Japanese companies are striving to build supply chains that do not depend on China amid that country's growing conflict with the US. This is expected to increase the costs of all manner of products dramatically. Are companies prepared for “zero-China?”
This past summer, a top-secret project was in full swing at Honda Motor -- a massive restructuring plan to explore building passenger cars and motorcycles using as few China-made parts as possible.
Companies will have to choose whether to continue doing business in China in the event of a Taiwan contingency. Management must always consider business continuity.
China accounts for more than 30% of Honda's global sales, and its policy of making China a mainstay of its earnings will not change. Although the automaker has no intention of leaving China anytime soon, it is facing the China risk head-on to ensure the company is prepared for an emergency.
The company is rushing to estimate the cost of procuring parts from other regions, such as Southeast Asia, while parts for cars built in China will be procured within the country. A Honda spokesperson told Nikkei that it is always looking at various options to hedge risks in its supply chain.
If 80% of Japan's imports from China -- about 1.4 trillion yen ($9.4 billion) worth, including raw materials and parts -- were disrupted for two months, Japan would not be able to produce a wide range of products, including home appliances, cars, resins, clothing and food products. About 53 trillion yen ($360 billion) worth of production would disappear, according to estimates by professor Yasuyuki Todo and his colleagues at Waseda University, who used the Fugaku supercomputer for their calculations. That would amount to a loss of about 10% of Japan's gross domestic product.
After the end of the Cold War, globalism incorporated the former communist-bloc countries and increased economic interdependence. Japan has powerful ties with China. That country accounted for 26% of Japan's total imports as of 2020, more significant than the US (19%) and Germany (11%).
Product prices would also increase. According to Owls Consulting Group, a Tokyo-based supply chain research firm, if 80 major products, including home appliances and cars, were to stop imports from China and switch to domestic production or procurement from other regions, costs would increase by 13.7 trillion yen annually. That is 70% of the total net income of manufacturing companies listed on the Prime Market of the Tokyo Stock Exchange.
If the cost increases were passed on to individual products, the average price of a personal computer would rise by 50% and a smartphone would rise by 20%. Inflation is currently rising due to the Ukrainian crisis and other factors, but the scale of price increases would be far more serious.
Countries are increasingly excluding China from their supply chains. In May, the Biden administration in the US created the Indo-Pacific Economic Framework (IPEF) with 14 countries, including Japan, the US and India. It assumes that in a contingency, countries will share information on critical products and exchange inventories as part of their crisis response.
US companies like Apple, which has grown by basing design in the US and production in China, are also moving to lessen their dependence on China.
The market is also sensitive to China risk. It is possible to classify the world's approximately 13,000 companies by percentage of sales in China, and compare their average stock prices to those at the end of 2009. The stock prices of companies with a China ratio ranging from under 50% to 75% are currently about 10% lower than at the end of 2009. That is a sharp contrast to the 60% increase experienced by companies with a China share of less than 25%.
During the Cold War, the supply chains in the East and West were not connected, making it much easier to not rely on the Soviet Union or China. Now companies are closely intertwined with China, from upstream, such as procurement of raw materials, to downstream, like product assembly. While continuing to do business in China in peacetime, companies are also being pressed to prepare for the zero-China option.
