ACC’S 2007 ANNUAL MEETING ENJOYING THE RIDE ON THE TRACK TO SUCCESS
303 - China: A Market Too Big to Ignore
Evan Chuck Partner Bryan Cave LLP
Susan Frank Deputy General Counsel Science Applications International Corporation
Maureen Pearson Global Customs Counsel Delphi Corporation
James E. Schobel Senior Vice President, Legal Affairs, ABII Anheuser-Busch Companies, Inc.
Brian Walsh Vice President and Associate General Counsel Emerson
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Faculty Biographies
Evan Chuck Partner Bryan Cave LLP
Susan Frank
Susan Frank is SAIC’s deputy general counsel and senior lawyer for international activities. SAIC is located in McLean, Virginia. Her responsibilities include export control, FCPA, OFAC and anti-boycott compliance, international contracts, foreign subsidiaries and joint ventures and support for all of SAIC’s international business and supervision of three lawyers assisting in this area. She also heads SAIC’s export/FCPA staff of five professionals. Ms. Frank has served as a mentor in SAIC’s Mentor Protégé Program and is a board member of the American Institute for Practical Training.
Ms. Frank’s background includes more than twenty years’ experience practicing law in these areas. Before joining SAIC ten years ago, she was a partner with the DC office of Sonnenschein, Nath & Rosenthal. Prior to that, Ms. Frank spent four years in London and Risky Business and the PRC: qualified as a Solicitor to the High Court of England and Wales, practicing in the international area with the law firms of Theodore Goddard & Co. and Herbert Smith & Co. She also served as an attorney in the Office of the Legal Advisor at the Department of State and was a member of the U.S. delegation to the UN working on the first anti-corruption FCPA & Export Compliance multilateral treaty initiative.
Ms. Frank is a graduate of Trinity College, Washington D.C. and of the National Law Center of George Washington University. Susan M. Frank Deputy General Counsel Maureen Pearson Science Applications International Corporation Global Customs Counsel Delphi Corporation
James Schobel Senior Vice President, Legal Affairs, ABII Anheuser-Busch Companies, Inc.
Brian Walsh Vice President and Associate General Counsel Emerson
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The PRC Is Particularly Challenging from a The Foreign Corrupt Compliance Perspective Practices Act The US Foreign Corrupt Practices Act (FCPA) Criminalizes bribery as a means of getting applies to dealings with state-owned entities. business overseas; Employees of state-owned or controlled entities No payments or promises to pay directly or are “public officials” within the meaning of the indirectly to government officials; Act. Many PRC entities and individuals will fall Puts the burden on US companies and citizens into this category. to hire only reputable foreign agents/ The PRC is under an arms embargo, so no U.S. consultants/subcontractors; military or military related goods or technology PERSONAL liability for those who participate in can be exported. misfeasance or conduct sham transactions. In addition, the USG has substantially expanded Failure to follow company procedures can be the risks via export controls on commercial evidence of bad faith in the eyes of DOJ. items/technology with the recent “China rule.”
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FCPA Prohibited Acts of Bribery PRC & FCPA: Schnitzer Steel Payments by companies or their employees or agents to any foreign official, foreign political party, or party official or Schnitzer Steel and its Korean subsidiary, SSI Int’l Far East, fined a candidate for the purpose of corruptly influencing decisions by combined total of $15.2 million dollars for improper payments to such official or inducing him to use his influence to affect managers of wholly and partially-government owned companies in China, and improper payments to managers of private companies, decisions by a foreign government to obtain or retain business i.e., commercial bribery, in order to induce purchases of scrap steel. or obtain “any improper advantage.” In both instances, books and records falsely described payments. A foreign official includes anyone acting in an official capacity for a foreign government or one of its departments agencies Many payments were in the form of gifts, including a $2,400 watch in or instrumentalities or state-owned enterprises and officials of one instance. international organizations. SSI Int’l plead guilty to criminal charges and Schnitzer Steel agreed Employee of foreign government “agency or instrumentality” to deferred criminal prosecution pending annual reviews by a Local law not determinative on this point compliance consultant who would review not only FCPA compliance, but also compliance with U.S. commercial bribery laws State ownership and control are factors and foreign anti-corruption laws. Department of Justice’s functional analysis: Does employee play governmental role? Does employee have rights and privileges of government position? Is employee capable of influencing public policy?
