Lull Before The Storm

One of the funnier stories told about wartime Calcutta, then still a major outpost of the British empire and the allied powers, is about how a good part of the city's gentry ran away from it for fear of Japanese bombardment. Ultimately, the Japanese almost never came. A lone bomber did drop a couple of bombs on the city's outskirts but they did not go off.

Today, the Japanese are viewed in an altogether different light. Calcuttans are rejoicing that Mitsubishi Chemical Co has decided to set up a downstream petrochemicals unit for Haldia Petrochemicals to manufacture purified terephthalic acid (PTA), which goes into the making polyester. The $400 million investment is important for two reasons. One is its size and another is the indication that Japanese investment is becoming more broadbased and going into areas other than automobiles and consumer electronics (see page 2).

 

The big issue today is: will Mitsubishi signal the long awaited take-off in Japanese investment in India?

It is well known that the Japanese are never the ones to quickly get in or out. They take long to make up their minds about a region or a country and when their mind is made up, many of them come in large numbers at the head of a flood of investment that changes the entire economic scenario of the host country. Those predicting that a take-off is round the corner recall that when China started its liberalisation in 1979, initial Japanese investment was a trickle. But it really picked up after about six years,

which is exactly where India is now. In the 1993 to 1995 period, an average six per cent of Japanese foreign direct investment

went to China, compared to only 0.2 per cent to India.

So the short answer to the question is no. The longer and more hopeful answer is not yet. Briefly, in 1995, it looked as if India was gathering speed on the take-off runway.

The Export Import Bank of Japan (Jexim) does an annual survey of Japanese companies in which they are asked to rank countries which are most promising for foreign direct investment in the medium term (three years) and long term (ten years). In the medium-term survey, in 1994, India came eleventh and China, first. The next year, India was up at seventh and China remained first. But in 1996, India remained stuck at seventh while China continued supreme at the top.

But the long-term scenario paints a steadier and better picture for India. Between 1994 and 1996, it has improved from seventh to third to second, dislodging Vietnam from the second position it had held in the two previous years. (China has, of course, been at the top right through.)

Outlining the prospects for Japanese investment in India, Masahito Ikeda, chief representative of Jexim, says that a take off is not round the corner and they will only come step by step. But the Japanese are actually very interested in the Indian market. Some big and a few small and medium

companies are already here or have decided to come.

He recalls that Japanese FDI has come in phases. In the first phase, it went to South Korea and Thailand. In the second phase, to USA and Europe and then again to East Asia and notably China. After that, it was expected to come to India but Vietnam and most recently the Philippines elbowed in. So India's turn is coming again.

In the first flush of large Japanese investment overseas since 1985 when the yen started appreciating steadily, Asia and the US and Europe were all attractive destinations. But the trade wars with the west in the late eighties refocused the perspective almost entirely on Asia. Initially, Japanese investment in Asia was mainly to manufacture exports cheaply for the west but as the yen appreciation remained unabated, Japan itself became an attractive destination for Japanese manufacturers from Asia.

Why does an Indian take-off for large scale Japanese investment remain tantalisingly away? One is that most Asian countries have had strong governments at crucial periods, which have enabled them to both extend incentives and also respond flexibly to emerging situations. India, on the other hand, notes Ikeda, has been a democracy in which policy changes have been slow to come.

The other reality, in contrast to say, China, is that India's own private industry is very broadbased. This industry, which has dug roots and grown in a protected regime, is naturally fighting to defend its own space. The Indian ground conditions are also quite daunting. There is severe competition and the ability of companies to respond is limited by the inadequate infrastructure.

But the potential is great and so gradually, Japanese FDI will increase, first through big companies like Honda, Mitsubishi and Toyota, which are already here, and then to be followed by the small and medium companies.

More recently, the situation within Japan has also changed (see page 3). The Japanese economy has been "struggling" for some time and the surplus available for investment is not there. Had India been at the forefront of good hosts at a time when the surplus was burgeoning, the picture would have been different by now. Today, the previously capital exporting Japanese banks are having to pay a "Japanese premium", that is a mark-up on the interest rate that would have been

paid by equivalent banks from other countries because of the sorry state of the Japanese banks.

