China's cheap labor lures Japanese firms

By Paul Wiseman
USA Today

DONGGUAN, China — Nervous Japanese called it "the China Syndrome" — the fear that cheap Chinese labor would spell doom for corporate Japan. How could Japanese factories compete with Chinese rivals that paid workers 1/30th as much?

But these days, China's lower costs are looking less like a threat and more like salvation to Japanese companies desperate to regain a competitive edge in world markets. At first reluctantly, but now with gusto, Japanese executives are descending on Chinese boomtowns like this one across the border from Hong Kong, spending their nights crooning at karaoke bars and their days scouring the industrial landscape for factories they can do business with.

Canon, NEC, Honda and other big Japanese manufacturers are spending billions to put up plants in China, usually with local partners.

Japanese investment in China this year could shatter last year's record $4.6 billion. Largely because relocated Japanese factories in China are busy sending products back to Japan, China quietly surpassed the United States as the No. 1 exporter to Japan in the first nine months of this year.

Shifting production overseas isn't new to Japanese manufacturers. They moved factories to Southeast Asia, the United States and other nations in the '90s. Japan has shed 3 million manufacturing jobs since 1990, when it fell into an economic slump from which it hasn't recovered. But after a brief China investment boom in the mid-'90s, Japan grew wary about doing business with a historic rival it sees as an economic threat.

Worried about rip-offs

For good reason, Japanese executives saw China as a backwater that could crank out cheap toys but make few sophisticated products. They worried about getting ripped off by Chinese partners; about seeing their best technology stolen and used against them by Chinese competitors; about shoddy Chinese-made goods that wouldn't meet the standards of persnickety Japanese consumers; about a capricious and corrupt communist government that changed the rules of business without warning. They even had to worry about personal safety: In the '90s, Chinese kidnapping rings preyed on foreign executives in coastal factory towns such as Dongguan.

Those worries haven't been banished. But China has gone a long way toward reassuring Japanese investors that its politics are stable, its streets safe and, most important, its factories competitive.

"In the past two years, the number of factories that have been able to find (an acceptable) level of quality has increased dramatically," says Takanori Ohara, executive director of Ad-Forest, a company in Osaka that makes alarm systems used in homes and cars. "This wasn't an overnight change but a slow buildup over a number of years."

Ohara has witnessed the transformation firsthand. One of his early experiences in China proved disastrous. As an executive for a Japanese electronic-games manufacturer in the mid-'90s, he placed a big order for handheld computer games with a Chinese factory. But his supplier substituted Chinese computer chips for the Taiwanese chips Ohara had specified, resulting in 50,000 defective games.

Back then, Chinese firms were out for quick cash, partly because they didn't know if their government would shut down the economic reforms that opened China to trade and investment in the early '80s. Ripping off Japanese was also sweet for those with memories of Japan's occupation before and during World War II.

Now, Chinese are more confident that economic reform is here for good, and more factory managers know that staying in business means satisfying customers, whether they're Japanese or not. The Chinese also have benefited from an influx of investment from Taiwan. The Taiwanese, fleeing rising costs back home, are moving entire companies to the Chinese mainland, bringing with them advanced technology and management expertise China lacks.

As Chinese factories improve, Japanese firms are under pressure to cut costs. Japan shows no sign of pulling out of its economic slump. Japanese consumers, once suspicious of foreign goods, now are willing to seek bargains.

"The environment has changed in both countries," says Joe Law, a Hong Kong consultant who helps companies from Japan set up shop in China.

Partnering with China

The China advantage has worked for Ohara's Ad-Forest. Two years ago, it was struggling as an operator of fitness centers and karaoke clubs in Japan. The company ditched the exercise bikes and sing-along machines and started making car and home security systems in China for export to Japan. China's low costs, combined with popular products, worked: In the fiscal year ended March 31,

Ad-Forest's profits rose fourfold.

