Honeymoon ends for Japanese investment

DURING Prime Minister Ryutaro Hashimoto's recent visit to the mainland, he became the first Japanese premier to travel to northeast China, known as Manchukuo when it was under Japanese occupation in the 1930s and 1940s. On the 25th anniversary of the normalisation of Sino-Japanese relations, Mr Hashimoto toured factories in the port city of Dalian - what the United States press calls the new Japanese bridgehead in China. Occupied this century by Russians, Japanese, Europeans and until 1955 by Soviet troops, Dalian today moves to a modern beat. Toshiba, Mitsubishi and Sanyo are among Japanese heavyweights operating in the development zone 40 minutes north of Dalian on the new expressway. City authorities count 1,400 Japanese enterprises here - certainly an overestimate - and Japanese fashion sets the pace on Dalian's busy downtown streets. The Dalian fish market supplies restaurants in Osaka and Tokyo, sushi bars and teriyaki restaurants are scattered throughout the city and half the membership at the nearby Golden Pebble Golf Club - corporate rate: US$100,000 - is Japanese. By last year, there were, according to Chinese statistics, about 15,000 Japanese companies in the mainland. Actual Japanese investment was $12 billion and committed investment last year reached $25 billion. But not all investment options are being taken up, and the Japanese would like to abandon the bridgehead For Dalian, a prime manufacturing zone with a large port facility and special tax breaks, the honeymoon is over. 'In 1996, new investment slowed and this year the downward trend is continuing,' says the Japan External Trade Organisation in Dalian. Japanese investment reached $3.6 billion last year, but figures for the first half this year show a decline, with committed investment down to $1.6 billion from $1.85 billion in the year-earlier half. Bilateral trade last year was $60 billion and Japan has been the mainland's largest trading partner for four consecutive years, the China Daily says. There are several reasons for the turnaround. Japanese companies are feeling the burden of capital goods import taxes which have increased costs for new factories. Strategies also have changed. 'In the past, Japanese companies saw China as a manufacturing base for exports. Now they focus on the domestic market,' Beijing based Japanese diplomat Kazuyuki Katayama said. 'But breaking into this market is difficult.' Japanese companies realise they have made two serious mistakes in their China strategy, an assessment by the Japanese embassy says. They have concentrated a lot of their resources and manpower in Dalian and northeast China and they have kept their China-based management and factory organisation firmly under the control of Japanese, failing to sufficiently cultivate Chinese management teams. Dalian, where the Japanese felt comfortable and familiar, was not without its handicaps. The city's growth is limited by the poverty of its natural hinterland, the depressed northeastern region, home to thousands of bankrupt state-owned industries. This is not the market which can meet the changed goal of Japanese companies, now targeting mainland sales rather than exports to Southeast Asia, where the buying power for consumer goods has been slashed. Therefore, Japanese companies are following the strategy of European and American firms, who have moved production bases to Shanghai and the heavily populated and richer regions of the Yangtze delta. Nearly all newly arriving Japanese companies choose Shanghai as their production base, shunning investment offers from Dalian. The Dalian bridgehead is not the only thing that has turned to the disadvantage of the Japanese. Worse was the belief Japanese management methods and tight Japanese control over company organisation would work best. While European and American multinationals put enormous energy and money into training Chinese staff and promoting them on the corporate ladder, Japanese companies have instead bred 'China experts' - Japanese fluent in Chinese who have studied Chinese business practice and behaviour. They maintain a firm grip on business and keep their Chinese colleagues at a distance. Despite their huge investments, the Japanese are outsiders and feel secure only in their own company. 'In business, that is a handicap,' the manager of a European multinational said. Some Japanese companies have had a disastrous run in China. Kazuo Wada, president of the Yaohan department store chain, a few years ago boasted he would open a 'thousand supermarkets' in the mainland and a chain of department stores. But the expansion overstretched Yaohan and Yaohan Japan has filed for bankruptcy. Japan is noticeably under represented in one of its strongest sectors, the car industry, where Beijing has awarded contracts for key industrial projects to European competitors such as Volkswagen and American giants such as General Motors and Ford. In big infrastructure projects such as the Three Gorges Dam, the Japanese have been left out this year despite considerable effort and lobbying. The visit of President Jiang Zemin to the US has resulted in billions of dollars worth of nuclear equipment deals for American firms. Last week, Vice-Premier Zhu Rongji hinted that Beijing prefererred either the German high-speed train ICE or the elevated high-speed Transrapid train for the Shanghai to Beijing line to be developed soon, meaning Japan's Bullet trains would lose out. To the surprise of international bankers, Japanese banks, already in deep trouble at home because of large unserviced loans, have taken syndicated loans to Chinese corporations onto their books. These loans initially were given under the lead management of Hong Kong and American financial institutions who, after cashing the management fee, offloaded the credit risk to the Japanese. During his last visit, Mr Hashimoto had pledged another aid package worth more than $1.6 billion at the usual interest rate of 2.1 per cent with a 10-year grace period and repayment over 40 years. However, this has not given Japan a decisive advantage in the mainland. More than half the Chinese projects funded by Japanese loans are carried out by non-Japanese foreign companies. In addition, the Chinese use every opportunity to stir up the bad conscience of the Japanese for war crimes and atrocities committed in the 1940s, for which Japan has yet to show adequate contrition. When Japanese leaders visit, Beijing makes a point of dragging them to museums and exhibitions documenting the suffering unleashed by the Japanese occupation army. This has made Japanese businessman uncomfortable contributing to their awkward working relationship with Chinese. Premier Li Peng bluntly told Mr Hashimoto that 'past experience if not forgotten, is a guide for the future' to describe the mainland's attitude to its much-loathed neighbour. All of this is despite the fact it would take Beijing a 'decade to catch up with Japan militarily and at least two decades to begin to match US military power,' as the Asian Wall Street Journal wrote in a recent editorial. 'In the same way that Japan and China are in competition for a greater role in Asia, business is also in competition - but the Chinese will not allow Japanese companies to blossom to their fullest,' a European ambassador accredited in Beijing says. 'Japanese political weakness and Japanese blunders in business strategy strengthen European and American business in China.'