South China's High-Tech Zones Struggling to Attract New

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E.O. 12958: N/A
TAGS: ECON EFIN EINV CH
SUBJECT: South China's High-Tech Zones Struggling to Attract New
Companies to the Region

REF: Guangzhou 406

(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.


1. (U) Summary: If you build it and offer the right package of
incentives, they might come. Then again, they might not. Those
that do might have been coming anyway. It's not exactly gambling
south China style, but the "build it and see what happens" mentality
that sometimes infuses the creation of these zones certainly has a
high element of risk. The high-tech zones in the Pearl River Delta
(PRD) are clearly part of the government's strategy to reorient the
PRD's economy away from labor-intensive/energy inefficient
industries to high-tech, finance-oriented services. While some of
these zones are faring well, others are struggling; they are simply
trying to maximize revenues and turn unused land into high rent
apartment complexes. Still, even the apparently successful zones
appear to be cannibalizing other areas of Guangdong, rather than
attracting new high-tech industry. End Summary.


2. (U) Eager to upgrade south China's industrial base, the central
and local governments have adopted various policies to encourage the
creation of high-tech enterprises -- principal among these are the
development zones that dot the landscape in Guangdong province.
There are ten large national-level economic and high-tech zones and
dozens of smaller ones sponsored by municipal governments. These
zones all offer tax and other incentives to the companies they want
to attract; the idea is that by bringing different high-tech
companies to the same area, the zones will develop into centers of
innovation, on the model of California's Silicon Valley.


3. (SBU) The zones have so far experienced mixed success. Some,
like the Guangzhou Development District (GDD),a sprawling area
located about 20 kilometers east of downtown Guangzhou, have managed
to attract scores of Fortune 500 companies. Others, such as
Dongguan's Songshan Lake, have struggled. According to Sung-Rak
Choi, the Korean CEO of Iriver (China),a manufacturer of consumer
electronics with a factory in Songshan, the Dongguan zone has been a
great disappointment, with utilization of just 30% of its available
space. After a recent visit to the zone, located near the highway
connecting Guangzhou with Shenzhen, Guangdong Party Secretary Wang
Yang was quoted as saying that Songshan "has a favorable environment
but very little content."


4. (SBU) According to Dr. Lu Jun, the chair of Sun Yatsen's
Department of Finance, zones like Songshan have struggled because
most of the PRD lacks the resources and infrastructure necessary to
develop high-tech industries. Lu believes that in the short-term it
will be very difficult to attract high-tech enterprises to south
China if they aren't already based in the area. The experience of
Songshan reflects this, according to Iriver's Choi, who told us that
every single major company in the development zone already had a
manufacturing plant elsewhere in the PRD.


5. (SBU) Some of our contacts argued that the zones contributed
little to the development of high-tech industry in south China
because they were competing primarily with other zones and
communities in the PRD. Choi told us that Iriver considered 10
different development zones in Guangdong. Choi also told us that
Songshan and GDD had a "bidding war" when competing to attract the
LG-Philips LCD manufacturing plant that was ultimately built in the
GDD. Choi said that incentives offered by the zones might lead a
company to choose one over another, but most companies looking at
the zones had already decided to move to south China and were at
that point simply shopping for the best deal.


6. (SBU) In some cases, it appears that the development in the zones
is little more than a mailing address that confers tax benefits.
According to Lin Qicai, a consultant at Guangzhou Zhengyi Enterprise
Management Consulting, which advises companies seeking to invest in
the GDD, many companies register in the GDD to take advantage of
incentives offered by the zone but never establish much of a
physical presence there. Lin told us that as many as 100 companies,
or more than 80% of the enterprises making up the GDD's Free-Trade
Zone, registered in the GDD solely for the tax incentives they
received. (Note: the Free-Trade Zone is one of the four zones that
make up the GDD. End note.) Lin said that these companies
maintained only small offices in the zone and conducted the bulk of
their operations elsewhere in the PRD. He further commented that

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GDD's management was well aware of this but didn't care as long as
the companies continued to provide tax revenue to the zone.


7. (SBU) Perhaps in desperation, Songshan has turned to real estate
development in recent years -- a move that Iriver's Choi says is due
as much to a lack of alternatives as to any coherent strategy.
Dozens of high-rise apartment buildings are springing up in the
southern side of the zone, although when Congenoff visited in late
June, few if any of them appeared to have been finished. According
to press reports, the apartments were all quickly sold when they
were put on the market in 2006, and the real estate developments now
provide the zone with much of its tax revenue. Choi commented that
he thinks the apartments were almost all purchased by speculators
who don't actually intend to move to Songshan.


8. (U) Comment: The success of development zones like GDD and
Songshan in cultivating high-tech industries in south China is mixed
at best. GDD is having some success in attracting large
multi-national companies (MNCs),but it seems to be doing so
primarily at the expense of other development zones and even
downtown Guangzhou. In addition, the principal goal of zone
management -- to maximize tax revenue -- does not seem to be
entirely aligned with the provincial government's goal of attracting
new high-tech investment to the PRD.

GOLDBERG