TOKYO/SEOUL (BLOOMBERG) - China's rampant economic growth has been a boon for exporters in Japan, South Korea and Taiwan, who have supplied high-end components and machines for its factories.
The risk for them now is that China changes from customer to competitor as it ascends the value chain.
Japanese shipments to China reached a record US$130 billion (S$170 billion) in 2017, leading an export-driven economic recovery that has run for eight-straight quarters.
South Korean sales to its neighbour have jumped 70 per cent in a decade, while shipments from Taiwan climbed to an all-time high.
Yet a deeper dive into the data highlights the threat.
Take the trade in semi-conductors - and the machines to make these microchips. Sales of the components from companies such as South Korean tech giant SK Hynix have helped drive export growth into China from the rest of North Asia.
But at the same time, there has been a spike in sales to China of precision metal working machines and equipment for making chips from firms such as Japan's Yaskawa Electric.
With a Chinese state-backed fund gearing up to pour as much as US$31.5 billion into homegrown semi-conductor manufacturing, there is potential for trade flows to start to shift.
China's ambitions, set out in its sweeping Made in China 2025 plan, go much further than semi-conductors and would see its technical prowess advance in a host of areas, ranging from bio-medicine and artificial intelligence to new-energy vehicles and aircraft.
The challenge to Japan, South Korea and Taiwan also applies to European exporters like Germany, and comes on top of the risks to global trade from the Trump administration's embrace of tariffs.
"The bits of the global supply chain that are currently the preserve of Korea, Japan, Taiwan, the US, and Germany, are the bits of the supply chain that China has a decade-long industrial strategy to move into," said Mr Tom Orlik, Bloomberg's chief Asia economist.
It is only a matter of time before many components for electronic products are made domestically and the country is on track to become a car exporter, said Mr Orlik. Eventually, it will be selling airplanes, he added.
INDUSTRIES TO WATCH
Bloomberg Economics and analysts from Bloomberg Intelligence identified these industries as areas where China will make inroads: electric vehicles, autonomous driving systems, solar cells, robotics, machine tools, medical devices and electronic sensors.
"Sensors are dominated by the Japanese, and it might take a while until the Chinese catch up," said Bloomberg Intelligence analyst Nikkie Lu. "Maybe in the next five years. But it is slowly emerging."
To be sure, climbing up the value chain will pose challenges for Chinese companies. For one thing, they still have a long way to go in building trust with consumers and developing "softer skills" in customer service, which Japan excels at, according to Ms Deborah Elms, executive director of the Asia Trade Centre in Singapore.
They also need to demonstrate similar standards for protecting consumer privacy and intellectual property to displace companies from Japan, South Korea and Taiwan, she said.
A more successful and richer China will also offer opportunities for its neighbours.
Already, its growing wealth has unleashed a tidal wave of outbound tourists. Their purchasing power in Japan is so renowned that a new word has been coined for it: "bakugai", or "explosive buying".
More than 14 million mainland Chinese visited neighbouring economies in North Asia in 2017, even after a security dispute saw a sharp drop-off in tourists to South Korea.
Airlines, hotels, tour operators and retailers in Japan, South Korea and Taiwan have all benefited from the influx of travellers.
Japanese hotels in tourist hot-spot Kyoto, South Korean tour operator Hana Tour Service and Taiwan's China Airlines have all profited from mainland customers. Despite the drop-off in South Korea, the growth in numbers of mainland tourists is expected to continue across the region over the longer term.
Foreign firms have also benefited by setting up their own manufacturing operations in China to lower costs and tap its huge consumer market. Japanese textiles manufacturer Toray Industries is a recent example, announcing in November that it would invest about 7 billion yen (S$87 million) for a new plant in Guangdong province.
Yet the direction is clear: Beijing is aiming higher and it has the resources to reach its destination. And that will mean difficulties for many companies around the region.
"China, in a very short period of time, is rapidly going up the value chain," said Mr Gary Hufbauer, senior fellow and trade specialist at the Peterson Institute for International Economics in Washington. "They will produce the things that Korea and Japan are now producing, and Korean and Japanese firms have a big challenge to try to keep ahead on the technology."