Guangdong's High Tech Incentives Fall Short for Industrial

UNCLAS SECTION 01 OF 02 GUANGZHOU 000016

SENSITIVE
SIPDIS

STATE FOR EAP/CM
STATE PASS USTR CHINA OFFICE

E.O. 12958: N/A
TAGS: ECON ELAB EFIN ETRD EIND PGOV
SUBJECT: Guangdong's High Tech Incentives Fall Short for Industrial
Equipment Manufacturers

REF: A) Guangzhou 732, B) Guangzhou 228

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1. (U) Summary: Industrial equipment manufacturing (EM): with its
high-tech, high-value-added, environmentally friendly, capital
intensive and skill labor focus, it's just what Guangdong's leaders
are looking for to replace labor-intensive export manufacturers that
are being encouraged to move out of the Pearl River Delta (PRD).
Plus EM is popular in the domestic market. However, EM business
owners say they are feeling the negative effects of the economic
downturn too. They report sales have dropped by as much as 70
percent and workforces have been cut by as much as 20 percent. To
make matters worse, industry executives express frustration that
government funds allocated as part of the recently announced
stimulus package for high-tech companies in south China will not go
them but be soaked up by university-affiliated state-owned
enterprises (SOEs). End Summary.

New Bird for the Empty Cage
--------------


2. (SBU) Industrial equipment manufacturing (EM) meets all the
qualifications for the kind of high-tech and high value-added
industries that Guangdong's leaders want to attract to the PRD as
they encourage labor-intensive export manufacturers to move
elsewhere -- a policy often referred to as "emptying the cage for a
new bird." Gao Yunfeng, President of Hans Laser Technology Co.,
Ltd. explained to us that his 5,000 employee work force is highly
educated, many of them holding college degrees including over 60
engineers holding masters or PhD degrees. The company has over 200
patents with technology that is more environmentally friendly than
the labor-intensive manufacturing technology it replaces. He also
said 90 percent of the company's laser machines are sold to China's
domestic market for use in the production of electronics,
appliances, computers, and textiles. Gao noted that his company
enjoys gross profit margins of up to 50 percent, compared to the 10
percent margins seen in more labor-intensive industries.


3. (SBU) Daniel Yan, CEO and President of Interlume Laser Systems,
said his target customers are U.S., European, and Taiwan companies
based in China, especially "high-end" companies which are
"performance" not "price" sensitive. His company's ability to
provide local, on-site, same-day service to customers is a key
advantage over foreign-based competitors.

Suffering Too
--------------


4. (SBU) Despite its advantages, the EM industry has been hit hard
by the global financial crisis. Gao reported that Hans Laser
suffered a 70 percent decrease in orders during the last quarter of
2008 and was forced to lay off 1,000 employees - 20 percent of its
total workforce. Interlume executives say that in the short term,
there is "essentially no business." Customers are not placing
orders and are telling the firm to wait until after the Lunar New
Year, said Yan.


5. (SBU) Some EM companies have been less affected by the downturn,
but growth prospects have diminished. He Zhao, General Manager of
Guangzhou Agile Manufacturing Technology Co. Ltd., said his firm had
been growing through the fourth quarter of 2008, although the trend
had slowed considerably. He claimed they hadn't had to lay off any
workers yet but had reduced employee overtime hours. Comment: The
uneven impact of the crisis on EM companies may be due to the
different nature of Guangzhou Agile's products. Hans Laser and
Intelume make production machines while Agile makes components for
fixed-asset machinery. Since manufacturing companies are cutting
costs, they may be less likely to procure new production machinery
equipment. However, even as they scale back operations,
manufacturers still require components for fixed-asset machinery to
keep their workshops running. End Comment.


GUANGZHOU 00000016 002 OF 002


Government's Empty Promises
--------------


6. (SBU) In November, the Guangdong provincial government released
stimulus package plans, which include over RMB 250 billion allocated
to "industrial upgrading". The funds target high-tech projects,
research and development in support of Guangdong Party Secretary
Wang Yang's "double transfer" policy of moving labor-intensive
factories and their migrant labor workforces out of the PRD (ref B).
EM industry executives say they are aware of promised government
funding for high-tech industries, but don't expect to receive
assistance. The distribution of such government funding is not open
or transparent enough, complained Gao. Distribution is decided by a
group of so called "experts", who represent different interest
groups, including universities, academic institutes and government
officials. Usually the people who need the financial aid the most
do not get it, Gao said.


7. (SBU) Gao said Hans Laser has applied in the past for government
funds allocated to the hi-tech industry, but received very little
compared to state-owned enterprises (SOEs),which benefit the most
from the government's preferential policies. He explained that EM
industry SOEs are established by quasi-governmental organizations
and run by university professors, who benefit from tax rebates and
profit from the enterprises and the patented technology. The SOEs
can't compete on a level playing field because they are under the
poor management of China's academic system, Gao explained. Comment:
Gao's observations echo concerns we've heard from others in the PRD
that SOEs will end up benefiting disproportionately from efforts to
help firms weather the global economic downturn (ref A). End
comment.


8. (SBU) Intelume's Yan said the most effective way to help hi-tech
enterprises was through tax deduction, but he had not seen any
government plans to reduce the tax burden. He commented that the
government had the resources, but in the end the stimulus package
would benefit construction companies, cement makers and the like.
Most of these enterprises are controlled or held by the government,
which means more opportunities for corruption, according to Yan.


9. (SBU) Comment: Similar to other sectors south China's economy,
high-tech industries are also suffering the effects of the economic
downturn. The government's explicit statements of support followed
by ambiguous actions are leaving many high-tech industry executives
frustrated. Whatever the government's strategy may be, if their
goal is to reassure industry and build confidence, it appears to be
falling short. End Comment.

GOLDBERG