VZCZCXRO0695
RR RUEHCN RUEHGH RUEHVC
DE RUEHSH #0194/01 3092328
ZNR UUUUU ZZH
R 052328Z NOV 09
FM AMCONSUL SHENYANG
TO RUEHC/SECSTATE WASHDC 8881
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0823
RHHJJAA/JICPAC PEARL HARBOR HI 0079
RUEKJCS/DIA WASHDC 0175
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 03 SHENYANG 000194 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON CH ETRD WEET PGOV PREL
SUBJECT: IN THE ZONE: COMPANIES TELL US THEIR DALIAN 
EXPERIENCES 
 
¶1. (SBU) Summary: The October 26 ) 27 visit of officers from 
the U.S. International Trade Commission (USITC) to various 
development zones in the port city of Dalian, Liaoning 
Province, provided an opportunity to visit several 
U.S.-invested and Chinese companies, including Intel, Epoch 
International Enterprises, Neusoft, and Genpact. The visits 
suggest that Dalian's unique location, highly educated 
population, and infrastructure play the most important roles 
in the decision to invest in one or the other of the port 
city's well-developed zones.  Intel, for example, has 
long-term expansion plans within the zones themselves. 
However, with increased competition for labor, diminishing 
'other benefits,' and aggressive courting by other cities, 
Dalian's natural advantages have already begun to wane, and 
some companies have begun to look westward. This cable 
provides a ground-level snapshot of operations at these 
companies, which were reluctant to discuss important details. 
Septel reports on the views of the zone administrators. End 
Summary. 
 
¶2. (U) October 26-27 ConGenOffs accompanied USITC officers 
Alexander Hammer, International Economist at the office of 
Economics, Country and Regional Analysis Division and Michael 
Anderson, Chief of the Advanced Technology and Machinery to 
Dalian to find out more about the differences between 
economic zones in China. Dalian, the major port in Northeast 
China, is replete with a hodge-podge of development zones 
that house a number of foreign and domestic companies. 
 
INTEL 
----- 
 
¶3. (SBU) At Fab 68, Intel's new wafer fabrication facility 
located in the Export Processing Zone (EPZ) James Zhang, head 
of PR and marketing, listed six reasons for building this, 
their first 12-inch wafer fabrication facility in Asia. 
First and foremost was Intel's interest in China as a 
long-term growth market.  Second, Dalian has sound 
infrastructure, including a steady electricity and water 
supply. In fact, the Dalian Development Authority (DDA) built 
a special power sub-station for the Fab 68 to prevent any 
supply fluctuations.  Third, Dalian's skilled labor pool and 
potential recruits from the 22 colleges and universities 
located in Dalian played a role.  Intel's recent donation to 
the Dalian Institute of Technology, an 8-inch fabrication 
tool worth USD 30 million, is a bid to further attract and 
train promising students in the semiconductor field. 
Fourth, Dalian labor costs are half those in Beijing or 
Shanghai, with the average software-related job being RMB 
2,000-3,000 (USD 293-439) per month.  Fifth, twenty large 
Intel suppliers have already set up branches in Dalian, and 
Intel believes that this is a good base from which it can 
build up a semiconductor 'ecosystem.'  Finally, the EPZ has 
provided Intel with numerous preferential policies.  Noting 
the policies are strictly confidential, Mr. Zhang said the 
EPZ has been "very supportive and responsive" to their needs. 
 
¶4. (SBU) Currently, the Manufacturing Support Building 
houses 800 employees, but by the end of next year, Intel 
plans to have 1,500 employees, including 800 assembly line 
workers and 700 managers and office staff.  Of those 1,500 
employees, roughly 250 will be Americans. Intel is awaiting 
the conclusion of the tool installation and equipment 
debugging process in its Essential Utility and Fabrication 
Processing buildings to complete what it calls Phase One of 
their operation. U.S. suppliers will ship 12-inch wafers to 
Fab 68, which will then process the wafers and ship them to 
Chengdu, where they will be tested and assembled. During 
Phase Two of construction, slated to begin after 2010, Intel 
will build a testing and assembly facility in the EPZ, 
thereby eliminating shipments to Chengdu for 
after-processing. Zhang offered no word on Intel's plans for 
the Chengdu plant. 
 
¶5. (SBU) Intel is the sole occupant in the 1.1-square 
kilometer Zone B of the EPZ. In this EPZ, set aside for 
manufacturing companies that export 100 percent of their 
product, no duties are levied on goods exported from the zone 
and manufacturers receive a refund on any import duties 
charged on materials used for exports. If the goods are sold 
in the domestic Chinese market, however, all related import 
duties are levied.  Despite this incentive to export, Intel 
plans to sell about 80 percent of the wafers domestically. 
One reason Fab 68 will still be cost-effective is because of 
another benefit conferred on companies located in the EPZ: 
 
SHENYANG 00000194  002 OF 003 
 
 
it is not charged customs duties on capital equipment imports 
(chiefly from Japan and the United States).  (Note:  During 
earlier conversations with Intel reps, the Consul General and 
others were told one problem the EPZ and other municipal 
authorities had helped with was in obtaining these 
concessions on equipment that Chinese Customs might consider 
"used," a problem frequently encountered by foreign investors 
here who want to import rebuilt equipment from other 
factories.) 
 