So where exactly does Japanese investment in India stand today? From 1991, when because of the new economic policies foreign investment began to pick up, the government of India has approved Rs 4,324 crore of direct investment from Japan. This is fourth after the US, UK and Mauritius, and accounts for 4.5 per cent of the total. The US leads with a 26.6 per cent share but not all approvals materialise into investment and the Japanese record of fulfilling intentions in better than the others.

To get an idea of proportions, let us look at the sanctions by the Jexim. As it

provides, among other things, export loans (to buy machinery from Japan) and

overseas investment loans to joint ventures, Jexim assistance gives a measure of Japanese involvement and investment in a country.

Till financial 1996, Jexim had sanctioned cumulatively 664 billion yen to India, which amounted to six per cent of sanctions to Asia. (Indonesia accounted for 29 per cent and China 25 per cent).

Jexim outstandings (disbursals minus repayments) in India have remained at 200 billion yen for a while now, indicating no dramatic change. A movement upwards would have signalled quicker disbursal and climbing investment.

More importantly, an annual FDI of $2 billion, called for by finance minister

P Chidambaram during his recent Japan visit, remains a distant dream. Actual Japanese FDI in India in 1995-96 came to $70 million, down from $95 million in the previous year (1994-95). Actual FDI in 1993-94 was a meagre $37 million, up from $26 million in 1992-93.

But take heart. Several major investments have been announced in the recent past by leading Japanese companies. The biggest is by Mitsubishi Chemicals. Next comes the decision by Toyota to manufacture cars (probably the Kijan) in collaboration with the Kirloskars.This is considered particularly auspicious because Toyota is Toyota and it had a false start by having to go through an infructuous courtship with the Hindujas. Then comes NTT, the telecommunications giant, which has gone in as a partner to provide basic services in Tamil Nadu. And, of course, there is the Honda SIEL project, which will launch the 1,300 cc City by the end of the year.

But how do people on the ground actually feel? Two dramatically different pictures are available. Honda, which has three successful joint ventures to manufacture scooters and small power generating sets and is on its way to implementing another to manufacture cars, is very upbeat about doing business in India and finds its past experience rewarding. Sony, on the other hand, finds its recent Indian experience, very daunting.

First, the Honda experience. Yoshiaki Nakamura, director, marketing, of Honda SIEL Cars India Ltd, recalls that the project was approved in 1995 after two years of intensive study. The first car will roll off over four years after work began on the idea. The initial capacity will be 30,000 cars per year but enough land has been acquired to take the factory's capacity upto 100,000 a year when needed.

We have a very positive assessment of the market potential, Nakamura asserts, even as the mid-size car market is reeling under the impact of consumer indifference. Naturally, market ups and downs are there, but the basic trend is positive. The only question being how long it will take for this trend to manifest itself, he adds.

Spelling out the bigger change taking place, he notes the tremendous improvement in auto component quality in the last few years. Honda has engaged 60 auto component manufactures as vendors and invited half-a-dozen Japanese vendors to come and start collaborations here to manufacture electrical and plastic parts and also die castings. He agrees with the view that the Indian consumer is very value conscious and the competition in the car market is likely to reward him suitably.

This value-conscious Indian consumer is giving Sony no end of trouble. It came in 1994, riding on the wings of projections of an expanding Indian market, and launched its TVs and music systems at a considerable premium. Offtake has been very poor and Sony has had to scale down its sales projections substantially.

Last year, we had estimated the total CTV market size in the country to touch 3.5 million by 2000, recalls Y Kubo, the Sony chief in India. But this year he apprehends that even the three million mark may not be reached. Sony has not only decided to go slow on additional investments in its plant but its desire to set up a factory to manufacture its proprietary Trinitron picture tubes has been postponed indefinitely.

Addressing the basic question of how far away is the big bang in Japanese FDI, Nakamura of Honda SIEL Cars draws

attention to certain cultural pointers. There has been a sharp rise recently in the

number of TV programmes and also magazine stories on the Indian economy, its market and growth prospects in Japan. Indian movies are proving to be quite popular and at the last count, Tokyo itself had around 300 Indian restaurants! So if a Japanese family wants to savour Indian food, it not only has a wide choice but can also pick out the particular Indian cuisine it is looking for - Punjabi, Mughlai or south Indian. And, as if to capture and cash in on the flavour of the time, a Japanese company has launched lassi in packs and also vending machines with exotic flavours.

So a taste for India is being created at the popular level. If all goes well and the Indian reform process does not lose its momentum, the arrival of the actual investments in India can only be a matter of time.