Changing Trends in Japanese Direct Investment in China

Traditional Modes of Investment

Still, manufacturing companies continue to represent the predominant share of Japanese investors in China today. Early investors were particularly visible in the automotive, electronics, heavy equipment and clothing industries. They typically started manufacturing from scratch in China. Geographically, there has been heavy concentration of Japanese investment in the Greater Shanghai area, in the Beijing area and in Guangdong province. Until deregulation a few years ago, many investors started operations as joint ventures with Chinese partners. As soon as wholly owned operations were permitted, they became the standard method of investment. Larger investors developed holding companies with a view towards having access to the Chinese market for their domestically manufactured products. Many of them also opened R&D centres.

Recent Trends

With the issuance of new MOFCOM regulations covering the opening of the commercial sector on April 16 2004 (the Administration of Foreign Investment in the Commercial Sector Procedures(商务部外商投资商业领域管理办法), effective June 1 2004), Japanese investors are swiftly moving towards the development of wholesale, retail and franchise operations in China. The April 16 regulations allow wholly owned foreign enterprises to operate in the wholesale, retail and franchise sectors on or after December 11 2004. Many investors with already existing manufacturing capabilities are preparing to launch distribution networks in China. New investors are coming in to sell their products in China. Many companies feel that greenfield investment is too time-consuming, and are reviewing the possibility of acquiring Chinese companies in wholesale and retail, among other sectors. Many restaurant chains, supermarkets and convenience stores, among others, are preparing to open franchise operations.

These developments, on the other hand, have left many existing holding companies wondering what to do next. Many such holding companies invested US$30 million or more primarily to gain access to the Chinese market under the terms of the Establishment of Companies of an Investment Nature by Foreign Investors Provisions (issued by the Ministry of Commerce on June 10 2003). They were treated as members of an elite club. Not so any more. Now any company, without investing such large sums, can import into and sell in China, and ordinary companies face fewer restrictions in doing so than holding companies (e.g., wider import rights, ability to sell products made by third parties, etc.).

Many Japanese investors who commenced operations as joint ventures are actively trying to acquire the interests in their ventures that are held by their Chinese partners. In many situations, long protracted negotiations have resulted, and some have failed outright.

Remaining Uncertainties

While the promised liberalization of the commercial sector has been enthusiastically received by Japanese investors, they are not yet certain as to how best to exploit this opportunity due to the current lack of clarity in the regulatory environment. Among other things, the governmental approval process and criteria are not yet clear. Which sectors are being liberalized is also not clear. For holding companies, whether they can enjoy the benefits of the new procedures governing the commercial sector is not certain. While MOFCOM seems to suggest that it plans to grant more benefits for holding companies that will give them more opportunities, investors are uncertain what will become available and whether they are user-friendly.

Conclusion

Japanese investors in China are rapidly changing their modes of investment. M&A, franchise and other transactional means to expand are being seriously considered and some have been executed. While uncertainties remain in the implementation of liberalization, these trends will accelerate once we see the full picture of the new regime for the commercial area.