While China
has enjoyed stupendous economic growth rates, Japan has
suffered a decade-long downturn, though now it's on the
upswing. These two opposing, yet complementary, forces
finally are beginning to interact, altering the
fundamental dynamics of the
Sino-Japanese
equation. Even though Japanese companies are still
heavily investing in China, the traffic is no longer
one-way. An increasing number of cash-rich Chinese
enterprises are starting to buy up Japanese firms
weakened by the prolonged business slump. Japan is
now China's largest trading partner, while China is
Japan's second-largest trading partner after the United
States. Most economists predict that in the space of a
few years China will easily snatch the number one slot.
China already has overtaken the US as the largest
exporter to Japan.
Although the trend of Chinese
companies buying Japanese enterprises is only in its
nascent stage, it appears to be the genesis of a highly
significant shift, which will probably transform the
underlying nature of the two countries' increasingly
interdependent economic links.
The exact number
of these Chinese acquisitions and their total worth or
estimated worth is not known. The Japanese government is
not known to have published figures or estimates for
Chinese firms investing in Japan because the numbers are
still low.There is apparently no public
country-by-country breakdown for foreign direct
investment (FDI). Overall, Japan's ratio of FDI inflow
to gross domestic product (GDP) is low.
Buoyed
by phenomenal growth and a determination to enhance
their global presence with brands and the latest
cutting-edge technologies, a growing number of Chinese
enterprises are homing in on Japan as fertile investment
soil. While some sectors of the Japanese economy have
recently shown signs of recovery, huge swathes remain in
poor shape, weakened by the lengthy recession. These
conditions make many Japanese companies ripe for foreign
acquisition.
Dr Linda Yueh, a well-known expert
on the Chinese economy at the London School of Economics
(LSE), told Asia Times Online, "China will likely become
an investor in Japan on account of the strong push of
Chinese firms to establish their brands overseas, and
[they are] learning from companies which have been able
to do so successfully. Moreover, Chinese consumers
prefer Japanese products, particularly in cosmetics, and
such industries become natural acquisitions and
partners."
In the past three years, a number
of Chinese enterprises have acquired majority stakes in
a wide variety of Japanese companies, ranging from
a microwave-oven manufacturer to a high-tech printing
firm. In most cases, the Chinese purchaser was able to
turn around an ailing Japanese business by restructuring
and relocating some production to China, where labor
costs are cheaper. All indicators point to a greater
volume of Chinese investment in Japan during 2004.
Tokyo wants to attract Chinese
investment Tokyo is keen to attract FDI as part
of its strategy to revitalize the nation's battered
economy, and China's voracious appetite for imports has
significantly fueled Japan's economic recovery. The
Japanese External Trade Organization (JETRO) is one of
the key government agencies tasked with implementing
this policy. Its efforts are part of a global five-year
plan that Tokyo hopes will double FDI from 2001 levels,
raising it to a target 13.2 trillion yen (US$119.3
billion) by 2006.
Presently, one of JETRO's many
FDI initiatives is spearheading a drive to assist
Chinese firms seeking to go to Japan. Hiroshi Tsukamoto,
the president of JETRO, is positive about Chinese
investment and eager to encourage it. He told Asia Times
Online, "JETRO already has five offices in China and
through these offices we are willing to work with
Chinese companies, to help them to come to Japan to
invest. At the moment, the numbers are rather small, but
I think the figure will gradually increase and we will
be prepared for this and ready to work with them."
In China, some regional and municipal
authorities have sponsored conferences to assist Chinese
companies thinking of investing in Japan. Some
enterprises such as the Shanghai Electric Group have
already successfully acquired a Japanese printing
enterprise and more are considering following suit. A
few Chinese consulting firms specializing in advising on
Japanese acquisitions and mergers have also sprung up,
including Tiantong Star Investment, set up by one of
China's largest brokerage houses, Tiantong Securities,
to advise government-owned companies on how to buy
Japanese firms.
