China less attractive to Japanese firms - but not because of riots

TOKYO —

China’s fading attractions were evident to Japanese companies even before September’s massive anti-Japanese riots, says Shukan Asahi (Nov 30). The riots, sparked by the Japanese government’s purchase of the disputed Senkaku islands in the East China Sea, only highlighted issues that had begun to surface years ago, the magazine finds. The issues are various but boil down to two. One: China’s labor pool is no longer cheap. Two: Chinese officials can be poisonous to deal with.

Cheap labor was the big draw. With Chinese wages so much lower than Japan’s, why not set up factories in China? The high yen was an additional impetus. Today, some 14,000 Japanese companies – most of them small producers of textiles, electronic parts, processed foods and the like – have operations in China. But wages have been rising steadily at a rate above 10% a year. In Shanghai, the average monthly wage is $439, still much less than in Japan but considerably more than other Asian venues: $325 in Manila, $286 in Bangkok, $135 in Ho Chi Minh City, $82 in Phnom Penh, $68 in Myanmar. In short, Japanese companies have plenty of other places to go.

As for Chinese officials, Shukan Asahi hears this story from a small parts manufacturer that had a factory in southern China. “At first,” a company executive explains, “they welcomed us with open arms. Why not? We created jobs and paid taxes.” Whether because of rising wages or some other reason, the company after a certain length of time decided to liquidate its operations. It applied for the pertinent documents. Suddenly the local government officials were inaccessible – or accessible in the wrong way. “Our president would get a phone call from an official: ‘How about drinking tonight?’” The president knew what this meant. He wined and dined the official at an exclusive local Japanese restaurant. The papers? Still not forthcoming. There was more wining and dining, and gifts of expensive tobacco. A year passed – still nothing. “Finally we basically slipped out of the country” – leaving the plant machinery behind.

Even bigger companies are gradually shifting operations elsewhere – the Aoyama menswear chain to Myanmar, Funai Electric to northern Thailand. These moves were underway before the riots and are expected to accelerate in their wake. Where Japanese companies will go when labor costs rise throughout the developing world, as inevitably they eventually will, is a problem that seems incidental in the short term.

Lately a new kind of seminar has been booming in Japan, says Shukan Asahi – seminars on leaving China with a minimum of fuss and bother. The magazine’s reporter, covering one of them, meets the president of a musical instrument maker, who says, “I’ve been thinking lately of starting up operations in China. A market of 1.3 billion people is after all very attractive. But who knows what will happen? So before I go in, I thought it would be a good idea to learn in advance how to get out.”

  • 10

    dudeyes

    I think this trend will only accelerate, and not just from Japanese Companies. US manufacturers are also pulling out, and moving back to North America, most notably Mexico. The majority of European companies are in no condition to invest more in China, so this could pose problems for the Chinese labor market, which has already been hit hard the last two years. The good will that existed between China and the rest of the world is fading fast, and not just because of territorial disputes - but raw economic reality. Also, the number of WTO cases against China is expanding exponentially, from solar panels to tires, to car parts , etc... The welcome rug to from foreign companies to China's manufacturing is being pulled in front its eyes, and the result won't be good for China.

  • 5

    gaijinfo

    One thing that's RARELY mentioned in these kinds of articles something far more important than the price of labor. It's generally assumed that if labor is ten times as cheap, you can get ten times as much productivity. This is not the case.

    When you measure "productivity per dollar per hour" then you can truly compare apples to apples. For example, if you pay Americans ten bucks an hour, is one worker more or less productive than ten Chinese making a dollar an hour each?

    The answer may surprise you. Economists who study these things find that "cheap Asian" labor really isn't so cheap when you look at "productivity per dollar per hour."

    In fact, most developing nations can't touch developed countries like U.S., Germany, or even Mexico.

    Chinese workers aren't all that productive, when you look at them in terms of "productivity per dollar per hour," which is why a lot of companies are now taking a bath on their Chinese factories.

    Throw in the massive inflation China is experiencing now, and the ever-present corruption, and China suddenly turns into the worst place in the world to open up a factory.

