I. Introduction
In recent years, there has been an accelerated withdrawal of foreign companies from China. In addition to the U.S.-China conflict, the background to this includes sluggish consumption due to slowing economic growth, rising wages and other production costs, strengthened security-related regulations, intensifying competition with local companies, the restructuring of global supply chains, and rising anti-foreign sentiment.
The withdrawal of foreign companies from China is not limited to export-oriented industries such as electronic devices, but also extends to domestic demand-oriented industries such as information technology, automobiles, and retail. This reflects the fact that China is becoming less attractive not only as a production base but also as a market for foreign companies. As a result, emerging countries such as ASEAN countries and India are attracting attention as alternative investment destinations to China.
The withdrawal of foreign companies from China can be seen as part of a global business restructuring triggered by the U.S.-China conflict. In response to rising geopolitical risks, many Japanese, U.S., and European companies are reducing their dependence on China by pursuing friend-shoring (strengthening economic ties with allied countries) and onshoring (returning production to domestic markets) strategies. Economic security policies implemented by governments around the world, such as the U.S. CHIPS and Science Act, are also supporting this trend.
II. Changes in the investment environment that led to the withdrawal of foreign companies
Trends in '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 (Figure 1). In addition, according to the "Balance of Payments of Japan" published by the Japanese Ministry of Finance, the amount of "implemented" direct investment by Japanese companies in China (new investment) peaked in 2021 and has been on a downward trend since, while the amount of "withdrawal" (withdrawal/business downsizing) has been increasing (Figure 2).
Source: Compiled by the author based on State Administration of Foreign Exchange, “Balance of Payments of China.”
The following changes in the investment environment have prompted foreign companies to accelerate their withdrawal from China and to downsize their operations there.
- 1) U.S.-China conflict
Since 2018, conflict between the United States and China has intensified. The United States has imposed heavy additional tariffs on imports from China and has strengthened sanctions against Chinese companies in many high-tech sectors, while also placing restrictions on its own companies' operations in China. Specifically, on August 9, 2023, the Biden administration announced that it would ban investment in China in areas such as advanced semiconductors, artificial intelligence (AI), and quantum technology. As a result, the trend toward decoupling between the United States and China has become evident not only in trade but also in direct investment and technology transfers. - 2) Slowdown in economic growth
China's GDP growth rate has been gradually declining from its previous double-digit growth. This trend has become even more pronounced since 2020 due to the COVID-19 pandemic and the collapse of the housing bubble. As a result, China's attractiveness as a market has declined relatively. - 3) Rising costs
In China, wage costs are rising year by year due to economic development and a decline in the working-age population. As a result, China's advantage as the "world's factory" is fading. - 4) Strengthening regulations related to national security
In recent years, the Chinese government has introduced a series of laws and regulations related to information security to enhance national security. These are imposing constraints on business operations, especially for information technology (IT) companies. Furthermore, to reduce dependence on overseas sources, the Chinese government is strengthening policies to develop domestic industries through initiatives such as "Made in China 2025," while reducing preferential tax treatment and other incentives for foreign companies. - 5) Increasing competition with local companies
In China, many new companies, primarily private enterprises, are growing rapidly and are becoming strong competitors to foreign companies, particularly in the high-tech sector. Against this backdrop, some foreign companies are seeing their market share in China decline. - 6) Restructuring global supply chains
The COVID-19 pandemic has exposed the fragility of global supply chains. In order to reduce the risks of overconcentration in China, many foreign companies are diversifying their production bases or shifting them back to their home countries. This move is leading to increased investment in Asian countries outside China. - 7) Rising anti-foreign sentiment
Along with the rise of anti-foreign sentiment in China, there have been a series of attacks on foreigners, including the death of a Japanese elementary school student in Shenzhen in September 2024. Ensuring the safety of expatriates and their families has emerged a
The combination of these factors is prompting many foreign companies to reconsider their business strategies in China, including the option of withdrawal. Emerging countries such as ASEAN countries and India are attracting attention as alternative investment destinations to China.
III. The case of the electronic device industry
An increasing number of foreign electronics companies are deciding to withdraw from the Chinese market or downsize their operations. The background to this includes the U.S.-China conflict, rising production costs including wages, intensifying competition with local companies, and the impact of the COVID-19 pandemic.
First, electronic devices are one of China's major export products, and many of them are subject to additional tariffs from the United States, which, combined with rising wages, is reducing their export competitiveness.
Additionally, local companies in the electronics sector are experiencing rapid growth. Brands such as Huawei, Xiaomi, and Lenovo are quickly expanding their market share in the domestic smartphone and PC markets while making a significant impact in the global market. These companies are catching up with foreign companies not only in price competitiveness but also in technological innovation and design capabilities.
