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James Buzek – Joshua Espinedo – Stephen Haines – Kyle McMillian – Rey Ruiz – Natalia Solis

May 16, 2009

GENB 7197: Dr. Roger Blakeney

presents

Contents

EXECUTIVE SUMMARY ................................................................................................................ 2

SHANGHAI TRANSFORMATION................................................................................................... 3

CHINA EVERBRIGHT GROUP ....................................................................................................... 3

HINES’ HISTORY ........................................................................................................................... 4

HINES’ CHINA STRATEGY ............................................................................................................. 5

HOTEL PROPERTIES LIMITED ....................................................................................................... 7

21st CENTURY TOWER ................................................................................................................. 7

BARRIERS ..................................................................................................................................... 8

Political Barriers ...................................................................................................................... 9

Environmental Barriers ......................................................................................................... 10

Cultural Barriers .................................................................................................................... 10

Economic Barriers ................................................................................................................. 11

Infrastructure Investment ..................................................................................................... 12

CONCLUSION ............................................................................................................................. 12

APPENDIX A ............................................................................................................................... 15

APPENDIX B ............................................................................................................................... 16

APPENDIX C ............................................................................................................................... 17

WORKS CITED ............................................................................................................................ 18

EXECUTIVE SUMMARY

In the spirit of China’s incredible effort displayed while hosting the Summer Olympics in

2008, Shanghai is attempting to equal the wow factor while hosting the 2010 World Expo. This

required a boost in development of Shanghai. Thus, after

twelve years of lengthy delays culminating with bringing in a

global partner from the west, the 21st Century tower in

Shanghai is climbing towards completion. The fifty story,

multi-purpose facility is nestled cleanly in the Shanghai

Pudong financial district, among several other impressive and

towering projects. Its neighbors include China’s tallest

building, the Shanghai World Financial Center, and the Jin

Mao Tower. The fifty story 21st Century building has twelve

floors of Four Seasons hotel splitting the commercial office

space. In the top twelve floors of the hotel, the joint

venture has carved out sixty-five residential apartments,

featuring one to four bedrooms.

A joint venture between Hines, Hotel Properties Limited (HPL) and the state owned

China Everbright, the project almost did not get off the ground. Originally conceived in 1997,

the building literally stopped at ground level when Chinese Everbright decided to implement a

strategy change, which included a termination of its commercial real estate business. Hines

agreed to resume the project in 2006, recognizing the importance of the financial district to the

people of China, and seizing an opportunity to grow its relationships in China, particularly

Shanghai. The multi-purpose facility is to be completed in 2009.

The 21st

Century tower (left) is nearing

completion next to the Shanghai World

Financial Center

SHANGHAI TRANSFORMATION

In 2002, Shanghai won the bid to host the 2010 World Expo. City planners promise that

it would soon be not only China's financial and manufacturing capital, but its "green" capital as

well. Already, Shanghai has converted Nanjing Lu to a pedestrian mall, remodeled the Bund

and its promenade, revitalized many avenues and villas in the old French Concession, and

created 1,800 hectares (4,500 acres) of greenway with trees and lawns (an area equivalent to

4,000 football fields). Also on tap is the Huangpu River Renovation Project, covering 20km (12

miles) of downtown riverfront on both shores, whereby the harbor will be transformed by

green corridors, an elliptical canal, a maritime museum, marinas, riverside parks, and new

housing estates. The latest environmental project is the most ambitious yet: the building of an

eco-city - the first self-sustaining city in the world which does no appreciable damage to the

environment - that will be home to half a million people on the wetlands of Dongtan on

Chongming Island at the mouth of the Yangzi River (Owyang, 2008).

For 2009, Shanghai municipal government plans to launch a 160 billion Yuan ($23.4

billion) economic stimulus package, adding to the 500 billion Yuan plan introduced earlier to

boost the slowing economy. The plan involves infrastructure spending over the next two years

on areas such as transportation, scientific innovation, industrial upgrading, environmental

protection and projects related to the 2010 Shanghai World Expo. In addition, the city's urban

construction and communication bureau announced plans to develop a wide range of

infrastructure projects, such as the improvement of low-rent housing, building projects in the

suburbs, constructing an international shipping center and investment in urban transportation

facilities (China.Org.Cn, 2008).

CHINA EVERBRIGHT GROUP

China Everbright Group is a state-owned enterprise (SOE) under the jurisdiction of the

central government. Founded in 1983, it was China’s first licensed financial holding company

and established as a vehicle contributing to the reform and opening of the Chinese economy.

Based in Hong Kong, it is focused on the financial sector, mainly involved in banking, securities,

insurance, and investment management.

By the end of 2008, it held total assets topping RMB 1 trillion ($128B USD). Specifically,

the Group owns and controls China Everbright Bank and Everbright Securities Co. Ltd, along

with several companies listed on the Hong Kong and overseas stock markets. China Everbright

Limited, China Everbright International Limited, China Everbright Technology Limited and Hong

Kong Construction Limited are listed in Hong Kong; China Everbright Pacific Limited is listed in

Singapore. Non-financial business and investment of the Group include information

technology, telecommunication, petroleum, property development and investment, timber

industry and industrial and manufacturing operations. China Everbright Group is a growing,

innovative and competitive group with widespread influence in both Hong Kong and the

Mainland (China Everbright Group, 2008).

HINES’ HISTORY

Hines is a privately owned international real estate investment, development and

management firm that was founded in 1957. The organization is currently active in 17

countries, with more than 3,700 employees and controlled assets valued at almost $26 billion.

Hines’ historical and current portfolio consists of more than 1,000 projects completed and

managed, with another 114 projects under development. Together they represent more than

42 million square meters of office, mixed-use, residential, retail, industrial, and medical

properties, as well as large master-planned communities, sports facilities, cultural arts venues

and other land developments (Hines, 2008).

Hines quickly became regarded as a developer of landmark office buildings in major

cities across the U.S. and revolutionized the industry by introducing signature architecture for

multi-tenant buildings, and higher standards for all aspects of building design, operations and

management. Among Hines’ best known projects are: The Galleria and Pennzoil Place in

Houston; the Philip Johnson-designed 53rd At Third in New York City; Columbia Square and

Franklin Square in Washington, DC; Three First National Plaza and 191 North Wacker in Chicago.

In 1974, Hines entered the international real estate market. Since then, the firm has

completed, acquired and redeveloped projects totaling more than 2.8 million square meters

including such notable office projects as; 99 Queen Victoria, London; Pórtico, Madrid; Ducat

Place, Moscow; Uptown München, Munich; and EDF Tower, Paris; Other notable residential,

retail and mixed-use international projects include Diagonal Mar, Barcelona; Embassy House,

Beijing; Del Bosque, Mexico City; and Metropolitan, Warsaw.

Hines executes its business strategies by integrating its investment management teams

with local market personnel in 68 U.S. cities and 40 cities outside of the U.S. As an investment

manager, Hines has a history of consistently delivering targeted, risk-adjusted returns to

investors. The firm pursues investment strategies across the risk spectrum: from core to value-

added to opportunistic.

Since 1991, Hines has sponsored more than 25 unique investment vehicles with over

$15.0 billion in equity for property acquisition and development in the U.S., Europe, Latin

America and Asia, with 21 funds currently in the investment or operations/disposition phase. A

recent U.S. investment fund is earmarked solely for “green” office buildings, which underscores

the firm’s longstanding commitment to sustainability. Hines was an early adopter of the EPA’s

ENERGY STAR program for commercial buildings, as well as the U.S. Green Building Council’s

LEED rating program. Hines’ investor partners and clients include major public and private

pension funds, government investment authorities, insurance companies, financial institutions,

endowments and individual high net worth investors (Hines, 2008).

Over the last 50 years, Hines has grown from a one-man operation in Houston, to a

multi-national enterprise with offices in 108 cities around the globe. With Hines’ experience, a

knowledgeable employee base with executive tenure averaging 30 years and a commitment to

excellence in the products and services they deliver, Hines continues to thrive as it adds value

to real estate around the world.

HINES’ CHINA STRATEGY

With 1.3 billion potential consumers and a ten percent growth rate in its economy last

year, China has attracted a flood of entrepreneurs and multinational companies, who demand

the sophisticated office and living space that is Hines' signature. Leading the way in 1995, Hines

opened its strategically located Beijing office to take advantage of the enormous opportunities

presented by such astonishing growth.

“When Hines decided to expand into Asia-Pacific, we looked at countries from Japan to

Malaysia,” says Jim Buie, Executive Vice President-Far East and West regions. “We decided to

make our first investment in China because it represented the greatest growth market, and it

has remained the most stable country in the region through the Asian financial crisis. As China’s

capital city, Beijing was a great place for Hines to get its start.”

“We have seen the property markets here go through several cycles since our arrival in

1994,” says Senior Vice President Jim Morrison, head of Hines’ China office. “China has

continued to enjoy robust economic growth, which is attracting a new wave of foreign

investment and foreign businesses establishing or expanding their presence here.”

