Identifier
Created
Classification
Origin
06GUANGZHOU13550
2006-04-28 06:21:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Guangzhou
Cable title:  

UPS One Year On: Despite Bumps in the Road, Big

Tags:  EAIR ETRD WTRO ECON CH 
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RUEHNH
DE RUEHGZ #3550/01 1230405
ZNR UUUUU ZZH
R 280621Z APR 06 ZDK CTG NUM SVCS
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6827
INFO RUEHC/SECSTATE WASHDC 6828
RUEHOO/CHINA POSTS COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI
UNCLAS SECTION 01 OF 04 GUANGZHOU 013550 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB, R, EAP/CM, EAP/PD, DRL
STATE PASS USTR - STRATFORD, CELICO
USDOC FOR 4420/ITA/MAC/MCQUEEN, DAS LEVINE
USPACOM FOR FPA

E.O. 12958: N/A

TAGS: EAIR ETRD WTRO ECON CH

SUBJECT: UPS One Year On: Despite Bumps in the Road, Big
Brown Is Not Blue

GUANGZHOU 00013550 001.3 OF 004


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

A) 05 GUANGZHOU 038410; B) GUANGZHOU 05379; C) GUANGZHOU
010672; D) 05 Guangzhou 018283

UNCLAS SECTION 01 OF 04 GUANGZHOU 013550

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB, R, EAP/CM, EAP/PD, DRL
STATE PASS USTR - STRATFORD, CELICO
USDOC FOR 4420/ITA/MAC/MCQUEEN, DAS LEVINE
USPACOM FOR FPA

E.O. 12958: N/A

TAGS: EAIR ETRD WTRO ECON CH

SUBJECT: UPS One Year On: Despite Bumps in the Road, Big
Brown Is Not Blue

GUANGZHOU 00013550 001.3 OF 004


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

A) 05 GUANGZHOU 038410; B) GUANGZHOU 05379; C) GUANGZHOU
010672; D) 05 Guangzhou 018283


1. (SBU) SUMMARY: UPS officials recently discussed their
experiences in South China as the company reaches its one
year anniversary of direct cargo services between Guangzhou
and the United States. Its China operation now wholly
owned, company officials are generally positive but raised
WTO-related concerns about the lack of transparency in
government decisions and lawmaking, slow and onerous
licensing requirements, and proposed changes to the labor
and postal system laws. Despite these worries -- as well as
some not-too-subtle hints from local officials about moving
their hub from Shanghai to Guangzhou -- our interlocutors
remain relatively upbeat about their experiences in South
China and about the potential that lies ahead. End Summary.


2. (SBU) The Consul General and Econoffs recently met with
Ken Torok, President of UPS Asia Pacific; Richard Loi,
Senior Vice President, Asia Pacific Region China District;
and Xiang Feng, Senior Manager for Public Affairs, China.
The UPS officials requested the meeting so that Torok, who
was visiting from Singapore, could meet discuss UPS'
experiences in South China over the last year. It was at
approximately this time last year that UPS began to offer
direct cargo service between Guangzhou and the United
States, via Anchorage, which was the first non-stop air
service by a U.S. air carrier between Guangzhou and the
United States (ref A).

One Year Later -- Going it Alone
--------------


3. (SBU) UPS originally entered the China market in 1988 in
partnership with SinoTrans, a state-owned enterprise. After
Chinese law was changed to allow wholly-owned foreign
companies, UPS announced in late December 2004, however,

that it was going to take direct control of its
international express operations in China's largest cities
by the end of 2005 -- essentially buying out Sino Trans.
UPS also planned to open offices in five major cities
(Shanghai, Guangzhou, Shenzhen, Tianjin, and Qingdao) and
expand to more than 20 other cities. This newfound
independence, however, may be bringing some unintended
consequences for UPS. Torok described how one of the
toughest hurdles UPS faces in China -- the licensing process
-- is not a requirement for the thousands of local courier
companies which compete with UPS in the same markets.

