Despite the enforcement of a counter-espionage law, Japanese businesses have resumed business trips to China in earnest

1． Japanese businesses had restrained business trips to China until around June

Since a senior manager of a major Japanese pharmaceutical firm was detained by the Chinese authorities in March 2023, many senior managers of other Japanese businesses had postponed their business trips to China until around June out of fear for being taken into custody.

When I went to Beijing and Shanghai on a business trip in April, I was told that among Japanese scholars and researchers specializing mainly in analyzing the Chinese economy, I was the only person that came to China on a business trip, and many Japanese who were stationed in the country were surprised, saying, “I can’t believe you came in this situation!”

Those whom I met in Beijing and Shanghai said that if I returned home safely, you would prove that Japanese were safe in China and that therefore, they prayed for my safe return to Japan.

I knew that the above-mentioned detainment had affected the behavior of many Japanese businesspeople, but I had not taken the risk of being detained so seriously for myself.

It is true that only after I arrived at Beijing I realized that I was taking exceptional action, which then made me somewhat anxious.

But I met Chinese scholars, experts, and government officials who are all close friends of mine for the first time in three years and three months, and the successive meetings were so exciting that they took my mind away from the anxiety.

Because I fortunately returned home safely without any problems, I thought that I would have been able to provide evidence that gave a sense of security to people around me.

2． After summer, Japanese businesses resumed business trips to China in earnest

By the time I visited Beijing, Wuhan, and Shanghai on a business trip in the second half of July, the situation had already changed.

Many persons concerned with Japanese businesses said that since June, an increasing number of people from the head office, including executives, have started to visit China on a business trip or that among several companies, even the company president had visited China.

On July 1, the Counter-Espionage Law came into force, but in Beijing, one commented, “The effects are not so large,” and in Shanghai, another commented, “Among Japanese businesses in China, the Counter-Espionage Law is not often taken up as a subject of conversation in daily life.”

These are all comments from senior managers of financial institutions and government agencies who exchange information with many people of Japanese businesses frequently.

A delegation of the Association for the Promotion of International Trade, Japan, visited China in early July, and representatives from the Japan-China Investment Promotion Organization did so in mid-July, and both were warmly received, including the meeting with Mr. Wang Wentao, Minister of Commerce.

The Chinese government’s stance of welcome witnessed when it received these delegations was probably effective in relaxing the wariness of Japanese businesses.

In the second half of October, I visited Beijing, Guangzhou, and Shanghai on my third business trip to China following the one in April and the one in July.

On this business trip, I confirmed further changes in Japanese businesses.

Since summer, many Japanese businesses had resumed business trips by personnel from company presidents and executives to managers of management planning, legal affairs, and other administrative departments, and senior managers stationed in China said that they were busy taking care of them.

As described above, Japanese businesses’ cautious attitude toward business trips to China have changed significantly since summer.

The fundamental reason for this change is that Japanese businesses broadly recognize that businesspeople are not detained as long as they do business normally and that this recognition is shared by them.

The Chinese government is so enthusiastic about welcoming this attitude of Japanese businesses that it surprises experienced China business experts.

I hear that it is becoming easy to make appointments with high-ranking government officials whom Japanese businesspeople have hitherto not been allowed to meet.

This is in sharp contrast with the situation in which it is becoming more difficult than before for Japanese government officials to make appointments with their Chinese counterpart for a meeting.

There are two factors behind the Chinese government’s stance of welcoming Japanese businesses as described below.

One is that in order for the Chinese economy to escape from the uncertainty of its future, it is necessary to expand investments by foreign capital in China.

The Chinese government is particularly concerned about the continued cautious attitude of many Japanese businesses, which were formerly active in investing in China, and this affects the Chinese government’s policy.

The other is that the conflict between the U.S. and China is not expected to be relieved in the medium and long run and that in this situation, the Chinese government wants to avoid the risk of prompting the U.S. and Japan to jointly contain China by turning Japan into an enemy.

In particular, there is concern that as the U.S. presidential election is scheduled for November 2024, Americans’ anti-Chinese sentiments will further grow across the party lines as election campaigns progress.

As mentioned above, the Chinese government is more active in attracting Japanese businesses than at any time in the past, but this fact is practically not recognized in Japan because it is not reported by the media there.

For this reason, many Japanese businesses, which are not so familiar with the actual situation in China, have not relaxed their cautious attitude toward China business.

In addition, during my recent business trip, I often heard that not a few people in the research field refrained from visiting China on a business trip out of fear for being detained.

3． Countries are bipolarized in their attitude toward investment in China

The Chinese economy bottomed out and started to recover slowly in July after it suddenly slowed down in the second quarter of 2023 (April to June).

On November 15 in 2023, the National Bureau of Statistics of China published the major economic indicators of October. According to the statistics, it was confirmed that while external demand and real-estate development investments remained sluggish, sectors such as industrial production, service production, and consumption continued to recover.

While real-estate development investments continue to be extremely stagnant, capital investments in the manufacturing industry, mainly among private enterprises, have continuously recovered since August.

Although investments are apparently continuing a gradual recovery as described above, it is true that a sense of unease about the future of the Chinese economy has not been swept away among managers and consumers.

Nonetheless, China’s real GDP growth rate is expected to go down slowly from the 4% to 3% level over the next ten years or so.

This growth rate is lower than during the 2010s, when it ranged from 8% to 6%, but is two to three times higher than that of advanced countries, including Japan, the U.S., and Europe.

