RESHAPING SUPPLY CHAINS

The economic relationship between China and Japan is characterised by their mutual dependence, which holds significant consequences for both nations and the broader global economy. Japan's trade relationship with China is characterised by an asymmetric dependency, wherein Japan relies heavily on China as a trading partner mainly for electronic appliances and machine parts. This dependency is evident in the significant volume of bilateral trade between the two countries, with China being one of Japan's largest export destinations and suppliers of various goods and services. The economic interdependence is primarily driven by Japan's export-oriented economy and China's position as a major manufacturing hub and consumer market. Overtime, China's significance has grown as a regional supplier of intermediate products. As a result, global supply chains (GSCs) are fragmenting production processes by centralising assembly operations in China while dispersing the supply of parts and components to other countries in the region.

This paper aims to address the challenges associated with the asymmetric economic dependence between China and Japan and discuss the reshoring initiatives taken by Japan to expand their supply chains. Factors such as the Anti-Japan riots in Chinese cities; military responses of both countries regarding the Senkaku island dispute; and the COVID-19 pandemic have adversely affected trade relations between the two countries, leading to the implementation of various reshoring and diversifying initiatives, with the China-Plus-One strategy being one of them. The China-Plus-One strategy describes the practice of foreign companies operating in China combining their investments with a second facility, typically in another Asian economy.

Catalysts for Japan's Reshoring Initiatives

Spanning many industries, the economic interdependence is most apparent in the context of the electronic and automotive industry where China's manufacturing prowess and Japan's technological capabilities converge. China has developed into a manufacturing powerhouse throughout time, due to its affordable labour and sizable consumer market. Because of these benefits, Japanese businesses have established factories in China to take advantage of the country's manufacturing capabilities and domestic market. Japan has concurrently given China access to cutting-edge technologies, industry knowledge, and financial resources that have helped China's industrial development. Furthermore, China is a significant market for Japanese machinery and electronics. The main imports from Japan revolve around Integrated Circuits ($1.9 billion) and machine parts for motor vehicles ($651 million) among others. With a rising middle class population, China provides a sizable consumer market for Japanese businesses. 

During the COVID-19 pandemic, Japan recognised notable vulnerabilities in its supply chains, prompting a re-evaluation of its dependence on China. The pandemic caused numerous factories in China to shut down, and reduced Japan’s imports from China to nearly half in 2020. This significantly impacted Japan's exports, GDP, and consumer welfare by disrupting the flow of items to Japanese retail malls and parts to Japanese industries.

The automotive sector, in particular, experienced significant challenges during the pandemic, evident in Nissan's decision to suspend operations at its Kyushu assembly plant due to difficulties in procuring parts from China. Many companies that had set up production lines in China were also forced to halt production due to the zero-COVID policy implemented in China.  This scenario emphasises the vulnerability of integrated supply chains to external shocks. While the industry had implemented risk management measures in response to past natural disasters, the unprecedented scale and global reach of the pandemic highlighted the necessity for further resilience-building efforts and adaptive strategies.

Factors such as the depreciation of the yen and escalating costs associated with overseas production have also influenced Japan's reshoring strategy. The value of the yen has witnessed a substantial decline, resulting in a recent stabilisation around ¥142 to the dollar. Currently, the yen stands at 20 per cent of the Chinese yuan. This weakened value has rendered Japanese-made export goods more cost competitive in foreign markets, augmenting their desirability among global consumers. Concurrently, the rapid economic growth and development observed in China and other emerging economies have engendered a surge in local wages.

Furthermore, the relatively feeble yen, coupled with escalating labour costs abroad, has caused price increases for imported goods in Japan, including those produced by Japanese manufacturers' overseas affiliates for domestic consumption. In certain instances, these factors have offset the cost advantages previously associated with producing goods overseas and subsequently re-importing them into Japan. As a result, Japanese manufacturers have initiated contemplation regarding the recalibration of their production strategies, which aims to optimise cost-efficiency and augment their competitive positioning in the domestic market.

Steps towards China Plus-One Strategy

Japanese Prime Minister Shinzo Abe advocated for policies that would bring back production bases to Japan for products heavily reliant on China, while diversifying production bases among other countries, particularly those in the ASEAN region, for other goods. The China-Plus-One strategy is advantageous to countries in the means of risk diversifications, cost reductions, and lesser dependence on China.

To support the diversification of production bases, the Japanese Government allocated a substantial budget of $2.3 billion, which aimed to incentivise Japanese companies to relocate to Japan or establish operations in Southeast Asian nations. This financial support facilitated necessary investments in new facilities, equipment, and feasibility studies. Notably, 56 businesses have already secured funding to bolster domestic manufacturing, while 30 others received financial assistance to establish factories in countries like Vietnam, the Philippines, and Thailand.

