Japan Inc. hooked on China

Such acquisitions have become a popular way for Chinese firms to upgrade their technology and gain a new market at the same time. This has naturally concerned Japan Inc., which has always been more concerned with building business empires headed by Japanese than with actually making money.

But China Inc. may not need to buy Japanese assets to advance its interests. Chinese firms can simply hire Japanese talent to work for them, for example. This is what Skyworth, a leading Chinese consumer electronics company, did when it recently hired a veteran Matsushita engineer together with many of his research colleagues. The Japanese engineer has become a senior executive at Skyworth. Due to such activities, and for other reasons as well, the technological gap between Japan and China is narrowing fast - faster than expected. The eroding of technological advantage has increasingly become a concern for Japan Inc.

In addition, many leading Chinese companies are actively expanding into Japan. So far, these efforts have met with limited success. This is partly because Japan's domestic market has always been notoriously closed to foreign companies. Surprisingly, in many ways, Japan is not as open as China.

Typically, a more effective way to penetrate the Japanese market is via joint ventures with Japan Inc. So far, most of these joint ventures have aimed for the China market. But this is gradually changing, as more Chinese companies attempt to invest in Japan as well. In recent months, leading Chinese brands such as ZTE, TCL and Haier have all increased their efforts to tap into the Japanese market. In particular, Huawei, a top Chinese telecom equipment manufacturer, has established joint ventures with NEC and Matsushita dealing with third-generation (3G) mobile phone technology.

Interdependence and beyond

As the world's second-largest economy, Japan has both advantages and challenges. The biggest advantage is that Japan has hundreds of truly global companies that are well equipped to operate anywhere it is beneficial for them to do so. Its biggest challenge is at home - Japan has had a 14-year economic slump. Deep-seated problems include high costs, low efficiency in many industries and rampant overstaffing. The banking sector is still recovering from massive numbers of bad loans made during the "bubble economy" period and is also running into more bad debts.

These problems run very deep and are not likely to go away anytime soon. This tightly closed Japanese market has backfired. Domestic stagnation virtually compels Japanese businesses to expand overseas - and China has been their overwhelming first choice.

At a deeper level, Japan Inc. is confronted with this reality: it needs to generate fat profits from overseas in order to sustain its declining operations - which are very often losing money - at home. This compels Japan Inc. to do even more overseas and in a hurry.

Unfortunately for the increasingly globalised Japan Inc., the Japanese political establishment has been behaving in a way that is contrary to its interests. The political leadership is keen to re-establish Japanese assertiveness, politically and militarily. This unresolved conflict has been causing wide debate within Japan.

The recent protests in China and Korea against new Japanese textbooks that minimise war crimes committed by the former imperial Japanese government; Japan's alleged interference in the Taiwan issue; and conflict over certain islands claimed by both China and Japan, among other issues; has heightened this conflict of interest between Japan Inc. and the Japanese Government.

At the same time, Japan Inc's competitive edge is no longer as sharp as it was back in the 1980s. For example, both the European Union and the US surpassed Japan in total trade with China in 2004. In fact, China’s trade with Australia, Latin America and the rest of world has been growing fast.

Also, "South Korea Inc." is investing more in China. Lately Korean investment has surpassed the Japanese. Leading South Korean names like LG, Samsung and Hyundai have made huge progress in China, although they were late entrants into the Chinese market. LG did $10 billion in business in China in 2004, a level even the biggest Japanese brands have hardly reached. So, Japan Inc. feels great pressure to do more in China, and do it bigger and better, for fear of losing out to Japan's global competitors.

For now, China is less dependent on Japanese investment than it has been. This is due partly to the fact that international investment in China has been so massive. By 2004, more than $560 billion worth of foreign investment had entered China, of which Japan accounted for only $66.6 billion, a small fraction. Although Japanese investment is still significant, its relative significance is decreasing.

Domestic Chinese companies have developed significantly, and tens of thousands of them have gained the ability to produce all sorts of products. China has already become the top manufacturer for over 100 manufactured goods. Furthermore, Japan has a high-cost structure, while Chinese buyers generally prefer low-cost, but highly competitive, products and services. For example, both Indian and Russian software companies are far better equipped to sell in China than Japanese companies.

Overall, even without the ongoing political row, Japan Inc. faces an increasingly uphill battle in China. Its entire business line faces tough competition from both China and from international firms. Japanese products no longer have any unique advantages, as they did in the 1980s. For example, in the auto industry, Honda and Toyota face competitors like GM, Volkswagen and Hyundai, among others. In home appliances and consumer electronics, which have been traditional strengths for Japanese firms, the domestic brands are improving fast along with intense competition from other international brands.

One can predict that the opposing interests of Japan Inc. and the Japanese Government will impact Japanese foreign policy more in the future. Traditionally, the close ties between business and the Japanese Government make it difficult for the government to act in a way that is contrary to the interests of the business community. Japanese foreign policy is more influenced by domestic politics than is widely believed. The Government has every reason to try to make Japan part of the solution for regional conflicts, rather than part of the problem. Japan's neighbours are watching eagerly for signs of this.