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Ticker
erman Chamber
01 | 2012 February – March Business Journal of the German Chamber of Commerce in China www.china.ahk.de
Interview with Dr. Marc Wucherer
Revealing Siemens’ Chinalization
Strategy
AerospAce
Another One of Chinas Leads Worth Following
The Renminbi
Exploring Possibilities of
International Transactions in CNY
Hegde Funds
Investing Through a Global
Financial Firm

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4 February - March 2012
Steep Rise Ahead
China’s aviation sector is taking off into new spheres according to the latest numbers. In the
12 th Five-Year Plan the Chinese government stated its plans to develop the aviation industry
with two digit growth rates until 2015. More than USD 230bn will be invested in the industry
throughout the next five years. A minimum of 45 new airports will be constructed and 88 airports
expanded. The largest investment is the new Daxing airport in Beijing with approximately
RMB 100bn. China’s passenger rate will rise by 70% until 2015 and will reach 1.5bn passengers
by 2030. The total amount of airplanes in China will double until 2015 to almost 5,000.
These figures are promising for a wide range of companies from Germany. Not only large aircraft
manufacturers will profit from China’s rapidly evolving aviation industry. Foremost among
the beneficiaries are the hundreds of suppliers of technology and infrastructure that will be
needed to provide the resources necessary to develop China’s aviation sector. They will supply
airplane components, flight surveillance & radar equipment, maintenance services and simulators.
Other sectors like construction, manufacturing and tourism will also profit from the boom
of aviation.
Along with a thriving automobile sector, the fast developing aviation industry plays a major
role in improving mobility in a country bigger than Europe. Today, these shortened distances
greatly enhance exchange and diversification – within China and throughout the world. And it
happens at an impressive rate.
I appreciate this development and believe that it supports our very own goals – to enhance the
relationship between German and Chinese businesses; to create a positive environment for joint
development and progress; and to profit from each other’s strengths.
I wish you an excellent start to the Chinese year of the dragon. May your business and personal
life prosper in China’s rich pool of possibilities.
Yours sincerely,
Ulrich Walker
Mr. Ulrich Walker
Chairman of the Board
German Chamber of Commerce in China • Beijing
Executive Vice President
Daimler AG
Chairman & CEO
Daimler Northeast Asia Ltd.

February - March 2012 5

6 February - March 2012
Cover Story:
Taking off
p. 10
In the Spotlight:
Dr. Marc Wucherer,
President of Industry
Sector, Siemens North
East Asia
p. 22
Chamber Affairs
Event Highlights
in Shanghai
p. 55
CONTENT
Business
8 China News
Cover Story: Aerospace
11 Taking off
15 SatCom in China
18 The People’s Pilot
20 Year of the Tourist
In the Spotlight:
23 Dr. Marc Wucherer,
President of Industry Sector,
Siemens North East Asia
Features
26 County-level City Economics
28 Internationalisation of the Renminbi
30 The Leadership Formula
32 China’s Nascent Hedge Fund Industry
Regional News
Beijing
34 Member Affairs
38 Chamber Affairs
Shanghai
46 Member Affairs
54 Chamber Affairs
60 Caution with China Investments
South & Southwest China
62 Member Affairs
66 Chamber Affairs
In Person:
36 Dr. Karl-Thomas Neumann:
Volkswagen Group China
72 GCC Boards
73 About us

February - March 2012 7

BUSINESS | China News
300 New Company Listings on
the Shanghai and Shenzhen Stock
Market
PricewaterhouseCoopers (PWC) is expecting
300 new companies to be listed on the stock
market in Shanghai and Shenzhen in 2012.
Altogether a sum of RMB 270bn to RMB
300bn will be collected. There will be about
40 IPOs on the Shanghai Stock Exchange
and about 260 IPOs in Shenzhen. The overall
budget will be valued at about RMB 100bn
and RMB 200bn, respectively.
China is the Second Largest
Consumer Market for Luxury
Goods Worldwide
The summit conference “2012 Luxury goods
in China” took place on 3 rd January 2012
in Zhengzhou. At the same time, the “2011
China Luxury Report” was published, which
states that China has become the second
largest consumer market for luxury goods
worldwide. An example is a Luoyang Dukand
jug of Schnapps, which was auctioned at the
conference for RMB 380,000.
Express-Service Earnings up to
RMB 143bn in 2015
On 31 st December 2011, the State Post
Bureau published the Express Service
Planning for the period of 2011 to 2015.
According to this information, express
business earnings will rise to more than
six times the current amount by 2015. The
average yearly increase of the business
earnings will amount to 21%. By that time
the express business earnings will amount
to as much as RMB 143bn, which represents
a yearly increase of 20%. This corresponds
to 55% of the total revenues of the postal
industry. In addition, customer satisfaction
was also factored into the planning.
Decrease of Fund Volume by RMB
300bn
According to the statistics of Tianxiang
Investment Consulting Co. Ltd, the total
assets of all types of funds (excluding GDII-
Qualified Domestic Institutional Investor
Funds) amounted to up to RMB 2.1081tn by
8 February - March 2012
the end of 2011. This represents a decrease of
RMB 303bn compared to the end of 2010. The
complete share of all the funds amounted to
RMB 2.2862tn, which represents a decrease of
RMB 6.1bn compared to the end of 2010. The
main reason for the decrease in fund shares is
apparently the stock market crash.
Price for Soft Gold Rises up to
RMB 200,000 per Kilo
Because of its scarcity, positive health effects
and price, Cordyceps Sinensis, known as “soft
gold”, is very popular with investors. Its price
consequently rose since December 2011
and even reached a value of RMB 880 per
gram and RMB 200,000 per kilo. This equals
a rise of 30% compared to November 2011.
In comparison, one gram of gold is priced at
RMB 388.
China’s Highway System Second
Longest in the World
According to statistics, the Chinese highway
system reached a length of 74,000km at the
end of 2010 and therefore ranked second after
the United States. Experts assume that by 2015,
China’s highway system will reach a length of
110,000km. Currently, there are 19 highway
companies listed on the stock exchange. As per
published data, the gross profit ratio of these
companies is extremely high, adding up to over
50%. According to data from the third quarterly
report of 2011, the sum of the gross profit ratios
of these 19 companies adds up to 59.27%. This is
considerably higher than the gross profit ratio of
the real-estate sector, which adds up to 30-40%.
National Tax in Guangdong
Province Accounts for more than
RMB 778bn
According to data from the “Guangdong
Provincial Office of the State Administration of
Taxation”, the overall earnings of the national
tax system amounted to RMB 778.01bn, which
represents an increase of 14.5% compared
to the previous year. The overall earnings
generated from the national tax in Guangdong
Province have continuously ranked among the
top sources of tax revenue in China during the
last 17 years. In 2011, the revenues from the
corporate income tax in Guangdong amounted
to RMB 746.349bn, an increase of 28.4%
compared to the previous year.
One Kilo of Jadeite Costs RMB 2mn
Recently, the price for one kilo of jadeite
reached RMB 2mn; in 1995 the price was still
RMB 5,000 per kilo. The big price difference
is also notable in the finished product. A jade
product that cost RMB 2,000 a couple of
years ago now has a value of RMB 1mn. The
price for tourmaline also increased quickly.
Even though the precious stone was not
famous a few years ago, its price increased to
eight times its original value in the last five
years.
The Demand for Gold Reached
more than 700t in 2011
The General Secretary of the China Gold
Association, Mr. Zhang Bingnan, stated that
between January and October 2011 a total of
290.75t of gold were produced. This represents
an increase of 4.96% compared to the
previous year. The production for the whole
year of 2011 is estimated at 355t to 360t.
According to the statistics of the China Gold
Association, the demand for gold in China in
2010 added up to 571.5t and ranked second
worldwide. The yearly demand for gold will
exceed 700t in 2011.
Consumers Saved around RMB
325bn through Online Shopping
in 2011
According to statistics from iResearch in
2011, the total value of the online shopping
market was RMB 736.4bn. In a comparison
between the prices of online and offline
goods, the biggest online search engine,
“Etao”, found that the average price of online
goods is 30% cheaper than that of offline
goods. Therefore, China’s online users saved
around RMB 325bn in 2011.
Bank of China Awaits an
Economic Bottom Out in the first
quarter of 2012
The growth of the global economy in 2012 is
going to decrease and the inflationary pressure

is not essentially weakened, according to a
statement from the Bank of China. Mr. Cao
Yuan Zheng, the Head of Economist of the Bank
of China, said that the Chinese economy awaits
a bottom out in the first quarter of 2012.
China’s GDP growth reached was 9.3% in 2011
and they predict 8.8% growth in 2012. It is a
decrease of 0.5% compared to 2011.
21 Chinese Brands Belong to the
top 500 brands
The “2011 World’s 500 Most Influential
Brands” list was published on 22 nd December
2011 in New York; it includes 21 Chinese
brands. Chinese Central Television (CCTV),
China Mobile, Industrial and Commercial
Bank of China (ICBC) and State Grid belong
to the Top 100. Within these 500 top brands
are 224 brands with a brand history of more
than 100 years. One of the brands is Tsingtao
beer, with a history of more than 108 years.
Central and Western Regions
Experienced Rapid Export Growth
in 2011
The export growth was considerably higher
in the central and western regions in the first
eleven months of 2011 than the nationwide
export growth, according to customs statistics.
From January to October 2011, the total value
of the external trade of Chongqing was USD
21.35bn. This is a 1.3 fold increase compared
to the previous year. This increase is the best
countrywide for the last four months.
Total Output of the Press and
Publishing Industry was RMB 1.3tn
The media forum held on 17 th December with
the topic “Reform of the Development of the
Media and the Cultural Scene” was discussed
by experts and representatives from TV,
newspaper and radio. During the forum, the
Deputy Chief Editor of People’s Daily, Mr. Xie
Guoming, said that the total output of the
press and publishing industry was RMB 1.3tn.
The total print fund of the publishing industry
and the total circulation of all publications
ranked first worldwide. The total circulation
of the electronic publications ranked second
worldwide. The yearly output value of the
print industry ranked third worldwide.
Reduction of Customs Duties for
more than 730 Imported Products
Since 1 st January 2012, the imported customs
duties for more than 730 products decreased in
accordance with the Ministry of Finance. Imports
should be expanded to cover the demand of the
economic and social development and to satisfy
the consumer. The average import customs
duties of the 730 products are 4.4% - 50% less
than other countries.
Over 1,000 Merger & Acquisition
Transactions in 2011
According to information from the Zero2IPO
research centre, around 1,040 M&A
acquisitions occurred this year in China, with
a volume of transactions of 880 cases that
were externalized. This volume of transactions
was USD 56.21bn and the average transaction
volume was USD 64.21bn. It is an increase
of about 67% compared to the 662 M&A
transactions in 2010 and an increase of about
62% compared to the volume of transactions
in 2010, which amounted to USD 34.8bn.
Online Banking Market Expanded
Rapidly in 2011
E-commerce in China developed rapidly in
2011. This is the reason that the online banking
market expanded so quickly. The “2011 China
E-banking Survey” of the China Financial
Certification Authority showed that the
proportion of individual online banking users
has reached 27.6%. The percentage of mobile
banking users increased 1% compared to 2010
and reached a total of 6.3%. Security for mobile
banking seems to be the biggest problem.
Internet Population at 505mn
The number of Internet users in China is
estimated to have reached 505mn as of
November 2011, up from 485mn at the end of
June, the China Internet Network Information
Center (CNNIC) said recently. The Internet
penetration rate rose to 37.7% in November,
up 3.4 percentage points from the end of 2010,
according to CNNIC. As of the end of November,
the number of microblog users exceeded 300mn,
jumping from 195mn by the end of June.
M-O-M Percent Change
Percent of GDP
Total Value, RMB 100mn
Percent Change, Average Consumer Prices
Consumer Confidence Index 2011
110
108
106
104
102
110
98
96
94
92
90
108.1
105.6
105
Source: China National Bureau of Statistics
45
40
35
30
25
20
15
10
5
0
www.china.ahk.de
103.4
100.5
97
June July Aug Sept Oct Nov
Goods & Services Exports
Source: IMF
Inflation
9
8
7
6
5
4
3
2
1
0
-1
39.1 38.4
35
26.7
29.8 30.2
2006 2007 2008 2009 2010 2011
Total Retail Sales of Consumer Goods
17,000
16,500
16,000
15,500
15,000
14,500 14,565.1
14,000
1.19 1.47
14,408
7.77
15,865.1
5.9
14,705
Source: China National Bureau of Statistics
-0.68
2005 2006 2007 2008 2009 2010 2011 2012
Source: IMF (2012 is an IMF estimate)
16,546.4
5.8
16,128.9
June July Aug Sept Oct Nov
3.33 3.3
February - March 2012 9

