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Japan firms line up for subsidiaries to leave China

08:16 | 10/09/2020

In a 2019 survey of Japanese companies by the Japan External Trade Organization, which used manufacturing costs in Japan as the base of 100, costs in China came in at 80, with Vietnam somewhat lower at 74.

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japan firms line up for subsidiaries to leave china
A textile factory in the Chinese city of Qingdao, Shandong Province. Many Japanese textile companies applied for the government's relocation subsidies in the first round. Photo: Reuters

The Japanese government has seen an overwhelming surge of interest in subsidies to bring manufacturing back as the coronavirus pandemic highlights the risk of having supply chains concentrated in a single region, particularly China.

The programme to promote domestic manufacturing had 220 billion yen (US$2.07 billion) earmarked in the supplementary fiscal 2020 budget, Nikkei Asian Review said.

In the first round, which ended in June, the government approved 57 projects totaling 57.4 billion yen, or over half the 90 applications.

japan firms line up for subsidiaries to leave china
An employee works on a production line inside a Japanese-owned factory in China's Hubei Province, April 8, 2020. Photo: Reuters

The second round of applications, which closed in July, got a much larger response: 1,670 applications worth about 1.76 trillion yen -- 11 times the remaining amount in the budget. Recipients will be chosen in October after a review by outside experts.

Though the government currently has no plans to earmark more funds for the program, some of the candidates looking to succeed Shinzo Abe as prime minister have mentioned measures to support supply chain diversification.

japan firms line up for subsidiaries to leave china
People look at Toyota cars during the 15th Shanghai International Automobile Industry Exhibition in 2013. Photo: Reuters

The subsidized projects tend to involve companies diversifying their production networks, to provide more security in case of an emergency, rather than simply shutting down foreign operations and moving back home.

The subsidies apply to production of goods that either are important to public health or are manufactured largely in a few specific countries, especially China. Subsidies cover a certain share of costs, capped at 15 billion yen per project.

japan firms line up for subsidiaries to leave china
Representtive image. Source: Bloomberg

In recent years, China has become less attractive to production businesses due to increased labour cost. In a 2019 survey of Japanese companies by the Japan External Trade Organization, which used manufacturing costs in Japan as the base of 100, costs in China came in at 80, with Vietnam somewhat lower at 74.

Another 30 companies have been approved to receive support under a separate 23.5 billion yen program focused on relocations to Southeast Asia, with half of them choosing Vietnam.

japan firms line up for subsidiaries to leave china
Manufacturing semiconductors at MTEX - a Japanese invested company in Vietnam (Photo: Cao Thang)

The Japanese government has used subsidies to lure production home in response to other crises. A programme to promote business creation after the March 2011 earthquake and tsunami received about 750 applications in the first round and accepted around 250, totaling about 200 billion yen. But it proved short-lived because of increased production costs in Japan, due partly to the strong yen at the time.

The latest subsidiary programme has been launched in the context of the unstable global business environment, especially the escalating tension between China and the US. Subsidiary policies had been rolled out prior to the COVID-19 outbreak to promote domestic production, but the pandemic has given a boost to the trend./.

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