For this reason, the shared understanding of the world’s first-class businesses is that over the next ten years or so, there will be no attractive market other than China.

Basically, the stance of these businesses, which have already made huge investments in the Chinese market and are earning profits continuously, toward investment in China remains unchanged.

It is also true, however, that owing to factors such as the enhanced technological capabilities and competitiveness of Chinese businesses as well as intensified competition among foreign-affiliated businesses, less competitive middle standing businesses and small and medium enterprises (SMEs) are facing difficulties in maintaining stable profits in the Chinese market and are forced to scale down investments or withdraw from the market.

This makes the bipolarization of businesses operating in China inevitable: while highly competitive huge global enterprises, middle standing businesses and SMEs with high technological capabilities maintain a stance of continuing active investments, those for which it is becoming difficult to survive in the Chinese market take an increasingly negative attitude toward the market.

According to the European Union Chamber of Commerce in China, the top four companies, BMW, Mercedes, Volkswagen, and BASF, accounted for approximately 80% of Germany’s total investments in China in 2022.

Given that these four companies formerly represented only about one-third of the country’s total investments in China, the clear bipolarization of German businesses is conspicuous.

In the future, businesses in advanced countries are expected to be more and more bipolarized in investment in China.

Geographically, Japan is closer to China than European countries, and in addition, historically, it has closer cultural relations with China, sharing Chinese characters and Eastern ideas, and therefore, many middle standing businesses and SMEs have advanced into the Chinese market.

For this reason, middle standing businesses and SMEs account for a high percentage of Japanese businesses that operate in China.

Not a few of these businesses have advanced into the Chinese market comparatively easily, thinking without long-term, clear management strategy that they should go to China because others in the same industry did so.

Such less competitive middle standing businesses and SMEs will be forced to scale down investments or withdraw from the market.

It is pointed out that the percentage of Japanese businesses that face this difficult situation is higher than that of such businesses from other countries.

As a result, at first glance, China business will look less attractive as more and more negative news of investments by Japanese businesses in China are reported by the media in the future.

As described above, however, businesses that are highly competitive or have high technological capabilities are highly likely to expand investments in China whether they are the world’s first-class global corporations or middle standing businesses and SMEs.

For this reason, Japanese businesses will highly likely continue to increase overall direct investments in China.

4． The challenge for Japanese businesses is lack of information-gathering abilities

Nonetheless, competition in the Chinese market is fierce.

When I visited Guangzhou in late October, a person working for the provincial government of Guangdong said the following to me:

“Japanese businesses have a strong tendency to examine the U.S. government’s restrictions on exports to and investments in China and comply with such restrictions in a conservative way so that they do not violate them.”

“For this reason, they do not go to the very limit permitted by the restrictions and supply products carefully by setting a buffer to a certain extent.”

“Looking at this tendency, in the area in which Japanese businesses refrain from supplying products though they are allowed to do so under the restrictions, European and North American businesses replace their Japanese counterpart to supply products, thus snatching the market share of Japanese businesses.”

Seeing this actually happen, the person concerned with the Guangdong provincial government told me that he could not understand the behavior of Japanese businesses, which were losing their market share to European and North American businesses before their very eyes.

In response to his comment, I answered as follows:

European and North American businesses closely investigate details of the U.S. government’s restrictions through lobbyists and other sources and supply products to the very limit that is permitted.

By contrast, most of Japanese businesses do not investigate details of restrictions decided by the U.S. government and act carefully in accordance with the conservative standards based on their own assumptions, and this brings the result mentioned above.

European and North American businesses as well as Chinese ones always confirm details of regulations decided by the government closely with the government’s related departments and, if necessary, approach them actively so that the application of the regulations are adjusted in a way that makes it easy to do their own business.

But since there is not the custom of lobbying in Japan, most Japanese businesses do not lobby foreign governments.

Japanese businesses are the only ones that do not do this, and therefore, they alone end up losing out.

Intended results cannot be obtained unless lobbying is outsourced to professional lobbyists, but the cost is high.

Japanese businesses lack information because they do not spend money to cover the costs, and as a result, they lose their market share to European and North American businesses.

It is natural that if businesses do not have necessary information to make managerial decisions and work out a business strategy, they cannot develop their business properly.

In particular, in the Chinese market in which needs are different from those in Japan and government policy frequently undergoes significant changes, the value of information is much higher.

The managers of Japanese businesses need to have a deeper understanding of this fact.

If managers are to recognize the importance of information gathering and improve management strategy based on the information gathered, it is necessary to secure excellent personnel.

Without excellent personnel, important information cannot be obtained, nor can appropriate managerial decisions be derived from it.

In many cases, highly capable people who obtained a Ph.D. support information gathering and strategy planning at overseas businesses. Leaders who make the most of such personnel are required to have higher abilities than they do.

Their decisions are swift and sometimes daring. If the company president cannot keep up with their ability to make decisions, the leaders and their excellent personnel cannot demonstrate their abilities to the fullest.

If this situation continues, they move to businesses that enable them to display their abilities.

In other words, the fiercer market competition is, the more severely the management ability of the company president is questioned.

If the company president lacks clear management vision and strategy, there is no incentive to recruit excellent people to realize them. As a result, the competitiveness of the company declines in the global market.

The business of a manager who takes on new challenges by going to the Chinese market, looking at market needs with his or her own eyes, thinking up a strategy on his or her own, and devising methods to put it into practice will develop substantially in China, too.

Today, when it is easy to garner strong support from the Chinese government, major opportunities are in fact arriving that enable such a manager to develop the Chinese market.