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.
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.
South Korea's Samsung Electronics is also withdrawing from China due to a decline in market share and friction between the U.S. and 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.
Among Japanese companies, Nintendo transferred part of the production of its flagship game console, the Nintendo Switch, to Vietnam in 2019.The aim was to avoid the impact of trade friction between the United States and China while reducing the risk of overconcentration in China. 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.
IV. The case of the IT industry
The withdrawal of foreign IT companies from the Chinese market is closely related to China's tightening regulations, intensifying market competition, content regulation and Internet censorship.
First, the Chinese government has introduced a series of strict laws to ensure information security, including the Cybersecurity Law (effective June 1, 2017), the Data Security Law (effective September 1, 2021), and the Personal Information Protection Law (effective November 1, 2021). These laws make it difficult for foreign companies to operate their businesses by restricting the cross-border transfer of data and requiring data to be stored locally.
In addition, market competition in China's IT sector is intensifying. In particular, Chinese platform companies are rapidly expanding their market share. For example, Baidu dominates the search engine market, while Alibaba and JD.com have strong positions in e-commerce.
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.
First, Google entered the Chinese search engine market in 2006, but was forced to withdraw as early as 2010. The withdrawal was triggered by a dispute with authorities over censorship of search results and the hacking of a human rights activist's Gmail. Facebook has also been blocked in China since 2009.
Next, Amazon withdrew from its Marketplace business, an e-commerce platform for China, in July 2019, and then closed its Kindle Store, an e-book distribution site, in June 2023.
In addition, following the implementation of a series of information security-related laws, Yahoo and LinkedIn have both withdrawn from China since 2021.
And Airbnb, a major home-sharing intermediary, announced in May 2022 that it would suspend its operations in China. The reasons behind this include the impact of the COVID-19 pandemic and increased competition with local companies.
Outside of platform companies, 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. The background to this move includes the Sino-U.S. conflict and the Chinese government's push for indigenous development of advanced technology.
V. The case of the automobile industry
In recent years, there have been a series of foreign automobile manufacturers withdrawing from the Chinese market or downsizing their production scale. The main reasons for this include the rise of Chinese manufacturers such as BYD, the shift to electric vehicles (EVs), and changes in the policy environment.
First, in China's automobile market, local manufacturers are experiencing remarkable growth, especially in the EV sector. Chinese EV manufacturers such as BYD, NIO, and XPeng have launched high-performance, relatively affordable vehicles and are rapidly expanding their market share. With government support, these companies have promoted technological innovation and cost reduction, making them strong competitors for foreign companies.
In China, the transition to EVs is progressing rapidly thanks to government support. Foreign manufacturers, with their lineup centered on traditional gasoline-powered vehicles, are unable to adapt to this sudden change and are being left behind in the competition.
Furthermore, the deterioration of U.S.-China relations and changes in Chinese government policies have increased uncertainty about business operations in the Chinese market. Increased tariffs due to trade friction are pushing up costs for foreign companies, and the Chinese government's strengthened data security regulations are also affecting the development of autonomous driving technology.
Against this backdrop, the share of Chinese brands in passenger car sales in China is increasing, while the share of foreign brands is falling sharply (Figure 3). Some foreign automakers have been forced to withdraw completely or partially from China.
Source: Compiled by the author based on data from the China Association of Automobile Manufacturers
First, Suzuki decided to dissolve two joint ventures, Changhe Suzuki and Chongqing Changan Suzuki, in 2018 and withdraw from the Chinese market. As market demand shifted from small cars to medium and large cars, Suzuki's production volume in China in fiscal year 2017 fell by 70% from its peak in fiscal year 2010 to 86,000 units. In contrast to its withdrawal from China, Suzuki has set a goal of expanding its annual production capacity in India from the current 2.25 million units to around 4 million units by fiscal 2030.
Next, Hyundai Motor's annual sales in China reached 1.13 million units in 2016, but began to decline sharply in 2017 due to the deployment of the THAAD missile defense system by the U.S. military in South Korea, dropping to just 260,000 units by 2023. In response to this, 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. Going forward, the company plans to strengthen its EV business and improve efficiency at its remaining bases.
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. As a result, its only factory in China, in Changsha, Hunan Province, was forced to cease operations in March 2023.
As Japanese automakers struggle in the Chinese market, 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. Nippon Steel is also moving forward with plans to acquire U.S. Steel, a major American steelmaker. This move underscores Nippon Steel’s intention to shift the focus of its overseas business from China to the United States.
VI. The case of the retail industry
In the retail industry as well, there has been a noticeable withdrawal of foreign companies from the Chinese market. The reasons for this include the rapid spread of e-commerce, the increased competitiveness of local companies, and sluggish consumption.
