The Japanese government is encouraging firms to relocate manufacturing from China to Southeast Asia. As Tokyo reacts to Beijing’s handling of the coronavirus and aggression in the South China Sea, it might foster stronger relations with ASEAN.
Earlier this year, Japan’s government announced plans to subsidise firms to shift manufacturing centres to Southeast Asia after the coronavirus pandemic caused supply chain issues.
Japan must base some of its manufacturing overseas because of the risks of natural disasters at home and its decreasing population. However, COVID-19 exposed the dangers of over-reliance on one country, especially China. Japan’s automotive industry was hit particularly hard due to a shortage of materials: imports from China have dropped by 47% compared to 2019.
In the wake of COVID-19 and deteriorating relations with Beijing, Tokyo is stepping up diversification plans. “Even before the virus outbreak, there has been a growing need for Japanese firms to set up production bases in the ASEAN region,” said a Japanese Economy, Trade and Industry Ministry official. “[The subsidy scheme] will help our country build better relationships with ASEAN countries, too.”
Where is the money going?
Fifty-seven Japanese companies will receive a total of 57.4 billion yen (US$536 million) to invest in domestic production while another 30 firms will receive funding to invest in production facilities across ASEAN. The move will strengthen economic ties between Japan and the region, as well as boost its Free and Open Indo-Pacific strategy, seen as an alternative to China’s Belt and Road Initiative (BRI).
Furthermore, the Tokyo government’s annual economy and trade white paper outlined plans to form an integrated strategic relationship with ASEAN economies by combining technologies, knowledge and business networks.
Details are scarce on where the money will go at present but there are plenty of candidates keen to welcome Japanese firms. Indonesia has been pushing hard to become a possible home for Japanese and US companies exiting China since April, with some success—seven have already committed including three from Japan.
Malaysian economists urged their government to step up its efforts to woo Japanese firms, while conceding that companies may initially prefer Indonesia, Cambodia, Thailand and Vietnam. “The competition is going to be stiff, so we have to move quickly to start talks with them,” said Sunway University’s Yeah Kim Ling.
Japan can build on existing strong links with ASEAN
Japan already has a significant presence in Southeast Asia having, as of 2019, made more infrastructure investments in the region than any other country. Japanese firm Marubeni recently won a deal to build a natural gas powerplant in Myanmar which will cost $US2 billion—one of the biggest investments in the country.
Japan pledged funding for Vietnam’s high-speed railway between Hanoi and Ho Chi Minh City and launched the Japan-Mekong Connectivity Initiative covering Cambodia, Laos, Myanmar and Vietnam in 2016. Hitachi has a digital services hub near Bangkok.
Moving more production to Southeast Asia would be another step towards “decoupling” from China. As Japan has built more production facilities in Southeast Asia, it has reduced investment in China as part of its “China Plus One” strategy. Japan appears to be following the example of Taiwan, which introduced a policy in 2019 to shift production away from the mainland as the US-China trade war intensified.
One simulation suggests that the impact of the trade war will cost the world US$301 billion per year. Any help Southeast Asian nations can get from Japan or any other country in the form of deals or relocations to mitigate those potential losses will be welcomed.
There are challenges ahead for Japanese firms looking to relocate
Firms must carry out detailed feasibility studies prior to investing in Southeast Asia. They must try to steer clear of controversy, such as that generated by Japan’s US$930,000 grant to the Myanmar police, which Human Rights Watch claims is “conferring undeserved legitimacy” on human rights abuses. Japan, for its part, says it carried out due diligence and is confident the money is being used appropriately.
They must also ensure that investment overseas does not have a long-term negative impact on companies’ finances. While there is a heavy initial cost to relocating, the government’s subsidies should help cover this. “It’s important to make their production systems both competitive and adaptable to disasters,” argued Takahiro Fujimoto, a University of Tokyo Graduate School professor.
Furthermore, some countries may need to introduce new labour laws to make further Japanese investment viable. In Indonesia, such changes are underway, including minimum wage increases and changes to business licensing.
Could the South China Sea bring Japan and ASEAN even closer?
During the pandemic, China has stepped up its activities in the South China Sea, where some ASEAN nations also claim sovereignty. Thus far, ASEAN’s response has been cautious. However, others—including Japan—have been more willing to stand up to China.
Australia, India, Japan and the US formed a loose alliance called the Quadrilateral Security Dialogue (QUAD) but have now begun working together to carry out military drills. The apparent formalisation of QUAD as a genuine counterpoint to China’s maritime ambitions might embolden ASEAN nations to take a firmer stance or force Beijing to take a step back.
Furthermore, some analysts think ASEAN nations might join QUAD to further ramp up pressure on Beijing. “As a core formulation, the QUAD with perhaps some among ASEAN members may eventually become a useful counterweight to China’s muscle-flexing and ambitions,” said ex-Indian navy rear admiral Sudarshan Shrikande.
Diversification as a boost for ASEAN and a sign of things to come
Japan’s white paper criticised “divisive forces” at work during the pandemic resulting in trade restrictions and a growing distrust of global institutions and existing trade agreements.
Diversifying manufacturing output is a sensible response on Tokyo’s part and a very welcome one for the ASEAN economies that will benefit: the arrival of global companies will bring increased employment and trading opportunities.
Japan’s decision to move more manufacturing to Southeast Asia is not a gamechanger by itself. However, when combined with other developments, such as moves in the South China Sea, Japan’s shift away from China takes on greater significance.
As global distrust of China grows in the wake of COVID-19, its maritime activities and its repression of dissent in Hong Kong, these moves may be a sign of things to come. In any case, the more Japan “decouples” from China, the more likely Southeast Asia is to benefit.
Source: ASEAN Today
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