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Friday, Oct. 19, 2012

Firms assessing China risk anew in isle row

Myanmar could loom large as Japan Inc. looks for new frontiers


Riots at Japanese factories, stricter customs inspections and other barriers thrown up over the Senkaku Islands territorial dispute have been a stark reminder to Japan Inc. about the risks of doing business with China, analysts say.

News photo
Senseless: This supermarket run by the Aeon Co. group in Qingdao, China, was vandalized and looted by anti-Japanese demonstrators last month. KYODO

While abandoning their well-developed manufacturing bases in China is not an option, firms are starting to look elsewhere, such as Myanmar, as alternatives.

The public demonstrations that erupted last month in cities across China sometimes turned violent. Factories and stores were shuttered amid vandalism and arson, or out of fear that employees would be assaulted.

Most quickly reopened, but Japanese companies operating in China then began reporting difficulties with getting their products through customs and longer waiting times for visas for their staff.

There has been nothing big enough yet to dam two-way trade — worth $342.9 billion last year, according to Chinese figures — but the restraints have been enough for companies to reconsider the cost of doing business there.

"No one knows when such demos will happen again in China in the near future," said Takeshi Takayama, an economist at NLI Research Institute in Tokyo.

Takayama said that China, which is no longer a mere production base, is going to remain Japan's biggest trading partner as the world's second-largest economy is too big to ignore.

"But I think Japanese companies will shift part of their investment from China to other Asian countries for sure," Takayama said. "The demonstrations reminded Japanese companies of China risks again."

Major automakers, including Toyota and Nissan, have said they are implementing production cuts in China because demand for Japanese cars has taken a beating. All Nippon Airways and Japan Airlines have announced tens of thousands of seat cancellations since the tensions flared up.

Two years ago, a diplomatic row over the same islets stymied shipments of rare earths to Japan, hampering the manufacture of high-tech products.

Calm was eventually restored and Japan Inc. resumed its huge investment in China, worth $6.3 billion last year, up 50 percent from the previous year. The United States invested $3 billion over the period, down 26 percent, according to official Chinese data.

But the renewed diplomatic tensions have rung alarm bells.

"We understand why one Japanese business leader after another is expressing wariness about investment in China," the Yomiuri Shimbun said in an editorial. "It is highly likely that Japanese companies will sharply curb their investment in China and instead increase investment in other Asian countries."

Analysts say a slowdown in the Chinese economy and a rise in labor costs are practical factors that come into play as companies no longer automatically think of China as the destination of choice.

The government in the Philippines has said it is courting companies stung by the territorial dispute, offering tax incentives and promoting a well-educated population, economic stability and a drive to stamp out corruption.

Thailand and Vietnam offer well-worn paths, but Myanmar could prove to be a real investment frontier as it opens up to the outside world, commentators say.

"Myanmar is quite a hopeful destination for Japan," said Yukio Suzuki, chief analyst at Belle Investment Research of Japan.

"Sentiment toward Japan is not so bad there."

During the long years of Myanmar's isolation, Japan — unlike its Western allies — maintained trade ties and dialogue, wary that a hard line on the ruling military junta would have pushed it closer to China.

The government has moved to capitalize on the current thaw, announcing in April it would waive about $3.7 billion of Myanmar's debt.

All Nippon Airways started regular flights between Japan and Yangon on Monday, while major contractor Shimizu will reopen a branch there it closed in 1999.

The Japan Chamber of Commerce and Industry already dispatched a large delegation to Myanmar to hold talks with local business leaders and high-ranking government officials.

Belle Investment analyst Suzuki said a push into Myanmar could prove a boon, and the timing of the rise in tensions with China might just be in Japan's favor.

"Myanmar is near empty and short-term profit can't be expected," he said. "But Japanese companies may steal a march if they take action now."

Top exec takes long view


The chairman of the Japan Association of Corporate Executives is warning that the tension between Japan and China could continue to have an adverse impact on Japanese companies for an extended period.

"We have no choice but to be prepared to see the current situation continue for the time being," Yasuchika Hasegawa, chairman of the association known as Keizai Doyukai, said Tuesday.

Chinese maritime surveillance vessels have increased their activity around the disputed Senkaku Islands since the government nationalized three of the five main islets last month.

"Japan will have to patiently address such actions and make them leave the waters as early as possible," Hasegawa told a news conference.

"The situation is unlikely to improve rapidly" even after the change in the Chinese Communist Party's leadership at its congress in November, he said.

Hasegawa, who is president of Takeda Pharmaceutical Co., said Japanese companies are finding it difficult to rely on domestic demand alone and must operate in foreign countries, including China.

He also welcomed Softbank Corp.'s decision announced Monday to acquire a 70 percent stake in major U.S. cellphone firm Sprint Nextel Corp. "It was a courageous decision," Hasegawa said.

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