  • 3

    Shaolin7

    At some point -- maybe not for a long time, but eventually -- all these corporations are going to run out of places to exploit cheap labour to maximize profit margins. Then what will happen? Workers will demand fair and equal payment in accordance with rising standards (and perpetually rising costs) of living, as is their absolute right to do so.

    To be frank, alot of this is driven by consumers i.e. you and I, demanding more and more for less, or seeking the cheapest price on literally everything bought and sold. People are unwilling to, and in many cases unable to afford, paying for locally sourced and produced goods. I only understand the nature of the game in its most crude element, so obviously you can't just blame Japanese companies -- but at what point will this give? It's hard to feel much sympathy for predatory businesses that take advantage and invest Iittle into these countries, which seems to be part of the spin in this article.

  • 4

    House Atreides

    The welcome rug to from foreign companies to China's manufacturing is being pulled in front its eyes, and the result won't be good for China.

    Chinese companies are now increasingly being eyed with suspicion. Obama just blocked a planned Oregon wind- farm project by a Chinese company because of national-security concerns. That is the first ban imposed by a U.S. president in 22 years on national-security grounds. So not only are foreign companies becoming reluctant to set up shop in China, many countries are also becoming adverse to Chinese companies doing business on their soil. According to a study by Olga Hawn of Duke University, cross border deals involving Chinese companies are almost twice as likely to break down (15% of the time) as deals involving companies from other BRICS countries (8%) and three times as likely as those involving Western multinationals (5%).

  • 2

    Molenir

    It's hard to feel much sympathy for predatory businesses that take advantage and invest Iittle into these countries, which seems to be part of the spin in this article.

    Predatory Business? Really? Which part of offering people jobs, which pay better then others in their area is predatory? Perhaps its the part where the companies recognize the hard economic reality, that for the company, it will no longer be profitable to continue to provide those jobs? And that doing business in China, which its corruption and government issues, actually increases the cost of doing business. What you are saying, is that reality is predatory.

  • 0

    onewrldoneppl

    chinese companies will emerge to fill the gaps created by departing foreign firms. they have the resources and the labour force. the departure of foreign firms is a blessing. they'll already shared their technological expertise, ideas and built infrastructure. the chinese will gladly steal them.

  • -8

    GW

    China is toast, its obviously totally unsustainable, I know I sound like a broken record but the fire cracker is lit!

    Only time will tell when China implodes, explodes or BOTH!

    Its coming plain as day, same as we all saw J-electronics companies faltering for the last 15+ years.

  • 1

    herefornow

    I’ve been thinking lately of starting up operations in China. A market of 1.3 billion people is after all very attractive.

    Uh, duh -- you think? This is a silly, sloppy article. First off, it misses the central point, which is the quote above from the musical instrument company president. China is growing and already has a population nearly ten times that of Japan. So with an aging, shrinking population, Japanese companies by default must look at China, no matter what the obstacles. Second, China has corruption. So what? Can it be an more stifling for doing business than the hundreds of Japanese rules and regulations? Third, China's wages are rising, which may or may not cause companies to move production to cheaper markets. But how does that help Japan? These jobs aren't coming back to Japan, because its whole cost structure -- wages, taxes, rents, etc -- are among the highest in the world. And the domestic efficiency is among the lowest. How about writing an article that might actually do Japan some good, rather than simply taking cheap pot shots at China? Japan should have these kinds of problems.

  • 2

    neobios

    China cannot remain being a mere world manufacturer if they continue to grow, they have to be versatile and focus more on creating things for themselves not for others which is why its government has been scratching their head on developing such industry. China even recently considered of relaxing its one child policy to ensure its future growth.

    Just 3 days ago, there's an article of China being a global trader:

    http://www.japantoday.com/category/world/view/china-overtaking-u-s-as-global-trader

    China has a huge advantage in market due to its population but they need to produce something of their own in order to remain that status in the future. Imagine foreign companies began to move out maybe to India while US and Europe start buying less from them, where would those engineers, technicians, managers and so forth end up? farming? Where are they going to get their income?

