American Business and China: The View From Shanghai

from the perspective of Shanghai we're delighted to collaborate once again with the American Chamber of Commerce in Shanghai for this program I believe this is the third or fourth time in a row that we've done this am sham Shanghai visits Washington every fall when the weather is nice and things are quiet - to talk to the policy community about how things are in Shanghai and how they hope thing things are in Washington I was just in Shanghai a couple weeks ago and met with some of the colleagues who you're going to hear from today and they have a very important story to share with you about the perspective of American companies in American industry in China not just companies that are on the ground but in the overall relationship today's program follows the practices of the past we're first going to hear from the president of amchem Shanghai who will present the findings from their most recent business climate survey that annal that looks at the experiences real-life experiences of American companies in Shanghai and you'll be able to see how their most recent experiences compared to years past and then we're gonna have a panel of three additional members of amchem Shanghai's Board of Governors who are in different industries and can talk about the experiences their companies and those that they interact with and then we will have open panel discussion and invite all of you to contribute to that dialogue we're joined online with lots of folks so I think even though it's a sunny day and people want to be outside in the park it's wonderful that everyone is here wherever you are let me introduce our first speaker cur Gibbs who is the president of amchem Shanghai he just started this year a quiet time to take over the reins VAM cham shanghai and actually occur is well-suited for taking leadership of amchem this year he's been involved with amchem for many years he first came to China as a student in 1985 so it's now 34 years his life involved with China he's been involved in a variety of positions and different companies at Apple Disney and other technology and media firms as well as at HSBC and in the banking and investment sector so he has a wide variety of expertise I hold a bachelor's degree in economics from UCLA and an MBA from UC Berkeley and I think he's going to get a firefighter's degree after serving as head of amchem Shanghai so and of course he's done an excellent job so please join me welcoming her Gibbs [Applause] thank you very much Scott for that for that introduction yeah my eyebrows are starting to grow back after being singed yeah it is it is in fact you know lovely climate here in Washington DC political climate not quite so much the so thank you all for being here and thank you Scott and to CSIS for for hosting us and and thank you all for being here and participating in this conversation it's it's very helpful for us to to come here and listen and understand kind of what's going on here inside the beltway also our delegation you'll have to forgive us if if our delegation looks a little bit dazed and confused we're battling jetlag but also we're recovering from about two-and-a-half days of meetings with the administration and on the hill so that's got challenges of its own so good so what I thought I would do is start with a discussion about our survey results as a way of kind of teeing up the conversation and and and having our panelists kind of respond to - - and offer an interpretation of some of the data first let's say how do I do this Scott let's say just which one is the advance oh great yeah our delegation you can see that confused looks okay quick introduction of am camp Shanghai with 3,000 members we are probably one of the larger am champs outside the United States we represent 1500 companies fairly long history and in in Shanghai we were founded in 1915 so have quite a bit of history there fairly large we do about 400 events annually and I put up this this light here to talk about content connectivity community these are the three C's this is fundamentally what American is about is is generating content knowledge and and and then sharing that content and experiences and that's what we mean by community we're all a lot three thousand members community that all have a bit of a stake in each other's success connectivity of course what we refer to there is it's really connectivity to to local government and we do see local government as very much partners in our success and we can talk about that more in the context of the panel amchem we are amped IAM Shanghai is actually one of four independents am shams with in mainland China obviously we have one in in Beijing one in Shanghai one Chengdu and and one in Guangzhou that's actually very important because as we all know China is very diverse and it looks different from different angles and so to have the four am shams we're all very cooperative but we do see things differently from a different angle mhm and Beijing obviously being in the capital itself they have more access to to government decision-makers and so they have a certain view from Shanghai we are much more the commercial center so we we would have a view that's influenced by that couple a couple of other notes getting into the survey itself and some of our methodology up at the left you'll see 333 companies responded you should compare that to the 1500 number that I showed in the last slide about that's 1500 company so we insist only one person can respond per company also some of you have been watching this from from year to year and that's important element of the of the survey is to have some continuity and you'll notice a drop and in that number I think we had last year about 430 some and the instant question for for the the data-driven people out there is oh you must have lost 25 percent of your membership right no that's that's not the right way to interpret that data frankly speaking the that number is driven mostly by our willingness to harass our members for for for taking the time to fill out the survey it's a it's a it takes a long time it's a big survey over 50 questions it takes a long time and so we do harass our members until we get a decent number of respondents second we we actually put out this survey a little bit later in the year so that it would coincide with this trip so we literally put out this survey in the month of July which is traditionally a downtime in in Shanghai especially among the foreign foreign companies and so that's that's much more the explanation there and and know our membership has not dropped actually we're fairly steady and we'll talk about that more in a minute about companies leaving China redirecting investments and whatnot top right let's talk about this who are our members our core members are still the large multinational so you see 24% have have annual revenues of over five billion dollars and I mentioned this because it's important to to as you look at different surveys and again I point specifically to another one of our partners is the US China Business Council they produce excellent data and information they've recently put out a survey we've looked at it and the surveys are roughly consistent but but not exactly the same and one of the reasons why is our memberships are very different so 24% are the large companies we have a mix of SMEs and and and you know the smaller businesses consulting firms things like that u.s. CBC as some of you would know very different organization it's only large companies so this the number for them would be actually almost hundred percent would be over five billion dollars so that's an important thing to note as you look at the different competing surveys out there in the market doesn't mean any of them are wrong it just means they hold different things from from a different different set of data fairly mature population 80% of our the companies that we surveyed have been in China for a while and so that's an important thing to note so let's jump into some of the data I'm gonna start with actually the least exciting slide and we're gonna sort of a little bit of Rolling Thunder here because I know we're all here to talk about one thing which is the tariffs and the trade war so I get that I get that but let's let's start with a couple of less exciting slides the the the most boring thing is about profitability so watch the gray line they're very consistent so we are not seeing companies dropping off a cliff we're not seeing the economy drop off a cliff our companies have been consistently fairly profitable so 77% report that they are profitable or extremely profitable in the China market 71% on have reported that they have revenue increase from from one year to the next so that's an important point