New York Times
February 17,2004

Japanese Capital and Jobs Flowing to China


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.