TAIWAN ENTREPRENEURS IN HANGZHOU CONCERNED ABOUT MAINLAND

C O N F I D E N T I A L SECTION 01 OF 03 SHANGHAI 000306

SIPDIS

TREASURY FOR AMB HOLMER, WRIGHT, TSMITH AND OASIA-DOHNER,
HAARSAGER, CUSHMAN
USDOC FOR ITA MAC DAS KASOFF, MELCHER, MCQUEEN
NSC FOR WILDER AND LOI

E.O. 12958: DECL: 8/5/2033
TAGS: CH ECON ELAB ETRD PGOV PREL TW
SUBJECT: TAIWAN ENTREPRENEURS IN HANGZHOU CONCERNED ABOUT MAINLAND
BUSINESS ENVIRONMENT

CLASSIFIED BY: Simon Schuchat, Deputy Principal Officer, U.S.
Consulate General, Shanghai, Department of State.
REASON: 1.4 (b),(d)




1. (C) Summary: At an August 1 roundtable, members of the
Hangzhou Taiwan Compatriots Investment Enterprise Association
voiced concerns about the Mainland business environment, and
wished for better access to national-level Chinese officials.
Rising costs, a slowing global economy, the new Labor Contract
Law, and changes in tax policy have all hurt their bottom line,
and will lead to consolidation and some factory closures.
Improvements in cross-Strait relations are welcome, but will not
have a large impact on their businesses. End Summary.


2. (SBU) On August 1, DPO and Econoff met with eight
entrepreneurs of the Hangzhou branch of the Taiwan Compatriots
Investment Enterprise Association (Taixiehui),a trade
association with branches in many major cities across China
representing the interests of Taiwan companies operating in the
Mainland. According to Jay Shane, Chairman of the Hanghzou
Taixiehui, there are about 1000 Taiwan enterprises and 3000 to
4000 Taiwan persons living in Hangzhou. In Zhejiang Province
(of which Hangzhou is the capital),there are 10,000 Taiwan
companies, the majority located in Ningbo, Hangzhou, Jiaxing,
Jiashan, and Wenzhou. In addition to his role as the Hangzhou
Taixiehui Chairman, Shane is also Managing Director of a leather
products company in Hangzhou. Representatives from a machine
tools company, cleaning equipment company, aluminum company,
food store chain, cosmetics company, and electronics firm also
participated in the roundtable.

Looking for Channels of Influence
--------------

3. (C) Shane lamented that Taiwan businessmen have relatively
weak channels of communication and influence with Chinese
officialdom. At present, their interests are handled primarily
by the State Council's Taiwan Affairs Office, an entity
primarily interested in political isssues and not attuned to
Taiwan business interests. If Taiwan businessmen were
represented in the National People's Congress, that would be
much better. Shane complained that the NPC "Taiwan delegation"
consists almost entirely of people born in the Mainland, who do
not understand Taiwan. The delegation should be drawn from the
Taiwan community currently residing in the Mainland -- a group
of more than one million people, according to Shane. By
contrast, later in the meeting Shane boasted of his own
relations with officials of Taiwan's ruling KMT party, noting
that he had gone to Shanghai to meet with KMT Chairman Wu
Po-Hsiung during his spring visit to the Mainland.

Business Sentiment Not Upbeat
--------------

4. (C) The Taiwan businessmen were not optimistic about the
current and near term outlook for their businesses in the
Mainland. According to Shane, Taiwan companies are concerned
about the impact of Renminbi (RMB) appreciation on exports,
reductions in value-added tax (VAT) rebates for exports, China's
new Labor Contract Law, the rising cost of raw materials, and
the loss of preferential tax treatment through tax unification.
(Note: Until 2008, Taiwan companies enjoyed a preferential tax
rate of 15 percent, compared with the 25 percent rate paid by
all domestic and foreign firms. End note.) Shane was
especially critical of the recently implemented labor law which,
he says, has significantly increased costs, is heavily biased in
favor of employees, and is a "time bomb" waiting to explode.
All of these factors have adversely affected companies' bottom
lines, leading to smaller profit margins and a "wash-out" period
in which many Taiwan enterprises in Wenzhou, Dongguan (Guangdong
Province),and other major export-oriented cities will probably
close or consolidate.


