Report on Overseas Business Operations of Japanese Manufacturers
FY2010 (the 22nd) Survey on Foreign Direct Investment

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• Manufacturing and Services
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1. The Japan Bank for International Cooperation (JBIC; President & CEO: Hiroshi Watanabe)^*1 released today the FY2010 Survey Report on Overseas Business Operations by Japanese Manufacturing Companies, the results of an annual survey on Japanese manufacturers' overseas business operations. The survey was conducted from July through August 2010, covering 961 companies, of which 605 returned valid responses (response rate: 63%). Its objective is to identify the current trends as well as future outlook for the overseas business operations of Japanese manufacturing companies which have long been doing business overseas. This year's survey is the 22nd of an annual series that began in 1989.
    
2. The survey examined "Medium-term business prospects," "Evaluations of overseas business performance" and "Promising countries or regions for overseas business operations," and, additionally this year, "Competition with companies in emerging market countries and countermeasures" and "Movements of domestic and overseas earnings after the Lehman shock."
    
3. The summary and highlights of this year's survey are as follows.(for the full document, please click here.)
   
   【Summary】
   The profits of Japanese manufacturing companies are showing signs of recovery, aided by cost cuts across the board and increases in sales both domestically and overseas. Due to steady sales in emerging Asian countries in particular, more companies are willing to strengthen or expand their businesses targeting these emerging countries.
   As a promising country for investment in the medium term, China remains top. However, Indonesia also received a high ranking this year, and India has become the most promising country for investment in the long term. These findings indicate changing views among the companies surveyed toward emerging market countries.
   Of particular note is manufacturers' intention to strengthen businesses targeting the middle class in emerging Asian markets, but with the increased competitiveness of Chinese and Korean companies in both production and sales capacities, these markets are becoming even more competitive. Japanese companies are trying to balance their strengths in quality with costs while exploring ways to develop products that meet the needs of local customers and to improve their cost competitiveness.
   In the wake of the Senkaku Islands incident, Japanese companies are becoming increasingly wary of the risks associated with doing business in China. There is a growing awareness of the importance of risk diversification, and thus it will be interesting to monitor future trends as Japanese companies expand into emerging Asian markets.
   
   【Highlights】
   (1) Companies' profits are recovering from the Lehman shock, mainly due to progress in cutting costs across the board.
   When companies were asked about their most recent (known as of July 2010) levels of profitability compared to those in the financial crisis immediately following the collapse of Lehman Brothers, 126 (21.1%) responded that their profits had "substantially recovered" and 309 (51.8%) said they had "somewhat recovered", bringing the "recovery" ratio to 73.0%. Among the reasons given for recovery of profits (multiple answers allowed), the top three in order were: 1) they had cut costs across the board (77.9%), 2) sales had increased at their overseas centers (61.4%), and 3) domestic sales had increased (53.7%).
   
   (2) Companies wishing to strengthen or expand overseas business operations exceeded 80%.
   Over the medium term, about 83% of companies expressed a desire to strengthen or expand their overseas operations (a 17 point year-on-year increase), indicating a greater desire to develop overseas businesses, particularly those targeting Asian countries. The proportion of companies expressing a desire to strengthen or expand domestic businesses also rose from last year.
   
   (3) China, India, and Vietnam ranked 1st, 2nd and 3rd as promising countries. Brazil and Indonesia rose in rank.
   In the section of the survey ranking promising countries (including expectations), China retained the top spot, followed in order by India, Vietnam, and Thailand. The relative rank of these countries remained the same as last year. Increasing expectations for the market growth potential of Brazil and Indonesia pulled these countries into the 5th and 6th slots.
   
   (4) The "middle class" is the priority focus in emerging markets. There is more competition with companies from emerging countries.
   When asked about the target demographics that companies are pursuing in emerging countries, responses were, in descending order: 1) the middle class (68.1%), 2) the affluent (16.4%), and 3) low-income customers (15.4%). The number of companies that cited Chinese, Korean, and Taiwanese companies as competitors in emerging markets rose from the previous FY2008 survey. When asked to compare Chinese, Korean, and Taiwanese companies to their own, respondents gave higher marks to the former than in the FY2008 survey. Thus, competition between Japanese companies and companies from emerging countries is becoming increasingly fierce.
   
   (5) There are also concerns over risks in China.
   Some 22.6% of companies have been affected by the Senkaku Islands incident in one way or another. The effects most often cited are related to delays in customs clearance and the procurement of rare earth elements. Furthermore, 24.8% of companies responded that they had "lowered their estimation" of China as a "promising country".
   Regarding willingness to do business in China, 35.1% of companies responded that they would proceed cautiously (including the possibility of rethinking their operations in China). As for their business prospects in China, 46.9% of companies acknowledged the importance of risk diversification in response to dependence on China.
    
4. Based on the findings of this survey, JBIC will provide suitable support for the overseas business activities of Japanese companies which remain exposed to tough international competition, while holding discussions with governments and relevant agencies in foreign countries in order to improve the investment climate.
    
   Appendix: Promising Countries/Regions for Overseas Business Operations over the Medium Term (about 3 years) (excerpt)
     

Note

1. *1 JBIC is the international wing of the Japan Finance Corporation (JFC; Governor: Shosaku Yasui).