China in Transition
Japan and China
- A Complementary Relationship that Leads to Business Opportunities
Chi Hung KWAN
Consulting Fellow, RIETI
Although many Japanese view China's remarkable progress as a threat, the situation is more of an opportunity than a challenge for Japan as the two countries are in a complementary relationship rather than a competitive one. What I mean by a complementary relationship is that Japan is weak in areas where China is strong, while Japan is strong in areas where China is weak. China's growth potential in markets such as housing, automobiles and distribution and the international competitiveness of its labor-intensive products, thanks to its low wages, comprise areas of strength compared to Japan, while its lag in technological know-how and the seriousness of environmental problems provide evidence for its relative weakness. When undertaking business in China, Japanese firms tend to be dazzled by China's strengths, but they should have more confidence in their own strengths.
The housing and real estate industries are expected to be the future pillars of the Chinese economy. In 1998, the government abolished its policy of allocating housing, thereby triggering a shift from a pattern in which the state lent housing to citizens to one in which individuals freely purchase homes on the market. Coming at the same time as high economic growth and a rise in income, this has triggered housing demand. In anticipation of this trend, some Japanese manufacturers in housing-related businesses have already begun entering the Chinese market. Coupled with the liberalization of banking activities, developments in business areas such as housing loans are also drawing attention.
The auto industry is another area that is gaining attention. Against the backdrop of the rise in personal income and better expressway networks, motorization in China is proceeding at a fast pace. With China's entry into the World Trade Organization, tariffs on automobiles will be slashed to 25 percent by 2006, and import restrictions will also be abolished. There are already moves among Japanese automakers to penetrate the Chinese market, in expectation of a future expansion in demand. Not only are we likely to see an expansion in car exports from Japanese manufacturing headquarters and local domestic production, but there will probably also be more technology transfer, as well as business alliances in which luxury cars are manufactured in Japan and more popular models made in China. In addition, business opportunities deriving from autos, such as auto loans, sales, insurance and after-sale servicing must not be overlooked.
Furthermore, China's WTO accession will enable Japanese firms to enter distribution and service sectors. The abolition of restrictions on investment, quantity and regions of operation will pave the way for increased efficiency in distribution and coordination in China. In addition, Japanese firms will also be able to enter the fields of after-sale servicing and other related businesses.
While Japanese companies have been successful in the housing and automobile industries, as well as distribution and services, China is weak in these sectors. Therefore, the application of past experience can be an effective strategy. The development of China's economy is an opportunity to utilize cultivated business know-how in other industries as well.
On the other hand, despite its increasing appeal as a major consumer market, China is also attractive as a production base for labor-intensive goods, as wage levels are still one-thirtieth those of Japan. Because China has an enormous amount of excess labor in rural areas, even if labor demand rises in the industrial sector, there will be little upward pressure on wages for the time being. Therefore, it will continue to be competitive in labor-intensive goods for some time. For Japanese companies, accurately grasping China's strengths as a production base such as for processing, as well as a consumer market, will lead to business opportunities.
In the future, for China to be considered as a production base, the issue of upgrading technology will have to be tackled. Although China has been dubbed "the world's factory," it has little world-class technology that it can call its own, and its capability in research and development is also weak. Because of this, introducing technology from overseas is a necessary step to improve economic efficiency and upgrade industrial structure. In view of the large gap between the stages of economic development in Japan and China, technology that has already become commonplace in Japan can still be significant for China.
Furthermore, China, like Japan in the past, is beset with serious environmental problems. This issue is not just a domestic one, as some problems such as acid rain extend beyond national borders and adversely affect Japan. Because of this, Japanese official development assistance to China has shifted from traditional infrastructure investment to projects to tackling environmental problems. For Japanese companies, environment-related businesses are indeed one sector in which experience and technology can be fully utilized.
To fully exploit their potential complementarity, Japan and China must remove restrictions that hinder the flow of goods, people and money through such means as a free trade agreement. Integration of the two economies will not only help to further develop China's economy, but can also trigger the revival of the Japanese economy.
- Related articles
- What If China is Only a Big Producer But Not a Big Market?, China in Transition, May 31, 2002
March 14, 2003
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