Why Japanese Companies Want To Pull Out Of China, And Why It's Not Always So Easy

The dispute over the Diaoyu islands, which Japan calls the Senkaku islands, is prompting some Japanese firms to consider closing Chinese operations. They quickly run into roadblocks.

Lu Bingyang

BEIJING - Not least among the victims of the Diaoyu Islands dispute between China and Japan are Japanese firms operating in China.

Because of anti-Japanese sentiment in China, coupled with the economic slowdown, increasing labor costs, strikes and other risks, many Japanese firms have begun to consider closing down their Chinese operations. But it's not always so easy.

"Japanese companies should learn how to leave from China as soon as they enter it. They should review corporate charters just in case,” warned Akihiro Maekawa, the Managing Director of CAST Consulting, a Japanese firm that provides services to Japanese companies in China.

As Maekawa explained, now that China has become the world’s second biggest economy, it is phasing out the preferential taxes it used to offer foreign businesses. Foreign enterprises have had to engage in fierce competition for survival.

Foreign-run factories often experience strikes and the business environment is becoming increasingly tight. But when Japanese firms want to withdraw from the Chinese market, they find it is even harder than it was to enter. They have to deal with a lot of problems when they decide to leave China, the hardest being labor relations.

Maekawa says once a Japanese firm has submitted its layoff plan to the local labor department, the information quickly spreads to the workers, which can quickly lead to chaos. If the situation deteriorates, it is difficult to hold redundancy negotiations.

Dealing with the local government, required in any closing plan, is also a major issue. These authorities are worried about the consequential reduction in tax revenue and increase in unemployment, and tend to be uncooperative and make formalities very difficult. The process can drag on, becoming very costly for the exiting company. “The Chinese government is used to attracting foreign investment, but lacks experience in divestment,” Maekawa said.

A difficult and time-consuming process

As for the companies that have a joint venture with Chinese firms, dissolving the partnership can be very time-consuming for other reasons. Maekawa said that although a few Japanese firms do specify in their corporate charters that “in the case of a loss for three consecutive years, dissolution of the company is to be discussed,” most Japanese companies don’t think that they will want to retreat from China and so their corporate charters are not very clear regarding dissolution of partnerships. In the case where the Chinese partner does not accept the proposal to close the joint venture, pulling out turns into an extremely lengthy and costly process.

One Japanese businessman said: “Over the last ten years, our company’s profit has been on the rise. But due to overproduction by Chinese firms, the commodity price has declined. It has gradually been more and more difficult to balance our books. Quite a number of Japanese enterprises are now studying how to re-integrate their subsidiaries.”

Another manager said the Diaoyu Islands dispute and the consequent anti-Japan demonstrations reminded him of the risks and the necessity of having an exit strategy.

CAST has, in the past 10 years, assisted more than a hundred Japanese firms wishing to enter the Chinese market. But in the past two years it has also helped a dozen of them to leave China.

However, despite CAST’s warning, Japanese car companies operating in China have all indicated that they were not planning to leave China any time soon. “We will continue to develop our business in China steadily,” the President and CEO of Toyota Motor Corporation, Akio Toyoda, told Beijing News.

The Chairman and CEO of Nissan, Carlos Ghosn, also declared that “the Chinese market is irreplaceable.” Seiji Kuraishi of Honda China, also said that China is Honda’s most important market. After keeping a relatively low profile following the rampant anti-Japanese demonstrations a few months ago, Japanese car manufacturers such as Toyota and Nissan in Guangzhou, in the southeastern Guangdong province, have restarted using large billboards and wall advertising from last December.