The earthquake and tsunami that struck Japan on Friday forced multinational companies to close factories, fight fires and move workers, inflicting at least short-term damage on the Japan's fragile economy.
Assessing the full economic impact was impossible in the hours after the quake. But traffic clogged streets, trains stopped, flights were grounded and phone service was disrupted or cut off. U.S. companies DuPont and Procter & Gamble said communications problems made it hard to gauge the effect on their operations in Japan.
Japanese stocks plunged. The benchmark Nikkei index fell 1.7 percent, and the Japanese market was open for only about 15 minutes after the quake.
Still, the damage to Japan's economy, the world's third-largest, wasn't nearly as severe as it might have been. The devastated northeastern coastal region is far less developed than the Tokyo metro area.
"Something similar hitting Tokyo Bay would have been unimaginable," said Michael Smitka, an economist who specializes in Japan at Washington and Lee University.
And in the long run, the disaster could help the Japanese economy as reconstruction projects put people back to work.
Natural disasters "do eventually boost output," said David Hensley, an economist at JPMorgan Chase. The 1989 San Francisco earthquake and the 1994 Northridge quake outside Los Angeles, for example, ultimately helped the local California economies, he said.
Takuji Okubo, an analyst at French bank Societe Generale, said industrial production in Japan fell 2.6 percent in January 1995, the month of the devastating earthquake near the city of Kobe. But it rebounded 2.2 percent the following month and 1 percent the month after that.
On Friday, Japanese auto companies halted production at some assembly plants. But it was not clear whether the catastrophe would have a major effect on the global auto industry. Japan's central Aichi prefecture, site of much of the country's auto manufacturing, is far from the disaster zone.
Analysts said the damage to production seemed limited. But the status of the ports and roads that automakers rely on to move their vehicles remains unclear.
India has overtaken China for the first time as the most attractive business destination for long-term Japanese investments, according to a survey by Japan Bank for International Cooperation (JBIC).
JBIC's annual survey revealed that 70 per cent of surveyed Japanese manufacturers regarded India as an attractive country to do business in over the next 10 years or so, while 67 per cent preferred China. Russia came third, with a 37 per cent rating, followed by Vietnam at 28 per cent.
ROI
The returns of being in India are substantial.
Indian companies give a higher return on equity than other countries in Asia. It is 18 per cent in India compared to 11.5 per cent in China says a JP Morgan study.
India subsidiaries of global companies often outperform their parent companies. And Japanese companies, in particular, are doing remarkably well. Seventy per cent of the Japanese companies in India are making profits in operations, 69 per cent achieve profitability targets, while 83 per cent utilise 70 per cent of their capacities, reveals a FICCI survey.
Corroborating this position, an AT Kearney report says that India is the best place to start a business.
Japan has now been identified as the fourth-largest foreign direct investor to India from July 1991 to July 2007 accounting for US$ 2.7 billion FDI, out of US$ 60.2 billion that the country received in total. According to data released by the Ministry of Finance of Japan, Japan's FDI in year 2006 alone was US$ 515.5 million, which was almost double of US$ 254.7 million received in 2005. Incidentally, 2006 saw the largest annual FDI inflows from Japan to India. During 2005-07, Japanese investment into India has been to the tune of US$ 1.8 billion.
With a growing engagement profile between the two countries, the year 2007 was designated the Indo-Japan Friendship Year. In the month of April 2007 alone, Japanese companies invested around US$ 353 million in India.
Not only Japanese FDI, equity investment from Japan into India is also on the rise, touching US$ 2.6 billion during August 1991-March 2007. The number of Japanese business establishments operating in India increased from 231 in August 2003 to 475 in February 2007.
India is also the biggest recipient of Japan's official development assistance (ODA). Since Japan's first ODA to India in 1958, the country has received monetary aid worth US$ 2.27 million so far.
Japanese FDI into India
Japanese FDI into India is estimated to reach US$ 5.5 billion by 2010. Some FDI projects involving Japan:
Japanese automobile giant Honda is setting up its second car manufacturing unit in Rajasthan at an investment of US$ 254 million with a capacity to produce 60,000 units in the first phase.
Japan's Itoh Oil Chemicals (ITOH) is picking up a 4.8 per cent stake in Mumbai-based Jayant Agro Organics (JAOL), a leader in castor oil and castor derivatives. India produces nearly 70 per cent of the world consumption of castor oil.
Mitsui Group of Japan has picked up 24 per cent stake in JAOL's subsidiary Ihsedu speciality & Chemicals (ISCL). ISCL is currently setting up a chemical manufacturing unit for manufacturing speciality chemicals based on castor oil.