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Foreign Companies are Affected: Beware of Agents, Subcontractors, Sapsizian/Alcatel Freight Forwarders: Baker Hughes
June 7, 2007 - Sapsizian, former Alcatel executive (and Baker Hughes Services International Inc (April 2007) French citizen) pleaded guilty to participating in the payment of more than $2.5 million in bribes to senior Allegations: Costa Rican government officials in order to obtain a Paying approximately $5.2 million to agents knowing that they would be used to bribe Kazakh officials. mobile telephone contract í worth $149 million í from Costa Rica’s state-owned telecom authority. Payments to Angolan agents (>$11 mil), Payments to Nigerian customs brokers and tax accountants (>$2.5 Payments were funneled through consulting firm. mil), Payments to an agent for sales of products in Kazakhstan, Russia & Sapsizian faces max of 10 years in prison, a Uzbekistan ($5.3 million) & US$250,000 fine and US$330,000 in forfeiture. Payments to freight forwarders for “door-to-door” services that avoided Indonesian customs clearance procedures. Sapsizian is cooperating – stay tuned for Alcatel Moral: it’s all about those intermediaries! settlement details! Alcatel was traded through ADRs on US Stock exchange The combined $44 million penalty is the largest monetary sanction through 2006. ever imposed in an FCPA case despite a voluntary disclosure.
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Vet Your Freight Forwarder: Vetco-Gray Fall-Out from Vetco Three subsidiaries of Vetco International, Inc. criminally According to Dow Jones, 11 oil and oil service firms received a letter on fined in total $26 million for violations of the anti-bribery July 2nd from DOJ asking about their relationship with Panalpina World provisions of the FCPA. Transport Holding Ltd. (PWTN), a Swiss-based shipping and logistics- management company. Largest criminal penalty ever sought by DOJ Also required to hire independent compliance monitor, undertake a complete investigation of all company conduct, and requires any “The oil and oil-service firms were asked to list the countries where Panalpina provided it with services in the past five years, and to specify future purchaser of the companies to be bound by the compliance what it paid for those services. Each firm also was asked to meet separately and investigation requirements. with federal prosecutors in Washington, D.C.” The Vetco subsidiaries pled guilty to paying approximately $2.1 million on 387 occasions to Nigerian Customs Service “Panalpina announced Tuesday that it is conducting an internal investigation and has been asked to provide documents to the Justice officials – using an international shipping and logistics Department relating to services in Nigeria, Kazakhstan and Saudi Arabia for company -- to induce the officials to provide the companies "a limited number of customers." with preferential treatment during the customs process. "Obviously, we are cooperating with the investigation," Panalpina The shipping co’s services were called “express courier spokesman Martin Spohn told Dow Jones.” payments,” “evacuations” and “interventions”—B & R violation. http://www.marketwatch.com/news/story/us-justice-department-probing- They were recorded as “local processing fees” and oil/story.aspx?guid=%7B1B210CAC-BB35-4929-99D9-006720B92189%7D “administrative/transport fee—B &R violation.
