GISPRI No. 11, 1994

The Conference on Global Problem
Situation of Japanese Industry in Relation to China

Mitsuhiro Seki
Associate Professor
Tokyo University of Information Sciences

My parents lived on the Chinese continent for many years, and they used to encourage me to work there when I grew up.

After finishing graduate school, I was engaged by the Management Consultant Office of The Tokyo Metropolitan Government to offer management advice primarily to medium and small-sized enterprises and to plan a new factory area. The work was interesting enough, but as long as I worked for the metropolitan government office, I was not able to do anything much outside Tokyo. I spent all my vacations in China and yet I was still not satisfied. That was why I moved to the university I work for now.

Although I was originally a specialist in the theory of Japanese industry, I gradually became interested in the problems of China, and the more I studied China, the more I realized the importance of its existence. I have become of the mind that China's problems are not only those of that country, but are Japan's problems as well.

Overseas advancement of Japanese enterprises was particularly remarkable in the 1980s. This advancement began in foreign countries, especially in East Asia, because of a labor shortage and rising wages in Japan. Firms first went to Korea and Taiwan, and as wages increased there, they went further south. Many businessmen must certainly have wanted to go to China, but various circumstances seem to have prevented them from going straight into that country at that time.

After 1990, however, there was a sudden increase in the number of Japanese businesses entering China.

China's reform and liberation policies had begun in 1979, but between then and 1991 the number of Japanese firms setting up shop there was almost the same as the number in 1992 alone. 1993 saw twice the 1992 number opening. This doubling referred to China as a whole: in the areas around Shanghai and Nanjing, in which I am particularly interested, however, growth was four-fold! And more Japanese businesses are expected to enter China in 1994.

As experiences in China increase, people are beginning to realize that this is a country which is basically different from other developing countries in Asia.

First, it seems to be the final hub among numerous East Asian countries where cheap and abundant labor is available. Second, it is looked upon as a tremendous market. Third, China is now recognized as the sole country which will take over the basic technologies Japan is losing because the work is 3Ds (dirty, dangerous, and demanding). Not only does it have an abundance of cheap labor, but it is also the only country in Asia that can be looked to for those fields of industry which have traditionally been done by Japan: casting and forging, mechanical processing of large items, and the manufacture of large cans. Fourth, China has many, many talented individuals in various disciplines.

Since time is limited today, I shall address primarily the second and third points.

I will begin with the second one. I was once invited by a prefectural office in northeastern Japan to research a certain town. It was a town which was thriving because it enjoyed the presence of one of the district's largest electronic parts manufacturers. During my visit to the company (Company A), the division manager gave me the following background on the current status of the firm:

The company had survived several international economic adjustments, the 'dollar shock,' the 'oil shock,' and the strong yen. Each time, it was feared that the factory would lose its foothold in Japan and that the kind of work being done would move overseas. To forestall this they undertook steps for drastic rationalization and labor saving, and were able to lower their costs. Since their products were extremely small, shipping was minimal even if the items were exported. However, users in China said they would not buy the products unless the company actually made them in that country.

Generally in Japan, electronic parts manufacturers organized influential local businessmen and persuaded them to back cooperative factories. The parent company usually leased the equipment, while the local businessmen provided the site and physical plant, secured labor and processed the parts supplied.

But the company I visited gave notice that since they were going to have to move to China, they would be withdrawing the leased equipment from that area; three thousand people were to lose their jobs.

I then visited factories that had been cooperating with the electronic parts manufacturer, and learned that that company had told them their personnel would be given jobs if they would also move to China.

Since about last August, most of the Japanese enterprises manufacturing electrical and electronic equipment have announced their intention to move to China, and my understanding is that many factories will begin building there this summer. I am afraid that when they go into operation and the plants in Japan are closed, there will be many personnel laid off.

What has brought about this situation? The fact that China is such a vast market.