Maruti Suzuki plans to invest between US$ 438.5 million-U$ 877 million for a research and development (R&D) facility in India over the next three to five years.
The above examples point to a singular fact. That Japanese presence in India is on a rise. So is Indian presence in Japan. Indian companies are exploring opportunities to invest in Japan. Around 70 Indian IT companies have already established their offices in Japan.
Bilateral Trade
Japan is among India's top five trading partners. Bilateral trade between Japan and India has been on the steady rise since the year 2003 with trade figures increasing from US$ 3.7 billion in 2002-03 to US$ 6.5 billion in 2005-06, rising further to US$ 7.5 billion in 2006-07, according to the Commerce Ministry.
The reasons behind this interest in India are obvious. India offers a large domestic market base. Besides, mutual synergies between businesses in the two countries are driving initiatives.
Japan is a relatively labour-scarce, capital abundant country that complements India's rich spectrum of human capital.
India's prowess in the software sector lends synergy to Japan's excellence in the hardware sector.
India's abundance of raw-materials and minerals matches well with Japan's capabilities in technology and capital to produce knowledge intensive manufactured goods.
India's large domestic market has been the main factor for investments by Japanese companies. The majority of investments are in traditional fields like automobiles and auto parts. However, some companies have invested in businesses like pharmaceuticals (EISAI), health drinks (Yakuruto), pulp (Nihon Koso) and rice processing (Yanmar).
Japanese small and medium enterprises have begun to discover India as the new growth market. Japan and India share a common vision for the world. This is aptly illustrated by the fact that there has been an increase in the number of joint declarations, delegation visits and other business events between the two countries.
Imports
India's imports from Japan are dominated by capital and knowledge intensive manufactured products such as machinery, transport equipment, electronic goods, chemicals and metal products. Imports from Japan have grown at a CAGR of 24 per cent for the period 2003-06. According to figures provided by the Indian Commerce Ministry, Indian imports from Japan were worth US$ 4.6 billion in 2006-07 compared to US$ 4 billion in 2005-06.
Exports
India's exports to Japan comprise mostly raw material and minerals such as marine products, minerals and iron ore, gems and jewellery and textile products. Exports from India to Japan were worth US$ 2.8 billion in 2006-07 compared to US$ 2.4 billion in 2005-06.
Japan's portfolio investment (FIIs)
There has been an increase in the number of portfolio investment funds through which Japanese investors can enter the Indian stock market. After the first "India Portfolio Investment Funds" was set up in 2004, the number of such funds has doubled from 8 in November 2005 to 16 as of March 2007, attracting large Japanese investments to the Indian stock market. The net asset of the Japanese "India portfolio investment funds" in March 2007 was US$ 8.2 billion, increased from US$ 4.7 billion in end November 2005.
Portfolio investors from Japan into India include funds such as Nomura India Security Investment (US$ 920.5 million), Shinko Pure India Equity Fund (US$ 617.1 million), JF India Fund (US$ 142.7 million), BlackRock India Equity Fund (US$ 929.1 million) Mitsui-Sumitomo India-China Equity Fund, HSBC India Open Fund (US$ 1033.3 million) from HSBC Investments (Japan) K. K, Sumitomo Mitsui Asset Management Co., Ltd. (US$ 264.1 million) and Shisei Investment Management Co., Ltd (US$ 241.9 million) among others.
India's popularity with Japanese investors can be gauged from the fact that an array of new India retail funds have been launched in Japan, which by the end of July were worth US$ 4.05 billion. In fact, the Nomura Asset Management Co. Ltd. in Tokyo had to close its India fund just a day after its launch on June 22 because it collected more money than it could invest without artificially shooting up Indian stock prices. Such has been the growth in Japanese investment in India that much of the US$ 1.9 billion foreign institutional investment inflow in July came from Japan alone
JBIC's annual survey revealed that 70 per cent of surveyed Japanese manufacturers regarded India as an attractive country to do business in over the next 10 years or so, while 67 per cent preferred China. Russia came third, with a 37 per cent rating, followed by Vietnam at 28 per cent.
ROI
The returns of being in India are substantial.
Indian companies give a higher return on equity than other countries in Asia. It is 18 per cent in India compared to 11.5 per cent in China says a JP Morgan study.
India subsidiaries of global companies often outperform their parent companies. And Japanese companies, in particular, are doing remarkably well. Seventy per cent of the Japanese companies in India are making profits in operations, 69 per cent achieve profitability targets, while 83 per cent utilise 70 per cent of their capacities, reveals a FICCI survey.
