Japan to help shift output to ASEAN from China after virus disruption

Keita Nakamura, Kyodo News

Posted at May 03 2020 10:29 AM | Updated as of May 03 2020 10:30 AM

TOKYO - 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 yen ($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 official of the Ministry of Economy, Trade and Industry 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.

ASEAN groups 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 yen to promote domestic output of items that are currently heavily imported from certain areas. Also included in the stimulus, the subsidies will 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 for universal distribution of two cloth masks in the country.

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

According to trade data by Japan's 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.