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SURVIVING A START-UP IN SURVIVING A START-UP IN CHINACHINAPart IVPart IV

(Or, “It’s Getting Better All The Time!”)(Or, “It’s Getting Better All The Time!”)

SKIP NELSONSKIP NELSONADS-B TECHNOLOGIESADS-B TECHNOLOGIES

www.ads-b.comwww.ads-b.com

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BUSINESS PROFILEBUSINESS PROFILE

ANCHORAGEANCHORAGEExports ADS-B hardware & software to ChinaExports ADS-B hardware & software to China

20042004

BEIJING and HONG KONGBEIJING and HONG KONGGarmin Avionics distributor for ChinaGarmin Avionics distributor for ChinaAvionics Component manufacturer forAvionics Component manufacturer for

20072007

HONG KONGHONG KONGExports General Aviation Aircraft to ChinaExports General Aviation Aircraft to ChinaBuilds GA infrastructure in Asia Builds GA infrastructure in Asia

20082008

20112011 HONG KONG, TAIPEI & GUANGZHOUHONG KONG, TAIPEI & GUANGZHOUNew Joint Ventures to market avionics andNew Joint Ventures to market avionics andBuild General Aviation infrastructure in ChinaBuild General Aviation infrastructure in China

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Since 2004, 44 trips to ChinaSince 2004, 44 trips to China 78% Export to China, 22% Chinese manufacturing 78% Export to China, 22% Chinese manufacturing

for sale in U.S.for sale in U.S. ~ $6.6M in air traffic control, avionics and aircraft ~ $6.6M in air traffic control, avionics and aircraft

sales last 3 yearssales last 3 years Permanent offices in Beijing, Hong Kong & Permanent offices in Beijing, Hong Kong &

GuangzhouGuangzhou 22clients: 7 government, 15 private22clients: 7 government, 15 private Most of our work is in Central and Western China Most of our work is in Central and Western China New business in Taiwan & Hong KongNew business in Taiwan & Hong Kong

CHINA EXPERIENCECHINA EXPERIENCE

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WhatWhat’’s ADS-B?s ADS-B?

The aircraft get their positionThe aircraft get their positionfrom the GNSS constellationfrom the GNSS constellation

Then they simultaneously broadcastThen they simultaneously broadcasttheir position and other data totheir position and other data toany aircraft, or ground stationany aircraft, or ground stationequipped to receive itequipped to receive it

Ground Stations then transmit the aircraftGround Stations then transmit the aircraft’’s position to Air Traffic Controls position to Air Traffic Control

AAutomatic utomatic DDependent ependent SSurveillance urveillance - B- Broadcastroadcast

Aircraft can “see” each other

Aircraft can “see” each other

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I know it’s cliché, but to do Business in I know it’s cliché, but to do Business in China, China, FIRSTFIRST, You Have To , You Have To UnderstandUnderstand China…China…

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CHINA SUPERLATIVESCHINA SUPERLATIVES ItIt’’s BIG!s BIG!

ItIt’’s SAFEs SAFE

ItIt’’s FRIENDLYs FRIENDLY

ItIt’’s s definitelydefinitely OPEN FOR BUSINESS! OPEN FOR BUSINESS!

1.3 Billion people 1.3 Billion people (1/5(1/5thth of the World of the World’’s population)s population)

Extremely low rate of Crimes Against Foreigners

As in, they are As in, they are genuinelygenuinely fond of Americans! fond of Americans!

China has had the WorldChina has had the World’’s largest Gross Domestic Product (GDP) in all s largest Gross Domestic Product (GDP) in all but 226 years out of the past 2,000 years. Right now, they have more but 226 years out of the past 2,000 years. Right now, they have more than $1 Trillion USD available to than $1 Trillion USD available to buybuy foreign products and services foreign products and services

(China's GDP is only about $3.5 Trillion, compared to the US GDP of about (China's GDP is only about $3.5 Trillion, compared to the US GDP of about $14 Trillion – but, China’s GDP is $14 Trillion – but, China’s GDP is growing 4 times as fastgrowing 4 times as fast!) !)

7CHINA MYTHSCHINA MYTHSAND MISCONCEPTIONS…AND MISCONCEPTIONS…

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China is a Third World country with crowded streets, dilapidated China is a Third World country with crowded streets, dilapidated infrastructure, a lot of bicycles and people in Mao Jackets. infrastructure, a lot of bicycles and people in Mao Jackets.

