Cablegate: Taizhou - China's Motor City

VZCZCXRO9654
RR RUEHCN RUEHGH
DE RUEHGH #0737/01 3230835
ZNR UUUUU ZZH
R 190835Z NOV 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6460
INFO RUCPDOC/USDOC WASHINGTON DC 0012
RHEHAAA/NSC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBJ/AMEMBASSY BEIJING 1530
RUEHIN/AIT TAIPEI 0777
RUEHCN/AMCONSUL CHENGDU 0958
RUEHSH/AMCONSUL SHENYANG 0958
RUEHGZ/AMCONSUL GUANGZHOU 0935
RUEHGH/AMCONSUL SHANGHAI 6958

UNCLAS SECTION 01 OF 04 SHANGHAI 000737

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EAP/CM, EAP/PD, AND INR/B
DEPARTMENT FOR INR/EAP - CLARKE
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, ALTBACH
DOC FOR ITA/MAC - DAS KASOFF, MELCHER, MCQUEEN
USPTO FOR INT'L AFFAIRS - LBOLAND

E.O. 12958: N/A
TAGS: ECON PGOV EINV ETRD PINR KIPR ELAB CH
SUBJECT: TAIZHOU - CHINA'S MOTOR CITY

REF: SHANGHAI 125

(U) Sensitive but unclassified. Not for dissemination outside
USG channels; not for Internet distribution.

1. (SBU) Summary: During a November 5-6 visit to Taizhou in
Zhejiang Province, Deputy Principal Officer (DPO) and econoff
engaged Taizhou officials and Chinese automotive industry
representatives on the area's booming automotive sector. Vice
Director Wang Haiping from Geely Auto, one of China's largest,
private, domestically-owned auto manufacturers, said the company
hopes to export to the U.S. by 2010, targeting the economy sedan
market. Taizhou Foreign Trade and Economic Cooperation Bureau
Director General Pan Xuhui noted Taizhou has a complete supply
chain of auto parts that brings low costs to auto makers and
success to the local industry. Vice Mayor Yuan Maorong credited
Taizhou's economic prosperity to the fact that 95 percent of
area's companies are in private hands (see Septel for additional
biographical reporting and comments on Politburo Standing
Committee member Xi Jinping). End Summary.

Taizhou - China's Motor City

----------------------------

2. (U) Taizhou, a municipality situated in the middle of
Zhejiang's coastal area, has a resident population of 5.6
million, as well as 1.5 million migrant workers. Taizhou's 2006
GDP reached USD 19 billion, 95 percent of which is generated by
the private sector. Manufacturing is the major driver of the
economy, with over 100,000 enterprises and 1.15 million
employees. Chief among its manufacturing industries is the auto
and auto parts sector with over 3,200 enterprises. In 2006, the
value of the city's auto sector production reached over USD 6.7
billion. The Taizhou auto sector's primary product is economy
sedans, but the city also produces a range of SUVs, pickups,
tractors, motorcycles and auto parts. Taizhou is recognized by
the Central Government as one of China's eight "National
Automobile and Auto Parts Export Bases." The city exported over
USD 300 million worth of autos and auto parts in 2006.

Geely Automobile: All Private with Big Ambitions

--------------------------------------------- ----

3. (SBU) Geely Vice Director Wang Haiping outlined the
company's current operations and aspirations. Founded in 1986,
Geely Auto is now China's eighth largest auto manufacturer with
roughly 6 percent of the market share. It is also China's first
and largest, fully Chinese-owned, private auto manufacturer. In
2006, the company's total sales volume was nearly 150,000 units
with an export volume of 20,000 units. Their biggest
competitors in China are Chery Auto and BYD Automotive. Geely
Auto is now listed on the Hongkong Stock Exchange, with the
company owning 55 percent of its own shares, and a U.S. hedge
fund, Century Fund, owning another 40 percent.

