China and the World, Economy

Sayonara Shenzhen

Japanese firms’ are moving production from China back home

Workers walk outside the Panasonic Electric Works (Shanghai) factory building in Shanghai

Stopped making televisions in China this year

“Here is a land with enormous potential,” Mitsui’s chairman Ikeda Yoshizo said of China in 1979. “We can understand their sentiments because they share a similar complexion to ours. I think we can help each other spiritually and materially.”

Shortly afterwards, the trading giant signalled its intent by becoming the first Japanese company to open a branch office in Beijing following the signing of a Treaty of Peace and Friendship in 1978. In the decade that followed Japanese companies rapidly established themselves as China’s biggest foreign investors.

Perhaps Communist China’s first premier Zhou Enlai had been right all along when two decades earlier he said that the two countries shared two thousand years of friendship and 50 years of misfortune.

And now in the year marking the seventieth anniversary of the ending of the most calamitous event of all between the two countries (World War Two), their complicated relationship appears to be entering a new phase.

In recent weeks, the Chinese press has reacted with some consternation to a succession of reports that Japanese companies are pulling out of China. Unlike other multinationals, they are not departing to take advantage of cheaper labour cost in Southeast Asia. They are returning home.

After three decades in which Japan’s industrial base was extensively hollowed out, the country is starting to become a cost effective place to manufacture once again. Since Japanese leader Abe Shinzo took office at the end of 2012 the yen has depreciated about 30% against the renminbi. At the same time minimum wage levels along China’s southern and eastern seaboards have doubled over the past five years.

As Japan’s Nikkei newspaper points out, the minimum wage in Shenzhen is now the equivalent of ¥260 ($2.13) per hour. In Japan’s Kochi and Miyazaki prefectures it is ¥677. And while this latter figure is still more than double the Chinese rate, Nikkei believes Japanese workers are more productive.

Daikin, the world’s largest air conditioning manufacturer, set the trend in 2014 when it started transferring some of its production back to Japan. In January, it said it planned to transfer more. Chairman Noriyuki Inoue told reporters, “Daikin sees great potential in being able to turn yen depreciation into a positive advantage.”

Later the same month, electronics manufacturer Panasonic announced plans to halt production at its TV factory in Shandong province with the loss of several hundred jobs. The United Daily News also reports that it plans to move microwave manufacturing to Kobe, air conditioners to Shiga and washing machines to Shizuoka.

At a recent US consumer electronics show, company president Tsuga Kazuhiro told reporters that Panasonic also hopes to attract Asian buyers with products stamped with the words “Made in Japan”.

Other electronics companies are following suit. Sharp has said it will increase its refrigerator production in Japan, while TDK is moving some of its auto electrical parts production to Akita prefecture. The company has announced a $208 million expansion plan at one of its domestic factories to produce next-generation components for automobiles and smartphones.

Nissan, meanwhile, has announced plans to produce an additional 100,000 cars a year in Japan, while Canon says it will increase the domestic production ratios of its cameras and printers from 40% to 60%.

But it is watchmaker Citizen which has ruffled Chinese feathers the most after abruptly shutting a plant in Guangzhou. About 1,000 employees lost their jobs last month, shortly before Chinese New Year.

The Chinese press wonders whether the Japanese are making a big mistake. The United Daily News comments: “Salmon like to return to their home ground, but will these Japanese fish have enough oxygen to survive? Is it wise to build factories in a country where restaurants have to close down because of severe labour shortages?”

The 21CN Business Herald takes an even stronger line. “Returning home because of short-term exchange rate fluctuations is suicidal,” it concludes. “It shows that Japanese companies have very little confidence in the future of their businesses.”

Unsurprisingly, the Japanese press interprets events somewhat differently. The Nikkei newspaper highlights the fact that this is not the first time Japanese companies have attempted to relocate back to Japan. Reasons for doing so in the past have ranged from anti-Japanese demonstrations, piracy and patent infringements, fear of infectious diseases such as SARS and concerns about natural disasters.

But it believes this time may be different and calls on the government to introduce legislation, which could lead to the kind of structural changes that may even attract other foreign MNC’s to Japan. Top of its wish list are reductions in corporate tax rates and more flexible labour laws.

The Nikkei says the trend is still in its infancy and notes that Japanese companies are currently increasing capacity at their existing plants rather than setting up new ones. But it believes Japan’s GDP could be lifted because productivity is higher in the manufacturing sector than the services sector.

The government may even accomplish its long cherished aim of encouraging “labour mobility without job losses” and more importantly, igniting inflation. For while the Chinese press is correct about labour shortages, these exist mostly in Japan’s service sector where wages are lower and less so in manufacturing where many companies are still plagued by overcapacity and find it tougher to lay off staff.

If these ‘excess’ workers are mopped up through capacity expansion, then pressure for wage rises may start to grow.

However, recent figures reveal that while some Japanese companies are beginning to produce onshore, many of their compatriots are still failing to invest much at all. Capital spending has declined for four straight quarters, while Japan Inc’s cash on hand now sits at $1.4 trillion, almost double the level when Abe took office.

Back in China, government officials say the exodus (which also includes US companies such as Microsoft, Tesla and Nike) is nothing to be worried about. Chinese industry is not being hollowed out as Japan’s was three decades ago. It is simply moving up the value chain.

In 2014, China was the world’s top destination for foreign direct investment (FDI). And in January, FDI grew at its fastest pace in four years, up 29.4% year-on-year to $13.9 billion.

Some US and Japanese firms may be pulling back, but other countries, notably the UK, Saudi Arabia and Germany are stepping up their investments.

Speaking to the Securities Times, Zhang Xiaoning, a director at UNCTAD, a United Nations think tank, said, “In 2014, foreign capital inflows in China’s services sector grew rapidly, particularly in distribution services and transportation.”

According to Ministry of Commerce data, new foreign investment in the services sector has risen to 55.4% of the total and is now 22% higher than the manufacturing sector. In an article entitled “Multinational exits nothing to fret over” the Global Times says that with foreign companies getting “out of the way”, local ones will be able to take advantage of new market opportunities. They will also be able to recruit the technicians that the foreign firms have trained.

Optimistically, it even concludes such moves may prompt an acceleration of China’s industrialisation and environmental clean up.

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