Japan boosts investment in India

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Nitin Ram Potdar was in a 14th-floor Tokyo office in March this year, when the 8.9 earthquake hit Japan . The 48-year-old Mumbai-based corporate lawyer was preparing a presentation on mergers and acquisitions, or M&A, in India to a Japanese client.

Potdar recalls that his host was amused to see him record the commotion in the street on his BlackBerry. "Earthquakes are normal here," his host said. All ended well, with Potdar and his host being escorted to safety.


The yen's rise against the US dollar is a shortterm phenomenon, and many Japanese want to take advantage of it: Kohey Takashima
'Normal' is a loaded word in the world's third largest economy, which has seen two decades of flat growth, rock-bottom interest rates, and an ageing population. This economy was the underlying reason for Potdar's visit. He sees his Japanese clients grapple with economic woes, natural calamities, political uncertainty and mounting government debt. "I end up talking 60 per cent business and 40 per cent law," he says. As he - or any investment banker in Mumbai, for that matter - can tell you, Japanese companies are on the prowl for acquisitions in India . "M&A is one of the fastest ways to start a business," says Akash Gupta, Executive Director at PricewaterhouseCoopers, or PwC. Few know that Japanese companies were among the serious contenders for Patni Computers, which eventually went to iGate.

Japanese companies are losing competitiveness and seeking low-cost production bases in other countries: Sandra Wu
Some two dozen deals in the last two years - mostly in mid-sized Indian companies - are testimony to the build-up in Japanese interest in Indian industries, including advertising, auto parts, banking, cables, chemicals, and logistics. Among the biggest so far are the $450 million Panasonic-Anchor buyout in April 2007, the $4.6 billion Daiichi Sankyo-Ranbaxy deal in June 2008, and the $2.7 billion NTT DoCoMo-Tata Teleservices one in November 2008. M&A and greenfield ventures have led to an 18-fold jump in direct investment inflows from Japan over a five-year period.

"Japanese companies are losing competitiveness," says Sandra Wu, President and CEO at Kokusai Kogyo Holdings. "They are looking for low-cost production bases and emerging centres of consumption." The torch bearers of the 800-plus Japanese companies in India are Suzuki, Honda and Canon. Reaching out early on to countries such as India is one of the reasons why they have outperformed the Tokyo Stock Exchange's Nikkei index.


"The government-to-government partnership also helps the investment climate," says Arun Agrawal, International Banking Head, Yes Bank, alluding to co-operation on energy, defence and infrastructure projects, especially the Delhi-Mumbai industrial corridor. These initiatives are percolating to the private sector. "It is not only about capital, but also technological capabilities," says Alok Vajpeyi, Managing Director and CEO, Daiwa Securities India.

In early November, 20 Japanese heads of consumer, industrial goods and technology companies gathered in Gurgaon, near Delhi, for a twoday Indo-Japanese business summit. "After the presentations, we took them to the local hypermarket and a few factories," says host Sharad Verma, Partner and Director, Boston Consulting Group. The Japanese participants gained a better understanding of India's business environment, the value-consciousness of Indian customers, and the need to trust local professionals rather than thrust expats on them.

In mid-November, another group of Japanese attended the World Economic Forum in Mumbai. Afterwards, Kokusai Kogyo's Wu got on a helicopter with Ajit Gulabchand, Chairman and Managing Director of Hindustan Construction, and visited the group's Lavasa township near Pune. Toru Takahashi, President of business education provider Globis Organizational Learning, attended meetings at the Indian Institute of Management, Bangalore, and the Indian School of Business, Hyderabad. "My idea is to unify the Japanese and Indian systems and create something new," he says. Kohey Takashima, CEO and Founder of online organic food retailer Oisix, went window-shopping at Mumbai supermarkets to see what they stock.

Sanjeev Sinha, President of Tokyobased Sun and Sands Advisors, who has lived in Japan for the past 15 years, says Japanese awareness about India has increased. In the early 1990s, taxi drivers often asked him which restaurant he worked in, adding that they loved curry. Today, the average Japanese is likely to remark on India's 1.2 billion consumers and its need for better infrastructure.

