Japanese Companies Investing More at Home

Japan's giants are investing in plants at home again. Why the switch?

After years of hand-wringing by authorities over the hollowing out of Japan's manufacturing industries, Corporate Japan is investing at home again. Expenditures on plants and equipment in Japan rose 10.3% during the first half over the same period of 2003, the Ministry of Finance reported in September. "These movements are very favorable for the Japanese economy," says Kenji Yumoto, chief economist at the Japan Research Institute. He expects capital expenditure to grow 10% in the current quarter and nearly 7% in the fourth.

Why the shift? On one level it's because Japanese companies have already reaped most of the potential gains from moving production overseas. In the past decade the share of Japanese-owned productive capacity located abroad has grown to 45% from just 8%, Merrill Lynch estimates. That's almost as high as the 50% level seen in the U.S, which means Japan Inc. overall now has a cost structure that's as competitive as most rivals from developed countries. Canon, for instance, has made 80% of its capital investments overseas for the past decade, and today, 42% of its total production is abroad.

This year the company decided to reverse course and is pledging to spend 80% of the $7.2 billion in capital outlays it plans for the next three years at home.One factor pushing the trend is a growing realization that the savings from producing in China aren't all they're cracked up to be. Sure, China has low wages -- typically 5% of Japan's -- but they're rising in coastal areas. And the cost advantage is increasingly eroded by supply bottlenecks and power shortages, which shut down plants in many coastal cities over the summer. Osada Co., a Tokyo producer of parts for air conditioners, refrigerators, and elevators, has been plagued by high employee turnover and quality problems at the Chinese facility it opened in 1999. So instead of expanding on the mainland, it's building a $4 million factory at home.

Japanese companies, of course, will still open new plants abroad. Auto manufacturers such as Toyota Motor Corp. and Nissan Motor Co. continue to ramp up in China to take advantage of the fast-growing market there. And electronics makers such as Sharp, Canon, and Toshiba have no plans to close existing Chinese operations, particularly given their high hopes for fast growth in the mainland market. But that scary feeling that Japan had no future as a manufacturing center is finally starting to ebb.

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