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INFO RUEHC/SECSTATE WASHDC 6828
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RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 04 GUANGZHOU 013550 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EB, R, EAP/CM, EAP/PD, DRL 
STATE PASS USTR - STRATFORD, CELICO 
USDOC FOR 4420/ITA/MAC/MCQUEEN, DAS LEVINE 
USPACOM FOR FPA 
 
E.O. 12958: N/A 
 
TAGS: EAIR ETRD WTRO ECON CH
 
SUBJECT: UPS One Year On:  Despite Bumps in the Road, Big 
Brown Is Not Blue 
 
GUANGZHOU 00013550  001.3 OF 004 
 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
PROTECT ACCORDINGLY.  NOT FOR RELEASE OUTSIDE U.S. 
GOVERNMENT CHANNELS.  NOT FOR INTERNET PUBLICATION. 
 
A) 05 GUANGZHOU 038410; B) GUANGZHOU 05379; C) GUANGZHOU 
010672; D) 05 Guangzhou 018283 
 
¶1. (SBU) SUMMARY: UPS officials recently discussed their 
experiences in South China as the company reaches its one 
year anniversary of direct cargo services between Guangzhou 
and the United States.  Its China operation now wholly 
owned, company officials are generally positive but raised 
WTO-related concerns about the lack of transparency in 
government decisions and lawmaking, slow and onerous 
licensing requirements, and proposed changes to the labor 
and postal system laws.  Despite these worries -- as well as 
some not-too-subtle hints from local officials about moving 
their hub from Shanghai to Guangzhou -- our interlocutors 
remain relatively upbeat about their experiences in South 
China and about the potential that lies ahead.  End Summary. 
 
¶2. (SBU) The Consul General and Econoffs recently met with 
Ken Torok, President of UPS Asia Pacific; Richard Loi, 
Senior Vice President, Asia Pacific Region China District; 
and Xiang Feng, Senior Manager for Public Affairs, China. 
The UPS officials requested the meeting so that Torok, who 
was visiting from Singapore, could meet discuss UPS' 
experiences in South China over the last year.  It was at 
approximately this time last year that UPS began to offer 
direct cargo service between Guangzhou and the United 
States, via Anchorage, which was the first non-stop air 
service by a U.S. air carrier between Guangzhou and the 
United States (ref A). 
 
One Year Later -- Going it Alone 
-------------------------------- 
 
¶3. (SBU) UPS originally entered the China market in 1988 in 
partnership with SinoTrans, a state-owned enterprise.  After 
Chinese law was changed to allow wholly-owned foreign 
companies, UPS announced in late December 2004, however, 
that it was going to take direct control of its 
international express operations in China's largest cities 
by the end of 2005 -- essentially buying out Sino Trans. 
UPS also planned to open offices in five major cities 
(Shanghai, Guangzhou, Shenzhen, Tianjin, and Qingdao) and 
expand to more than 20 other cities.  This newfound 
independence, however, may be bringing some unintended 
consequences for UPS.  Torok described how one of the 
toughest hurdles UPS faces in China -- the licensing process 
-- is not a requirement for the thousands of local courier 
companies which compete with UPS in the same markets. 
 
The Licensing Hurdle: Misery Loves Company? 
------------------------------------------- 
 
¶4. (SBU) Torok described how, despite the fact that UPS now 
operates express delivery services in 23 cities, each time 
the company applies for a new license to operate, it has to 
basically start anew.  He commented that to open a UPS 
retail store, the company needs to obtain a new and 
different license, even if the retail store is co-located 
with the delivery office, and that this process is as much 
work as opening an entire new city to UPS delivery services. 
 
¶5. (SBU) Econoffs mentioned that these restrictions were a 
common occurrence in other service industries such as 
banking and insurance (refs B and C.)  We noted that 
officials from these industries are anxiously looking toward 
11 December 2006, after which time China's five-year WTO 
transition period will end and foreign service industries 
should theoretically be able to operate on the same terms as 
their domestic counterparts.  We explained that 
representatives from those industries have told us about 
similar frustrations at breaking into domestic markets due 
to administrative hurdles such as the licensing regulation. 
 