Corroborating this position, an AT Kearney report says that India is the best place to start a business.
Japan has now been identified as the fourth-largest foreign direct investor to India from July 1991 to July 2007 accounting for US$ 2.7 billion FDI, out of US$ 60.2 billion that the country received in total. According to data released by the Ministry of Finance of Japan, Japan's FDI in year 2006 alone was US$ 515.5 million, which was almost double of US$ 254.7 million received in 2005. Incidentally, 2006 saw the largest annual FDI inflows from Japan to India. During 2005-07, Japanese investment into India has been to the tune of US$ 1.8 billion.
With a growing engagement profile between the two countries, the year 2007 was designated the Indo-Japan Friendship Year. In the month of April 2007 alone, Japanese companies invested around US$ 353 million in India.
Not only Japanese FDI, equity investment from Japan into India is also on the rise, touching US$ 2.6 billion during August 1991-March 2007. The number of Japanese business establishments operating in India increased from 231 in August 2003 to 475 in February 2007.
India is also the biggest recipient of Japan's official development assistance (ODA). Since Japan's first ODA to India in 1958, the country has received monetary aid worth US$ 2.27 million so far.
Japanese FDI into India
Japanese FDI into India is estimated to reach US$ 5.5 billion by 2010. Some FDI projects involving Japan:
Japanese automobile giant Honda is setting up its second car manufacturing unit in Rajasthan at an investment of US$ 254 million with a capacity to produce 60,000 units in the first phase.
Japan's Itoh Oil Chemicals (ITOH) is picking up a 4.8 per cent stake in Mumbai-based Jayant Agro Organics (JAOL), a leader in castor oil and castor derivatives. India produces nearly 70 per cent of the world consumption of castor oil.
Mitsui Group of Japan has picked up 24 per cent stake in JAOL's subsidiary Ihsedu speciality & Chemicals (ISCL). ISCL is currently setting up a chemical manufacturing unit for manufacturing speciality chemicals based on castor oil.
Maruti Suzuki plans to invest between US$ 438.5 million-U$ 877 million for a research and development (R&D) facility in India over the next three to five years.
The above examples point to a singular fact. That Japanese presence in India is on a rise. So is Indian presence in Japan. Indian companies are exploring opportunities to invest in Japan. Around 70 Indian IT companies have already established their offices in Japan.
Bilateral Trade
Japan is among India's top five trading partners. Bilateral trade between Japan and India has been on the steady rise since the year 2003 with trade figures increasing from US$ 3.7 billion in 2002-03 to US$ 6.5 billion in 2005-06, rising further to US$ 7.5 billion in 2006-07, according to the Commerce Ministry.
The reasons behind this interest in India are obvious. India offers a large domestic market base. Besides, mutual synergies between businesses in the two countries are driving initiatives.
Japan is a relatively labour-scarce, capital abundant country that complements India's rich spectrum of human capital.
India's prowess in the software sector lends synergy to Japan's excellence in the hardware sector.
India's abundance of raw-materials and minerals matches well with Japan's capabilities in technology and capital to produce knowledge intensive manufactured goods.
India's large domestic market has been the main factor for investments by Japanese companies. The majority of investments are in traditional fields like automobiles and auto parts. However, some companies have invested in businesses like pharmaceuticals (EISAI), health drinks (Yakuruto), pulp (Nihon Koso) and rice processing (Yanmar).
Japanese small and medium enterprises have begun to discover India as the new growth market. Japan and India share a common vision for the world. This is aptly illustrated by the fact that there has been an increase in the number of joint declarations, delegation visits and other business events between the two countries.
Imports
India's imports from Japan are dominated by capital and knowledge intensive manufactured products such as machinery, transport equipment, electronic goods, chemicals and metal products. Imports from Japan have grown at a CAGR of 24 per cent for the period 2003-06. According to figures provided by the Indian Commerce Ministry, Indian imports from Japan were worth US$ 4.6 billion in 2006-07 compared to US$ 4 billion in 2005-06.
Exports
India's exports to Japan comprise mostly raw material and minerals such as marine products, minerals and iron ore, gems and jewellery and textile products. Exports from India to Japan were worth US$ 2.8 billion in 2006-07 compared to US$ 2.4 billion in 2005-06.
