VZCZCXRO0910
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0668/01 3190929
ZNR UUUUU ZZH
R 140929Z NOV 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0003
INFO RUEHOO/CHINA POSTS COLLECTIVE 0001
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0001
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0001
RUEAIIA/CIA WASHDC 0001
RUEKJCS/DIA WASHDC 0001

UNCLAS SECTION 01 OF 02 GUANGZHOU 000668 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/TC, EAP/CM 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ELAB TW CH
SUBJECT: China's Largest Association of Taiwan Investors Complains 
of "Cold Winter" Coming for PRD Factories 
 
REF: A) Guangzhou 518, B) Guangzhou 618, C) Guangzhou 655 
 
¶1. (SBU) Summary: Approximately 500 out of 6,000 Taiwan-invested 
enterprises have closed in the Pearl River Delta (PRD) city of 
Dongguan since last year, with more closures to come over the Lunar 
New Year holiday, according to the Secretary General of the Dongguan 
Taiwan Businessmen's Association (DG TBA), the largest local 
association of Taiwan investors in China.  He highlighted falling 
overseas demand for China's exports among the many factors that have 
made business difficult for labor-intensive export manufacturers. 
However, he acknowledged that, despite the many closures, the DG 
TBA's membership had remained stable and noted that some more 
competitive firms see a brighter future because they expect their 
market share to increase as weaker players are eliminated.  The 
executive believes that local officials are doing an effective job 
of dealing with demonstrations by disgruntled workers who have been 
laid off due to factory closures and that public security and social 
stability have not seriously deteriorated.  He commented that new 
economic conditions will make it even harder to encourage 
labor-intensive factories in the PRD to move inland.  End summary. 
 
Taiwan Investors Face Chilly Prospects... 
----------------------------------------- 
 
¶2. (SBU) Taiwan firms in Dongguan face a "cold winter," according to 
DG TBA Secretary General Zhao Weinan.  Approximately 500 firms have 
shut down over the past year, out of a total of 6,000 
Taiwan-invested enterprises in the city.  He predicted that we would 
see many more closures around the Lunar New Year holiday when 
migrant workers return home.  Investors have complained a lot about 
worsening conditions in the past, Zhao said, but this time "the 
suffering is real."  In addition to closures, factories are 
downsizing or merging several factories into one facility.  Zhao 
noted that the impact on the shoe industry had been particularly 
negative. 
 
¶3. (SBU) Zhao highlighted declining orders from overseas export 
markets among many factors that have made the economic environment 
difficult for Dongguan's Taiwan-invested firms.  He said most firms 
were already seeing fewer orders for the holiday season and now the 
global financial crisis had made the situation worse.  He also 
complained that the Labor Contract Law had made relations between 
employers and workers "less harmonious" -- specifically criticizing 
restrictions on overtime work, which he called "too detailed and 
rigid."  Zhao also said that Taiwan firms were finding it even more 
difficult to get credit because banks were concerned about their 
falling orders.  He pointed out that not only were banks refusing to 
lend, some had even called in outstanding loans. 
 
¶4. (SBU) Strong supply chains continue to be one of Dongguan's chief 
advantages, according to Zhao, but changing conditions are straining 
relationships between buyers and suppliers.  He noted that trade 
disputes are increasing in frequency and that some buyers have 
refused to honor orders placed earlier because their own sales are 
dropping. 
 
But the Strong Will Flourish 
---------------------------- 
 
¶5. (SBU) Nevertheless, Zhao also said that some DG TBA members see 
brighter futures as harsh conditions weed out the weakest 
competitors.  The best companies expect to increase their market 
share.  They believe that when orders eventually start to rise 
again, it will be a seller's market.  Zhao also acknowledged that 
despite the high number of factory closures, the total number of DG 
TBA members had remained basically stable.  Comment: The fact that 
factory closures that have received so much media attention have had 
a negligible effect on the number of DG TBA members suggests that 
it's still only the most marginal industry players that are shutting 
down.  End comment. 
 
Disgruntled Migrant Labor Not a Threat Yet 
------------------------------------------ 
 
¶6. (SBU) Noting the increased frequency of demonstrations by 
laid-off workers, Zhao commented that he did not believe that local 
security conditions had deteriorated.  He praised the government and 
the Communist Party's response to recent factory closures, 
especially efforts by township and village governments to pay back 
wages.  Zhao also said that the DG municipal government had been 
particularly responsive to the concerns of Taiwan investors, meeting 
monthly with foreign investors and lobbying Beijing for measures to 
ease conditions for labor-intensive manufacturers in the PRD.  He 
believes these efforts helped secure recent increases in 
value-added-tax rebates and implementation regulations for the Labor 
 
GUANGZHOU 00000668  002 OF 002 
 
 
Contract Law that benefit Taiwan enterprises. 
 
"Double Transfer" in a Deep Freeze 
---------------------------------- 
 
¶7. (SBU) Zhao believes that despite the government's "double 
transfer" policy of encouraging labor-intensive manufacturing in the 
PRD to move inland (ref A), there will be few Taiwan factories 
moving under current conditions.  Most firms that had any plan to 
move have already done so.  Others that might have considered moving 
are now waiting and watching the overall economic conditions, 
according to Zhao.  He argued that government efforts to encourage 
Taiwan factories to move would be ineffective, in part because some 
investors feared that incentives offered at inland destinations 
wouldn't be sustained. 
 
JACOBSEN