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  • The Upgrading of China’s Industry and the Potential for Japan’s Small and Medium-Sized Enterprises

The Upgrading of China’s Industry and the Potential for Japan’s Small and Medium-Sized Enterprises

|China

China, as the world’s factory, is now reaching a major transitional period of the upgrading of its industry. China, along with striving for the upgrading of its traditional industries such as sundry goods and textiles, must also promote the development of emerging industries, including energy-saving devices, IT and eco-friendly cars.

China’s upgrading of its industry is not something which can be realized only by the power of local enterprises, however. Concerning traditional industries, a large number of industrial agglomerations have been formed in China. For example, in Yiwu in Zhejiang Province, 25,000 companies which manufacture sundry goods and 60,000-plus retail premises have accumulated as the world’s largest trading center for sundry goods. Yongnian in Hebei Province is China’s largest production area for nuts and bolts, and the number of related small and medium-sized enterprises (SMEs) has grown to 2,300 businesses. The main competitive pattern for these agglomerations is cutthroat price competition centered on the low-end market, and although there is the will for upgrading, there exist a great many firms that are unable to extricate themselves from the quagmire of the current competition.

Meanwhile, regarding emergent industries, the establishment of the seven emerging industries of strategic importance (energy-saving and environmental protection, new-generation information technology, biology, high-end equipment manufacturing, new energy, new materials, and new-energy cars) has been raised in the Twelfth Five-Year Program starting in 2011, and it has been aimed that the share of GDP which these industries will account for will rise to 8% by 2015, and to 15% by 2020. However, in the case of emerging industries, while ample funding has been secured, for Chinese firms the greatest bottleneck has come to be that they don’t have the capacity in hand to develop the core technology and components.

One problem point common to China’s traditional and emerging industries is that regional firms providing the upgrading are not suitable for a fine-tuned and integrated production system. Chinese firms have been achieving rapid growth in the giant domestic market. Amid a situation where the market size is continuing to expand many firms have been developing business on the premise of new business partners appearing on a continuous basis. As a result the relationships between companies in China have ended up being ones that are fluid and superficial. Such business relationships are certainly advantageous for the opening-up of a new growing market. What is important, however, for the heightening of the value added for traditional industries and the development of the key components in emerging industries is that there are long-term and stable interactions between assemblers and suppliers. Between the two parties it is necessary that they share a great deal of knowledge relating to particular products and repeat close coordination concerning the processing of particular components. That is, for China which is attempting to promote the upgrading of industry, the construction of a “fine-tuned and integrated” production system—the forte of Japanese manufacturers—is required.

Not surprisingly, this will be a good opportunity for Japanese SMEs in hot water from the financial crisis and the expansion overseas of their parent companies. There is great potential for Japanese SMEs to cooperate in initiatives aimed at the upgrading of Chinese firms. Actually, even SMEs in Ota Ward in Tokyo have set up a “China Market Study Group” and have carried out a research project aimed at the cultivation of the Chinese market.

Nevertheless, they will have to resign themselves also to the fact that links with Chinese firms will not proceed so easily. This is because the gap between Japan and China is too large in terms of their understanding of the market and technology. Chinese firms will try and make the scale of operations as large as possible if there is a market opportunity, whereas Japanese SMEs have a strong tendency to dislike the price competition from the increase in scale. For Japanese firms there is a strong sense of caution about the outflow of the technology they have built up, whereas for Chinese firms the thinking is still strong that technology is something to be shared and it can be obtained if there is the finance.

It would appear that what is necessary to close such a gap is a private-sector-driven platform to promote the business matching of Japanese and Chinese SMEs. For companies to manage the platform, personnel must be secured who are familiar with the legislation, possess the technical knowledge, and understand well the differences in thinking of Japanese and Chinese people about company management. The author considers that the success or failure of links between Japan and China within the upgrading of China’s industry depends on the establishment of such a platform.

[Translated by ERINA]