27413

2005-02-22

05THEHAGUE484
Embassy The Hague

SECRET

04STATE239012
S E C R E T SECTION 01 OF 03 THE HAGUE 000484

SIPDIS

STATE FOR NP/ECNP AND EUR/UBI/HOLLIDAY
DOD FOR U/S WYNNE, U/S BRONSON AND N. BRELAND
E.O. 12958: DECL: 02/18/2009
TAGS: ETTC, KSTC, PARM, NL, CH
SUBJECT: DUTCH UNVEIL THEIR 14-BIT ADC PARTS CONTROL PLAN
REF: A. 2004 STATE 239012

B. 2004 THE HAGUE 3156 (NOT ALL)

Classified By: Richard Huff, Econ Counselor, for reasons 1.4 (b) and (d
).

1 (S) Over the last two years, Defense and State export
control officials have been working with the GONL towards
agreement on rules governing sales of 14-bit analogue to
digital converters (ADCs) to Chinese companies. Most
recently, on 14 November, 2004 State NP/ECNP and DOD officers
briefed Dutch Ministry of Defense (MOD), Economic Affairs
(MEA) and Foreign Affairs export control staff on Chinese
end-users (ref A). At that meeting the Dutch said Philips
Electronics had pending sales of 14-bit ADCs to Chinese
companies. The GONL favored a parts control program to
govern these sales, and promised to share their plan with us
as soon as it was ready (ref B).

2. (S) On February 11, 2005, MOD officials provided post's
Office of Defense Cooperation with a letter from Dutch MOD
Armaments Director RADM Dirk van Dord to Acting U/S Michael
Wynne and Deputy U/S Lisa Bronson (para three), an advance
copy of the Dutch parts control plan (para four) and an annex
to the plan (para five). MEA officials told us Dutch State
Secretary for Trade Karien van Gennip will provide the USG

SIPDIS
with an official copy of the plan and annex, probably in
March. ODC has forwarded the letters to their principals.
Text of the letter, plan and annex follow.

-----------------------------------------
COVER LETTER TO U/S WYNNE AND U/S BRONSON
-----------------------------------------
3. (S) Begin text of letter:

The Hague, 11 February 2005

The last two years we discussed the subject of the 14-bit
Analogue Digital Converters (ADCs), the potential export of
ADCs by Philips to the People's Republic of China (PRC), in
several bilateral meetings. After having evaluated all the
relevant aspects, the Ministry of Economic Affairs will
inform the United States government about the position of the
Dutch government. The purpose of this letter is to inform
you about this letter and to provide background information
on the decision.
The Dutch government will apply strict export conditions to
the supply of high speed 14-bit analogue-to-digital
converters (ADCs) to Chinese manufacturers of
telecommunication equipment. The conditions have been
accepted by Philips Electronics (see annex).
The decision to apply these specific conditions was taken
after due consideration of all relevant aspects presented in
several US non-papers, the bilateral meetings as well as the
identical letters sent by the Deputy Secretaries Kassinger,
Armitage and Wolfowitz in August 2004 to State Secretary Van
Gennip, Minister Bot and State Secretary Van der Knaap
respectively.
You will notice that the conditions laid down in the parts
control plan bare a close resemblance to the license
conditions agreed on by the (US) Advisory Committee on Export
Policy with regard to an application, more than a year ago,
by (a) US exporter(s) of 14-bit ADCs to Chinese entities and
in that sense constitute the sought after level of
harmonization of conditions as set by the export control
authorities in both our countries.

You may also notice that the Netherlands export control
authorities have not in advance limited the applicability of
these conditions to any particular Chinese manufacturers of
telecommunication equipment or for example excluded certain
such manufacturers by virtue of stock ownership (i.e. no
distinction between wholly and non-wholly owned PRC
companies). Specifically included within the scope of these
conditions are contracts with manufacturers based outside
China but with (known intended use of) production facilities
in China. By thus expanding rather than limiting the scope
of harmonized conditions, unwarranted distortion of the
Chinese market for telecommunication equipment incorporating
high speed 14-bit ADCs is avoided. As long as the production
of these 14-bit ADCs is limited to companies based in either
the US or the Netherlands all such ADCs entering the Chinese
market as bulk supply of parts will in fact be covered by a
similar parts control plan.

