,
and a dozen or so have received the
new business license so far.
How many do you expect to survive?
I believe the ones with the best
value proposition for serving an ex-
panding and increasingly diverse
A Conversationwith Automobility’sBill Russo
Bill Russo is the founder and CEO of Automobility Ltd, a strategy and investment advisory firm that helps its clients create the future of mobility. He is a globally recognized automotive and mobility expert with over 35 years of experience including 15+ years as an automotive executive, with more than 14 years in China. Russo is the chair of AmCham Shanghai’s automotive committee.
By Ian Driscoll
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need for mobility as part of a digitally
connected lifestyle will have a shot.
However, I believe we tend to focus
on these companies as NEV compa-
nies because that is the most obvious
technology difference from the cars
we know today. However, the fact that
they are powered by electricity is not
the determining factor for the survival
of these companies. Take NIO, Xpeng,
Weltmeister and Byton, for example:
the reality is that their design objective
is not just about the electric power
train; the most compelling rationale
for these products is their digital con-
nectivity features. These companies
are ICVs first – Intelligent Connected
Vehicles – vehicles that can generate
revenues beyond the sale and service
of the hardware. Virtually everyone
moves around every single day. If we
move large distances, we need vehi-
cles to move us between the places
we live, work and play. By gathering
and collecting information on our
mobility patterns, ICV companies can
monetize our connected lifestyle in
ways conventional carmakers cannot.
This is the new automobility revolu-
tion that we are witnessing, led by a
an new and commercially aggressive
set of Chinese companies, backed
by digital ecosystem players such as
Tencent, Alibaba and Baidu.
These companies are also antici-
pating that the government over time
has stated its ambition to ban the in-
ternal combustion engine. So if you
are going to start a new company, of
course you are going to make it an EV
company. The commercial rationale
for these companies in China is to be
connected mobility devices first, but
they happen to be electric because
that is the logical choice in order to
avoid being regulated out of existence.
The question is what will be the
future of mobility? What we have
observed is: vehicles will be increas-
ingly shared, not just designed for
the individual owner, but designed
for the mobility services economy,
which is huge in China. There are far
more riders than there are drivers,
by a multiple of perhaps 10 to one.
Those riders have flocked to mobility
services apps because it’s a conve-
nient way to upgrade from the metro
or the bus into a comfortable space.
You get your time back; you can do
things on your phone or on another
digital service. That’s what these new
ICV companies are designing: a plat-
form that connects people to the car,
that allows them to hail a ride when
they need it, pay for it when they
use it, and not allow that asset to sit
parked for over 23 hours a day.
So there’s a paradigm shift in the
auto market?
In the rest of the world, in the ma-
ture markets, we have built homes
for our cars, we have multi-car ga-
rages; we love owning cars so much
that they live with us. We lay out cit-
ies with distances between the inner
city and suburbs because we have
cars. But the context of China, and
the need for China to solve mobility
problems, is quite different.
We have dragged the 20th cen-
tury business model of owning an
under-utilized asset into the 21st cen-
tury. But what’s happened in the last
five years, since the advent of Didi
and Kuaidi in China, is that people
have started to recognize that there’s
another way. A shared economy,
which has come about because of
the smartphone, has allowed us to
access basic services like getting a
ride or getting food delivered to our
house. The lifeblood of the city, the
movement of people and things, is
now choreographed by the internet
economy; and it’s no coincidence
that the new mobility players are
coming from the internet economy.
The Tencents and Alibabas of the
world are going beyond being mobil-
ity service providers and into the next
generation of hardware services.
That’s why they are investing in Welt-
meister and NIO: so that they have a
direct influence over the future mo-
bility form factor and technology.
Which of the Chinese auto manufac-
turers will challenge foreign brands,
whether in China or overseas?
Are we asking the question who
is serving mobility or who is making
cars? The answer to the question is
that up until recently, mobility was
served by personal ownership or pub-
lic transportation. But now we have a
whole new segment of the market
called on-demand mobility, which
I think means it is open season on a
whole new transportation paradigm.
Traditional cars are designed for a
driver, and the style of the vehicle is a
cockpit. Such cars are manufactured
by a traditional auto maker, whether
local or foreign. If they are deployed
in taxi fleets they are typically a low-
end configuration, because taxi cus-
tomers do not want to pay much for
a ride. Taxi fleets have historically
been dominated by the brands from
the manufacturers producing cars in
or near the city where the fleet is de-
ployed (SAIC VW in Shanghai, BAIC
Hyundai in Beijing, etc).
Along comes mobility as a service.
Anyone who takes a Didi knows you
probably have an 80 to 90% chance of
being in a locally branded car, usually
a sedan. So ask yourself this question:
who wins in the fleet-based mobility
market? I would expect local carmak-
Finally, hands-free driving
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ers are likely to dominate in the future
market where there will be higher mix
of shared mobility. And, these vehi-
cles are more than likely to be electric
and eventually autonomous. Why?
Because cars that move around all
the time need to consume less fuel to
be cost effective, and paying a driver
is expensive. In my view, China take
the global lead for the commercializa-
tion of connected, electric and auton-
omous vehicle technologies, driven
by the shared economy.
Of course, car ownership is still as-
pirational and will not be going away
any time soon. However, the market is
redistributing into different use cases.
We now have a much more diverse
ecosystem. If I’m buying a car, I may
not be buying it to take me to work;
I’m more likely to be buying it to take
the family to the shopping mall, to
take the parents on a weekend trip,
to take the children to school. If that
is the buying criteria, what will I buy?
More likely a multi-passenger vehicle,
or an SUV. Shared mobility is already
having an impact on the type of cars
you are seeing on the road.
If you are BMW or Ford and you are
in China, are you afraid? Is there an
existential threat?
What they [auto companies] are
hoping is that habits start to grow
deeper roots, that people will con-
tinue to own, to want to possess, to
want to use automobile ownership as
a lifestyle projection. There are plenty
of wealthy people now, and there will
be plenty more in the future who will
want to continue to own. If I’m BMW
or Daimler, I want to protect that core
business, maybe grow it, and maybe
a time-shared mobility service will be
a way to reach out to a larger popu-
lation of customers; not a basic Didi
taxi-like vehicle, more like a premium
mobility, fractional-ownership model.
The problem is that they aren’t
the companies facing the existen-
tial threat, at least not for now. The
most endangered are the traditional
mid-market multinational car com-
panies. Companies that make cars
for the middle-class consumer are
finding that consumers are still buy-
ing SUVs for family use, but com-
muter use is being severely disrupted.
Mid-market companies like Ford,
Hyundai and PSA are already feeling
this disruption and will need to seize
this as an opportunity and determine
how to embrace this new, shared mo-
bility market，. It’s not cannibalistic to
the market, it’s incremental for now
as more people upgrade to personal
mobility from public transportation;
but the incremental opportunity is
flowing to the local car companies,
not to the multinationals. I
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FEATURES
The global trend toward elec-
tric vehicles is very obviously
being reflected in China’s auto
industry. Strong policy support and
continual technical advances are the
key drivers around the world. For ex-
ample, the U.S. government incen-
tivizes EV purchases by providing a
tax credit of up to US$7,500. China
has also set ambitious targets and
introduced subsidy policies for new
energy vehicles, making China the
world’s fastest-growing EV market.
The prospect of continued rapid
growth in EV sales is beyond doubt.
However, with changing subsidy poli-
cies and growing maturity of the mar-
ket, competition will become increas-
ingly intense. The U.S. government
is considering cutting the tax credit
mentioned above, a move which
would have a significant impact on the
EV market. China’s overall subsidies on
new energy vehicles in 2017 dropped
by 40% compared to 2016, although
EVs with high energy density and long
battery life continue to receive support
from the government. China is plan-
ning to stop subsidizing pure EVs with
battery life below 150 km but increase
subsidies for models with longer bat-
tery life.
Given the policy changes, the
fast-growing EV battery market is
facing increasing challenges. Bar-
riers to entry are getting higher and
the market is consolidating. The
number of EV battery manufacturers
in China dropped from about 150 in
2016 to fewer than 100 in 2017.
So, what are the key success factors?
Investing in technologies: Follow the development of next-gen technologies
NiCoMn/NiCoAl (NCM/NCA) bat-
teries enjoy advantages in energy
density and are catching up in cost.
Energy density: In China, policy
guidelines require that the energy
density of a passenger vehicle bat-
tery must reach 300Wh/kg by 2020
and 500Wh/kg by 2030. NCM/NCA
batteries are the only ones that can
achieve this level of energy density.