In my view the reform and open-door policies of China are very limited. China has a severe policy governing domestic production. They will probably never allow their domestic market to be free. What I mean is that "to open" does not mean a freeing of the market, but rather it makes it possible for foreign enterprises to manufacture in and export from China.

China has experienced a boom in its consumption three times since 1979. The first was in the early 1980s, when bicycles, watches, radios, and electric fans sold well. The second was in the latter half of the 1980s, and people bought television sets, refrigerators, and washing machines. Incidentally, China's production of TV sets is the greatest in the world. The third was in the early 1990s, and the commodities most sought after are now air-conditioners, microwave ovens, VTRs (videotape recorders), motorbikes, and lightweight cars.

A Japanese manufacturer of home electric appliances that has been making air-conditioners in Shanghai sold 60,000 air-conditioners in its first year of operation last year. By March of this year 200,000 orders had already been received the company's sales target for the entire year.

Motorbikes are not often seen in Shanghai because of regulations on their use there, but a large number of them are found in farming villages around Wuxi.

The sizable consumption booms during the past ten-odd years indicate the level of demand by the Chinese has risen remarkably. For instance, young people today want a Sony 'Walkman' and a Toshiba refrigerator. As the Chinese use and wear better things, the workers' sense of quality will change. I think that this will lead to the opening of the market I mentioned earlier.

The way Japanese industries have advanced into China has been in an 'assemble and export' manner. No actual processing was done, but processed parts were assembled by a large number of workers into products scheduled for export. Therefore, the factories had to be located near a harbor, such as around Dalian, Shanghai, Shenzhen, or Hong Kong.

This way of operating has not been limited to Japanese enterprises alone, and thus foreign capital has been concentrated in coastal cities. Per capita GNP in Shanghai is said to be seven times what it is in the inland province. Only the coastal areas are developed while inland regions have been left behind.

For this reason, it appears to me that inland cities are now beginning to invite Japanese manufacturers of motorbikes and other next generation products to locate there, perhaps in an attempt at "single-hook fishing." Unlike the policy of the central government, local governments of these inland cities are telling Japanese enterprises that they may sell their products inside China.

The attitude of the central government is that since China is lacking in foreign currency and must therefore control it strictly, the government cannot buy consumer goods from foreign countries. Each business that has entered China must thus balance its foreign currency independently. In contrast, governments of main inland cities are saying that, if a foreign business sells its products in China and wants to take the money home in foreign currency, that government will guarantee the whole amount. They claim to be able to do this because the overall balance of foreign currency is well maintained in the city. This broader policy is resulting in Japanese companies beginning to appear in these inland regions. If manufactured goods can be sold on the domestic market, a business need not be located near the coast, and a location convenient for inland delivery would be preferable.

The third point I referred to earlier is related to fundamental technology. In September of 1989 I went to China as a member of the Dalian Investment Environmental Investigation Group. My role was to run a diagnostic check on local enterprises that might be interested in participating in a joint venture with Japanese firms. Midway through my three week stay I visited the Second Dalian Electric Machine Works. It is a national enterprise with about 2,000 workers which manufactures mid-size motors. Unlike the Japanese, Chinese manufacturers handle all steps of a motor's production: designing, casting, machining, pressing, coiling, assembling, coating, and final inspection.

I had asked them to show me the machining and pressing shops prior to my visit, and was quite surprised at what I saw. The equipment, workers' way of working and the layout of their workplace, everything was exactly the same as in a Japanese medium or small-sized business.

I then interviewed the plant manager who told me that until 1984 the production of this factory had been the second lowest among 30 enterprises of this kind in all of China. But in 1989 when I visited it was by far the largest in the entire country. 1984, by the way, was the year the northern districts of China, such as Liaotung Peninsula and Dalian were opened to foreign enterprises.

I asked him how such a remarkable turnaround had been accomplished. He told me that in 1984 when Dalian was opened, the management of the factory had an opportunity to be checked by a Japanese firm (Company Y) with the cost borne by the Japanese Government. The checking was taken over by another company (Company F) later. Company F offered advice on how improvement could be made in the casting techniques being used. The Second Dalian Electric Machine Works, having now reached the level of casting recommended by this company, has signed a contract for castings production on a commission basis with this company and is exporting to Japan.

