Panasonic Defies Decoupling Movement to Increase Investment in China

Panasonic Holdings Corp. plans to increase its investment in China significantly, despite the fact that many other foreign companies are reducing their exposure to the country due to rising geopolitical tensions and a slowing economy.

The company will invest more than 50 billion yen ($373 million) in China through the end of 2024 to build and expand factories making home appliances for the local market, according to the Nikkei newspaper. The company will allow key decisions to be made locally and develop products tailored for the Chinese market in a bid to boost sales, the Nikkei said.

A Panasonic spokeswoman confirmed to Bloomberg News that the company will invest more in China, but she couldn't confirm the amount of the investment. The Nikkei story, which was based on an interview with the spokeswoman, said the company would invest billions of yen in China.

Japanese direct investment in China decreased in 2022.2022 data is preliminary through October and compares with the same period in 2021.

China is a vital trading partner for Japan, and Japanese companies rely heavily on the Chinese market, from Toyota Motor Corp. and Sony Group Corp. to Uniqlo.

Since the outbreak of the pandemic in 2020, the Japanese government has been encouraging companies to reduce their dependence on production and supply chains in China. Rising tensions between Tokyo and Beijing, as well as between the US and China, are having an impact on corporate investments and business decisions.

According to preliminary data from the Ministry of Finance, Japanese companies cut new investments by more than 2% in the first 10 months of 2022 from the same period in 2021. This decline may continue, as more than half of major Japanese manufacturers surveyed by the Nikkei late last year said they planned to reduce their reliance on China as a supplier of parts.

The relationship between Tokyo and Beijing has worsened in recent years. An unresolved territorial dispute, tensions over Taiwan, and increased Chinese military spending are all seen by Japan as concerns.

Japan's Minister of Economy, Trade and Industry Yasutoshi Nishimura said this week that he wanted the Group of Seven advanced economies to take a coordinated approach this year aimed at preventing the "economic coercion" that China has applied to some of its trading partners. Nishimura described China as an "unprecedented strategic challenge" in Japan's latest defense strategy.

Japan is currently in talks with the United States about the possibility of imposing additional restrictions on the export of equipment used for making computer chips. According to people with knowledge of the situation, there is an agreement in principle for Japan to adopt at least some of the controls that the US has already put in place.

This could further damage relations with China. Leaders from both nations met in November in an attempt to improve relations, but a follow-up visit by the Japanese foreign minister was subsequently postponed.

Despite the tensions between China and Japan, and some anti-Japanese sentiment in China, many companies see the Chinese market as essential and cannot afford to abandon it. This is due to the size of the Chinese economy, which is the second largest in the world.

Furniture retailer Nitori Holdings Co. is increasing its presence in mainland China, having opened its first store in Beijing late last year. This move puts Nitori in competition with other Japanese retailers who have already established a strong presence in the Chinese market, such as Fast Retailing Co.’s Uniqlo and Ryohin Keikaku Co.’s Muji.

Murata Manufacturing Co. is working on a long-term project to build a production chain that uses only local parts and operates entirely in China. This is a key supplier for Apple Inc.

That company announced a 45 billion yen investment in China late last year to make capacitors for electric vehicles and smartphones. However, it is also investing more in Vietnam and elsewhere, with President Norio Nakajima saying late last year that China and the US are decoupling faster than expected.