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UNCLAS SECTION 01 OF 03 GUANGZHOU 000042 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/TC, EAP/CM, S/P, INR/EAP 
STATE PASS USTR CHINA OFFICE 
 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ELAB TW CH
SUBJECT: Bad News Sinks In: It's Worse than We Thought it would be - 
the Inevitable Economic Downturn in Dongguan 
 
REF: A) 2008 Guangzhou 518, B) 2008 Guangzhou 618, C) 2008 Guangzhou 
655, D) 2008 Guangzhou 668, E) 2008 Guangzhou 715, F) 2008 Guangzhou 
719 
 
¶1. (SBU) Summary and Comment: It's always instructive and well worth 
revisiting Dongguan, a Pearl River Delta (PRD) export manufacturing 
center that is a barometer of the worst economic downturn China has 
confronted in the past decade or two.  According to the head of the 
local Taiwan Businessmen Association (TBA), production overcapacity 
driven by price competition has brought major factory closures (ref 
D); even the most competitive firms are dramatically cutting their 
workforces.  While measures enacted by the Dongguan municipal 
government to assist local enterprises have been helpful, the 
provincial government has been les engaged in the bail out, perhaps 
the result of Party Secretary Wang Yang's continued focus of getting 
energy-inefficient, labor-intensive companies to move out of the 
PRD.  Lack of financing for SMEs remains a serious challenge.  The 
TBA head was skeptical that Taiwan firms would be able to take 
advantage of financing programs being implemented by the central and 
municipal governments. 
 
¶2. (SBU) What's new in this diagnosis is that business leader 
expectations of recovery are adjusting downward as the severity of 
the global economic downturn becomes more apparent.  As recently as 
November many investors had looked forward to a recovery of export 
orders in the spring, in sync with the normal yearly business cycle. 
 Now these same leaders are more pessimistic -- preparing for a 
difficult 2009.  The Dongguan municipal government's activist 
response and preparations for large numbers of unemployed migrant 
workers signal that government officials share this more realistic 
assessment.  End summary and comment. 
 
Dongguan Doomed to Downturn 
---------------------------- 
 
¶3. (SBU) The economic downturn - though perhaps not initially its 
severity - was inevitable in Dongguan, according to Andrew Yeh, 
chair of the Taiwan Businessmen Association of Dongguan (TBA-DG) and 
YFC-Boneagle Electric Co.  He blamed reckless expansion of 
production capacity driven by intense competition to lower prices by 
manufacturing in larger volumes.  Yeh also said U.S. consumers who 
developed a habit of demanding large quantities at very low prices 
shared responsibility.  With spending power of Americans reduced by 
the financial crisis, the closure of factories in China was 
unavoidable, he said. 
 
¶4. (SBU) Approximately 900 Taiwan-invested firms in Dongguan closed 
in the second half of 2008, according to Yeh, out of 3,000 
foreign-invested firms that shut down in the city during the same 
period.  (Note: As reported ref D, the TBA-DG Secretary General told 
us that 500 Taiwan enterprises had closed in Dongguan as of 
November.  End note.)  He speculated that 99 percent of factories in 
Dongguan had had to downsize as orders had dropped by as much as 70 
percent for many firms. 
 
¶5. (SBU) He underscored that the financial crisis was just the last 
straw.  Many firms had already seen their profit margins fall to 2-6 
percent before the crisis due to reduced value-added tax (VAT) 
rebates, rising wages caused by the new Labor Contract Law, high 
fixed costs for materials and energy, and renminbi appreciation. 
When China later restored the VAT rebate rate to 11-13 percent, it 
wasn't enough to make up for the lost orders. 
 
Even the Survivors Are Cutting Way Back 
--------------------------------------- 
 
¶6. (SBU) Yeh commented that even though the impact on his company, 
which mainly manufactures electronic cables and networking 
equipment, had been minimal, he was still in the process of cutting 
costs and reducing his workforce.  Well before the financial crisis, 
YFC-Boneagle had cut employment at its Dongguan factory from 1,900 
workers in 2006 to 1,600 in 2007 and then to 1,200 by the end of 
¶2008. He cut salaries by 20 percent for staff working in 
subsidiaries in Los Angeles and 10 percent for Taiwan employees. 
Yeh noted that although orders for one of the major products made by 
 
GUANGZHOU 00000042  002 OF 003 
 
 
its Los Angeles subsidiary had dropped by 30 percent, orders for its 
other major product had remained stable because one of its major 
competitors had shut down. 
 
¶7. (SBU) Similarly, Mohamad Amini, President of Lacquer Craft MFG Co 
in Dongguan, told us that his firm, another Taiwan-owned firm, had 
already cut its workers from 3,500 when the plant was at its peak to 
3,000 today.  Although costs had declined 5-10 percent in 2008 due 
mostly to lower transportation and input prices for petrochemical 
products, it had only been enough to restore margins to a level 
where the firm no longer needs to raise prices it charges customers. 
 
 
¶8. (SBU) Zhang Xifan, Chair of General Jack Technology Ltd, which is 
also Taiwan-owned, said his company has seen orders drop by 40-50 
percent even though it had been able to keep some steady customers. 
General Jack has cut staff from a high of 2,300 workers in 2007 to 
1,400 today.  However, Zhang noted that this was a good time to 
attract skilled employees from large companies that are laying off. 
 