BUSINESS | Cover Story
10 February - March 2012

©imaginechina.com
Taking Off
In the beginning there was the word. And
the kite. And the Chinese. During the second
century BC the latter invented the kite and
named it ‘fengzheng’ which literally means
“instrument in the wind”. According to some
historical records these kites were huge in
size and strong enough to carry up men in
the air. Back then, China deployed the first
man-made flying object mainly for military
purposes such as spying on enemy territory.
Later on, during the Tang Dynasty (7-10 th
Cent), the Chinese also used kites to entertain
themselves and making kites even became a
profession during the Song Dynasty (10-13 th
Cent). At that time kites were transported
from China to the West, which led to the formation
of Asian and Western kite culture after
years of development. During this process,
traditional Chinese culture integrated the
country’s kites craft forming a kite culture
with unique characteristics. The popular British
scientist Dr. Joseph Needham described it
in his book “A History of China’s Science and
Technology” as one of the major scientific
inventions which came from China to Europe.
The National Aeronautics and Space Museum
in Washington D.C. placed a plaque in one
of its pavilions claiming that “the earliest
aircraft were the kites and missiles of China”.
With its kites, the nation marked the start of
the world’s aviation industry. It was not until
the 15 th century when Leonardo Da Vinci created
the first flying machine that the aviation
industry began developing into what it
is today. And it wasn’t until the 21 st century
that China could reclaim its lead in the flying
industry and even arrive at the verge of a
new era in its airline history.
China’s Aviation Industry in the
Making
China’s first plane was designed and flown by
Feng Ru in 1911, when he returned from his
childhood country of the US to his country of
origin, China. He founded the Guangdong Air
Vehicle Company and prepared for the development
of the aviation business in China by
establishing a flight team for the Guangdong
Revolutionary Government. Before the Chinese
Civil War, the only three airlines operating in
the Republic of China (ROC) were the Civil Air
www.china.ahk.de
by SELMA KOEHN
Transport, the joint venture between the ROC
government and Pan American World Airways
and the joint venture between the ROC government
and Lufthansa. When the People’s
Republic of China was founded in 1949, there
were only 36 airports on the vast Chinese
territory and most of them were unable to receive
large aircraft. Establishing the country’s
aviation industry was atop the agenda of the
Chinese Communist Party. The world situation
as well as the needs of national defence
prompted the newly established country to set
up its aviation industry bureau and, hence, the
heavy industry ministry was founded in Shenyang,
Liaoning Province in 1951. Developing
the industry by repairing, imitating, remodeling
and then independently designing planes
was the guiding principle and proved successful.
But air travel in China was still rare.
Only one airline remained - the Civil Aviation
Administration of China (CAAC) - and the airports
and airspace were all controlled by the
military. Technical equipment such as radars
was primitive, which meant that most airplanes
couldn’t fly in inclement weather. During
the period when Deng Xiaopeng ruled the
country, China’s civil aviation and air travel
industry really took off. Existing airports were
rapidly expanded and renovated and about 40
new ones were built. Deng’s policy of modernization
gave the civilian arm of government
reins over air travel in 1980 and increased
the number of regional airlines. In 1984, the
airline division of the CAAC was split into six
different corporations while the airline regulation
division remained China’s top administrative
aviation body. Some of China’s largest
airliners were established during Deng’s time.
China now possesses 43 airlines (only eight
are privately held), including:
� Xiamen Airlines: founded in 1984; the
first airline company in China to be run by
private individuals
� Shanghai Airlines: founded in 1985;
China’s first commercial airline to be responsible
for its own operational profits
and losses. In 2010, it became the 19 th
member of the Star Alliance
� China Southwest Airlines: established in
1987; the first major airline to abide by
the principle of separation of responsibil-
February - March 2012 11

BUSINESS | Cover Story
ity between administration and enterprise;
merged into Air China in 2002
� China Southern Airlines: founded in 1988;
China’s largest airline due to its annual
passenger traffic volume and one of the
world’s ten leading passenger airlines today
� Air China: created in 1988; the nation’s
largest commercial airline in terms of
traffic volume and company assets. The
airline is the only national flag carrier in
China
� China Eastern Airlines: founded in 1988;
based in Shanghai’s Pudong International
Airport
� Hainan Airlines Company Limited: established
in 1993; the first Chinese civil airline
company to offer direct flights from
Beijing to Berlin in 2008
Since 2000, China’s airline industry has been
growing at an annual rate of 16%. In 2005,
China took a significant step in helping to
promote the domestic aviation industry by
ending the state monopoly in the airline sector.
The General Administration of Civil Aviation
of China (CAAC) declared that it would
open China’s aviation sector and encourage
private and foreign investment in Chinese
airlines. This change was a move to end state
monopoly in the sector, promote the development
of the private economy as well as to
make air travel available to more Chinese.
As the market opened further in accordance
with China’s involvement with the World
Trade Organization (WTO) this shift enabled
the country to meet the growing demand and
competition from foreign airlines. China’s
first privately run airline, Okay Airways, was
established in 2005 and became the first
Chinese carrier to operate the largest model
of the Boeing 737 family. Following the new
regulation, anyone with a minimum of three
airplanes could set up an airline company.
This led the CAAC to issue a total of 14 air
operating certificates (AOCs) to private domestic
airlines in the same year. Furthermore,
Chengdu’s United Eagle Airlines, Shanghaibased
Spring Airlines and Beijing-based Okay
Airways received permission from civil aviation
authorities to offer low-cost services as
the first private airlines. By end of 2005, two
more private airlines, East Star Airlines and
Junyao Group (Shanghai Auspicious), followed
suit.
But still, China’s top three airlines are stateowned
companies - China Eastern Airlines,
China Southern Airlines and Air China. The
CAAC governs the country’s civil aviation industry
and handles air traffic for around 1,000
domestic airlines covering 140 cities to date.
12 February - March 2012
China’s airports receive 130 international
airlines and 21 regional airlines, flying to 60
cities in 40 countries.
The C919 and German
Involvement
With air travel volumes expected to peak
within the upcoming 20 years, the Chinese
government is determined to develop a large
civil aircraft domestically, to expand its parts
industry and to further increase its capacity
to build its own large aircraft. Hence, the
manufacturing of large, globally competitive
aircraft is a key component of China’s plan
to build an innovation-oriented country. “Let
the Chinese big airplane soar in the blue sky.”
Those were Wen Jiabao’s words back in 2008,
when he announced the start of the development
of the C919, China’s second own build
airplane. He listed the aerospace industry as
one of China’s 16 major development plans
in the 12 th Five-Year Plan to be promoted
through easier access to credit, increasing
governmental support including R&D spending
and tax incentives as well as price incentives
and quotas. In 2011 alone governmental
investments were around USD 230mn.
The C919 is the second airplane to be fully
built in China, after the ARJ21, a regional jet
with a space capacity of up to 90 passengers.
The ARJ21 was build by the state-owned
AVIC Commercial Aircraft Engine Company
(ACAE), a consortium of six companies and
aerospace research institutes carrying out the
development and manufacture of the aircraft.
It is intended to serve the domestic need for
technologically advanced, regional jets and
to establish China as a commercial aerospace
manufacturer. In 2008 the plane already
embarked on its first flight and will be going
into service this year.
As a narrow-body commercial airplane the
C919 is designed to carry up to 150 passengers.
It is comparable to the Airbus 320 and
Boeing 737 and will be built by the stateowned
Commercial Aircraft Corporation
(COMAC) which was established in 2008.
The aircraft will be deployed for the domestic
market and should be an alternative for
Chinese carriers. The first flight is planned
for 2014 and the commercial availability for
2016. COMAC claims that it will be more
advanced and lower in price than the current
B737 and A320 family, e.g. 12-15% lower
fuel consumption. Other experts even say that
the plane could take market share away from
Boeing and Airbus if it can establish a comparable
safety and reliability record and can
offer improved comfort - provided that Boe-
ing and Airbus do not develop an even better
aircraft beforehand. Regarding all wide-body
aircraft like the A380, China will still import
them at least through 2020. The A380 was
“designed to suit the needs of the East Asian
and Middle Eastern markets, especially the
fast-growing Chinese market,” said Thomas
Enders, CEO Airbus, during a press conference
late last year announcing the hand-over of
the first out of five models to be delivered to
China Southern Airlines, making the company
the first operator of the A380 in China and
the seventh globally. The Chinese government
has attempted to leverage airliner purchases
in exchange for arrangements that it hopes
will lead to technology transfers into China’s
aviation manufacturing industry.
In the ARJ21 and C919 airliner projects in
particular, a condition for foreign aerospace
firms to be selected as suppliers has often
been that a local production facility must be
established. Partly as a result of these policies,
foreign aerospace manufacturers are engaged
in numerous joint ventures and other
technology transfers with China’s aviation
industry.
One recent example for a successful market
entry is the German middle-sized company
BROETJE-Automation, which won a contract
for the planning and manufacturing of the
C919 Middle Fuselage Assembly line as turnkey
provider. It is the first state-of-the-art
aircraft structure assembly line of this kind to
be set up in China and is seen as a milestone
for the further progress of the C919 project.
Another German company which is hoping to
play a major role in the development of the
C919 is MTU Aero Engines, Germany’s leading
engine manufacturer. The company expects
that in the coming years a Chinese consortium
will be established to develop a competitive
engine which it would like to participate
in. “The options range from the development
of supplier relationships to collaboration on
engine design or setting up a joint venture
with the Chinese engine manufacturer AVIC
Commercial Aircraft Engine Company (ACAE),”
said Mr. Holger Sindemann, President and
CEO MTU Maintenance Zhuhai. “MTU is currently
in the process of performing a cycle
study together with ACAE, which will enable
MTU to determine what an engine for
the C919 must be like. Furthermore, we are
envisioning a partnership similar to the one
ACAE has in the maintenance sector with
China Southern Airlines.” All these steps are
being carried out in close consultation with
MTU’s strategic partner, Pratt & Whitney,
one of the leading global manufacturers. “The

challenges for foreign companies to engage
themselves in this project lie in the whole
process of technical communication, supplier
pre-selection, development of tender
documents and contract negotiations, all of
which requires the very intensive resources of
highly professional staff including the ability
to communicate the technical and contractual
content in Chinese language and a ‘new’
cultural environment,” states Dr. Andreas
Szesny, Partner SEN-Consult Ltd. “Quite demanding
negotiations include legal issues like
intellectual property rights and the tendering
system which puts high price pressure on
the supplier, although technical abilities are
also considered in the evaluation process.”
More investment opportunities will arise as
the Chinese aviation industry is about to
make a great leap forward which will create
manifold opportunities. And the C919
project is not the only one. There are further
areas of potential demand including other
AVIC companies, the Airbus A320 project in
Tianjin, the setup of airport facilities, ground
services or even the Shenzhou programme,
China’s spaceflight programme which started
back in 1992. Its latest unmanned spacecraft
Shenzhou 8 was launched in November last
year and conducted life sciences experiments
on its mission in conjunction with German
scientists from the German Aerospace Center.
Furthermore, China plans to send a capsule
to the moon in 2013 and will organise a
manned mission in 2020.
Outlook
Over the past decade China advanced its
aerospace industry at an impressive rate,
much faster than the country’s GDP. The
CAAC expects an annual growth rate of 10%
for the upcoming years. Analysts predict that
China will be the world’s second largest aviation
market after the US by 2020. And by
2028 the country even aims to be the second
largest key market for civil aircraft, behind
the US. Not only did the rapidly growing
governmental support develop China’s aerospace
sector enormously but the latter also
benefited from its increasing participation
in the global commercial aerospace market
and the supply chains of the world’s leading
aerospace firms. How it further expands now
will surely have profound implications for
the global industry, which will drive a strong
growth in air traffic as well as attract significant
investment in China’s aerospace industry.
Until 2020 more than 3,700 narrow-body
aircraft are expected to be required and the
development of planes for airfreight as well
www.china.ahk.de
as helicopters will progress. Furthermore,
over 97 new airports are expected to be built,
totalling more than 244 airports in the country
handling an estimated 700mn people and
10mn tons of cargo a year. To sustain this
growth, China needs to match these numbers
with adequate manpower. Local aviation authorities
estimate that the industry will need
55,000 new pilots over the next twelve years,
plus thousands more maintenance engineers
and ground handlers. Even more challenges
remain. However, China is already taking
actions to overcome major challenges such
as improving its technological capabilities,
enhancing aircraft manufacturing expertise,
strengthening the local supply chain, establishing
a trusted airline service culture,
creating a well-funded airplane development
and design centre, increasing manufacturing
capabilities for military aircraft and building
partnerships with Western suppliers.
Regardless of what lies ahead, the fast development
of China’s aviation industry is
impressive. Certainly, the sounds in the skies
made by Chinese airplanes will differ from
those that were heard back in the second
century BC when soaring kites filled the air
with music.
February - March 2012 13

