Japan’s manufacturers have started moving production out of China because they fear the deadly coronavirus outbreak could prolong plant closures and wreak more havoc on their supply chains.
Reallocating production outside of China means a temporary surge in costs and is not an easy decision to make, but some companies cannot afford to wait until the health crisis is contained, analysts said.
Japanese companies have extensive manufacturing operations in China, though increased labor costs and the trade war between Beijing and Washington have prompted some of them to shift production from the world’s second-largest economy to Vietnam or elsewhere in Southeast Asia.
“We are preparing an alternative production plan outside China, especially for our (electronic) device products” in case disruption in supply chains continues, Panasonic Corp. Chief Financial Officer Hirokazu Umeda said in a recent news conference to announce the electronics giant’s third-quarter earnings.
“But there are house appliance products that cannot be made outside China and we have to consider what is the most efficient solution,” he said.
Factory activity in China has stalled and some plants are staying closed beyond the extended Lunar New Year holiday as authorities limit the movement of people and goods to contain the outbreak of the pneumonia-causing coronavirus, which has killed over 1,000 people and infected more than 40,000 in the country.
Japanese manufacturers have been hit hard by the lockdown of Wuhan, the business and logistics hub where the outbreak began. Temporarily shifting production to other countries while continuing to pay the bills in China is certain to raise costs.
Major auto parts maker Aisin Seiki Co. is moving some production out because delays in parts deliveries from China would strain its global operations.
“We are trying to determine which products need to be manufactured elsewhere because even if production in China stops, other regions are operating,” the company’s head of accounting, Yuji Fukushige, said, adding that a temporary transfer of production to Japan is a possibility.
Toyota Boshoku Corp., which also operates extensively in China, said it is considering moving production of auto seat covers to Japan or Thailand because logistics in China will take time to normalize even after employees return to work.
An executive at major air conditioner- maker Fujitsu General Ltd., which has factories in Shanghai and Jiangsu province, said it is weighing production in Thailand as there is no telling how long China’s shutdown of public transport will continue.
Some are moving more quickly because they began drafting relocation plans after the U.S.-China trade war began.
Nintendo Co. partially shifted production of the Switch Lite game console to Vietnam, while Sharp Corp. and Ricoh Co. moved copier production to Thailand.
If risks continue to climb, companies “may start thinking twice about staying committed” to China, said Toru Nishihama, chief economist at Dai-ichi Life Research Institute.
Unlike the 2002-2003 SARS epidemic, it will likely take much longer for China to contain the new coronavirus, he said.
In the long term, Takuji Aida, chief Japan economist at Societe General Securities Japan, said small and midsize firms may decide to move their China operations back to Japan.
Such companies tend to be more flexible in upgrading facilities with digital and robotics technologies, and the reduction in labor costs they can achieve in China may be smaller compared with that achievable by large manufacturers, he said.
“For sure, there would be initial investment costs (in a production shift) but robotics and internet of things technology have increasingly been adopted by Japanese manufacturers as a way to resolve labor shortages” and could lessen the appeal of China for them, Aida said.