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Red Flags Ignored: Statoil This can get personal: Statoil, a Norwegian company traded on the NYSE, fined a total of $21 million by SEC, DOJ and Norwegian authorities in connection with a series At the March 28, 2007 FCPA Conference, the DOJ Fraud Section Chief of improper payments to the head of a subsidiary of the National Iranian Oil cited prosecution of responsible individuals in corporations as a priority. He Company. Also required to hire an independent compliance monitor. noted that the more senior the executive, the more DOJ would look to them to set and example and follow proper procedures. Statoil agreed to pay the Iranian Official through a consulting contract with He also emphasized that DOJ will look at the culture of the company to an offshore intermediary company organized in Turks and Caicos and determine if senior executives are following procedures and setting an owned by a third party located in London, England. Payments made to example. If not, they will be targeted by prosecutors. Swiss bank account. In return for the payments, the Iranian Official used his The former CEO of Titan’s Africa subsidiary has plead guilty to authorizing influence to assist Statoil in obtaining business in Iran. improper payments. David M. Pillor, former Senior Vice President for Sales and Marketing and Also of note, apparently numerous reports in the press relating to corruption member of the Board of Directors of InVision Technologies, Inc., agreed to in official’s family – Statoil conducted no due diligence on official. pay a $65,000 civil penalty in settlement of SEC charges that he aided and abetted in the company’s failure to establish adequate internal controls to Findings of SEC, DOJ and Norwegian investigations: prevent improper payments. Employees circumvented Statoil's internal controls and procedures that Pillor received e-mail messages from his Asian regional sales manager that were in place to prevent illegal payments; suggested that InVision's overseas sales agents/distributors intended to Statoil lacked sufficient internal controls; and make improper payments or other gifts to foreign government officials. Statoil lacked sufficient internal controls; and InVision subsequently paid invoices to its agents/distributors in China and By mischaracterizing the payments as legitimate consulting fees, Statoil the Philippines and improperly recorded the payments as legitimate violated the books and records provisions of U.S. federal securities laws. business expenses.
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Record Keeping Under the Recent Cases: DirecTV/Hughes FCPA Network Under SEC rules, SAIC & subsidiaries must maintain DirecTV/Hughes Network fined $5 million, accurate financial records which demonstrate that: You know what is being paid to whom for what. received directed remediation mandate, You have strict accountability in international business. and foreign subsidiary debarred for This has become a strict liability standard in practice. satellite technology transfers, including to 50-50 joint ventures or minority investments are held to a China and India, proscribed countries. good faith standard by the US partner to use its influence to the extent reasonable to ensure that the sub uses good accounting controls. DirecTV/Hughes Network also required to Actual interference or de facto management of the 50 participate on a “lessons learned” panel. percent or minority venture could, however, create greater liability.
