SURVIVING A START-UP IN CHINA Part IV (Or, “ It ’ s Getting Better All The Time! ” )

1. SURVIVING A START-UP IN CHINA Part IV (Or, “It’s Getting Better All The Time!”) SKIP NELSON ADS-B TECHNOLOGIES www.ads-b.com

2. BUSINESS PROFILE 2004 ANCHORAGE Exports ADS-B hardware & software to China BEIJING and HONG KONG Garmin Avionics distributor for China Avionics Component manufacturer for 2007 2008 HONG KONG Exports General Aviation Aircraft to China Builds GA infrastructure in Asia 2011 HONG KONG, TAIPEI & GUANGZHOU New Joint Ventures to market avionics and Build General Aviation infrastructure in China

3. Since 2004, 44 trips to China 78% Export to China, 22% Chinese manufacturing for sale in U.S. ~ $6.6M in air traffic control, avionics and aircraft sales last 3 years Permanent offices in Beijing, Hong Kong & Guangzhou 22clients: 7 government, 15 private Most of our work is in Central and Western China New business in Taiwan & Hong Kong CHINA EXPERIENCE

4. What’s ADS-B? Automatic Dependent Surveillance - Broadcast The aircraft get their position from the GNSS constellation Aircraft can “see” each other Then they simultaneously broadcast their position and other data to any aircraft, or ground station equipped to receive it Ground Stations then transmit the aircraft’s position to Air Traffic Control

5. I know it’s cliché, but to do Business in China, FIRST, You Have To Understand China…

6. CHINA SUPERLATIVES • It’s BIG! • It’s SAFE • It’s FRIENDLY • It’s definitely OPEN FOR BUSINESS! 1.3 Billion people (1/5th of the World’s population) Extremely low rate of Crimes Against Foreigners As in, they are genuinely fond of Americans! China has had the World’s largest Gross Domestic Product (GDP) in all but 226 years out of the past 2,000 years. Right now, they have more than $1 Trillion USD available to buy foreign products and services (China's GDP is only about $3.5 Trillion, compared to the US GDP of about $14 Trillion – but, China’s GDP is growing 4 times as fast!)

7. CHINA MYTHS AND MISCONCEPTIONS…

8. Myth #1 China is a Third World country with crowded streets, dilapidated infrastructure, a lot of bicycles and people in Mao Jackets. - BUSTED! - • Not even close. Even in rural areas, you’ll see modern new roads, bridges and communications infrastructure. The quality and scope of China’s Internet and cell phone connectivity are legendary. Several of the most dramatic modern cityscapes in the world can be seen in China and Dior and Calvin Klein are seen far more often than Mao!

9. Myth #2 The Chinese Central Government (aka’ The Communist Party) is very visible and heavy-handed. - BUSTED! - • Nope! Forget everything you learned about China prior to 1985 - This is, and always has been a country of aggressive independent individuals and goodbusinessmen. Think “single party system” rather than “communism” and you’ll be more comfortable. Provincial governments now operate somewhat like State governments in the U.S.Best technique: Ignore politics and deal with the people (that’s what the Central Government has learned to do…)

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

11. Myth #4 It’s a lot cheaper to manufacturer your “stuff” in China. - 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 markets • Today, 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..!

12. Myth #5 Corruption is quite common and/or, the Chinese will steal your “stuff”. - 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: • Know your Client • Isolate, compartmentalize and/or protect your Intellectual Property • Deal fairly with your Customer (aka’ don’t give them a reason to rip you off) and he’ll probably treat you the same Hong 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” !

13. Myth #6 China is a wide open, Billion Person Market (aka’“wow – It’ll be easy to sell a lot of stuff here”… - Maybe, but don’t give up your 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 domesticentrepreneurs 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?!

14. GETTING STARTED

15. Good Old Naïve ME!

16. What’s your strategy? – Merely selling “America” is very Old School! How are you going to handle your business in China – Business-to-Business, wait for them to come to you, or through an AGENT? How are you going to find a reputable Agent? Do you have the patience to do business the “Chinese Way”? FIRST, YOU HAVE TO ASK YOURSELF….

17. Alaska Export Assistance Center U.S. Commercial Service in China Alaska World Trade Center Attend a trade fair, or professional meeting in China Network through other people doing business in China BUILD YOUR NETWORK Don’t even think about going in cold!

18. Professional organizations – especially those that have full-time reps in China (OGP, for example) Other U.S. government agencies (FAA, USDA, etc) that have offices in China U.S. – China Chamber of Commerce www.usccc.org OTHER POINTS OF CONTACT

19. RULE #1: It’s virtually impossible to do business in China without a good Agent. RULE # 2: The majority of the agents you’ll encounter will have only one significant skill: They are bilingual. (“I speak Chinese, therefore I am a China Expert…”) Get to know your agent before you sign anything: How long has he worked in the field? Who does he know, what is his experience? Is the U.S. Commercial Service familiar with him? Has he traveled to the U.S.? Is he Chinese-American, Chinese, Taiwanese, or Singaporean? “AGENTS” (A Necessary Evil)

20. TRADE SHOWS

21. If you find the right one, they are an excellent way to meet an Agent and begin to create your network in China! (But a good forum is hard to find) Virtually every industry has at least one reputable Trade Show in China each year Check with the U.S. Commercial Service How many years have they been operating? How many exhibitors, speakers, etc? Beware of “Forums”! They can be little more than a disguised pitch for an individual Agent What is the ratio of foreigners to Chinese decision-makers ?? If the ratio is >1 on 1, then you’re just talking to yourself! Chose a Forum that will be held in a city close to your potential market – travel is expensive for the Chinese TRADE SHOWS & FORUMS

22. CLOSING THE DEAL IN CHINA

23. GUANXI Guanxi 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!)

24. THE “CHINESE 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!

25. In other words: Eat lots of lunches… Drink lots of tea. … and then it’s Contract Time!

26. Know your product, your prices and your competition cold! Expect many rounds of negotiation Last minute “Discount” is expected Know Export Controls & End Users Know Import Duties and Regulations Be very careful with Joint Ventures! NEGOTIATING Remember: The Chinese have been perfecting their business skills for more than 3,000 years…

27. The correct people are hard to find! Travel is becoming more expensive Up 60% in the last 2years Access is not balanced The Exchange Rate can fool you Frustration with business methods The language barrier ! Jet lag, airport hassles, etc And the biggest problem: Shopping! SPEED BUMPS

28. 问题？ (Questions?) SKIP NELSON ADS-B TECHNOLOGIES (907) 258-2372 www.ads-b.com

29. 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 institutions China's central bank reserves are 987 billion as of November 2008 The 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 weakened In 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

30. One in a million = 1,300 like you in China and 1,100 like you in India 1.3 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