TOKYO -- A project to build a blast furnace in Vietnam has some East Asia watchers scratching their heads. With participation from Vietnam, China, Taiwan, Japan and South Korea -- all involved in diplomatic spats with at least one of the parties -- it is an unlikely undertaking.
There have been setbacks, including a deadly riot targeting Chinese workers that erupted there in 2014. But today, construction continues.
The project exemplifies how economic reciprocity can win out in Asia when politics disrupt economic activity.
Sign of change
A recent visit to the site, in the north-central province of Ha Tinh, had me wondering if the anti-China riots had been an illusion. All around the construction site were eateries with signboards written in Chinese.
Relations between China and Vietnam became stormy in May 2014, when the two sides were wrangling over oil resources in the South China Sea. Anti-China demonstrations broke out in Vietnam, and some targeted facilities where Chinese were working. Simply having signboards written in Chinese was cause for provocation.
In Ha Tinh, a number of facilities staffed with Chinese were attacked, resulting in a few deaths, according to press reports.
The massive blast-furnace integrated steel mill now under construction in Ha Tinh -- the first of its kind in Vietnam -- will be managed by a company belonging to Formosa Plastics group, a leading Taiwanese chemicals manufacturer. Formosa Plastics group placed an order with the Chinese state-owned China Metallurgical Group Corp. to build the plant.
A large number of Chinese were working at the construction site when the riot broke out. They reportedly returned to China after the incident. Three years on, however, Chinese workers are back at the site.
I didn't see a trace of bad blood between the Chinese and Vietnamese workers I saw eating together amicably at a Sichuan-style restaurant near the plant.
"There used to be about 10,000 Chinese here, but now it's closer to 2,000," said the owner of the restaurant, who moved to Ha Tinh from Sichuan Province.
A Chinese engineer who was eating with his Vietnamese colleagues, said, "I see South Koreans and Japanese at the plant, too."
That is because of the project has attracted so many different investors and participants. Joint investors include the Formosa Plastics group, China Steel -- Taiwan's biggest steelmaker -- and JFE Steel of Japan. Also involved as contractors are steel behemoth Posco group and the Samsung group's Samsung C&T, both South Korean.
Despite the many delay-inducing setbacks, including the riot, a serious accident and environmental problems, construction appears to be moving along steadily.
What makes the undertaking so intriguing is its unlikely mix of participants. In addition to the tensions between China and Vietnam, Japan and South Korea have a long-running dispute over their history, and China has condemned South Korea for letting the U.S. deploy its Terminal High-Altitude Area Defense system within its borders. China and Taiwan, meanwhile, are at odds over the "one China" issue.
And politics are just a part of it. A sense of competition is growing in Asia, adding fuel to economic nationalism. But even as those dynamics are at play, companies from across the region are forming cross-border alliances in the automobile, home appliance and many other industries despite antagonistic national relations.
These seemingly contradictory economic ties exist in Asia due to the large economic gaps in the region: There are high-income countries like Japan, quasi-high-income economies like South Korea and Taiwan, mid-income countries like China and low-income nations such as those found in Southeast Asia.
In the steel industry, Japanese players boast the most technological proficiency, followed by South Korean and Taiwanese companies. Further behind are Chinese companies, and Vietnam, whose economy is just starting to rev up, is still at the point where it does not have enough blast furnaces.
When it comes to production costs, however, that order is completely reversed. Steelmakers in low-income Vietnam have the edge, followed by Chinese companies, then South Korean and Taiwanese steelmakers, and finally Japanese companies.
That explains the Ha Tinh plant and other multinational projects in East Asia, which seek an optimal combination of the most advanced manufacturing technology and the lowest costs.
For the blast-furnace project, Formosa Plastics called on a Chinese builder because it simply cost less than going with a South Korean or Taiwanese company. Choosing a Vietnamese company would be even less expensive, though it would mean giving up the skills possessed by the Chinese builder.
For the facilities that required higher technological capabilities, Formosa Plastics turned to a South Korean construction company.
Looking ahead to when the plant opens, it will be able to bank on inexpensive Vietnamese labor and technological support from Japan's JFE Steel.
Asia has created a system to efficiently produce electronics and automobiles through a combination of companies or locations with strengths in specific areas -- from production equipment and finished products to intermediate materials to assembly -- by leveraging the different economic levels of the players involved. Call it "Team Asia."
Disparities are said to work against economic unification, but those gaps are what have enabled companies to join hands and create "integration" through the division of labor between work processes.
Team Asia won't yield profits if governments across the region let their political differences extend to matters of economics. Severing economic ties with others would be akin to shooting oneself in the foot.
Vietnam imported 18.4 million tons of steel in 2016, up 18% from the previous year. If that figure continues to rise, it may incur a trade deficit. The Ha Tinh blast-furnace is crucial to lowing the country's dependence on steel imports, which is why it has brought back Chinese workers despite the lingering anti-China sentiment there.
Of course, the economic disparities in Asia will not forever remain fixed at their current levels. Companies in economic laggards are working hard to catch up. And just as industry leaders can lose their technological edge, companies in emerging economies can see their cost advantage disappear when development progresses.
In industries where gaps close or the rankings are reversed, competitive -- rather than complementary -- relations are reinforced, and political confrontation tends to be extended the economy. This can been seen between China and South Korea.
South Korean retailers have fallen victim to harassment in various parts of China, while Hyundai Motor's sales have been slipping there. At work here is the narrowing gap between Chinese and South Korean companies in the retail and auto industries, which is reinforcing their competitive relations.
This is not the case in the electronic parts sector, where South Korean companies still have a clear edge over Chinese companies. In this area, therefore, we still see a complementary relationship between the two sides. That is why there is never news of disruptions at Samsung Electronics' semiconductor plant in Shanxi Province or at LG Display' joint panel factory in Guangdong Province. China will suffer if the supply of key electronic parts, which its companies are unable to produce, is halted.
Keeping conflict in check
The connections between companies in East Asia go beyond borders. These complementary relations in terms technology and cost have kept political clashes in check.
Put another way, if the complementary relations between economies and companies weaken, political and economic conflicts will be impossible to contain, opening the way for the unrestrained pursuit of profit among all parties concerned.
That can be seen with North Korea. The country's weak complementary relations with its regional neighbors -- with the exception of trade in resources with China -- may explain its hard-line foreign policy stance.
Hiroshi Murayama is a former correspondent of The Nikkei in Hong Kong, Taipei and Bangkok, who covered politics, economy, and society. He studied in mainland China.
In this "Business Insight" column, we track business activity in Asia, shedding light on changes and structural problems of the region's economy, politics and society.
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