About five years ago, Uday Kotak's investment banking team first uncovered the opportunity. In early 2007, it was scouting for a buyer for electrical switches manufacturer Anchor Electricals. Before long, French major Schneider Electric was edged out by Panasonic. "This first big deal gave us the feeling there was more opportunity waiting," says Sourav Mallik, Senior Director, M&A, Kotak Investment Banking. A year later, Japanese drug maker Daiichi Sankyo bought Ranbaxy Laboratories.

In 2008, when Mallik accompanied a highlevel team to Tokyo and Osaka to hold seminars, more than 300 Japanese companies participated. "We didn't have enough chairs for people to sit," he says.


"By the end of this year, we expect to close six or seven deals," says Mallik, who handled Kokuyo-Camlin deal, closed earlier this year. Toshiba tied up with the Sajjan Jindal Group, and Hitachi with Chennai-based BGR Energy, to make turbines and generators. Mitsubishi has partnered with Larsen & Toubro to make boilers. About half a dozen Japanese companies are building smart cities in India. Ravindra Sannareddy, Founder and Managing Director of Sri City, which is building a 6,000-acre special economic zone - South India's largest - says many Japanese manufacturers plan greenfield ventures there.

Japanese companies are also eyeing the steel industry, especially flat steel products used to make goods such as refrigerators and cars. On November 15, Tokyo-based conglomerate Mitsui bought a stake in online payment service provider Suvidhaa Infoserve - including a seat on the board - for $12 million. Mitsui recently acquired a controlling stake in Russian online payment company Qiwi after buying a small stake. "Perhaps that is their approach," says Paresh Rajde, Managing Director and CEO, Suvidhaa.

When PwC's Gupta visited a Japanese auto parts factory in Bangalore, he was struck by the influence of Japanese methods. "They have a zero-error style of working, and an emphasis on efficiency," he says. That approach is reflected in business moves, too: they start with a small step, and take a bigger one only after they feel comfortable. Kokuyo entered into a distribution tie-up with stationery maker Camlin before buying a majority stake. "It is their corporate culture," says Kotak's Mallik.

Tokio Marine took almost six years to decide to enter India's life insurance business. It signed a joint venture with the Edelweiss Group in 2009, and spent another two years finalising the business plan. The Japanese are tremendously averse to failure, says Sinha of Sun and Sands.

Oisix's Takashima explains Japanese caution: "The Internet and new businesses are changing corporate culture." Yes Bank's Agrawal says the attitude will change once there are success stories. "India is far more blue-sky and entrepreneurial," adds Vajpeyi of Daiwa Securities.

Besides Japan's ho-hum economy and India's growth, there are other reasons for the Japanese to invest here. "The yen's rise against the dollar is a short-term phenomenon that people want to take advantage of," says Takashima. China's competitive market is another reason. "The largest consumer durable player in China survives on a market share of six to seven per cent," says Verma of Boston Consulting. "Japanese companies are looking to balance out their investment in Asian countries," says Hisao Nakajina, President of the Nomura Research Institute.

Many Japanese companies have gone beyond baby steps, but need to tread carefully. The biggest investment - Daiichi Sankyo-Ranbaxy - has halved in three and half years, though that could have happened back in Japan, too. For now, Japanese companies' future is abroad, and India is a good place for them to be.

Japanese companies eye India, raise investment to make gains - Business Today

 

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What makes India a much bigger market for Japan Inc?

Consider these three data together. First, compared to 100,000 Japanese expats in China, India hosts just 4,000. Second, this week, Japan recorded its first trade deficit in 31 years; exports were short of imports by $30 billion. Third, in 2011, car sales in Japan fell, yes, fell by 15%.

What do these numbers taken together mean, specifically what do they mean for India? Japan Inc's presence in India is still small but Japan's current trade and economic factors are set to change that. A strong yen that makes exports expensive, a weak economy that means shrinking home demand and near-saturation presence of Japanese business in China already are combining to make India a much bigger play for Japan Inc.

Early Signs of Big Push

You can see the first big signs of Japanese businesses new big push in India. NTT Communications acquired Netmagic Solutions and Nomura Research has acquired Anshin Software and Market Xcel Data Matrix respectively. Panasonic has bought out Indian brand Anchor Electricals.

Dentsu has raised its stake in its Indian venture to make it a wholly-owned subsidiary. Companies like JTB are making their Indian debut by setting up offices here and some like Nippon Life are buying minority stakes in Indian companies like Reliance Capital AMC.

