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UNCLAS SECTION 01 OF 03 GUANGZHOU 000375 
 
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 ETRD ELAB CH
SUBJECT: Growth amid the Gloom - Some Companies Still Prospering in 
the Pearl River Delta 
 
Ref: A) GUANGZHOU 276, B) GUANGZHOU 218, C) GUANGZHOU 163, D) 
GUANGZHOU 42 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly.  Not for release outside U.S. government channels.  Not 
for internet publication. 
 
¶1. (SBU) Summary and Comment: Factories are closing and migrant 
workers are unemployed, but there are still success stories in the 
Pearl River Delta (PRD).  While the city of Dongguan with its heavy 
concentration of Hong Kong and Taiwan investment in labor-intensive 
export manufacturing has been hit hard, Chinese companies like 
Galanz, Gree and Midea, with production based on the west bank of 
the Pearl River in cities like Foshan, Zhongshan and Zhuhai, 
continue to grow.  Their healthy mix of domestic and export sales 
has allowed them to escape much of the pain that export 
manufacturers felt after the dramatic decline in orders for the U.S. 
and European markets.  Meanwhile, they've expanded further in 
markets like Southeast Asia, the Middle East and Africa and have 
moved further up-market, increasing margins with more expensive 
products.  Some executives even see potential benefits from the 
downturn as industry consolidation eliminates competitors. 
 
¶2. (SBU) The examples of these three firms further underscore the 
fact that the economic picture in the PRD is more complex than some 
of the one-sided media reports that only describe factory closures 
and declining export orders.  Many firms have been able to use sales 
to the China market to drive continued growth.  Gree, Galanz and 
Midea are not the only examples; some American firms that have 
penetrated the China market like Procter and Gamble also continue to 
grow, albeit at a slower rate (ref B).  We expect restructuring and 
consolidation to continue among manufacturing industries in 
Guangdong, especially among firms focused entirely on export 
production that are unable to adapt to new conditions and target 
consumers in China and other emerging markets.  However, the PRD is 
not turning into a factory ghost town, and it will continue to be a 
critical global manufacturing center.  End summary and comment. 
 
Looking to Grow in 2009 
----------------------- 
 
¶3. (SBU) The news has been mostly bad for export-reliant Guangdong 
Province in the aftermath of the global financial crisis.  But there 
are a few bright spots amid the gloom.  Firms like Galanz, Gree and 
Midea, all Chinese-owned appliance manufacturers located on the west 
side of the Pearl River Delta, have not only weathered the storm but 
are predicting growth this year.  Gree, which manufactures only 
air-conditioners, has already seen first quarter revenue rise 15.9 
percent in 2009 with profits for the quarter up by approximately 50 
percent, according to executives at the firm's headquarters in 
Zhuhai.  Midea executives told us they expect the firm, which 
produces a wide range of household appliances, to see revenue of RMB 
98 billion (USD 14.4 billion) in 2009, up from RMB 90 billion (USD 
13.2 billion) in 2008.  Galanz, which dominates the global microwave 
oven manufacturing industry, has already begun to see orders begin 
to recover after dropping dramatically in the first quarter. 
Company executives said they believe that June 2009 sales would 
match sales from a year ago and expect further recovery the rest of 
the year. 
 
Feeling the Impact Overseas 
--------------------------- 
 
¶4. (SBU) These firms did not completely escape the impact of the 
global financial crisis.  Each saw orders from the important U.S. 
and European markets plummet after the crisis began last year. 
According to company executives, Gree saw sales to the United 
States, its largest foreign market, fall by 15-20 percent.  Galanz 
saw U.S. and European sales both fall by about 20 percent with an 
overall decline in export sales of 10 percent year-on-year in the 
first quarter.  An overseas marketing manager at Midea told us that, 
with the United States and Europe accounting for more than 60 
percent of the firm's export sales, the impact of the global 
financial crisis had been considerable, especially in product 
categories mostly closely related to the construction industry like 
dishwashers and air-conditioners.  In addition to falling orders, 
 
GUANGZHOU 00000375  002 OF 003 
 
 
the risk of non-payment has increased with rising numbers of 
bankruptcies in the United States.  A Galanz executive noted that 
the firm almost suffered a USD 1 million loss in payments after a 
Miami importer went out of business.  (Fortunately for Galanz, the 
transaction was insured.) 
 
