NYTimes.com Article: Japan Braces for a 'Designed in China' World

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Japan Braces for a 'Designed in China' World

April 21, 2002 

By JAMES BROOKE


 

TOKYO 


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 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 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." 

"It would be so easy for us to produce nuclear warheads,"
he continued. 

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 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."    


http://www.nytimes.com/2002/04/21/business/yourmoney/21CHIN.html?ex=1020496729&ei=1&en=d81126908511914b



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