Japan Manufacturers Encouraged to Move Production Out of China
Wed, April 21, 2021

Japan Manufacturers Encouraged to Move Production Out of China

 

A spokesman of the Japanese foreign ministry said that the government has been doing its best to continue its economic development. / Photo by f11photo via Shutterstock

 

Japanese companies with production in China are being encouraged by the government to shift their production back home to Japan as the Covid-19 outbreak is causing havoc on the supply chains, reports newspaper The Daily Mail.

 

Japan’s plan to shift production away from China

The Japanese government has announced an over £1 billion budget to help Japanese manufacturers quit their production in China as the supply chains between the two trading partners have been disrupted because of the pandemic. Japan’s major trading partner countries for exports were China and the United States, but Chinese imports declined by more than 50% in February due to factory closures. This consequently slowed the flow in the supply chain and forced Japanese manufacturers to rethink their dependence on manufacturing in China.

Last month, the Japanese government also held a panel where they discussed the requirement of moving the manufacturing of high-added value products back to their home country. If these Japanese manufacturers will not be moved back to Japan, then the production of the goods will be divided among other Southeast Asian countries.

The decision to move the production of China comes ahead of the planned celebration of ties between Beijing and Tokyo. Both cities have agreed to delay the visit of Chinese President Xi Jinping to Japan as the two nations are still fighting the new coronavirus outbreak. President Jinping was originally scheduled to visit Japan early April and no new date has yet been announced. It was supposed to be the first state visit by President Jinping since Hu Jintao in 2008. Jintao was the former President of the People’s Republic from 2003 to 2013.

A spokesman of the Japanese foreign ministry said that the government has been doing its best to continue its economic development.

 

The sentiment of Japanese manufacturers

For the first time in seven years, Japanese manufacturers in their home country also turned pessimistic in the three months to March. This is based on the Tankan survey, which is a poll of business confidence reported by the Bank of Japan and it shows the status of the Japanese economy.  The business short-term economic sentiment survey is one of the financial measures in the country and influences the currency rate and stock prices.

The sentiment index of major manufacturers was at -8 in March compared to zero in December 2019. This is the first time in seven years that the sentiment index of big manufacturers in Japan turned negative and is considered the worst reading since March 2013.

The survey likewise showed that it will be deteriorating to -11 in the next three months. Big manufacturers are planning to increase their capital expenditure by 1.8% in the financial year to March 2021, as analyzed by financial news platform Reuters Tokyo.

 

 

Japan Tankan business conditions for large enterprises in manufacturing

Bank of Japan’s Tankan survey also details that the sentiment index of large enterprises in manufacturing in the first quarter of 2019 was at 12.00, slightly declined at 7.00 in the second quarter, and 5.00 in the third quarter. The reason for the negative reading was that the pandemic affected the business activity in the country. To come up with the sentiment index, the number of respondents who said that conditions are poor are subtracted from respondents who said the conditions are good. Deriving a negative reading means that there are more pessimists among Japanese manufacturers than the optimists.

Japan has a highly-advanced and large manufacturing sector. Japanese prefecture Fukui has the highest number of manufacturing industries per 100 thousand population with a 73.05 standard score followed by Gifu (70.70), Toyama (66.05), Shizuoka (64.88), and Ishikawa (64.81), according to the Ministry of Economy, Trade, and Industry.

Prefectures with a low concentration of manufacturing industries are Okinawa (32.22 standard scores), Chiba (32.92), Kanagawa (32.98), Tokyo (33.36), Hokkaido (36.57), and Fukuoka (38.15).

Manufactured goods from Japan earned a reputation for sophistication, durability, and high quality. Japanese automotive manufacturers, including Mitsubishi, Honda, and Toyota, are among the largest worldwide. The most notable manufacturing industries in the country are electronics, robotics, and shipbuilding. These manufacturers do not rely on low labor costs to maintain their competitiveness but world-class workforce, high-quality standards, and innovative product design.

 

 

Attracting investment from the affected Japanese companies

Economist Yeah Kim Leng, who is also a professor of economics at Sunway University Business School in Malaysia, has urged the city of Putrajaya to seize this opportunity to attract high-end and medium foreign direct investment from the Japanese firms told to move away from China in the wake of the pandemic.

The economist said in an interview with Malaysian news portal Free Malaysia Today that these Japanese firms will most likely look for new bases to begin their business after the pandemic and it should be viewed as a “silver lining” on the part of Malaysia to attract these companies into their shores.

The economist said that the competition is going to be strong so they have to move quickly to begin the talks with the Japanese firms. He was commenting on the report that the Japanese government has reserved an economic stimulus package to help the manufacturers shift their production from China to other countries. Such an economic stimulus package includes US$217 million for companies seeking to move their production from China to other countries and US$2 billion for manufacturers that want to shift their production to their home country.

Yeah expects that the cash-rich Japanese firms will be moving their operations to consumption markets near them. Some of these companies may not move their production back to Japan because of the high cost of production and the aging population. Putrajaya has the potential to meet the requirements of these Japanese firms, but the city has to be aware of competitors, including Singapore, the Philippines, Indonesia, Thailand, and Vietnam. The economist’s idea to attract these firms is to offer them incentives, including tax holidays, although other nations might also be offering such. On the other hand, the obstacle of these potential foreign direct investors would be a labor shortage. This is why Putrajaya should target high-end and medium investors, like those in medical equipment, electronics, and electrical, as Malaysia can provide skills in these fields.

While some firms may be relocating to other countries or back home, those manufacturing for the Chinese domestic market are also likely to stay put.

 

Putrajaya has the potential to meet the requirements of these Japanese firms, but the city has to be aware of competitors, including Singapore, the Philippines, Indonesia, Thailand, and Vietnam.  / Photo by Hasbul Aerial Stock via Shutterstock