Based on Masahiko Hosokawa’s essay in Seiron magazine, this article examines the risks of Japan’s dependence on China exposed by the coronavirus crisis. It analyzes vulnerabilities involving Chinese tourists, rare earths, pharmaceuticals, automobile parts, supply chains, and semiconductors, arguing that Japan should take this moment as an opportunity to structurally reassess China risk.

April 7, 2020
However, what Japan must not forget is that, in this process, the vulnerability of excessive dependence on China has been exposed.
The risk of depending on China has been thrust before us.
The following is from an essay by Masahiko Hosokawa, specially appointed professor at Chubu University, published in the monthly magazine Seiron under the title “The Review of Dependence on China Should Be Made an Opportunity for Japan.”
The novel coronavirus turmoil has sent severe shocks through the world economy and the Japanese economy.
At first, as the infection spread in China and led to the authoritarian lockdown of cities, economic activity as a whole was forced to stop, and the Japanese economy also suffered a severe blow.
Because of border-control measures, Chinese tourists sharply decreased, and inbound demand, meaning demand from foreign visitors to Japan, disappeared before our eyes.
Production activities have also suffered various serious effects in many parts of Japan, such as the inability to produce because materials and parts from China do not arrive, and the suspension of exports of parts and materials to factories in China.
Moreover, what began in China has now shown a worldwide spread to Europe and the United States.
Public attention is focused on how to restore the economy through large-scale economic measures.
For now, everyone is doing all they can simply to get through the immediate crisis.
However, what Japan must not forget is that, in this process, the vulnerability of excessive dependence on China has been exposed.
The risk of depending on China has been thrust before us.
The China risks Japan faces are not limited to infectious diseases such as this one.
Even if the novel coronavirus moves toward containment, the lessons of this crisis will not be put to use if Japan continues to carry China risks in the same way as before.
Rather, Japan should face China risk and turn this into an opportunity to tackle this structural problem.
Chinese tourists can also become a “weapon”
The China risks Japan faces have increased greatly over the past decade.
Recently, the term “economic statecraft” has become widely used.
This refers to a method of achieving a state’s geopolitical strategic goals by using economic means rather than military power.
Since 2011, China has deepened its confidence in its economic development, adopted a hard-line external stance, and begun to make blatant and frequent use of “economic statecraft.”
In 2017, over South Korea’s deployment of THAAD, Terminal High Altitude Area Defense, missiles, China implemented boycotts against South Korean companies and restrictions on tourist travel, among other measures, and has frequently repeated unilateral economic sanctions.
The seriousness of this China-dependence risk was brought home by China’s restriction of rare earth supplies, triggered by the Senkaku Islands issue in 2010.
Industries that relied on China for rare earths fell into a serious situation, rushed to secure alternative supplies from other countries, and worked to reduce their use of rare earths.
As a result, the degree of dependence declined, but Japan has still not been able to escape a situation in which it must depend on China for more than 60 percent.
The reason rare earths have recently begun to attract attention again is the confrontation between the United States and China.
For the United States as well, rare earths are used in military applications such as precision guidance devices for missiles and fighter aircraft radars, and are a major concern.
Therefore, the United States is rushing to break away from dependence on China as a national-security issue.
In the National Defense Authorization Act as well, huge budgets are being poured into support for domestic production, alternative supplies, and stockpiling.
Last year, after President Xi Jinping visited a magnet manufacturer in Jiangxi Province, speculation flew that China was trying to use rare earths as a card in negotiations with the United States.
Japan too must naturally consider the risk of being drawn into such bargaining between the United States and China.
A situation similar to rare earths exists in pharmaceuticals.
Many medicines made by pharmaceutical companies around the world depend, as their raw materials, on active ingredients produced in China.
Due to the spread of the novel coronavirus infection, Chinese factories stopped operating, and American newspapers also reported that medicines were in short supply because raw materials could not be procured.
Japan too must be on guard and must hurry to prepare by diversifying supplies of raw materials and other measures.
The same is true of Chinese tourists.
