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."

Speaking of math… I have a little bit myself… Now lets assume those GDP #s are correct... and those predictions come true...just for entertainments sake...

In Y2000 China had 5 trillion gdp, or so they say…

5,000,000,000,000/1,300,000,000=$3846 of per capita output per year…

That equals about $320 per month…

Average wages in China (a good one at that) is about $100 usd per month (around 800rmb)

That means Chinese workers get to keep less than 1/3 of the spoils of their labors… the rest goes… well somewhere else…

Now compare to the US…

10,000,000,000,000/300,000,000= $34,000 per capita output…

Average US workers wages are close to $30,000 per year…

Average US worker keeps about 85% of the spoils of his labor…

Now back to China…

With 2% population increases (annually), in 2020 the population of China will be around 1.8 billion…

Then keep in mind 2% inflation… 20 years from now 1 rmb will buy about ½ of what it will buy now…

19,000,000,000,000/1,800,000,000=$10,500 (about) in annual per capita output…

If we take the same ratio of 1/3 take home… that equates to about $3500 per year in annual wages…

That equals about $300 per month in average wages…(about 2,400 rmb)

Adjusted for inflation 2,400 rmb 20 years from now equals about 1,200 rmb in todays wages…

1,200 rmb = about $150 per month….

Now folks are making $100 per month vs $150 per month in 20 years…. That is IF those predictions are true…and the CCP stays in control of things…

While relative to itself that’s pretty good, but my prediction is the dynamic of the Chinese market won’t change a whole lot in 20 years, or in between now and then…20 years from now US exporters still won’t have a huge market to export to…

45...we live in an age of globalization where the trend is for countries to unify together...

55...the mere fact that separatist movements exist in Europe, Asia, and elsewhere does not necessarily mean that separatism will be achieved, as you seem to believe...

I did not state that I believed separatism will be achieved. You are putting words in my mouth. I was responding to your statement that the trend is for countries to unify. The trend towards globalization is countered by another force that seeks localization. Look at the strong anti-UN and anti-NAFTA sentiment here in FreeRepublic. The trend towards regional governments will provoke a strong trend towards smaller enclaves where people share a common culture. Europe, Africa, and Asia are all experiencing a reverse diaspora as ethnic communities purify themselves. Not all separatism will succeed. In fact probably only a few will. There will be surprises where large nations will not achieve independence and small ones will.

55...The E. Asian tigers all transitioned to democracy peacefully after first developing their economies rapidly under one-party rule, didn't they?...

I would say no.

South Korea
The government of South Korea was imposed on it by the US military in 1945...Lacking an effective plan that devoid of specifics, General John R. Hodge and his XXIV Corps were sent to Korea and ordered to establish a United States Military Government in Korea. Unprepared and inexperienced in Korean affairs, General Hodge set out to create a military occupational government structure without a central plan issued from above. General Hodge's first course of action in Korea was to refuse to recognize the Korean People's Republic and its various "people's committees" as the legitimate governing body in Korea. Next, Hodge moved to "resurrect" former officials who had served under the Japanese and incorporated them into the USMGIK bureaucracy. The use of former pro-Japanese Koreans as officials in the new military government and the National Police alienated the great majority of Koreans. Hodge would later replace many of his "hand-picked" Japanese collaborators with Koreans who were not part of the former colonial governing structure because of heavy pressure emanating from the populace. link

Taiwan
Taiwan has a government imposed on it by the KMT. A violent riot in 1979 led to Martial Law and then democracy...In 1949, Chiang Kai-shek lost the war on the mainland, and fled to Taiwan, where he established the remainder of his regime. For the next four decades, the people of Taiwan lived under Martial Law, while the KMT attempted to maintain the fantasy that they ruled all of China, and would some day "recover" the mainland. The Chinese mainlanders who came over with Chiang Kai-shek constituted only 15 percent of the population of the island, but were able to maintain themselves in a position of power over the 85 percent native Taiwanese through tight control of the political system, police, military, educational system and media......The Kaohsiung Incident of December 1979 galvanized the Taiwanese on the island and overseas into political action. The tangwai ("outside-the-party") democratic opposition started to question the KMT's anachronistic claim to represent all of China, and began to work towards ending the 40-years' old martial law. In September 1986, this movement culminated in the formation of the Democratic Progressive Party (DPP), which then began its growth into a full-fledged opposition party.....The Martial Law was finally dropped in 1987, but replaced by a less-stringent National Security Law. However, it wasn't until 1991 that the KMT claim to rule all of China was dropped, and that aging Nationalist Chinese legislators -- elected on the mainland in 1947 -- were sent into retirement. Since then the island has made major strides in the direction of a fully democratic political system, but the KMT authorities continue to cling to this day to their outdated claim that "Taiwan is part of China." link