the 46 percent operating margin that looks like a big drop I would provide the context for that so again that's fewer companies are reporting an increase in their operating margin but frankly when you look at what's going on in the China market and we can have more discussion about that I mean we're seeing we're clearly seeing GDP growth slowing we're seeing domestic competition increasing we're seeing costs labor costs increasing so frankly in that environment if we didn't see some kind of dip that would be extraordinary so that'd be the explanation here so I would say overall profitability not much new thrilling let's talk about revenue fairly similar situation there some negative pressure but overall still positive on 2018 the the big news here is revenue expectations going forward and that's where we saw the drop we actually saw thirty point drop in the number of companies that were expecting to have revenue growth next year versus this year so that's really the story there a second data point that came out of this is the direct impact of the tariffs so 50% of our memberships said yes they have a direct negative impact on the revenue line as a result of the trade war so that's the significant point out of this investment here important to note the long-term trend is we have been seeing a steady decrease in a decrease in the investment increase right so so a steady decrease in investment since 2012 okay so so some drop would actually be expected here we're seeing about a seven point decline what it are what it are our members say is the reason clearly it's it's really both it's it's it's definitely the the trade tensions but also GDP GDP growth another point on on optimism on investment and the relationship to the optimism level that's where we saw a big drop so typically amchem shanghai is surveyed our members we typically see about 80 to 90 percent respondents say they are optimistic or very optimistic about the future in China that we saw a 20 point drop in in that in that number looking at investments our interpretation on this in terms of the reduction of investment and and the trade war and especially in supply chains we are seeing a little bit of both of the trade war pushing investment in both directions in other words the the most obvious one is in the supply chain our companies investing in new factories to build textiles in China in order to export back to the United States no obviously not so that is going to be investment that's in decline those investments are now going to Southeast Asia Bangladesh and Vietnam there is some degree of of investment coming in as a result of the trade war where and this is providing a bit of tailwind behind the overall strategy of this so-called in China for China strategy where we're producing goods and services within the China market for the China market the trade war has accelerated that so you are seeing some investment coming into China as a result of that another slide on investment and redirection of investment yes this the the what we're asking our our members is of the investment number that you had planned for China to what extent are you redirecting that elsewhere and this is a fairly big big jump here is about one-quarter of our respondents in the report said yes they are redirecting investment out of China and that's that's larger than its then it's ever been I do want to say note about this though that redirection again we see it mostly around the supply chain it would be a mistaken again we've just come from two-and-a-half days of meetings on the hill and everybody wants to know if American companies are abandoning the China market are we running out of that market in droves the answer is no and and I mean the president is you know famous for he came out with a number he said 13 percent of American companies are leaving to leaving China we have no idea where that number came from frankly frankly I don't know of even one again if you separate out the discussion about supply chain versus companies that are in China for China each I honestly don't I know a fair number of companies who are adjusting their supply chains moving either you know parts of supply chains out of China and and frankly that's been happening for quite a long time especially you know you can look at the supply chains in almost two different buckets you know there's this sort of low-end supply chain you know in terms of textiles apparel shoes I mean that trend has actually been happening for quite a long time I mean labor costs have been going up in China so that's something we've we've been watching what's new is around some of the more sophisticated areas in supply chain is you know the electronics that's much more difficult to move China is is extremely developed around the electronic supply chain the ecosystem very sophisticated and also there's capacity issues as far as moving those parts of the supply chain out of China that's that's going to take years but again the in China for China companies abandoning China as a market not seeing it business outlook again this is where we've seen traditionally our numbers have been very high eighty to ninety percent optimism levels and this dropped dropped by 20 points on the optimism side and then the red part is the how many of our members are are pessimistic and that went up by 14 points so this is a very important part of the data now the slide you've been waiting for trade war again it's certainly made an impact it's got our attention companies are having to adjust to the trade war but again nobody's falling off a cliff typically our members again the in China for China some percentage of inputs are imported and there are some degrees of products going back and forth but for the most part our members aren't as directly affected by it but everybody is if hundred percent of our members are affected by the tone and the the general spirit in the relationship and very concerned about that specifically looking at kind of what what we think about about the trade war we've got that it's split up into sort of two two sides one is a direct quote though on the right here we see a direct question is do you support the use of tariffs and again we've got 2018 compared to 2019 we asked the exact same question in the same way last year so that we could have a baseline so the the interesting part is is welt down at the at the bottom we said how many people are on shore right so last year was 23% we're unsure people have now made up their minds so those folks have made up their mind so much fewer number are unsure and most of them are going into the no category so you see 75% of our members say the tariffs specifically are not the right approach so then on the left you you ask well you know what is the right approach and and what do you recommend and again that's part been part of the conversation that we've been having the last two and a half days on the hill most of our members favor more dialog but especially multilateral pressure and here's the issue is many of our companies we feel like with the tariffs the way they're being applied by doing this in a bilateral way versus multilateral way we feel like we're filling up a leaky bucket because as long as the Japanese companies and the European companies don't face the same tariffs situation our customers are just simply transferring to to European and Japanese companies and as much as we'd like to think our products are unique and our technology is superior the fact is people have choice and if they're faced with the 25 percent increase on our products but Europeans and Japanese haven't they're going to go they're going to go to those competitors so that's the issue around multi oh that's why our members are saying multilateral pressure is the way to go and again we've been having that that conversation in the last couple days smaller numbers international dispute mechanisms a lot of blood of skepticism around WTO I think that won't be surprising to people way down on the bottom how many people think that that again tariffs would be the best way to resolve this three percent challenges what are the the things that that our members think are the most difficult it's all macro again the top two us-china tensions and economic slowdown these other things have always always been there I mean domestic competition every year domestic competition does does does go up I want to say a word about about domestic competition actually elsewhere in the in the survey we asked specifically about about domestic competition and seventy percent of our companies say that they actually do have a lead visa v their domestic competitors in both product quality and technology seventy percent say their domestic competitors are faster to market and I really want to emphasize this