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ITT Industries Recent Cases: Boeing ITT Industries ITT plead guilty to two felony charges, deferred Boeing fined $15 million and directed remediation mandated for prosecution as to third, March 27, 2007 unlicensed exports of QRS-11 gyrochip, an ITAR item incorporated $100 million in fines: in commercial aircraft, including to China, a proscribed country. $20 million to DDTC Notwithstanding persuasive argument by Boeing that commercial $2 million criminal fines aircraft standby systems containing the chip should not be subject to $28 million forfeiture the ITAR despite see-through rule, DDTC interpreted otherwise. $50 million must be invested in R&D and fielding of night vision Boeing disregarded this interpretation. The regulations were later revised to move chips to Commerce jurisdiction when incorporated technology for US soldiers with USG retaining Government in commercial aircraft and other conditions met, however, Boeing Purpose Rights in technology still fined for prior transfers. Plus full panoply of compliance – independent monitor, audits, training, etc. Moral: You must comply with rulings/interpretations of regulatory agencies, even if they make little sense, until such time a regulatory ITAR debarment limited to ITT’s Night Vision division: fix or change in position effected, or else face potentially stiff Existing export approvals mostly still valid penalties! Or in other words, don’t dis DDTC! Future export approvals subject to a policy of denial except in support of US Government contracts/end-use, or coalition partners in support of war on terror
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ITT Facts More ITT Procurement of Light Interference Filter (laser False and misleading statements in voluntary countermeasure for night vision), with classified disclosure – “recent discovery” of violations specification in Singapore, China and UK when company was aware of facts more than 2 Singapore/China: After US supplier was denied ITAR license to years before disclosure produce a substrate lens in China, Manager B tells Singaporean company to produce it, and suggests it could be produced in Offshore procurement of night vision parts and China facility components in Singapore: In UK, sends classified LIF specification to UK supplier facility Without license before 1994 without license With DSP-5 license but exceeding “build-to-print” after having been told by US Gov’t it would be difficult to obtain technology by engaging in collaborative design and approval and after being told by UK company that it did not have the necessary manufacture until 2000 security clearance With TAA but in violation of provisos (no hardware Production continues in UK even after US Gov’t requests exports, no production, no design manufacturing or design technology) until 2003 the return of the LFI classified specification from the UK
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Still More ITT Still More ITT ITT Lessons Enhanced Night Vision Goggle system – ITT designs next generation system with assistance from Singaporean company without a TAA from 2000 to 2004 ITT conduct so egregious, are there any lessons for the defense industry? TAAs drafted to cover activities but never filed due to concerns about past violations YES: So ITT decides to use a “Front Co” in US: Outsourcing of parts and components abroad must be done very cautiously. ITT requested employment of US engineer of Singaporean company by US affiliate in Rochester NY Make sure whether you can use a DSP-5 for offshore US affiliate obtained broad TAA without detailing technical procurement, take time to see if a TAA is enough or information to be sent an MLA is necessary. US engineer then used as conduit to send Enhanced Night The days of making a TAA do an MLA’s work are Vision Goggle technical data – email indicates Rochester co was over. front Be very cautious using US companies to do AND IT TURNS OUT, US Engineer was never employed by something you do not have authorization to do. Rochester company in any event, but remained an employee of Singapore company