5. (C) Alan Zhou, Director of the Mei Yuan Cosmetics Company,
said his company faced financing difficulties due to the
government's tight monetary policy. Likewise, Paul Chen,
General Manager of the Hangzhou Good Friend Precision Machinery
Company, a maker of machine tools, attributed his company's
increasing financing costs to tightening monetary conditions.

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Since 60 percent of his exports go to the United States, the
weak U.S. economy and depreciating U.S. dollar have also
strained his business. Jian Mingkun, General Manager of the
Hangzhou Jiamei Cleaning Equipment Company, complained that, due
to the loss of preferential tax treatment, the tax rate in the
Mainland is now higher than in Taiwan.

If We Can Only Survive the Next Few Years...
--------------

6. (C) However, not all our interlocutors were as downbeat.
Gao Xinyi of the Xinyi Aluminum Company sees many of the recent
moves by the Chinese Government as an effort to transition from
low technology, labor-intensive industries to more high
technology, higher value-added industries. The current round of
industry consolidation will pose a challenge, but is a good
opportunity for his company to win greater market share -- if it
can survive the next few years. Similarly, Li Guoyan, Assistant
to the Chairman of Cross Straits Cafe, a coffee shop and
restaurant chain with 400 outlets throughout the Mainland, is
fairly optimistic that industry consolidation would eliminate
many competitors and benefit his company since it is already
well established in the Mainland. His company has already
received investment from Goldman Sachs and is planning an
initial public offering (IPO) in China in 2010.

Improvements in Cross-Strait Relations Help, But...
-------------- --------------

7. (C) The Taiwan entrepreneurs welcomed improvements in
cross-Strait relations following Ma Ying-jeou's election.
Several participants said they had flown back to Taiwan to vote
for Ma and are now relieved that the risk of a sudden flare-up
across the Strait has diminished. However, they do not see a
direct correlation between improved political relations and
improved business conditions in the Mainland. The global
economic downturn, particularly in the United States, and
domestic Chinese labor, finance, and tax policy developments
have outweighed the positives of improved cross-Strait
relations.


8. (C) Shane said direct flights between Taiwan and the
Mainland are convenient but would not have a huge impact on his
business. He noted that direct flights between Taipei and
Hangzhou will commence later this year. Another participant
mentioned that he still flies to Taiwan via Hong Kong since
those routes are cheaper than direct flights and argued, to the
approval of other participants, that ticket prices would need to
come down, if direct flights are to be meaningful for
cross-Strait businesses.

Nowhere Else to Go?
--------------

9. (C) Despite deteriorating business conditions in the
Mainland, our interlocutors said they do not now plan to move
elsewhere. When asked about the possibility of moving to
Vietnam, several stated that this was not a good option, since
Vietnam has a relatively small population and a limited pool of
skilled labor. Furthermore, one observed, the workers there
frequently go on strikes. Moving to China's interior provinces
-- the Chinese Government's preferred option -- is also not so
desirable due to high transportation costs, lower workforce
productivity, and lack of adequate infrastructure. They
estimate the total cost of operating in the interior provinces
would be higher than operating in the coastal region.
Furthermore, conditions in the interior resemble those they
faced when they first came to the Mainland in the early 1990s.
Several joked that they would not go through that hardship
again.

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

10. (C) Although the Taiwan entrepreneurs are generally
frustrated with current business conditions in the Mainland,
their concerns are not unique to Taiwan firms. Other foreign
and domestic firms have similar complaints about current
business conditions. However, sentiments differ across industry
lines. Entrepreneurs from export-oriented firms are more
negative, since the global economic downturn, exchange rate
developments, and recent policy changes such as the labor law,
disproportionately affect lower value-added, labor-intensive,

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export-oriented enterprises. Those in the service or high-tech
sectors are less anxious.
JARRETT