point because you know in the I mean the trade war has so many different aspects to it but one aspect it really doesn't get enough attention and is that is the fact that United States needs to compete we do need to up our game across the board and I think you're going to be hearing more about that from our panel the the two things when we have visitors from outside outside China and come to come to China the two reactions that they generally have obviously one is the the volume right China big you know we know that but what what really surprises people is that China is fast they are extremely fast to market they're fast to make adjustments they're fast to to adopt digital technologies that's an issue that's an issue across bored for multinational companies American companies doing business over there as we compete and as we compete for talent so talent you're going to see is is is one of the number-one issues that American companies face is is the challenge of recruiting and retaining local talent and the speed with which your companies make make decisions is a big part of that issue the American multinationals are famous for identifying situation in the local market and then the decision goes up to the local local CEO and then the decision goes back to headquarters sits on a desk for three days and then comes back with more questions and the opportunity is gone local local local competitors just move so much faster than we do regulatory hindrances overall good news this this environment continues to improve and this is this is I mean a lot of these are things that we have been complaining about for many years especially the lack of IPR protection and enforcement and again it's it's it's a situation that has has been steadily improving over the years IPR protection you know it's it's one of those things it's a little bit like like eating chocolate you know you you never have enough so you shouldn't ever expect American companies to say oh IP enforcement we're done yeah well it's all being being handled perfectly and we don't think that's an issue it is an issue but it's not the number one issue and it's an issue that's been steadily getting better over time not worse moreover looking at our survey results we don't have the capability we only have the capability of surveying our own members we don't have the capability of serving all of the surveying all of China and finding out what other domestic companies think about IPR protection but I know anecdotally we hear this from our domestic competitors as well is that yes we'd like more transparency more consistency in terms of IP IP protection let's see so again domestic competition domestic competition is is has always been an issue but and most of our companies they look at competition per se is not a bad thing it's it actually just it just makes us all better the issues are going to be around unfair competition and that's been the issue having to do with the trade war um regulatory hindrances overall there are some sectoral differences this just gives you the overall picture of what our members have said but sector by sector issues around licensing for example that's going to be a bit more prevalent in the banking and Finance sectors procurement is is procurement and sort of unfair practices within a within the procurement world that's impacted more in real estate and real estate and construction IP matters generally as you'd expect chemicals and pharma companies tend to list that higher in terms of issues going forward operational challenges again signs of progress this is a picture that's been steadily improving one part that I just want to point out on internet restrictions that looks like a big drop and I would caution people not to interpret that as the idea that internet restrictions aren't a problem anymore or that that the China has has released their their restrictions on internet no that that's not the case VPNs are still required in order to to access websites that are that are that are not hosted within China I think that has not changed the other thing to to note China does actually pinch the overseas cable that so in other words some some websites are blocked out right so Facebook Twitter would go into that category but virtually all websites that are not hosted within China are much slower to access and this is a this is a big issue and it's again there's sectoral differences in terms of who feels this more it tends to be the services companies consultants banking finance those those sectors feel this pinch much more than say the manufacturing companies a couple of other things to note around internet restrictions is again we see increasing localization of management and so clearly you know if your foreign manager is going to feel the pain here more than then a local person who's simply found more ways around the the internet restrictions port for example by using Baidu instead of Google things like that internet opportunity opportunities again on the macro level I would say consumption the consumer story and the growing middle class four hundred million consumers that are that are getting steadily more wealthy this presents great opportunities for our companies and so the the overall consumer stories is is still quite strong so you can see there 59 percent see that as as as the driver for for growth and again removal or reduction of the tariffs it's it's gotten everybody's attention everybody wants to see the trade war ended as soon as possible so that's a that is a quick picture of the survey the entire survey is is is quite quite large it's over 50 questions it's I encourage you to get you know I'm not sure if we're handing out physical copies today but it's certainly available on our website but these are the overall takeaways you know the survey results are mixed it always is but overall performance is is basically strong the the issue is really about the view towards the future an investment is certainly a reflection of that the regulatory environment improving so that's that's some of the good news that's some of the good news around the overall survey results so with that I'm going to pause I'm going to hand back to just Scott and I think we're going to go on to the next phase but I encourage with us to have a productive conversation about the results or in what what the M Cham Shanghai members are seeing on the ground thank you so much for your attention [Applause] Kurt thank you so much terrific presentation very clear results places where there's been some continuity and some change in the climate and and some some big themes came out from from the results so really appreciate that and also you know popping a few myth mythical bubbles occasionally we need those popped in Washington so you've already achieved a lot of progress just in the first few minutes of presenting the results let me now introduce the others who have joined us on stage and get into the the conversation to my immediate right is chang Liu who is the divisional vice president for Abbott Laboratories in China he's vice president of global government affairs for Abbott and leads their North Asia regional government affairs team he joined Abbott in 2014 and Abbott in China helps provide nutritional products medical devices Diagnostics as well as works with other established pharmaceutical firms in China prior to joining Abbott Chang was corporate affairs director at Mars Wrigley he was born in Beijing holds a bachelor's degree from the 4th Military Medical University of China I believe the first graduate of the fourth military medical unit University to speak here at CSIS and he holds an MBA from INSEAD in changhua he was the vice chairman of the China oral health foundation in 20 from 2012 to 2014 to his right in the middle is Pilar dieter who was senior partner at ycp solo dance limited and she's based in their Shanghai office Pilar has served b2b clients across a number of industries for many years and has been a frequent speaker on topics related to business model redesign an optimization across Asia and so this is a high time great opportunity for her this is everything that's occurring that occurred just described means that Pilar is at the center of everything she holds an MBA from the University of Chicago Booth School of Business and received her BA in political science in public policy from University of California Berkeley LA UCLA okay all right and then to her right is Don Williams who is the managing partner in chief representative of Sheppard Mullen Richter and Hampton law firm and in their head of their Shanghai office he has a broad range of experience with general corporate and transactional matters in both China and the United States including in private equity venture capital financing mergers and acquisitions