Board of Directors Update on CGP August 23, 2006

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(No Transcript)
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• The History of EAP in ChinaBusiness
  Programmatic Challenges
• Presented by
• Russell J. Hagen, MADaolong Zhang, MD

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Session Goals

• Review a brief history of employee assistance
  programs (EAP) in China
• Detail some of the challenges of doing business
  in China
• Detail some of the challenges to developing
  programming in China

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History of EAP in China

• Early Development of EAPs in the Region
• First EAP like services began in late 1980s or
  early 1990s
• Focused on serving the needs of Expats their
  families
• Organizations based in Hong Kong were the first
  to provide these services
• Early pioneers were multi-nationals with internal
  programs providing services for expats in the
  region
• Subsequently, many of the programs were expanded
  to include local nationals

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History of EAP in China (cont)

• Introduction of EAPs in China
• First introduced to China in approximately 2000
• Multi-nationals with internally managed programs
  led the way
• Motorola was first to provide services to local
  nationals out of a Beijing base
• DuPont started using an external provider to
  deliver EAP services to Chinese employees in 2002

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History of EAP in China (cont)

• Introduction of EAPs in China (cont)
• Other regional providers based in Hong Kong
  Australia began providing EAPs in China in 2001
  2002
• Since 2003, at least 3 Chinese owned operated
  providers have been established and are providing
  services
• Psychcn-Chestnut Global Partners established in
  2005 is the only Sino-Foreign joint venture
  operating in China

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History of EAP in China (cont)

• 1st China International Forum of EAP-June 2005
• Memorandum of Understanding (MOU) between China
  Association of International Exchange of
  Personnel EAPA
• 2nd China International Forum of EAPJuly 2006
• Increasing numbers of multi-nationals are
  discussing or actively pursuing the development
  of EAPs for local nationals
• Growing interest in EAPs among Chinese privately
  held government owned entities

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• Business Challenges
• for
• EAPs in China

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Government Involvement in Business

• Complicates slows creation of business
• Complicates slows operation of business
• Complicates slows sales marketing in the
  primary market segment

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China Business Legal Regulatory Environment

• Good news China has come a long way in
  establishing clear relatively favorable laws
  regulations related to the operation of private
  business in China

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China Business Legal Regulatory Environment
(cont)

• Bad news
• Administratively, the laws are often
  inconsistently enforced and interpretation varies
  from one government official or agency to another
• The judicial system is still under-developed
• Regulations are often vague not well defined

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China Business Legal Regulatory Environment
(cont)

• Bad news
• Chinas regulatory environment is rapidly
  changing particularly since China became a
  member of World Trade Organization (WTO)
• The concept of EAP is so new there is no
  established agency for approving new projects

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Banking Regulations, Currency Taxations

• Chinas currency is not directly convertible on
  the world monetary market
• Chinas national monetary policies complicate
  getting money into out of China
• Enterprise Business Tax
• Federal 30
• Local 3

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Banking Regulations, Currency Taxations (cont)

• There are exceptions for special economic
  districts business classifications
• Incentives were common prior to Chinas WTO
  membership
• Incentives being phased out to meet WTO
  membership requirements

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Human Resources Issues from a Business
Perspective Employment Practice

• High demand extreme competition for experienced
  managers middle managers
• Managers have no experience in operating an EAP
  must be trained mentored
• Chinese employees are generally dedicated, loyal
  hardworking
• Chinese employees are eager learners interested
  in career development opportunities

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Cultural Language Differences

• English is the international business language
• Only for multi-national companies in China
• Government privately owned companies will only
  speak Mandarin
• JV partners may or may not speak English
• Accurate translation becomes of paramount
  importance
• Different styles of communication
• Indirect
• Avoidance of conflict disagreement

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Cultural Language Differences (cont)

• Decision Making
• Individuals making decisions or suggesting
  solutions can be considered inappropriate
• Made by consensus requires time is highly
  relationship dependent
• Risk taking is not historically rewarded
• Right decision successful outcome result in
  promotion
• Wrong decision bad outcome can cost your job
  if not your career

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Significant Investment of Resources Required

• An EAP business in China can require significant
  capital investment
• A successful EAP business with a foreign entity
  requires significant investment in time energy
• Absentee ownership is not a feasible option
• Foreign owners have to be boots to the ground
• The CEO, managing director or partner must be in
  country with some frequency

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An Immature EAP Market

• 5 years ago the EAP concept was virtually unknown
  in China
• Only slightly understood today
• Multi-national companies are slowly implementing
  EAPs in China

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An Immature EAP Market (cont)

• Concept of EAP is foreign to potential
  customers in the state owned privately held
  Chinese corporate sectors
• By any global standard, China is an immature
  market that will require years of development

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Complex Market Segmentation

• Generally there are 3 primary market segments
• Government owned entities
• Chinese privately owned entities
• Multi-national entities
• In reality, market is more complex
• Each unique aspect of market has different
  requirements
• Heavy involvement of government makes business
  more bureaucratic

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A Thinly Sliced Market

• Wholly owned non-Chinese multi-nationals (non JV)
• Multi-national/Chinese JVs (multi-national
  majority owner)
• Multi-national/Chinese JVs (Chinese majority
  owner)
• Non-Chinese corporate entities with local offices
• Wholly government owned companies

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A Thinly Sliced Market (cont)

• Government owned companies/partial multinational
  ownership
• Government owned companies publicly traded
• Government owned companies/privately held Chinese
  corporate ownership
• Privately held Chinese companies/closely held
  small number of investors

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A Thinly Sliced Market (cont)

• Privately held Chinese companies (publicly traded
• Chinese multi-nationals

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Meeting Multi-National Customer Expectations in
the China Market

• Significant number of western multi-nationals
  expect to replicate western style EAPs in China
• Evidence of this trend is in the large number of
  RFPs received by CGP that are unmodified or
  barely modified for the Chinese market
• Reveal a lack of knowledge appreciation for the
  current state of Chinese EAP development

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Meeting Multi-National Customer Expectations in
the China Market (cont)

• Reveal lack of real cultural understanding
  adaptation of EAP concept in developing
  countries, particularly China
• Expectations are often unrealistic
  inappropriate
• EAPs must be adapted to the social business
  culture of China

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How Long Can you Wait for Return on Investment
(ROI)?