    They need way more than Huawei and Lenovo where the next 5 years would be crucial for China to find another source of decent income which would be domestic development as its people receives more education and wages, so does the decline of its cheap labors.

  • -4

    ubikwit

    @herefornow

    Precisely, these delusional Japanese politicos are soon to be memories on the waste heap of history, whereas if China can maintain an even keel, they are bound for growth and sustainable development, as they are actively pursuing import substitution, etc., diversifying their industry.

    WTO complaints work both ways, but what is probably more important is the inroads China has made internationally in South America and Africa.

    Like many of those countries, China was once under the yoke of Western colonialism.

  • 4

    skroknog

    Two: Chinese officials can be poisonous to deal with.

    Yep. That's China. Corruption will destroy the country from the inside out. They are their own worst enemy.

  • 1

    forzaducati

    From what I have been reading, even Chinese companies are moving out of China to South-East Asian countries, apparently due to a labour shortage. Not that there are not enough Chinese, but less Chinese want to work for meager wages. The younger Chinese generation is seemingly not much different from anywhere else, they want easy jobs that also pay well.

  • 3

    House Atreides

    WTO complaints work both ways, but what is probably more important is the inroads China has made internationally in South America and Africa.

    These so called "inroads" are making the Chinese decidedly unpopular in Africa. Take the mining field for example. In 2010, two Chinese supervisors at the Collum coal mine were charged with attempted murder, after 13 Zambian miners were shot. In August of 2012, Zambian miners killed a Chinese manager because he was too cheap to pay them a proper wage. A 2011 report by Human Rights Watch said that, despite improvements in recent years, safety and labour conditions at Chinese mines were worse than at other foreign-owned mines. Chinese are so unpopular in Zambia that in September of 2011, Michael Sata won the Zambian presidential elections by campaigning on an anti-Chinese platform.

  • 0

    oberst

    there are plenty of " developing " countries around for corporations to exploit for CHEAP labor. That's the nature of the beast, just don't give us the BS about helping the starving people.

  • -4

    ubikwit

    In August of 2012, Zambian miners killed a Chinese manager because he was too cheap to pay them a proper wage. A 2011 report by Human Rights Watch said that, despite improvements in recent years, safety and labour conditions at Chinese mines were worse than at other foreign-owned mines.

    Chinese are so unpopular in Zambia that in September of 2011, Michael Sata won the Zambian presidential elections by campaigning on an anti-Chinese platform.

    Those are valid points, and unacceptable practices--if not crimes--by the managers in question, and they should be held accountable. However, what about the scenario in South Africa vis-a-vis miners?

    The Chinese presence is viewed positively in enough places in Africa for Clinton to have broached the issue in a somewhat undiplomatic manner not long ago.

    More important, perhaps, is Brasil and Latin America, where the USA and particularly the UK are increasingly unpopular.

  • 0

    iWorld

    And yet, China will become one of the largest, if not the largest, FDI recipient this year, above USA.

    Total FDI into China for the first 10 months of 2012 was $91.74 billion.

    "For the first time since 2003, China has surpassed the United States as the world’s largest recipient of global foreign direct investment (FDI)." --From Forbes.com

    Because for every Shukan Asahi that can't compete in China anymore because their business is based only cheap labors, there are others like GM are investing Billions into china to build cars.

  • 0

    wanderlust

    When China investment and start-ups were booming in the 80s and 90s, one of the best selling business books was entitled, The Life and Death of a Joint Venture. People were rushing in to do business and try to make money, but few though about how to proceed when the business need to go independent, to take over or be taken over by a Chinese 'partner' or just to cease trading. Should be required reading by all business people...

  • 3

    cabadaje

    A market of 1.3 billion people is after all very attractive.

    I hear this in almost every class I give regarding foreign investments. It is a common mistake.

    China doesn't have a market of 1.3 billion people. It as a market of about 300,000. It has another billion people or so living close to abject poverty.

