Fully 38% of German companies taking part in a recent business survey said they are relocating production facilities from China to Japan, while 23% are also shifting regional management functions in the same direction, with economic, political and social stability the primary considerations.

The study was conducted by the German Chamber of Commerce and Industry in Japan, and accounting giant KPMG in Germany, with 164 firms responding to the survey released on March 27.

The report closely echoes the findings of another study, released by the Japan External Trade Organization a week earlier, which found that Japan is an attractive destination for foreign companies that want to avoid geopolitical, trade and financial uncertainties.

"German companies have long had a very strong focus on China because of the cheap labor costs and because it is an important and growing market," said Martin Schulz, chief policy economist for Fujitsu's Global Market Intelligence Unit.

"That is changing and there are challenges on all sides," he told DW.

"Significantly, there are growing political and geopolitical issues for companies to consider, with worries about whether it will become more difficult for firms to export from China to the United States, for example."

China-US tension in the background

Trade frictions between Washington and Beijing have worsened in recent years, with the US keen to stop China from obtaining the most advanced technologies, particularly in microchips.

This is combined with concerns that a change of presidential administrations in the US early next year could lead to a bout of tit-for-tat trade restrictions, tariffs and sanctions.

By moving production facilities to Japan, Schulz points out, companies are lowering — although not eliminating entirely — the risk of becoming involved in any potential trade war between the US and China.

"Costs are also rising in China and we do not know the future of the Chinese economy during the restructuring that it is undergoing," he added.

Other concerns include industrial espionage and friction with Chinese authorities that could, in extreme cases, lead to a company being blacklisted.

A German business executive for a company with operations in both Japan and China said firms need to have "countermeasures" prepared in the event that they are blacklisted by the authorities or are threatened with blacklisting. The executive declined to be named.

Schulz agrees that there are sound reasons for companies transferring "sensitive functions" to Japan, although there are plenty of "pull functions" in Japan's favor.

Japan a 'stable' choice

"Japan is economically and politically stable, companies here are well connected across the rest of Asia, which is important for partnerships, and the country is closely integrated into global supply chains," Schulz said.

Klaus Meder, president in Japan of German manufacturing giant Bosch, has said both China and Japan have compelling reasons for a significant investment of the company's time and efforts.

China is the world's largest market for cars and Japanese automobile companies still control the largest share of the global market.

Bosch has a principle of producing locally for the local market, said Meder, with manufacturing facilities equally important in both countries to meet local demand.

"Japan can be a hard market to enter, with many obstacles, the language barrier and different specifications, but once you are established and have earned the trust of your customers, then you can build long-lasting partnerships," he told DW.

"There is stability here, there is trust, it is rules-based and most companies are satisfied with their financial returns," he added.

A presence in Japan is also critical as many partners here are active in other parts of the world, notably Southeast Asia, Europe, China and both North and South America, so it is important to be close to the headquarters of those firms to sustain relationships, said Meder, who has been based in Japan for 12 years. 

Japan's industrial tradition

Marcus Schuermann, CEO of the German Chamber of Commerce in Japan, said the results of the study underline the importance of firms' connections with "the oldest industrialized country in Asia" and the growing trend of management functions being based here.

More than 90% of firms taking part in the survey said stability — economic stability, the stability of business relationships and safety and social stability — were their prime motivations for being in Japan.

This was followed by a qualified workforce and advanced infrastructure. A stable political environment based on democratic principles and the legal protection of intellectual property were also cited as key reasons.

"Regional purchasing and sourcing can be done easily in Japan and there are many key global players here, which means it makes a lot of sense for companies to take that into consideration when they are thinking about a location for their regional management functions," he told DW.

Japan is outstanding when it comes to economic stability, and pricing and cost levels are "reasonable," he added.

The work force is also qualified and capable, the revenue potential is positive and increased use of robotics and automation is helping to overcome problems associated with an aging population.

"In addition, wages here are very competitive and between 20% and 30% lower than in Germany, which makes Japan more appealing," he said.

Anecdotal evidence would also suggest that German companies find it harder to convince employees to transfer to positions in China than Japan, with living conditions and the overall environment in Japan more appealing, particularly for families with children, Schuermann said.

Edited by Wesley Rahn