The Programs for Promoting Investment in Japan to Strengthen Supply Chains and Strengthening Supply Chains represent strategic initiatives implemented by the Japanese Government to bolster supply chain resilience and address concerns regarding heavy reliance on China. The former program focuses on facilitating domestic investment by Japanese companies, aiming to establish new plants and introduce facilities for critical products and materials within Japan's borders. The latter aims to assist companies in diversifying their production lines, emphasising the utilisation of digital technologies and operational enhancements.

It is important to note that the government's policy does not encourage a full decoupling from China but rather a relocation of production bases to Japan and diversification of production sites to reduce dependence on a single country.  Japan’s subsidy program focuses on supply chain resilience rather than repatriating supply chains as it still recognises China’s role as an indispensable economic partner. The supply chains between Japan and China will remain largely intact. These initiatives are vital in strengthening Japan's supply chain resilience, mitigating risks associated with excessive dependence, and fostering a more balanced and robust global supply chain network. By diversifying production lines and exploring new markets, Japanese companies can enhance overall competitiveness, reduce vulnerability to disruptions, and establish a sustainable supply chain ecosystem. 

Fostering Resilient Supply Chains: The SCRI

In order to mitigate the risks that arise from its dependence on China, Japan has not only offered subsidies to incentivise Japanese firms to set up production units in their home country, but has gone one step further by launching the Supply Chain Resilience Initiative (SCRI) along with India and Australia. 

China's assertive actions in relation to disputed territories in the Indo-Pacific region, such as the ongoing territorial disputes with Japan over the Senkaku islands; the military clash with India along the Sino-India border; and the economic coercion of China’s economic interests on Australia, have caused tensions among neighbouring countries. The trade war between China and the United States raised concerns about potential trade restrictions, leading to speculation about Japan considering supply chain resilience initiatives. 

The Supply Chain Resilience Initiative is a trilateral undertaking, emanating from high-level consultations that commenced in September 2020. Recognising the significance of risk management and continuity plans in mitigating potential disruptions within supply chains, the participating ministers have reasserted their unwavering commitment to fortify resilient supply chains. The SCRI contemplates the implementation of policy measures aimed at fostering supply chain resilience, notably through the expanded utilisation of digital technology and the facilitation of trade and investment diversification.

The overarching objective of the SCRI is to create a virtuous cycle that amplifies supply chain resilience, ultimately culminating in the realisation of robust, sustainable, well-balanced, and inclusive growth within the region. By strengthening supply chains and fostering collaboration among participating nations, the initiative endeavours to cultivate a resilient and sturdy regional economy capable of weathering future challenges and disruptions.

Through the SCRI, Australia, India, and Japan exhibit their collective dedication to fostering a secure and stable trading and investment landscape. By jointly addressing vulnerabilities within supply chains and sharing best practices, the initiative seeks to contribute to the overall economic stability and growth of the region, ensuring the resilience of supply chains in the face of unforeseen contingencies.

As part of the SCRI's initial implementation phase, the ministers have directed their respective officials to undertake specific projects. These initiatives encompass the exchange of best practices pertaining to supply chain resilience and the organisation of investment promotion events and buyer-seller matching events. Such endeavours serve as platforms for stakeholders to explore diversification prospects for their supply chains and engender a collaborative environment conducive to enhancing resilience.

Moreover, the implementation of the SCRI has been complemented by Japan's broader regional initiatives, reflecting its commitment to regional cooperation and resilience building. As part of these efforts, Prime Minister Shinzo Abe introduced the Partnership for Quality Infrastructure (PQI) in May 2015, which aimed at financing infrastructure projects across the Indo-Pacific region. This initiative, later upgraded as the Expanded Partnership for Quality Infrastructure (EPQI), aligned with Prime Minister Narendra Modi's 'Make in India' initiative, creating a convergence of strategic and economic interests between India and Japan. The EPQI, with its commitment of approximately US$200 billion over five years, not only aimed to enhance Japan's regional influence but also facilitated the exploration of new growth opportunities in the international infrastructure market. 

These initiatives further facilitate Japan’s active pursuit of a Free and Open Indo-Pacific (FOIP). The FOIP strategy emphasises principles such as the rule of law, freedom of navigation, open markets, and respect for human rights. Japan has sought to strengthen partnerships with like-minded countries in the region to promote a rules-based order and ensure a peaceful and prosperous Indo-Pacific. Through the FOIP strategy, Japan aims to enhance connectivity, infrastructure development, and economic cooperation while safeguarding maritime security and addressing regional challenges.

By combining the SCRI, EPQI, and FOIP strategy, Japan has taken a comprehensive and integrated approach to promote regional stability, economic development, and resilience in the Indo-Pacific. As Japan continues to collaborate with regional partners, it aims to contribute to a secure, open, and prosperous Indo-Pacific. 

