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INSIGHT
A
The Journal of the American Chamber of Commerce in Shanghai - Insight September/October 2021
P D i
Re o
www.amcham-shanghai.org
gi
vo l ta
lu ic l
t y io
n
The market
impacts of China’s
rapidly changing
tech and data
regulatory regime
FEATURES P.17 POLICY P.28 MEMBER NEWS P.31
Join our WeChat:
China’s new Strengthened IP A chat with Retail
digital currency enforcement committee chair Ashley Wu
FEATURES
INSIGHT
The Journal of the American Chamber of Commerce in Shanghai - September/October 2021
AMCHAM SHANGHAI
President FEATURES
KER GIBBS
VP of Administration & Finance
HELEN REN 05 The NEV Revolution
A look at the policy push to grow China’s new energy vehicle sector
Directors 10 A Peek Inside IKEA
An interview with IKEA China CEO Anna Pawlak-Kuliga about the company’s growth strategy
Committees
JESSICA WU 13 How to Be a Foreign SaaS in China
Communications & Publications Explanations and advice for operating as a foreign cloud service provider
IAN DRISCOLL
17 Centralized Digital Currency
Corporate and Commercial
How China’s burgeoning digital currency will impact the economy and the US
KAREN YUEN
Government Relations & CSR
VEOMAYOURY "TITI" BACCAM
Trade & Investment Center
LEON TUNG
POLICY PERSPECTIVES
INSIGHT 21 Data Secured
A detailed review of the new Data Security Law
Editor in Chief
KATE MAGILL 25 Greening the Economy
Content Manager China’s attempts to create a more climate friendly economy
IRIS FU 28 Bulking Up IP
Design
Beijing is strengthening its IP enforcement across the country
GABRIELE CORDIOLI
Printing
SNAP PRINTING, INC.
MEMBER NEWS
INSIGHT
SPONSORSHIP 31 Committee Chair Interview
We chat with Ashley Wu, chair of the new Retail committee
(86 21) 6169-3000
Story ideas, questions or
comments on Insight: Please contact
34 AmCham Snapshots
Kate Magill Find your face in the crowd at recent AmCham events
36
kate.magill@amcham-shanghai.org
Event Report
Insight is the bi-monthly publication of A recap of recent speakers, outings and conferences
The American Chamber of Commerce in
Shanghai. Editorial content and sponsors'
announcements are independent and do
not necessarily reflect the views of the
governors, officers, members or staff of the
Chamber. No part of this publication may
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the copyright holder.
September / October 2021
Special thanks to the 2021 AmCham Shanghai President’s Circle Sponsors
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3
CHAIRMAN’S This year is, in a surprising number of
ways, an in-between year, one of slow
This issue of Insight explores two do-
mains in which environmental concerns
NOTE transitions. We have long known that
2022 would be radically different from
are reshaping the Chinese, American
and global economies: climate change
2020. But the move during 2021 from and electric vehicles. It also reviews
“the before times” to “the after times” two legal areas that are of fundamental
has been frustratingly slow. significance for many foreign business-
es operating in China: the data security
On the pandemic front, we ended law and legal protection of intellectual
last year with high hopes that vaccines property. Finally, it includes an interest-
would bring a rapid return to normal ing interview with the CEO of IKEA.
life in the rest of the world, and with it a
restoration of international mobility. Un- I hope you enjoy it. I
fortunately, viral mutation has outpaced
global vaccinations and the cycle of
surges in hospitalizations and deaths
has continued, with global mobility still
frustratingly out of reach.
On the geopolitical front, we ended
last year with similarly high hopes that a
change in Washington would bring a re-
duction in bilateral tensions, and with it
a restoration of the ever-deepening in-
terdependence between China and the
JEFF LEHMAN US. Unfortunately, political differences
Chairman of The American Chamber between the countries remain broad
of Commerce in Shanghai and deep, and businesses must adapt
to a world where partial decoupling in
some domains seems likely to endure.
This year the Chamber has contin-
ued to help our members thrive in an
environment of uncertainty. Special
taskforces have worked to ensure
that the most up-to-date information
is available – about the epidemiology
of the disease, availability of different
vaccines and the logistics of travel. An
encouraging high point was the Au-
gust 24 webinar by Dr. William Hasel-
tine in which he outlined a “multimod-
al” strategy for safely accelerating our
return to normalcy. If you did not catch
the webinar live, you may watch a re-
cording of it on the Chamber website.
In the policy sphere, we were privi-
leged to hold a “closed door” meeting
with China’s new ambassador to the US,
www.amcham-shanghai.org
Qin Gang, just two days before he flew
to Washington. Similarly, the American
consul general in Shanghai, Jim Hell-
er, frequently provides members with
briefings on the new administration’s
developing China policy.
4
FEATURES
If You
Build Them,
They Will Drive
The past and future of China’s New Energy Vehicle industry
By Stephen, W. Dyer, Ph.D.
Stephen W. Dyer is a Managing Director for AlixPartners, a global consulting firm, and heads their Asia Automotive & Industrials
practice to support multinational and Chinese organizations with growth strategies and business results improvement programs. With
almost 30 years of corporate and consulting experience, Steve was previously Ford Motor Company Vice President for Business Strategy,
Asia Pacific, based in Shanghai. Prior to that, Steve was a Partner at consultancies Bain & Company and Kearney.
