Japanese firms should adapt to changing China

By Li Xiaochun Source:Global Times Published: 2018/1/17 21:58:40

Illustration: Peter C. Espina/GT

Japanese conglomerate Nitto Denko Corp recently denied reports that it closed a plant in Suzhou, East China's Jiangsu Province. The company said, however, that it had decided to stop making polarizers, one of the most important components in liquid crystal displays, at that particular plant.

The reported relocation of that production sparked concerns over the challenges facing Japanese companies in China.

Nitto came to China in 2001, when China had a strong comparative advantage in terms of labor. Many companies like Nitto had great returns at that time as they took advantage of China's demographic dividend. But due to the rapid growth of the Chinese economy, production costs have soared and eroded the companies' advantages.

The Nitto issue reflects the contradictions created during the economic transformation of China. The only option for Japanese enterprises is to follow the broader trend.

Most Japanese companies - Nitto, Sharp and others - invested in China to take advantage of the demographic dividend. These companies had to go overseas to make up for labor shortages in Japan, but they have not been willing to transfer their core technologies to China. Nitto, a technology-intensive company at home, only brought production to China, where it became a labor-intensive company.

During the past decade, China's economic development was unprecedented. Costs such as labor and land surged with its economic development. Also, in the same fields, local enterprises developed as well.

Japanese companies are facing a dilemma. They want to protect their core technologies and so they won't transfer them to China. But Chinese labor costs have risen so fast that a labor-intensive production model is not suitable for China any longer.

While the Chinese economy undergoes a transformation, companies that formerly benefited from the Chinese demographic dividend must also transform. Only by adjusting to the changing market can they survive in China. Japan has to consider more technology cooperation with China instead of treating China as just a factory.

This situation also means that local governments in China must do more for foreign companies. This doesn't mean simply preferential policies. In the past, local governments put more focus on attracting investment and businesses without providing enough follow-up. Now it's time to do more for foreign companies, especially in terms of living conditions.

Some Japanese firms will reallocate production from China to Southeast Asia. It's inevitable for those that cannot adapt to the economic changes in China. But allowing this to happen does not have a good demonstration effect. To show support for globalization amid rising protectionism and populism, China has to attract more renowned companies that are both technology- and capital-intensive.

China can't do much with empty factories if companies leave the country, and what will happen to the workers? Also, any gaps in industry chains and markets will take time for Chinese companies to fill.

It is still important for foreign investment to stay in China. The Japanese companies did not hinder the development of local companies - actually, they stimulated it. Their advanced management concepts and skilled personnel contributed to economic growth.

Their products provided more learning opportunities for China. Nitto, for example, which is a major player in the world market for polarizer film, set quality standards for the industry.

These effects are important for Chinese manufacturing to reach a higher level.

In 2018, the Chinese economy will keep growing and labor costs will keep rising. There may be more cases like Nitto, but they should not be treated as crises. They are just episodes in China's economic transformation.

For companies that want to stay in China and share technical advances, the government can do more to help them complete their own transformation.

The author is a professor at the Business School of Nanjing University. bizopinion@globaltimes.com.cn


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