Business climate in china and how it could affect trade relations with the u. S. This is one hour. Good morning, ladies and gentlemen. If you will kindly take your seats. Latecomers will be accommodated. There are handouts over on the right you will want to have with you or take away with you. Please help yourself to some coffee. Welcome to the u. S. China Business Council. This is a press conference talking about our annual member survey, and it will be done in three parts. The first part i will introduce our president , craig allen, and then after that our Senior Vice President , jake parker, will walk you through some of the highlights of the survey, and then we will open it to questions. So at this point, its my pleasure to introduce you to president alan. Alan good morning, everyone, and thank you very much for joining us today. My name again is craig allen and the president of the u. S. China Business Council, and we would like to welcome you here to discuss our most recent survey, which we are releasing here today. So thank you again for joining us. So just a couple of words of background at this stage. The u. S. China Business Council has some 220 members, and most of our members are large multinational american headquartered companies. And theres a good mix of manufacturing, service companies, and agriculture as well. Most of our members, not all, but most are invested in china. And for the most part, they are in china to Service Chinese customers, rather than to export back to the United States. Many of them have trade going both ways, but they are not invested in china primarily to service the american market. So we send out this survey on an annual basis, and approximately one half of our 220 members reply every year. And so we have excellent data going back some 19 years on many of these same questions. Some of the question migrate over time. We at new questions, we change them a little bit, but by and large with very good data going back almost 20 years. So the Current Survey that we are releasing today was conducted, or was closed in june 2019. And so this data represents, or reflects the state of the bilateral relationship at that time in june. And that of course is before the designation of currency manipulation and the most recent tariff round. So, you know, a survey as a survey. It provides specific Reference Data from a certain sample group at a specific time. And we put a lot of effort into this project, and we are very confident of its statistical veracity. But as with every data set, we also recognize that the survey does not represent the totality of the American Business experience in china. Rather, it reflects the views of about one half of our members. So today, jake parker, our Senior Vice President , will walk you through the numbers, and then ill provide a little bit of a wrap up after he concludes. Following that, were happy to discuss with you the survey or anything else you would like to discuss on the record. So with that, thank you, jake. Jake thank you, craig. Jake parker, Senior Vice President at u. S. China Business Council. Ive recently relocated from beijing, so i dont know many of you. Please feel free to come up afterwards and introduce yourself. Ive interacted with many of your colleagues in china over the last several years. So before we get into the survey findings, i did want to walk you through some of the Respondent Profiles of this years survey. The survey was conducted for three weeks in june. 100 Companies Respond to the survey, which, as craig mentioned, is around half of our membership. In terms of Respondent Profiles, the majority have operated in the china market for many years. Around 95 of respondents are in china for china. Thats important because if youre operating in the china market or manufactured in the china market, and the terrorist tariffs and the bilateral relationship will impact you in a very different way. That being said, read a quarter of our companies are leveraging china sport platform for the new broad or for the United States. 67 of respondents in this years survey were in china are based in china. Around 33 are based in the United States, 2 in other locations, europe, south america, et cetera. So getting into the survey, the key findings this year, companies are commercially successful in china. Revenue in china operations increased last year and the overwhelming majority of our Member Company respondents, 97 , were profitable. However, trade frictions are eroding use company competitiveness. This is happening because both u. S. And chinese retaliatory tariffs and because u. S. Companies are increasingly viewed as unreliable suppliers. While this issue is top of mind, the more pernicious longterm concern for u. S. Companies in the market is that chinas Playing Field is increasingly unlevel. We will hear from companies, the Chinese Government policies and practices frequently offer competitive advantages to Domestic Companies, not offered to foreign ones. So the key point that we see from our survey data is that optimism that use companies can participate in chinas future Economic Growth and development is moderating. While the most significant concern of use china trade frictions, the reality is chinas domestic policy