W
ho would have thought the old Why NEVs are important on foreign oil and shifts reliance to domestic
“Field of Dreams” movie quote to China sources such as coal, renewable and nucle-
“If you build it, they will come” As China’s reform and opening efforts ar energy, is beneficial.
would fit 21st century China? Yet, that max- have matured, so have its strategic industri- In the boomtimes of the early 2000s,
im applies to many monumental efforts al policies. There are three main rationales growing GDP was a primary objective of
by the Chinese government, whether it be for developing the NEV industry: provincial and local governments, even at
steel production, solar cell or wind turbine 1. energy security, the expense of the environment. Now, how-
capacity, modern expressways or high- 2. environmental protection, and ever, China’s government is increasingly
September / October 2021
speed train tracks. And now the adage can 3. economic competitiveness prioritizing the environment, seeing it is a
be applied to the electric vehicle industry. In Throughout the 20th and 21st centu- key element in citizens’ perception of their
my 16 years in China, I have learned not to ries, hydrocarbons have been the primary standard of living.
bet against the Chinese government when source of energy for modern economies. NEVs present an opportunity to reduce
it aligns on something, including new ener- Access to a plentiful and inexpensive sup- these harmful emissions. Because China’s
gy vehicles (NEVs) as a pillar industry. There ply of oil is high on the strategic agenda of electric power generation is dominated by
will, however, be winners and losers amidst every nation. China imports a majority of its fossil fuel sources, overall “well-to-wheel”
the rising tide. oil; anything that reduces its dependence emissions are not necessarily reduced by
5
electric vehicles. However, shifting emis- over the years as the market changed and A major change in China’s NEV promo-
sions away from populated, vehicle-dense the government learned what did and did tion measures was the establishment of a
areas reduces pollution that citizens see not work. new “dual credit policy.” This is a system that
and feel. At first, the government used direct R&D requires OEMs to meet corporate average
NEVs were designated a “pillar” indus- grants, sales subsidies and purchase tax fuel consumption (CAFC) credit targets and
try in the “Made in China 2025” plan and rebates to incent automakers and consum- NEV sales credit targets or buy credits from
for good reason. As one of the most tech- ers to build and buy NEVs. These subsidies other automakers to comply. The dual cred-
nically and commercially complex con- came from national, provincial and local it policy shifted the burden of funding NEV
sumer goods, the impact of automobile government entities. The direct subsidies subsidies from the government to the auto
design and manufacturing goes far be- and tax rebates seemed to work well, but OEMs that did not invest in complying by
yond the firms and people that design and also required large government outlays. developing low fuel consumption vehicles
manufacture them. Automakers, (known Another less costly measure was to ex- or NEVs.
as “original equipment manufacturers” or empt NEVs from license plate restrictions As the Chinese NEV industry has devel-
“OEMs”), rely on a broad and sophisticat- that exist in many cities. When car buyers see oped, the government has relaxed some
ed supply chain of components suppliers, that they can acquire a hard-to-come-by or of the “home field advantage” policies that
from tier one (those directly supplying the expensive license plate (Shanghai plates can restricted foreign players from freely par-
OEMs) to tier two and below (those who cost over 80,000 RMB in the monthly auc- ticipating in China’s market. Previously, for
supply the suppliers). The raw material tion), they consider buying an NEV. a vehicle to qualify for NEV subsidies, auto-
supply, manufacturing expertise, quality In many cases, the purchase is a plug- makers had to incorporate a battery from a
and reliability of this sup- in hybrid electric vehicle government approved “white list”. Although
ply base benefits many (PHEV), that can run on many foreign battery makers applied, only
As one of the
other industrial and con- gasoline after the short Chinese manufacturers had ever been ap-
sumer product manufac-
most technically battery range is exhaust- proved for inclusion on the list. In 2019, how-
turing sectors. and commercially ed. These are generally ever, the “white list” was eliminated as a cri-
Because China was complex consumer cheaper than BEVs and teria for NEV subsidies.
late to auto production, if a charging station is Another significant change was to the
goods, the impact of
the government believed unavailable, drivers can longstanding requirement for foreign au-
there was little chance the
automobile design fill up the gas tank and tomakers to form joint ventures with Chi-
country would become and manufacturing drive just like any other nese partners to produce vehicles for sale
a world leader in tradi- goes far beyond the car. PHEV sales make up in China. This program dated back to Deng
tional auto technology. firms and people 23% of all NEV sales in Xiaoping’s approval for the entry of Volk-
NEVs represented largely license plate-restricted swagen into China in 1984 through a 50-50
that design and
“untilled” technological cities (and 33% in Shang- joint venture with Shanghai Automotive In-
ground. Yet China had manufacture them. hai), compared with 9% dustrial Company (SAIC).
planted seeds in its role of NEVs in other cities. This protectionist policy was permitted
as a consumer electronics However, these NEV li- to continue as part of China’s agreement to
manufacturing base. NEVs were a chance cense plate exemptions may be phased enter the World Trade Organization (WTO)
for Chinese firms to “overtake while driving out as NEV sales increase. Shanghai an- in 2001, as WTO members perceived Chi-
around the curve” and leapfrog into a global nounced that its current NEV plate poli- na to still be an undeveloped market. The
leader position. This is feasible due to the cy will continue only through 2023, with policy gave significant leverage to Chinese
government’s commitment to supporting PHEVs only eligible for the special NEV automakers and allowed them to learn the
local companies through the financially plates through 2022. crafts of auto supply chain management
barren initial phases of technology devel-
opment. And it contrasts with market-driv-
en economies and companies in the West,
which struggle to justify these seemingly
unattractive capital investments.
How China approaches
NEV industry development
www.amcham-shanghai.org
A common industrial playbook for China
is to set a policy objective and then exper-
iment with measures to achieve it. Officials
adapt easily when something doesn’t work.
