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Cablegate: China's Largest Association of Taiwan Investors Complains

VZCZCXRO0910
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0668/01 3190929
ZNR UUUUU ZZH
R 140929Z NOV 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0003
INFO RUEHOO/CHINA POSTS COLLECTIVE 0001
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0001
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0001
RUEAIIA/CIA WASHDC 0001
RUEKJCS/DIA WASHDC 0001

UNCLAS SECTION 01 OF 02 GUANGZHOU 000668

SENSITIVE
SIPDIS

STATE FOR EAP/TC, EAP/CM

E.O. 12958: N/A
TAGS: ECON ETRD EINV ELAB TW CH
SUBJECT: China's Largest Association of Taiwan Investors Complains
of "Cold Winter" Coming for PRD Factories

REF: A) Guangzhou 518, B) Guangzhou 618, C) Guangzhou 655

1. (SBU) Summary: Approximately 500 out of 6,000 Taiwan-invested
enterprises have closed in the Pearl River Delta (PRD) city of
Dongguan since last year, with more closures to come over the Lunar
New Year holiday, according to the Secretary General of the Dongguan
Taiwan Businessmen's Association (DG TBA), the largest local
association of Taiwan investors in China. He highlighted falling
overseas demand for China's exports among the many factors that have
made business difficult for labor-intensive export manufacturers.
However, he acknowledged that, despite the many closures, the DG
TBA's membership had remained stable and noted that some more
competitive firms see a brighter future because they expect their
market share to increase as weaker players are eliminated. The
executive believes that local officials are doing an effective job
of dealing with demonstrations by disgruntled workers who have been
laid off due to factory closures and that public security and social
stability have not seriously deteriorated. He commented that new
economic conditions will make it even harder to encourage
labor-intensive factories in the PRD to move inland. End summary.

Taiwan Investors Face Chilly Prospects...
-----------------------------------------

2. (SBU) Taiwan firms in Dongguan face a "cold winter," according to
DG TBA Secretary General Zhao Weinan. Approximately 500 firms have
shut down over the past year, out of a total of 6,000
Taiwan-invested enterprises in the city. He predicted that we would
see many more closures around the Lunar New Year holiday when
migrant workers return home. Investors have complained a lot about
worsening conditions in the past, Zhao said, but this time "the
suffering is real." In addition to closures, factories are
downsizing or merging several factories into one facility. Zhao
noted that the impact on the shoe industry had been particularly
negative.

3. (SBU) Zhao highlighted declining orders from overseas export
markets among many factors that have made the economic environment
difficult for Dongguan's Taiwan-invested firms. He said most firms
were already seeing fewer orders for the holiday season and now the
global financial crisis had made the situation worse. He also
complained that the Labor Contract Law had made relations between
employers and workers "less harmonious" -- specifically criticizing
restrictions on overtime work, which he called "too detailed and
rigid." Zhao also said that Taiwan firms were finding it even more
difficult to get credit because banks were concerned about their
falling orders. He pointed out that not only were banks refusing to
lend, some had even called in outstanding loans.

4. (SBU) Strong supply chains continue to be one of Dongguan's chief
advantages, according to Zhao, but changing conditions are straining
relationships between buyers and suppliers. He noted that trade
disputes are increasing in frequency and that some buyers have
refused to honor orders placed earlier because their own sales are
dropping.

But the Strong Will Flourish
----------------------------

5. (SBU) Nevertheless, Zhao also said that some DG TBA members see
brighter futures as harsh conditions weed out the weakest
competitors. The best companies expect to increase their market
share. They believe that when orders eventually start to rise
again, it will be a seller's market. Zhao also acknowledged that
despite the high number of factory closures, the total number of DG
TBA members had remained basically stable. Comment: The fact that
factory closures that have received so much media attention have had
a negligible effect on the number of DG TBA members suggests that
it's still only the most marginal industry players that are shutting
down. End comment.

Disgruntled Migrant Labor Not a Threat Yet
------------------------------------------

6. (SBU) Noting the increased frequency of demonstrations by
laid-off workers, Zhao commented that he did not believe that local
security conditions had deteriorated. He praised the government and
the Communist Party's response to recent factory closures,
especially efforts by township and village governments to pay back
wages. Zhao also said that the DG municipal government had been
particularly responsive to the concerns of Taiwan investors, meeting
monthly with foreign investors and lobbying Beijing for measures to
ease conditions for labor-intensive manufacturers in the PRD. He
believes these efforts helped secure recent increases in
value-added-tax rebates and implementation regulations for the Labor

GUANGZHOU 00000668 002 OF 002


Contract Law that benefit Taiwan enterprises.

"Double Transfer" in a Deep Freeze
----------------------------------

7. (SBU) Zhao believes that despite the government's "double
transfer" policy of encouraging labor-intensive manufacturing in the
PRD to move inland (ref A), there will be few Taiwan factories
moving under current conditions. Most firms that had any plan to
move have already done so. Others that might have considered moving
are now waiting and watching the overall economic conditions,
according to Zhao. He argued that government efforts to encourage
Taiwan factories to move would be ineffective, in part because some
investors feared that incentives offered at inland destinations
wouldn't be sustained.

JACOBSEN

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