and public offerings he's also co-chair of the legal committee of amchem Shanghai from 2010 to 2016 and remains a vice chair today his BA from Stanford and JD from a school up in the northeast of the United States called Harvard so we have a great group of folks with us actually let me I want to pick up on one thing Kurt you said and then I want to turn to the rest of the panel's because just I wanted to ask from the survey you gave and I just want to if I could play devil's advocate for just a second that's my specialty and I want you know obviously the the trade war is is hurting directly and it's causing a lot of adjustments in business plans and operations which we'll get into in a second but I wonder if there's another way to read some of the results from some of the survey and again we'll ask about this specifically so the first thing is on the problem side the challenge side you notice the number one of the big challenges that companies are facing is the slowdown in the Chinese economy and you mentioned competition and I wonder is that is the slowdown an alternative way to say the China model is inefficient and creates the volatility in the Chinese economy which is a drag forever buddy that's sort of the first half which maybe gets to the concerns that some folks have in Washington about China and the second you mentioned that there's been improvement with regard to regulatory hindrances and operational challenges sort of recently you you cautioned us to not read too much into the internet numbers but everywhere else it looked like a small improvement maybe the tariffs are working so question on the challenge side is is it perhaps maybe a similar reading of the challenges just sort of described differently from the survey and what folks here is here and then maybe maybe the tariffs are generating some positive returns in terms of the improvement of how companies are feeling on the ground I just wanted to throw that out there too as maybe an alternative and then we'll get into the more details sure happy to address that yeah that is a devil's advocate position on the GDP growth numbers I mean is it an indication of efficiency I I would say it's probably more you probably have to have an ask an economist about this but it's it's probably more to do with maturing of the economy itself I mean they do have their issues within the economy but it I think it would be a mistake to say and this relates to the political discussion that we're having is I think it'd be a mistake to say it's an indictment of their model like just because they've gone from 6.2 percent GDP growth to 5.8 oh the state the state led model obviously isn't working no I think I think that would be a misinterpretation of the facts I and and in more importantly I think would be a misinterpretation of the domestic politics within China in other words there is a lot of discussion about the Chinese system and and whether to what degree the trade negotiators have been have been on the US side as is asking for fundamental changes in the system meaning this the the subsidies the SOE things like this the reality on the ground is that China believes in their system it's they and they believe that it's worked for them for a long period of time so to get them to fundamentally change their their their economic system and certainly the the the political system it's just not going to happen so if that's going to be core to the to the to the deal we're trying to get that that's that's going to be problematic your second question was around or are the chairs working that's hard to that's hard to say I mean it's it'd be hard to draw a direct line between that I I think this is a lot much longer-term trend towards again China China maturing getting a lot better at providing transparency and again you don't think I mean I've been working in China for quite a long time and to my conversations with my Chinese friends and many of them are competitors my sense is that our views slash complaints about China have actually been converging so in other words that the same things that we complain about the domestic companies actually complain about the same thing again you know transparency in the regulatory environment IP protection enter even internet I have my Chinese for instance yeah it's keep it up please please keep making noise about that because we can't make noise about it but you can and it drives us crazy to perfect very helpful and your last point is is why I've been suggesting for a long time although I know it be hard to implement to have the surveys that the am shams carry out also include a lot of domestic companies because I think then you'd you'd you then have the data to show the convergence that these aren't just multinational concerns but business as a whole all right you brought a great team with you so let's turn to them and I asked just the one question the same question to each of you to begin because you come from Shanghai you do business every day I think it would be really helpful just for this audience to hear a little bit about what your businesses are focused on and whether the results in the survey are reflected in your purse experiences of either the companies your company the companies that you interact with what you see or whether there's something different more challenging more positive that comes out of your daily experiences I think that'll provide some sort of empirical foundation for a substantive question where we go deeper into some of the results that Kerr elaborated why don't we start with Lou then Pilar and then Don if we could okay thank you Scott I come from Abbott I'm running a verdict coming the fears in China and those of the region so avid is a healthcare company we established over 135 years ago in Chicago Illinois we used to be a pharmaceutical company until 2013 and companies split to two company wines abba-zaba v so now we are a very diversified company we we have a four business division like nutrition medical device diagnostic and established pharmaceutical that's men in the of pattern job in China where almost 2 billion u.s. dollar business accounting speak health healthcare industry and my companies um yeah just like survey show we are doing well in China so still remained double digits girls so if you have interesting can look at our annual report so China is obviously hot topic you know quarter call and also the annual call we have a full factory in Shanghai and judging and 2-iron be Center and one Innovation Centre in Shanghai so that's why you can see we're headquartered in Shanghai so that's our company's outlook come back to you questions god about economic slowdown in my industry I still see very strong domestic demand you know our contract still coming from the hospitals from the Kriegers from the daily life you know I commute between Beijing and Shanghai every week the flights do you are fully occupied it's not easy to book your ticket if you want to just go the same day so that's always not easy to find a ticket so I see still very strong business activities there during the lunch and dinner the restaurant still of the young people so I can see that yeah this is a big machine if even even though we say that's a slowdown that's the effect of the number that still take time to see that's my observation thank you so I run a strategy advisory firm and our headquarters are actually Hong Kong and we operate in 14 countries across Asia Pacific so when we come around to the conversation and there's a lot to unpack in this survey but when we come along to the conversation about where are people going are they truly packing up and going to Southeast Asia India Middle East where I'll be happy to share some insights with you on that point the clients I serve are probably 40 percent American probably another 30 to 40 percent European and the remainder are predominantly Japanese with a small subset of some Asian operators not a single Chinese company as a client of ours now when I look at the clients that I serve predominantly b2b industries a lot of manufacturing industrial and biotech and healthcare these companies would easily argue and my clients predominantly the u.s. ones would say is the economic slowdown happening and impacting us absolutely I would say that they're echoing a lot of what you're seeing in the survey here but I would also say let's be cautious with this reflection because this has been a deceleration in the growth of this economy for over 10 years we can't just take a snapshot of one year and think that that's the only reality so my clients those that have been wise to this decades ago have actually put together some of their plans of what are our risk contingencies what are some of the plans we have in place to realize that we are going to drop into