Sixth Annual In-House Counsel Conference Panel 2 Interactive

Sixth Annual In-House Counsel Conference Panel 2 Interactive Strategies for Doing Business in China

Presenters Frances Chou, President and General Counsel, Schechter + Chou Robert Hart, Senior Corporate Counsel, Harman International Industries, Inc. Kimberley Chen Nobles, Partner, Crowell & Moring LLP Andrew Pan, Chief Representative & Managing Director, North American Representative Office of Shenzhen, P. R. China (NAROS) 2

China’s Market Under Global Slowdown Update and Opportunities Andrew Pan 3

Overview China’s Economy Under Global Economic Slowdown China’s Economic Stimulus Package Opportunities by Industry Sectors Recent Development 4

China’s Economy Under Global Economic Slowdown GDP growth statistics 9% in 2008 in Quarters 10. 6% (Q 1) 10. 1% (Q 2) 9. 0% (Q 3) 6. 8% (Q 4) 2009 in Quarters 6. 1% (Q 1) 7. 9% (Q 2) 8. 9% (Q 3) 2009 target: 8% Source: National Bureau of Statistics of China 5

China’s Economy Under Global Economic Slowdown (cont. ) Export declined 19. 7% in Q 1, 2009 Export volume decreased from $111. 4 billion (Jul 2008) to $51. 3 billion (Jan 2009) FDI decline FDI flows declined 20. 6% in Q 1, 2009 Unemployment rate increase Raised 2009 target to 4. 6%, the highest since 1980 6

China’s Economy Under Global Economic Slowdown Stock market, housing market, auto market and other key economic figures were all down sharply 7

China’s Stimulus Package Announced Nov. 9, 2008, projects and spending already started in 2008 4 trillion RMB ($586 billion USD) stimulus package for government investment in infrastructure, tax deductions and subsidies, to stimulate domestic spending 2 years, 10 major areas: Finance, housing, rural infrastructure, transportation, industry, health and education, disaster rebuilding, environmental protection, technology innovation, and tax reform 8

Opportunities by Industry Sectors Finance Removing lending quota on commercial banks Increasing the lending scale Credit support to M&A Credit support to rural areas Credit support to small and medium enterprises Tax (VAT) reform 120 billion RMB tax reduction from January 1 st, 2009 Export VAT refund rate increases to help exporters, applicable to 3, 770 products 9

Opportunities by Industry Sectors Housing Tax reduction to boost real estate market Affordable and low-rent housing Expanding the pilot program to rebuild rural housing Increasing senior housing Rural infrastructure/modernization Improving countryside roads and power grids Ensuring drinking water safety Expediting the North-South Water Diversion Project and country-wide reservoirs Rural Home Appliance Subsidies Program 10

Opportunities by Industry Sectors Transportation Budget: 1. 8 trillion RMB Building more dedicated passenger railways and coal routes Expanding highway system Building more airports in the western areas Automobile Tax reduction for purchasing economic cars less than 1. 6 L Subsidies to farmers for purchasing light trucks and minivans 10 billion RMB to subsidize auto industry technological innovation and new energy vehicles Expanding auto financing 11

Opportunities by Industry Sectors Telecom Long awaited 3 G licenses issued to China Mobile (TD- SCDMA), China Telecom (CDMA 2000) and China Unicom (WCDMA) Will spend 170 billion RMB in 2009, and 400 billion RMB by 2011 on 3 G network Could lead to US $290 billion in private-sector investment by 2011 Target: 50 million subscribers by 2011, covering all cities and bigger townships 12

Opportunities by Industry Sectors Healthcare and education Improving health and medical systems in rural areas Restructuring the healthcare system Building more joint-venture hospitals Expanding health insurance, especially to rural areas Developing cultural and educational sectors in rural areas Building more schools in rural western and central areas 13

Opportunities by Industry Sectors Energy and environment Budget: 350 billion RMB Technology upgrade of coal-burning power plants to reduce pollution Encouraging investment in renewable energy such as nuclear, wind, solar, and biomass Encouraging energy conservation, and improving energy efficiency Clean Development Mechanism (CDM) projects – greenhouse gases reduction projects Waste management Eco-city plan 14

Opportunities by Industry Sectors Other industry sectors Sichuan earthquake rebuilding: 1 trillion RMB Technology innovation E-commerce Entertainment, animation, media and advertising Logistics 15

