Identifier
Created
Classification
Origin
08BEIJING1201
2008-03-31 07:45:00
CONFIDENTIAL
Embassy Beijing
Cable title:  

NORINCO BRIEFS EMBASSY ON ITS EXPORT CONTROL

Tags:  MNUC PARM ETTC PREL CH 
pdf how-to read a cable
O 310745Z MAR 08
FM AMEMBASSY BEIJING
TO SECSTATE WASHDC IMMEDIATE 6170
INFO SECDEF WASHINGTON DC
DEPT OF TREASURY WASHINGTON DC
DEPT OF COMMERCE WASHDC
NSC WASHDC
C O N F I D E N T I A L BEIJING 001201 


DEPT FOR ISN, EAP

E.O. 12958: DECL: 03/31/2033
TAGS: MNUC PARM ETTC PREL CH

SUBJECT: NORINCO BRIEFS EMBASSY ON ITS EXPORT CONTROL
COMPLIANCE EFFORTS

REF: A. 06 BEIJING 13341

B. 07 STATE 155042

Classified By: Charge d'Affaires, a.i., Dan Piccuta. Reasons 1.4 (b/d)

Summary
-------

C O N F I D E N T I A L BEIJING 001201


DEPT FOR ISN, EAP

E.O. 12958: DECL: 03/31/2033
TAGS: MNUC PARM ETTC PREL CH

SUBJECT: NORINCO BRIEFS EMBASSY ON ITS EXPORT CONTROL
COMPLIANCE EFFORTS

REF: A. 06 BEIJING 13341

B. 07 STATE 155042

Classified By: Charge d'Affaires, a.i., Dan Piccuta. Reasons 1.4 (b/d)

Summary
--------------


1. (C) NORINCO management wants to end the "distorted image"
of the firm and become a "decent member of the international
community," NORINCO Vice President Zhi Yulin told the Charge
in a March 27 meeting. Zhi believes the firm's experience
building infrastructure projects creates an opportunity for
NORINCO and the United States to cooperate in "turbulent
countries." Although acknowledging that "differences" remain
over the firm's conventional weapons sales to "some
countries," NORINCO is willing to discuss this further with
the United States, Zhi said. NORINCO's Internal Compliance
Program (ICP) is "not for show" and will be computerized and
"further improved." The Charge welcomed future, detailed
exchanges with NORINCO and said the list of questions
presented to NORINCO during an October meeting in Washington
(ref B) could form the basis of future conversations. Being
honest and frank about the past and the future will help
build trust, he stressed. Following the meeting, NORINCO
officials took EmbOffs on a tour of the firm's showroom of
weapons systems (septel) and answered questions about the
firm's audit procedures and its relationship with the
Ministry of Commerce. COMMENT: Although the meeting did not
provide significant new insights into NORINCO's compliance
operations, the meeting afforded a good opportunity for
EmbOffs to encourage greater transparency and lay down
markers for future cooperation. End Summary/Comment.


2. (C) In a March 26 meeting with the Charge and EmbOffs,
NORINCO Vice Presidents Zhi Yulin and He Xiaodong discussed
NORINCO's efforts to implement an export control compliance
program. Zhi thanked the United States for lifting the
proliferation sanctions that had been imposed on NORINCO and
for the U.S. Government's continued willingness to engage in
discussions with NORINCO officials. Effective implementation
of nonproliferation and export control policies requires
communication and the combined commitment of the
international community, he said. Recalling the June 2006

visit of then-DCM David Sedney and Emboffs to NORINCO (ref
A),Zhi said that meeting "opened the gate" to direct
communication between the U.S. Government and NORINCO, and
led to additional "wide ranging, productive" discussions.
Although "differences and different interests" between both
sides remain, dialogue has helped "develop understanding and
build mutual trust." NORINCO hopes to "shelve these
differences" while seeking "common ground."


3. (C) Differences exist, Zhi acknowledged, because of
NORINCO's weapons exports to "some countries." This issue
requires further discussion, he said. Through dialogue,
NORINCO can better understand U.S. concerns and "strike a
balance between risk and opportunity." Although NORINCO has
already given up "a lot" by forgoing trading with "some
companies," the firm's export of conventional weapons will
not come to a "complete stop." The firm will adopt a
"cautious approach" when dealing with "some countries and
some products," he stated.

Zhi Describes NORINCO's Export Control Policies
-------------- --


4. (C) Zhi said NORINCO is setting an example for other
Chinese firms by "comprehensively" abiding by Chinese export
control laws and policies. NORINCO's leadership and staff
believe the firm must undertake socially responsible behavior
and be an "active force" in preventing proliferation.
Proliferation is not in Chinese or U.S. interests. As a
"responsible company," NORINCO has adopted measures to
prevent the proliferation of conventional weapons and
dual-use items and technology, Zhi claimed, and has taken the
initiative to forgo export contracts that might impair
regional or global stability. NORINCO has placed export
control compliance and nonproliferation over its commercial
interests, he stated. (Note: VP He told us later that NORICO
walked away from worldwide sales to "sensitive countries"
worth USD 70 million.)


