Japan Firms Warned Over China Supply Chain Exposure

(MENAFN- The Arabian Post)

Warnings that Japanese companies face existential risks if supply chains linked to China are disrupted are sharpening the debate in Tokyo over economic security, diversification and the costs of geopolitical strain in East Asia.

Hidetoshi Tashiro, chief economist at Infinity LLC and chief executive of Terra Nexus Project Management Services, said the most serious danger from worsening Japan–China relations lies not in tariffs or diplomacy but in the dense web of supply chains binding the two economies. He argued that nearly all Japanese industries are entwined with China for components, intermediate goods, manufacturing capacity and logistics, leaving companies vulnerable to shocks they cannot easily absorb.

Japanese firms risk survival without China supply chains, Tashiro said, warning that abrupt dislocation could undermine competitiveness across sectors ranging from automobiles and electronics to chemicals, machinery and consumer goods. He added that the scale and depth of integration built over decades make rapid disengagement unrealistic for most businesses, particularly small and medium-sized enterprises that lack the capital to reconfigure production networks.

Trade data underscore the exposure. China has been Japan's largest trading partner for years, accounting for a substantial share of imports of parts and materials used in domestic manufacturing and exports. Japanese multinationals operate extensive production bases across mainland China, while countless tier-two and tier-three suppliers depend on Chinese factories for sub-assemblies, tooling and specialised inputs. Even firms that have shifted final assembly elsewhere often continue to source critical components from China due to cost, quality and capacity advantages.

The risk profile has become more complex as strategic competition intensifies. Export controls on advanced technologies, tighter investment screening and heightened scrutiny of data and national security have introduced uncertainty into cross-border operations. Japanese policymakers have promoted supply-chain resilience through incentives to diversify sourcing and encourage reshoring or nearshoring, but progress has been uneven. Analysts say diversification tends to be incremental, with companies adding alternatives rather than replacing China outright.

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Executives interviewed across manufacturing sectors note that China's ecosystem remains difficult to replicate. The country offers clusters where suppliers, skilled labour, logistics hubs and downstream customers coexist at scale, reducing lead times and costs. Shifting production to Southeast Asia, India or Mexico can mitigate some risks, but building comparable supplier depth takes years. For advanced components, alternatives may be limited or more expensive, eroding margins in fiercely competitive global markets.

Automobiles illustrate the dilemma. Japanese carmakers rely on Chinese suppliers for batteries, rare earths, electronics and wiring harnesses, while China is also a major sales market. Efforts to localise battery supply chains in Japan and partner countries are advancing, yet dependence on Chinese processing of critical minerals remains high. Electronics manufacturers face similar constraints in semiconductors, displays and printed circuit boards, where Chinese capacity plays a pivotal role even when final assembly occurs elsewhere.

Tashiro's warning comes as corporate boards weigh compliance with evolving regulations against commercial realities. Firms must navigate export controls and sanctions regimes while maintaining operational continuity. Legal and compliance costs are rising, and contingency planning has become a standing agenda item. Insurers and lenders are also reassessing risk, potentially raising financing costs for companies deemed overly exposed.

Government initiatives aim to cushion the transition. Subsidies for domestic investment, support for allied-country manufacturing and stockpiling of critical materials are intended to reduce vulnerability. Yet economists caution that policy tools cannot quickly unwind private-sector supply chains shaped by market forces. Overcorrection could raise prices for consumers and weaken Japan's export competitiveness at a time of slowing global growth.

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Industry groups are urging a pragmatic approach that balances resilience with openness. They argue for transparent rules, coordination with partners and targeted measures focused on genuinely critical sectors rather than broad decoupling. Labour constraints and energy costs at home further complicate reshoring, while demographic pressures limit the pace at which domestic capacity can expand.

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