Report on Japanese Manufacturers' Overseas Business Operations FY2004 Business Survey on Foreign Direct Investment
November 5, 2004
November 5, 2004
- Japan Bank for International Cooperation (JBIC; Governor: Kyosuke Shinozawa) released today the results of a survey on Japanese manufacturers' overseas business operations, conducted from July through September 2004.(The survey covered 939 companies, of which 595 responded effectively. The effective response rate was 63.4%.) Its purpose is to identify the current trends as well as future outlook of overseas business operations of the Japanese manufacturing companies being active abroad. This year's survey is the 16th of an annual series that began in 1989.
- In this year, the survey examined "business operations in China and their risk," in addition to "top priorities for domestic and overseas," "prospect for overseas business operations over the medium-term" and "promising countries and regions for overseas business operations." Currently, a positive cycle is observed in the Japanese economy: a favorable development in corporate profits leading to an increase in capital investment. Accordingly, the survey found that the companies are taking a forward-looking stance in domestic business activities, especially in research and development, while strengthening or expanding overseas business operations. What has emerged from this trend is the progress being made in the alignment and the division of roles between domestic and overseas activities. Furthermore, while many companies continue to strengthen or expand their Chinese operations, they are increasingly aware of the risks that could affect these operations. The survey also showed clearly that they have growing interest in BRICs, such as India and Russia, as well as Vietnam as promising countries for their business operations.
- JBIC will draw on the findings of the survey to provide well-tuned support for overseas business activities of Japanese firms that are exposed to increasingly intense global competition and to improving the investment climate in individual countries and regions by working on and conducting a dialogue with foreign governments and their agencies.
- The highlights of this year's survey are as follows.
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(1) Top priority is strengthening or expanding overseas production. Aggressive attitude is found toward conducting both domestic and overseas business: strengthening and expanding research and development as well as domestic production.
The current top priority for domestic and overseas business operations was "Strengthen or expand overseas production" (338 companies), followed by "Strengthen and expand R&D functions" (235), "Strengthen or expand customer base by the company's own efforts" (155) and "Aggressive expansion into new business areas" (131). Compared to the results of the FY2002 survey, "Strengthen or expand domestic production" (104) rose substantially in the rankings of responses. This reflected the more positive stance companies took toward overseas and domestic operations. Efforts to reorganize their own business system, such as "Review domestic production from the viewpoint of total cost" (60), saw a relative decline in the rankings.
It appears that Japanese manufacturers are not aiming at a one-way shift toward overseas production, but rather they intend to strengthen R&D and domestic production simultaneously in order to achieve high value-added production domestically and build a globally optimum production system.
(2) Continued enthusiasm for overseas operations, while there was a trend to strengthen or expand domestic operations
When asked about the medium-term (the next 3 years) outlook for overseas operations, 81.9% of the companies in all the industries responded that they would "Strengthen or expand" them, indicating their continued enthusiasm for overseas business development. When asked about their stance on domestic business operations in the medium-term, 47.2% of the companies in all industries said they would "Maintain the present level," and 45.2% would "Strengthen or expand." These two responses respectively accounted for nearly half of the total companies responded, with a mere 4.6% intending to "Reduce".
(3) Exports from the parent company in Japan grow with strengthening or expanding overseas business operations
When the relationship between strengthening or expanding overseas business operations and parent company exports from Japan over the past three years was examined, 49.7% of the companies in all the industries said their "Exports have increased", while only 13.3% said "Exports have decreased." By major industrial classifications, a majority of companies in general machinery, electrical equipment & electronics, and automobiles replied that "Exports have increased," indicating a close relationship between strengthening or expanding overseas business operations and growth in the parent company's exports from Japan. In addition, the survey revealed an example where strengthening overseas production led to export growth and the reality that advances have been made in the division of domestic and overseas production were shown.