To conclude, I assure you that this issue has kept my
personal attention all the time. Please be aware that to
ensure that all the defense interests would be addressed, the
final parts control plan was formulated in close co-operation
with my staff. If you need any clarification, please do not
hesitate to contact me personally.
Dirk van Dord
Rear Admiral

END TEXT.
------------------
PARTS CONTROL PLAN
------------------

4. (S) Begin text of Parts Control Plan:
SECRET - RELEASABLE TO THE UNITED STATES OF AMERICA

SIPDIS
NETHERLANDS' APPROACH TO DELIVERIES OF ADCs TO CHINESE
ENTITIES

Conditions set by the Netherlands export control authorities
and agreed to by Koninklijke Philips Electronics N.V.
(Philips) to the supply (supply is understood to mean the
actual delivery of ADCs to production facilities where these
ADCs are processed into telecommunication equipment or into
assembled parts of such equipment, irrespective of the
question whether the ADCs are sold directly to the
manufacturers involved or through intermediates.) of high
speed 14-bit analogue to digital converters (hereafter:
14-bit ADCs) to manufacturers of telecommunications equipment
in the People's Republic of China (hereafter: Chinese
manufacturers).
Before signing a contract for the supply of 14-bit ADCs to
any Chinese manufacturer Philips will establish that the
relevant contract, be it with a Chinese manufacturer or an
intermediate, contains clauses to effectively assure that:

1. all 14-bit ADCs that are to be supplied under this
contract will solely be used for the manufacture of base
stations or parts thereof for civilian communication purposes;

2. telecommunication equipment or assembled parts of such
equipment containing these 14-bit ADCs can only be sold to
telecommunications operators or any other third party after
receipt of an end-use statement by such a third party
declaring that the equipment or assembled parts will solely
be used for civilian communication purposes;

3. the supply of these 14-bit ADCs will occur according to
an agreed parts control plan with the features described in
the delivery procedure in Annex 1;

4. the person(s) who will be responsible for the proper
implementation of the parts control plan and its delivery
procedure is (are) identified by name and function;

5. all parties concerned agree - or will have agreed in
advance of any supply to them - to provide Philips with all
information required to enable Philips to report on the
implementation of the parts control plan to the Netherlands
export control authorities;

6. no objections exist or will be raised against audits to
be performed by or on behalf of the Netherlands Government on
the implementation of the parts control plan at the
manufacturers site.

Prior to the first regular supply of 14-bit ADCs to any
Chinese manufacturer of telecommunications equipment or parts
thereof, Philips will be allowed, under the conditions
described above, to supply a set of samples in a quantity -
yet to be decided - that will not exceed the number
appropriate for testing and prototype manufacturing purposes.
Should Philips be asked to supply 14-bit ADCs to a
manufacturer outside China, but with (the use of) production
facilities in China, then the relevant contract must
stipulate that all the clauses mentioned above as well as the
delivery procedure described in Annex 1 will apply in full to
any shipments of 14-bit ADCs to such production facilities in
China.

END TEXT
5. (S) Begin text of Annex.

-------
ANNEX 1
-------
Annex 1 - Delivery Procedure

Physical deliveries will be made to manufacturers, not to
intermediates. Invoicing, however, can be done as required.
Philips will register the date, the amount of ADCs involved
and the particular recipient of every relevant shipment.

Each recipient will register the date and the amount of ADCs
involved of every shipment received with a reference to the
supplier's order/delivery number.
Since the total stock at Chinese manufacturers production
sites may not exceed the amount of ADCs necessary for two
weeks production the Chinese manufacturer will provide
Philips either directly or trough any intermediate supplier
with the following documentation for each production site:

- A detailed production schedule for the period of three
weeks starting the day the order is placed and specifying the
exact quantity of 14-bit ADCs need to complete that
production plan;

- The exact quantity of 14-bit ADCs on stock at the moment of
ordering;

- A declaration containing the exact quantity of 14-bit ADCs
destroyed because of malfunctioning of PCB's or base stations
and a precise description of the manner in which these ADCs
were destroyed. This declaration must cover the period
between the date of the previous order and the date of the
new order and it must be signed by the quality control
manager of the production site in question.

The volume of any follow on supply will be adjusted if a
report by the Chinese manufacturer shows a significant
deviation from the anticipated volume for two weeks
production.

Philips will archive all information on the implementation of
the parts control plans and will make this information
available for scrutiny by the Netherlands export control
authorities upon request.

Philips will provide the Netherlands export control
authorities with a quarterly summary report on the
functioning of the parts control plans as well as on the
quantity of ADCs supplied to Chinese manufacturers under
those parts control plans.

Philips will inform the Netherlands export control
authorities forthwith of any irregularities it notices in the
figures or in case it has reason to believe that any Chinese
manufacturer or intermediate involved in the parts control
plans is not compliant with these conditions.

END TEXT.
SOBEL