Minolta, Olympus join manufacturing flight to China

By Ann Saphir
Bloomberg News Service

Shipping containers stand empty on a pier in Tokyo. As more manufacturers move production to China, Japan may no longer be able to count on exports as a major source of economic growth. Advertiser library photo • September 2001

The reason: Minolta Co., Olympus Optical Co. and other Japanese camera makers are shifting production to China, where wages are lower and the market is bigger.

"Costs were too high," said Ueki, 62, whose 50-year-old factory, Ueki Glass Works, is being razed to make way for a high-rise condominium, costing 20 workers their jobs. "I knew I'd have to close."

As more manufacturers shift production to China, Japan may no longer be able to count on exports as a major source of growth — putting the squeeze on small-business owners such as Ueki who rely on orders from bigger businesses to survive.

A report last week showed exports had their smallest gain in four months in April, rising just 0.3 percent from March, as the monthly trade surplus narrowed to a lower-than-expected $6.2 billion.

Japan, the world's second-biggest economy, earned more from overseas investments than trade for the first time last year, as the trade surplus shrank to an 18-year low.

In the next decade, the surplus will probably shrink by a third to $37.8 billion a year, said Peter Morgan, chief economist at HSBC Japan. As competition with China slows exports from Japan, the nation will also end up importing more goods from companies that have moved to the world's most populous nation.

Some economists say the exodus of exporters isn't all bad. Falling exports may put pressure on the Japanese government to deregulate the domestic market and spur growth, Morgan said.

"Trade probably should shrink," Morgan said. "The risk is that it won't shrink fast enough."

Japan had a $26.5 billion trade deficit with China last year, one of the few major economies with which it doesn't run a surplus. That was three times larger than its next-biggest deficit, with oil-rich United Arab Emirates. Japan imports almost all its oil.

By comparison, Japan's trade surplus with the U.S. last year was $57 billion.

The move abroad by Japan Inc. started more than four decades ago. It gained pace in 1979, when Honda Motor Co. opened a motorcycle factory in the United States. The nation's second-biggest automaker by sales now makes more cars overseas than it does at home.

China, once regarded by Japan as an economic backwater, is now increasingly seen as a destination of choice. In the six months ended Sept. 31, Japan's direct investment in China more than doubled from a year earlier to $739.8 billion.

While Japan's economy stalled in the 1990s, China was catching up in technology and infrastructure.

"Small and medium-sized companies in Japan survived because they could make things for less than large companies," said Masako Ayakawa, an economist at Mizuho Financial Group. "But now they are being forced to close as large companies shift to Chinese suppliers."

In China, workers earn a twentieth the going wage in Japan. Land is cheaper and municipal governments are offering tax breaks, subsidized utility costs and easier approval procedures to attract foreign capital to save unprofitable state businesses.

Consider Pioneer Corp, which plans to make China its biggest manufacturing base this year. The company expects to cut costs by 20 percent by making more DVDs, car navigation systems and other gadgets at its nine factories in China, including the two it opened last year.

By March 2003, China will account for more than a third of Pioneer's global production; Japan less than a quarter.

Nissan Motor Co. is in talks to start building cars and making auto parts in China to take advantage of an expected 7 percent growth in gross domestic product this year. That compares with an expected 1.1 percent decline in Japan's GDP and a car market that shrank for the fourth year in the past five in 2001.

China's car market is expected to almost triple to 5.8 million autos by 2010, according to a report by McKinsey & Co.

Japanese companies that set up shop in China are shipping the goods back home to Japan. They now account for an estimated 15 percent of imports from China.

The exodus of Japanese manufacturers to China was one reason an estimated 100,000 companies closed or went bankrupt last year, said Hirotake Araya, general manager at credit researcher Tokyo Shoko Research — a pace of about 270 a day.

As Japan's manufacturing might wanes — total factory capacity fell a record 4.2 percent in the first three months of the year — outdated regulations and bureaucratic red tape block the creation of new jobs, threatening push unemployment higher.

From 1997 to 2001, almost 1 million jobs were lost in Japan as three services jobs were created for every four manufacturing jobs lost, government figures show. During those five years, the U.S. added more than 10 service-industry jobs for every manufacturing job lost.