Japanese printer giants Brother, Kyocera & Fuji Xerox have relocated from China to Vietnam

Japan has offered a group of 87 companies subsidies totalling US$653 million to expand production at home and in Southeast Asia. The coronavirus pandemic has wreaked havoc on global supply chains, and Japan is officially trying to diversify its supply chains and make them more resilient

Japan’s decision to offer an initial group of 87 companies subsidies totalling US$653 million to expand production at home and in Southeast Asia has sparked debate whether the world’s third largest economy is trying to gradually decouple from China.

The coronavirus pandemic has wreaked havoc on global supply chains, with the crisis underlining what many companies and countries have known for some time: they are too reliant on China.

China is Japan's largest trading partner, and Japan is China’s second largest trading partner, and while not all of the enterprises involved in the initial wave have operations in China, the move by the Japanese government has sparked concerns in China.

Although the companies involved are estimated to be less than 1 per cent of total Japanese investment in China, and there will not be an immediate economic impact, if the trend continues, it might shake the foundation of China’s long-term growth model and potentially lead to some hollowing out of the country’s industrial base.

Using the subsidy, 57 of the companies will open more factories in Japan, while the remaining 30 plan to expand production in Southeast Asian countries, including Vietnam, Myanmar and Thailand. 
Around 70 per cent of the companies are small and medium-sized enterprises, with over two thirds involved in medical supply manufacturing.

A second list of companies to be offered subsidies is also being drawn up, with a similar composition to the first, according to Japanese officials.

Instead of cutting off ties, Tokyo’s goal is to diversify supply chains, make them more resilient, and be less dependent on China - Scott Kennedy

A survey by Teikoku Databank, a leading Japanese credit research house, showed that there were 13,685 Japanese firms in China at the end of May 2019, down from 13,934 in the previous survey conducted in 2016. At the peak in 2012, there were 14,394 Japanese firms with operations in China.

But caught in the middle of the trade war between China and the United States, as well as suffering the impact of the coronavirus, Japanese printer giants including Brother, Kyocera and Fuji Xerox are relocating from China to Vietnam. Sharp is also set to relocate part of its multi-function printer production lines from Jiangsu province to Thailand, although these moves are not all linked to the subsidies, according to Chinese magazine Caijing.

Liu Zhibiao, a professor of industrial economics at Nanjing University in Jiangsu, said local governments are becoming increasingly worried about the looming exodus of Japanese manufacturers as they would “lose face” if foreign enterprises opt to relocate.

“In Jiangsu, we haven’t seen a trend of the mass exodus of Japanese firms. We understand the Japanese government’s move, particularly given what has happened since the Covid-19 pandemic,” said Liu, who is also a government adviser.

“The Jiangsu government is confident about its infrastructure and government efficiency, so they are not that worried about the exodus. So at the end of the day, the only way for local governments to keep foreign enterprises is to help lower their costs and provide a safe investment environment for them.”

Japan’s imports of electronic products, computers and car parts is heavily dependent on China, but the coronavirus ground factory production in China to a halt earlier this year, which resulted in production disruptions in Japan.

Last month, Japan’s annual white paper on trade also said companies in upstream positions are easily affected when production activities are disrupted in China, so the country needs to rebuild a resilient supply chain to prepare for and deal with another potential crisis in the future.

The Japanese government’s move came at a time when US-China relations are at an all-time low. In April, on the same day Japan announced its subsidy plan, White House National Economic Council director Larry Kudlow said the US should “pay the moving costs” of every American company that wanted to move out of China.