Ad-Forest has plenty of company in China. In July, Honda announced it would put up a plant with two Chinese partners in Guangzhou near here to build and export small cars. Nissan has revealed plans to start building cars next year in a joint venture in central Hubei Province. Canon began making laser printers in Zhongshan in southern China last year, and this year is opening a copier complex near Shanghai. Electronics giant NEC plans to make 80 percent of its projectors in China, up from 50 percent now. NEC says producing projectors in China's Guangdong Province, instead of Nagano, Japan, will cut costs 20 percent.

Chinese companies and government agencies are eager to make the Japanese feel at home. In Dongguan, Chinese developers are clearing land for a 40-acre industrial park known as Little Japan. It will offer tenants access to Japanese-speaking accountants and lawyers along with a hotel furnished with the tatami mats and low tables Japanese business people are used to back home.

Japanese in China tend to live, work and party together. Restaurants, karaoke clubs and golf courses catering to Japanese businessmen are sprouting across southern China. Some Chinese prostitutes learn to speak Japanese and make themselves up to look like the young women who shop in Tokyo's ritzy Ginza district.

A growing number of Japanese companies see China as more than a production base. They want to sell products here, too. Their hopes are linked to China's recent entry into the World Trade Organization, which requires it to dismantle trade barriers that have kept foreign products out. Tumbling auto tariffs, for example, sent Japanese auto imports to China surging 61 percent the first half of this year.

Selling to the Chinese market has been perilous for foreign companies. Among other dangers, they can fall victim to copycat Chinese firms that sell lookalike items. Local courts and government officials, who sometimes have ties to pirate companies, often look the other way. But Japanese firms were heartened by a surprise legal victory in August: A Beijing court awarded Yamaha nearly $110,000 from a copycat motorcycle maker. Honda is pursuing a similar case.

The Sino-Japanese trade relationship can still be tense. Japan worries that low-cost Chinese imports will wreck local companies. Last year, Japan blocked imports of Chinese tatami mats, mushrooms and onions, and China retaliated by shutting down imports of Japanese autos in a dispute that lasted months. This year, China is complaining about Japanese steel imports, and Japan has barred imports of Chinese spinach, alleging that it failed health inspections.

"Such disputes will keep happening," as the two countries adjust uneasily to their economic interdependence, predicts Masaki Yabuuchi, chief of the China division for the Japan External Trade Organization , a Japanese government agency.

But economist Kwan, a Hong Kong native who's spent his career in Japan, says Japanese fears of China are overblown. It's easy to pay too much attention to China's cheap labor: True, Chinese workers — who usually make less than $100 a month — earn just 3 percent of Japanese and 2 percent of U.S. wages. But because they tend to be poorly educated, use obsolete machines and toil for inefficient state-owned companies, they're far less productive. Chinese productivity is just 3 percent of U.S. levels and 4 percent of Japan's.

Kwan argues that Japan and China don't compete head-to-head because Japan specializes in more advanced products. He says Japan and China compete in just 16 percent of product lines. China and its impoverished Southeast Asian neighbor Indonesia, by contrast, compete in 83 percent. (Nor should the United States be worried about being replaced as No. 1 exporter to Japan; few U.S. firms compete head-to-head with Chinese exporters in Japan.)

For now, Kwan says, China is best at assembling sophisticated components made elsewhere. He distinguishes between two kinds of goods. First, there are those "made in China" with technology shipped in from a more advanced country; then, there are products "made by China" with Chinese intellectual capital and raw materials. "Take a $1,000 computer," Kwan says. "If you take away the Intel CPU and the plasma monitor made in Japan, not much would be left (to be) 'made by China.' "

China faces a critical shortage of management, marketing and technological expertise. Japanese firms that set up factories in China usually continue to handle research and development, product design, marketing and quality control. Ad-Forest's Ohara figures it will take another decade before Japanese companies can entrust sophisticated design work to Chinese firms.

Economists say it makes sense for Japanese companies to focus on the complicated stuff and let China handle labor-intensive assembly jobs.