Rising tensions between Japan and China are having a knock-on effect on industry as Japanese companies look for new factory locations outside China to reduce their risk.
The result has been a dramatic upsurge in demand for industrial machinery, as witnessed at Metalex, the region’s largest international machinery trade exhibition and conference, held annually in Bangkok.
Order volumes at the most recent edition of Metalex, late last year, were up 42% from the year before. Exhibitors pointed to three factors driving new demand: Japan-China tensions, the higher minimum wage in Thailand, and further integration of Asean economies.
Many Japanese companies operating in China last year began contemplating relocating production, as tensions mounted between the two countries the islands known as Senkaku in Japan and Diaoyu in China.
Sales of Japanese goods in China have plunged, with automobiles down as much as 70%, and some Japanese factories were damaged by angry Chinese protesters.
Asean countries seem to be the preferred destinations for those Japanese companies that want to move out of China. Japanese businesses can have the best of both worlds because Asean and China have a free trade agreement, while the formation of the Asean Economic Community will make doing business in the region easier.
Soichiro Goto, a representative of the overseas sales section with Horkos Corp, a Japanese manufacturer of machinery for the automotive industry, said many Japanese auto companies wanted to avoid risk from China. At Metalex he saw many Japanese companies seeking new machinery to install in new factories outside China, and Asean countries were their targets.
According to Reed Tradex, the organiser of Metalex 2012, the event attracted 65,216 visitors, an increase of 16% from the previous year. Orders surged 42% to 8.5 billion baht.
Mr Goto said that China had become the most important market for many Japanese companies, overtaking the United States and Europe. However, if the conflict in the East China Sea cannot be resolved, Japanese businesses have to be prepared to change their strategy.
"Now times have changed. Although Japanese companies still believe that China is the most important market for them, they have to diversify risk from this country and focus more on Asean in order to save their business," he said.
According to the Ministry of Commerce in Beijing, foreign direct investment by Japanese companies totalled US$460 million in October 2012, a decrease of 32% from the same month in 2011.
However, Mr Goto is still optimistic that the dispute between China and Japan will be short-lived. China will remain a high-potential market for Japanese companies, while Asean also offers good opportunities for machinery sales.
In any case, he said, Asean was a fast-growing market for the automotive industry given rising urbanization and affluence. More Japanese companies are pouring investments into the region to meet demand.
Horkos, for example, plans to start operating a factory in Chachoengsao province this year to support its customers, which are leading carmakers.
Jakapoom Pungvirawat, general manager for industrial sales of Apollo (Thailand), the manufacturer of Idemitsu automotive and industrial lubricants, said his company had noted the trend of Japanese factories, particularly small and medium enterprises (SMEs), relocating from China to other Asian countries. Their aim, he said, was not only to reduce political risk but also to tap into fast-growing Asean markets.
Increasing wage costs are another factor driving machinery sales in Thailand, one of the industrial centres in the region.
Theerapat Songlerk, product manager of T.N. Metal Works Co, the distributor for Hyundai Heavy Industries of robots and automation machinery, said the company attracted a lot of interest at Metalex from visitors seeking to automate factories and reduce human labour.
"After the government announced the rise in the minimum daily wage to 300 baht nationwide, starting from Jan 1, 2013, we got a lot of feedback from our clients, asking for new machinery to replace workers," he said. "Robots and automation will gain more attention over the next few years."
Automation has been used in Thailand for years, but robots are not yet widespread. The use of robots will reduce production losses usually made by human errors and avoid risk from increasing wage costs, Mr Theerapat added.
Hyundai Heavy Industries only introduced robots in Thailand last year and has yet to receive many firm orders, as prospective customers are weighing the cost and payback period before making decisions, he said.