4. (SBU) The company has four manufacturing plants in Linhai,
Ningbo, Taizhou, and Shanghai, and it hopes to build another 4
plants next year. The annual capacity is 200,000 vehicles, with
roughly an equal capacity for engines and gear boxes. Current
capacity utilization is 67 percent. In addition, the company
produces 2-3 new models every year; its main model is an economy
sedan. Additionally, the company produces China's first
indigenous sports car and hopes to gradually tap into the
high-end sedan market. Currently, the company targets the
economy sedan market, keeping prices 1/2 that of Japanese cars
and 2/3 of Korean cars. The Taizhou factory produces about 160
cars per day using a fair degree of automation. Wang claimed
most of the equipment is of local origin. Most material is also
sourced in Zhejiang Province, largely from the immediate area to
ensure just-in-time delivery.

Expanding Both Inside and Outside China

---------------------------------------

5. (SBU) Nationwide, the company has 120 dealerships and 400
customer service shops to support their sales. So far the

SHANGHAI 00000737 002 OF 004

company has produced a cumulative total of 700,000 units, and it
hopes to sell 2 million units by 2015. Currently the company
exports mainly to the Middle East, South Africa, Eastern Europe,
and South America. In addition, the company has assembly lines
in the Ukraine, Indonesia, and Russia. Geely seeks to enter the
U.S. market by 2010, at which time it hopes that 2/3 of its
sales revenue will come from exports.

Geely's Focus on Intellectual Property and Innovation

--------------------------------------------- --------

6. (SBU) Wang noted that innovation and intellectual property
(IP) is an integral part of the company's strategy. The company
has a staff of 800 people devoted to R&D, mostly working at its
R&D Shanghai facility. One of its main projects is a "green
car," which the company aims to deliver by 2008. The company
owns 120 patents and was the first Chinese auto maker to develop
its own gearbox. Wang acknowledged the company had one IPR
dispute with Toyota due to an alleged trademark infringement.
The company also receives government subsidies for filing
patents, with the amount dependant on the complexity of the
patent. Wang also claimed that government-owned Chery Auto
receives bigger subsidies than Geely for filing patents. The
company also files patents overseas. (Note: In a separate
meeting, Taizhou Foreign Trade and Economic Cooperation Bureau
Director General Pan Xuhui said there is no IPR Complaint
Center; the local IP Administration handles IPR complaints.
There is also no specialized IPR court, but a local arbitration
center handles many IPR cases.)

Geely's Labor - Fairly Representative of the Industry

--------------------------------------------- --------

7. (SBU) The company engages roughly 1,200 employees, with
approximately 40 percent from the local area; the rest come from
throughout China. The company pays a minimum wage of 1,500 RMB
(USD 200) and provides dormitories for employees. Employees are
unionized, and the average age is 25. (Comment: Geely's
factory seemed less labor intensive than Chery Auto, and Geely
workers seemed less hurried than their counterparts in other
auto factories. It appeared the workers also were not well
equipped with safety gear such as goggles and helmets.)

The Taizhou Auto Parts Industry

-------------------------------

8. (SBU) The DPO and econoff also visited two typical auto
parts manufacturers located on the Geely Auto Base. Privately
owned Geely Electric produced wiring exclusive for Geely Auto,
with 300 employees. The second company, Johnson He Da, produced
seats exclusively for Geely Auto. It was recently bought by the
U.S. company Johnson Controls, which is the largest auto seat
manufacturer in China with 65 percent of the market share.

The Automotive Sector - The Motor of the City

--------------------------------------------- -

9. (SBU) In a separate meeting, DPO Schuchat engaged Taizhou
Foreign Trade and Economic Cooperation Bureau Director General
Pan Xuhui on Taizhou's economic growth and trade issues. The
area's economy is mainly powered by manufacturing (over 50
percent). Of the manufacturing sector, the largest is autos and
auto components. There are over 80,000 employees working in
Taizhou's auto industry. Other major sectors include sewing
machines, household electronics, plastic, and pharmaceuticals,
ship building and shoe manufacturing. All the auto and auto
parts companies are privately owned. There are also over 2,000
auto parts companies, of which 420 are authorized to export.
In the first 9 months of 2007, Taizhou exported vehicles and
auto components valued at over USD 253 million. Taizhou exports
to over 123 countries, and except for tires, the city produces a
complete line of auto components. Xu said the key to the
Taizhou auto industry is its ability to offer a complete
production chain.