But Expanding Territory and Moving Up Market 
-------------------------------------------- 
 
¶5. (SBU) Damage from declining orders in the United States and 
Europe was mitigated by growth in exports to other regions.  Galanz 
has seen export sales to the Middle East, Africa, and South and 
Central America continue to rise throughout the crisis.  Gree saw 
particularly strong export growth to the Middle East/Africa region, 
which has become its second largest export market.  Midea executives 
noted rising sales to Africa and Southeast Asia. 
 
¶6. (SBU) Some of these rising sales to regions other than the United 
States and Europe also represent higher margins for the appliance 
makers.  Each of the firms estimated that approximately 90 percent 
of export sales overall were original equipment manufacturing (OEM) 
sales produced under contract for international brand name buyers. 
The percentage is significantly higher in the U.S. and most European 
markets, where the Galanz, Gree and Midea brand names are 
practically unknown.  However, the three firms have had some success 
in penetrating emerging markets with their own brand name products. 
Gree executives claimed that their products enjoyed a 15 percent 
market share in Pakistan, 10 percent in Vietnam and were the second 
highest selling brand of air-conditioner in Brazil. 
 
¶7. (SBU) The firms have also made some effort to increase profits by 
producing more advanced and higher value products.  Gree and Galanz 
executives each told us that their firms spend approximately 3 
percent of revenue on research and development.  Galanz also noted 
that they had implemented a new strategy in the U.S. and European 
markets to increase margins at the expense of unit sales volumes. 
In June of July 2008, the firm raised its prices for U.S. and 
European buyers by 7-8 percent.  This caused a drop in unit sales 
that preceded the most severe period of the global financial crisis. 
 The firm lost major orders from Wal-Mart and Carrefour, but the 
strategy successfully raised sales margins. 
 
Growing at Home 
--------------- 
 
¶8. (SBU) However, the most critical advantage these firms have 
enjoyed over many other export manufacturers in the Pearl River 
Delta is their impressive success in dominating certain segments of 
the Chinese appliance market.  Galanz maintains a 60 percent market 
share in microwaves.  As is true for the other two firms, nearly all 
of its China sales are its own brand-name products.  China sales 
account for approximately two-thirds of the firm's revenues.  The 
executives noted that domestic market growth for their products is 
strong; China's microwave sales were 10-11 million units in 2008 and 
are expected to rise to 14-15 million units in 2009.  They believe 
there is much potential for further growth with rising sales in 
third and fourth-tier cities, where microwaves are still relatively 
rare. 
 
¶9. (SBU) Midea executives gave a similar assessment.  The firm earns 
60 percent of its revenue from domestic Chinese sales.  The 
executives noted that the air-conditioner and refrigerator markets 
in China continue to grow as sales spread to small and medium-sized 
cities.  Although the firm is by no means abandoning the export 
market, it is mobilizing more resources toward production and 
marketing aimed at Chinese consumers, according to the executives. 
 
 
¶10. (SBU) Gree's revenues are even more heavily dependent on the 
Chinese market, accounting for 70 percent of global sales.  It 
dominates domestic air-conditioner sales with a 40-45 percent market 
share.  The company's projections for growth in its unit sales of 
air-conditioners in China are not as optimistic; last year it sold 
23.2 million units and predicts only 23 million for 2009.  However, 
the executives told us that they are starting to see signs of 
recovery in the domestic real estate market, which they believe will 
 
GUANGZHOU 00000375  003 OF 003 
 
 
help drive future sales growth. 
 
Crisis as Opportunity 
--------------------- 
 
¶11. (SBU) Executives from the three firms pointed to some benefits 
from the global economic downturn as well.  Gree executives said 
that they expected their market share in China to increase as 
falling orders force some competitors out of businesses.  Midea and 
Galanz executives both claimed that the government's stimulus 
programs aimed at increasing consumption in rural areas had boosted 
sales of their products. 
 
GOLDBERG