Manufacturing costs: Increasing
battery production brings economies
of scale, and the cost of NCM/NCA
batteries is predicted to further decline
over the next few years. While the re-
cent rise in the price of cobalt is a fac-
tor, it is still highly possible that NCM/
NCA batteries will break the threshold
of 1,000 RMB/Kwh within two years.
Safety and service life: Both the
safety and the service life of NCM/
NCA batteries will be further im-
proved with technical advances,
such as better battery management
and cooling systems. The number of
full charging cycles for this type of
battery will reach 1,200 (nearly a 15-
year life) by 2020.
We project that global market
demand for NCM/NCA batteries will
increase rapidly.
In addition to NCM/NCA, a series
Fast-Moving Ev BattEry MarkEtHow to Win the Competition
Helen Chen is a managing director and partner at L.E.K. Consulting and serves as the head of L.E.K.’s China practice in Shanghai. Chen has 30 years of consulting and industry experience in the U.S. and Asia and has resided in China since 2000.
2012
Source: Bloomberg New Energy Finance, China Association of Automobile Manufacturers, L.E.K analysis
2013 2014 2015 2016 2017
120
100
80
60
40
20
0
EV BattEry
1 1 411
3 7 10
18
21
21
28
47
610
12
12
16
24
2
23
4
5
6
12
21
29
45
Fig.1 Global EV Sales (2012-17) 10K Other U.S. Europe China
70
105
CAGR%(2012-17)
5418
34
56
139
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of new technologies are emerging
that will shape the market in the long
run. For example, lithium-ion with
solid electrolytes can greatly improve
safety and energy density. The energy
density of lithium-ion batteries with
solid electrolytes can be 2.5 times
greater than that of liquid electrolytes.
Meanwhile, with the absence of liquid
electrolytes, storage becomes eas-
ier, and additional cooling systems or
electronic controls are not required,
significantly enhancing safety.
Toyota announced significant
progress in solid electrolyte bat-
tery research at the end of 2017 and
plans to begin shipping cars with
solid-state batteries in 2022. In China,
several companies and research in-
stitutes have also begun research
on solid electrolyte batteries. Con-
temporary Amperex Technology Co.
Limited (CATL) and China Aviation
Lithium Battery Co. (CALB) have both
announced that they are accelerat-
ing the development and commer-
cialization of solid-state batteries.
Lithium-ion batteries with solid
electrolytes still have problems such
as high manufacturing costs, insuffi-
cient solid interface stability and low
electrolyte conductivity, although
these problems will gradually be
solved. We believe that early com-
mercialization of solid-state batteries
might occur by 2022, with gradual
achievement of scale industrializa-
tion by 2025-2030.
Ramping up capacities: accelerate capacity buildup and drive cost down through scale
Manufacturing capacity for EV lithi-
um-ion batteries will expand rapidly to
reach 180GWh globally by 2020. China
will be the fastest-growing country in
terms of capacity and will have an es-
timated 60%-65% share by 2020, sur-
passing the United States.
Low capacity and disadvantages
in economy of scale will be the major
challenges faced by small to midsize
manufacturers.
Cuts in subsidies and pressure
from downstream OEMs will squeeze
the profit margins of battery man-
ufacturers. Companies need to ex-
pand capacity to gain an edge on
capacity and cost in order to survive.
“Megafactories” with 20GWh capac-
ity will bring about significant com-
petitive advantages.
Capacity expansion results in a re-
duction in manufacturing costs. Tesla
claims that its newly-built megafac-
tory will lead to a 30% drop in battery
cost. CATL achieved a 15% decrease
in battery cost in the past two years
through technology upgrades and
capacity expansion.
Rapid expansion of capacity will
bring about financial risks. Therefore,
strategic partnerships with down-
stream OEMs are vital to risk reduc-
tion. The $5 billion joint venture be-
tween Panasonic and Tesla is the
most well-known example of how EV
battery manufacturers cooperate with
OEMs to deal with competition and
risks. Similarly in China, SAIC and DF
Motor invested in CATL, and BYD an-
nounced cooperation with Guoxuan
High-Tech. These are all considered
to be forward-looking strategies.
Moving up the value chain: control key technologies and resources through vertical integration
EV battery manufacturers (and
some EV manufacturers) consider
vertical integration to be key to low-
ering costs, extracting more value
through synergies both upstream
Yong Teng, PhD, is a partner in L.E.K.’s Shanghai office and a leader in the firm’s Industrials practice. He has over 15 years’ experience working with leading global corporations and Chinese state-owned and private enterprises.
Figure 2NCM/NCA have advantages in energy density and cost
Figure 3Global market demand for NCM/NCA will increase rapidly given more applications
Keyperformance parameters
LOW HIGH
Source: Xincailiao, GGII, IRENA, Guoxin Securities, L.E.K. analysis
Source: CleanTeq, L.E.K. analysis
Key performance parameterscomparison, 2020
Global EV Battery Demand Forecast by Electrode Material (2015, 2025F)10k ton
NCM/NCA
250-300Wh/kg
250-300Wh/kg
250-300Wh/kg
250-300Wh/kg
250-300Wh/kg
Low Low Low Low
LMOLCOLFPNCM/NCA
Low
Thermal stability
temperature 210℃
Manage safetythrough battery management system
Thermal stability
temperature 150℃
Thermal stability temperature <150℃
unstable in slow charging state
Thermal stability
temperature 250℃
Thermal stability
temperature 270℃
>1k >1k <1k -2k -2.5k
EnergyDensity
NCM NCA LCO
Cost Economy
Safety
ServiceLife
Non - NCM/NCA
LFPLMO
2015 2025F
60
45
30
15
042
11
252
10
4
10
12
56Other LFP NCA NCM
18.6
20.1
17.5
Non
- N
CM
/NC
AN
CM
/NC
A
17.7
9.6
CAGR%(2015-2025F)
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13
FEATURESFEATURESFEATURES
and downstream, and avoiding com-
modity price/supply fluctuations.
Electrode materials
Given the growth in battery sales,
demand for raw materials will in-
crease rapidly, especially for nonfer-
rous metals such as lithium, nickel
and cobalt. Steady cobalt and nickel
supplies are of critical importance.
• Cobalt: Further promotion of
NCM/NCA batteries will drive de-
mand for cobalt, pushing up its price
• Nickel: The trend toward “high
nickel” will drive increasing demand
for nickel sulfate; however, domestic
pressure due to environmental pro-
tection concerns may limit the sup-
ply capacity of nickel sulfate
•Lithium:The demand for lithium
carbonate is rapidly increasing, but
capacity is lagging, leading to a short-
run gap between supply and demand
Lithium battery manufacturers
can invest in upstream production
and strengthen control of raw ma-
terial supply. With the increase in
cobalt prices, competition between
tech companies and EV battery
manufacturers/OEMs for cobalt re-
sources has intensified. Apple is ne-
gotiating the long-term purchase of
metallic cobalt from mining com-
panies, seeking five-year or even
longer stable contracts. Tesla and
BMW have announced negotiations
with mining companies to ensure
raw material supply. In China, CATL
and BYD strengthened their supply
chain and control of upstream bat-
tery materials in 2017.
Further promotion of NCM/NCA
batteries will drive demand for raw
materials even while new capacity is
limited in the short run. The market
is concerned that prices of raw ma-
terials will soar over the next three to
five years. However, with increases
in capacity or emergence of substi-
tute materials, we project that pric-
ing will become stable within two to
three years.
Take the case of cobalt for anal-
ysis. Increase in capacity of existing
projects and the launch of new co-
balt mine projects (there are approx-
imately 400 active cobalt mine proj-
ects in the world) will gradually grow
overall capacity. Hence, we project
that the price of cobalt will stabilize
after 2019 unless affected by special
factors (such as political instability in
Republic of Congo, the main supplier
of cobalt).
Components
Cathodes account for the highest
proportion of cost in battery produc-
tion, reaching approximately 30% of
the total cost.
In China, most components, ex-
cept separators, are supplied by
local manufacturers. Strengthening
R&D-driven investment should be
the priority for future development.
It is important for EV battery man-
ufacturers to strengthen control of
the value chain, push proper vertical
integration and control key upstream
resources or technologies. Vertical
integration is the trend, but asso-
ciated risks need to be mitigated,
including financial pressure, policy
uncertainty and upstream material
price fluctuations.