BUSINESS | | Cover Story
14 February - March 2012
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SatCom in China
Market Perspectives and Investment Opportunities
With the beginning of the third millennium of
the Common Era, China has grown into a major
player in the global space markets, showcasing
specific domains of excellence through
its ambitious space programmes, fuelled by
investments in defence and institutional programmes.
As it stands right now, the Dragon
Nation has committed sufficient resources
to the space sector to become comparable
to other global players. The European Space
Agency (ESA), which coordinates European
space activities both in scientific and industrial
terms, commissioned a “Survey of the Chinese
and Indian Telecom Space Industry and
Market” to better understand the background
against which this success has been achieved.
This article deals with the insights gained from
that survey and analyses the market perspectives
and investment opportunities for German
companies in the aerospace sector.
The Satellite Telecommunications
Sector
In the last 10–20 years, space has become more
and more commercially attractive; nowadays
the commercial sector is readily comparable
to the institutional one. In fact 2001 was the
first year that the commercial sector outran
the institutional one in terms of expenditure.
At that time the world space market, including
commercial revenue generated by space applications
(telecommunication, navigation, Earth
observation), was estimated to have reached
EUR 167bn. In 2001 the budgets for institutional
space programmes worldwide totalled EUR
42bn (civil activities: EUR 26bn; defence activities:
EUR 16bn). The world commercial market
– satellites, launch services, and operations – in
2001 was estimated at EUR 49bn. Of the three
space application areas – telecom, navigation,
and Earth observation – the telecom sector is by
far the most developed. Telecom has reached
its leading position especially because of the
continuing worldwide growth of satellite TV
platforms. This growth is forecasted to continue
in the years to come with double-digit
growth rates. A market that features doubledigit
growth rates is attractive to numerous
players, be they active in the areas of satellite
design and construction, launch services, or
operations. Data on the top-20 fixed satellite
operators showcase the involvement of the
leading players (Reference: Company reports
and Space News research).
Top-20 fixed Satellite Operators
in the period 2007-2009
As seen in the table below, the top-20 fixed
satellite operators run 214 satellites (an increase
of 2% vs. 2007 numbers), and achieved
revenues of approximately USD 9.6bn in 2009.
Intelsat and SES dominate the market; SES, the
SatCom operator out of Luxembourg which
operates the Astra satellites, achieved revenues
of nearly USD 2.4bn in 2009. Four major players
– the so-called “Big 4” – from Luxembourg, the
US, France, and Canada dominate the market,
while China and India, the most populous countries,
are not represented in this top-20 list, at
least until now. The logical question is: Will this
change – possibly due to strong growth in the
Asian satellite telecom market and/or because
the financial crisis hit Europe and the US more
severely than China and India?
The Satellite Telecom Market
Initiated at the end of 2008, the ESA study of
the SatCom sector was immediately confront-
Top 20 fixed Satellite Operators in 2009
www.china.ahk.de
by NORBERT FRISCHAUF, PETER MüLLER-BRüHL AND RAINER HORN
ed with the biggest financial crisis that had hit
the world for many decades. What originally
started as a crisis of the US real estate market
quickly crossed the American borders and
spread, due to the global nature of the banking
sector. At the beginning of 2009, the financial
crisis had become a global phenomenon sending
economic shock waves throughout automotive,
tourism, and other industries, some of
which are currently strongly cross-connected
to the aerospace sector. Luckily however, the
aerospace sector appeared to be resilient to
the financial and economic crisis. Although
the increased technology transfer between the
aerospace and terrestrial sectors could eventually
become a pathway for impacting the
aerospace market, the long-term nature of the
aerospace sector prohibited any immediate effects.
However, this resilience did not protect
Very Small Aperture Terminals (VSAT) Network
providers from a cold economic breeze and
a more suspicious regard by their shareholders.
As a result, most of the VSAT Network
providers saw a sharp decline in stock values
in 2008/2009, with the exception of the innovative
high-throughput player ViaSat. That
is indeed good news for the global SatCom
sector, but what about the Asian market? Will
it be boosted or slowed down by the crisis?
The answer reflects a mixture of effects: Sat-
Rank Satellite Operator
Revenues (million $)
Country
2009 2007
Satellites in Orbit
2009 2007
1 Intelsat 2500 2200 Bermuda, US 50 54
2 SES 2440 2370 Luxembourg 44 37
3 Eutelsat 1410 1240 France 26 24
4 Telesat Canada 750 685 Canada 12 12
5 Sky Perfect JSAT 363 347 Japan 13 8
6 SingTel Optus 237 172 Singapore/Australia 5 4
7 Hispasat 216 189 Spain 4 3
8 Russian Satellite Communications Co. 200 161 Russia 11 11
9 Star One SA 193 207 Brazil 7 7
10 Arabsat 189 150 Saudi Arabia 6 4
11 Telenor Satellite Broadcasting 177 141 Norway 3 4
12 AsiaSat 150 120 Hong Kong 4 3
13 ISRO/Antrix 141 120 India 10 11
14 Nilesat 119 92 Egypt 4 2
15 Thaicom 105 134 Thailand 3 5
16 Satmex 102 80 Mexico 3 3
17 KT Corp. 92 110 South Korea 1 3
18 APT Satellite Holdings 75 58 Hong Kong 3 5
19 Gazprom Space Systems 72 70 Russia 2 3
20 Amos-Spacecom 70 56 Israel 3 3
February - March 2012 15

BUSINESS | Cover Story
Com growth is expected to continue in all of
Asia at 6–8% per annum, mainly fuelled by
more and more TV programmes. Therefore –
much like its global counterpart – the Asian
SatCom market was found to be resilient in
the financial crisis. It is, however, distinctive
from its Western counterparts in specific
points, mostly related to the fact that regional
Asian markets are not yet liberalised. Because
of this protected nature, the Asian SatCom
market is the least penetrated by the “Big 4”
Satellite operators - SES, Intelsat, Eutelsat, and
Telesat. Thus, for the moment, Asia features
the highest number of satellite operators. This
is not expected to change for some time, as
the financial crisis has slowed the wave of operators’
mergers and acquisitions activity and
industry consolidation. As the credit market
becomes more stable, transactions beyond
share-swap might become feasible again. In
the long run, provider consolidation will hit
Asia, especially when markets become liberalized.
In the end, fixed satellite services still
thrive on economies of scale; therefore the “Big
4” are expected to maintain or expand their
market share and remain the drivers for consolidation
– especially in Asia.
The Asian SatCom Market
The Asian markets, with high population numbers
and strong population growth, as well as a
significant set of countries aiming to match the
Western world in terms of living standards, are
prone to future demand growth rates for basic
services similar to the ones that Europe and the
US had decades ago. This makes Asia a very lucrative
target market. Based on these forecasts,
C-Band in Asia will start to saturate the market
in the years to come, while Ku-Band will still
see a growth rate on the order of 4–5% primarily
driven by the introduction of high definition
(HD) and 3D channels, resulting in a capacity
increase up to 50% for the respective satellite
transponders. However, it must be noted at
this point that forecasts that include China are
Geo Telecom Satellites Lauched / To be Lauched
30
25
20
15
10
5
0
16 February - March 2012
.com Bubble,
A5 anomaly in 07/2001
A5 and Proton failures in
2002, plus .com oversupply
prone to uncertainty because of the scarcity of
reliable information and the overarching question
of whether and when the Chinese market
will open up. In line with these prospects, both
China and India are very active SatCom players.
Both countries have built their own telco satellites.
The Indian Space Research Organization’s
(ISRO) SatCom Program involves a mix of classic
and innovative technologies. Current space
infrastructure services experience growth rates
of 30% (especially broadband). India continues
to invest in a satellite-based multimedia system
and sees its Internet-based information services
as an effective tool to bridge “the digital divide”
– India’s own Digital Mobile Broadband (DMB)
System is to be launched in 2012.
Market Regulation in India and
China
The recent liberalization of the SatCom market
in India has led to the competition of
seven players in the DTH market, more than
anywhere else on the continent. Already
today, four Indian players find themselves
among the Asian Top 10. In contrast, China’s
SatCom market is still largely publicly-owned
and heavily regulated. A recent wave of
corporatisation moved the monopolist operator
China SatCom under the umbrella of
China Telecom. According to our sources and
analysis, there are no short to medium-term
tendencies to liberalise the SatCom market in
China, despite China’s ongoing liberalisation
efforts in the terrestrial telecoms sector. In
short, one could say that China and Europe
form two antipodes when it comes to protectionism
and liberalisation, while India is
positioned in the middle, as it has recently
started to open up its market.
Commercialisation – different
approaches prevail
The ESA study compared the different Sat-
Com commercialisation approaches along
Launch manifests for 2009-
2010 are largely full due to
strong capacity demand
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Proton-M
Launch: $ 120m
Proton-M
Launch: $ 45m
Proton-M
Launch: $ 50m
Proton-M
Launch: $ 70m
Proton-M Launch:
$ 95-105m
different dimensions and found that distinct
differences in the respective approaches can
be attributed to the following factors:
� To stimulate commercialization, India
operates a dedicated commercial arm of
its space agency – ANTRIX. ANTRIX was
founded in 1992 for the promotion and
commercial exploration of products and
services from the Indian Space Program.
� In China, the China Great Wall Corporation
in cooperation with Dong Fang Hong
(DFH) provides services similar to ANTRIX;
however China aims to master the whole
range of satellite technologies and does
not focus on specific niches as India does.
� China instrumentalises SatCom satellite
exports as part of complex barter deals
that comprise many trade areas.
� The establishment of the Asia-Pacific
Space Cooperation Organization (APSCO)
in Beijing serves as a further vehicle for
China to widen regional space cooperation.
Analysis of the Satellite
Communication Value Chain
The SatCom capabilities of China and India
diverge due to different strategic approaches,
historical reasons, and their unique societal
systems, which manifest themselves in the
different ways that the two countries have
organized their SatCom value chain. For China,
the following observations can be made:
� Space governance is rather fragmented,
with several players aiming to shape
China’s space activities.
� The R&D movement is broad and not centred
on certain niches. However progress
is often slowed as the “Military is always
involved – especially in SatComs.”
� Playing on prestige – as an emerging
superpower – is of high importance, so
activities like human spaceflight are much
higher on the agenda than in India.
� China has built up “significant research
capabilities” and “has moved on from
reverse-engineering Russian space technology.
Whilst minimalist in many ways,
China is nowadays certainly more hightech
than Russia – but still lacking USstyle
high-tech capabilities.”
Both China and India have realised the importance
of having powerful launchers at
their own disposal. If their plans succeed, the
next decade will see both a Chinese and In-
Note: quotes are from interview partners who are engaged
in the Chinese aerospace market.

