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UNCLAS SECTION 01 OF 03 GUANGZHOU 000076 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EAP/EP, EEB/TPP, EEB/IFD, S/P, INR/EAP 
STATE PASS USTR CHINA OFFICE 
 
E.O. 12958: N/A 
TAGS: ETRD ECON KIPR EFIN EINV PGOV CH
SUBJECT: Domestic Demand Strong, But Not "High End" in Guangxi's 
Industrial Center 
 
REF: A) GUANGZHOU 75, B) 09 BEIJING 425, C) 07 GUANGZHOU 862 
 
GUANGZHOU 00000076  001.2 OF 003 
 
 
(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: Demand for inexpensive automobiles and 
heavy machinery produced in Liuzhou, the main manufacturing city in 
the Guangxi Zhuang Autonomous Region, increased in 2009 and is 
likely to exceed sales records in 2010, according to local 
executives.  However, China's domestic demand for the companies' 
costlier high-end products remains weak when compared with low- and 
mid-tier product lines.  Tourism in Guilin, 80% of which consists of 
domestic travelers, was hurt by the economic downturn but showed a 
strong recovery in 2009 that local officials predict to continue in 
¶2010.  IPR protection has taken root as a priority for Guilin 
officials, but work remains to be done before the city can truly 
live up to the central-government conferred title of "Model IP 
City."  End summary and comment. 
 
¶2. (SBU) South China's third-tier economic growth was on display 
during the Consul General's February 1-3 visit to Guilin and 
Liuzhou, Guangxi Autonomous Region's most important cities for 
tourism and heavy manufacturing.  Guilin Vice Mayor He Liangjun told 
the CG that despite being designated as a national-level tourism 
center (along with Beijing and Xi'an), the 2008 economic slowdown, 
and a corresponding decline in the number of visitors, was difficult 
for his city's tourism industry.  Separately, Liuzhou Mayor Zheng 
Junkang remarked that the effects of China's economic stimulus paid 
handsomely for his city's three most important industries -- steel, 
automobiles and construction equipment.  Both leaders, as well as 
their department-level officials, expressed optimism that robust 
economic growth will continue in 2010 following a strong year in 
¶2009. 
 
Economic Stimulus, Guilin- and Liuzhou-style 
-------------------------------------------- 
 
¶3. (SBU) Infrastructure projects in both Guilin and Liuzhou were 
ubiquitous before the economic downturn, but China's 
infrastructure-focused economic stimulus bolstered each city's 
efforts in 2009, according to city leaders.  Water treatment and 
distribution, new roads and bridges, and expansion of green areas 
were common themes highlighted by officials who met with the CG on 
February 2 and 3. (Meetings with NGOs, educators, and the press 
reported in ref A.)  Guilin, which claims 40% or its urban areas are 
forested, has focused on reducing pollution caused by garbage and 
waste water, according to Vice Mayor He.  Governing an industrial 
city, however, Mayor Zheng said Liuzhou's designation as one of four 
Chinese cities with acid rain is being addressed through physical 
improvements to the water sewage system as well as efforts to reduce 
emissions from heavy industries. 
 
Boom Times for Heavy Manufacturers in Liuzhou 
--------------------------------------------- 
 
¶4. (SBU) General Motors operates a 13,000 employee joint venture 
automobile plant (partnering with Shanghai Automotive Industry 
Corporation and Wuling Motors) in Liuzhou that became the first in 
China to exceed annual production of one million vehicles in 2009. 
The plant already has two vehicle plants and a two-year old engine 
plant in operation, but Vice President Matthew Tsien said it still 
had trouble keeping up with burgeoning demand in 2009 and is 
currently expanding production in order to meet projected 2010 sales 
for inexpensive small-sized minivans and entry-level compact cars. 
The factory's small-sized minivan, known locally as the Wuling 
Sunshine, is a market leader in China, with just under 50% market 
share nationwide.  Tsien said the company began production of a 
locally-designed mid-sized minivan that competes in a higher-end 
market segment and is produced at the joint venture company's 
Qingdao factory.  The government announced an incentive program 
commonly known as "Cars for the Countryside" in March 2009, which 
Tsien said was a major factor in the Liuzhou GM factory's 67% sales 
increase last year.  The policy offered subsidies to rural 
purchasers of small-displacement vehicles (engines under 1.6 liters) 
like those produced at the Liuzhou GM factory.  (Note: More detailed 
 
GUANGZHOU 00000076  002.2 OF 003 
 
 
information about the program can be found on the following website: 
http://www.gov.cn/zwgk/2009-03/20/content_126 4324.htm. End note.) 
 
