Steering Into India

The last time he was in India, Teruo Fujisaki was steering Hero Honda to gain a foothold in the two-wheeler market. The task done, Fujisaki is now in the drivers seat at Honda Siel Cars India Ltd (HSCI), the 60:40 joint venture between Honda Motor Co Ltd and Siel Limited.

After a long hiatus, when only Maruti Suzuki was in the fray, Japanese car makers like Honda, Mitsubishi and Toyota are entering India. Toyota has finalised the Kirloskars as its joint venture partner. In the two-wheeler segment, the big four, Honda, Suzuki, Kawasaki and Yamaha have been here but post-liberalisation, they too are increasing stake in their joint ventures.

Says HSCIs president and CEO, Fujisaki, We are taking a long-term view of India and these are temporary trends. Come December 1997 and the Honda City will ride out from the factory at Noida. Investment of Rs 850 crore are planned over the next six years, with Rs 450 crore marked for the first phase. Honda has extended a working capital loan to HSCI against an option to pick up 30 per cent additional stake.

Close on its heels is the Hindustan Mistubishi project, which will launch the Mitsubishi Lancer in early 1998. Mitsubishi has a 10 per cent stake in the Rs 300 crore project. Its upcoming plant in Tamil Nadu will produce 24,000 cars a year.

So why the sudden interest in India? Although Maruti Udyog Ltd (MUL) has a 80 per cent market share, its success didnt inspire other Japanese automobile majors. Rather the experience of the LCV manufacturers pre-liberalisation made them even more cautious than usual.

However, the Japanese have now reassessed the market and seem ready to pump in money. In the motorcycle segment, their sway is complete with over 85 per cent of the market. Honda has a joint venture with Hero, Suzuki with TVS, Kawasaki with Bajaj Auto and Yamaha with Escorts.

Yamaha Motor Co has the highest stake with 50 per cent equity in the Rs 850 crore joint venture, Escorts Yamaha Motor Ltd. As part of its Rs 525 crore investment programme, it launched a 135 cc motorcycle from its new factory in Noida recently. It plans to sell 30,000 units locally as well as export the RXZ mobike range from

next year.

Apart from investing on their own, the automobile makers are also bringing in their wake the ancillary manufacturers. A Mckinsey study estimates the Indian auto components industry to be around $2.5 billion. And it is expected to be around $8 billion by 2000. Car makers are aiming at higher indigenisation levels to avoid the mistakes of the LCV manufacturers who had relied on imports.

While MUL has achieved over 80 per cent indigenisation, HSCI will start with 50 per cent indigenisation and expects to touch 70 per cent by 2001. As with MUL, many of Hondas ancillary manufacturers are following it to India. For instance, Tokyo Seat has tied up with Sun Vacuum while Moriroku had tied up with UT Limited for plastic parts. The vendors are banking on Hondas sales touching around 30,000 cars a year.

So far, most of the component tie-ups have been technical ones but partners are now looking at financial participation. Nippondensu India Ltd, which manufactures starter motors and alternators, was earlier a joint venture between Nippondensu Ltd and the SRF group. But last year, the Japanese firm bought controlling stake, renaming it Densu India. Denso Corporation is picking up 51 per cent stake in Densu India.

Or take the case of Sona Steering Systems Ltd, a joint venture between the Sona group and MUL. It has a financial and technical alliance with Koyo Seiko Co. Last month, Koyo Seiko announced plans to increase its stake from 7.9 per cent to 20.5 per cent to help finance the companys expansion plans.

So the entry of the Japanese automobile makers is likely to change the face of the Indian industry.

Consumer durables

It is the most visible sign of Japanese investments. From Sony and National Panasonic to Sharp, Sanyo and Akai, Japanese white goods are crowding Indian showrooms. The lure: the estimated 200-million strong Indian middle class and cheap manufacturing facilities.

However, actual inflows are not very high as investments are largely in assembly operations and brand creation. The brands have grabbed some market share already. In 1996-97, Akai, with its innovative replacement and freebie schemes, took 10 per cent of the market while Sony, Panasonic and Kalyani Sharp have around five per cent each.

