TAIWAN BUSINESSES IN NANJING HURT BY ECONOMIC DOWNTURN,

C O N F I D E N T I A L SECTION 01 OF 03 SHANGHAI 000085 SIPDIS TREASURY FOR OASIA - DOHNER, HAARSAGER, WINSHIP USDOC FOR ITA MAC DAS KASOFF, MELCHER, SZYMANSKI NSC FOR LOI E.O. 12958: DECL: 2/19/2034 TAGS: PREL PGOV ETRD ECON ELAB EFIN CH TW SUBJECT: TAIWAN BUSINESSES IN NANJING HURT BY ECONOMIC DOWNTURN, LABOR LAW, FINANCING DIFFICULTIES REF: A. A) 2008 SHANGHAI 096 ¶B. B) 2008 SHANGHAI 578 ¶C. C) SHANGHAI 26 ¶D. D) 2008 SHANGHAI 526 ¶E. E) 2008 SHANGHAI 306 ¶F. F) SHANGHAI 079 CLASSIFIED BY: Simon Schuchat, Deputy Principal Officer, U.S. Consulate, Shanghai, U.S. Department of State. REASON: 1.4 (b),(d) ¶1. (C) Summary: Taiwan entrepreneurs in Nanjing, Jiangsu Province said securing bank loans remains one of the biggest challenges for Taiwan firms in the Mainland but are hopeful the next SEF-ARATS talks will address this issue. The interlocutors complained about their inability to layoff workers despite the economic downturn because of the Labor Contract Law (LCL). Some Taiwan export-oriented firms in Nanjing plan to focus more on the Chinese domestic market but find it difficult to set up domestic distribution channels. End summary. ¶2. (C) On February 10, DPO and Econoff met with five entrepreneurs of the Nanjing branch of the Taiwan Compatriot Investment Enterprises Association (Taixiehui),a trade association with branches in major cities across China representing the interests of Taiwan companies. According to Hai Zhongtian, who holds multiple roles of Vice Chairman of the Nanjing Taixiehui, KMT Central Committee member, BMW dealer, and Chief Representative of Lian Qiang International (a Taiwan IT and telecommunications equipment firm with 40 branches across the Mainland),there are about 2000 Taiwan enterprises in Nanjing, most of them SMEs. Nanjing is the capital of Jiangsu Province, located 186 miles west of Shanghai. (Note: For more on Hai Zhongtian and Nanjing's KMT connection, see Ref A. End note.) Our interlocutors included Taiwan owners of furniture, metal, and chemical companies. Financing Difficulties -------------- ¶3. (C) Hai Zhongtian explained that securing bank loans remains one of the biggest challenges for Taiwan firms in the Mainland. Although Beijing promised 130 billion RMB (USD 19 billion) in loans to Taiwan businesses in China during the KMT-CCP talks in December 2008 (Ref B),loan applications take too long, sometimes several months, to process, said Hai. Furthermore, many Chinese commercial banks do not lend to Taiwan firms due to what the banks perceive as credit risk. (Note: In a separate discussion on February 10, Cui Zhiqing, Director of the Taiwan Research Center at Nanjing University, said many Taiwan companies find it cumbersome to borrow from Chinese banks because the banks require a great deal of information, including financial records of the company's Taiwan headquarters, since some Taiwan firms in the past had fled the country after receiving loans. End note.) There are probably 1000 enterprises in Nanjing actually run by Taiwan entrepreneurs but registered under Mainland relatives' names so they can more easily borrow from Chinese banks, said Hai. ¶4. (C) Even if Taiwan enterprises are able to obtain loans from Mainland banks, the terms are for only one year at a time, and the banks conduct lengthy reviews before deciding whether or not to renew the loans (Ref C). According to Hai, some Taiwan firms are finding it difficult to get their loans renewed. Taiwan banks are currently barred from RMB lending in the Mainland, but Hai hopes these restrictions will be lifted at the next SEF-ARATS talks in June. Then, Taiwan firms will be able to borrow from Taiwan banks in the Mainland. Hai also expects Taiwan's restrictions on Chinese investment in Taiwan to be relaxed as a result of the June discussions. LCL: Stuck with Bad Workers -------------- ¶5. (C) One of the biggest problems for Taiwan firms amid the current economic downturn has been their inability to layoff workers because of the Labor Contract Law (LCL),said Hai. Gu Zhenzuo, the President of Nanjing Axeda Metal Industrial Co, a manufacturer of steel pots and pans, agreed that many export-oriented factories like his are suffering because he cannot layoff workers, despite plummeting overseas demand. It is especially difficult to layoff workers who have been at the factory for over 10 years, said Gu, as doing so would incur a SHANGHAI 00000085 002 OF 003 penalty of at least 20 months salary. He cited one worker in his company who punched a factory manager but could not be fired under the current law. Gu said he is thinking of closing his factory, where he has lost every labor lawsuit. His