VZCZCXRO8033
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0419/01 1980811
ZNR UUUUU ZZH
R 160811Z JUL 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 7417
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 02 GUANGZHOU 000419 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LEE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER 
STATE PASS SAN FRANCISCO FRB FOR CURRAN 
TREASURY FOR MOGHTADER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV CH
SUBJECT: South China's High-Tech Zones Struggling to Attract New 
Companies to the Region 
 
REF: Guangzhou 406 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. Not for release outside U.S. government channels. Not 
for internet publication. 
 
¶1. (U) Summary: If you build it and offer the right package of 
incentives, they might come.  Then again, they might not.  Those 
that do might have been coming anyway.  It's not exactly gambling 
south China style, but the "build it and see what happens" mentality 
that sometimes infuses the creation of these zones certainly has a 
high element of risk.  The high-tech zones in the Pearl River Delta 
(PRD) are clearly part of the government's strategy to reorient the 
PRD's economy away from labor-intensive/energy inefficient 
industries to high-tech, finance-oriented services.  While some of 
these zones are faring well, others are struggling; they are simply 
trying to maximize revenues and turn unused land into high rent 
apartment complexes.  Still, even the apparently successful zones 
appear to be cannibalizing other areas of Guangdong, rather than 
attracting new high-tech industry.  End Summary. 
 
¶2. (U) Eager to upgrade south China's industrial base, the central 
and local governments have adopted various policies to encourage the 
creation of high-tech enterprises --  principal among these are the 
development zones that dot the landscape in Guangdong province. 
There are ten large national-level economic and high-tech zones and 
dozens of smaller ones sponsored by municipal governments.  These 
zones all offer tax and other incentives to the companies they want 
to attract; the idea is that by bringing different high-tech 
companies to the same area, the zones will develop into centers of 
innovation, on the model of California's Silicon Valley. 
 
¶3. (SBU) The zones have so far experienced mixed success.  Some, 
like the Guangzhou Development District (GDD), a sprawling area 
located about 20 kilometers east of downtown Guangzhou, have managed 
to attract scores of Fortune 500 companies.  Others, such as 
Dongguan's Songshan Lake, have struggled.  According to Sung-Rak 
Choi, the Korean CEO of Iriver (China), a manufacturer of consumer 
electronics with a factory in Songshan, the Dongguan zone has been a 
great disappointment, with utilization of just 30% of its available 
space.  After a recent visit to the zone, located near the highway 
connecting Guangzhou with Shenzhen, Guangdong Party Secretary Wang 
Yang was quoted as saying that Songshan "has a favorable environment 
but very little content." 
 
¶4. (SBU) According to Dr. Lu Jun, the chair of Sun Yatsen's 
Department of Finance, zones like Songshan have struggled because 
most of the PRD lacks the resources and infrastructure necessary to 
develop high-tech industries.  Lu believes that in the short-term it 
will be very difficult to attract high-tech enterprises to south 
China if they aren't already based in the area.  The experience of 
Songshan reflects this, according to Iriver's Choi, who told us that 
every single major company in the development zone already had a 
manufacturing plant elsewhere in the PRD. 
 
¶5. (SBU) Some of our contacts argued that the zones contributed 
little to the development of high-tech industry in south China 
because they were competing primarily with other zones and 
communities in the PRD.  Choi told us that Iriver considered 10 
different development zones in Guangdong.  Choi also told us that 
Songshan and GDD had a "bidding war" when competing to attract the 
LG-Philips LCD manufacturing plant that was ultimately built in the 
GDD.  Choi said that incentives offered by the zones might lead a 
company to choose one over another, but most companies looking at 
the zones had already decided to move to south China and were at 
that point simply shopping for the best deal. 
 
¶6. (SBU) In some cases, it appears that the development in the zones 
is little more than a mailing address that confers tax benefits. 
According to Lin Qicai, a consultant at Guangzhou Zhengyi Enterprise 
Management Consulting, which advises companies seeking to invest in 
the GDD, many companies register in the GDD to take advantage of 
incentives offered by the zone but never establish much of a 
physical presence there.  Lin told us that as many as 100 companies, 
or more than 80% of the enterprises making up the GDD's Free-Trade 
Zone, registered in the GDD solely for the tax incentives they 
received. (Note: the Free-Trade Zone is one of the four zones that 
make up the GDD. End note.)  Lin said that these companies 
maintained only small offices in the zone and conducted the bulk of 
their operations elsewhere in the PRD.  He further commented that 
 
GUANGZHOU 00000419  002 OF 002 
 
 
GDD's management was well aware of this but didn't care as long as 
the companies continued to provide tax revenue to the zone. 
 
¶7. (SBU) Perhaps in desperation, Songshan has turned to real estate 
development in recent years -- a move that Iriver's Choi says is due 
as much to a lack of alternatives as to any coherent strategy. 
Dozens of high-rise apartment buildings are springing up in the 
southern side of the zone, although when Congenoff visited in late 
June, few if any of them appeared to have been finished.  According 
to press reports, the apartments were all quickly sold when they 
were put on the market in 2006, and the real estate developments now 
provide the zone with much of its tax revenue.  Choi commented that 
he thinks the apartments were almost all purchased by speculators 
who don't actually intend to move to Songshan. 
 
¶8. (U) Comment: The success of development zones like GDD and 
Songshan in cultivating high-tech industries in south China is mixed 
at best.  GDD is having some success in attracting large 
multi-national companies (MNCs), but it seems to be doing so 
primarily at the expense of other development zones and even 
downtown Guangzhou.  In addition, the principal goal of zone 
management -- to maximize tax revenue -- does not seem to be 
entirely aligned with the provincial government's goal of attracting 
new high-tech investment to the PRD. 
 
GOLDBERG