56 Business The EconomistNovember 9th 2019
I
n 1977, five years after China and Japan
re-established diplomatic relations, Mi-
yakoshi, an electronics manufacturer, be-
came the first Japanese firm to receive a
business permit from the Communist
Party, to make cassette-tape recorders. In
2017 around 32,000 Japanese companies
had investments worth $117bn on the
mainland, one of the biggest foreign cor-
porate footprints. Last year they poured
close to $11bn into China, up by half since
2010 and not far off America’s long-stagnat-
ing tally. Big listed Japanese firms derived
17% of their overseas profits from China,
according to calculations by Jesper Koll, a
fund manager in Tokyo.
The rapport between the world’s sec-
ond- and third-biggest economies has nev-
er been better. Last year Chinese officials
paid a visit to Panasonic, Canon and Toyota
in Japan to meet executives and lure their
firms to new free-trade zones. A year ago
Shinzo Abe, Japan’s prime minister, trav-
elled to China, to a forum attended by 1,000
businesspeople. During the trip the two
countries announced 500 deals worth
more than $18bn. Yet for all the bonhomie,
it is also an unusually delicate time for Jap-
anese businesses in the People’s Republic.
The first reason is the changing nature
of commercial relations between an en-
riched China and the world. Japan’s firms
have navigated this shift well, displaying
none of the overconfidence which bedev-
illed their gung-ho American misadven-
ture in the 1980s. As Chinese labour has
grown pricier, many have moved manufac-
turing to cheaper places in the region.uniqlo, a Japanese garment-maker, is one
of a clutch to decamp to South-East Asia.
At the same time, many of the same
companies have successfully turned them-
selves into desirable brands in China. Chi-
nese shoppers covet uniqlo’s well-made
clothes. Fed up with safety scandals at local
producers, they prefer Japanese-branded
snacks and beverages from Asahi or Yoshi-
noya or medical products made by Ko-
bayashi. Kao, a Japanese consumer-goods
firm, recently started making a premium
version of its Merries nappies for the Chi-
nese market only. This summer Toyota in-
vested $600m in Didi Chuxing, a Chinese
ride-hailing giant. Miyakoshi, which now
sells property rather than cassette-players,
generates all of its sales in China. Chinese
consumption has gone “beyond the point
of no return”, says Takeshi Niinami, the
boss of Suntory, a giant Japanese distiller.
Japanese wares appeal not only to Chi-
na’s consumers but also to its corporations.
In April Toyota agreed to sell electric-car
technology to Singulato, a Chinese builder
of low-emissions vehicles. In June it an-
nounced partnerships to build batteries
with China’s catl, a technology company,
and byd, a carmaker. When in 2015jd.com
decided to erect China’s largest hydropon-
ics factory on the outskirts of Beijing, the
Chinese e-commerce giant looked as far
afield as Israel and the Netherlands for the
right technology to regulate the tempera-
ture of its seedling rooms and soil-free veg-
etable beds. In the end, it settled for Mit-
subishi Chemical. The Japanese firm has
already helped build close to 20 factorieslike jd.com’s in China and aims to break
ground on ten a year.
Japanese firms run into the same hur-
dles as others trying to do business in Chi-
na. Bosses in Tokyo echo Western gripes
about woolly, haphazardly enforced rules,
a tax system skewed towards Chinese com-
panies, unreliable courts and theft of intel-
lectual property. But Japan’s government
and industry groups may be doing more to
help them than America’s or Europe’s do
for theirs. Its embassy in Beijing and the Ja-
pan External Trade Organisation, an inde-
pendent government agency, have em-
ployed ip experts to assist firms. Japanese
advertisers have set up shop in China to
help compatriots market to local tastes.
Having had its fingers burned in China a
few years ago, in May Rakuten, a Japanese
e-commerce giant, opened an office in Da-
lian, a Chinese coastal city now home to
some 1,500 Japanese companies.
For all its recent success in China, Japan
Inc must still tread carefully there. One rea-
son is ghosts of the past. In 2005 a contro-
versial change to Japanese history text-
books, seen to whitewash Imperial Japan’s
sins, led to riots in China and boycotts of
Japanese businesses. In 2012, during a po-
litical row over the disputed Senkaku Is-
lands, which Japan controls but China
claims (and calls the Diaoyu), Toyota and
Honda dealerships, as well as a Panasonic
plant, were set on fire.
Japanese firms have got better at deal-
ing with Chinese grievances over Japan’s
failure to atone for its wartime occupation
of parts of China, when firms such as Mit-
subishi Materials forced Chinese labourers
to toil in Japanese mines. Three years ago
Mitsubishi even issued a rare formal apolo-
gy and has been setting up a compensation
fund. But resentment simmers—and could
easily boil over if China’s self-confidence
continues to find expression in an asser-
tive nationalism.Between the eagle and the dragon
Then there is the spectre of Sino-American
rivalry. Japanese firms have long benefited
from geopolitical proximity to America
and geographical closeness to China. The
two are the most important markets for
many Japanese companies, whose supply
chains criss-cross both. As the superpow-
ers jostle over everything from trade to
technology, this blessing looks ever more
like a curse. Because Japan’s firms are more
exposed to China than American ones
are—China is Japan’s largest trading
partner—they would find it harder to give
up on the Chinese market. It would be “a
nightmare” to have to choose between Ja-
pan’s biggest neighbour and its chief stra-
tegic ally, says Ichiro Hara of Keidanren, a
Japanese business lobby. As geopolitics
impinges on globalised commerce, the
choice may become inevitable. 7BEIJING, DALIAN AND TOKYO
Japanese companies have thrived in China of late. Can it last?Japan Inc in ChinaNeighbourly love-in