dian heavy lift launcher, which will be able to
compete with their European, American and
Russian counterparts.
Numbers of GEO Telecom Satellites
Launched and Typical Prices
So far, the SatCom market has always been
strongly influenced by the economy and
launcher availability, as can be seen in the
graphic above. What is obvious is that there
is a need to launch 20-25 geostationary
telecom satellites per year. Still, that rather
stable demand cannot guarantee stable
launcher prices. When one looks at the typical
price for a Proton-M launch - we have
chosen the Russian rocket as reference, as
its performance remained rather constant
throughout the studied period – one can
see prices ranging from USD 45mn to USD
120mn for a launch of the geostationary
telecom satellite. These large variations are
caused by changes on the demand side (e.g.
dot com bubble) and on the supply side (e.g.
launcher failures). While the new Chinese/
Indian rockets will not change the situation
on the demand side, we are likely to see an
improvement on the supply side, potentially
even reducing the price of sending 1kg into
orbit to values below the current “standard
value” of EUR 10,000.
Investment opportunities for
German aerospace firms
The ESA study “Survey of the Chinese and
Indian Telecom Space Industry and Market”
assessed the status of the different players,
analysing how the US, Europe, India and China
position themselves vis-à-vis the demand
relationship curve. In general, the US and
Europe aim to compete on the global SatCom
market by using high quality as their main
value proposition, while India and China excel
with low pricing, thereby performing well
on the mass market.
Demand Relationship and the
Positioning of the Players
Typical mass market applications in the Sat-
Com sector are VSATs and their associated
sub elements, such as parabolas, low-noiseconverters,
coax cables, desktop boxes, etc.
Therefore, first-order investment opportunities
do readily exist for German companies
that focus on these areas. The VW joint
venture might serve as a good role model,
www.china.ahk.de
ensuring an adequate business share for
the German partner while prohibiting copy
attempts. As far as the high quality / price
segment is concerned, which is so far the domain
of the US and Europe, possible investment
opportunities arise where Chinese firms
and partners might contribute elements such
as software, chipsets, MEMS, etc. Here again
joint ventures are likely the model of choice
for a successful cooperation. Although ITAR
limitations might make such an endeavour an
arduous undertaking, this type of investment
is likely to be very profitable if there is the
potential to perform a spin-in or spin-off of
the relevant technologies into the mass market,
at least in the medium term.
Mr. Norbert Frischauf, Mr. Rainer Horn
and Mr. Peter Müller-Brühl are partners
at SpaceTec Capital Partners, a consulting
and investment company, which is
engaged in the Geo- and Satellite applications
business. As strategy consultants
they provide their expertise to public institutions,
multinational organisations and
national authorities from their Brussels
and Munich offices.
February - March 2012 17

BUSINESS | Cover Story
The People’s Pilot
“That’s one step forward in world flight, but
a leap for Chinese private aviation,” Chen
Wei announced to the throngs of supporters
that greeted him at the Beijing International
Airport. The Chinese aviator and entrepreneur
knew the reason for their enthusiasm: he was
halfway through a globe-trotting adventure
to become the first Chinese national to fly
around the world in a single-engine plane,
a grueling two month journey across vast
oceans and empty deserts, evading volcanic
ash and violent storms, pushing the limits of
physical and mental fatigue. Just as he inspired
his countrymen, who greeted him with
crowds at Chinese airports and followed his
blog by the thousands, he found motivation
in their support: “I’m not flying by myself but
with all Chinese,” Chen declared. And yet as
he surveyed his supporters, Chen knew that
he flew with the hopes of another group: the
staff and patients of St. Jude Children’s Research
Hospital, a cancer research institute in
Memphis, Tennessee.
15 years before, Chen had been one of many
poor students in China. After being rejected
in his bid to become a Chinese fighter pilot,
the University of Memphis offered him
a scholarship that set Chen on the path to
starting his own distribution company in the
US. “My wife and I came here with nothing,”
he had told city leaders at a celebration
held before his departure in May. “We are
very fortunate to have received the scholarship
to attend University and then start our
business and become successful.” Now, the
40-year-old Chen wanted to give something
back. Despite financing the trip himself, he
pledged to raise USD 250,000 for the hospital
18 February - March 2012
in donations. And to use the trip to publicize
his cause: “I think there is a huge potential
for the people to get to know St. Jude and to
build a relationship with people over there,”
he had said. But that was two months ago,
before his plane was surrounded by menacingly
armed guards in Saudi Arabia, before a
volcanic eruption forced him to make a lastminute
detour around Iceland, and before
he had achieved his donation goal. Now, on
a Beijing summer afternoon so smoggy that
the runway had been shrouded in haze until
a harrowing 15 seconds before landing, Chen
could see clearly how many lives his mission
had touched.
The German Chamber Ticker landed an exclusive
interview with this pioneering pilot,
learning about the challenges inherent to
flying around the world, why his journey attracted
so much attention in China and what
entrepreneurs and aviators share in common.
You are the first Chinese citizen to fly around
the world in a single-engine plane, a feat that
has only been accomplished by 168 people.
What inspired you to undertake this goal?
When I found out that pilots from 28 countries
have accomplished this mission, but
none of them were from China, I was inspired
to become the first Chinese citizen to take on
the adventure. My goals for this round-theworld
(RTW) trip were to promote general
aviation in China and raise money for St.
Jude Children’s Research Hospital.
How did you develop an interest in flying?
I always wanted to become a pilot. When I
was in high school in China in the 1980s, I
by KYLE SMITH
applied to become a military pilot but was
not selected.
How did you prepare for this trip?
It took me 18 months to prepare for the trip,
including obtaining visas and flying permits
for all the countries, airport research, flight
training, airplane selection, airplane equipment
modification, and so on.
How did you finance the trip?
I paid for the entire trip by myself without
any sponsors. All the donations for this trip
were given to St. Jude Children’s Research
Hospital. The trip was a once-a-life opportunity
and I preferred not to commercialize it
with sponsors.
What type of plane did you fly?
I flew a Socata TBM700, a single engine
Turbo Prop, built by a French airplane manufacturer.
This airplane is one of the fastest
single-engine planes in the market; it is very
reliable and uses a PT6 engine. It cruises at
290 knots and has a pressurized cabin. It can
fly at 30,000 feet, above most stormy weather.
The range is 1,200 nautical miles, which is
an advantage to fly over the ocean.
You reached 40 cities in 21 nations within 70
days. Could you describe how you spent these
two months?
It was hectic during those 70 days. I didn’t
get much rest along the route and had to fly
almost every day or every other day. Some
days I flew three hours, some days I had to
fly over ten hours. The airplane has six seats
and is comfortable for short range flights. It
is not very easy for long range flying. I met a

lot of friends along the route. Some of them wanted to join me on the
historic flight; I invited them to fly some legs with me. I had about 22
passengers along the route.
What was the most challenging part of the trip?
The challenges of this RTW trip were enormous. They included airplane
malfunction, inclement weather, volcanoes, airport infrastructure
issues, flying permits, fuel quality, and so on. The most difficult
part was the mental and physical challenge. Not knowing the flight
conditions for the next leg and facing life and death decisions every
day was a significant mental challenge. It was also a big physical
challenge to avoid getting sick and tired during the flight.
Describe how you felt when you landed in China.
It was a big relief after the last leg in China. It was difficult to get the
flying permit in China since it was the first time such a flight had occurred
there. I didn’t know what to expect and what kind of problems
I might run into. The military didn’t want me to take off in the last leg
of the trip and I had to wait for a couple of hours to get clearance.
Once I took off and flew to Russia, I felt relieved.
Your micro blog has almost 120,000 followers. Why do you think your
story attracted so much interest?
Chinese people are passionate about flying. We invented the kite 2,800
years ago. Due to the restricted airspace in China, no civilian can
learn how to fly and it is a fantasy for most Chinese to even thinking
about flying. When they heard about the first Chinese citizen flying
around the world, it immediately attracted their enthusiasm and interest.
Your trip marks the first time that a round-the-world flight has utilized
Chinese airspace, which has traditionally been quite restricted
for private flights. Do you foresee a growing interest in private aviation
in China? How do you see the industry developing?
General aviation in China is definitely growing and growing very fast.
China is becoming wealthier and more and more people like the challenges
of flying and the convenience of general aviation. The government
realizes the importance of the general aviation industry and will
open its airspace gradually. Private charter flights with large airplanes
will grow first. Then the small airplanes will catch up as more and
more people want to learn how to fly.
How did you approach the trip from an entrepreneur’s point of view?
Any lessons you learned that could be applied to business?
Entrepreneurs are risk takers. But we are successful because we manage
risk well. We take calculated risks and manage them to produce
a return. Even though there is a lot of risk in flying around the world
in a single-engine airplane, all of the risks can be managed with dedicated
effort. I feel I have applied a lot of good business practices to
manage this RTW trip and accomplish it successfully.
What advice do you have for anyone seeking to accomplish such an
intricate, challenging and long-term goal?
Never, never, never give up!
What is your next goal?
Stay tuned!
Mr. Chen, thank you for the interview.
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February - March 2012 19

BUSINESS | Cover Story
Year of the Tourist
In the blue skies over Mongolia’s grasslands, passengers enjoy Beijing
roast duck on their flight to Europe. Upon arrival, they notice that
hotels have positioned their furniture in accordance with Feng Shui.
Mandarin echoes through Parisian stores, from both customers and
staff. European travel websites, now embracing Chinese characters,
are explored for information. These Sino-centric sales pitches are
part of a larger trend of Mandarin-speaking staff, luxury packages
and tour group services, all targeting Chinese travellers. Back in the
Middle Kingdom, students, newlyweds and white-collar workers book
their trips directly with foreign companies, a stark change from what
was once a highly regulated market. Social media websites have become
essential forums for gathering travel information. Vacationers
now venture out of the traditional tour bus and into themed trips,
back roads and luxury cars. And they are doing so in record numbers.
The Year of the Chinese Tourist has arrived.
It’s proving to be an auspicious one for business. A report by World
Travel Trends predicts that the number of outbound tourists from China
will reach 79mn by 2015. This would make it the largest market in
the world and still leave plenty of room for growth. Current estimates
of the size of China’s middle class range from 70mn to 300mn – by
2030 that number will be 1.4bn, according to the UN Population Division.
As China’s middle class expands, so does its spending on international
travel: industry revenue from China increased fourfold since
2000. Chinese now rank third worldwide with an annual expenditure
of USD 55bn, behind only Americans and Germans. How to capitalize
on this trend has governments and private firms striving to bargain,
promote, and tailor their destinations into the hearts, minds and wallets
of Chinese consumers.
Crossing the Continent
In February of 2003, Germany signed a bilateral agreement with the
Chinese government granting it ‘Approved Destination Status’. As the
first European country to receive the designation, the German gov-
20 February - March 2012
by KYLE SMITH
ernment and private sector were allowed to market directly to potential
Chinese visitors and list their tour packages with Chinese travel
agents. Other countries soon followed, but Germany has remained
at the forefront of Chinese tourism to Europe. In 2010, Lufthansa
launched a luxury package for Chinese medical visits to Munich offering
limousines and Mandarin-speaking assistants. Recently expanded
services, which include Beijing roast duck on the Beijing to Frankfurt
route, have Lufthansa landing in second-tier cities like Shenyang and
Qingdao. Chinese departing for Germany were once limited to booking
their trips with local Chinese agencies; they can now do so directly
with German companies. In 2011, the German travel group TUI
AG became the first European tour operator to receive a licence to
organise international trips for Chinese vacationers. Simply offering
more flights and opening branches on Chinese soil is no guarantee of
success, however. Global competition for China’s tourism market is
intense and the country’s travellers have become more independent,
affluent and sophisticated. According to Professor Wolfgang Arlt,
Director of the China Outbound Tourism Research Institute (COTRI),
the current level of China’s outbound tourism was unimaginable even
ten years ago. Recognized today, it is being competed for all over the
world. “Germany will have to do more in the coming years to become
more attractive to Chinese visitors,” explained Professor Arlt. “Especially
the ‘New Chinese Tourists’.”
Tourism with Chinese Characteristics
Defining exactly what constitutes this group is no easy task. Still,
certain trends are apparent. Independent travel is beginning to compete
with, if not replace, organised tours. With greater exposure to
the outside world and the proliferation of the Internet, the waves of
Chinese travellers today have much more knowledge about their destinations.
They are also younger and wealthier. “In China the average
age of a millionaire is only 39,” stated the German Professor, who has
been involved in Chinese tourism since 1978, when the average Chinese
millionaire was five years old. “Affluent does not mean old.”
The tourism industry is responding. Companies have recognized that
as Chinese vacationers break away from traditional tour groups, they
look for travel products with specific themes. ‘Romance tours’ have
caught on, with groups of young couples taking their vows in classical
Western milieus like the Neuschwanstein Castle. Trips through
Germany’s wine-growing regions and classical music tours are being
promoted. For EUR 2,200, Chinese travellers can rent a guided convoy
of BMWs for a quick tour on the German highway. Regions have become
associated with themes: the abundance of museums, galleries
and other cultural attractions in Berlin draws consistent crowds. The
city launched Germany’s ‘Chinese Culture Year’, organised in recognition
of the 40 th anniversary of Sino-Germany diplomatic relations,
with a concert by the China Philharmonic Orchestra in January. The
year-long programme is designed to encourage cultural dialogue and

