Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Japan's Future Made in China?

In recent decades, Japanese companies invested to make China the "factory to the world." In recent months, Japan's blue-chip manufacturers announced investments to make China the "design laboratory to the world."

In a cascade of announcements this spring, blue-chip Japanese manufacturing companies said they were planning research and development units in China. Spurring the moves are the low wages of Chinese engineers, a growing Chinese market for computer chips and the hope that China's entry into the World Trade Organization will bring protection for patents.

The crumbling of an informal wall that long kept assembly in China and research in Japan may spell the end of the latter's last great competitive advantage over its low-wage neighbor. And it is yet another step in China's rise, one that means both new opportunities and wrenching change for Japan, which has lately been coasting on wealth built up in earlier, high-growth decades.

Today's young Japanese have grown up in affluence, taking for granted high wages and their nation's status as the world's second-largest economy. But older Japanese returning from visiting Chinese factories and laboratories report that the hard-working, self-sacrificing Chinese workers remind them of the Japanese workers of the 1960s.

As more and more Japanese manufacturing migrates to China, the research and development activity is gradually following, to be close to production.

"China is quickly becoming a country of low wage and high tech," Yotaro Kobayashi, chairman of Fuji Xerox, warned recently, echoing the spreading insecurities here. "They are going to prove to be extremely competitive with Japanese companies."

China, with an economy only one-quarter the size of Japan's, has a long way to go. But the thousands of computer engineers graduating annually from Chinese universities are enough to keep wages at one-third the level in Japan, a country facing a shortage of engineers. With the number of 18-year-olds decreasing, colleges across Japan are closing because of a shortage of students.

Many of the biggest recent investments involve some of Japan's biggest technology names. This month, the Matsushita Electric Industrial Co. opened a research and development laboratory in Suzhou, China, for household appliances. By 2005, this lab and a Matsushita cellphone lab that opened in Beijing last year will employ 1,750 Chinese engineers.

Last month, the Nomura Research Institute, a leading Japanese systems integrator, began outsourcing software projects to China in an effort that will employ 1,000 Chinese software engineers by 2005.

The Toshiba Corp. is planning a tenfold increase in the number of engineers at its new chip development center in Shanghai, to 1,000 by 2004.

"We intend to enlarge the R&D function in China," Yukio Shohtoku, managing director of Matsushita Electric, said the day after the lab opened.

The complex, in Jiangsu province, 320 kilometers northwest of Shanghai, will concentrate on developing air-conditioners, lights, refrigerators and washing machines. His company, he added, does "as much software development outside Japan as possible" because it does not have enough engineers and the cost of engineering is high in Japan.

Following the Pack

Japanese companies are not pioneers in China. By the end of 2000, 29 multinationals, including Lucent Technologies, Microsoft and IBM of the United States, Alcatel of France and Nokia of Finland, had opened research and development units in China.

Typical of Japan's investment frenzy this spring, Yomiuri, a daily newspaper in Tokyo, recently ran a banner headline, "Toshiba Plans I.T. Plant in China," over an article that cited company sources as saying the electronics concern planned to spend hundreds of millions of dollars to build a huge information technology production and research complex outside Shanghai. A Toshiba spokesman, Hiroyuki Izuo, immediately denied the report. But given the wealth of detail and Japan's tradition of news leaks, many business analysts here believe that Toshiba is preparing a major project.

Japan Inc.'s new scramble to show individual competitiveness looks a lot like Japan's old herd instinct. Hitachi, Sony, Pioneer, Fujitsu and NEC are just some of the other blue-chip companies that have announced plans recently for research and development units in China.

Two weeks after the Mitsubishi Electric Corp. opened an elevator research unit in Shanghai in February, a major rival, the Toshiba Elevator and Building Systems Corp., opened a research unit, also in Shanghai. And two weeks after plans were announced for the Honda Motorcycle R&D China Co. in January, the Yamaha Motor Co. announced that it would open a research and development unit in or near Shanghai in 2003.

About 80 percent of the 11 million motorcycles made in China last year were copycats of Japanese models, according to the Japan Automobile Manufacturers Association. With China now in the World Trade Organization, Japanese manufacturers hope that it will crack down on sales of "Yamehas" and "Suzakis."

Much of the new Japanese push into China is in semiconductor design and production, long an area of Japanese strength. The heavy investment this year comes after the worst year by far for the global chip market, but a year in which chip demand in China grew about 30 percent. It is expected to grow another 30 percent there this year.

Fueling this chip demand, China is now the world's largest market for cellphones, and by 2006 is expected to surpass Japan as the No. 2 market for PC's, after the United States. In 30 years, China's population is expected to grow to 13 times that of Japan, from 10 times greater today.

Chinese chip demand is expected to quadruple by 2010, to a $48 billion market, Richard Chang, president of the Semiconductor Manufacturing International Corp., said in a speech in Japan. His company, 38 percent owned by Royal Philips Electronics, the Dutch giant, is part of a series of Chinese chip makers whose executives have visited here in recent weeks to drum up investment.