JETRO president Tsukamoto
comments, "There is already a very substantial presence
of foreign companies in Japan and they are known for
their very good performance. So, in the case of China, I
think a very similar pattern will emerge." He adds, "We
hope that there will be an increase in Chinese
investment into Japan. In fact, I think it is rather a
natural trend and we are really looking forward to
cooperating with Chinese firms on this."
Chinese firms already successful in
Japan In October 2001, low profitability forced
Sanyo Electric Co, a major Osaka-based home appliance
maker, to sell its entire microwave-oven division to
China's Guangdong Midea Holding Co. Tsukamoto sees the
takeover as a positive development. "Sanyo has a good
experience with its Chinese partner [Guangdong Midea
Holding Co]. We hope that other such foreign alliances
will develop," he says.
In 2002, the Shanghai
Electric Group Corp (SEC), a heavy electronics and
industrial equipment manufacturer also entered the
Japanese market by purchasing the troubled Akiyama
Printing Machinery Manufacturing Corp, a globally
renowned manufacturer of high-tech printers.
The
new Chinese-owned entity was renamed Akiyama
International Co, Ltd (AIC). It immediately hired back
many of the Japanese company's former employees. SEC
decided to keep its factories in Japan as it was able to
trim production costs through renegotiating contracts
with suppliers. This rapidly made the new venture
profitable.
SEC then overhauled the entire
management system, cutting benefits for senior staff,
instituting a merit-based pay system, and encouraging
all employees to take initiative. The Japanese staff
adjusted relatively well to the changes, although many
found it difficult to come to terms with being taken
over by a Chinese company.
By 2003, SEC had
transformed AIC, registering approximately 6 billion yen
(about $54 million) in sales revenues from its Japanese
acquisition, a 52% increase from the previous financial
year.
SEC's executives have publicly
acknowledged that Japanese government agencies were
positive about their takeover proposals and assisted
them in successfully concluding the deal. Chinese
companies like Guangdong Midea Holding Co and SEC have
now become trailblazers for other Chinese companies that
are certain to follow in their footsteps.
Sino-Japanese economic bonds
deepening As the first few Chinese companies
establish themselves in Japan, economic bonds between
the two neighbors continue to grow at an astronomical
rate. In the first half of 2004, figures show Japan's
exports to and imports from China broke all previous
records. The newly released Japanese Ministry of Finance
data reveal that exports to China, excluding Hong Kong,
climbed an impressive 24.2% to 3.8 trillion yen (about
$26.9 billion), while Chinese imports, excluding Hong
Kong, were up 14.9% to 4.74 trillion yen.
Economics specialist Dr Yueh says, "The
long-term economic relationship between China and Japan
looks positive. Japan has been growing via its external
sector, including significant exports to China as well
as the US. Japanese investment in China has also been
robust, indicating a shift away from the US and towards
China with its rapid growth of imports exceeding 40%
year-on-year and significant opportunities for
investment with WTO [World Trade Organization]
liberalization measures coming into place."
She
adds, "With indicators of interest from Chinese firms in
foreign investment and establishing their brands, there
is also a strong likelihood that China could see Japan
as a potential partner for investment and for
acquisition given the strong brands in Japan."
JETRO's Tsukamoto concurs, "I basically think
the Chinese economy is in a rapid phase of development.
It is growing at a very high speed, faster than Japan.
So that gives China a greater global presence, meaning
they will also come to Japan and we will welcome them."
From an economic perspective, increasing Chinese
investment in Japan seems highly probable. Indeed, it is
a natural development arising from the virtual frenzy of
economic activity between the two.
China's
efforts to cool key sectors of its overheated economy -
steel, cement and real estate, among others - is not
expected to deter Chinese enterprises from seizing good
bargains in Japan.
Closer Sino-Japanese ties
inevitable While many Chinese are not
overenthusiastic about the increasing strength of
economic ties with Japan, given Tokyo's brutal wartime
occupation of China, the majority of Chinese seem
resigned to them. Tang Liejun, an educator at Qingdao
University in Shandong province, sums up this feeling
well: "Like it or not, the geographic locations and
proximity of the two countries cannot be chosen or
changed. In some way China and Japan will have to deal
with each other."
