Effects of disasters could upset supply chains for a year
Chinese businesses from sovereign wealth funds to small processing factories are bracing for the long-term fallout from the disasters in Japan.
Japan is one of China's biggest trading partners and although official media initially reported that the earthquake and tsunami did not inflict any damage on Chinese businesses, an untold number of firms are caught in worldwide delivery delays and rising component costs.
Some economic analysts say that it could take a year or even longer for supply chains linked to Japan to return to normal, and Chinese investors will not be able to count on any returns in the short term on their Japanese investments.
Trade and investment between the two countries is immense. The island nation accounts for 10 per cent of China's international trade and it ploughed US$4.1 billion into the mainland in 2009, up from US$3.65 billion the year before, according to the National Bureau of Statistics. US direct investment in China, by contrast, declined over the same period, from US$2.94 billion in 2008 to US$2.55 billion in 2009.
At the same time, China has also been pouring substantial amounts of its reserves into its neighbour's economy, snapping up US$19.4 billion in blue-chip Japanese stock last year alone.
One Japanese blue-chip that is looking precarious is Tokyo Electric Power (Tepco). Sovereign wealth fund China Investment Corporation (CIC) is believed to have put nearly 36 billion yen (HK$3. 46 billion) into the utility last year through the fund's Australia-based investment arm. That was before the disasters battered Tepco's Fukushima Dai-ichi power plant, triggering a nuclear crisis.
The 21st Economic Herald reported that by Tuesday, Tepco's share price had plummeted nearly 40 per cent compared to September last year.
But a CIC spokesman said that now was not the time to talk about investment returns. Instead, the fund needed to support the country on humanitarian grounds.
In terms of manufacturing, Japan is China's key supplier of transport and engineering vehicles, high-end machinery and machine parts, key electronic parts, and high quality materials such as chemicals and steel. With production at all Japanese auto makers on hold, mainland car dealers fear a shortage of vehicles; in 2010, shipments from Japan, totalling 270,000 units, made up one-third of China's market for imported cars.
Wang Liusheng, an auto industry analyst with China Merchants Securities, said the supply problems could also affect some Chinese carmakers who depended on Japanese manufacturers for vital components like gearboxes. But, Wang said, other suppliers such as German and higher-quality domestic firms might be able to fill the breach.
Despite the near industry-wide shutdown in Japan, no stoppages have been reported at Sino-Japanese auto joint ventures on the mainland. Beijing-based Honda spokesman Takayuki Fujii said Honda plants in China relied on Japan for only 10 to 20 per cent of their parts so assembly lines at the company's China operations could keep running for the time being.
Nevertheless, Japan is China's biggest source of engineering equipment and vehicles, claiming about 9 per cent of the mainland market, most of it excavators. Given that Japan's post-quake reconstruction will require a great deal of this kind of equipment, China will not only have to slash imports, but might also end up exporting excavators to Japan, according to online business information service HC360.com.
While there seems to be breathing space in the auto sector, the market in electronic equipment and components is nearing a crunch point.
Japan's delivery halt is already affecting the global supply chain and the price-sensitive China market is expected to experience even wilder fluctuations in price than usual, according to Liu Guanwu, of Analysys International, a Beijing-based research company.
Japanese flash memory parts would be the first dominoes to fall, Liu said. Toshiba supplies 35 per cent of the world's NAND flash memory chips, a component for smartphones and iPads. Like crude oil or grain, 'flash memory chips are almost a speculative commodity in the market of electronic components', Liu said. 'Their supply is so concentrated, and any fluctuation in shipments can cause the price to skyrocket.'
The price of Japanese NAND chips has reportedly already soared 20 per cent on the world market and is only expected to rise further.
Liu said Chinese panel display makers also relied on Japan, especially Asahi Glass, for screen supplies. Mainland-based Huawei and Taiwan-headquartered Foxconn, both with big operations in Shenzhen, said they were assessing their inventories. Meanwhile Taiwan's Acer Group said it had enough stocks for 21/2 to three months.
But Liu said he doubted if most Japanese companies would be back on their feet within six months. 'It will probably take more than a year,' he said, to overcome both the direct and indirect impact, and to move 'from protecting people to assessing the damage, rebuilding factories and re-matching the logistics support'.
At the same time, according to Gu Wenjun, an analyst for market research service iSuppli, it would be unrealistic for companies to entirely shift to alternative suppliers from South Korea, Taiwan, Israel or North America. 'The global division of work has been so specialised that one can't switch partners so easily.'
In the meantime, many companies, especially small exporters in the Pearl River Delta, are already working together with their Japanese partners to deal with the supply problems.
Peter Chai Kwong-wah, the owner of a toy factory exporting to Japan, said that even though he had signed a full-year contract with his Japanese importer, he might have to cut the consignment by 20 per cent because of lower consumer demand.
Chai, who is also chairman of the Hong Kong Small and Medium Enterprises General Association, said China-based exporters also used to buy parts from Japan, out of respect for their importers' preferences. But the supply of those parts had ground to a halt.
'Most Japanese partners have shown understanding and agreed to accept substitute parts made on the mainland, so long as they meet our existing standards,' Chai said, adding there was an abundant supply of parts on the mainland of equal quality.
Japan invested US$4.1 billion in China in 2009, up from US$3.6 billion in 2008
As a major trading partner, Japan's stake in mainland trade is: 10%