- BUSTED! -- BUSTED! -

Myth #1Myth #1

Not even closeNot even close. Even in rural areas, you. Even in rural areas, you’’ll see modern new ll see modern new roads, bridges and communications infrastructure. The quality roads, bridges and communications infrastructure. The quality and scope of Chinaand scope of China’’s Internet and cell phone connectivity are s Internet and cell phone connectivity are legendary. Several of the most dramatic modern cityscapes in legendary. Several of the most dramatic modern cityscapes in the world can be seen in China and Dior and Calvin Klein are the world can be seen in China and Dior and Calvin Klein are seen far more often than Mao!seen far more often than Mao!

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The Chinese Central Government (The Chinese Central Government (aka’ The Communist Partyaka’ The Communist Party) is ) is veryvery visible and heavy-handed. visible and heavy-handed.

- BUSTED! -- BUSTED! -

Myth #2Myth #2

NopeNope! Forget everything you learned about China prior to 1985 - ! Forget everything you learned about China prior to 1985 - This is, and always has been a country of aggressive This is, and always has been a country of aggressive independent individuals and independent individuals and good businessmen. Think “single businessmen. Think “single party system” rather than “communism” and you’ll be more party system” rather than “communism” and you’ll be more comfortable. comfortable. Provincial governments now operate somewhat Provincial governments now operate somewhat like State governments in the U.S.like State governments in the U.S. Best technique: Ignore Best technique: Ignore politics and politics and deal with the peopldeal with the people (that’s what the Central e (that’s what the Central Government has learned to do…)Government has learned to do…)

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Myth #3Myth #3The average Chinese doesn’t like Americans and can be The average Chinese doesn’t like Americans and can be quite difficult to deal with (quite difficult to deal with (aka’ enigmaticaka’ enigmatic).).

- BUSTED! -- BUSTED! -Way off the mark! - Of all the countries I’ve visited during the last 40 years, China is probably one of the most outgoing and friendly toward Americans. The average Chinese remembers our help in WWII and seems to take genuine pride in the commercial and intellectual contributions China has made to the U.S. during the past 25 years.

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Myth #4Myth #4It’s a It’s a lotlot cheaper to manufacturer your “stuff” in China. cheaper to manufacturer your “stuff” in China.

- Not necessarily … -- Not necessarily … -Historically, it was always cheaper to make things in China if:• They were high volume, labor intensive, used local materials and were

relatively low tech• Manufacturing involved OSHA or EPA issues (not very ethical – huh?)• They were being sold in China or other Asian marketsToday, some of the former advantages of cheap labor and loose

environmental standards have been erased by demands for higher wages and Provincial concerns with the quality of life. On the other hand, China’s growing high-tech infrastructure is now able to compete with Taiwan & Japan on things like printed circuit boards and microcomponent manufacturing.

And where do the Chinese go for their “cheap” goods?

Vietnam & Malaysia, or course..!

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Myth #5Myth #5Corruption is quite common and/or, the Chinese will steal Corruption is quite common and/or, the Chinese will steal your “stuff”.your “stuff”.

- Well, sort of…- Well, sort of…Yeah, and so will most countries if you give them half a chance! The Government is leveling the playing field by instituting some strong new anti-corruption rules. Your biggest problem may actually be other foreigners that support corruption as a competitive tool. Your best defense is to:1.1. Know your ClientKnow your Client2.2. Isolate, compartmentalize and/or protect your Intellectual PropertyIsolate, compartmentalize and/or protect your Intellectual Property3.3. Deal fairly with your Customer (aka’ don’t give them a reason to rip Deal fairly with your Customer (aka’ don’t give them a reason to rip

you off) and he’ll probably treat you the sameyou off) and he’ll probably treat you the sameHong Kong is a model for official honesty and clean government, due largely to the effective oversight of its Independent Commission Against Corruption (ICAC). On the street however,

many Chinese joke that the acronym actually stands for “Interfering [with] Chinese Ancient Customs” !

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Myth #6Myth #6China is a wide open, China is a wide open, Billion Person MarketBillion Person Market (aka’ “wow – It’ll be (aka’ “wow – It’ll be easy to sell a easy to sell a lot of stuff lot of stuff here”…here”…

- - MaybeMaybe, but don’t give up your, but don’t give up yourday job just yet..!day job just yet..!

Yes, that means nearly a billion consumers, but don’t forget that there are also at least 50 million very aggressive domestic entrepreneurs working in the same market.

Do not underestimate the local competition!• They learn very fast (Okay, so maybe they copy a few things!)• They prefer to deal only with people they know (Like other Chinese)• And after all – What part of, “Hey - they’ve been doing this for 4,000

years don’t you understand?!

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GETTING GETTING STARTEDSTARTED

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Good Old Good Old NaïveNaïve ME! ME!

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1.1. WhatWhat’’s your strategy? – Merely selling s your strategy? – Merely selling ““AmericaAmerica”” is very Old School! is very Old School!

