TAIWAN FIRMS TO INVEST IN PRC

UNCLAS SECTION 01 OF 02 TAIPEI 003752

SIPDIS

DEPARTMENT FOR EAP/ TC AND EB/TRA/OTP
DEPARTMENT PASS TO AIT/W

E.O. 12958: N/A
TAGS: EAIR ECON EINV TW CH
SUBJECT: TAIWAN FIRMS TO INVEST IN PRC
TRANSPORTATION FIRM


1. Summary: Three Taiwan transportation firms,
China Airlines, Wan Hai Lines and Yang Ming
Marine, will join together to buy a 37 percent
stake in China-based Yangtze River Express (YRE),
a logistics and transportation company. Together
the firms will invest approximately USD 58
million. CAL will be the largest investor with a
25 percent share. Some reports indicate that
Luxembourg-based cargo airline Cargolux will join
the group to increase the foreign stake to 49
percent. The Taiwan investors seek access to the
PRC's growing domestic transportation market. The
plan is only the latest in a series of CAL
proposed investments in PRC transportation and
reflects Taiwan firms' growing frustration with
Taiwan government restrictions on cross-Strait
transportation. End summary.

Yangtze River Express
--------------

2. CAL has assembled Taiwan shipping companies Wan
Hai Lines and Yang Ming Marine to join it in
buying a 37 percent stake in Yangtze River
Express. Together the firms will invest a total
of USD 58 million. According to some media
reports, Luxembourg-based cargo airlines Cargolux
will join the group to increase the total foreign
stake to 49 percent.


3. YRE is an affiliate of Hainan Airlines, one of
China's four major aviation groups, and provides
logistics, land transportation and air cargo
services. YRE purchased its first cargo plane in
January 2003 and gained government approval in
2004 to run international cargo routes in Asia.
The company needs a management group with
international expertise to expand its business.
YRE is UPS' major partner in China and owns four B-
737 freighters.

Investment Group Brings Range of Expertise
--------------

4. CAL President Philip Wei announced that the
company had been working on this project for more
than a year. CAL invited the partners because
each of them has a specialty in some aspect of air-
sea operations. CAL serves as the core of the
investment group. Yang Ming is CAL's air-sea
alliance partner, and Wan Hai controls one seat on
the board of CAL. CargoLux is CAL's major partner
in Europe.


5. CAL plans to invest RMB 312.5 million (USD 39
million) for 25 percent of YRE, while Wan Hai and
Yang Ming will each invest RMB 75 million (USD 9.3
million) for a 6 percent share of YRE. CargoLux
may purchase an additional 12 percent equity.
China limits foreign holdings in domestic air
carriers to 49 percent; any one foreign investor
is limited to a 25 percent share.

Looking for Entry into PRC's Transportation Market
-------------- --------------

6. CAL Spokesman Sun Hong-wen told the press that
once Taiwan's Investment Commission approves this
case, there will be further negotiations with YRE.
"We believe that there is a great air cargo market
in China, and we need to begin the operation as
soon as possible. This is a great opportunity in
front of us," said Sun.


7. Wan Hai Spokesman Lee Yao-hung confirmed this
investment, and predicted that YRE's land
transportation and logistics operations will help
Wan Hai's entrance into China's transport
logistics network.

Latest Piece in CAL's PRC Investment Strategy
--------------

8. Although prohibited from providing flight
service to the PRC, CAL has already initiated
other investment projects in the Mainland. In
September 2001, CAL and China Cargo Airlines
reached initial agreement that CAL would invest
USD 30 million for a 25 percent equity share in
China Cargo Airlines. Although officials from
both China and Taiwan approved the investment
project, the project has not been implemented
because of concerns raised by China Cargo
Airlines.


9. In early 2003, CAL, with EVA Air, Far Eastern
(FAT) and Taiwan Airport Service Company (TASC),
purchased 49 percent of Xiamen Air Cargo Warehouse
Co. with an overall investment of RMB 54.88
million (USD 6.86 million). CAL, EVA, FAT each
hold 12 percent, and TASC holds 13 percent of
Xiamen Air Cargo Warehouse Co. TASC is 94 percent
owned by CAL.

10. Comment: Taiwan air carriers and shipping
companies are eager to capitalize on China's rapid
growth but are held back by Taiwan's prohibition
on direct cross-Strait flights and shipping.
Taiwan aviation firms, with their large cargo
capacity and experience in the field have long
seen themselves as a very competitive
transshipment center for air traffic to and from
China. However, Chinese carriers' efforts to
initiate their own cargo operations and the
increased cargo capacity for the China market
agreed to under the July 2004 U.S.-PRC aviation
agreement, has diminished Taiwan's competitive
position. This latest proposal, and others like
it, illustrate how Taiwan firms have found
alternative ways to slip into China's
transportation market. We can expect to see more
examples of this type of investment. End comment.

KEEGAN