CHINA APPROVES ELECTRONICS/ IT INDUSTRIES SUPPORT

UNCLAS SECTION 01 OF 04 BEIJING 000515 SENSITIVE SIPDIS State for EAP/CM - SFlatt, PPark State for EEB/IPE - RWatts, JUrban, TMcGowan State for EEB/CIP - SFlynn, FSaeed USTR for China Office - TStratford, TWineland, AWinter USTR for Industries Office - JMcHale, AMain USTR for IPR Office - JRagland, SMcCoy Commerce for National Coordinator for IPR Enforcement Commerce for MAC NMelcher, JWu, ESzymanski Commerce for MAS RLayton, SMathews LOC/Copyright Office - STepp USPTO for International Affairs - LBoland, EWu, STong DOJ for CCIPS - MDubose and SChembtob FTC for Blumenthal FBI for LBryant DHS/ICE for IPR Center - DFaulconer, TRandazzo DHS/CBP for IPR Rights Branch - GMacray, PPizzeck ITC for LLevine, LSchlitt E.O. 12958: N/A TAGS: ETRD ECON EINV ECPS PGOV ASEC WTRO CH SUBJECT: CHINA APPROVES ELECTRONICS/ IT INDUSTRIES SUPPORT PLAN Ref A: Beijing 0151 Ref B: Beijing 0326 Ref C: Beijing 0425 Ref D: Beijing 0443 Summary -------------- ¶1. (SBU) China's State Council on February 18 approved a RMB 600 billion (USD 88 billion) industrial support plan for its electronics and information technology (IT) industries, the sixth of ten industry-specific plans to bolster sectors affected by the economic downturn - and the first to include a specific dollar amount. The State Council's released summary of the plan - the plan itself is not yet public - is brief and short on details. The overarching objective is to boost domestic demand and spur indigenous innovation in China's electronics, telecommunications, and Internet industries over the next three years, primarily through investment, policy support, and the promotion of new technologies and high-tech services. While industry experts fear the new measures could exacerbate recent protectionist trends as China focuses on propping up domestic industries, some believe that Chinese businesses will continue to pursue foreign investment and partnerships as they seek to import cutting edge technologies from overseas. One sidebar of concern: those who have seen the unreleased text of the draft plan report that it includes a call to replace "foreign" software with Chinese-developed products. End Summary. Support for Electronics, Telecoms, Internet -------------- ¶2. (SBU) China's State Council on February 18 approved "in principle" a RMB 600 billion (USD 88 billion) support plan for its electronics and IT industries, which it called "a leading pillar industry for China's national economy." The Chinese government released a broad overview of the so-called "restructuring and rejuvenation plan," which is to be implemented over the next three years, but few details of the unreleased text of the draft proposal that is circulating within the Chinese government have emerged. The strategy aims to boost the country's electronics, telecommunications, and Internet industries by generating domestic demand, granting policy support to high-tech companies, promoting new technologies like 3G wireless, and expanding China's role in high-tech services outsourcing. The plan is the sixth in a series of ten initiatives to support Chinese industries affected by the economic slowdown (see reftels),and, like the others, shares the objectives of promoting indigenous innovation. Focus on Competitiveness, Innovation, Outsourcing -------------- -------------- ¶3. (SBU) The plan as announced by the State Council calls for three general areas of focus. First, to "guarantee the stable growth" of electronics and IT industry, China should increase its competitiveness in these sectors, mainly by upgrading existing infrastructure, including a transition from analog to digital television. Second, the plan calls for the promotion of indigenous or self-reliant BEIJING 00000515 002 OF 004 innovation in areas of key technologies, including integrated circuits and software. Third, China should focus on developing IT services, including services outsourcing (call centers and off-shore programming, for example),as a means to stimulate the communications equipment and information services sectors. ¶4. (SBU) Beyond these three broad guidelines, the publicly announced plan outlines five specific ways to stimulate China's electronics and IT industries. These include: expanding domestic consumption in this sector; investing in six key technology projects (see para 5); strengthening indigenous innovation by expanding national science projects and restructuring key enterprises; promoting the development of services outsourcing and the overseas expansion of Chinese businesses; and increasing policy support, including export rebates and insurance support, for high-tech enterprises, as well as increasing trial bond issuances for small- and medium-sized enterprises. Few details are offered on how these goals would be accomplished. Six Key Technologies to Receive Attention -------------- ¶5. (SBU) Finally, the State Council's announcement singles out six technologies for investment. These are integrated circuits (microchips); flat-panel displays; 3G wireless communication (including China's homegrown TD-SCDMA standard); digital television; personal computers and next-generation (fiber) Internet; and software and information services. The amounts to be allocated to each technology are not specified. Building Capacity to Prepare for the Upturn -------------- ¶6. (SBU) The U.S. Information Technology Office (USITO), which represents U.S. high-technology and telecom companies in China, commented that the Chinese government, with cash