An emerging exodus from China, in which more than 1,700 Japan-invested firms and manufacturers have pulled up stakes this year, has worried Communist Party cadres in charge of cities with big clusters of such entities.
Previous reports by Chinese papers and Japan’s Yomiuri Shimbun newspaper claim officials in Guangdong, Jiangsu and Zhejiang are beseeching businesses from the Asian neighbor, also the third-largest source of foreign direct investment for China, not to pull out en masse.
These provinces fear that a big chunk of their GDP, fiscal revenues and jobs may go as well.
The trend gathered pace after then-Japanese Prime Minister Shinzo Abe rolled out in April a suite of initiatives to entice overseas firms home or to diversify into more places such as Southeast Asia. The Covid-19 contagion had exposed the underbelly of the world’s third-largest economy. From masks to monitors, Japan hinges disproportionately on supplies from China.
Tokyo has dangled 243.5 billion yen (US$2.35 billion) worth of subsidies budgeted as part of its bigger economic relief package to woo Japanese firms to head home or venture to Indonesia, Vietnam and the like.
The call has been well heeded, according to the Japanese Ministry of Economy, Trade and Industry.
It revealed in July that 57 firms, mostly from China, had shifted production back to Japan and another 30 had moved to the ASEAN bloc. Applicants for the subsidies soared to more than 1,700 as of the end of the third quarter, and the Yomiuri Shimbun cited Tokyo’s embassy in Beijing as saying that a task force had been set up to facilitate relocation.
Japan Inc’s new homecoming trip and pivot to Southeast Asia have prompted Chinese cities to roll out new business retention incentives. State media has also weighed in, with Xinhua claiming that most of the Japanese businesses leaving China were “small to medium-sized manufacturers” of medical gear, masks, testing tools and other medicinal products.
The state news agency added that its survey found none of the Japan-invested automakers, commerce and financial institutions planned to leave.
It cited executives of I’m Corporation, a Japanese drugmaker and producer of personal healthcare products, and said its decision to break ground on a new mask plant back home would not affect continued investment in its manufacturing base in Suzhou, in the eastern Jiangsu province.
But cities that derive decent revenue from big Japanese firms are rushing to urge them to stay.
Guangzhou, the provincial capital of the southern economic powerhouse of Guangdong that pools together all top three Japanese automakers of Toyota, Honda, Nissan as well as Mitsubishi, has reportedly offered more tax cuts amid reports that leading automakers would shift some production to ASEAN.
As a sign of support, Guangzhou’s municipal government has mandated all its bureaus and departments buy only Japanese cars made in the city in their procurement of government vehicles and that the city’s party chief and mayor all use Honda sedans.
Guangzhou also plowed back some of its fiscal revenue collected from Toyota into a joint venture for a new plant to make electric and hybrid cars. Toyota’s initial plan was said to be to build production lines in Malaysia and sell the cars back to China.
Guangzhou Automobile Group, owned by the city’s government and a party to the new JV, noted in its press release about the new project in August that hundreds of jobs at 30-odd auto parts suppliers in the city had been saved and the JV could contribute more than 100 billion yuan each year to the city’s industrial output.
Tokyo’s consulate in Guangzhou did not reply to emailed inquiries about the changes to the number of Japanese enterprises operating in southern China. But a business sentiment questionnaire conducted by the Guangzhou representative office of the semi-official Japan External Trade Organization (JETRO) found that 15% of the 3,500 Japanese firms in southern China had shifted production and business away from China or were mulling doing so.
Lost sales due to China’s economic malaise from Covid and soaring labor costs were two major “push factors” cited. Among those considering leaving, some were shedding staff through natural attrition and fewer hirings.
The Globe, a financial magazine published by Xinhua, also noted that Japanese firms in Guangzhou’s neighboring manufacturing hub of Dongguan now needed to pay no less than 3,000 yuan per month, on top of overtime allowances, medical insurance and pension contributions, to recruit an entry-level worker there, yet the base salary was a mere 345 yuan in 2005.
The share of Japan’s capital flowing into China in the country’s overall investment across Asia has also shrunk from about 30% in 2013 to 22% in 2019, as Southeast Asian nations supplant China as the top destination, according to JETRO figures.
Still, JETRO China stressed in its media newsletters that relocation subsidies from the Japanese government’s supply chain restructuring program unveiled by Abe were not meant to “hollow out or debase” the cluster of Japanese firms across China.
Yin Xiuzhong, a partner at the Guangdong-based law firm Zhuojian whose clients include the Chinese subsidiaries of Panasonic and Honda, said the shift of production from China to Southeast Asia had been years in the making.
“It would be easy for big Japanese firms with footholds in both China and ASEAN to stagger production across multiple locations,” Yin said.
“Most of them will still keep their bases in China and given time, some manufacturing activities may even flow back to China as China’s well rounded infrastructure, supply chain integration and skilled labor are all obvious edges over upstart countries like Indonesia and Vietnam.”
China’s Commerce Ministry said foreign direct investment in the first eight months stood at US$89 billion, down 0.3% year-on-year.