Japan's portfolio investment (FIIs)
There has been an increase in the number of portfolio investment funds through which Japanese investors can enter the Indian stock market. After the first "India Portfolio Investment Funds" was set up in 2004, the number of such funds has doubled from 8 in November 2005 to 16 as of March 2007, attracting large Japanese investments to the Indian stock market. The net asset of the Japanese "India portfolio investment funds" in March 2007 was US$ 8.2 billion, increased from US$ 4.7 billion in end November 2005.
Portfolio investors from Japan into India include funds such as Nomura India Security Investment (US$ 920.5 million), Shinko Pure India Equity Fund (US$ 617.1 million), JF India Fund (US$ 142.7 million), BlackRock India Equity Fund (US$ 929.1 million) Mitsui-Sumitomo India-China Equity Fund, HSBC India Open Fund (US$ 1033.3 million) from HSBC Investments (Japan) K. K, Sumitomo Mitsui Asset Management Co., Ltd. (US$ 264.1 million) and Shisei Investment Management Co., Ltd (US$ 241.9 million) among others.
India's popularity with Japanese investors can be gauged from the fact that an array of new India retail funds have been launched in Japan, which by the end of July were worth US$ 4.05 billion. In fact, the Nomura Asset Management Co. Ltd. in Tokyo had to close its India fund just a day after its launch on June 22 because it collected more money than it could invest without artificially shooting up Indian stock prices. Such has been the growth in Japanese investment in India that much of the US$ 1.9 billion foreign institutional investment inflow in July came from Japan alone
After years of subdued ties following India's nuclear tests in 1998, two large deals last year appear to have set the stage for a renewed wave of Japanese investment in India.
Japanese pharmaceutical major Daiichi Sankyo bought a 34.8% controlling stake in India's largest pharmaceutical firm, Ranbaxy Laboratories. The deal, announced in June, valued Ranbaxy at US$8.5 billion. A few months later, Japanese telecom giant NTT DoCoMo bought a 26% stake in Tata Teleservices Ltd. (TTSL).
Japan had taken a "cautious attitude toward India," says Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based Indian School of Business (ISB). "But now they seem to have decided that it is time to move in."
The bilateral relationship is indeed picking up fast. Japan was the partner country at the Vibrant Gujarat Global Investors' Summit this month. According to Japanese ambassador Hideaki Domichi, who visited Gujarat for the jamboree: "Relations between India and Japan have grown, but there is still more that we can look forward to."
A total of 8,500 memoranda of understanding signaling US$240 billion of planned investments were signed at the summit, more than the total US$185 billion of the last three summits, according to Gujarat chief minister Narendra Modi. Japan was but one of 30 participating nations, and a breakdown of the numbers hasn't been announced. But Japan could end up with a pivotal chunk because it is a key funder of two projects that run through the state: the Delhi-Mumbai Industrial Corridor and the Dedicated Freight Corridor.
Some observers are quick to point out that Japan, which has trailed the United States and the United Kingdom in India investments, has overpaid for foreign investments in its not-too-distant past. "In the late 1980s, Japanese firms raced after foreign real estate, and in the late 1990s they piled into technology companies," the U.K.-based weekly newsmagazine The Economist noted in an October 2008 article. "Both binges ended badly, as companies sold their stakes at a loss and bolted for home." The article points out, however, that things could be different this time. "Instead of trophy assets such as Rockefeller Center or Pebble Beach golf course, the targets are companies that fit strategically with their acquirers, providing new technology or access to new markets."
However, the Ranbaxy investors have taken some large early losses. Ranbaxy shares have traded far below the Rs 737 (US$15.11) that Daiichi Sankyo paid to Ranbaxy's promoters, the Singh family, closing last week at Rs 217.6 (US$4.46). Daiichi Sankyo said this month that it expects to take a US$3.84 billion charge to earnings to reflect the reduced value of its 64% holding in Ranbaxy. (Daiichi Sankyo acquired the rest of the stake in late summer through a statutory open offer.) Similar comparisons aren't possible for TTSL, which is privately held.
The Big Picture
"India-Japan economic relations are definitely on an upward trajectory," says Sanjana Joshi, a consultant with the Delhi-based Indian Council for Research on International Economic Relations (ICRIER). Joshi has a key role with the ICRIER-SPF (Sasakawa Peace Foundation) Japan Studies Project and wrote the book, Changing Japan: Opportunities and Challenges for India.
