Congressmen Kirk and Larsen's Roundtables with Chinese,

UNCLAS SECTION 01 OF 03 BEIJING 001703 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: BEXP ECON EINV ETRD KIPR CH SUBJECT: Congressmen Kirk and Larsen's Roundtables with Chinese, U.S. Business Leaders REF: (A) Beijing 1473; (B) Beijing 1500; (C) Beijing 1518; (D) Beijing 1523; (E) Beijing 1675; (F) Beijing 1695 This cable is Sensitive But Unclassified (SBU) and for official use only. Not for transmission outside USG channels. ¶1. (SBU) SUMMARY. Congressmen Mark Kirk and Rick Larsen participated in a Chinese Business Roundtable on May 30 and a joint American Chamber of Commerce (Amcham) and U.S.-China Business Council (USCBC) Roundtable on June 1, during their visit to Beijing as co-chairs of the U.S.-China Working Group of the U.S. Congress. At the Chinese Business Roundtable, Chinese executives explained their responses to the Global Financial Crisis (GFC) and raised concerns that American misperceptions of Chinese companies not only overestimate government support to these firms, but also block foreign acquisitions. A Chinese academic from the State Council's Development Research Center (DRC) expressed concern about U.S. government deficits and the long-term effects on the U.S. economy. At the joint AmCham/USCBC Roundtable, U.S. business leaders expressed their desire to work closely with the U.S. government to engage China on environmental and energy issues, building on past cooperation. They raised concerns about an increasingly protectionist business environment, citing recent cases involving energy and environmental opportunities. U.S. business leaders also expressed concern about compulsory licensing and intellectual property rights (IPR) protection, which are making it more difficult to do business in China. END SUMMARY. ROUNDTABLE WITH CHINESE FIRMS -------------- ¶2. (SBU) On May 30, at a Chinese business roundtable organized by Dr. Scott Kennedy, a Fulbright Research Scholar from Indiana University, Congressmen Rick Larsen and Mark Kirk exchanged views with executives from Huawei (China's leading telecommunications group) and Sinotrans (a key state-owned enterprise (SOE) involved in freight, logistics and shipping); as well as a State Council Development Research Center (DRC) academic. HUAWEI: A 100 PERCENT "PRIVATE" COMPANY? -------------- ¶3. (SBU) Tang Xinbing, Vice President of Chinese telecom vendor Huawei, introduced the company's plans to open a representative office in Washington. In part, the move is a response to Huawei and Bain Capital's failed attempt to purchase the U.S. firm 3Com in ¶2008. Tang said Huawei executives believed the Committee on Foreign Investment in the U.S. (CFIUS) would reject the deal, thus it was withdrawn. Huawei hopes that an increased government affairs presence in Washington can help them to overcome the "mistaken impression" that the company is owned and operated by the Chinese military. In actuality, Tang says, the company is "100 percent privately owned by its employees." (NOTE: Few details about Huawei's ownership structure are provided on the company's website, and questions regarding Huawei's ownership were raised at the time of the firm's 3Com bid. END NOTE.) ¶4. (SBU) Congressman Kirk asked if China's domestic 3G wireless standard, TD-SCDMA, was a just a way to give an edge to domestic Chinese equipment vendors, such as Huawei. Huawei's Tang noted that the company does not have enough influence with the Chinese government to receive such preferential treatment. On the contrary, Huawei is dominant in W-CDMA, and reasonably good at CDMA2000. The requirement to support a third, domestic standard, in which Huawei did not have a base of expertise, was also a burden to his company. ZTE, another Chinese firm, dominates TD-SCDMA. Tang believes that different markets simply adopted different standards to meet different needs, and Huawei must adapt to these market needs. SINOTRANS: DOWNTURN HURT; HELPED BY STIMULUS -------------- ¶5. (SBU) Sinotrans Vice President Huang Bilie humorously contrasted his large transport and logistics firm with Huawei, saying Sinotrans was a "100 percent state-owned enterprise (SOE)." Huang explained that his company has been hit hard by the GFC and had quickly taken measures to significantly reduce the company's debt, to improve their collection of accounts receivable, and to cut executive salaries by 10 percent. Huang noted the firm's express delivery business had remained strong, but danced around the fact that Sinotrans appears to be benefiting from China's new Postal Law, which effectively excludes foreign firms from the domestic document business. Instead, Huang emphasized that his firm had a partnership with DHL, and also worked closely with U.S. firms UPS and Federal Express. ¶6. (SBU) Huang admitted that Sinotrans has benefitted from Chinese government stimulus measures, but only marginally since these focused heavily on infrastructure, not on service providers. To BEIJING 00001703 002 OF 003 demonstrate his point, he noted that of 150 key government stimulus projects in transport and logistics, Sinotrans had a stake in only two. Huang defended Chinese SOEs as being increasingly efficient and modern, having adopted professional management practices and having eliminated waste. He encouraged the Congressmen and the U.S. not to fear the Chinese state ownership structure, but to consider new areas of mutually