exchange between the two countries. Such tours and government efforts
have contributed to a 22% rise in the annual number of Chinese
tourists to Germany, reaching over 1.22mn in 2011.
At each locale they visit, retail outlets are rolling out the red carpet.
With the growth of disposable income, shopping has become an integral
part of Chinese travel itineraries: Chinese tourists to Germany
spend over EUR 42mn on clothes each year. Other popular items
include cosmetics and local products. Nearly one third of Chinese
shopping in Germany takes place in Frankfurt. Other top destinations
are determined by convenience. Chinese travellers prefer locations
that offer large shopping centres, such as Metzingen with its Hugo
Boss factory outlets. It is not simply materialism that drives Mainland
tourists to spend so freely on trips that often include stops in Trier,
where 13,000 Chinese pay homage to Karl Marx’s former residence
every year. High taxes and customs duties mean that German brands
bought locally can be as much as 40% cheaper than in China, without
the risk of fakes. These whirlwind spending sprees also contain a cultural
foundation: travellers are expected to bring back souvenirs for
friends and relatives. Finally, buying famous brands in the country of
their origin offers an ‘image factor’ that is lost in domestic purchases.
But before Chinese can be persuaded to buy cosmetics, travel packages,
or plane tickets, they must first be convinced of the product’s
value, which is increasingly being done online. The Internet is now an
essential component of communicating with the Chinese market. China’s
Internet population exceeds 300mn and averages 20 hours online
each week. The Internet is progressively becoming the initial point
of contact between company and customer. The Munich Airport now
www.china.ahk.de
offers Chinese-language information on its website. Last year, the EU
launched a Chinese-language web portal marketing multi-destination
tours to Germany and other EU member countries. According to Professor
Arlt, social media sites have become essential forums for Chinese
tourists to learn about their destinations. Lufthansa has begun
advertising to Chinese students through social networking platforms
like the Chinese site Renren. As a result of such direct marketing,
Professor Arlt explained, “In many cases Chinese travellers now have
more information about their destinations than professional tour operators.”
Food for Thought
As Chinese travellers become better informed, they are also becoming
more demanding. Companies must improve their services to compete,
especially in terms of specifically addressing the needs of Chinese
customers. This will certainly involve more Mandarin-friendly options:
the Munich Airport is considering translating its signage into Chinese
and already offers a welcome service for Chinese passengers flying
with Lufthansa. The city of Cologne trains its own Mandarin-speaking
tour guides and distributes information material in Chinese. It may
mean more airlines filling their trays with Beijing roast duck. “No
one likes foreign food. Now we provide Chinese food only – wherever
we are,” one Chinese tour operator told the Time of London after a
study found almost half of Chinese travellers to Europe had tried local
gastronomy only once. Companies will do whatever it takes to make
this trip more palatable to Chinese visitors: with a deeper interest and
understanding of their destinations, Chinese tourists are now willing
to pay a higher premium for the experience.
February - March 2012 21

BUSINESS | In the Spotlight
22 February - March 2012

Siemens’ “Chinalization”
Success Recipe
Interview with Dr. Marc Wucherer,
President of Industry Sector, Siemens North East Asia
With more than 29,000 employees, 16 R&D
centres, 65 operating companies and 65
regional offices across China, Siemens has
become an integral part of the Chinese
economy and is partnering with the
country to address its pursuit of sustainable
development. Siemens’ revenue in China
totaled EUR 6.39bn in 2011 (excluding Osram
and Siemens IT Solutions and Services). The
history of Siemens in China dates back to
1872, when the company delivered the first
pointer telegraph to China. For nearly 140
years now, Siemens has been active in the
country, where it holds leading positions in
the company’s main four sectors: Industry,
Energy, Healthcare and Infrastructure &
Cities. Over the years, Siemens has become
an integral part of the Chinese economy
and a reliable, committed and trustworthy
partner of China. By applying a wide array
of environmental portfolios and innovative
solutions in cooperation with local partners,
Siemens is committed to contribute to the
sustainable development of China. Siemens
has witnessed the tremendous changes that
have taken place since China opened up
and embarked on its reform drive. To date,
around 65 operating companies and 65
regional offices in China are the backbone
of Siemens’ regional marketing strategy and
work together with regional and provincial
managers to ensure that the company is
close to its customers in order to respond
quickly and effectively to their needs.
The German Chamber Ticker met Dr. Marc
Wucherer, President of Industry Sector,
Siemens North East Asia, and talked with him
about his experiences in China and Siemens’
role as a Chinese company.
How long have you been working with
Siemens in China?
I’ve been to China many times for various
job assignments. Since my first business
delegation to China in 1997, I have been
working here altogether for almost eight
years. During September 1997 to May
1998, I worked for Siemens Ltd. China in
Beijing and Siemens regional companies
in other countries in Southeast Asia as
Sales & Marketing Manager of Automation
Products and Systems. After four years of
engagement in the R&D division for the
buildings business of the then Siemens
Automation and Drives Group (A&D) in
Germany, I returned to China and worked
for Siemens Numerical Control Ltd. Nanjing
from the beginning of 2002 to mid 2006
and took the post as General Manager of
the company. In September 2010, I took
the position of Executive Vice President of
Siemens Ltd. China and President of Industry
Sector, Siemens North East Asia.
What are the most valuable things you have
learned from working and living in China?
Working in China with many Chinese
colleagues enriches my knowledge, experience
and understanding about China, and that
also affects my perspective in business
management, which was based on a Western
approach. The integration of Western and
Asian cultures helps me take a broader
view when looking into and considering the
business environment as well as making
decisions and working out specific strategies
for the Chinese market. For example, in
Western culture we emphasize competition as
we believe in “survival of the fittest”. But in
Chinese culture people prefer win-win results
and create a more harmonious environment
that allows diversified participants to play
their roles in the society.
What is more difficult to deal with in China -
life or business?
For me the most challenging part
might also be the most interesting. My
www.china.ahk.de
by JULIANE BIELINSKI AND DANIEL ABEL
working experience in China enriched my
management experience in the fast-growing
and ever-changing markets of developing
countries. Because of the increasingly fierce
market competition here, our customers
are more demanding in terms of delivery
time, response, price/performance ratio and
flexibility in getting products and services
from Siemens. Therefore we tried to meet the
customer demands by adjusting our business
process, setting up more sales offices, and
investing in localized manufacturing and
R&D. This is a big challenge but it is also a
great experience from which I learned a lot
about really getting close to the customer
and best satisfying their needs by listening to
their voices.
What do you think is the success recipe of
Siemens China? How does Siemens tailor its
services to the special requirements of the
Chinese market?
I believe the success of Siemens in China can
be attributed to its localization strategies,
for which I coined the word “Chinalization.”
Taking Siemens Industry as an example, we
commit ourselves to localizing our value
chain from Research & Development to
supply chain, engineering and manufacturing.
The Siemens products are not only “Made
in China”, but also “invented in China”.
Our culture of localization must be
complemented by a specific understanding
of local customers’ needs, in-depth industrial
knowledge and the willingness to collaborate
with our partners. Let me give you an
example in the Industry Sector. China is the
largest production base of the iPhone and
iPad. In order to address the huge potential
of the market demand for machine tools
and solutions for the production of such
electronic products, Siemens launched a
fitting product portfolio, which was developed
jointly by Germany and China and produced
in China. This product portfolio has been a
February - March 2012 23

BUSINESS | In the Spotlight
huge success, contributing more than 40% of
the total machine tool business volume over
the past 20 months. In the next five years,
we will deepen our localization process in
China with more investment in developing
products tailored for the China market. In
doing so, our operating companies engaged
in different businesses will be playing a
major role, with technological support from
the German headquarters. Meanwhile, we
will further localize our management team
by both developing our existing, excellent
employees in the management posts, and
also recruiting professional managers from
the talent market.
Compared with your big American and French
competitors, do you profit from the positive
German image in China?
Having a German heritage helps us stand
out from competition. In China, Siemens
is generally seen as reflecting German
features such as exquisite precision,
excellent quality, high reliability, etc.
Siemens, actually, is an international
company with German heritage. Led by
a diverse and international management
team, Siemens will not only take advantage
of our German legacy but also make smart,
local and focused decisions with our elite
team and internationalized background.
Four of Siemens’ core sectors are mentioned
in the 12 th Five-Year Plan as future industries
in China. Is Siemens going to scale up
investments in China consequently?
The history of Siemens in China dates back
to 1872, when the company delivered the
first pointer telegraph to China. For nearly
140 years, Siemens has been active in the
country, where it holds leading positions
now in the company’s four sectors: Industry,
Energy, Healthcare, and Infrastructure &
Cities. China is the second largest foreign
market for Siemens. Customers in China
generate 7% of our total revenue. Some
90% of the products that we sell in the
24 February - March 2012
country are high-tech. China seeks a balance
of economic growth and environmental
protection. China takes resourceconservation
and environmental protection
as top priorities. We acknowledge these
targets in the 12 th Five-Year Plan, and these
areas are exactly where the opportunity lies
for Siemens: we can support China’s green
revolution with our innovative technologies.
We will increase our investment and expand
our presence in second and third-tier cities
and in central and western China.
The latest example is that in October 2011,
Siemens signed an investment agreement
with Chengdu High-Tech Development Zone
to set up a world-leading manufacturing
and R&D base for industrial automation
products in Chengdu. The facility will be
built to be Siemens’ largest digital factory in
China and the third R&D centre for Siemens
industry automation products worldwide,
following Germany and the United States. By
building the most modern digital factory in
China, Siemens is setting global standards in
manufacturing efficiency and productivity,
and providing individualized products to
customers. This will help drive the industrial
upgrade of the region and cultivate the
talents of high calibers in the long run.
The establishment of R&D activities by
foreign multinationals is a current trend in
China. What is Siemens’ strategy regarding
R&D activities and technological upgrading
in China? Do you see any substantial
technological innovations evolving in China,
now or in future?
Siemens is one of the world’s most
innovative companies. The company aims to
be a trendsetter in all its business sectors,
and to shape its technologies with a clear
focus on delivering tangible and valuable
benefits for customers and stakeholders. We
define innovations as ideas and inventions
that can be implemented in marketready
products, services or processes. Our
technologies are helping industry customers
to compete more effectively and reduce
their environmental footprint by optimizing
their productivity, efficiency and flexibility.
For Siemens, China has become one of
the most important R&D bases. Siemens
will continuously increase investment to
R&D capabilities here. The emphasis is on
locally designing and developing the right
products and solutions for the Chinese
market to meet local customer needs, and
also using the advantages China offers to
develop technologies in China for global
application.
From your point of view, is the Chinese
market welcoming foreign business? Wen
Jiabao remarked once that Siemens is a
Chinese company. How true is this?
This was evident during Premier Wen’s
visit to a Siemens production facility in
Tianjin last May when he emphasized that
enterprises that legally register in China,
employ Chinese staff, invest and do R&D
in China are considered to be Chinese
enterprises. We have witnessed the great
efforts China has been making over the past
three decades to construct a transparent
and legal business environment, driven by its
intention to integrate as a full member of the
international community. We understand that
it takes time for the country to accomplish
what it took the industrialized countries
more than a hundred years to achieve.
A recent report stated that multinationals
like Siemens often play a significant role
in educating Chinese specialists. Most of
them go to Chinese state owned companies
afterwards. How does Siemens deal with the
challenges of retaining qualified staff? How
much are you affected by fast rising labour
costs in China?
Our challenge in achieving personnel
excellence today is to get the best talents
from the market, and more than that,
keep them in Siemens. The responsibility
as leaders is to make the company a place
where the ambitious people can become

