India’s trade and economy is not just about fostering and strengthening bilateral relationships with the US, European Union and China but more importantly to ‘look east’ and ‘act east’. Asean countries, South Korea and Japan are integral parts of India’s initiatives in East Asia.
Such initiatives towards the east are mutual. Japan looks at India as a leading market with potential for developing various businesses and social infrastructure. The Delhi Metro, which has become a success symbol of infrastructure development in India and is now the lifeline of the public’s daily travel in the national capital and its suburbs, is the foremost manifestation of Indo-Japanese bilateral cooperation. This national icon would not have seen the light of the day but for the generous soft loans from Japan’s Bank for International Cooperation.
Captains of the industry stress on an urgent need to re-energize the 2011 Comprehensive Economic Partnership Agreement, or CEPA between India and Japan.
It seems CEPA was initially slow in achieving its aims to enhance the economic relationship between the two countries. It is designed primarily to remove tariffs to help boost bilateral trade, especially in the segment of industrial goods.
In the medium term, CEPA is also expected to stimulate exports of consumer goods against a backdrop of an ever-growing Indian middle class. Time has come for CEPA to begin its march onward for the medium term.
“India is a very important market as well as a partner for various businesses Japan is keen to develop,” Takeo Sumino, Senior Managing Director, Head of Asia Strategy, Nomura, said in an interview with fii-news.com.
The Japanese companies are very keen to establish manufacturing bases in India and take advantage of the subcontinent’s proximity to the Middle East and African markets. The Japanese initiative is in line with the clarion call given by Indian government, inviting businessmen from across the globe to manufacture or ‘Make in India’.
Many Japanese companies are now readying themselves to take this logic forward in the form of ‘Design in Japan, Make in India’. India is serious about this plan and a dedicated cell is being set up in the Prime Minister’s Office to deal with business proposals emanating from Japan.
Manufacturing skills and process controls are key strengths of the Japanese companies. The ‘Make in India’ scheme presents large opportunities for Japanese entrepreneurs.
“Not only can Japanese companies foster the notion of ‘Make in India’, they can also nurture future talent for the manufacturing sector in India,” stressed Sumino.
“Japanese companies are eager to grow their businesses outside of their country as the local demographics will not enable any significant increase in domestic demand in the near-term,” Sumino pointed out. Japan’s population is ageing and is on the decline.
The Japanese government and companies have deep skill-sets, which can be used to develop smart cities and hence the Indian projects are very important for Japan, said Sumino. It may be recalled that last year, India’s central government decided to set up a series of 100 smart cities starting with the national capital, Delhi.
One size doesn’t fit all
The Japanese do not believe in the maxim, “one size fits all”. They study markets in every region very carefully and then apply their global expertise or create a local practice which fits the needs of each country or market.
Sumino also noted that airports, highways, high-speed trains and social infrastructure are all critical for the future development of India. “The experience of Japanese companies in dealing with such multiple projects in different environments globally, will enable them to adjust to the local needs of India.”
Moreover, the Japanese are not new to the Indian market. A decent number of Japanese industrial mills and automobile companies have established a large presence in India. Sumino cited the example of Yamaha Motors, which has been manufacturing two-wheelers in India for several decades. Suzuki, Honda and Kawasaki, all have had joint-ventures with Indian companies to manufacture automobiles and two-wheelers in the country.
The size and volume of Indian projects are critical for Japanese businesses. In addition, investing in social infrastructure is also important for Japanese manufacturing companies.
The Japanese have taken into account the social considerations and societal needs and given priority to the feminine customers. Yamaha Motors took a conscious decision to employ more female designers in its factory in India. The objective is to provide greater employment opportunities for women in the country and better cater to the large number of women who are two-wheeler users. It may be pertinent to point out here that two-wheelers are a very popular mode of travel for women in towns and cities of India.
“This is one example of a Japanese company adapting to local needs,” he said. Automobile companies, parts suppliers and industrial mills have a long history of operating in India, he highlighted.
