[Japan and ASEAN]--"Japan eyes greener pastures in SE Asia"
By Phar Kim Beng
Jan 11, 2005
Japan is looking for greener investment grass in Southeast Asia, though the lawn is far from perfect; still, in some cases, it's better than Chinese pastures.
For years, Japan and most other investors saw China as the Asian market magnet, a treasure trove of profits. Now, however, now some firms have second thoughts about continuing to pour so much into the Middle Kingdom, noting that the business environment is not as conducive to foreign investors as in the past. Some markets are saturated, electricity is in short supply, at least in the short term, and China no longer offers the same incentives and facilities to investors as it did as recently as two years ago, according to senior Japanese businessmen.
For some Japanese and other businessmen, China's problems with energy, infrastructure and unskilled labor - for years cheap labor has been China's greatest asset are making the grass look greener elsewhere. Not that the grass is really green elsewhere, and not that China investment will cease - far from it - every day there are articles about new Japanese investments and joint ventures in China.
But for some kinds of industries - those that require natural resources - China is less attractive to many firms, though Beijing still offers incentives and facilities to investors in high-tech fields. Japanese high-tech and other business people are still keenly interested in China's vast market potential.
In contrast, Southeast Asia offers many attractions for Japanese business, though these countries also have their shortcomings, especially Indonesia with its lack of infrastructure, unskilled labor, lack of law enforcement, and corruption. Japanese investors hope the situation will improve under Indonesia's new president, Susilo Bambang Yudhoyono.
A senior Japanese business leader said in Semarang, Indonesia, recently that Japan would favor members of the Association of Southeast Asia Nations (ASEAN) over China as investment destinations in the future. He said China has been saturated and no longer is conductive to significantly lucrative business in some fields. Hirota Nakanishi, Japan's chief delegate to the ASEAN-Japan Center, said that Japanese investment flows to China will be reduced in favor of ASEAN, including Indonesia. The immediate effect of the tsunami on investment and the Jakarta's government's ability to provide facilities and advantageous terms to investors is not clear, though the great wave hit areas where Japan so far is not developing its investment.
Nakanishi said China is far different than it was two years ago when the Beijing government was generous in offering facilities and incentives to foreign investors. Nakanishi said Japanese investment in Indonesia probably will focus on manufacturing, automotive and parts production, furniture, mining sectors and agribusiness. He made the statements in a meeting with central Java Governor Mardiyanto and his remarks were reported by the Antara News Agency.
Japanese Minister for Economic, Trade and Industrial Affairs Shoichi Nakagawa said Indonesia's problems have decreased Japanese investment there lately; he addressed a meeting with the Indonesian government and the Indonesian Chamber of Commerce and Industry officials. He expressed hopes conditions could improve so that Japanese investment could be restored to its previous levels of investment.
In mid-December, Toshiba Corp president Tadashi Okamura said the value of Japanese investment in Indonesia continued to decline over the past several years, but he said Tokyo hopes the new Indonesian government will improve the situation for investors.
In Tokyo, meanwhile, one senior Japanese businessman told Asia Times Online that China still provides good facilities, especially to high-tech firms and companies with the technology that China needs. Masami Ishida, director of the Economic and Technical Cooperation Studies Group at Inter-disciplinary Studies Center at the Institute of Developing Economies (IDE) in Tokyo, said in an interview: "Where Japanese companies' investment go depends on which industry you are talking about. Yes, it is true that Japanese companies are more likely to invest in ASEAN countries such as Indonesia and Thailand in the manufacturing, automotive, furniture, mining sectors, agribusiness and lumbering and pulp. These industries need more natural resources and materials and assembling parts, which Japanese companies cannot easily obtain in China. This is the one of the reasons why Thailand is called Asian version of Detroit. They have lots of parts plants.
"Also, since Chinese markets are becoming more competitive in general, for Japanese companies it's more profitable to go to ASEAN countries. China is now trying to invite more high-tech industries than manufacturing, automotive, furniture and mining industries. China is more keen to invite high-tech industry. They are still generous in offering facility and incentives to foreign investors of high-tech."
Japanese-funded projects in China totaled 31,000 by the end of October 2004, with a combined investment of $46.1 billion. Chinese Commerce Minister Bo Cilia said the Japanese side had the advantages in capital, manufacturing technology, new and high-tech research and development and enterprise management. At a recent joint meeting of Chinese and Japanese investment promotion organizations in Beijing, both sides said investment cooperation was reciprocal and held enormous potential.
Prior to the Asian financial crisis in 1997, foreign direct investment (FDI) in Southeast Asia was $34 billion. In 2003, FDI surged 48% over the previous year to $20.3 billion, with the top investors being the United Kingdom, then the ASEAN countries, followed by Japan. The numbers were expected to rise even more in 2004.
Still, despite the reassuring message for Southeast Asia from Hirota Nakanishi, Japan's chief delegate to the ASEAN-Japan Center, the coast is not yet clear for formidable Japanese investment in ASEAN. In the past three years, there has been an unhealthy slippage in Japanese investment in the region.
Japan's ranking has slipped, according to the secretary general of ASEAN, Ong Keng Yong, although he declined to give more detailed figures. The reduction in Japanese investments clearly has affected Indonesia, Malaysia and the Philippines. Indonesian Industry and Trade Minister Rini Soewandi told a press conference after chairing a session on investments in ASEAN last year, "We see Japan investments moving out of ASEAN. They have been relocated back to Japan or they have gone to China" - at least some of them.
At the same conference, Ong Keng Yong affirmed that a study conducted by the ASEAN Secretariat shows that in recent years it has not always been a case of China sucking up investments from ASEAN. In other words, Japanese direct investments have matured to the extent that they could be placed in countries other than China.
