Is China fast losing its appeal for Japanese companies?

With China still placing a large swath of its cities in pandemic related lockdowns and its friction with the US in the Taiwan Straits gradually inching towards an alarming stage, a large number of Japanese production facilities, including chip making companies have begun moving out of China.

According to the Asahi Shimbun, 135 companies engaged in the manufacturing of semiconductors, cosmetic items, clothing, household appliances and motor vehicles have begun dismantling their operations in China.

Japan’s widely circulated daily said that while some Japanese companies are relocating their manufacturing bases to Vietnam and the countries of the South Asian region, a sizable number of companies are coming back to home since they feel weaker yen is hurting their profits. Japan has about 90 percent of its products manufactured abroad and of this, a large number of products are made in China. Top Japanese multinational companies such as Toyota, Honda, Nissan, Mazda, Suzuki, Kawasaki, Mitsubishi, Toshiba, Hitachi, Sony, Nikon, Canon, and Pioneer have their bases in China.

But due to multiple factors, including Covid triggered lockdowns, US-China tension, weakening of yen, widening rift between Tokyo and Beijing on geopolitical and diplomatic fronts and declining appeal of the Chinese market in the past one-decade, Japanese companies are not seeing a bright future for their growth in China. As per the survey of the Japan-based financial research and support services, Teikoku Databank, as many as 249 Japanese companies left China between 2016 and May 2019.  However, in 2022, ongoing effort by Japanese companies to locate their manufacturing capacities outside China gained momentum as 135 companies have either left the Chinese shore or are on the verge of relocating them outside the Middle Kingdom.

Japanese vehicle manufacturing companies’ unhappiness with China knows no new bounds. Due to suspension of auto part plant operations owing to pandemic-related lockdowns in Shanghai and other parts of China, global production of Toyota Motor Corp, as per the Asahi Shimbun, declined by 9 percent year-on-year to 690,000 vehicles, while Honda Motor Co, witnessed a 54 percent decline and Hino Motors Ltd recorded a 27 percent drop.

Panasonic Corp, as per the Japanese daily, stopped taking orders from domestic retail outlets in April 2022 for microwave ovens and washing machines because its plants in Shanghai had suspended operations. Similarly, Yaskawa Electric Corp. has three manufacturing plants in Shanghai. Operations were suspended in one plant, while manufacturing continued at the two other plants, yet production was only between 20 and 30 percent of regular levels.

On May 31, 2022, the Japanese Chamber of Commerce and Industry in China released the results of a survey of Japanese companies and many of them said they realised for the first time the existence of a “China risk.” Therefore, amid slump in productions and profits in China, Japanese companies have preferred to shift their operations back to Japan or cheap labour cost areas in Southeast Asia and South Asia.

In the backdrop of escalating tension between China and the US over Taiwan, there is a fear that America, Europe, Japan, and numerous other countries would impose sanctions on Beijing if the latter undertakes militaristic adventures against Taipei. According to the Asahi Shimbun, this fear has a great impact on the Japanese companies’ decision to move their operations out of China as soon as possible. The Japanese dailies said this trend will pick up in days to come.

This might be terrible news for China as it is taking place at the time when the country is going through an economic slowdown due to the uncompromising zero-Covid approach of the government. Gross Domestic Product declined by 2.6 percent in the three months to the end of June from the previous quarter. To revive demand in the market, the country’s central bank has cut lending rates, still consumption has not scaled back to its previous level.

Profits of industrial firms from January to July have declined 1.1 percent from a year earlier, said the National Bureau of Statistics of China in its latest report. In July, retail sales rose 2.7 percent compared to a year ago, still the number missed forecasts for 5 percent growth and fell short of June’s figure by -3.1 percent. Adding to woes of the Chinese authorities is mortgage boycott by homebuyers. This has resulted in 12.3 percent decline in investment in property. On the other hand, unemployment among youth is witnessing a huge rise. The National Bureau of Statistics of China said youth unemployment in the country reached 19.9 percent in July, the highest rate since China started publishing the unemployment rate in January 2018, when it was as low as 9.6 percent.

These all are indications of a desperate economic situation, yet all attempts to revive it are falling flat since major Chinese cities, including Beijing are still in lockdowns.