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Cablegate: Domestic Demand Strong, but Not "High End" in Guangxi's

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RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH
DE RUEHGZ #0076/01 0410810
ZNR UUUUU ZZH
R 100810Z FEB 10
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1371
INFO RUEHOO/CHINA POSTS COLLECTIVE 0459
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1124
RUEHCN/AMCONSUL CHENGDU 0386
RUEHHK/AMCONSUL HONG KONG 0452
RUEHGH/AMCONSUL SHANGHAI 0385
RUEHSH/AMCONSUL SHENYANG 0395
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUEHC/DEPT OF LABOR WASHDC
RUEAIIA/CIA WASHDC 0427
RUEKJCS/DIA WASHDC 0423

UNCLAS SECTION 01 OF 03 GUANGZHOU 000076

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EAP/EP, EEB/TPP, EEB/IFD, S/P, INR/EAP
STATE PASS USTR CHINA OFFICE

E.O. 12958: N/A
TAGS: ETRD ECON KIPR EFIN EINV PGOV CH
SUBJECT: Domestic Demand Strong, But Not "High End" in Guangxi's
Industrial Center

REF: A) GUANGZHOU 75, B) 09 BEIJING 425, C) 07 GUANGZHOU 862

GUANGZHOU 00000076 001.2 OF 003


(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.

1. (SBU) Summary and comment: Demand for inexpensive automobiles and
heavy machinery produced in Liuzhou, the main manufacturing city in
the Guangxi Zhuang Autonomous Region, increased in 2009 and is
likely to exceed sales records in 2010, according to local
executives. However, China's domestic demand for the companies'
costlier high-end products remains weak when compared with low- and
mid-tier product lines. Tourism in Guilin, 80% of which consists of
domestic travelers, was hurt by the economic downturn but showed a
strong recovery in 2009 that local officials predict to continue in
2010. IPR protection has taken root as a priority for Guilin
officials, but work remains to be done before the city can truly
live up to the central-government conferred title of "Model IP
City." End summary and comment.

2. (SBU) South China's third-tier economic growth was on display
during the Consul General's February 1-3 visit to Guilin and
Liuzhou, Guangxi Autonomous Region's most important cities for
tourism and heavy manufacturing. Guilin Vice Mayor He Liangjun told
the CG that despite being designated as a national-level tourism
center (along with Beijing and Xi'an), the 2008 economic slowdown,
and a corresponding decline in the number of visitors, was difficult
for his city's tourism industry. Separately, Liuzhou Mayor Zheng
Junkang remarked that the effects of China's economic stimulus paid
handsomely for his city's three most important industries -- steel,
automobiles and construction equipment. Both leaders, as well as
their department-level officials, expressed optimism that robust
economic growth will continue in 2010 following a strong year in
2009.

Economic Stimulus, Guilin- and Liuzhou-style
--------------------------------------------

3. (SBU) Infrastructure projects in both Guilin and Liuzhou were
ubiquitous before the economic downturn, but China's
infrastructure-focused economic stimulus bolstered each city's
efforts in 2009, according to city leaders. Water treatment and
distribution, new roads and bridges, and expansion of green areas
were common themes highlighted by officials who met with the CG on
February 2 and 3. (Meetings with NGOs, educators, and the press
reported in ref A.) Guilin, which claims 40% or its urban areas are
forested, has focused on reducing pollution caused by garbage and
waste water, according to Vice Mayor He. Governing an industrial
city, however, Mayor Zheng said Liuzhou's designation as one of four
Chinese cities with acid rain is being addressed through physical
improvements to the water sewage system as well as efforts to reduce
emissions from heavy industries.

Boom Times for Heavy Manufacturers in Liuzhou
---------------------------------------------

4. (SBU) General Motors operates a 13,000 employee joint venture
automobile plant (partnering with Shanghai Automotive Industry
Corporation and Wuling Motors) in Liuzhou that became the first in
China to exceed annual production of one million vehicles in 2009.
The plant already has two vehicle plants and a two-year old engine
plant in operation, but Vice President Matthew Tsien said it still
had trouble keeping up with burgeoning demand in 2009 and is
currently expanding production in order to meet projected 2010 sales
for inexpensive small-sized minivans and entry-level compact cars.
The factory's small-sized minivan, known locally as the Wuling
Sunshine, is a market leader in China, with just under 50% market
share nationwide. Tsien said the company began production of a
locally-designed mid-sized minivan that competes in a higher-end
market segment and is produced at the joint venture company's
Qingdao factory. The government announced an incentive program
commonly known as "Cars for the Countryside" in March 2009, which
Tsien said was a major factor in the Liuzhou GM factory's 67% sales
increase last year. The policy offered subsidies to rural
purchasers of small-displacement vehicles (engines under 1.6 liters)
like those produced at the Liuzhou GM factory. (Note: More detailed

GUANGZHOU 00000076 002.2 OF 003


information about the program can be found on the following website:
http://www.gov.cn/zwgk/2009-03/20/content_126 4324.htm. End note.)