"Total trade between the two countries crossed US$10 billion in 2007-2008," Joshi says, adding that foreign direct investment from Japan to India from April 2000 to July 2008 was US$2.2 billion. She also points out that Japan ranks third in foreign technology transfer approvals, trailing only the United States and Germany. A total of 871 such technology collaborations between India and Japan were approved from August 1991 to June 2008. "These figures are not very impressive when seen in terms of India's share in Japan's total global trade and investment," Joshi says. "On the other hand, there has been a notable increase in Japan's official development assistance (ODA) to India. India has been the largest recipient of Japan's yen loans since 2003. In August 2008, Japan pledged to extend Japanese ODA loans to five projects. Given that the issue of 'underdeveloped infrastructure' comes up repeatedly in Japanese perspectives on the business environment in India, the recent ODA disbursements are a strong signal of growing Japanese economic focus on India."
Joshi further notes that Japan has agreed to provide US$4.5 billion for the first phase of the Delhi-Mumbai Industrial Corridor, and that five Japanese companies already have decided to set up industrial bases along the corridor. Japan is also committed to supporting the rest of the corridor which, at an estimated cost of US$90 billion, would span six states and bring a major expansion of infrastructure and industry, Joshi says.
She points out that according to the latest survey of overseas business operations by Japanese manufacturing companies, released in November by the Japan Bank of International Cooperation, the number of Japanese companies that view India as promising has increased to a level on par with those that view China as promising. "India and Japan are also in the midst of negotiations for a comprehensive economic partnership agreement," Joshi says.
The Big Players
The flagship Japanese investment in India is car manufacturer Maruti Suzuki India. "The company still sells one in every two cars sold in the country," says managing director Shinzo Nakanishi. The economic slowdown has hit sales, but Nakanishi is unfazed. Maruti Suzuki, now majority-owned by its Japanese parent, will remain market leader, he predicts.
Maruti is celebrating its 25th year in India. The bigger players among other Japanese companies in India are Honda (both in a joint venture with the Hero Group and independently), Toyota, Asahi Glass, Mitsubishi, Marubeni, Panasonic and Sony. According to Japanese embassy figures, the number of Japanese companies operating in India has increased from 260 to 560 in the last two years.
"Over 80% of Japanese companies in India are profitable, and more than 90% have expansion plans," says business weekly BusinessWorld, quoting Japan External Trade Organization chairman Yasuo Hayashi. "Japanese investment in India tripled in 2006 and doubled again in 2007."
The 1,483-kilometer (921-mile) Dedicated Freight Corridor is sure to keep the investments flowing. Japan is helping to fund the railway project that will provide high-speed connectivity for high-axle-load wagons. The industrial corridor will be on both sides of the freight corridor; dozens of Japanese companies are expected to set up shop.
Traffic also flows in the other direction -- from India to Japan. Several Indian information technology companies have started operations in Japan. Some textile majors are headed there, lured by the prospects of an attractive export market. Even the Tokyo Stock Exchange (TSE) is wooing Indian companies to raise funds and list there. Says TSE board chairman Taizo Nishimuro, who was in India recently: "Indian companies have vigorous fund-raising needs and Japanese investors have abundant financial assets. The TSE will act as a bridge between the two."
A 'Radical Reappraisal'
When money moves, bankers follow. Last year, in the first such deal, Mizuho Financial Group of Japan announced a tie-up with the State Bank of India. India's UTI Asset Management Company has inked a deal with Japan's Shinsei Bank. And Nomura, which handled the Ranbaxy deal, has acquired a significant additional presence in India through its takeover of Lehman Brothers worldwide.
Why is India becoming a hot destination for Japanese money? "A radical reappraisal of India's economy has taken place in Japan in view of the high economic growth led by the service industry and the accompanying rapid expansion of consumption," says Joshi of ICRIER. "They have noted the development of the IT, pharma and biotech technologies in India on the strength of a large, highly educated workforce and the fact that the proportion of India's working population aged 15 to 64 will expand over the long term. There is also an element of not wanting to be left out as India strengthens ties with other East Asian countries, particularly Singapore, Thailand, South Korea and China."
Japan's interest in India is "really not very surprising," says Chakrabarti of ISB. "If you look at the profile of investors in India over the past few years, ever since the India story caught on, Japan has not been as participative as the U.S. and the UK. The delay in looking at India could probably be related to the Japanese attitude toward foreign investments. Compared to other developed countries, Japan has shown reluctance in foreign investments, and the extent of home bias in Japan has always been much higher than that in other developed countries."
But Chakrabarti feels that Japan may shine simply because the West is mired in the global meltdown. This is particularly true of foreign institutional investor (FII) funds. "In the short to medium run, it is possible that one may see more investments in India from Japan than from the U.S. or the UK, and this is because of the current crisis," he says. "The FIIs need to honor their commitments in their home countries and so are rolling back from India and going for a safe portfolio. It is possible that in a few months, once things get back to normal, they may return to India."
