Strolling through the food court of a department store in Taipei's Xinyi District on a weekend afternoon and hearing the chorus of voices proffering the Japanese greeting irasshaimase ("Welcome"), you could mistakenly think you've been transported to Japan.

Looking up, one notices that since the arrival six years ago of Ramen Kagetsu Arashi, the Kanto region's top noodle chain, followed by Ramen Sanji from Kagoshima and the more recent arrivals of udon noodle chains Marugame Seimen and Mita Seimen, a veritable slew of Japanese restaurant chains has set up shop in Taiwan and now occupies the most prominent spaces in many food courts, with throngs of eager customers lining up at their counters.

Elsewhere nearby in this eastern Taipei shopping district, a branch of Ippudo – famous for winning the "TV Champion" ramen contest in Tokyo three years in a row – as well as Santouka and Baikohken, two well-known chains from Hokkaido, and the intentionally low-key Kyoto institution Enishi, all can be found doing brisk business.

"It's been really fantastic in Taipei recently. Just walk down the street, and it's lined with well-known noodle shops you'd find all across Japan. But unlike in Japan where different regions favor different styles, in Taiwan all the ramen shops are doing good business," Japanese film director Kitamura Toyoharu, a 16-year resident of Taiwan, says effusively. "Forget about other world cities. You'd be hard-pressed to find such a sight even in Japan."

From already formidable established Japanese chains to smaller boutique-type purveyors, driving the "Japanese direct-operated" blitz across Taiwan's food and beverage landscape trend has been the recent wave of overseas forays by the high-performing SMEs that dominate Japan's service industry.

Taiwan has come to be first port of call for the "Japanese middleweights" on their expansions abroad.

Enter the Realtors

According to figures from the Ministry of Economic Affairs' Investment Commission, although growth in the value of Japanese commercial investment has remained flat over the past five years, the number of individual investment projects has more than doubled. Of those, service industry investment projects account for half, far higher than the steady average of around 30 percent over the years.

"These past few years Japanese investment in Taiwan, spearheaded by SMEs and the service industry, has been way more active than in the past," says Yi-cheh Chiu, director general of the economics ministry's Department of Investment Services.

During the first three months of this year, the number of Japanese commercial investment projects grew at a rate of 13 percent, far and away Taiwan's largest foreign investor.

In the service industry vanguard, Japanese SMEs that have successfully set up operations in Taiwan span the entire spectrum of consumer markets, from food and beverages to fashion, travel and entertainment. After grabbing a meal at a ramen noodle shop, you can have a coffee at Doutor, Japan's largest coffee shop chain, or pick up something at Uniqlo, a leading Japanese clothing manufacturer and retailer that has seen rapid expansion to 36 stores since opening its first Taiwanese location two and a half years ago. Now, a large variety of top Japanese cosmetics and pharmaceuticals brands are even available in Taiwan through outlets like Japan Medical.

Japan's biggest online retailer Rakuten is now even planning to set up a regional headquarters in Taiwan and offer third party payment services.

Even that most local of businesses, real estate, has begun to look abroad. Last year, venerable Japanese real estate developer Mitsubishi Estate Co., Ltd. and leading brokerage At Home Co., Ltd. signed cooperative agreements with Sinyi Realty Inc. and Shin Kong Group, respectively, to capitalize on a declining Japanese yen by selling Japanese property in Taiwan.

With the ongoing contraction in domestic demand stifling growth in the Japanese economy, the once trepidatious Japanese SMEs, who seldom ventured beyond their own shores, are now scrambling to expand into overseas markets.

For Japanese SMEs, particularly those in the service industry, Taiwan is a natural as the best choice to set up a key overseas outpost. That aforementioned wave of famous Japanese noodle shop openings? From Ramen Kagetsu Arashi leading the charge to Hokkaido's Santouka and Kyushu's Ippudo, consumer demand in Taiwan has successively driven each to product turnover in excess of 1,000 bowls of noodles per day, and monthly revenues exceeding NT$5 million per outlet.

In terms of revenue per square meter, the figures for the Japanese imports exceed those for competitors within the same shopping districts more than fourfold.

"No matter how you add it up, this [market] is our top performer, overseas or domestic," says Adachi Akihiro, Sentouka's Taiwan regional manager. Sentouka also has locations in Singapore, Hong Kong and North America. At present, however, Taiwan has become Sentouka's most important overseas market.

Late last year, the Japan External Trade Organization, Japan's equivalent to the Taiwan External Trade Development Council, internally circulated a research paper titled: "Taiwan's Japanese Noodle Craze."

The report concluded that Taiwanese consumers showed the world's highest degree of acceptance of Japanese food and beverage culture. Still, there were slight differences in preferences in arranging seating and menus as well as in food and drink flavors.

So, as far as Japan's food and beverage chains are concerned, Taiwan is the perfect base from which to get to know the ethnic Chinese market. For relatively smaller, more localized and specialized Japanese operators, Taiwan is an obvious offshoot of the Japanese market, potentially offering a new source of growth.

As Japan's service industry accurately observed, Taiwan offered the distinct dual advantages of possessing big future potential (the overall ethnic Chinese market) and sustainability (large population of Japanophiles). What Japanese manufacturers have locked onto is the dexterity of Taiwanese companies in China. Starting in Taiwan, they're looking to re-establish their supply chain in the China market, one that Japanese companies both love and loathe.