Singapore
Singapore has a government imposed on it by the British after the British almost lost the colony to the Communists. Martial Law gave way to democracy and then independence...When the Communist Party of Malaya tried to take over Malaya and Singapore by force, a state of emergency was declared in June 1948. The emergency lasted for 12 years. Towards the end of 1953, the British government appointed a commission under Sir George Rendel to review Singapore's constitutional position and make recommendations for change. The Rendel proposals were accepted by the government and served as the basis of a new constitution that gave Singapore a greater measure of self-government. link

Hong Kong
Hong Kong was a British Crown colony until 1999 when it was returned to the Chinese. China's "Basic Law" for Hong Kong is not Democracy...never in over 155 of colonial appointed rule has there been a democratic election in Hong Kong. One year ago a carefully staged procedure allowed for just one third of the legislature to be decided by direct vote. The rest of the legislature was decided. as always, by appointments from financial institutions and corporations. The overwhelming majority of the population did not vote.....The rule of this colony has been not only undemocratic, but also thoroughly racist. Although the population of Hong Kong is over 98% Chinese, the governor appointed by the British crown has never been a Chinese person. The Governor has always been a white British aristocrat. The judiciary is also a not elected by the population. It is appointed. In addition, Hong Kong has some of the most draconian laws of press censorship.....The U.S. media always refers to the prosperity of Hong Kong. What the media fails to mention is that this is prosperity for a small elite. Hong Kong has proportionately the largest number of millionaires in the world. It also has the greatest gap between rich and poor in all of Asia. Taxes on the wealthy are the lowest in the world. link

55...The nations surrounding China are becoming economically dependent on China whether they like it or not out of sheer economic necessity...

I agree whole heartedly with you on this. The Chinese are a force to be reckoned with. The powerhouses of Hong Kong and Singapore show what the Chinese are capable of. Those cities are mirrored in Chinese communities around the world. Ties are strong within the communities and economic power is a by-product. Whether China is whole or more than one country, the Chinese will dominate the region. The only break in Chinese dominance was the Age of European Empires starting in the 16th century.

...Yes, separatist movements exists, but it doesn't necessarily mean they will achieve their goals. This is because the overwhelming majority of any nation usually prefers to maintain the country's territorial integrity and they usually get their way. Countries usually want to maintain their territorial integrity in any case anyway. Globalization just makes them want to maintain their territorial integrity even more and, in addition, join together with other nations to form economic blocs....

I agree. Separatist movements rarely lead to independence. US history is a good example of that. We have survived numerous secession attempts starting right after the American Revolution. The War Between the States was only the biggest one. I disagree on your reason. Struggles of any kind, including war, are won by determined minorities. The American Revolution was won by 3% who were opposed by 3%.

Countries attempt to maintain their integrity because they are like any other living being. They aim for survival. They band together in the face of a common threat and drift apart in its absence. Modern examples are the Triple Alliance and Triple Entente, the Axis and Allies, NATO and Warsaw Pact. At the end of WW1, the winners went there separate ways. At the end of WW2, the US and its Allies began disarming only to have to rearm against the Soviets. At the end of the Cold War, our allies wasted no time in attacking us in every way but militarily. The coming struggle of West versus Islam will cause Western to band together and Arab to band together. Afterward, we will drift again until we face China.

Globalization is the modern version of the struggle of each generation since human history began.

...Sure, there will always be minorities who want to separate, but the 94%-majority Han who have the power don't want to separate but stay together, especially in light of globalization, so China is unlikely to break apart anytime soon no matter what minorities want. This is the simple reality of the situation. China has had minorities throughout its history, but that never stopped China from being a unified whole more or less for most of its history...

You are assuming the Han are a single homogenous people. They are different in the North, South, and West. The people of the coast are different from those of the interior. They have different local languages and local customs. They are large pockets of various religions around the country. China hasn't been unified more or less throughout history. It has pulsed in cycles that ebb and flow. At times it has been unified but just as often it has been broken into warring factions.

The + mark denotes a time of union covering all or most of present day China. Keep in mind that the dynasty only covered the area shown at its maximum and was less during its growth and decline. Total time since the Han for greater China is 1502 years. Total time since the Han for lesser China is 615 years. More than forty percent of China's time was spent as a smaller China. That doesn't include losses during each dynasty during transitions.

China's great strength lies in it's long common history. Until the Qing dynasty the mountains, desert, rivers and sea geographically protected it from outside influences.

2100b-1800b.....Xia Dynasty.....300yrs

1800b-1700b..................no dynasty.....100

1700b-1027b.....Shang Dynasty.....673
1027b-_221b.....Zhou Dynasty.....806
_221b-_207b.....Qin Dynasty.....14
_206b- _220..+..Han Dynasty.....426
_220 - _265.....Three Kingdoms.....45
_265 - _420..+..Chin Dynasty.....155

_420 - _618.................no dynasty.....198

_618 - _907..+..T'ang Dynasty.....289

_907 - _960.................no dynasty.....53

_960 - 1279.....Song Dynasty.....319
1279 - 1368..+..Yuan Dynasty, a part of the Mongol Empire.....89
1368 - 1644..+..Ming Dynasty.....276
1644 - 1911..+..Qing Dynasty.....267

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