Companies Should Consider Reducing Reliance On China And Japan, Gartner SaysCompanies Should Consider Reducing Reliance On China And Japan, Gartner Says

TAIPEI, Taiwan — As tensions between Japan and China escalate over arguments with origins in World War II, technology companies should prepare to lessen their reliance on the two countries, according to market research company Gartner Dataquest.

"More than 95 percent of the largest 2,000 companies in the world have extensive interests, investments and employees in China and Japan," said Dion Wiggins, vice president and research director of Gartner. "Most large global companies will have to adjust their strategies and plans if the China-Japan situation remains volatile. For many companies, it is no longer 'business as usual' in northeast Asia."

For the past two months, China and Japan have been embroiled in a diplomatic battle over events during World War II. The conflict, which led to widespread street protests in China, was initially sparked by a school textbook, released recently in Japan, that allegedly glosses over World War II atrocities.

China is also angered by annual visits Japanese Prime Minister Junichiro Koizuimi makes to the Yasukuni shrine, a Shinto temple historically linked with Japanese militarism. In an editorial Wednesday (May 25), the government-run China Daily called the visits "intolerable." Japan considers them an internal matter.

In its assessment, Gartner said the "large disconnect" between the business and political relations of China and Japan could threaten trade between the two partners. That would be a serious matter for both countries. Currently, Japan is China's largest trade partner, with $213 billion passing between the countries last year. Japan is also a top investor, with $48 billion invested from 1979 to 2003, more than the U.S. at $43 billion or Europe, with $28 billion.

As a hedge against escalating tensions, Wiggins said companies "should certainly consider plans to reduce their dependencies on supply of products and services from this region through diversification of supply and the broadening of any new investments to balance the increased risk." Some leaders around the region, however, seemed confident that China and Japan would work through this rough patch, as they have others. During a visit to Japan, Singapore's prime minister, Lee Hsien Loong, said friction between the regional rivals was "inevitable" as they both seek to bolster their presence regionally and internationally. However, Lee said a "collision is not inevitable," since the two sides have too much to lose in an all-out conflict.

The regional rivals have made efforts to ameliorate frayed relations, but it appears little progress has been made. Earlier this week, Chinese Vice Premier Wu Yi — who was a key broker in settling technology-related trade disputes between the U.S. and China — canceled a meeting the Chinese had requested with Koizuimi. The last-minute snub has increased tensions once again.

In a worst case scenario, Gartner said escalating tensions could affect business relations with Hong Kong as well, which serves as a financial gateway to China. South Korea, which also has tense relations with Japan over World War II, could also be affected, Wiggins said. "This extreme outcome could hasten the onset of a global recession and would certainly kill off initiatives to develop joint standards in areas such as fourth-generation mobile networks, RFID, Open Source software and next-generation Internet.

"In this scenario, Japanese technology firms will reduce their commitment to the Chinese market, with many ultimately withdrawing completely. India, currently supported actively by the Japanese government, would become Japan's new base for low-cost manufacturing. Chinese industry would suffer as its source of leading-edge technology dries up amid continuing export restrictions from the U.S. and Europe. Some technology companies from North America, Europe and elsewhere in Asia will acquire Japanese assets at attractive prices but others will steer clear and divert sourcing away from an unstable region."

In more moderate scenarios, Gartner said there would be "continued uncertainty and volatility" or, in the best case, "business returns to almost as usual."

In the latter scenario, Gartner said fallout would be isolated, affecting primarily Chinese and Japanese companies. Chinese consumers may signal their disfavor with Japan by boycotting its products, and Chinese companies may find their fledgling efforts to break into the Japanese market further stymied.

Also, Japanese companies may be reluctant to increase investments in China rapidly, choosing other regional outsourcing centers instead, such as the Philippines, Vietnam, Thailand, Malaysia, Indonesia or even Australia.