Kunio Sasaki, a Japanese
politician for the main opposition Democratic Party of
Japan (DPJ), recently visited China on an official trip.
He told Asia Times Online, "I think it is safe to say
that in certain areas the Chinese economy is racing
ahead, and in 10 years' time they will probably overtake
Japan in some aspects of commerce. Japanese people will
easily adapt to the change as we already have lots of
business dealings with China. People from both countries
are becoming more familiar with each other and that is a
good thing."
He adds optimistically, "Bilateral
ties will improve tremendously once a DPJ government has
been elected as we stand for a strong Japan-China
relationship and our leaders have already developed a
good rapport with Beijing. People know the DPJ will take
a mature approach in dealing with China. Under [Prime
Minister Junichiro] Koizumi and the Liberal Democratic
Party [LDP], relations with Beijing have been a
catastrophe." He was referring to Koizumi's annual
visits to the Yasukuni shrine, memorializing Japan's war
dead, including some executed Class-A war criminals.
Post-Koizumi China relations likely to
improve For decades, a lengthy list of disputes
has periodically soured relations between the two
neighbors. However, since Koizumi took the premiership
in April 2001, Sino-Japanese political ties have taken a
nosedive. Koizumi repeatedly has offended Chinese public
opinion by his regular visits to the controversial war
shrine.
Fortunately, the fallout has not yet
slowed the pace of economic cooperation. The great irony
of the situation is that Koizumi is the driving force
behind Japan's efforts to double its FDI, including
Chinese investment.
Since a lot of the current
friction can be directly traced to what Beijing
considers Koizumi's insensitive behavior, once he leaves
office tensions should substantially ease, and Chinese
companies are likely to be even more eager to invest in
a post-Koizumi Japan. In the meantime, Beijing has put
high-level political exchanges on hold, refusing to
allow the premier to pay customary official visits to
China.
Currently, Beijing is biding its time,
knowing that a Japanese prime minister's shelf-life is
short. Although Koizumi has been around longer than many
of his predecessors, assuming he survives until the end
of his term as president of the LDP, he is scheduled to
leave office in September 2006. Party rules dictate that
once Koizumi's current term as LDP leader expires, it
cannot be extended.
It is highly unlikely that
any future prime minister would wish to antagonize China
as Koizumi has done, so his premiership will probably
turn out to be a temporary downward blip in bilateral
political relations that will improve in the future.
China's momentum unstoppable Dr Yueh
believes economics will eventually overcome politics.
She says, "The political ties may begin to strengthen
despite the numerous unresolved territorial and
historical issues between the Chinese and Japanese.
However, as China increases its economic and political
ascendancy in the global economy, its relationship will
likely become better with Japan as one of the world's
largest economies and its key position in East Asia. The
recent talks regarding ASEAN+3 [the Association of
Southeast Asian Nations plus China, Japan and Korea] and
the possible development of a Northeast Asia Free Trade
Area are testament to the increasing economic
integration in the region and therefore should foretell
better relations among the region's governments."
Geoffrey Howe, the distinguished former British
foreign minister and deputy prime minister in the
administration of Margaret Thatcher, is currently the
president of the Great Britain-China Center. Lord Howe
believes Chinese business dynamism is building up an
almost unstoppable momentum, and the Middle Kingdom is
destined overtake Japanese and European economies.
He sums up his enthusiasm for China: "President
[George W] Bush said he did not think the French had a
word for entrepreneur, but the Chinese don't need a word
for entrepreneur, because they are all entrepreneurs."
Dr Yueh sees good long-term economic prospects
for both countries. "In 10 to 20 years time, China and
Japan will likely find themselves as the powerhouse
economies of East Asia with closer ties than at
present," she says. "The political issues will continue,
but mitigated by growing closeness in economic
linkages."
J Sean Curtin is a GLOCOM
fellow at the Tokyo-based Japanese Institute of Global
Communications.
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Sino-Japanese
equation. Even though Japanese companies are still
heavily investing in China, the traffic is no longer
one-way. An increasing number of cash-rich Chinese
enterprises are starting to buy up Japanese firms
weakened by the prolonged business slump. 
