Shosha’s Cha l lenges i n a Chang i ng Ch i na                           Shosha                     !
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 %$     Shosha                "    & "   "    '       Shosha     !     (     )   *        "     +  +    , 

JFTC

ISBN4-931574-04-1
C0033 ¥500E

Japan
Foreign
Trade
Council,Inc.

Shosha’s
Challenges in a
Changing
China

Shosha’s Challenges
in a Changing China

Japan Foreign Trade Council, Inc.

Foreword
The Japanese word “Shosha” consists of the two Chinese characters“sho” and “sha”, and the former (“sho”) is derived from the Yin Dynasty
which prospered in China for some 600 years from the 17th to 11th
century B.C.
The country of “Yin” is said to have originally been called “Shang” (i.e.
“sho” in Japanese meaning “trade” or “commerce”) with “Yin” named
afterwards. While boasting of its culture at such a high level as exampled
by the creation of bronze vessels, people in the Shang Dynasty becameaware of the fact that they could earn profit by moving goods from one
place to another and began to set out for peddling to foreign countries.
People of such foreign countries must have called the peddlers from
Shang “sho-nin” or “person of Shang”, from which words such as “shobai” (trade) and “sho-ten” (store) branched out and gave birth to theword “Shosha” in a later age.
(Note) Today’s Shosha is no longer a mere trading company. Its activities arequite diversified into various fields such as investment, finance,
logistics, and project coordination. No English word properly explains
the image of such a Shosha.

Since the People’s Republic of China was founded in 1949, theJapanese Shosha have been making efforts, as an engine for the Japanese
economy, to promote trade/investment with China, the home of “sho”
activities. Since politics and the economy are two sides of the same coinin China, a lot of risks are involved in Sino-Japanese trade. Therefore, it
may safely be said that the trade relationship would have been
impossible to grow to the extent that we can see today without Shosha
acting as a pilot to maneuver the matters with flexibility.
In 1992, a famous lecture was given by Deng Xiaoping during his tour
to the southern provinces of China. With this momentum, he resolutely
promoted the reform and open policy. Then, thanks to Jiang Zemin’s
leadership to positively accept foreign enterprises while introducing

foreign funds, China is now in the midst of rapid economic progress.
Realizing its long-awaited participation in the WTO in December, 2001,
China is increasingly expanding its presence as a production base in theworld economy although various problems are yet to be solved.
Shosha have hitherto been taking the lead in Sino-Japanese trade.
Based on experience thus acquired, they are now taking further steps toenhance economic exchanges between the two countries by assuming a
new role in new business sectors and markets. The roles of the Shosha are
expected to grow in the light of deregulation and open policy as a resultof China’s membership in the WTO.
China has a proverb to the effect that “when drinking water, you
should not forget those who dug the well”. As the proverb goes, Shosha
will continue to dig wells, contributing to the economic exchange
between Japan and China, so as not to be forgotten.
Japan Foreign Trade Council Inc. organized a special study group for“Shosha’s Challenges in a Changing China” with 10 members
representing each respective Shosha. They made the one-year study
under the guidance of Dr. Chi Hung Kwan, a senior fellow in the
Research Institute of Economy, Trade and Industry, an incorporated
administrative agency. He kindly joined the group as the chairman of thestudy meeting. This book is compiled based on the group’s studies anddiscussions.
We hope that people will get a real image of business in China throughthe Shosha’s observations noted in this book. We will be more than happy
if this book will provide a perspective for the China business in the
future.
March, 2003

Kenji Miyahara
Chairman, Japan Foreign Trade Council, Inc.

Shosha’s Challenges in a Changing China
Published by Japan Foreign Trade Council, Inc.
All rights reserved.
Copyright © 2003 by Japan Foreign Trade Council, Inc.
This book may not be reproduced in whole or in part,by mimeograph or any other means, without permission.
ISBN4-931574-04-1 C0033 ¥500E
Domestic price: ¥500 (consumption tax & postage excluded)
Address to contact:
Japan Foreign Trade Council, Inc. (JFTC)World Trade Center Bldg., 6th Floor, 2–4–1, Hamamatsu-cho,Minato-ku, Tokyo 105–6106, JAPANURL: http://www.jftc.or.jp
e-mail: mail@jftc.or.jp

Members of the JFTC Special Reseach Project“Shosha’s Challenges in a Changing China”
C. H. Kwan, Ph. D.
(General Manager)
Kenichi Nishida(Executive Adviser)
Akira Furuya(Manager)
Yutaka Kitamura(Sub-manager)
Keiichi Inaba
Takahiro Hayashi(Former Member)
Miyoshi Kamijyo
Akitoshi Tanaka
Takashi Okajima
Tatsuhiko Yoshizaki
Takashi Imamura
Tetsuhide Mikamo(Former Member)
Hiroki Fujimori
Kyoko Oshima
Keisuke Takanashi
Hisao Ikegami

Senior Fellow, Reserch Institute of Economy,
Trade and indutry, IAA
Corporate Executive Vice President, Member of the Board,
Marubeni Corporation
General Manager, China Departmemt,
Itochu Corporation
Assistant General Manager, Information Analysis &Research Dept., Sumitomo Corporation
General Manager, Business Planning & Coordination
Dept., Kanematsu Corporation
Manager, Overseas Business Planning & Cordination
Dept., Kanematsu Corporation
Manager, Research & Intelligence Group,
Tomen Corporation
Group Leader, Strategy Planning Group,
Corporate Planning Dept., Toyota Tsusho Corporation
General Manager, General Management Dept.,
Nichimen Corporation
Senior Economist, Research Group,
Nissho Iwai Research Institute, LTD.
Senior Economist, Marubeni Research Institute,
Marubeni Corporation
Chief Economist, Marubeni Research Institute,
Marubeni Corporation
Senior Economist, Global Information Dept.,
Mitsui Global Strategic Studies InstituteManager–China Team, Regional Strategy & Coordination
Dept., Mitsubishi Corporation
Executive Managing Director,
Japan Foreign Trade Council, Inc.
Managing Director, Japan Foreign Trade Council, Inc.

Tsuneo Inagaki
Director of Board, General Manager–Planning &(Chief Coordinator)
Coordination, Japan Foreign Trade Council, Inc.
Yutaka Takahashi
Director of Board, General Manager–Planning &(Former Chief Coordinator) Coordination, Japan Foreign Trade Council, Inc.
Yukio Hirao
Deputy General Manager, Planning Group,(Coordinator)
Japan Foreign Trade Council, Inc.
Yusuke Sekiya
Assistant Manager, Planning Group,(Coordinator)
Japan Foreign Trade Council, Inc.
Ayano Kanita
Planning Group, Japan Foreign Trade Council, Inc.
(Coordinator)
As of Feb. 2003

Table of contents
Foreword(by Kenji Miyahara, Chairman, Japan Foreign Trade Council, Inc.)

Chapter 1. Changing China and Changing Shosha’s China Business ･･･････ 1
1. Changes in China after its WTO Entry ･････････････････････････････ 1
2. To Overcome the ‘China Threat’ Theory････････････････････････････ 6
3. An Opportunities and Challenges for Shosha ･･･････････････････････ 12

Chapter 2. Shosha’s Functions and the China Business Modelof the 21st Century ･････････････････････････････････････････ 18
1. Shosha’s Functions ･･････････････････････････････････････････････ 18
2. Business Model for Shosha’s Business in China in the 21st Century ････ 20

Chapter 3. Prospects of Shosha’s China Business ････････････････････････ 36
1. Business Opportunities by Making Use of China’s Strength ･･････････ 36
2. Business Chances by Making Up for China’s Weakness ･････････････ 38
3. A Bridge between China and Foreign Countries ････････････････････ 43

Chapter 1. Changing China andChanging Shosha’s China Business
By joining the WTO China’s moves towards internationalization, amarket economy and rule of law have accelerated, causing remarkablechanges in the business conditions of China. The ‘China threat’ theory ison the rise in Japan in fear of high economic growth in China. However,wouldn’t it be rather a good opportunity for Japan to have China growing
strongly and open its market more widely? Chinese enterprises’ strength
and weakness, coupled with their needs toward internationalization, will
surely bring business opportunities to Japan, especially to Shosha.

1. Changes in China after its WTO Entry
1) China’s integration into the world economy
With the WTO membership, China will enter an all-out opening stage
from a partial opening. The conventional opening policy is applied only
to specified industries with a certain limitation in the extent of openness,and is executed in some experimental areas under administrative
guidance. There will be complete opening for all kinds of industries andeverything will become predictable as a legal framework is put in place.
It is not a one-sided opening but opening reciprocated by other WTO
member countries. As a result of the reduction in customs duties and theremoval of discriminatory measures, it will become easy for foreigncompanies to make inroads into China and access its domestic market. At
the same time, China will benefit from an increase in foreign trade with,and direct investment from foreign countries. Under these circumstances,
the Chinese economy will increasingly ride on the waves of globalization,
thus fusing into the world economy.
Firstly, China will be incorporated into the world production system—1—assuming an important role in the step-by-step transfers of industries
across borders. World industries are now in the process of restructuringthat involves the reallocation of resources across borders underintensifying international competitions. As the developing country,
China, is becoming the factory of the world in the 21st century by making
use of its comparative advantage in abundant labor supply. Chinese
private enterprises will probably become main industrial forces replacing
foreign-based companies. Then, China will likely increase its own direct
investment to foreign countries rather than merely introducing direct
investment from abroad.
Secondly, China will become part of the global technologicalinnovation system. Although it is very important for a country to carryout research and development as well as scientific and technologicalinnovation, it is unrealistic and uneconomical for a country at an initialstage of development to achieve them by its own efforts for the purposeof upgrading its industries. For example, China is in need of technicalassistance from foreign countries in such fields as automobile bodydesign and chip manufacturing where China is short of research anddevelopment ability. The share of technology and high-tech products inworld trade is going up. International cooperation and exchange in thefields of science and technology will be further promoted. Therefore,
China is favored with a good chance to introduce, absorb, and digest highlevel technologies relating to high-tech products, as they are brought into
China together with imported new products. Further, leading foreigncompanies and multi-national corporations have begun to open researchand development institutes in China, which are intended to form an
important base of their global network. Internationally reputed multinational high-tech corporations have already branched out into China one
after another. These include IBM, Dell Computer, Microsoft, Hewlett
Packard, GE, and Matsushita Electric.
Finally, China will be further fused into the international financial
system. After entering the WTO, China’s financial sector will be more
—2—

widely open to foreign countries, resulting in closer ties with the rest of
the world. Chinese enterprises will have access to new fund-raising
methods such as listing their stocks on foreign stock exchanges. At thesame time, a large amount of foreign venture capitals are ready to rush
into China. Thus, Chinese enterprises will diversify their fund-raisingroutes, while withdrawal mechanisms for foreign venture capitals will bebuilt up.