But the growth is not as expected. According to the Consumer Electronics and Television Manufacturers Association (Cetma), given the existing duty structure, the domestic colour television (CTV) market will touch 4.4 million sets a year by 2000 against the projected eight million.

So the Japanese companies are grappling with the ground realities. National Panasonic has lowered prices. Sony too has found that its brand name is not enough to push sales.

Sony Corporation set up a 100 per cent subsidiary, Sony India Pvt Ltd, in 1995. It has invested $10.5 million. An additional $16 million was expected this year but it may not materialise. Sony has postponed its target of 1.2 lakh CTV sales from 1995-96 to 1997-98.

The first three years have been devoted to building the foundation, points out Ravi Nookala, senior manager, consumer marketing division, Sony India. We may not be aggressive but we are trying to understand the market, he adds. Sonys turnover has gone up from Rs 200 crore in 1995-96 to Rs 345 crore in 1996-97, and is expected to touch Rs 380 crore this year. It has also built a 1,300-strong dealer network.

Sony is manufacturing both CTV and audio systems in India. With 70 suppliers, it has achieved 20 per cent indigenisation in CTVs and 30 per cent in music systems. Picture tubes are still imported. And Sony has delayed plans to set up a picture tube plant with the proprietory Trinitron technology. It has also launched two-in-ones, video CD players, video cameras and cordless telephones, which it is importing. It plans to introduce the Glasstron or video CD version of the walkman, launched recently in Japan.

The other major investor is Matsushita Electrical Industries, with six subsidiaries in India. There is National Panasonic India Pvt Ltd, the sales and marketing company set up in July 1994 with a 70 per cent stake by Matsushita, 20 per cent by Salora and 10 per cent by others. Matsushita TV Audio India Co, the manufacturing unit, is a 55:45 joint venture with Salora. Then there is Indo Matsushita Appliances Co Ltd at Chennai, which is making rice cookers. And the battery subsidiaries, Indo-National Ltd, Indo Matsushita Carbon Co Ltd, both at Chennai, and Lakhanpal National Ltd at Baroda

Apart from CTVs and audio products, Matsushita has launched cellular phones, fax machines and key telephone systems, which it is importing. It is now diversifying into white goods with two joint-ventures, both with Videocon, for air-conditioners and washing machines. The former will be based

in Chennai and the latter in Pune.

Another Japanese company, the Kenwood Corporation, is also reportedly talking to Videocon for a joint venture for audio equipment. Besides, Toshiba and Sansui already have tie-ups with the Indian major for video cassette recorders and audio products respectively. The other market leader, BPL, also has a 50:50 joint-venture with Sanyo.

Perhaps, the most aggressive is Akai. In 1994, it picked up a 10 per cent stake in Baron International Limited. Subsequently, Akai was taken over by the $6 billion Hong Kong-based SemTech. SemTech has picked up a 51 per cent stake in Akai but it still has some Japanese shareholding.

Apart from its capital investment, Akai offers a $7.5 billion interest-free line of credit to Baron. It is investing $10 billion in a new CTV facility coming up at Baroda.

Barons sales have gone up from Rs 151 crore in 1995-96 to Rs 325 crore in 1996-97. Says managing director Kabir J Mulchandani, Akai is taking a long-term view on India. It doesnt expect gains till 2001.

Apart from slower domestic offtake, consumer goods companies are concerned about the grey market. Players like Sony are rethinking on manufacturing products like walkmans in India because of this threat. Says M Takafuki, managing director, Kalayani Sharp India, The success of the consumer electronics companies will depend both on the development of the countrys infrastructure and the goverments steps on the import duty and grey market front.

On June 20, Sumitomo Bank will open its first branch in India at Mumbai. With an initial capital base of $10 million, the bank will mainly offer traditional banking services like corporate and trade finance as well as forex loans. Last year, Fuji Bank opened its first branch, also at Mumbai.

Moreover, the big four Japanese securities firms, Nomura Securities, Daiwa Securities, Nikko Securities and Yamaichi Securities,have plans for India. But they are treading cautiously.

