December 7, 2015 7:00 pm JST
China manufacturing

Japanese companies move away from the 'world's factory'

TOKYO -- China's reputation as the world's factory appears to be standing on increasingly shaky foundations as labor costs continue to rise, making the country a more expensive manufacturing location. Once productivity and other factors are taken into consideration, even Japan now compares favorably with China in terms of production costs.

Lower economic growth

The situation has led a number of Japanese companies to reexamine their business strategies with a view to lowering their reliance on China.

     Kobe Steel has decided to delay increasing its production capacity in the country. The company had initially planned to raise forged aluminum auto-suspension parts production capability by 40% this autumn, but decided to shelve the plan for the next 12 months or so. The decision comes in response to the slowing growth of the Chinese new-car market.

     Meanwhile, the company will invest about 7 billion yen ($56.3 million) to increase production capacity of the parts in the U.S. by 80% to keep up with solid new-car sales in the country.

     After rising sharply until last year, China's smartphone market appears to have reached a saturation point. This has hit smartphone manufacturers as well as related industries.

     Tsugami is now making just 300-400 units of its compact turning machines a month in China, due partly to weak demand from manufacturers of smartphone parts. The company was making approximately 800 units a month this past spring, but even that figure is well below its monthly output capacity of 1,500 units.

Higher labor costs

In addition to lower demand, rising labor costs are driving Japanese companies to reduce reliance on China as a manufacturing base.

     Adastria, an apparel company that owns Global Work and other clothing brands, aims to lower its production in China from 90% of its overall output to 70% within the next five years. This will involve moving production to other Southeast Asian countries such as Vietnam. The change will result in higher shipping costs, but these will be offset by lower wages, meaning overall costs are expected to come down by approximately 10%.

     Fast Retailing, Japan's No. 1 apparel company and operator of the Uniqlo brand clothing stores, is believed to have reduced its output in China to 60-70% of its overall total from over 90%.

Reshoring

Some Japanese manufacturers have gone as far as to move production home.

     Daikin Industries plans to cut back its household air-conditioner output in China in the current fiscal year by around 20%, or 150,000 units, from a year earlier. At the same time, the company is raising output at its plant in Kusatsu, Shiga Prefecture, by 200,000 units, bringing total output up to 1 million units.

     Over several years, TDK expanded its production of electronics parts and materials in China and other Asian countries, but has reversed the trend because of the shrinking gap in labor costs between Japan and other locations in Asia.

     "We will boost our competitiveness by manufacturing in Japan, instead of looking for new areas with low labor costs," said President Takehiro Kamigama.

     The company is now constructing new buildings at its production sites in Yurihonjo, Akita Prefecture, and in other areas of the country.

     Labor costs in China continue to rise at an annual pace of around 10%. According to the Japan External Trade Organization, the average monthly wage for factory workers now stands at $566 in Beijing and $474 in Shanghai. These amounts are still significantly lower than the $2,000 average monthly wage earned by their Japanese counterparts.

     But a different picture emerges when the two countries' labor markets are compared based on unit labor cost, which measures the cost of labor per output unit.

     Estimates by SMBC Nikko Securities show Japan's dollar-denominated unit labor cost was more than triple that of China in 1995. But the gap has gradually narrowed, with China's unit labor cost eventually rising above Japan's in 2013 and widening the gap in 2014.

     Since Prime Minister Shinzo Abe came to power at the end of 2012, the yen has lost around 40% of its value against the yuan. This is a big factor behind Japan's falling unit labor cost.

     "Making things in Japan becomes more advantageous, especially for high-value-added products, which require high worker productivity," said Hiroshi Watanabe, senior economist at SMBC Nikko Securities.

     While currency exchange can be extremely fickle, many economists believe Japan's unit labor cost will remain more favorable than China's for some time to come.

     "Even if the yen strengthened and pushed up labor costs in Japan, wage growth in China would have a bigger impact," said Takuya Hoshino, economist at Dai-ichi Life Research Institute.

(Nikkei)

Kobe Steel, Ltd.

Japan

Market(Ticker): TKS(5406)
Sector:
Industry:
Non-Energy Minerals
Steel
Market cap(USD): 4,084.41M
Shares: 364.36M

Tsugami Corp.

Japan

Market(Ticker): TKS(6101)
Sector:
Industry:
Producer Manufacturing
Industrial Machinery
Market cap(USD): 510.16M
Shares: 64.91M

Adastria Co., Ltd.

Japan

Market(Ticker): TKS(2685)
Sector:
Industry:
Retail Trade
Apparel/Footwear Retail
Market cap(USD): 1,181.52M
Shares: 48.8M

FAST RETAILING CO., LTD.

Japan

Market(Ticker): TKS(9983)
Sector:
Industry:
Retail Trade
Apparel/Footwear Retail
Market cap(USD): 31,603.5M
Shares: 106.07M

Daikin Industries, Ltd.

Japan

Market(Ticker): TKS(6367)
Sector:
Industry:
Producer Manufacturing
Industrial Machinery
Market cap(USD): 31,058M
Shares: 293.11M

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