In 2002, when Forbes magazine asked a group of real estate executives where clients

are most likely to be scouting for new offices, the country named most often was China. Not

only are global companies moving manufacturing operations there, they are also setting up

regional headquarters in the new office towers being developed in Beijing, Shanghai and

Shenzhen. Hines’ three Beijing projects, Embassy House, Hyundai Motor Tower and Park

Avenue,, have been designed to meet the needs of foreign companies entering the China

market, as well as China’s emergent professional classes.

To better serve this rapidly expanding market for upscale office, residential, retail and

industrial space, Hines has brought together a diverse team of professionals from China and

from around the world. Together, they provide a blend of local, regional and international

experience that combines some of the best real-estate minds from abroad with an acute insight

into Chinese business, government and culture. This has allowed the company to leverage its

network of talent and global connections to address both international clients in China and the

country’s growing middle class with equal effectiveness.

HOTEL PROPERTIES LIMITED

Singapore’s Hotel Properties Limited (HPL), founded in 1980, is a diversified property

development group active in three primary areas: Hotels and Hotel Management; Property

Development and Investment; and Lifestyle, covering the group's restaurant, food distribution,

retail, and leisure interests (Hotel Properties Limited, 2008).

The group's hotel division is primarily engaged in operating hotels and shopping

galleries as well as providing hotel management services. It currently owns 18 hotels in nine

countries in tourist destinations, including resorts in Bali, Singapore and the Maldives. Its hotel

brands include the Four Seasons and Hilton Hotel. The properties division is involved in

developing residential and commercial units for rental or sale upon completion. Development

properties in Singapore include Four Season Park, Nassim Jade and Scotts 28. Investment

properties include shop units at Meridien Shopping Center and condominium units at Four

Seasons Park. The lifestyle division carries out distribution and retail operations including

various food and non-food items. It holds retail franchise rights for Hard Rock Cafe and

Haagen-Dazs in Asia.

21st CENTURY TOWER

On January 6, 2006, Hines announced that it had formed a joint venture with China

Everbright Group and HPL to resume construction on a mixed-use tower in Shanghai. This

building, labeled the 21st Century Tower, would be a 50 story skyscraper located along Century

Boulevard, the main street in the ‘Little Lujiazui’ Financial District. Set for completion in 2009,

the building will be divided into four elements: headquarters for China Everbright Group

(22,000 square meters); Class A office space over 39,000 square meters); a luxury Four Seasons

Hotel with 187 rooms; and 65 Four Seasons private residences, located on the 12 uppermost

floors, that will be among the most luxurious apartments in Shanghai (Hines, 2006).

The project was originally initiated in 1997, solely by China Everbright Group, but never

progressed further than the construction of the foundation and basement. The delay was due

to a change in Everbright’s business strategy, which included the elimination of its real estate

business. The site remained abandoned until Hines and HPL conducted redevelopment studies

and finalized a new development plan. Leaders of the three companies cited the importance of

Shanghai in the global market and its leading position as a financial center as main reasons for

entering the agreement. For Hines, the project takes on added importance as this will be its

first major project in Shanghai, having established itself as a leading international development

company with its ventures in Beijing.

BARRIERS

Over the past 25 years, China has been through a number of transformations in the

political, environmental, cultural and economic arenas. Some of the key changes include

shifting from a totalitarian government to soft authoritarian, and shifting from a low income

society to a growing consumptive economy with a rising “middle class”. China has also passed

from practicing egalitarianism, a political doctrine that holds that all people should be treated

as equals with the same political, economic, social, and civil rights, to very unequal income

distribution and conspicuous consumption. This consumption can be described as the lavish

spending on goods and services acquired mainly for the purpose of displaying income or

wealth. In the mind of a conspicuous consumer, there seems to be a need to attain or maintain

social status (Wikipedia, China, 2009).

In the construction industry, there have been massive transitions: from public

construction projects to more private and joint-venture construction projects; from “Danwei”,

or work unit, to what today is called a place of work or place of employment (Prof. Lieberthal,

2004). “Danwei” acted as the first step of a multi-tiered hierarchy linking each individual with

the central communist party. Also, workers were bound to their work unit for life. Each

“Danwei” created their own housing, child care, schools, clinics, shops, services, post offices,

etc; the influence of a work unit on the life of an individual was substantial and permission had

to be obtained from the work units before undertaking everyday events such as travel,

marriage, or even having children.

Another important transition was a population migration from rural to urban, as

industry moved from inland to the coast. Most investments developed along the east coast,

which accounted for almost 60% of the total construction, helping develop cities such as:

Beijing, Shandong, Guangdong, Shanghai, and Zhejiang (China Statistical Yearbook, 2005)

Since Hines began its foreign strategy in the Far East in early 1990’s, the company has

dealt with barriers in fields such as: governmental, environmental, and cultural. Additionally,

there have been differences in communications styles, project & contact management

procedures, materials used and design trends.

