BANGALORE: IT research firm Gartner, Inc. has issued a new report encouraging enterprises to develop contingency plans for reducing dependency on products and services from northeast Asia in anticipation of unstable relations between China and Japan for the foreseeable future.

"More than 95 per cent of the largest 2,000 companies in the world have extensive interests, investments and employees in China and Japan," said Gartner V-P and research director Dion Wiggins. "Most large global companies will have to adjust their strategies and plans if the China-Japan situation remains volatile. For many companies, it is no longer 'business as usual' in northeast Asia."

Enterprises should also look to take advantage of opportunities that the situation presents, the report said.

The new report analyses three possible scenarios with different degrees of severity: business returns to almost as usual; continued uncertainty and volatility; and, continued escalation of tension.

By leveraging the insight provided by these scenarios, companies based in China, Japan and the rest of the world can examine possible outcomes and prepare for action in case one or more elements of a scenario become reality.

"There is a large disconnect between the business and political relations of China and Japan," Mr. Wiggins said. "This has the potential to negatively affect commerce and trade in both countries and have an influence on commerce in many other parts of the world. We believe that all IT-using and IT solution-providing enterprises globally need to reassess their business models, investments, trading partners and strategies for both Japan and China. This reassessment should be based on an understanding of the causes, current status and potential trigger points in the relationship."

Wiggins said participants in the IT economy of northeast Asia "should certainly consider plans to reduce their dependencies on supply of products and services from this region through diversification of supply and the broadening of any new investments to balance the increased risk." For some IT multinationals outside Japan and China, the upheaval presents opportunities for them "to fill in any gaps, or offer alternatives," he said.

If tensions between the two countries were to escalate-the most severe of the three scenarios-the impact will spread to Hong Kong, to places such as Korea that have their own issues with Japan, and to other societies with strong historical ties to China, according to Gartner.

In this scenario, Japanese technology firms will reduce their commitment to the Chinese market, with many ultimately withdrawing completely. India, actively supported currently by the Japanese government, would become Japan's new base for low-cost manufacturing. Chinese industry will suffer as its source of leading-edge technology dries up amid continuing export restrictions from the US and Europe. Some technology companies from North America, Europe and elsewhere in Asia will acquire Japanese assets at attractive prices but others will steer clear and divert sourcing away from and unstable region.

Gartner's medium severity scenario calls for continued uncertainty and volatility in relations between China and Japan. This will have a broad business impact with bias against each other's products becoming more widespread and pronounced. Japanese technology firms will assume a lower profile in China through intermediaries and local brand strategies. Moreover, Japanese investment in technology manufacturing will gradually decline because of difficulties in hiring and retaining staff. This will create an opportunity for other overseas investors.

Chinese IT service and software firms will reduce their Japanese business initiatives. As they refocus on North America and Europe, these Chinese firms will meet more direct competition from established global IT service firms, particularly those from India.

Economic growth in both countries would suffer, with the shock enough to drive Japan into recession and perhaps act as a catalyst for business and government reform. China surpassed the United States as Japan's largest trading partner in 2004, with trade between China and Japan increasing more than 30 percent to $213 billion. Both nations are each others' second-most-important export market after the U.S.

In the third scenario, "business returns to almost as usual", Gartner believes the impact will be restricted primarily to Chinese and Japanese companies. Chinese consumers will start to favour alternative brands, whether home grown or from Korea and Taiwan, while nascent efforts by Chinese technology companies to enter the Japanese consumer market will meet even more resistance.

Japanese companies that have temporarily frozen investment will resume most activities, but with greater due diligence and an increased focus on disaster recovery planning and risk management. Chinese antipathy will cause Japanese organisations to be more interested in offshore IT and business process service providers elsewhere in the region, such as the Philippines, Vietnam, Thailand, Malaysia and Australia, that are positioned to meet their needs.

Direct cumulative investment by Japanese corporations in China exceeded $48 billion from 1979 to 2003. During this same period, the U.S. invested $43.6 billion in China, while Europe -- through the combined direct investments of Great Britain, France, Germany and Italy -- invested $28.6 billion in China.