beneficial cooperation. CHINESE CONCERNED ABOUT THE U.S. ECONOMY -------------- ¶7. (SBU) State Council Development Research Center (DRC) Institute of World Development Director Ding Yifan, expressed deep concern about the future of the US economy. Implicitly criticizing U.S. spending, he observed, "Since the RMB is not an international reserve currency, there is a limit on the debt we can accrue, and China cannot consume on borrowed money." In particular, he worried about how long the United States would maintain an effective zero percent nominal interest rate and inquired about the U.S. government deficit and its long-term effects on the economy. ¶8. (SBU) Still, Ding emphasized that China's growth could help the United States. He acknowledged that the coastal regions have suffered, but emphasized that China's inland regions are doing well. He predicted the Chinese economy would emerge from the crisis larger but more balanced, and with a greater domestic focus. In response to a question, Ding admitted that exporters had considerable political strength in China, but noted that their clout came from exports' contribution to overall GDP growth, and he implied that this dynamic was changing. U.S. FIRMS SEEK MORE U.S. GOVERNMENT COOPERATION -------------- --- ¶9. (SBU) On June 1, the Kirk-Larsen delegation participated in a roundtable with 20 U.S. businesses sponsored by the American Chamber of Commerce (AmCham) and the U.S.-China Business Council (USCBC). U.S. firms expressed a consensus view that cooperation between business groups and the U.S. government are even more relevant and important given the current economic and business climate. U.S. firms were grateful for the access they were granted to the policy-making process through both the Strategic Economic Dialogue (SED) and the Joint Committee on Commerce and Trade (JCCT),and are interested in seeking other means of strengthening cooperation. Amcham and USCBC hope to stay abreast of Strategic and Economic Dialogue (SnED) developments by assigning special liaisons. ENVIRONMENT AND CLIMATE CHANGE -------------- ¶10. (SBU) United Technologies Corporation (UTC) China President Jim Gradoville discussed the importance of the U.S. environment and climate change dialogue with China. His company has focused on green buildings in China, given that buildings account for 40 percent of global energy demand. China's goal to reduce energy consumption per unit of GDP by 20 percent has shaped its policy of increasing energy efficiency. But Gradoville speculated that while current technologies may solve 65-70 percent of carbon emission issues, the last leg will require legislation. ¶11. (SBU) General Electric (GE) General Manager Albert Xie noted his company's eco-city project in Tianjin focuses on climate change, water conservation, and building code safety issues. GE would like to cooperate on more projects, but sometimes finds itself unable to participate in some of the more than 800 current infrastructure projects. In the case of wind power, for example, foreign vendors' products are manufactured to higher quality standards, and thus reliability is better and life-cycle operating costs lower than their Chinese competitors. But the Chinese bidding process only takes into account initial costs, giving a big advantage to local companies. In spite of better technology and better performance, foreign firms only win between 10 and 20 percent of bids. COMPULSORY LICENSING OF INTELLECTUAL PROPERTY -------------- ¶12. (SBU) Malcolm Lee, Senior Director of Legal and Corporate Affairs for Microsoft China, believes the issue of compulsory licensing of intellectual property (IP) using environmental justification is very real. "U.S. companies fear this," he said. In addition, the new Anti-Monopoly Law (AML) contains "abusive IP provisions." Many believe that Chinese courts are being used to counteract the strength of foreign patents, he explained. While IPR issues have improved, companies fear going forward and losing business if Chinese IPR enforcement remains too weak or at times non-existent. James Zimmerman, Chief Representative of Squire Sanders in Beijing, added, "At present, there is no effective remedy through Chinese courts." BEIJING 00001703 003 OF 003 INDIGENOUS INNOVATION: US VS THEM MENTALITY -------------- ¶13. (SBU) Microsoft's Lee observed that the implicit goal of China's information technology (IT) industry support plan is to encourage domestic spending on domestic products. The concept of indigenous innovation is presented in a very stark "us vs. them" framework, undermining efforts at joint collaboration. In China, innovation is simply intended to develop domestic substitutes to foreign technology. ¶14. (SBU) American Chamber of Commerce (AmCham) Chairman John Watkins of Cummins China echoed this view by observing that China's stance on IPR and indigenous innovation feels different today. He has real concerns and fears that this unwelcome commercial environment will affect business relationships. The less-than-optimistic mood in China is due in part to recent events such as the new Postal Law, the MOFCOM decision against Coca-Cola's purchase of Huiyuan, and numerous "buy local" campaigns. Watkins observed, "The result is the worst commercial environment ever in China." Although most U.S. companies in China are profitable, he continued, they are finding it increasingly difficult to do business here. PICCUTA