A PERCEPTION OF INDIA

[This column was published in Business World of 7 October 2008.]


FOLLIES OF OUR MARKETERS

In July I interviewed Yasuo Hayashi, chief of Japan External Trade Organization. After the economic reforms of 1991-93, in which I played a small part, India has received growing volumes of foreign investment. Little of it has been from Japan, which exports enormous volumes of investment otherwise. I wanted to ask Hayashi whether Japan was not missing an opportunity in India. In his diplomatic manner, he gave an interesting answer - that India has not opened up its economy enough, and so it has not become a member of the supply chain formed by Japan, China and Southeast Asia, which all work like a single economy. The following is my interpretation of what Hayashi meant.

Japan is the country that has invested most abroad, next only to the USA. Its investment has played a large role in the transformation of Thailand and Malaysia into prosperous middle-income countries. Vietnam is in the middle of the same Japan-led transformation. At the end of the war with the US 30 years ago, Vietnam was dirt poor. Today it looks like a rich cousin of India.

Japan reached heights of prosperity in the 1980s, but also ran short of investment opportunities within the country; that is when it started investing heavily abroad. Japanese companies have poured investment into every significant country in the world. But they have largely avoided India. After the reforms of the 1990s, India attracted much foreign investment, but Japan’s share in it was not large. I used to think this was a result of Japanese miscalculation. Some Japanese investments in Indian automobile units went sour in the 1980s. The news spread in Japan, and turned all Japanese companies away from India.

That was my explanation for Japan’s lack of interest in India until I recently met Yasuo Hayashi, chairman of Japan External Trade Organization. I met him on his way to Bombay, where he was going to open a second JETRO business support centre. I asked him a question: All the world’s major companies have been investing in India. Why not the Japanese? Have they not missed the bus?

Mr Hayashi said that Japanese investment in India was not so negligible as I implied; Japan is the sixth largest foreign investor in India after Mauritius, USA, UK, Singapore and Netherlands. It invested $512 million in 2006 and 1.506 million in 2007. Indian statistics include only fresh investment, and exclude reinvestment – for instance, the Rs 160 billion that Suzuki proposes to invest in India in three years. Over 80 per cent of Japanese companies in India are making profits, and more than 90 per cent experct further growth. These figures are the highest for any host country in Asia. Nearly 500 Japanese companies are operating in India, and the number has been increasing by 80-100 in the past three years. According to JETRO’s annual survey of Japanese firms operating in ASEAN and South Asia, India is the most attractive destination in the medium term. Indo-Japanese trade too was growing. It almost doubled to $10 billion in the past three years, and Mr Hayashi expected it to touch $20 billion by 2010 – mostly Indian iron ore against Japanese machinery. And trade will act as an incentive for investment.

But he agreed that India was not a prime destination of Japanese investment, like China. His explanation was that Japan is a major manufacturing country, and so is China; India is not. Japanese and Chinese economies are complementary in a way India’s is not. India is not a part of the supply chains. What the East Asian countries did – Thailand, Malaysia, Vietnam, and most recently, China – was that they abolished trade barriers between Japan and themselves: no tariffs, and minimum procedures. As a result, goods and components moved without obstruction between them and Japan. Japan, for instance, has free trade agreements with ASEAN and eight other countries. So parts of a product could be made anywhere, assembled anywhere else, and sold somewhere else. Thus, for instance, China would assemble an entire CNC lathe. The computer for it may come from Japan, the chips from Taiwan, and the box from Vietnam. All would be flown to a Japanese joint venture in Shanghai, and the lathe, once assembled and tested, may be exported to Mexico. The Japanese could produce each component where it was cheapest, and coordinate production in factories in different East Asian countries as if they were one country. They could send technicians to any country on long-term, multiple-entry visas; there were no limits on the number they could send. That was what Mr Hayashi was talking about – that East Asian countries form a supply chain with Japan, and India does not. This is a kind of enormous free trade area which permits each country to maximize economies of scale and to learn from others. Mr Hayashi did not say it in so many words, but it is the low costs and the access to neighbouring markets that have enabled East Asian countries to grow so much faster than India. Now Australia is being integrated into the East Asian supply chain.