Not surprisingly, therefore, earlier this week, Federation of Indian Chambers of Commerce and Industry (Ficci) received the biggest ever business delegation from Japan. Some 80 Japanese business heads were here. And, yes, the 4,000 Japanese expats in India does look a small number compared to the Japanese presence in China. But the Japanese expat population in India has doubled in the past two years.

And the number of Japanese companies doing business in India has jumped. "In the past two-three years the number of Japanese companies here has doubled," says Gajendra Badgujar, deputy director, Ficci. There are now 1,000 Japanese companies in India.

Post-Reforms Small Entry

Japan Inc had of course discovered India in the 1990s, after reforms began. Companies like Sony, Toyota, Honda entered in the 1990s. But barring Suzuki, most of them made what can only be called half-hearted India plans. The results were predictable.

Lack of focus, low investments and poor India connect meant most India operations of Japanese companies remained small. Koreans, American and European MNCs in various sectors outpaced Japan Inc in India. For example, today the consumer durables business is dominated by the Koreans with Sony being a very small player. Ditto in cars where Korean Hyundai and even a very late entrant like VW is making good gains in the Indian market.

Japanese businesses' smaller presence is clear even from success stories. Nikon India set up its India office in 2007. Its managing director, H Takashina, says Nikon has been doubling its turnover every year. "This market is small but it is one of the most promising for us," he says.

In 2011-12, Nikon sold 3.2 million camera and optical units, up 33% from the previous year. The story is the same in the premium single-lens reflex (SLR) camera category. But Nikon has no manufacturing facility, just 130 staff, including three Japanese executives, and offices in the four metros. That's really small compared to the Samsungs and LGs. Or take Sony. It retailed products in India but failed to invest in after-sales service support.

But Nikon India is also a good example of how things might change. It has 22 service centres and 50 collection centres, many in Tier II and III cities. And it is betting that India will contribute 5% of its global sales by 2015; the current figure is just 1%. This kind of scaled up ambition for India has a very sobering context, however.

The Yen for Change

The sharpest wake up call for Japan Inc in India, indeed for Japan Inc everywhere else in the world, has been the strong yen. Last year the yen was at an historical high since the World War II and it continues to remain strong against dollar. That makes Japanese exports uncompetitive, making one of the foundational principles, make high-quality products, sell them everywhere, of Japan Inc shaky. It puts enormous stress on the business model of most Japanese companies in India.

With exceptions like Suzuki Motors, very few Japanese companies have invested in manufacturing facilities here. Since they were selling imported products, their pricing suffered a double whammy, a strong yen and a weak rupee, both increasing the cost of imports substantially.

Take for example Canon India. It imports all its products from overseas, and at least 40% of its imports are from Japan. Between July and December 2011, the yen appreciated against the dollar by 5%, and the rupee depreciated against the dollar by 21%. The math is simple, and terrible for Canon India. The landed cost of its products went up by 26% in six months.

Canon India simply couldn't pass on that degree of cost hike to consumers. "So many of our products are either loss-making or not as profitable," says Alok Bharadwaj, vice-president, Canon India. And some Japanese companies in India had to cut their product prices, despite the deeply unfavourable rupee-yen scenario. The prime example is Honda SIEL, which reduced its auto prices thanks to intense competition in the Indian car market.

Home for Aged

Markets like India would have been less crucial for Japan Inc had its home market not become increasingly unreliable. Across many consumer product categories, from cars to cameras, Japan's domestic market is shrinking rapidly. Japan's macro-economic problems that started after the 1980s bubble burst are well known. But the shrinking domestic market has a dimension that can't be righted by policy correction.

Japan is ageing fast, the average age is 40, compare that to India's under 30. One in four Japanese today is over 65. A decade back, about one third of Canon's business came from Japan. Today the domestic market contributes just 10% of Canon's sales. But Asia minus Japan buys 30% of Canon's products, up from 5% 10 years back.

An even more dramatic illustration: car sales in Japan in 2011 dipped by 15%. Japan experts say preference for public transport (for environment and cost reasons) combined with an ageing population is impacting car sales in Japan.

Global M&As

Domestic market performance has brought home the message to Japan Inc that the future of their businesses lies outside. "They finally are realising that the future is overseas, especially China and India," says Kenichi Takano, general manager, JTB India, Japan's largest travel company. JTB set up its India office two months back.

