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Cablegate: Coping with Rising Costs in South China -- Foreign

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R 270101Z FEB 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6934
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UNCLAS SECTION 01 OF 02 GUANGZHOU 000121

SIPDIS

SENSITIVE
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STATE FOR EAP/CM
STATE PASS USTR

E.O. 12958: N/A
TAGS: ELAB EINV ECON OVIP CH
SUBJECT: Coping with Rising Costs in South China -- Foreign
Companies Describe Strategy to Staffdel

(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT SHOULD NOT BE
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR. IT SHOULD NOT BE
POSTED ON THE INTERNET.

REF: 07 Guangzhou 1298

1. (SBU) Summary: Companies in south China told visiting
congressional staffer David Lloyd that they are taking different
approaches to deal with rising production costs in the Pearl River
Delta. Wal-Mart executives said that they are working to develop
long-term relationships with suppliers that can benefit both
parties. Foxconn, which expects wages in the area to rise 10-15
percent this year, is reducing employment at its giant Shenzhen
campus as it expands elsewhere in China and in other markets.
Silverlit Toy Manufactory is staying put in the Delta area and
continuing to focus on its design and manufacture of high end toys,
even as many competitors move to lower wage locations. The company
cited, as a number of others have done as well, the lack of
infrastructure to move product to market. End summary.

Wal-Mart Building Long-Term Relationships
-----------------------------------------

2. (SBU) Wal-Mart Global Procurement Chief Operating Officer Emilio
Cui explained to David Lloyd, legislative aide to Senator Debbie
Stabenow, that although the cost of labor and other inputs has risen
in the Pearl River Delta and elsewhere in China, Wal-Mart has sought
to build long-term relationships with suppliers. He said that
Wal-Mart is trying to avoid hopping from supplier to supplier to
chase the lowest price. The firm believes a long-term relationship
can be beneficial both to Wal-Mart and the supplier.

3. (SBU) This approach is also consistent with Wal-Mart's new
program to strengthen supply chain security. As reported reftel,
Wal-Mart implemented a new program on January 1 that requires all
new vendors to be pre-certified across a range of criteria assessed
by independent auditors. Cui described the program as "beyond
C-TPAT," the U.S. Customs and Border Protection's Customs-Trade
Partnership Against Terrorism, that assures Wal-Mart that vendors
meet its standards on labor conditions, product quality and safety,
and reliability as a supplier. Cui said the pilot program had been
implemented in Indonesia, Italy and Guangdong and Fujian provinces
in China. It will be applied globally starting in June.

Foxconn Expanding Elsewhere, Looking Beyond Costs
--------------------------------------------- ----

4. (SBU) Foxconn Vice President for Corporate Human Resources Jacob
Chen told us his firm believes that labor costs will be up 10-15
percent this year due in part to the new Labor Contract Law that
went into effect at the start of the year. Foxconn, a
Taiwan-invested contract manufacturer of a vast array of consumer
electronic goods and China's largest exporter, is reducing the size
of the workforce at its massive Shenzhen campus due in part to
rising labor costs. Chen noted that the number of employees at the
campus had already fallen from about 400,000 to 300,000 and would
fall further. Foxconn has recently established new manufacturing
facilities in other parts of China and is expanding in Vietnam, but
"slowly" according to Chen.

5. (SBU) Chen explained that Foxconn looks at a range of factors
besides wages when considering where to expand production. The firm
also considers the cost of materials and the tax structure. Chen
pointed out that another important factor was the presence of a
local market for Foxconn to serve. China is still by far the home
of Foxconn's largest workforce with some 600,000 employees according
to Chen, followed by the Czech Republic and United States.

Silverlit Staying Put as Competitors Move Out
---------------------------------------------

6. (SBU) Marketing Director Eddie Wong of the Silverlit Toy
Manufactory, a Hong Kong-invested toy manufacturer, commented that
his firm had seen labor costs rise by 15-20 percent in the last
year. He also noted that the price of many materials had gone up by
as much as 20 percent. Safety concerns had further increased
expenses, largely due to increased laboratory costs. However, he
explained that working with retailers, the firm would ensure that
not all of the costs would be passed to consumers. He predicted
that U.S. prices for Silverlit's products would only increase by 3-5
percent.

7. (SBU) Wong said many companies in the Pearl River Delta have been

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scouting out locations in western and central China. Jiangxi is a
particularly popular destination among Taiwan investors, who, Wong
said, were moving there "in droves." He commented that Taiwan
investors were more likely to move as a group and noted that many
were also going to Vietnam.

8. (SBU) Nevertheless, Wong said that Silverlit would not be moving
from its current location in the near future. He explained that
while the firm could save money on unskilled labor in other regions,
there was little infrastructure to support Silverlit's operations.
He commented that other potential sites lacked engineers and
suppliers of more sophisticated components such as motors and
precision gears. Wong emphasized that Silverlit targets a higher
price market than many of its competitors. It will continue to
compete on quality and by designing and manufacturing new,
innovative products.

9. (SBU) In addition, Wong told us that concerns about toy safety
continue to help Silverlit by disadvantaging low-quality
competitors. Although the wide-scale closures of factories that
took place during the Chinese government's four-month product safety
and quality campaign have largely ended, according to Wong, many toy
manufacturers in south China find it difficult to meet higher
standards. He explained that the strengthened regime of inspections
implemented at the start of the campaign was still in place and some
producers have found that they are no longer able to cut corners in
order to save costs.

10. (U) Staffdel Lloyd did not have an opportunity to review this
cable before transmission.

GOLDBERG

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