In response to rising geopolitical risks, foreign companies are reducing their dependence on China by strengthening economic ties with allied countries and returning production to their domestic markets, writes Chi Hung Kwan, Consulting Fellow at Japan’s Research Institute of Economy, Trade and Industry (RIETI), and Senior Fellow at the Nomura Institute of Capital Markets Research.
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The ‘inward direct investment’ as reported in the ‘Balance of Payments of China’ by the State Administration of Foreign Exchange indicate a significant acceleration in the withdrawal of foreign companies from China. These statistics reveal a sharp decline in net inward direct investment, with the scale of foreign company withdrawal, including business downsizing, now exceeding new investment. In the most recent second quarter of 2024, the net flow was $-14.8 billion, marking the second negative figure recorded since the first in the third quarter of 2023.
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Furthermore, as a key player in the international division of labor for electronic device production, China’s factory closures and production halts during the large-scale lockdowns implemented during the COVID-19 pandemic significantly disrupted the global supply chain. This prompted many companies to recognize the need to diversify their risk management options and to implement “China + 1” strategies.
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As an example of electronics companies moving away from China, Taiwan’s Hon Hai Precision Industry Co., Ltd. (Foxconn), Apple’s largest contract manufacturing partner, is working to reduce its dependence on China and diversify its production bases. In particular, the company has accelerated the construction of factories in India and Vietnam in response to the intensifying U.S.-China conflict since 2018 and the impact of the COVID-19 pandemic that began in 2020.
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Furthermore, as a key player in the international division of labor for electronic device production, China’s factory closures and production halts during the large-scale lockdowns implemented during the COVID-19 pandemic significantly disrupted the global supply chain. This prompted many companies to recognize the need to diversify their risk management options and to implement “China + 1” strategies.
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Taiwan’s Hon Hai Precision Industry Co., Ltd. (Foxconn), Apple’s largest contract manufacturing partner, is working to reduce its dependence on China and diversify its production bases.
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South Korea’s Samsung Electronics is also withdrawing from China […] In 2019, it closed its last smartphone factory in China and moved production to Vietnam and India. Following that, PC production also withdrew from China in 2020.
[Japan’s] Nintendo transferred part of the production of its flagship game console, the Nintendo Switch, to Vietnam in 2019 […] Sony also closed its smartphone factory in Beijing in 2019 as part of a restructuring of its global production structure, concentrating production at a factory in Thailand.
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Furthermore, content regulation and internet censorship in China is becoming stricter. The censorship system known as the “Great Firewall” restricts access to many overseas services, posing a major barrier to foreign platform companies doing business in China.
Among information technology companies, the withdrawal of platform companies has been especially significant, encompassing many of the industry’s leading global players.
[In addition to platform companies like Airbnb and Amazon,] IBM, a comprehensive IT services company, announced that it will close its research and development division in China in August 2024. This will affect more than 1,000 employees. IBM plans to transfer its research and development functions to other overseas locations and will increase staff in places like India.
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[In the car industry], Suzuki decided to dissolve two joint ventures, Changhe Suzuki and Chongqing Changan Suzuki, in 2018 and withdraw from the Chinese market.
[…] Hyundai Motor sold its Beijing No. 1 Plant in 2021 and its Chongqing Plant to a Chongqing city government-affiliated company in December 2023. The company also plans to sell its Cangzhou plant in Hebei Province soon.
[…] Honda announced in July 2024 that it will close its plant in Guangzhou, Guangdong Province in October and suspend production at its plant in Wuhan, Hubei Province in November. As a result, production capacity in China will be reduced by about 20% from the current annual level of 1.49 million units.
[…] Mitsubishi Motors announced in October 2023 that it would transfer its shares to its joint venture partner Guangzhou Automobile Group and withdraw from the Chinese market. Sales in China peaked at 179,000 units in 2018, falling to 33,000 units in 2022.
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Nippon Steel announced in July 2024 that it will withdraw from its joint venture with China’s Baoshan Iron & Steel, which supplies automotive steel sheets to Japanese manufacturers. The decision marks a significant shift in their half-century cooperation, which includes Nippon Steel’s assistance in building the Baoshan Steelworks.
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[As] consumption [in China’s retail market] has been sluggish due to slowing economic growth and the collapse of the housing bubble […] many foreign retail companies have decided to withdraw from the Chinese market or downsize their operations.
[…] In June 2019, Carrefour sold 80% of its Chinese business to China’s Suning.com Group.
[…] Britain’s Tesco sold all its shares in its Chinese joint venture to China Resources Enterprise, marking its complete withdrawal from the Chinese market.
[…] South Korea’s Lotte Department Store in 2022, the company [sold its] last store in China [after operating in the country since 2008], in Chengdu, was sold. Meanwhile, Lotte Department Store has shifted the focus of its overseas expansion to Indonesia and Vietnam.
[…] Japan’s Isetan Mitsukoshi Holdings is also significantly scaling back its China operations. The company first entered China in 1993, […] However, in 2022, it closed two stores in Chengdu, Sichuan Province, in April 2024 it closed two stores in Tianjin, and in June of the same year it closed its Shanghai Meilongzhen Isetan store. Currently, the company’s only store in China is located in the Isetan Renhan shopping mall in Tianjin.
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Many countries have introduced policies to promote onshoring and friend-shoring to enhance their economic security. Good examples include the U.S. CHIPS and Science Act (enacted in August 2022), which encourages companies from friendly countries to invest in semiconductors in the U.S.; Japan’s Economic Security Promotion Act (enacted in May 2022), which strengthens the supply chain of critical materials and promotes technological cooperation with friendly countries; and the European Semiconductor Act (enacted in July 2023), which aims to strengthen the semiconductor ecosystem.