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