Japanese Capital and Jobs Flowing to China

The New York Times

February 17, 2004
By KEN BELSON

SHANGHAI - The qualms are gone. Now even Japan's pride and
joy, its top-end electronics manufacturers, are coming to
China.

They are building immense new plants and research centers
here to take advantage of abundant Chinese labor, doing
nearly every kind of job their Japanese work force does.
Cost pressures are driving them to forget old fears of
having their best technology stolen or of harsh publicity
at home from moving high-paying jobs out of the country.

"We hesitated in the past, but we cannot say that any
more," said Hiroyuki Mineta, chairman of the Pioneer
Corporation's Shanghai subsidiary, as he stood on the
factory floor where hundreds of Chinese workers were
building 11 types of DVD recorders. "We have to overcome
our fear or we won't be able to survive in the market."

Unlike the first generation of Japanese factories in China,
which cranked out routine products like washing machines,
air-conditioners and stereos for sale mainly in China and
neighboring countries, the Pioneer plant in the
Comprehensive Industrial Development Zone, an hour's drive
south of central Shanghai, assembles the company's most
advanced consumer products and ships them to Europe, North
America and even to Japan.

In an office tower across the river from the city center in
the Pudong new area, Hiroshi Matsuo of Sharp says that his
company, too, is getting over its squeamishness. Like NEC,
Toshiba and others, Sharp is actively recruiting Chinese
engineers for its newly opened research and development
laboratories here.

For the moment, they will work only on goods intended for
sale locally. Mr. Matsuo said that the company's Japanese
engineers are still better at designing the main components
that distinguish electronic products. But Sharp's Chinese
engineers, who are paid only one-quarter of what Japanese
make, are closing the talent gap.

"Our top management is afraid of exporting brain jobs to
China," Mr. Matsuo said. "But comparing Chinese and
Japanese engineers on a cost-performance basis, Chinese are
superior. They are hungrier. Most Japanese are no longer
hungry."

For a Japanese manager to say such a thing would have been
unthinkable a few years ago. The Japanese electronics
giants have for decades been national symbols of know-how
and corporate might, with globally famous brands, well-paid
work forces and sales in the billions.

But with the bursting of the technology bubble and the
commoditization of even many sophisticated digital
products, companies from Sony and Matsushita on down find
themselves under growing pressure from lower-cost rivals
like Samsung in South Korea and Dell, which relies on
contractors across Asia to build many of its products. To
compete effectively, the Japanese companies say, they must
cut costs and move even more production to China.

Japan poured some $4.2 billion directly into factories and
other operations in China in 2002, according to the Japan
External Trade Organization, and the electronics industry
accounted for more than 40 percent of manufacturers'
capital. A new Japanese factory seems to open in China
almost every week, while another closes at home, reshaping
Japanese marquee industries.

The pace is unlikely to slacken anytime soon, Japanese
executives and industry experts say, not least because
Japan has come relatively late to the overseas
manufacturing trend. Counting all industries, Japanese
companies now do about one-sixth of their manufacturing
abroad, compared with 27 percent by American manufacturers.
And China will remain the focus of such work, the experts
say.

This is particularly true of electronics, an industry where
prices can fall rapidly and the pressure to cut costs is
constant. Pioneer, for example, will build 28 percent of
its products in China this year, up from 22 percent last
year.

"Japanese manufacturers are only doing what's rational" by
moving to China, said Masaki Yabuuchi, who tracks Japanese
manufacturers in Asia for the external trade organization.

The move into China is not coming just at the expense of
factories and workers in Japan but also in Southeast Asia,
where many Japanese manufacturers turned in the 1980's and
early 90's during a more modest wave of foreign expansion.
Matsushita, Japan's largest electronics maker, has said it
intends to eliminate 40 percent of its production and sales
subsidiaries in Southeast Asian countries by 2006, because
costs there are higher than in China.

"It's only a question of time that production on a
competitive scale will not be able to survive" in Southeast
Asia, said Yukio Shohtoku, Matsushita's executive vice
president for global operations.

Matsushita will not abandon Southeast Asia, because keeping
some factories there is a useful hedge against the risk of
turmoil in China, Mr. Shohtoku said, and because it will
need a continuing presence to meet estimated sales growth
of 26 percent by 2006, to 660 billion yen - $6.26 billion
at current exchange rates. But over the same period,
Matsushita expects its sales in China to more than triple,
to 1 trillion yen - almost $9.5 billion.

