Published June 22, 2009

Japan, China gear up for industrial makeover

Economists warn that export demand in many industries will just 'never come back'

By ANTHONY ROWLEY
IN TOKYO

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ASIA'S two biggest industrial power houses - China and Japan - are facing a need for extensive industrial restructuring and downsizing to counter the impact of what some analysts say is likely to be a permanent downturn in demand for consumer exports to the US and other advanced economies.

Change is in the air: Steel production in China has been identified as one industry that needs restructuring, when emphasis switches to services from manufacturing

The restructuring could lead to a change in the production and export profiles of the two countries and a significant reduction in the production capacity of certain key industries, say analysts.

This is likely to affect a broad range of export-oriented industries, especially in China, ranging from computers and telecommunications devices to consumer electronics, motor vehicles and steel production, analysts say. There will need to be a shift away from emphasis on manufacturing and more towards service industries, they add.

Part of the dramatic collapse that China is facing in import demand from the US is due to cyclical factors but a large part of the demand may 'never come back', Chen Zhaohui, a prominent Chinese economist told BT.

Mr Chen, who is president and CEO of the First Light Academy of Global Economics and of a finance and management training institute in Shanghai, is in Beijing this week to make a presentation on industrial restructuring to China's State Council Overseas Affairs Office.

Similar views to Mr Chen's were voiced at an international meeting in Beijing this month where Morgan Stanley Asia chairman Stephen Roach said that 'the US consumer is now toast'. Citibank chairman and president William Rhodes too warned that 'no one should expect the US consumer to come back anytime soon'.

In light of this likely extended collapse in US demand that has driven East Asia's export engines at full throttle for many years, China needs to make significant reductions in its capacity to produce export goods, according to Mr Chen.

In Japan. too, there is a need to face up to the fact that US and European demand for consumer imports could remain depressed for a long time and perhaps never recover its former strength, analysts say.

Former vice-finance mi-nister for international affairs Eisuke Sakakibara says that Japan needs to shift gears away from its heavy export reliance.

Mr Sakakibara, who is tipped to become the next finance minister if the main opposition Democratic Party of Japan is able to gain control of the lower house of Parliament in elections due within a few months, says that Japan needs to focus on developing rural and service industries.

For China, where an estimated 20 million migrant workers who left their villages to work in textile, electronics and other export-oriented industries located in coastal regions and have now been forced to return jobless to their homes, employment implications of closing down further export capacity are serious.

Anxiety on the part of the government to limit further unemployment and possible social unrest is why Beijing is putting so much emphasis on maintaining an overall growth rate of at least 8 per cent in the country's economy this year, according to Mr Chen.

But rather than focusing on shoring up export industries, including key sectors that have been officially targeted for such help, the government could be better advised to shift resources into new industries, he said.

'When we start to face reality and begin restructuring the export sector, we will face a rising unemployment level, and that is why the government is trying to maintain a certain growth rate. They have identified 10 sectors, including textile, and they have started to help these.

'This is the wrong approach. Just to keep people employed is not a good idea. A better strategy would be to transform industries into new ones. There will be some pain initially, but there will be new industries, such as services, coming up to help.

'I don't think the impact will be that bad and if they manage this transition well there will be opportunities for China.'

'This happened in Singapore around 2000,' he noted. 'They decided to cut the civil service and to privatise some of its functions. In the process, the government allocated funding for people to get retrained. A lot of consulting firms and training companies shot up as well as outsourcing work. So, in the end, it was a positive development.'