Japan would like India to become a part of the supply chain. The Indo-Japan Free Trade Area agreement is partly about that. Japan is saying: let our inputs in duty-free into India, and we will let in Indian pharmaceuticals and agricultural products, which are just now barred by Japanese standards, otherwise known as non-tariff barriers. If the FTA were signed, Japanese carmakers would be able to import parts duty-free; then they could produce vehicles in India cheaply enough to export. The Japan-Malaysia FTA, for example, aims to do something similar: it creates a market for Japanese auto components in Malaysia, in exchange for textile exports from Malaysia to Japan.

Kamal Nath’s enduring refrain has been that he would not sacrifice the poor Indian farmer in trade negotiations. He does not have to when it comes to Japan; Japanese agricultural products are so expensive that they cannot be exported. So Japan is the only country with which he should have no difficulty in signing an agreement. But he has tarried for three years. What is holding up the FTA?

It is the products on which India is not prepared to give tariff concessions. In all the FTAs India has entered, it has inserted enormous sensitive lists of products on which it would not reduce tariffs for many years. These include products in which Japan is interested. Indian auto part makers are a strong lobby; they oppose the opening of the market to imported components. It is India’s protectionism that prevents it from emerging as an Asian tiger.

I also asked Mr Hayashi about the use of Indian brain power. The US has for many years been very open to Indian intellectual workers, especially IT workers. As a result, it has attracted lacs of them. In the 1990s, Indian IT firms came up and began to compete for the software engineers that American companies were luring away to the US West Coast. In response, those companies also came and set up affiliates in India. By now over a hundred MNCs have research centers in India. Why has Japan lagged behind?

To this, Mr Hayashi said that Suzuki and Nissan have announced plans to set up R&D centres in India. Toshiba, NTT, NEC and Fujitsu are sending young Japanese workers to their partner companies in India to train them in English and IT. But the Chinese learn Japanese in larger numbers, so more of them are used by Japanese companies.

That answer also made me think. We are proud of our Anglophonicity and our connection with the US. But it is possible to learn from any technologically advanced country, and people can do so by learning its language. Thus, the Chinese access Japanese knowledge, and the Poles and Russians access German knowledge. Japan and Germany have not missed out on Indian brains; they just use other brains.

Mr Hayashi said that Japanese multinationals were international and used English; but Japanese small and medium enterprises were more comfortable with Japanese. He mentioned the career development plan for Asian students run by the Japanese government. It runs courses which include courses on Japanese language and Japanese business culture. It offers career consultation, and provides placement opportunities. It hopes to reach a target of 30,000 students from all of ASEAN-South Asia in 2010, of whom perhaps 10,000 may be from India. This figure is dwarfed by the number of East Asians who know and learn Japanese.

Japan was badly hit by the first oil crisis in the 1970s. But it implemented a rigorous energy conservation programme. By 1980 it was the world’s most energy-efficient country – it produced more dollars of GDP per joule of energy than any other country. Still, Japan has negligible domestic energy resources and imports the bulk of its requirements; so it is highly vulnerable to oil prices. I asked Mr Hayashi how Japan had tackled the recent rises in oil prices. Being highly energy-efficient, Japan has less room to improve its efficiency; how did it deal with the current oil crisis?

Japan has been trying to replace oil and economize on it; it has brought down the share of oil in its energy consumption below 50 per cent. It has instituted an award for Top Runners – companies that achieve the highest energy efficiency. Other producers learn from these model companies. Nissan and Toyota are pioneers in energy-efficient cars, and have gained market share in the US on that account. Japan is now a leader in energy conservation policies, and would like to export them, including to India. It will showcase its energy technologies in the 2009 Indian Engineering Trade Fair in Bangalore next February, where it is going to be the guest country. It will also set up an Indian Institute of Technology, which will act as a bridge between industry and academia in the two countries.