We are witnessing great changes
in the EV and battery industries. To
survive and thrive in this dynamic
market, all players must consider
carefully how to follow technology
development, leverage economies
of scale through capacity and cap-
ture more value through appropriate
vertical integration. I
Figure 5The price of cobalt has been very volatile and is expected to remain so for the long run given further increase in demand
Figure 4>20GWh “megafactories” remain scarce though capacity expansion is underway
Source: Benchmark Mineral Intelligence, L.E.K. analysis
Source: CleanTeq, L.E.K. analysis
• Wide usage in cellphones, aerospace, etc., drives increasing demand for cobalt • Republic of Congo, the main exporter of cobalt, restricts the export of cobalt, leading to tight supply and soaring price• Cobalt price plunged due to financial crisis after 2008
• Many governments and enterprises are procuring cobalt ore on a large scale• Strong demand for cobalt in EV battery market leads to soaring price
• Gap between supply and demand will still exist in the next few years but will shrink • Unless there is political instability in more regions, price may not continuously grow but will still remain at a high level in the long term
Capacity of Selected Plants (2020F)GWh
Historical and Forecast Price of Cobalt (2002-22F)k USD/ton
2002 2007 2012 2017 2020F
100
80
60
40
20
0
61.1
31.237.3
Historical price
L.E.K. estimation
44.4
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One era ends, anOther Begins
By Carl Minzner
Carl Minzner is a professor at Fordham Law School, specializing in Chinese law and politics. His book, End of an Era: How China’s Authoritarian Revival is Undermining Its Rise, was published by Oxford University Press in the spring of 2018.
China’s reform era is ending.
The post-1978 period marked
by rapid growth, ideological
openness and relative political stabil-
ity is over. China is now entering a far
more uncertain era.
Economically, it is slowing down.
China’s go-go years of 10% annual GDP
growth are fading into history. The key
question now is whether the coun-
try manages to steadily transition to a
much lower rate of growth along the
paths followed by Taiwan and South
Korea, experiences an extended period
of near-zero growth (similar to 1990s
Japan), or suffers a more dramatic hard
landing arising from an implosion of its
debt and property bubbles.
Ideological climate changeIdeologically, it is closing. China’s
reform era leaders had governed with
a lighter touch. They turned down the
dial on the ideological flames that had
burned so bright during the pre-1978
Maoist era. They created space within
the bureaucracy to debate contested
policy issues. And they opened China
to the outside to look for ideas on how
to develop the nation. In contrast, Bei-
jing’s 21st century rulers are turning
back the clock. Inside the state, strict
obedience to central orders has re-
placed flexible local experimentation
as the watchword of the day. Uncer-
tainty and foot-dragging are spreading
within the bureaucracy as a result. And
within society, Beijing is ideologically
pivoting back to Chinese tradition and
history to bolster the flagging appeal
of hoary Communist revolutionary
slogans. Appeals to narrow nationalist
sentiment are intensifying.
Politically, the partially-institution-
alized norms instituted by leaders
such as Deng Xiaoping in the late 20th
century to guard against a reoccur-
rence of Maoist excesses are buckling.
Collective Party leadership has stead-
ily eroded. Succession norms have
been thrown into disarray with the
failure to name any successor to Xi Jin-
ping as Party general secretary (at the
19th Party Congress in fall 2017) and the
removal of the two-term constitutional
term limit on his role as state president
(in spring 2018). Slowly but surely, Party
rule is steadily morphing into a more
personalized authoritarian system un-
der the aegis of Xi.
At this point, one must make the
standard disclaimers. While China’s
economy is slowing, foreign firms con-
tinue to reap major profits. Some of the
economic constraints that Beijing is en-
countering are secular ones – they are
not the result of its domestic political
shifts. Rather, they are part of the stan-
dard deceleration that follows a period
of rapid growth. Ideologically, while
Party officials increasingly voice con-
cern about “foreign influences” inside
China, Beijing continues to be actively
involved in expanding its footprint over-
seas (as witnessed by the proliferation
of Belt and Road projects.) Last, the
term “reform” (or gaige) will continue to
feature regularly in the Party political
lexicon for the foreseeable future. [In-
deed, that term has become so sacro-
sanct as to lose all meaning. The launch
of China’s one-child policy in the late
1970s and early 1980s was billed as a
gaige; so too was the 2016 relaxation
into a two-child policy.]
But the key point is that the essen-
tial givens of the reform era – the eco-
nomic, ideological and political foun-
dations that have governed China over
the past four decades – are coming
undone.
Business and political riskWhat does this mean for foreign
businesses in China? The short answer:
rising political risk. Decades of steadily
rising profits and reform-era policies
had convinced many that China’s pre-
1978 Maoist past was dead and buried,
and that its future trajectory would
look more like late 20th century Taiwan
and South Korea, rather than Iran in the
1970s, Venezuela in the early 2000s or
Turkey in the 2010s. For many, China
seemed to offer a unique combination
of a massive market, rapidly-expand-
ing economy and stable manufac-
turing base, one in which the political
winds could largely be ignored if one
stayed clear of any logical trip wires.
But big changes are coming. The
late 20th century had seen Party au-
thorities back out of a range of areas
such as academia and civil society,
partially through inattention, partially
due to a desire to relax the pervasive
grip that had characterized the Maoist
years. Those controls are returning. Xi
Jinping seeks to restore the Party as a
leading force throughout Chinese so-
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FEATURES
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POLICY PERSPECTIVES
ciety. Firms and businesses are no different.
That’s precisely why you’re seeing pressure
to expand the role of Party committees within
foreign and domestic enterprises in China, in-
cluding amending corporate charters to make
explicit their role in company governance. Ex-
pect an array of tensions to emerge when of-
ficial priorities regarding social stability begin
to conflict with corporate decisions regarding
restructuring or layoffs.
As for individual firms, the space they were
accustomed to occupying is eroding. Back in
China’s reform era heyday, foreign status was
something to flaunt, overseas connections
a source of pride. That is now giving way to a
steadily expanding sense of being a poten-
tial target. Foreign airlines and hotel chains are
nervously checking their websites to see what
charges might be leveled against them regard-
ing how they refer to Taiwan; manufacturers re-
assessing their supply chains to how they might
be vulnerable should trade conflicts with the
United States escalate in unpredictable ways.
Last, central decision-making processes
in China are fundamentally shifting. The re-
form era had seen space for discussion about
key policies. Sure, China was a one-Party au-
thoritarian state, but room existed for differ-
ent voices within the state to gather around
conference tables and argue over the best
course of action. There was also room for
policymakers to reach out to experts within
Chinese society and solicit their opinions and
expertise. As the political atmosphere tight-
ens, those are eroding. Cautionary voices
within the state that might have suggested
alternative courses of action are falling silent.
And channels for soliciting external views on
pending policies are drying up.
Decision-making weaknessBoth of those weaken the quality of de-
cision making in China. They increase the
likelihood of policy missteps precisely as
the nation moves from an era marked by an
ever-expanding economic pie into one char-
acterized by increasing resource constraints,
in which authorities will be forced to make
increasingly difficult choices (say, between
urban pensioners who feel entitled to the
elevated benefits promised to them, recent
college graduates dissatisfied with their job
prospects, and migrant workers seeking to
stay in China’s cities and share in the benefits
doled out to established urban residents).
Nor are these merely theoretical concerns.
Beijing’s uneven response to the emergence
and deflation of the 2015-16 stock market
bubble is a sign of how the technocratic
sheen of China’s bureaucracy is wearing thin.
And the black-box processes by which major
legislation affecting foreign actors (such as
the 2017 Foreign NGO Law – thrust into the
hands of public security bureau, rather than
civil affairs officials) are being drafted and im-
plemented, is making outside actors increas-
ingly jittery about the direction of state policy.
Naturally, if much of this is tied to top-
down political erosion within China’s one-
Party state, it is also part of a new global re-
ality. Neo-authoritarianism is on the rise in
Turkey and Hungary. And developed Western
democracies themselves face their own form
of erosion at the hands of populist leaders
who seek to dismantle wide swaths of exist-
ing political and economic architecture. Cor-
porate leaders now find themselves waking
up in the morning wondering if the leader of
the world’s most powerful country has per-
sonally attacked them in an overnight tweet
or embroiled them in a looming trade war.
But if the risks of such trends are world-
wide in nature, they carry particular weight in
China. Because if China’s reform era is indeed
unwinding, it raises the possibility that the polit-
ical and social instability that had characterized
China before 1978 might also re-emerge. I
16
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Mitigating White Collar Crime in China
Dr. Tim Klatte is a partner and head of the Shanghai Forensic Advisory Services practice of Grant Thornton China. With
nearly 25 years of China-related experience, Klatte has conducted approximately 250 investigations across multiple
industries and in all regions of China. He holds both an MBA and DBA, with concentrations in International Business. His
doctoral dissertation is titled, “U.S. Manufacturing Sector Strategies for Effective Offshoring to China.”