environment, particularly the policies that favor Domestic Companies over foreign ones is the trend most likely to negatively impact u. S. Companies outlooks on their ability to compete in the china market in the years ahead. So looking specifically at some of the data points, lets begin with a positive note. The overwhelming majority of u. S. Companies are profitable with 97 of Companies Reporting profitability in 2019. The Profit Margins are generally in the midsingle digits as opposed to double digits that weve seen in the past, recent past. This is because companies are beginning to treat them more like a mature market. Its no longer about expanding capacity at all costs. Companies are much more careful and considered about headcount because of rising costs from the Human Resources side. And companies are automating or possible which is increasing their profitability and reducing their costs. Where we begin to see some challenges and concerning signals is in the current projections for 2019 revenue growth. What you can see is significant uncertainty on revenue of the year ahead. We attribute this to an increasingly competitive environment and the impact of the tariffs are having on u. S. Company margins. I also want to dig a little into the top ten challenges that Companies Report facing in the china market. I wont go through all these but but i want to highlight a few of them from our member survey. First, despite positive commercial gains in the last year, American Companies are feeling a measurable impact of u. S. China, of the deterioration degeneration of use china bilateral relations second, advantages enjoyed by Chinese Companies industrial policies, and uneven scrutiny raise questions about American Companies future competitiveness in the china market. Looking specifically at the u. S. China trade tensions and impact its having on business, fourfifths of respondents in this years survey have been impacted by use china tensions. The impact has been felt in ways that we have not seen reported in previous years. Lost sales because of tariffs, lost sales because of doubts of continued use company supply, and lost sales because he is companies are not viewed as reliable suppliers. That can be impacted primarily by price of the products fluctuating as a result of the u. S. And chinese retaliatory tariffs. Also is impacted by the perception by many Chinese Companies in the domestic market that any Chinese Company could be added to the entity list and that could have an impact on their future supply in china. This has led to an erosion of use Company Market share which is been absorbed by european, japanese, and Chinese Companies. This mortgage is built up over decades. So once lost, the marketers extremely difficult to regain. Next, ill pivot my points to protectionism and how the survey looks at that. Getting back to the top ten challenges. We recognize many Chinese Companies excel at producing innovative, highquality competitive goods. However, Chinese Government policies and practices frequently offer competitive advantages to Domestic Companies not offered to afford. Unfair competition is at the root of many of this years top challenges. Licenses and approvals, data flows, ip our protection, uneven enforcement of rules and regulations, innovation policies and investment restrictions on Foreign Companies. These issues are all at the core of the bilateral negotiation between the United States and china which is why we support the objectives of the Trump Administration in section 301 report. However, protection manifest itself would look at protectionism it manifests itself in what i would describe as two main ways. The the first is Market Access. The second is Domestic Company support for the Market Access irritant span the gamut from increasing time and Regulatory Burden it takes a company to receive license approval. Restrictions and standardsetting jam packs u. S. Companies to fairly compete in Government Procurement processes, to greater scrutiny to Foreign Companies on the ground in china. The second main basket is around Domestic Company support. And on the other side, so in this situation as i mentioned before, we see or our members see the Chinese Companies receive benefits that use companies are unable to receive. This applies to both private and stateowned companies as you can see on the chart above. This allows Chinese Companies to be more financially competitive because of preferential tax policies, lower cost of capital from preferential financing, and other financial subsidies that the Chinese Government offers to Domestic Companies. Next, i want to shift to Technology Transfer. The way we ask this question is very specific. Has your company been explicitly asked to transfer technology in china . Weve been asking this question largely in the same way every year for the last decade, and the findings have been consistent. A few Companies Receive explicit request to transfer technology. That said, there are plenty of Ways Technology can be compromised. Information request and regulatory processes, lower incentives if theres limited Technology Associate with an investment, partners which is not to proceed if technology is not transferred. The companies asked in a survey indicate