Technological Innovation in China

A CEO’s guide to innovation in China

Dynamic domestic players and focused multinationals are helping China churn out a growing number of innovative products and services. Intensifying competition lies ahead; here’s a road map for navigating it.

MCKINSEY QUARTERLY FEBRUARY 2012 • Gordon Orr and Erik Roth

China is innovating. Some of its achievements are visible: a doubling of the global percentage of patents granted to Chinese inventors since 2005, for example, and the growing role of Chinese companies in the wind- and solar-power industries. Other developments—such as advances by local companies in domestically oriented consumer electronics, instant messaging, and online gaming—may well be escaping the notice of executives who aren’t on the ground in China.

As innovation gains steam there, the stakes are rising for domestic and multinational companies alike. Prowess in innovation will not only become an increasingly important differentiator inside China but should also yield ideas and products that become serious competitors on the international stage.

Chinese companies and multinationals bring different strengths and weaknesses to this competition. The Chinese have traditionally had a bias toward innovation through commercialization—they are more comfortable than many Western companies are with putting a new product or service into the market quickly and improving its performance through subsequent generations. It is common for products to launch in a fraction of the time that it would take in more developed markets. While the quality of these early versions may be variable, subsequent ones improve rapidly.¹

Chinese companies also benefit from their government’s emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competitiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence.

But progress isn’t uniform across industries, and innovation capabilities vary significantly: several basic skills are at best nascent within a typical Chinese enterprise. Pain points include an absence of advanced techniques for understanding—analytically, not just intuitively—what customers really want, corporate cultures that don’t support risk taking, and a scarcity of the sort of internal collaboration that’s essential for developing new ideas.

Multinationals are far stronger in these areas but face other challenges, such as high attrition among talented Chinese nationals that can slow efforts to create local innovation centers. Indeed, the contrasting capabilities of domestic and multinational players, along with the still-unsettled state of intellectual-property protection (see sidebar, “Improving the patent process”), create the potential for topsy-turvy competition, creative partnerships, and rapid change. This article seeks to lay out the current landscape for would-be innovators and to describe some of the priorities for domestic and multinational companies that hope to thrive in it.

China’s innovation landscape

Considerable innovation is occurring in China in both the business-to-consumer and business-to-business sectors. Although breakthroughs in either space generally go unrecognized by the broader global public, many multinational B2B competitors are acutely aware of the innovative strides the Chinese are making in sectors such as communications equipment and alternative energy. Interestingly, even as multinationals struggle to cope with Chinese innovation in some areas, they seem to be holding their own in others.

The business-to-consumer visibility gap

When European and US consumers think about what China makes, they reflexively turn to basic items such as textiles and toys, not necessarily the most innovative products and rarely associated with brand names.

In fact, though, much product innovation in China stays there. A visit to a shop of the Suning Appliance chain, the large Chinese consumer electronics retailer, is telling. There, you might find an Android-enabled television complete with an integrated Internet-browsing capability and preloaded apps that take users straight to some of the most popular Chinese Web sites and digital movie-streaming services. Even the picture quality and industrial design are comparable to those of high-end televisions from South Korean competitors.

We observe the same home-grown innovation in business models. Look, for example, at the online sector, especially Tencent’s QQ instant-messaging service and the Sina Corporation’s microblog, Weibo. These models, unique to China, are generating revenue and growing in ways that have not been duplicated anywhere in the world. QQ’s low, flat-rate pricing and active marketplace for online games generate tremendous value from hundreds of millions of Chinese users.

What’s keeping innovative products and business models confined to China? In general, its market is so large that domestic companies have little incentive to adapt successful products for sale abroad. In many cases, the skills and capabilities of these companies are oriented toward the domestic market, so even if they want to expand globally, they face high hurdles. Many senior executives, for example, are uncomfortable doing business outside their own geography and language. Furthermore, the success of many Chinese models depends on local resources—for example, lower-cost labor, inexpensive land, and access to capital or intellectual property—that are difficult to replicate elsewhere. Take the case of mobile handsets: most Chinese manufacturers would be subject to significant intellectual property–driven licensing fees if they sold their products outside China.

Successes in business to business

Several Chinese B2B sectors are establishing a track record of innovation domestically and globally. The Chinese communications equipment industry, for instance, is a peer of developed-world companies in quality. Market acceptance has expanded well beyond the historical presence in emerging markets to include Europe’s most demanding customers, such as France Télécom and Vodafone.

Pharmaceuticals are another area where China has made big strides. In the 1980s and 1990s, the country was a bit player in the discovery of new chemical entities. By the next decade, however, China’s sophistication had grown dramatically. More than 20 chemical compounds discovered and developed in China are currently undergoing clinical trials.

China’s solar- and wind-power industries are also taking center stage. The country will become the world’s largest market for renewable-energy technology, and it already has some of the sector’s biggest companies, providing critical components for the industry globally. Chinese companies not only enjoy scale advantages but also, in the case of solar, use new manufacturing techniques to improve the efficiency of solar panels.

Success in B2B innovation has benefited greatly from friendly government policies, such as establishing market access barriers; influencing the nature of cross-border collaborations by setting intellectual-property requirements in electric vehicles, high-speed trains, and other segments; and creating domestic-purchasing policies that favor Chinese-made goods and services. Many view these policies as loading the dice in favor of Chinese companies, but multinationals should be prepared for their continued enforcement.