The China market continues to be a
diverse and evolving fraud theater.
New threats are constantly arising
to accompany traditional threats and con-
sistently challenge business leaders to stay
ahead of the curve. Threats are changing
not only in complexity but also in magni-
tude, forcing companies to adapt or face the
consequences of costly fraud attacks. Ac-
cording to the Association of Certified Fraud
Examiners’ (ACFE) 2018 Report to the Nations,
China recorded the most cases of occupa-
tional fraud of any country in the Asia-Pa-
cific region in 2017, significantly outranking
neighboring countries.
In recent years, multi-national corpora-
tions (MNCs) have become more integrated
and sophisticated in their compliance efforts.
Therefore, they can react faster to threats
and have gained a great deal of experience in
addressing fraud-related issues. This raises
the bar regarding quality and focus. Because
of this experience and the increasing prev-
alence of fraud detection technology, many
MNCs have stronger in-house capabilities for
prevention and detection.
I would like to share an overview of fraud
trends most prevalent in China followed by
simple steps to prevent them. Included are
reflections on developing a sound and sus-
tainable compliance program, and the arti-
cle concludes with a quote from more than
a century ago in Europe that is applicable to
fighting fraud in China today.
Current fraud trendsEven as the depth of fraud schemes con-
tinues to evolve, the foundation remains the
same. Corruption and bribery remain China’s
most common type of occupational fraud,
making up more than half of the cases, with
fictitious expense reimbursements coming
in second. Occupational fraud is defined
as “any deliberate deception to secure un-
fair or unlawful gain.” This includes any type
of corruption and bribery, wrongful acts
designed to gain improper benefits, kick-
backs, collusion, falsifying financial or other
records to cover up the company’s true fi-
nancial situation.
Corruption and bribery schemes are the
linchpins of fraud schemes. They have al-
ways been significant problems for corpora-
tions, and they will continue to be problems
for the foreseeable future. Furthermore, as
technology evolves, new threats are emerg-
ing. The opportunities to commit fraud have
become less about physical work and more
computer-based. IT-related schemes, such
as cybersecurity threats, have grown in
number as we are ever more connected in
a digital world. Social media has played a
major role in this. It is easy to be lulled into a
false sense of security online, as you are not
faced with a physical threat. That is the ex-
act feeling a fraudster wants you to have as
they gain access to your computer systems
and company files. These threats are on the
rise, and likely will grow as the sophistica-
tion of cyber-attacks increases. Statistics
have revealed that cyber-attacks now take
place on average every 14 seconds some-
where in the world.
Fighting fraudThe challenge for MNC executives in
China is staying ahead of the changes in
fraud schemes. With frequent changes in
Prepare for the Worst,Hope for the Best:
By Tim Klatte
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FEATURESPOLICY PERSPECTIVES
fraud’s scope and scale, staying ahead can
be difficult. The most effective way to pre-
vent major losses is to detect internal issues
before they turn into a fully developed fraud
case and to establish strict anti-fraud con-
trols. Through early detection, one can more
easily mitigate fraud from occurring and
prevent financial loss. Not only is develop-
ing a strong compliance program required
by the Federal Sentencing Guidelines for
Organizations (FSGO), but it is the most ef-
fective and easiest way to stay ahead of
fraudsters. Compliance programs should be
based on the following seven actions:
1. Implement standards and procedures
across the organization;
2. Organizational leadership support to
create a culture of compliance;
3. Reasonable efforts to exclude prohib-
ited persons;
4. Conduct ongoing training and commu-
nication to include continuous monitoring;
5. Audit & evaluate program effectiveness
on a regular basis;
6. Integrate performance incentives and
disciplinary actions into the program; and
7. Swiftly respond to criminal conduct and
take remedial action.
These seven guidelines make creating
a compliance program a simpler process.
The first measure to take is to reduce pres-
sures on employees. Creating a friendly
and collaborative work environment is an
easy step to take that can hugely improve
a compliance program. An open-door pol-
icy invites teamwork and makes it difficult
for employees to hide their activities. This
should be enforced for everyone through-
out the organization. This approach keeps
executives and managers accountable
while showing employees that everyone is
held to the same standard. Another way to
reduce employee pressures is by creating a
welcoming workplace setting. The environ-
ment should be not only friendly but also
supportive. Team building activities or shar-
ing meals together are also effective ways
to boost morale and decrease the likelihood
of employee fraud. Employee support pro-
grams can also be used to decrease pres-
sure and can often help prevent the first fac-
tor that leads to fraud: employee problems.
Within any office, there should be stan-
dards and procedures in place to minimize
risk. This starts with a basic code of conduct
for all employees. It should outline the way
employees should act, and reflect the ba-
sic ethics and principles of the company. In
addition to a code of conduct, there should
also be a detailed code that includes, for
example, the company’s policies on bribery
and corruption. The code of conduct and
policies should be supplemented with pro-
cedures that enforce and confirm that these
policies are followed and are effective.
At the top of every compliance program
is the leadership. Every company must have
strong leaders who enforce these poli-
cies and support the compliance program.
Without support from the top, the compli-
ance program is difficult to sustain. Not only
should the company leadership participate
in all compliance procedures, but they
should also actively educate themselves on
new threats to stay ahead of fraudsters.
Within the office, it is necessary to have
strong anti-fraud controls in place to pre-
vent internal and external threats. The first
step is anti-fraud training for all employees.
Everyone should regularly participate in
seminars and education classes both online
and through in-person training. These train-
ing sessions should be mandatory for all
and should occur often to take into account
changes in fraud schemes and protection
measures. Employees should not only be
taught how to detect and prevent fraud but
also be brought up to date on relevant com-
pany, local and national policies.
The need to tighten internal controls
According to the ACFE Report to the Na-
tions, the most common internal control
weakness that allows fraud to occur is “Lack
of Internal Controls.” A shocking 30% of in-
ternal fraud cases in 2017 were caused by
not having a simple risk prevention process
in place. Internal controls are the most ef-
fective way to prevent fraud, and one of the
most basic ones that every company should
have.
Random surprise internal audits are an
effective way to detect fraud and also a
strong deterrent to potential fraudsters.
These should be done often, but not in a
regular pattern. Additionally, separation
of duties and job rotations are methods
that should be implemented in all offices.
These limit the opportunities for fraudsters
to commit fraud. They keep employees
alert and stop them from getting too com-
fortable in any specific role. After all em-
ployees have attended training and fraud
controls have been put into place, regular
fraud risk assessments should take place.
Fraud is constantly changing, and compa-
nies must change with it. Risk assessments
should take place in all departments and
be extremely thorough. We must “think like
a fraudster” to detect the weaknesses in a
company’s anti-fraud network.
Once fraud is identified, corporations
must move quickly to execute a response
plan. The plan should trigger procedures
which allow for evidence gathering and col-
lation. Having a response plan in place al-
lows leaders to act efficiently to investigate
and prevent even more loss from occurring.
The plan should contain the following four
steps for responding to detected or sus-
pected instances of fraud: (1) Implement
a clear reporting mechanism; (2) Conduct
a thorough investigation; (3) Discipline the
individuals responsible (internal, civil and/
or criminal); and (4) Recover stolen funds or
property. Knowing the steps you must take
ahead of time saves time and confusion. Af-
ter a fraud incident, time must be taken for
reflection. There are lessons to be learned
from each fraud incident. An organization’s
willingness to learn is as important as any
other response. Leaders should examine
the conditions that allowed the fraud to oc-
cur and improve systems and procedures
so similar frauds do not occur in the future.
No matter how strong your fraud controls
are, there is always a human element that
threatens to derail procedures. The most
important measure one should take is to
continue educating yourself. Keep a student
mindset. Always be learning and investigat-
ing. The more educated and qualified the
members of the team are, the greater the
chance of success to excel in the role. Fraud
can change quickly; you must be prepared
to change with it or face the consequences.
Laowai hongbao
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Chance favors only the prepared mind
Fraud continues to grow in covertness
and complexity. The jobs of forensic ac-
countants are more and more challeng-
ing as fraudsters have become more
sophisticated through new techniques.
The biggest driver of this is technology.
As technology changes, it offers new
methods and new ways for fraudsters
to gain access to the company’s secure
files and take advantage of employees.
