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Companies

Japanese companies face roadblocks when exiting China

Labor issues and social media require a soft touch when closing shop

Sony faced an employee strike in 2016 when it announced it was pulling out of its Guangzhou plant. (Photo by Yu Nakamura)

TOKYO -- 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.

It is extremely rare for foreign companies in China to file for bankruptcy. "There are almost no cases in which foreign businesses withdraw from the country through bankruptcy procedures," notes lawyer Takashi Nomura.

Whatever exit path is chosen, a company is more likely to face a labor dispute than in most other major countries.

Companies operating in China must compensate employees that are terminated. While the amount is legally set, foreign employers often have to pay more than their domestic counterparts and sometimes deal with unreasonable claims.

When Sony announced in 2016 its intent to sell a plant in Guangdong Province to a local company, employees staged a walkout, demanding compensation. Legally, Sony was not required to pay, but it eventually agreed to dish out 16,000 yen ($151) per person as a "reward for service."

A carefully constructed road map is vital for gaining the understanding of employees as to the necessity of job cuts or closures.

"Recently, an increasing number of companies are being attacked on social media concerning their departures," said a local lawyer. "One way to avoid this censure is to work with a public relations company when planning the exit."

Zhou Jiaping, a Chinese lawyer who once worked for the local unit of a Japanese company, agrees. "Many disputes related to business withdrawals involving Japanese companies are caused by a lack of good communications between the headquarters in Japan and the local unit."

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