Political Barriers

Even though there has been a recent shift to a more globally-focused society, the legacy

communist system remains. The relationship of party-government and hierarchy-ranks are key

challenges when dealing with Chinese government. Hierarchy is a key characteristic in the

Chinese culture where complex reporting lines evolve. As an example, the Ministry of

Construction (MoC) plays a key role in the construction industry. Although, the Ministry of

Commerce, Ministry of Information, the Development & Reform Committee, and the Trade and

Economy Committee cannot be ignored (Appendix B).

Government continues to evolve and new policies affecting the construction industry

have been created. This steady change in policy forces foreign companies to be prepared for

regular changes in regulations and personnel. MoC decrees pose barriers to foreign design and

contracting firms. In addition, the government subsidizes several industries, which gives it

more control. Privatization is a limited figure, as government owns main infrastructure

projects: railways, airports, ports, and especial venues such us stadiums.

The SOEs still lead the design institutes and contractors. The top 10 real estate

developers only account for 8% of the total market. Foreign companies pursuing development

in China must have an entry-mode strategy, knowledge and goodwill in their local market, and

most importantly, must partner with local firms to complete projects. Without SOE’s, foreign

developers would have limited access to material sourcing and applicability in the local market.

To improve their position in China, Hines sought a joint venture with China Everbright and

contracted the development of the 21st Century Tower.

Environmental Barriers

Energy conservation is becoming an important issue for China, not only due to

increasing prices, but also due to increases in energy consumption within urban buildings.

Energy consumed in these buildings rose from 10 percent nationally in the late 1970s to more

than 25 percent in 2006; and is expected to reach 35 percent by 2020 (UNEP SBIC, 2008). This

is a concerning trend for the government and it is now promoting low energy construction

technologies. In the near future, government will increase barriers to companies or materials

that are not “eco-friendly”. Foreign companies interested in obtaining a competitive advantage

in China must follow this trend.

In 2004, the National Development and Reform Commission (NDRC), implemented the

“Conservation Plan” which stipulates that new buildings should subject to a 50 percent energy

conservation design. Several major cities such as Beijing and Tianjin shall take a lead in

implementing the 65 percent energy-saving standard.

With regards to this, Hines followed the policies during the construction of the 21st

Century Tower by incorporating a HVAC System which has an energy efficient dual system that

simultaneously provide heating and cooling. Cooling is provided by chilled water supply and

heating by user-controlled electrical heating elements. Additionally year round fresh air is

supplied. In addition, even though not yet a standard in China, Hines is seeking Leeds

certifications for future developments in China. The Leeds certification includes several “green”

initiatives to lower energy costs.

Cultural Barriers

“If you try to compete head to head with Asian developers and investors, you'll be killed

in a flash, quite frankly,” says Cushman & Wakefield's Thompson. “You don't have the ‘Guanxi’,

you don't have the understanding, and you don't have the speed of decision-making” (Voyles,

2005). “Guanxi” literally means "relationships" and stands for any type of relationship. In the

Chinese business world, however, it is also understood as the network of relationships among

various parties that cooperate together and support one another.

Western companies want to strike a deal very quickly, while the Chinese prefer to

negotiate and seek concessions. Western companies find relationships less important;

substituting them for written agreements. In China, it is the right “Guanxi” that makes all the

difference in ensuring that business will be successful. By getting the right “Guanxi”, the

organization minimizes the risks, frustrations, and disappointments when doing business in

China. Often, acquiring the right “Guanxi” with the relevant authorities will determine the

competitive standing, in the long run, of an organization in China. And moreover, the inevitable

risks, barriers, and set-ups encountered in China will be minimized when the right “Guanxi”

network is working. Hence, the correct “Guanxi” is vital to any successful business strategy in

China.

“Guanxi” does not have to be based on money. Treating someone with decency while

others treat him/her unfairly could result in a good relationship. It starts with and builds on the

trustworthiness of the individual or the company. If a company promised certain things and

delivered as promised, the company is showing trustworthiness and the Chinese would be

more inclined to deal with them again. Being dependable and reliable definitely strengthens

the relationship. Frequent contact with each other foster understanding and emotional bonds

and the Chinese often feel obligated to do business with their friends first.

During development of the 21st Century Tower, Hines and their partners encountered

set-backs due to cultural barriers. “The number of times that I was prepared to throw up my

hands and pack my bags are too numerous to recount,” says Jim Buie, Executive Vice President

for the Western U.S. and Asia-Pacific for Hines, the U.S. developer with the most experience in

China (Voyles, 2005).

