VZCZCXRO2356
RR RUEHCN RUEHGH
DE RUEHGH #0079/01 0440120
ZNR UUUUU ZZH
R 130120Z FEB 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7634
INFO RUEHBJ/AMEMBASSY BEIJING 2510
RUEHHK/AMCONSUL HONG KONG 1907
RUEHSH/AMCONSUL SHENYANG 1731
RUEHCN/AMCONSUL CHENGDU 1740
RUEHGZ/AMCONSUL GUANGZHOU 0196
RUEHIN/AIT TAIPEI 1530
RUEHKO/AMEMBASSY TOKYO 0543
RUEHUL/AMEMBASSY SEOUL 0373
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8268

UNCLAS SECTION 01 OF 03 SHANGHAI 000079 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EAP/J 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP/CUSHMAN 
TREASURY FOR IMFP -- SOBEL/MOGHTADER 
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA 
NSC FOR LOI 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
 
E.O. 12958: N/A 
TAGS: ETRD EFIN EINV ELAB PGOV CH JA
SUBJECT: JAPANESE MANUFACTURERS IN EAST CHINA HIT HARD BY ECONOMIC 
DOWNTURN, BUT NOT LAYING OFF WORKERS 
 
REF: SHANGHAI 074 
 
(U) Sensitive but unclassified.  Not for dissemination outside 
USG channels or posting on the internet.  Please protect 
accordingly. 
 
¶1.  (SBU) Summary: Japanese manufacturers in East China started 
seeing a drop in domestic and export demand in early 2008 but 
did not cut production until late 2008, hoping for 
Olympics-driven growth and pressured by Chinese JV partners to 
"keep the machines running," according to Shanghai-based 
Japanese analysts.  The analysts are skeptical that China's 
fiscal stimulus package will boost Chinese domestic consumption 
in the near term and that infrastructure projects will help 
Japanese construction firms.  Chinese Government subsidies to 
rural households for the purchase of household appliances will 
not help Japanese firms since China's rural consumers prefer 
low-end products, and the Chinese Government is encouraging 
consumers to "buy China," said the analysts.  Japanese 
manufacturers in East China, constrained by the Labor Contract 
Law, have laid-off very few workers and are relying on "natural 
attrition."  A few Japanese SMEs have left East China amid the 
downturn, but most are staying put and taking a "wait-and-see" 
approach, said the analysts.  End summary. 
 
¶2.  (SBU) Congenoff spoke with three Japanese research analysts 
based in Shanghai on February 9 about the impact of the global 
financial crisis on Japanese companies in East China.  The 
analysts included: Naotaka Sonoda, Senior Vice President and 
Head of Corporate Research Group, Sumitomo Mitsui Banking 
Corporation (SMBC); Takehiro Matsuda, Vice President, Corporate 
Research Group, SMBC; and Katsushi Shiokawa, Chief 
Representative, Okasan Securities Co Shanghai Representative 
Office.  According to Katsuyuki Tomizawa, Consul at the Japanese 
Consulate in Shanghai, there are 6800 Japanese companies in 
Shanghai, 6000 in Jiangsu Province (including 2000 in Suzhou, a 
city in Jiangsu located 50 miles west of Shanghai), 2000 in 
Zhejiang Province, and 500-600 in Anhui Province.  Japanese 
Consulate officials said in 2008 that more than 40,000 Japanese 
citizens are residents of Shanghai, and that only New York and 
Los Angeles have greater numbers of expatriate Japanese 
residents. 
 
Japanese Electronic Firms Experience Sharp Slowdown 
--------------------------------------------- -------- 
¶3.  (SBU) Matsuda of SMBC said Japanese household appliance 
manufacturers in East China experienced "very strong demand" 
(both domestic and export) for their products up to the end of 
¶2007.  Some firms began noticing a drop in demand in the 
beginning of 2008, a phenomenon Matsuda attributed to the drop 
in the Shanghai stock market (which began its rapid decline 
after hitting its peak on October 16, 2007) and decline in 
residential property prices from the end of 2007.  The loss of 
capital gains and decline in new home purchases constituted a 
"double punch," as Chinese consumers stopped buying expensive 
electronic products like large screen TVs, refrigerators, and 
air conditioners, said Matsuda. 
 
¶4.  (SBU) According to Sonoda of SMBC, Japanese electronics 
firms in East China starting seeing a rise in inventory in March 
2008 but continued manufacturing at the same pace because they 
expected an economic boost from the Beijing Olympics in August 
¶2008.  The Japanese firms also faced pressure from their Chinese 
joint venture (JV) partners who, with their "SOE (state-owned 
enterprise) mentality," were interested in "just keeping people 
employed and the machines running."  (Note: Matsuda added that 
Japanese auto makers in China faced similar pressure from their 
JV partners, preventing Japanese managers from utilizing their 
just-in-time production and inventory management skills.  End 
note.)  Sonoda said the Olympics, however, did not boost 
domestic demand as expected, and after the collapse of Lehman 
Brothers in September 2008, domestic demand as well as demand 
from the United States and European Union fell precipitously. 
 
