The Tokyo Foundation for Policy Research


The Tokyo Foundation for Policy Research

Economic Opportunities Outweigh Risks in China

July 22, 2014

Japanese companies doing business in China have enjoyed a strong rebound in sales over the past year, after protests and boycotts sent sales plummeting in the fall of 2012. Kiyoyuki Seguchi reviews their success and warns that businesses that shy away from China on the grounds of risk are jeopardizing their own survival in the global marketplace.

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With diplomatic relations between Japan and China relations at their lowest point since the normalization of ties more than four decades ago, the influx of Japanese businesses into the Chinese market has slowed. But firms that previously took the time and effort to adapt to China’s business environment and establish a foothold in the local market are reaping rich rewards. Their experience offers important lessons for Japanese business in today’s global economy.

Business as Usual

More than a year and a half has passed since tensions flared over the Japanese government’s purchase of the Senkaku Islands in September 2012, but relations between Tokyo and Beijing remain as chilly as ever. A glimmer of hope appeared in the late summer and fall of 2013, when Prime Minister Shinzo Abe passed up two opportunities to visit Yasukuni Shrine, viewed by the Chinese as a symbol of Imperial Japanese aggression. But that November, Beijing put an end to speculation about an imminent rapprochement with its announcement of a vast East China Sea air defense identification zone covering the Senkakus. And with Abe’s Yasukuni visit the following month, the relationship appeared doomed to continue on its frigid course

The anti-Japanese protests and boycotts that broke out in China in the fall of 2012 dealt a significant short-term blow to Japanese business activity in China, with sales plummeting in all sectors. But the effect petered out fairly quickly. As early as December 2012, sales had recovered in all major sectors except autos, government procurement, and tourism. By April 2013, auto sales were almost back to year-before levels. By the end of June, Japanese companies were able to bid on Chinese government contracts again, and July sales figures of Chinese travel agencies showed a rebound in group tours to Japan.

The guardian lion at the entrance of the Forbidden City, Beijing. (© d’n’c)
The guardian lion at the entrance of the Forbidden City, Beijing. (© d’n’c)

In October last year, Japanese manufacturers of automobiles, industrial robots, and farm equipment, among other products, posted record-breaking sales on the Chinese market. In the following, let us examine these trends a little more closely.


Japan’s big three automakers (Toyota, Nissan, and Honda) made impressive gains in China from September 2013 on. In November, sales of new Nissans and Hondas nearly doubled from the previous year, while Toyota posted year-on-year growth of 40%. Together, Japanese automobiles claimed a 19.2% share of China’s new-car market that month, overtaking German cars (15.6%) to reclaim their top position among foreign brands. Sales of auto parts have mirrored this recovery in finished-auto sales.

Meanwhile, demand for Japanese factory automation systems has been soaring, as manufacturers in China scramble to cope with rapidly rising labor costs. In the summer of 2013, Yasukawa Electric launched operations at a brand-new robot manufacturing plant in Changzhou, and Kawasaki Heavy Industries plans to produce robots at a new plant in Suzhou beginning in April 2015. Mitsubishi Electric has also posted rapid growth in Chinese sales of factory automation systems, and Epson’s plans to shift robot production from Nagano to its Shenzhen facility testify to a growing emphasis on the Chinese FA market.

Nor is the good news limited to cars and robots. Daikin Industries, for example, is riding a surge in Chinese demand for air conditioners. With sales for the period from April to September 2013 up 45% from the year before, Daikin plans to add 2,000 more sales outlets in China, increasing the total to 14,000.

In the food sector, Saizeriya, an Italian-style family restaurant chain with about 150 restaurants in China, intends to increase that number to 400 over the next three years. Other companies eyeing ongoing expansion in their China operations include Yoshinoya, a fast-food chain specializing in gyudon (“beef bowl”); Muji (Ryohin Keikaku), known for its extensive line of design-conscious, no-frills consumer products; Seven & I Holdings, parent company of Japan’s 7-Eleven chain; and instant-noodle giant Nissin Foods, which plans to build three additional plants in China between now and 2016.

Direct Investment

Underlying the fundamental health of Japanese business in China is the high level of foreign direct investment from Japan, which continues to lead the world in FDI to China. Between January and November 2013, FDI flows to China from Japan totaled about $6.7 billion, outpacing those from the United States ($3.1 billion), South Korea ($2.9 billion), and Germany ($2.0 billion).

