Report on Japanese Manufacturers' Overseas Business Operations FY2005 Survey: Outlook for Japanese Foreign Direct Investment
NR/2005-48
November 4, 2005
November 4, 2005
- Japan Bank for International Cooperation (JBIC; Governor: Kyosuke Shinozawa) released the results of a survey on the overseas business operations of Japanese manufacturers today. The survey, titled "Survey Report on Overseas Business Operations by Japanese Manufacturing Companies," was conducted from July through September and covered 945 companies, 590 of which responded effectively, making the effective response rate 62.4%. The purpose of the survey was to identify the current trends and future outlook of the overseas business operations of Japanese manufacturing companies that are active abroad. This year's survey is the 17th of an annual series that began in 1989.
- This year, the survey examined "China and ASEAN" (balancing between China and ASEAN in terms of business strategy, production function, and sales destination of bases in China and ASEAN), "EPA and FTA in East Asia" (intention to use individual agreements), and "EU Enlargement" (position of the new EU member countries in the business strategy), in addition to "prospects for domestic and overseas business operations," "prospects for overseas business operations by region," and "promising countries and regions for overseas business operations."
Currently, the Japanese economy has emerged from its temporary pause and corporate profits are improving. Accordingly, the survey found that companies are taking a forward-looking stance in domestic business activities, focusing especially on higher value added products, including production, while also strengthening and expanding their overseas business operations. What has emerged from this trend is a willingness to strengthen or expand business operations both in Japan and abroad. By region, the share of companies that will strengthen or expand business activities in China decreased from the previous year, while the respondents continued to show greater interest in BRICs (excluding China) such as India and Vietnam.
- JBIC will draw on the findings of the survey to provide well-tuned support for the overseas business activities of Japanese firms that are exposed to increasingly intense global competition. It will also work to improve 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) Continued enthusiasm for overseas operations, and a strong stance to strengthen and expand domestic operations as well
When asked about the medium-term (next three years or so) outlook for overseas operations, 79.1% of the companies in all the industries, a 2.8 points decrease from the previous year, responded that they would "strengthen or expand" them, indicating their continued enthusiasm for overseas business development. They foresaw increases in both production and sales abroad, predicting that overseas production will grow to 29.2% and overseas sales to 30.1% in FY2005 from 27.8% and 28.6% (average in all industries), respectively, in FY2004.
When asked about their stance on domestic business operations in the medium-term (next three years or so), 47.0% of the companies in all industries said they would "strengthen or expand domestic business operations," surpassing the 46.3% of the companies that would "maintain the size of domestic business operations at the present level." Comparison with the previous year indicates that the companies who would "strengthen or expand" increased by 1.8 points, while those who would "reduce" the scale of their domestic operations decreased by 1.1 points. This reflected the continued positive stance companies took toward domestic operations. When asked about areas in which they would "strengthen or expand," they often cited "the production of value added" (74.1%) and "research and development" (64.7%).
(2) Strengthening or expanding overseas business operations had only small impacts on domestic business activities
When asked about the effects of overseas business operations on domestic operations, the largest proportion (40.3%) of the respondents answered that they would "offset the portion of production shifted to the overseas base by launching production of other goods or production in other areas in Japan" in FY2003. In contrast, the largest group (38.3%) of companies answered that "the foreign investment was intended for maintaining or expanding the sales market in the host country and thus had no impact on domestic business operations" in FY2005. This indicates that the impact that strengthening or expanding overseas business operations had on domestic operations over the past three years was smaller than forecasted three years before.
(3) Strongly positive stance continued on China, Russia, and Central & Eastern Europe; Big surge in positive stance on India and Vietnam in Asia
As in the previous year, China continued to obtain the highest proportion (71.2%) of the responses of the companies among the surveyed regions/countries that responded to "strengthen or expand the scale of overseas business operations" over the medium-term (next three years or so). This was followed by Russia and other CIS countries (66.3%), Central & Eastern Europe (65.9%), and Other Asia/Oceania (61.2%). Comparison with the previous year indicates that the shares of Other Europe and China declined, while a significant growth was registered by Other Asia/Oceania, Latin America and the Caribbean, and Russia and other CIS countries. In particular, the increase by Other Asia/Oceania was largely driven by a growing number of companies who would "strengthen or expand" in India and Vietnam, two of the fastest growing economies.
