Tadashi Yanai, chairman, president and CEO of Fast Retailing (left) holds talks with Indian Prime Minister Narendra Modi in New Delhi, on June 25 (Courtesy of Government of India). © Kyodo
TOKYO -- Concern about the state of Indian business is spreading in Japan's industrial circles because major Japanese companies, including Daiichi Sankyo and NTT Docomo, have been obliged to quit the Indian market or reduce operations there at a time when the Indian economy is finally showing signs of bottoming out. However, overall, Japanese companies remain active in moving into India and expanding their business there, with companies coming from more industries and starting operations in more areas in India.
Narendra Modi, when he was governor of the western state of Gujarat, successfully attracted many large-scale foreign investments to the state and brought significantly higher economic growth to it than India as a whole experienced. Since his election as India's prime minister, expectations have been growing that he will make investment-friendly reforms, including accelerating the improvement of infrastructure, solving problems about land acquisition and rationalizing the taxation system and the legal system. India is increasing its efforts to attract Japanese firms' investment, led by state governments.
Whether foreign investment in India, including Japanese investment, will become a big trend again will hinge on a series of foreign investment and industrial policies the new government will hammer out over the next several months.
Establishments triple in five years
As of October 2013, 1,072 Japanese companies had 2,542 business establishments in India. The number of establishments had increased about 40% from a year earlier and had roughly tripled from five years earlier. This trend has continued into 2014, when many other Japanese companies have moved into India. Corporate acquisitions by Japanese companies have become more active than last year. Hitachi Systems agreed to acquire a 76% stake in Micro Clinic India, an Indian IT service company, in February to enhance its operations in India. Meidensha decided in March to take a 23% stake in Prime Electric, a local transformer manufacturer. Acquisition deals are also seen in the service sector. Staffing service Outsourcing Inc. turned Alp Consulting, an Indian staffing company, into a subsidiary in January by acquiring a majority stake in it, with plans to expand its human resources outsourcing service for IT and manufacturing companies in India.
Food companies are also making new investments in India in anticipation of the expansion of the middle class. Toyo Suisan and Ajinomoto in April decided to establish an instant-noodles production joint venture, Maruchan Ajinomoto India, in Chennai in the southern state of Tamil Nadu. They aim to produce 500 million packages of instant noodles a year in 10 years. Nissin Foods Holdings has started operating its third plant in India, in the eastern state of Orissa (Odisha). Instant noodles produced at the new plant include short-cut, masala-flavored noodles that suit Indian dietary culture.
Shachihata is expanding its stationery business in India, partly by entering the color pen market, in view of the huge market, where people six to 14 years of age, who correspond to people receiving compulsory education in Japan, number more than 200 million. Kokuyo Camlin, which takes the lead in India, is also enhancing its sales system for notebooks and other stationery items.
Mitsui & Co. and Yanmar are focusing their attention on India's agricultural sector, which has great potential for growth. In April, they agreed with Coromandel International, an affiliate of Murugappa Group, a conglomerate in southern India, to establish a joint venture, Yanmar Coromandel Agrisolutions, to produce and market rice-farming machines, including rice-planting machines and combine harvesters.
Yamuna Expressway, which links a suburb of Delhi with Agra, where the Taj Mahal, a World Heritage Site, is located, was opened to traffic in August 2012 under a public-private partnership project. In March, East Nippon Expressway (NEXICO East) took a 9% interest in Pune Sholapur Road Development, a wholly-owned special purpose company of IL&FS Transportation Networks, India's largest road PPP operator. The special purpose firm is in charge of widening a national road in the western state of Maharashtra. East Nippon Expressway thereby entered a road PPP project in India on a trial basis. If the move is successful, it will likely be a milestone case that opens the way for Japanese companies to take part in road construction projects in India.
Yokohama Rubber's new plant in India was completed in February. In April, India steel major JSW steel inaugurated most modern cold rolling mill facility at its works in Karnataka state, with technical assistance by JFE Steel. JSW started producing high-quality automotive steel sheet. Hitachi Lift India, Hitachi's elevator unit, got an order in May to supply 14 elevators, including ones that are the fastest in India at 360 meters per minute, to a 73-story skyscraper under construction in Mumbai.
Japanese firms are also moving into more regions in India. While the number of Japanese companies' establishments has risen by about 10% in the National Capital Region of Delhi, the number in southern India, which includes Chennai, a rapidly growing new center for the automobile and information technology industries, has recorded a 77% year-on-year jump.
Interest in India remains strong
Many of those Japanese-related projects started around 2010, when the Indian economy was thriving. "There are still many ongoing projects related to infrastructure and automobiles. Depending on future economic trends, more companies will move into the country," said a person from a major consulting firm. Since the Indian economy was sluggish in 2012-2013, this year's trends need to be watched.
Satish Khanna, former president of Indian pharma giant Lupin and an adviser to many Japanese companies, told a local newspaper, "Daiichi Sankyo's or NTT Docomo's exit should not mean a lack of Japanese interest in India. They are keen to actively participate in the growing and strategic Indian market, in multiple industries."
Japan Tobacco was forced to withdraw from India in 2011 because the Indian government suddenly strengthened regulations on foreign investment in the tobacco industry. NTT Docomo was obliged to leave as a result of the government's inappropriate telecommunications policy, under which it recklessly issued licenses, allowing more than 10 Internet service providers to enter each operation circle, leading to price-cutting competition resulting in lack of profits, and also because the company got involved in a corruption scandal. For Daiichi Sankyo, it remains doubtful whether the company had got sufficient disclosure from the former owner of major pharmaceutical producer Ranbaxy Laboratories it acquired, though it cannot be denied that the company's own due diligence had been lax.
It is undeniable that these three cases of withdrawal were attributed not only to serious misjudgment on the part of the management and problems peculiar to India but also to factors that were considerably special and difficult to avoid.
Investment-friendly -- at last
India has begun to make efforts to attract Japanese companies, with state governments leading the way. In March, at investment seminars held in Tokyo, Nagoya and Osaka under the auspices of the Ministry of Economy, Trade and Industry and the Japan External Trade Organization, government representatives from nine influential states of India made presentations and a total of more than 300 attendees from Japanese companies talked directly with senior state government officials and other attendees from India. B. Mahesh, joint director of Karnataka Industrial Friendship Agency, said, "Decision-making of Japanese companies is slow but steady and trustworthy." The agency is located in the southern state of Karnataka, which includes Bangalore, a big city known for concentrations of IT and automotive companies. India's first dedicated industrial park for Japanese firms in Neemrana, Rajasthan, has been successful, leading to similar projects arising in other states, including Gujarat and Maharashtra.
Since Modi has a track record in inviting foreign companies to make large-scale investments in Gujarat, in his political style of making prompt decisions, and is considered pro-Japanese, his assumption of prime ministry is likely to encourage Japanese companies that are hesitant about investing in India.
On June 25, Modi talked with Tadashi Yanai, chairman, president and CEO of Fast Retailing, the operator of Uniqlo casual clothing stores, in New Delhi. The prime minister encouraged Yanai to expand the company's business to India. Takashi Shimada, president of consulting firm Indo Business Center, said, "The birth of the new government led by Modi should have a sufficient impact for Japanese companies, which need convincing reasons when deciding to move into an emerging country." Of course, if India is to attract a large number of foreign companies, the country has to improve infrastructure, including electricity, water and roads; to quickly introduce the Goods and Services Tax, which would unify national and state taxes and smooth the movement of goods between states; and to rapidly provide industrial sites to resolve the chronic shortage of land for industries. Needless to say, a stable and enduring foreign investment policy is needed.
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