As China tensions simmer, Japan pulls back from "world's factory"

China may have encouraged its citizens to protest against perceived Japanese incursions into Chinese maritme territory. These protests resulted in burnt Japanese car showrooms in China nd other acts of violence. The unintended consequence may be a speeding up of Japanese investment away from China to more peaceful and increasingly less costly countries.

From Reuters - http://www.reuters.com/article/2012/10/23/us-japan-china-firms-idUSBRE89M1GS20121023



"Almost a quarter of Japanese manufacturers are rethinking their investment plans in China and some may shift future production elsewhere after the spike in tensions between Asia's two largest economies."

The sentiments were expressed in a Reuters Corporate Survey released on Wednesday and in interviews conducted in recent weeks with executives in industries ranging from electronics to apparel manufacturing.

The concerns suggest the recent rift between China and Japan over disputed islands in the East China Sea could mark the end of a boom that has played out over two decades in which Japanese companies have emerged as the most active source of outside direct investment in China after Hong Kong and Taiwan.

Since 1990, Japanese companies led by electronics makers like Panasonic Corp (6752.T) and followed by a wave of automakers like Nissan Motor Corp (7201.T) and Toyota Motor Corp (7203.T) and their suppliers have poured almost $1 trillion into Chinese factories, Japanese government statistics show.

The investment by over 20,000 firms created over 1.6 million jobs as Japanese companies looked to take advantage of low production costs and then China's potential as a surging market for everything from cars to cosmetics.

Now, sentiment has turned. When asked if their attitude toward using China as a production hub over the medium term had changed, 37 percent of Japanese companies surveyed said they had grown more cautious.

Almost half of Japanese manufacturers said they expected to see lower sales in the current fiscal year. In response to a separate question, 24 percent said they were considering delaying or reducing planned investment in China. Eighteen percent said they were considering shifting production to other countries.

The survey allowed companies responding to pick more than one choice to describe the impact of the China dispute on their business, meaning there could be some overlap between the group of manufacturers considering cutting investment and those looking to other markets outside China as future production hubs.

"China is very convenient, but gradually that convenience has been fading," Yoshihisa Ejiri, 65, president of clothing chain Honeys Co (2792.T) told Reuters.

The Reuters survey of 400 Japanese companies took place between October 1 and October 17. A month earlier, almost 60 percent of firms in a Reuters survey said they expected little to no fallout from the strains with China. Companies were not asked if they were considering delaying or reducing planned investment in China in that poll.

"The level of the anti-Japan demonstrations was different this time and I think that will make it harder for companies that have been successful in China to continue operating there," said Hisayoshi Hashimoto, a professor at Japan's National Graduate Institute for Policy Studies."