In the current novel coronavirus turmoil as well, tourism and retail industries dependent on Chinese tourists have suffered a severe blow because China banned group travel.
Of course, relief measures such as immediate cash-flow support are necessary.
But fundamentally, Japan should review the very structure of excessive dependence in which “Chinese account for 30 percent of foreign visitors to Japan and 40 percent of their spending.”
This is also one reason why Japan hesitated to impose a total entry ban on people from China this time.
As stated earlier, China’s retaliatory measure in 2017 banning group travel to South Korea dealt a severe blow to the South Korean economy.
Instead of merely being elated or depressed by immediate inbound demand, Japan should also consider the future risk that China may use Chinese tourists as a “weapon” against Japan.
Tourism administration that sets numerical targets for foreign visitors to Japan and pursues quantity should now graduate from that stage and enter a stage where security is taken into account.
Diversification and decentralization of foreign visitors to Japan should be the policy objective.
The shutdown of factories inside China also had a major impact on the supply chains of various industries.
A supply chain means the entire chain of supply, from the procurement of raw materials and parts to manufacturing and sales.
Factories in various parts of China have begun moving toward resumption of operations, but they do not immediately restart smoothly.
It takes time for all employees to return, and the procurement of the parts and materials necessary to operate factories is not sufficient.
In addition, logistics such as ports and truck transport have stopped, creating obstacles to production activities in various industries.
As a result, procurement of parts from China has been delayed, and delivery delays have occurred among housing-equipment manufacturers of toilets, system kitchens, and other products.
In response to this, housing sellers have also found themselves unable to hand over new houses to customers.
Such disruptions in supply chains are occurring in various industries.
Due to the impact of the Trump administration’s tariffs on China, moves to shift production bases from China to Southeast Asia and elsewhere had already accelerated in apparel, home appliances, and other sectors.
Amid this situation, the current crisis has become an opportunity forcing companies to review their supply chains as a matter of management strategy.
The price paid for the pursuit of efficiency
The supply-chain problem also occurred in the automobile industry.
Nissan Motor decided to temporarily suspend its completed-vehicle factory in Kyushu because the spread of the novel coronavirus made it difficult to procure parts from China.
Honda was also forced to restrict operations at its Saitama plant.
Not only did completed-vehicle factories in China stop, but the stagnation of China’s supply chain also affected automobile production in Japan.
Imports of automobile parts from China have been steadily increasing.
They account for around one-third of Japan’s imported parts.
That said, since imported parts are said to account for 20 to 30 percent of automobile parts overall, the degree of dependence on China is not especially high.
The issue is what kinds of parts depend on China.
There are unexpectedly many parts that require certification, including safety-related parts such as airbags and brakes.
Even if one wants to change the suppliers of such safety-related parts to other factories, they cannot easily be substituted because certification is required.
If substitution becomes difficult for even some parts, the problem may arise that automobile production in Japan stops.
The automobile industry is fundamentally based on a pyramid-shaped supply chain, with completed-vehicle manufacturers at the top, supported broadly by first-, second-, and third-tier parts manufacturers.
Automakers have formed such supply chains not only inside Japan, but globally at various bases, including Thailand in Southeast Asia.
In China as well, when producing automobiles, Japanese parts manufacturers were encouraged to enter the market and local parts manufacturers were cultivated, creating entire pyramid-shaped supply chains in places such as Guangzhou and Wuhan.
As a result, in Wuhan, among the 159 Japanese companies that had entered the area, 70 were Japanese automobile-related suppliers, accounting for about half.
The technological capabilities of such Chinese parts factories improved, and they became able to produce low-cost, high-quality parts.
Now the local procurement rate for automobile parts in Wuhan has reached as high as 90 percent.
If things had remained at that stage, the impact of China risk would have been limited to completed-vehicle production in China.
But another movement was added to this.
That was the global standardization of parts.
Companies narrowed down parts to the best automobile parts in terms of quality and price, and used them globally in production.
In this way, Chinese-made parts came to be used not only in completed vehicles made in China, but also in completed vehicles in other regions.