GUANGZHOU 00013550  002.3 OF 004 
 
 
(Note:  Other service industry officials have told us how a 
long application process to open a new branch allows local 
governments to control the speed of expansion, and how 
intangible administrative measures, such as having 
additional capital requirements for each and every license, 
push up the expansion costs for foreign competitors.  End 
Note.)  The Consul General mentioned the Chinese concern 
with the social and economic consequences of opening up the 
market to foreign competitors too quickly, a factor that is 
undoubtedly influencing Chinese decisions on the issue. 
 
Serious Concerns About Proposed Labor Law: 
A French Model in the Works?  Bad News. 
------------------------------------------- 
 
¶6. (SBU) The conversation then turned to a discussion of the 
draft of a proposed labor law, which many observers see as a 
mis-guided government attempt to offer more protection to 
workers, many of whom have been displaced during China's 
vast economic reforms.  Critics -- among them many Western 
multinational companies who are voicing their concerns to 
the government via the protective cover of business 
associations -- have said the draft new law will severely 
limit employers' flexibility to hire and fire employees; 
gives unions considerable input over personnel decisions; 
requires excessive severance payments in certain cases; and 
bans service agreements which allow temporary employment. 
The temporary worker provision converts temporary workers to 
fully-vested workers after a short time of working 
temporarily for a company.  The target date to finish the 
draft legislation is 2007 and the legislation is currently 
open for public comment. 
 
The Government as Union 
----------------------- 
 
¶7. (SBU) Torok commented rhetorically that under his 
interpretation of this new law, labor unions would not be 
necessary because the government would take their place with 
the provisions of this proposed law.  The Consul General 
commented, and Torok readily agreed, that perhaps rather 
than "reinventing the wheel" with a new law, a better 
approach would be for China to simply enforce its current 
labor laws, which most experts find to be quite 
comprehensive, at least on paper. 
 
¶8. (SBU) Loi commented that in his experience, UPS employees 
are happy working for UPS without labor union representation 
because the company respects them and meets their needs. 
Loi continued that the company celebrates holidays and 
cultural events with its employees; for example, giving 
employees moon cakes during the Mid-Autumn festival.  He 
commented that he has heard that Taiwan companies in 
particular, take advantage of their workers, paying only the 
minimum wage, despite requiring overtime work.  He opined 
that the growing number of labor protests attests to the 
fact that there are many workers who are unhappy with their 
employers. 
 
No Express Delivery of New Postal Law, But Concerns Remain 
--------------------------------------------- ------------- 
 
¶9. (SBU) The discussion then turned to efforts to rework 
China's postal law.  (Note:  China has been working to 
reform its existing postal law, enacted in 1986, for more 
than seven years.  Drafting of the reform package began in 
2003, but the law became bogged down by the slow pace of the 
amendment process.  In the meantime, many foreign companies, 
such as UPS, remain concerned about the possible impact of a 
new law on their business.  End Note.)  Torok said that 
while he was somewhat heartened by a statement that Vice 
Premier Wu Yi made during the April 11 Joint Commission on 
Commerce and Trade (JCCT) meeting in Washington, DC, -- in 
which she reportedly said that the regulatory environment 
for express services for foreign companies would not be 
negatively effected by new rules, including by postal reform 
 
GUANGZHOU 00013550  003.3 OF 004 
 
 
-- UPS still has several concerns about the new law.  These 
include:  the universal postal fund, which UPS sees as a 
form of double taxation; the law's definition of a monopoly, 
with which UPS does not agree; a proposal to make the State 
Postal Bureau (SPB) a regulator for the whole industry -- 
since the SPB is a direct competitor UPS would like to see 
an independent regulator; and the treatment given to 
domestic firms, which UPS believes comes at the expense of 
foreign companies and would violate WTO national treatment 
rules. 
 
