Cablegate: Usdoc Bis Under Secretary Mccormick Visit to South

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UNCLAS SECTION 01 OF 05 GUANGZHOU 016447

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM
USDOC FOR 4420/ITA/MAC/MCQUEEN, CELICO, DAS LEVINE
USDOC FOR BIS/MCCORMICK
STATE PASS USTR
USPACOM FOR FPA

E.O. 12958: N/A
TAGS: ECON BEXP ETTC ETRD PGOV PREL CH
SUBJECT: USDOC BIS Under Secretary McCormick Visit to South
China

THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT
ACCORDINGLY. NOT FOR RELEASE OUTSIDE U.S. GOVERNMENT
CHANNELS. NOT FOR INTERNET PUBLICATION.

1. (SBU) SUMMARY: While in Guangzhou, USDOC BIS Under
Secretary David McCormick gave a speech at Huawei

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Technologies, Inc. Training Center, met with the Guangdong
American Chamber of Commerce (AmCham) Board of Governors,
and conducted a site visit to True Temper Composite Material
Products (Guangzhou) Co., Ltd, a golfing products
manufacturer. Huawei Vice President Fei Ming regaled U/S
McCormick with claims of how open Huawei is, but stopped
short of providing details in his responses to a number of
inquiries. Huawei employees attending U/S McCormick's
speech showed they were interested in his opinions on how
Huawei could do better in the face of globalization.
Representatives of a number of American companies attending
the AmCham dinner with U/S McCormick discussed their
progress in China, tactics they have adopted to deal with IP
violations, and touched on some other challenges such as
port security and a new Chinese labor law. The delegation's
final stop in Guangzhou - the True Temper sports production
line - revealed responsible and successful use of graphite
composite materials in a market beneficial to U.S. exports.
END SUMMARY

2. (U) During a visit to Guangzhou on May 18-19, Under
Secretary of Commerce for Industry and Security David

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McCormick gave a speech at Huawei Technologies, Inc.
Training Center, met with the Guangdong AmCham Board of
Governors, and conducted a site visit to True Temper
Composite Material Products (Guangzhou) Co., Ltd. U/S
McCormick became the first USG official to give a speech at
Huawei.

"Open" But With Chinese Characteristics
---------------------------------------

3. (U) Before the speech, Huawei Vice President Fei Ming
hosted a lunch for U/S McCormick, during which Fei mentioned
the claim that Huawei is China's "most open" company. Fei
recounted how Huawei never turns down requests by potential
customers and partners as well as foreign officials who want
to visit the company's headquarters in Shenzhen. He also
emphasized the fact that Huawei has more international
partners than any other Chinese company. Fei explained that
in order to build brand recognition from scratch, Huawei had
no choice but to open itself up to potential customers and
partners who wanted to visit and make sure the company has
the capacity to deliver on its promises.

4. (SBU) In the course of conversation, U/S McCormick
raised a number of questions as follow-up to various stories
reported in the media about Huawei over recent months. In
response to U/S McCormick's inquiry about the status of
Huawei's reported intentions to acquire UK's Marconi, Fei
stated that Huawei had made contact with Marconi but was
unsuccessful in the acquisition. He did not elaborate or
provide any details on when or why Huawei's acquisition
attempt failed. U/S McCormick commented that he had heard
Huawei was unique among Chinese companies in that it had a
sizeable number of employees who were foreigners. Fei
explained that Huawei employs many foreigners in its
overseas offices, but so far only Indian nationals have
agreed to come to China to work at Huawei headquarters.
(Note: This seems to contradict Econoff's experience from
talking to different Huawei officials at the various events
in the past, who stated that foreigners working at Huawei
headquarters come from India, Russia, Canada, the United
States, and some European countries. The delegation saw
Caucasians at Huawei wearing employee badges during the
visit and one even attended U/S McCormick's speech. End
Note.)

5. (SBU) U/S McCormick also brought up the issue of
intellectual property (IP), noting that the media reported a
few months ago that Huawei won a lawsuit against infringers.
Fei remarked that the company has learned that the most
successful countermeasure against IP infringers is to take
them to court. At the same time, Huawei is taking steps to
intensify internal security measures to prevent leaks of IP

GUANGZHOU 00016447 002 OF 005

by employees and to make sure all its IP are patented on a
timely basis. According to Fei, in addition to the case
reported in the media, Huawei is also involved in another
two ongoing IP-related lawsuits. However, he did not
elaborate or provide any details other than the fact that
both lawsuits were filed in Shenzhen.

Globalization On Top Of Huawei Employees' Minds
--------------------------------------------- --

6. (U) In his speech to approximately 200 Huawei employees
in an auditorium at the Huawei Training Center, U/S
McCormick discussed the opportunities and challenges in the
crucial areas of security, globalization, and technology
revolution. U/S McCormick stressed the importance of
winning the War on Terror and stopping the proliferation of
weapons of mass destruction (WMD), while at the same time
working to encourage legitimate high-tech trade, strengthen
the protection of IP throughout Asia, and increase the flow
of high technology to ensure continued innovation.

