JETRO Invest Japan Report 2024
Chapter1. Global Trends in Inward FDI Section 3. Impact of Structural Changes in Global Value Chains (GVCs)

Unstable international situation changes GVC structure

In recent years, global companies have been required to strengthen and restructure their supply chains in a timely manner in order to deal with various international challenges and a competitive business environment that is necessary to use of the latest technologies, and this has led to changes in the structure of global value chains (GVCs). As a specific background, for instance, those are caused by the disruption of the existing economic structure due to the Covid-19 pandemic, the high demand for measures to deal with climate change, and the impact on procurement and distribution channels due to friction and disputes among nations.

JETRO has implemented a survey "Impact of Structural Changes in Global Value Chains (GVCs)" to reveal the responses of global companies to these highly volatile events and how they perceive the Japanese market. Based on the result of this survey, the factors that determine Foreign investment by global companies are considered in this section and in Section 6 of Chapter 2.

The outline of JETRO's survey "Impact of Structural Changes in Global Value Chains (GVCs)"
Target companies	Foreign companies mainly active in the following 10 sectors and related industries. Companies that do not fit into this category are classified as "Others". "Bio-Pharmaceutical", "Storage battery", "AI/Sensors, etc. (Industrial Robots/Automation)", "Autonomous driving (Automobiles)", "AI/Sensors and other ICT (Special vehicles)", "Metaverse/Digital twin (industrial purpose)", "Semiconductors", "Biomaterial", "Hydrogen fuel (Mobility) ", and "Wind power (offshore) “. 62 companies in total (The target companies include those that JETRO supported or is supporting for investment in Japan).
Target persons	Authorized persons to decide investment plans (manager class or higher)
Survey method	Interviews (online/ in person) based on the questionnaire
Period	December 18, 2023 to February 16, 2024

Respondent companies
Industry classification of respondents	Number of valid responses
Bio-Pharmaceutical	6
Storage battery	5
AI/Sensors, etc. (Industrial Robots/Automation)	8
Autonomous driving (Automobiles)	4
AI/Sensors and other ICT (Special vehicles)	1
Metaverse/Digital twin (industrial purpose)	6
Semiconductors	6
Biomaterial	2
Hydrogen fuel (Mobility)	4
Wind power (offshore)	6
Others	14
Total	62

A pie chart representing the regional classification of countries where the respondent's head office locates．The total does not necessarily equal 100% due to round off.　Europe：25（40.3％）　Asia Pacific　20（32.3%）North America：17 — Regional classification of countries where the respondent's head office locates

"Geopolitical conflicts and disputes" have a major impact on foreign investment strategies of global companies

The various events that lead to structural changes in GVCs can have a significant impact on the foreign investment strategies of global companies. In the survey, more than half (56.5%) of the respondent companies view "geopolitical conflicts and disputes" as one of the events that affect their business. Some companies mentioned the actual impacts, such as "business activities have been disrupted by the China-related supply chain problems and rising tensions in Southeast Asia," and "the war between Russia and Ukraine has forced us to close our offices in Russia."

Horizontal bar graph created from JETRO's survey of the impact of changes in the global value chain structure.Geopolitical conflicts and dispures 56.5% Transformation of of the global economic structure 41.9% Changes in economic trends 41.9% Energy conversion 37.1% Development of digital technology 35.5% Disseminati on Corporate Social Responsibility (CSR) 24.2% Demographic changes　14.5% Increased risk of climate change 12.9% Special of 5G networking 8.7% Others 9.7% Unknown 1.6% — Chart 1-5: Events That Affect the Company's Business Operations

Note:

In the form of prioritizing up to three choices from among the choices.
Companies that selected at least one option were considered valid.
Source:

JETRO's survey "Impact of Structural Changes in Global Value Chains (GVCs)"

Many companies have been affected in their China/Asia operations

Recent U.S.-China conflict, as an example, which is one of the Geopolitical conflicts, and it affects global companies’ operations in China/Asia. When asked whether the heightened geopolitical risk caused by the U.S.-China conflict is affecting their own businesses in China and other Asian countries, among the responded companies, about 67% of them in China and about 52% in Asia (other than China) answered "significant" or "to some extent." On the other hand, approximately 20% of the companies responded that they had had no impact.