These changes lead to more diverse and
harder-to-detect threats. Another prob-
lem moving forward is the fraudster’s in-
creasingly global networks. Fraud threats
are no longer contained in one region or
company but are now on a global scale
and will only continue to grow with tech-
nological change. This makes it even
more difficult to trace assets and do re-
covery work. As threats grow in scope
and scale, it can be harder to recover
from an attack and move forward.
The most effective way to stay ahead
of a fraudster is to think like a fraudster.
When testing your internal anti-fraud
controls, work out the weak points and
how, if you were a fraudster, you would
take advantage of them. Simply stated,
know the enemy, and know how the en-
emy operates.
French microbiologist Louis Pasteur,
who lived from 1822-1895, said, “Chance
favors only the prepared mind.” Pasteur’s
words are simple to understand but can
be a challenge to follow. It is critical for
MNC executives to be prepared for the
unknown and stay one step ahead within
their industry. But if you do, you will have
an advantage when the moment comes.
Everyone would benefit from thinking
in this way. Prepare for the worst, and
chance will favor you.
If you would like to discuss more
about how to build a sustainable com-
pliance program within your organiza-
tion, please contact the author directly at
The prepared mind that invented pasteurization
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FEATURESFEATURESFEATURES
After all these years, foreign-related
joint ventures (JVs) in China should
be running smoothly. The first joint
venture law came into existence in 1979,
which means everyone has had nearly 40
years to sort out the issues in operating
Sino-foreign joint ventures. But oddly, even
today, whether you are the foreign or the
Chinese party, the majority or the minority
shareholder, you are still likely to find your-
self in the same bed with different dreams.
Disputes are common but in our experi-
ence, before an aggrieved party acts under
the dispute resolution clause of the joint
venture agreement, the aggrieved party
needs to take stock of its rights, the status
quo and the risks of acting.
When a dispute arises, the first step is to
review the dispute resolution clause in your
joint venture agreement (JVA) and decide
how to proceed. Often the JVA calls for off-
shore arbitration, which may only provide a
partial answer to the overall problem. In this
article, we explore the multitude of issues that
can arise in a soured joint venture relationship.
We also consider ways to address these chal-
lenges. If problems persist and litigation or
arbitration ensues, the shareholder must con-
sider whether the dispute resolution venue
can finally resolve the ultimate issue and what
1. Pursuant to the Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises, effective on November 8, 2016, JVA is not a mandatory filing
for JV establishment. Therefore, for a JV established after the effectiveness of this Interim Administrative Measures, it is possible that the corresponding AIC file does not contain a copy of the filed JVA.
will happen to the JV as a result.
Having seen such troubled marriages
for many years, common problems reoccur.
The issues are generally driven by one party
wanting more of the JV equity or wanting to
exit. The problems tend to be manifested in
a host of passive-aggressive tactics.
The JVAFirst you need to consider how the JVA
will impact and shape the shareholders’ op-
tions in the event of a dispute. If your JV was
established before 2016, you may want to go
to the Administration of Industry and Com-
merce (AIC) where your JV is domiciled and
get a copy of the filed JVA.1 Compare it to your
version to ensure there are no discrepancies.
We find occasionally that the filed version for
older JVs has been amended in favor of one
party with only the signature page from the
original remaining. Once you are satisfied you
have the official JVA, consider your risks and
rights under the agreement.
At the shareholder levelDisputes first arise at the shareholder
level. When a dispute arises with your JV
partner, you need to consider your coun-
terparty’s motivation. For example, look at
trends and events in the market. Is a merger
or listing by the counterparty imminent? Has
the value of the JV’s product increased or
declined in value? Is the chairman of the
counterparty leaving or retiring? Has new
management been appointed? As the for-
eign party, are you still viewed as bringing
identifiable value to the JV, such as intellec-
tual property, loans, marketing expertise or
foreign sales channels?
The aggrieved shareholder should con-
sider: How does the current shareholding
ratio impact dividends? What is the com-
position of the board? Is there a put-option
in the agreement? Are there bases for ter-
mination? Are there provisions for liquida-
tion and dissolution? Note the issues that
require unanimous agreement by the board
of directors as opposed to a majority vote. In
the context of disputes between partners in
a WFOE, note the division of responsibilities
between the board and the shareholders.
The board levelSino-foreign equity joint ventures do not
have shareholder meetings, but the govern-
ing law requires that some decisions be put
to the board of directors and be subject to
unanimous consent.2 Unfortunately, a recal-
citrant shareholder can take steps to hinder
the board’s operation. Board meetings can
JVDisputesin China
By Meg Utterback
POLICY PERSPECTIVES
Meg Utterback is an American lawyer based in Shanghai and London for KWM, the first Chinese law firm to go global.
She first came to China in 1985. She is fluent in Mandarin and focuses her practice on cross border disputes and compliance.
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be stymied in the following ways:
• Refusal to hold meetings;
• Refusal to amend the board member
roster or other corporate changes at
the local AIC;
• Refusal to include matters on the
agenda, to hear proposals or enter-
tain board resolutions;
• Refusal to provide transparency in
bookkeeping and denial of audit
rights; or
• Refusal to remove a rogue general
manager or senior member of man-
agement.
Are there effective ways to get beyond the
recalcitrant behavior of your counterparty?
Obviously the shareholder being stymied in
achieving consensus can relent on certain
points in an effort to settle the dispute. Fail-
ing that approach, the aggrieved shareholder
can begin to look at mechanisms that force
the hand of the counterparty. Can a board
resolution be drafted in such a way that the
counterparty has to agree to it? Can you re-
locate meetings to other less hostile venues?
Can you use the exercise of the put-option to
get an audit of the books as part of the due
diligence of a buy-out?
ManagementandstaffWhen a dispute begins to percolate,
the concerned party should review the
management structure of the JV. Often the
general manager (GM) is nominated by the
majority shareholder and is loyal to the ma-
jority shareholder. Often members of the
staff have loyalty to the GM and the major-
ity shareholder. Transparency in bookkeep-
ing and daily operations can be a problem.
Control over the company and over the
chops ultimately means that the minority
shareholder can quickly lose any insight
into how the business is being run. Attempts
at getting information are easily thwarted or
worse, misinformation is provided. The ag-
grieved party should be concerned about
how the GM and JV staff will respond in the
event of a shareholder dispute.
When the staff and management of the
JV are loyal to the counterparty, you are
vulnerable. We see cases where the GM or
CFO, appointed by the majority shareholder,
is prevented from entering the EJV’s fac-
tory by staff loyal to the counterparty (often
transferred to the JV from the counterparty).
The deputy GM – loyal to the counterparty
– subsequently takes over the factory’s op-
eration. We have also seen the counterparty
inciting labor unrest by claiming bad faith on
the part of the other party or misrepresent-
ing the nature of the shareholder dispute
to the labor union. In these instances, the
staff may believe that you are withholding
salaries and bonuses or putting them at risk
of losing their jobs. We occasionally see in-
stances where the JV has failed to pay tax or
social insurance benefits for its workers and
has thereby put the JV and the legal repre-
sentative at risk for fines and detention. This
too can lead to labor unrest, regulatory ac-
tion and disruption of the JV’s business.
How can you co-opt these stakehold-
ers before acting against the counterparty?
What spin will you put on messaging to the
labor force and the trade union to cast your
role in the best possible light? Can social
media be a vehicle for successful commu-
nication? WeChat is incredibly influential in
getting the word to employees about the
status of the venture. If you plan to raise a
formal claim, you will need to have a plan
in place to insure the continued healthy op-
eration of the JV by management and staff.
ChopsWe mentioned above the risk of the man-
agement taking control of the company to
the disadvantage of one party. A key feature
of corporate control is the control of the com-
pany’s chops. The management, at the direc-
tion of the favored shareholder, may act by
using the chops in contravention of the JV’s
interests. Such acts could include executing
related-party agreements or extending loans
to affiliated companies. It may also include
binding the company to onerous obligations.
Because the chops bind the company,
one way to get control of the company is by
stealing the chops. Whoever has the chops
has considerable leverage. Before you have
a problem in your JV, you need to begin to
pay close attention to who has the chops
and how they are being used. What is the
chop policy? Do you need to put a chop pol-
icy in place? Checks and balances in control
and use of the chops can help to limit the
JV’s liability and the ability of one party to
act against the interests of the counterparty.