(4) Strongly positive stance on China, Central and Eastern Europe and Russia
As in the previous year, China continued to account for the highest proportion (76.5%) of the responses of the companies as the region where they would be "strengthening or expanding the scale of overseas business operations" in the medium-term (the next three years). This was followed by Central and Eastern Europe (64.1%), Russia & other CIS (63.0%) and North America (53.9%). Compared to the last year, this survey found that stronger intentions to expand overseas business operations for almost all countries and regions.
(5) Positive attitudes toward China, Thailand and the North America stood out in all the industries
In the medium-term (the next three years) many companies in all the industries intending to strengthen or expand their overseas operations had positive attitudes toward the eastern and southern regions of China, Thailand and the North America. However, relatively fewer companies had positive attitudes toward Latin America, the Middle East and Africa.
(6) Overseas business performance improved in all the regions, but profitability remained inadequate
The evaluation with respect to the level of satisfaction for sales and profitability in their overseas business operations showed some improvement in each region and country, as in the previous year. Business performance in the NIES, ASEAN4 and China was seen with relatively high levels of satisfaction. There was also some improvement in Central and Eastern Europe, Latin America and elsewhere, which led to relatively better business evaluation for Europe and North America.
However, this year's survey found some issues that still need to be addressed for improving profitability. They are: (1) profitability remained at inadequate levels in all the countries and regions; (2) business performance in the North America was assessed to be the lowest; (3) In China and the North America, there was an agenda for improving profitability, as a rise in the level of satisfaction with respect to profitability was lower than with respect to sales.
Evaluation of business performance in China rose in this year's survey, as in the previous year, but the level of profitability was still unsatisfactory. Many companies were trying to strengthen or expand both production and marketing of their business in China. However, if they are to increase profitability of their business operations, it is increasingly important for them to make efficient investments commensurate with the market, while they create their own markets and secure their market positions.
(7) Many foresaw economic growth in China continuing until 2010
When companies were asked how long they projected economic (high) growth in China would continue, as they drew up their business plans, the most common answer was "Until 2010 (the Shanghai Expo)" (174), followed by "Until 2008 (the Beijing Olympics)" (150). Among the major industries, "Until 2008"(34) is the most common response in electrical equipment and electronics, while "Until 2010"(38) is the most common response in the automobile industry. Thus, the respondents viewed economic growth varied depending on the industries where they belong.
(8) Most often cited among the present risks facing China was "power supply shortage"; viewed most serious among future risks was "economic recession and market contraction"
Among the risks that could have a serious impact on business operations in China, "power supply shortage" was most often cited (56.5%) as the present risk facing China, followed by "Rising prices for energy and raw materials" (36.5%) and "Infringement of intellectual property rights" (29.3%). Most often cited among future risks was "Revaluation of the Yuan" (67.7%). The companies interviewed voiced concerns over economic slowdown due to a rising Yuan and increased economic uncertainty caused by exchange rate fluctuations, apart from concerns over a revaluation-induced decrease in export competitiveness.
Among these risks facing China, viewed most serious were "Economic recession and market contraction" (20.2%), "power supply shortage" (18.8%) and "Revaluation of the Yuan" (17.0%).
While many respondents took the view that China's economic growth will continue until 2010, the companies interviewed expressed concerns over an earlier-than-expected onset of recession or slow growth beyond 2010.
(9) India and Russia rose in the rankings of promising countries, but expectations ran well ahead
In the countries and regions that companies viewed as promising for business development in the medium-term (the next three years), the top ten remained unchanged from the previous year. For three consecutive years since 2002, China continued to top the list, followed by Thailand. However, India, which ranked the fifth last year, rose to the third, and Russia climbed to the sixth from the tenth. Vietnam also won more votes this year. These results indicate that Japanese companies had increased their interest in these countries. However, unlike the case of China, Thailand and the U.S., the companies with no specific business plans far exceeded the companies having actual plans for these countries. Therefore, the rankings are considered to be a reflection of expectations for future potential rather than realistic investment possibilities. Among the countries and regions that fell in the rankings, as compared to the last survey, Indonesia saw the largest drop in votes.