This is often referred to as “crossing the river
by feeling the stones,” an adage attributed
to Deng Xiaoping. The measures to promote
NEVs have been adjusted several times
6
FEATURES
China’s NEV sales continue to grow, having achieved the government’s target of 5M parc by 2020,
and will approach 20% share by 2025
China NEV Unit Sales Volume (millions) 5.4
BEV PHEV
4.2
+31%
3.3
2.5
1.9
+56% 1.3 1.4
1.2
0.8
0.5
0.3
2015 2016 2017 2018 2019 2020 2021F 2022F 2023F 2024F 2025F
NEV share of all
vehicle sales 3% 5% 5% 6% 7% 10% 13% 15% 19%
Source: CADA, Vehicle Insurance registration data, AlixPartners analysis
and manufacturing. ing its Model 3 in China, which resulted in a
However, the joint venture requirement significant increase in its China sales. Other
may have backfired in the more innovative foreign brands will likely also see increased
The dual credit policy
portions of the auto value chain. Chinese NEV sales as they localize production in
state-owned auto OEMs in JVs with foreign shifted the burden of China and avoid passing on import tariff
partners enjoyed great profits from making funding NEV subsidies costs to consumers.
and selling the foreign brands and designs, from the government There are two clearly successful price
but they had little incentive to invest in cre- segments for NEVs – a premium price,
to the auto OEMs
ating competitive new self-owned prod- dominated by the battery electric vehicle
ucts. The Chinese privately held OEMs, such that did not invest (BEV) startups such as Tesla and NIO, often
as Geely, Great Wall and BYD, meanwhile in complying by priced at over $40,000, and a cheaper seg-
had to struggle to survive, quickly gaining developing low fuel ment, dominated by Wuling’s Mini EV, with a
experience in developing and selling new starting price of $4,500. NEV buyers in more
consumption vehicles
self-owned branded products. The struggle affluent, higher tier cities tend to buy more
paid off—as of 2020, while seven of the top or NEVs of the premium vehicles, while car buyers in
ten selling auto brand groups in China were lower tier, less affluent cities prefer the low-
foreign, two of the three Chinese brands in er priced vehicles.
the top ten were privately-owned Geely and phase-out of direct government subsidies.
Great Wall. Growth returned in 2020, even in the face The fight to survive
In 2018, however, the JV requirement for of COVID-19, as subsidies were extend- Currently, there are more than 100 NEV
foreign automakers was ended for NEVs. ed, and China’s economy recovered faster brands and over 300 NEV models in China.
Tesla was the first player to benefit from
September / October 2021
than most countries. In its “NEV Technolo- Not all of these will survive, as only a few
this policy change, as it set up a self-owned gy Roadmap 2.0” the Chinese government have significant scale. Most NEV players to-
manufacturing operation in Shanghai. established the target that by 2025, 20% of day can’t make money without government
new vehicle sales will be NEVs. The market support (either in the form of direct cash,
NEV market growth will likely reach close to that level. R&D or tax subsidies or credit sales from
NEV sales have grown consistently In recent years, more than three-quar- the dual credit policy). Battery costs are still
over the last five years, apart from 2019, ters of NEV sales in China have been Chi- high, leading to lower margins per vehicle.
when sales dropped due to the announced nese brands. In 2020, Tesla began produc- Average sales per vehicle platforms are four
7
Aside from the “big bet” BEV specialists and early adopters,
China “Challenger” OEMs seem to pursue different paths
Electrification maturity for leading Chinese OEMs (2020 PHEV+ BEV)
Average Selling Price
100
>200k RMB “BEV Specialists” group formed by
150-200k RMB BEV Specialists startup pure-play Battery Electric Vehi-
100-149k RMB cle (BEV) brands, such as Xpeng, NIO,
50
Life Success Starts with Concordia
LOOKING TO
THE FUTURE Interview by
Kate Magill
Let’s start with IKEA’s 2020 10 billion RMB is to really digitalize the business, digitalize When you did your market research,
investment in the China market. What led to the meeting places, be a data-powered what did you find that Chinese consum-
the decision to prioritize China in this way? company. And third to bring the home fur- ers were looking for?
nishing experience to a different level for the
We started our China transformation consumer here in China. There’s no doubt that the China mar-
around two-and-a-half years ago. We have We did a lot of research, we talked to ket is becoming very digitalized, people
www.amcham-shanghai.org
been in China for 23 years, and have been customers from many markets across Chi- are looking for new things. Customers in
very successful. We see that the market is na. We know that customers are looking China have unique ways of buying things
moving, and we operate in the most ad- for different things, that their time is more and distinct taste. Time is the new curren-
vanced retail market in the world—data demanding. We know that Covid acceler- cy. We were eager to transform our stores
driven, pace driven, innovation driven. So, ated the behavior of the customer; they to be different meeting places, to change
we launched IKEA’s biggest ever transfor- have less time and they shop in a differ- the components of the stores, the shape
mation, with very important objectives. First ent way. So our strategy is more important and format of the stores, and to be more
was to be accessible to the many. Second, than ever. accessible.
10FEATURES
Why did you wait until recently to join process. We want to be close to customers
Anna Pawlak-Kuliga is
the CEO and President Tmall, and how has business been since before the stores open. The presence of IKEA
for IKEA China, leading you began using the platform? is not about only the store anymore, it’s about
the totality of the Ingka online and offline, about digital meeting plac-
companies in mainland For us Tmall is the complementary com- es as well. The store is like the cherry on the
China. Anna has an ponent to our own strategy. Our internal cake, but at the same time very rewarding for
extensive business background prior strategy is a strong base, but we need to be the customer. Look at Foshan for example,
to IKEA in law and the retail sector curious and open to new things as well. We there are very different KPIs from the market
in the UK. She initially joined IKEA in
started our Tmall platform in March of last perspective, but at the same time, everyone
September 2008, and in 2012, Anna
year in Shanghai, Jiangsu, Zhejiang and An- has the same basic needs of cooking, clean-
moved to Poland as a member of the
hui provinces, and in May we decided to roll ing, doing homework, working at home—hu-
management board. In September 2016
it out across China. But we are not stopping man beings are the same across the world.
Anna moved into the role of CEO IKEA
Retail Poland and in September 2018, the accessibility of our of-
she started her new role in China as fline stores and consum-
CEO and President of IKEA China. er touchpoints as well as
continually improving our
online channels, including
the IKEA app.
