A recent survey has shown that supply chain risks, the implementation of China’s “Anti-Spy Law,” and escalating geopolitical tensions are dampening Japanese companies’ willingness to expand their business in China.
According to the latest report from Teikoku Databank, Japan’s largest credit information agency, as of June this year, there were a total of 13,034 Japanese companies operating in China. This number has decreased by 9.4% compared to the peak in 2012, which stood at 14,394 companies.
Among the Japanese enterprises in China, the manufacturing of machinery and equipment holds the largest share, with 5,139 companies, accounting for approximately 40% of the total. This category includes companies involved in automobiles, electronics, tools, molds, various types of machine tools, and semiconductor manufacturing.
Wholesale trade comes next, constituting 32.4% of the total. Within the 1,803 service industry companies, those engaged in software development, including gaming development and other packaged software, make up the largest portion at around 30% of the entire sector.
The report begins by stating that “Japanese companies entering China are at a turning point.” It analyzes the declining attractiveness of China as an “export base” in recent years, citing reasons such as the Chinese authorities’ COVID-19 lockdown policies leading to prolonged production halts, disruptions in logistics and supply networks, the impact of the depreciation of the yen, rising labor costs in China, and more stringent legal regulations.
The report notes that Japanese companies are showing an increasingly cautious attitude towards their operations in China. While the number of Japanese-capital enterprises in China has not significantly changed, indications suggest that business strategies of local Japanese enterprises have shifted from aggressive expansion towards maintaining or downsizing their operations, including integrating and merging local subsidiaries, dissolving joint ventures, and restructuring supply chains by relocating to Southeast Asia or back to Japan.
The report’s author, researcher Daisuke Iijima from Teikoku Databank, believes that Japanese companies are losing interest in investing in China. He emphasizes, “Companies’ interest in doing business in China may be even lower than the data indicates.”
He adds that while labor costs once attracted many Japanese companies to invest in China, labor costs have doubled over the past decade, and the increased tensions between China and the United States have added to the risks in the business environment. Iijima states that more and more companies are realizing the management risks of placing China at the center of their supply chains, leading to the consolidation of local subsidiaries or their relocation to Southeast Asia.
Iijima notes in the report that the process of exiting China is challenging, and the deteriorating sentiment of Japanese companies towards doing business in China is not fully reflected in the survey. Foreign companies wishing to close offices or factories must overcome stringent demands from local Chinese governments, as these authorities seek to retain the investments and job opportunities brought by foreign companies.
Given these factors, Iijima believes that the likelihood of a large-scale exodus of Japanese companies from China is not high. He states, “Japanese companies are trying to distance themselves from China without angering the local government, but a sharp decline in their operations in China is unlikely.”
Furthermore, in recent years, the risks to the safety of foreign employees in China have become increasingly prominent due to the implementation of China’s “Anti-Spy Law” and the tightening of regulatory measures by the United States towards China. The “unforeseen risks” for foreign-invested enterprises conducting business in China have rapidly increased.
China’s “hostage diplomacy” has long been criticized internationally, and the implementation of the “Anti-Spy Law” has accelerated this trend, leading to a chilling effect on foreign enterprises in China.
Last March, a Japanese man in his fifties working for Astellas Pharma, a Japanese pharmaceutical company, was arrested in Beijing by the Chinese authorities on charges of “espionage.” This individual remains detained in a detention center in Beijing.
In a survey conducted by Teikoku Databank in 2023, approximately 600 Japanese companies operating in China mentioned “politics and economic conditions of the destination country” as a challenge when asked about the difficulties they face when expanding overseas and entering new markets. This indicates that businesses venturing into China are generally dissatisfied and distrustful of the increasing political and economic risks.