VZCZCXRO3832
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3209/01 3351037
ZNR UUUUU ZZH
O 011037Z DEC 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6998
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHIN/AIT TAIPEI 7415
RUEHKO/AMEMBASSY TOKYO 0125
RUEHUL/AMEMBASSY SEOUL 1416
RUEHGV/USMISSION GENEVA 2555
RUEAHLC/DHS WASHDC
RUCPDOC/USDOC WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RHMCSUU/FBI WASHINGTON DC

UNCLAS SECTION 01 OF 03 BEIJING 003209 
 
SENSITIVE 
SIPDIS 
 
State for EAP/CM - WKlein, SFlatt 
State for EEB/CIP - SFlynn, FSaeed 
USTR for Awinter, JMcHale, TWineland, JGrier 
Commerce for ITA - IKasoff, NMelcher, ATing 
DOJ for CCIPS - MDubose and SChemtob 
FBI for LBryant 
State for White House OSTP Ambassador Richard Russell 
NSC for Melissa Hathaway 
 
E.O. 12958: N/A 
TAGS: ETRD PGOV PHUM SOCI SCUL ECON CH
SUBJECT: CHINA SIDESTEPS S&ED/JCCT COMMITMENTS - 
INDIGENOUS INNOVATION IN GOVERNMENT PROCUREMENT RANKLES 
U.S. FIRMS 
 
REF:  BEIJING 590 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE HANDLE ACCORDINGLY. 
 
¶1. (SBU) Summary.  Rules providing preference in 
government procurement for Chinese companies with 
accredited indigenous innovation appear to contravene 
China's S&ED and JCCT commitments to consider products 
produced by foreign-invested enterprises in China as 
domestic.  A recent joint Ministry of Science and 
Technology, National Development and Reform Commission, 
and Ministry of Finance circular creating an accreditation 
system (catalogue) for national indigenous innovation 
products has alarmed U.S. high-tech firms who believe the 
new system will further block their access to Chinese 
government contracts.  The deadline for applying to 
qualify for national indigenous innovation product status 
is December 10, 2009.  We recommend a coordinated USG 
response to industry request for assistance in countering 
implementation of this circular.  End Summary. 
 
NEW INDIGENOUS INNOVATION ACCREDITATION SYSTEM CODIFIES 
BIAS FOR CHINESE IP IN GOVERNMENT PROCUREMENT 
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¶2. (SBU) Despite commitments by China at the July 2009 
S&ED and the October 2009 U.S.-China Joint Commission on 
Commerce and Trade to treat products produced in China by 
foreign invested enterprises (FIEs) the same as products 
by Chinese enterprises for the purposes of Government 
procurement and to issue rules in this regard, U.S. high- 
tech firms here report a growing threat to their interests 
due to preferential policies favoring indigenous 
innovation products in government procurement. 
 
¶3. (SBU) China's Ministry of Science and Technology (MOST), 
National Development and Reform Commission (NDRC), and 
Ministry of Finance (MOF) on November 6, 2009 issued 
circular G.K.F.J. No. 618 creating an accreditation system 
for national indigenous innovation products.  Accredited 
products will enjoy preferential policies in government 
procurement.  The circular is the most concrete proof of a 
previously-rumored catalogue of products promoting 
indigenous innovation issued by MOST. 
 
¶4. (SBU) China's promotion of homegrown innovation 
includes an array of policies and programs and is 
complicated by a lack of transparency in government 
procurement.  Conflicts between the Government Procurement 
and Tender and Bidding laws create inconsistent 
definitions and allow for discriminatory application of 
rules.  While these broader concerns remain part of USG's 
longer-term objective of bringing China into the WTO 
Government Procurement Agreement, this new measure may 
have an enormous and immediate impact on U.S. industry. 
It also raises questions about China's trade commitments, 
including its G-20 pledges to avoid trade protectionism. 
 
¶5. (SBU) Representatives from Microsoft, IBM, Oracle, HP, 
Dell, and Texas Instruments, led by industry association 
U.S. Information Technology Office (USITO), met with 
Emboffs November 23 to voice frustration over the joint 
MOST/NDRC/MOF circular and requested USG engagement to 
help counter the latest salvo in the PRC's offensive 
against foreign high-tech firms.  According to one U.S. 
company's estimates, it has lost at least USD 100 million 
in business volume due to restrictive government 
procurement practices against it as an FIE.  Other U.S. 
FIEs expect significantly larger long-term impact should 
the new system be fully implemented. 
 