The Licensing Hurdle: Misery Loves Company?
--------------


4. (SBU) Torok described how, despite the fact that UPS now
operates express delivery services in 23 cities, each time
the company applies for a new license to operate, it has to
basically start anew. He commented that to open a UPS
retail store, the company needs to obtain a new and
different license, even if the retail store is co-located
with the delivery office, and that this process is as much
work as opening an entire new city to UPS delivery services.


5. (SBU) Econoffs mentioned that these restrictions were a
common occurrence in other service industries such as
banking and insurance (refs B and C.) We noted that
officials from these industries are anxiously looking toward
11 December 2006, after which time China's five-year WTO
transition period will end and foreign service industries
should theoretically be able to operate on the same terms as
their domestic counterparts. We explained that
representatives from those industries have told us about
similar frustrations at breaking into domestic markets due
to administrative hurdles such as the licensing regulation.

GUANGZHOU 00013550 002.3 OF 004


(Note: Other service industry officials have told us how a
long application process to open a new branch allows local
governments to control the speed of expansion, and how
intangible administrative measures, such as having
additional capital requirements for each and every license,
push up the expansion costs for foreign competitors. End
Note.) The Consul General mentioned the Chinese concern
with the social and economic consequences of opening up the
market to foreign competitors too quickly, a factor that is
undoubtedly influencing Chinese decisions on the issue.

Serious Concerns About Proposed Labor Law:
A French Model in the Works? Bad News.
--------------


6. (SBU) The conversation then turned to a discussion of the
draft of a proposed labor law, which many observers see as a
mis-guided government attempt to offer more protection to
workers, many of whom have been displaced during China's
vast economic reforms. Critics -- among them many Western
multinational companies who are voicing their concerns to
the government via the protective cover of business
associations -- have said the draft new law will severely
limit employers' flexibility to hire and fire employees;
gives unions considerable input over personnel decisions;
requires excessive severance payments in certain cases; and
bans service agreements which allow temporary employment.
The temporary worker provision converts temporary workers to
fully-vested workers after a short time of working
temporarily for a company. The target date to finish the
draft legislation is 2007 and the legislation is currently
open for public comment.

The Government as Union
--------------


7. (SBU) Torok commented rhetorically that under his
interpretation of this new law, labor unions would not be
necessary because the government would take their place with
the provisions of this proposed law. The Consul General
commented, and Torok readily agreed, that perhaps rather
than "reinventing the wheel" with a new law, a better
approach would be for China to simply enforce its current
labor laws, which most experts find to be quite
comprehensive, at least on paper.


8. (SBU) Loi commented that in his experience, UPS employees
are happy working for UPS without labor union representation
because the company respects them and meets their needs.
Loi continued that the company celebrates holidays and
cultural events with its employees; for example, giving
employees moon cakes during the Mid-Autumn festival. He
commented that he has heard that Taiwan companies in
particular, take advantage of their workers, paying only the
minimum wage, despite requiring overtime work. He opined
that the growing number of labor protests attests to the
fact that there are many workers who are unhappy with their
employers.

No Express Delivery of New Postal Law, But Concerns Remain
-------------- --------------


9. (SBU) The discussion then turned to efforts to rework
China's postal law. (Note: China has been working to
reform its existing postal law, enacted in 1986, for more
than seven years. Drafting of the reform package began in
2003, but the law became bogged down by the slow pace of the
amendment process. In the meantime, many foreign companies,
such as UPS, remain concerned about the possible impact of a
new law on their business. End Note.) Torok said that
while he was somewhat heartened by a statement that Vice
Premier Wu Yi made during the April 11 Joint Commission on
Commerce and Trade (JCCT) meeting in Washington, DC, -- in
which she reportedly said that the regulatory environment
for express services for foreign companies would not be
negatively effected by new rules, including by postal reform

GUANGZHOU 00013550 003.3 OF 004


-- UPS still has several concerns about the new law. These
include: the universal postal fund, which UPS sees as a
form of double taxation; the law's definition of a monopoly,
with which UPS does not agree; a proposal to make the State
Postal Bureau (SPB) a regulator for the whole industry --
since the SPB is a direct competitor UPS would like to see
an independent regulator; and the treatment given to
domestic firms, which UPS believes comes at the expense of
foreign companies and would violate WTO national treatment
rules.