Despite recent setbacks, an interesting example of how the Chinese government has moved to build an industry comes from high-speed rail. Before 2004, China’s efforts to develop it had limited success. Since then, a mix of two policies—encouraging technology transfer from multinationals (in return for market access) and a coordinated R&D-investment effort—has helped China Railways’ high-speed trains to dominate the local industry. The multinationals’ revenue in this sector has remained largely unchanged since the early 2000s.

But it is too simplistic to claim that government support is the only reason China has had some B2B success. The strength of the country’s scientific and technical talent is growing, and local companies increasingly bring real capabilities to the table. What’s more, a number of government-supported innovation efforts have not been successful. Some notable examples include attempts to develop an indigenous 3G telecommunications protocol called TDS-CDMA and to replace the global Wi-Fi standard with a China-only Internet security protocol, WAPI.

Advantage, multinationals?

Simultaneously, multinationals have been shaping China’s innovation landscape by leveraging global assets. Consider, for example, the joint venture between General Motors and the Shanghai Automotive Industry Corporation, which adapted a US minivan (Buick’s GL8) for use in the Chinese market and more recently introduced a version developed in China, for China. The model has proved hugely popular among executives.

In fact, the market for vehicles powered by internal-combustion engines remains dominated by multinationals, despite significant incentives and encouragement from the Chinese government, which had hoped that some domestic automakers would emerge as leaders by now. The continued strength of multinationals indicates how hard it is to break through in industries with 40 or 50 years of intellectual capital. Transferring the skills needed to design and manufacture complex engineering systems has proved a significant challenge requiring mentorship, the right culture, and time.

We are seeing the emergence of similar challenges in electric vehicles, where early indications suggest that the balance is swinging toward the multinationals because of superior product quality. By relying less on purely indigenous innovation, China is trying to make sure the electric-vehicle story has an ending different from that of its telecommunications protocol efforts. The government’s stated aspiration of having more than five million plug-in hybrid and battery electric vehicles on the road by 2020 is heavily supported by a mix of extensive subsidies and tax incentives for local companies, combined with strict market access rules for foreign companies and the creation of new revenue pools through government and public fleet-purchase programs. But the subsidies and incentives may not be enough to overcome the technical challenges of learning to build these vehicles, particularly if multinationals decline to invest with local companies.

Four priorities for innovators in China

There’s no magic formula for innovation—and that goes doubly for China, where the challenges and opportunities facing domestic and multinational players are so different. Some of the priorities we describe here, such as instilling a culture of risk taking and learning, are more pressing for Chinese companies. Others, such as retaining local talent, may be harder for multinationals. Collectively, these priorities include some of the critical variables that will influence which companies lead China’s innovation revolution and how far it goes.

 

Deeply understanding Chinese customers

Alibaba’s Web-based trading platform, Taobao, is a great example of a product that emerged from deep insights into how customers were underserved and their inability to connect with suppliers, as well as a sophisticated understanding of the Chinese banking system. This dominant marketplace enables thousands of Chinese manufacturers to find and transact with potential customers directly. What looks like a straightforward eBay-like trading platform actually embeds numerous significant innovations to support these transactions, such as an ability to facilitate electronic fund transfers and to account for idiosyncrasies in the national banking system. Taobao wouldn’t have happened without Alibaba’s deep, analytically driven understanding of customers.

Few Chinese companies have the systematic ability to develop a deep understanding of customers’ problems. Domestic players have traditionally had a manufacturing-led focus on reapplying existing business models to deliver products for fast-growing markets. These “push” models will find it increasingly hard to unlock pockets of profitable growth. Shifting from delivery to creation requires more local research and development, as well as the nurturing of more market-driven organizations that can combine insights into detailed Chinese customer preferences with a clear sense of how the local business environment is evolving. Requirements include both research techniques relevant to China and people with the experience to draw out actionable customer insights.

Many multinationals have these capabilities, but unless they have been operating in China for some years, they may well lack the domestic-market knowledge or relationships needed to apply them effectively. The solution—building a true domestic Chinese presence rather than an outpost—sounds obvious, but it’s difficult to carry out without commitment from the top. Too many companies fail by using “fly over” management. But some multinationals appear to be investing the necessary resources; for example, we recently met (separately) with top executives of two big industrial companies who were being transferred from the West to run global R&D organizations from Shanghai. The idea is to be closer to Chinese customers and the network of institutions and universities from which multinationals source talent.

Retaining local talent

China’s universities graduate more than 10,000 science PhDs each year, and increasing numbers of Chinese scientists working overseas are returning home. Multinationals in particular are struggling to tap this inflow of researchers and managers. A recent survey by the executive-recruiting firm Heidrick & Struggles found that 77 percent of the senior executives from multinational companies responding say they have difficulty attracting managers in China, while 91 percent regard employee turnover as their top talent challenge.

Retention is more of an issue for multinationals than for domestic companies, but as big foreign players raise their game, so must local ones. Chinese companies, for example, excel at creating a community-like environment to build loyalty to the institution. That helps keep some employees in place when competing offers arise, but it may not always be enough.

