German economy discovers Japan as a counterweight to China

20 percent of the companies surveyed stated that they were considering Japan as an alternative location to China. “It’s about the relocation of regional headquarters or the partial relocation of sales, research or production,” says chamber boss Marcus Schürmann of the Handelsblatt. The need for diversification is obviously so great that more companies are considering Japan as another procurement location, explains Andreas Glunz, Head of International Business at KPMG in Germany.

When asked about the most important reasons for their involvement in Japan, 51 percent of the companies surveyed stated access to innovative and highly specialized suppliers. That is nine percentage points more than in the last survey a year ago. According to KMPG manager Glunz, it is remarkable how quickly companies are implementing the concept of friendshoring that is being propagated by politicians.

The term refers to the relocation of supply chains to friendly countries. From a German perspective, Japan is one of them. So far, the term “value partnership” with Japan has been more of an empty phrase, says chamber boss Schürmann. “Through the survey, we can demonstrate for the first time that he has placed Japan at the top of the corporate headquarters’ agenda.”

Japan as a springboard to Asia

Martin Schulz, chief economist at the Japanese technology group Fujitsu and a member of an advisory committee to Prime Minister Fumio Kishida, even believes that Japan has “become significantly more attractive”, also due to the weak Japanese yen.

“In some areas, companies can already produce cheaper in Japan than in China,” he says. Calculated in dollars or euros, even skilled workers are often cheaper there than in Europe or the USA.

Japan is also interesting for him when it comes to supply chains. “Supply chains must now not only be inexpensive, but also secure,” he says. “And when it comes to the resilience of supply chains, Japan is a leader.” At the same time, China has become significantly less attractive due to the geopolitical turmoil. His conclusion: “If companies see Asia as a future market, Japan has become more interesting.”

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There is already initial evidence for the thesis. The German chemical group Evonik announced at the end of February that it would build its first Asian factory for aluminum oxide specifically for car batteries at a Japanese location. The company emphasized the security of supply of Japanese production. In this way, Evonik is securing the regional supply of all customers in the fast-growing battery markets in China, Japan, and Korea, said Susanne Reinhart, head of the Silica Business Line in the Asia-Pacific region.

The German automotive industry, which buys a lot in China, is now also increasingly looking to Japan because of the semiconductor supply problems. The country is not only an important chip manufacturer, especially for car and machine builders. It also has good contacts with Taiwan and Southeast Asia, which play an important role in the chip supply chain. Taiwan’s chip giant TSMC is currently building research centers and a factory in Japan.

According to the AHK survey, 66 percent of German companies in Japan use their branch there to do business with Japanese companies in other countries. It’s called a third-market strategy. Some are even expanding into other markets with Japanese companies, including outside of Asia.

One example is the power group RWE, which is examining the construction of an ammonia plant in the USA with the Japanese trading company Mitsubishi and the Japanese-Korean group Lotte. Mitsubishi invests in the production of raw materials and renewable energies worldwide.

Japan’s economic performance with high profit potential

However, the partnership between the two export nations has its limits: On the one hand, many German and Japanese companies are in direct competition. Japan’s foreign trade bureau said it was not easy to find areas for a to find far-reaching cooperation.

On the other hand, Japan cannot replace China as a market. China and Hong Kong were the largest German export market in Asia in 2022 with 117 billion euros. South Korea followed in second place with 21 billion euros, followed by the more populous Japan with 20 billion euros.

One reason for the low export volume is that the strongest competitors of German automobile and mechanical engineering companies are based in Japan. In addition, in Japan it traditionally takes a long time for Japanese companies to integrate new suppliers into their supply chains. Japan is also not a growth market with its shrinking population and sometimes suffers from slow politics.

The Japanese gross domestic product is still below the level before the outbreak of the corona crisis, says Nicholas Smith, strategist at the stock house CLSA in Japan. Due to Japan’s late opening of the borders, the strong slump in the first half of 2020 has not yet been compensated for, says Smith. It has only been possible to enter the country again without major hurdles since autumn 2022.

The good news: This does not diminish the success of the companies already based there. “Operating profits for public companies are already well above the previous record,” notes Smith. The German economy also benefits from this. “As in previous years, profitability was extraordinarily high,” says Chamber Manager Schürmann.

Only 7 percent of survey respondents made a loss in 2022, 11 percentage points less than in 2021. 23 percent of survey respondents achieved a profit margin of more than 10 percent, and another 35 percent between 5 and 10 percent. The value of both groups is already higher than in 2019, the year before the corona pandemic.

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