Japan Inc. sees ‘China risks’ anew in island row

TOKYO—Riots at Japanese factories, stricter customs inspections and other barriers thrown up over a territorial row have reawakened an alarmed Japan Inc. to the risks of doing business with China, analysts say.

Although abandoning well-developed manufacturing bases in China is not an option, Japanese firms are starting to look at other countries, such as Myanmar, as alternatives.

Sometimes violent demonstrations erupted in cities across China earlier this month while consumers have boycotted Japanese products in response to Tokyo’s nationalization of an island chain it controls but which Beijing also claims.

Factories and stores were shuttered amid vandalism and arson, or feared assaults on staff.

Most quickly reopened, but Japanese companies 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 to dam two-way trade—worth $342.9 billion last year, according to Chinese figures—but the strictures have been enough for Japanese firms to reconsider the cost of doing business with its neighbor.

“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 says China, which is no longer a mere production base, is likely to remain Japan’s biggest trading partner for now, 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 demos reminded Japanese companies of China risks again.”

Toyota and Nissan said Wednesday they would cut production in China because demand for Japanese cars has been hit.

And the airline ANA announced it had received 40,000 seat cancellations for the three months to November, as tourists from both countries get cold feet.

Two years ago, a diplomatic row—over the same islands—stymied shipments of rare earths to Japan, hampering the manufacture of hi-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 $3.0 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,” the mass-circulation daily said.

Analysts say a slowdown in the Chinese economy, as well as a rise in labor costs are practical factors that come into play as part of a rethink that means China is no longer the destination of choice.

The Philippines on Wednesday said it was courting companies stung by the territorial spat, 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 rapidly opening-up Myanmar could prove a real investment frontier, commentators say.

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

“Sentiment toward Japan is not so bad there,” he said.

During years of isolation, Japan—unlike Western allies—maintained trade ties and dialogue with Myanmar, wary that a hard line on the then-ruling junta could push it closer to China.

And Tokyo has moved to capitalize on the thawing in Naypyidaw’s relations with the outside world since decades of outright military rule were ended, announcing in April it would waive about $3.7 billion of debt.

All Nippon Airways will start regular flights between on October 15, while major Japanese contractor Shimizu will reopen a branch it closed in 1999.

The Japan Chamber of Commerce and Industry dispatched a large delegation to Myanmar this week 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 spat with China might just play in Japan’s favor.

“Myanmar is near empty and short-term profit cannot be expected,” he said. “But Japanese companies may steal a march if they take action now.”