Overseas Business Operations by Japanese …Overseas Business Operations by Japanese Manufacturing Companies Toshiro Nishizawa JBIC Institute Japan Bank for International Cooperation

Overseas Business Operationsby Japanese Manufacturing Companies

Toshiro NishizawaJBIC Institute

Japan Bank for International Cooperation

ICRIER - SPF

Conference on

“India-Japan Economic Cooperation”

July 14, 2008

Magnolia Hall, India Habitat Centre, New Delhi

Copyright © 2007 JBIC Institute. All Rights Reserved. 1

PROFILE OF JBIC


JBIC is “a policy-based financing institution, which has a mandate to implement Japan’s external economic policy and economic cooperation.”

Established in October 1999

As a result of the merger of the Export-Import Bank of Japan (EXIM) and Overseas Economic Cooperation Fund (OECF)

100% owned by the Government of Japan

Total assets of JPY 21 trillion (US$ 200 billion)


JBIC’s operations consist of:

“International Financial Operations”, ranging from export loans, import loans, overseas investment loans, untied loans, guarantees and equity participation

and “Overseas Economic Cooperation Operations”, providing Official Development Assistance loans


Organizational Realignment

As a result of the government decision on the reform of policy-based financing institutions, the two types of operations conducted by the current JBIC will be realigned on October 1, 2008 as follows:International Financial Operations will be taken over by Japan Finance Corporation (“JFC”) as its international finance sector (“New JBIC”);Overseas Economic Cooperation Operations will be succeeded by new Japan International Cooperation Agency (“New JICA”).


JBIC ANNUAL SURVEY ONOVERSEAS BUSINESS OPERATIONS

BY JAPANESE MANUFACTURING COMPANIES


Survey Overview (p.2)

Companies Surveyed, Response Rates, and Overseas Affiliates(Units: No. of companies, %)

Survey targets: Manufacturing companies that have three or more overseas affiliates (including at least one production base)

No. of companies questionnaires were mailed to: 970

Responses returned: 600 (response rate: 61.9%)

Period of survey: Sent in July 2007Responses returned from July to

August

Main survey topics:-Medium-term business prospects-Evaluations for overseas business performance-Promising countries or regions for overseas

business operations-Competition in the global sales market-Important efforts domestically and abroad

to maintain/improve international competitiveness

No. of Respondent Companies by Industrial Classification

Paper & Pulp 7Wood & Wood Products 3

Transportation (excluding Automobiles) 8

Other36

Steel 15

Nonferrous Metals 16Ceramics, Cement &

Glass 16

Petroleum & Rubber19 Metal Products 21

Textiles 34

Foodstuffs35Precision

Machinery38 General

Machinery53

Chemicals85

Electrical Equipment & Electronics

111

Automobiles103

600Companies

See Appendix 1 for more detailed characteristics of the companies surveyed.

Survey year FY2007 FY2006 FY2005 FY2004 FY2003

Surveyed companies 970 967 945 939 932

Responses 600 594 590 595 571

Response rate 61.9 61.4 62.4 63.4 61.3

Overseas Affiliates 11,516 10,152 10,847 10,079 9,838


I. Status of Overseas Business Operations and Strategic Directions


Overseas production and sales both on the rise, approaching 1/3 of the total production and sales …. (p.5)

Ratio of Overseas Production (average for all industries)

0%

5%

10%

15%

20%

25%

30%

35%

40%

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Actual Planned

(Medium-term plan)

Overseas Production Ratio

Overseas Net Sales Ratio

Estimate for FY2007

(FY)


Overseas Production & Net Sales Ratios

(n=563)

(n=498)

15%

20%

25%

30%

35%

40%

45%

15% 20% 25% 30% 35% 40% 45%Overseas Production Ratio (%)

FY2004 figuresFY2002 figures

FY2006 figures

Average for all Industries

Electrical Equipment &

ElectronicsGeneral Machinery

Chemicals

Auto-mobiles

Ove

rsea

s Net

Sal

es R

atio

(%)

(21.5%, 24.6%)

(18.9%, 28.0%)

(41.5%, 41.8%)

(38.6%, 40.9%)

(32.1%, 35.3%)

(21.3%, 27.2%)

(25.9%, 27.8%)

(27.3%, 42.1%)

(26.6%, 26.4%)

(30.5%, 33.2%)

