Japanese Companies Confronting heightened “China risk,” Reassess Operations

Latest Update December 4, 2023
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Amidst escalating "China risk," Japanese companies are reevaluating their operations. Faced with economic security concerns and supply chain dependencies, businesses are navigating challenges in China, testing the mettle of top management. Explore the shifting dynamics and strategic considerations in this insightful report.

17 November 2023 - Japanese companies are grappling with the challenge of “China risk” and are reassessing their business operations. Economic security concerns, coupled with efforts to reduce supply chain dependence, are driving companies to downsize their presence in China. However, the country remains a crucial market, leading some companies to pursue a dual strategy of restructuring and leveraging opportunities in China. The shifting dynamics present a significant test for top management skills. 

Growing Concerns Over Geopolitics and Economic Security; Importance of China Remains

Companies are increasingly cautious about expanding in China, as revealed by a survey by the Japan External Trade Organization (JETRO). The survey indicates a trend toward “downsizing” or “relocating to a third country/region” in business development over the next 1-2 years, with the lowest percentage of companies opting to “expand” since 2007.

China stands out for increased supply chain risks over the past decade, reaching close to 4.5 out of 5, according to the Ministry of Economy, Trade and Industry's Trade White Paper. Geopolitical and economic security risks were cited by 50-70% of companies, emphasizing a growing unease among Japanese businesses.

Factors contributing to the shift include disruptions from the COVID-19 pandemic, China's zero-corona policy affecting its role as the "factory of the world," and escalating trade tensions. Concerns about local business expansion, including arrests under anti-espionage laws, have also risen.

Rising Costs and Economic Slowdown

A survey by JETRO highlighted an increase in costs, such as procurement and personnel expenses, as a major reason for downsizing. Other Asian countries, including India, Vietnam, and Indonesia, are gaining popularity as alternatives to China.

Despite China's economic slowdown, its market size and established production system remain significant. Approximately 17.1% of companies consider China the most crucial destination for production bases, according to a survey by Teikoku Databank.

Government Initiatives and Prudent Investment Decisions

The Ministry of Economy, Trade and Industry aims to enhance domestic investment measures and ensure economic security. Collaboration with the Group of Seven (G7) and ASEAN aims to establish fair trade rules with China. Companies are expected to make cautious investment decisions to maximize profits while minimizing China-related risks.

Strengthening Supply Networks and Adapting to Local Changes

Since around 2021, companies have been reconsidering their presence in China to make supply chains more resilient. Examples include Sakai Heavy Industries and Nippon Tungsten diversifying their procurement routes. The trend extends to cost considerations, with manufacturers returning to Japan for high-value-added products.

In the automotive sector, companies like Toyota are maintaining sales levels, while others like Nissan, Honda, and Subaru face double-digit sales declines. Mitsubishi Motors has decided to withdraw from local production, citing an inability to keep up with changing needs and intense competition.

Preparedness for Technology Leaks and Supply Chain Dependence

Kazuto Suzuki, a professor at the University of Tokyo Graduate School of Public Policy, emphasizes the need for companies to prepare for the risk of sudden regulatory changes in China. Key risks include technology leakage and supply chain vulnerabilities. Suzuki advises Japanese companies to safeguard critical technologies and explore options like local production for local consumption to mitigate risks.

In conclusion, while China remains a vast and attractive market, Japanese companies are navigating complex management tasks, considering risks, and adopting strategies to adapt to the changing dynamics of the Chinese business landscape.

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Source:  Nikkan Kogyo Shimbun