China increasingly worried about ‘losing face’ as Japan bankrolls exodus of firms. by Cissy Zhou

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• Japan has offered a group of 87 companies subsidies totalling US$653 million to expand production at home and in Southeast Asia
• The coronavirus pandemic has wreaked havoc on global supply chains, and Japan is officially trying to diversify its supply chains and make them more resilient.

• Japan’s decision to offer an initial group of 87 companies subsidies totalling US$653 million to expand production at home and in Southeast Asia has sparked debate whether the world’s third largest economy is trying to gradually decouple from China.

  The coronavirus pandemic has wreaked havoc on global supply chains, with the crisis underlining what many companies and countries have known for some time: they are too reliant on China.

  China is Japan

  ’

  s largest trading partner,

   and Japan is China’s second largest trading partner, and while not all of the enterprises involved in the initial wave have operations in China, the move by the Japanese government has sparked concerns in China.

  Although the companies involved are estimated to be less than 1 per cent of total Japanese investment in China, and there will not be an immediate economic impact, if the trend continues, it might shake the foundation of China’s long-term growth model and potentially lead to some hollowing out of the country’s industrial base.

• Using the subsidy, 57 of the companies will open more factories in Japan, while the remaining 30 plan to expand production in Southeast Asian countries, including Vietnam, Myanmar and Thailand.

  Around 70 per cent of the companies are small and medium-sized enterprises, with over two thirds involved in medical supply manufacturing.

  A second list of companies to be offered subsidies is also being drawn up, with a similar composition to the first, according to Japanese officials.

  A survey by Teikoku Databank, a leading Japanese credit research house, showed that there were 13,685 

  Japanese firms in China

   at the end of May 2019, down from 13,934 in the previous survey conducted in 2016. At the peak in 2012, there were 14,394 Japanese firms with operations in China.
• But caught in the middle of the 

  trade war between China and the United States,

   as well as suffering the impact of the coronavirus, Japanese printer giants including Brother, Kyocera and Fuji Xerox are relocating from China to Vietnam. Sharp is also set to relocate part of its multi-function printer production lines from Jiangsu province to Thailand, although these moves are not all linked to the subsidies, according to Chinese magazine Caijing.

  Liu Zhibiao, a professor of industrial economics at Nanjing University in Jiangsu, said local governments are becoming increasingly worried about the looming exodus of Japanese manufacturers as they would “lose face” if foreign enterprises opt to relocate.

  “In Jiangsu, we haven’t seen a trend of the mass exodus of Japanese firms. We understand the Japanese government’s move, particularly given what has happened since the Covid-19 pandemic,” said Liu, who is also a government adviser.

  “The Jiangsu government is confident about its infrastructure and government efficiency, so they are not that worried about the exodus. So at the end of the day, the only way for local governments to keep foreign enterprises is to help lower their costs and provide a safe investment environment for them.”

  Japanese corporate managers decide where to invest by considering diversification to minimise the risk of disruptions to supplies of important goods and to supply chains in the event of unanticipated crisesHideo Kawabuchi

  In Shandong province, where more than 1,300 Japanese manufacturers are based, the local government is working hard to lure more Japanese investment. The province is co-hosting an event with both Chinese and Japanese trade promoting organisations, lasting until the end of September, to deepen cooperation in high-end equipment manufacturing, medical care and the health industry with Japan.

  The official aim of the subsidies is to diversify 

  Japan’s supply chains

   and make them more resilient, rather than focusing on withdrawing from China, said Hideo Kawabuchi, deputy director general of Japan External Trade Organization (JETRO) Beijing, a government-related organisation that promotes trade and investment to and from Japan.

  The policy is not compulsory, added Kawabuchi, and the decision to relocate factories from China is up to each individual company.

  “Japanese corporate managers decide where to invest by considering diversification to minimise the risk of disruptions to supplies of important goods and to supply chains in the event of unanticipated crises,” Kawabuchi said.

• Japan’s imports of electronic products, computers and car parts is heavily dependent on China, but the coronavirus ground factory production in China to a halt earlier this year, which resulted in production disruptions in Japan.

  Although the level of imported parts is not large, the car industry has a complex production system and a concentrated supply chain, meaning any disruption can cause vehicle production to be suspended.

  Last month, Japan’s annual white paper on trade also said companies in upstream positions are easily affected when production activities are disrupted in China, so the country needs to rebuild a resilient supply chain to prepare for and deal with another potential crisis in the future.

  The Japanese government’s move came at a time when US-China relations are at an all-time low. In April, on the same day Japan announced its subsidy plan, White House National Economic Council director Larry Kudlow said the US should “pay the moving costs” of every American company that wanted to move out of China.

  Instead of cutting off ties, Tokyo’s goal is to diversify supply chains, make them more resilient, and be less dependent on ChinaScott Kennedy

  To some, Japan’s move is seen as a step to economically decouple from China and join Washington to form a united front against Beijing.

  However, Scott Kennedy, a China expert at the Centre for Strategic and International Studies in Washington, said that Washington needs to better understand Tokyo’s actions and adapt its own approach if it wants a true partnership with Japan in managing the challenge posed by China.

  “Instead of cutting off ties, Tokyo’s goal is to diversify supply chains, make them more resilient, and be less dependent on China, while also encouraging greater manufacturing at home to address a slowing economy,” said Kennedy.

  Like other international firms that are increasing investment in China, most Japanese companies are in China for the domestic market. Even with China’s gradual slowdown over the last few years, and the prospects for even slower growth over the next decade as it grapples with its demographic transition and 

  substantial debt,

   the expectation is China will have a growing need for hi-tech infrastructure and an expanding consumer market, added Kennedy.

  Japanese companies are closely watching the changing relationship between the US and ChinaHideo Kawabuchi

  In an April survey by JETRO of 424 Japanese companies that have facilities in eastern China, 86 per cent of respondents said they had no plan to change their supply chains or relocate to other countries.

  Among the 361 respondents in southern China, 22.3 per cent of Japanese companies said they would expand their future business in China, and 8.6 per cent said they would downsize their operation in the country, while 69.1 per cent said they were watching and their position was “not clear yet”.

  “Japanese companies are closely watching the changing relationship between the US and China, but their business strategies are based on each country’s economy and market. To them, it is not an either-or situation between China and the US,” added JETRO’s Kawabuchi.