Talented Chinese employees increasingly recognize the benefits of being associated with a well-known foreign brand and like the mentorship and training that foreign companies can provide. So multinationals that commit themselves to developing meaningful career paths for Chinese employees should have a chance in the growing fight with their Chinese competitors for R&D talent. Initiatives might include in-house training courses or apprenticeship programs, perhaps with local universities. General Motors sponsors projects in which professors and engineering departments at leading universities research issues of interest to the automaker. That helps it to develop closer relations with the institutions from which it recruits and to train students before they graduate.

Some multinationals energize Chinese engineers by shifting their roles from serving as capacity in a support of existing global programs to contributing significantly to new innovation thrusts, often aimed at the local market. This approach, increasingly common in the pharma industry, may hold lessons for other kinds of multinationals that have established R&D or innovation centers in China in recent years (read about AstraZeneca’s experience in “Three snapshots of Chinese innovation”). The keys to success include a clear objective— for instance, will activity support global programs or develop China-for-China innovations?—and a clear plan for attracting and retaining the talent needed to staff such centers. Too often, we visit impressive R&D facilities, stocked with the latest equipment, that are almost empty because staffing them has proved difficult.

Instilling a culture of risk taking

Failure is a required element of innovation, but it isn’t the norm in China, where a culture of obedience and adherence to rules prevails in most companies. Breaking or even bending them is not expected and rarely tolerated. To combat these attitudes, companies must find ways to make initiative taking more acceptable and better rewarded.

One approach we found, in a leading solar company, was to transfer risk from individual innovators to teams. Shared accountability and community support made increased risk taking and experimentation safer. The company has used these “innovation work groups” to develop everything from more efficient battery technology to new manufacturing processes. Team-based approaches also have proved effective for some multinationals trying to stimulate initiative taking (read about General Motors’ approach in “Three snapshots of Chinese innovation”).

How fast a culture of innovation takes off varies by industry. We see a much more rapid evolution toward the approach of Western companies in the way Chinese high-tech enterprises learn from their customers and how they apply that learning to create new products made for China (read a perspective on the evolution of its semiconductor sector in “Thee snapshots of Chinese innovation”). That approach is much less common at state-owned enterprises, since they are held back by hierarchical, benchmark-driven cultures.

Promoting collaboration

One area where multinationals currently have an edge is promoting collaboration and the internal collision of ideas, which can yield surprising new insights and business opportunities. In many Chinese companies, traditional organizational and cultural barriers inhibit such exchanges.

Although a lot of these companies have become more professional and adept at delivering products in large volumes, their ability to scale up an organization that can work collaboratively has not kept pace. Their rigorous, linear processes for bringing new products to market ensure rapid commercialization but create too many hand-offs where insights are lost and trade-offs for efficiency are promoted.

One Chinese consumer electronics company has repeatedly tried to improve the way it innovates. Senior management has called for new ideas and sponsored efforts to create new best-in-class processes, while junior engineers have designed high-quality prototypes. Yet the end result continues to be largely undifferentiated, incremental improvements. The biggest reason appears to be a lack of cross-company collaboration and a reliance on processes designed to build and reinforce scale in manufacturing. In effect, the technical and commercial sides of the business don’t cooperate in a way that would allow some potentially winning ideas to reach the market. As Chinese organizations mature, stories like this one may become rarer.

China hasn’t yet experienced a true innovation revolution. It will need time to evolve from a country of incremental innovation based on technology transfers to one where breakthrough innovation is common. The government will play a powerful role in that process, but ultimately it will be the actions of domestic companies and multinationals that dictate the pace of change—and determine who leads it.

 

India’s Slowdown May Be More Important than Europe’s Crisis

Never Mind Europe. Worry About India

NEW YORK TIMES  Tyler Cowen  May 6, 2012 

The economic slowdown in India is one of the world’s biggest economic stories, but it is commanding only a modicum of attention in the United States.

It may not even look like a slowdown because by developed standards, India’s growth — estimated by the International Monetary Fund at 6.9 percent for 2012 — is still strong. But a slowdown it is: the economy has decelerated from projected rates of more than 8 percent, and negative momentum may bring a further decline. The government reported year-over-year growth in the October-through-December quarter of only 6.1 percent.

What is disturbing is that much of the decline in the growth rate is distributed unevenly, with the greatest burden falling on the poor. If the slower rate continues or worsens, many millions of Indians, for another generation, will fail to rise above extreme penury and want. The problems of the euro zone are a pittance by comparison.

China commands more attention, but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will continue to grow, so under even modestly optimistic projections the Indian economy will be No. 1 in terms of total size.

India also is a potential force for energizing the economies of Bangladesh, Nepal and, perhaps someday, Pakistan and Myanmar. The losses from a poorer India go far beyond the country’s borders; furthermore, the wealthier India becomes, the stronger the allure of democracy in the region.

Why is India’s economic growth slowing? The causes are varied. They include a less than optimal attitude toward foreign business and investment: recall the Indian government’s reversal of its previous willingness to let Wal-Mart enter the retailing sector. The government also has been assessing retroactive taxation on foreign businesses years after incomes are earned and reported. Another problem is the country’s energy infrastructure, which has not geared up to meet industrial demand. Coal mining is dominated by an inefficient state-owned company and there are various price controls on both coal and natural gas. Over all, the country does not seem headed toward further liberalization and market-oriented reforms.

