India: A Priority Partner for Japan

Earlier this year, Japan’s Prime Minsiter Shinzo Abe visited India to pledge continued economic, technical and political support for the subcontinent amidst increasing geopolitical tensions with China; Japan’s largest trading partner. Abe’s visit signified growing interest in India among Japan’s private and public sector, in particular amongst Japanese corporations looking for a new abundant source of highly skilled, entrepreneurial, low-cost labour and a massive market of emerging middle-class consumers.

Japan’s foray into India began in the early 1990s following India’s period of economic reforms, but it served as a second priority to China and ASEAN until around 2008 to 2012 when Japanese investments into India rose seven fold making Japan the third largest source of foreign investment. A survey by the Japan Export Trading Organisation (JETRO) in 2012 also revealed that India had become the most preferred location for Japanese investment.

In August 2011, both nations signed a Comprehensive Economic Partnership Agreement (CEPA) with the intention of boosting bilateral trade, and since then more than 900 Japanese companies have been registered in India, whilst steadily expanding their local presence and according to an Ersnt and Young study, Japan is now the second largest foreign job creator in India. The Hindustan Times believes that ”If a fraction of the 14,000 Japanese firms in China were to move (to India), the result would be a job Tsunami.”

Current Challenges

On the other hand,  since the implementation of the CEPA India has been on the rough end of a widening trade deficit with Japan as Indian companies have to cope with much tougher and more expensive tariffs to enter the Japanese market and once inside, Indian IT firms for example have experienced stagnant growth. Therefore from the perspectives of many Indians, Japan is benefiting more from the agreement so far.

At the same time as Masanori Kondo points out it is not so easy for Japanese companies to establish themselves in India either as they struggle to cope with India’s poor infrastructure, bureaucratic red tape, complicated tax system and human resource management.

Lessons from Korean Companies in India

In the late 1980s and 1990s when Japanese companies where focusing their efforts on the US and Western European markets, Korean corporations such as Samsung and LG made inroads into the former USSR and India and have since become highly successful. Masanori Kondo believes this stems from the more competitive business practices of Korean companies which should now be adopted by Japanese firms hoping to expand their presence in India as well. Three strategies in particular stood out from Masanori’s report:

1- Localization

South Korean corporations were highly sensitive to local tastes and the needs of Indian consumers when developing their products for the Indian market and took the initiative to conduct in-depth market research and established local R&D facilities. Quiet air conditioners, dust-free keyboards, sari-cycle washing machines and vegetarian orientated refrigerators are examples of such Indian-orientated products. In hindsight many Japanese companies failed to recognize the importance of adapting to Indian aesthetics and tried selling products already adapted for Southeast Asia or European markets. In contrast Toyota’s ‘minivan’ has proved very popular among large Indian families and Sony’s flat-screen TVs continues to outsell those of its Korean competitors.

2- Improving Expatriate Life

Samsung encourages their expatriate staff in India to take part in cultural exchanges such as home stays with Indian families in order to become more sensitive to local customs and develop enthusiasm for working in India. ‘Korean villages’ have also been created, designed to provide comfort and to cater to all the Korean necessities of expatriate staff which enables them to adapt more easily to life in India. In contrast Japanese expatriates find it very difficult to adapt to conditions in India, and often become less motivated and less productive which Masanori believes contributes to a “vicious cycle of poor performance.”  As a result on average, Korean expatriates stay in India twice as long as a their Japanese counterparts.

3- Making the most of Local Talent

India’s abundance of young, skilled and motivated talent has contributed to the success of Korean companies in India who, like LG have even sent some of their best performing Indian managers to oversee operations in other emerging markets. Decision making in Japanese companies is often concentrated in the hands of Japanese rather than Indian employees and there are scarce opportunities for global career progression for local staff. Providing more optimistic career prospects and chances to benefit the firm both locally and globally could ensure that Japanese companies can recruit and retain the best of India’s talent.

Opportunities for Japanese Companies in India

Despite the surge in Japanese investment in India over the last five years, the country still represents “only 4% of total Japanese outward investment flow into Asia,” so there is potential for much greater cooperation between the two nations. Atish Patel writing for the Wall Street Journal identifies these opportunities for future collaboration: “India has natural resources; Japan lacks raw materials. India has built a thriving software industry; Japan is home to many of the world’s hardware heavyweights. India’s economy is labor intensive; Japan’s is capital intensive. India’s infrastructure is in a dire state; Japan’s infrastructure is the envy of the world.”

Japanese can gain tremendously from spearheading massive infrastructure projects in India such as the Delhi Metro, The Delhi-Mumbai Industrial Corridor, and possibly even bullet trains to update India’s ancient railway system. Not only does improved infrastructure benefit Japanese companies operating in India but economies and cities can be built around these improved transport networks, which generates more wealth for local populations. Japan offers a competitive advantage as a world leader in infrastructure engineering and is in a key position to dominate the market as the largest infrastructure supplier which also requires a long term commitment to sustain quality and maintenance.

Finance, insurance, pharmaceutical and IT sectors present much easier market entry for Japanese companies compared to capital intensive sectors such as manufacturing in which there are many established competitors. India’s well educated, but comparatively low cost professionals enable Japanese companies to launch more R&D centres, and increase their penetration in the tertiary sector. Recently Japanese financial groups such as Nomura, Daiwa and Dai-ichi Life Insurance have all entered and expanded operations in India.

India’s rapidly growing population and industry drastically requires a low-cost, sustainable source of energy and nuclear seems an attractive solution. Since the 2011 Fukushima crisis in Japan, domestic development of nuclear energy has become a controversial topic in Japan, therefore Japan can gain from selling its nuclear technology and expertise to India.

More than just a China Plus One-strategy

As stated in a previous post about Japanese and Korean companies in China, many have or are adopting a ‘China-Plus One strategy’, India does not have to be part of this, instead it can become a complete alternative to China altogether. Japan can benefit from expanding operations in the subcontinent which offers more promising prospects than other parts of the world. According to the president of Panasonic India, “India is not anymore a part of our emerging market business but has been carved out as the number one priority market globally” as the company plans to double sales over the next three years and invest more than US$20 Billion. With this kind of optimism and prospects for mutual benefit and cooperation India has clearly become a key partner for Japan.

About the Author

Thomas is a pentalingual graduate of the University of Hong Kong, now based in Japan as editor of Shifteast.com and researcher for Mandalah Tokyo.