Japanese manufacturers have started to move production out of China as it is feared the deadly coronavirus outbreak could prolong plant closures in the country and wreak havoc on 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 crisis is contained, analysts said.
Japanese companies still have extensive manufacturing operations in China, though increased labor costs and the trade rift between Beijing and Washington have already led some of them to shift production out of the world's second-largest economy to Southeast Asian countries such as Vietnam.
"We are preparing an alternative production plan outside China, especially for our (electronic) device products" in case disruptions in supply chains continue, Panasonic Corp.'s Chief Financial Officer Hirokazu Umeda said in a recent press conference for the Japanese electronics maker's third-quarter earnings.
(File photo taken in April 2019 shows a Honda Motor Co. car plant in China's Wuhan.)
"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 partly stalled and some plants remain closed beyond the extended Lunar New Year holiday as Chinese authorities limit the movement of people and goods due to the outbreak of the pneumonia-causing coronavirus, which has killed over 600 and infected more than 30,000 in the country.
Japanese manufacturers have been hit hard by the lockdown of Wuhan, the business and logistics hub in central China where the virus originated. Temporarily shifting production to factories in other countries, while continuing to pay bills in China, is certain to increase costs.
Aisin Seiki Co., a major auto parts maker, is moving some of its production out of China as continued delays in parts supply from the country would cause a strain on 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 department Yuji Fukushige said, adding that a temporary production transfer to Japan is a possibility.
(Nintendo Switch Lite)
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 of major air conditioner maker Fujitsu General Ltd., which has factories in Shanghai and Jiangsu Province, said the company is weighing production in Thailand as there is no telling how long the shutdown of public transportation systems will continue.
Some Japanese companies are moving more quickly as they were already making relocation plans after the U.S.-China tariff war began.
Among such companies, Nintendo Co. has shifted production of part of its Nintendo Switch Lite game console from China to Vietnam, while Sharp Corp. and Ricoh Co. have moved manufacturing of their copiers to Thailand.
If companies continue to face business risks in China "they may start thinking twice about staying committed" to the country, said Toru Nishihama, chief economist at Dai-ichi Life Research Institute.
Unlike the aftermath of the 2002-2003 SARS epidemic, it will likely take much longer for China to contain the latest coronavirus outbreak, he said.
In the long term, Takuji Aida, chief Japan economist at Societe General Securities Japan, said medium-sized and small Japanese manufacturers may decide to move their Chinese operations back to Japan.
Such companies tend to be more flexible in upgrading production facilities using digital and robotic technologies, and the level of labor cost reductions they can achieve in China may be smaller compared to 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.