U.S. Firms Voice Concerns about China's Stimulus Packages

UNCLAS SECTION 01 OF 02 BEIJING 001028

SENSITIVE
SIPDIS

STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, READE,
VENKATARAMAN, KEMP, MILLER, MALMROSE, MCHALE
DOC FOR MELCHER, SAUNDERS; LORENTZEN AND SHOWERS (5130); HEIZNEN
(6510)

E.O. 12958: N/A
TAGS: ECON EWWT EIND ETRD CH

SUBJECT: U.S. Firms Voice Concerns about China's Stimulus Packages

REF: (A) Beijing 151; (B) Beijing 326; (C) Beijing 425; (D) Beijing
443; (E) Beijing 515; (F) Beijing 583; (G) Beijing 585; (H) Beijing
661; (I) Beijing 665

This cable is Sensitive But Unclassified (SBU) and for official use
only. Not for transmission outside USG channels.


1. (SBU) Summary: A lack of transparency and "buy local" biases
could thwart U.S. companies seeking to benefit from China's
considerable stimulus package funding, according to representatives
of major U.S. firms. Firms report that the plan has been used to
support Chinese firms and create import-substituting products.
While a few U.S. high-tech companies credit the stimulus package for
recent growth in sales, other companies have seen few successes or
opportunities thus far. Chinese officials continue to downplay
concerns about "buy China" while adopting measures that largely
benefit China's "backbone" enterprises. End summary.

Import Substitution, Buy Local
--------------


2. (SBU) At an April 14 Embassy roundtable for American Chamber of
Commerce (AmCham) members, representatives of U.S. firms in China
expressed concerns about the possibility of being excluded from
China's stimulus package funding. A Microsoft representative said
China's investment in the IT sector was aimed at creating
substitutes for imported foreign products. He said China's
government procurement system promoted import substitution without
violating trade agreements because China was not a signatory to the
WTO Government Procurement Agreement (GPA). Even if the stimulus
package does not specifically exclude foreign companies, there is a
widespread perception among local officials that they should buy
locally-produced software, the Microsoft representative said.


3. (SBU) In a separate meeting with EconOff, a representative of
Caterpillar said her company was concerned about the possibility of
local officials' using stimulus package funding to support local
companies. She cited the example of an agreement recently signed by
six state-owned enterprises (SOEs) in Guangxi Province pledging to
give priority to local machinery manufacturer Liugong Machinery
Company for the SOEs' construction projects. The agreement was
reportedly signed at a meeting organized by officials from the
Guangxi Zhuang Autonomous Region Government. The Caterpillar
representative said this kind of local protectionism could spur
protectionist measures in other provinces. She said the machinery
industry revitalization plan support for mergers and acquisitions
would not formally exclude foreign companies but expressed doubts
about local governments' willingness to allow foreign companies to
acquire strong local companies. She said Caterpillar's initial
excitement about the stimulus package has given way to frustration
at the lack of details.

Lack of Transparency in the Bidding Process
--------------


4. (SBU) Some U.S. companies raised concerns about the lack of
transparency in the bidding process, pointing out that Chinese
bidders are provided information about procurement opportunities
much sooner than overseas bidders. A representative of Caterpillar
said they typically have a window of only four days to put a bid
together for rail projects, making it virtually impossible for them
to organize a successful bid. Caterpillar reports that at least
half of domestic contracts are going to Chinese companies that are
less qualified but have greater access to information and more time
to prepare bids. Companies in the 3G telecom sector have also
complained about the unreasonably short time-frame for foreign
entities to submit bids for projects for which domestic competitors
appeared to have advance notice. According to Article 24 of China's
bidding and tendering law, companies should have at least 20 days
from the time the bid invitation documents are sent out until the
deadline for submission of bids.

Some U.S. Companies Express Optimism
--------------


5. (SBU) A representative of United Technologies, which sells
high-tech equipment for building projects, said his company's sales
in China were starting to pick up after a big drop at the end of

2008. He credited the stimulus package funding for his company's
improving sales. U.S. chip makers Texas Instruments, Altera and
Xilinx have recently reported higher than expected sales, due in
part to chip orders tied to part of China's economic stimulus plan
aimed at building 3G networks across the nation. A representative
of General Electric (GE) told EconOff that China's stimulus package
was "a perfect match" for GE, given the company's involvement in

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many sectors that would benefit from stimulus package funding. He
said GE's large size, long history in China, and joint ventures with
many Chinese firms put GE in a good position to benefit,
particularly for projects requiring key technology that GE controls.


Concerns about Buy American
--------------


6. (SBU) Representatives of both GE and Caterpillar expressed
concerns about the negative impact of "buy American" provisions in
the U.S. stimulus package. While acknowledging that the provisions
were not new measures, both company representatives said the
perception of U.S. protectionism could encourage local governments
in China to adopt protectionist measures. Speaking publicly at the
China Development Forum, a three-day forum for government officials,
CEOs, and economists held in Beijing March 21-23, Caterpillar
Chairman and CEO James Owens said he remained relatively optimistic
about his company's prospects in China and announced plans to open
three new manufacturing facilities in China. However, Owens warned
against the threat of protectionism, stating that "buy American"
would lead other countries to adopt similar measures and prolong the
recession.

China's Stimulus Aimed at Supporting "Backbone" SOEs
-------------- --------------


7. (SBU) Chinese officials have repeatedly stated that they opposed
"Buy China" policies. On April 15, Ministry of Commerce (MOFCOM)
Spokesperson Yao Jian defended recent Chinese policies concerning
export tax rebate and industry revitalization, asserting that all
the measures are WTO-compliant. Yao pledged that China, while
strengthening anti-monopoly reviews of merger and acquisition (M&A)
deals, would continue to encourage foreign investors to participate
in domestic industry's restructuring through M&A and support foreign
companies to invest in China. At the China Development Forum,
Chinese Commerce Minister Chen Deming expressed his strong
opposition to the spreading trade protectionism, just one week after
he raised concerns with statements trying to draw distinctions
between "legitimate trade protection" and the "trade protectionism"
practiced by foreign governments.


8. (SBU) While China has publicly stated its opposition to
protectionism, its stimulus packages and industry revitalization
plans are clearly aimed at supporting Chinese SOEs. Speaking at the
China Development Forum, Minister of Industry and Information
Technology (MIIT) Li Yizhong outlined the major problems facing
China's industrial sector, including the lack of "key, core
technology," backward production, and the lack of large, strong
companies. To address these shortcomings, Li said China had adopted
a number of measures to provide a boost to industries hit hard by
the global financial crisis: 1) increase domestic consumption
through programs such as "appliances to the countryside"; 2) provide
support to 10 key industries (ref A-I describe these 10 industry
revitalization plans in more detail); 3) encourage technical
innovation; and 4) promote industry restructuring and upgrading. Li
said China needed leading "backbone" enterprises in each industry to
spur innovation and boost domestic consumption.

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


9. (SBU) Although China's stimulus packages and industry
revitalization plans are not explicitly protectionist, foreign firms
are not exactly playing on a level playing field. A number of
factors - lack of transparency in the bidding process, local
protectionism, and China's interest in using stimulus funding to
help its own SOEs and private firms - will likely frustrate many
U.S. companies that are seeking to benefit from stimulus package
funding. U.S. companies that partner with Chinese firms or provide
products and service that Chinese firms cannot provide are in a
relatively good position to benefit.

WEINSTEIN