At the same time, FDI from Japan increased at a slower rate—2.3%—than that from the United States or South Korea (both up 8.6%), not to mention Germany (up 43.7%). This represents a sharp drop compared with the previous year’s growth of 16.1% or the 55.0% increase recorded the year before that.

For the most part, this slowdown reflects the reluctance by Japanese companies to launch operations in China in the wake of the 2012 protests, which resulted in boycotts and incidents of vandalism. Companies that had already enjoyed a measure of success on the Chinese market have kept their wits about them, pursuing profits from a smart growth strategy, even while keeping an eye on the risks involved. The rest, however, have been scared off by the gloom-and-doom atmosphere of biased media reports. This gap has been apparent for some time, but it has grown all the more conspicuous since the government purchase of the Senkaku Islands.

Looking Ahead

Japan’s direct investment in China is expected to continue to grow over the next few years, judging by the ambitious investment plans Japan’s major banks have been receiving from client companies. The reason is simple: a burgeoning consumer base that continues to expand at a rate exceeding GDP growth.

Demand for Japanese goods and services typically soars in cities where the per capita GDP has topped $10,000. By computing the total population of Chinese cities that have achieved this average income level, one can roughly estimate the number of Chinese consumers in the market for Japanese goods and services. In 2010, that number was approximately 100 million. By 2013 it had grown to around 300 million, and in 2020 it is expected to reach between 700 and 800 million.

Two basic factors are driving the surge in China’s (dollar-denominated) per capita GDP: the rapid rate of real economic growth and the appreciation of the renminbi. The currencies of other emerging markets, such as India, Brazil, and Indonesia, have declined in value owing to a deteriorating current account balance. But China has maintained a sizable trade surplus ever since 2005, and as a result its currency has continued to appreciate. This, combined with rapid economic growth, has pushed up per capita GDP in dollar terms.

China’s economic growth is expected to remain brisk until around 2020, buoyed by continuing urbanization and infrastructure investment. And barring an unexpected drop in the competitiveness of Chinese exports, the renminbi should continue to appreciate. This means that per capita GDP will keep rising, making it likely that the market for Japanese goods and services will continue to grow.

Surviving in the Global Economy

As previously mentioned, Japanese businesses tend toward two general extremes. At the heart of this gap are disparities in companies’ capacity to localize, which in turn determines their ability to succeed in today’s global economy.

Japanese companies that have successfully localized their Chinese business operations, recruiting talented Chinese managers to lead their local affiliates or subsidiaries, have deftly navigated China’s business environment, with its special risks, and boosted their performance year by year. The key is organizational support from the main office predicated on close communication and mutual trust between the parent company and its local affiliate.

On the other hand, many Japanese businesses have spent years trying to penetrate the Chinese market with very little to show for it. The reason is that they have failed to meet the challenge of localization head-on by tapping capable Chinese executives and delegating genuine authority to them. Meanwhile, those companies that have remained on the sidelines until now are at an ever-increasing disadvantage. Lacking access to reliable local information sources, they allow themselves to be deterred by biased reporting in the Japanese and Western media and hang back until their window of opportunity has closed.

The fact is that the risks traditionally associated with doing business in China—problems recovering payment and protecting intellectual property—are receding in importance. From a long-term viewpoint, the biggest risk for major Japanese firms is losing their presence in the Chinese domestic market. Given the size of this market and the huge potential for profit that it offers, firms that cannot compete in the Chinese market are likely face at a significant decline in global stature and corporate value relative to rivals who can make a go of it.

Small and medium-sized firms competing in niche markets may well be able to survive on the strength of their share of the Japanese market and overseas markets other than China. But for major Japanese corporations facing intense global competition from Japanese and foreign rivals, failure to compete on the Chinese market will mean failure to compete in the world. This is the real “China risk” for businesses today. Japanese corporate executives must remember that the best defense is a good offense. If they want to survive in the global economy, they cannot afford to shy away from the Chinese market.

    • Research Director, Canon Institute for Global Studies
    • Kiyoyuki Seguchi
    • Kiyoyuki Seguchi

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