What did this mean? It reminded me of something else in which I was involved. Since the mid-1970s, I have checked about 5,000 enterprises in the Tokyo-Yokohama district, so I can honestly claim to know every detail of this district. Since the middle of the 1980s I have seen the rise of an increasingly troubling situation: enterprises engaged in the type of processing I mentioned earlier which is 3Ds (dirty, dangerous, and demanding) have, one after another, given up. These are firms doing casting, forging, plating, heavy machining, or the manufacturing of large cans.

In 1986 and 1987, I looked at areas all over Japan where casting, forging, and machining of large items were going on, and found that the fundamental situation was the same as that in the Tokyo-Yokohama district, though four or five years behind it.

I imagine this is exactly the phenomenon which led to the contract for the production on a commission basis between the Japanese company and the Second Dalian Electric Machine Works. In short, it has become difficult to expect a long-term steady supply of basic formative from Japanese domestic manufacturers. Viewed in terms of 20 or 30 years, it is also difficult to get them from Korea, Taiwan, or Hong Kong. The only place that can be relied upon for these basic formative now is China, the area from Shenyang to Dalian or that from Shanghai through Wuxi to Nanjing.

If the handling of this work is increasingly being done in other Asian countries, particularly in China, what is to become of Japan's industry in this sector? I think we cannot but rely on East Asia for large quantities of these products.

Strengthening the network of industry and technology will lead to stability and prosperity in East Asia, and we must do all we can to ensure that. Like a black hole, China is greedily absorbing basic technologies these days. But at a certain point she must be brought under control. This is the concept of "manufacturing minimum".

Although I do not know yet where the minimum line should be drawn, I believe every country must have one. If a country is to keep manufacturing things independently and retain the power to plan, create and develop, it is essential to set a manufacturing minimum.

This minimum level must be maintained even if the economic cost is high, though I do not have the answer to by whom and how the cost will be borne. It would be dangerous for Japan to lose all its basic formative, casting, forging, and heavy machining technologies, because the country's manufacturing in this area would then be no more.

There is a so-called "rule of a mother machine." For example, a machine with a precision of 1/100 mm cannot produce parts more precise than this. But a skilled worker with long training and experience can obtain a precision of 1/1000 mm or 1/10000 mm. The Tokyo-Yokohama district has individuals with a variety of specialized skills. If these skilled workers were to disappear, Japan would not be able to put a rocket into orbit. If left to the mechanics of the market alone, there will absolutely be no successors for these specialists.

Japanese manufacturers are already looking at processes categorically. For casting and forging they depend on China, while plating and precision machining are performed in Japan.

With regard to the fourth point I mentioned earlier, the abundance of talented people in China, it may be of interest to you to know that Qinghua University in Beijing has the largest number of Nobel Prize winners in Asia.

The State Science and Technology Commission of China states that, although the country is rather advanced in science and technology, it is not industrialized. I imagine, however, that China has very highly developed military technologies, particularly those concerned with rockets, lasers and aeronautics. I have been told there are five research institutes specializing in lasers, each with a staff of 500.

It is not a well-known fact in Japan, but there is a "Silicon Valley" in Beijing. When I asked the Chinese why they did not announce this in Japan, they answered that they were still dealing with the domestic problem of how to industrialize their science and technology.

On a trip to Dongbei University in Shenyang, I found that there was a joint venture with a Japanese enterprise being carried on in the research building. About 50 people were busy at their workstations. According to the Japanese supervisor, these were associate professors of the University who, after studying Japanese for one week, were able to read the specifications sent from the main office in Japan.

China has a very large pool of talented and able persons, even though the country has not yet become involved in the current of market economy. I find it strange and am getting a bit worried about the fact that Japanese enterprises are apparently not concerned about this.