US – China Trade War: Japanese companies ready to reduce China footprint?

From Nintendo to Uniqlo operator Fast Retailing, Japanese companies have long established a supply chain centered on China, with many of the finished products exported to the U.S.

Now amid the prolonging U.S.-China trade war, many of those companies are at a crossroad. Already facing a sharp increase in Chinese workers' wages, the trade war has pushed at least a fourth of Japanese companies to consider reducing its China footprint, a Nikkei survey has found.

The results of the survey indicate that a substantial proportion of Japanese companies are preparing to restructure the international supply networks they have built over years, in anticipation of a widening rift between the two superpowers.

In a survey of 1,000 unit managers or higher executives at Japanese companies involved in business with China, 23.9% of respondents said they should scale back their China businesses amid the growing U.S.-China trade dispute.

Meanwhile, 60.4% of respondents said they would wait and see how the situation panned out while maintaining the status quo.

A deeper analysis of the "wait and see" group showed that respondents fell largely into two groups: those who had already felt that China was losing its competitive edge as the factory of the world and will refrain from new investment, and those who still believe that the country's 1.4 billion population offers a market too big to ignore.

Following the fourth round of tariffs, Nikkei and the Japan Center for Economic Research conducted this survey in early September.

Asei Ito, a University of Tokyo associate professor, said: "The respondents are taking a wait-and-see approach probably because they expect the dispute between the U.S. and China to be a drawn-out battle."

According to a 2018 survey by the Japan External Trade Organization, 40% of Japanese manufacturers in China rely on exports from China for more than half of their sales. The U.S. was the second most important export destination after Japan, indicating that China has become a base for exports to the U.S.

However, if trade tensions continue in the longer term, the decoupling of the U.S. and Chinese economies will accelerate and the supply network between the two countries will be destroyed.

In July, imaging and electronics company Ricoh transferred the production of its photocopiers for the U.S. market to Thailand from China. Ceramics and electronics manufacturer Kyocera is moving its production in China to Vietnam. Fast Retailing, the operator of the casual clothing chain Uniqlo, will shift production in China to Vietnam and other countries in Southeast Asia, in preparation for the possibility of a protracted trade dispute between the U.S. and China.