(4) Evaluation of overseas business performance improved in all the countries and regions, except in China where it suffered a sharp setback
Evaluation with respect to the level of satisfaction with sales and profitability in their overseas business operations showed more improvement than it had in the previous year.
By region, business performance in the NIEs was regarded with the highest levels of satisfaction, while business evaluation for EU15, Latin America and the Caribbean, and North America largely improved. In contrast, evaluations of business performance in China took a sharp downward turn from the previous year.
When asked about why they responded "insufficient or somewhat insufficient" in the level of evaluation for profitability, fewer companies cited "difficulty with securing sales destination" than in the previous year, while a greater number of companies answered "difficulty with reducing cost" in all regions. This reflected the increasing trend of personnel cost and material cost.
(5) Priority was given to good balance between China and ASEAN; Anti-Japan demonstrations had only a limited impact
The majority (58%) of companies answered they would take a "well-balanced approach with risk diversification," in dealing with China and ASEAN. This was followed by the companies who would take an "approach weighted for China" (23%) and those who "cannot compare because the business objectives differ for each country" (12%). 5% of the companies responded that they would "place greater emphasis on ASEAN."
Asked about the impact of the anti-Japan demonstrations that took place in April 2005*1, about 10% of the companies responded that they were affected by them. With regard to their business plan in China for the coming years, however, almost all respondents (96%) said they would "not change" the plan, indicating that the impact from the anti-Japan demonstrations had only a limited effect on the business operations of Japanese companies in China.
(6) Axis of production in China and ASEAN shifted from general-use goods to value added; Sales destination is also shifting from Japan to China.
Although the production bases in both China and ASEAN are intended to manufacture general-use products at the moment, the study found that the companies intended to reduce the proportion of general-use goods and replace it with high value added ones over the medium-term (next three years or so). With regard to the sales destination of products manufactured at the bases in China and ASEAN, the largest share (over 80%) of products was sold within the region, followed by sales in Japan. The medium-term (next three years or so) outlook indicates, however, that more companies pursued sales in China for their products manufactured in the Chinese bases, while companies focused on sales markets in ASEAN decreased. Instead, an increasing number of companies cited China as a sales market for their products manufactured in ASEAN bases. In the meantime, the share of sales to Japan dropped in both areas.
(7) Economic Partnership Agreement (EPA) and Free Trade Agreement (FTA): Utilization differs according to the host country and the type of industry
The study asked companies for their intentions regarding the use of six EPAs, over which the government of Japan has either been negotiating or has practically reached an agreement in East Asia, as well as how the companies made use of three EPAs/FTAs for which an agreement has been signed. The majority of companies that answered they would either "use" or "are already using" such agreements are those companies that will use the Japan-Thailand EPA, even though the group accounted for only a meager 30% of the total (all industries). Utilization differs, however, depending on the signatory country to EPA and the type of industry. For instance, in the automobile industry, over 40% of the companies had a policy of utilizing the Japan-Thailand EPA. More active use of such agreements is desirable in the future.
(8) 54.8% of companies gave a position to new EU Member Countries in their business strategies
The companies that positioned new EU member countries such as Czech Republic and Hungary in their overseas business strategies as either a production base or sales market accounted for more than half (54.8%) of the total respondents. However, 42.7% of the total respondents replied that they are "not relevant to the company's overseas business strategy." As there are emerging market countries with high potential that are geographically nearer, such as China and India, Japanese companies do not necessarily have a strong interest in the new EU member countries. It is worth noting, however, that though still small in number, there are companies that were considering them as a production base for Russia and CIS countries.
(9) BRICs, India, and Russia among others rose in the rankings of promising countries
In the countries and regions that companies viewed as promising for business development in the medium term (next three years or so), the top four—China, India, Thailand, and Vietnam—remained unchanged from the previous year. However, India, which ranked third last year, outpaced Thailand and rose to second; and Brazil, which was 13th last year, went up to ninth. Russia remained sixth as in the previous year. These rankings indicate that Japanese companies have a growing interest in the BRICs. However, in three countries, excluding China, the number of companies that have no specific plans exceeded that of companies with concrete business plans. We should closely watch the development of specific planning by the companies over the coming years. China continues to top the list of promising countries, but the number of companies citing China sharply dropped from the previous year.
- *1 Anti-Japan demonstrations include street demonstrations denouncing Japan, destructive activities wrecking Japan-related facilities that occur during such demonstrations, and boycotting Japanese goods.