As they rush into China, Matsushita and its rivals have
shut down dozens of factories in Japan, pushed tens of
thousands of workers to retire early, and cut back on the
number of Japanese university graduates they recruit,
reinforcing fears of a permanent loss of premium jobs. And
since 1991, 2.5 million manufacturing jobs have disappeared
in Japan, a decline of 25 percent.

In the United States, where the exodus of manufacturing
jobs is an old story, permissive labor laws and an
entrepreneur-friendly financial system foster the creation
of new businesses. But Japanese policy makers have been
slow to loosen their tight grip on the economy, making the
country one of the most expensive places in the world to do
business. A heavy emphasis on preserving jobs rather than
creating them has also stunted worker mobility.

"Germany and the U.S. have gone through the same thing
already,'' said Tomoko Fujii, an economist at Nikko
Citigroup. "But they have created new industries to
compensate. Job creation via deregulation is key."

The relationship between Japan and China, fraught as it is
with historic antipathy and grievances, remains uneasy.
Nationalist commentators and labor unions in Japan make
China out to be a job-eating bogeyman; still, Japanese
consumers are able to stretch their stagnant or falling
incomes further because of cheap Chinese textiles, food
products and other goods.

The new factories that blue-chip brands like Hitachi and
Fuji Film are opening in China make their Japanese parent
companies that much better able to survive in the global
marketplace. And China's rapidly growing and modernizing
industries are big customers for Japanese steel, machinery
and controls, providing a growing market for capital goods.

In all, trade between China and Japan trade increased 34
percent in the first six months of 2003, to $60.4 billion,
a record. Without its China trade, economists reckon, the
Japanese economy might not have grown at all in 2002.

Of the manufactured goods that China ships to Japan, about
a third are made by Japanese companies and may not seem
Chinese to this country's consumers. But increasingly,
manufacturers with a distinct Chinese identity are making
themselves felt in the Japanese marketplace. China's
best-known electronics and appliance company, Haier, now
sells washing machines and refrigerators in Japan, and has
even rented one of the giant neon billboards in the Ginza,
Tokyo's equivalent of Times Square, to promote its brand.

"I want to reach the hearts of Japan's consumers," Yang
Mianmian, Haier's president, told executives at a Ginza
restaurant last August after the billboard was lighted up.

Increasingly, they are doing so, giving Pioneer and other
Japanese manufacturers even more reason to move operations
to China. And if they do not cut production costs, the
Japanese brands may price themselves even out of their home
market.

This possibility, however distant, is not lost on Mr.
Mineta, who oversees 3,550 workers at the Pioneer plant
here, which runs around the clock and has expanded more or
less continually since it opened in 2001. Pioneer is hiring
workers by the hundreds to fill jobs on the line that pay
about $95 a month, above average for the region.

Spread across the spotless factory floor, teams of
employees in gray work smocks and pink hats do everything
from soldering components and plugging in circuit boards to
running quality-control tests and packing completed DVD
players in boxes along with instruction manuals in French,
German and other languages. In China, paying workers, most
of them women, to do rote tasks like hunching over tiny
chip assemblies and affixing pinhead-size pieces is cheaper
than installing the industrial robots that would typically
be used to do the same work in Japan.

As Japanese manufacturers develop China as a market as well
as a manufacturing site, many are setting up design centers
too, and not just because Chinese engineers work cheap.

"We used to sell one kind of product, including in China,"
Mr. Matsuo of Sharp said, but now the company has Chinese
designers developing models to suit local tastes,
requirements and budgets. "If we sell conventional
products" designed for Japan, he said, "we can't compete
with Chinese producers."

Japanese companies say the crucial technologies at the
heart of most electronic goods continue to be developed in
Japan, and then sent to the Chinese plants as a "black box"
for finished products to be built around. But to recoup
their development investment, many Japanese companies are
now licensing even core technologies to Chinese
manufacturers, including direct competitors - a practice
that Mr. Shohtoku of Matsushita and other executives
acknowledge can be a double-edged sword.

The interweaving of East Asia's two giants shows no sign of
slowing. At the back of Pioneer's factory, Mr. Mineta takes
visitors to the loading docks. From there, beyond the
parking lot filled with hundreds of workers' bicycles, the
view is of flat, mud-caked fields and a few rough-hewn huts
that seem lost in time.

For now, farmers still work that land, but Pioneer has an
option to lease it and nearly double its production space.
Though headquarters has not given a final go-ahead, Mr.
Mineta said it was only a matter of time. "We want to
expand as quickly as possible," he said.