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UNCLAS SECTION 01 OF 02 GUANGZHOU 000016 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
STATE PASS USTR CHINA OFFICE 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN ETRD EIND PGOV
SUBJECT: Guangdong's High Tech Incentives Fall Short for Industrial 
Equipment Manufacturers 
 
REF: A) Guangzhou 732, B) Guangzhou 228 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  IT SHOULD NOT BE 
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM 
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR.  IT SHOULD NOT BE 
POSTED ON THE INTERNET. 
 
¶1. (U) Summary: Industrial equipment manufacturing (EM): with its 
high-tech, high-value-added, environmentally friendly, capital 
intensive and skill labor focus, it's just what Guangdong's leaders 
are looking for to replace labor-intensive export manufacturers that 
are being encouraged to move out of the Pearl River Delta (PRD). 
Plus EM is popular in the domestic market.  However, EM business 
owners say they are feeling the negative effects of the economic 
downturn too. They report sales have dropped by as much as 70 
percent and workforces have been cut by as much as 20 percent.  To 
make matters worse, industry executives express frustration that 
government funds allocated as part of the recently announced 
stimulus package for high-tech companies in south China will not go 
them but be soaked up by university-affiliated state-owned 
enterprises (SOEs).  End Summary. 
 
New Bird for the Empty Cage 
--------------------------- 
 
¶2. (SBU) Industrial equipment manufacturing (EM) meets all the 
qualifications for the kind of high-tech and high value-added 
industries that Guangdong's leaders want to attract to the PRD as 
they encourage labor-intensive export manufacturers to move 
elsewhere -- a policy often referred to as "emptying the cage for a 
new bird."  Gao Yunfeng, President of Hans Laser Technology Co., 
Ltd. explained to us that his 5,000 employee work force is highly 
educated, many of them holding college degrees including over 60 
engineers holding masters or PhD degrees.  The company has over 200 
patents with technology that is more environmentally friendly than 
the labor-intensive manufacturing technology it replaces.  He also 
said 90 percent of the company's laser machines are sold to China's 
domestic market for use in the production of electronics, 
appliances, computers, and textiles.  Gao noted that his company 
enjoys gross profit margins of up to 50 percent, compared to the 10 
percent margins seen in more labor-intensive industries. 
 
¶3. (SBU) Daniel Yan, CEO and President of Interlume Laser Systems, 
said his target customers are U.S., European, and Taiwan companies 
based in China, especially "high-end" companies which are 
"performance" not "price" sensitive.  His company's ability to 
provide local, on-site, same-day service to customers is a key 
advantage over foreign-based competitors. 
 
Suffering Too 
------------- 
 
¶4. (SBU) Despite its advantages, the EM industry has been hit hard 
by the global financial crisis.  Gao reported that Hans Laser 
suffered a 70 percent decrease in orders during the last quarter of 
2008 and was forced to lay off 1,000 employees - 20 percent of its 
total workforce.  Interlume executives say that in the short term, 
there is "essentially no business."  Customers are not placing 
orders and are telling the firm to wait until after the Lunar New 
Year, said Yan. 
 
¶5. (SBU) Some EM companies have been less affected by the downturn, 
but growth prospects have diminished.  He Zhao, General Manager of 
Guangzhou Agile Manufacturing Technology Co. Ltd., said his firm had 
been growing through the fourth quarter of 2008, although the trend 
had slowed considerably.  He claimed they hadn't had to lay off any 
workers yet but had reduced employee overtime hours. Comment: The 
uneven impact of the crisis on EM companies may be due to the 
different nature of Guangzhou Agile's products.  Hans Laser and 
Intelume make production machines while Agile makes components for 
fixed-asset machinery.  Since manufacturing companies are cutting 
costs, they may be less likely to procure new production machinery 
equipment.  However, even as they scale back operations, 
manufacturers still require components for fixed-asset machinery to 
keep their workshops running.  End Comment. 
 
 
GUANGZHOU 00000016  002 OF 002 
 
 
Government's Empty Promises 
--------------------------- 
 
¶6. (SBU) In November, the Guangdong provincial government released 
stimulus package plans, which include over RMB 250 billion allocated 
to "industrial upgrading".  The funds target high-tech projects, 
research and development in support of Guangdong Party Secretary 
Wang Yang's "double transfer" policy of moving labor-intensive 
factories and their migrant labor workforces out of the PRD (ref B). 
 EM industry executives say they are aware of promised government 
funding for high-tech industries, but don't expect to receive 
assistance.  The distribution of such government funding is not open 
or transparent enough, complained Gao.  Distribution is decided by a 
group of so called "experts", who represent different interest 
groups, including universities, academic institutes and government 
officials.  Usually the people who need the financial aid the most 
do not get it, Gao said. 
 
¶7. (SBU) Gao said Hans Laser has applied in the past for government 
funds allocated to the hi-tech industry, but received very little 
compared to state-owned enterprises (SOEs), which benefit the most 
from the government's preferential policies.  He explained that EM 
industry SOEs are established by quasi-governmental organizations 
and run by university professors, who benefit from tax rebates and 
profit from the enterprises and the patented technology.  The SOEs 
can't compete on a level playing field because they are under the 
poor management of China's academic system, Gao explained.  Comment: 
Gao's observations echo concerns we've heard from others in the PRD 
that SOEs will end up benefiting disproportionately from efforts to 
help firms weather the global economic downturn (ref A).  End 
comment. 
 
¶8. (SBU) Intelume's Yan said the most effective way to help hi-tech 
enterprises was through tax deduction, but he had not seen any 
government plans to reduce the tax burden.  He commented that the 
government had the resources, but in the end the stimulus package 
would benefit construction companies, cement makers and the like. 
Most of these enterprises are controlled or held by the government, 
which means more opportunities for corruption, according to Yan. 
 
¶9. (SBU) Comment:  Similar to other sectors south China's economy, 
high-tech industries are also suffering the effects of the economic 
downturn.  The government's explicit statements of support followed 
by ambiguous actions are leaving many high-tech industry executives 
frustrated.  Whatever the government's strategy may be, if their 
goal is to reassure industry and build confidence, it appears to be 
falling short.  End Comment. 
 
GOLDBERG