This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 TAIPEI 000479 
 
SIPDIS 
 
SENSITIVE 
 
DEPT PASS AIT/WASHINGTON 
DEPT FOR EAP/RSP/TC 
 
FROM AIT KAOHSIUNG BRANCH OFFICE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV PREL TW HK CH BG IN
SUBJECT: POU CHEN GROUP FOCUSES ON CHINA'S RETAIL MARKET AND 
LOOKS ELSEWHERE FOR MANUFACTURING OPPORTUNITIES 
 
¶1.  (SBU) Summary.  As widely reported in the Taiwan press, 
Taiwanese businessmen have largely greeted President Chen's 
exhortation to avoid excessive focus on the mainland either 
negatively or dismissively.  However, according to Chi Jui 
Tsai, Chairman of Pou Chen Group, the world's largest shoe 
 
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manufacturer, increasing costs of doing business in China 
will lead many Taiwanese concerns to focus on other locales 
for manufacturing, while devoting more attention to China's 
retail market.  While this will match Chen's exhortations, 
Tsai emphasized that it would result from market rather than 
 
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political concerns.  End Summary. 
 
¶2.  (U)  Numerous business leaders in Southern Taiwan have 
expressed increasing frustration with the Chen 
administration's lack of progress in cross-strait relations. 
Chi Mei Group's Optoelectronics and Chilin division vice- 
presidents, Jack Lin and Richard Soong say that current 
investment regulations are needlessly complex and burdensome 
and while they hamper investment on the mainland, they do 
nothing to encourage investment in Taiwan.  Chen's recent 
announcements concerning the National Unification Council 
and his exhortation to invest in Taiwan, even at the cost of 
substantial profits have, in the opinions of Lin and Soong, 
only served to bring needless attention to their mainland 
operations.  Various other industrial leaders have voiced 
similar complaints.  Tommy Hong, chief of American President 
Line's Kaohsiung operations said that substantial opening in 
cross-strait operations is critical to the continued 
viability of Kaohsiung Harbor.  C.J. Tsai, Chairman of Pou 
Chen Group said that, while he agrees with the general 
sentiment that the Chen administration's performance in 
cross-strait relations has been unhelpful, market forces 
within China will lead his company and many other 
manufacturing concerns to look beyond China for expansion of 
their manufacturing operations, regardless of political 
concerns. 
 
¶3.  (U)  As China's economy continues its rapid growth, Pou 
Chen Group, through its Yue Yuen Industrial Holdings 
operation in Hong Kong, has changed its China focus from 
manufacturing to retailing, wholesaling and logistics.  Mr. 
Tsai told AIT/K that the rapidly increasing costs of land 
 
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and labor will lead manufacturers to look elsewhere. 
However, increasing disposable income will, in Mr. Tsai's 
estimation, soon deliver on the promise of a robust Chinese 
consumer market.  He said that his company's business 
strategy will take into account both of these realities. 
 
¶4.  (U)  Mr. Tsai believes the rapid development of China's 
freeway system will quickly make road transportation the 
most effective means for delivery within China.  In light of 
this, Yue Yuen entered into a joint venture with Hutchison 
to establish a logistics arm within China.  According to Mr. 
Tsai, the company expects to be well positioned to take 
 
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advantage of increasing industrialization of China's 
interior by providing services to other manufacturers. 
Moreover, the company will allow Yue Yuen to meet the 
delivery needs of its rapidly expanding retail operations in 
China. 
 
¶5.  (U)  Hoping to capitalize on both the increasing amount 
of disposable income within China, as well as a fitness 
craze prompted by the 2008 Olympics,  Pou Chen Group has 
established more than one thousand retail outlets within 
China to market athletic apparel and shoes within China. 
The outlets will operate under the brand "Footzone" and will 
carry products for which Pou Chen is the lead manufacturer, 
including such brands as Nike, Adidas, Reebok and 
Timberland.  Most of the clothing will be produced by Yuen 
Thai, a joint venture controlled by Pou Chen.  This will 
give the retail outlets access to Nike, Ralph Lauren and Liz 
Claiborne lines among others. Additionally, Pou Chen Group 
will be establishing a chain of fitness centers throughout 
China, the first twenty-two of which are expected to begin 
operations by the end of this year. 
 
¶6.  (SBU)  While Mr. Tsai said that manufacturing operations 
within China will continue (Pou Chen employs more than 
400,000 people in its China plants), along with those in 
Indonesia, Hungary, Mexico and the United States, the price 
of labor and real estate will lead his company to develop 
increased capacity elsewhere.  The company has looked 
closely at a number of countries including Vietnam, 
Indonesia, India, the Philippines and even Mongolia, but has 
decided that their major manufacturing effort going forward 
will concentrate on Bangladesh.  Mr. Tsai said that over the 
longer term his company will look closely at Mongolia as 
well as the interior of China.  However, he said that 
western China suffered too much social instability to be a 
viable choice at present. 
 
¶7.  (SBU)  Mr. Tsai said that India and Bangladesh were the 
final two candidates for immediate expansion.  His company 
settled on Bangladesh largely because of dissatisfaction 
with India's factory regulations.  He said that India's 
regulatory environment is overly restrictive in terms of 
factory size and number of employees.  Given this, his 
company would need to open three factories in India to 
accomplish what can be done with one factory in Bangladesh. 
 
¶8.  (SBU)  According to Mr. Tsai, his company will follow 
the same top-to-bottom business model in Bangladesh that 
they used in China.  Noting that Bangladesh is about where 
China was two decades ago in terms of infrastructure, Mr. 
Tsai said his company expects to develop roads as well as 
 
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power and water supplies to support not only its own 
operations, but those of other companies that decide to 
locate in the region.  Pou Chen was one of the first Taiwan 
companies to establish a major presence in China, and 
through its Yue Yuen Holdings it has experience in 
developing power plants, water plants and a variety of other 
infrastructure needs. 
 
¶9.  (SBU)  Mr. Tsai said that he is more concerned bout U.S.- 
China relations than Taiwan-China relations.  He expressed 
worry that a disagreement between China and the U.S. over 
the handling of the Iran problem could adversely influence 
world oil prices.  He also expressed concern over the level 
of the U.S. dollar, as Pou Chen Group does more than two 
billion dollars worth of business per year with U.S. 
companies. 
 
¶10.  (U)  Pou Chen Group, while largely producing outside of 
Taiwan, has still made substantial investments in Taiwan, 
recently opening new headquarters and an R&D facility in 
Taichung.  Again, Mr. Tsai emphasized that this was a 
business decision and had nothing to do with politics.  He 
pointed out that his company, in addition to being the 
largest manufacturer of finished shoes, is also the largest 
producer of shoe making materials.  Moreover, he noted that 
Pou Chen does the design work for Nike's top end shoe lines. 
The need to protect proprietary data was the key to making 
the decision.  In Mr. Tsai's opinion, Taiwanese labor and 
land are cost prohibitive for most low tech manufacturing, 
but for cutting edge technology, the ability to protect 
proprietary technology makes Taiwan a good option. 
 
¶11.  (SBU)  Comment.  AIT/K considers Mr. Tsai's views of 
China's business conditions to be extremely reliable.  He 
was one of the very first Taiwanese to establish himself on 
the mainland.  AIT/K will report further on the China- 
related plans of Chi Mei, various shipping concerns, and 
Southern Taiwan's steel producers by septel.  End Comment 
 
 
Thiele 
 
Keegan