Japanese electronics companies and suppliers of electronic parts are expected to play a major role in the next wave of big investments into India. Given the strength of Japan in these sectors, both countries stand to benefit mutually.
Investment
In recent years, Japan’s foreign direct investment into India has been consistently rising. Between April 2000 and March 2014, Japan’s cumulative investment in India was $16.3 billion, accounting for around 8% of total FDI inflows into the country during this period, according to Nomura’s recent report “Abenomics x Modinomics: Greater opportunities for Japan and India”.
However, India still accounts for a very small amount of Japan’s total investments overseas – a paltry 1.2% of Japan’s total FDI assets at the end of 2013.
Although the total number of Japanese overseas subsidiaries has increased to 23,000, only 1.8% among them were operating in India, as of end-2012. It goes without saying that these levels are quite low compared with Japan’s investment portfolio in China. Nomura estimates that at the end of 2013, the Chinese Dragon had an 8.8% share in Japan’s FDI portfolio and by the end of 2012, a third of Japan’s overseas subsidiaries were operating in the country.
This comparative gap between Japan’s country-wise investments point towards the growth potential for Japanese forays in India.
Over the previous decade, Japanese foreign direct investments have largely focused on sectors such as drugs & pharmaceuticals (28%); the automobile industry (16%); services sector (15%); metallurgical industries (9%) and electrical equipment (4%).
Trade
Indo-Japan bilateral trade rose steadily at a compounded annual growth rate of around 15% during the period from 2004 to 2014. Despite this growth, the scope for greater bilateral ties remains immense as Japan accounts for a miniscule 2% of India’s total global trade. India has around 1% share in Japan’s total trade, according to the Nomura report.
Japan’s exports to India have increased rapidly since 2005-06, mainly due to the rapid growth in the supply of capital goods followed by nuclear reactors, iron & steel products and electrical and electronic equipment.
On the other hand, refined petroleum products account for more than 40% of Indian exports to Japan. Rest of the exports are concentrated mostly in the marine products and gems & jewelry sectors. India and Japan had a small trade deficit of $3 billion last year as Indian imports exceeds exports to the Japanese market.
In a nutshell, a lot has been achieved in recent decades but much more can be done if a fresh push is made in Indo-Japanese relations.
Nomura to push Indo-Japan M&A activity
Nomura is identifying and studying opportunities for Japanese and Indian companies to undertake cross country mergers and acquisitions, or M&As. It will also assist in increasing the participation of Japanese institutional and retail investors in the Indian capital market.
Asset management and infrastructure finance are also potential areas to develop and nurture between the two countries in the next few years.
Nomura has an investment banking license in India that allows it to :-
1) facilitate mergers and acquisitions
2) make transactions in equity and debt capital markets
3) undertake equity research, sales and trading
4) make sales in fixed income
Nomura is also a primary dealer and non-banking finance company in India. In July 2009, it took a 35% stake in India’s LIC Mutual Fund.
Nomura started operations in India in 2007. It employs about 100 people at its seafront office in Worli and another 3,000 in Powai, both eminent townships in India’s commercial capital, Mumbai. The set-up in Powai supports Nomura’s global operations.
Nomura has been the brain behind some of the landmark deals done in India’s history of M&As. To name just a few, these include Daiichi Sankyo’s US$5.5 billion acquisition of a majority stake in Ranbaxy Laboratories in June 2008, the US$2.7 billion merger of Tata Teleservices’ telecom tower business with Quippo Telecom Infrastructure in January 2009, and JFE Steel’s US$1 billion acquisition of a 14.99% stake in JSW Steel in July 2010.
Nomura’s transactions in the equity capital markets, or ECM, includes Religare Health Trust’s US$418 million Singapore IPO in October 2012 in which it was the joint bookrunner and Essar Energy’s US$2 billion IPO in April 2010, which it co-managed.
In debt capital markets, Nomura was the joint lead manager and bookrunner in Tata Steel’s US$300 million guaranteed senior bond issuance in 2013 and joint bookrunner in ETHL Communications’ US$964 million secured bond issuance in 2009.