5. (SBU) Construction and heavy machine builder Liugong Machinery
also saw an increase in tractor and other equipment sales in 2009,
Vice President for Research and Development David Beatenbough told
the CG on February 3. However, even as domestic sales improved,
overseas orders fell dramatically when construction projects were
cancelled or delayed during the global economic downturn. For
Liugong, Beatenbough said the overseas sales decline hurt the
company's plans for international expansion but not the bottom line
because the company only relies on overseas markets for 15% of its
annual revenue. Liugong employees described subsidies very similar
to those seen for many of China's export industries, including VAT
rebates (ref B and C) and tax incentives for domestic R&D
expenditures. More important than the subsidies, continued growth
in China's domestic construction sectors served by Liugong were a
boon to the company as it works to become a world leader in modern
heavy machinery.

Domestic Demand Strong, But Not "High End"
-----------------------------------------

6. (SBU) When asked to predict how the domestic market will look in
2010 and 2011, executives from both General Motors and Liugong said
they expect to break new sales records in this timeframe. However,
when asked about local R&D and introduction of higher-end
technologies, GM's Tsien said, "Consumers would love to get more
high-tech features and higher-end products, but they absolutely
don't want to pay for it." Liugong executives offered a similar
view, telling the CG that advanced Cummins engines are only used in
certain equipment models designed specifically for export; almost
all domestic customers insist on low-to-mid level products in terms
of both price and features. By producing less expensive products to
meet domestic demand, both firms had achieved rapid sales growth and
profits, but not with the high margins that products from western
countries and Japan regularly fetch in advanced markets.

Tourism Remains Key for Guilin
------------------------------

7. (SBU) Tourism, to the tune of 6 million visitors annually, is the
main economic driver in Guilin city and surrounding areas with its
population of just over one million people. International tourists
from Asia, Europe and the United States account for 20% of the total
visitors. Deputy Director Chen Yunchun of the Guilin Tourism Bureau
told the CG that 60,000 U.S. tourists visit the city each year, and
the city is ranked seventh in China for the number of international
visitors each year. The economic downturn led to a 24% decrease in
the number of 2009 visitors, but tourism picked up at the end of the
year and 2010 will see growth return to prior levels, said Chen.

IPR Also Important to Guilin
----------------------------

8. (SBU) Protecting intellectual property rights (IPR) is
increasingly a focus of Guilin's municipal government, according to
an interagency group of working-level officials. Representatives of
the Guilin Intellectual Property Office (IPO), Administration of
Industry and Commerce (AIC), Economic Crimes Investigative Division
(ECID) of the Public Security Bureau (PSB) and the Foreign Affairs
Office (FAO) told the CG that resources for IPR enforcement have
steadily increased in recent years. Guilin has established a
government-wide interagency task force as well as IPR points of
contact in the city's five urban districts and 12 rural counties.
Enforcement efforts could receive even more attention if a proposal
to certify the Guilin Municipal Court to handle IPR cases is
approved, the officials said.

9. (SBU) Guilin's industrial development has expanded into
pharmaceutical and medical products, leading to a concurrent
increase in local counterfeit production. ECID officials took the
opportunity to brief the Consulate on the recent case involving
counterfeit Johnson & Johnson diabetic test strips. The
investigation into the case was concluded in 2008 and is currently
awaiting a final court decision and sentencing. Comment: Despite a

GUANGZHOU 00000076 003.2 OF 003


number of delays in the trial phase, the case could be an important
example of successful IPR enforcement in south China. If the trial
ends in jail time for the accused, which the law allows up to 7
years in this case, many observers and U.S. rights holders will see
this case as an enforcement success. However, if it ends in
administrative fines or suspended sentences, rights holders will see
this as "business as usual" and continued weak enforcement of IPR
that is endemic throughout much of south China. End comment.

GOLDBECK

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