Japan increasingly finds itself in a quadrangle between China, India and Korea. How to manage this?
Japan’s total trade with China rose by 34.5% to US$138.4 billion in the first half of 2010, setting a new record. Now China accounts for 20.2% of Japan’s total trade (18.9% for Japan’s exports, and 21.5% for Japan’s imports). Almost one-quarter of Japanese outward foreign direct investment (FDI) is in China. Overall, China is Japan’s biggest trade and investment partner.
But at the highest levels of Japan’s foreign policy community, China is seen as a threat. This is the main reason why Japan is delaying the possibility of negotiating a free trade agreement with China. Sure, there are some sensitive trade items like agriculture, but the main thing is the perceived threat – as highlighted by the recent spat between the two countries over vagrant Chinese fishermen wandering into the area of the disputed Senkaku islands.
By contrast, Japan’s trade and investment with India is simply puny, about 1% of total. Investment is concentrated in the automobile and electrical equipment industries with the leading investors being Matsushita Electric Works, Susuki Motors, NTT DoCoMo and Panasonic Electric Works.
But Japan sees India as a friend, and a good counterweight to China. Japan and India share common values of pluralist democracy, respect for human rights and market economy. Japan is also India’s largest bilateral donor. So, Japan and India are just finalizing an economic partnership agreement. This will eliminate trade restrictions on a vast number of items over a ten year period.
To some extent, it is natural that China is more important economic partner than India for Japan. China is after all the world’s second biggest merchandise exporter and third biggest importer. By contrast, India is only the world’s 27th largest exporter and the 16th importer. China has after all a much biggest economy than India.
But it is not as simple as that. According to all reports, Korean firms are beating the Japanese hands down in India. Companies like Daewoo, Hyundai, LG and Samsung entered the Indian market over a decade ago, and are now dominating the consumer market. Most Japanese companies lost out except Sony. Korean companies were able to cater to the Indian consumers by their high quality and good value products. They also localized production of components and hired local staff. India already signed an economic partnership agreement with Korea in 2009.
A key thing is being able to adapt products to local markets. Sometimes strategic downsizing and downgrading of products is necessary to conquer markets. For example, according to the BBC a survey of more than 1,000 men in India has concluded that condoms made according to international sizes are too large for a majority of Indian men. The study found that more than half of the men measured had penises that were shorter than international standards for condoms. Quite clearly, this shows that condoms of mixed sizes need to be made for the Indian market.
What’s the problem with Japanese firms? India is now pretty open to foreign investment. India would like to benefit from more Japanese technology in the biotechnology, food processing, energy and information technology areas. And with the sluggish Japanese market, it is a good opportunity for Japanese enterprises.
But Japanese business is very cautious about India. It is concerned about government red tape, complex tax system, bad infrastructure and trade union problems. They think that the Indian business environment is tough.
India is changing, and Japanese companies have been slow to wake up. They should set up local subsidiaries. If they would only hire more local managers, this would help them navigate their way through the local system, especially given the Japanese weakness in the English language.
Japanese business seems more comfortable in East Asia than India. It's a pity, because there are plenty of opportunities in India. Like everywhere, the Indian market is being flooded with Chinese goods, toys and textiles. However, India would prefer to see more Japanese presence.
So, in short, Japanese business needs to get its act together, and be more active in the Indian market. The Koreans have proven that it can be done!
Reference
Japan-China Trade Continues its Recovery in the First Half of 2010 -- JETRO News Release
http://www.jetro.go.jp/en/news/releases/20100818310-news
Japanese Trade and Investment Statistics, JETRO
http://www.jetro.go.jp/en/reports/statistics/
World Trade Organisation, International Trade Statistics 2009
http://www.wto.org/english/res_e/statis_e/its2009_e/its09_world_trade_dev_e.pdf
Condoms 'too big' for Indian men, by Damian Grammaticus, BBC News, Delhi
http://news.bbc.co.uk/2/hi/6161691.stm
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