10. (SBU) One example Torok provided highlighted several
concerns at once. While the central government has declined
to provide firms with copies of the draft laws, UPS has
managed to acquire an unofficial copy. Torok explained that
as he understands it, the 7th draft of the law allows
foreign companies to only provide express services, which
the industry regulator (i.e. its competition, the China
Post) would define, presumably in a way that would suit its
own business needs. Torok explained that UPS has heard from
its sources that the Chinese government may have decided to
discard this point because it violates WTO, but he said UPS
does not know for sure -- underscoring a complaint he made
earlier about how the companies that will be affected by the
new law have little knowledge about the decision making
process and no opportunity to comment on it.


11. (SBU) Torok noted that according to another senior UPS
official, postal reform may be put on hold, however, as
Chinese legislative priorities have reportedly changed and
postal reform is less of a priority. It has reportedly been
pushed into the background by a new interest in promoting a
limited partnership law. According to this UPS official,
the draft postal law is not yet out of the State Council and
it is uncertain if it will go to the National People's
Congress by the end of the year.


12. (SBU) Econoff addressed Torok's concerns about the SPB
becoming the industry regulator by noting that if past
experience in the banking and insurance industries is any
indication, the Chinese government may recognize that this
is a conflict of interest. In both of those industries, the
initial plan was to use regulators who were direct
competitors in the industry. However, the Chinese realized
the problems inherent in this plan and eventually separated
the functions.

So Now That You Are Here, When Are You Moving Your Hub?
Guangzhou Hints at Favors
-------------- --------------


13. (SBU) Torok noted that as part of his visit to Guangzhou
he was making the rounds to call on various Chinese
officials. Torok commented that when meeting with the
Guangzhou Party Secretary General and with one of the Vice
Mayors, he was asked with the bluntness characteristic of
many Chinese officials "so when are you moving your China
hub from Shanghai to Guangzhou?" (Note: This was in
obvious reference to the July 2005 deal Fedex signed to
establish its Asia Pacific hub at Guangzhou's Baiyun Airport
(ref D) -- a coup for local officials considering the
estimated USD 60 billion economic benefit the hub will bring
to the region. End Note.) Officials noted that some
current frictions -- slowness in licensing and Customs
clearances and additional fees (see below) that UPS objects
to -- could all be dealt with if UPS would move its
headquarters to Guangzhou. Torok replied that Guangdong
Province is UPS' operational headquarters, and the company
is continually injecting more money here -- more than USD
100 million this year alone, in part due to capital
requirements for new licenses. Torok also met with the Vice
President of the Baiyun Airport Authority, with whom he
raised concerns about additional fees UPS must pay their
handling agent for ground handling inside their own express
handling unit and fees due to stationing of government
officials within the building -- fees UPS does not pay

GUANGZHOU 00013550 004.3 OF 004


anywhere else in the world.

Comment: Speed Bumps Not Bad but Not Fair
--------------


14. (SBU) Despite the issues of concern that Torok raised
during the meeting, he was, on the whole, upbeat about UPS'
experiences thus far in South China. The opening of the
logistics and postal express markets under China's WTO
accession agreement acted as a strong lure for UPS to come
into South China, and this lucrative market is still very
much within UPS' sights. UPS officials are seasoned
businesspeople who seem to understand that there will be
bumps on the delivery route, but that once UPS can overcome
these speed bumps, a vast market anxious to take delivery of
UPS' professional services lies ahead. Nonetheless, UPS
believes China should keep to the spirit of the WTO rules
and let competition flourish without putting obstacles in
its way.

DONG