Analysis: Japan wants manufacturing back from China, but breaking up supply chains is hard to do
09/06/2020 24:00
* Govt earmarks $2 bln to encourage shift of output back
home
* Face mask maker so far only big firm to use the subsidy
* Many companies say need to be in China due to huge market
* Relationships with Chinese suppliers also important to
maintain
By Naomi Tajitsu, Makiko Yamazaki and Ritsuko Shimizu
TOKYO, June 9 (Reuters) - When Japanese firm Iris Ohyama
agreed in April to begin producing much-needed face masks in
Japan, it marked a win for Prime Minister Shinzo Abe who wants
to bring manufacturing back from China.
Spooked by coronavirus-induced factory shutdowns in China,
Abe's government has earmarked $2 billion to help companies
shift production home. The policy, part of a massive stimulus
package to cope with the pandemic, has even been termed by some
bureaucrats as a matter of national security.
"We have become dependent on China," Economy Minister
Yasutoshi Nishimura told reporters last week. "We need to make
supply chains more robust and diverse, broadening our supply
sources and increasing domestic production."
Japanese production of masks, for which domestic demand has
skyrocketed, makes sense. But Iris Ohyama, which until this
month had only made face masks in China, is so far the only
large firm known to be taking advantage of the subsidies.
Many other Japanese firms say shifting output back home is
simply impractical and uneconomical. They need to be physically
present in China because much of what they are making is
ultimately for the Chinese consumer, and to meet the demands of
'just-in-time' production which prioritises short delivery times
for efficient manufacturing.
"The parts we make are so big that we need to be near our
customers to control our costs," said Chikara Haruta, a
spokesman at Yorozu Corp 7294.T , which makes suspension and
other auto components.
Its plant in Wuhan, China is located just seven kilometres
from a Honda Motor Co Ltd 7267.T assembly factory.
For Japan's car makers, reliance on Chinese suppliers in the
world's biggest auto market is also just good business.
"Even if we wanted to, it would be difficult to lower our
exposure to China-made parts," an executive at a Japanese
automaker told Reuters, declining to be identified as he was not
authorised to speak to media.
He added that over the past decade, Chinese suppliers had
upped their game and now provide a vast range of quality,
low-cost parts.
Toyota Motor Corp 7203.T , Nissan Motor Co Ltd 7201.T and
Honda also have at least three R&D centres each in China, and
their suppliers are following suit.
"Where the software is developed dictates where the hardware
is developed and made," said an official at a Japanese parts
supplier, speaking on condition of anonymity.
"The new government incentive is misguided if it only
focuses on bringing manufacturing back, while overlooking R&D
functions."
OVERLY DEPENDENT?
Japanese politicians have increasingly fretted over Japan's
dependence on China as a production hub.
Since the early 2000s as Chinese labour costs rose, there
has been talk of a "China Plus One" strategy — a policy of
managing risk by locating plants and facilities in China and one
other Asian nation. It gained more traction in 2012 when
bilateral tensions flared and many Japanese firms have sought to
diversify with operations in Southeast Asia.
The near total shutdown of China's factories in February as
the world's No. 2 economy sought to stamp out the coronavirus
has, however, rammed Japan's China dependence home.
The government's 220 billion yen ($2 billion) allocation is
the first time it has offered subsidies for bringing back
manufacturing. It is also offering 23.5 billion yen to Japanese
firms to strengthen and diversify supply chains in Southeast
Asia.
Japanese firms had at least 7,400 affiliates in China as of
March 2018, according to a trade ministry survey, up 60% from
2008. In the same year, Japanese manufacturing affiliates in
China sold $252 billion in goods, with 73% of that sold in China
and 17% exported back home, a separate survey by the ministry
shows.
For a graphic on Japanese companies in China, please click https://tmsnrt.rs/2Ubu7aP
CHOOSING CHINA
Electronics makers too say they would struggle to sever ties
with China's supply chains.
Nidec Corp 6594.T , which produces motors for electronic
goods, even said in April it needed to improve its supply chain
in China. It was unable to procure supplies of a basic part this
year which it had believed was sourced locally but was in fact
being shipped from Europe.
"We need to strengthen sourcing capabilities at our Chinese
plants. We should be producing these sorts of parts in-house,"
CEO Shigenobu Nagamori told reporters.
Japan Display Inc 6740.T and chipmaker Rohm Co Ltd
6963.T say potential shifts to full automation for
labour-intensive back-end processes done overseas could lead to
new assembly lines being built at home where more advanced
manufacturing takes place.
But for many others, China remains the cheaper option.
Display panel and television maker Sharp Corp 6753.T
produces ultra-thin panel cells in Japan, which are shipped to
China where backlights, connectors and other parts are added - a
process that requires constant manual testing and machinery
adjustments.
"The back-end process has long been done in China because
it's labour intensive," said a spokesman at Sharp, which was
acquired by Taiwan's Foxconn 2317.TW in 2016.
"It would be expensive to bring it back home."
($1 = 109.1600 yen)
(Reporting by Naomi Tajitsu, Ritsuko Shimizu and Makiko
Yamazaki; Additional reporting by Maki Shiraki, Tetsushi
Kajimoto and Linda Sieg; Editing by David Dolan and Edwina
Gibbs)
((naomi.tajitsu@thomsonreuters.com; +81364411078; Reuters
Messaging: naomi.tajitsu.thomsonreuters.com@reuters.net))