"In the past year and a half there has certainly been a renewed interest from Japan," says Alok Shende, principal analyst at Ascendia Consulting. "This has happened in two phases. In the first phase, a lot of Japanese money went into the Indian stock market as part of emerging market investments. The second phase that we are seeing now is the serious money that has come in with the two big deals -- Daiichi-Ranbaxy and DoCoMo-TTSL. But instead of looking at Japan as a monolith, we need to realize that the Japanese have always looked at emerging markets. We have seen Japanese investments coming to India earlier also, like in the case of automobiles. Now, with India showing high growth potential, we are going to see more of these deals. Earlier, because interest rates in Japan were low, a lot of U.S. banks borrowed from Japan and invested in India. As part of the deleverage, that is now coming down. But money has started coming to India directly. We are likely to see some significant Japanese investments."
Regional Concerns
Regional concerns also play a role in Japan's newfound interest in India. "There is a China-India-Japan story," says Arvind Mahajan, executive director, advisory services, of global auditing major KPMG. "With Europe and the U.S. in recession, at least for some time, the safeguard for Asia is intra-Asia trade. In that context it makes good sense for Japan, which is under-invested from an India perspective, to diversify its portfolio and invest in India."
"Over the past few years, this region -- India and China together with Japan -- has certainly experienced economic prominence," says Chakrabarti of ISB. "China and India having risen so fast and, being so large, much of the action in the world economy is here. After the Asian crisis, Japan was seriously considering an Asian Monetary Fund. But the international community -- especially outside Asia -- was not particularly impressed with the idea and it did not take off."
Joshi, of ICRIER, notes that "the idea of trilateral cooperation between India, Japan and China was first [proposed] by the then-Japanese ambassador to India, Yasukuni Enoki, in 2004. But it did not find many takers. In the context of the current global economic downturn, cooperation between these three major Asian economies will be certainly required, particularly for the effective utilization of Asian savings." Joshi says, however, that, given the importance India and Japan attach to relations with the United States, "any proposition to form a counterbalancing axis is not likely to find favor."
Adds Mahajan of KPMG: "Japanese investments are not a knee-jerk reaction. They take a long time to consider and think through. Over the past 10 years, the Japanese market has grown very slowly, so they are certainly looking at newer markets. In the past, they have made significant investments in China; now they are looking at India."
Joshi uses a broad brush to paint her view of the future: "The road ahead for India-Japan relations is economic and this is the arena in which India should continue to direct its energies. This will not be easy. But enhanced economic cooperation between the two countries will develop interdependencies that will be harder to ignore for Japan. There are three reasons for proposing this: First, Japan continues to be firmly committed to the alliance with the U.S. as the primary vehicle to advance its security in the international arena; second, Japan is no longer complacent about the economic rise of China; and, third, there may be some slowdowns, but the Indian economic growth story is now irreversible."
Japanese pharmaceutical major Daiichi Sankyo bought a 34.8% controlling stake in India's largest pharmaceutical firm, Ranbaxy Laboratories. The deal, announced in June, valued Ranbaxy at US$8.5 billion. A few months later, Japanese telecom giant NTT DoCoMo bought a 26% stake in Tata Teleservices Ltd. (TTSL).
Japan had taken a "cautious attitude toward India," says Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based Indian School of Business (ISB). "But now they seem to have decided that it is time to move in."
The bilateral relationship is indeed picking up fast. Japan was the partner country at the Vibrant Gujarat Global Investors' Summit this month. According to Japanese ambassador Hideaki Domichi, who visited Gujarat for the jamboree: "Relations between India and Japan have grown, but there is still more that we can look forward to."
A total of 8,500 memoranda of understanding signaling US$240 billion of planned investments were signed at the summit, more than the total US$185 billion of the last three summits, according to Gujarat chief minister Narendra Modi. Japan was but one of 30 participating nations, and a breakdown of the numbers hasn't been announced. But Japan could end up with a pivotal chunk because it is a key funder of two projects that run through the state: the Delhi-Mumbai Industrial Corridor and the Dedicated Freight Corridor.
