Dell China: Expanding Amid Concerns of Growing

C O N F I D E N T I A L SECTION 01 OF 02 GUANGZHOU 000527

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STATE FOR EAP/CM AND DRL
USDOC FOR 4420/ITA/MAC/MCQUEEN
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CONFIDENTIAL

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E.O. 12958: DECL: 04/22/2017
TAGS: ETRD ECON PGOV CH
SUBJECT: Dell China: Expanding Amid Concerns of Growing
Nationalism Affecting the Market

Classified by Robert Goldberg, Consul General, Guangzhou,
Reasons 1.4 (b/d)


1. (C) Summary: In meetings with the Ambassador, executives
from Dell-China took note of the critical importance of China
to Dell?s future operations in the Asia-Pacific region,
expressed confidence in their ability to continue building
market share and discussed Dell?s expansion plans, especially
out of its plant in Dalian, which is geared toward exports to
Japan and South Korea. Dell China President Amit Midha
expressed concern about PRC Government efforts to direct
Chinese IT purchases to local companies. He also suggested
that the draft labor law could restrict company flexibility in
terms of hiring temporary workers and took note of rising
consumer litigation against defective Dell products. End
summary.


2. (C) During meetings April 17 and 18 in Xiamen with Ambassador
Randt, the Consul General and staff members, senior Dell
executives [Dell China President Amit Midha, Managing Director
York Li and General Counsel Albert Wang] provided an overview
of Dell?s development, growth and evolving market strategy in
China.

Expansion
--------------


3. (C) Dell?s two factories in Xiamen currently supply 70-to-80
percent of the North Asia market. Dell?s service base is
centered in Shanghai and its Dalian plant is oriented toward
the Japan and Korean markets. The company plans to expand its
manufacturing base in Xiamen by opening more lines and optimizing
the use of its workshop space.


4. (C) Most of Dell?s suppliers are American or Taiwan companies.
About 80 percent of them manufacture in China, mainly in
tax-bonded zones. In 2003, Dell was China?s 10th biggest
foreign investor. In 2005, the company?s global procurement
from China was about USD 16 billion, which, according to Peking
University researchers, created about 1.5 million jobs in the
country. Dell directly and indirectly contributed USD 36.4
billion to China?s economy, more than 1 percent of national GDP.
Dell?s purchases out of China increased last year to USD 18
billion and are expected to amount to USD 22 billion this year.
In Xiamen, Dell accounts for about 16% of the Prefecture?s
industrial revenues and pays USD 2.3 billion in taxes.

Rising Nationalism
--------------


5. (C) At his breakfast meeting with the Ambassador on April
18, Dell China President Amit Midha expressed concern about
Chinese Government efforts to promote local standards without
regard to international standards-making procedures. The
Central Government was now requiring Dell to account for the
local content and domestic IPR of its products and the lack of
same has had an impact on Dell?s ability to access the lucrative
government procurement market. Dell has been able, however, to
design a first-time buyer computer, the EC 280, in its Shanghai
research and development center, which retails in China for USD
300 and is selling well.

New Labor Union
--------------


6. (C) In response to the Ambassador?s question about the impact
of the Chinese labor movement on Dell, the executives said that
the company had been on the black list of the All China Federation
of Trade Unions (ACFTU),along with Wal-Mart, for not having
a trade union. Dell did have an employee committee that gave
voice to employees? concerns, however. According to Wang, the
employees did not see a need for having their own trade union,
but Dell, nonetheless, had decided to quietly establish an ACFTU
branch; the head of Dell?s union is a long time employee. Wang
said trade unions would have a greater impact on employees in
domestic firms and Taiwan-invested enterprises, where working
conditions are poor and employees do not have input into work
procedures. Dell China handled its sometimes difficult
relationship with the national ACFTU by doubling its government
relations efforts and seeking assistance from contacts in the
State Council?s Ministry of Commerce, as well as in the Xiamen
ACFTU. Wang said labor disputes were inevitable, and Dell?s
strategy would be to follow all of the government?s labor

GUANGZHOU 00000527 002 OF 002


regulations and to guarantee maximum transparency in dealing
with its employees. Dell?s employees are young, with an average
age of 29, and have a ?new economy? outlook.


7. (C) Dell is concerned about proposed changes in a draft labor
contract law that would automatically make temporary workers
permanent once certain conditions are met. The draft law could
thus limit company flexibility in responding to market and
seasonal fluctuations.

Media Coverage of Lawsuits
--------------


8. (C) Consumer litigation is another challenge that Dell has
tried to handle with a low-profile strategy. Domestic customers
have sued Dell for ?false advertising? due to reportedly having
the ?wrong? chips in ordered products; the local district court
in Xiamen is hearing the case. Negative media stories against
Dell regarding the case have been confined mainly mostly to blogs
and on bulletin boards rather than in mainstream media. In other
cases, Dell staff believe that the mainstream media has engaged
in campaigns against Dell similar to those against other large
American companies, including Proctor and Gamble, McDonald?s,
and KFC. Wang cited the media?s handling of the way in which
Dell?s global recall of defective laptop batteries spread in
the press, while a similar problem with Lenovo batteries was
ignored. Though the negative stories have had little impact on
Dell?s business, officials are concerned about the effect of
such press on employee morale.

Relations with Local Government
--------------


9. (C) Despite the trade union and litigation crises, Dell still
has excellent relations with local Xiamen Government leaders
and agencies. Dell was able to find additional land for
expansion at a time when the Prefecture faced land shortages.
In contrast, Dell did have problems with a local district
government in Shanghai which wanted to revoke a land use contract
that its predecessors signed several years earlier. The
district government tried to force Dell to yield by flooding
the company with officials - from the tax bureau to the labor
bureau ? who repeatedly inspected Dell?s operation.


10. (C) Dell-China President Midha said that despite labor
problems, differing standards and the government?s reluctance
to certify Dell for government procurement, Dell would be even
more successful than it has been were it not for a few mistakes.
He cited delays in rolling out new products; reading customer
preferences incorrectly; higher operational costs; investments
in some consumer products that have not paid off, such as
television; and slowness in investing in direct consumer support.
The return of Michael Dell to the helm signifies the return of
?Dell culture.? Michael Dell has attracted ?stars? to help him
manage the decision-making process more quickly.

Comment: Favoring Local Producers
-------------- --------------


11. (C) While the draft labor contract law is of concern and
could affect Dell?s manufacturing flexibility; Dell is much
more concerned about the Central Government?s decision to favor
Chinese producers by insisting on indigenous standards, a
situation similar to the WAPI issue of several years ago.
China?s preference for locally developed IPR also prejudices
Dell?s chances of selling to Chinese Government customers at
all levels. Dell?s situation is similar to that of many American
enterprises, which have problematic relations with local Chinese
governments and which find it difficult to operate in a
non-transparent business environment.

GOLDBERG