7. (U) During the ensuing Q&A session, Huawei employees
asked U/S McCormick for suggestions on how the company
should change internally to meet the challenges brought
about by globalization. U/S McCormick reiterated his point
about the importance of IP protection. Huawei is arguably
one of China's best known brands in the United States.
Further progress would require the development of new
proprietary technologies, so it would be in Huawei's
interest to remain committed to the protection of IP.
Huawei employees also asked U/S McCormick to comment on the
impact globalization had on the Sino-U.S. relationship vis--
vis high tech trade and the future of export controls
restrictions on dual-use technologies. U/S McCormick noted
that high tech trade benefits both countries, but it is
usually hampered by poor IP protection and the risk of
sensitive dual-use technology being diverted to military
use. Pointing to the creation of the Strategic Trade and
High Technology Working Group at the most recent round of
the U.S.-China Joint Commission on Commerce and Trade (JCCT)
talks, U/S McCormick remarked that while the U.S. and China
may not always agree, they were at least candid with each
other, so the new working group should help facilitate
further dialogue, which should subsequently improve the
bilateral trade in civilian high-tech goods and services.

FedEx Creating Its Own Path
---------------------------

8. (U) During a dinner with the Board of Governors for the
Guangdong American Chamber of Commerce (AmCham), U/S
McCormick outlined the Bureau of Industry and Security's
(BIS) mission and briefly described the purpose of his trip
to China. AmCham President Harley Seyedin provided a
general overview of the economic situation in South China,
with an emphasis on the role played by U.S. companies.

9. (SBU) Alex Yim, Managing Director of South China Region
for Federal Express (FedEx), noted that there has been a
significant shift recently in the responsiveness of the
Chinese Customs officials he deals with. According to Yim,
the Central Government has been pushing China Customs to
focus more on contributing to the economic development of
the country. To that end, China Customs has reached out to
FedEx for assistance in creating benchmarks for a new model
for customs clearance procedures that would help facilitate
trade. Later during the dinner, when U/S McCormick
solicited the audience's input on why U.S. companies are not
exporting more to China, Yim noted that in addition to the
language barrier, many American companies do not bother to
invest the resources necessary to research what specific
types of products are in demand vis--vis the ever-changing
purchasing power of the Chinese market. Yim also recounted
an example of how FedEx is working to resolve the problem of
the serious shortage of airplane mechanics in China. The
company is cooperating with the University of Tianjin's
Civil Aviation Department to develop and help fund a new
curriculum to get more qualified airplane mechanics into the
job market over the next few years.

Export Controls Do Affect U.S. Companies In China

GUANGZHOU 00016447 003 OF 005

--------------------------------------------- ----

10. (SBU) On the topic of U.S. export controls, Owen Ley,
Managing Director of True Temper Composite Material Products
(Guangzhou) Co., Ltd., commented that his company is very
satisfied with how USDOC's export licensing process has
shortened dramatically since two years ago when it took as
long as seven months to obtain an export license. Stella
Liu of IBM China, Guangzhou Branch, noted that there is
considerable local demand for high performance computers.
Unfortunately, IBM cannot meet this demand because U.S.
export control laws preclude the sale of such technologies.

U.S. Companies Get Creative To Obtain Better IP Protection
--------------------------------------------- -------------

11. (SBU) In response to U/S McCormick's query on what
results American companies are seeing in China's effort to
increase IP protection, Yvonne Pei, Director of External
Relations for Procter & Gamble (China) Ltd. (P&G), led the
discussion by noting that for many years, an average of 20
percent of P&G products in China were counterfeits. Two
years ago, that rate dropped to eight percent, but now it
stands at approximately twelve percent. Pei explained that
the major difference between P&G's battle against
counterfeits and that of Louis Vuitton (LV), for example, is
that when Chinese consumers buy a fake LV bag, they know
they are buying a counterfeit and are therefore doing so
willingly. With P&G products, however, there is no way for
consumers to tell the counterfeit products from genuine ones
because they are all sold at the same prices. To make
things even more complicated for P&G, unlike fake LV bags,
there is a potential for counterfeit P&G products to cause
physical harm to consumers. Pei stated that while the
Central and provincial governments are willing to contribute
to the effort to fight IP violations, the problem is usually
with the local protectionism found at the town and village
levels. This is often due to the fact that most
counterfeiting factories employ large numbers of the local
populations, therefore making it difficult to convince local
authorities to close those factories.

12. (SBU) Pei also noted that P&G is lobbying the Chinese
government to change its laws to allow for factory
production line equipment, in addition to molds, to be
confiscated during raids. She provided the example of how
in the 150 raids conducted every month on factories making
counterfeit P&G products, P&G has repeatedly seen the
pattern of the same 20 factory owners simply moving their
equipment to another location and continue producing
counterfeits. To help win over local government officials,
P&G has developed the strategy of conducting research on the
impact counterfeiting has on potential tax revenues, the
results of which the company then presents to the local
government authorities to enlist their assistance in putting
counterfeiters out of business.

