Japan to help shift manufacturing to ASEAN from China after virus disrupts supply chains

Japan to help shift manufacturing to ASEAN from China after virus disrupts supply chains

Japan will launch a subsidy program to encourage domestic manufacturers to transfer their overseas production bases to Southeast Asia, as the coronavirus pandemic has greatly disrupted their supply chains heavily dependent on China.

The ¥23.5 billion ($220 million) program, incorporated into the government’s emergency stimulus package to ease the economic fallout from the pandemic, will help firms diversify their supply chains by financially assisting the construction of production facilities as well as feasibility studies in ASEAN countries.

The initiative came after many automakers and other manufacturers suffered a shortage of parts produced in China after the new coronavirus outbreak started late last year in the central Chinese city of Wuhan.

“Even before the virus outbreak, there has been a growing need for Japanese firms to set up production bases in the ASEAN region,” an Economy, Trade and Industry Ministry official said. “(The subsidy scheme) will help our country build better relationships with ASEAN countries, too.”

To avoid various risks associated with a heavy reliance on production in China, such as anti-Japan demonstrations, rising wages and its tariff war with the United States, Japanese firms have tapped the Association of Southeast Asian Nations for alternative output bases under the “China plus one” strategy.
The ASEAN members are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

In another effort to reinforce supply chains, the government will spend ¥220 billion to promote domestic output of items that are currently heavily imported from certain areas. Subsidies also included in the stimulus will go to financially support the relocation of Japanese firms’ overseas production sites back home.

The program will also target manufacturers of items essential for Japanese people to “lead a healthy life” amid the outbreak, including face masks and alcohol sanitizers. They can receive subsidies when they newly open factories or boost their existing output capacity in Japan.

The subsidies will cover up to two-thirds of investments in boosting domestic production of such essential items for major companies, and three quarters for small and medium-sized companies, according to the ministry.

According to the Japan Hygiene Products Industry Association, about 80 percent of face masks in the country in 2018 were imported, mainly from China. Such masks have become scarce since the virus outbreak, prompting Prime Minister Shinzo Abe to launch a program to distribute masks in the country.

Outlays for the two subsidy programs were included in a ¥25.69 trillion supplementary budget for fiscal 2020 that cleared the Diet on Thursday to finance the stimulus.

According to trade data by the Finance Ministry, car parts from China accounted for 36.9 percent of Japan’s total imports in 2019, while phone handsets from the Asian neighbor accounted for 85.5 percent of the total import value.

Takahiro Fujimoto, a professor at the University of Tokyo’s Graduate School of Economics, said the subsidy programs are “reasonable to some extent” from a long-term perspective as they will encourage Japanese manufacturers to strike a better production balance among Japan, China and ASEAN.

But Fujimoto, who is well versed in Japanese firms’ supply chains, pointed out diversification and localization of their global output bases should not be promoted if it could end up impairing the companies’ cost advantages.

“It’s important to make their production systems both competitive and adaptable to disasters,” he said.

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