Japan and Korea: Still Looking West to China?

Japanese and Korean firms have been investing in China since the early 80s and 90s respectively; setting up factories and research facilities in order to save on costs.  Yet as China’s growth slows, albeit still at impressive levels above 7%, the country is becoming less attractive for Japanese and Korean companies for a variety of reasons.

Major Challenges:

Several factors are affecting the decisions of Japanese and Korean firms to continue operations, expand and in some cases pull out of China altogether.

Rising Labour Costs

As China evolves from a lower to a middle-income economy, wages and associated human capital costs are rising fast, more than 10% in 2012 coupled with the increasing value of the RMB it has become more costly to ship goods manufactured in China.

Competition from Local Firms

Chinese companies are emerging as competitors to Japanese and Korean manufacturers.

Government Regulation

Ranked 91 out of 185 counties in terms of ease of doing business (which could represent the level of red tape in China), a lack of ‘guanxi’ or connections and difficulties in understanding the rules established in inland provinces as factories move away from the coast can pose great obstacles to Japanese and Korean firms.

Protectionism

According to the CEIBS Business in China Survey 2013, 16% of foreign firms are worried by local protectionism and Korean companies in particular are concerned about the unfavorable sentiment directed at their companies.

Intellectual Property Infringements

This is a key challenge, especially for companies producing higher-end products and research, the recent claim by Kawasaki Heavy Industries that a Chinese company stole their Shinkansen or high speed railway technology is a testament to the issues with IP protection in China.

Finding and Retaining Skilled Talent

With restrictions on rural-urban mobility and and a lack of semi-skilled labour in certain sectors, foreign companies struggle to cope with the shortage of key talent despite the oversupply of college graduates and migrant workers in cities.

Political Tensions

Following flare ups of territorial disputes over islands in the East China Sea,  anti-Japanese sentiment can affect overall stability of operations for Japanese companies in China as boycotts of Japanese products, worker strikes and violent protects become larger and more rampant.

Major Opportunities:

China Plus One Strategy

For years Japanese and Korean firms have been employing this strategy to set up operations in China followed by a cheaper Southeast Asian economy in order to spread risk and anticipate rising labour costs. Now in particular firms are looking to exploit newly attractive destinations such as Myanmar, India, Indonesia, Laos, Cambodia and Bangladesh.

Repatriate Manufacturing

A weaker Yen in Japan and favorable government policies in Korea are encouraging firms to relocate some of their manufacturing back home.

Focus on Higher-end Investments

Larger Japanese and Korean companies such as Sony and Samsung are taking advantage of China’s climb up the value-chain and focusing on research and higher-end manufacturing an area of which only a handful of Chinese firms can currently compete.

Sell to the Chinese Market

With an expanding middle class and rising purchasing power the Chinese market offers Japanese and Korean firms a large pool of potential consumers considering their shrinking domestic markets.

China-Korea-Japan FTA. 

A Free Trade Agreement between Asia’s economic giants would present interesting opportunities for all three nations to enhance trilateral trade and boost their competitive industries.

As doing business in China becomes more challenging for Japanese and Korean companies there are also opportunities they can exploit to be part of China’s continuing economic growth.

About the Author

Thomas is a pentalingual graduate of Modern East Asian Studies from the University of Hong Kong, now based in Japan as editor of Shifteast.com for Mandalah Tokyo.