In the past, the automobile industry had a pyramid structure completed domestically, but with the advance of globalization, the supply chain itself became global.
In this way, China risk came to extend even to the global production system.
This risk first became visible at Nissan’s Kyushu factory.
In a sense, this can be called the result of the “Ghosn reforms.”
The company shifted sharply away from domestic keiretsu transactions toward management that emphasized cost-cutting efficiency, and increased imports of parts from China and South Korea.
There was probably also a judgment that, even for important parts, depending on one company in China was advantageous in terms of cost efficiency.
At the Kyushu factory, where the transport lead time from China is short, the operation seems to have been designed to hold as little inventory as possible.
It is natural that the impact appeared there first.
After a while, Honda also experienced a similar effect.
That is because it had created a similar supply chain and had brought some of the parts from Wuhan to its completed-vehicle factories in Japan as well.
Japanese automakers have had bitter domestic experiences: the 2007 Niigata Chuetsu Offshore Earthquake, the 2011 Great East Japan Earthquake, and the 2016 Kumamoto Earthquake.
As a result, they were thought to have taken risk countermeasures even at the cost of higher expenses, such as developing vast supplier maps, lists of supply sources, advancing “visualization,” dispersing factories, and diversifying suppliers.
On the other hand, it is also true that with the advance of globalization they were pressed toward efficiency, and from a global perspective the risks in the production system had become higher.
Whether to adopt a production system that pursues economic efficiency or to emphasize risk dispersion is a trade-off.
How to balance the two is a management decision.
In the future, that balance should be reconsidered, and preparations such as the supply of alternative parts should be reviewed in light of China risk.
The risk of U.S.-China confrontation over semiconductors
Now, in the shadow of the infectious disease, another risk is emerging.
It is the security risk caused by the U.S.-China tech cold war, the struggle for technological hegemony.
The main battlefield is semiconductors, and Japan’s related industries must be careful.
Recently, several hundred Japanese nationals returned from Wuhan on charter flights.
About half of them were engaged in automobile-related work, but most of the remaining half were related to semiconductors.
Engineers from Japanese semiconductor manufacturing equipment makers are involved in the construction and maintenance of such factories.
Of course, it is natural to engage in this as a business to develop the Chinese market.
At present, this itself is not a problem.
However, it is dangerous to think that there will continue to be no problem in the future.
China is trying furiously to foster its semiconductor industry.
The semiconductor industry is the highest-priority industry in “Made in China 2025,” and China aims to achieve a self-sufficiency rate of 70 percent by 2025.
Wuhan is positioned as a core base, and huge factories are being built there based on South Korean and Taiwanese technologies.
The major Chinese semiconductor company Tsinghua Unigroup became the first Chinese manufacturer to begin mass production of high-performance three-dimensional NAND flash memory.
Some production lines of this semiconductor factory have been completed and are already operating.
Even with Wuhan locked down, labor and materials are being put into this factory so that it continues to operate.
It is a specially important base treated as an exception by the Chinese government.
In April 2018, after the major Chinese telecommunications equipment company ZTE suffered the bitter experience of being unable to receive semiconductor supplies from Intel and Qualcomm because of U.S. sanctions, forcing it to stop its core business and cry out in distress, China accelerated its drive to internalize semiconductor production.
Furthermore, in October of the same year, the Chinese national-policy semiconductor maker Fujian Jinhua Integrated Circuit, JHICC, appears to have learned from the severe blow it suffered when U.S. sanctions subjected it to export restrictions on semiconductor manufacturing equipment.
In the first phase from 2014, China invested in semiconductor chips with a 2 trillion yen fund.
In the second-phase plan announced in October 2019, it will invest in semiconductor manufacturing equipment with a 3.2 trillion yen fund.
Using such financial power as a weapon, China is accelerating the absorption of technology and human resources.
It is said that more than 3,000 engineers have flowed out of Taiwan, which possesses advanced semiconductor talent, and that this outflow cannot be stopped.
Assuming that U.S.-China confrontation will continue over the medium to long term, China is desperately working to produce semiconductors on its own in order to break free from dependence on the United States.
This article continues.