Buffer for China's anti-Japan Complex

Early this year, as a wave of anti-Japanese sentiment swept across China at the height of a fishing rights dispute over the Diaoyu (or Senkaku) Islands, the Shanghai office of CAST Consulting, a Japanese firm that provides services to Japanese companies in China, released a major report. The report was unsparing in expressing the frustrations of Japanese companies operating in China.

The report that sparked such widespread reaction from the Japanese business community and media was titled: "Exit Strategies and Withdrawal Practicalities: Legal Issues for Japanese Companies in China."

The report bluntly states that profits for Japanese companies operating in China have been steadily declining for years as China's government has reduced tax incentives for foreign companies and economic growth has slowed. That, combined with excessive regulation, inadequate intellectual property right protections and growing anti-Japanese sentiment, made China unfavorable for Japanese companies.

"Japanese companies in China should reassess their future viability in China and draw up new strategies; otherwise, they should make advance preparations for orderly withdrawal," the report starkly states.

"Japanese SME manufacturers are between a rock and a hard place here," says Chien-I Weng, who as director of III's Taiwan-Japan Industry Collaboration Center closely monitors developments in Japanese industry.

"On the one hand, the competitiveness of the big Japanese multinationals has declined over the past 10 years, so SMEs along their supply chains will have to look overseas for some path to survival," Weng says. "On the other hand, with their lack of international experience, Japanese SMEs looking to go it alone in the China market have virtually no chance of adapting to the local circumstances, and more than a few have ended up getting 'eaten alive' over there."

Weng concludes that those Japanese manufacturers that once sought to bypass Taiwan and go directly into China in search of a business partner are now taking a second look at the advantages Taiwan offers – its relatively transparent regulatory system and the wealth of international experience of Taiwanese companies – and are coming back in droves looking for partners.

Over the past two years, Taiwanese technology giant Hon Hai has become the largest shareholder in Sharp Electronics, while Japanese players such as Elpida Memory and Renesas Electronics have approached wafer foundry titan Taiwan Semiconductor Manufacturing Co. seeking mergers or strategic alliances, and numerous Japanese SME manufacturers of precision machinery, optoelectronics and even traditional light industries have been setting up shop in the industrial parks of central and southern Taiwan.

"What Japanese companies have now recognized are the abilities of Taiwanese companies in securing international orders and in expanding into the China market," Weng says. "These advantages have become more apparent over the years."

Another major draw for Japanese companies of which few are aware has been the conclusion of the Cross-Strait Agreement on Intellectual Property Rights Protection and Cooperation, which formally took effect at the end of 2010 and which could help alleviate the biggest headache for Japanese companies operating in China: the unauthorized use and/or counterfeiting of Japanese technology and goods, prior to which there had been little avenue for redress.

As Weng notes, quite a few foreign companies have applied for patents through China's domestic IPR protection system only to find their patents already registered by a Chinese corporation, with the ensuing lawsuits proving quite costly. Under the cross-strait IPR agreement, however, Taiwanese patents enjoy preferential protection in China, a major bonus.

The most recent wave of Japanese companies to come ashore offers Taiwanese industry a rare opportunity to take its game to the next level.

Branding, Technical Skill Lessons

The transformation is already quietly underway all around us.

Behind the glass counter of a Hoshina udon noodle outlet on Taipei's east side, a staffer in impeccable chef's whites is intently kneading and trimming the dough for the noodles. His action is precise with strict attention to every detail.

This is part of a local chain that started out in Taichung and has been operating in Taipei less than a year, yet gives absolutely nothing away to its Japanese competitors in terms of reputation and sales volume.

"Taiwanese people used to be enthralled with Japanese cuisine, seeking an exotic atmosphere and different flavors, but now, there's a greater appreciation for the spirit of craftsmanship," says Crystal Lee, vice director at iSurvey, a consumer behavior and market research consultancy. "Japanese or Taiwanese is not the point. What Taiwanese consumers value is a focus on doing your job well and making good food with sincerity." 

Just as the reality has become clearer and Japanese companies have been increasingly arriving on Taiwan's shores, Taiwan's food and beverage industry has begun to pay more serious attention to "the process," an attitude adjustment that has brought a new-found respect among owners for their formerly neglected kitchen staff.

One other transformation has been the increasing propensity of local artisans all across the island – be they purveyors of mochi from the east coast, late-night snacks from Tainan, or earthenware from Yingko – to seek to establish their own brands that "tell their own story."

The particularly Japanese characteristics and traditional goods that have continually emerged on the market here have become Taiwan's intangible "branding mentor" in terms of product orientation, packaging and narrative.

Taiwanese service industry companies have borrowed from the Japanese in developing their own brands. Taiwanese manufacturers, meanwhile, seek to establish mutually beneficial alliances with Japanese companies with exclusive high-level technology, to move into the global marketplace.

"Japanese companies are conservative and a little slow out of the gate but have somewhat more trust in Taiwan," the III's Weng believes.

The large number of Japanese companies now exploring options in Taiwan offers an opportunity for Taiwanese companies to seize the initiative in seeking out the most complementary business partners and hasten the process of acquiring and deploying core technologies necessary for taking domestic industry to the next level.

From a bowl of noodles to core technologies used in the manufacture of precision IC components, when top-flight Japanese SMEs take to the field, their preferred battleground is Taiwan. Yet with the various ASEAN member states also making an all-out push, that opportunity is likely to be fleeting. How might Taiwan make use of its relationship with Japan to effect an industrial upgrade? It is a question worth pondering in the halls of government and business, and demands an immediate plan of action.

Translated from the Chinese by Brian Kennedy