successful. If we can do better than our
competitors, individual by individual, we are
strong enough in the playing field. And with
360,000 jobs around the world, we can grant
opportunities that not many companies can
offer. For example, an employee working in
Beijing can also work in Brazil on delegation.
In China, we expect more local talents to join
us. And what I’d like to tell the young people
is that “there’s no limitation of your career
in Siemens” – you could be among the top
management if you prove to be excellent
enough, no matter where you are from –
Germany, China, Africa or the Americas.
Siemens executes a lot of CSR activities in China.
How do you ensure and promote the successful
outcome of these projects? Are Siemens' efforts
valued by the public and the media?
We believe that an unwavering commitment
to Corporate Responsibility is vital for our
long-term success in China and at the same
time an integral part of our company’s
culture. People in Siemens believe in the
values of being responsible, excellent and
innovative. Those values are imbedded in
the actions we take with CSR projects. We
do business in 190 countries, where we are
always an integral part of society – as an
investor, a provider of goods and services,
an employer, and a customer. As a good
corporate citizen all over the world, Siemens
actively fosters social development that
promises a viable future – thus safeguarding
its own future as well. Sustainable corporate
success depends on reliable political
structures and the greatest possible social
stability in those countries where we do
business.
To help ensure a sound environment for our
business, we assume social responsibility
as part of our international activities. For
this, we base our efforts on the principles
of sustainability and enabling people to
help themselves. Our technical expertise
and innovative solutions help establish and
reinforce lasting, viable structures. Our
corporate citizenship activities support the
United Nations’ Millennium Development
Goals and the principles of the UN Global
Compact. This includes, among other things,
raising awareness about environmental
protection and climate change and taking
steps to combat poverty and corruption.
We focus our corporate citizenship activities in
three areas: scientific and technical education,
social and humanitarian assistance, and
environmental protection and conservation.
These are closely interconnected. Take the
latest programme in China as an example.
In China, migrant workers’ children do not
always have access to a suitable education. To
help improve the situation, Siemens China has
designed and developed its national I-Green
Education Program. The programme consists
of a green curriculum and classes offered by
Siemens employees to spread science and
environmental knowledge in an entertaining
way. By the end of September 2011, more
than 12,000 migrant children benefited from
the programme, and around 350 Siemens
employees volunteered more than 5,000
hours. Additionally, 63 schools nationwide
have included the I-Green curriculum in their
standard curriculum. Siemens’ long-term
commitment to corporate citizenship has been
widely recognized by Chinese society and the
public. In 2011, Siemens topped the “The Most
Respected Companies of China” ranking by
the Economic Observer and the Management
Case Center of Beijing University, and was
awarded the “Best Company Award in Green
Competitiveness” by the Financial Channel of
China Central Television (CCTV) and the “2011
Best Low Carbon Enterprise in China” by the
Economic Observer.
After the scandal in 2006, Siemens has
invested a lot into comprehensive compliance
systems. Do you feel handicapped by this
when it comes down to doing business in
China today?
When it comes down to doing business
in China, the implementation of such a
www.china.ahk.de
comprehensive compliance programme has
actually gained a competitive advantage for
us. In 2006, after the corruption incidents
were reported, Siemens took immediate
and drastic actions to address the problem.
A compliance organization was set up to
prevent, detect and respond to occurrences
of corruption. Now, everyone in Siemens
is fully aware of the company’s mistakes
made in the past and the huge price paid
for them. In fact, there is one particular
example in the Industry Sector in China
that is especially noteworthy. In negotiation
with a customer for a specific contract,
the Siemens sales team emphasized the
compliance aspects of doing business in
addition to superb product quality and
functionality. This convinced the customer
to choose Siemens over competitor products
despite their concern about the price of
Siemens products, eventually clinching
an order valued at more than RMB 5mn
(approximately EUR 500,000). Actually this
makes plenty of sense in the light of recent
developments in the legal environment
in China, where there is a much stronger
regulatory emphasis on clean business
and more severe penalties on corruption.
Siemens has achieved record growth in
China in the fiscal year 2011. I believe
we have achieved this because we set the
objective for “Highest Performance with
Highest Ethics” and we worked hard to
realize this by earning every dollar with only
clean business.
Dr. Wucherer, we thank you for the interview.
Dr. Juliane Bielinski, Executive Chamber Manager, talking
with Dr. Marc Wucherer, President of Industry Sector,
Siemens North East Asia
February - March 2012 25

BUSINESS | Features
County-level City
Economics
In 1978, Deng Xiaoping, a Chinese politician
and diplomat, initiated China’s “reform and
opening up policy” in order to revive the
country’s desolated economy and lay the
foundation for China’s following three ‘golden’
decades. The policy brought more than
30 years of rapid economic development
in China, especially in coastal and midto-large
cities. Over the past thirty years,
China’s economy has maintained a doubledigit
annual growth rate. GDP per capita has
grown from just USD 200 in 1978 to over
USD 4,000 in 2010. There are many reasons
behind this, but the key lies in the focus of
China’s opening up policy on coastal regions
and Deng Xiaoping’s ‘let some people get
rich first’ philosophy. The average growth
rate of coastal regions has been 12.4% per
annum versus 10.6% in central China and
10.2% in western China, leading to large
discrepancies in wealth. Since the global
economic crisis in 2008, the annual growth
rate of coastal regions has dropped from
12.4% (1990-2007) to 12% (2008-2010),
due to shrinking demand for exports. Meanwhile,
China’s inner regions are experiencing
rapid growth. Rising labour costs and other
factors affecting economies in the coastal
region are diminishing their advantages over
inland and county-level economies. So what
will be the engine of growth during China’s
next three decades? County-level economies
are poised to assume the role given their
huge scale, cost factor advantages, adoption
of administrative reforms and increasing urbanisation
rates.
The vast population of country-level cities as
well as their enormous GDP output will set
them up to be the next key battle ground in
China. By the end of 2010, there were 2,001
county-level cities in China, accounting for
50% of China’s GDP and 70% of the total
population. Nowadays, most of the rural population
can be found in the county regions,
which will act as the next springboard for
further urbanisation. Many county-level cities
already possess significant economic scale
and competitiveness. The top 100 countylevel
cities in China have an average popu-
26 February - March 2012
Private villas in Huaxi village, Jiangyin County, Jiangsu Province
lation of 830,000 and GDP of RMB 48bn.
Average income per capita has reached RMB
22,170 in county centres and RMB 10,560 in
the rural areas.
Jiangyin County in Jiangsu Province ranks
first with a GDP of RMB 170bn and 13% annual
growth. Its economic scale is even larger
than the individual GDPs of provinces such
as Qinghai, Hainan, Ningxia and Tibet. In addition,
its purchasing power and market potential
are even higher than some cities and
provinces. County regions have significant
cost advantages leading to the relocation
of production operations. Due to increases
in labour costs and land prices, the cost advantages
of coastal regions are being quickly
eroded. Companies in China will not be able
to compete with their competitors located in
other low cost emerging countries (e.g. Vietnam)
unless they transfer their production
capabilities to lower cost areas. Increasingly,
companies will relocate their factories from
coastal areas and major cities to central and
western parts of China, mirroring the transfer
of production from Japan and Korea to China
during the past thirty years.
In 2010, the average salary in coastal provinces
was approximately RMB 40,000 per
by JIANGHUA WANG
year, almost 57% and 23% higher than
central and western China respectively. In
the county-level city economy, there is a
vast agricultural population which is willing
to relocate to areas relatively close to
their hometowns and villages. The low cost
and abundant supply of labour is the county
economy’s key advantage. Furthermore,
administration reforms are supporting the
development of the rural economy. China’s
administrative structure is based on five levels:
central government, provincial, prefecture-level
city, county-level city, and town.
Since 1982, power has increasingly been
decentralised with greater responsibility and
influence being delegated to the county administrative
level. Since most of the counties
are relatively economically underdeveloped,
local governments are incentivised to
provide favourable policies and support to
attract companies in order to improve their
own economic and fiscal standings.
Development of county-level
cities will be the next driver of
urbanisation in China
Over the past thirty years, China has experienced
the largest mass migration of people
and the fastest rate of urbanisation the world

Administrative structure reform in China
Central
Government
Provinces
Prefecture
level cities
County
level cities
Prefecture
level cities
has ever seen. However, since 50% of the
population continues to reside in rural areas,
China’s urbanization level still has plenty of
room for further growth. The increasing urban
population has put a considerable strain
on the transportation networks, healthcare
services and social security infrastructures
of China’s major metropolises. As a result,
China’s next round of urbanization will need
to focus more on the country’s county-level
cities. Geographically, county-level cities are
closer to rural areas and thus find it easier
to accommodate future rural population migration.
For the migrants, not only are living
expenses and real-estate prices more affordable
but the “Hukou” resident permit systems
are also much less rigid compared to those
implemented in larger cities.
The influx of immigrants from rural areas will
provide an additional “demographic dividend”
for the county-level cities by increasing the
ratio of productive workers in their population
and growing consumer demand. This
will become a key advantage for the county
economy.
CLIP as a guideline for investment
in the county economy
Since county economies are less developed
than their prefecture-level city counterparts,
there are significant risks involved in doing
business in these regions. To be successful, it
is important for companies to bear in mind
several key ground rules. These essential
points can be summarized as CLIP: Customization,
Localisation, Infrastructure and Penetration.
Customisation: tailor the product
and brand strategy to meet the
needs of the county market
Unlike consumers found in the larger cities,
consumers in county economies have differ-
Central
Government
Provinces
County
level cities
ent affordability price points, buying behaviours,
brand awareness and perceptions due
to their differing educational backgrounds,
living environments and lifestyles. Companies
are advised to ‘tailor’ the product and
brand to the right target audience as well as
explore new business models incorporating
customised pricing strategies, distribution
channels, and after-sale services etc.
Haier presents a good example of a wellexecuted
customisation strategy. Based on
their understanding of rural consumers,
Haier tailored their refrigerator products
to meet these consumers’ needs. The new
products are cheaper, more durable and less
technologically complex than those developed
for the middle to large cities. Haier
also launched the two new product lines
“Joy” and “Happiness” for newly-weds and
family use in rural areas. In addition, to better
serve the county market, Haier has also
built an after-sale service network in these
markets from scratch.
Localisation: familiarize with
localisation requirements
One of the key success factors for county
market entry is localisation: It is essential
to localize operations and management by
building a local team who truly understand
the market and are familiar with functions
such as human resources, marketing, sales
and after-sale services. Localisation will not
only save costs, but also improve the efficiency
and profitability of the company.
Infrastructure: only certain county
markets benefit from developed
infrastructure and favourable
development policies
There are significant differences among
the more than 2,000 counties in China.
Companies should investigate the level of
Percentage of population and GDP for county economy
Percentage of
Population
Percentage of
GDP
Major City: 30%
Major City: 50%
County: 70%
County: 50%
www.china.ahk.de
0% 20% 40% 60% 80% 100%
infrastructure development carefully when
it comes to choosing which counties to invest
in. A well-developed infrastructure not
only refers to good physical transportation
networks but also the openness, investment
policy, social security framework, education
level and purchasing power of the region.
Penetration: to penetrate the
market through innovative
channel strategies
In the county markets, the density of population
is much lower than that of middle to
large cities. Developing distribution channels
is thus usually more difficult and expensive.
At the county level a company’s hard work
and investment will be in vain unless they
can reach their end customer; consequently,
distribution is even more vital than having a
highly regarded brand image. A well-developed
yet cost efficient distribution network is
the key to winning at the county level.
50 years ago, millions of young Chinese city
dwellers were moved to county and rural
areas in an attempt to eradicate the differences
between city and countryside. 50
years later, companies may follow a similar
migration pattern from large city to county
and countryside. However, unlike their city
dwelling predecessors, the first companies
to successfully ride this wave will be greatly
rewarded.
Mr. Jianghua Wang is the Vice President
of Estin & Co, which is an international
strategy consultancy based in Paris,
London, Geneva and Shanghai. The firm
assists the boards of major European,
North American and Asian groups in their
growth strategies, and private equity
funds in analysing and improving the
value of their investments.
February - March 2012 27