Triumphs and Trials

Japan's reshoring initiatives have shown remarkable effectiveness driven by key factors such as the Japanese companies’ strong financial positions, enhanced corporate governance and efficient capital allocation. Industries where Japan holds significant market shares, such as semiconductor production equipment and machine/electronic tools, play a vital role in establishing more secure and resilient supply chains. Furthermore, Japan's expertise in industrial robotics and factory automation empowers the reshoring process by enabling efficient and cost-competitive manufacturing. Investments in advanced technologies like robotics, automation, AI, and 3D printing have accelerated innovation, reducing reliance on labour and optimizing production efficiency.

The initiatives taken by the Japanese Government have resulted in the adoption of 92 projects across various sectors, with Southeast Asia, particularly Vietnam, emerging as the preferred destination for Japanese companies seeking to diversify their supply chains. Over 35 projects have been relocated to Vietnam, with Thailand and Malaysia following with 22 and 12 projects respectively. Moreover, major industry players in Japan have been engaging in initiatives that result in firms reshoring back to Japan or relocating to other countries. For example, Panasonic has transitioned towards domestic production for appliances targeted at the Japanese market, and Sharp has signalled its intent to relocate the production of certain products from China back to Japan. Japanese camera manufacturers, including Olympus and Sony, have also shut down or relocated their factories from China to other countries, reflecting a broader trend of companies reevaluating their manufacturing locations and supply chain strategies.

However, the SCRI faces hurdles that can impede its effectiveness. Inadequate infrastructure in some participating countries, such as India, poses logistical challenges and higher transportation costs. India's complexities, including intense competition, limited technological advancements, and political divisions, hinder its full potential as a low-cost production alternative. Moreover, technology and human capital gaps present challenges for SCRI. Insufficient planning and scheduling capabilities and a shortage of skilled professionals in logistics and supply chain management in Australia and Japan hinder optimisation. 

Companies rely on a talented labour force to operate advanced technologies, manage complex supply chains, and drive innovation. Companies encounter difficulties in finding workers with the necessary skills and knowledge to operate advanced machinery or manage sophisticated supply chain systems. Additionally, adapting to new technologies and implementing changes in work processes may require up skilling or retraining of the existing workforce, which can be a time-consuming and resource-intensive process.

In order to attract more skilled professionals to overcome the challenges that labour shortage poses to the reshoring initiatives, Japan implemented the “specified skilled worker" visa in 2019. Moreover, Japan’s advancement in automated functioning suits the country’s shrinking population. This enables higher investment in manufacturing capabilities. 

The economic and business environment of these countries also plays a role at the successful implementation of the SCRI. Any international supply chain cooperation requires an open trade environment, which is exactly what India is not suited for due to its reluctance to open up its market.

Addressing logistical and infrastructure issues, investing in technology, and fostering collaboration between industry and government are crucial steps in maximising the effectiveness of the SCRI and ensuring the continued success of Japan's reshoring efforts.

Japan's Path to Resilient and Diversified Supply Chains

The various reshoring and supply-chain diversifying initiatives that Japan has undertaken are powered by the country's aim to reduce its dependence on China. The research has revealed the complex and multifaceted nature of the China-Japan economic relationship within the context of global supply chains, particularly in industries such as automotive and electronics. Due to the strategic competition between the two countries and the after-effects of the COVID-19 pandemic, the Japanese Government is continuing to invite Japanese companies to rebuild the assembly lines in the home country to ensure economic stability and reduced reliance. 

Various strategies such as, the Programs for Promoting Investment in Japan to Strengthen Supply Chains and the trilateral initiative - SCRI, aim at bolstering supply chain resilience by promoting domestic investment, diversifying production lines, and utilising digital technologies. By addressing vulnerabilities, sharing best practices, and leveraging expertise and technological advancements, Japan can contribute to the development of a resilient and robust global supply chain network. 

Reacting to these actions, China has strongly criticised the SCRI arguing that the initiative contradicts economic principles and disrupts the global supply chain network, warning of potential negative consequences for global industrial supply chain stability and economic recovery. In response to the challenges posed by international trade conditions and the COVID-19 pandemic, China introduced the Dual Circulation Strategy (DCS) in 2020. The DCS aims to shift the focus of China's economy towards domestic consumption, reducing reliance on overseas markets and enhancing economic independence. This strategy reflects China's commitment to building a resilient and self-sustaining economy that will limit the impact of external instability that rises out of countries wanting to shift away from China.

In conclusion, the ongoing geo-political tensions and economic instability in the South-East Asian region have posed challenges to the successful implementation of reshoring initiatives. While these initiatives offer the prospect of a more secure economic future, the complexities and time required to achieve them make continued dependence on China inevitable for the time being. The associated costs also act as a deterrent for manufacturing companies considering relocation or reshoring. To foster a stable trade platform, adopting a "China-and" instead of a “China-or” model, which combines cooperation with China alongside diversification efforts, could provide a more sustainable approach.