Overseas operations in general machinery and automobile industries particularly showing strong growth …. (p.5)


81.9%

18.0%

0.2%

79.1%

20.2%

0.7%

82.8%

17.1%

0.2%

82.2%

16.8%

1.0%

0%

20%

40%

60%

80%

100%

FY2004 FY2005 FY2006 FY2007

Medium-term Prospects (next 3 years or so) for Overseas Operations

590 575 580 595 companies

Scale back/withdraw

Maintain present level

Strengthen or expand

Strategies of strengthening or expanding overseas business operations continue …. (p.6)


Medium-term Prospects (next 3 years or so) for Overseas Operations by industry

595 34 32 83 53 108 103 38 companies

All industriesFoodstuffs Textiles

Chemicals

General machinery

Electrical equipment & electronics

AutomobilesPrecision machinery

20%

40%

60%

80%

100%

0%

85.3%

14.7%0.0%

88.0%

12.0%

0.0%

82.2%

16.8%

1.0%

56.3%

37.5%

6.3%

81.1%

18.9%

0.0%

76.9%

19.4%

3.7%

88.3%

11.7%

0.0%

78.9%

21.1%

0.0%

Focus on automobiles stands out …. (p.6)

Scale back/withdraw

Maintain present level

Strengthen or expand


Ratio of Reasons Cited for Being Promising (average for all reasons, percentages relative to FY2003 levels of same)

Local Market

Current size of local market 29.1

Future growth potential of local market 70.9

0%

20%

40%

60%

80%

100%

120%

FY2003 FY2007

30.7

77.3

100 108

Low-cost Operations

Inexpensive source of labor

73.856.1

Inexpensive components & raw materials

0%

20%

40%

60%

80%

100%

FY2003 FY2007

14.8

100

7126.2

Motivations for overseas investment are shifting from the search for low-cost to local markets …. (p.15)


II. Promising Countries Ranking


28S aud i A rab ia2 1 st16A ustra lia28P o land2 0 th16C an ad a28A ustra lia1 9 th28H u ng ary28H o ng K o n g1 8 th21 2E ngland21 0T urkey1 7 th21 2P hilip p ines21 0E ngland1 6 th31 4M exico31 3C zech R ep u b lic1 5 th31 5C zech R ep u b lic31 5G erm an y1 4 th31 5P o land31 5P hilip p ines1 3 th31 5G erm an y42 1M exico1 2 th52 2M alaysia42 1M alaysia1 1 th62 7T aiw an52 4T aiw an1 0 th83 9Ind o ne sia63 2K o rea9 th94 4K o rea94 6Ind o nesia8 th94 5B razil94 7B raz il7 th

2 09 8R ussia1 89 3U nited S ta tes6 th2 11 0 4U nited S ta tes2 31 1 4R ussia5 th2 91 4 2T hailand2 61 3 2T hailand4 th3 31 5 9V ie tn am3 51 7 8V ietn am3 rd4 72 2 9Ind ia5 02 5 4Ind ia2 nd7 73 7 2C hin a 6 83 4 2C hin a 1 st

percentage share (% )

(C o m pan ie s)4 8 4FY 2 0 0 6 S u rveypercentage

share (% )(C o m pan ie s)

5 0 3T h is year’s su rveyR ank in g

28S aud i A rab ia2 1 st16A ustra lia28P o land2 0 th16C an ad a28A ustra lia1 9 th28H u ng ary28H o ng K o n g1 8 th21 2E ngland21 0T urkey1 7 th21 2P hilip p ines21 0E ngland1 6 th31 4M exico31 3C zech R ep u b lic1 5 th31 5C zech R ep u b lic31 5G erm an y1 4 th31 5P o land31 5P hilip p ines1 3 th31 5G erm an y42 1M exico1 2 th52 2M alaysia42 1M alaysia1 1 th62 7T aiw an52 4T aiw an1 0 th83 9Ind o ne sia63 2K o rea9 th94 4K o rea94 6Ind o nesia8 th94 5B razil94 7B raz il7 th

2 09 8R ussia1 89 3U nited S ta tes6 th2 11 0 4U nited S ta tes2 31 1 4R ussia5 th2 91 4 2T hailand2 61 3 2T hailand4 th3 31 5 9V ie tn am3 51 7 8V ietn am3 rd4 72 2 9Ind ia5 02 5 4Ind ia2 nd7 73 7 2C hin a 6 83 4 2C hin a 1 st

percentage share (% )