These problems can be solved. More troubling are the causes that have no easy fix.

Agriculture employs about half of India’s work force, for example, yet the agricultural revolution that flourished in the 1970s has slowed. Crop yields remain stubbornly low, transport and water infrastructure is poor, and the legal system is hostile to foreign investment in basic agriculture and to modern agribusiness. Note that the earlier general growth bursts of Japan, South Korea and Taiwan were all preceded by significant gains in agricultural productivity.

For all of India’s economic progress, it is hard to find comparable stirrings in Indian agriculture today. It is estimated that half of all Indian children under the age of 5 suffer from malnutrition.

Another worry is that India’s services-based growth spurt may have run much of its course. Call centers, for example, have succeeded by building their own infrastructure and they often function as self-contained, walled minicities. It’s impressive that those achievements have been possible, but these economically segregated islands of higher productivity suggest that success is achieved by separating oneself from the broader Indian economy, not by integrating with it.

India also has one of the world’s most unwieldy legal systems, and one that seems particularly hard to reform. On the World Bank’s Doing Business Index, the country ranks 132 out of 183 listed countries and regions, behind Honduras and the West Bank and Gaza, and just ahead of Nigeria and Syria. One undercurrent of talk is that the days of “the license Raj” have returned, referring to the country’s earlier subpar economic performance under a regime of heavy government regulation.

On the positive side of the ledger, the country retains a population with remarkable talent, energy and entrepreneurship. It has worldwide networks of trade and migration, and world-class achievements in entertainment and design, among numerous other strengths. Nonetheless, the previous pace of progress no longer seems guaranteed.

India may not be alone in this slowdown. There is a more general worry that the grouping of disparate giants known as the BRIC nations — Brazil, Russia, India and China — has, for some reason, lost much of its previous momentum. Last year Brazil grew at only a 2.7 percent rate, down from 7.5 percent, and Chinese and Russian G.D.P. growth are slowing too, to an unknown extent and duration. In the past, many countries engaged in catch-up growth have suddenly slowed and hit plateaus, although economists do not have firmly established theories as to when and why this happened. In any case it remains a real danger.

In the short run, we often focus on headlines, elections and fights between personalities and political parties. But the world is shaped by deeper structural forces, such as resources, technologies, demographics and economic growth rates.

We ignore India’s troubling trends at our peril.

 

 

Tenth Anniversary of the ‘BRICs’ – Is the Western World ‘Finished Financially’?

CNBC – November 30, 2011

The Western world has run out of ideas and is “finished financially” while emerging economies across the world will continue to grow, David Murrin, CIO at Emergent Asset Management told CNBC on the tenth anniversary of coining of the so-called BRIC nations of Brazil, Russia, India and China, by Goldman Sachs’ Jim O’Neill.

“I still subscribe and I’ve spoken about it regularly on this show that this is the moment when the Western world realizes it is finished financially and the implications are huge, whereas the emerging BRIC countries are at the beginning of their continuation cycle,” Murrin told CNBC.

Murrin added he believes the power shift from the West to emerging economies beyond Europe and the United States was “unstoppable” and he blamed a lack of ideas from Western leaders on how to stimulate growth together with contracted demographics and rising inflation as catalysts for Western decline.

“We suffer from no growth and we suffer from imported inflation… that means we have negative real growth and societies fracture when you have negative real growth and quite simply our society faces fractures for trying to stick Europe back together again is not going to work with that underlying paradigm, unless you can create five percent growth to overcome that imported inflation,” Murrin explained.

Murrin said that the East was depending less on the West and the rise of a consumer society was the first step in the expansion of an economic empire.

“If you look at the cycle of an empire system from regionalization to expansion to empire, the first phases of that catalyst are when you have a self fuelled consumer society and so actually that process of building your consumer base which is really what’s going on in China, day by day their consumer base increases and the dependence on the West decreases,” he said.

Containing China

Murrin added that while China is by far the biggest emerging economy and would be at the center of a new economic order, other emerging nations were set to join the BRIC countries and new political orders and alliances would come about as a result.

“This isn’t just a BRIC story, this is the end of the Christian Western Empire versus the rise of the whole emerging world led by China as the foremost and most powerful,” Murrin told CNBC.

“I think it’s going to be the whole world trying to contain China’s growth and there’s going to be completely new alliances that take place… between Australia, Japan and India and America and possibly Russia if the foreign policy is expansive enough, there’s going to be a ring of containment trying to hold this bulging entity which is like no other nation we’ve ever seen coherently challenge for control of world commodities and resources,” he added.

Intervention Not the Answer

Finally, Murrin stressed that Europe in particular was set to experience a rapid and deep decline and intervention by the European Union and its financial institutions was not a solution to stimulate growth.

“I think there’s a real reality amongst investors and just taxi drivers, that without growth, the system’s not sustainable, so intervention is just a drug and we all know that the more drugs you put into someone, the more the system becomes immune to their response and so I don’t see this as a solution,” he said.

Pointing to previous economic downturns, Murrin said the West was much less equipped than the emerging world to deal with its current decline.

“In all our examples of disastrous events, Argentina, Russia, the Asian crisis, they’re not good references for us in the West because they take place in countries with good demographics, good commodity stories and essentially underlying tides which lift them away from their problems,” he said.

