Anti-Japan riots in Beijing, Shanghai and elsewhere in China in September triggered by Japan’s nationalization of the disputed Senkaku Islands brought vandalism and violence to Japanese restaurants, stores and car dealers and a boycott of Japanese products.

The disturbances prompted Japanese companies to worry that they have been too dependent on China for their sales and production and thus should consider diversifying their global exposure.

The “China-plus-one” concept, in which firms look to establish footholds elsewhere in Asia, was fostered several years ago but since September has gained greater traction.

Many Japanese firms are now looking to other emerging Asian markets to spread their risks.

Following are questions and answers regarding the China-plus-one strategy, why businesses are considering it and what alternative markets they are targeting:

What is China-plus-one and what are the latest trends?

Many multinational companies have benefitted from Chinese growth over the past decade, but the boom has also sparked inflation on the mainland and, in the case of Japan, there are ever-present political and territorial strains that are cause for businesses to hedge their bets.

Japanese corporate investment started to surge around 2001 when China became a member of the World Trade Organization and opened its market to foreign investment.

Recent figures, however, indicate Japan Inc. is increasingly investing in other parts of Asia.

Amid the rise in political risks in China, direct corporate investment in the communist nation fell to ¥63.4 billion in October, down almost 30 percent from a year earlier.

In the same month, investment in member states of the Association of Southeast Asian Nations, including Thailand, Indonesia and Vietnam, more than doubled to ¥201.9 billion, according to the latest data from the Finance Ministry.

In 2011 as a whole, the data show Japan’s direct investment in ASEAN reached ¥1.5 trillion, more than double the previous year’s figure, while investment in China was ¥1 trillion last year, up 60 percent from ¥628.4 billion in 2010.

“If labor costs continue to rise and anti-Japan sentiment lingers in China, Japanese firms will inevitably look to ASEAN to diversify their risks,” said a report by Daiwa Institute of Research issued Dec. 5.

How have Japanese firms reacted to the September riots?

In a Nov. 5 survey by Teikoku Databank, 1 out of 6 Japanese companies said they were either looking to scale down or shut down their China operations.

According to the corporate credit research firm, 54.5 percent of 10,534 responding firms said they would maintain their business, while 15.5 percent said they were considering withdrawing from China or scaling back business there.

Roughly speaking, there are three different strategies Japanese manufacturers are taking on business in China, according to the Japan External Trade Organization.

One trend has been an accelerated shift of production centers to lower-wage parts of Asia, including Vietnam and Myanmar.

Firms pursuing this generally are in labor-intensive businesses, including apparel and small “zakka” goods producers.

“In light of further increases in labor cost and difficulty in securing workers, mainly in coastal areas of China, we have been conducting surveys to find a suitable location for our new bases in inland China, Vietnam, Cambodia, Laos, Myanmar and other countries since August 2011,” a JETRO report on Nov. 22 quoted one company as saying.

Another trend is the partial shift of production bases from China to ASEAN. Electronic appliance and general machinery makers plan to maintain production centers in China for Chinese consumers but transfer other output away from the country.

But for those businesses that highly value China’s output networks, among them electronics appliance and auto parts makers, relocation would be difficult because their supply chains are already well-established.

“Because they have invested so much in China, it is hard for them to get out,” said JETRO Chairman and CEO Hiroyuki Ishige.

It’s a different story, however, for nonmanufacturers. Japanese logistics firms, food providers and retailers are looking to expand their business opportunities in the vast Chinese market, he said.

What countries are showing up on the business radar?

Thailand, Indonesia, Malaysia, Vietnam and Myanmar are popular mainly due to their low labor costs and potential consumer power.

Myanmar in particular has grabbed the spotlight in recent months as a China-plus-one site after the United States lifted economic sanctions following the landslide victory of Nobel Peace Prize laureate Aung San Suu Kyi’s party in the April election.

The outcome triggered an influx of foreign investment.

“Myanmar has been uncultivated. But the lifting of U.S. economic sanctions makes it easier for other Western nations to tap the market,” said Takeru Tsuzuruki of Teikoku Databank, who was in charge of a Nov. 21 report on Japanese firms’ business in Myanmar.

In the report, 91 Japanese companies said as of the end of October that they were operating in Myanmar after the departure of the former ruling junta. The figure is up 75 percent from 2010, according to the report.

Besides lower labor costs and 62 million consumers, the nation’s high literacy rate attracts firms because it makes it easier for workers to be trained, Tsuzuruki said.

“The location (close to other emerging Asian markets) is also attractive because it is convenient to make products there to export to other countries,” he said.

Trading houses Okaya & Co. and Kanematsu Corp. as well as machinery maker Kubota Corp. are major Japanese firms doing business in Myanmar.

Recently, Juroku Bank tied up with Ayeyarwady Bank, a major private concern in Myanmar, in the first such arrangement between a Japanese regional lender and a Myanmar financial institution to help Japanese companies set up in the country.

“Although Myanmar is a member of ASEAN, it has not grown economically for many years. . . . But it draws a lot of attention as the last frontier in Asia because it has abundant natural resources such as natural gas and rare earth materials as well as an uncultivated consumer market,” Teikoku Databank said in the report.

“Many companies are looking to start business, and with domestic demand remaining sluggish, we expect more Japanese firms to enter Myanmar,” it said.

What about other countries?

Many firms find Thailand attractive and have already expanded businesses there as a second production hub outside China. As of the end of October 2011, 3,133 Japanese firms were active in Thailand, mainly manufacturers, including automakers and parts suppliers, according Teikoku Databank.

Many Japanese carmakers are operating already in Indonesia, whose 240 million people and high economic growth show potential. As of March 23, there were 1,266 Japanese firms operating there.

Vietnam is also gaining attention. Its low labor costs and easy access to China make it an attractive production base. As of the end of January, 1,542 Japanese firms were doing business in Vietnam, said Teikoku Databank.

But some experts caution that businesses should not rush to set up in Myanmar or Vietnam because despite their promise they also have social infrastructure shortcomings.

The Weekly FYI appears Tuesdays but was moved to Wednesday this week due to election coverage. Readers are encouraged to send ideas, questions and opinions to hodobu@japantimes.co.jp

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