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OTHER DEVELOPMENTS – What is a “Military End-Use”? China military end-use rule Exports, reexports or transfers in China of U.S. items Incorporation into a military items: that fall into one of the following 31 ECCNs require a described on the U.S. Munitions List (USML) license from BIS if sold to a “military end-use” described on the International Munitions List (IML) (as set out on the Wassenaar Arrangement, http:\\www.wassenaar.org); OR Cat 1 í Materials, Chemicals, Microorganisms, and Toxins, 1A290, 1C990, 1C996, 1D993, 1D999,1E994 listed under ECCNs ending in “A018” on the CCL; Cat 2 í Materials Processing 2A991, 2B991, 2B992, 2B996 Cat 3 í Electronics Design, Development and Production For the “use”, “development”, or “production” of military 3A292.d 3A999.c 3E292 items described on the USML or the IML, or items listed Cat 4 í Computers 4A994, 4D993, 4D994 under ECCNs ending in “A018” on the CCL; and Cat 5 í Telecommunications 5A991, 5D991 5E991 Cat 6 í Sensors and Lasers 6A995, 6C992 For the “deployment” of items classified under ECCN Cat 7 í Navigation and Avionics 7A994, 7B994, 7D994, 7E994 9A991(aircraft and engines). Deployment is defined as Cat 8 í Marine 8A992, 8D992, 8E992 "placing in battle formation or appropriate strategic í position." Cat 9 í Propulsion Systems, Space Vehicles and Related Equipment 9A991, 9D991, 9E991
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WHAT DOES THIS MEAN? What if my ECCN is not listed? No licensing requirement for military end-uses, Due diligence process even more but WATCH OUT, you still have: necessary than before for exports of dual- Numerous prohibited parties in China on various use items to China restricted lists Companies that could be engaged in business of Various options available: WMD concerns – which require a license regardless Due Diligence providers, Google, Local The risk that any form of support of a product sold to Counsel Report a Chinese military end-user will be subject to the ITAR as a defense service and proscribed since Can also ask the Chinese company to China is a proscribed country become a Verified End User (VEU) to BOTTOM LINE: any form of dealing with eliminate licensing concerns Chinese customers requires due diligence as to the identity and activities of those customers
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Conclusion
FCPA and Export Control are increasingly evolving into strict liability areas—the dark side of doing business internationally; PRC dealings are under particular scrutiny JamesJames E.E. SchobelSchobel and require care, attention and 6HQLLRUU9LLFH3UUHVLLGHQWW /HJDOO$IIIIDLLUUV monitoring/auditing; and Set up comprehensive policies and review $$QQ KKHHXX VVHHUU systems to ensure compliance. %%XXV VFFKK ,,QQWWHH UUQQDDW WLLRRQQD DOO,,Q -1 QFF
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AgendaAgenda
• :K\LLV&KLLQDDQLLPSRUWDQWEHHU PDUNHW" • %XGZHLLVHUSUHVHQFHLLQ&KLLQD A-B’sA-B’s ExperienceExperience inin ChinaChina ವ++RZ$%ಬಬVGHDOOVZHUHGRQH M&AM&A TransactionsTransactions • /HVVRQVOOHDUQHG
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StrategicStrategic RegionsRegions ofof thethe WorldWorld China’sChina’s PotentialPotential