“We in the West have none of those, we live in a world where resources are increasing in prices, where we’re a consumer society, we’re an old society, we’re not innovative, we’re not expansive, so we don’t have any of those natural lifting qualities to actually pick us out of the mire which is what decline is really about,” he added.

 

 

Possible Visa Program Expansion May Fuel Asian Purchases of US Homes

Foreigners are buying U.S. homes

CNN MONEY Les Christie, On Friday October 21, 2011

Hey, wealthy foreigners! Want to live in the U.S.? Buy a home here.

International purchases of American homes are ramping up, and a new Senate bill designed to boost the ailing real-estate market would encourage globe-trotting investors to buy even more.

The bill, co-sponsored by Charles Schumer (D-N.Y.) and Mike Lee (R.-Utah) would grant a U.S. visa to international investors who agree to spend at least $500,000 on residential real estate here.

If passed, the legislation could add to a surge in homebuying by international purchasers over the past year or two that’s already given some local U.S. markets a welcome boost.

Growing international interest

Foreigners spent $82 billion buying up U.S. homes in the 12 months ended in March, up 24% from a year earlier, according to the National Association of Realtors (NAR). That represents 8% of total U.S. sales.

In places like South Florida, international buyers already account for a whopping 25% of the market. California, Texas and Arizona also attract many foreign buyers, as do Hawaii and New York.

South Florida condo sales have been surprisingly strong, said Brad Hunter, chief economist for Metrostudy, a housing analytics company. “And the majority of those sales are to South Americans and Canadians,” he said.

All that international buyer activity has been a tonic for the anemic Florida market. Housing starts were up nearly 20% in the three months ended Sept. 30, according to Metrostudy.

Your local forecast

In Manhattan, there’s been a steady baseline of foreign condo buyers, said Jonathan Miller, CEO of Miller Samuel, a New York appraisal firm. They generally account for about 15% of investors, but in recent years, the buyer mix in New York City has shifted, he said.

When the euro was strong in the mid-2000s, buyers from Western Europe — and particularly Ireland — dominated.

The Irish “economy was so strong back home — the ‘Celtic Tiger’ years — that many were flush and wanted to invest and take advantage of the spread between currencies,” said Miller. “There were marketing groups that would go to Ireland and sell packages of condos here.”

Now, said Miller, the New York market now attracts more Asian and Latin American buyers than in the past.

Wei Min Tan, a real-estate agent with Charles Rutenburg Realty who specializes in selling Manhattan real estate to Asians, said his volume has more than doubled this year.

“I tell [buyers] it’s going to be a stable investment that should go up 10% a year,” he said. That’s “not as much as they might get in Hong Kong or Shanghai,” but there’s less volatility, he said.

Even better for homeowners, foreign sales can be very easy: The buyers are often affluent and buy more expensive homes. The median sale price of $175,000 they pay in Florida, for example, is well above the median sales price of $136,500 for all transactions.

There’s also no hassle over financing or waiting around for a mortgage lender to approve the deal: Overwhelmingly, international buyers pay cash.

Indeed, the Senate bill would require buyers to pay cash for the homes to qualify for the new “homeowner” visa. They’d also need to pay U.S. taxes and spend at 180 days a year in the country, and can’t work here or take out home-equity loans against the properties. In return, they’d get to live here for at least three years.

A vote of confidence

The program could improve the housing market nationwide, said Schumer.

“We think a very significant number of people will be brought in,” he said. “They’ll sop up the extra supply of homes we have right now that has been dragging down the economy.”

Foreigners seem to have more confidence in the U.S. real estate market than Americans do. Almost half of buyers surveyed by NAR cited the profitability or safety of their investments as the main factor that persuaded them to buy.

“With the economic distress in Europe,” said Miller, “people are still looking for safe havens for investing and the U.S. is perceived globally as safe.”

FCPA Enforcements Uneven Recently

David Griffith’s Note: we recently did a radio show on The Asian Business Hour about the Foreign Corrupt Practices Act.  Recent lack of enforcement actions for minimal violations where the companies self-report in their public filings suggests a de minimis threshold for violations enforcement.

August 11th, 2011

 

EITHER ENFORCE THE FCPA OR DON’T ENFORCE THE FCPA

 

The DOJ and the SEC (the “Enforcement Agencies”) should either enforce the FCPA or not enforce the FCPA.

For instance, Team Inc. violated the FCPA, but in its August 2nd SEC filing (here) the company stated as follows regarding its previously disclosed FCPA issue.  “In a letter to us dated July 12, 2011, the staff of the SEC informed us that it had completed its investigation and did not intend to recommend any enforcement action by the Commission or impose any fines or penalties against the Company. We have not received formal notification from the DOJ, however in July 2011, the staff of the DOJ informed us that it was likely that the staff would not recommend taking any further action or imposing any fines or penalties against the Company.”

How do we know that Team Inc. violated the FCPA?  Because the company said it did.  For instance, in this August 2010 SEC filing the company said as follows in reference to its previously disclosed internal review regarding its branch operation in Trinidad.  “The report of the independent investigator was delivered to the Audit Committee in March 2010 and to the DOJ and SEC in May 2010.  The investigation concluded that improper payments of limited size were made to employees of foreign government owned enterprises in Trinidad, but determined that the improper payments were not made, or authorized by, employees outside the one TMS Trinidad branch. The investigation of our other foreign operations did not result in any findings of significance and management has remediated or is undertaking remedial action on all matters identified in the investigation. Based upon the results of the investigation, we believe that the total of the improper payments to government owned enterprises over the past five years did not exceed $50,000. The total annual revenues from the impacted TMS Trinidad branch represent less than one percent of our annual consolidated revenues for all years presented. “  (emphasis added).