from a double-digit GDP to what is inevitably going to be a five percent growth rate somewhere around 2019 and these types of initiatives that they take on in order to remain competitive are much more in line with the innovation that you see happening around them in China business model innovation figuring out new technology investing in their own R&D in China for the China market so they're trying to get smart and savvy in the region that they're playing in in the region that they're trying to grow in because China is easily their number two number three and in some cases even their number one market economy so I think we want to try to keep everything in context when we talk GDP economic slowdown growth rates these are all things that have to be taken with a grain of salt so I'm a lawyer who I've operated in the technology sector I represent both us technology companies and Chinese technology companies in China for purposes of answering Scott's question I'll focus on the American companies and I spoke with many of my clients you know in preparation for this panel I think does the the survey reflect accurately the reality of my clients I think yes the answer is yes we are my clients Jews continue to see gradual improvements in the IP environment in China IP protection gradually improving you know so forced technology transfer gradually decreasing we've seen a repeal of some regulations early this year that essentially forced technology transfer those are now off the books that was a step that Chinese government took so we are seeing these gradual improvements in the IP environment where we're seeing gradual improvements in the regulatory environment more generally III think we do see a slowdown in the tech sector it's not a contraction by any means I was mostly cyclical that that it's the first real slowdown in the tech sector that I've seen and I've been in China since 2006 even in 2008 there wasn't much of a slowdown in that sector in particular and that was partly probably because government implemented a massive stimulus which it has not done more recently in response to the current issues it's sort of refrained from massive there been some tax cuts and other measures but no massive stimulus but in any event the tech slowed and I see is largely cyclical it's I think mostly just connected from the trade dispute although the uncertainty has undoubtedly affected the sector and it hasn't been helpful but I don't think it's the major cause of slowdown all very helpful reflections on where you sit relative to the survey let me ask about China from another perspective just mentioned number two is competition and so you're advising firms or representing firms that face a lot of competition from Chinese where the Chinese excelling you mentioned speed in addition to speed technological innovations you know technologies fit for the market where the Chinese getting better where do we need to get better in addition to getting faster as Kerr said yeah so working in the tech sector and I I do a lot of work for Alibaba on the Chinese side and others um I would say the Chinese excel in business model innovation so we may in this country still have a lead in basic hard core scientific research by the way I'm not sure that lead is sort of unchallengeable and I know it isn't but we probably still have a lead in those areas but in terms of business model innovation coming up with new ways to do things the Chinese are absolutely excel in that so so you know I think everyone knows mobile payments you know sort of buying things via chat just the WeChat platform but but there other areas too facial recognition software there are there are lots of areas where where the Chinese are the world leaders and I would Coker's comments this country needs to compete it's not all a question of the Chinese stealing our stuff and that's how they've done well it's really if you go there and you work with their companies in the tech sector you you understand and it's certainly speed is one of the one of the the challenges American companies face but but the the new ways of doing things and how quickly the Chinese companies innovate and the business model side is is remarkable and and people in this country should should not take for granted the the lead in innovation my own view is this country needs to invest more in education and infrastructure in in research in basic research I'm not saying we want to target specific sectors maybe that's not who we are but we need to compete with that level of business model innovation the level of innovation that's coming out of China to me is the real story not the IP theft IP theft is there it is an issue we need to address it but the real story is how fast they innovate they're coming from a lawyer that's saying something because you could have a lot of cases if you wanted if you just focused on the IP theft Chong and Pilar what are the type of innovations you seem in biotech nutrition health care maybe some of the other sectors that you all yeah in my industry the many the life science I know medical device we still see in China and Chinese competitor is still relatively small and technology they have the gap with them they still take time to catch up so we are it's the US company where many compete with company we start from other countries like Europe and Japan so yeah we encourage the local industry can be a player can be catch-up so but the competitions do not between the Chinese and us I would say from the manufacturing side you know think about companies like Timken Johnson Controls caterpillar these guys are to win in business they're looking to increase market share profitably and I would have to echo the business model discussion from dawn the when I go and visit companies that are competing with my clients Chinese companies Chinese distributors the one word I walk away with after I go and visit their facilities is scrappy these guys are entrepreneurs beyond any kind of recognition and when they are hungry and eager to do business and I'm talking about Chinese operators who are running businesses granted probably at a distributor or dealer level they are doing so with a knife or how can i how can I do this more effectively how can I be more aggressive how can I push more of my product into the marketplace and beat out the competition whether they're American German or Japanese and what you find with that is they start to leverage things and force my American clients to start looking this way to leverage things like mobile payments leverage things like new ways of contracting and doing business in a faster way and I think this is one of the deficits that some US companies are going in there with is they just aren't thinking in that manner they're not as hungry perhaps and so we're starting to see a lot more on that innovation side I would say on the business model framework all right I've got one more question then we're gonna throw it open to the audience and get their feedback and questions let me start with curb it then I'll adapt so if you were the president of the Euro Chamber Shanghai or the Japanese Chamber Shanghai or Korean or others would you be popping champagne right now and thinking the trade war has done a lot to slow down your American competitors and that you're benefiting or is it tariffs and all the talk basically been appalled on everyone because they're all interconnected and then for your colleagues just asking from a similar light what does it look like visa vie the other multinationals that you are doing business with are competing or advising is it wouldwould does the China story look different their perspective as opposed from an American perspective so we start with her and then come down the line sure we we talk with our European counterparts and Japanese counterparts fairly often and and yeah the answered question is both on the one hand yeah they're laughing their heads off there they're getting they are there companies are definitely getting the benefit I mean look at wine right I mean I'm from California I love California wine but but you know it's not that much different from French wine right I mean so if you're sitting in China and your California wine has just gone up by 25% French wine Australian wine are in Disneyland wine tastes pretty good so so yeah we're definitely losing market share to to our European competitors before sure I wouldn't say though that they're popping champagne because they they do feel the other way too they don't like tension they don't like instability they don't like uncertainty and yeah when that when the - when these two giants do battle it's not a good thing for anyone so I do think that they would they would like to to see an end to this and this is one of the baffling things that we heard