Policy Series: Diaoyu Islands

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One of the most well publicized conflicts concerning China’s foreign policy over the last year was their strained relationship with Japan. China and Japan have had a long and heated rivalry which doesn’t likely won’t be resolved any time soon. While China and Japan are politically and socially divided, they have enjoyed a prosperous economic relationship for most of the 21st Century. Westerners and the companies they represent must have a firm understanding of the troubled history between these two nations if they hope to be successful in their Chinese operations.

china korea japan leadershipIt is important to recognize that the relationship between China and Japan is extremely old. Conflicts over the ownership of Manchuria have been fought between what we now call China, Japan and Russia since the 12th Century. However modern China’s relationship with Japan was formed by steel during the Second World War. The Japanese military executed a brutally efficient campaign through China on their path south to Singapore. While the military campaign was focused on China’s Eastern Seaboard, Central Chinese cities such as Changsha were also occupied. The Chinese have alleged that the use of chemical agents against civilian populations was commonplace and China’s Dong Bei Provinces are dotted with museums dedicated to Japanese war crimes during World War II. The deepest wound was dealt in Nanjing, which was then the capital of China. Iris Chang’s book The Rape of Nanking, described horrible acts perpetrated by Japanese soldiers as they occupied the city. While the book has been criticized as biased, it is important to understand that China’s relationship with Japan has been largely been defined by events that occurred during World War II.

Remarkably, China and Japan have shared a fruitful economic relationship since Deng Xiaoping opened China to the West in the 1980s. Chinese consumers often consider Japanese brands to be reliable, high quality, yet inexpensive alternatives to high-priced American and European goods. Japanese car companies have experienced great success within the Chinese marketplace, and Japanese cosmetics are also very popular. However, Chinese consumers have chosen to reject Japanese brands at times of high political tension.

The most recent division in Sino-Japanese relations concerns a small island chain 170 kilometers from Taiwan, in the East China Sea. While the islands themselves are of little real value, the discovery of underwater oil reserves has sparked a territorial debate. The conflict went mainstream in August of 2012, when a Japanese activist group attempted to land on the islands. The Japanese government denied the group permission to land, but several activists swam ashore and planted the Japanese flag. A group of Hong Kongers retaliated with a similar act a month later. In September, 2012 the Japanese government purchased three of the islands from a private Japanese citizen and Beijing declared this as a provocative act.

Senkaku_Diaoyu_Tiaoyu_IslandsChinese social networking sites exploded with objections and within several days large scale protests had begun. In Changsha, the Japanese owned Ping He Tang department stores were surrounded. After picketing for several hours a portion of the crowd attempted to damage the building and some looting ensued. The city’s central department store remained closed for over a month. In some very extreme cases owners of Japanese vehicles were beaten. Local Chinese governments worked quickly to quell the violence, but the psyche of the Chinese consumer had already been altered. Even though a full boycott has not been implemented, many Chinese consumers now view buying Japanese products as an unpatriotic act.

Japanese companies have suffered major losses as a result of the East China Sea conflict. In seven days, from September 15-21, 2012, the major Japanese car manufacturers lost close to $250 million dollars after protests concerning the Diaoyu Islands shut down production. In the months following they saw sales drop as much as 40%. The Japanese instant noodle company Ting Yi saw profits rise only 8.5% in 2012. Their Chinese competitor Want Want saw a 32% gain in profits over the same period. The Japanese restaurant chain Ajisen reported a massive 56% profit loss in 2012.

How can companies possibly hope to combat losses in China due to the unpopular policies of their host government? The Chinese consumer has shown that they are willing to alter their spending habits based on non-economic factors. However, the history of China and Japan shows that consumers are also willing to make value based purchases, even in the face of public disapproval. Taking a hit in revenue or production may be inevitable, but companies who have established powerful brand recognition and lasting relationships in China will likely be able to survive in the long haul. Just last January, Japanese car manufacturers reported a double digit bump in sales over the previous year. While Chinese consumers demand to be heard, they have shown that they are also willing to compromise on politics for products they trust.

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