Accepting the Enforcement Agencies’ position that payments to government-owned enterprises fall under the FCPA, why didn’t the Enforcement Agencies bring an action?  Sure Team Inc. did voluntarily disclose the conduct at issue and the results of its investigation, but that could also be said for nearly all corporate FCPA enforcement actions.  Sure,  Team Inc.’s  ”improper payments” appear to have been isolated, were relatively minor in scope, and were not (per the company) ”made, or authorized by, employees outside the one TMS Trinidad branch.”  But again, the same could also be said for a significant percentage of all corporate FCPA enforcement actions. 

Using the Team Inc. standard, did Rockwell Automation deserve an FCPA enforcement action (see here for the prior post).  Did Comverse (see here for the prior post) deserve an FCPA enforcement action? 

If the FCPA contained a compliance defense (along the lines that a company would not be held vicariously liable for a violation of the FCPA’s anti-bribery provisions by its employees or agents, who were not an officer or director, if the company established procedures reasonably designed to prevent and detect FCPA violations by employees and agents) the end result in Team Inc. would have likely been the same and rightfully so.

But at least the result would have been grounded in law, not in the ad hoc, opaque, non-reviewable discretionary decisions of the Enforcement Agencies.

Looking for Work – Consider Moving to China

China Wants to Hire You — Should You Go?

ByJoe Mont, Staff Writer , On Thursday August 4, 2011, 8:00 am EDT

BOSTON (TheStreet) — NBA players may soon follow the lead of a growing number of Americans looking for work in China.

With the upcoming basketball season jeopardized by an expiring collective bargaining agreement, several NBA superstars — among them Dwyane Wade and Carmelo Anthony — have said they would consider playing for Chinese teams, which have been growing an increasingly rabid fan base.

In looking for opportunities in the so-called Middle Kingdom, the players are not much different than others turning to China for job prospects.

Put simply, there are at least jobs to be had. Unlike the U.S, with near double-digit unemployment, there is great demand in China for skilled professions such as banking and finance. That demand shows little sign of slowing, bolstered by the fact the country had 10% growth last year and will experience nearly the same rate this year.

There has traditionally been demand for English-language teachers in China, a job niche that typically attracts young graduates enticed by the prospects of living abroad. Now U.S. companies are looking to move top managers into Chinese territories, and executives have found themselves forced to relocate. Recently, General Electric moved the headquarters for its X-ray division and top division executives to China to capitalize on growth in the Asian marketplace.

Entrepreneurs are also enticed by lower taxes, decreased regulation, cheap labor and a pipeline into the massive Asian marketplace, while Chinese companies are looking to expand globally by building their U.S. brain trust.

An exact count of how many Americans are working in China is not readily available, as neither country has a uniform process for registering such employment status.

UniGroup Worldwide, an international mover of household goods with headquarters in St. Louis and Amsterdam, used its own shipping business to gauge the trend. It found a 46.7% increase in the number of American’s relocating to China for work over the past three years.

Its international migration study, released last week, was based on more than 15,000 household goods moves completed in 2010 for major corporations. In the U.S., UniGroup is affiliated with Mayflower Transit and United Van Lines.

It shows that last year European countries topped the list of destinations for U.S. residents moving abroad, consistent with trends over the past 10 years. Asian countries, however, appear higher and more frequently on the top destinations list.

The U.K and France were the top two countries American’s were moving to, followed by China. In 2000, China wasn’t even among the top 10.

Once you get there

Adapting to local customs can be just as challenging as the logistics of moving there for a transplanted worker.

Similar to Japan, there is a ritualistic nature to rules of etiquette and even to business cards — they should be printed with English on one side, Chinese on the other; always presented and received with two hands; and momentarily studied before being carefully tucked away.

English is not as much a barrier, but interpreting subtext is crucial, given China’s stoic traditions. Hierarchy and one’s place in the “food chain” of a company can dictate nearly all interactions, and direct confrontation is considered impolite.

The website The idle Kingdom, run by expatriates Matt and Kara Banker as a resource for those planning to live or work in China, offers a rundown of some of the common types of visas China requires of all working foreigners.

The “Z” visa is for those working for an established company in China and are tied to that workplace. Businesses are issued a limited number, which typically cover only full-time employees. A Z-Dependent visa is available for a spouse and children.

The “F” visa covers foreign experts in China temporarily to work on a specified project.

Transportation, if walking or biking doesn’t meet your needs, has to be addressed.

“Purchasing a car in Beijing has become much more problematic in the last year,” says Matt Banker, who moved to Beijing to be the youth director at an international church. “To get a car you will need to win the license plate lottery, about a 1-in-5 chance, then you can purchase a car for about two to three times the cost of what you would pay in America. You’ll also need to pass the written driver’s license test, since China doesn’t recognize foreign licenses.”

The other option is to hire a driver, which will cost roughly 5,000 yuan a month, or about $777.

