From high-tech consumer electronics and solar panels to bathroom tiles and tanker hulls, corporate Japan is leading an Asian manufacturing switch from China to Vietnam, Eastern Europe and South America in its relentless hunt for lower labour costs.
It is Japan to which the eyes of manufacturers around the world are now turned. For years, living in fear of a “hollowing-out” of its production skills, the world’s second-largest economy has staunchly resisted letting too much of its output seep overseas. Now, faced with the mass retirement of baby-boomers and low fertility rates, Japan has been forced to outsource. Analysts believe that the choices made by its largest companies – such as Canon, Toyota and Mitsubishi – will inform decisions of major corporations elsewhere.
Japan has already gained a useful feel for the way that global manufacturing is tending. As the world’s largest producer of machine tools – it set a record last year of Y1.43 trillion (£5.82 billion) – Japan has a unique view on where production is being set up. In Europe, for example, the pursuit of cheaper labour costs can be seen as machine tools head towards Romania, Bulgaria, Slovenia and Hungary.
Although Japanese direct investment in China remains substantial, at just under $4.5 billion (£2.25 billion) last year, Japan Inc’s interest in using China as its workshop was contracting long before TTI redrew its plans for further investment there. For while China remains a huge resource of cheap labour, the advantages of other Asian hubs – in terms of transport and energy infrastructure, proximity to major trade routes and availability of materials – have begun to shine.
Japan’s investment in China in 2006 was more than 30 per cent lower than in 2005, and it is expected to fall another 30 per cent this year.
As Japan’s industrial giants – from a wide range of sectors – make their choices, they are forcing huge changes in their parts supply chains. So as Nissan and Toyota set up factories in Brazil and Russia, the companies that make tyres and exhaust pipes must do the same.
In electronics, the Philippines and India are becoming more attractive, with Fujitsu and NEC building huge armies of engineers in those countries.
Towering over corporate Japan’s recent strategic rethink is the economic rise of Vietnam. Vietnamese workers earn average monthly pay of about $80 – half that of a Chinese worker and just a fifth of what a domestic Japanese would cost. However, Japanese companies say there is more to the shift than cheap labour. They began to invest heavily in Vietnam after the Sars crisis of 2003, which, for a while, appeared to threaten the viability of Japanese factories in China. The military coup in Thailand last year has also forced the Japanese to reconsider projects there.
Japanese chief executives, whose 2006 investments in Vietnam were twice those of the previous year, at $1.3 billion, believe that the Vietnamese work ethic is closer to Japan’s, in terms of a strong belief in quality.
Even before China Inc’s image as a manufacturer was tainted by recent scandals of toxic toys and shoddy food products, Japanese bosses have privately been saying that they “trust” Vietnamese workers over their Chinese counterparts. Thus, Yamaha has unveiled plans to boost motorcycle capacity in Vietnam to 700,000 units per year, Canon now assembles photocopiers there, and IHI has shifted its ship-design operations to the port of Hai Phong. Toshiba has also set up R&D operations in Vietnam, a project that it would be reluctant to take to China.
Japan’s largest trading house, Mitsui, has just set up a subsidiary in Hanoi. “Vietnam,” the subsidiary’s president, Ken Ozeki, recently told Japanese media, “could become even more reliable than China or India.”