5. (C) Zhi said NORINCO is the first company in China to
establish an Internal Compliance Program (ICP). The firm's
ICP "is not for show," he remarked, but an obligation owed by
NORICO Group's 700,000 employees to the Chinese Government.
NORINCO's President has authorized the firm's ICP Council
(which Zhi heads) to have the final decision on sales orders.
The firm has been carrying out "extensive" export control
training at its "major subsidiaries" in cooperation with the
University of Georgia (UGA). Senior business managers have
also been sent to the United States for training. Zhi said
the Ministry of Commerce (MOFCOM) uses NORINCO's ICP as a
template for other Chinese firms to adopt. UGA has given
NORINCO's ICP "high appraisal" and has provided suggestions
on how to strengthen it, Zhi said.


6. (C) In the second half of 2008 or early next year, Zhi
told us, NORINCO plans to take two steps: First, the firm,
with UGA's cooperation, will "further improve" its ICP,
particularly the "management elements" of the program.
Second, the firm will make its ICP "automatic and electronic"
by establishing a computerized order screening procedure. To
accomplish this, NORINCO plans to purchase software from
Price Waterhouse and employ the services of two UGA experts.
Moreover, the firm will create a database of "sensitive
clients and products" by combining the Harmonized Tariff
System with a commodity classification system presently being
developed by the General Administration of China Customs.
The implementation of NORINCO's ICP can not be accomplished
in one day, Zhi contended, as management procedures
continuously change as do the firm's "sensitive clients and
products."

The NORINCO Family
--------------


7. (C) Zhi explained that NORINCO was once part of the Fifth
Industrial Ministry and was responsible for the research and
development and manufacture of products developed by the
ministry. NORINCO at that time was not permitted to export
products developed by other ministries -- a prohibition that
still exists, he said. NORINCO has since expanded beyond
military equipment manufacturing and today operates in three
main business areas: conventional military items and
services, petroleum services and "civilian goods." NORINCO
is the biggest manufacturing group in China, he claimed.
(Note: Zhi told us later that NORINCO is the fourth largest
automobile manufacturer in China and is involved in mining
and the manufacture of heavy mining equipment, automobile
parts, luxury buses, plastics and chemicals.)


8. (C) Zhi said the firm has "two mothers": China North
Industry Company and China South Industry Company. The sales
volume of these two entities ranks eighth and ninth in China
respectively, he stated, and if combined would be the largest
in China. (Note: A copy of a PowerPoint presentation that
Zhi did not use but was given to us indicates that NORINCO
subsidiaries include China Wanbao Engineering, NORIMC
Logistics, NORINCO International, and "others;" and that
NORINCO has overseas branches in France, Pakistan, Saudi
Arabia, South Africa, the UAE and "others.")


9. (C) Zhi said the total sales volume of NORINCO in 2007 was
approximately USD 4 billion. Military sales, he explained,
comprise 14 percent of the firm's total sales. (Note: Zhi
said earlier in the conversation that the firm's total sales
were USD 1 billion. He also said military sales are
equivalent to 20 percent of total sales and the PowerPoint
document states that "civilian business takes up more than
85% of revenue.")

Zhi Looks to the Future
--------------


10. (C) After the United States imposed sanctions on NORINCO
in 2003, Zhi said, the firm was "expelled" from the U.S.
market and stopped purchasing U.S.-origin goods. He called
this a "lose-lose" situation. NORINCO is capable of selling
civilian commodities and carrying out infrastructure
development projects, including constructing power stations
and electric railways. We should be cooperating in
"developing and turbulent countries," like Afghanistan and
Iraq, he said. NORINCO wants to end the "distorted image"
that many have of the firm in the United States. NORINCO
wants to be seen as a "decent member of the international
community," Zhi stressed, and wants to work with the United
States to create a "win-win" situation.

Charge Urges NORINCO to Deepen its Dialogue
--------------


11. (C) The Charge thanked Zhi for the presentation and said
he appreciates the firm's willingness to discuss its export
control compliance program. He welcomed future, detailed
exchanges with company officials. He said we look forward in
particular to learning more about NORINCO's ICP and its
relationship with PRC ministries, particularly MOFCOM, and he
offered the Embassy's assistance to help the firm better
understand U.S. nonproliferation and export control policies.
Referring to the list of questions presented to NORINCO
officials during their October meeting at the Department (ref
B),the Charge said the questionnaire could form the basis of
future conversations. Being honest and frank about the past
and the future will help build trust, he stressed.


