News analysis

Coronavirus: Japanese companies urged to cut supply chain reliance on China

"Made In China" Japanese goods may be the latest casualty of the coronavirus pandemic as Prime Minister Shinzo Abe resolves to wean companies off their dependence on China.

To help them do it, Mr Abe has earmarked about 240 billion yen (S$3.2 billion) to support domestic companies in decoupling their supply chains from China, especially those in high value-added manufacturing.

Yesterday, the Premier apologised at a news conference for Japan's struggles to secure medical equipment such as masks, ventilators and personal protective equipment for its front line workers battling the virus, while noting a "problem" in the country's heavy reliance on foreign production, particularly China.

As Japan wants to boost its output of the drug Avigan as a potential cure for Covid-19, manufacturer Fujifilm has run into a core problem: a key raw ingredient is sourced from China.

"The strategy among businesses has long been China-Plus-One," said Dr Takashi Suzuki, an expert on Sino-Japan ties at Aichi Prefectural University, referring to how some businesses cover their baseline by supplementing a non-China location.

"But in the medium to long term, there will likely be a shift to 'Plus China'," he added, as companies reduce their risks by putting fewer eggs in the Chinese basket.

While the shift has been under way since the height of the trade war between the United States and China last year, Covid-19 may hasten the process.

The Prime Minister's Office, in a document last week detailing 108 trillion yen in emergency economic measures, said the pandemic "has clearly exposed grave vulnerabilities in the supply chain of Japanese companies".

Mr Abe has privately called the fight against Covid-19 World War III, wrote political journalist Soichiro Tahara on his blog this week, noting the state of emergency declaration in Japan had marked a "change from a 'peacetime' to a 'wartime' mindset".

The plan to support businesses as they diversify from China, which is part of Japan's record 108 trillion yen stimulus package, urges "the return to domestic production any products or materials that are highly dependent on a single country".

Japan is also doling out subsidies to companies that diversify their production lines to South-east Asia.

 a key ingredient is sourced from China.
As Japan tries to boost its output of the drug Avigan (generic name: Favipiravir) as a potential cure for Covid-19, its manufacturer has run into a core problem: a key ingredient is sourced from China. PHOTO: REUTERS

But Dr Akio Takahara of University of Tokyo's Graduate School of Public Policy said the decoupling policy is not uniquely Japanese.

 
 
 
 

"It is becoming clearer that too much concentration and dependence on one country is not desirable," he told The Straits Times. "Such a principle of diversification will be implemented not only by Japanese companies, but by all, including Chinese ones."

Still, Asia's two largest economies have made a show of their closer relations, with their leaders making statements of how they are on the verge of a "new era" in ties.

Meanwhile, Covid-19 threatens to derail more than just Chinese President Xi Jinping's visit to Japan, which was slated for spring but has been postponed.

Dr Shin Kawashima, a Sino-Japan expert at University of Tokyo, said any political measure is, above all, a response to the "Chinese risk", and that moving production bases does not mean Japan will stop doing plenty of business with China.

However, he said that politically speaking, there was "no atmosphere to welcome Xi on a state visit anytime soon".

Japan will also see as a negative, he said, the fact that its Self-Defence Force's scrambles over the disputed Senkaku/Diaoyu islands are continuing despite the coronavirus pandemic.

 
A version of this article appeared in the print edition of The Straits Times on April 18, 2020, with the headline 'Japanese companies urged to cut supply chain reliance on China'. Print Edition | Subscribe