2) From rule of man to rule of law
The WTO consists of a set of regulations and agreements that has astrong binding power on its member countries. The negotiation with
China concerning disputes in three agricultural items in 2002 wasextremely hard for Japan as China had not become a WTO member at thattime. Settlement of this kind of trade friction will be left to the WTO fromnow on. China has not only committed to observe the international trade
rules set forth by the WTO, but also to revise its domestic laws to conformto the international standard. With its WTO membership, China is
expected to improve protective measures for intellectual property rights
and the transparency of its policy towards foreign investors. China hasoften been criticized that it is a “rule of man society” rather than a “rule oflaw society”. Its affiliation with the WTO is a large step for China
towards realizing its aims to build up a “rule of law society”.
Until the reform and open policy was adopted, most economic
activities in China were directly controlled by the State under a planned
economy system. Although this situation began to change after thereform and open started, both the central government and local
governments still controlled the economy by relying on administrative
measures without resorting to laws. Policies are applied arbitrarily andrevised frequently. In addition, governments at various levels make toomuch intervention in enterprises and markets. At the present time, aconsiderable number of enterprises are still under direct control by thegovernments and some of such companies are even monopolizing—3—specific

fields. However,

under

the

WTO’s

principles

ofnondiscrimination and fair competition, governments are now required tothoroughly give up the inappropriate interventions in the markets andtheir tolerance to the monopolizing enterprises in such industries.
Under the traditional planned economy system, the governments
directly controlled the economic activities of economic entities by making
use of administrative measures and/or taking advantage of ownership in
the case of state-owned enterprises. These controls were fairly reasonable
in those days as they were conducted under the planned economy.
However, after joining the WTO, in order to achieve economic goals suchas economic development, the governments are required to take indirectintervention to economic entities, mainly paying attention to market
mechanisms instead of simple administrative measures and directintervention. Since China is now in a transitional period from a planned
economy to a market economy, many unreasonable administrative
examination systems still remain, by which the market is prevented fromperforming its role and the Chinese economy is hindered from joining in
the world economy. Confronting the challenge arising out of the affiliate
with the WTO, China is now required to reform the administrative
examination system to cope with the globalization of its economy.
Thus, talking about the effects of China’s participation in the WTO,
China will be more seriously affected by changes in its economic system
and legal system rather than its reduction of customs duties and the flowof foreign goods into its domestic market. Accordingly, China is required
to perform substantial reform and adjustment of its economic and legal
systems. Large adjustment pressure brought by the WTO entry will
become a strong driving force for the reform. If this challenge issuccessfully managed, several serious problems facing us in the reform
process will be smoothly overcome. Then, the formation of a market
system and the establishment of a legislative system suitable to theeconomic system will be accelerated. And the conventional way of
thinking based on the planned economy and the bad habit of thinking—4—light of legislation will be changed, which will bring about major effects
on economic and social development.

3) Challenges for further reform
Since the reform and open policy started, China has achieved higheconomic growth at the level of 9 percent per year and people’s standardof living has been remarkably improved in coastal areas in particular.
However, while keeping pace with progress towards a market economy
and globalization, competition has become keener and bad debt problems
have worsened, revealing inefficient management of state-owned banks
and state-owned enterprises. On the other hand, private enterprises arestill discriminated in many aspects including loans, and therefore their
growth is restricted. In addition, mass unemployment and farmers’depauperation caused by polarization between haves and have-nots are
becoming causes of an unstable society, weak private demand, andworsening deflation. Further, as a result of the rapid progress inindustrialization, environmental problems such as air pollution areworsening. For the purpose of keeping sustainable growth, General
Secretary Hu Jintao and other new leaders are compelled to carry out
their policies taking into account “justice” and “stability” rather than only
“efficiency” and “growth”.
Although the current Chinese economy is being classified as “earlystage of socialism” by Chinese authorities, it is better classified as “earlystage capitalism” with the polarization of haves and have-nots rapidly inprogress. The Chinese economy is sure to be heading for a higher level ofcapitalism rather than that of socialism. However, unlike early-stage
capitalism, high-level capitalism is based on rule of laws instead of rule ofman and democracy in lieu of dictatorship, and requires the protection ofprivate property and the presence of a social security system to help theweak. China will confront many difficulties from now on.
It goes without saying that the most difficult challenge is political
reform, the necessity of which is also recognized by the Communist party—5—

leaders. Concretely speaking, as a result of increased capitalists due tothe development of the market economy, it has become difficult for theCommunist party to maintain its political power without support fromthe newly emerging forces. Under the circumstances, in his speech madein July, 2001 commemorating the 80th anniversary of the party’s
establishment, General Secretary Jiang Zemin at last formally admitted
the capitalists to join the party. This decision was justified by his “theoryof three representatives” announced in his important lecture during his
inspection tour of Guangdong Province in February, 2000. This theory
declares that the Communist party represents advanced productivity,
advanced culture, and the widest range of the people’s interests.
Considering that the Communist party is supposed to represent theproletariat following the traditional Marxian doctrine, the “theory of
three representatives” emphasizing the party for all people is far from theprinciple. The Chinese Communist party would be no longer a real
Communist party if it turned out to be a party for all people. The“Theory of Three Representatives” is by no means reflection of a patchedup reform. It has a potential to change the foundation of the present
Communist party.

2. To Overcome the ‘China Threat’ Theory
The ‘China threat’ theory is on the rise in Japan whose economy issuffering from a long-lasting depression in contrast with the Chinese
economy which is under rapid growth. However, a cool-headed analysis
shows that a large difference still exists between the two countries in thedevelopment stage of their economies. Because of the difference, the twocountries can be said to be placed in mutually supplemental relations.
From this view, China’s rapid advance is regarded as a plus-sum game to
Japan. Therefore, Japan should not be afraid of implementing structuralreform, but should carry forward an “industrial upgrading without
hollowing-out” strategy by moving declining industries to China while—6—creating new industries at home.

1) Business opportunities from China’s rise
Many companies in Japan consider it a threat to them that China is
expanding its production capacity, while regretting that China has no
attractive domestic market. However, according to the basic
macroeconomic identity of aggregate output, income and expenditure,
expansion of production naturally brings about an increase in income andspending by an amount equivalent to the increased production. This is
not peculiar to China but happens in all other countries. Moreover, it
may be easy for Japanese companies to branch out to the Chinese market,
as Japan and China complement each other. Pessimistic views may be
amplified by such information bias that companies making profits are
silent but those who are losing money raise their voices loudly. Even if
admitting this view, if the domestic market in China has not expanded as
fast as its production, the reasons may be as follows:Firstly, reflecting a comparatively higher market share and the
profitability of foreign-funded companies in China’s output, the GNP(gross national product) is exceedingly lower than the GDP (grossdomestic product). For example, most dividends paid to foreignaffiliated companies are transferred abroad without becoming income for
the Chinese people, and economic growth does not result in an expansionof domestic demand. Under such a situation, China is attractive to
foreign enterprises including Japan-based companies only as a
production base for exports. If only Japanese companies are unable tomanage business development in China, despite the fact that Westerncompanies are smoothly operating it, the Japanese companies’
conventional managerial strategies should be reviewed.
Secondly, because of a high saving ratio as a whole (household,enterprise, and government), expenditure is much lower than income in
China. Money derived from the difference heads for properties in foreigncountries mainly through an increased foreign reserve without enhancing—7—

domestic demand for goods and services. In this regard, Japan would
like to be a saucer for the funds recommending that the Chinese monetary
authorities purchase Japanese government bonds. Regrettably, most of
the Chinese money flows out to the U.S. bond market, while Japanesebonds seldom become a target for their investment.
Finally, in an inverse proportion to the expansion of exports, terms oftrade (relative price between exported goods and imported goods) haveworsened in China. The more the export quantity increases, the lower theexport prices drop, and the quantity of exchangeable imported goods all
the more decreases. Thus, China falls into a situation similar to“immiserizing growth”. Consequently, the Chinese yuan increasingly
weakens and national income in dollar terms does not increase as fast as
production. Under such a situation, Japan can import low-cost products
and semi-finished products from China, enabling Japanese consumers topurchase good products at low prices and Japanese enterprises to reduce
their production costs. Regrettably, clamorous voices have been callingfor import restriction to protect certain domestic industries as a result of
the sharp increase in imports from China.
Thus, even if the expansion of the Chinese market is not proportionate
to its production growth, there must be some ways for Japaneseenterprises to utilize the economic growth in China. So far, OEM
schemes, by which products manufactured in China are reimported into
Japan, are operated fairly satisfactorily. According to data issued by the
Ministry of Finance, however, although Japan’s direct investment in
China sharply increased in fiscal year 2001, up 64 percent over theprevious year, it still remains at such a low level as 180 billon yen (4.6
percent of all the foreign direct investment). It can be said that mutuallycomplementary relations between the two countries are not yet fully
utilized by Japan.
As one of the reasons behind this, Japanese companies’ delay inlocalizating management has been pointed out, apart from problems on
China’s side. Especially, the Japanese companies’ wage structure, based—8—

on a lifetime employment and seniority system, is making it difficult forthem to secure the most talented workers who prefer merit-based
treatment. Under the circumstances, it is difficult to transfer authorities
from managers dispatched from headquarters in Japan to local managers
who are familiar with business conditions in China. To Japanesecompanies aiming to expand their business in China, management
localization is an urgent task to be tackled.
In order to solve this problem, students studying in Japan (NECs or
Nippon Educated Chinese as it is called) with knowledge about Japaneseand Chinese situations should be much more utilized. So far Japanesecompanies have been being reluctant to transfer their technology to China
in fear of a “boomerang effect”. While recently Japanese companies havestarted to set up research and development departments in China, they
are considerably behind, their Western counterparts such as Microsoft
and Intel.
In contrast with the Japanese companies’ cautious attitude, Westerncompanies positively regard the rise of Chinese economy as a businesschance, and successful companies are coming out one after another. In
fact, when referring to the sales ranking list of foreign-based companies in
China, most of its higher ranks are monopolized by Western companies.
German Volkswagen is by far the leader in automobiles, and Motorola(U.S.A.) and Nokia (Finland) are remarkably active in cellular phones,
while Japanese companies look very poorly. Chinese enterprises havealso gathered strength vigorously in the electronics field, where Japanesemanufacturers’ market share is declining. Japanese companies should be
more concerned about the possibility that they will be left outside thegrowing market in China rather than a hollowing-out of domestic
industries due to increased investment in China

2) Aiming at industrial upgrading without hollowing-out
In order for Japan to study how to cope with the rise of China, it may
be helpful to distinguish conceptually between a “good ‘China threat’—9—theory” and a “bad ‘China threat’ theory”.
In the “good ‘China threat’ theory”, the rise of China acts as a stimulus
to structural reform in Japan. Industries which have lost comparativeadvantage in Japan should be moved to China, with their factors of
production relocated to growing industries at home. The aim is to raise
Japan’s production structure up to a more advanced level and leave
China the industries which technologies are too obsolete to continue theirproduction in Japan. In this way, the Japanese economy may recoup its
superior position again.
On the contrary, in the “bad ‘China threat’ theory” industries hurt bycompetition with China seek protection by exerting political influence. In
this case, the ‘rise of China’ theory provides the governmental authorities
and corporate managements with a very convenient cover to hide their
mistakes. However, by averting people’s eyes from the true nature of the
problem, Japan will have to pay a large compensation in the form of afurther delay in the structural reform.
To revitalize its economy, Japan should seek to build a division of laborwith China making use of China’s vital power rather than protecting
declining industries by restricting imports from China. Many Japanesecompanies have already succeeded in direct investment, outward
processing, and OEM schemes, making use of both China’s abundantlabor force and Japan’s advanced technologies. The number of suchcompanies is increasing. It is not right to think that domestic productionin Japan will decrease in proportion to an increase in Japan-based
companies’ production in China. In fact, sales of overseas subsidiarities
of Japanese corporations include parts and components procured fromJapan, dividends paid to parent companies, royalties for technologies, etc.
Nevertheless, a question may still remain as to whether employment
opportunities will decrease in Japan or not. However, so long as a
macroeconomic policy is properly carried out and current rules hinderingresources from movement are deregulated, full employment should beachieved. For instance, in the 1990’s, America achieved almost full— 10 —

employment while increasing foreign investment, and enjoyed a decadelong prosperity.
As shown in the American experience in the 1990’s, Japan is required
to develop new growth areas in place of industries moved abroad. The
target areas should not be limited to manufacturing industries, butattention should also be paid to the potentiality of service sectors
abundant employment opportunities. Tendencies for an economy to shift
to service-oriented businesses and post-industrial age are a phenomenon
due to economic maturation in advanced countries, and therefore it
should be distinguished from the hollowing-out. Keeping pace with theglobal tendency toward an information-oriented, software-oriented, andnetwork-oriented economy, Japan should aim to develop new industries
without sticking only to traditional ones. Business leaders in Japan haveseen the country’s transformation from a developing country into an
economic superpower through industrialization over the last 50 years.
They are now unable to change their way of thinking because of theirexcessive attachment to manufacturing industries based on this success.
It may be a problem that they do not easily pay attention to any
industries except manufacturing with the firm belief that only
manufacturing deserves an industry. Their past experiences of successhave ironically become an obstacle that prevents the economy fromfurther development.
In the process of its industrialization since the Meiji Restoration, Japan
has consistently led Asian countries. Therefore, Japan must have received
a strong shock from the China’s rise as “the factory of the world”.
However, it should be recognized that catching up by Asian countries
such as China means a reduction in the gap between the North and Southin the Asian region, which should contribute to stability in the region.
Obviously the reduction in the gap should ideally be realized by good
economic growth of latecomers including China rather than by thedecrease in the growth rate of advanced countries such as Japan. As amatter of fact, the per capita GDP of NIEs has already reached its level of— 11 —

OECD countries, and the age that Japan is the only advanced country in
Asia is over. However, if the structural reform is properly carried out,
Japan will be able to further raise its people’s standard of living, though
the relative position of its economy may decline. Needless to say, as
suggested by the recent financial crisis in Asia, the prosperity andstability of neighboring countries is more helpful to Japan’s national
interests than their poverty and disorder.

3. An Opportunities and Challenges for Shosha
1) Shosha keeping pace with China’s reform and opening
Recently, economic exchanges between Japan and China have become
brisk through trade and direct investment, for which Shosha are
performing an important role. Prior to the normalization of diplomatic
relations between Japan and China in 1972, Shosha were already engaged
with business in China through their dummy firms. Right after thenormalization, the Chinese government wanted to promote economic
development by utilizing yen loans. In this regard, Shosha assumed afunction as a bridge between Japan and China. One of such projects was
the present Baoshan Iron & Steel Corp., Ltd. in Shanghai, for which theprotocol was signed in May, 1978. Around the latter half of the 1970s,
Shosha gradually began to open representative offices in several cities ofChina and rendered such services as liaison, market research, consulting
and the like.
After Deng Xiaoping’s lecture during his tour to South China in 1992,
Shosha shifted their weight in China business to investment. Almost all of
the leading Shosha branched out in China, and one after another they
established companies in free-trade zones to conduct production such asprocessing raw materials to make use of low-cost manpower. As a result,Sino-Japanese trade expanded considerably. At the outset, Shosha werehandling products mainly for export to foreign countries including Japan.
To exploit the large potentiality of the Chinese market, trading companies— 12 —

in tax-free zones started to sell products to the domestic market in China.
After 1992, large-scale investment projects began to emerge and thenumber of investments increased remarkably. Investment targets
widened from textile and food processing to include machinery, steel
sheet fabrication, communication, energy, chemicals, distribution, services
and the like.
Upon the issuance of related regulations by the Chinese government in
1995, foreign-based companies including Japanese Shosha started toestablish, one after another, holding companies (umbrella-type
corporations) to place affiliated enterprises under their control. Then,they further expanded their investments in China. In August 2002, theShanghai city government recognized the above-mentioned holding
companies as headquarters for all enterprises of each group in China.
Mitsubishi Corp. and some other firms were authorized. Since then,
Shosha have advanced to a new development stage in China. Moreover,
China’s entry into the WTO has provided Shosha with new business
opportunities and prompted them to adjust their development strategies.
In the past 30 years, Shosha functions in China have delicately changed.
At the outset, Shosha were surely a leader in China business, playing a keyrole in the division of labor with other industries. When small andmedium enterprises made inroads into foreign countries, besides thegovernment aid, a Shosha’s assistance was indispensable to them. Theirgeneral plans on trade were made by relying on information collected bya Shosha at their request. In terms of superiority as a group and theimpact of scale, no other organizations can compete with the Shosha.
But, as the division of production progresses internationally andinformation technology develops globally, many manufacturers havecome to acquire the ability to carry out their business abroad bythemselves. They got rid of their reliance on Shosha and started to walktheir own way, forming their own group for business in China. To
countervail the gradual deterioration of the Shosha’s role in the economy,
its functions such as logistics and financial investment have consistently— 13 —

been strengthened.
However, Shosha in China have not yet made full use of their intrinsic
superiority. In early days, a Shosha’s representative offices were restricted
to perform only a liaison function. Neither domestic sales nor investment
were possible. Foreign companies access to the Chinese market was also
restricted. Various duties and non-tariff barriers were obstacles to theirimport and export. Trading activities in which Shosha have the strongest
advantages have been heavily restricted by laws. As a result, even withover 20 years under development in progress, Shosha have been unable tobuild close relationships with Chinese enterprises. In particular, they
have been unable to establish long-term cooperative relationships withprivate enterprises which have shown vigorous growth during theperiod. Accordingly, their main customers are limited to subsidiaries ofJapanese companies in China, and Shosha have been extremely hinderedfrom demonstrating their superiority in China.
Following WTO accession in December of 2001, China has further
opened distribution and trade fields. To cope with this new situation,
Shosha are switching their stance from import/export businesses todomestic transactions in China, to take advantage of progress inderegulation. In addition, as newly emerged private enterprises havegrown at an amazingly fast speed, Shosha are strengthening their efforts to
expand transactions with them and invest in them. Moreover, in view ofChina’s further growth in the future, Shosha are considering to makeinroads into China not just from their headquarters in Japan but also fromtheir various bases in Asia, America, and Europe. At the same time, they
are setting up organizations in their head offices in Japan to exchange
Chinese market information among all staff concerned so as to improve
the quality and efficiency of their services, while upgrading their strategy.
Shosha have hitherto been unable to fully perform their functions due
to restrictions by regulations, but, with the WTO entry as momentum,
there have already been signs that their functions will be activated fromnow on. China’s open-door policy will surely provide them with a new— 14 —

large expectation and opportunity. Shosha have long been assuming suchfunctions as coordination, marketing, lease and finance to help Japaneseenterprises make inroads to foreign countries. However, at the stake ofsurvival, they are now concentrating on more focused businesses, getting
rid of “across-the-board” business style, and are trying to build more
efficient organizations. Shosha are looking for business models in which
they can make full use of their resources. Shosha should take advantageof the chances arising from the reform and open-door policy as well as
China’s participation in the WTO. Considering their present advantage
and superiority, the new business models should include the Chinese
market and Chinese enterprises as new business partners.

2) Overcoming the ‘Shosha unnecessary’ theory
After the end of the World War II, Shosha started their business as a
guide for Japan to restructure the country on the basis of foreign trade.
Since that time, they have expanded their business scale and scope.
However, this process has not necessarily been a smooth one. The“‘Shosha sunset industry’ theory” and “‘Shosha in winter time’ theory”
appeared in past questioning about the role played by Shosha. The“‘Shosha sunset industry’ theory” was brought forward in 1961 andadvocated that : (1) as industries advance to a higher level, manufacturers
begin to handle foreign trade by themselves, (2) in an inverse proportion
to the development of information and communication technology, aShosha’s function as an information provider decreases, (3) as technology
becomes more sophisticated, Shosha begin to have difficulty in handling
products with such technology incorporated. The “‘Shosha winter time’
theory” appeared in the latter half of the 1980s and emphasized Shosha’s
heavy dependence on smokestack industries, their lateness in branchingout into software-oriented industries, and their declining profitability. In
the 1960’s, manufacturers were expanding their sales channels in Japan.
To cope with the situation, Shosha shifted more of their weight to foreign
trade while diversifying their businesses.
— 15 —

Today, many manufacturers have built up their own sales channels
both in Japan and abroad by their own efforts, and have branched out
into foreign countries without relying on a Shosha’s intermediaryfunction. So-called “distintermediation” is in progress. Moreover, Shosha
are in short of specialists who are required to branch out into new fields.
It is apprehended that the importance of their information providing
function will further decrease noticeably in proportion to thedevelopment of information technology.
The Shosha’s crises have so far given them a springboard to expand
their business scale and functions, but business conditions have not yet
turned better for them. Kanematsu Corp. reduced its business scale andcurtailed its employees to become a specialized Shosha in 1999. Tomen
Corp. asked Toyota group for additional aid and announced torestructure itself under the wing of the Toyota group in November, 2002.
Nissho Iwai Corp. and Nichimen Corp. announced their merging in
December, 2002. At any rate, finding new business chances is the key toovercome the “‘Shosha Unnecessary’ theory”.
In order to activate Shosha’s business activities, it is effective for themto build up close relationships with customers who have vitality. Also it
is important to secure rapidly growing markets. If they can make use of
their own core competence in doing so, they will be able to obtain new
business chances. Shosha will be sure to get business chances by targeting
the Chinese market and Chinese enterprises. Chinese enterprises havevital energy and Japanese Shosha have know-how. Both parties shouldmake full use of their respective strengths, and also mutually make up forthe other party’s weaknesses.
Shosha can help its Chinese partner solve its problems. For instance, tosolve environmental problems caused by industrialization in China, aChinese enterprise can introduce environmental technology throughShosha. Other industrial technology introduced from Japan throughShosha will also help Chinese enterprises improve their productivity. In
addition, Shosha can show their real functional ability in providing China— 16 —

with an efficient logistics system. Also, Shosha are expected to help
Japanese small and medium enterprises branch out into China by finding
good Chinese partners for them and providing them with appropriate
information. Moreover, when a Chinese enterprise branches out to aforeign country, Shosha can serve as its partners and utilize their knowhow acquired in the past.
In the meantime, Shosha will be able to obtain new business chances bymaking the most of China’s strength. Domestic demand is now
increasing in China under the high economic growth in progress.
Industries such as housing and automobile are forming vast markets.
Shosha will be able to enter such growing markets by functioning as atechnology provider and consultant. China still maintains a comparativeadvantage in labor-intensive industries and processing trade. Shosha will
be able to earn fairly large profits by utilizing their coordinating function
and taking advantage of China’s merits as a production base.
Under these circumstances, both Shosha and Chinese enterprises will
largely benefit from China’s strength as a production base and large
consumer market, if they can fully utilize these merits. Accordingly, inestablishing management strategies, it is important for Shosha to take into
account both the complementary relationships between Japan and China
and the full utilization of China’s vitality and potentiality. At any rate, toovercome the “‘Shosha Unnecessary’ theory”, it is an effective way for
Shosha to challenge new business opportunities.

— 17 —

Chapter 2. Shosha’s Functions
and the China Business Modelof the 21st Century
1. Shosha’s Function
Shosha have developed their businesses by making full use of theirtrade function and other various functions. They are now making efforts
to make these functions more advanced, more sophisticated and morevalue-added to keep pace with today’s significant changes in businessconditions seen through economic globalization and the IT revolution.
In its web site, the Japan Foreign Trade Council, Inc. explains a Shosha’s
eight functions as follows:(1) Trade Function: This is the core function of buying and selling“goods” and “services” in Japan, to and from Japan and outside Japanby making use of worldwide disparities in supply/demand andinformation. Various services pertaining to these transactions areoffered, namely, logistics (transportation, customs clearance,
processing and storage), financing (fund raising, fund management,international payment, and foreign exchange), insurance (marine,
import/export and fire), legal affairs, credit control and the like.
(2) Information and Research Function: A wide range of information iscollected through a worldwide network and is analyzed for use incorporate strategy and operating plans as well as for daily businessactivities.
(3) Market Development Function: By making supply and demand tomatch each other in the world market, Shosha introduce newtechnology, find customers for it, and sell new products developed by
the customers using the technology, thus creating new markets.
(4) Business Management Function: Shosha make investments in various— 18 —

businesses inside and outside Japan, and make them grow andimprove their performance through raw material procurements,
product sales, logistics arrangements, fund raising, and humanresource development. Their aim is not merely to increase profits
from trade but also to boost consolidated returns, dividends andcapital gains. They also pursue strengthening their group level
management.
(5) Risk Management Function: By utilizing managerial resources
accumulated over the years, many business risks are contained to aminimum. Especially in the case of large-scale projects and venturebusinesses in new growth fields, risks are minimized by selecting
appropriate partners, forming consortiums, sharing responsibilities
properly, securing collaterals, and utilizing insurance facilities.
(6) Logistics Function: Shosha offer the best logistics by land, sea or air.
They are involved themselves in the logistics business to prepare
efficient logistics information systems and to operate logistics facilities
such as warehouses and distribution centers.
(7) Financial Function: Unique financial facilities different from those ofbanks are offered. These include a credit substitution for customers, aguarantee of debts, project finance, foreign exchange dealing, andleasing services. Recently, functions related to venture capitals andbusiness acquisitions/mergers are also offered.
(8) Organizing Function: By combining their functions systematically,
Shosha lead large projects through such comprehensive activities as
information collection, plan preparation, partner selection, consortium
formation, fund raising, construction contract, and market
development.
Making full use of these functions, Shosha have developed theirbusinesses both inside Japan and in many other countries. However, it
was not so in China until its entry in the WTO as there were various
restrictions. With the WTO membership, the restrictions on foreign
capitals will be lifted to remove the obstacle which has been hindering— 19 —

Shosha from exerting their functions. With a new stage for their activities,
Shosha will enter into high value-added industries such as distribution,
logistics, finance and information. They will contribute to develop thesemarkets, raising them to higher level.
If fact, Shosha are recently targeting at service-oriented industries andother new frontiers in China business. In this chapter, some examples of
the Shosha’s challenges in a changing China are introduced.

2. Business Model for Shosha’s Business in China
in the 21st Century
Birth of China’s First Wholesaler under Joint Venture
Backward wholesale business in China
In the middle of the 1990s when the market economy was rapidly
growing in China, it was an urgent task for Shosha to make a full-scale
entry into its distribution industry. At that time, the distribution industry
in China had only scheduled distribution systems conforming to ashortage of goods under the planed economy. The industry was
extremely short of abilities. It was able neither to adjust supply anddemand nor to respond to a division of production, despite these abilities
being indispensable to a market economy. This situation was one ofobstacles for foreign-based companies trying to develop a domestic
market in China. Therefore, efficient distribution systems were needed in
China.
In those days, in opening the market to foreign countries, the Chinese
government gave a priority to export-oriented industries at the
beginning, resulting in delay in opening the domestic distribution
industry. Although the retail market began to open in 1992, the wholesale
business was still under strict control. It was difficult for Japanesecompanies to branch out to China and build efficient sales channels in thedomestic market. Under the circumstances, Shosha A predicted that
China would be allowed to participate in the WTO and, if so, the Chinese— 20 —

government would finally open the distribution industry to foreigncountries. Since 1996, they made preparatory work for the possible
opening, and selected Chinese Company Z as a partner, who belonged toa leading distribution group in Shanghai.
The situation quite noticeably changed in June, 1999, when the Chinese
government made public the “Experimental Measures for Commercial
Enterprises with Foreign Investment”. Now, foreign capitals werepermitted to enter the wholesale business under partial shareholding(foreign capital as minority). At last having obtained the opportunity toenter the market, Shosha A and Company Z immediately conducted athorough survey on manufacturers and retailers of both Japan and China
to find a concept of wholesale business which would be viable in China.
The survey revealed a situation that foreign-based manufacturers wereunable to locate customers in China, while Chinese retailers were unable
to procure enough goods to sell. Their further survey identified problems
behind the situation, that is, the deficiency of a logistics network and theanxiety for debt collection. Under continued economic growth, Shanghai
had potentially an enormous volume of consumption which was morethan enough to absorb a large quantity of supply. But, the potentiality
could not be actualized due to the mismatch as mentioned above. Shosha
A and Company Z reached a conclusion that a great opportunity washidden in the mismatch, and if the debt collection problem could be
solved, their branching out into the wholesale business would be
successful. They made an application for the feasibility study to thecentral government in July, 2000. After obtaining its approval, the joint
venture agreement was concluded to establish a firm for wholesale
business. The business license was issued in August, 2001 and the firm
started its operation in September of the year.
The first modern general wholesaler in Shanghai
The jointly owned wholesaler, Firm Y, mainly handles toiletries,
sundries and textile goods. As a general wholesaler, it has many
— 21 —

functions such as wholesale of domestic goods inside China, import andexport, warehousing, delivery and retail (a part of goods handled by thefirm). Features of these functions are explained respectively as follows:First, with regard to its wholesale business in China, Firm Y purchases
goods from foreign-capital manufacturers in China, Shosha A, its affiliatedJapanese company, and Chinese enterprises, and supplies the goods tolarge-scale retailers under the umbrella of the joint venture partner andother retailers in China. From now on, Firm Y offers their domestic sales
channels to foreign-affiliated manufacturers in China, while providing
foreign-affiliated retailers in China with the new supply source which has
distribution function. Thus, with the two functions, the firm should
contribute to vitalize the distribution industry in Shanghai. In regard todomestic sales of clothing items, Firm Y noticed that cash transactions areprevalent in China, and made a tie-up with a Japanese cash-and-carrywholesaler. It can accept orders for a wide variety of goods each in small
quantity. No local wholesalers have this kind of function.
With regard to import and export, the type of goods which foreignaffiliated manufacturers were allowed to handle had long been limited,
unless the goods were their own products. However, Firm Y waspermitted to handle a wide range of goods and raw materials. As aresult, as far as exports are concerned, Firm Y became able to perform all
work, from finding customers for export goods to actually shipping them.
Meanwhile, assorting, tagging and inspecting goods to be imported toChina have so far been carried out in exporting countries of the goods.
But, from now on, many manufacturers will shift this work to China, as
they can reduce their cost by utilizing the Firm Y’s logistics function. As
to import business, Firm Y is preparing to offer new function by
providing Japanese suppliers and other suppliers in the world with thesales channels of Company Z, the joint venture partner.
Foreign-affiliated companies in China and their related Chinese firms
are highly appreciative of the new functions as mentioned above. Firm
Y’s business performance has been satisfactory from its first fiscal year,— 22 —

which ended in the black on a monthly basis. To further strengthen its
competitiveness as a wholesaler, Firm Y is scheduled to complete a
distribution center in 2003. Its site area is 20,000 square meters and its
floor space is 10,000 square meters. It will be equipped with a state-ofthe-art ERP (Enterprise Resource Planning) system to centralize thecontrol of diversified processes from putting goods into storage to taking
them out of storage. It will realize an efficient logistics and a complete
just-in-time system. By introducing the modern managerial method, Firm
Y will be clearly distinguished from conventional Chinese wholesalers
who rely on only human labor, and will probably become a model for
new type of wholesaler who can provide efficient distributing services.
A Partner is the key to successFirm Y’s entry into the distribution industry has so far been successful.
The main reason is attributable to the partner in this joint venture, who isconsidered the best in this particular case. Because of the difficulties
involved in debt collection in China as mentioned earlier, many Japanesecompanies have reluctantly withdrawn from the Chinese market aftergetting in trouble. Firm Y has taken over staff with enough experience intoiletries wholesale in addition to good customers from Company Z, theJ/V partner. The debt collection system was also introduced from thecompany. Therefore, almost no problem has so far occurred in thisregard. In order to be successful in China business, it is important forcompanies to have a thorough knowledge of Chinese trade customs andto secure good customers from the beginning. However, it is not easy forJapanese companies to overcome these problems if they make the inroad
alone. It will be indispensable for them to tie up with an excellent
Chinese enterprise so as to utilize their know-how and credibility in theregion. Recent good examples are a partnership between Sanyo Electricand the Haier Group, and an agreement for cooperation between
Matsushita Electric and the TCL Group in connection with homeelectrical appliances.
— 23 —

Although Firm Y has started its operation smoothly, it is notguaranteed to be successful in the future as well. Firstly, the current
restrictions on entry into the wholesale business by foreign capitals arescheduled to be lifted within three years after China’s participation in the
WTO. Firm Y can enjoy the pioneer’s profit only until such time. It isquite possible that many new entries will be made to the distribution
industry in 2004 and competition will be further accelerated. Secondly,
the consumer market will grow very rapidly in Shanghai, where the
distribution industry is expected to change drastically in the future.
Wholesalers in Shanghai are not guaranteed to continue to exist
maintaining such importance as is kept by Japanese counterparts. Thereis a possibility that most of the market will be occupied by directtransactions between leading manufacturers and large-scale retailers as
now seen in America. Therefore, to prepare for possible furious
competitions in the future, Firm Y is required to thoroughly strengthen its
competitiveness during the period when it can earn its pioneer’s profit.
As one of such means, they are newly building a distribution center
equipped with an ERP system. Leading Japanese wholesalers have themarketing ability to give advice to their customers about best-selling
goods. It will be necessary for Firm Y to acquire the ability to assume aleading role in the industry. Even if the restrictions on foreign capitals arelifted, Chinese trade customs will never change in a day. The relationshipwith company Z will be necessary to be further strengthened. To achievesustainable success, it is necessary for them to identify what will change
and what will not change by the economic growth after China’s entry in
the WTO, while taking necessary steps without delay.

Aggressive Logistics to Develop the Chinese Market
Establishment of a logistics network
Japanese and Western companies are continuing to rush out to China.
Both imports to China and exports from China are increasing. The
distribution system in China is still backward and yet to be modernized.
— 24 —

To develop sales in the domestic market, which is rapidly growing, notonly Japanese enterprises but also Western enterprises have long been
looking forward to general logistics services of good quality.
Reliability in logistics services in China is still fairly low. For instance,
it is a daily occurrence for a truck loaded with products to become
missing, or arrive late. Though quite normal in the past, it is still not
unusual for customers to go to their suppliers’ factory by truck to buy
and pick up products in exchange for cash.
In order to positively comply with the needs, Shosha B started in 1994
to make a study to establish a logistics network to perform reliable andspeedy distribution services. After making the feasibility study for two
years, they selected a partner and obtained necessary licenses. In 1996,
jointly with a Japanese distribution company and an overseas Chinesecompany, they established a distribution hub and a transportationcompany in Shanghai. These were the first case established by foreign
capital as majority shareholders.
The distribution hub (with floor space of about 35,000 square meters)
and the transportation company are operated as if they were within in thesame entity. With the two facilities at the core, a very closely knit
transportation network is built up by linking local networks with coastal
and inland bases on trunk routes.
The present network consists of 32 bases in 23 cities. In the businesscircle of Shosha, this is the only distribution network covering all of China.
Its 22 bases in 18 cities handle the domestic transportation of generalcargo, while 7 bases in 7 cities are engaged in international forwarding
services. In addition, there is a cold storage warehouse in Qingdao and atank terminal for liquid cargo both in Zhangjiagang and in Ningpo. The
total warehouse floor space of all these facilities amounts to about 60,000
square meters, and these facilities have about 600 trucks in total.
To comply with customer requirements, Shosha B has establishedseveral of their entities in many locations throughout China to offer
international forwarding, domestic transportation, storage, cold storage— 25 —

warehousing and delivery under the licenses obtained from the central
government. They are making efforts to provide general distribution
services for SCM (Supply Chain Management) in China and abroad by
combining their trading and logistics functions. To satisfy their customer
needs and to cope with situations in the future, they focus on“preparation for increasing cargo volume, reduction of distribution costs,
shortening travel time, safety control, and improvement of reliability byan advanced information system”.
Logistics strategy in China
Shosha B has made the inroads into China starting from a domestic
logistics business. On this point, the company is distinguished from other
Shosha, who have entered the market through international logistics
services. Until recently, China had almost no means to locate cargo intransit. To solve this problem, this company has promptly introduced
GPS (Global Positioning System): a mobile terminal equipped in a truck
informs the control center of a cargo’s location through the satellite.
Installation of this system to Shanghai-based trucks is under way.
Based on this logistics network in China, Shosha B provides a wide
range of their customers with efficient, safe, reliable (by information
system) and low-cost services.
Their problem is in how to secure human resources. It is indispensable
for all their logistics bases and their subcontractors to secure capable staff
with know-how of all operations, from loading and unloading of cargo to
management of the bases. In addition, an ability to communicate withJapanese customers is required. But, since logistics systems haveemerged only recently, the number of such capable people is naturally
limited in China. The supply of human resources is unable to catch up to
the rapid growth of the logistics business, resulting in fierce battles of
scouting. Requirements from Japan-based customers are very severe, andthe same level of services as that in Japan is required by them. Therefore,
it is necessary for staff in charge to have an ability of Japanese language to— 26 —

understand the customer requirements and respond to them. In addition,complaints about delayed deliveries and damage to cargo are daily affairs
in this industry. While minimizing the occurrence of such incidents, it isimportant for the company to promptly and properly deal with any
complaint once it has occurred. But, an ability to cope with such asituation cannot be acquired in a day. Moreover, the concept has not yet
established in China that logistics are a service industry. Shosha B iseagerly tackling the problem to develop human resources by dispatchingspecialists from Japan.
In the meantime, further cost reduction is also one of the challenges forthem. A key to success in the logistics business is to save labor costs, as it
is a labor-intensive business and its profit margin is small. Besides thefast upbringing of Chinese key officers, the low-cost operation of
warehousing is also important. However, the large volume of cargo
which is worth the investment of a large-scale system is only available incoastal areas. Manpower is often more economical than using systems ininland areas. Cost-cutting is impossible unless a certain volume of cargo
is secured. Since many contracts on cargo transportation are negotiatedbetween head offices in Japan, the logistics business in China can be said
to be conducted through a three-legged race by Shosha’s local entities in
China and their head offices in Japan.
In addition to major manufactures, small and medium enterprises
including Japanese component manufacturers are expected to branch out
into China in the future. In its logistics strategy for China, Shosha B isplanning to expand their service menus to precisely satisfy their customer
needs, which are becoming higher and more complex. For example, thelaunching of scheduled transportation services between large cities, theexpansion of consolidated small cargo services, and the improvement of acargo tracing system by using GPS are included in the plan. Also, homedelivery services in large cities and SCM services covering all of China areunder study.
Shosha B is developing aggressive logistics in China because they aim— 27 —

to enter the trade of goods in the future after starting from performing
logistics services.

Cost Reduction of Components by Local Procurement— Establishment of a Trading Company
for Electronics Components
Current situation of IT industry in China
China has become the factory of the world. Its next challenge is tobecome a more value-added self-sufficient type manufacturing base aftergetting rid of its present situation of mere assembly and fabrication.
What China expects from foreign companies will shift from assistance infund raising to advanced production technology and software formarketing and distribution. Local governments in particular are desirousof developing high value-added export-oriented industries and areearnestly inviting foreign enterprises which have advanced technology.
To such enterprises, they offer tax exemption and other incentives in
addition to certain benefits (e.g. simplification of application procedures)
after the enterprises settle down there. Excessive incentives beyond thoseof the central government are offered by the local governments, making
competition escalate among them. This situation rather causes not only
confusion to foreign enterprises but an anxiety for the continuation ofsuch policies among them as well.
Local governments are enthusiastic about the introduction of IT-related
enterprises in particular, and are promoting semiconductor
manufacturing projects of a national scale. So far, leading manufacturers
such as Toshiba, Siemens, Fujitsu and NEC have participated in national
projects as technology partners.
China has three production centers with IT-related equipment, i.e.
South China including Dongguan in Guangdong Province, the Beijingarea including Zhongguancun, which is called China’s Silicon Valley, andEast China including Shanghai. South China has developed as an exportbase taking advantage of low-cost migrant workers who are inexhaustibly— 28 —

supplied from the countryside. Electric and electronics industries haveaccumulated mainly in Shenzhen–Dongguan–Guangzhou areas of thePearl River delta. In Beijing, the political center, mobile phone
manufacturers such as Nokia, Motorola and Ericsson have their factories.
The city has a great accumulation of intellectual industries consisting ofventure businesses originated from Peking University and Tsinghua
University, and the internet-related entrepreneurs.
On the other hand, semiconductor manufacturers from Japan andWestern countries have branched out to Shanghai one after another. The
city is becoming a worldwide base for semiconductor manufacturing.
Having become the factory of the world, China is now seen for its
importance as a consuming market of semiconductors besides an export
base.
Business opportunities for an electronic component trader
In 1997, the largest project to manufacture semiconductors in China
was started jointly by the Chinese government’s former Ministry ofElectronics Industry and the City of Shanghai under cooperation with aleading Japanese semiconductor manufacturer. As part of the project,
Shosha C made a proposal to establish a trading company for electronic
components. Keeping pace with the development of IT-related productmanufacturing in China, logistics systems and sales channels in China
and abroad for electronic components were expected to become
necessary. The proposal was accepted and China’s first electronic
component trader, Shanghai Hong Ri International Electronics Co., Ltd.
(Shanhai Hong Ri), was born in 1997.
Shanghai Hong Ri aims to eventually become a window for the export
and domestic sales of semiconductors manufactured by its groupcompanies. But, its operation was started by the import of electronic
components including semiconductors and liquid crystals to sell toforeign-affiliated manufacturers in China. In regard to the procurementof components for personal computers and other electronic products, the— 29 —

just-in-time system based on SCM (Supply Chain Management) is a
global standard. Even in China, Shosha C is able to timely supply any
electronic components, whether they are made in Japan, America, Europe
or Korea, through sales and distribution channels in China and abroaddeveloped by Shosha C’s group companies.
Shanghai Hong Ri is entitled to receive preferential treatment as an
excellent enterprise at the time of customs clearance. They are allowed toclear customs at the bonded warehouse for the parcels they received theorder of and convert them to domestic cargo, so that they can deliver thecomponents to their customers on time. They are also allowed to sell
imported components in yuan renminbi. This is welcomed by theircustomers, whose income in yuan renminbi is on the increase reflecting
their expanded sales of DVD etc.
For the construction of distribution centers and the preparation ofdomestic distribution network in alliance with a Japan-affiliated leading
distribution company, Shanghai Hong Ri is making use of their knowhow in semiconductors distribution, which has been accumulated by
Shosha C and its group companies.
In 1997 when China was aiming to join the WTO, an inflow ofsmuggled goods was a headache for China. Without wiping out
smuggling and other illegal practices, China was unable to build a stablefinancial foundation necessary to develop its industries. It was alsofeared that China would lose its international reputation and its foreign
trade development was impeded. In order to boost the IT industry byintroducing foreign capital for its technological reform, reliable andefficient distribution networks are needed in China. Zhu Rongji finallybegan to tighten his control over smuggling in 1998. As a result,Shanghai Hong Ri’s sales increased drastically as it was an official
electronic component supplier.
In 2002, they established a comprehensive contract to undertake theprocurement and logistics of components on behalf of foreign-affiliatedmanufacturers. This means outsourcing by the manufacturers’— 30 —

purchasing department. Outsourcing to local distribution companies
who have professional knowledge of components and capacity of just-intime delivery will likely become popular in the future as competitions
intensify. Shosha have expertise of electronic components and a wide
range of suppliers backed by their global network, and therefore they cancomply with manufacturers’ requirements as mentioned above. Few
enterprises except Shosha are in a position to make a package deal fornearly 400 kinds of components coming from more than 30
manufacturers.
The next challenge for foreign companies, who have branched out toChina to utilize its low-cost and good-quality labor force, is to strengthen
their cost competitiveness by procuring parts and components fromdomestic sources in China. After its domestic market opens as a result of
the WTO membership, improvements in the logistics network including
local procurements and preparations of SCM systems will become
important. Business opportunities for Shanghai Hong Ri will further
increase.

Inroads into China through Assistanceby Local Government— Economic Cooperation with Shandong Province
Provinces and cities in China are stepping up their activities to an
extent that this period is worthy to be called the “age of local areas”. A
soft expression such as “stepping up” may be inappropriate. The reformand open policy launched by Deng Xiaoping has quickly spread to local
areas, causing fundamental changes there. Market principles havepenetrated into all aspects of local economies. Commercialism andefficiency principles cover China as if they were umbrellas.
Details until the agreement is signed
It was the early spring of 2002, when Shosha D had momentum toestablish economic cooperative relationships with the Shandong— 31 —

provincial government in various fields of trade and investment. At thattime, Shosha D was already active in the Shandong Province next to
Beijing and Shanghai. They had investments resulting in over 20
enterprises in food and textile industries. Their regular trade had
expanded to a scale that was comparable to those in the above two cities.
Since the end of the 1970’s, they had been cooperating in importantnational projects and infrastructure constructions in the province. A large
amount of loans were given to the province’s Ministry of Petroleum
Industry for a Shengli oilfield project in addition to Qilu petrochemicalcomplex. They had personal connections with not only the provincial
government officials in Jinan but also the top management of cities suchas Qingdao, Yantai and Weihai. Shosha D’s executives were serving as
advisors to these governments. A foundation for all-out cooperative
relationships was already there.
“Agreement on an overall collaboration in economy and trade” wassigned in May, 2002. In March of the year, two months prior to thesigning, a mission headed by the Director General of the province’s
Department of Foreign Trade and Economic Cooperation visited Shosha D
in advance of a mission headed by the province’s governor. Its purpose
was to finalize negotiations about the agreement. There was no precedentuntil then of a Chinese local government concluding an agreement with a
private enterprise such as Shosha D.
Regional characteristics of Shandong Province
Shandong Province is situated downstream of the Yellow River. The
Shandong Peninsula stretches into the Yellow Sea and the Bohai Sea, from
where the Liaodong Peninsula is seen across the Strait of the Bohai Sea.
The province boasts the largest agricultural output in China. It is
China’s leading producing center of Chinese cabbages, Welsh onions,apples, pears and dates in addition to cotton and oil crop. Besides, pig
breeding and poultry farming are flourishing with Yantai as a mecca formeat processing operated mainly by Japan-based companies. Thus, it is— 32 —

the food processing industry of vegetables, meat and the like that is themost distinguished characteristic of Shandong Province. There are nearly
300 food processing enterprises under foreign capital in the province.
Fisheries are also prosperous with fish farming operated along its longcoastline. Troublesome work to cut fish and remove their bones etc. ismostly carried out by female workers in Qingdao and Yantai. Since
several years ago, scheduled direct flights have become available between
Narita/Osaka and Qingdao. The investment climate in this province hasremarkably improved.
When launching a new business in China, it is important for thepromoter to investigate the regional characteristics of its target area fromthe viewpoint of its compatibility with its own products, taking into
account procurement of raw materials, sales channels and logistics for the
products. Shandong Province is one of the best places in China for the
food processing industry of meat, vegetables and fish. The foodprocessing industry is expected to grow both in Japan and China in the
future. Especially, production of value-added healthy safe foods will beneeded. Under these circumstances, food processors’ decisions to build
their factories in Shandong Province can be justified by the regional
characteristics of this province, where low-cost labor and low-price raw
materials are easily available.
An example of economic cooperation
The negotiation of the agreement was finalized between Shosha D andthe Department of Foreign Trade and Economic Cooperation of Shandong
Province. Shosha D was all prepared to receive the economy and trade
mission headed by the province’s governor. Shosha D’s businessdepartments, especially those related to foods and textile goods, were
instructed to make briefings to the mission, and their arrangements werealso finished. All of a sudden, however, just before their departure, thegovernor became unable to visit Japan as he had to attend an important
meeting in the provincial government.
— 33 —

Soon, a courteous letter informing the matter was received. In theletter, they promised to sign the agreement as prearranged regardless of
their postponement of visiting Japan. Shosha D’s staff was relieved. In
May, 2002, Shosha D was visited by a mission of 16 members including thevice chairman of the province’s Political Consultative Conference as aproxy for the governor. The mission members had friendly conversations
with Shosha D’s president and others, and then an “agreement on overallcollaboration in trade and investment” was signed in success. After thesigning, a social gathering was held and a mutual exchange waspromoted in a friendly atmosphere. Through long experiences in China
business, Shosha D’s people were fully aware that mutual exchanges at
top managerial levels have an extreme importance in carrying out
business with China. They also knew that once heart-to-heart
relationships were built with counterparts, all businesses with themwould go smoothly in China.
Although the agreement is comprehensive, its outline is as follows:
1. Both parties set up “collaboration committees” respectively. Shosha D’s
president and the province’s deputy governor assume thechairmanship of the committees respectively.
2. Both committees hold a regular meeting once a year to study anddetermine important collaboration projects for the new fiscal year,
promoting them with responsibility.
3. Both parties mutually dispatch business study teams to the other party
periodically to promote the collaboration.
4. The collaboration in economy and trade by both parties is omnidirectional, as follows:* Shosha D expands both bilateral trade and multi-national tradethrough its global network. In particular, it promotes the export ofspinning and weaving goods/textile products, foods and othergoods produced in Shandong Province.
* Shosha D actively makes collaborative investments in Shandong
Province and assists its affiliated enterprises in investing in the— 34 —

province, while promoting projects in connection with
infrastructure, energy and State-owned enterprises’ reform.
* Both parties jointly develop markets in China and third countries,
and promote joint projects.
* Both parties make efforts to improve distribution structures of main
cities in Shandong Province to boost its domestic demands.
* Both parties endeavor to develop and upgrade human resources inview of long-lasting all-out collaboration between the parties.
Especially, they will focus on a plan to select excellent people in
Shandong Province and dispatch them to Shosha D for training.
Following the agreement with the above contents, the project started infull scale. At first, it was agreed to establish a large-scale cold storage
distribution center in Qingdao, the main city, considering that Shandong
Province was the main producing district of agricultural products. Thiscenter is going to be operational around the middle of 2003, and aims tohandle 100,000 tons of cargo in the future. Through this center, frozen
foods and cold-storage foods will be supplied to the consumer market in
China, which is expected to grow towards the future. The center is also
expected to form an international cold chain, linking production centersin Shandong Province with consumers in Japan. Logistics is now the very
bottleneck of China. And, Shosha may be responsible for its improvement
as a pioneer in the distribution industry.
Shosha D has actively started to make a study to promote similar
projects to the above from now on. The above example is a symbolic casethat regional characteristics of a local area in China have coincided with
the Shosha’s needs. Land is vast in China. Therefore, a firm “regional
strategy” is required for each area respectively.

— 35 —

Chapter 3. Prospects of
Shosha’s China BusinessThis chapter deals with opportunities and challenges brought toJapanese Shosha, as industrialization and internationalization gather pacein China. A key to success is for them to make use of China’s strengths
while making up for its weaknesses. Shosha’s visible and invisible assets
accumulated through their international businesses in the past will help
Chinese enterprises achieve internationalization. Shosha should further
exhibit their advantages by utilizing their network of human resources inboth Japan and China. They are expected to develop new businessmodels in China by making full use of their assets accumulated in thepast.

1. Business Opportunities
by Making Use of China’s Strength
Tanks to high economic growth, China is becoming attractive notmerely as an export base but as a large market as well. Its increased
domestic demand is shown by its booming housing and automobile
markets. With an abundant labor force available, China still maintains its
advantage in labor-intensive industries. It is important, therefore, for
Shosha to acquire such business opportunities that enable them to utilize
China’s advantages.

1) Expansion of the market
The housing quota system of the Chinese government was abolishedin 1998. Since then, the government’s house leasing system has changed
to a new system under which people can voluntarily purchase houses
sold by developers, etc. (However, land is owned by the state and leased— 36 —

to people under long-term contracts). Private housing demand has beenstimulated by this change, as well as by the high economic growth that
boosted people’s incomes. In July, 1998, Marubeni Corp. established ahousing company to develop houses for Chinese people. The newcompany has grown satisfactorily. Housing and real estate businesses are
expected to become pillar industries for the Chinese economy from now
on. The Japanese housing industry imported low-cost building materials
from China. With China’s WTO membership, however, Shosha will haveopportunities to enter the housing market in China in the future. Bymaking use of their experience in sales, intermediaries and managementin Japan in addition to Japanese technology, they should be able to render
coordinating and consulting services to Chinese dealers as developers.
Also, the Chinese automobile industry is becoming a focus of attention
in connection with the China’s WTO entry. Its production volume was at
a level of about 2.09 million cars in 2002. Reflecting increased income
through economic growth, demand for private cars will be boosted in
China, and its motorization will accelerate. Due to WTO accession,
import duty on completed cars will be reduced in steps from 80–100% to25%, and import quotas on cars will be removed by 2006. Nissho Iwai
Corp. has already begun to sell Suzuki-made cars in expectation of
expanded demand for cars in the future. Shosha will probably no longer
be engaged in only the export of completed cars, but will be involved in
the transfer of technology from Japan to China. They may also be
involved in coordinating a tie-up that intends to make high-class cars inJapan while making popular cars in China. Shosha will likely have manybusiness opportunities derived from cooperation in connection with
automobile sales.

2) Production base utilizing low wages
The wage level in China is still as low as one thirtieth of that in Japan.
Low wages tend to set a limit on the expansion of its domestic market,
but it makes China attractive as a production base for labor-intensive— 37 —

products. Because of a vastly excessive labor force available in rural
areas, little upward pressure is exerted to the wage level, even if thedemand for manpower increases in the industrial sector of China. The
country’s competitiveness in labor-intensive products will be maintained
for the time being. It is important for Shosha to recognize China’s
advantages of both a consumer market and production base, so as toacquire business opportunities there.

2. Business Chancesby Making Up for China’s Weakness
Today’s China, like Japan during the 1960s, is experiencing a rapid
economic growth, a large-scale migration of people from rural areas tocities, and serious environmental problems. Japanese Shosha have so far
accumulated logistics systems, debt collection know-how, information
networks, sales channels, and coordinating functions throughout theworld. By making use of these assets, they can help Chinese enterprisesin their economic activities. They in turn will be able to obtain business
opportunities by utilizing the strengths of the Chinese market while
covering China’s weaknesses. Indeed, Shosha’s main functions
accumulated in the past are sure to be their core competence in China
business.

1) Protection of environment
Some of the most serious issues in industrialization are related to thedeterioration in the environment. Although the emission rate per capita
is relatively low because of its large population, China is ranked 2nd after
the U.S.A. for total carbon dioxide emission. Not only is air pollution
caused inside the country but global warming is worsened by theemissions. In China also, subsidies are curtailed to users who use coaland other fossil fuels which generate massive carbon dioxide, and efforts
to improve the efficiency of energy are under way. As a result, the— 38 —

country’s emissions peaked in 1997, despite the rapid economic growth inprogress. However, about 75% of primary energy still relies on coal,
which generates carbon dioxide. China is required to further accelerate
replacing coal with energy with less carbon dioxide emissions. China isalso ranked 1st in the world for sulfur dioxide emissions. Not only is air
pollution a problem, but spreading acid rain and soil pollution areconcerns as well. At the same time, water pollution has also surfaced as anegative aspect of industrialization.
To solve environmental problems, it is indispensable for China to
introduce more advanced environmental technology, apart from
regulations and subsidies by authorities concerned. The energy required
to produce 1 ton of iron by today’s steel industry in China is one and ahalf times more than that in Japan, for example. One of the reasons is
attributable to China’s delay in introducing energy-saving equipment, as
compared with Japan. Under the circumstances, the know-how ofJapanese enterprises accumulated through coping with serious pollution
problems during its high economic growth period will help China solve
the environmental problems. Shosha should be able to find new profitablebusiness opportunities in connection with the environmental problems
through consulting and intermediary work to introduce environmental
and energy-conserving technology to China. Further, after the foundationof an environmental business is established in China by utilizing its lowcost manpower, Shosha may be able to expand the business worldwide incooperation with Chinese enterprises expanding businesses overseas. In
environment-related areas, Mitsui & Co. and Toyota Tsusho Corp. arepromoting business to convert conventional boilers to acid rain resistantboilers in many places of China. Itochu Corp. is developing an LNG(Liquefied Natural Gas) business in Shenzhen and East China. Shosha
have already begun to enter this business field.
However, it is difficult for private enterprises such as Shosha to develop
this kind of business with only their own efforts. It will be necessary forthem to utilize environmental ODA and the like, although such unfair— 39 —

practices as happened in Mongol and Kunashir in 2002 should not be
repeated. They must conduct their business not only for their own sakebut also to help to promote China’s industrialization.

2) Technology transfer
Although called “the factory of the world”, China has little world-classtechnology of its own, and its R&D capability is also limited. Therefore, itis necessary for China to introduce technologies from abroad to improve
economic efficiency and upgrade its industrial structure. Especially,
Japan’s experience and technology should be most helpful to them, asJapan is ahead of the flying geese pattern, as far as industrial
advancement is concerned. The most advanced technology does notnecessarily need to be transferred to China. Even out-dated technology inJapan may be useful in China. For instance, production management
skills such as TQC (Total Quality Control) and conventional sewing
technology are no longer fresh in Japan, but such technologies wereintroduced to a sewing factory in China by Shosha as China open itself tothe world. The technologies were quite helpful to improve quality of theChinese products. This success caused a processing trade boom in Japan,
by which low-cost high-quality products were manufactured in China
and imported to Japan.
Targets of foreign capital investments in China are so far polarized
between labor-intensive industries and the most advanced high-techindustries. The transfer of medium level technology is not active. In
2002, Mitsui & Co. entered into a comprehensive technical tie-up with
Tsinghua Tongfang Co., Ltd., an enterprise established by Tsinghua
University. Technology imports from Japan and human resource
exchanges between the two countries are included in the cooperationagreement. Through these affiliations, not only leading-edge
technologies but core and medium level technologies for production canbe transferred to China. The latter technologies are core competence ofJapanese SMEs. Japanese enterprises desire to enter the Chinese market— 40 —

to utilize the low-cost labor force, while Chinese enterprises wish to
introduce labor-intensive industries and appropriate technologies which
are not necessarily the most advanced technology. In this regard, Shosha
are in a position to serve as a bridge between both parties. Shosha’s
introduction of appropriate technologies into China by making use of
their past experience in rendering services to Japanese enterprises willbring about good results to both Shosha themselves and Chinese
enterprises. It will eventually contribute to develop industries inunderdeveloped rural areas and inland regions in China.

