Japanese Companies Shifting to Southeast Asia as New US Tariff Hits

September 2, 2019 Updated: September 2, 2019

A number of Japanese companies are considering relocating their part of their manufacturing away from China, after the latest round of U.S. tariffs which went into effect on Sept. 1.

Among those contemplating relocation is Japanese fashion retailer Uniqlo, which has 52 stores in the United States and 698 stores in China. The retailer is now seeing many of its key merchandise manufactured in China, including jackets, trousers, and shirts, being subjected to a new 15 percent U.S. tariff.

“Our U.S. executives have come to Japan so we can discuss the level of impact and how to respond,” said an unnamed executive of Fast Retailing, the parent company of Uniqlo, according to a Sept. 2 article by Japanese media Nikkei.

The company is looking to shift production from China to countries in Southeast Asia, such as Vietnam and Cambodia, Nikkei reported.

There would, however, be challenges associated with the shift. An unnamed source familiar with the matter told Nikkei, “We still rely on China for raw materials, so we could see higher costs in procurement and in shipping the finished products to the U.S.”

Last March, a Section 301 investigation conducted by the U.S. Trade Representative’s Office, concluded that Beijing was engaging in state-sponsored intellectual property theft. That investigation prompted the U.S. administration to impose punitive tariffs on $250 billion worth of Chinese imports, precipitating the current trade war.

On Aug. 1, President Donald Trump announced new tariffs of 10 percent to be imposed in September on another $300 billion worth of Chinese imports, covering a wide range of consumer goods including smartphones, laptops, and apparel. Some of the new tariffs have since been postponed until mid-December.

Trump raised the tariffs to 15 percent at the end of August, in response to Chinese retaliatory tariffs on $75 billion worth of U.S. goods, including crude oil.

According to Nikkei, Uniqlo’ annual sales in North America ending in August 2018 was about 90 billion yen ($847 million), accounting for about 5 percent of its global total.

Fast Retailing currently has factories in several Southeast Asia countries. According to a list of “core sewing factory list” published on its website, the parent company has a total of 242 workshops in 11 countries—including 128 in China, 44 in Vietnam, and 24 in Bangladesh.

Uniqlo plans to open its first store in Vietnam in fall this year. According to Vietnamese media, Tadashi Yanai, president and CEO of Fast Retailing, identified the Southeast Asia region as an “important growth driver” for the company.

Lower labor costs in countries such as Vietnam and Bangladesh make it an attractive alternative for companies seeking to relocate manufacturing out from China.

Japanese copy machine maker Kyocera is also planning production changes given that American-bound photocopiers are also now subject to the new 15 percent tariff.

Currently, Kyocera’s factories in Vietnam make products for the EU market while those in China manufacture products destined for the United States. According to Nikkei, Kyocera is planning to swap them by the end of March 2020.

Japanese watchmakers Seiko Holdings and Citizen Watch are also planning some production changes.

According to Nikkei, Seiko is planning to move some production back to Japan, while Citizen Watch is planning a shift to Thailand.

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