reserves to spend, views the current economic downturn as a good opportunity to invest in technology, recruit talented engineers, and expand the sector and build capacity so that China is well-positioned when the economy begins to recover. USITO representatives cited as analogous recent reports that China's financial institutions are recruiting laid-off Wall Street bankers to benefit from their expertise. There's Money to Spend and Technology to Transfer -------------- -------------- ¶7. (SBU) The unreleased text of MIIT's support package, according to USITO, which has seen the internal government draft, includes language that expresses concern at the shrinking role of foreign businesses. The document credits foreign-invested enterprises (FIEs) as "the major force" of China's ICT industries, responsible for 57 percent of investment and 80 percent of revenue, and warns of a 10 percent decrease in FIEs in 2008 in Beijing and Tianjin. USITO representatives pointed out that this decline is particularly worrisome to China because it knows it lacks expertise and capacity in key cutting-edge BEIJING 00000515 003 OF 004 technologies. Pursuing such technology via foreign partnerships appears to be the reason, they said, that the plan encourages Chinese enterprises to go abroad to establish R&D centers and production bases. ¶8. (SBU) USITO's observation that Chinese IT enterprises may continue to seek technology transfers through foreign partnerships and investment is consistent with recent comments by the European Union's Intellectual Property Rights Attach in Beijing, who said that China, with about 1,200 domestic R&D centers, has become the largest non- European partner in the European Commission's FP7 multilateral research program. Under the program, he added, the EC is beginning to face difficulties over defining IPR ownership when a project includes Chinese co- inventors. No More Foreign Software, Please -------------- ¶9. (SBU) Beyond a reported acknowledgement of the important role of FIEs in China's ICT industries, however, it is unclear whether the unreleased text of the support plan includes any explicit measures to encourage foreign investment in China. The contrary appears to be true: journalists who appear to have seen the internal document have reported it includes language that calls for Chinese government agencies to "gradually migrate towards using domestic software applications, replacing foreign-made software." An alternative translation by USITO, which has also seen the text, is more severe: "to systematically replace foreign software products used in government agencies with homegrown software products." MIIT DG Hasn't Yet Reviewed the Plan -------------- ¶10. (SBU) On February 20, two days after the IT support package was approved and publicly announced, Chen Yin, Director General of MIIT's International Cooperation Department, explained to Emboffs that his ministry (though not his department),together with the National Development and Reform Commission (NDRC),was responsible for drafting the support plan. However, Chen said that he had not yet had the opportunity to review the plan because he was busy reviewing the previous five. Chen said that every one of the expected ten support plans would affect his ministry, which, since its reform in late 2008, is responsible for many of China's large industries in addition to information technology. An Unfunded Mandate -------------- ¶11. (SBU) In a February 26 meeting with President Yang Zemin of the China Academy of Telecom Research (CATR),a division of MIIT, CATR officials acknowledged that the RMB 600 billion support plan will not be entirely funded by the government. As little as one-third or less of the money would come from the central government, they said, leaving provincial governments and industry to make up the difference. They also explained that the plan is not entirely new, and includes a number of ongoing initiatives BEIJING 00000515 004 OF 004 that have been rebranded as part of the support plan. These include the Ministry of Commerce's "home appliance" program, launched in late 2008 to spur domestic demand by providing people in rural areas with a discount on a basket of eight electronic products that includes computers, televisions, telephones, refrigerators, microwaves, and washing machines. Comment -------------- ¶12. (SBU) The Chinese government has not yet released a draft of its IT support plan, leaving the details open to speculation. Some reported measures appear to extend and strengthen existing policy, including support for homegrown standards, encouraging a transition from manufacturing to services, and the "go abroad" mandate for Chinese enterprises. Others are a new twist on old policies, such as ending the use of foreign software by government agencies, which would reverse the U.S. commercial gains from a fairly successful Chinese effort to legalize the (mostly Microsoft) software used in government and state-owned enterprises. China has repeatedly insisted that promoting indigenous innovation will not be at the expense of foreign companies, but such opposition to the presence of "foreign" software would seem inconsistent with this averred Chinese reassurance. It is unlikely that the plan will include measures to directly benefit foreign companies, but there are reports that attracting foreign partnerships and investment will remain a priority for Chinese high-tech companies. We will report further when the final text of the comprehensive plan is released. End Comment. PICCUTA