In August we opened
the first ever “store of the
future” for IKEA. We call it
the “Home Experience of
Tomorrow.” China is very
important to us from a
strategy and investment
perspective. We know the
future is happening here,
so we are keen to build on what is good and What about the transition to these small-
experiment with a lot of new things. er, more centrally located stores, have
people responded well?
What is the IKEA “store of the future”?
Jing’an was our test
It will be very different in China and it was very
from stores around the
The presence of successful when it comes
world: different in terms IKEA is not about to the visitation rate. We
of how it looks and from only the store have a lot of learnings
what people experience. but bringing IKEA closer
anymore, it’s about
It will be built around the to people is our ultimate
community. How the cus-
online and offline, goal. Even though the
tomer sees the range will about digital store is smaller people
be very different from meeting places as can reach out through
our standard stores. How the phone and buy every-
well. The store is
people shop will be fully thing. It’s a meeting place,
like the cherry on
digitalized. The third com- it’s a community place, it’s
We experimented with our store for- ponent is it will be a truly the cake a place where people get
mats quite a bit. We opened an outlet sustainable store. inspired, spend time with
store in Yangpu a year ago; we opened a family, eat at some point;
shop in Jing’an, which is very small, and Are you looking to export this idea to other the store has many roles.
in Beijing. We also launched a lot of digi- markets?
tal channels. We introduced our account What are some of the learnings from these
September / October 2021
on IKEA.cn [our official Chinese website]; Yes, to other parts of China and to other smaller stores?
we’re running a Tmall shop across Chi- parts of the world. If something works in
na. It’s about making sure we have the China, it will probably work in the rest of Weekends are very crowded and peo-
right components for our internal strat- the world. ple are looking for different things. They
egy in China. Because omnichannel is a have less time. So the in-store touch points
cohesive ecosystem, our customers can What are smaller city markets like in China? are constantly moving. For Jing‘an we
meet us wherever they want, however change our offers, we change the products.
they want. When we enter a market it’s quite a long It’s a living organism.
11In terms of what consumers buy from IKEA, we announced our strategy two-and-a half
did you see any shifts as a result of Covid? years ago, we also decided that we wanted to
be in China, for China, with China. It’s important
Looking at home furnishing, our catego- that we are relevant in the China market.
ries were quite stable. Our most important As part of that, in Shanghai we have
customer group is parents living with chil- opened a product development center that
dren. The customer is still looking for fantas- is designing products relevant to the China
tic design, functionality, affordability. People market. When we are close [to the market]
are also more concerned about health, we are more relevant and much faster. We
about conscious choices. We see that in our have introduced a lot of deliveries in the
sustainability range — water saving, light cooking and eating range and also in the
saving, lot of goods with recycled materials. cleaning and care range, and perhaps most
People are more conscious of their impact successfully in the gaming range.
of their lives on the planet. Our sustainability
range is growing very fast. What are some key differences between
this market and the West?
How have you prioritized sustainability
from a manufacturing standpoint, in the For us, the core business is life at home.
products being offered and in the consum- There are differences driven by culture, behav-
er experience? ior, how people eat, sleep, meet, spend time
with families. There’s a distinct way Chinese
It starts with how we design products. people spend time, what kind of holidays they
We want our products to be functional, sus- have. There’s also a very distinct taste when it
tainable, good quality, affordable and beau- comes to design and what makes people loyal
tiful. We decided that by 2030 our products to brands. They want surprises, they want new
will be either recyclable things. They’re looking for
or made from reusable value for money, for prod-
materials. We are in- We were eager to ucts that bring value to
jecting innovation into transform our stores to their lives.
the manufacturing and Look at how peo-
be different meeting
design process. In Chi- ple sleep, in China we
na 90% of our deliveries places, to change have firmer mattresses,
are green; it is important the components of our sofas and seating
not only how we pro- the stores, the shape have to be much firmer
duce products but how as well. There are lots
and format of the
we deliver goods to the of differences when it
customer. Shanghai was stores, and to be more comes to textile pat-
the first market in the accessible terns and we have to
world to do green de- have different designs
liveries. We put a lot of for kitchen sets as well.
effort into our store operations. We have a
food waste watcher; we are investing in so- Looking into the latter part of the year and
lar panels for some of our stores. Across the next year what are your biggest priorities
whole value chain we want as little footprint for IKEA in China?
on the planet as possible.
In the Shanghai market we introduced Accessibility, affordability and sustain-
the “as is” market for customers to buy old- ability. We continue the journey, and as we
er IKEA showroom furniture that is sold at a continue we will accelerate digitalization.
discounted price. People in China are eager Almost two years ago we established a
to test these ideas as well. digital hub in China, purely designing dig-
www.amcham-shanghai.org
ital solutions for the China customers, so
What have been some of the biggest chal- we’re going to continue this. We’re going
lenges to the expansion of the China market? to develop new ranges for customers in
As a company that has been operating China, we want to be more accessible, we
in China for many years, we understand that want to remain affordable and sustainable
some key decisions have to be made much in this market. For us these are the guiding
faster. We have to be more agile, more innova- principles that make our strategy more rel-
tive, brave and willing to try new things. When evant than ever. I
12FEATURES
FOREIGN SAAS
COMPANIES
IN CHINA
By Art Dicker, Director, R&P China Lawyers; Robin Tabbers, Partner, R&P China Lawyers;
Chad Catacchio, Marketing Director, Alliance Development Group; Chris DeAngelis, General Manager, Alliance Development Group
C
hina remains one of the largest un- of China’s regulatory environment. As reg- The main concern around the ICP li-
tapped markets for many global ulations evolve, SaaS companies are won- cense is that it requires a joint venture,
business-to-business software as dering if there are still paths to China that which is a non-starter for many foreign
a service (SaaS)/cloud company. Beyond can be pursued with a modest investment, executives. Even for those who strike a JV
the large established enterprise resource while avoiding the arduous requirements deal, licenses are difficult to obtain. SaaS
planning (ERP) solutions (e.g., Workday) for SaaS firms to find a local majority part- companies handle lots of data, including
and customer relationship management ner. Fortunately, there are alternative ways personal data, making them more vulner-
(CRM) offerings (e.g., Salesforce.com), there for companies to enter China. In this article able to close regulatory scrutiny. China is
are already thousands of global companies we share how SaaS companies can navi- stepping up its data regulatory regime with
operating with SaaS functions in China or gate China on their own. the new Data Security Law (DSL) that was
considering entering the market. Com- passed in June 2021 and the Personal In-
panies want to take advantage of China’s Frequent SaaS formation Protection Law (PIPL), which
massive potential customer base, which compliance issues passed in August and will come into effect
includes over 35,000 companies with rev- The Commercial Internet Content Provid- on November 1.