¶5. (SBU) Construction and heavy machine builder Liugong Machinery 
also saw an increase in tractor and other equipment sales in 2009, 
Vice President for Research and Development David Beatenbough told 
the CG on February 3.  However, even as domestic sales improved, 
overseas orders fell dramatically when construction projects were 
cancelled or delayed during the global economic downturn.  For 
Liugong, Beatenbough said the overseas sales decline hurt the 
company's plans for international expansion but not the bottom line 
because the company only relies on overseas markets for 15% of its 
annual revenue.  Liugong employees described subsidies very similar 
to those seen for many of China's export industries, including VAT 
rebates (ref B and C) and tax incentives for domestic R&D 
expenditures.  More important than the subsidies, continued growth 
in China's domestic construction sectors served by Liugong were a 
boon to the company as it works to become a world leader in modern 
heavy machinery. 
 
Domestic Demand Strong, But Not "High End" 
----------------------------------------- 
 
¶6. (SBU) When asked to predict how the domestic market will look in 
2010 and 2011, executives from both General Motors and Liugong said 
they expect to break new sales records in this timeframe.  However, 
when asked about local R&D and introduction of higher-end 
technologies, GM's Tsien said, "Consumers would love to get more 
high-tech features and higher-end products, but they absolutely 
don't want to pay for it."  Liugong executives offered a similar 
view, telling the CG that advanced Cummins engines are only used in 
certain equipment models designed specifically for export; almost 
all domestic customers insist on low-to-mid level products in terms 
of both price and features.  By producing less expensive products to 
meet domestic demand, both firms had achieved rapid sales growth and 
profits, but not with the high margins that products from western 
countries and Japan regularly fetch in advanced markets. 
 
Tourism Remains Key for Guilin 
------------------------------ 
 
¶7. (SBU) Tourism, to the tune of 6 million visitors annually, is the 
main economic driver in Guilin city and surrounding areas with its 
population of just over one million people.  International tourists 
from Asia, Europe and the United States account for 20% of the total 
visitors.  Deputy Director Chen Yunchun of the Guilin Tourism Bureau 
told the CG that 60,000 U.S. tourists visit the city each year, and 
the city is ranked seventh in China for the number of international 
visitors each year.  The economic downturn led to a 24% decrease in 
the number of 2009 visitors, but tourism picked up at the end of the 
year and 2010 will see growth return to prior levels, said Chen. 
 
IPR Also Important to Guilin 
---------------------------- 
 
¶8. (SBU) Protecting intellectual property rights (IPR) is 
increasingly a focus of Guilin's municipal government, according to 
an interagency group of working-level officials.  Representatives of 
the Guilin Intellectual Property Office (IPO), Administration of 
Industry and Commerce (AIC), Economic Crimes Investigative Division 
(ECID) of the Public Security Bureau (PSB) and the Foreign Affairs 
Office (FAO) told the CG that resources for IPR enforcement have 
steadily increased in recent years.  Guilin has established a 
government-wide interagency task force as well as IPR points of 
contact in the city's five urban districts and 12 rural counties. 
Enforcement efforts could receive even more attention if a proposal 
to certify the Guilin Municipal Court to handle IPR cases is 
approved, the officials said. 
 
¶9. (SBU) Guilin's industrial development has expanded into 
pharmaceutical and medical products, leading to a concurrent 
increase in local counterfeit production.  ECID officials took the 
opportunity to brief the Consulate on the recent case involving 
counterfeit Johnson & Johnson diabetic test strips.  The 
investigation into the case was concluded in 2008 and is currently 
awaiting a final court decision and sentencing.  Comment: Despite a 
 
GUANGZHOU 00000076  003.2 OF 003 
 
 
number of delays in the trial phase, the case could be an important 
example of successful IPR enforcement in south China.  If the trial 
ends in jail time for the accused, which the law allows up to 7 
years in this case, many observers and U.S. rights holders will see 
this case as an enforcement success. However, if it ends in 
administrative fines or suspended sentences, rights holders will see 
this as "business as usual" and continued weak enforcement of IPR 
that is endemic throughout much of south China.  End comment. 
 
GOLDBECK