This realisation is already showing up in numbers. Last year, Japan saw a record number of outbound mergers and acquisitions transactions, the highest in its history, valued at $88 billion-plus. And this M&A figure is not just quantitatively impressive, the qualitative dimensions of outbound Japanese investment in 2011 tell an even more interesting story.

China overtook the US last year to become the largest destination of Japanese foreign investment. Emerging markets are increasingly getting more attention from Japan Inc. Another change: Japan's export-oriented companies used to dominate foreign investment. But 2011 saw home market-focused firms looking overseas more aggressively. The Japanese business delegation Ficci welcomed was dominated by small and medium enterprises (SMEs), which typically have bigger bets on the home market than on exports.

India Over China

As in almost everything to do with India and business, there's the India-China debate. India now appears to have some advantages vis-a-vis China, which of course remains the bigger market for Japanese products.

The first Indian advantage is the already huge presence of Japan Inc in China. There are 8,000 Japanese companies in Shanghai alone compared to 1,000 in India. Second, India has a political advantage over China. Sino-Japanese ties are marked with distrust and suspicion. Indo-Japanese ties aren't.

"The Indian government is much more stable, much more welcoming and fairer," says Sandeep Singh, deputy MD, Toyota Kirloskar Motors. India was one of first destinations of the new Japanese prime minister, Yoshihiko Noda. "The new bilateral agreements will give trade a big boost," says Ficci's Badgujar.

In 2008-09 and 2009-10, Indo-Japanese trade was stuck at around $10 billion. In 2010-11, the figure moved up to $14 billion. Bilateral trade is likely to cross $16 billion in 2011-12, and the target for 2014-15 is $25 billion, according to Ficci.

The third reason India looks more favourable than China is that Japan Inc can build things that India desperately needs. "India is at a stage where Japan was in the 1960s. We need to build our basic infrastructure, cities. Delhi Metro has been a great success story," says Singh.

Japanese companies can contribute significantly in infrastructure like the Delhi-Mumbai industrial corridor. Experts also see a big role for Japanese manufacturing companies, even the SMEs going forward, in the growth of Indian manufacturing. Companies like Toyota are looking at India as an export hub.

Invest in India?

The big questions though are will Japanese companies set up local manufacturing bases and significantly scale up their managerial presence? Bar the auto majors who are in India, most Japanese companies still aren't talking about investment in plants here. Most of them are importing products from China, Thailand and Japan.

Japan's automakers are rapidly changing gears, Singh says in two years Toyota's Etios model will have 90% localisation. The business conditions for others to follow are there. Investing in India may be the next stage, say Japan Inc watchers.

"By nature, Japanese companies are cautious but once they are comfortable they are ready to bet big. Many are now looking at reshaping their business model", says Sandeep Dhupia of KPMG, a consultancy.

Unlike other MNCs, Japanese firms don't seem to mind taking minority stakes in business ventures. Dentsu or Nippon Life, unlike, say, Walmart or Ikea, prefer a small start before upping their stakes, even if government rules allow bigger plays from the beginning. What's changing is that an increasing number of Japanese companies are willing to play a bigger game.

The Japanese Way

Even if Japan Inc puts its money where business logic points it should be, a few very Japanese ways of doing things won't change. Japanese companies like Japanese managers to head their foreign operations. Look at Suzuki. It's been in India for so long, but it's still more comfortable with a Japanese heading its biggest foreign operation. In this, the Japanese are like the Koreans, and unlike most Western MNCs.

Another very Japanese characteristic is that most expat managers don't bring along their families. Japan Inc watchers say just 30% of the Japanese expats in India have brought their families. No family means no need to set up homes. Most Japanese executives of Maruti Suzuki live out of hotels.

This reluctance to set up homes may be explained by cultural complexities, language barriers and the very different food in India, say Japanese expats. Nikon's Takashina, who in contrast to most Japanese expats is comfortable speaking in English, says "things have become better in the past three years. There is a Japanese supermarket now in NCR". For him, that's a sure sign that Japan Inc is making big plans.

More and more Japanese managers shopping for home-sourced comfort food in India while setting up more and more manufacturing and service shops here, that may be the positive business future India and Japan are looking at.

What makes India a much bigger market for Japan Inc? - The Economic Times

 

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[EXPERT]

We need huge reforms to make these Inc's feel comfortable in india . Should make laws, licencing and other matters suitable.