Another expense beyond food and housing an overseas worker or employer will need to be prepared for: securing an international health insurance policy.

For those with children, English language schooling needs to be considered. Homeschooling can range from $500 to $20,000 or more for an international school, Banker says.

Stateside expenses, such as storage of belongings, and the cost of trips back home also need to be part of a total budget.

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income.

According to the IRS, however, you may qualify for a foreign housing deduction. Anyone who lives in China for more than a year also pays taxes to that country on their worldwide income (less than a year incurs only domestic income) at a progressive rate that ranges from 5% to 45%.

Decide fast

Despite the demand for foreign workers, the job market pendulum could eventually swing back toward America.

Within the next five years, the U.S. is expected to experience a “manufacturing renaissance” as the wage gap with China shrinks, proposes a recent analysis by Boston Consulting Group, a global management consulting firm. With U.S. wages stagnating while Chinese wages rise at about 17% per year and the value of the yuan continues to increase, the gap between U.S. and Chinese wages is narrowing rapidly.

“All over China, wages are climbing at 15% to 20% a year because of the supply-and-demand imbalance for skilled labor,” says Harold Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA‘ in the next five years.”

As the wage gap shrinks, once inventory and shipping costs are considered, China’s advantage may be minimal at best, BCG says. It predicts that products that require less labor, such as household appliances and construction equipment, are most likely to shift to U.S. production. Goods that are labor-intensive and produced in high volumes, such as textiles, apparel and TVs, will likely continue to be made overseas.

That trend may already be revealing itself.

NCR has flipped production of its ATMs back to domestic soil and toy manufacturer Wham-O last year returned 50% of its Frisbee production and Hula Hoop production from China and Mexico to the U.S.

 

The United States 2010 Report on the Asean Markets

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In August 2010, the United States International Trade Commission (ITC) published a report about the Asean markets. Asean is the Association of Southeast Asian Nations conformed by Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The report addressed Asean markets productivity growth, free trade agreements, manufacturing exports, and the future of Asean markets. One of the main conclusions of this report is the fact that China, not surprisingly, is the major competitor for foreign investment and manufacturing jobs for Asean countries. This article provides a summary of the ITC’S report.

The ITC report is titled ASEAN: Regional Trends in Economic Integration, Export Competitiveness, and Inbound Investment for Selected Industries (hereafter the Report) and was published in August 2010. This Report was requested by the Office of the U.S. Trade Representative and provides an overview of regional trends in Southeast Asia. The report states that the following factors benefit Asean”s manufacturing exports: low wages, diverse production conditions, high productivity growth, proximity among large markets, and the region’s trade policy environment, including free trade agreements. Hence, Asean markets still face some challenges such as a shortage of skilled labor and professionals, lack of an efficient system for product standards and conformity assessment procedures, inadequate physical and institutional infrastructure, among others. The six main priority sectors in the Asean markets are: agro-based products, automotives, electronics, healthcare, textiles and apparel, and wood-based products. Among these, the most relevant sub-industries are palm oil, motor vehicle parts, computer components, healthcare services, cotton woven apparel, and hardwood plywood and flooring.

The Report highlights the following conclusions,

(1) Asean countries “are committed to liberalize trade and investment in logistic services by 2013;” such as customs brokerage, freight forwarding and express delivery. These services currently vary in quality across members. For example, these services are “world-class” in Singapore, but poor in Laos, Cambodia and Burma, the Report says.

(2) Technical infrastructure such as broadband connections, and people’s computer skills are important areas to improve so Asean markets can expand their e-commerce transactions. E-Commerce laws have been implemented in general, but the technical and human resources factors need to improve.

(3) “China is the major competitor to Asean countries in foreign investment and integrating regional production chains.” Yet, China recently signed a free trade agreement with Asean countries; this is expected to offer better opportunities for Asean countries.

(4) Trade among Asean members must improve, the Report states; particularly in certain countries such as Laos and Cambodia, where procedural requirements are cumbersome. Importing and exporting procedures are easy in Singapore, Thailand, and Malaysia.

(5) Asean Industry Roadmaps for Integration (Roadmaps) have promoted tariff reduction and facilitate certain administrative procedures; yet, regional integration has not been fully accomplished through the use of these Roadmaps. Asean countries still see each other as competitors for inbound investment and jobs.

Courtesy of Internet Business Law Services

Related Articles

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• Ugly Royalist Series (6): Economist on ASEAN being “Loose stalks posing as a sheaf” (thaiintelligentnews.wordpress.com)
• ASEAN Mediates in Cambodia, Thailand Conflict – Voice of America (news.google.com)
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India Will Overtake China by 2025? Not So Fast…

India won’t outpace China without a few miracles

FORTUNE

Anja Manuel, contributor, On Friday February 18, 2011

Several recent economic reports glowingly predict that by 2013-15, India will start outpacing China’s stunning annual GDP growth rate of 8.5-9.5%. A number of trends in India lead to this conclusion, including a young, increasingly educated labor force, relatively few retired people to care for, India’s high savings rate, the massive structural reforms the Indian government continues to undertake, and increased infrastructure spending.