BUSINESS | Features
Internationalisation of
the Renminbi
In 2009, China had already become the number
one export nation. The country achieved
this within the last three decades with a currency
which was closely controlled and only
usable within Chinese borders. At the same
time, exchange rates were set by the government.
However, for such an important trading
country, this situation was not tenable in
the long-term. In order to be able to manage
the risks and take advantage of opportunities,
China’s leadership has made several steps toward
an internationally recognized currency
within the last ten years. In 2005 the fixed
rate to the USD was changed to a system of
managed, floating rates aimed at a currency
basket. Even at that time it was not clear in
detail which currencies this basket contained.
Nevertheless, since that change we have seen
a constant appreciation of the CNY towards
the USD and other currencies.
In 2009 the next bold step in the development
of the CNY towards an international currency
came as the government allowed cross border
payments with the CNY. As expected, the
Chinese government executed this change not
in a fast, hasty way, but rather in small, calculated
steps. Responsible authorities released
a regulation for CNY cross border payments
which was characterized by more restrictions
than opportunities. In the beginning the system
was limited to a small number of participating
companies in China as well as a concise
group of countries within Asia. Obviously, positive
experiences led the Chinese government
to continuously develop the system at a rather
fast pace. This development was supported by
a strong demand from the international
market to complete
28 February - March 2012
the process of creating a truly international
Chinese currency.
Even after the People’s Bank of China released
its latest regulation on CNY Cross Border Settlement
in October 2011, further widening the
international and cross border usage of CNY,
it is still a managed system with a large number
of open questions and organisational and
technical problems. Before getting into details
about possible international transactions in
CNY, we need to explain the current paradigm
established by Chinese authorities. As already
mentioned, several ministries and authorities
are involved in the development of the system.
Among them, the Chinese central bank (PBOC),
the authority that manages the CNY, and the
State Administration of Foreign Exchange
(SAFE), the authority that controls all cross border
transactions, competed for the leading role,
which was eventually taken by PBOC. Initial restrictions
on participating groups and regions in
the CNY Cross Border Scheme have been lifted,
with a few exceptions. Currently, the scheme
is only relevent for commercial payments, thus
leaving out any type of private payments. Only
Chinese companies receiving CNY cross border
payments through their export activities still
need to be registered on a specific list of Mainland
designated companies. All other companies
in China as well as all international companies
outside China can benefit from the system. After
international and regional restrictions were
lifted in 2010, all China’s areas are also allowed
to handle CNY cross border transactions.
Besides companies with the need to pay and
receive international CNY, Chinese and international
banks are involved to set the technical
framework for these transactions. Here we can
see several different types of participating
banks. The Chinese regulations
differentiate between domestic
agents and domestic settlement
banks. A Chinese domestic
agent bank is authorized
to maintain clearing accounts
for their international counterparts.
These clearing accounts
are used to technically settle the
international payments in CNY.
by MARCUS WASSMUTH
Domestic settlement banks handle the part of
the transactions with the Chinese companies.
Of course, most of the large Chinese banks have
a combined status of domestic settlement and
domestic agent bank.
International banks need respective clearing
accounts in CNY with Chinese domestic
agent banks to directly participate in the CNY
cross border scheme. Without having exact
figures, we believe that currently all major
international banks fulfil this condition. Further
measures by the Chinese central bank
(PBOC) were taken to keep the development
of international payments in CNY under control
as well as to limit the effects of allowing
CNY in the international markets within
a manageable volume. The domestic agent
banks received netting quotas, limiting the
difference between the purchase and sale of
CNY for international transactions. The Chinese
government agreed with the Hong Kong
monetary authorities to create an offshore
market for CNY outside Mainland China.
Even though offshore and onshore CNY are in
fact the same currency, international banks
started using the unique currency code CNH
for all Chinese Yuan handled and booked
outside China. Basically it can be said that
Chinese Yuan used for cross border payments
and handled through clearing accounts within
Mainland China can be defined as onshore
CNY, whereas Chinese Yuan used outside
Mainland China and booked through clearing
accounts in Hong Kong can be described as
offshore CNY, i.e. CNH.
Before going more into details regarding the
ways in which CNY can cross the border from
or to Mainland China today, we should discuss
how the CNH offshore is marketed in Hong
Kong. After a rather slow start in 2009, activity
in the offshore Yuan market has soared
in 2011, with surging Yuan deposits in Hong
Kong spurring daily currency trading estimated
at about RMB 1bn each day and sparking a
flurry of bond issues. Nowadays a variety of
products are offered on the market, from CNH
bond issues and trade through several types of
derivatives to hedge risks that come with the

handling of CNY/CNH. Besides simply exchanging the CNY from and
into other currencies, these products are so far not allowed to conduct
transactions in CNY with Mainland China directly. This circumstance
makes Hong Kong the only real playing field for international players
with CNY. For foreign companies procuring their supplies from China,
selling their products to China or planning to directly invest in the
country, knowledge about the CNY onshore transactions might still
be more important. For this area, China has divided payments in CNY,
similar to payments in foreign exchange, into the two main groups of
current items and capital items, each with a different set of regulations.
Nevertheless, the common basic principle for all CNY cross border payment
is the requirement for an underlying business transaction within
the framework of the regulations. We already know this principle from
foreign exchange cross border payments.
Capital items consist mainly of payments under direct investment, for
example registered capital or profit distribution for and from foreign
invested enterprises in China as well as payments for Chinese overseas
direct investment. Loans from outside China are also counted within
the group of capital items. Until October 2011, these types of payments
were only allowed with the individual and special approval of the respective
authorities. The PBOC Notice No. 23 (2011) further opened this
area of CNY usage. Now, investors can pay their capital contribution in
CNY or can support their Chinese subsidiaries with a direct shareholder
loan in that currency. Nevertheless, strict rules must be observed:
Payment of registered capital in CNY
� The amount of registered capital in CNY has to be fixed during the
registration process of the company.
� A special CNY capital account has to be opened with a bank in
China. The PBOC registration of this account is usually handled by
the account opening bank.
� The payment of the registered capital must be in accordance with
the company’s registration and will be registered with PBOC and
SAFE. The SAFE registration is necessary to calculate the FX Debt
Gap of the company.
� No extra approvals are necessary for the usage of the paid-in capital
in CNY.
International shareholder loans in CNY
� The difference between the total registered investment and the
registered capital of a foreign invested company in China, also
known as FX Debt Gap, sets the maximum limit for any type of
loan in CNY from abroad to the company. Therefore CNY shareholder
loans from abroad need to be registered with PBOC as well
as SAFE.
� The borrower needs to open a special CNY loan account with a
bank in China.
� Loans in CNY from abroad also fall under the regulations of CNY
loan interest, thus they must have interest rates of not less then
10% below the actual PBOC reference rate for the respective loan
term.
� Article 19 of PBOC Notice No. 23 (2011) states that the usage of
the loan funds is directly controlled by the account maintaining
bank. Documents that prove the correct application need to be
provided.
� According to PBOC Notice No. 23 (2011), article 19 and further
verbal confirmations from a bankers’ meeting with officials of
PBOC at the EUCCC, the repayment of the loan and interest payment
for the loan do not need an individual approval like the same
www.china.ahk.de
types of loans in foreign exchange. Nevertheless, documents like
the loan contract, respective payment order and tax certificates
should be presented to the paying bank.
Current items include all payments based on trade transactions or
some day-to-day business. Currently, the settlement of all international
trade and service contracts with China in CNY is permitted. As
the only restriction for payments to China, the beneficiary (Chinese
exporter) needs to be registered as a designated Mainland export
company. Those companies which have already handled trade settlements
in foreign currency in the past know about the technical
requirements to prove the underlying deal of the payment. Chinese
banks need to see trade documents including contracts, invoices,
transportation documents and customs declarations to approve the
payment in CNY. Service contracts can be settled across borders in
CNY by providing contracts, invoices and tax documents showing
that the required withholding tax has been settled. For current items,
which do not fall under trade or services, a proper documentation of
the background of the payment needs to be presented to the paying
or receiving bank. In the past few months, we have observed that the
majority of CNY cross border payments handled through our bank
were settled without problems. Nevertheless some cases showed that
the new system is not fully developed and that, especially on the
technical side, there is still room for improvement.
Mr. Marcus Wassmuth is the Country Head China and Chief
Representative of Landesbank Baden-Württemberg in Shanghai.
He can be contacted via:
' +86 (21) 5081 6002 | * pmarcus.wassmuth@LBBW.de
February - March 2012 29

BUSINESS | Features
The Leadership Formula
In a fast and ever-changing world, leaders are
needed who can withstand and embrace these
turbulent times. They must follow the principles
of true leadership to develop great people, great
teams and great results. But what sounds like a
logical consequence is in reality the most challenging
scenario one can think of. As easy as
this might sound, motivating groups of people
towards a common goal is a difficult task; yet it
is one of the most important skills that leaders
possess. Hence, understanding the characteristics
of strong leaders and cultivating those skills
is necessary for those climbing up the ladder.
Many of the world’s most respected leaders
have several personality traits in common, of
which the most recognizable ones are the ability
to initiate change and inspire a shared vision,
as well as knowing how to encourage the
heart and model the skills and behaviours that
are important to achieve the stated objectives.
Moreover, leadership always begins with leading
oneself in order to be able to lead others
and enable them to contribute and succeed.
But what exactly does leadership mean? How
can one become a great leader? Through talent
or by training? Is it a combination of certain
behaviours? Is it style? How do leaders differ
from managers? Does one have to be a good
manager first in order to become a good leader?
It might be worth taking a look into the
meaning of the words first. Management
Guru Peter Drucker, who is the most widely
followed management thinker of today, used
a simple explanation to differentiate between
a leader and a manager. He went back
to the ancient Greek roots of each word. The
English word ‘leader’ is rooted in an ancient
Greek word meaning ‘pathmaker’ while the
word ‘manager’ has its root in the ancient
Greek word which means ‘pathfollower’. Furthermore,
Drucker defined leadership as doing
the right thing (effectiveness) and management
as doing things right (efficiency).
But for him, leadership is not about a list
of attributes as no two leaders will exhibit
the same list, nor is it about charisma or
some king-like quality. It is all about delivery
of performance. Just like management.
Effective leadership for Drucker is thinking
through the organisation’s mission, defining
30 February - March 2012
it and then clearly and visibly establishing it.
It is the leader who sets the goals and priorities
with total clarity. Likewise it is up to
the leader to define and maintain standards.
Effective leaders take charge as well as full
responsibility and they do whatever it takes
to encourage and champion their teams in
order to become stronger themselves. In a
nutshell, the leader’s task is to create the
energy and vision where others might follow
and be able to flourish. This is all based on
trust, which must be earned. Without it the
leader will hardly have any followers. This
doesn’t imply that he/she necessarily has to
be loved and nor does it mean that the followers
must agree with everything the leader
says or does. Instead the manager must
believe that the leader is honest and really
means what he/she is saying. Overall, his/her
behaviour has to be congruent. A congruency
between a leader’s beliefs, his/her words and
his/her actions must consistently exist. The
leader needs to be perceived to walk the talk.
Management versus Leadership
While managers fulfill common functions
and similar features as those of leaders, like
executing processes, supervising teams and
achieving goals, they also have important
distinctions that separate them from each
other. It’s more about being on top of projects,
having the right people in the right positions
at the right time and keeping work processes
flowing effectively. A leader’s vision cannot
come to life unless he/she has talented managers
in his/her team with the proven ability
A Comparison of Management and Leadership Competencies
by SELMA KOEHN
to make things happen and think creatively
and innovatively. This doesn’t mean that an
individual can’t hold both management and
lead¬ership responsibilities simultaneously,
but management is considered a term separate
from leadership. The definition of management
is to exercise executive, administrative,
and supervisory direction of a group or organisation.
Manager focus on different specific
aspects and they are directed into different
purposes as shown in the table below:
According to John Kotter, who is also an
international luminary on the topics of
leadership and change, leadership can be
considered an age-old concept that has been
around for centuries, while management is
a concept developed in the last 100 years, in
part from the rise of the industrial revolution.
For him leadership and management
are two distinct but complementary systems
and not every good manager has the competency
to become a good leader. Although
in his opinion no one can be a leader and a
manager there is still an overlap between the
two fields; when managers are involved in
influencing a group of employees to meets
its goals, they are operating under leadership.
In addition, when leaders are involved in aspects
such as planning, organising, staffing or
controlling, they are operating within management.
So combining both styles at the
same time might not be so difficult. For that
you have to manage the day-to-day tasks
and deliver results, while seeing the opportunity
for change as well as the big picture.
Demonstrating good leadership skills without
Management Produces Order & Consistency Leadership Produces Change & Movement
• Planning and budgeting
• Establishing agendas
• Setting timetables
• Allocating resources
• Organizing and staffing
• Provide structure
• Making job placements
• Establishing rules and procedures
• Controlling and problem solving
• Developing incentives
• Generating creative solutions
• Taking corrective action
Source: Peter Northouse, Leadership: Theory and Practice, 2007
• Establishing direction
• Creating a vision
• Clarifying the big picture
• Setting strategies
• Aligning people
• Communicating goals
• Seeking commitment
• Building teams and coalitions
• Motivating and inspiring
• Inspiring and energize
• Empowering subordinates
• Satisfying unmet needs

