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Cablegate: Usitc Studies the Benefits of Doing Business in South

VZCZCXRO0591
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #1094/01 2710838
ZNR UUUUU ZZH
R 280838Z SEP 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6499
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 GUANGZHOU 001094

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EB

E.O. 12958: N/A
TAGS: ECON ETRD EIND ENV PGOV CH
SUBJECT: USITC Studies the Benefits of Doing Business in South
China


1. (U) SUMMARY: Access to credit, tax benefits, historical and
cultural ties, and the presence of a well-developed transportation
system were among the reasons cited by executives from enterprises
in Guangdong for doing business in South China during conversations
with a visiting U.S. International Trade Commission (USITC)
delegation. END SUMMARY.

2. (U) As part of a country-wide examination of trade policies,
economic specialists from the USITC visited a variety of enterprises
in Guangdong Province to determine what effect Chinese government
policies had on business development and trade. During the early
September visit, the USITC delegation interviewed managers and
owners of collectively-owned enterprises (COEs), wholly-owned
foreign enterprises (WOFEs), and a state-owned enterprise (SOE).

From Collectivism to IPO
------------------------

3. (U) Foshan-based Midea Company began as a collectively-owned
enterprise in 1968. With an initial investment of RMB 5,000, He
Xiangjian (who is now the president of Midea Group) and 23 fellow
villagers grew a small operation producing plastic bottle caps into
a home-appliance giant boasting RMB 31.3 billion (about US$4.1
billion) in assets and RMB 57 billion (US$7 billion) in sales
revenues in 2006. Though much of the company remains privately
owned, Midea publicly listed its air-conditioner, compressor,
refrigerator, and washing-machine units in 1993. Midea maintains
controlling shares in all of these affiliates.

4. (SBU) Midea maintains its operations in Foshan because of
logistics and history, according to International Strategic and
Market Development Department Manager Ms. Xin. Not only was the
company founded there, but proximity to port facilities and a
well-developed supply chain are also major factors. In addition,
Xin noted that, with its record of success, the firm had no
difficulty getting loans from local banks.

WOFE -- Agility and Contingency Planning is Necessary
--------------------------------------------- --------

5. (SBU) Hong Kong-based Kam Ying Wong Garment Factory has been
family-owned for more than 20 years. President Tommy Wong told the
delegation that the wholly-owned foreign enterprise had to think
creatively to stay competitive. To cope with U.S. textile import
quotas, the company first expanded to Macao, then to Zhongshan in
Guangdong, and finally to Canada, shifting production to different
factories based on the quota allowed for each location.

6. (SBU) When asked why his company favored investment in south
China instead of other Asian countries, Wong noted China's stable
political situation, a language and culture similar to Hong Kong's
and convenient ports for easy transportation. However, Wong
lamented that frequent power shortages -- especially during the
summer -- sometimes made production unpredictable and difficult.

SOE Government Connections Lead to Consulting Contracts
--------------------------------------------- ----------

7. (SBU) A state-owned enterprise founded in 1983, Huizhou-based
Desay Company is one of China's top 500 enterprises and is ranked
19th in China's top 100 electronic enterprises. According to Zhang
Rentian, General Manager of Desay's International Marketing
Department, certain privileges generally available only to SOEs,
such as free land and government-guaranteed loans from local banks,
were factors in the company's development in the 1980s. However, the
firm does not appear to receive such benefits today. Nevertheless,
Zhang told the delegation that, because of Desay's expertise in
dealing with Chinese government agencies, companies such as Sony
employ Desay as a consultant to facilitate their own government
interactions.

8. (U) Zhang believes that tax incentives have been an important
factor in luring foreign investment to Huizhou. According to Zhang,
China's corporate income tax is normally 30 percent, but regions
keen to attract foreign investment may have rates as low as 24
percent. He also pointed out that Huizhou has two industrial parks
created by the central government -- the Zhongkai Industrial Park
and the Daya Bay Industrial Park -- where the tax rate dips to 15
percent.

Conveniently Collective
-----------------------

9. (SBU) Baolihua Garment Company General Manager Ye Mengrong told
the delegation that, although his Shenzhen-based company began more

GUANGZHOU 00001094 002 OF 002


than 20 years ago as a township-level collectively-owned enterprise,
from the beginning it was actually a privately-owned company under
full control of his family. Ye's suggested that "collectively-owned"
was a widely-used euphemism for private ownership during the early
days of enterprise reform. Ye noted that, in his experience,
companies with close government contacts had an edge over those that
do not. However, Ye denied that Baolihua currently maintained any
special relationship with the government. COMMENT: Baolihua's
investment in important national infrastructure projects -- such as
power stations and highways -- cast some doubt on Ye's denial of a
special relationship. END COMMENT.

10. (U) The USITC delegation reviewed this cable before
transmission.

GOLDBERG

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