¶6. (SBU) According to related application instructions, 
MOF will prepare a catalogue of indigenous innovation 
 
BEIJING 00003209  002 OF 003 
 
 
products for government procurement on the basis of the 
needs of government procurement policies as well as actual 
conditions.  Products should be of great significance, 
contribute much to or produce vital influence on economic 
and social development, be proprietary, and include 
Chinese intellectual property and Chinese proprietary 
brands.  Six high-tech fields have been selected, 
including: computer and application devices; communication 
products; modernized office equipment; software; new 
energy and equipment; highly energy-efficient products. 
The products should also be symbolic and reflect China's 
indigenous innovation capabilities.  The current deadline 
for submission is December 10, 2009. 
 
¶7. (SBU) FIEs have already encountered roadblocks despite 
meeting all previously understood conditions to qualify as 
an indigenous innovation product.  According to U.S. 
industry, the application of a U.S.-invested enterprise 
that did try to qualify for national indigenous innovation 
product status - by handing over their intellectual 
property and registering their trademark in China was 
denied. 
 
¶8. (SBU) U.S. industry representatives have requested USG 
support, and are preparing to campaign various government 
agencies to reverse or defer indefinitely such an 
accreditation system.  Industry representatives are also 
requesting formal clarification of discriminatory 
practices by local governments, urging them to issue rules 
to ensure that government procurement is conducted in a 
transparent and non-discriminatory manner and to prevent 
the recurrence of such discrimination. 
 
LOCAL GOVERNMENTS GO EVEN FURTHER TO BLOCK FOREIGN 
PRODUCTS FROM PROCUREMENT 
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¶9. (SBU) Similar policies are taking root at the local 
level.  In August 2009, local media reported a Beijing 
government official's claim that 51 Beijing products had 
been accredited as "indigenous innovation products", 
accounting for 21 percent of MOST's first batch of 243 
products.  According to that report, the Beijing 
government procurement market in 2008 stood at RMB 7.1 
billion (USD 1.04 billion), among which RMB 2.7 billion, 
or 38 percent, was spent on indigenous innovation 
products. 
 
¶10. (SBU) To date, MOST has refused to publicize the 
original catalogue of indigenous innovation products, 
claiming it is for internal use only.  Industry contacts 
report that MOST has notified the accredited product 
companies individually, as well as having issued a press 
release which briefly states the catalogue is now 
available.  Lack of transparency has inhibited FIEs and 
other stakeholders from effective engagement with the 
Chinese authorities. 
 
¶11. (SBU) Additional discriminatory practices occur at the 
provincial level (see Reftel for background), most 
recently by the government of Hubei Province.  Hubei's 
Director for Government Procurement Wei Chengyu has stated 
on various occasions that the Hubei provincial government 
had decided to exclude all foreign brand products from 
government procurement, regardless of their manufactured 
location.  As stressed by Wei in a recent media report, 
defining whether a product is domestic or not should be 
based on whether the product contains indigenous 
intellectual property and only those controlled by 
enterprises of Chinese majority equity should be qualified 
as domestic products.  The Hubei government, moreover, 
issued Document E'Cai'Han [2009] 21 on November 12, 
explaining that Hubei would maintain its government 
 
BEIJING 00003209  003 OF 003 
 
 
procurement policies into 2010, and continue to exclude 
products of foreign companies from government procurement, 
including those made by FIEs in China.  Post's local IBM 
contacts report Hubei's practices may have already 
resulted in USD 1 million sales losses for its low-end X- 
series servers. 
 
¶12. (SBU) Given that these immediate economic effects come 
on the heels of recent Chinese government S&ED and JCCT 
commitments to the contrary, and U.S. industry beliefs 
that these and other actions constitute significant 
obstacles and are inconsistent with fair competition, 
transparency, and with commitments to avoid trade 
protectionism, U.S. industry have requested USG 
intervention.  Although further rule-issuing by the 
central government consistent with S&ED/JCCT commitments 
may not eliminate further misinterpretations by local 
governments, it would be a step in the right direction, 
according to U.S. industry. 
 
COMMENT AND ACTION REQUEST 
-------------------------- 
¶13. (SBU) China's unhurried progress toward accession to 
the WTO Government Procurement Agreement and its expanding 
efforts to use its rapidly growing government procurement 
budget to support domestic firms and promote domestic 
innovation in key industries does not bode well for U.S. 
high-tech firms that hold competitive technical advantage 
and have heavily invested in the Chinese market.  While 
long-standing practices at both the central and local 
levels in China have suggested strong bias in government 
procurement for Chinese domestic intellectual property, 
the newly announced system makes it an explicit policy. 
We recommend a coordinated USG response to the new policy 
to respond to U.S. industry concerns and press for China 
to fulfill the commitments it made at both the S&ED and 
JCCT.  End comment. 
 
HUNTSMAN