(C o m pan ie s)4 8 4FY 2 0 0 6 S u rveypercentage

share (% )(C o m pan ie s)

5 0 3T h is year’s su rveyR ank in g

Promising Countries/Regions for Overseas Business Operations over the Medium-term (next 3 years or so) (multiple response)

Note: left column = respondent companies; right column = percentage share

China maintains the top position, but India, Vietnam, and Russia increase their shares …. (p.13)


Promising Countries/Regions for Overseas Business over the Medium-term (next 3 years or so): Percentage Shares

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY2003 FY2004 FY2005 FY2006 FY2007

China India Vietnam

Thailand Russia USA Brazil Indonesia

(490 Companies)

(497) (483) (484) (503)

Interest shifts from China to India, Vietnam, and other countries …. (p.7)


Existence of Concrete Business Plans for Promising Countries/Regions

150

100

50

0

50

100

300

US

KoreaIndonesia

Taiwan

No plan

Plans exist

(Unit: Companies)

112

252

157

62

71

23

54

46

17

21 23

19 11

1616

13

10

218

115

89

159

72

57

59

115

35

77

55

33

18

26Brazil

13

31

18

27

China

India

58

80

Thailand

104

52

Vietnam Russia

LeftFY2007

RightFY2006

14

India, Vietnam, and Russia are attracting more companies’attention, but the majority yet to have concrete business plans …. (p.13)


Rest of A

sia & O

ceania

No. of Companies to Strengthen/Expand Operations

Russia &

other CIS

(Companies)

Korea

Taiw

an

Singapore

Hong K

ong

Thailand

Indonesia

Malaysia

Philippines

Northeastern

Northern

Eastern

Southern

InlandIndiaV

ietnam

North A

merica

Mexico

Brazil

Rest of L

atin Am

erica

EU

15

Central &

Eastern E

uro

Rest of E

urope

Middle E

ast

Africa

All industries

China

11792

6391

256

10684

5684

167

292

213

67

168139

24

229

6077

173

101

37

9059

3 -5 7 20 18 4 -2 6 0 15 -2 -10 -4 45 21 -1 22 17 16 16 2 14 26 20

2627

717

-50

0

50

100

150

200

250

300

350 FY2007 Survey results

Change since FY2006Legend

The number of companies to strengthen operations in China leveling off, spreading out into other countries …. (p.8)


III. India and Other Promising Destinations—Comparison


Number of companies with one or more production bases

Number of companies indicating the relevant country being “promising for overseas operations over the medium-term”

India

0

50

100

150

200

250

300

FY03 FY04 FY05 FY06 FY07

(Companies) Vietnam

0

50

100

150

200


(Companies)

Number of Companies with Production Bases and Indicating the Country as Promising (p.14)

China

050

100150200250300350400450500550


(Companies) Thailand

0

50

100

150

200

250

300

350


(Companies)


Businesses in China and Thailand being cultivated more deeply, while India and Vietnam gain attention as new destinations.Although responses citing China as a promising country for overseas operations have decreased, the number of companies with production bases there is steadily increasing. About 80% of the 600 respondent companies have production bases there, and it is an extremely important destination for overseas expansion for Japanese companies.Although companies citing Thailand as a promising overseas destination have reached a plateau in terms of numbers, about 50% of respondent companies already have production bases there, making it a core of operations in Southeast Asia. The ratios of companies owning production bases in India and Vietnam remain at a mere 10% and 15% respectively, actual moves into these countries are expected to pick up in the near future.


IV. Why Promising?


19.9355. Social/political situation stable

19.9355. Base of export to third countries

31.3554. Qualified human resources

36.4643. Good for risk diversification

53.4942. Future growth potential of local market

71.01251. Inexpensive source of laborRatio

No. of companies(Total number of respondent companies: 176)

Vietnam Thailand

28.5375. Current size of local market

32.3424. Concentration of industry

33.1433. Supply base for assemblers


48.5631. Inexpensive source of laborRatio


Inexpensive source of laborGood for risk diversification

Qualified human resources

Reasons for Vietnam being promising

FY03 FY04 FY05 FY06 FY07(85 Companies) (108) (126) (154) (176)