on more on the administration side and it's it's this idea that we're doing we're applying tariffs unilaterally that's that's really problematic and some of the questions that we've had on the hill and in the administration is like oh yeah why don't why don't the Germans just impose tariffs just like we are if they if they feel the same way about China and you know this effort has to be coordinated it just it's not it's not something that can just happen out of thin air so so we've had some challenging conversations with the administration about that particular point yes I think echo course comments I mean the Europeans the Japanese are definitely benefiting from from the American companies issues with with the tariffs and the Chinese retaliatory tariffs I think they do share I mean the EU chamber the Japanese chamber they certainly share some of the u.s. concerns about the Chinese environment although as noted we we see the IP environment gradually improving as it has been for a while now we see we see gradual improvement and and but but the environments are still not perfect by any means and the Europeans and the Japanese they share those concerns we have I certainly feel like we would be much stronger if we were acting together with them instead of instead of trying to do this on our own and and letting them benefit basically while we're fighting a battle that in many respects the battle benefits them more than it does us to the extent there are changes I mean if you look at new licenses being handed out in key sectors and things a lot of them are going to the Europeans or the Japanese they're not going to be Americans this is not the time there are a few but this is really not the time to reward American behavior I think from the Chinese perspective so so you're not seeing you're not seeing you know but China does want to show that it's it's opening its opening up and maybe some of that is in response to u.s. pressure but the beneficiaries are more the Europeans and the Japanese and the Americans at the risk of beating a dead horse here I would share you know industrial companies once again serving infrastructure development oil and gas mining a couple of our client and we probably have about 12 companies in the portfolio that are involved in industrial pumps of all types of sorts and sizes some of my clients are Americans some are European was in a European clients office just three weeks ago and I asked him candidly I said hey you know I'm gonna be going to American Chamber of Commerce if Dornoch I'm gonna be speaking at CSIS anything you'd like to share and he said no I said well how's the trade war going for you and he said after looking around the room a few times making sure there was nobody really recording anything and he goes under his breath go trump go so he is increasing his market share he is beating out competition the second illustration I would share with you is another client of mine california-based medical device company they're producing equipment for heart valves so implants that are going to be used in surgical operations and they have a technology that they've had in the queue to be licensed and approved in China for over four years and licensing in China in the medical device space can be cumbersome take a long time but it's it's that it is the way it is they have been delayed approval up until the point where regulation has permitted this kind of technology to be used in the operation labs operation labs open up regulation permits this now however even though they were first in the queue to be approved there's other competitors that have caught up in the technology development not only Chinese mind you who have all of a sudden somehow got the green light to get their licenses approved first so again are we being slapped on the wrist as American businesses because of the behavior that we're exerting here in Washington I think that's a question for some people on the hill but I would say my clients would probably say from the American side it feels that way yeah just make quake as up you know as I said before if I lost if we lost a business in China where a lot not lost to the Chinese companies we are lost to the companies in from other countries so yeah these years we already say the competitors already say you know the Medical Device not affected by tariffs yet but think about it what is the tariff effective to medical device so spare parts going to be extra tariffs that's extra cost to the clients so these kind of a mood already spread in the customers so we have to deal with that all right we have about twenty minutes left and we've got a very smart bright audience and love your feedback questions comments again since we're online we have microphones that will come if you'd wait for the microphone and identify yourself and your organ is and we're gonna start right here this fourth row in the middle of the gentleman with his hand up yes please wait for the microphones coming your way yeah we - with the Policy Center funding yourself two questions could you any of you comment on the joint venture requirements which append here a big issue and the second is I don't understand the companies in China are not supporting the tariffs the American importers from China are very badly hurt by the tariffs and the exporters from the United States to China including the farmers are heard by the tariffs well is the support for the tariffs coming from I think there's an address on Pennsylvania Avenue Scott you want me to make a comment about jayvees sure and maybe you give people a little bit of context about what the regulations are and then what the changes have been yeah I mean the big picture is I mean we've almost come full circle in terms of you know in the early days in the early days in China everything was was a joint venture and that was really forced we've actually come full circle it mean it's sector by sector and I'll let the lawyers you know comment on some of the regulations and things but we're actually seeing an increasing trend toward joint ventures in in many sectors where where American companies are finding that you know that the environment is it's a challenging environment it's difficult to compete against against invested companies so in some instances American companies have chosen to to go back to a joint venture or or simply license technology or take just take an equity position I think uber and the DD situation was a case in point where Oberer went into the market and you know we could argue they made certain tactical mistakes but the net-net is they spent billions in the market and and realized that that the local competition was was too severe and so what they did is they swapped they swapped their ownership of a wholly owned wholly owned venture and they swapped that for an equity stake in their local competitor and so so it's an alternative structure I don't think there's anything particularly sinister about that I think it's a it's a realistic view that look I mean in in the 1980s when I first went to China I mean China just didn't have any of those capabilities so American companies going in they you know selling products and and why not today is a very different situation and we need to wake up to that that that China is is simply a formidable competitor that doesn't mean it's an enemy that means it's a competitor those are two very different things in terms of the joint ventures I'd echo what what Curtis said I think so historically they're there and to this day actually there are a number of sectors but there were more in the past where if you were a foreign company and you wanted to participate in the Chinese market you had to invest through a joint venture and that sort of implicitly or explicitly sometimes meant transferring technology to the joint venture which is one of the kind of long-standing complaints of the American business community I think auto cars automobiles was the classic example I would say I would say that I would group these in three categories though so so financial services joint venture restrictions are I believe already phased out or being phased out now so the previously you know you couldn't own 100% of financial services entity no if as a foreign company now you can so that those restrictions are eased autos I believe the plan it remains to phase those out over time and there are other sectors that are like cloud computing which there's no indication that that those restrictions or other other Internet related sectors where there's no indication those restrictions will be removed and and so I think and the tech sector those requirements if you want to do business in there mate there may be n runs around those requirements and in some sectors I mean you probably may have heard of if in