No Yen For India?

But are they? Far from it, although it is, no doubt, true that with thesouring of their love affair with China, the Japanese have begun to cast theirgaze India-wards. Signs of this new mood were indicated when Japan’s PrimeMinister referred to India as a "major power", when he visited the countryearlier this year. A telling fact is also that a major Japanese businessdelegation visited India after a long gap of five years -- led by Hiroshi Okuda,chairman of the world’s most profitable car company, Toyota Motor Corporation.

Like the Japanese premier, Okuda too is gracious in his praise for India’sgrowing manufacturing capabilities. His delegation comprised the NipponKeidanren that is dominated by Japanese big business interests. At a recentluncheon meeting with the Confederation of Indian industry (CII), Okuda candidlystated, "India and Thailand are growing fast because of their focus on qualityin manufacturing", adding that they soon would "overtake Japan if Japanesecompanies do not pay attention to quality."

To buttress his statement, Okuda mentioned that despite appeals at thehighest levels to pay greater attention to quality, Japanese companies are notinterested in winning awards like the Deming prize while the total qualitymovement was spreading in India and many companies are winning this covetedprize. When he headed the Deming award committee last year, three Indiancompanies -- Indo-Gulf Fertilizers Ltd, Lucas-TVS and SRF Ltd -- comprised thesix Deming awardees. No Japanese company has won this award of late.

No doubt, all of this sounds like music to India Inc. But if the expectationwas that Keidanren would announce dramatically higher investment intentions inthe country, this didn’t come to pass. The Japanese, for their part, are knownto be unfailingly polite and lavish with their appreciation of India’s immensepotential. But when it comes down to business, their exposure in the countryleaves much to be desired. With actual FDI of only $101 million in 2004, theydon’t have the yen for big-ticket investments in India.

Okuda’s company is, of course, already present in India’s booming carmarket and has plans to rollout a small car to take on Suzuki’s bread andbutter model, the Maruti 800. Toyota indeed has high comfort levels operatingfrom the state of Karnataka -- its local subsidiary’s vice-chairman VikramKirloskar mentioned an interesting fact that the company could indeed roll outthe first vehicle within 18 months with 75 per cent local content -- the fastestimplementation as yet in Toyota’s overseas plants!

Similarly, Suzuki-controlled Maruti Udyog Ltd is also stepping up itsinvestments to set up another assembly plant and diesel engine facility in thestate of Haryana. There are also reports of Mitsubishi Chemicals ramping upcapacities to produce purified terephthalmic acid. Honda, too, is thinking ofexpanding its operations although a dark and troubled shadow hangs over itsplans due to the brutal lathicharge on workers of Honda Scooter and MotorcycleIndia in Gurgaon, Haryana on July 25.

All these plans aggregate to investments of $500 million per annum over thenext three years but still represent only a teeny-weeny fraction of Japan’sexposure to China and ASEAN. For all the talk of investment plans, Indiaaccounts for less than 4 per cent of the 4,100-odd Japanese companies worldwidewhile more than a half of them do business with China. For a sense ofperspective, the cumulative actual Japanese investments in India since 1991 areless than its investments in China in a single year!

In this regard, the subtext of Okuda’s praise of India offers a clue as towhy they will not come here in a bigger way: the issue is not India versus Chinabut India versus Thailand. With Japan’s love affair rapidly souring with thedragon, the beneficiaries of its higher investments are likely to be Thailandand ASEAN. India can hope to leverage these inflows only if it’s able to alignduty structures in line with ASEAN. Japanese companies also have operations inThailand that has a free trade agreement (FTA) with India.

The upshot is that instead of investing here, the Japanese have the option todo so in Thailand. This possibility of FDI diversion indeed is why Indianautomobile industry opposes the Indo-Thai FTA. While, no doubt, the tradebalance has shifted towards Thailand since the FTA, the fear of localmanufacturers and component suppliers is that the Japanese companies will usebases like Thailand increasingly as a staging ground for their assault on theIndian market in automobiles, consumer electronics and so on.

All these factors raise concerns regards India’s attractiveness as adestination for Japanese FDI. The assumption that they are lining up to comehere is a delusion. Nothing of the sort will be in prospect unless Indiaharmonises its business practices with ASEAN. Although the Honda episode isunlikely to trigger an exodus of Japanese from Haryana, the fact is thatKeidanren raised queries regarding labour relations during the luncheon with CII.The Japanese are still waiting and watching.

N. Chandra Mohan is a Delhi-based commentator on economic issues.