workers' productivity continues to decline since they know they are protected under the LCL. ¶6. (C) Cai Yide, President of Nanjing Jardine Enterprise Ltd, a furniture exporting company, said he used to have two factories employing 800-900 workers in Nanjing but had to shut one down. Now he has one factory with 700 employees. Cai said the LCL has raised labor costs and made it impossible to fire workers, even those who run into trouble. Cai, like Gu, thinks the Chinese legal system favors the workers. Although labor arbitration hearings conducted by local governments often end in favor of companies since local governments want to attract businesses, companies often lose labor lawsuits that end up in courts. According to Cai, one judge who presided over such a case mentioned that the court wants to maintain a harmonious society and prevent unrest among workers. Only Shi Junqiu, Chairman of San Shang Chemical Co, said he wants to keep all 200 of his factory employees in case business picks up again, though he agreed it would be very difficult to layoff workers even if he wanted to. Exports Plummeting -------------- ¶7. (C) Shi's chemical company, which exports melamine products to the United States and European Union (and has been under the watchful eye of Chinese regulators because of the melamine milk scandal in 2008, according to Shi),has seen sales drop 70 percent in the most recent quarter. Gu's metal company exports all of its products, mostly to the United States. He said demand plummeted in Q4 2008 and that the Chinese Government's raising of VAT rebates did not help his company since the measure only applies to products manufactured on domestic equipment, whereas Gu's company uses imported equipment. Likewise, Cai Yide said his furniture company's sales started falling in September 2008. His company ships all of its products overseas, mostly high-end furniture to the U.S. market. He said sales at an October 2008 furniture show in Las Vegas were down 30 percent from the previous year, and that low-mid range furniture sales have declined by an even greater 40-50 percent. Customers that used to carry 6-8 months worth of inventory are now only carrying 3 months inventory. Cai has a pessimistic outlook for 2009 since his company is heavily reliant on the U.S. market, and he is now looking to expand sales in the European Union, Middle East, and Russia. Switching to Domestic Market Not Easy -------------- ¶8. (C) Chinese domestic demand is still strong, but it is difficult to switch from overseas sales to domestic sales, said Cai. Since his company makes furniture specifically tailored to U.S. retailers, he would have to completely change his product line if he decided to switch to the domestic market. Hai agreed, noting that it takes time and money to create a distribution network. Although his IT company, with its 40 branches across China, already has well-established distribution channels, this would not be easy for a company that, until now, was solely focused on the export market. Hai believes the various Taixiehui branches throughout China should help Taiwan companies by providing a platform for domestic distribution. Direct Flight Prices Likely to Come Down -------------- ¶9. (C) Hai thinks direct flights between East China and Taiwan recently were more expensive than routes through Hong Kong because of the peak season during Chinese New Year. He expects prices to come down soon. (Note: A Shanghai Airlines executive told Econoffs in January that the direct Shanghai-Taipei route is one of their most profitable and that, though demand is high, prices would come down soon. A search of Shanghai-Taipei direct flights over the Internet on February 19 quoted a rate of RMB 2650, about one-third of the rate during Chinese New Year. End note.) Hai also took credit for the Nanjing-Taipei direct flights, saying he organized representatives from other Taixiehui in Jiangsu Province to lobby Mainland and Taiwan authorities to open direct flights between the two cities. (Note: This seems to fit a pattern of Taiwan businesspeople in second-tier Mainland cities actively lobbying for the opening of direct flights between their cities and Taiwan. End note.) SHANGHAI 00000085 003 OF 003 Comment -------------- ¶10. (C) Though these interlocutors have not seen many closures of Taiwan businesses in Nanjing, they are clearly downcast about business prospects, at least in the near term. Like some Taiwan companies in Kunshan (Ref D),some are looking to switch from exports to the domestic market but are finding the transition difficult. Despite the gloomy outlook, however, none of the interlocutors expressed a desire to move to another country or back to Taiwan. CAMP