Dependency on the counterparty
Before taking action under a JVA and pursu-
ing an aggressive approach to protecting your
rights, you need to analyze whether the JV is
2. Article 6 of the EJV Law specifies the matters that a board of directors is empowered to address. Article 33 of the EJV Implementing Regulations specifies the matters that require
unanimous approval by the directors present at a board meeting. The matters include the following: amendment to the articles of association of the joint venture; suspension or disso-
lution of the joint venture; an increase in or reduction of the registered capital of the joint venture; and a merger or division of the joint venture.
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FEATURES
reliant on the counterparty for survival. Does
the counterparty own the land use rights or
the facility? Are you at risk of a rent increase? Is
the counterparty a service provider, supplier or
customer? Cancellation of a Feed or an Offtake
contract can push a viable JV into dissolution. In
addition, consider whether these relationships
are exclusive. Interestingly, a shareholder can
starve a JV by redirecting sales (if the share-
holder is a supplier) or purchases (if the share-
holder is a customer) to affiliate companies in
the absence of exclusivity. Non-exclusivity and
exclusivity in JV contracting with shareholders
or their affiliates can equally bring challenges
when a relationship sours. In the case of exclu-
sivity, the shareholder could take steps to starve
the joint venture. In the absence of exclusivity,
there is a risk that key business opportunities
are being siphoned off to apparent third parties,
which may be shadow companies of a share-
holder set up through a nominee structure.
Common claimsWhile the end-game may be to increase
shareholding, drive out the other partner or
create leverage for a profitable exit, the le-
gal claims asserted to achieve those ends
are varied. Here are a few claims that we
have seen in recent cases:
• Failure to perform all business within
the business scope of the JV;
• Failure to increase the production ca-
pacity of the JV;
• Thwarting third party sales or pur-
chases in favor of cheaper sales or
purchases from related parties;
• Directing goods to related third par-
ties at a discount;
• Unreasonably increasing rent or over-
head;
• Embezzlement; and
• Competing with the JV in contravention of
a contractual non-compete commitment.
There are many other contractual and
legal claims that can be brought in litigation
or arbitration. Often a domestic case and an
offshore arbitration are filed at the same time.
The domestic case, usually filed in the name
of the JV against one shareholder, will assert
causes of action falling outside the arbitration
clause, such as torts like unfair competition or
abuse of a shareholder’s rights. It might also
seek dissolution of the JV based on the Com-
pany Law.3 The arbitration, generally filed by
one shareholder against another under the
JVA, will assert contractual causes of action
that are subject to the JVA’s arbitration clause.
ConclusionToo often the relief needed to resolve is-
sues with a joint venture cannot be crafted
and enforced by an arbitral tribunal or even
by a court. Damages are an inadequate
compensation if the joint venture agreement
is not terminated and the issues of the joint
venture company have not been addressed.
POLICY PERSPECTIVES
3. Article 180 of the Company Law states in relevant part:
“A company shall be dissolved on the following grounds:
(1) when the term of operation as specified in the com-
pany’s articles of association expires or other cause of
dissolution as specified in the company’s articles of as-
sociation arises; ... (5) it is ordered to be dissolved by the
people’s court according to Article 182 hereof.” Article
182 provides: “Where any severe difficulty occurs to the
operation management of a company, in which case the
interests of the shareholders may suffer heavy losses if
the company continues to exist and there is no other
way to solve the problem, the shareholders represent-
ing more than ten percent of the voting rights of all the
shareholders of the company may file to the people’s
court for dissolving the company.”
A damages award only underscores the dis-
trust and ill-will between the shareholders.
Thus, arbitration may be a poor means to
achieve a complete solution to the problem.
JV partners need to anticipate problems
that could arise when they are drafting the
JVA and related agreements. When a dis-
pute arises, the aggrieved party needs to
look at commercial and legal angles of the
dispute to find a course of action that leads
to the best result. Too often parties refuse
to acknowledge that the relationship will
never recover and a new solution needs to
be considered. Because of this denial, they
can wait too long to assess and act on their
rights. Be proactive when entering your JV,
participate and monitor the JV’s operations,
be aware of your rights and anticipate is-
sues. And don’t assume that a purely legal
solution will get you the best result. I
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China has repeatedly committed itself
to market liberalization in the nearly
20 years since the country’s acces-
sion to the WTO. In early August, Premier Li
Keqiang reiterated this sentiment to United
Nations General Assembly President-Elect
María Fernanda Espinosa Garcés. “By observ-
ing the rules of the World Trade Organization
(WTO), nations should uphold and improve
the free trade mechanism, and promote
trade and investment facilitation,” said Li.
Li’s statement was made against the
backdrop of an incipient U.S.-China trade
war in which both parties have presented
themselves as committed to free market
and trade principles. In part to demonstrate
China’s commitment, the National Develop-
ment Reform Commission and the Ministry
of Commerce (MOFCOM) jointly released the
2018 national and free trade zone foreign in-
vestment negative lists in July.
The national list replaces parts of the Cat-
alogue for the Guidance of Foreign Investment
Industries and continues to open key sectors
of the Chinese economy to foreign invest-
ment by reducing the number of restrictive
measures from 63 in 2017 to 48 in 2018. No-
table market openings have been made in
the financial services sector, where foreign
ownership caps in banking have been entirely
removed and raised to 51% for companies
operating in securities, fund management,
futures and life insurance. Foreign ownership
caps in these sectors will cease in 2021. Sim-
ilar foreign equity caps have been removed
in the new energy (NEV) and special vehicle
industries as well as in agriculture, mining and
manufacturing, among others.
The shortcomingsHowever, this policy document fails to ad-
dress many problems in the Chinese market
that disproportionately disadvantage foreign
firms in key industries. Sectors like ICT and
education remain almost entirely closed off
to foreign investment; in sectors opened by
the negative list, numerous regulatory barri-
ers obstruct foreign companies trying to gain
a foothold in select Chinese markets.
Consider the automotive industry. China
has upheld removal of shareholding caps as
proof of its commitment to pledges made by
President Xi Jinping at Bo’ao in April, but for-
eign firms remain unevenly positioned rela-
tive to their Chinese counterparts. Although
the government has heavily subsidized NEVs,
funding disproportionately goes to cars with
Chinese-made batteries. Maps, crucial com-
ponents of autonomous vehicles, are also
heavily regulated. Blanket bans on foreign in-
vestment in the electronic navigation map sec-
tor remain and foreign companies must enter
Sino-foreign joint ventures in internet mapping
services. These laws effectively force foreign
auto manufacturers to equip their cars with
Chinese machinery to remain competitive.
Foreign firms operating in the financial
services industry also remain implicitly dis-
advantaged. China’s 2017 cybersecurity law
mandates that any firms whose data leaks
could endanger national security – defined
as “critical information infrastructure” oper-
ators – must store data locally and submit
it for regular security reviews. Although this
law applies to all companies operating in the
Chinese market, it disproportionately affects
firms with overseas headquarters. To com-
ply, they must create duplicate data centers
in China in addition to those in their home
countries and pass security assessments
before transferring data abroad. Data local-
ization especially raises compliance costs
for international firms that engage in regu-
lar cross-border data transfers, like financial
service providers，, and having to submit data
to multiple regulatory agencies is time-con-
suming and raises the possibility of IP theft.
Other Chinese governing bodies also
stand ready to block outside investment.
Draft rules issued in July would expand
the power of China’s Ministry of Commerce
(MOFCOM) to regulate foreign investment
into local companies on national security
grounds. China’s conception of national
security is expansive compared to many
countries. A powerful regulatory body that
targets loosely defined threats could result
in arbitrary obstructions. Although occurring
before the release of the draft laws, in July
Qualcomm had to terminate a deal to buy
NXP Semiconductors after failing to receive
authorization from MOFCOM to operate in
the Chinese market. MOFCOM’s decision in
this case was viewed by many American po-
litical leaders as influenced by the trade war.
While the 2018 negative list inches China
toward market liberalization, numerous ac-
cess barriers remain for foreign investors. Fix-
ing these substantive issues requires more
than simply raising shareholding ratios. Only
wholescale structural changes will signal
that China is committed to upholding its de-
cades-old obligations made at the WTO. I
New Negativelist
ByDanielRechtschaffen
No longer negatively charged
Commercial, Operational & Risk Management Specialists for China/Asiaa s s o c i a t e s
®westeast
ABOUT EAST WEST ASSOCIATES
East West Associates (EWA) has closed, relocated and project managed construction of 65+ manufacturing plants in China.
Founded in 2005 with US and China offices, EWA provides Commercial, Operational & Risk Management solutions and implementation in China & Asia.