SHANGHAI 00000079  002 OF 003 
 
 
Inventory rose rapidly in October and November 2008, and many 
firms cut capacity to 30-40 percent by the end of the year, said 
Matsuda.  Most Japanese electronics firms in East China are 
still adjusting their production and inventory, according to 
Matsuda, a process that will continue through the end of 2009. 
 
Component Makers Feel Delayed Slowdown 
--------------------------------------- 
¶5.  (SBU) The slowdown for Japanese electronic component 
manufacturers in East China came later, according to Matsuda. 
He said several component makers were fairly optimistic even as 
late as September 2008, since they still had a backlog of orders 
from electronics firms.  However, orders fell abruptly in 
October 2008, and most component makers have had no new orders 
since.  The component makers have "just given up" on Q1 2009, 
said Sonoda, but some are optimistic about Q2 2009.  Their 
optimism, however, is solely based on the hope that new orders 
will somehow start coming in after March and that the situation 
cannot get worse than it is now, Sonoda said. 
 
Pessimistic About Fiscal Stimulus, Domestic Consumption 
--------------------------------------------- ------------ 
¶6.  (SBU) Shiokawa thinks the idea of a Chinese economic 
recovery in Q2 2009 is "too optimistic."  For most Japanese 
firms in East China, the main question is "where will the demand 
come from?"  China's USD 586 billion fiscal stimulus package 
announced in November 2008 will only have a delayed effect and 
will not boost domestic consumption until the second half of 
2009 at the earliest, these analysts speculated. 
 
¶7.  (SBU) The interlocutors believe Chinese domestic demand, 
even if it picks up, will not make up for the sharp decline in 
demand from the United States, Japan, and European Union.  They 
said Chinese Government subsidies to rural households for the 
purchase of electronic products, including TV sets, 
refrigerators, and air conditioners, will not help Japanese 
firms since rural consumers prefer lower-end Chinese products. 
The Chinese Government is also encouraging consumers to "buy 
China," they said, by designating certain brands for the 
subsidies program. 
 
¶8.  (SBU) The analysts do not think infrastructure projects in 
the fiscal stimulus package will help Japanese makers of 
construction machinery.  According to Sonoda, the Chinese 
Government's main concern now is creating jobs, so construction 
projects are likely to utilize a larger number of small 
construction machinery rather than more efficient, large 
Japanese machinery that can be operated by a single worker. 
Matsuda noted that Komatsu and Hitachi, two Japanese firms that 
make large construction equipment, had seen year-on-year growth 
in China of 40 percent through much of 2008 but that sales in 
November and December 2008 were down 50 percent from the 
previous year.  These companies expect slow growth in 2009. 
"The Chinese Government would rather give 50 shovels to 50 
workers rather than employ one worker to operate a large 
bulldozer," Sonoda said half-jokingly. 
 
No Large Layoffs 
------------------ 
¶9.  (SBU) Although Japanese manufacturers in East China have 
slowed production in recent months, there have been very few 
layoffs, said the analysts.  The biggest reason for this, they 
explained, is the Labor Contract Law (LCL), which has made it 
very difficult to layoff workers.  Instead, Japanese firms are 
relying on "natural attrition," which Matsuda estimated to be 
about 30 percent annually.  Companies have frozen all new 
hiring, leaving empty slots unfilled, he added.  Many Japanese 
firms are also sending ex-pat employees back to Japan, since 
"every Japanese employee costs as much as several dozen Chinese 
workers," said Sonoda.  The interlocutors do not know what 
percentage of migrant workers have returned to their Japanese 
factories after the Chinese New Year, nor have they heard of 
 
SHANGHAI 00000079  003 OF 003 
 
 
social unrest among workers of Japanese factories.  (Comment: 
U.S. firms in East China are also limiting layoffs despite the 
downturn.  See reftel.  Taiwan entrepreneurs in Nanjing, Jiangsu 
Province also complained during a recent discussion to be 
reported septel that the LCL is major problem preventing them 
from adjusting to the economic downturn.  End comment.) 
 
Wait and See 
------------- 
¶10.  (SBU) According to Matsuda, unlike Taiwan, Hong Kong, and 
Chinese manufacturers, not many Japanese firms in East China are 
going out of business.  Although some companies, especially 
SMEs, are retreating from the China market, most are now in a 
"wait-and-see" mode.  The interlocutors said the general 
sentiment among Japanese firms is that if they cannot make it in 
China, how can they expect to compete globally?  Sonoda added 
that most Japanese companies will not leave China because they 
realize that once they get out, it will be hard to get back in. 
CAMP