• Aligning ROI expectations with reality
• Must be committed to China for the long haul
• Market must be developed
• Potential customers must be convinced of the
  value
• Most privately held companies do not provide a
  lot of benefits to employees. Why would they
  start with an EAP?

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Choosing the Appropriate Type of Corporate Entity

• Equity Joint Venture with Chinese Corporate
  Partner (EJV)
• Cooperative Joint Venture
• Wholly Foreign Owned Entity (WFOE)

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China Equity Joint Ventures (EJV)

• Legal person under Chinese law
• Own assets, sue be sued
• Essentially a limited liability company in other
  jurisdictions
• Personal assets of shareholding partners are
  shielded from corporate loss
• Profits liabilities allocated according to
  ratio of ownership
• Requires at least two owners

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China Cooperative Joint Ventures

• Two types Pure Hybrid
• Allow more flexibility regarding form of capital
  investments
• Allow more flexibility in terms of the
  distribution of profits
• Most frequently used in industries with a lot of
  fixed assets

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China Wholly Foreign Owned Entity

• Almost identical to an EJV with only one owner
• Legal person under Chinese law
• Own assets, sue be sued
• Essentially a limited liability company in other
  jurisdictions
• The single owner is a foreign investor

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Advantages of EJV

• Skill in negotiating with government entities
• Carefully chosen JV partners will have Guanxi
• General knowledge of culture
• Specific knowledge of business environment
• Knowledge of employee human resources practices
• Shared risk

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Disadvantages of EJV

• How do you find the right partner(s)
• Time to develop mutual trust respect
• Decisions outside the scope of contract are all
  negotiable
• Each partner must invest time energy in
  maintaining the relationship
• Shared profits

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Advantages of WFOE

• Easier to develop Article of Association
• Independence in terms of decision-making
• Every company decision can be made more rapidly
  no 2nd 3rd party negotiations
• All profits accrue to the sole owner

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Disadvantages of WFOE

• Negotiating with government entities without
  local knowledge or having to pay a consultant to
  provide local knowledge negotiation
• Lack of China specific cultural business
  knowledge
• Lack of knowledge can result in costly mistakes
• All risks financial otherwise accrue to the
  single owner

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Keys to a Successful Joint Venture

• Choose the right kind of partner
• What do you expect from your partner(s)
• Capital
• Relationships with government
• Management expertise in Chinas business
  environment

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Keys to a Successful Joint Venture (cont)

• Know your partner(s)
• Relationships take time energy to develop
• Same bed, different dreams make sure you have
  the same vision
• Negotiate what you want in your contract
  Articles of Association

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Keys to a Successful Joint Venture (cont)

• Critical elements of a successful relationship
• Trust
• Good communication
• Effective decision-making
• Shared ethics standards

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Steps in Establishing a Legal Corporate Entity in
China

• Step 1 Letter of intentmust be submitted with
  the project proposal (required of only JVs)
• Step 2 Project Proposalpreliminary approval
• Step 3 Submission of Feasibility Study Report
• Step 4 Contracts Articles of Association
• Step 5 Apply for business license other
  registrations

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China EAP Business Challenges Conclusion

• There are exciting potentially beneficial
  business opportunities in China
• The cultural, political business environment
  makes realizing this potential extremely
  challenging
• To be successful will require a significant
  long-term investment
• The potential rewards are significant the risks
  are equally significant

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Program Challenges

• Access issues
• Infrastructure issues telephone systems, etc.
• Data systems
• Adapting existing data system for language
  culture
• Developing internet access in a sophisticated
  consumer market

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Program Challenges (cont)

• Creating a provider network
• Shortage of trained counselors
• Trained counselors are primarily trained to do
  psychoanalysis
• Virtually no trained EAP counselors in China
• Emerging but small network of private counselors
  most practice psychoanalysis

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Selecting the EAP Counselor

• Who are willing to accept the short-term
  counseling approach
• Who have experiences dealing with workplace
  issues
• Who have worked with human resources managers and
  employees
• Who have critical incident stress debriefing,
  training and consultative experiences

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Training the Counselors

• Working with Chinese Universities and training
  companies to educate more potential EAP
  counselors
• Providing the face to face, telephone and
  web-based training and supervision to the
  selected EAP counselors for your program

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Training the Managers

• Working with the Human Resources Association to
  educate more managers about the EAP
• Working with the Chinese government sponsored
  programs and forums to promote the EAP among the
  general public

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Bibliography of Suggested Readings

• China Knowledge Press Private Limited. Doing
  Business in Beijing. Mappler Core, Inc, 2004.
• Fernandez, J.A., Underwood, L. China CEO Voices
  of Experience from 20 International Business
  Leaders. John Wiley Sons (Asia) PTE, LTD, 2006.
• Ke, M., Jun, L., Peiming, S., Youruo, Z. China
  Business. China Intercontinental Press, 2004.

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Bibliography of Suggested Readings(cont)

• McGregor, J. One Billion Customers Lessons
  from the Front Lines of Doing Business in China.
  Free Press. 2005
• Baker McKenzie. Doing Business in China. Baker
  McKenzie, 4th Edition, 1995.

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Thank you