China in Transition

A New Stage in Japan-China Corporate Tie-Ups
- When China's Carlos Ghosn comes to Japan

Chi Hung KWAN
Consulting Fellow, RIETI

More and more Chinese companies are exploring various new types of cooperative relations with their Japanese counterparts. Until now, Japan-China corporate tie-ups have primarily taken the form of joint ventures that utilize China as a production base. In these cases, Japanese companies, which have control over brands and technologies, have strong bargaining power. In recent years, however, many Chinese companies have acquired international competitiveness and are moving beyond the conventional strategy of attracting foreign businesses to China. Instead, they are seeking to move outward, with an eye to invest overseas and to form strategic tie-ups with foreign companies.

One recent example is the tie-up between Sanyo Electric and the Haier Group announced in January 2002. This moves well beyond the traditional pattern of Sanyo seeking to use low-cost Chinese labor to manufacture products cheaply. Sanyo Electric is looking at the improvement in domestic market conditions brought about by China's accession to the WTO, as well as the enormous Chinese market, while Haier wants to use its high quality and low prices to capture a share of the Japanese market. Accordingly, both parties seek to build wide-ranging cooperative ties so as to make optimal use of their respective technologies, manufacturing capacities and sales know-how. The tie-up has been described as the first truly equal partnership between Japanese and Chinese companies. Haier-brand small refrigerators, washing machines and other appliances are already being sold on the Japanese market through the newly established Sanyo-Haier Co., Ltd.

Subsequently, TCL and Matsushita, Hisense and Sumitomo Corporation, and Shanghai Electric and Mitsui have all announced tie-ups modeled on the Haier-Sanyo precedent. Some of these have even been angled at third-country markets, as in the tie-up between Mitsui and Chinese electrical appliance manufacturer Shanghai Electric. Shanghai Electric aims to build a worldwide sales network using Mitsui's trading company functions to expand its offshore operations, selling flat-screen televisions and other cutting-edge AV equipment not only in Japan but also in the United States and Europe.

While tie-ups between Chinese and Japanese companies have many potential merits, there are also numerous problems to overcome. The most critical issue for partners in a tie-up is the integration of production and sales channels. To achieve an optimal division of labor, both sides need to concentrate their resources in their particular competencies. In many cases, this means trimming back (or even withdrawing altogether from) sectors that are comparatively weak, and the adjustment process requires considerable time. In addition, because Japanese companies are worried about a potential boomerang effect, they are reluctant to hand key technologies over to their rivals. Chinese companies are therefore unsure whether they will be able to acquire the technologies they are pushing for. Moreover, while the image of products "made in China" has rapidly improved in recent years, further efforts will need to be made to capture the fancy of Japanese consumers, who tend to be extremely fussy in terms of brand, quality and design. These issues are of utmost importance not only at the corporate level, but also in the context of Japan-China economic relations at large.

In addition to strategic corporate tie-ups, Chinese companies are also beginning to move more aggressively in buying up Japanese companies. Unthinkable only a few years ago, this trend reflects the slump in Japanese stock and asset prices spurred by a protracted economic recession, making it easier for Chinese companies to pursue buy-up strategies. The aim of these buy-ups is to acquire the brands, technologies (patents), facilities and sales channels of the Japanese companies being purchased.

This inflow of foreign direct investment is also an effective tool for Japan to revitalize its economy. There are already cases where the introduction of foreign capital has helped speed up corporate restructuring. Nissan, for example, has come back strongly under the leadership of President Carlos Ghosn sent from Renault's headquarters. The penetration of market economy into China has spurred the rapid growth of a new generation of young entrepreneurs, especially in the private sector. If Japanese companies fail to reform themselves, one solution may well be to bring in Chinese entrepreneurs to do the job.

January 17, 2003

January 17, 2003