China Losing Ground as Firms Shift Overseas

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A new Teikoku Databank survey released on November 20 shows a dramatic decline in China's importance as an overseas destination for Japanese companies compared to the pre-COVID era. The share of firms prioritizing China has declined by roughly 30% for companies using it as a production base and 50% for those using it as a sales base. This marks a major shift in corporate strategy.

Meanwhile, Beijing has been rolling out countermoves in response to Prime Minister Sanae Takaichi's recent Diet remarks on a Taiwan contingency. However, Japanese companies were already growing wary. Concerns over mounting "China risk" are now pushing many to actively scale back their reliance on the Chinese market.

Frequent Policy Shifts

A Teikoku Databank representative observed that "awareness of China's country risk is rising sharply among Japanese companies."

China nevertheless remains the top destination of the 1,908 firms surveyed with overseas operations. It is a top choice for 16.2% as a production base, and for 12.3% as a sales market. However, these figures represent a steep drop from 2019, when 23.8% cited China as an important production base and 25.9% as a key sales market.

Asked about the shift in priority, many respondents highlighted political risks as a major concern. One company commented:

"China changes its laws whenever it wants to collect information, so it no longer feels safe to expand there."

Increasingly, companies are wary of the Chinese government's tightening measures, particularly its National Intelligence Law. Under it, both organizations and individuals are required to cooperate with state intelligence activities.

Many firms also cited concerns about China's slowing economy, including the prolonged real estate slump.

Growing Interest in Vietnam and India

When companies were asked about potential future expansion destinations, China ranked second as a production base, now behind Vietnam. It remained first for sales bases, although the United States was close behind.

According to Teikoku Databank, "High tariffs under the Trump administration have reduced China's advantages as a manufacturing hub. Some companies even said that factories once moved to China may end up returning to Japan."

Compared to the pre-pandemic period, more companies are now looking to diversify by expanding into emerging economies such as Vietnam and India.

*People dining in a crowded market, New Delhi, India (©AP/Kyodo)*

The survey was conducted online from October 20 to 31, targeting 25,111 companies nationwide, with a valid response rate of 41.5%.

Concerns About China's Slowing Economy

In response to Prime Minister Takaichi's Diet remarks, the Chinese government has announced countermoves daily. These have included urging Chinese citizens to avoid traveling to Japan and suspending procedures for resuming imports of Japanese seafood.

However, Beijing has so far avoided using its most damaging lever: restricting exports of rare earth elements.

Given China's current economic slowdown, further downsizing or withdrawal by Japanese companies would also hurt China's own economy. For this reason, Beijing appears to be carefully weighing how far it can escalate its pressure on Japan.

If Japan's economic dependence on China continues to diminish, it will also become easier for the Japanese government to take a more resolute stance toward Beijing.

Going forward, how Japanese companies choose to expand, or withdraw, will remain a matter of keen interest for both Japan and China.

(Read the article in Japanese.)

Author: Hiroaki Tanabe, The Sankei Shimbun

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