the tech sector you may have heard of the VIU structure and there there may be n runs around joint ventures but but those have regulatory risk associated with them but in any event in the tech sector most there's still a number of sectors were like cloud computing where you still have to do a joint venture and those probably won't go away I would say we can't underestimate the value of what's happening with the shift between this joint venture requirement and the relaxation of that regulation it's very important that US companies have had the opportunity to shift into a woofy model at the get-go what I'm gonna comment on though is who thought the it's Harris for a good idea in the first place I've been living in Shanghai since 2005 and I've been a proud member of amchem for pretty much the entire time and I can tell you that through those years the delegations of people from Capitol Hill that would come into the chamber would constantly hear from American businesses it's not a level playing field we need support we want some help you know let's make regulations transparent reciprocity all the buzzwords and to be perfectly fair there hadn't been a lot of action taken that was improving that situation so American businesses basically took it upon themselves to act in the diploma diplomatic way of saying we're gonna make this work we're gonna realize there's some nuances to operating here we'll deal with it but we are here because we believe in the China market opportunity so the tariffs that we have in place today are in my opinion after these last 48 hours on the hill a bit of let's try to address we keep using the term or we're using a bludgeon to address something that should have used a scalpel and it's just become a very overreaching attempt with the plan with all the lists that have been coming out to kind of reverse some of it thinking that that's the way to be more surgical so it's created the uncertainty in the marketplace which is the number one worst thing for businesses and it's it's also just caused a lot of angst over all hi Owen Churchill with the South China Morning Post and over the past four or five months has seemed to have been a few moments where we were quite close to to a deal or some substantial progress you know in May we were apparently close to finalizing something and then there was some optimism after the g20 that we'd be closing the gap Chinese negotiators coming to Washington in a couple of weeks and there seems to be some optimism about that and Trump said I think half an hour ago or so he said there might be a deal sooner than you think so I just wondered whether the panel had any optimism about that those high-level negotiations in the next couple of weeks and then secondly what you're doing excuse me what you're doing to prepare should those negotiations fail to make progress or even you know fall apart if there's an escalation in the tension there and we don't see another deal in the immediate future even not before the the 2020 election Thanks I guess that it's a question for me fundamentally yeah the back and forth and tit-for-tat has been has been really problematic and and we've just been suffering from the whip saw you know in terms of like as you said we thought we were very close to a deal we were that we were here actually in May and talking about as the negotiators were getting closer and closer to the deal and everybody was asking us about how this deals gonna look and how it's gonna get implemented there was no question that it was gonna happen and then all of a sudden the walk away so it's been it's been a challenging time for sure no I'm I'm fundamentally optimistic that a deal will get done the question is when and what its gonna look like will it be in parts or in a hole those kinds of things but especially after the discussions on the hill I'm actually more encouraged on on both sides I mean on the American business community sides we're very clear we we need a deal that we are not in a position to abandon this market . that's that is the position of the American business community I can say with complete confidence that that's our that's our position on the hill I actually heard that more or less echoed our if I could say one word that characterizes the conversations it was constructive we were prepared mentally prepared for in fact we had we had people come to us to help us prepare for these discussions and they said look Kerr every conversation you start on the hill has to start with the sentence I also hate China this is what we want otherwise they're just not going to listen to you I actually found that wasn't true I I was I was encouraged both the ours and these were were constructive they were you know questioning in terms of how to go forward but but there is a a commitment to get some kind of deal in some kind of relationship or China I think that that is that is clear it's equally clear that they were firm again ours Indies are both firm that something does need to change in terms of the relationship and again we would we would support that the question really is the tactics that we're using going forward is this an effective approach are we getting there are we closer to a deal are the tariffs working or are they just are they just creating mutual destruction I know if any of you want to want to comment on that as well I was going to maybe speak to the escalation of tensions point I think in terms of do we have do my clients have a plan if there's I think I think my clients fear an escalation of tensions and don't really have a true plan B I think if you look at if you look at what's happened so far in China you you have not really seen other than perhaps after the the hallway banned maybe in a couple of weeks after that you've not really seen an outpouring of anti-american sentiment but many of my clients fear that especially more consumer facing that they may be subject to boycotts or other other action if if you know if things really deteriorate significantly and there you know so far I would my own sense is if anything the government has been sort of damping down I mean Chinese consumers tend to be fairly nationalistic and and proud of China and and maybe don't understand why the u.s. is taking various actions and so far of anything I feel my own sort of informal view is and from talking to others as the government has been damping down the anti-american sentiment but if they choose not to do that the if test if tensions escalate or worse they choose to sort of on you know fully unleash or even exacerbate the sentiment online I think American companies and brands could suffer significant damage because because and it may take a very long time to reverse that damage so my clients fear escalation of tensions take a couple questions together and as a wrap-up so we're gonna one two three over there hi Brett Fordham with inside US trade is there getting to be a certain amount of exhaustion from businesses with the tariffs and if there is a deal it struck you know the key part of it is of the discussion so far has been about how that deal would be enforced would that be reliant on your your clients and companies in China reporting back to the US that you know China is living up to the provisions in this deal or China is not living up to the provisions and if the alternative is more terrorists what companies being kind to do that or will this deal not really enforceable okay so I got one there right behind you I think Scott and thank you everyone for taking the time to share your insights my name is brandon from FAO global and we're an intelligence consulting company and we recently were approached by US and Chinese asset management companies interested in pursuing JV partnerships so they want us to facilitate it my question is to if you have any insights on how is the overall I guess climate for setting up these type of funds are they seeking to be our companies on your end in Shanghai are they looking to do joint ventures are people seeking to establish separate funds again if you have any insights into this we'd appreciate it hi John Corrigan Wall Street Journal a few weeks ago President Trump hereby ordered us companies to consider leaving China I gotta get you reaction show up from your clients and your companies to that directive from mr. Trump terrific okay I think that's a good set of questions too you can take which ones you'd like the easy ones actually there but they're all really good so as I told you we have group great groups here that come maybe we'll start while we start down with Qiong and then work this way in will and where we began with Kerr oh I think I can only third of what to you is yeah we heard about that but we're not really have any plan to pull out because my view is least country is