Snorrend makes the drone of the listed Japanese company ACSL demonstration rounds in a cage in the warehouse. Without missing a pixel, the Soten (Heaven) captures all the details of the camouflage fabric in the cage. “You’ll find more of the features you know from DJI,” Chris Raabe, chief technology officer, told a trio of visitors to ACSL’s Tokyo headquarters.
A few years ago, Raabe mulled over competition from DJI, the Chinese drone giant that dominates the global market. Nowadays he sees potential customers walking past DJI at international trade fairs. “They stay with us. They see Made in Japan as a safe alternative.”
The Coast Guard, the Police—virtually every Japanese government organization flew low-cost drones from DJI. Until April 2021. Since then, governments must have every drone vetted for risks to national security before purchasing. Companies in sectors such as telecommunications, healthcare, financial services, energy and transportation soon followed. After all, industrial drones come to places where you don’t want prying eyes, such as nuclear power plants, disaster areas, ports and other essential infrastructure. They pass on sensitive information to servers, with the risk that malicious parties intercept that data or hijack the drone. Chinese drones pose an additional risk due to legislation from 2017 requiring Chinese companies to share their data with the state.
Although DJI denies that such requests are made, Japan is playing it safe. The same is happening with drones as earlier in 2018 with communication equipment: ‘Made in China’ is banned and Japanese companies receive subsidies to develop alternatives. In late 2021, ACSL mass-produced the first “Made in Japan” drone. There is no Chinese part in the Soten, which is also extra protected once morest hijackings and data leaks. The vehicle does not go online, but stores data internally, says Raabe.
Painful and complicated operation
Like some other countries, Japan is participating in the US tech war by not supplying Beijing with machines for the production of high-quality semiconductors. Recently, Tokyo and Washington are said to have come to an agreement, making those machines virtually out of reach for Chinese companies. The Japanese cabinet goes one step further by also protecting the supply of eleven essential products and raw materials. It will buy and store Japan, or make it somewhere where China cannot disrupt production. For example in Japan itself.
That will be a painful, expensive and complicated operation. Japan’s economy is much more closely intertwined with China than Europe’s. In 2020, 26 percent of all Japanese imports came from China, while the European Union gets more than 22 percent from there. According to the cabinet, more than eleven hundred products cannot even be made in Japan, because more than half of the parts come from China. Some Japanese companies are according to a survey by business newspaper Nikkei Index even more than 80 percent dependent on parts imported from China.
With the Soten drone, the biggest concern was finding batteries for cameras, says Raabe. “We suffer from the Chinese talent for vertical integration: they buy the best suppliers. We can’t use the best cameras in the world because DJI has taken over Hasselblad. Looking for all kinds of parts, we come across suppliers that DJI has swallowed.”
If imports from China are a weak spot, Japanese exports to China are the other Achilles’ heel. About 10 percent of the European Union’s exports go to China, for Japan that is double. In 2021, China and Japan traded for 352.5 billion euros.
Chinese tourists
In the traditional shops in Asakusa, a district of Tokyo that attracts many tourists, the close ties with China become clear. Whether they sell rice crackers, hairpieces or sweets, the shopkeepers miss the Chinese tourists. In 2019, until the pandemic kept the Chinese at home, they accounted for 30 percent of all foreign visitors to Japan.
“70 to 80 percent of my turnover came from Chinese tourists,” says the owner of one mochi-candy store called Shoujudo. For the first time in her thirty-year existence as a shopkeeper, she has no money for staff due to more than three years of economic malaise.
Japan reopened its borders in October 2022 and strict Chinese restrictions on foreign travel will lift this week. With omikron sweeping through China, travelers from China must show a negative PCR test at the Japanese border. Still hopes mochi-seller that the Chinese will boost her turnover soon. She’s going to stock up on extra supplies of their favorite flavors. “They love red beans and green tea.”
The same goes for rice cookers, cosmetics and luxury foods. Japan wants to keep this innocent trade with China, while at the same time arming the country once morest economic dependence on China. Tokyo does this very quietly, because going once morest Beijing’s hair is not in the interest of the 12,706 Japanese companies that are active in China. According to the American Japan expert Ezra Vogel, no other country has as much activity in China as Japan.
However, Japanese businessmen learned to spread their risks earlier than other foreign entrepreneurs. For example, since massive anti-Japanese demonstrations in China in 2005, they have built a second one for every new Chinese factory elsewhere, to be able to continue working there in an emergency.
The Japanese government got involved in 2010, when tensions with China over a territorial dispute flared. Overnight, Japan ran out of Chinese earths. When the supply of those metals, which are indispensable for the car industry, for example, started up once more in 2014, modest successes had been achieved with other suppliers, recycling and attempts to extract earth metals from the seabed ourselves, although the most important lesson was that Japan cannot do without China might.
During the pandemic, shortages of medical supplies and pharmaceutical raw materials from China sounded alarm bells for a third time. This time, Japanese politicians and technocrats are determined not to let go of the economy until key production and supply chains are secure. For Japan, the greatest danger lies in a military conflict between China and Taiwan, in which Japan might be sucked into.
At the end of December, the Japanese cabinet therefore published its list of eleven categories of indispensable goods and raw materials that will from now on be made in Japan, or somewhere else than China, or bought in bulk, as long as Japan does not run out. Ryohei Tamura heads the Office of Economic Security Promotion of the Japanese Cabinet. There, regarding fifty men and a single woman from different ministries are working on this new resilience. “We feel the urgency at our office. We regularly work overtime until following midnight,” says Tamura.
A new law will come into effect no later than February, which will ensure that Japan has enough semiconductors, robot parts, earth metals and other goods to keep the economy going in the event of future disruptions to international production chains. The Japanese government is allocating a cool $ 7.5 billion for this, but it is up to the business community to organize supply chains differently, says Tamura. “Companies have to come up with their own ideas.”
It is too early to restore Made in Japan
A first attempt in 2021 to lure companies away from China, with $ 221 million of government money, met with little response. A record number of more than 900 companies have left China in the past two years, according to research firm Teikoku Databank, but surveys by Japan’s Foreign Trade Organization show that the majority are staying. As soon as entrepreneurs stop investing in their Chinese operations, the Chinese competitor overtakes them right – moving means letting go of the immense Chinese market. Moreover, where should those companies go? No country can match the scale and efficiency of Chinese industrial areas, especially Japan with its high electricity rates and aging population, no matter how many robots are used in the workplace.
It is therefore too early for Made in Japan to be rehabilitated, but a change has begun. According to a recent survey by business newspaper Nikkei Asia among 79 leading companies, more than half plan to source fewer parts from China. Factories are being built on their own soil once more, by both Japanese industry giants and new international consortia that have to breathe new life into the moribund Japanese chip industry with millions of dollars of government money.
In East Asia, for example, globalization is unraveling. For strategic products such as drones, it will be every country for itself, Raabe expects. This year ACSL has sold a thousand Sotens. The cost is double that of a comparable DJI drone and the customer has to wait longer for it because the factories that assemble the Soten are backlogged. Despite those hurdles, Raabe expects orders for 2,000 drones next year. “I hope we don’t frighten DJI too much with that.”
He says that with a big wink, because DJI sold this year according to the Chinese state newspaper China Daily 200,000 agricultural drones alone. However, according to research firm DroneAnalyst, DJI’s market share for specialized commercial drones in 2021 suffered a significant dent of 15 percent, probably a result of Western distrust. Raabe: “This is a favorable climate for us. And if those anti-Chinese sentiments turn, then in a few years we will be able to compete with our Chinese competitors with the quality of Made in Japan.”