Some observers are quick to point out that Japan, which has trailed the United States and the United Kingdom in India investments, has overpaid for foreign investments in its not-too-distant past. "In the late 1980s, Japanese firms raced after foreign real estate, and in the late 1990s they piled into technology companies," the U.K.-based weekly newsmagazine The Economist noted in an October 2008 article. "Both binges ended badly, as companies sold their stakes at a loss and bolted for home." The article points out, however, that things could be different this time. "Instead of trophy assets such as Rockefeller Center or Pebble Beach golf course, the targets are companies that fit strategically with their acquirers, providing new technology or access to new markets."
However, the Ranbaxy investors have taken some large early losses. Ranbaxy shares have traded far below the Rs 737 (US$15.11) that Daiichi Sankyo paid to Ranbaxy's promoters, the Singh family, closing last week at Rs 217.6 (US$4.46). Daiichi Sankyo said this month that it expects to take a US$3.84 billion charge to earnings to reflect the reduced value of its 64% holding in Ranbaxy. (Daiichi Sankyo acquired the rest of the stake in late summer through a statutory open offer.) Similar comparisons aren't possible for TTSL, which is privately held.
The Big Picture
"India-Japan economic relations are definitely on an upward trajectory," says Sanjana Joshi, a consultant with the Delhi-based Indian Council for Research on International Economic Relations (ICRIER). Joshi has a key role with the ICRIER-SPF (Sasakawa Peace Foundation) Japan Studies Project and wrote the book, Changing Japan: Opportunities and Challenges for India.
"Total trade between the two countries crossed US$10 billion in 2007-2008," Joshi says, adding that foreign direct investment from Japan to India from April 2000 to July 2008 was US$2.2 billion. She also points out that Japan ranks third in foreign technology transfer approvals, trailing only the United States and Germany. A total of 871 such technology collaborations between India and Japan were approved from August 1991 to June 2008. "These figures are not very impressive when seen in terms of India's share in Japan's total global trade and investment," Joshi says. "On the other hand, there has been a notable increase in Japan's official development assistance (ODA) to India. India has been the largest recipient of Japan's yen loans since 2003. In August 2008, Japan pledged to extend Japanese ODA loans to five projects. Given that the issue of 'underdeveloped infrastructure' comes up repeatedly in Japanese perspectives on the business environment in India, the recent ODA disbursements are a strong signal of growing Japanese economic focus on India."
Joshi further notes that Japan has agreed to provide US$4.5 billion for the first phase of the Delhi-Mumbai Industrial Corridor, and that five Japanese companies already have decided to set up industrial bases along the corridor. Japan is also committed to supporting the rest of the corridor which, at an estimated cost of US$90 billion, would span six states and bring a major expansion of infrastructure and industry, Joshi says.
She points out that according to the latest survey of overseas business operations by Japanese manufacturing companies, released in November by the Japan Bank of International Cooperation, the number of Japanese companies that view India as promising has increased to a level on par with those that view China as promising. "India and Japan are also in the midst of negotiations for a comprehensive economic partnership agreement," Joshi says.
The Big Players
The flagship Japanese investment in India is car manufacturer Maruti Suzuki India. "The company still sells one in every two cars sold in the country," says managing director Shinzo Nakanishi. The economic slowdown has hit sales, but Nakanishi is unfazed. Maruti Suzuki, now majority-owned by its Japanese parent, will remain market leader, he predicts.
Maruti is celebrating its 25th year in India. The bigger players among other Japanese companies in India are Honda (both in a joint venture with the Hero Group and independently), Toyota, Asahi Glass, Mitsubishi, Marubeni, Panasonic and Sony. According to Japanese embassy figures, the number of Japanese companies operating in India has increased from 260 to 560 in the last two years.
"Over 80% of Japanese companies in India are profitable, and more than 90% have expansion plans," says business weekly BusinessWorld, quoting Japan External Trade Organization chairman Yasuo Hayashi. "Japanese investment in India tripled in 2006 and doubled again in 2007."
The 1,483-kilometer (921-mile) Dedicated Freight Corridor is sure to keep the investments flowing. Japan is helping to fund the railway project that will provide high-speed connectivity for high-axle-load wagons. The industrial corridor will be on both sides of the freight corridor; dozens of Japanese companies are expected to set up shop.
Traffic also flows in the other direction -- from India to Japan. Several Indian information technology companies have started operations in Japan. Some textile majors are headed there, lured by the prospects of an attractive export market. Even the Tokyo Stock Exchange (TSE) is wooing Indian companies to raise funds and list there. Says TSE board chairman Taizo Nishimuro, who was in India recently: "Indian companies have vigorous fund-raising needs and Japanese investors have abundant financial assets. The TSE will act as a bridge between the two."