enues north of $150 million, in addition to er License (“ICP License”) is the most often Perhaps the most direct impact of these
China’s 40 million small businesses. cited Value-added Telecom Service (VATS) new laws on international SaaS compa-
However, global enterprise software license that SaaS businesses apply for in nies that operate in China is the increased
companies are concerned about how to China. However, there is much debate about sensitivity to the processing of personal
stay compliant while generating a positive whether an ICP license is strictly necessary data and the scrutiny of cross-border data
ROI in China. These are increasingly rea- for a company that simply offers its own transfers. The silver lining to these new
September / October 2021
sonable concerns as more software com- solutions over the cloud or does not trans- requirements is that the rules are becom-
panies continue to transform their delivery act directly through its website in China. Even ing clearer, especially once implement-
models from locally installed (on-prem- for these companies, there is a risk that local ing regulations come out within the next
ises) installations to “service” delivery for- regulatory authorities may not have a nu- year. Companies should be aware of these
mats via the cloud (SaaS). anced understanding of the regulations and changes, but we expect with this new clar-
This transformation puts companies will default to the view that a SaaS business ity, firms will be able to comply without too
into a significantly more scrutinized area requires a Commercial ICP License. much concern.
13Where many companies cloud in China when: • The company must still spend re-
start is not always the 1. Their products simply do not work sources to understand and customize its
right place well enough to support their customers in cloud for the China market.
Historically, most SaaS companies start China from abroad, or • The VAD is unable to fully understand,
their China journey through a cross-border 2. They are providing services in China sell and service the company’s complex
approach. Companies leverage their ex- from abroad and have hit a cap on their po- SaaS solutions in the market.
isting global infrastructure and then build tential, and/or • Complex decisions need to be made in
out a sales and marketing program on the 3. They are concerned that the data they the operation’s early stages, and the company
ground, either independently and/or with are capturing is at risk of being blocked or and partner need to communicate effectively
partners. Depending on the type of solu- running afoul of increasingly stringent data and coordinate resources to make decisions
tion and its technical performance require- residency requirements in China. together on suitable China pricing models,
ments, this can be an effective strategy for In most other markets, hosting a solution product features and business strategy.
many companies, at least initially. locally is as simple as spinning up new AWS, Regardless of the downsides, some
However, this strategy is typically limit- Azure or Google Cloud instances. Howev- companies do start by partnering with a
ed for several reasons: er, the process is more VAD. In our experience,
1. The company may struggle to under- complicated in China. Other companies however, after a couple
stand and meet the needs of its China cus- The closest alternative of years many of these
do – on the face of
tomers from afar. is working with a local companies become dis-
2. Larger customers and state-owned IT partner (value-added
it – seem to require illusioned and look for
entities are often hesitant to purchase from distributor or VAD). Many a Commercial alternatives to re-ener-
companies without local technical and op- foreign companies start ICP license. For gize their China busi-
erational support. by speaking with one of ness.
those companies,
3. The company’s IT infrastructure will these VADs that can ob- Whether new to the
typically encounter performance issues tain the necessary licens-
however, there are market and looking to
due to its location outside of China’s Great es for local operation. many variables that go it alone or a company
Firewall. While initially attrac- can determine if that started with a part-
All that said, many companies eventual- tive to many SaaS com- ner and now wants to
such a license is
ly need to do more than provide their solu- panies (they often ex- consider a more active
tion from abroad and may need to set up a pect the VAD to take the
really necessary approach to China, com-
business and run with (it’s often not) panies have the same
it in China) the realities
and downsides of work-
ing with these distributors usually become
quickly apparent. These include:
• A high upfront fee and revenue shar-
ing. For companies without an existing
business in the country, they will typical-
ly push for exclusivity to offset the risk of
bringing an unproven company into China.
• The VAD makes the company’s busi-
ness a low priority (both because SaaS is
hard, and for new entrants especially, be-
cause there isn’t an existing pipeline).
www.amcham-shanghai.org
14FEATURES
key question: do other options exist for SaaS alternatives. For some companies these have historically been a potential work-around
companies that want to control their own IT strategies can be a permanent solution. For for restrictions on foreign-invested companies
infrastructure and China strategy? others, they act as a delaying mechanism obtaining VATS Licenses. However, there are
until the company has validated its oppor- some regulatory indications that these struc-
Option 1 - You may not actually be a SaaS tunity and is ready to consider a more sig- tures are falling out of favor with regulators
company in China, so why not stay that way? nificant investment in China. (and not just for SaaS businesses):
Simply launching servers in China and • A domestically invested company is
running aspects of a business through the Option 2 - Some companies ARE SaaS first established as an operating company
cloud does not automatically mean a com- companies and should have a license, but... to apply for and hold the ICP License.
pany is considered a “SaaS” by Chinese Many B2B SaaS companies took the di- • The foreign business must find local
regulators. Thus many SaaS companies’ rect route into China (whether independent- Chinese citizens – sometimes key local
business and/or delivery models do not ly or with the help of services providers). management – to act as nominees to hold
require a Commercial ICP license (and a lo- They made an upfront investment, created these shares of the local operating compa-
cal JV) in order to operate in China. a WFOE, put boots on the ground, filed an ny on the foreign company’s behalf.