Japanese finance companies are looking at India as spreads on loans are getting thinner in advanced markets, says Toshiaki Kobayashi, managing director, Sakura Capital India Ltd, the first Japanese non-banking finance company (NBFC) to set shop in India. The entry is also in keeping with the general pattern of Japanese investments where the banks and finance companies follow trading and manufacturing outfits overseas. According to Kalpana Morparia, general manager, Industrial Credit and Investment Corporation of Indian (ICICI), enquiries from Japanese finance companies has gone up from one a month last year to once a week today.

So Daiwa Securities (funds under management: over $90 billion) has a representative office and is scouting for a joint-venture partner. Nomura Securities was to pick up 40 per cent stake in UTI Securities but the venture is stalled following the Nomura pay-off scandal in Japan. Nikko Securities was looking at an infrastructure fund with Shipping Credit and Investment Corporation of India. As SCICI is today merged with ICICI, Nikko is negotiating with the latter. Also eyeing the market is Yamaichi Securities.

The NBFCs are equally keen on India. In July, the 50:50 joint venture between the RPG groups Ceat Financial Services and the Japanese trading house, the $175 billion Itochu Corporation, for leasing and hire purchase will commence operations. The Delhi-based RPG Itochu Finance Ltd, has an initial capital base of Rs 30 crore.

Last year, Sumitomo Corporation picked up 50 per cent equity for Rs 42.3 crore in the Calcutta-based Jhawar group company, Usha Martin Finance Corporation to form Sumit Usha Martin Finance. Leading leasing firm, ORIX Corporation, has a 20 per cent stake in Infrastructure Leasing & Financial Services.

The first off the mark, Sakura Capital India, formed in October 1995, is a joint venture between Sakura Bank (total assets: $497,710 million) and the cotton trading house, Khimji Visram & Sons. Sakura Bank, the core bank of the Mitsui group with an Indian presence since 1924, has invested $5 million for its 75 per cent stake.

The NBFC, which was into the leasing, hire-purchase and bill discounting has broadbased its services today. It has now got a merchant banking license. Unfortunately, the market is quite bad so we are waiting and watching, says Sakuras Kobayashi.

RPG Itochu Finance will leverage Itochus experience in leasing automotives and textile machinery. It will also look at Itochus imports into India in terms of import leases. The targets are fairly modest, which is typical of Itochu. But in five years, it will be one of the large finance companies here, says S A Krishnan, president, Ceat Financial Services Ltd.

On the capital markets front, the Securities Exchange Board of India (Sebi) is aggressively wooing Japanese investments. Earlier this year, Sebi chairman D R Mehta led a delegation to Japan to convince the Japanese of improved trading, settlement and surveillance systems -- a concern with most Japanese investors.

The response is still cautious though. The Japanese are said to have invested around $25 million in Indian paper, primarily GDR issues, so far. The interest is there but the action is yet to come in, says Aditya Rattan, head of Daiwa Securitiess representative office in India. Apart from Daiwas plans for a broking outfit, five of its fund management companies registered with Sebi in late 1994. But they have not been active. It is also considering an India-specific fund while its emerging markets fund is already investing in GDR issues.

Daiwa has been servicing India from its Hong Kong and London branches since the eighties. It has participated in $1.8 billion worth of debt issues. These were mainly public sector unit issues like ICICI and Industrial Finance Corporation of India. It now hopes to play a bigger role in handling both debt and equity issues.

Like other Japanese finance companies, Daiwas strengths are its links with Japanese investors and international markets. We want to be in a position to service Japanese investors, says Rattan.

Theres action on the venture capital front as well. Daiwas venture capital arm, Nippon Investment Finance (NIF) with funds worth $one billion and operating out of Singapore, has allocated $50 million towards India. It has already made investments over the last three years and is getting more aggressive, claims Rattan. For instance, NIF has a small stake in broking and research firm SSKI.

This is only the beginning and future investments will depend on the performance of the existing players. As Kobayashi says, We Japanese are cautious investors. We like to know what is going on and to watch the direction of policies before we decide to increase our commitment.

