- Region: Others
- Manufacturing and Services
December 2, 2011
- The Japan Bank for International Cooperation (JBIC; President & CEO: Hiroshi Watanabe)*1 released today the FY2011 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 by sending questionnaires to 977 companies in July and received their return from July through September 2011, and 603 companies returned valid responses (response rate: 61.7%). Its objective is to identify the current trends as well as future outlook of overseas business operations by the Japanese manufacturing companies with an extended record of overseas business. This year's survey is the 23rd of an annual series that began in 1989.
- 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, "supply chain network in the wake of the Great East Japan Earthquake (the Earthquake)" and "overseas infrastructure development."
- The summary and noteworthy findings of this year's survey are as follows( for the full document, please check here.):
Facing a meager prospect for growth in the domestic market, Japanese manufacturers, including mid-tier firms and small and medium enterprises (SMEs), are expected to strengthen and expand business operations in overseas markets to take advantage of their growth.
The overseas business performance of the respondents continues to improve in FY2010, driven primarily by robust business performance in ASEAN countries such as Thailand and Indonesia. In promising countries for overseas business in the medium-term, rising labor costs posed the most important challenge to China, while underdeveloped infrastructure and legal framework/taxation system emerged as specific issues in India. Another trend is that Indonesia and Brazil have attracted more votes as promising this year.
Whereas about 70% of Japanese manufacturers were affected by the Earthquake in procuring parts, they have overcome this hardship by obtaining replacements from either their own factories or other Japanese companies. The Earthquake also provided an opportunity for Japanese manufacturers to reassess and reconstitute their supply chain network. In the meantime, prolonged or further constraints in power supply may induce some companies to scale down their domestic operations.
Although Japanese manufacturers have interest in overseas infrastructure development, especially in emerging countries with robust market growth, there are a relatively limited number of companies that have actually entered in this area, even if including delivery of parts and equipment. A major trend going forward is that Japanese manufacturers will remain to engage in sales of parts and equipment in overseas infrastructure development and that there are few moving further to provide operation, management and maintenance services. Further, to move forward overseas infrastructure development, it is essential to identify and meet local needs, find reliable local partners and strengthen cost competitiveness.
(1) It has become clear that Japanese manufacturers including mid-tier firms and SMEs have an intention to strengthen overseas business.
Partly affected by the Earthquake, the number of Japanese manufacturing companies with an intention to strengthen domestic business has plummeted to the lowest level (25.9%), while there was a record increase (87.2%) in the number of companies willing to strengthen overseas business. That clearly shows that Japanese manufacturers including mid-tier firms and SMEs have a strong intention to expand overseas business with a view to take benefits from growth in overseas markets. Both overseas production ratio and overseas sales ratio have continued to grow and their growth has gained momentum after the Lehman Shock. Furthermore, overseas production percentage is forecast to increase further, up to the 40% range, over the coming years (p. 4 and 12).
(2) Japanese manufacturers showing their intention to strengthen or expand overseas operations tend to maintain or strengthen domestic operations as well.
Of the companies with an intention to strengthen or expand overseas operations (506 companies), 303 respondents reply that they will maintain domestic operations, while 142 companies state that they even have an intention to strengthen or expand domestic operations. This means that approximately 90% of the companies with an intention to strengthen overseas business will maintain or expand domestic operations. Whereas there exist moves that some companies will strengthen overseas business and reduce domestic operations at the same time, this seems to reflect activities of some medium-sized companies in sales which have sought overseas expansion (p. 12 and 14).
(3) The degrees of satisfaction with net sales and profits are higher in Thailand and Indonesia; by industry, steel, petroleum and rubber, and automobiles.
The degrees of satisfaction with net sales and profits in FY 2010 show a brisk recovery from the sharp drop following the Lehman Shock. Ranking high on the list are Thailand and Indonesia by country, and steel, petroleum and rubber, and automobiles by industry. Particularly notable is the improvement made by the automobile sector in the Southeast Asian countries. Although the impact of Thailand's flooding caused by heavy rain this summer is not covered in this survey, we need to closely monitor adverse effects of the disaster on the Japanese manufacturers' production activities for the coming months, because nearly half of the responding companies have production bases in the country (p. 8 and 11).
(4) As promising countries for overseas business over the medium-term, the percentage shares of votes to China and India hit a peak.
Although China and India ranked 1st and 2nd respectively as most promising countries for overseas business over the medium-term, their percentage shares of votes have hit a peak. Regarding China, Japanese manufacturers express raised awareness about increasing labor cost while pointing out legal practices and other issues as challenges for doing business. With regard to India, while many Japanese manufacturers continue to consider the underdeveloped infrastructure as an issue, they are increasingly recognizing specific issues such as unclear execution of legal practices and taxation system as India gathers more interest (p. 8, 10, pp. 16-18).
