US embassy cable - 05TAIPEI3752

UNCLAS SECTION 01 OF 02 TAIPEI 003752 
 
SIPDIS 
 
DEPARTMENT FOR EAP/ TC AND EB/TRA/OTP 
DEPARTMENT PASS TO AIT/W 
 
E.O. 12958: N/A 
TAGS: EAIR, ECON, EINV, TW, CH, Transportation, Cross Strait Economics, Finance 
SUBJECT: TAIWAN FIRMS TO INVEST IN PRC 
TRANSPORTATION FIRM 
 
1. Summary:  Three Taiwan transportation firms, 
China Airlines, Wan Hai Lines and Yang Ming 
Marine, will join together to buy a 37 percent 
stake in China-based Yangtze River Express (YRE), 
a logistics and transportation company.  Together 
the firms will invest approximately USD 58 
million.  CAL will be the largest investor with a 
25 percent share.  Some reports indicate that 
Luxembourg-based cargo airline Cargolux will join 
the group to increase the foreign stake to 49 
percent.  The Taiwan investors seek access to the 
PRC's growing domestic transportation market.  The 
plan is only the latest in a series of CAL 
proposed investments in PRC transportation and 
reflects Taiwan firms' growing frustration with 
Taiwan government restrictions on cross-Strait 
transportation.  End summary. 
 
Yangtze River Express 
--------------------- 
2. CAL has assembled Taiwan shipping companies Wan 
Hai Lines and Yang Ming Marine to join it in 
buying a 37 percent stake in Yangtze River 
Express.  Together the firms will invest a total 
of USD 58 million.  According to some media 
reports, Luxembourg-based cargo airlines Cargolux 
will join the group to increase the total foreign 
stake to 49 percent. 
 
3.  YRE is an affiliate of Hainan Airlines, one of 
China's four major aviation groups, and provides 
logistics, land transportation and air cargo 
services.  YRE purchased its first cargo plane in 
January 2003 and gained government approval in 
2004 to run international cargo routes in Asia. 
The company needs a management group with 
international expertise to expand its business. 
YRE is UPS' major partner in China and owns four B- 
737 freighters. 
 
Investment Group Brings Range of Expertise 
----------------------------------------- 
4. CAL President Philip Wei announced that the 
company had been working on this project for more 
than a year.  CAL invited the partners because 
each of them has a specialty in some aspect of air- 
sea operations.  CAL serves as the core of the 
investment group.  Yang Ming is CAL's air-sea 
alliance partner, and Wan Hai controls one seat on 
the board of CAL.  CargoLux is CAL's major partner 
in Europe. 
 
5. CAL plans to invest RMB 312.5 million (USD 39 
million) for 25 percent of YRE, while Wan Hai and 
Yang Ming will each invest RMB 75 million (USD 9.3 
million) for a 6 percent share of YRE.  CargoLux 
may purchase an additional 12 percent equity. 
China limits foreign holdings in domestic air 
carriers to 49 percent; any one foreign investor 
is limited to a 25 percent share. 
 
Looking for Entry into PRC's Transportation Market 
--------------------------------------------- ----- 
6. CAL Spokesman Sun Hong-wen told the press that 
once Taiwan's Investment Commission approves this 
case, there will be further negotiations with YRE. 
"We believe that there is a great air cargo market 
in China, and we need to begin the operation as 
soon as possible.   This is a great opportunity in 
front of us," said Sun. 
 
7. Wan Hai Spokesman Lee Yao-hung confirmed this 
investment, and predicted that YRE's land 
transportation and logistics operations will help 
Wan Hai's entrance into China's transport 
logistics network. 
 
Latest Piece in CAL's PRC Investment Strategy 
--------------------------------------------- 
8. Although prohibited from providing flight 
service to the PRC, CAL has already initiated 
other investment projects in the Mainland.  In 
September 2001, CAL and China Cargo Airlines 
reached initial agreement that CAL would invest 
USD 30 million for a 25 percent equity share in 
China Cargo Airlines.  Although officials from 
both China and Taiwan approved the investment 
project, the project has not been implemented 
because of concerns raised by China Cargo 
Airlines. 
 
9. In early 2003, CAL, with EVA Air, Far Eastern 
(FAT) and Taiwan Airport Service Company (TASC), 
purchased 49 percent of Xiamen Air Cargo Warehouse 
Co. with an overall investment of RMB 54.88 
million (USD 6.86 million).  CAL, EVA, FAT each 
hold 12 percent, and TASC holds 13 percent of 
Xiamen Air Cargo Warehouse Co.  TASC is 94 percent 
owned by CAL. 
10. Comment: Taiwan air carriers and shipping 
companies are eager to capitalize on China's rapid 
growth but are held back by Taiwan's prohibition 
on direct cross-Strait flights and shipping. 
Taiwan aviation firms, with their large cargo 
capacity and experience in the field have long 
seen themselves as a very competitive 
transshipment center for air traffic to and from 
China.  However, Chinese carriers' efforts to 
initiate their own cargo operations and the 
increased cargo capacity for the China market 
agreed to under the July 2004 U.S.-PRC aviation 
agreement, has diminished Taiwan's competitive 
position.  This latest proposal, and others like 
it, illustrate how Taiwan firms have found 
alternative ways to slip into China's 
transportation market.  We can expect to see more 
examples of this type of investment.  End comment. 
 
KEEGAN