EWA executives held senior management roles with P&L responsibilities for western MNCs with China & Asia operations, including Briggs & Stratton (NYSE: BGG), Bechtel Group, Fluor Corporation (NYSE: FLR) and Littelfuse, Inc.
ADJUSTING YOUR CHINA MANUFACTURING FOOTPRINTTO ADDRESS THE CURRENT MARKET REALITIES
East West Associates Webinar
Implementation challenges of site selection, closing and/or relocating plants, andoverseeing design and construction of a new manufacturing plant.
Two specific Case Studies of western companies successfully implementing: • Site Selection for a fine chemical manufacturing operation • Plant Closure & Relocation of an automotive parts supplier
Webinar Speakers
Mr. Jay HoenigFormer VP & GM of Bechtel Asia Pacific, Chairman AmCham Shanghai, Hill and Associates – Global COO/China Chairman
Mr. Warren WisnewskiFormer VP & GM, Eastman Kodak Company, Asia Pacific Region (NYSE: KODK)
Registration Information
September 27 at 9:30 AM CST | October 2 at 9:30 AM CSTRegister at eastwestassoc.us/amcham-webinar
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Please introduce yourself and tell us what you do
I am president and chief executive officer, Greater China Region
(GCR) for PepsiCo, a global food and beverage leader. PepsiCo has
been in China for 37 years. We were one of the first MNCs to enter
China in the footsteps of the country’s reform and opening.
I assumed this role in January 2018 and am responsible for
PepsiCo’s GCR business across beverages, foods and nutrition.
I am based in Shanghai, headquarters of PepsiCo GCR which
covers mainland China, HK, Taiwan and Macao. In my profes-
sional career so far, I have had opportunities to work across
multiple industries such as consumer electronics, automotive,
and now consumer goods.
How many years have you been in China and what has been the
most interesting experience you’ve had so far? (Either personal
or business)
I spent my first few months in the role actively gaining in-
sights about China, a market which is fast-changing, highly
competitive and full of both opportunities and challenges.
I have traveled to a lot of cities in China such as Guangzhou,
Shenzhen, Foshan, Bo’ao, Nanchang, Yichun, Hangzhou, Nan-
chang, Chengdu, Mianzhu, etc.
My big realization from my travels is that China is a country with
a diverse consumer base, cuisine and culture. Companies that
want to be successful in the long term have to tap into that diver-
sity. I have also loved the sense of possibility, energy and optimism
that I see in the Chinese consumer market place.
How do you look at the future for your company and industry in
the China market?
Emerging markets such as China are engines of growth for
PepsiCo, as a result they are top of mind with all MNCs, including
PepsiCo. We’re committed to investing in our business in these
markets to ensure continued success over the long-term. We are
focused on executing a vision and strong commitment to being “In
China, For China, and With China.”
• “In China” – manufacturing and selling through local Chinese
employment within China’s borders
•“ForChina” – ensuring the products we sell are locally relevant
and improve the happiness and nutrition of Chinese citizens
• “With China” – working directly with government and other
stakeholders to align our strategies and operations with Chinese
needs
The China market has significant potential for continued fast
growth, and I feel confident that our GCR team will continue its ut-
most efforts to contribute to China’s development while we grow
the business here.
In terms of the food and beverage industry and our business
New Member Profile
Ram Krishnan is the Greater China president and CEO for PepsiCo.
He assumed this role in January 2018 and is responsible for PepsiCo’s
Greater China business across beverages, foods and nutrition.
Krishnan has held several senior leadership roles across strategy, brand
and shopper marketing since joining PepsiCo in 2006. Most recently
he was senior vice president and chief customer officer for PepsiCo.
Previously, he served as Frito-Lay North America’s senior vice president
and chief marketing officer. Krishnan holds an MBA from the University
of Michigan and an MS, BS in Engineering.
RAM KRISHNANPresident & CEO, Greater China, PepsiCo
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FEATURESMEMBER NEWS
in China, I think that Chinese consumers in major cities are be-
coming more discerning about their food choices and are driv-
ing new demand for healthy food options. So, to satisfy growing
H&W (health and wellness) demand, PepsiCo opened its first
Quaker plant in Beijing in 2015, and we are committed to work-
ing with institutions and experts in China to actively disseminate
nutritional knowledge, proactively promoting a more balanced
diet and healthier lifestyle.
What is an interesting or surprising fact about the Chinese
consumer in comparison to consumers elsewhere?
China is at the forefront of mobile evolution in e-commerce.
As smartphone penetration among consumers continues to
grow, e-commerce is fast transforming into mobile commerce,
or “m-commerce.” The dramatic rise in online and mobile activity
points to a Chinese consumer who is increasingly sophisticated,
influential and hungry for information. One of the most interesting
facts is that the Chinese consumer averages 40 apps while in the
U.S. the consumer averages 5 apps. China is a mobile economy
driven by a sophisticated consumer group that I have not seen in
the U.S. and Europe.
In recent years, China’s booming economy has inspired more
people to purchase snacks on the move, rather than preparing
them at home. According to Kantar’s OOH (Out-Of-Home) report,
84% of convenience store spend is coming from OOH in China, the
second highest of the countries in the report. The number of con-
venience stores in China doubled between 2010 and 2015. This,
combined with the growth of OOH consumption, has meant the
convenience channel has outperformed the total Consumer Pack-
aged Goods (CGP) market consistently.
Can you share a lesson you’ve learned in your professional ca-
reer, either in China or elsewhere?
My biggest learning in China is “Learn from the past; seek the
truth from facts,” from The ＢBook of Han. China has a 5,000-year
heritage; it is wise for companies to learn from it.
Which book(s) would you recommend to our members?
For members who are new to the China market place I would
highly recommend the following books:
• On China by Henry Kissinger
• Wealth and Power by Orville Schell and John Delury
• Chinese Rules by Tim Clissold
• The Party by Richard McGregor
• China’s Economy by Arthur Kroeber
What is your favorite or go-to restaurant in Shanghai?
As a vegetarian in Shanghai my favorite places are Lost Heaven
& Hakkasen. I
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Board of Governors Briefing
The AmCham Shanghai 2018 Board of Governors
Eric Zheng
Chairman of theBoard of Governors
Robert AbbanatILE
Grace XiaoUCB
Simon YangAptiv
Sarah KöchlingShanghai Blossom Consulting Co.
Helen HuInternational Paper
Eddy ChanFedEx Express
Christine Lam Citigroup
David A. BasmajianShanghai Disney Resort
Stephen M. Shafer3M
HelenChing-Hsien YangDuPont
Board Vice Chair Board Vice Chair Treasurer
MEETING ATTENDANCE
Governors: Eric Zheng, Robert Abbanat, David Basmajian, Eddy Chan, Helen Hu, Sarah Köchling, Christine Lam (by phone), Nancy Leou, Stephen M. Shafer, Grace Xiao, Simon Yang
Regrets: Helen Yang, Gentry Sayad
Attendees: Kenneth Jarrett, Helen Ren, Shilpi Biswas, Jessica Wu, Han Lin, Titi Baccam
NEC UPDATE
Board Chair Eric Zheng reported that NEC Chair Tim Huang
had selected Shirley Zhao and Helen Yang to join the NEC.
The other two seats will be elected by and from commit-
tee leaders, a process already underway. Candidates for the
Board will be able to submit their nominations between Sep-
tember 24 and October 12. The Annual General Meeting will
be November 29.
WASHINGTON DOORkNOCk
GR/CSR Director Titi Baccam briefed on preparations for the
DC doorknock, noting the importance of taking a clear and
effective message to Washington. Board members stressed
the need to emphasize our distinctive voice as the best rep-
resentative of companies operating on the ground in China.
We should underscore the importance of success in China
and the global success of U.S. companies. There was discus-
sion about how best to reflect our members’ views on tariffs,
the challenges they face in China and how the U.S. govern-
ment could best assist.
FINANCIAL REPORT
Vice President Helen Ren expressed confidence that the
Chamber will meet its annual P&L target. The Corporate Visa
Program is performing better than expected. The GPS pro-
gram may be reworked to add additional benefits to make
the program more attractive to member companies.
FINANCIAL SERVICES COMMITTEE
As part of the Chamber’s effort to improve board awareness
of the work of various Chamber committees, Financial Ser-
vices Committee Chair Han Lin briefed the BOG on his com-
mittee’s activities. He offered some suggestions on how to
improve the Chamber and participated in the doorknock dis-
cussion. The BOG welcomed the chance to learn more about
a specific committee and thanked Han for his strong leader-
ship of the Financial Services Committee.
