Japanese Industries and their China-Exit

Japanese Business in China

The Japanese government has announced diversification in supply chains and emphasized the huge risk of having over-dependence on a single region for manufacturing. It is ready to bring back manufacturing into its domestic territory resulting in a reduction of investment footprint in China. There are an estimated 30 thousand Japanese companies having production bases in China [1]. It all began when diplomatic relations between China and Japan thawed in 1992. Later Communist Party of China granted a business permit to a Japanese electronics manufacturer, Miyakoshi, in 1977 to produce cassette-tape recorders. After China joined WTO in 2001, the Japanese manufacturing industry started to consider China as a 'factory of the world'. Up until recently, Japanese firms have invested around 117 billion USD in mainland China. The majority of the profit of these Japanese firms comes from their overseas business in China. Japan has one of the biggest foreign corporate presence on the Chinese land.

All these years, Japan and China have shared a cordial economic relationship. When Japan first set its foot in China, production was meant for local sales. The main intention behind the overseas manufacturing was to export goods back to Japan, and some to the United States. However, times changed completely since the 2000s. China was no longer just a manufacturing hub for Japan because of its easy availability of cheap labor but opened up as a profitable market for Japanese exports. Japan acclimatized itself to China's continuous economic growth. Now, these companies were drawn towards the Chinese markets. Many established popular brand names in the growing and highly advantageous Chinese consumer market. At the same time, the corporates in China found the Japanese firms to be suitable partners for business. For instance, in 2015 when China's e-commerce giant JD.com planned to construct the country's largest hydroponic factory, it decided to hire Mitsubishi Chemical for the job [2]. The financial strings conjoining both the countries turned out to be quite beneficial in the longer run. Japan has always been serious about China, the companies were not left in the lurch coping with the extremely burdensome entry restrictions and tax systems in place. The Japanese government, the Japanese embassy in Beijing, and the Japan External Trade Organization worked hand-in-hand with the Japanese industries in China to overcome all obstacles in setting up their businesses. There were Japanese advertisers to aid these companies to flourish in Chinese local markets. In conclusion, Japan has established a prosperous relationship with mainland China and the latter ended up being its biggest trading partner. All cautions have shattered in recent times. It is nightmare for China to see its favorable business partner leave.

The Relocation Conundrum

COVID-19 pandemic has brought the issues with the Japanese firms' supply chains into the limelight. It exposed their vulnerability to external shocks. Moreover, the Chinese economy was also in a volatile position after the pandemic struck, albeit it jumped back to normal business earlier than expected. In the year 2020, when the world was going through hard times, Japan suffered from disrupted supply chains from China and realized its overreliance on Chinese production centers. Amid the early pandemic horrors, world economies were in shambles and that was the time when alarm bells began ringing in Japan. After the virus emerged in the Wuhan City in China which is considered a major hub for the auto industry; Nissan, the Japanese automaker was compelled to shut its operations in Japan due to an excessive shortage of auto parts meant to be exported from China. Another instance noted when Iris Ohyama, a Japanese consumer goods company, was unable to meet increasing domestic demand for surgical masks after the supply chain to its factory located in China was severed and there were stringent restrictions on Chinese exports in place [3].

The difficulties faced by Japan impelled the government to relocate business back home or diversify its production to South Asia and Southeast Asia. The government encouraged the companies based in China to observe risks attached to such vulnerable supply chains. It is high time to rethink the trading capacities with China and target an overhaul. To support various companies, the Japanese government rolled out a subsidy plan in its 2020 supplementary budget amounted to 23.5 billion yen allocated specially for the exiting process and expanding production to either India, Bangladesh, or ASEAN nations. Earlier, the government granted around 10 billion yen to the first group of 87 companies to shift their business from China to Vietnam, Myanmar, and other Southeast Asian countries or establish factories in Japan in a bid to form a more resilient supply chain [4]. The companies are offered these subsidies for pilot programs and business feasibility studies in the new territories. Japan's initiative was bolstered by the bigger question raised by other countries including India and Australia as well. Cooperation enhanced on the efforts to formulate a trusted supply chain resilience in the Indo-pacific, as a result, reduce dependence on China. The three countries founded the Supply Chain Resilience Initiative (SCRI) to institute alternative supply chains.

