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Friday, Sep. 21, 2012

Factory shift to non-Chinese sites seen accelerating

Companies reopen as anger eases in China


Staff writer

The widespread protests in China appeared to ease Thursday as Japanese companies were left with yet another stinging reminder that doing business in China comes with risks.

News photo

Experts said some manufacturers that depend on production in China are likely to accelerate plans to shift some plants to neighboring nations to reduce the possibility of disruptions from political upheavals.

Over the weekend, Chinese protesters angered by Japan's nationalization of the Senkaku Islands, which are called Diaoyu in China, damaged three Panasonic Corp. plants, burned dealerships run by Toyota Motor Corp. and Honda Motor Co., and ransacked stores operated by Aeon Co. and Heiwado & Co.

Some Japanese firms closed down their operations out of fear of the attacks, which appeared to intensify with the anniversary of the Mukden Incident, in which Japanese soldiers bombed a Japanese railroad as a pretext for invading China 81 years ago.

On Thursday, Honda restarted three of its five plants in China, while Canon Inc. also reopened some facilities. Nissan Motor Co. got its factories back online Wednesday and Panasonic reopened one of its three affected plants on Monday.

"Companies' momentum to diversify production plants will definitely accelerate," said Mitsumaru Kumagai, chief economist at the Daiwa Institute of Research.

The concept of "China plus one," or shifting some plants from China to such neighboring countries as Vietnam, Myanmar and Thailand, peaked around 2010 along with the rise of labor costs in China, he said.

"The fever had died down in recent years and they no longer felt the urgency," Kumagai said. "Now, they realize that this kind of crisis could happen at any time in China."

In particular, apparel makers and other businesses requiring unskilled labor could increasingly search for other production sites, experts said. But the stronger sense of caution won't prompt Japanese firms to shift a huge amount of production, they said.

Automakers, electronics makers, retailers and other businesses targeting the huge Chinese market won't be eager to move out.

Daiwa's Kumagai said some companies are likely to stay put in spite of the local political risks and will continue trying to cash in on China's economic growth, which could continue for the next several years despite recent signs of cooling down.

"Japanese automakers have produced vehicles that best suit Chinese roads and have grown together with Chinese workers and friends," Akio Toyoda, president of Toyota and chairman of the Japan Automobile Manufacturers Association, said at a regular news conference Thursday, stressing the importance of the Chinese market.

China accounts for 25 percent of Nissan's net profit, 21 percent of Toyota's and 16 percent of Honda's, Takaki Nakanishi, an auto sector analyst for Merrill Lynch Japan Securities Co., wrote in a recent report.

China's impact on Japanese industry as a whole is huge.

In 2011, Japanese investment in China reached a record high of just over ¥1 trillion, 59.9 percent greater than the previous year. Around 22,000 Japanese firms are doing business in China, according to the Japan External Trade Organization.

If Japanese exports to China were to be cut off for one month, it would take a ¥2.2 trillion bite out of Japanese production, with machinery manufacturers hit the hardest, according to estimates by Daiwa. Following on the list would be electronics, chemical, iron and steel, and transportation machinery makers, the research institute said.

"Each company's decision on whether to scale back in China will be based on balancing the benefits of growth against the political risks," said an analyst at a research institute who did not want to be named.



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