EPOCH INTERNATIONAL ENTERPRISES, INC. 
------------------------------------- 
 
¶6. (SBU) During their visit to Epoch, a wholly U.S.-owned 
company located in the Free Trade Zone (FTZ) since 1988, 
Epoch President Foad Ghalili explained how his contract 
manufacturing business operates in a niche market in the 
microelectronics sector.  According to Ghalili, Epoch's 
unique status as an American company means it has no direct 
competitors in the China market:  his clients expect and are 
assured a level of IPR protection that Chinese companies 
engaged in similar, small-scale manufacturing simply cannot 
match. As the respect for IPR has not yet improved 
dramatically in China, Ghalili expects continued growth. He 
noted that although demand for contract manufacturing 
decreased dramatically at the end of 2008, business has since 
returned to normal and total year on year profits for October 
2009 have increased. 
 
¶7. (SBU) Epoch imports about 60-70 percent of the total value 
of their materials; the rest is bought on the local market. 
Although Epoch has to pay the 17-percent value-added tax 
(VAT) on the locally purchased materials, any VAT paid on 
materials used in exported products is later refunded. 
(Epoch exports almost all of its products.)  Sixty percent of 
their products are shipped to Europe, 25 percent to the 
United States, and 15 percent elsewhere. In addition, Epoch 
can purchase components and raw materials from foreign 
companies operating in other FTZs in China and ship them to 
the Dalian FTZ, where they manufacture the final product, 
without paying any duties or taxes.  Ghalili added that his 
company receives income tax benefits because it is considered 
a "high-tech" company, whereas the corporate income tax for 
other foreign companies in the FTZ is 25 percent.  Epoch also 
re-sells its used tools and equipment VAT-free on the 
domestic market since no VAT is levied on high-tech tools and 
equipment purchased from the FTZ.  About 60-70 percent of 
EPOCH's tools and equipment are re-sold in China; the rest 
are re-sold internationally. 
 
NEUSOFT 
------- 
 
¶8. (SBU) The information fountain seemed to be closed during 
a visit to Neusoft, a private Chinese software company 
located in Dalian's High Tech Zone (HTZ).  The USITC 
delegation received a rather cursory introduction to the 
company's founding and expansion plans, all of which has been 
reported widely. Founded in 1991 at Northeast University in 
Shenyang, Neusoft is the flagship company in the HTZ, which 
contains Neusoft Park, a commodious campus styled like a U.S. 
university. Phase One, as it is called, houses a domestic 
business R&D center, an IT training center, an international 
business R&D center, and a business processing outsourcing 
(BPO) call center. After Phases 2 and 3 are completed, the 
entire park will employ 30,000 people. Unlike other zones, 
the park also includes optional housing, which Neusoft rents 
to its employees for RMB 300 (USD 44) per month; the HTZ 
administration built a residential area for Neusoft and then 
rented these buildings to the company at a reduced price. 
The discussion gleaned no information about the company's 
import-export structure, tax benefits, or business 
relationships with other companies in the HTZ, other zones in 
Dalian or elsewhere, or its international clients. 
 
GENPACT 
------- 
 
¶9. (SBU) Established in Dalian in 2000, Genpact provided HR 
support for GE's business development arm before splitting 
from its parent in 2005. Now it operates a back-office 
operation and supply-chain logistics company for the Asian 
market. Director of Business Development Daniel Tong 
explained that Genpact's reasons for being in Dalian mirrored 
those of Intel. Lower labor costs; a large supply of educated 
 
SHENYANG 00000194  003 OF 003 
 
 
labor; and proximity to the Chinese, Japanese, and South 
Korean markets far outweighed any special incentives, such as 
tax breaks. Tong said, however, that one new challenge to 
operating in Dalian was increasing competition for highly 
skilled labor, which has driven up costs. This challenge, 
along with a growing domestic market led Genpact to expand 
beyond Dalian.  The company has already opened a BPO center 
up the road in Changchun, Jilin Province.  Furthermore, in 
response to Genpact's expressed interest in moving westward, 
more than ten western cities, including Chengdu and former 
Dalian Mayor and Liaoning Party Secretary Bo Xilai's 
Chongqing, are vying for its business, offering aggressive 
tax incentives for the company and its employees.  In 
anticipation of the move westward, Genpact is working with 
western city governments to establish language training 
centers at their universities. 
 
¶10. (SBU) Although still exporting most of their services, 
Genpact recognizes increased growth potential in a maturing 
domestic market. The global economic downturn made stark the 
need for increased efficiency at previously unchallenged 
behemoths, such as China Mobile, PetroChina, and Bank of 
China, which have seen increased competitive pressure to 
streamline operations. These companies are looking to 
outsource their back-office operations to BPOs like Genpact 
as a cost-cutting measure, which Tong hopes will translate 
into an ever-widening net of clientele. 
 
WICKMAN