The COVID-19 pandemic and geopolitical risks have raised questions about the future of the Chinese market for Japanese companies operating in China. Many are concerned about how these companies will adjust their business and investment plans in response. In this regard, researchers at ANBOUND have gained valuable insights into this issue through their discussions with Japanese research institutions.
Recently, the Japan External Trade Organization (JETRO) surveyed more than 800 Japanese companies operating in China on issues such as how they view the prospects of the Chinese market and their business and investment plans in the country. The results showed that due to the pandemic and other reasons, the percentage of companies reporting profits decreased by 7.3 percentage points from 72.2% in 2021 to 64.9% in 2022. Among the remaining companies, 18.4% reported having a balance or revenue, while 16.8% reported losses. In terms of business confidence, over 90% of Japanese companies remain optimistic about their business prospects in China. Regarding their business plans in the country for the next 1 to 2 years, 33.4% of companies expressed interest in expanding related businesses, 60.3% of companies stated they would maintain their current operations, 4.3% reported that they would reduce their business scale, and only 2% plan to transfer their business to other countries. It is worth noting that from an industry perspective, the intention to expand business in the medical device-related industry is most evident. Among them, 66.7% of medical device companies plan to expand their scale, 31.6% intend to maintain their current status, and only 2.7% of companies opt to shrink their business scale.
From the survey results, Japanese companies' views on continuing to expand their business and investment scale in China are still relatively optimistic, and the attractiveness of the Chinese market to Japanese companies remains evident. This is consistent with the results of some previous similar surveys. For example, a previous JETRO survey showed that in 2023, China is still the third-ranked investment destination for Japanese companies in Japan, with approximately 26% of the surveyed company leaders considering it as their primary investment target, similar to the first-ranked United States and second-ranked Vietnam. It can be seen that the cooperation and investment relationship between Japanese and Chinese companies is still relatively stable, and for Japanese companies, the pull factor of the Chinese market still exists.
However, behind the optimistic sentiment, Japanese companies' views on China have undergone some changes as well. For instance, although only 4.3% of Japanese companies in China plan to shrink their business scale in this survey, the proportion is still significantly higher compared to the results of 1% to 2% in the previous two years. This may indicate that the various impacts on the Chinese market in recent years have to some extent undermined the confidence of Japanese companies in the country. What is even more concerning for China is how to ensure the safety and stability of supply chains and industrial chains after experiencing the impact of the COVID-19 pandemic and geopolitical risks. This has become an increasingly important concern for Japanese companies in China.
According to insiders, Japanese companies are taking steps to strengthen supply chain security in the three areas of production, procurement, and sales. Of these, the largest adjustments are being made on the procurement side. Currently, Japanese companies are striving to diversify their upstream supply sources and procurement channels to avoid over-reliance on specific countries, regions, or suppliers. This involves diversification both between China and global suppliers, as well as adjusting cooperation partners within the Chinese market. Additionally, Japanese companies are promoting sales transfers to expand their overseas market space while maintaining their market share in China. Finally, some Japanese companies are increasing the automation of Chinese factories while also establishing additional production bases overseas.
Taking into account the trends in these three areas, it becomes apparent that the future development trend of Japanese companies in China may be to build a complete and independent closed-loop production chain within the country itself, achieving complete localization from procurement, production, to sales. At the same time, these Japanese companies will also establish another independent supply-production-sales system overseas to meet the demands of both the Chinese and non-Chinese markets, while reducing geopolitical risks. The approach of Japanese companies to building supply chains within and outside of China is actually what researchers at ANBOUND have previously mentioned, that foreign companies are implementing a "parallel supply chain" approach to decouple from China. These trends are currently being adopted by large Japanese companies such as Matsushita and Sony. Although this implicit decoupling does not leave the Chinese market, it still separates the Chinese and global markets, and the negative spillover effects are still worth the attention of the Chinese authorities.
In addition, in a survey conducted by researchers at ANBOUND, some analysts pointed out another issue worth noting: when Japanese companies consider overseas investment decisions, they often view the development potential of a country as an important decision factor. However, recent surveys show that in the eyes of Japanese companies, the development potential of China is continuing to decline, and is even lower than that of some smaller developing countries. Analysts believe that the reason for this phenomenon is not only due to the slowdown in China's economic growth but also because of the growing alienation between China and the global market in recent years. Especially since the outbreak of the COVID-19 pandemic, the country's strict policies have caused communication channels between the Chinese market and foreign companies to be obstructed, which inevitably causes foreign companies to have doubts about the current situation and potential of the Chinese market. Some Japanese companies have revealed that although their Chinese management team still values the Chinese market, it is difficult to convince the management team of the Japanese parent company to continue expanding investment in China. The communication gap between the Chinese management team and its Japanese counterpart has widened in the past two years.
From an optimistic perspective, although geopolitical factors in recent years have created some rifts between the governments of Japan and China, the interest and confidence of Japanese companies in the Chinese market at the corporate level remain relatively stable. However, it is worth noting that the communication blockage caused by China's border closures since the pandemic is slowly eroding the confidence of Japanese companies and investors in the Chinese market. Moreover, with the intensification of geopolitical risks, the push factor between Japanese and Chinese firms is constantly increasing, and the risk of implicit decoupling is becoming more and more serious. Against this background, China must seize the valuable window of opportunity brought about by its relaxation of the pandemic policies to strengthen communication and contact with the local teams of Japanese companies, so as to demonstrate the potential and value of its economy and market.
Final analysis conclusion:
While Japanese companies maintain interest and confidence in operating and investing in China, the COVID-19 pandemic and geopolitical risks are gradually eroding this trust relationship, which further exacerbates the decoupling of Japanese companies from China. With the tweak of pandemic policies and the restart of its economy, China must strengthen its contact and communication with the Japanese business community, demonstrate the value, potential, and open confidence of the Chinese market to them, ultimately repairing this precious trust relationship with foreign enterprises and rebuilding its attractiveness.