too close I mean if you talk about in my industry the Chinese people really need our technology our product our innovation so or continually supply that we are globally manufacturing not only in u.s. so as I said before we are fine in China so yeah we don't have any plan to review current circumstances and in need we need to pull out I'll touch on the JV conversation I'd say that's I still have a significant amount of clients who are looking to enter in the Chinese market doing so with a JV model in mind I would say however in one case again a biotech company medical device manufacturer they are looking at a licensing agreement instead and when I presented them with alternatives I said you know here we are looking at the array of ways in which you can go in you can start doing some clinical trials doing through partnerships you can do it through a joint venture they said why does everybody turn to JV as an answer in China and he said that's not the business that we run we don't like jayvees none of my clients like JB's for the record you know there if there is a JV model at to be played it's always guarantee me that there is a line of sight to full outright ownership on the point about get out and get out of China I would say you know the divestiture of investment which actually isn't necessarily a complete extraction is as I alluded earlier looking into other Asian markets the people that are in China especially the large multinationals they're there for the local market and the region whether they are trying to sell just you know into the China market or try to participate in the economy that's created around asia-pacific the reality is they have had plans for many many years to look into a diversification play these are plans that they've just simply dusted off in the tariffs or and tweets like that have not done nothing but accelerate the process to start moving things maybe a little bit faster than they were originally intending so on the leaving China question I don't think any of my American clients that I've talked to have any plans to do so I you know I look for a whole host of different reasons but I mean one of the main reasons is is just the importance of the Chinese market to being globally competitive it's very hard to operate a globally competitive business if you're not in China it's too big it's too important it's moving too fast you you have to be there in the midst of it in order to to to compete worldwide and I mean you learn from things developments in China you you make money in China I mean there are too many reasons you need to be there though the whole consumer upgrade the four hundred million consumers that are getting wealthier every day even if the economy slows down the consumer upgrade is not it's not going away and so so my clients need to be there they feel to be to be to be globally competitive they can't they can't just leave they can't they can't leave it's too big a market for them they can't afford to I think on the JV point I would I would say yes we continue to see companies wanting to enter the China market I think the jayvees remain an attractive way I can't really speak to asset management specifically but I would say that there remain especially at the provincial level if you know if you're talking to specific provinces not at the central government level you there remain a lot of provinces that are very interested in in attracting US investment of any almost any nature and and and so you know I think there is this conflict of the central government level but if you dig if you get down to the provincial level or the you know the sort of city level you'll you'll you'll still find a very warm welcome in many sectors I guess that leaves the enforcement question to me I'll respond actually to all three of these very briefly just to emphasize some of the things my colleagues have said on enforcement yeah absolutely right I mean that's that's core to the to the deal it has to be something enforceable what you know that the the common phrase be is you know a lot of countries not just the United States have you know what we call promise fatigue I mean we have been here before in terms of agreements with China that don't get implemented and so yeah that's an issue and but I think both sides are looking for a lasting agreement there is acknowledgement on that point it's a little bit difficult to talk about but behind closed doors the Chinese side understands that that that that they have a reputation that they need to repair with respect to enforcement on asset management yeah I would echo what what Don is saying I we're hearing quite a lot of interest specifically about asset management and general liberalisation within the financial sector generally so I don't have a comment about the the the JV per se that's pretty specific but generally speaking and again what Don said was is correct I mean at the municipal and provincial level we're we're actually feeling probably more enthusiasm than we've ever had before you know in terms of welcoming of investment welcoming of American companies again the view from Beijing as I mentioned earlier in my remarks the view from Beijing is very different from it is from from the view at the provincial level our government interlocutors they're there they don't like the trade war any more than we do they are very businesslike they they're interested in investment job creation . and and they they're very much welcome american american businesses their last question about the president's remarks yeah exactly i mean no we don't see businesses pulling out that did get a lot of attention it contributed to again this whip saw that that we're feeling american businesses in shanghai feel very unsettled and these kinds of remarks frankly are not helpful american companies did not line up behind that that that that remark and and head for the exits and it's not because we're not patriotic or that we don't support the goal of a rebalancing or the relationship it's simply because we looked at that and and and came to the conclusion that it simply wouldn't help again as we've been talking about before if if we were to exit the china market on mass we would be replaced by european and japanese companies the next day so it would accomplish nothing and that's the reason why american companies are really not in a position to to to exit the China market this has been a terrific discussion and I want to since we've done this a few years in a row now just kinda to bring things together mentioned you know two years ago when we did this event and AM champ Shanghai brought a relatively similar message there was very little hospitality in Washington to that message there was much more criticism of the delegation being too idealistic optimistic about China being willing to accept a quarter of a loaf from the Chinese and etc and saying you know you're not representing American interests but but these these narrow interests and then I think what we've seen is actually the anxieties about what we've been doing here serve more self-introspection doing our own self analysis and then watching the outcomes of the tensions so that you come with a relatively similar message but find some empathy around town particularly up on Capitol Hill I think says something about where Washington is shifting and maybe in a direction more in line with some of the messages that you've been bringing which means that in your first year as a president of amp champ you've got a big success to take home to share with with the rest of your membership I would one point of caution is that is still the administration is still the administration they still have their approach and an issue that we didn't talk really much about today's questions of national security and there's a lot of folks within the administration who aren't really managing trade policy are thinking about that who are thinking about simply national security issues of course there's a very good argument then that can be made that's not made often enough that more trade more engagement properly managed leads to better security but nevertheless you have folks who aren't really looking at the scores that you had up here coming up with a different conclusion about what our overall policies should be and those are the folks that I think maybe next time around will be need to be engaged even even even further again a terrific discussion quite constructive positive I want to thank the audience for your contributions to Chang Apple R Don and ker thank each of you if we could all just give them a round of applause [Applause] [Music]

Channel: Center for Strategic & International Studies

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Length: 84min 34sec (5074 seconds)

Published: Wed Sep 25 2019