    On a related note, when one looks at the wealth gap distribution on a bell curve, the farther the gap, the farther the distribution to the ends of the curve, the greater the risk of a society collapse. A massive wealth gap has been the precursor to practically all imploding civilizations in history. Contrary to what many dystopian novels (and conspiracy theorists who believe 1984 is a documentary), people will only tolerate a certain amount of shit before they decide it is time to send it winging back to the fan. And when one person starts flinging, the crowd follows pretty fast.

    China does not have the internal infrastructure to support even the ridiculously unbalanced economy it currently has. Being one of the world's largest economies means very little if the stability of it is in question (indeed, the size of it can become something of a drawback). China went too early in its power play; it made the incorrect assumption that economic power could be treated the same way that military power is. Military power, however, is largely predicated on the internal strength of the military, whereas economic power is far, far, more intricately intertwined with that of foreign powers. If you think of military power as a single mighty oak, you have to think of economic power as an impenetrable wall of ivy, each vine representing a different economy..

  • 3

    Zenpun

    While Japanese firms wanted to get out from China, German firms wanted to expand the market share in China. Considering Germany is far away from China. BMW plant in China is enjoying the boom.

    No nation on the earth has sustained the 10% GDP for more than 30 years. Therefore China cheap labor and land supply has peaked and the growth will be lower and lower in the future. While factories are struggling to get cheap process workers, unemployed university graduates are also growing in China.

  • 0

    iWorld

    This is a typical "not see the forest for the trees" type of report.

    Yes, there are non-competitive investors in China have to leave, but the general trends is higher tech and services investors are moving in.

  • 0

    cabadaje

    Yes, there are non-competitive investors in China have to leave, but the general trends is higher tech and services investors are moving in.

    Could you expand on that? I'm not seeing that pattern in the business world. What are you referring to, specifically?

  • -1

    OssanAmerica

    DogDec. 02, 2012 - 07:01AM JST This says more about the way China wants to go, than Japan's economic choices. Just as Yoshida had no intention of Japan remaining of nation of paper napking makers, China does not intend to >remain a nation of sweatshops; while Thailand will still be that in a 100 years time. Good for China.

    Really some wishful thinking there. China is nowhere near able to stand on it's own as a producer of high end goods. And China's future growth is going to be affected by it's behavior in 2012, not just Japanese companies but US, and Europeans are liking at the "China Risk". Take away the cheap labor and that the risks don't justify investing in China.

  • 0

    bajhista65

    To the Japanese companies in China, get out of China and put your manufacturing back to Japan. That's the only way Japan can recover from a very bad economy and give jobs to your fellowmen.

  • 0

    AKBfan

    That is the first ban imposed by a U.S. president in 22 years on national-security grounds.

    No its not. Been a few bans on takeovers (CNOOC Port of Long Beach, etc) and such imposed for national securitiy reasons

  • 0

    AKBfan

    The only companies who make REAL money in China are Chinese ones. all the foreign ones make pitiful returns on investment and are often ripped off (tech, money or more) by their Chinese partners or the government

  • 0

    jianadaren

    Inflation in China is less than 2%.

    No, it is not. Where did you get a number like that? Government reported statistics here - in China - are notoriously unreliable.

    Things in shops have stabilised recently, but prices across the board have gone up - especially earlier in the year. They will go up again at year-end and especially for the Chinese New Year.

    Rents are out of control, possibly because people can't afford to buy into the housing bubble. Wages are most definitely going up.

    Those are my on-the-street observations.

  • 0

    MADCOWS

    china is a ticking time bomb

  • 0

    technosphere

    Chinese trap.

  • 1

    md2009

    There are lots of reasons why Japanese are pulling out not least of all because of rising costs and because China often does not know how to make products that meet the quality standards that Japanese consumers demand. But underneath it all many Japanese do not like the Chinese very much and they are happy to stick it to the Chinese when they can. Based on discussions (admittedly an unscientific sample) I have held with Japanese, many Japanese hold the view that Chinese are inferior, unclean and unsophisticated. And not so far underneath it all many Japanese blame China for their country's economic woes. Japan has lagged behind China for so long and many Japanese find that hard to take.

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