POU CHEN GROUP FOCUSES ON CHINA'S RETAIL MARKET AND

UNCLAS SECTION 01 OF 02 TAIPEI 000479

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SENSITIVE

DEPT PASS AIT/WASHINGTON
DEPT FOR EAP/RSP/TC

FROM AIT KAOHSIUNG BRANCH OFFICE

E.O. 12958: N/A
TAGS: ECON PGOV PREL TW HK CH BG IN
SUBJECT: POU CHEN GROUP FOCUSES ON CHINA'S RETAIL MARKET AND
LOOKS ELSEWHERE FOR MANUFACTURING OPPORTUNITIES


1. (SBU) Summary. As widely reported in the Taiwan press,
Taiwanese businessmen have largely greeted President Chen's
exhortation to avoid excessive focus on the mainland either
negatively or dismissively. However, according to Chi Jui
Tsai, Chairman of Pou Chen Group, the world's largest shoe

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manufacturer, increasing costs of doing business in China
will lead many Taiwanese concerns to focus on other locales
for manufacturing, while devoting more attention to China's
retail market. While this will match Chen's exhortations,
Tsai emphasized that it would result from market rather than

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political concerns. End Summary.


2. (U) Numerous business leaders in Southern Taiwan have
expressed increasing frustration with the Chen
administration's lack of progress in cross-strait relations.
Chi Mei Group's Optoelectronics and Chilin division vice-
presidents, Jack Lin and Richard Soong say that current
investment regulations are needlessly complex and burdensome
and while they hamper investment on the mainland, they do
nothing to encourage investment in Taiwan. Chen's recent
announcements concerning the National Unification Council
and his exhortation to invest in Taiwan, even at the cost of
substantial profits have, in the opinions of Lin and Soong,
only served to bring needless attention to their mainland
operations. Various other industrial leaders have voiced
similar complaints. Tommy Hong, chief of American President
Line's Kaohsiung operations said that substantial opening in
cross-strait operations is critical to the continued
viability of Kaohsiung Harbor. C.J. Tsai, Chairman of Pou
Chen Group said that, while he agrees with the general
sentiment that the Chen administration's performance in
cross-strait relations has been unhelpful, market forces
within China will lead his company and many other
manufacturing concerns to look beyond China for expansion of
their manufacturing operations, regardless of political
concerns.


3. (U) As China's economy continues its rapid growth, Pou
Chen Group, through its Yue Yuen Industrial Holdings
operation in Hong Kong, has changed its China focus from
manufacturing to retailing, wholesaling and logistics. Mr.
Tsai told AIT/K that the rapidly increasing costs of land

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and labor will lead manufacturers to look elsewhere.
However, increasing disposable income will, in Mr. Tsai's
estimation, soon deliver on the promise of a robust Chinese
consumer market. He said that his company's business
strategy will take into account both of these realities.


4. (U) Mr. Tsai believes the rapid development of China's
freeway system will quickly make road transportation the
most effective means for delivery within China. In light of
this, Yue Yuen entered into a joint venture with Hutchison
to establish a logistics arm within China. According to Mr.
Tsai, the company expects to be well positioned to take

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advantage of increasing industrialization of China's
interior by providing services to other manufacturers.
Moreover, the company will allow Yue Yuen to meet the
delivery needs of its rapidly expanding retail operations in
China.


5. (U) Hoping to capitalize on both the increasing amount
of disposable income within China, as well as a fitness
craze prompted by the 2008 Olympics, Pou Chen Group has
established more than one thousand retail outlets within
China to market athletic apparel and shoes within China.
The outlets will operate under the brand "Footzone" and will
carry products for which Pou Chen is the lead manufacturer,
including such brands as Nike, Adidas, Reebok and
Timberland. Most of the clothing will be produced by Yuen
Thai, a joint venture controlled by Pou Chen. This will
give the retail outlets access to Nike, Ralph Lauren and Liz
Claiborne lines among others. Additionally, Pou Chen Group
will be establishing a chain of fitness centers throughout
China, the first twenty-two of which are expected to begin
operations by the end of this year.


6. (SBU) While Mr. Tsai said that manufacturing operations
within China will continue (Pou Chen employs more than
400,000 people in its China plants),along with those in
Indonesia, Hungary, Mexico and the United States, the price
of labor and real estate will lead his company to develop
increased capacity elsewhere. The company has looked
closely at a number of countries including Vietnam,
Indonesia, India, the Philippines and even Mongolia, but has
decided that their major manufacturing effort going forward
will concentrate on Bangladesh. Mr. Tsai said that over the
longer term his company will look closely at Mongolia as
well as the interior of China. However, he said that
western China suffered too much social instability to be a
viable choice at present.


7. (SBU) Mr. Tsai said that India and Bangladesh were the
final two candidates for immediate expansion. His company
settled on Bangladesh largely because of dissatisfaction
with India's factory regulations. He said that India's
regulatory environment is overly restrictive in terms of
factory size and number of employees. Given this, his
company would need to open three factories in India to
accomplish what can be done with one factory in Bangladesh.


8. (SBU) According to Mr. Tsai, his company will follow
the same top-to-bottom business model in Bangladesh that
they used in China. Noting that Bangladesh is about where
China was two decades ago in terms of infrastructure, Mr.
Tsai said his company expects to develop roads as well as

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power and water supplies to support not only its own
operations, but those of other companies that decide to
locate in the region. Pou Chen was one of the first Taiwan
companies to establish a major presence in China, and
through its Yue Yuen Holdings it has experience in
developing power plants, water plants and a variety of other
infrastructure needs.


9. (SBU) Mr. Tsai said that he is more concerned bout U.S.-
China relations than Taiwan-China relations. He expressed
worry that a disagreement between China and the U.S. over
the handling of the Iran problem could adversely influence
world oil prices. He also expressed concern over the level
of the U.S. dollar, as Pou Chen Group does more than two
billion dollars worth of business per year with U.S.
companies.


10. (U) Pou Chen Group, while largely producing outside of
Taiwan, has still made substantial investments in Taiwan,
recently opening new headquarters and an R&D facility in
Taichung. Again, Mr. Tsai emphasized that this was a
business decision and had nothing to do with politics. He
pointed out that his company, in addition to being the
largest manufacturer of finished shoes, is also the largest
producer of shoe making materials. Moreover, he noted that
Pou Chen does the design work for Nike's top end shoe lines.
The need to protect proprietary data was the key to making
the decision. In Mr. Tsai's opinion, Taiwanese labor and
land are cost prohibitive for most low tech manufacturing,
but for cutting edge technology, the ability to protect
proprietary technology makes Taiwan a good option.


11. (SBU) Comment. AIT/K considers Mr. Tsai's views of
China's business conditions to be extremely reliable. He
was one of the very first Taiwanese to establish himself on
the mainland. AIT/K will report further on the China-
related plans of Chi Mei, various shipping concerns, and
Southern Taiwan's steel producers by septel. End Comment


Thiele

Keegan