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Why Japanese Firms Are Finding Breaking Up Hard to Do

These islands in the East China Sea, called Senkaku in Japanese and Diaoyu in Chinese,  are claimed by both countries and a source of a simmering tensions.
AP
These islands in the East China Sea, called Senkaku in Japanese and Diaoyu in Chinese, are claimed by both countries and a source of a simmering tensions.

Since the start of the Diaoyu Islands dispute between China and Japan in September, Japanese firms operating in China are facing increasing negative sentiment, an economic slowdown, rising labor costs and frequent strikes. A number of Japanese firms have started to think about a withdrawing from the country.

"Japanese companies should learn how to leave China as soon as they enter the country," said Akihiro Maekawa, managing director of CAST Consulting, a Japanese firm that mainly provides services to Japanese companies in China. "They should now review corporate charters just in case."

(Read More: China and Japan Seek to Dial Down Tensions)

CAST has helped more than a hundred Japanese firms enter China over the past decade. However, in the past two years it has also helped a dozen leave.

Maekawa gave a CAST lecture at the end of January in Beijing entitled: "The export strategy and retreat practices of expatriates." In the talk, Maekawa said that since China became the world's second largest economy, it had been phasing out preferential taxes it used to offer to foreign businesses, and foreign enterprises have had to engage in fierce competition to survive.

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But Japanese firms are finding leaving harder than entering was. They have to deal with a lot of issues, especially regarding labor, Maekawa said. Once a Japanese firm has submitted its plan for layoffs to the local labor department, the information quickly spreads to workers, which could lead to chaos, he said.

Dealing with the local government was also a major issue, Maekawa said. This was because closing a company required the approval of local authorities, who were worried about reductions in tax revenue and unemployment. They tend to be uncooperative and made formalities very difficult. The process could drag on, becoming very costly for the exiting company, Maekawa said.

"The Chinese government is used to attracting foreign investment, but lacks experience in divestment," he said.

(Read More: Japan's Autos Are Finally Shrugging Off China Blues)

As for companies that are part of joint ventures with Chinese firms, dissolving the partnership can be very difficult.

Maekawa said most Japanese companies never imagined they would want to retreat from China, so their corporate charters were not very clear on this point. When a Chinese partner does not accept a proposal to close a joint venture, pulling out becomes time-consuming.