2.2. How are you going to handle your business in How are you going to handle your business in China – Business-to-Business, wait for them to China – Business-to-Business, wait for them to come to you, or through an AGENT?come to you, or through an AGENT?

3.3. How are you going to find a reputable Agent?How are you going to find a reputable Agent?4.4. Do you have the Do you have the patiencepatience to do business the to do business the

““Chinese WayChinese Way””??

FIRST, YOU HAVE TO ASK YOURSELF….

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1.1. Alaska Export Assistance CenterAlaska Export Assistance Center2.2. U.S. Commercial Service in ChinaU.S. Commercial Service in China3.3. Alaska World Trade CenterAlaska World Trade Center4.4. Attend a trade fair, or professional meeting in Attend a trade fair, or professional meeting in

ChinaChina5.5. Network through other people doing business in Network through other people doing business in

ChinaChina

BUILD YOUR NETWORKBUILD YOUR NETWORK

DonDon’’t even t even thinkthink about going in cold! about going in cold!

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Professional organizations – especially Professional organizations – especially those that have full-time reps in China those that have full-time reps in China (OGP, for example)(OGP, for example)

Other U.S. government agencies (FAA, Other U.S. government agencies (FAA, USDA, etc) that have offices in ChinaUSDA, etc) that have offices in China

U.S. – China Chamber of CommerceU.S. – China Chamber of Commerce www.usccc.orgwww.usccc.org

OTHER POINTS OF CONTACTOTHER POINTS OF CONTACT

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1.1. RULE #1RULE #1: It: It’’s virtually impossible to do business in China s virtually impossible to do business in China without a good Agent.without a good Agent.

2.2. RULE # 2RULE # 2: The majority of the agents you: The majority of the agents you’’ll encounter will ll encounter will have only have only oneone significant skill: significant skill: They are bilingualThey are bilingual. . ((““I speak I speak Chinese, therefore I am a China Expert…Chinese, therefore I am a China Expert…””))

3.3. Get to know your agent before you sign anything:Get to know your agent before you sign anything:1.1. How long has he worked in the field?How long has he worked in the field?2.2. Who does he know, what is his experience?Who does he know, what is his experience?3.3. Is the U.S. Commercial Service familiar with him?Is the U.S. Commercial Service familiar with him?4.4. Has he traveled to the U.S.?Has he traveled to the U.S.?5.5. Is he Chinese-American, Chinese, Taiwanese, or Singaporean?Is he Chinese-American, Chinese, Taiwanese, or Singaporean?

““AGENTSAGENTS””(A Necessary Evil)(A Necessary Evil)

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TRADE SHOWSTRADE SHOWS

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1.1. If you find the right one, they are an excellent way to If you find the right one, they are an excellent way to meet an Agent and begin to create your network in meet an Agent and begin to create your network in China! (China! (But a good forum is hard to findBut a good forum is hard to find))

2.2. Virtually every industry has at least one reputable Virtually every industry has at least one reputable Trade Show in China each year Trade Show in China each year

a.a. Check with the U.S. Commercial ServiceCheck with the U.S. Commercial Serviceb.b. How many years have they been operating?How many years have they been operating?c.c. How many exhibitors, speakers, etc?How many exhibitors, speakers, etc?

3.3. Beware of Beware of ““ForumsForums””!!a.a. They can be little more than a disguised pitch for an individual They can be little more than a disguised pitch for an individual

AgentAgentb.b. What is the ratio of foreigners to Chinese decision-makers ?? If What is the ratio of foreigners to Chinese decision-makers ?? If

the ratio is >1 on 1, then youthe ratio is >1 on 1, then you’’re just talking to yourself!re just talking to yourself!c.c. Chose a Forum that will be held in a city close to your potential Chose a Forum that will be held in a city close to your potential

market – travel is expensive for the Chinese market – travel is expensive for the Chinese

TRADE SHOWS & FORUMSTRADE SHOWS & FORUMS

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CLOSING THE DEAL IN CLOSING THE DEAL IN CHINACHINA

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GUANXIGUANXIGuanxi means “connections” – It’s not what you know, but who you know that really opens doors in China!

Building a good network of friends will help you avoid hearing, “Yan jiu, yan jiu” – Let us consider for a moment…, or “Mei yo” – There isn’t any

Guanxi is not bribery, even though it might involve taking an official out to lunch, or offering small gifts on special occasions (such as Lunar New Year)

Guanxi takes patience and perseverance(Something most Americans are not too good at!)

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THE THE ““CHINESE WAYCHINESE WAY””

30% - 50% of your time. 25% of marketing expense

The “Agreement to Agree” starts the real negotiation

Things will change up to the very last moment!

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Eat lots of lunches…Eat lots of lunches…

Drink Drink lotslots of tea. of tea.