12. (C) Following the meeting, Zhi and He took EmbOffs (minus
the Charge) on a tour of NORINCO's salesroom where the firm
displays samples of the military equipment it manufactures,
including tanks, artillery, small arms, bombs and weapons
systems. (Details on the facility will be reported septel.)

NORINCO raises VEU Concerns
--------------


13. (C) At a dinner for EmbOffs following the tour of the
exhibition facility, NORINCO VP He Xiaodong said the firm
pays close attention to changes in U.S. export control
policy, citing the "China policy rule" as an example. He
asked Embassy Export Control Officer (ECO) to clarify the
validated end user (VEU) program, saying that he knew MOFCOM
was uneasy with the program and in particular with the
on-site review provisions. When asked why he thought MOFCOM
has this view, VP He offered several reasons: anything new
automatically engenders a negative reaction, the program is
difficult to understand, the application process appears to
be intrusive in the amount and depth of the information
required, and MOFCOM is concerned with on-site inspection
procedures over which it does not appear to have control.
After listening to ECO's description of the U.S. Government's
year-plus consultative process with MOFCOM, VP He said this
was the clearest explanation of the VEU he has heard and
suggested reiterating this to MOFCOM. He offered NORINCO's
assistance in approaching MOFCOM on this issue.

NORINCO and MOFCOM: Interesting Bedfellows
--------------


14. (C) VP He and NORINCO ICP Director Cui Zheng explained
the firm's role in helping MOFCOM Export Control Division II
set up a consulting company (Beijing Long-Lat Consulting
Company) to assist Chinese firms to develop and implement
ICPs. They said a NORINCO employee, Tan Meili, is one of
three employees of this consulting company. The NORINCO
officials described the work of this consulting company as
partially to set up training programs for MOFCOM, citing as
an example a training program that took place on March 25 in
Nanjing. Cui revealed that the "experts panel" serving under
MOFCOM's Export Control Division II has been subsumed under
the auspices of this consulting firm. (Note: This "experts
panel" had previously been described to EmbOffs as an ad hoc
collection of academic and NGO experts that advises MOFCOM on
the export of sensitive dual-use commodities.) Cui turned to
ECO and stated, "You know many people on this panel." He
then went on to name a number of ECO's contacts, noting that
he is also a member of the "experts panel." Additionally,
the NORINCO officials said the firm provides funding to the
consulting firm (150,000 RMB per year) as well as 200,000 RMB
per year to the China Arms Control and Disarmament
Association (CACDA).

NORINCO's Audit Procedures
--------------


15. (C) When asked how NORINCO tests the effectiveness of its
ICP, Zhi said the firm relies on its internal audit office
and experts from CACDA and UGA to perform this function. The
internal audit office reports anomalies to NORINCO's
President. NORINCO's internal auditors do not audit overseas
branches, VP He noted, nor does the firm hire foreign
auditors to perform this service. NORINCO's country managers
"know all of the sensitive players" in their respective
countries and are adept at screening customers, he said,
adding that most of NORINCO's business is based on repeat
customers. The firm also screens customers against
international control lists. VP He mentioned the U.S. and
German designated nationals list. The firm screens
transactions against a list of "sensitive countries,"
although the NORINCO officials did not state which countries
are on this list. They reiterated that NORINCO ensures its
exports do not impair "regional and global stability."
(Note: The PowerPoint presentation also states that exports
"should not be used to interfere with other countries
internal affairs.")


16. (C) When asked if PRC officials opposed NORINCO's
decision to establish an ICP because it conceded to U.S.
sanctions, Zhi said the firm did not face any obstacles. The
firm took into account political concerns before moving
forward, he said, noting that NORINCO's President is a member
of the CCP Central Committee.

Comment
--------------


17. (C) Our meeting with NORINCO did not provide significant
new insights into NORINCO's ICP or export compliance
operations. However, the extensive discussions on NORINCO's
relationship with MOFCOM and the tour of the company's
showroom of weapons systems afforded a good opportunity for
EmbOffs to encourage greater transparency by NORINCO and lay
down markers for future cooperation.


18. (U) Participants

United States
--------------

Dan Piccuta, CDA
Mark Tesone, Political Officer
Will Oh, Political Officer
Drew Holiday, Embassy Defense Attache Office
Jeannette Chu, Embassy Export Control Attache

China
--------------

Zhi Yulin, NORINCO Vice President
He Xiaodong, NORINCO Vice President
Cui Zheng, NORINCO Director, Internal Control Program Office
Ding Weimin, NORINCO, Internal Control Program Office
Li Zimin, NORINCO, Marketing Promotion Department
Gu Fengyun, NORINCO, Marketing Promotion Department
PICCUTA


NNNN




End Cable Text