Japanese Presence in China Drops by 30%

For decades, China served as a critical hub for Japanese companies, offering an attractive combination of affordable production, an extensive workforce, and a sophisticated network of suppliers.

This foundational relationship enabled Japan's overseas industrial expansion, positioning China as a central manufacturing base for global operations.

Research released by Teikoku Databank on September 28, 2026, identified 10,147 Japanese companies operating in mainland China as of June, marking a 22.4% decrease from the previous survey period.

This figure represents a significant 29.7% decline from the peak of 14,394 companies recorded in 2012, with 1,231 new entrants offset by 4,137 withdrawals or unconfirmed statuses.

Declines in Japanese entities were recorded across manufacturing, wholesale, and service sectors, with labor-intensive industries like textiles particularly affected, seeing a reduction from 310 to 218 entities.

The evolving business climate, characterized by higher labor costs, intensified competition, and uncertainty in international trade, is compelling executives to reconsider their investment destinations and explore alternatives in Vietnam, Thailand, Indonesia, and India.

Relocating production infrastructure extends beyond finding cheaper labor, as industrial clusters in China offer deep-rooted benefits in terms of dependable components, trained employees, transport connections, and maintenance services.

Despite the push for diversification, 43.7% of surveyed companies still consider China their most important overseas production site, significantly outpacing alternatives like Vietnam at 8.7% and Thailand at 7%.

This approach helps manage the rising costs or potential supply chain disruptions associated with concentration in one region, despite the added operational expenses from duplicated equipment and management layers.

Navigating local distribution, pricing, and rapid competition cycles is essential for success as Japanese firms move beyond using China merely as an export base.

This shift necessitates a deep understanding of local distribution, pricing strategies, and the rapid cycles of local competition, moving beyond reliance on inexpensive export production.

Businesses with annual sales under 100 million yen now account for just 4.8% of the total, reflecting a Teikoku Databank finding that larger firms are proving more resilient by restructuring and adapting their products.

Companies with annual sales under 100 million yen now account for only 4.8% of the total, indicating that larger firms possess greater resilience due to their resources for restructuring and product adaptation.

Despite this optimism in profitability, only 21.3% of companies plan to expand operations, marking the lowest figure since 2007, with most (64.3%) intending to maintain their existing scale.

JETRO's research indicates that 74.5% of Japanese companies in China identify Chinese firms as their primary competitors.

Success now depends not just on brand reputation but also on product development and localized services, often requiring greater decision-making authority for local teams to effectively compete.

A Teikoku Databank questionnaire in October 2025 revealed that 58.4% of manufacturing respondents with Chinese operations expect US tariff negotiations to negatively impact their fiscal 2025 profits.

The extent of tariff impact varies depending on whether a firm serves the Chinese domestic market or utilizes China as an export hub, with trade uncertainty acting as a significant driver for supply chain diversification.

Companies are currently balancing the benefits of industrial infrastructure against the risks of concentrated exposure as they decide whether to treat their Chinese operations as local consumer markets or global export hubs.

However, firms are now carefully weighing these strengths against rising costs, intensifying competition, and the risks of concentrated exposure, with future commitment depending on whether Chinese operations function as a local consumer market or a global export hub.