Chinese Exports: Japan's Phantom Menace

Scary as it seems to most Japanese, the Asian giant's growing prowess -- even in high tech -- doesn't have to be bad news for them

By Brian Bremner

Perhaps the most fascinating economic trend in the Pacific Rim is coastal China's emergence as the region's workshop. I'm not just talking factories that churn out Christmas ornaments, bicycles, and textiles, but manufacturers producing DVDs, PDAs, mobile phones, and all manner of cool high-tech gadgets.

Japan's sogo denki, the big, vertically integrated consumer-electronics companies like Hitachi, Toshiba, and NEC, have long faced growing competitive pressure from the South Koreans and Taiwanese. Is China next? And are Japan's fabled high-tech industries destined to cede one critical market after another to lower-cost competitors in Shanghai and elsewhere in China?


  The Japanese press is rife these days with a mixture of fascination and dread about China's growing economic clout. It's not just the Middle Kingdom's vast market. Cheaper imports from China, plus the steady migration of Japanese manufacturing production overseas, strike a raw nerve in a country that has always prided itself as an high-end export powerhouse, one that preserves high-wage jobs at home and dominates critical markets overseas.

Yet, the trends were unmistakable in the Japanese trade data all last year. Despite the recent and dramatic depreciation of the yen, exports fell sharply. Some doomsayers predict the decimation of Japan's high-tech manufacturing base -- and sayonara to all those nice-paying engineering and production jobs -- as cheaper labor, land, and utility costs in China prompt more and more Japanese companies to shutter factories at home.

Scary scenario. To Americans, it might be reminiscent of the arguments about free trade that have swirled during the 1970s, 80s, and 90s. But such gloomy types in Japan ought to get a grip. The data do indeed show a seismic shift in the economy. Yet, nothing is intrinsically wrong with this development. Japanese companies need to outsource to stay competitive. They should focus the efforts of their well-paid, well-trained Japanese workers on making more complex products like high-end liquid-crystal-display panels and digital TVs, while other workers should enter the service economy.

This shift occurred in the U.S. and, by and large, produced a healthier economy. Japan should let China, already home to one-fifth of Japanese consumer-electronics parts and component plants, handle the job of producing cheap goods.


  After all, what's the alternative? China is a vast and expanding market. It's clocking double- and even triple-digit growth in just about every major consumer-electronics category, notes Richard Chang, President and CEO of Shanghai-based Semiconductor Manufacturing International. As Chang, a former Texas Instruments executive, sees it, China could be a "win-win" proposition for Japanese companies. They would save billions in production costs, keep at home high-end research-and-development, design, and other critical jobs, plus plug into a vast consumer market for their goods.

True, big players like NEC and Matsushita already know this and are shifting more and more resources to China. But plenty of other Japanese high-tech players have been too reluctant to make the move, unwilling to take the unpopular step of shutting down facilities at home to ensure a prosperous future down the road. And, adds Chang, "if the Japanese don't take the opportunity, the U.S., Taiwanese, and Europeans will." Indeed, he points out that in mobile phones, where Japan leads the world in technological sophistication, Siemens and Motorola dominate the Middle Kingdom market.

All those cheap Chinese imports may give Japanese producers headaches -- but certainly not Japanese consumers. These days, shoppers can buy $15 dress shirts imported from China instead of $50 shirts made locally. Where I come from, increasing the purchasing power of consumers is called progress.


  True, some Chinese companies you haven't heard of now will be powerhouses in 10 years and probably will give some Japanese rivals a run for their money. But it's also true that smart Japanese outfits will benefit as China gets more and more plugged into the global economy.

Instead of worrying about some phantom economic threat from the Middle Kingdom, however, Japan should turn its vast talents to fixing its banking mess and rebuilding the rest of its creaky economy at home.

Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BusinessWeek Online

Edited by Douglas Harbrecht

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE