Insight: On Japan Sea coast, small firm shows scars of China's economic woes

TOTO

14/03/2019 23:00

By Tetsushi Kajimoto
    JOETSU, Japan, March 15 (Reuters) - In snow country along
Japan's northern coast, a small manufacturer of precision moulds
is feeling the pain of China's economic slowdown.
    Orders have slowed to a trickle at Nagumo Seisakusho Co,
which supplies big auto-parts makers such as Denso Corp  6902.T 
and Aisin Seiki Co  7259.T , and the company may keep salaries
flat or even reduce them in the coming fiscal year.
    Manufacturers across Japan depend heavily on customers in
China, the world's second-biggest economy, to buy their
products, especially the parts and equipment that reach China's
factory floor and fuel its domestic and export growth.
    Automotive chipmaker Renesas Electronics Corp  6723.T  last
week said it would suspend production at some plants for up to
two months as it braces for China's growth to slow further. In
recent months, other big companies such as factory-robot makers
Yaskawa Electric Corp  6506.T  and Fanuc Corp  6954.T ;
Mitsubishi Electric Corp  6503.T , trading house Mitsui & Co
 8031.T  and toilet giant Toto Ltd  5332.T  have blamed China as
they cut profit forecasts.  urn:newsml:reuters.com:*:nL3N20U1HX
    But the impact of China's wobble is worse for manufacturers
nearer the start of the supply chain, like tiny Nagumo. It
employs 100 people to create precision press moulds other
Japanese manufacturers use to make car parts and other products
for the China market.
    On the nondescript 4,000-square-metre (43,000-square-foot)
factory floor in Nagumo's main Sanwa plant, grey-clad workers,
some wearing blue surgical masks, busied themselves during a
recent day designing moulds by computer, then milling, stamping
and assembling dies.
    But the normalcy belies tough times for Nagumo, which makes
all of its products on demand.    
    "Orders have stalled suddenly since January. Many of our
clients are car-parts makers, and they have slammed on the
brakes for orders recently," at least through March, said
president Hiroshi Komemasu.
    "It is said that when China sneezes, Japan catches a cold,"
Komemasu told Reuters recently on the factory floor. "I strongly
feel that the trade war is affecting even small firms like us." 
  
    
    RIPPLE EFFECTS
    The emptiest section of the facility was the busiest.
Nagumo's five sales staff were often out of the office hunting
new customers to make up for the drop-off in orders.
    The company, founded as a fibre-processing company in the
immediate aftermath of World War Two, is based in Joetsu, a
quiet city of about 200,000 people 225 kilometres (140 miles)
northwest of Tokyo.
    Far from the bustle of Japan's biggest cities, Joetsu is
known for a festival, a museum and a mascot celebrating an
Austro-Hungarian general who taught cross-country skiing to
Japan's Imperial Army in the early 1900s.
    Sharp slowdowns for upstream manufacturers like Nagumo bode
ill for Japan as a whole, as smaller companies employ seven in
10 Japanese workers, and weak demand points to smaller shipments
by bigger firms down the road.
    Komemasu would not discuss Nagumo's specific customers, but
said one had slashed its orders by half.
    Unlisted Nagumo managed to stay in the black for the 2018
calendar year, but probably lost money in the fiscal year, which
ends this month, Komemasu said. Declining orders threaten its
forecast of sales edging up 6 percent this year to 1.9 billion
yen ($17 million).
    Nagumo executives, worried about sales, have become
reluctant to raise wages. After increasing base pay for three
years, the company hopes to keep overall pay flat in the coming
fiscal year, which starts in April, Komemasu said.
    Such constriction could ripple through to other Japanese
manufacturers - now in annual wage negotiations - reinforcing
concerns that trade friction will hurt salaries and consumer
spending nationwide.
    Japanese giants such as Toyota Motor Corp  7203.T  and
Panasonic Corp  6752.T  offered smaller pay increases at annual
wage talks on Wednesday, tempering hopes that domestic
consumption will offset external risks to growth.  urn:newsml:reuters.com:*:nL3N21006V
        
    TRADE WAR
    Despite signs that U.S. President Donald Trump and Chinese
President Xi Jinping may be nearing a truce in the U.S.-China
trade war, the collateral damage for Japan may persist.
    "The U.S.-China trade war won't be resolved entirely. Both
sides may reach a vague compromise, but that doesn't mean
everything will be rosy for China's external demand," said Toru
Nishihama, emerging-market economist at Dai-ichi Life Research
Institute.
    "Downward pressure will mount on Japanese exporters and
manufacturers as the global economy slows further," Nishihama
said, adding that as Beijing focuses on supporting the domestic
economy, the authorities will tolerate slower demand. 
    Atsushi Takeda, chief economist at Itochu Research
Institute, sees the China slowdown's impact on Japanese
companies lasting for months, countering an expected rebound in
car demand late in the year from Beijing's stimulus measures.
    "But we need to bear in mind that the effects of trade
friction will play out fully in Japanese exports and output in
January-March and the following quarter, after the rush in
shipments of Chinese goods to the United States seen late last
year," Takeda said.
    "Semiconductors and cars will take a hit in the first half
of this year, and other goods related to trade friction will
follow suit in the second and third quarters, so the worst will
come around April-June for Japanese exporters and
manufacturers."
    Last year, about 38 percent of Japan's exports were
electronic parts, semiconductor-manufacturing equipment and
heavy machinery used to make other goods, while the auto
industry accounted for 23 percent, Finance Ministry data show.
    Japan's manufacturing supply chain, linking small firms like
Nagumo to Japan's industrial giants and consumers worldwide, is
the China-reliant core of Prime Minister Shinzo Abe's plan to
lift Japan out of decades of deflation and fitful growth.
    A much cheaper yen, driven by unprecedented money-printing
from the Bank of Japan, has made the country's exports more
competitive globally. This has spurred a long export boom and
record corporate profits, promoting hiring, creating the
tightest labour market since the 1970s and delivering modest pay
raises.    
    But domestic consumption has remained tepid and export
demand - especially from China - has slumped, threatening to
derail what could be Japan's longest postwar expansion.
    This year has seen the biggest monthly export drop in two
years, with a plunge in China-bound shipments, a big drop in
machinery orders signalling weaker capital spending ahead, a
weak wage outlook and dampening business sentiment in the
Reuters Tankan survey.
    The government last month cut its assessment of factory
output and profits, and indicators this month suggest the
expansion may have halted.  urn:newsml:reuters.com:*:nL3N20U287  
    In Joetsu, Kenichi Watabe, head of Nagumo's general-affairs
division, says the company has "managed to make ends meet as our
sales staff dashed here and there trying to attract new
customers and secure new orders."
    Nagumo's workforce is now half its peak due to past layoffs,
Watabe said.
    But company president Komemasu said squeezing too hard would
cause lasting damage.
    "We, like everyone else, tell employees to turn off the
lights and refrain from purchasing unnecessary things in a
downturn," he said. "But we won't curb investment in human
capital and R&D."
    
($1 = 111.3200 yen)

 (Reporting by Tetsushi Kajimoto
Editing by William Mallard)
 ((tetsushi.kajimoto@thomsonreuters.com; +81-3-6441-1829;
Reuters Messaging:
tetsushi.kajimoto.thomsonreuters.com@reuters.net))