First, e-commerce is rapidly spreading, and reflecting this, the share of online sales in retail sales is increasing (Figure 4). The rapid growth of Chinese e-commerce giants such as Alibaba and JD.com has transformed consumer shopping habits, putting many brick-and-mortar retailers in a bind.
Source: Compiled by the author based on data from the National Bureau of Statistics of China
Local retailers are also growing rapidly. Having accumulated management know-how, they are becoming formidable competitors to foreign companies by developing products and providing services that meet the needs of local consumers.
Moreover, consumption has been sluggish due to slowing economic growth and the collapse of the housing bubble. In particular, declining housing prices are suppressing consumption among middle- and high-income households—the primary customer base for foreign retail companies—through a negative wealth effect.
Against this backdrop, many foreign retail companies have decided to withdraw from the Chinese market or downsize their operations.
First, Carrefour, headquartered in France, entered China in 1995 and once occupied an important position in the Chinese retail market, operating more than 300 stores; however, in recent years, the company has been losing market share due to the rapid growth of major Chinese e-commerce companies and intensifying competition with local retail chains. In June 2019, Carrefour sold 80% of its Chinese business to China's Suning.com Group. As a result, although the Carrefour brand remained in the Chinese market, actual management rights were transferred to Suning.com Group. Carrefour's number of stores in China continued to decline after that.
Next, Britain's Tesco entered China in 2004, but its performance was poor. As a major step towards its withdrawal, in 2014 the company transferred its Chinese operations to a newly established joint venture with China Resources Enterprise, a Chinese state-owned enterprise. Tesco's stake in the joint venture was only 20%. In 2020, Tesco sold all its shares in the joint venture to China Resources Enterprise, marking its complete withdrawal from the Chinese market.
Furthermore, South Korea's Lotte Department Store, like Hyundai Motor, has had its China business affected by Sino-South Korean relations. The company entered the Chinese market in 2008 and had stores in Tianjin, Weihai, Chengdu and Shenyang. However, in 2017, widespread boycotts of Korean brand products in response to the U.S. military's deployment of THAAD in South Korea led to a deterioration in business, forcing the company to close its stores. In 2022, the company's last store in China, 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, and at its peak operated six Isetan-branded department stores in the country. 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.
VII. Global restructuring of business centered on friend-shoring
Of the factors that have led foreign companies to withdraw from China, the U.S.-China conflict is the most important. In addition to U.S. companies, many Japanese and European firms are pursuing friend-shoring and onshoring strategies to reduce their dependence on China, which is seen as a geopolitically unfriendly country.
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.
To promote the semiconductor industry in the United States, the CHIPS and Science Act provides $39 billion in grants and a 25% investment tax credit for companies building or expanding semiconductor manufacturing facilities, as well as $11 billion in grants for companies conducting research and development. The subsidies also include guardrails that prohibit companies from building advanced semiconductor manufacturing facilities or producing cutting-edge chips in China. Industry leaders such as Intel, Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC), Samsung Electronics and Micron Technology have already been selected to receive the grants. As a result, these companies have faced significant restrictions on their investments in China, forcing them to shift their investments to the United States and its friendly countries. TSMC, the world's largest contract manufacturer of semiconductors, is implementing a friend-shoring strategy, supported by subsidies from various countries, and is building new factories in Kumamoto, Japan, and Dresden, Germany, as well as in Arizona in the United States.
On the other hand, the trend of Japanese companies aiming for friend-shoring is already clear. According to the "Quarterly Survey of Overseas Local Subsidiaries" compiled by the Ministry of Economy, Trade and Industry, China's share of key indicators showing the scale of Japanese companies' overseas business activities, such as "amount of tangible fixed assets," "sales," and "number of employees," has been on a downward trend in recent years (Figure 5). In addition, a survey of Japanese companies expanding overseas published in the White Paper on International Economy and Trade 2023 predicts that China's importance as a sales destination, direct investment destination, and procurement source will decline, while the importance of ASEAN countries and India will increase (Figure 6).
- China's (including Hong Kong's) shares of tangible fixed assets, sales, and number of employees are declining -
Source: Compiled by the author based on the Ministry of Economy, Trade and Industry's "Quarterly Survey of Overseas Subsidiaries"
[Click to enlarge]
Source: Ministry of Economy, Trade and Industry, White Paper on International Economy and Trade 2023, June 2023
As the U.S.-China conflict becomes the norm, foreign companies are accelerating their withdrawal from China, and global industrial restructuring is underway, centered on onshoring and friend-shoring. As a result, the global economy is splitting into two blocs, centered on the United States and China. This new international environment is leading to higher production costs and a shrinking market size. Responding to this situation is becoming a difficult task for companies around the world.
The original text in Japanese was posted on October 17, 2024.
