Japan Braces for a 'Designed in China' World

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 (news - web sites) will bring protection for patents.

The crumbling of an informal wall that long kept assembly in China and research here may spell the end of Japan'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 1960's.

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 Company 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 Corporation 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, 200 miles 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.

JAPANESE companies are not pioneers in China. By the end of 2000, 29 multinationals, including Lucent Technologies, Microsoft and I.B.M. of the United States, Alcatel of France and Nokia (news - web sites) 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 Corporation opened an elevator research unit in Shanghai in February, a major rival, the Toshiba Elevator and Building Systems Corporation, opened a research unit, also in Shanghai. And two weeks after plans were announced for the Honda Motorcycle R&D China Company in January, the Yamaha Motor Company 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 R. Chang, president of the Semiconductor Manufacturing International Corporation, said in a speech here. 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 5 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."

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 1990's, 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."

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," Mr. 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, Mr. 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."

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, Mr. Ohmae predicted. The Nintendo (news - web sites) Company, 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, Mr. Ohmae, former chairman in Japan of McKinsey & Company, 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," Mr. 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."

...I disagree about past trends being nothing more indicators. Economics is not as random as many believe. In essence, given a country's land size, population size, and other resources, every country has a certain maximum potential GDP size called the "production possibilities frontier." You wouldn't generally expect a country with just a 5 million population to have as large a GDP over time as a country with 100 million population. And, if anything, China today is following the one-party path of development that E. Asian tiger economies took earlier, so it's reasonable to assume that just as the tigers developed their economies very rapidly, China will do more or less the same. China's economic growth over the past 20 years has actually surpassed those of the tigers...

I agree as far as the economy is concerned. However, other factors must be taken into consideration. The government will affect the growth rate as it chooses to relax or restrict its control on the economy. And as it relaxes or restricts its control on the middle class. China also has to contend with 55 official minority nationalities totaling 91,200,314 and 201 languages. In addition religion has largely been repressed.

People's Republic of China. Zhonghua Renmin Gongheguo. National or official language: Mandarin Chinese. 1,262,358,000 (1998 UN). 55 official minority nationalities total 91,200,314 or 6.5% of the population (1990). Han Chinese 1,033,057,000 or 93.5% (J. Matisoff). Also includes Central Khmer 1,000, Portuguese 2,000, Shan, Tai Dam 10,000, Tai Don 10,000. Information mainly from J. Dreyer 1976; S. Wurm et al. 1987; J-O Svantesson 1989, 1995; J. Janhumen 1989; J. Matisoff et al. 1996; J. Evans 1999. Secular, Chinese traditional religion, Buddhism, Taoism, Christian, Muslim, traditional religion. Blind population 2,000,000. Deaf population 3,000,000 (1986 Gallaudet University). Deaf institutions: 7. Data accuracy estimate: B. The number of languages listed for China is 202. Of those, 201 are living languages and 1 is extinct. Diversity index 0.48.
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In an interview last November, Liu Binyan, the former Xinhua journalist and now dissident Chinese writer living in exile in the U.S., suggested: "Nationalism and Han chauvinism are now the only effective instruments in the ideological arsenal of the CCP. Any disruption in the relationship with foreign countries or among ethnic minorities can be used to stir 'patriotic' sentiments of the people to support the communist authorities."

http://www.innermongolia.org/english/ethnic_threat_in_china.htm

The authorities' worries may be justified. Ethnic disturbances could jump from Xinjiang to Tibet and other areas. Hui Muslims, for instance, are chafing under the majority rule of China's dominant Han people. Late last year, they blocked streets in the Shaanxi city of Xian for days after a Hui died in police custody.

http://www.businessweek.com/1997/13/b352086.htm

Yunnan is one of nine western provinces that China is lavishing attention on in the form of its ''Western Big Development'' plan. The plan is designed to bind China's minorities to the motherland, especially in the three western provinces - Yunnan, Tibet, and Xinjiang - where separatist sympathies have simmered. In the 19th century a warlord founded a Muslim kingdom here for 10 years before it was put down by the ruling Quing dynasty, and separatist movements continued well into the 20th century. The struggles of the Tibetans to protect their autonomy and identity are well known. But China's most serious ethnic problem lies to the northwest in Xinjiang, a province geographically half the size of India. There, 8 million Muslim and Turkic-speaking Uighars bordering on the former Soviet Republic of Kazakhstan, outnumber the Han, as ethnic Chinese are called. Xinjiang means ''new province'' and has fallen in and out of Chinese control many times. From the mid-19th century to the Communist victory in 1949, Uighars succeeded three times in setting up independent republics. Unlike the Tibetans, Uighars are part of a greater Turkic-speaking hinterland spreading westward into the new republics of Central Asia. In recent years Uighar separatists have blown up buses and attacked police stations in the name of independence. The Chinese cracked down in 1996, issuing the infamous ''Document 7,'' which rolled back the nascent freedom of religion that had been allowed to grow across China. The document claimed that Islam was being invoked to incite rebellion, which in some cases it was, and hinted darkly that foreign influences were at work. China sees Islamicist rebellions in the Philippines, Indonesia, Russia, and Central Asia and wonders if it could spread to China now that the state is loosening its authoritarian grip. Unfortunately, the thrust of the ''Western Big Development'' seems to be to encourage ethnic Han people to come and settle in the west in order to dilute the minorities and their culture - to create ''new facts on the ground,'' as the Israelies have done in the West Bank. Given the Chinese record in Tibet, this can only lead to more misery for the Uighars and the growth of the same separatist sympathies that China hopes to suppress.

