JIN-306 -- China as Japan's No. 1 Trading Partner

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Issue No. 306
Saturday January 29, 2005 TOKYO

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CONTENTS

@@ VIEWPOINT: China as Japan's No. 1 Trading Partner

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@@ VIEWPOINT: China as Japan's No. 1 Trading Partner

Earlier this week the Finance Ministry released data showing
in 2004 China (including Hong Kong) replaced the US as Japan's
largest trading partner for the first time, a fact
symbolizing the image of the Japanese economy being propped
up by its giant neighbor's. Japan had a trade surplus of
1.45 trillion yen with China in 2004. That was only one-fifth
of the surplus with the US, just shy of 7 trillion yen, but
the surplus with the US has been nearly flat in recent years,
while that with China has been growing at an annual rate of 20
percent.

One area of growth was image devices such as televisions and
VTRs, up by 34 percent over 2003, on the strength of the export
of top-end models not manufactured in China.

Another was vehicle parts, in spite of an increase in percent
of local content. Exports of vehicle parts rose by 24 percent
year-on-year. According to a spokesperson at Denso, one of the
largest parts makers, the company is increasing local production,
but foresees a continuing increase in the export of parts for
on-site production of finished cars.

The rise in exports of parts reflects Japanese companies’
rapid adoption of the "export via China" business model--assembly
in China for export to the US and elsewhere.

So while automakers have been exporting more parts to China,
they have been exporting fewer finished vehicles--20 percent
fewer in 2004 year-on-year. Toyota, for example, exported 7
percent fewer vehicles, 49,000, in 2004 year-on-year, while
on-site production grew by 67 percent, to 87,000. In the same
year Honda, the earlier of the two automakers to manufacture
in China, exported only 1,900 vehicles, a drop of 70 percent
year-on-year. Meanwhile, its on-site production grew 82 percent,
to the 214,000 level.

The "export via China" business model has also been adopted
by consumer appliance makers. For example, Funai Electric has
established its main manufacturing centers for DVDs and televisions
in China with annual production figures for each above 10 million
units. It exports almost its entire output to North America,
mainly to the giant retailer Wal-Mart. For both products it
commands top shares in the US; truly the road to the American
electronics market lies through China.

Sony Computer Entertainment has contracted out 100 percent of
the assembly of PlayStation 2 to Chinese factories. It exports
the end-products to the US, Japan, and Europe. Sony manufactured
PlayStation in Japan in 2000, the year of the game machine's
debut, but by the summer of 2003 it had entirely shifted
production to China as a cost-cutting measure. The semi-conductor,
the heart of the game machine, is manufactured in Japan and
assembled in China.

Such division of labor between Japan and China is accelerating
in the manufacture of personal computers and other
information-related devices with a rapid rise in imports of
final goods to Japan. NEC, for instance, consigns the production
of designed-in-Japan personal computers to a Taiwanese
manufacturer, which undertakes production in China. NEC imports
the computers to Japan and installs the software at its Yamagata
factory. Thus it is can sell low-priced goods imported from China.
Toshiba and Sony have adopted the same strategy. Even Dell and
IBM products sold in Japan are manufactured in China. Last year
imports of personal computers topped 5 million, a tenfold increase
in three years. Chinese-manufactured computers now command about
half of the Japanese market.

Likewise printers and copiers are manufactured by a horizontal
division of labor. Japanese companies ship the main components to
China for assembly and import finished products to Japan.

In 2004 the US trade deficit with China ballooned to
$150 billion, one-fourth of its total trade deficit.
That figure is partly due to "export via China," for
which reason Japanese execs understand Sino-US trade
friction is not without implications for them.

The maintenance or expansion of exports via China
hinges on continuation of the schema wherein capital flows
to the US, US consumption rises, and exports from China and
Japan expand. However, the business climate in the US, the
country of final consumption, is murky. Will American consumers
continue gravitating to Wal-Mart like Muslims on a hadj to Mecca?

-- Burritt Sabin

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EDITOR
Written and edited by Burritt Sabin (editors2@japaninc.com)

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