The writer heads the India desk at Grant Thornton Taiyo LLC, Japan
While India needs Japan’s varied expertise, Japanese companies are keen on alternatives to China
The Narendra Modi government’s regulatory policy and business-friendly stance has provided much-needed relief, given that discussions about India have usually always drawn negative remarks. The government is now expected to go full throttle in its national growth strategy by attracting foreign capital and utilising private-sector investment.
The immediate focus has been to speed up decision-making; major policy reforms are yet to follow.
The legislative agenda for the winter and Budget Parliament session thus includes many important matters such as increase in FDI in the insurance sector, the Goods and Services Tax (GST) Bill and other business-friendly reforms.
The reality is that business on the ground is still tough, with no pricing power at hand. This is true even for foreign companies. Whether foreign investment in India becomes a big trend again hinges on a series of initiatives and industrial policies the government will hammer out over the next several months.
Having said that, it is largely expected that Japan’s increasing thrust on infrastructure exports and India’s growing need for everything from power to roads are likely to bring the two countries together.
Notably, Japanese trading and manufacturing houses are betting high on Indian businesses.
Japanese investment and technology houses are committing to invest in the online retail marketplace in India; other companies are betting on IT, food processing, auto components, apparels and so on. Robotics, vaccines and immunotherapy drugs, railways and defence equipment are target areas.
Japanese establishments have tripled in five years. There was a brief period of concern in Japanese industrial circles about some major Japanese companies quitting or reducing operations in the Indian market at a time when the Indian economy was finally showing signs of bottoming out.
However, investments are now on the rise. Japanese companies are interested in India and many look to make acquisitions a key part of their growth strategy.
They aim to use their cash reserves more efficiently so that there is an increased flow of investment not only in businesses but also into capital markets. Another important reason for increased interest is the slowdown in China, which could make a big difference.
Pinched by double-digit increases in China’s minimum wages and its opaque legal system, many companies are looking for low-cost alternatives. Southeast Asian countries such as Vietnam and Indonesia are attractive in sectors such as solar energy and infrastructure but they lack the supply of workers that India can provide.
At present, the Japanese presence in China is significantly higher than in India. Japan has more than 15,000 companies and businesses in China, as against 1,200 in India, with leading brands in the electronics and auto sectors already operating in India at full capacity.
What really contributes to this big gap is the non-existence of small and medium size Japanese companies in India.
While India poses several challenges to these companies, they also face internal challenges.
For instance, only risk-averse financing is available to them, they don’t have a strong task force and global experience, and their aged management expects short- to medium-term return on equity with stability around the principal amount invested in India.
Therefore, the mid-size companies prefer strategic partnerships or acquisitions, through which available synergies can be leveraged and Japanese technology can be combined with the market intelligence and strong supply chain of Indian companies.
However, with the growing need for overseas expansion, the current overseas M&A boom in Japan will see a more measured investment stance. There is a shortage of Japanese executive talent with global experience.
Thus a key challenge will be how Japanese executives, with board positions on their overseas ventures or acquisitions, use their position and authority to nurture, protect and preserve their company’s overseas investment.
Indian companies must ensure stronger governance to provide comfort to Japanese investors and understand and appreciate the unique style and values of Japanese management which derive from their cultural values. This will go towards developing long-term understanding between Indian and Japanese companies.
The article appeared in the Hindu Business Line. The article can be found here.