2006 Consumption Annual Growth Rate Percent 100% = 1,653 MM HL 2001-2006 Asia/Pacific 6.2 ವವ//DUJHVWDQGIDVWHVW Africa 5% S. America South JURZLQJEHHUPDUNHW 3.5 JURZLQJEHHUPDUNHW 11% America Europe 32% North 1.3 ವವ//RZEXWLLQFUHDVLLQJ North America America 21% FRQVXPSWLLRQ Asia Pacific 31% Africa 4.4 ವವ55LLVLLQJSHUVRQDOOLLQFRPHV Europe 2.6
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ChinaChina BeerBeer IndustryIndustry BeerBeer VolumeVolume GrowthGrowth
China 2006 From 2004 - 2006, China’s beer volume growth is more than China’s beer market is now twice that of the other Top 10 countries -- combined rd th th, th larger than 3 , 4 , 5 and 6 352 MM HL largest beer markets -- 80 70 combined (Russia, Brazil 00 60 00 Germany, and Japan) +/ 50 China 1980 40 *similar in size to the 30 00 current L.A. market 20 +/ 10 &KLLQD 2WWKKHHUU77RRSS 7 MM HL Volume growth (2004-2006) &RRXXQQWWUULLHHVV 0
#33 in World #1 in World -6 -7
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AgendaAgenda A-B’sA-B’s ChinaChina BusinessBusiness
A-B owned and operated • :K\LLV&KLLQDDQLLPSRUWDQWEHHU Harbin No. 5 Brewer in China PDUNHW"
• %XGZHLLVHUSUHVHQFHLLQ&KLLQD A-B 27% minority position Tsingtao Leading Chinese Brewer • +RZ$%’VGHDOOVZHUHGRQH
• /HVVRQVOOHDUQHG A-B 97% / City of Wuhan 3% Wuhan No. 1 Super-Premium Brand
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PurchasePurchase ofof WuhanWuhan BreweryBrewery PurchasePurchase ofof WuhanWuhan BreweryBrewery
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BudweiserBudweiser WuhanWuhan BreweryBrewery BudweiserBudweiser WuhanWuhan BreweryBrewery
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AgendaAgenda
• Why is China an important beer market? • Budweiser presence in China TsingtaoTsingtao StrategicStrategic • How A-B’s deals were done InvestmentInvestment AgreementAgreement • Lessons learned 20022002
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5%5% EquityEquity StakeStake inin 19931993 5%5% TsingtaoTsingtao StakeStake
Tsingtao is the most famous Chinese beer brand InIn conjunctionconjunction withwith Tsingtao’sTsingtao’s IPOIPO inin HongHong Kong in 1993, A-B purchased 5% stake of the company Tsingtao was the first Chinese company listedlisted onon thethe HongHong KongKong StockStock ExchangeExchange A-B was the first foreign company invested inin aa ChineseChinese companycompany throughthrough publicpublic tradabletradable sharesshares inin anan overseasoverseas marketmarket
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WhyWhy WasWas TsingtaoTsingtao Attractive?Attractive? TsingtaoTsingtao SIASIA
China is the largest volume beer market in the We had remained in contact with Tsingtao world due to our 5% stake Tsingtao is the most important player in this They contacted us in 2001 to say they market with a rich tradition, a brand would be looking for a strategic partner recognized world-wide, nation-wide presence, recognized world-wide, nation-wide presence, Negotiations resulted in an agreement on and a strong management team Negotiations resulted in an agreement on a Term Sheet in June 2002 InvestmentInvestment inin TsingtaoTsingtao providedprovided A-BA-B withwith aa “growth option” on the mainstream Chinese We then proceeded to definitive market, complementing our high-end negotiations and signed a Strategic Budweiser strategy InvestmentInvestment AgreementAgreement inin OctoberOctober 20022002
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TsingtaoTsingtao SIASIA TsingtaoTsingtao SIASIA