SHANGHAI 00000737 003 OF 004

A City with a Diverse Industry Base

-----------------------------------

10. (SBU) Taizhou is also home to the biggest sewing machine
manufacturer in China. The machines are for factory use.
Electric appliance production includes refrigerators and air
conditioners. To support its plastic industry, Taizhou consumes
3 million tons of plastic material annually. Taizhou also
produces active chemical ingredients for use in pharmaceuticals.
Agriculture still represents 8-10 percent of the economy,
mostly fishing, sea farming, and fruits. Although there is a
small port, most of Taizhou's exports transit through Ningbo and
Shanghai.

An Economy Fueled Mostly by Domestic Investment

--------------------------------------------- --

11. (SBU) Pan said there are very few foreign investors in
Taizhou - enterprises are mostly fueled by Chinese investment.
Hong Kong is Taizhou's biggest outside investor, followed
closely by the EU. Cumulative outside investment is USD 300
million. Because Taizhou is relatively far from Shanghai, has
limited resources (especially land), and has adequate local
capital, it has not attracted much foreign investment. Urban
per capita is RMB 19,200, and rural income per capita is RMB
8,700.

Local Labor Issues

------------------

12. (SBU) According to Pan, Taizhou already has seen signs of
shortages in both skilled and unskilled labor, especially
skilled labor. Consequently, many Taizhou companies choose to
locate their R&D Centers in Shanghai and Hangzhou. Taizhou has
difficulty attracting highly skilled workers because the quality
of life is below that of big cities and the city "lacks
information resources."

Taizhou Economic Success Reflects its Large Private Sector

--------------------------------------------- -------------

13. (SBU) In a separate meeting, Executive Vice Mayor Yuan
Maorong attributed the area's economic success to its large
private sector. Most companies are private enterprises, so they
are more efficient and produce higher quality products. Before
China's reform policies were implemented, Taizhou was very poor.
It had few natural resources. It also had very few state owned
enterprises (SOE) because the Central Government did not want to
risk investing heavily in a "front line area" so close to
Taiwan, where it would be vulnerable in the case of military
conflict. Hence, there was little need to push SOEs aside to
provide room for the private sector when the economic reform
began. Since the reform, Taizhou developed rapidly through
"people's innovation, hard work, and creativity." That is, its
main resource is human capital. "The people are hardworking and
have high integrity," he said.

14. (SBU) The auto industry is the cornerstone of Taizhou's
economy, according to Yuan. The municipality is also home to
China's largest motorcycle manufacturer. Taizhou has a complete
supply chain of auto parts that brings low cost and speedy
delivery time to auto makers. About 20 companies from Taizhou
plan to list next year on the Shenzhen Stock Exchange.

IPR and Environmental Issues

----------------------------

15. (SBU) The DPO raised the IPR infringement of the Lance
Armstrong Foundation's trademark in Taizhou and the subsequent
court case and appeal by the defendant. The DPO urged a fair
and transparent resolution of the case. Although the Executive
Vice Mayor was unaware of the case, he promised to look into it

SHANGHAI 00000737 004 OF 004

and respond to the Consulate. The DPO also urged Taizhou to
focus more on environmental protection. The Mayor responded
that the city is in the process of conserving energy and
pollution reduction.

Comment

-------

17. (SBU) Similar to Wuhu and Hefei in Anhui Province, Taizhou
has closely tied its economy to the automotive industry. Its
champion enterprise, Geely Auto, is also following the same
model for development as Chery Auto in Anhui, with volume
compensating for lower prices and plans to boost exports as the
domestic market becomes more saturated. One industry analyst
told us the biggest growth driver for China's auto industry is
the gradual increase in household incomes and the "wealth effect
from the market rally. " However, "fierce price competition
will continue to squeeze margin for auto manufacturers in
China." The rising RMB exchange rate will also lower the price
of imported automobiles, putting more pressure on domestic
vehicle manufacturers and making it more expensive for firms
like Geely to export. Geely's biggest advantage going forward
is flexibility as a private enterprise. The advantage, however,
can also sometimes mean lack of government support (which Chery
receives since the Anhui Government is the majority
shareholder.) It also does not have a foreign partner to help
with its foray into the international market (unlike Chery,
which receives support from Chrysler in tech transfer and market
access). As a result of these issues, the company may soon face
a bottleneck in its growth plans.
JARRETT

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