1) Pie chart left: Impact on our business in China. 15 companies (27.7%) to a great extent, 21 companies (38.9%) to some extent, 5 companies (9.3%) not sure, 1 company (1.9%) not much, 12 companies (22.2%) not at all. 2) Right pie chart: Impact on our business in Asia (excluding China). 7 companies (12.5%) to a great extent, 22 companies (39.3%) to some extent, 9 companies (16.1%) not to say much, 5 companies (8.9%) not to much, 13 companies (23.2%) not at all. Both 1) and 2) are rounded off to the second decimal place, so the total does not add up to 100%. Created based on JETRO's survey of the impact of changes in the global value chain structure. — Chart 1-6: Impact of the US-China Conflict on Business in China/Asia

Note1:

The sum does not necessarily equal 100% due to rounding to one decimal place.
Note2:

Calculated excluding non-responses.
Source:

: JETRO's survey "Impact of Structural Changes in Global Value Chains (GVCs)"

Supply chain and procurement strategies need to be adjusted both inside and outside China

Of the companies which responded "affected", just under half responded that they "had adjusted their supply chains and procurement strategies in the area concerned" as one of their countermeasures. In terms of specific measures, it showed a tendency to downsize its business in China, such as "changed its investment destination from China to other Asian regions" and "adjusted each production amount to direct production in China to only the Chinese market, and for other bases in Southeast Asia to take responsibility for production for other regions." On the other hand, there was a company that responded that they "are expanding investment in China targeting specific industries and markets."

Horizontal bar graph created from JETRO's survey of the impact of changes in the global value chain structure.1) Bar graph left: Impact on our business in China. Adjusting supply chains and procurement strategies 44.4% Relocating the base 38.9% Strengthening investment in the area concerned 19.4% Postponing or freezing of expansion/investment plans 19.4% Withdrawal/sale of business 13.9% Others 13.9% Not yet addressed 13.9%.　 2) Bar graph right: Impact on our business in Asia (excluding China). Adjusting supply chains and procurement strategies　46.4% Relocating the base 21.4% Strengthening investment in the area concerned　28.6% Postponing or freezing of expansion/investment plans 3.6% Withdrawal/sale of business 3.6% Others 17.9% Not yet addressed 14.3% — Chart 1-7: Impact of the U.S.-China Conflict on Business in China and Asia (Details)

Note1:

Multiple selections are allowed. Companies that selected at least one option were considered valid.
Note2:

This question was asked to companies that answered "significant" or "to some extent" to the question of whether the increasing geopolitical risks due to the U.S.-China conflict are affecting the business in China and other Asian countries.
Source:

JETRO's survey "Impact of Structural Changes in Global Value Chains (GVCs)"

Measures aimed at hedging risks against China are prominent

Chart 1-8: Specific measures of global companies' in light of the impact of the U.S.-China conflict.

Countermeasures in China	Specific details
Adjusting supply chains and procurement strategies	Overcoming geopolitical risks requires strategic adaptation, including diversification, prudent investment, and proactive supply chain management. The company tried to merge with another company in the Chinese market, but it had to cancel the plan because it could not obtain the permission.
Relocating the base	The sales channel in China was temporarily cut off. The company is considering alternative bases in Thailand and Indonesia for establishing a sales structure in each region. For protecting its intellectual property, the company moved its base from China to Singapore.
Strengthening investment in the area concerned	Through a joint venture with a Chinese company, the company built a material procurement system in China. It is expanding its investment in China, targeting the Chinese automotive market, where electrification is particularly important. Focusing on local production in China, the company plans production activities tailored to local needs.
Postponing or freezing of expansion/ investment plans	China has laws that require servers to be located in China and localized (Cybersecurity Law, Data Security Law, and Personal Information Protection Law), but the company has difficulty complying with these laws. Currently, the company has stopped investing in its Chinese bases.
Withdrawal/sale of business	As a result of heightened tensions between the U.S. and China, the company had been forced to withdraw or scale back its operation in China, and it began withdrawing from China as real estate risks had become more apparent since 2019.
Not yet addressed	The company is considering relocating some of its business bases to other countries, but has not yet taken any actual steps. Although the production capacity in China is large, no major problems have arisen so far.

Countermeasures in other Asian countries	Specific details
Adjusting supply chains and procurement strategies	By making production in China only for the Chinese market (China for China), the Southeast Asian sitessites are required to meet the demands of the rest of the world (including digitalization and establishing new factories), so existing factories are being optimized and adjusted. In response to the deteriorating political relations between India and China, the company is scaling back procurement and collaborations in China. Partnerships with local players in Asia are being reorganized to avoid risk.
Strengthening investment in the area concerned	The company has shifted its investment destination from China to other parts of Asia (Thailand). Investment is increasing in India, and the business has been concentrated in India.
Relocating the base	Investments in APAC region, particularly in India, Thailand, and Singapore, are increasing, so that losses incurred in one country can be offset by business in other countries.
Others	The bases in East Asia are preparing for a slowdown in the Chinese economy, by changing supply chains and hiring personnel. In addition, it is mitigating financing risks by combining investors, financial institutions, and credit institutions.
Not yet addressed	If geopolitical risks in Asia worsen in the future, the company will respond by withdrawing from the market, but so far no such measures have been taken.

Source:

JETRO's survey "Impact of Structural Changes in Global Value Chains (GVCs)"

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