Other companies do – on the face of it – ICP registration, set up their services on lo- • A set of contracts between the foreign
seem to require a Commercial ICP License. cal cloud providers or on their own servers and local company (and its shareholders)
For those companies, however, there are and then started to serve China customers. ostensibly offer the foreign company 100%
many variables that can determine if such These companies may not be technically in control over the local company.
a license is really necessary (it’s often not). compliance and need to look at their op- VIE structures have been used for over
Some common variables include: tions. However, many of these regulations 20 years, especially by many Chinese in-
• Pricing models and where payments have only been introduced over the last four ternet companies when listing on stock
are processed years, so many of these companies are still exchanges outside China. While it is an op-
• The type of data collected and where working on compliance. tion, there is much debate about the risk of
and how the company aggregates and pro- These companies may have some risk the structure, especially if the relevant par-
cesses that data exposure, but thus far we haven’t seen reg- ties’ relationship appears to exist primarily
• How products are delivered (on-prem- ulators pursue companies that are techni- to avoid the regulations. There are other
ises, local installation, cloud) cally out of compliance, but which are not possible issues as well, such as the risks
• The type of customers targeted in Chi- acting illegally and are not touching sensi- of the foreign company losing control over
na (MNCs, SOEs, SMEs) tive data. While this could change, in prac- nominee shareholders, as well as contracts
• The size of the business tice we continue to see many new com- ultimately lacking enforcement in court.
The strategies to avoid needing a Com- panies follow the same path. China, like
mercial ICP License are unique to every all countries, wants to attract good com- Balancing considerations
company— competent legal and GTM ad- panies to invest and increase its tax base. for SaaS companies
visors can help companies work through Generally speaking, when companies get entering China
in trouble for lacking full proper licenses, it There are challenges for business soft-
is more likely that a local competitor blew ware providers entering and operating in
the whistle because they felt threatened by China, especially those built exclusively
a foreign company’s success. for using an SaaS model, but opportunities
clearly exist for both SaaS and non-SaaS
Option 3 - VIE software companies alike that are willing to
Variable Interest Entity (VIE) structures make the investment. I
September / October 2021
15FEATURES
GOING CASHLESS
WITH CBDCS
AND STABLECOINS
The diverging future of payment in China and the US
By Rich Turrin
Rich Turrin is the international best-selling author of “Cashless - China’s Digital Currency Revolution” and “Innovation Lab Excellence.”
He is an award-winning executive previously heading fintech teams at IBM following a 20-year career in investment banking.
C
hina’s new Central Bank Digital largely cashless society, making the coun- With the US dollar’s standing as the world’s
Currency (CBDC) is already chang- try the world leader in mobile payment. reserve currency, the Fed has every reason
ing the world, and it hasn’t even China’s mobile payments in 2020 topped not to rush and tread carefully. However,
launched. China’s CBDC is partly respon- $52 trillion, 3.7 times larger than China’s citizens now accustomed to the immediacy
sible for a global rush to develop new CB- GDP. In the US, instant and potentially free of cryptocurrency and disillusioned by bank
DCs, with 87% of central banks around the mobile payment is promised to arrive in fees aren’t willing to wait.
globe “exploring” them, according to the 2023 with the launch of the Federal Re- This has given rise to calls for the launch
Bank for International Settlements survey of serve’s FedNow system. In the meantime, of “stablecoins” in a bid by the private sec-
central banks in January 2021. Meanwhile, Apple Pay, Google Pay and PayPal, which tor to beat the Fed to the punch with in-
the US Federal Reserve remains undecided. charge 3-5% fees on some transactions, are stant payments. Stablecoins are a form of
Federal Reserve Vice Chair for Supervision the major players in the US but with mini- privately issued cryptocurrency. The issuer
Randal Quarles called the global push for mal market reach. ties the value of the cryptocurrency coin to
September / October 2021
CBDCs nothing more than a “fad,” while Fed The Fed has been reluctant to discuss
Governor Lael Brainard commented that CBDCs as the next step in digital payments,
she “can’t wrap her head around the US publicly stating that there is “no rush” to de-
not issuing a CBDC.” Fed Chairman Jerome velop such technology. Even if a US CBDC
Powell remains steadfastly non-committal. were approved tomorrow, it might not reach
Alipay and WeChat Pay’s launches in the market until 2028 if it takes seven years
2014 resulted in China’s transition to a to painstakingly research, as did China’s.
17the same disruption as they did in China
with the launch of Alipay and WeChat Pay.
Consumers will no longer pay a hidden tax
of 3-5% in card fees.
CBDCs are considered by many to be a
natural evolution of money, and there are
many advantages to their use, including re-
duced payment costs, improved security,
increased tax collection, and the increased
ease of making social welfare payments.
However, these pale to CBDCs’ two most
important roles—bringing financial inclu-
sion to the vulnerable and increasing soci-
etal digitization. While about 20% of China’s
population still lacks a bank account, China’s
the dollar or other currency by maintaining CBDCs are custom designed, and not unbanked population was reduced consid-
cash reserves equal to the value of coins is- all are created equal. The general design
sued. The stakes are high—the cost of cash concept uses cryptocurrency technolo-
transfer globally is estimated by McKinsey gy to create a cryptographically secure A two-tier Central Bank
& Co. to be $2 trillion annually, and the digital representation of cash which is Digital Currency separates
IPO valuation of the new stablecoin “Circle” stored in a digital wallet on a phone or issuance and
topped $5.4 billion in July 2021. The promise computer. Anyone using Alipay or a West- distribution of CBDC.