A surge is also expected in the number of high-tech workers. At an information technology conference here last month, Liu Jiren, chairman of the Neusoft Group, China's largest software company, told Japanese investors that in five years Chinese universities "will produce five to 10 times as many engineers as now."

Over all, Japan will be short 300,000 high-technology workers within three years, a Japanese government study warned recently. Despite this shortage, hundreds of Japanese managers and engineers, many forced into early retirement, now work in China, usually for lower pay.

The flow of investment, both human and financial, is changing the nature of China's exports to Japan. Ever since Japan and China established diplomatic ties in 1972, the two largest Asian economies were seen as complementary.

"There is a clear division of labor between the two countries, with China specializing in labor-intensive products and processes, while Japan concentrates in high-tech products," C.H. Kwan, a senior fellow at the Japanese government's Research Institute of Economy Trade and Industry, wrote in a report six months ago. "China's exports look like Japan's imports and vice versa."

Turning the Tables

In this relationship, China has sold goods like towels, coal and spring onions to Japan, and Japan has sold laptops, digital cameras and DVD players to China. Now China produces and exports all these goods. The high-technology portion of China's exports has more than tripled, to 18.5 percent last year from 5 percent in 1985. But the goods produced by Japanese companies have largely been designed in Japan.

The Japanese have long prided themselves on quality production, relegating Chinese-made goods to discount shops. Now, Japanese manufacturers and consumers say they do not see much qualitative difference between Made in Japan and Made in China.

In a recent survey of 81 Japanese companies operating in China, 62 percent of managers said they saw no difference in the quality of products made in Japan from those made in China. Fifteen percent said the Chinese products were of better quality, according to the poll, which was commissioned by The Nikkei Business Daily, Japan's leading business newspaper, and Japan Management Association Consultants, a private industry group.

These tectonic shifts are rattling the increasingly insecure Japanese. In the 1990s, China's economy grew seven times as fast as Japan's. Such statistics help populist politicians fan the flames as they play on Japanese fears of this emerging -- and ambitious -- economic giant next door.

Last year, Japan reduced its foreign aid to China by 25 percent, to $1.2 billion, the biggest cut since aid started in 1979. The cut was not big enough for Shintaro Ishihara, Tokyo's populist governor, who warned voters last month that Japan "has been providing H-bomb-producing China with hundreds of billions of yen every year from your tax money."

According to the Kyodo News agency, Ichiro Ozawa, a conservative opposition leader, warned recently that if China "gets too inflated, Japanese people will get hysterical."

"It would be so easy for us to produce nuclear warheads," he continued.

But with Japan rivaling the United States as China's biggest economic partner, such hostile talk has prompted a series of "China is not a threat" statements.

"The growth of the Chinese economy will not be a threat for Japan," Li Peng, chairman of China's Parliament, told Japanese investors in Japan this month in one such sally. "The size of the Chinese economy is still small compared with that of Japan."

Full economic cooperation with China will continue, Japan's prime minister, Junichiro Koizumi, vowed this month in a speech at an Asian economic conference in China.

"Some see the economic development of China as a threat," Koizumi said. "I do not. I believe that its dynamic economic development presents challenges as well as opportunities for Japan.

"I see the advancement of Japan-China economic relations not as a hollowing out of Japanese industry but as an opportunity to nurture new industries in Japan and to develop their activities in the Chinese market," added the prime minister, an advocate of free-market changes at home.

In an exercise in raising morale, Koizumi recently visited two Japanese high-technology companies in Tokyo and said: "I feel Japan's potential is high. Japanese people should be more confident."

Many business people in Japan think that China's growth will provide jobs for the Japanese in new ways. For example, a consortium of companies in the Japan Railway group is talking with China about selling technology and materials to build a Japanese-style "shinkansen" bullet-train system in China.

But looking 25 years ahead, when China's economy is expected to surpass Japan's, some Japanese say they will have to adjust to playing a secondary role to their huge neighbor.

"Over the last 4,000 years of history, Japan has been a peripheral country to China, with the exception of this one last century," said Kenichi Ohmae, author of "China Impact," published in Japan this month. "In the future, Japan will be to China what Canada is to the United States, what Austria is to Germany, what Ireland is to Britain."

'There Is No Border'

Despite the move of higher and higher technology manufacturing and research to China, for the near term at least Japan will retain an edge in animation, video games and the most advanced consumer electronics, Ohmae predicted. The Nintendo Co., for instance, produces 70 percent of its GameBoy Advance units in China and plans to start producing GameCube video-game consoles there this summer. But like most Japanese multinationals, Nintendo keeps most of its research and design in Japan.

Not content to write about China's high-technology boom, Ohmae, former chairman in Japan of McKinsey & Co., the consulting firm, is investing in back-room data processing and telephone information call centers in Dalien, China. Both operations take advantage of the linguistic links of China and Japan and new fiber optic telephone and high-speed data connections. "Half a million Japanese-speaking Chinese live in northeastern China," Ohmae said, referring to an area with long investment ties to Japan. "The costs are one-tenth that of Japan.

"There is no border," he added, spinning a future of ever closer economic integration. "Part of the business goes to China. Part remains in Japan. I don't see a clear, industry-by-industry separation of China and Japan."