 
Dongguan City Government to the Rescue 
-------------------------------------- 
 
¶9. (SBU) YFC-Boneagle's Yeh praised the Dongguan municipal 
government's efforts to assist enterprises during the economic 
downturn.  For example, the city waived the site-use fee for 
foreign-invested enterprises (FIEs) starting on August 1, 2008, cut 
the embankment protection fee by half on November 1 and suspended 
payment of guarantees for the Handicapped Employment Security Fund 
on January 1, 2009.  He estimated that these measures alone will cut 
operation costs for firms by hundreds of thousands of renminbi. 
 
¶10. (SBU) In addition, the Dongguan government will provide RMB 1 
billion (about USD 143 million) in financing for small and medium 
enterprises (SME) and another RMB 1 billion to help enterprises 
upgrade their operations.  He doubted that Taiwan businesses would 
be able to take advantage of these programs but noted that TBA-DG 
had invited Taiwan's China Productivity Center to assist Taiwan 
businesses to upgrade.  TBA-DG is negotiating with the Dongguan city 
government to subsidize 30-50 percent of the program's cost. 
 
¶11. (SBU) General Jack's Zhang echoed Yeh's praise for Dongguan's 
efforts to support SMEs.  He said that city officials meet with 
TBA-DG once a month to learn more about their difficulties.  He said 
that city Customs, Taxation Bureau and Labor Bureau officials 
refrained from excessive interference and noted that enforcement of 
regulations had become more lax.  But Zhang complained that fees 
from township-level governments are still a heavy burden for FIEs. 
A TBA-DG survey found that some township governments in Dongguan 
impose more than 40 separate administrative fees.  In addition, he 
explained that most land in Dongguan is collectively owned by 
villagers.  Despite the fact that 30 percent of factories in 
Dongguan are unoccupied, according to Zhang, factory owners still 
find it difficult to negotiate lower rents. 
 
¶12. (SBU) In contrast, Yeh indicated that the Guangdong provincial 
government had provided almost no help to Dongguan's struggling FIEs 
and SMEs.  He said they had been largely absent and the policies 
they had in place didn't make much sense.  Comment:  This might well 
be because Party Secretary Wang Yang would like to see many of these 
factories - labor intensive, energy inefficient - go out of business 
and let a new generation of service and high-tech companies sweep in 
behind them.  End comment. 
 
Financing a Persistent Problem 
------------------------------ 
 
¶13. (SBU) Affirming what we've heard repeatedly from executives and 
financiers in south China, Yeh said that SME's are still having 
trouble getting the credit they need.  He pointed out that the 
Taiwan Affairs Office had recently announced that China would 
allocate RMB 160 billion (about USD 23.5 billion) in financing for 
Taiwanese companies on the mainland over the next two or three 
years.  The financing will be provided by three of China's major 
 
GUANGZHOU 00000042  003 OF 003 
 
 
banks: Industrial and Commercial Bank of China, Bank of China and 
China Development Bank.  However, Yeh argued that mainland banks 
would still be reluctant to provide loans to most Taiwan enterprises 
due to inadequate collateral or credit information.  He said credit 
problems for Taiwan enterprises would be a top priority for the next 
round of SEF-ARATS talks between Chen Yunlin and Chiang Pin-kung to 
be held in March or April, focusing in part on how opening the 
mainland market to Taiwan banks can assist Taiwan enterprises here. 
In the meantime, TBA-DG is working with the Dongguan municipal 
government to set up a joint guarantee company. Yeh is trying to 
persuade Dongguan to fund 40 percent of the company. 
 
Double Transfer? Not for Taiwan Enterprises 
------------------------------------------- 
 
¶14. (SBU) Yeh commented that few Taiwan enterprises would move their 
factories out of the Pearl River Delta (PRD) to less-developed parts 
of Guangdong as called for in the province's double transfer policy. 
 He claimed the new Labor Contract Law made it too expensive to 
lay-off existing employees in the PRD and lack of financing made it 
difficult to build a new factory somewhere else.  Yeh said that the 
Taiwan Affairs Office had once called on Taiwan-owned firms to sign 
up for a "group transfer" but not one firm expressed interest. 
 
Dongguan Adjusting Expectations 
------------------------------- 
 
¶15. (SBU) Yeh emphasized that no one knows how many more companies 
will close after the Lunar New Year holiday; it depends on whether 
orders recover.  He explained that U.S. buyers normally stop placing 
orders around October and resume buying again in February.  Every 
one is watching whether the same will happen this year, he said. 
 
¶16. (SBU) He commented that many migrant workers had just gone home 
for "a longer than usual vacation," without being told that they 
were laid-off.  They will return because this is the only way they 
can earn money, according to Yeh.  He said the government was 
watching closely, hoping that enough factories will be able to hire 
workers, but at the same time, preparing for large numbers of 
jobless migrants. 
 
¶17. (SBU) Yeh is not optimistic, predicting that U.S. consumer 
purchasing power will drop 50 percent in 2009, especially for autos 
and furniture.  Zhang is equally pessimistic (Comment: or perhaps 
realistic... End comment.), forecasting that orders would not 
recover any time soon and that it would take more than one and a 
half years for the economy to revive. 
 
GOLDBERG