Supply-Chain Strategies Isolate China

Japanese companies have spent years outsourcing components of their supply chain to China. Among other points, the approach was a sensible way to lower operating costs in a deflationary environment. But, in effect, Japan created a single point-of-failure for its manufacturers. Covid-19 has exposed that weakness, forcing government and industry leaders alike to examine vulnerabilities.

Tokyo’s massive fiscal stimulus package in early April earmarked some $2 billion to help domestic manufacturers move production back to Japan, as well as a smaller tranche of about $200 million to encourage firms to shift beyond China where supply-chain repatriation does not make sense.

The new direction represents a massive shift in conventional thinking. Some 20 years ago, an IMF-backed publication noted, “Japanese FDI outflows are part of a necessary restructuring of the Japanese economy, reflecting globalization and economic growth in the rest of Asia. Despite the pain involved, such a restructuring will produce a domestic economy better able to face the rigors of the world economy in the future” (Finance and Development, September 1997). We are cautious in confusing supply-chain issues with foreign-investment trends, but in practice they are often conflated.

Japanese companies of course have already been active in markets across Southeast Asia, acknowledging supply-chain overdependence on China. But the coronavirus outbreak has spotlighted a national weakness, while amplifying homeland-security anxiety. In recent years, disparate foreign investment has been biased toward overseas consumption; it will now be colored by domestic supply-chain concerns.

The move by Japan is highly-nuanced. Tokyo is hesitant to overtly antagonize Beijing, given the size of the Chinese market for Japanese goods and services. The policy shift, for instance, was couched within a larger fiscal package, rather than announced as an independent measure. Still, Japan is setting the pace for similar moves by US and European companies, complicating economic-recovery expectations in China.

The restructuring of Japan’s foreign supply chain is likely to be positioned as good news for economies like Vietnam, Bangladesh, and Indonesia. India too is set to work overtime to attract new-found investment potential. These shifts in foreign-investment patterns, however, are a type of window dressing amid a depressed global setting. The real benefit to Japanese companies and their overseas hosts will be apparent when economic growth accelerates.

Our Vantage Point: In Japan, the economic-security debate suggests that supply-chain diversification will become mantra, with no national market capturing disproportionately-large benefits. We are more transfixed on the economic impact of an isolated China.

Learn more at The Japan Times

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