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2EWWDLLQDQDWWWWUUDFWWLLYHUUHWWXUUQRQRXUULLQYHVWWPHQWWRIIFDSLLWWDOO DQGPDQDJHPHQWIRFXV •• $FFHVVWWKHFDSLLWWDOOUUHTXLLUUHGWWROOHDGWWKH&KLLQD DQGPDQDJHPHQWIRFXV PDUUNHWWFRQVROOLLGDWWLLRQGXUULLQJDSHUULLRGRIILLQFUUHDVLLQJ •• /HDUUQIIUURP7VLLQJWWDRDQGJUURZWWKHUUHOODWWLLRQVKLLSIIRUUWWKH FRPSHWWLLWWLLRQ IIXWWXUUH -22 -23 25 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success SummarySummary ofof AgreementAgreement TsingtaoTsingtao WrapWrap -- Up Up 3XUUSRVHRIIWWKHLLQYHVWWPHQWW– WWRGHYHOORS7VLLQJWWDR ,,QZHFRQYHUWWHGDOOOO%RQGVLLQWWR FRPSDQ\DQGWWKHEUUDQG VKDUHVDQGQRZRZQHTXLLWW\ ,,QYHVWWPHQWWVWWUUXFWWXUUH– FRQYHUUWWLLEOOHERQGV • $%DSSRLLQWWHGWWZRGLLUHFWWRUVDQG $%ZLLWWKXOOWWLLPDWWHHFRQRPLLFUULLJKWWVEXWW RQHZDVQDPHG9LLFH&KDLLUPDQ YRWWLLQJUULLJKWWV 7VLLQJWWDRFRQVHQWWHGWWR+DUELLQ %HVWWSUUDFWWLLFHH[FKDQJH DFTXLLVLLWWLLRQ $QWWLLGLLOOXWWLLRQUULLJKWWVIIRUU$% 6XPPDU\ DJRRGGHDOOIIRUERWWKVLLGHV 4LLQJGDR&LLWW\WWRUUHPDLLQOODUUJHVWWVKDUUHKROOGHUU DQGWWKHUHOODWWLLRQVKLLSLLVVWWURQJ -24 -25 26 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success HarbinHarbin AcquisitionAcquisition $VSDUWWRIIWWKHUHYLLWWDOOLL]DWWLLRQRIIWWKH LLQGXVWWU\EDVHLLQ1RUWWKHDVWW&KLLQDWWKH +DUELLQJRYHUQPHQWWGHFLLGHGWWRGLLYHVWW QRQVWWUDWWHJLLFDVVHWWVLLQ HarbinHarbin BreweryBrewery GroupGroup 7KLLVSURYLLGHGDQRSSRUWWXQLLWW\IIRUIIRUHLLJQ LLQYHVWWPHQWWLLQ1RUWWKHDVWW&KLLQD AcquisitionAcquisition +DUELLQ%UHZHU\ZDVDQDVVHWWWWKDWWWWKH JRYHUQPHQWWGHFLLGHGWWRGLLYHVWW 20042004 -26 -27 27 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success HarbinHarbin StructureStructure –– “Pre “Pre A-B”A-B” HarbinHarbin AcquisitionAcquisition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of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success HarbinHarbin AcquisitionAcquisition (2004)(2004) HarbinHarbin AcquisitionAcquisition (2004)(2004) :LLWWK+DUELLQ&LLWW\ಬಬVVXSSRUWW$%VLLJQHGD $WWWWKLLVWWLLPH$%KDGVHFXUUHGWWKHVXSSRUUWWRIIWWKH 3XUFKDVH$JUHHPHQWWWWRWWDNHRYHUWWKH &KLLQHVHJRYHUUQPHQWWDQGWWKH+DUUELLQ ULLJKWWVRII+RQJ.RQJLLQYHVWWRUZLLWWKFHUWWDLLQ PDQDJHPHQWWDQGHPSOOR\HHV FRQGLLWWLLRQV 6$%0LLOOOOHUU’’VWWHQGHUURIIIIHUUZDVYLLHZHGDVDKRVWWLLOOH RIIIIHUUDQGVSHFXOODWWLLRQPRXQWWHGDVWWRZKHWWKHUU 8QGHU+RQJ.RQJ/LLVWWLLQJ5XOOHV$%ಬಬV $%ZRXOOGELLG SXUFKDVHZDVUHTXLLUHGWWREHPDGHSXEOOLLF 'XUULLQJWWKLLVSHUULLRG$%SXUUFKDVHGDERXWWRII $IIWWHU$%ಬಬVSXEOOLLFDQQRXQFHPHQWW +DUUELLQVKDUUHVWWKUURXJKWWKHRSHQPDUUNHWW 6$%0LLOOOOHUDQQRXQFHGDYROOXQWWDU\RIIIIHUDWW $%OODXQFKHGDFRXQWWHUURIIIIHUUDWW+.SHUU DSULLFHRII+.SHUVKDUH VKDUUH -30 -31 29 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success HarbinHarbin AcquisitionAcquisition (2004)(2004) Post-HarbinPost-Harbin AcquisitionAcquisition 6$%0LLOOOOHUWWHQGHUHGLLWWVVKDUHVWWR$% 'XHWWRWWKHQDWWXUHRIISXEOOLLFWWHQGHURIIIIHU $%DFTXLLUHGPRUHWWKDQ RII+DUELLQ $%ಬಬVSUHDFTXLLVLLWWLLRQGXHGLLOOLLJHQFHZDV VKDUHVLLQWWKHWWHQGHURIIIIHU OOLLPLLWWHG 7KLLVZDVIIROOOORZHGE\DFRPSXOOVRU\ $IIWWHUWWKHDFTXLLVLLWWLLRQ$%FRPSOOHWWHG VTXHH]HRXWWDQGGHOOLLVWWLLQJRII+DUELLQ LLQWWHQVLLYHGXHGLLOOLLJHQFH 1DPHG“GHDOORIIWWKH\HDU” LLQ$VLLDLLQ :RUOOGZLLGHFRYHUDJHRII&KLLQD V $%KDVERXJKWWRXWWPLLQRULLWWLLHVಬಬ LLQWWHUHVWWV IILLUVWWFRQWWHVWWHGWWDNHRYHULLQWWKH+RQJ LLQVHYHUDOORIIWWKHEUHZHULLHV .RQJPDUNHWW -32 -33 30 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success Post-HarbinPost-Harbin AcquisitionAcquisition AgendaAgenda $%KDVLLPSOOHPHQWWHGIILLQDQFLLDOODQG • :K\LLV&KLLQDDQLLPSRUWDQWEHHU OOHJDOOFRQWWUROOVLLQDOOOOWWKH+DUELLQ PDUNHW" %UHZHULLHV • %XGZHLLVHUSUHVHQFHLLQ&KLLQD $%KDVFRQGXFWWHGYDULLRXVWWUDLLQLLQJV ZLLWWKPDQDJHPHQWWDQGHPSOOR\HHV • +RZ$%’VGHDOOVZHUHGRQH • /HVVRQVOOHDUQHG -34 -35 31 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success LessonsLessons LearnedLearned ConclusionConclusion )DFHWWRIIDFHPHHWWLLQJVDUUHHVVHQWWLLDOO ವ)ವ))RFXVRQWWKHUUHOODWWLLRQVKLLS $%KDVPRUHWWKDQELLOOOOLLRQLLQYHVWWHGLLQ &KLQD -36 -37 32 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success Emerson’s Journey in China Brian J. Walsh Vice President & Associate General Counsel Emerson -38 33 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success Characteristics of Emerging Markets How we started in China • No grand strategy in the beginning Pros Cons • All we knew was that we could not afford not to be - Market Potential and Opportunities - Lack of Infrastructure in China for First Mover Advantage - Rules and Regulations not - Low Cost Talent Available, often Transparent • High level ‘push’ – CEO without Experience - Rule of Law questionable - Eager to Attract Foreign - Corruption and Safety Issues • Local level ‘pull’ – Silver Platter Investments - No Reliable Market and other Information • Started small, took risks, learned from mistakes - Language and Cultural Differences and moved on - Fast Changing Market Dynamics - Plenty of Unknowns and • 1991 - Sales approx. $56 mil Uncertainties Headcount 146 people 34 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success Asia-Pacific Milestones - the Period of Significant Partnering Programs with China Universities Changes (1984 to Now) CEO Dialogue with MBA students • 1984 - CEO’s first Asia Trip China Research Programs • 1986 - Set up Regional Headquarters in Hong Kong and Taiwan ¾ Started in 1996 - Total of 30 programs at 5 universities and 1 research institute to date • 1990/92 - Set up country offices in Singapore, Thailand and Malaysia ¾ Sponsorship for Ph.D. candidates to perform • 1993 - Emerson Electric (China) Holdings established in Shanghai research on topics initiated by Emerson • 1994 - Senior Emerson Executives (Vice Chairman level) posted to Hong Kong to continue the transfer of the Emerson Management Process to Asia MBA Scholarship Programs • 1995 - Set up Emerson India 2005 • 1997 - Emerson Law Department established in Hong Kong Tsinghua University, Beijing CEIBS, Shanghai • 1999 - Procurement Department established in Hong Kong Jiaotong University, Shanghai • 2001 - Established eBusiness center in Manila Fudan University, Shanghai • 2006 - Asia has the largest headcount among all regions for Emerson 35 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success Corporate Social Responsibility Programs Emerson China Presence Today Advisory posts to committees David N Farr Economic advisor to Jiangsu China is Emerson’s biggest partner in Asia Chairman, CEO & governor, Liang Bao-hua President Current infrastructure: Edward L Monser Economic advisor to Dave Farr as economic adviser Chief Operating Guangdong governor, Huang to Jiangsu governor Liang Baohua • 39 entities in 15 cities Officer Hua-hua • There are 13 R&D centers Peter Yam Member of the Suzhou President, Greater Industrial Park Int’l Advisory • Over 35,000 employees China Committee Director of the Executive Committee of Foreign • Sales of approx $1.5 Bil. Investment Companies in Ed Monser meets with Huang Beijing Huahua, Guangdong Governor 36 of 37 ACC's 2007 ANNUAL MEETING Enjoying the Ride on the Track to Success Strategic Issues We Face in China • Developing the leadership required to manage the sales and infrastructure growth in the future • Understanding and developing strategies to address the regional differences of China • Adapting to the changing influence/impact the government, financial community, and social structure have on business (11th 5 Year Plan, RMB, Labor Law Changes, Bird-Flu, RoHS, etc.) • Designing products to suit the emerging multi-tiered markets • Competing with emerging local competition 37 of 37