Japan Inc sours on China after long years of brushing off risks

BEIJING - 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 neighbour’s economy.

In an era defined by geopolitical risks and worry over China’s faltering growth, the economic maths no longer adds up for the likes of Nippon Steel, which said in July it was exiting its joint venture in China. Mitsubishi Motors suspended its local operations indefinitely in 2023, a casualty of slumping car sales and China’s rapid shift to electric vehicles.

Almost half of Japanese firms in China polled in a recent survey said they will not spend more or will cut investment in 2024. Companies listed rising wages, falling prices and geopolitics as the biggest issues they faced.

“We are now past Japan’s peak economic engagement with China,” said Mr Robert Ward, director of geo-economics and strategy at the International Institute for Strategic Studies in London.

The hurdles range from the US-Chinese tech competition to rising tensions in the Taiwan Strait, according to Mr Ward. “Geopolitics is a significant factor” in the changing attitudes, he said.

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 low-interest loans.

Commerce and trade have been a pillar of an otherwise contentious relationship between the two Asian giants – summed up among academics by the catchphrase “hot business, cold politics”.

This time, the chill of geopolitical winds is proving hard to contain.

New foreign direct investment (FDI) is on track to stagnate near 2023’s multi-year low after volumes in the first quarter fell to the lowest since 2016.

It is a turnaround for Japanese companies that had built up an FDI stock of almost US$130 billion (S$170 billion) in China through the end of 2023.

Beijing 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.

The political backdrop is also far less benign. In August, a Chinese military airplane intruded into Japan’s airspace for the first time, an incident soon followed by a Chinese naval vessel entering Japanese territorial waters. 

Threats to the welfare of Japanese citizens in China have also emerged.

A knife attack on a Japanese woman and her child in Suzhou in June – which the Chinese government called an “isolated” incident – caused concern across the Japanese community and heightened security at schools nationwide.

Japan’s firms are also getting caught up in broader geopolitical tensions, with Washington pressuring Tokyo to tighten export restrictions on high-tech exports for the semiconductor sector, and Beijing reportedly threatening retaliation if that happens.

For Nippon Steel – one of the first Japanese investors in China – the local business had become an obstacle to its attempt to buy US Steel, with politicians in America pointing to it as a national security threat.

As the focus for Japanese companies shifts elsewhere in Asia and beyond, the travails of China’s economy are taking much of the blame as well. Of the 1,760 firms in the survey by the Japanese Chamber of Commerce and Industry in China, 60 per cent said the economy now was worse than in 2023. 

China’s importance for Japanese exporters is not the same as in years past, as firms adapt to US tariffs and other changes, including incentives from Tokyo to move factories from China.

China took less than 18 per cent of Japan’s exports in 2023 – the lowest level since 2015 – with values slipping almost 7 per cent compared with double-digit growth to the United States and European Union. As a result, the US overtook China as Japan’s largest export market for the first time in four years.

Komatsu 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.

While Komatsu’s revenue in China for construction and mining equipment plunged 57 per cent in the last financial year from a peak in 2019, it was up almost 46 per cent globally over the same period.

There were around 31,000 Japanese companies in China in 2023, according to Japan’s Ministry of Foreign Affairs, down by about a tenth from 2020. Over the same period, some 4,000 firms set up offices elsewhere in the world.

“Right now, companies are restructuring their business to stop losses,” said Mr Masami Miyashita, general manager of the Japan-China Economic Association in Beijing. “It’s not the time to invest.”

However, not every Japanese firm is backing away. 

Panasonic Holdings was planning to invest more than 50 billion yen (S$456 million) from early 2023 to build new appliance factories, according to the Nikkei newspaper, while Kobe Steel recently announced it would form a joint venture with a company in China.

But it will take far more to mend economic ties. 

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 Professor Kazuto Suzuki, a professor of global political economy at the University of Tokyo.

“Japanese companies do not see an immediate recovery of the Chinese economy, so it does not make sense to increase investment,” he said. “Other factors, such as geoeconomic concerns and lack of transparency, will make it difficult to invest on a large scale as they used to do.” BLOOMBERG