(5) Among promising countries, Indonesia and Brazil are on a roll.
While emerging countries such as Thailand and Indonesia climbed in the list of the promising countries or regions for overseas business over the medium-term, Indonesia and Brazil particularly have gathered more votes from companies with concrete business plans and it is expected that more Japanese companies will actively enter these countries for the coming years. In the meantime, it is also notable that Cambodia moved up to the top 20 ranking group for the first time (p.15 and 24).
(6) Merger and acquisition (M&A) activities increased primarily in the emerging economies.
The number of companies engaged in M&A activities doubled to 70 from the previous survey's 36. Of the increased portion (34 companies), 21 took place in the emerging countries, which was largely attributable to India (increased by 6) and Brazil (increased by 6). By industry, brisk activities were seen in the chemicals (17 companies) and food (16) sector (p. 28).
(7) Japanese manufacturers have responded to disruptions of the supply chain network caused by the Earthquake either by "not changing supply source" or by "procuring from Japanese alternate companies".
As many as about 70% (422 companies) out of 603 responding companies were affected by the Earthquake in procuring parts and components. Half of them (212 companies) did not change their procurement sources, while a little more than 40% (191 companies) looked to other Japanese companies for alternative procurement sources. However, the companies that relied on foreign alternate sources for procurement, including those that did so only for part of products, remained approximately 20% (95 companies) of the total affected companies (p. 33 and 34).
(8) "Reconstituting the supply chain network" is the major risk diversification measure in the wake of the Earthquake.
From the point of risk diversification in the wake of the Earthquake, the responding companies have accelerated a move of "identifying a wider picture of the overall supply chain network" and "multiplying supply sources." On the other hand, many companies have already done "the development of multiple domestic production bases" and added "the alternate functions of domestic plants to overseas plants." As a result, it is only a small number of companies that took these measures anew in the wake of the Earthquake. In addition, this survey shows that only part of the companies took such new measures as "maintaining extra stock" or "requesting suppliers to take risk diversification measures" (p. 35).
(9) Power supply constraint if getting more serious or prolonged may lead to scaling down domestic operations.
Although about 70% (429 companies) out of 603 responding companies take the power supply constraint as a serious problem, as many as about 70% (434 companies) have kept their business projections unchanged even under the constraint this summer. However, close to 20% (113 companies) respond that they might revise the outlook of business projections and most of them suggest a scale-down in domestic operations in the case that the constraint gets more serious or prolonged (p. 35).
(10) While about 30% of the respondents find a business opportunity in overseas infrastructure development, those already entering this area are limited.
Japanese manufacturing companies which find a business opportunity in overseas infrastructure development account for 192 companies out of the responding 603 companies (response rate: 31.8%). However, the companies that have already entered this area still number 126 companies, even if including those simply supplying parts and components. On the other hand, the companies which responded as a business opportunity but not actually entered this area amount to 76 companies, which account for about 40% of the companies which find a business opportunity in this area. By sector, renewable energy and water business attract more interest. By industry, companies primarily in chemicals, electrical equipment and electronics indicate more interest, hoping for increasing demand for component parts (pp. 36-39).
(11) Emerging countries with high potentiality of market growth gather more votes as promising in overseas infrastructure development. The United States is also seen as promising in environment-related sectors.
Following China and India, emerging countries such as Vietnam, Indonesia, Thailand and Brazil gather more votes as promising in all sectors because of their high potentiality of market growth. In developed countries, the United States is also seen as promising in the environment-related sectors such as smart grid, smart community and renewable energy (p. 40).
(12) Japanese manufacturers are mainly engaged in selling parts and equipments in overseas infrastructure development.
Many companies which have already entered in overseas infrastructure development will remain to engage in simply selling parts and equipments for moving it forward and there are few moves to provide operation, management and maintenance services (pp. 41-43).
(13) The agendas for moving forward overseas infrastructure development are: "find reliable local partners," "identify and meet local needs" and "strengthen cost competitiveness."
In particular, it is crucial to “find reliable local partners” before they enter this area and to "strengthen cost competitiveness" after that (p. 44 and 45).
- Based on findings of this survey, JBIC will support overseas business activities of Japanese companies operating under tough international competition, while conducting dialogues with governments and relevant authorities in foreign countries and regions in an effort to improve their investment climate.
Appendix 1: Ratios of Overseas Production and Overseas Sales (Excerpt 1)
Appendix 2: Rankings of Promising Countries/Regions for Overseas Business Operations over the Medium-term (about 3 years) (Excerpt 2)