Highlights from the August 16, 2018, meeting
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Event Report
AMCHAM SHANGHAI ANNOUNCES WINNERS OF 2018 FUTURE
LEADERS OF THE YEAR AWARDS
AmCham Shanghai announced the winners of the 2018 Fu-
ture Leaders of the Year Awards at the Four Seasons Hotel on
August 7. This was the third annual Future Leaders of the Year
Awards, which recognizes young trailblazers in the community,
whether through contributions to the community, success in
their professional careers, or starting their own entrepreneurial
ventures.
The awards were launched in May, followed by a two-month
nomination process, where applications were accepted in three
main categories: Future Leader, Entrepreneurship and Social
Impact.
The winners of these year’s awards were Yinan (Amanda)
Zheng, principal at China Impact Ventures (winner of The Fu-
ture Leader of the Year Award); Liang Sun, founder and CEO of
Snackeroo Ltd and Generate Ltd (winner of Entrepreneurship
Award); and Marina Kalnitski, senior director and head of project
development service for east & central China at Taicang Inclu-
sion Factory (winner of Social Impact Award).
ENFORCEMENT AND REGULATORY PERSPECTIVES IN THE
U.S. DEPARTMENT OF JUSTICE
At AmCham Shanghai’s Legal Committee event on August
9 (Enforcement and Regulatory Perspectives in the U.S. De-
partment of Justice), Nathan J. Hochman, partner at Morgan
Lewis, discussed the latest developments concerning the U.S.
Department of Justice in the U.S. and in China. A variety of en-
forcement and regulatory perspectives involving China such as
FCPA, securities, tax, customs and immigration were also ad-
dressed. Hochman was the former head and assistant attorney
general of the U.S. Department of Justice’s Tax Division.
CORPORATE SOCIAL RESPONSIBILITY WORkSHOP
On August 20, AmCham Shanghai’s Business Council for Social
Responsibility joined Dr. Wolfie Yu, an expert on creative thinking
and innovative theories, and Michael Rosenthal, chair of the Am-
Cham Environmental Committee, to hold the second workshop
of AmCham’s CSR Workshop Series, Design Thinking for Environ-
mental Issues, at the AmCham Shanghai Conference Center.
Following Rosenthal’s presentation on environmental chal-
lenges and issues caused by take-out food containers waste,
Yu introduced the basics of design thinking methodology and
demonstrated how design thinking and innovative methods can
be used to help companies better engage internal stakeholders
and support CSR work.
MANUFACTURING BUSINESS COUNCIL’S TRADE TARIFFS
ROUNDTABLE: BEST PRACTICES FOR SMES
The Manufacturing Business Council held a roundtable
discussion on trade tariffs for manufacturing SME players on
August 21. Dolly Zhang of Deloitte China, partner, Global Trade
Advisory gave an overview of the trade tensions, focusing on
how SME players cope with the continuous trade tensions and
what the action plans are going forward. Leaders from the
Supply Chain Committee also joined the discussion to provide
valuable insights and to share best practices in the field. I
Say “nai lao!”
Wait for the mic drop
Nathan J. Hochman
MEMBER NEWS
AmCham Shanghai
Audience listens with rapt attention at 2018 CBR launch
Victor Wan, vice chair of Shanghai Yanhua Smartech Group,
imspires future leaders
I have a cunning plan
Just one more thing...
AmCham Shanghai Month in Pictures
Panel pontificates on cybersecurity
Education and HＲR summer mixer
If you think this is just an egg carton, think again
Members share green ideas
Launch of the 2018 China Business Report
MBC trade tariffs roundtable
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MEMBER NEWS
Esoterica
Bits and Bobs
The snippets below are drawn from Weekly
Briefing, the Chamber’s email newsletter. In
addition to business, economic, legal and
trade matters, it occasionally touches on the
more lighthearted, perplexing or downright
crazy aspects of life in the Middle Kingdom.
We’re all airheadsLosing your nouns? Puzzled by the
crossword? Struggling to improve your
Chinese? If you answered yes to these
questions, you may have Alzheimer’s.
Or you’re suffering from non-pulmonary
symptoms of air pollution. Yes, in addition
to imperceptibly carving years off your
lifespan, research unveiled this week by
Yale University shows that air pollution,
particularly fine particles, measurably
denudes intelligence.
Using language and math tests gleaned
from the China Family Panel Studies on
20,000 people between 2010 and 2014
and comparing these with nitrogen dioxide
and sulphur dioxide levels, scientists
determined that “polluted air can cause
everyone to reduce their level of education
by one year” and “the effect is worse for the
elderly, especially those over 64, and for
men, and for those with low education. If we
calculate [the loss] for those, it may be a few
years of education,” research team member
Xi Chen said. So, time to earn your PhD. At
least you’ll die with the intelligence of a
master’s graduate.
Up to the Appalachians and down to the trailer park
As U.S.-China trade negotiations ground
to a halt and President Trump declared that
"it’s just not the right time to talk right now,”
Chinese intellectuals are seeking new sources
to better comprehend the president. Whether
a fumbling gambit or a well-founded effort
to “learn from the countryside,” the revered
Chinese Academy of Social Sciences (CASS)
is scouring rural America for insights among
the inhabitants of trailer parks.
According to the Sydney Morning Herald,
CASS – a top advisory body to China’s
government leaders – has added new
material to its reading list: 2017’s best-seller
White Trash: The 400-Year Untold History
of Class in America. So far, these studies of
America’s sans-culottes have not furthered
China’s understanding of Trump’s motives
or the trade war. Zhao Mei, managing
editor of the Chinese Journal of American
Studies, recently said of White Trash, “Trump
represents that political class, and I don't
know how China should respond.” Digging
around the tonier parts of Queens might help.
Afishcalledsalmon(ortrout)Earlier this year Chinese gastronomes
learned that the country’s largest fishery was
labeling and selling rainbow trout as salmon.
Given China’s history of food scandals,
epicureans expected the ensuing brouhaha
to result in swift punishment of the offending
fishery. Au contraire. Thanks to a fishy directive
from the China Aquatic Products Processing
and Marketing Alliance (CAPPMA), a unit
of the Ministry of Agriculture, rainbow trout
sold in China can now be formally labelled
as salmon. The government’s move merely
legislates what many ，，aficionados already
suspected: a third or more of the ‘salmon’ sold
in China is farmed rainbow trout.
Observers say that the CAPPMA bowed
to pressure from well-connected fishery
companies. Consumers of raw ‘salmon’ fear
infection from the parasites known to infest
rainbow trout. At least sushi lovers need no
longer fear the social ignominy of confusing
the two fish, even at the cost of ingesting a
sprinkling of nematodes. Expect rainbow
trout production to scale up.
China’s millennials put their heads in the sand
A recent study by Fidelity International
and Ant Fortune shows that only 44%
of Chinese millennials are saving for
retirement. The study also reveals that
China’s average retirement age is 58, and
most millennials believe that a retirement
fund of RMB1.634 million (US$237,300) will
guarantee a “carefree retirement.”
Millennials’ lack of retirement
planning and failure to save for rainy
days will exert extra pressure on China’s
already overburdened pension system.
Compounding the possibility of future
penury is the pernicious profligacy of
China’s 月光族, or moonlight clan, the term
used to describe young people who spend
every fen of their monthly salaries. Chinese
millennials also increasingly borrow money
on credit. According to Chinese investment
bank CICC, consumer loans grew nearly
40% last year to reach RMB6.8 trillion.
Mike Bloomberg bids Beijing goodbye, for now
Singapore was once waggishly described
as a great place to change planes for
Amsterdam. But for the plutocrats and
associated global luminaries who expected
to join Mike Bloomberg’s New Economy
Forum in Beijing this November, the island
state is now a destination. At the prompting
of the Chinese government, the inaugural
forum is headed south.
Beijing’s apparatchiks may have been
concerned that the New Economy Forum,
whose advisory board included such
burnished figures as Henry Kissinger, Hank
Paulson, Ban Ki-Moon and former State
Council vice premier Zeng Peiyan, would
distract from China’s International Import
Expo, also planned for early November,
and designed to show China openness
to imports. Another explanation is that
Beijing does not want to be seen indulging
Americans, even friendly ones, while the
trade war is ongoing. President Trump
will be unmoved. The names behind the
new forum have little sway in today’s
Washington. The organizers of déclassé
Davos may be experiencing a smattering of
schadenfreude. I
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FEATURES
AmCham Shanghai strives to bring you insightful news and content
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