Recent Development Challenges: Global/U. S. economic slowdown lasting can cause China’s economic growth sluggish and market (most sectors) downsize continuously Is 4 trillion RMB enough? Saving vs. spending Government spending vs. consumer spending Over liquidity/inflation concern Banking trouble again: non-performing loans may rise Currency and trade disputes between the U. S. and China 16

Recent Development Q 4/2009 GDP growth: >9% (estimated), 2009 GDP growth: 8% (almost confirmed), 2010 GDP growth: >8% (estimated) China’s economy V-shaped recovery confirmed Transformation of growth pattern Before: excess consumption of natural resources; environmental pollution; too much dependable on investment and export; insufficient domestic consumption Aim: more balanced, sustainable and steady growth with a better skilled work force and technological innovation; boost domestic consumption 17

Key Business Issues Frances Chou 18

Key Business Issues Initial research Unexpected costs and expenses Labor related issues Relationship, Relationship! Due diligence Lost in translation Opportunities 19

Initial Research Permits, licenses, approvals, . . What kinds From which agencies Fees, costs, expenses, . . Market research The Chinese market is extremely regional Understand where you will fit in Adjustment of Products Government policies Relevant US and Chinese laws 20

Unexpected Costs and Expenses Permits, licenses, approvals, . . IPR issues Government incentives and expiration of such incentives Other start up costs Currency conversion issues 21

Labor Related Issues Hiring and retaining skilled employees in china Employment agreements Insurance Training Firing employees 22

Relationship, Relationship! Understand how “Relationship” works in China Government relationship Relationship with the “Right People” 23

Due Diligence The most important thing Government filings and documents Corporate documentation Financial information References Site visit Background check of executives 24

Lost in Translation Different business cultures 100 ways to say “NO, ” but 90 of them sound like a “YES” to a foreigner Read between the lines What does a “contract” mean to Chinese? 25

Opportunities Selling into the China market Sourcing and outsourcing Selling/licensing technologies to Chinese companies 26

Conclusion Initial research Understand the differences Find competent assistance Due diligence 27

Key Legal Issues and Business Approaches Robert Hart Kimberley Chen Nobles 28

Overview Economic and trade trends Growing importance of IP assets in information -based economy Key law changes and legal issues Outsourcing – Export Control regulations and issues New opportunities with associated risks Red flags and what to do about them 29

Introduction Economic and trade trends Globalization of markets and manufacturing bases China’s role and position Growing importance of IP assets in information -based economy Market value of business increasingly based on IP assets Outsourcing Trends Models Issues 30

Current Business Climate Skyrocketing Production Costs*: Management compensation + 9. 1 % Support staff wages +10. 3 % Blue collar wages + 7. 6 % Raw materials + 7. 1 % Continued increase in production costs in 2009/2010 * 2008 Booz Allen Hamilton & American Chamber of Commerce data. 31

2010 -2020? Foreign currency reserves: $1. 4 Trillion (2007) $2. 3 Trillion (2009) Purchasing raw materials on a worldwide scale Time compression due to Growth: 1 year in China = ~ 2. 8 years in U. S. ~ 5. 6 years in Ireland ~ 5. 8 years in U. K. 32

New Market Opportunities Key technology sectors: Biotech and pharmaceutical Agricultural chemicals Software Satellite broadcasting encryption technology Computer, video games Raw materials 33

Business & Governmental Policies How understanding and utilizing key business, government policy and legal issues can work for you Create new market and exploitation opportunities International trade agreements are raising the standards for protection and enforcement of IPR International rules and policies create risks as well Compulsory licensing of patents WTO-sanctioned retaliation Other policy tools 34

Recent Legislation Issuance Date Effective Date Significance Property Rights Law 3/16/2007 10/1/2007 First time recognition of legal protection of PRIVATE and public property Enterprise Tax Law 3/16/2007 1/1/2008 Phasing out of favorable tax treatment foreign investors, tax holidays, etc. Labor Contract Law 6/29/2007 1/1/2008 Implementing Regulations - - 9/18/2008 Provides greater protection for employees making it harder to terminate employees, lots of compliance issues Anti-Monopoly Law 8/30/2007 8/1/2008 Expands scope of prohibited activities that affect business and commercial trade 35

Key Legal Issues IP and ownership issues Export controls U. S. Foreign Corrupt Practices Act (FCPA) & China’s Anti-commercial Bribery Rule of 1996 – “ 1996 Rule” Mandatory hiring/contracting and in-country labor laws Local content laws 36

Intellectual Property Rights Proactive exploitation and protection is essential in today’s global marketplace Key premises: Intellectual property rights are a private right Intellectual property rights are generally territorial In order to protect and enforce in any country, must obtain IPR in that country Best way to ensure protection of IP asset: know and comply with the local rules 37

Intellectual Property Rights Exploit IP asset in strategic manner Be proactive even if currently a potential market Utilize international treaties which make it possible to file/register in several countries Patent Cooperation Treaty E. g. , Parties include Japan, China, Taiwan, Korea, Malaysia, United States Madrid Protocol (Trademarks) E. g. , Japan, China, Korea, Singapore, United States 38

Intellectual Property Rights Exploit IP Asset in Strategic Manner - cont’d Contractual approach – IP Licenses Obtain necessary licenses before sharing data Know and comply with local laws Business approaches Form joint ventures instead of licensing Split production processes Control Through vertical distribution chain 39

Contracts American contract attributes: Long Detailed and tight Legalese does not often translate Use Modern Format - no whereas clauses, delete the words “said” and “hereto” as used in “said parties hereto, ” etc. “AS WITNESS, the parties hereto have caused this Agreement to be signed on the date first written above. ” Large Chinese companies are experienced with U. S. style contracts versus midsized Chinese companies with little, but increasing experience Boilerplate language often a stumbling point 40

Signing Ceremonies Informalities in the U. S. Mail contracts and sign at leisure Ceremonies are a waste of time and money Major agreements with Chinese partner: Expect top executives to meet and sign Often followed by dinner, drinking and karaoke 41

Dispute Resolution Dispute resolution options: Ad hoc rules Administered mediation – not enforceable Litigation Adjudication of cases in rural areas is primitive with protectionist influences May be impossible to enforce outside of China Arbitration Preferred in business disputes, has confidentiality unlike courts and IS enforceable under the New York Convention signatories 42

Arbitration Choosing an arbitration venue Chapter 14 of the MOFCOM Chinese Handbook used to say: Day # 1: Insist on arbitrating in China Day # 2: If the foreigner still wants to arbitrate outside China, continue to argue the benefits of arbitrating inside China Day # 3 – 14: Repeat Day #2 Day # 14: Suggest Stockholm, Sweden Insist on Hong Kong and Singapore These cities have better Chinese restaurants than Stockholm winters are dark and cold 43

Arbitration Administration CIETAC – established in the 1950 s, monopoly over international matters Local arbitration commissions (over 180 in number) – domestic disputes When regional commissions were allowed to hear international disputes, CIETAC lobbied for local disputes, thus CIETAC is now the busiest arbitration group 44

Arbitrating in China – ad hoc arbitration? Supreme People’s Court has struck down domestic ad hoc arbitration clauses - People’s Insurance Company of China, Guangdong Branch v. Guanghope Power et al [Min Si Zhang Zi No 29] Supreme People’s Court (2004) - Prohibit ad hoc arbitration agreements, EXCEPT: 1. where all the parties are from New York Convention States; and 2. local laws do not prohibit ad hoc arbitration Are ICC arbitrations permitted in China? 45

Drafting Effective Arbitration Clauses Requirements for valid arbitration agreements: Must be in writing Designate an arbitration commission “If a dispute arises, submit to arbitration by CIETAC or by the People’s Court” Unenforceable Can’t have an alternative in the provision, drafter must choose forum “ARBITRATION INSTITUTION” are MAGIC WORDS 46

Combating Global Infringement Requires multi-faceted strategy Establish IP management and anti-infringement measures for business operations Utilize all available domestic legal remedies U. S. enforcement laws U. S. Government and international trade policy initiative tools 47

Combating Global Infringement IP management and anti-infringement measures for business operation Management structure Contracts/agreements Education Operational procedures Monitoring of operations 48

Conclusion Exploiting and protecting rights and assets in doing business with China Global marketplace and international trade Developments create opportunities AND risks Need knowledge of international trade obligations, policy tools, business and legal rights to effectively navigate Proactive exploitation and protection is essential Develop multi-faceted strategy utilizing legal, business and government-assisted approaches THINK GLOBAL / ACT LOCAL 49

QUESTIONS? 50

Contact Information Frances Chou, Schechter + Chou, Inc. 310 -479 -8600 Robert Hart, Harman International Industries, Inc. (949) 337 -0568, rhart@harman. com Kimberley Chen Nobles, Crowell & Moring LLP 949 -798 -1330, knobles@crowell. com Andrew Pan, North American Representative Office of Shenzhen, P. R. China (NAROS) 213 -628 -9888, andrewpan@shenzhenoffice. org 51