13. (SBU) Seyedin suggested that instead of just continuous
lobbying for more to be done, USG should also begin making
public acknowledgements of some of the progress China has
made so far in IP protection. True Temper's Ley remarked
that some of the success his company was able to achieve in
the IP arena can be attributed to an adjustment in their
marketing and advertising campaigns. For example, when
Chinese golfers learn that their performance on the golf
course is directly related to whether they use genuine or
counterfeit True Temper golf clubs, it is enough to convince
them to stay away from the counterfeits and invest more to
buy the genuine clubs. Brian Ma, whose company -- Shenzhen
Pacific Investment Co. Ltd. -- is putting together an
investment project to set up a pharmaceutical company,
mentioned that he has been working with U.S. patent holders
to arrange for the legal transfer of certain IP's so that
all parties can benefit.

Other Challenges U.S. Companies Must Face
-----------------------------------------

14. (SBU) Charles Hubbs of Guangzhou Fortunique Limited, a
medical instruments manufacturing and consulting company,
commented that while IP protection is an ongoing concern, he

GUANGZHOU 00016447 004 OF 005

and his clients have recently encountered a number of
similar experiences with delays in clearing U.S. ports due
to new security measures. He remarked that many companies
have reached a point where they are willing to pay
additional fees to get their shipping containers inspected
at loading so that the containers can get expedited
clearance upon arrival at U.S. ports. Hubbs also suggested
that in order for American companies to be successful in
China, they must establish a physical presence to show their
customers that they are willing to stay in the China market
on a long-term basis. Seyedin recounted some of the
proactive measures the French and Italian governments have
taken to generate more export revenues. One example Seyedin
provided was how both of those governments actively
recruited small and medium-sized enterprises (SME) to attend
the annual SME Fair in China. He suggested USG should look
into similar efforts.

15. (SBU) Pei remarked that P&G is the number one taxpayer
for light industry in China and with every job the company
creates, ten jobs are created upstream and ten jobs are
created downstream. Despite all its contributions to the
Chinese economy, P&G, like other foreign-invested companies,
now faces a new formidable challenge with a proposed labor
law requiring them to deposit RMB 5,000 (approx. USD 625)
per employee in an escrow account as unemployment insurance
and to give all contractors permanent positions after one
year of work. Pei explained that considering P&G's size,
the company would have to put out approximately USD 60-65
million just for the escrow accounts and see their costs
increase dramatically with the new requirement to turn
independent contractors into permanent employees.

Site Visit To True Temper: A "Hole-In-One"
-------------------------------------------

16. (SBU) While in Guangzhou, U/S McCormick also visited
the True Temper Composite Material Products (Guangzhou) Co.,
Ltd. factory to inspect True Temper's use of composite
materials for sports equipment production. The graphite
composite materials are made up of very fine carbon
molecules that have dual-use capability in a number of
military applications. True Temper uses the light, durable
composite material in their production of golf clubs, hockey
sticks, and bicycle frames. The Managing Director, Owen
Ley, briefed the delegation that True Temper (headquartered
in Memphis, Tennessee), is a medium-sized company at $120
million revenue a year. Of its approximately 1,000
employees, 520 are located in Guangzhou. Daily current
production quantities are about 10,000 golf shafts, 1,000
hockey shafts and 150 bicycle frames. Notably, this company
is owned by a U.S. private equity firm.

17. (SBU) U/S McCormick inspected the log and tracking
system True Temper uses to manage its supplies of controlled
composite materials. Last year True Temper imported 64
metric tons of U.S.-made high module graphite, a controlled
item. U/S McCormick seemed quite impressed with the
professional management of the composite materials and the
overall success of the company. While the golf club
industry in general usually has stable but low growth, True
Temper grew by 60 percent in 2005 and currently has 90
percent growth in 2006. This growth had led to the creation
of considerable purchases of U.S.-made products -- USD 15
million in composite materials and USD 1.4 million in other
supplies (such as paint, molds and heat transfers).

18. (SBU) True Temper's labor standards also seemed
adequate. The factory floor had plenty of space, light and
air. Most of the workers were wearing safety glasses and
earplugs, while paint specialists wore special air-
filtration masks. The average worker made approximately RMB
3,000 per month (USD 375), which is more than three times
the minimum wage for Guangzhou (RMB 900 per month, or USD
112). However, workers must earn these wages with long
hours. Ley openly admitted that work shifts - particularly
during the peak season in the spring and around Christmas -
were ten hours a day, six days a week. Such figures exceed
national limitations of 36 overtime hours a month.

19. (U) Both Embassy Beijing and U/S McCormick have cleared

GUANGZHOU 00016447 005 OF 005

this cable.

DONG

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