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Friday, Jun 26, 2020 14:15 [IST]

Last Update: Friday, Jun 26, 2020 08:38 [IST]

Japanese Shy Away from China

Japanese industries are now seriously pursuing the intricate tasks of relocating their industries and supply chains from China for various reasons. In fact the Japanese Government has set aside US$2 billion as incentives for companies shifting production back to Japan and another US $ 0.22 billion for those seeking to move production to other countries.
After Japan and China normalized their diplomatic relations and signed Japan-China Peace and Friendship Treaty in 1978, the former heavily assisted China for full two decades (1979-2000). By 1998, Japan was the largest donor country and accounted for over 60 percent of all bilateral aid provided to China. While fully supporting China in its ‘Open and Reform Policy’, Japan advocated multi-layered relations. During 1994-1999 alone Japan provided  US $ 14.48 billion of ODA grant,  loan and technical assistance to China. In the poverty alleviation front Japan concentrated on  economic and social development that rectified the disparities between the coastal and inland regions. This liberal aid became a major issue of national debate in Japan on issues related to China itself being an aid donor, projects being not visible to Chinese people and ODA provided cushion to resort to military build up.
In the total ( US$ 267. 3 billion) realised foreign investment that poured into China during the crucial period of  1979-98,  Japan’s share was over 8 percent, second to Hong Kong’s 52 percent. Japanese investment was particularly concentrated in Dalian in Liaoning province owing to its historical presence there before the second world war. Besides utilising cheap labour to produce for its domestic and export markets, Japanese investment improved the human resources capacities, inducted newer technology, induced higher productivity and added to domestic capital formation. During 1980 to 1999, Japan’s trade with China recorded a  seven fold jump from $ 9.45 billion to $ 66.52 billion. However, except for initial three years, Japan had a staggering trade deficit.
Japan solidly supported Chinese integration into the world economy. A large number of Japanese companies had been gradually located in China, a major constituent of ‘Factory Asia’ and provided superior Japanese equipments, systems and technologies. According to a 1995 MITI survey, 29 percent of Japanese production in China was exported back to Japan.  In the global net FDI flows, China’s share steadily increased from 1.6 percent in 1980s to 6.9 in 1990s and 5.1 in 2000s and its share of regional value added increased from around 15 per cent in the mid 1990s to 35 per cent in the mid 2000s. However its share in the total Japanese FDI flows to Asia has steadily gone down from 33 percent in 2009 to 23 percent in the total, $ 60.69 billion investment in 2019.
Why Exodus
The factors that are triggering relocations are attributed to acute US-China trade disputes thereby making the Chinese goods face high tariff walls. During July 2018 to September 2018, the U.S. government imposed three rounds of new tariffs on Chinese imports of over 6840 items covering $250 billion worth of goods. The shrinking domestic demand and increasing labour costs in China increasingly stood critical. The average factory worker in China earns $27.50 per day, compared with $8.60 in Indonesia and $6.70 in Vietnam. Against the ageing population of China the median age in the other relatively low income ASEAN countries are much lower than the global 29.7. The attractive demographics of manufacturing power houses in other parts of Asia including infrastructure, communications, market access, skilled workforce, legal and tax regimes, cost effectiveness and economies of scale have facilitated this ongoing industry migration. 
The massive supply chain disruptions witnessed during the COVID-19 caused lockdown,  clamp down on political freedom and human rights, its heavily tilted support to the North Korean regime and the festering Senkaku Islands dispute in the East China Sea with Japan are other non-economic issues that triggered these relocations. However, within China also there has been domestic relocation by prolific coastal manufacturers to the inland provinces to take advantage of lower costs and policy concessions. This phenomenon of internal industrial transfers actually started in early 2000s.
This "decoupling" and unwinding of US-China economic ties has already facilitated the likely full or partial exit of a range of global companies from China that primarily focused on US bound production. These include Apple, HP, Dell, Microsoft, Google, Amazon, Sony, Nintendo, Lenovo,  Acer and Asustek.  A Nikkei survey showed that more than 50 global companies have already shifted or are considering shifting production from China.
Attractive Vietnam
Vietnam which is poised to record the highest growth of urban population of 3.5 percent during 2018-2025 is emerging as the most attractive destination and has become attractive regional logistics hub for global consumer companies. It is now an export driven economy with high-profile corporations like Samsung alone contributing 25% of its total export in 2018. A Nomura analysis found that during April 2018 and August 2019, out of the 56 Japanese companies that relocated their production base only three companies were relocated in India whereas Vietnam attracted 26, Taiwan 11 and Thailand 8.
A recent JLL Research Report stated that Vietnam, Malaysia and Thailand have shared major portion of FDI into the manufacturing sectors in Southeast Asia. It doubled over the last eight years to reach USD 46 billion in 2018. In the first four months of 2019, exports to the US from Thailand and Vietnam recorded 25-30 percent year to year increase, potentially suggesting these could be the main recipients of relocation of production out of China. It also found that wages in these countries are now about 60 percent lower than in China, compared to 33 percent in 2010. SE Asia has a large consumer market due to rising urbanisation, middle income population and e-commerce adoption. 
In this continuum of the first industrial migration of this century witnessed after the financial crisis of 2008, India could be a major attraction. It has distinct advantages in terms of sweeping reforms, liberal and much cheaper labour cost, well codified legal regimes,  improving land acquisition legal regimes and environmental regulations and huge domestic market spread over to whole of South Asia. Some of the federal states are in competitive mode to attract the FDI and its gradual acceptance of manufacturing sector as a driver of economic growth.  However, there are serious constraints too including incomplete supply chain, lowly competitive exporting capability, and dismal ease of doing business and inadequate infrastructure. There is strong possibility that spill over of ongoing India-China border skirmishes could trigger a large number of Chinese companies to quit their production base in India. In such situations the most crucial new entrants will be Japanese enterprises coming out of China.
 The Eastern South Asia consisting of Bangladesh, Bhutan, Nepal and North East region of India - where Japan has been a crucial development player-  provide pertinent, congenial, fertile and cost effective socio-economic bastions and flourishing markets. These are backed by availability of raw materials, relatively lower wages, and ample supply of skilled manpower and also a vast English speaking youth populations with innovative and organic entrepreneurial knowledge and skills. The relocation will induce cross-border movement of factors of production and would bring technological knowledge, capital, and other business resources. The absence of political will and sub-regional consensus in all likelihood will avert this prolific opportunity once again.
For a small state like Sikkim and its young entrepreneurs, its a huge opportunity to collaborate with some of the low end Japanese firms and companies who are looking for congenial relocating geographies. What is needed at this juncture is upfront actions from the concerned Departments in Government and Sikkim and also the young entrepreneurs team to start examining these possibilities. This definitely requires a sharp improvement in the ‘Ease of Doing Business’ indices in Sikkim and proactive roles of the Banks and other professional institutions.

[ Courtesy – Kathmandu Post. This is a segment of the ongoing research study Prof Lama and the Team has been commissioned to undertake to bring the seed projects and investors from the South East Asian and East Asian Countries]

Sikkim at a Glance

  • Area: 7096 Sq Kms
  • Capital: Gangtok
  • Altitude: 5,840 ft
  • Population: 6.10 Lakhs
  • Topography: Hilly terrain elevation from 600 to over 28,509 ft above sea level
  • Climate:
  • Summer: Min- 13°C - Max 21°C
  • Winter: Min- 0.48°C - Max 13°C
  • Rainfall: 325 cms per annum
  • Language Spoken: Nepali, Bhutia, Lepcha, Tibetan, English, Hindi