¶10. (SBU) One example Torok provided highlighted several 
concerns at once.  While the central government has declined 
to provide firms with copies of the draft laws, UPS has 
managed to acquire an unofficial copy.  Torok explained that 
as he understands it, the 7th draft of the law allows 
foreign companies to only provide express services, which 
the industry regulator (i.e. its competition, the China 
Post) would define, presumably in a way that would suit its 
own business needs.  Torok explained that UPS has heard from 
its sources that the Chinese government may have decided to 
discard this point because it violates WTO, but he said UPS 
does not know for sure -- underscoring a complaint he made 
earlier about how the companies that will be affected by the 
new law have little knowledge about the decision making 
process and no opportunity to comment on it. 
 
¶11. (SBU) Torok noted that according to another senior UPS 
official, postal reform may be put on hold, however, as 
Chinese legislative priorities have reportedly changed and 
postal reform is less of a priority.  It has reportedly been 
pushed into the background by a new interest in promoting a 
limited partnership law.  According to this UPS official, 
the draft postal law is not yet out of the State Council and 
it is uncertain if it will go to the National People's 
Congress by the end of the year. 
 
¶12. (SBU) Econoff addressed Torok's concerns about the SPB 
becoming the industry regulator by noting that if past 
experience in the banking and insurance industries is any 
indication, the Chinese government may recognize that this 
is a conflict of interest.  In both of those industries, the 
initial plan was to use regulators who were direct 
competitors in the industry.  However, the Chinese realized 
the problems inherent in this plan and eventually separated 
the functions. 
 
So Now That You Are Here, When Are You Moving Your Hub? 
Guangzhou Hints at Favors 
--------------------------------------------- ---------- 
 
¶13. (SBU) Torok noted that as part of his visit to Guangzhou 
he was making the rounds to call on various Chinese 
officials.  Torok commented that when meeting with the 
Guangzhou Party Secretary General and with one of the Vice 
Mayors, he was asked with the bluntness characteristic of 
many Chinese officials "so when are you moving your China 
hub from Shanghai to Guangzhou?"  (Note:  This was in 
obvious reference to the July 2005 deal Fedex signed to 
establish its Asia Pacific hub at Guangzhou's Baiyun Airport 
(ref D) -- a coup for local officials considering the 
estimated USD 60 billion economic benefit the hub will bring 
to the region.  End Note.)  Officials noted that some 
current frictions -- slowness in licensing and Customs 
clearances and additional fees (see below) that UPS objects 
to -- could all be dealt with if UPS would move its 
headquarters to Guangzhou.  Torok replied that Guangdong 
Province is UPS' operational headquarters, and the company 
is continually injecting more money here -- more than USD 
100 million this year alone, in part due to capital 
requirements for new licenses.  Torok also met with the Vice 
President of the Baiyun Airport Authority, with whom he 
raised concerns about additional fees UPS must pay their 
handling agent for ground handling inside their own express 
handling unit and fees due to stationing of government 
officials within the building -- fees UPS does not pay 
 
GUANGZHOU 00013550  004.3 OF 004 
 
 
anywhere else in the world. 
 
Comment: Speed Bumps Not Bad but Not Fair 
----------------------------------------- 
 
¶14. (SBU) Despite the issues of concern that Torok raised 
during the meeting, he was, on the whole, upbeat about UPS' 
experiences thus far in South China.  The opening of the 
logistics and postal express markets under China's WTO 
accession agreement acted as a strong lure for UPS to come 
into South China, and this lucrative market is still very 
much within UPS' sights.  UPS officials are seasoned 
businesspeople who seem to understand that there will be 
bumps on the delivery route, but that once UPS can overcome 
these speed bumps, a vast market anxious to take delivery of 
UPS' professional services lies ahead.  Nonetheless, UPS 
believes China should keep to the spirit of the WTO rules 
and let competition flourish without putting obstacles in 
its way. 
 
DONG