… … and then itand then it’’s s Contract TimeContract Time!!

In other words:In other words:

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Know your product, your prices and your Know your product, your prices and your competition cold!competition cold!

Expect Expect manymany rounds of negotiation rounds of negotiation Last minute Last minute ““DiscountDiscount”” is expected is expected Know Export Controls & End UsersKnow Export Controls & End Users Know Import Duties and RegulationsKnow Import Duties and Regulations Be Be veryvery careful with Joint Ventures! careful with Joint Ventures!

NEGOTIATINGNEGOTIATING

Remember: The Chinese have been perfecting their business skills for more than 3,000 years…

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The correct people are hard to find!The correct people are hard to find! Travel is becoming more expensiveTravel is becoming more expensive

Up 60% in the last 2yearsUp 60% in the last 2years Access is not balancedAccess is not balanced The Exchange Rate can fool you The Exchange Rate can fool you Frustration with business methodsFrustration with business methods The language barrier !The language barrier ! Jet lag, airport hassles, etcJet lag, airport hassles, etc And the biggest problem: And the biggest problem: ShoppingShopping!!

SPEED BUMPSSPEED BUMPS

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SKIP NELSONSKIP NELSONADS-B TECHNOLOGIESADS-B TECHNOLOGIES

(907) 258-2372(907) 258-2372www.ads-b.comwww.ads-b.com

问题？问题？(Questions?)(Questions?)

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China has had the World’s largest Gross Domestic Product (GDP) in all but 225 years out of the past 2,000 years China's GDP is about $3.5 Trillion, and the US GDP is about $14 Trillion Their $550B bailout = 14%, ours is ~5% Theirs is going into technology & infrastructure, ours is restoring failing financial institutionsChina's central bank reserves are 987 billion as of November 2008The country's annual trade surplus or the amount exports exceed imports ballooned to $262.2 billion, up 47.7 percent from 2006 Exports in the 1st qtr 2008 amounted to 424.6 billion U.S. dollars, up 21.5 percent, or 6 percentage points less than a year earlier. Imports were 366.6 billion U.S. dollars, up 27.9 percent, or 8.8 percentage points more than a year earlier. I watched the Yuan gain almost 20% against the Dollar since 2005. The US initially welcomed China's July 2005 decision to remove the peg tying the value of the yuan to the US dollar and link the yuan instead to a vaguely defined basket of currencies. Pressure soon grew in Washington, however, for a faster rate of appreciation as the US trade deficit with China continued to mount, sucking ever-more dollars into the Chinese treasury. When I started in China the Dollar was 8.2 Yuan, The currency hit a record high of 6.8099 on September 23. There is some indication that the Yuan may be weakenedIn September, China surpassed Japan to become the biggest foreign holder of US Treasury debt, with a total of $585 billion. China's $2 trillion in foreign-exchange reserves (the world's largest, followed by Japan's $1 trillion), are primarily invested in relatively low-yielding US government debt and the until recently considered safe debt of Fannie Mae and Freddie Mac, the two mortgage-finance companies taken over by the US government three months ago.

Statistics that say the U.S. is producing 70,000 engineers a year vs. 350,000 from India and 600,000 from China aren't valid, the Duke team says. We're actually graduating more engineers than India, and the Chinese numbers aren't quite what they seem. In short, America is far ahead by almost any measure, and we're a long way from losing our edge.

Actually - We found that the U.S. was graduating 222,335 engineers, vs. 215,000 from India. The closest comparable number reported by China is 644,106, but it includes additional majors. Looking strictly at four-year degrees and without considering accreditation or quality, the U.S. graduated 137,437 engineers, vs. 112,000 from India. China reported 351,537 under a broader category. All of these numbers include information technology and related majors

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One in a million = 1,300 like you in China and 1,100 like you in India1.3 billion people (1/5 of the world’s population)

You can encounter the entire population of North America ( 330M) within a day’s drive of Shanghai [US = 305M), Mexico = 106M US is the 3rd largest country on earth PC Board Assembly & Final Packaging Full Box build for Electronics & Commercial Applications Fabrication of Metal & Plastic Molding Parts & Assemblies Cable and Harness Assembly and other Value-Added Assemblies General Assembly for Business-to-Business & Retail Applications Standardized & Customized Components, Parts and Assemblies

Here are some examples of benefits of manufacturing in China:Reduction in Direct Labor, Material, and Overhead Cost Reduction in Indirect Engineering, Marketing, Financial Labor & Transactional Cost Simplify supply chain logistics & service to your Asia customers Center for Material Sourcing throughout Asia for Domestic and China Production Fast-turnaround of Low Cost Tooling & Fixtures Currency Transaction Flexibility between Multi-National Countries Knowledge of Emerging Local Chinese and Asian Markets