http://www.tibet.ca/wtnarchive/2000/10/24_3.html

China's Communist rulers have captured lands which previous dynasties have only held intermittently. Beijing rules many Muslims whose ancestors owed no traditional allegiance to Beijing. In modern China there are 18 million followers of Islam scattered among 10 ethnic groups. It is the Muslim population of Xinjiang Uighur Autonomous Region which exercises the minds of the Chinese leadership. Recent years have seen the mobilisation of Islam in the cause of their ethnic separatist struggle. The Uighurs are a Turkic people who have their own language and distinct Islamic culture. Uighur separatists lay claim to the revival of a short-lived earlier political entity of Eastern Turkestan. The western Uighur region of Xinjiang is rich in minerals, oil and gas - resources lacking in the Chinese heartland and essential for China's growth and stability. Beijing has no interest in fostering greater self determination for its Uighur citizens.

http://news.bbc.co.uk/hi/english/world/monitoring/media_reports/newsid_1304000/1304652.stm

At the session, the president also called upon the PLA to assume more responsibilities in fighting anti-terrorist activities, primarily in regions with concentrations of ethnic minorities -- and underground separatist groups.

http://www.cnn.com/2002/WORLD/asiapcf/east/03/12/china.jiang/

Sperling emphasized that economic growth and better material conditions in Tibet will not necessarily resolve the region's ethnic problems. Because of historical conflicts between Chinese and Tibetans as well as Beijing's harsh measures against religious freedom and political protests in Tibet, it is difficult to imagine that Tibet would be integrated into China through economic means and the implementation of the great western development program. Both Benson and Sperling believe Tibet and Xinjiang will maintain their cultural identities despite increased Han immigration. As Benson pointed out, the language and culture in Xinjiang is primarily Turkic, despite Beijing's claims that Xinjiang has always been part of China. Ethnic Uighurs and the newly arrived Han Chinese are intolerant of each other, and little or no intermarriage has occurred. Benson concluded, therefore, that Han Chinese immigration into Xinjiang is not likely to lessen local identity. Sperling argued that increasing immigration from China proper into Tibet will strengthen rather than weaken Tibetans' national feeling and their struggle against Sinicization.

http://wwics.si.edu/asia/reports/2000/chminor.htm

Xinjiang, a predominantly Muslim Uighur region, with ethnic Han Chinese making up only 37 percent of the population, has faced a growing separatist movement since 1996. A wave of violent demonstrations in February 1997 was followed by a government crackdown, in which thousands or tens of thousands of separatists (depending on the report) were arrested. According to security sources in Beijing, cited by the South China Morning Post, Xinjiang's pro-independence movement has escalated into an armed struggle due to "an influx of firearms into the western parts of the autonomous region." The sources claimed that clashes involving "heavy firearms" have taken place when authorities attempted to confiscate arms caches. Beijing has sought the assistance of Central Asian republics in stemming this arms traffic, but the Chinese government is worried that the Uighurs could find a new source of arms in the Taleban militia of Afghanistan and Pakistan.

http://www.nyu.edu/globalbeat/asia/GIU081898.html

China's secrecy and preoccupation with saving face make it all but impossible to confirm the rebels' claims. But every so often the bamboo curtain parts to reveal the reality of its ethnic divisions. An official Xinjiang newspaper, the Talimu Daily, reported that in one region, Aksu, between February and July the police "destroyed 78 violent terrorist groups, captured 768 suspects, caught 153 violent terrorists and cracked 633 criminal cases". It said security forces seized 908 illegal guns and nearly 3,000kg of explosives from separatists and extremist religious elements.

http://www.uyghuramerican.org/researchanalysis/chinahides.html

Even assuming peaceful reunification with Taiwan and victory over Tibetan separatists, Beijing's leaders face some big hurdles. They must integrate a billion subsistence-level farmers and workers into the consumer economy of the east coast or face ethnic discontent on a scale that would dwarf America's racial strife of the 1960s. Yet burdening the developed regions could breed separatist sentiment in Guangdong, Fujien, Manchuria and other regions. Over 100 languages and dialects are spoken in China. Long-suppressed religious minorities are becoming better organized thanks to the internet and other communications technology

http://goldsea.com/Air/Issues/China/china.html.

...China can gradually introduce those freedoms as its middle-class gets bigger...Introducing religious freedom and other freedoms associated with democracy too early may lead to premature adoption of democracy itself, and the end result may be that China becomes another Third World democratic economic basketcase like India or Russia...

Name one instance where any nation has peacefully transitioned to democracy. I don't think it has ever happenned.

...we live in an age of globalization where the trend is for countries to unify together (like the European Union) so as to be in a better, stronger position to face the larger global economic environment. Even if China ever did break apart, eventually it would just unify back together again because of Han homogeneity and globalization...

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