Japan ’s move to provide government subsidies to companies so they can diversify their supply chains away from China is not likely to result in a large-scale exodus back home or to Southeast Asian countries, analysts say. All five Japanese companies spoken to by This Week in Asia for this article said they intended to continue to manufacture in China on the grounds that it remains a critically important market and that it would be expensive and unnecessarily disruptive – particularly at the present time – to relocate a large part of their operations elsewhere. Coronavirus: why Asia will win the race to economic recovery “ Toyota has no plans to change our strategy in China or Asia due to the current situation,” the Aichi-based carmaker said in a statement. “The auto industry uses a lot of suppliers and operates a vast supply chain and it would be impossible to just switch in an instant. We understand the government’s position, but we have no plans to change our production.” Household fittings and construction materials provider Lixil Corporation released a similar statement saying it had no plans to move production out of China. “We operate a flexible global supply chain with more than 100 manufacturing bases worldwide. This flexible and fully integrated structure has enabled us to absorb some of the impact of Covid-19,” it said. A third Japanese manufacturer, which did not want to be identified, said it would continue to make its goods in China as it “designs products for China and we sell them in China” and that moving elsewhere would make little business sense. As part of a record stimulus package unveiled amid the coronavirus pandemic and designed to keep the national economy afloat, the Japanese government has earmarked 220 billion yen (US$2 billion) for companies that want to move production back to Japan and a further 23.5 billion yen for firms that want to shift manufacturing to Southeast Asia . The move came after car companies and other manufacturers suffered shortages of parts from China, when production was temporarily shut down across most of the country earlier this year in an effort to curb the virus’ spread. Parts made by Chinese partners or Japanese subsidiaries in China are used to build engines, electrical systems, interior fittings and moulded plastic components for the automotive industry. As well as being exported to Japan, these parts are also used at Japanese carmakers’ plants in China. Dependent on China? How Japan wants to tackle virus disruption Shortages are not the only concern for Japanese firms based in China, however. They are worried about being hit with future tariff increases or new duties they have to pay, as a result of Beijing’s ongoing trade war with the US . There are also rising labour costs to consider and the possibility of anti-Japanese demonstrations that have broken out in the past over unsolved territorial issues such as the uninhabited Diaoyu/Senkaku Islands , which are controlled by Tokyo but claimed by Beijing. Another concern has revolved around the theft of Japanese firms’ intellectual property, while there have also been rumblings of discontent within some governments about collaborations with Chinese companies that might compromise national security. Yet analysts say Japanese companies still see an upside to remaining in China. “These companies are going to be very careful about what they say, whether or not they actually want to move elsewhere,” said Ivan Tselichtchev, a professor at the Niigata University of Management. “They want to keep relations with the Chinese government in a good state.” Even with financial support from the Japanese government, shifting production to a new facility or even a new country will inevitably be very costly, Tselichtchev said, not least because of the cost of compensating staff and business partners if the company should opt to leave China. Similarly, the paperwork involved would be time-consuming and expensive, he said, while Chinese authorities could intervene to make the procedures even more complicated as a disincentive to leave. It’s not simply a case of shutting up shop in China and moving somewhere else Jun Okumura, analyst “Companies do not want to talk about sensitive matters like this because it could, theoretically, invite retaliation from China,” said Jun Okumura, an analyst at the Meiji Institute for Global Affairs. “But, at the same time, China is still a market of 1.3 billion people, it will have one of the world’s fastest growing economies when the world emerges from the coronavirus crisis and Japanese firms will not want to do anything that jeopardises their standing in that market.” Okumura said he believes biggest change to come from the pandemic will be that many firms will make preparations that allow them to be more flexible if disaster strikes in one location by building additional production facilities in Southeast Asia, for example. Japanese firms already have a manufacturing presence across the 10 nations that make up the Association of Southeast Asian Nations , including in Thailand , Indonesia and Vietnam . In 2017, these firms invested US$22 billion in the region, twice as much as in 2012, with automotive sector companies focused on Thailand and Indonesia, machinery and retail in Vietnam, Malaysia leading in chemicals and pharmaceuticals and semiconductor manufacturing centred on the Philippines . Tselichtchev said the process of diversification has already begun in some sectors, in large part driven by rising labour costs, but he said he does not anticipate “a large-scale exodus” from China as a direct result of the Japanese government’s offer. Okumura agrees. “I’m not sure just how effective the Japanese government’s efforts will be,” he said. “The whole world has been affected by this pandemic so it’s not simply a case of shutting up shop in China and moving somewhere else.” Help us understand what you are interested in so that we can improve SCMP and provide a better experience for you. We would like to invite you to take this five-minute survey on how you engage with SCMP and the news.