A 'Radical Reappraisal'
When money moves, bankers follow. Last year, in the first such deal, Mizuho Financial Group of Japan announced a tie-up with the State Bank of India. India's UTI Asset Management Company has inked a deal with Japan's Shinsei Bank. And Nomura, which handled the Ranbaxy deal, has acquired a significant additional presence in India through its takeover of Lehman Brothers worldwide.
Why is India becoming a hot destination for Japanese money? "A radical reappraisal of India's economy has taken place in Japan in view of the high economic growth led by the service industry and the accompanying rapid expansion of consumption," says Joshi of ICRIER. "They have noted the development of the IT, pharma and biotech technologies in India on the strength of a large, highly educated workforce and the fact that the proportion of India's working population aged 15 to 64 will expand over the long term. There is also an element of not wanting to be left out as India strengthens ties with other East Asian countries, particularly Singapore, Thailand, South Korea and China."
Japan's interest in India is "really not very surprising," says Chakrabarti of ISB. "If you look at the profile of investors in India over the past few years, ever since the India story caught on, Japan has not been as participative as the U.S. and the UK. The delay in looking at India could probably be related to the Japanese attitude toward foreign investments. Compared to other developed countries, Japan has shown reluctance in foreign investments, and the extent of home bias in Japan has always been much higher than that in other developed countries."
But Chakrabarti feels that Japan may shine simply because the West is mired in the global meltdown. This is particularly true of foreign institutional investor (FII) funds. "In the short to medium run, it is possible that one may see more investments in India from Japan than from the U.S. or the UK, and this is because of the current crisis," he says. "The FIIs need to honor their commitments in their home countries and so are rolling back from India and going for a safe portfolio. It is possible that in a few months, once things get back to normal, they may return to India."
"In the past year and a half there has certainly been a renewed interest from Japan," says Alok Shende, principal analyst at Ascendia Consulting. "This has happened in two phases. In the first phase, a lot of Japanese money went into the Indian stock market as part of emerging market investments. The second phase that we are seeing now is the serious money that has come in with the two big deals -- Daiichi-Ranbaxy and DoCoMo-TTSL. But instead of looking at Japan as a monolith, we need to realize that the Japanese have always looked at emerging markets. We have seen Japanese investments coming to India earlier also, like in the case of automobiles. Now, with India showing high growth potential, we are going to see more of these deals. Earlier, because interest rates in Japan were low, a lot of U.S. banks borrowed from Japan and invested in India. As part of the deleverage, that is now coming down. But money has started coming to India directly. We are likely to see some significant Japanese investments."
Regional Concerns
Regional concerns also play a role in Japan's newfound interest in India. "There is a China-India-Japan story," says Arvind Mahajan, executive director, advisory services, of global auditing major KPMG. "With Europe and the U.S. in recession, at least for some time, the safeguard for Asia is intra-Asia trade. In that context it makes good sense for Japan, which is under-invested from an India perspective, to diversify its portfolio and invest in India."
"Over the past few years, this region -- India and China together with Japan -- has certainly experienced economic prominence," says Chakrabarti of ISB. "China and India having risen so fast and, being so large, much of the action in the world economy is here. After the Asian crisis, Japan was seriously considering an Asian Monetary Fund. But the international community -- especially outside Asia -- was not particularly impressed with the idea and it did not take off."
Joshi, of ICRIER, notes that "the idea of trilateral cooperation between India, Japan and China was first [proposed] by the then-Japanese ambassador to India, Yasukuni Enoki, in 2004. But it did not find many takers. In the context of the current global economic downturn, cooperation between these three major Asian economies will be certainly required, particularly for the effective utilization of Asian savings." Joshi says, however, that, given the importance India and Japan attach to relations with the United States, "any proposition to form a counterbalancing axis is not likely to find favor."
Adds Mahajan of KPMG: "Japanese investments are not a knee-jerk reaction. They take a long time to consider and think through. Over the past 10 years, the Japanese market has grown very slowly, so they are certainly looking at newer markets. In the past, they have made significant investments in China; now they are looking at India."
Joshi uses a broad brush to paint her view of the future: "The road ahead for India-Japan relations is economic and this is the arena in which India should continue to direct its energies. This will not be easy. But enhanced economic cooperation between the two countries will develop interdependencies that will be harder to ignore for Japan. There are three reasons for proposing this: First, Japan continues to be firmly committed to the alliance with the U.S. as the primary vehicle to advance its security in the international arena; second, Japan is no longer complacent about the economic rise of China; and, third, there may be some slowdowns, but the Indian economic growth story is now irreversible."
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