Ong is right, as a 2003 study by the Japan Economy and Trade Organization (JETRO) has confirmed. While "low wages are one of the merits of China, its social-security burden is exceedingly high", he said. According to the survey, China's social-security burden ratio is one of the highest in Southeast Asia, reaching from 9% to 44%, while the Philippines is the lowest at only 6-7%.
'We thought many of these investments were flowing to China, but we do find that many of these high-tech activities have been relocated back to Japan," Ong said, adding that investors have also been heading for India, South Korea and Central Europe.
To be sure, Indonesia is not the only country feeling the sting in the reduction of Japanese FDI. The Philippines has been singled out by Japanese companies for its diminishing comparative advantage in labor cost as well. As a result of the daily-minimum-wage increase as approved by the National Capital Region Wages and Productivity Board in Manila, the new minimum daily wage of P300 a day now corresponds to about $133.75 for 25 working days a month. This is higher than the minimum wage provided in Shenzhen, China ($72.49 a month), Shanghai ($68.87 a month), Bangkok ($106 a month), Jakarta ($74.21 a month), and Hanoi and Ho Chi Minh City ($40.11 a month).
Responding to the JETRO study, Japanese executives based in the Philippines have said that if the government of President Gloria Macapagal-Arroyo wants to attract foreign investment in the manufacturing sector, it needs to develop an industrial hazardous-waste treatment plan in addition to other business requirements. A plan for the plant was turned down by the Department of Environment and Natural Resources for reasons of budgetary constraint. The absence of such a facility is expected to minimize investment opportunities in the Philippines. Overall, the infrastructure of the Philippines remains weak.
But the clearest warning to Japan of febrile investment conditions over the past few years is definitely Malaysia. Despite its Look East policy, introduced in 1981, Malaysia has gradually borne the brunt of a draw-down in Japanese FDI, especially in the consumer-electronics sector.
Surveys conducted by the correspondents of Nihon Keizai Shimbun, Japan's leading economic daily, argued that Japanese factories in Malaysia have left in droves, while those that stay are struggling. While this interpretation is subject to further investigation, it is nevertheless the fact that some 100 Japanese companies have left Malaysia over the past six years. Such a development heralds a reversal of trend between 1985 and 1998. Indeed, there was a time when Malaysia was at the heart of the push into Southeast Asia by Japanese electronics manufacturers. But those days are gone, according to Lim Pe Hong, a Japanese-speaking graduate who once headed factory production for a firm that specializes in producing magnetic strips.
Under the previous administration of prime minister Mahathir Mohamad, Malaysia granted favorable treatment to foreign businesses. Japanese electronics makers responded by turning Malaysia into their production center in ASEAN. Japanese factories were built in Malaysia to make a vast range of parts and finished goods. The 21 companies in the Matsushita Electric Industrial Co group in Malaysia continued to make everything from audio-video equipment to air conditioners. Together, they account for some 4% of Malaysia's gross domestic product (GDP).
But since 2003, the parent group of Matsushita has even ended its profitable partnership with local car maker Proton. Instead, AG Volkswagen of Germany has become Proton's strategic partner.
New investments in plant and equipment by Japanese electronics companies have plummeted in Malaysia. In 2002, direct investments from Japan plunged 80% from the previous year. Indeed, Japan's FDI is so crucial to Malaysia that it is taken as a signal by foreign investors to reflect on the state of the Malaysian economy and competitiveness.
Malaysian government officials, most notably Datuk Rafidah Aziz, minister of international trade and industry, have refused to acknowledge the dwindling Japanese economic interest in Malaysia.
During a trade-promotion trip to Osaka last July, Rafidah told the business community there that Japan will continue to be an important source of investments for Malaysia, given the strong presence of Japanese manufacturers and trading houses in the country such as Itochu, Sumitomo, Matsushita and Marubeni. She was only partially right.
In the period 1999-2003, Japan ranked as the third-largest investor in the manufacturing sector of Malaysia after the United States and Germany, with 618 of its manufacturing projects worth $2.4 billion approved. Rafidah also said 1,322 companies were operating in Malaysia, 736 in the manufacturing sector and 586 in the non-manufacturing sector.
But the figures quoted by Rafidah are by no means entirely accurate. According to a survey by the Japan Bank for International Cooperation (JBIC), the percentage of Japanese companies in Malaysia that plan to expand and strengthen their business operations has decreased, while the percentage that plan to scale back or pull out has increased. The number of Japanese companies in Malaysia is now 6.5% below 1998's peak of 1,433.
In other words, over the past six years alone, some 111 Japanese companies have pulled out Malaysia; this despite Rafidah's claim that during the period 2003-April 2004, 90.2% of the total investments were in expansion/diversification projects with investments of $407.6 million.
Still, according to Lim Pe Hong, who heads the Malaysian Chinese Association Youth Party in Klang, an area known for Japanese factories, the dip in Japanese investments is not necessarily a thumbs-down to the investment and manufacturing environment of Malaysia. If anything, he pointed out, Western companies have begun using Malaysia as the regional base for technical development and marketing. Lately, Japanese companies are showing renewed interest in ASEAN, as they realize this is a region that has governments that can continue to work closely with Japanese companies.
More important, as long as Japanese companies do not focus excessively on cost-cutting, rather than appreciate the well-developed infrastructure of some ASEAN countries, then future returns on Japanese FDI remain very good.
At any rate, the profile of Japanese FDI has shown vast degree of internationalization. It is not purely going into China and Thailand, but other countries too. It is even trickling back to Southeast Asia, especially Indonesia. Such a development marks the possibility of a renewed Japanese interest in the region, even though its investment had declined substantially over the past three years.
Phar Kim Beng is a regular contributor to Asia Times Online; he currently is on a Sumitomo Foundation fellowship in Japan to study the state of Japanese social sciences.
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