of free and immediate cash transfers similar ern bank payment system would be cor- It is considered
ISSUANCE
to those enjoyed in China is big business. rect in saying that they are using a form protective of banks
For anyone not following financial tech- of digital payment. The critical difference because banks remain a
nology (fintech to the cognoscenti) or cryp- is that most CBDCs are stored directly on critical part of the
tocurrency, these emerging cash transfer your phone. When you pay another per- distribution system.
methods represent a new and unknown son, the digital money leaves your phone Source: “Cashless”
future. Let’s examine their pros and cons. and transfers to the recipient’s. No bank
or third party is required for this transfer. DISTRIBUTION
Central Bank This contrasts to Alipay or a Western bank
Digital Currencies system where the money moves between
China is the first major industrialized na- accounts controlled by third parties.
tion to launch a CBDC, though it is not the CBDCs are disruptive to incumbents be-
world’s first. The Bahamas issued the world’s cause they allow digital payment without a
first central bank digital currency, the Sand bank, credit card or other third-party inter-
Dollar, in October 2020. Still, China’s CBDC, mediaries. Even if a central bank builds fea- erably through the launch of electronic pay-
known as the digital yuan or e-CNY, is making tures into their CBDCs to protect banks, it is ment, the convenience of which spurred the
headlines because it will be used in domes- likely that when CBDCs launch in the West, populace to open either easy to create on-
tic and global markets, making it a compet- banks and credit card companies will face line or traditional bank accounts.
itor to the US dollar. Moreover, China’s new
CBDC is not just a new currency but a digital
currency transfer system that breaks its de- Percent of adults with bank accounts and transacting electronically
pendence on the ubiquitous SWIFT system.
This means that digital yuan payments will 79% 80%
be hidden to the US and its allies, who have 64%
68%
historically monitored and controlled access 50%
43%
to the SWIFT network.
CBDCs, as the name implies, are a dig-
ital currency and are the distant cousins of
www.amcham-shanghai.org
cryptocurrencies like Bitcoin. However, un-
like Bitcoin, whose value is determined by
2011 2014 2017
fickle market sentiment, CBDCs are backed % of adults that own a transaction account
by a nation’s central bank, just like the pa- % of adults transacting electronically
per bills they are designed to replace. This
means that a CBDC has the same value as China’s impressive progress in providing electronic banking services played a role in
attaining its poverty alleviation goals ahead of schedule.
a banknote, an advantage over notoriously
Source: The World Bank, Universal Financial Access 2020
volatile cryptocurrencies.
18FEATURES
Stablecoins but potentially crash their value when sell- ing months. The issuers will likely be large
The US is likely to fall back on private ing. Tether also illustrates these risks. With companies like Circle or Facebook, whose
stablecoins as a means of bringing digital reported commercial paper (a cash-like Diem Coin may be the first to make a splash.
payment to the country. While CBDCs rep- investment) holdings of $30 billion, Tether Diem Coin is the evolution of Facebook’s first
resent a deeper commitment by the central is the seventh-largest commercial paper attempt at a stablecoin, the now infamous
bank to digitize payments and benefit from holder globally. Liquidating even a fraction Libra, which regulators across the globe
a central bank guarantee, the use of stable- of this portfolio is serious business. rejected because it represented a suprana-
coins first in the US is the right approach, Stablecoins, like CBDCs, offer the prom- tional currency. Corporate-backed coins like
even if only as a stopgap. ise of free cash transfer without the use of Facebook’s Diem, however, may harvest user
In a dollar-based stablecoin, each dollar
that buys a coin is held in reserves whose
value is tied one to one with the number of
coins sold. Stablecoins have two risks ob-
scured by the word “stable” that have led
some to call the name a misnomer.
The first risk is that the value of a dol-
lar-based stablecoin is assumed to be
pegged 1:1 with the dollar. This assumes that
stablecoin reserves are equal to the dollar
value of coins issued and are high enough
quality to be sold in the market. These are
two big “ifs.” Unlike CBDCs, which have the
backing of the central bank, stablecoin val-
ues depend on faith in the issuer’s skills in
managing reserves. third-party intermediaries to transmit the data as a means of increasing their profitabil-
This faith can be misplaced, and one of transaction. Stablecoins may lack the “offi- ity. This further highlights the advantages of
the most popular stablecoins named “Teth- cial status” of CBDCs, but they offer actual CBDCs, which lack an underlying profit mo-
er” serves as a textbook example of how the savings in third-party tive and will likely pro-
quality of the assets held by a stablecoin is- transfer fees at the cost vide greater privacy than
Look for regulators to
suer can be questionable. A Financial Times of holding an asset mar- stablecoins.
analysis of Tether’s financial reports shows ginally more risky than announce precisely China and the US
that cash and cash equivalents cover only real dollars. Because how they will regulate are taking different ap-
74% of Tether outstanding, of which dollar the US lacks a real-time stablecoins in the proaches to digitize
deposits account for only 2.9% of the total. payment system and a payment. China is mov-
coming months. The
A not-so-stable stablecoin. CBDC, there simply are ing quickly to launch its
The second problem with stablecoins is no other options, which issuers will likely be second generation dig-
that if they proliferate, they could outstrip is why stablecoins are in large companies like ital payment, while the
the supply of high-quality, short-term in- such high demand. Circle or Facebook US is on its first. China
vestible assets, causing liquidity problems Look for regulators to will enjoy a first-mover
when buying and selling. This could cause announce precisely how advantage with CBDCs,
asset prices to rise when in buying mode they will regulate stablecoins in the com- but it does not guarantee the international
demise of the dollar, as some may specu-
Five steps in the lifecycle of a Tether coin late. That said, complacency is ill-advised
3
and digitizing the dollar is necessary to pre-
serve its reign as the reserve currency.
Tethers Tethers Chinese residents will likely have access
sent sent
to the trial version of China’s CBDC this year,
Tethers Tethers Tethers
user user user if they are not already using it in early trials.