the receipt you a direct request than in the past but that does not mean that Technology Transfer is not happening in other ways. And even though the number of Companies Report it locum it is illegal under dubya to the rules for any such request to be made are traditionally the companies are received the request have to make a decision on whether to comply and if not then foregoing investing in the market. This is an inappropriate choice to force upon them. Looking ahead at the fiveyear outlook, uscbc survey dated has indicated moderating optimism over the past several years, a trend that continued in 2019. While companies are not pessimistic, only slightly more than half, except the companies are fully about the prospects in the market five years from now. However, decreasing optimism is neither inevitable nor is it unsolvable. Uscbc is called for chen to speed up implementation of its Economic Reforms to fully implement its calls for improved ip protection, provide equal treatment of Foreign Companies and allow the marketable in a stronger role the economy. Chinas leadership is regulated acknowledge these changes are in its own economic interest. While we seem some movement, the pace is far slower than expected. Shifting to some issues specific areas, id like to talk about ipr protection. This is ranked six in come of the top ten challenges and regularly ranks among the top ten in the history of uscbc survey. Nearly 60 of Companies Companies noted improvement in ipr protection and none none reported the protection it working. The reason we achieve if this is china has continued to take steps and ip protection. They set up a supreme court, ip appeals mechanism. Theyve made amendments to the trade law, which address some of the challenges companies have faced in the market. They released an interagency m. O. U. Talking about ipr protection and if set of specialized ip courts which companies indicate are important for resolving their ip issues. Improved ipr protection does not mean i pr enforcement has been fully addressed. Companies continue to express concern with ipr enforcement environment with over 90 either somewhat or very concerned. Just in the last year, for example, we hear from u. S. Companies that many courts are refusing to rule on pending ip adjudications involving u. S. Companies, likely as as a result of u. S. China trade tensions. And keep issues remain. Ip leakage through administrative processes is a challenge Companies Deal with. Weak deterrence, high thresholds for burdens of proof, theres progress back and still be made but as we saw in the last slide theres been some incremental progress to date. We should recognize that. Talking a bit about data flows and cybersecurity, these issues affect almost all companies in our membership, not Just Technology firms. The majority of our members, 76 , are concerned about chinese policies and information flows and technology security. 64 cited u. S. China political tensions as the top concern. Negotiations between u. S. And china as an aside with a significant number of these draft policies put on hold while the two sides were negotiating. When the situation deteriorated in the aprilmay timeframe, a significant number of these were released, a flood of new regulations which have a Significant Impact on u. S. Company operations, should they be finalized in their current form. Other top concerns and data are operational such as crossborder data flows. The new data regime increases cost to businesses as well. Such as requiring them to build new local data infrastructure, and at the same time decreases Network Security because companies are unable to use the best technologies or connect seamlessly with a global operations. Enforced to chain link off a section of their i. T. Infrastructure in the china market. Last, ill just give it very briefly to one final slide on investment. And i would note that there was a slight error in the slide in the packet you received. My colleague will be sent along an update, and i would just like to thank our friends at the wall street journal reporting that out so that we are able to correct it. The plurality of uscbc Member Companies take a china for china strategy, as i mentioned at the beginning. Those companies have been impacted by the u. S. Tariffs but they are primarily impacted by the chinese retaliatory tariffs. Affecting the upstream inputs the import from the United States which are hit by the chinese tears. For those companies that export chinese products to the United States which smh is about a quarter of our Member Companies, theres a mixed bag of responses. And those are related to the increased costs of labor in the china market. They are related to the costs of the tariffs. They are also related to an automation push that our companies are dealing with. So with that i will conclude todays presentation on the survey data, and pass it over to great to talk a little bit more. Thank you. Thank you for a really thorough walkthrough of our data. Let me try and highlight three things and draw quick conclusion. And jake has always spoken about these, reaching into the same pool of data. But three trends and then a a conclusion, if you would allow me to add the first is, the first trend is that the tra