Indo-Japan trade flows slow on fewer outbound, smaller inbound deals

With India starting to surpass China's rate of growth, small and medium enterprises in Japan should have more upside to expand into the country

Fewer large deals are heading from Japan to India, even as there are indicators that there will be increased trade between India and Japan. It will take major infrastructural developments to come alive before the subcontinent sees pivotal change.

In the past year, there have been sparks of activity with acquisitions and tie-ups in automotive, IT, glass and manufacturing sectors. Vedanta picked up glass-maker AvanStrate from Carlyle Group for $158 million, Cognizant acquired IT services layer Brilliant Service Co for an undisclosed sum and Lupin will buy $150 million worth medical products from Shionogi & Co.

Inbound deals,haven't seen as much of a flurry as well, which raises the question is there more buzz than actual traction? According to Zia Mody, founding partner at law firm AZB & Partners, "Deal flow both ways was far much more substantial eight years ago, and that applies to the frequency of smaller deals as well."

Mody was alluding to NTT Docomo's investment of Rs 230 billion or US$3.5 billion in 2007 in Tata Teleservices, the $7 billion buyout of Ranbaxy by Daiichi-Sankyo in 2008, a $1 billion investment by JFE Holdings for a collaboration with JSW Steel in 2010, and over Rs 150 billion invested by Honda Motorcycles and Scooters India after the split from Hero.

So what led to the deceleration? "Today it's actually slowed down, at least in some part because of the trauma and the fallout that the Daiichi and Docomo deals caused," Mody says."In Japan, these deals aren't just considered bad transactions, they're seen as affronts to national honour, and taken very seriously."

Despite that, there will be a new investment deal cycle when the infrastructure required to build out towns bridges, airports, highways and roads in the nation rolls out under Prime Minister Narendra Modi's initiatives. 

Last year amid promises of soft loan support through billions of dollars, top-level officials, including Prime Minister Shinzo Abe from Japan, visited India to launch the foundation stone for the "Bullet Train" network in Gujarat, the first of which will connect Ahmedabad and Mumbai, can cover over 500 kilometers in less than three hours, and is projected to be wrapped up by 2022. Japan had extended a soft loan for the ambitious project conceptualised by PM Modi, which is to be a joint venture between the Indian Railways and Japan's Shinkansen Technology. The Bullet Train has a reputation for never having ever had a single mishap. 

Even then the big bang deals may not be as visible as earlier since the pipeline hasn't dried up."If you look at the growth trajectory of deals from Japan to India, the growth rate is around 6 per cent annually," said Gaurav Malhotra, who runs Grant Thornton's Japan Desk.

However, the key, of course, is that with India starting to surpass China's rate of growth, small and medium enterprises in Japan have more upside to expand into the country. 

Presently, according to Malhotra, there are around 22,790 Japanese firms in China as compared to just 1,369 in India. Those numbers have to increase at some point for the greater good of both economies.