Staging for Accelerating Japanese Investment in India – Analysis – Eurasia Review
In 2020, Japan adopted two policies to build supply chain resilience. A major grant was made to incentivize Japanese investors to diversify offshore investments and invest in the domestic market for supply chain resilience. The main objective was to reduce excessive dependence on China. The focus was on Southeast Asian countries for offshore diversification.
Currently, China is the largest supply chain source for Japan. Nearly a quarter of Japanese import parts, components and intermediates come from China. Nonetheless, the 2020 policy of eclipsing overreliance on China was nothing new. Over the decades, Japanese companies left China, but gradually. According to a survey, there were 13,934 Japanese companies in 2016. It fell to 13,685 in 2019. Moreover, according to one estimate, the share of parts and components from China was already on a downward trend. It fell from 29.5% in 2015 to 26.1% in 2021.
During COVID 19, China was Japan’s main trading partner. In 2021, it accounted for 22.9% of Japan’s total trade. Exports to China accounted for 21.6% of Japan’s global exports, and imports from China accounted for 24.9% of Japan’s global imports. Japan had an unfavorable trade balance with China.
In offshore diversification to reduce overreliance on China, efforts have been given to Thailand, Vietnam, Malaysia, Indonesia and the Philippines. India presented less potential for diversification. But, the irony is that in 2021 Japanese investment in India has increased. On the contrary, Japanese investments have fallen in Thailand, Indonesia and the Philippines – the preferred nations for supply chain diversification.
To everyone’s surprise, Japanese investment in India has increased significantly in 2021 and more than in Vietnam and Malaysia, the preferred destinations for supply chain diversification. Japanese investment in India increased by 72% in 2021, compared to increases of 58.5% and 47.9% respectively in Vietnam and Malaysia (according to Japanese statistics). This reflects that there was a perceived difference between the Japanese government and Japanese business interests regarding the countries’ potential for offshore supply chain diversification.
There were few takers of Japan’s supply chain resilience initiative. According to JBIC (Japan Bank for International Cooperation), most Japanese investors surveyed lamented the insufficiency of Japanese clusters in prime destinations in Southeast Asia for diversification compared to clusters built in China. In addition, China’s rapid recovery compared to other Asian countries has led them to think about diversifying towards other Asian countries in attracting subsidies.
Nevertheless, pro-Japanese analysts in India are optimistic about the active role played by Japanese investors. They argued that if India can be a contract manufacturing hotbed for a major US company, such as Apple, attracting investment from Foxconn, why not have the potential to be an alternative destination for the chain? Japanese supply. The truth is that even though Japanese foreign policy is less influential in catalyzing India’s global political landscape, in the economy, Japan has unbroken contributions in transforming the Indian economy into a modern, environmentally friendly manufacturing solution. the environment. The automobile, the metro, the rapid transport system (such as the high-speed train), electronics are examples of this.
Under these conditions, how can India reap the benefits of Japan’s supply chain resilience initiative? The JBIC survey reveals the way forward. This is an annual survey conducted by the Japanese bank. According to the survey, India was voted one of the most promising business destinations for Japanese investors in the medium term. Even for a longer period, say 10 years, respondents were optimistic about doing business in India.
The reasons given for the preference for India were better economic growth and larger local market size, low labor costs and supply base assemblies and components and materials raw materials at low cost. The economy’s sharp rebound with the fastest growth recovery impressed Japanese investors. India’s GDP is expected to grow by 8% in 2022-23, after falling by 7% in 2021-22. India is expected to outpace Chinese growth, which is expected to reach 4% over the same period.
Investing in supply chain resilience in the Indo-Pacific region, which is attracting growing interest, is another factor paving the way for Japanese investment. This paves the way for India to exploit the opportunities of its low-cost hub, laden with high IT technology, for the supply chain in the region. The launch of the IPEF (Indo-Pacific Economic Framework) poses a challenge to Vietnam, Thailand, Malaysia and the Philippines, after India’s withdrawal from RCEP. Eventually, the Japanese government supported the initiative by giving financial support to 6 Indian projects under the “Programme for Supply Chain Resilience in the Indo-Pacific Region”.
Rupee convertibility may pose a new challenge for India to tap the supply chain resilience market in Japan. Until now, the Indian rupee was not convertible. Recently, RBI allowed the Indian Rupee to be commercially convertible. It allowed invoicing as well as payment in Indian rupees for export and import. This will help reduce currency risks. The rupiah will help Indian manufacturers supply components, parts and intermediaries to assemblers across borders at more stable prices amid global exchange rate volatility.
Ultimately, this will ensure that assemblers rely on India for a low-cost supply chain that provides sustainability.
Therefore, India is equally competent to be the preferred destination of the China +1 strategy.