Japan Inc. hooked on China

In the past three decades, Japan and China have enjoyed ever-increasing economic ties, but their political relationship has been lagging behind. The ongoing political rows cast a shadow over their economic ties. So what’s really at stake?

Japan Inc. in China

Japan Inc. has been the third-most important investor in China, after "Overseas Chinese Inc." and "US Inc.". By 2004, Japan had invested US$66.6 billion in equity into China, while Japanese banks are leading international lenders to China. At the same time, the booming Chinese economy has become an engine for Japan's economic recovery. Recently 50 per cent or more of the total increase in Japanese exports has been attributable to China.

Japan Inc's investments in mainland China have come in three waves. The first wave, which really only tested the water, came in the 1980s. Japanese investors at that time felt the Chinese lacked sufficient buying power to make investments worthwhile.

In 1993-95, as Chinese growth began to accelerate, the second wave arrived. Still, however, Japanese investments remained limited in scope and reach. China was treated as a factory, not a market. Goods made in China by Japanese manufacturers were largely sent to overseas markets.

But by the late 1990s, seemingly all of Japan Inc. rushed in - the third wave. By 2005, not only giant Japanese multinationals, but also countless small and medium-size firms had arrived. Shanghai alone has more than 40,000 Japanese residents. Japanese schools operate in major cities such as Xian, Dalian, Beijing, Shenzhen and Shanghai. In 2004, the number of people travelling between the two nations reached 4.35 million - a new record.

Basically, Japan Inc. is now completely hooked on China. This should not come as a surprise - China has already become the largest consumer market in the world, besides being a top manufacturer and top trading nation. In 2004, China had 334 million handset users and sold 15 million personal computers, giving it respectively the first and second biggest global market for these goods. Countless Japanese firms are now established in China, including Mitsui, with more than 110 joint ventures; Matsushita, which runs more than 49 factories and is adding more; and Canon, Hitachi and Sharp, which intend to make China their biggest market and site of their biggest factory. Japanese auto giants Honda and Toyota are already top players. Clearly, the fortunes of Japan Inc. are already seriously tied to China.

Furthermore, many Japanese companies are setting up research and development (R&D) labs in China, and lining up Chinese research institutes and universities to support future R&D efforts. Outsourcing is another major activity. Sony alone has more than 3,000 China-based suppliers, and Japanese firms are increasingly turning to China, rather than India, for their software outsourcing.

Japan Inc. is active in all economic sectors, not just manufacturing. Retail giants like Justco, Ito-Yokado and 7-Eleven (which has been Japanese-owned since its Japanese subsidiary purchased it from the Southland Corporation in 1991) are all established in China. Increasing Chinese consumption has become a goldmine for these retailers, who are competing with Wal-Mart, Tesco, Carrefour and everyone else, to set up more stores.

The rising real estate price in China has brought over countless Japanese land developers, who have been busy building countless hotels, office towers and shopping centres in places like Xian, Nanjing, Tianjin and Suzhou. Japanese banking and financial service giants are increasingly active in China as well. In particular, venture capital companies are arriving in crowds. Top venture capitalist firm Softbank is already a major investor in numerous Chinese Internet and information-technology companies.

China Inc. in Japan

Chinese exports to Japan have been increasing quickly. By 2004, China had replaced the US as the top exporter to Japan. Chinese products in Japan are mostly consumer products, and their penetration has been greatly aided by Japan Inc's operations in China. Relying on low costs in China, Japan Inc. has adopted a strategy of manufacturing its vast range of products in China, then selling them in Japan and elsewhere, including China itself. The cost advantages are tremendous, since the average Chinese manufacturing job pays only around $115 a month, while the labour pool is vast.

Besides trade activities, China Inc. has become increasingly active in Japan. Some Chinese companies are interested in acquiring Japanese assets as a way to obtain better technology, a distribution network, or both. Several high-profile cases come to mind. First, Shanghai Electric Group acquired a bankrupt Japanese manufacturer of high-tech printers, Akiyama. Another purchase came from Guangdong-based Midea, a major home-appliances manufacturer, which acquired the entire microwave oven division from Sanyo Electric Co. Also, the Chinese company 999, a Shenzhen-based pharmaceutical and consumer-chemicals business, has an active joint venture with a Japanese pharmaceutical concern, with the aim of cross-selling each other's products.

Chinese purchases like this have shocked Japan Inc. In the case of Shanghai Electric Group's purchase of Akiyama, made basically for its printer factory, the Chinese factory had been in distress itself. Before the acquisition, the Chinese firm's technology was three decades behind. By buying the Japanese asset, the resulting company benefited tremendously, and it now offers popular printers for the Chinese market and beyond.