TAIWAN ARMS SALES: U.S. FIRMS' EXPOSURE TO

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 000268

SIPDIS

STATE FOR EAP/CM SFLATT
STATE FOR EEB/TRA/AN JBYERLY, KURS; VLIMAYE-DAVIS
STATE PASS TO USTR TSTRATFORD
COMMERCE FOR AHAAKENSEN
DEPT OF TRANSPORTATION FOR PGRETCH, KGLATZ, NPORTER
NSC FOR JLOI
FAA FOR RCICERO

E.O. 12958: DECL: 02/01/2020
TAGS: ETRD EAIR PREL CN TW
SUBJECT: TAIWAN ARMS SALES: U.S. FIRMS' EXPOSURE TO
CHINESE SANCTIONS

REF: BEIJING 260

Classified By: Econ M/C William Weinstein. Reasons 1.4 (b) and (d).


1. (C) SUMMARY. Representatives of major U.S. firms involved
in the Taiwan arms deal (and with significant China
operations) tell the Embassy they are concerned about
possible Chinese sanctions resulting from the deal, but have
not yet been contacted by Chinese authorities. Chinese media
have focused on the possible impact to the U.S. aviation
industry, which recorded USD 6 billion in exports to China in

2009. However, many of these firms are deeply integrated
into the Chinese economy, with localized manufacturing and
supplier relationships that also pose vulnerabilities for
Chinese interests if sanctions get extreme. END SUMMARY.


2. (C) Econoff spoke with leading involved U.S. firms in
Beijing to assess their exposure to Chinese sanctions
threatened in the MFA's January 30 press release. To date,
none of the U.S. firms named by the USG as suppliers in the
Taiwan arms deal have been contacted by Chinese authorities
over their involvement in the arms package. Possible
sanctions were the front page story in the February 2 China
Daily, with a National Defense University analyst stating
they have yet to be announced. Per reftel, this is the first
time the Chinese government has publicly threatened sanctions
on the specific firms involved, though Boeing noted that in
the past it was called to meetings intended to discourage its
involvement in such deals, but so far has not been in this
case.

BOEING: China Sales of USD 2.5-3.5 Billion
--------------


3. (C) Boeing Corporation's China told us today that their
China revenue ranges from USD 2.5 to 3.5 billion per year
(slightly lower than estimated reftel). Sales are primarily
commercial aircraft, with 50 aircraft delivered to Chinese
airlines in 2009 -- mostly short-haul, narrow-body Boeing
737s. The company also earns limited additional revenue from
services. Although Boeing earlier dominated the China
market, it now shares the market roughly 50/50 with Airbus.
(NOTE: A Chinese row with France in 2009 over President
Sarkozy's meeting with the Dalai Lama did not have a
perceptible impact on Airbus' market share in China, in spite
of much speculation to the contrary and a threatened
moratorium on future contracts. END NOTE.)


4. (C) Boeing's position in the China market for long-haul
aircraft is stronger, roughly 75 percent, but has been hurt
by the two-year delay of the 787 Dreamliner. Boeing expects
787 deliveries to begin in late 2010, but initial deliveries
will go to All Nippon Airways with China-bound deliveries not
likely until 2011. Chinese officials have complained
steadily about the negative impact to Chinese carriers from
787 delays. In September 2009, Boeing reached agreement with
six Chinese airlines to modify 787 delivery dates, and only
one cancelled its purchase plan.


5. (C) Boeing also has a range of supplier relationships with
China's aviation conglomerate, AVIC, including supply
of some composite materials components and tail and wing
components. Chinese industrial policy specifically
encouraged these supplier relationships and AVIC values them
highly. Boeing has been careful to build relationships
within this system, while ensuring that it diversifies supply
beyond China for critical components. This business area may
therefore be relatively insulated.

UNITED TECHNOLOGIES: USD 2.7 Billion in 2009
--------------


6. (C) United Technologies Corporation (UTC) is another major
aviation conglomerate involved in the Taiwan arms deal
through its Sikorsky Helicopter division. UTC generated USD

BEIJING 00000268 002 OF 002


2.7 billion in Chinese revenue in 2009. However, over 60
percent of that revenue is from UTC's building and
infrastructure business, with under 40 percent from
aviation-related businesses. Moreover, UTC reports that 90
percent of its Chinese revenue comes from products
manufactured locally in China.


7. (C) Nearly all of UTC's business units are deeply involved
in China, many through local production ties. Pratt and
Whitney supplies aircraft engines to Chinese airlines,
including some through PW Canada division. Sikorsky has
supplied search and rescue helicopters to the Ministry of
Transport, but lost the most recent bid to Eurocopter in
mid-2009. Sikorsky also has manufacturing in China, where
AVIC manufactures the company's S76 helicopter frames. Its
Carrier business unit supplied heating and cooling systems to
70 percent of the Olympic venues in Beijing. Otis Elevator
also delivered 1400 elevators to the Olympics project through
2008, valued at USD 100 million. UTC's Fire and Security
Systems has provided systems to the Beijing subway system.

GE AVIATION
--------------


8. (C) General Electric (GE) Aviation sales in China reached
USD 800 million in 2009, involving primarily aircraft
engines. The division's products are largely imported, with
only one small manufacturing facility for aviation components
in Suzhou. The GE group, however, has sales here of
approximately USD 5 billion per year, and its energy, health
care and other units are heavily invested in local production
throughout China.

LOCKHEED, RAYTHEON AND OTHERS
--------------


9. (C) Lockheed confirmed it had almost no business in China,
and employs only one full-time representative. Lockheed had
dabbled in China's air traffic management equipment market,
but withdrew two years ago. The firm maintains a small joint
venture with the China Meteorological Administration to
produce weather radar systems. This small JV in Beijing and
Xiamen has only 100 employees.


10. (C) Raytheon contacts were unavailable for comment, but
in a visit to the Embassy in 2009 confirmed that it has a
trickle of business in China from the maintenance of older
air traffic control (ATC) systems. Chinese authorities have
explicitly told the firm in the past that its sales to Taiwan
would effectively limit the potential of its business in the
mainland. Raytheon representatives tell us it comes down to
a "a simple business decision," military sales to Taiwan were
much greater than the potential ATC system sales in the
mainland.


11. (C) COMMENT. At first glance, huge U.S. aviation exports
to China appear vulnerable to sanctions, but the complex
customer, supplier, and partner relationships mean sanctions
could also affect Chinese interests if carried to an extreme.
END COMMENT.
HUNTSMAN