The UN estimates that India’s age dependency ratio (the number of working age people supporting children and the elderly) will improve substantially, from 55.6% in 2010 to 47.2% in 2025. China, by contrast, has already reaped the benefit of a large working age population, which will soon begin to age and decline: its dependency ratio will rise from 39.1% in 2010 to 45.8% in 2025. India alone will contribute 26% of the total rise in the world’s entire working age population over the next 10 years, thus — the argument goes — adding a large number of skilled workers, who will have larger savings, which can in turn be invested in their economy.

India will only be able to take advantage of this “demographic dividend,” however, if it can educate its people, move more quickly on long-delayed business reforms, and tackle the environmental consequences of an even larger population.

The Indian government has taken promising steps to improve its inadequate education system, but an enormous amount of work remains. Only 74% of Indian men and 48% of Indian women are literate, compared to 96% (men) and 88% (women) in China. India’s much-touted knowledge economy employs only about 2.23 million Indians out of a 750 million strong working population.

Prime Minister Manmohan Singh‘s government is aware of these deficiencies and has started to implement a series of reforms, including setting aside $60 billion over the next several years to augment the primary education system, tabling bills that allow foreign education providers to operate in India, and others that will facilitate private sector investment in Indian education. Thanks to these reforms, the number of children out of school has dropped from 18 million in 2000 to 5.6 million in 2005, and dropout ratios in primary schools have improved as well.

Obstacles to growth

Even with these promising developments, however, the challenges ahead are daunting: at present, only 12% of India’s citizens enter higher education, and the government hopes to increase this to 21% by 2017. The Indian Institutes of Technology — a group of universities focused on engineering and technology — are world-renowned, but offer only a miniscule 7,000 places to students each year. The Indian government has identified a skills gap in between 240 — 250 million persons in the next ten years. Current vocational and technical training schools unfortunately only have the capacity to absorb 1.1 million students a year. Kapil Sibal, the talented and energetic Minister for Human Resource Development has a herculean task ahead.

Indian corporate sector reforms are also only half complete. Despite Prime Minister Singh’s admirable efforts, the legendary “license raj” — the elaborate red tape required to set up and run businesses in India — is still much in evidence. Again, the government has taken some steps in the right direction: it is actively working to simplify the byzantine tax code, and many new sectors have been opened to foreign direct investment. In spite of these promising steps, India still ranks a low 134 out of 183 countries on the World Bank‘s Ease of Doing Business Index. For example, the per capita cost of setting up a warehouse in India — which involves the acquisition of permits and licenses as well as obtaining necessary utilities connections — is slightly more than four times higher than in China.

Indians are increasingly frustrated at the slow pace of reforms, which the Congress-led government has now promised for the past six years. Speeding up their pace is critical both to make local businesses more efficient, and attract foreign direct investment (which lags far behind foreign investment in China and sank by over 30% in 2010).

Finally, before we celebrate a “demographic dividend,” can the Indian subcontinent (and the world) sustain 1.4 billion Indians? Calcutta’s population is more than twice as dense as that of New York City. Food inflation currently plagues the Indian economy: onion and other vegetable prices (staples for most poor Indians) are up 71% since last year. Streamlining the agricultural supply chain can help to relieve immediate food shortages, but in the long run, environmental degradation will make it difficult to vastly increase crop yields.

Global warming and the “atmospheric brown cloud” — a dense smog that permanently hangs over much of India from burning diesel, wood, and dung — negatively impacts crop yields already. To compound the problem, India suffers from chronic electricity shortages of about 8%. And with a growing middle class buying more TVs, air conditioners and the like, the situation will only get worse. India is already the world’s third largest-emitter of greenhouse gases, and that is with is current low per capita emissions rate. One American currently creates almost 13 times as much CO2 per year as one Indian. Combine a more carbon intensive, prosperous economy with a rapidly growing population, and the environmental problems India faces look even more overwhelming than its education and economic challenges.

As desirable as Indian economic growth is — are India and the planet ready for 1.4 billion more prosperous Indians?

Anja Manuel is a Principal at The RiceHadley Group LLC and a Visiting

 

Asian Business Hour Shows on February 16th and 23rd

THE ASIAN BUSINESS HOUR – FEBRUARY 2011 – UPCOMING SHOWS

February 16, 2011: Doing Business in India with Gunjan Bagla. Mr. Bagla is the author of the acclaimed book “Doing Business in 21st Century India: How to Profit Today from tomorrow’s most exciting Market” and the Managing Director of Amritt, Inc. He has been interviewed on Fox Business Television, BBC World News, BBC Television’s The Hub with Nik Gowing and National Public Radio’s To The Point with Warren Olney. He’s been quoted in the New York Times, the  Los Angeles Times, Business Week, Industry Week, the Hollywood Reporter, and other global media for his expertise on India. His articles have appeared in Business Week, CIO Magazine, Purchasing Magazine, Quality Magazine, Business World, Daily Variety, and many other publications.

February 23, 2011:  Customs and Transportation Issues in Exporting and Importing with Susan Kohn Ross. Ms. Ross is a partner with the Los Angeles office of Mitchell Silberberg & Knupp LLP (MS&K) where she heads their international trade practice. She represents companies and entities in both administrative and commercial settings, regarding the importation and exportation of goods before the U.S. Customs and Border Protection, Food and Drug Administration (FDA), Departments of Justice, Commerce and State, Federal Maritime Commission, U.S. Trade Representative and International Trade Commission, the Court of International Trade and various other federal and state courts and agencies.