0%

20%

40%

60%

80%

100%

Inexpensive source of labor

Current size of local marketConcentration of industry

Reasons for Thailand being promising

FY03 FY04 FY05 FY06 FY07(141Companies) (146) (145) (133) (130)

0%

20%

40%

60%

(p.17)


China India

Reasons for China being promising

0%

20%

40%

60%

80%

FY03(447 Companies)

FY04(448)

FY05(393)

FY06(362)

FY07(336)

Inexpensive source of laborCurrent size of local marketTax incentives for investment

24.7835. Inexpensive components & raw materials



50.31692. Inexpensive source of labor


RatioNo. of

companies(Total number of respondent companies: 336)



29.7733. Qualified human resources

47.61172. Inexpensive source of labor


RatioNo. of


Reasons for India being promising


(69 Companies) (112) (168) (223) (246)

0%

20%

40%

60%

80%

100%

Inexpensive source of laborFuture growth potential of local market

Qualified human resources

(p.16)


V. What are the Remaining Challenges?


34.5495. Execution of legal system unclear

34.5494. Underdeveloped legal system

35.2503. Underdeveloped local supporting industries

39.4562. Difficult to secure management-level staff

47.9681. Underdeveloped infrastructure

RatioNo. of


Vietnam Thailand

23.2265. Security/social instability

24.1274. Difficult to secure technical/engineering staff

36.6413. Difficult to secure management-level staff

38.4432. Rising labor costs

42.9481. Intense competition with other companiesRatio


Challenges faced in Vietnam

FY03 FY04 FY05 FY06 FY07(71) (82) (94) (127) (142)

0%

20%

40%

60%

Rising labor costsUnderdeveloped infrastructureLack of information on the country

Challenges faced in Thailand

FY03 FY04 FY05 FY06 FY07(106) (102) (103) (107) (112)

0%

20%

40%

60%

Rising labor costsSecurity/social instability

Difficult to secure management-level staff

(p.17)


China India

Increased taxationRising labor costs

Underdeveloped infrastructure

39.11275. Execution of tax system unclear

44.91464. Intense competition with other companies

53.51743. Rising labor costs

54.51772. Insufficient protection for intellectual property rights

64.92111. Execution of legal system unclearRatio


23.2485. Lack of information on the country

44.9494. Labor problems

23.7503. Intense competition with other companies

27.1562. Execution of legal system unclear

54.11121. Underdeveloped infrastructure

RatioNo. of


Challenges faced in China

0%

20%

40%

60%

(427) (423) (380) (351) (336)FY03 FY04 FY05 FY06 FY07

0%

20%

40%

60%Challenges faced in India

FY03 FY04 FY05 FY06 FY07(60) (95) (127) (178) (207)

Rising labor costsUnderdeveloped infrastructureLack of information on the country

(p.16)


For India, Infrastructure is viewed as a very real problem .... (p.19)

Note: These graphs represent which elements of infrastructure were thought to be underdeveloped by companies that chose “underdeveloped infrastructure” as a response to questions about “issues in promising countries”. The percentages in the graphs were calculated by dividing the number for each by the total number of companies giving answers to the “issues in promising countries” question.

India

Vietnam

(n=207)

(n=142)

China

(n=325)

40.1%

27.1%

14.0%11.1% 10.6%

31.5%

25.8%

11.8% 12.4% 11.2%

37.2%37.1%

0%

10%

20%

30%

40%

Roads Electricity Water Communications Railways Ports

5.5%

24.6%

10.2%

4.9%3.1% 1.2%

4.8%

22.8%

6.3%3.1% 2.6% 1.7%

0%

10%

20%

30%

40%

28.9% 28.2%

14.1% 14.8%

9.2%

14.1%

31.5% 31.5%

15.7%14.2%

8.7%

14.2%

0%

10%

20%

30%

40%

Left2007

Right2006

Many infrastructure-related issues cited for India. Roads, electricity and water in particular were listed as issues that need to be addressed.

As the problem of insufficient information is solved and companies are beginning to study actually investing in India, the infrastructure issue is coming to be viewed as a very real problem.



Thank you!

Toshiro Nishizawa

Deputy Director General

JBIC Institute

[email protected]

Documents

Overseas Business Operations by Japanese …Overseas Business Operations by Japanese Manufacturing Companies Toshiro Nishizawa JBIC Institute Japan Bank for International Cooperation