2 Tethers
issued
Tethers
redeemed 4 Ironically, it will seem like nothing new for
many, since free and instant payment is the
September / October 2021
norm here. Meanwhile, US digital payment
Fiat reserves held by users will likely have a private stablecoin op-
Tether Limited tion sometime in the first half of 2022. This
1 5
will likely be a significant event in the US,
perhaps on the same scale as the launch of
Fiat Fiat WeChat Pay and Alipay in China. The pay-
IN OUT ment world is changing fast and how we pay
Source: Tether Whitepaper for things will get faster and cheaper. I
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FEATURES
CHINA’S DATA
SECURITY LAW
What you should know
By Ron Cai
T
he Standing Committee of the processing activities taking place out-
National People’s Congress of side of China that are to the detriment
China passed the Data Secu- of national security, the public interest
rity Law (the DSL) June 10, 2021, less or the lawful rights and interests of
than a year after publishing the first citizens and entities of China are sub-
draft and after two rounds of revisions ject to the DSL. Notable is that under
and public comments. As one of the the DSL, the term “data” refers to any
highest-level laws governing data record of information in electronic or
security and protection in China, the other forms, and “data processing”
DSL, together with the Cybersecurity activities include the collection, stor-
Law, which came into effect on June age, use, refinery, transfer, provision or
1, 2017, form the legislative basis for public disclosure of data.
data security protection in China. Foreign entities whose business
The DSL will take effect on Sept. 1, and activities include processing
2021, leaving companies with a grace Chinese citizens’ data, or whose data
period of less than three months to processing activities may substantial-
conduct self-evaluation and self-cor- ly impact China, should be cautious
rection. As summarized below, the about potential liabilities under the
DSL contains a number of core obli- DSL.
gations on data security protection for
entities engaged in data processing II. Notable obligations imposed on
activities in China. companies and individuals under
the DSL
I. Jurisdictional scope and extraterri- In general, companies’ obligations
torial application of the DSL under the DSL include: (i) establish-
The DSL applies to both domes- ing and improving a data security
tic companies in China as well as management system that integrates
data-related activities conducted by every part of data processing activ-
foreign entities and individuals. Article ities; (ii) organizing and carrying out
2 of the DSL states that data process- data security education and training;
ing and security supervision activities (iii) taking necessary technical mea-
conducted in China fall under the sures to safeguard data security; (iv)
law’s purview. It also states that data strengthening risk monitoring and
September / October 2021
Ron Cai has more than 32 years of legal experience assisting clients
in US-China business projects. He handles international business
transactions and dispute resolution. He is a seasoned expert in Chinese
TMT (Telecom, Media and Technology) laws and regulations. Ron is
familiar with Chinese laws and practices in a wide range of industries,
including AI, cloud computing, internet of things and e-commerce. Ron
received his LLB from Xiamen University Law School, LLM from Columbia
University Law School and J.D. from Lewis & Clark Law School.
21taking timely remedial measures; (v) for en- and self-correction as soon as possible to en- that need their own important data catalogs.
tities who carry out data processing activities sure that their own classification system will This provision of the DSL stipulates that “regu-
via information networks, such as the inter- comply with the national system. latory authorities in industrial, telecommunica-
net, performing the above data security pro- tions, transportation, finance, natural resourc-
tection obligations by obtaining certifications ii. Formulation of important data catalogs es, public health, education, and scientific
under the multi-level protection system (a at national, regional and industry levels technology are responsible for the regulation
mechanism mandated by the Cybersecurity Since the Cybersecurity Law took effect, of data security in their respective industries or
Law); and (vi) for “important data” processors, there has been no definition and scope given sectors.” By looking at existing and future rules
performing strict data security obligations. for “important data.” For enterprises carrying and industry standards issued by relevant min-
Under the DSL, “data security” refers to out data-processing activities, there is no istries, it is possible to glean more information
taking necessary measures to ensure the ef- clear guidance to help them determine what on industries of concern for data protection.
fective protection and lawful utilization of data data can be categorized as “important data.” For example, on May 12, 2021, the Cyber-
and to safeguard the Under the DSL, space Administration of China (CAC) pub-
continuing state of secu- China will establish a lished the Several Provisions for the Adminis-
rity (Article 3 of the DSL). national mechanism tration of Automotive Data Security (Draft for
The DSL emphasizes
More specifically: to coordinate relevant Comments), which is China’s first ministerial
that China will authorities to prepare regulation for data security management in
i. Article 21: Establish establish a national an “important data” cat- the automotive industry. The document is a
and deploy a data clas- classification and alog. More importantly, regulatory response to data security issues
sification system based on the national that have brought increased attention to
hierarchical data
Article 21 of the DSL level important data cat- smart car development.
emphasizes that China
protection system, alogue, each regional
will establish a national which can be viewed and industry authority iii. Enhanced requirements for protection of
classification and hier- as high-level guidance will determine regional, important data
archical data protection ministry and relevant The DSL also puts forward regulatory re-
for companies’
system, which can be industry and sector lev- quirements for the protection of important
viewed as high-level
establishment of their el data-specific lists. In data, including:
guidance for companies’ data classification addition to national level
establishment of their legislation, companies (i) Designated person and department:
data classification. The must be mindful of the An entity processing important data must
DSL provides that to establish the national important data catalogues issued by local designate a person in charge of data security
data classification protection system, regula- governments in the areas where they oper- and a management department to perform
tors must consider the data’s level of impor- ate, and by relevant authorities governing data security protection obligations (Article
tance to state economic and social devel- their industry. This may present a challenge 27, paragraph 2). The Cyber-
opment. Regulators must also consider the to small- and medium-size companies with security Law
degree of harm caused to national security, limited resources for data compliance.
public interests or the lawful interests of citi- Article 6 of the DSL provides
zens and entities if the data is tampered with, examples of indus-
destroyed, leaked or illegally obtained or uti- tries
lized. Once the national system has been
established, companies should
conduct self-exam-
ination
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