3) Establishment of distribution systems
The challenges of Chinese enterprises exist not only in industrial
technologies but also in the efficiency of logistics and coordination, which
are necessary to be improved to develop Chinese industries in the future.
Efficient logistics systems are needed to increase productivity and lower
the cost of distribution. Although it is desirable to improve infrastructure
to develop logistics, efficient distribution can be achieved even underpresent infrastructure, if a supply chain management (SCM) is properly
conducted. When it comes to the improvement of efficiency in logistics,
Japanese Shosha will be able to display their competence.
In fact, logistics is acting as a bottleneck hindering rapid economic
growth in China. Shosha therefore are making efforts to provide local
enterprises with logistics as efficiently as possible by making use of theirbases in China and abroad. Utilizing functions of their own bases and theumbrella-type corporations, they are now establishing highlysophisticated logistics systems in cooperation with their staff stationed in
China. At the same time, their head offices in Japan have set up neworganizations to systematically exchange information on China business,so that knowledge and know-how can be shared, services are improved,and strategies are advanced. In the meantime, based on the know-how
acquired through their subsidiaries in China, they are developing thesame business in many cities in China. In addition, to cope with— 41 —

increasing exports from China to third countries, they are strengthening
SCM functions by utilizing their distribution network. Expecting aliberalization of distribution and domestic sales as a result of the WTO
membership, Shosha are rendering consulting services to Japaneseenterprises entering into the Chinese market.
Shosha’s sophisticated logistics system is also attractive to Chinese
enterprises. Improved logistics systems and intermediary functions will
enable them to conduct divisions of work in different parts of China andabroad. Efficient intermediary functions will provide Chinese enterprises
with business opportunities in both rural and inland areas by enablingthem to take advantage of regional characteristics.

4) Risk hedge
The last theme in this section is what is called the “China risk”. This isa general term for risks arising from changes in Chinese policies andsystems, frequent occurrences of sudden and drastic changes in market
conditions, debt collection problems and other credit risks inside China,
and the like. Japanese direct investments in China are divided into 3
principal types in terms of foreign ownership, namely, equity joint
venture, cooperative joint venture and wholly foreign-owned enterprise.
Enterprises wholly owned by foreign capital have increased to nearly ahalf of all enterprises. This reflects the foreign companies policy to
reduce their risks by quick and unanimous decision-making. If adequate
measures are taken to contain the risks, China business will be sure to befurther developed. Shosha have improved their intermediary and debt
collection functions through businesses with foreign-based companies in
China and indigenous Chinese enterprises. Compared with otherindustries, they have the largest accumulation of information concerning
the risks. Shosha’s roles are exhibited in such activities as settlingaccounts with Chinese enterprises and cooperating with them in domestic
marketing. These advantageous functions will be helpful to many
enterprises aiming to go to China in the future. Although Japanese— 42 —

enterprises planning to go to China have a concern about the “Chinarisk”, Shosha can mitigate their concern through proper coordination andconsultation, finding good Chinese partners for them, and providingthem with useful information. Shosha will find new business
opportunities by enabling Japanese enterprises to carry out stable
operations in China.

3. A Bridge between China and Foreign Countries
1) Assisting to Chinese enterprisesin their internationalization
Following WTO entry, many Chinese enterprises are beginning to go
beyond conventional export businesses on an OEM basis. With “let’s goout” as a slogan, they are recently promoting internationalization throughdirect investments in foreign countries and strategic alliances with foreign
enterprises. The Chinese government is also assisting enterprises when
they make inroads to foreign countries.
However, Chinese enterprises do not yet have enough know-how todevelop foreign markets and operate their businesses there. To solve thisproblem, Chinese authorities may be considering it necessary forenterprises to tie up with a partner with a role similar to that of aJapanese Shosha. The establishment of trading companies under joint
venture was permitted by the Chinese government in September, 1997.
This is evidence of the government’s recognition that for promoting
exports and developing industries, trading companies that assume suchfunctions as Shosha render to Japanese companies are helpful partners to
Chinese enterprises.
Shosha have been rendering consulting services to Japanese companies
branching out abroad. They can apply their experiences to Chinese
enterprises planning an inroad into foreign countries. One of suchsuccess stories is cooperation between Sumitomo Corp. and a Chinesecontainer manufacturer, China International Marine Containers (Group)— 43 —

Co., Ltd. (CIMC). After their cooperation agreement was concluded in
1990, Sumitomo Corp. provided CIMC with all the information on how to
manufacture containers for export. CIMC’s present market share is 40%of global container production. In 2000, CIMC was ranked No.10 inexport sales among Chinese companies.
In the same way as Shosha, multinational corporations based in Japanand other advanced countries have enough know-how and assets for theinternationalization of production, distribution, sales and coordination.
So, there is no need for them to rely on Shosha. On the other hand, bymaking use of Shosha’s worldwide logistics system, debt collection
facility, sales channels and coordinating functions, Chinese enterprises
can make inroads into foreign countries more easily. By virtue of
information and know-how supplied by Shosha, they can smoothly carryout their overseas operation.
In July, 2002, Sumitomo Corp. announced a strategic alliance with
Hisense Co., Ltd. in Quingdao to export Hisense’s home electricalappliances to Japan and Western countries. In December of the year,
Mitsui & Co., Ltd. made public its tie-up with the SVA (Group) Co., Ltd.
in Shanghai to export SVA’s liquid crystal television and other high-tech
products overseas as well. As seen above, by making use of Shosha’sfunction, Chinese electric manufacturers are trying to establish
worldwide sales channels to expand their market shares in overseas
markets. In the case of Sumitomo and Hisense above, Sumitomo Corp. isplanning to supply high-end home electrical appliances to the domestic
market in China with a hope to enter a mass retailer business for homeelectrical appliances in the future.
Recently, acquisitions of Japanese enterprises by Chinese investors
have begun. Nobody had ever imagined this could happen until a few
years ago. Due to a decline in stock prices and asset values under aprolonged recession in Japan, the acquisitions have become more
affordable to Chinese enterprises, whose aim is to acquire brands,
technologies (patents), equipment and sales channels. In this regard,— 44 —

Shosha are expected to play a pilot role, as Chinese enterprises do nothave enough knowledge about laws and commercial practices in Japan.
Such cooperation provides Shosha with good business opportunities
that can utilize their visible and invisible assets accumulated in the past.
Thus, assisting Chinese enterprises in their internationalization should
produce ideal cooperative relationships between Chinese enterprises andShosha.

2) Business opportunities arisingfrom economic integration in Asia
Economic integration in East Asia is still at a very early stage where
China and Japan are negotiating separately FTAs with ASEAN countries.
But, region-wise FTAs have already been established in EU and NAFTA
countries. From now on, a call for a region-wise FTA is expected to rise in
East Asia as well. In the not too distant future, an East Asian FTA willprobably be accomplished comprising China, Japan, Korea and ASEAN
countries.
As in the case of EU and NAFTA, how much member countries will
benefit from an East Asian FTA will depend on how far the flows of trade,investment and human resources are enhanced. In this regard, Shosha
may play an important role by applying their experience and knowledge
accumulated through their bases which have long been maintained in
Asian countries. Besides making efforts to expand Japan’s trade andinvestments with Asian countries, through bases in ASEAN countries,
Shosha will be able to assist ASEAN enterprises in exporting their goods
to China. At the same time, through their bases in China, Shosha will beable to assist Chinese enterprises in branching out to ASEAN countries.
Thus, Shosha can contribute to ecomomic development throughout East
Asia by coordinating all their bases in the area.
With regard to the FTA negotiations with ASEAN countries, China isseemingly ahead of Japan at present. In reality, however, the scale oftrade and investment between Japan and ASEAN countries is far larger— 45 —

and more substantial than that between China and ASEAN. In addition,
China and ASEAN are similar in their industrial structures and arecompetitors of each other. Even if China finishes FTA negotiations with
ASEAN countries ahead of Japan, trade and investment may not expand
as much as expected because business links between the two sides are stilllacking.
Should this be the case, formation of an East Asian FTA might notrealize a high level of economic integration as seen in EU and NAFTA.
This could cause serious damage not only to China but also to potential
members of the East Asian FTA including Japan. It is important that
already established production and distribution networks between Japanand ASEAN countries are compatible to such networks between Japanand China. And, to increase the synergetic value of the two networks, a
network between China and ASEAN countries needs to be developed tosuch a degree as is comparable to that of the above two networks. In
short, it is necessary for East Asia to have a network through which goods
and services, funds, human resources and information can move quickly
and freely at all times to anywhere else in the area. There should not be
any obstacle blocking the move in the network. In order to avoid the
obstacle and promote trade and investment between China and ASEAN
countries, it is necessary for Chinese enterprises to tie up with someone
who assist them those regards, and Shosha have capacities to perform an
important role as a facilitator for them.
Under the circumstances, Shosha will be able to drastically expand
potential business opportunities through their business between ASEAN
countries and China by becoming partners for both Japanese companies
and local enterprises of the area. In this sense, it is eagerly awaited thatthe present FTA negotiations between ASEAN countries andChina/Japan will be completed in success and an East Asian FTA will be
realized in the near future.

— 46 —

Shosha’s Cha l lenges i n a Chang i ng Ch i na                           Shosha                     !
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JFTC

ISBN4-931574-04-1
C0033 ¥500E

Japan
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Shosha’s
Challenges in a
Changing
China