On the other hand, the Japanese government has made it clear that the country does not stand against globalization or not trying to adopt more protectionist trade policies. Japan is simply bringing a change in the dynamics of globalization. Excessive interconnection has proved to be damaging to the domestic economy, therefore, Japan wants to work with a combination of domestic and overseas production along with emergency global supplies during times of external shocks.

The Impact of the Exodus

Japan pulling out its business from China has caused trouble to the party leaders. Officials in Guangdong, Jiangsu, and Zhejiang; some of the big cities with the presence of many Japanese firms are in dismay as a huge share of their GDP, fiscal revenues and employment will drain out with this exodus. It brings back the horrors of the South Korean electronics giant Samsung shifting its business from the Guangdong Province in 2019 [5]. There has been an increasing spur within the global corporates to move out of China ever since. For instance, the American giant Apple is planning to move its business out of China to India or Vietnam. Another major concern would be the US-China trade war leading to many investors and corporates fearing the volatility of doing business in China. Gradually, China is deteriorating from its position of being the most popular manufacturing destination and facing a huge dearth in employment opportunities. The relocation frenzy will have a long-term negative impact on China's productivity. Subdued productivity will in turn affect the potential growth rate. The global value chains from China will be disrupted further as India, Bangladesh, and ASEAN countries are acquiring its business.

Though China has refuted that big businesses such as automakers, commerce, or financial institutions have the plan to leave. Most of the Japanese businesses moving out are small and medium-sized manufacturers. However, the exodus has triggered China to take some action. The government has announced strengthening efforts to ensure the companies stay put. One of the localized efforts taken in Guangzhou Province wherein the municipal government mandated all its bureaus and departments to procure only cars manufactured by Japanese automakers including Toyota, Honda, and Nissan in the province [6]. Earlier in 2021, a slew of policies such as maximizing currency convertibility and increasing market access for foreign investors were introduced to make business in China more beneficial.

Conclusion

The global value chains around the world are under distress due to the continuous waves of the coronavirus pandemic hitting the crucial manufacturing hubs. Japan took a rational step in rethinking supply chains after witnessing a slump in exports from China. Although the decision could have a ripple effect on the global economy, as similar to Japan many other countries can urge their manufacturers to come back or relocate. Parallel trends are visible in the actions of the United States lately. Secondly, it would have a major impact on the Japan-China relationship. Japan aims to relocate the leftover companies in China fuming the difficulties for the country. China's manufacturing blockade during the lockdown period is meant to be the biggest reason for the financial pullout, however, Japan is also flustered with China because of its misdeeds. There exists a negative sentiment towards the Chinese policies including misadventures in Taiwan, the new National Security Law in Hong Kong, and aggression in the South China Sea which encouraged the Japanese retreat. The fanciest weapon in Japan's armory to tackle China remains to hurt the financial setup of the Communist nation. Therefore, there is an urgent need for China to endorse certain foreign policy reforms, simultaneously orchestrate dialogues with the Japanese government.

References:

[1] https://timesofindia.indiatimes.com/business/india-business/japan-to-offer-aid-to-2-companies-moving-manufacturing-base-from-china-to india/articleshow/79071600.cms

[2] https://www.boyden.com/media/japans-chinese-operations-14184548/index.html

[3] https://www.washingtonpost.com/world/asia_pacific/japan-helps-87-companies-to-exit-china-after-pandemic-exposed-overreliance/2020/07/21/4889abd2-cb2f-11ea-99b0-8426e26d203b_story.html

[4] https://www.deccanherald.com/business/business-news/japan-to-offer-subsidy-to-companies-shifting-from-china-to-india-report-883272.html

[5] https://newsable.asianetnews.com/business/manufacturers-are-shutting-shop-in-china-and-moving-out-vpn-qrun51

[6] https://asiatimes.com/2020/12/japanese-manufacturers-beat-a-path-out-of-china/

Pic Courtesy-Oj Serrano at unspalsh.com

(The views expressed are those of the author and do not represent views of CESCUBE.)