Infrastructure

Indo e yookoso irasshai mashita. Thats Welcome to India in Japanese. But Japan doesnt seem to be heeding the request as far as the infrastructure sector is concerned. The courting continues. P Abraham, power secretary, has just returned from Japan. But the Japanese are not too keen.

The reasons are not hard to see. According to the 1993 survey of the Exim Bank of Japan, India was ranked 14th as a potential investment destination. Only last year, the country jumped to the number three slot. But the Japanese are nothing if not cautious. So barring stray projects in telecommunications and possible ventures in power, there are few mega projects to write home about.

In telecommunications, Nippon Telephone and Telegraphs (NTT) is the most prominent investor. NTT, with its partner RPG Enterprises, has won the Tamil Nadu circle for basic services. While NTT has a 39 per cent stake, RPG has 51 per cent and Itochu Corporation, 10 per cent. Around Rs 1,700 crore will be invested over four years. But all telecom projects are hanging fire as a case with the department of telecommunications awaits settlement.

Says K N Memani, country managing partner, S R Batliboi & Co, which has been tracking Japanese investments into India, "One reason for the slow investments is that the Japanese economy is not doing as well as it was in the late eighties and early nineties. So the investible surplus has come down".

But Memani believes that investments will rise in the next two years. They will come in areas like ports, refineries and power.

If foreign direct investment hasnt come in, Japanese aid is playing a big part in funding infrastructure projects. The Overseas Economic Cooperation Fund (OECF) committed a loan package of 125,765 million yen in February 1995, which covered 12 projects. Of these, six are in the power sector. In 1996, the loan commitment went up to 128,774 million yen for nine development projects, taking the total OECF loan commitment to 1.36 trillion yen. Of these nine, four are for water supply, sewerage and forestry projects while two are in the power sector. They include the Pipavav ship-breaking project in Gujarat (7,046 million yen), the Bangalore Water Supply and Sewerage Project (28,452 million yen) and the Anpara Power Transmission System Project II (12,020 million yen).

Yoshitaro Fuwa, chief representative, OECF, New Delhi, says, "Our priority is to improve infrastructure through our loans as it is essential to attract private investment."

He believes that the Japanese private sector will only invest in projects that offer immediate returns. Yet OECF is wooing these companies to India.

Even the Ministry of International Trade and Industry (MITI) had set up a task force to mobilise resources for the Indian power sector. The MITI committee, comprising leading power companies, has drawn plans to set up power stations upto 5,000 MW in India. Groups like Marubeni, Mitsui, Mitsubishi and Toshiba have evinced interest and are identifying projects.

Besides, it is believed that the Japanese trading houses hold the key for future investments. Some have already converted liaison offices in India into subsidiaries with an eye on future investments. Last June, the Mitsubishi Corporation became the first trading company to set up a 100 per cent subsidiary, MC International India Pvt Ltd.

Itochu and Sumitomo have followed suit. Sumitomo Corporation India Limited is planning major investments in India. Country head and vice-president Anant P Dehadrai admits that the company is interested in investing in ports, power, roads and jetties. "Sumitomo Bank has opened a liaison office in Mumbai and is sniffing around for business possibilities. The group also has interests in insurance," he says. In fact, its joint venture, Sumit Usha Martin Finance Ltd, may fund projects. Sumitomo has 11 joint ventures already. Says Dehadrai, "We work in a quiet manner and are looking to build long-term relationship in business."

Trading houses are also claiming higher stakes in joint ventures. Till 1991, Mitsubishi had five joint ventures in India. Since then, it has added eight more, but with higher stakes. So it has a 50:50 joint venture with Western India Petroleum Ltd called Western Petro Diamond. And, along with group company, Mitsubishi Logistics, it has formed an alliance with the Unilever groups Amalgam Foods to establish the country's first cold chain, Snowman Frozen Foods Ltd. Mitsubishi has a 26 per cent stake and Mitsubishi Logistics eight per cent. Snowman will have an initial investment of Rs 33 crores.

So the government is hopeful that once the trading houses are wooed, half the battle will be won.