the management skills to support it will leave you with an inability to
operationalise your visions. Likewise, being a good manager without
good leadership skills will cause continual challenges in motivating
your team and producing the results you are trying to manage. Being
able to blend these two styles is truly a unique skill set. And the fact
is, there are an abundance of managers in the world but very few who
truly embody the characteristics of a leader. For this reason, making
the leap from manager to leader may be the most challenging move
for some professionals during their career.
So are some people born to be leaders? Kotter believes that leadership
is something one can learn and leadership potential can be professionally
developed. It has nothing to do with charisma or certain personality
traits. It is about actualising potential and deploying these skills
and abilities. Other experts like him agree on nine actions necessary
for everyone seeking a transition from a management into a leadership
position. They would have to create a vision, provide inspiration, articulate
the values, share the credit, build trust, establish empathy, act
courageously, empower the team and be open. Before transforming into
a leader, a manager has to let go of old attitudes and behaviours, more
precisely he/she has to let go of his/her old identity which was attached
to these values - a transitional phase which leads him/her to the person
he/she wants to be rather then the position he wants to fulfil.
Different Leadership Styles
Leadership is less about his/her needs and more about the needs of the
people and the organisation he/she is leading. Once one is a leader, it
depends on which kind of leader he/she wants to be as leadership styles
are not something that can be easily executed. It depends on the particular
demands of each situation, the respective requirements of the people
involved and the specific challenges the organisation is facing. Daniel
Goleman, who popularized the notion of ‘Emotional Intelligence’ (1997),
describes six different styles of leadership. The most effective leaders can
move among these styles, adopting the one that meets the needs of the
moment and he/she can keep them as part of his/her repertoire:
� Visionary: This style is most appropriate when an organisation
needs a new direction. Its goal is to move people towards a new
set of shared dreams.
� Affiliative: This style emphasizes the importance of team work, and
creates harmony in a group by connecting people to each other.
� Coaching: This one-on-one style focuses on developing individuals,
showing them how to improve their performance, and helping to
connect their goals to the goals of the organisation.
� Pacesetting: In this style, the leader sets high standards for performance.
He or she is obsessive about doing things better and
faster, and asks the same of everyone.
� Commanding: This is classic model of military style leadership
– probably the most often used, but the least often effective. Because
it rarely involves praise and frequently employs criticism, it
undercuts morale and job satisfaction.
� Democratic: This style draws on people’s knowledge and skills, and
creates a group commitment to the resulting goals. It works best
when the direction the organisation should take is unclear, and
the leader needs to tap the collective wisdom of the group.
So do you have what it takes?
Note: The Young Leaders – Wirtschaftsjunioren Shanghai have dedicated their 2012 annual
theme to the topic ‘Sustainable Leadership’. They are hosting several events each aimed at
developing leadership competencies for international managers and entrepreneurs based in
and around Shanghai.
www.china.ahk.de
February - March 2012 31

BUSINESS | Features
China’s Nascent
Hedge Fund Industry
Hedge funds have historically been the financial
territory of the English-speaking world.
They were created in the US in 1949 and are
currently concentrated in New York and London.
These sophisticated, privately-managed
investment vehicles, which became popular
in the 1980s and 1990s, have now spread
to other locations - those that allow them
enough freedom to conduct their business.
Hedge funds have never really managed to gain
much popularity in Germany, as their structure
does not quite conform to the country’s
conservative financial system – even though
Germany liberalized its hedge fund taxation
rules in 2004 – and they suffer from a negative
reputation. This was illustrated in 2005 when
Mr. Franz Müntefering, then Vice Chancellor,
famously compared private equity funds and
hedge funds to “swarms of locusts” that fall on
companies, devour all they can, and then move
on. The Volkswagen-Porsche affair in 2008 was
also seen as an attack by the German financial
establishment on hedge funds; the latter were
shorting Volkswagen stocks just as Porsche
was secretly building up a 74% stake in VW –
leading to around USD 4bn in losses within the
hedge fund community. Germany, along with
France (as opposed to the UK), has also been a
staunch supporter of more constraining regulations
for hedge funds, particularly since 2008.
The financial instruments utilized by hedge
funds include short-selling (betting on the
fall of a stock price by borrowing the stock
for a fee and selling it, then buying it back
once the price has gone down and returning
the stock to the owner), margin trading (buying
stocks without having all of the money
to do so), futures and other derivatives trading,
high turnover trading, etc. Hedge funds
typically charge management fees of 2% and
performance fees of 20%, demand a minimum
investment of USD 1mn, and are most often
domiciled in an offshore jurisdiction. These investment
vehicles are associated with greater
risk than traditional (aka long-only) funds but
are also more liable to deliver in all market
environments. However, following the traumas
and revelations of the 2008 financial crisis,
32 February - March 2012
when their performance fell by almost 20%
on average, wiser hedge funders are now more
likely to act as relatively sober investors with a
primary focus on capital protection and steady
returns, as well as serving institutions rather
than individual investors. They have formed a
crowded industry in the last few years, with
around 10,000 hedge funds (the number
declined by 10% in 2008, but has gone up
again since then) often fighting for the same
opportunities. According to recent data, they
currently manage around USD 2tr worldwide.
New tools for Chinese hedge funds
Hedge funds started appearing in the People’s
Republic of China in the early 1990s. However,
they could never really be proper hedge funds as
legislation did not allow them to conduct most
of the transactions mentioned above. Thus, the
majority of them operated in the freer sphere of
Hong Kong. But the environment on the mainland
became friendlier to hedge funds as of last
year. One thing to know about hedge fund companies
in China is that they are either backed
by the government (including brokers, trusts) or
are private (investment consulting companies,
investment management companies).
Another important point to know is that
China’s central government approved the introduction
of stock-index futures, short-selling
and margin trading of stocks in early 2010.
The introduction of these new tools follows
by BENEDICTE GRAVRAND
years of trial and error as the country is pursuing
caution in its approach to the new project
by making it hard on managers and investors.
According to FT.com (March 2010), any investor
using the new tools must open an account
with at least RMB 500,000 (USD 73,000 then)
– thus excluding the many local retail investors.
Applicants also need to have held a securities
trading account for at least 18 months
and must pass an eligibility test to show they
understand the risks. Margin financing and
short-selling only apply to a limited number
of stocks. And foreigners are presently banned
from trading the new contracts.
“Hedge funds can use shorting, margin financing
and index futures, but they seldom
utilize these strategies”, explained Mr. Rex
Chan, founder of newswire China Hedge, in
an interview. “Those underlying [stocks] for
shorting are limited to blue chips only. There
is some legal limitation for those employing
index futures at this moment if they pair trust
companies to launch a product.” There is still
a lot of confusion as to which regulator oversees
what entities, he said. This leaves a few
loopholes open. But industry observers predict
that a Fund Law will be promulgated to solve
the issue. According to Mr. Josh Gu, director of
the new China offices of Hedge Fund Research
(HFR), a data provider head-quartered in Chicago,
there are also limits on how much USD
one can change into RMB. “Foreign investors
do not have the right to short index futures

ight now”, he said in an interview. “So most
of those who want to short index futures do it
on the Hong Kong or Singapore markets.”
Those regulatory developments are recent and
investors will encounter many new hedge fund
managers who are only experienced in plain vanilla
(unsophisticated) investing. These managers
will need a few years of practice. But there
are also some “second generation” hedge fund
managers who have expertise from previous
experience, sometimes acquired overseas, and
will want to set up shop in China – although
many might prefer Hong Kong, which has good
infrastructure compared to the mainland.
What Chinese hedge funds invest in
A few hedge funds have been launched since
these regulatory developments took place.
For example, the asset management arm
of Shanghai-based Guotai Junan Securities
told Thailand Business News in February
2011 that it was ready to launch a financial
product that may become China’s first hedge
fund, which would hedge systematic risks on
the A-share market through short-selling the
country’s stock index futures. “Most Chinese
hedge funds used the traditional equity long/
short strategy, but we have seen an increase
in relative value arbitrage which trade fixed
income, based on models including spread
trading and credit arbitrage”, said Mr. Gu.
Furthermore, most foreign investors trade with
USD in the Hong Kong market and trade in H
shares instead of A shares, he said. That’s because
A shares are now very exclusive to RMB
traders. But H shares and A shares do trend
similarly as they are shares of the same companies.
The A-class is designed for Chinese residents;
only a handful of Qualified Foreign Institutional
Investors (QFII) are allowed to trade in
them (QFII holders receive an investment quota
of up to USD 1bn, recently increased from
USD 800mn). In the past, the few China-based
hedging opportunities that existed centred on
the relationship between A shares and H shares
(shares listed in offshore Hong Kong, where
shorting has long been possible). One route
would be to go long in A shares and short in H
shares. A second would be to play an arbitrage
on the spread, with the more lucrative A-shares
typically trading at a premium.
What to watch out for
Some foreign investors do not invest in China
even if they feel optimistic about it, due to a lack
of trust in Chinese companies. Some complain
about the red tape, the lack of transparency, and
the restrictions reserved for foreign investors.
Some others prefer exposure to China via Hong
Kong. That lack of trust can be exploited: Muddy
Waters, a research firm that specializes in Chinese
companies, claimed in June this year that
Sino-Forest, a timber firm that operates in China
and is listed in Canada, had been issuing doctored
accounts. Sino-Forest’s stock went down in
value and Muddy Waters made a profit by shortselling
the stock. Many funds, including hedge
funds, are now hiring Hong-Kong-based firms
to “fish” for dodgy Chinese firms and repeat the
trick, claimed The Economist. This is a practice to
watch out for.
There are also concerns that long-only funds,
those that invest in stocks and indices and bet
on them increasing in value, are doing well
enough riding the growing China market. There
is no need for hedging in a bull (i.e. rising) market,
and any hedge fund investing in China is
secretly a beta (long-only) player. However, not
all stocks perform well in bull markets. Besides,
the continued economic growth of China is
something that remains to be seen, as volatility
is high and inflation is looming. Also stay away
from shadow banking entities, and from “sunshine”
hedge funds, which are the Chinese version
of a hedge fund, but which do not usually
invest in same way that hedge funds do. There
are many of them around but they are generally
unavailable to foreigners anyway. Foreign
investors, when entering any transactions on
China’s markets, must be exceptionally wary
of their rights and their administrative and
regulatory duties. Some have been caught for
forgetting to register someplace or taking some
specific legal precautions.
Some statistics
According to HFR, there are many Asian-focused
funds (not necessarily headquartered in
Asia) which invest broadly across the region,
and the number of funds investing primarily
in China (32.9%) increased in the latest quarter
of 2011. The number of Asian hedge funds
located in China increased in 2Q-11 as well.
“In the second quarter of 2008, there were
189 funds located in China (Greater China,
including Hong Kong)”, Mr. Gu noted. “And
in the second quarter of 2011, the number
increased to 281. After the financial crisis,
China became the third largest location for
hedge fund firms, following the US and the
UK. So there are more hedge funds in Greater
China than in Europe excluding the UK.”
The HFRX China index is up 0.54% (est) year-todate
through July; it returned 9.37% in 2010;
50.37% in 2009; and was down 25.16% in 2008.
“This includes all funds that majorly invest in
Chinese markets”, he added. “Compared to the
www.china.ahk.de
Shanghai Composite Index which was down
around 65% in 2008 and down around 14% in
2010, the HFRX China index has fared well…
Hedge funds do offer a risk protection for people
investing in the stock market in China.” Eurekahedge,
a hedge fund data provider based in Singapore,
said its Greater China Hedge Fund Index
had gained 691% since its inception in January
2000 and had consistently outperformed the DJ
Asia Pacific (excluding Japan) Index.
Foreign funds and foreign investors
Many foreign hedge funds and financial institutions,
attracted by the opportunities in Asia,
have set up offices in Hong Kong and Shanghai
as of late. “These firms follow the flow of money,
and there are a lot of investable assets from
individuals and institutions in the Greater China
region”, explained Mr. John Mullally, a specialist
in the private-equity and hedge fund industries
for Robert Walters, a recruiting firm in Hong
Kong, in a recent interview with the USA Today.
“There used to be more hedge funds located
in Switzerland and in Singapore, but there has
been a lot of what we call ‘localization’ of late”,
said HFR’s Mr. Gu. “A lot of hedge funds that
used to trade in the Chinese market but were
located elsewhere have moved to Hong Kong
after the financial crisis. This trend that we
have observed has made China the third biggest
location for hedge funds.”
For the foreign investors who want to invest in
a local hedge fund, it is much easier to invest in
Hong Kong than in Shanghai. Hedge funds in
Shanghai trade in the A share market, and to invest
in them, you have to have an RMB account
there. Most hedge funds will ask you if you are
an accredited investor, as this is a private placement.
The best thing for a foreign investor who
wants to have part of a portfolio in China is to
invest through a global financial firm that invests
in China. Those who have an offshore account
can invest in an offshore-domiciled hedge fund
or invest in a fund based in their own country. A
lot of UCITS-compliant funds that invest in China
have been launched in recent years, especially
designed for European investors. It is best to go
through the foreigner’s gate if you want to put
your finances to work in China.
Opalesque was formed in 2001 to provide
professional news services to participants
in the alternative investment sector,
through its popular daily newsletter, the
Alternative Market Briefing, and other
online publications. Opalesque is led by
Mr. Matthias Knab, an internationally
recognized expert on hedge funds.
February - March 2012 33