Economic Barriers

As for Shanghai’s property market, loosened restrictions on foreign investment since the

1990s has transformed Shanghai into the new economic hub of China. However, since the

beginning of 2008, the number of property transactions has dropped dramatically, prices

soared and investors turned to second and third tier Chinese cities for investment

opportunities. In reaction to the slowdown, the central government recently announced its

first loan interest rate cut in four years. The city appears to be experiencing a cooling off period

(Wakefield, 2008).

Through beneficial partnerships with China such as the 21st Century Tower in Shanghai,

Hines has benefited from Shanghai’s prosperity. However, with the recent downturn in the

Shanghai property market, Hines will need to reinforce their relationships with additional

Chinese SOEs.

Infrastructure Investment

Regarding the regulatory and competitive landscape, China’s construction industry

remains protected. State-owned companies drive the construction sector in China and

especially in Shanghai. There are about 9,000 state-owned construction corporations,

compared with just 400 foreign-owned firms doing business in the country. Foreign

construction companies are allowed to form joint ventures and are eligible to bid for works that

are entirely foreign-funded or for projects that local companies are unable to undertake.

However, the government does not allow foreign enterprises to undertake design, construction

or consulting alone.

CONCLUSION

The skyline of Shanghai is simply stunning. The combined rich architecture of the

financial district is the envy of western civilization, feeling like an opulent blend of Manhattan

and Las Vegas. Behind the

glittering mask is the clear iron

fist of the local and national

government, supervising and

advising every step of the way.

Although the 21st Century tower

is not near the tallest of China’s

structures, it significance rises

far above its stature. The joint The evening landscape of Shanghai

venture between the state owned China Everbright and Houston’s own Hines Company

represents a partnership that can supersede boundaries formerly thought impenetrable. The

tower is a nice asymmetrical addition to the outward city, while more subtly providing a

partnership that allows private foreign companies to utilize their talents in China’s most

impressive city.

While an impressive completion to a once deserted project, the 21st Century tower also

raises some new questions, which we will pose to the company representatives on our trip:

1. In today’s current economic climate, is Hines having any problems finding capital for

new China projects?

2. There have been reports of a growing competition between the financial centers of

Shanghai and Hong Kong. What is the corporate strategy to take advantage of this

competition, increase the Hines brand visibility, and increase market share across

China?

3. Besides the energy efficient HVAC System, which other green initiatives has been

approached by Hines in the 21st Century tower construction? For instance, what has

happened to all the unused construction materials? Is there a waste recycle policy?

4. Are there plans for other projects with China Everbright Group or Hotel Properties

Limited in Shanghai or other major cities in China?

Appendices

APPENDIX A

APPENDIX B

APPENDIX C

WORKS CITED

(2005). Retrieved May 2009, from China Statistical Yearbook:

http://www.stats.gov.cn/tjsj/ndsj/2005/indexeh.htm

(2006, January 6). Retrieved May 5, 2009, from Hines:

http://www.hines.com/press/releases/01-06-06.aspx

(2008, November 20). Retrieved May 15, 2009, from China.Org.Cn:

http://www.china.org.cn/government/local_governments/2008-11/20/content_16795387.htm

(2008). Retrieved May 10, 2009, from Hotel Properties Limited: http://www.hotelprop.com/

(2008). Retrieved May 11, 2009, from China Everbright Group: http://www.ebchina.com/

(2008). Retrieved May 9, 2009, from Hines : http://www.hines.com/about/

(2008, March 6). Retrieved 9 2009, May, from UNEP SBIC:

http://www.unepsbci.org/SBCINews/latestNews/showNews.asp?what=Briefing__Policies_for_

Energy_Efficient_Buildings_in_China

(2009). Retrieved 2009, from Wikipedia, China: http://en.wikipedia.org/wiki/China

Owyang, S. (2008, December 10). Retrieved May 15, 2009, from Frommer's :

http://www.frommers.com/destinations/shanghai/0717010012.html#ixzz0Ewe7hDGC&B

Prof. Lieberthal, K. (2004, November 30). Hu in Command: Now Comes the Political and

Economic Challenges. Retrieved May 2009, from

http://www.cctr.ust.hk/articles/pdf/WorkingPaper4.pdf

Voyles, B. (2005, February 1). Retrieved May 12, 2009, from National Real Estate Investor:

http://nreionline.com/mag/real_estate_cracking_forbidden_market/

Wakefield, J. (2008, September 22). Retrieved May 10, 2009, from Property Report Asia:

http://www.property-report.com/property-news-opinion-analysis.php?id=169&date=8922

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