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Japanese companies are increasingly abandoning an approach to business in China that once seemed immune to politics, a stark shift after years when they were the biggest single investors in their neighbor\u2019s economy. \u00a0<\/p>\n
In an era defined by geopolitical risks and worry over China\u2019s faltering growth, the economic math no longer adds up for the likes of Nippon Steel Corp., which said in July it was exiting its joint venture in China. Mitsubishi<\/a> Motors Corp. suspended its local operations indefinitely last year, a casualty of slumping car sales and China\u2019s rapid shift to electric vehicles.<\/p>\n Almost half of Japanese firms in China polled in a recent\u00a0survey<\/a>\u00a0said they won\u2019t spend more or will cut investment this year. Companies listed rising wages, falling prices and geopolitics as the biggest issues they faced.<\/p>\n \u201cWe are now past Japan\u2019s peak economic engagement with China,\u201d said\u00a0Robert Ward<\/a>, director of geo-economics and strategy at the International Institute for Strategic Studies in London.\u00a0<\/p>\n The hurdles range from the US-Chinese tech\u00a0competition<\/a>\u00a0to rising\u00a0tensions<\/a>\u00a0in the Taiwan Strait, according to Ward. \u201cGeopolitics is a significant factor\u201d in the changing attitudes, he said.<\/p>\n The slow-motion rupture threatens an economic bond that dates back more than four decades, when Japan started to extend trillions of yen in development assistance to China by way of\u00a0low-interest loans<\/a>. Commerce and trade have been a pillar of an otherwise contentious relationship between the two Asian giants \u2014 summed up among academics by the catchphrase \u201chot business, cold politics.\u201d<\/p>\n This time, the chill of geopolitical winds is proving hard to contain.<\/p>\n New foreign direct investment is on track to stagnate near 2023\u2019s multi-year low after volumes in the first quarter fell to the lowest since 2016. It\u2019s a turnaround for Japanese companies that had built up an FDI stock of almost $130 billion in China through the end of last year.<\/p>\n This is a turnaround from previous periods of bilateral tension, which didn\u2019t affect investment much. Even in 2010-2012, when the territorial dispute between the two sides was hot and Beijing temporarily blocked shipments of rare earths to Japan, companies still increased their stock of investment by an average of 13% each year.<\/p>\n China seems concerned about the decline and has been trying to attract Japanese businesses to invest more, according to an official in Tokyo involved with China policy, who asked not to be named discussing official matters.<\/p>\n The political backdrop is also far less benign. Last month, a Chinese military airplane intruded into Japan\u2019s airspace for the first time, an incident soon followed by a Chinese naval vessel entering Japanese territorial waters.\u00a0<\/p>\n What\u2019s more, threats have emerged to the welfare of Japanese inside the country.<\/p>\n A\u00a0knife attack\u00a0<\/a>on a Japanese woman and her child in Suzhou in central China in June \u2014 which the Chinese government called an \u201cisolated\u201d incident \u2014 caused concern across the Japanese community and heightened security at schools nationwide. Japan is still asking the authorities in Suzhou to provide detailed information on the incident, according to a statement from an embassy spokesperson.\u00a0<\/p>\n The\u00a0detention<\/a>\u00a0of a Japanese pharmaceutical executive early last year also stoked public alarm about the safety of Japanese citizens in China. The man was indicted for espionage earlier this month.<\/p>\n Japan\u2019s firms are also getting caught up in broader geopolitical tensions, with the US pressuring Tokyo to tighten export restrictions on high-tech exports for the semiconductor sector, and China reportedly threatening retaliation if that happens.<\/p>\n Some of Japan\u2019s companies are even speaking about China as a threat instead of an opportunity. The head of one of the nation\u2019s biggest trading firms has called for government assistance to help the country\u2019s businesses compete in places like Southeast Asia, where Chinese firms such as BYD<\/a> Co. are quickly making inroads.<\/p>\n For Nippon Steel \u2014 one of the\u00a0first Japanese investors<\/a>\u00a0into China \u2014 the local business had become an obstacle to its\u00a0attempt<\/a>\u00a0to buy US Steel Corp., with politicians in America pointing to it as a national security threat.<\/p>\n As the focus for Japanese companies shifts elsewhere in Asia and beyond, the travails of China\u2019s economy are taking much of the blame as well. Of the 1,760 firms in the\u00a0survey<\/a>\u00a0by the Japanese Chamber Commerce and Industry in China, 60% said the economy now was worse than last year.\u00a0<\/p>\n China\u2019s importance for Japanese exporters isn\u2019t the same as in years past, as firms adapt to US tariffs and other changes including\u00a0incentives<\/a>\u00a0from Tokyo to move factories from China.\u00a0<\/p>\n China took less than 18% of Japan\u2019s exports last year \u2014 the lowest level since 2015 \u2014 with values slipping almost 7% compared with double-digit growth to the US and European Union. As a result, the US overtook China as Japan\u2019s largest export market for the first time in four years.\u00a0<\/p>\n Komatsu<\/a> Ltd. is a case in point. The maker of excavators and heavy equipment is selling a lot less in China as the economy slows, construction slumps and competition stiffens.<\/p>\n While Komatsu\u2019s revenue in China for construction and mining equipment plunged 57% last financial year from a peak in 2019, it was up almost 46% globally over the same period.<\/p>\n The were around 31,000 Japanese companies in China last year, according to Japan\u2019s Ministry of Foreign Affairs, down by about a 10th from 2020. Over the same period, some 4,000 firms set up offices elsewhere in the world.\u00a0<\/p>\n \u201cRight now companies are restructuring their business to stop losses,\u201d said Masami Miyashita, general manager of the Japan-China Economic Association in Beijing. \u201cIt\u2019s not the time invest.\u201d<\/p>\n At a recent conference in the Chinese port city of Qingdao aimed at attracting foreign companies, the mood was equally grim. None of the half-a-dozen senior Japanese executives who spoke to Bloomberg said they planned to expand investments, expressing little optimism for the economy this year or next.<\/p>\n However not every Japanese firm is backing away.\u00a0<\/p>\n Panasonic Holdings<\/a> Corp. was planning to invest more than 50 billion yen ($350 million) from early last year to build new appliance factories, according to the Nikkei newspaper, while Kobe Steel<\/a> Ltd. recently announced it would form a joint venture with a company in China.<\/p>\n But it will take far more to mend economic ties.\u00a0<\/p>\n Chinese companies have become more competitive, and the geopolitical showdown between the US and China is scaring off Japanese firms from investing in some sectors, such as semiconductors and emerging tech, according to\u00a0Kazuto Suzuki<\/a>, a professor of global political economy at the University of Tokyo.<\/p>\n \u201cJapanese companies do not see an immediate recovery of the Chinese economy, so it does not make sense to increase investment,\u201d he said. \u201cOther factors, such as geoeconomic concerns and lack of transparency will make it difficult to invest on a large scale as they used to do.\u201d<\/p>\n<\/div>\nLooking Elsewhere<\/h3>\n
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