Japanese companies face roadblocks when exiting China

Japanese companies face roadblocks when exiting China

A growing number of Japanese companies are looking to exit China — either fully or partially — as the pandemic, a simmering Sino-U.S. trade war and rising labor costs create a murky future.

But pulling the plug on a business in China can be complicated and fraught with risks, especially regarding labor, according to legal experts.

“Many Japanese companies, especially small and midsize ones, are rethinking their Chinese operations,” said Ko Wakabayashi, Beijing office chief of law firm Anderson, Mori & Tomotsune.

While China is still an attractive destination for many tech companies, some Japanese concerns are using the current economic climate to shed their unprofitable Chinese businesses.

There are, however, risks associated with a sudden withdrawal. Arguably, the best way for companies to get out relatively unscathed is to sell their stakes, according to lawyer Yasuyuki Suzuki. After finding a buyer, the only major legal hurdles are obtaining shareholder approval and submitting documentation to the government.

Once shareholders approve the sale, paperwork can be done in a couple of months. This approach offers a fast and inexpensive way to leave.

Importantly, since the company continues to exist, it also lowers the risk of employee lawsuits.

This makes finding a buyer key to a pullout. And if there is no prospective buyer at hand — as thee would be in a joint venture — an outside offer is needed. But “brokering mergers and acquisitions is fairly uncommon in China. Unlike in Japan, mechanisms to mediate and coordinate deals between sellers and buyers are not sufficiently developed in the country,” says Wakabayashi. “Deals are often arranged through personal contacts.”

If no buyer is found, dissolution and liquidation become the next option. But this entails more work due to the added time needed for negotiations and paperwork, not least those related to personnel. This approach is also costlier because it typically requires massive severance payouts and may risk additional taxes.