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Japanese Investments: Beyond Manesar!

Published on Thu, Aug 30,2012 | 16:19, Updated at Thu, Aug 30 at 16:23Source : Moneycontrol.com 

By: Nitin Potdar, Partner – M&A, J. Sagar Associates

India's remarkable home-grown resilience to withstand the negatives of the global economic crisis spells great news for Japanese investors. The recent unrest at Maruti’s Manesar plant is only a cause for correction in India's outdated labour policies, certainly not a cause for concern for the bright prospects that await the Japanese players on Indian shores. 

The labour unrest and the unfortunate turn of events at Maruti’s Manesar plant in Noida have raised many eyebrows from as many quarters.  As it happens with all untoward incidents, speculation is ripe over Maruti’s business prospects and even the future of Indo-Japan collaborations and JVs.

Before we explode the myth that the Manesar incident is fatally detrimental, let’s recount the facts leading to the trouble at Manesar:-

Like so many other factories owned by other companies in the given belt, the Manesar plant was facing labour unrest which seems to have stemmed from high number of contract labour and the apparent lack of cohesive communication between the management and the unions and certainly, dysfunctional labour laws.  Honda, Scooters India, Sunbeam, Rico Auto, Micro-Tech, FCC Rico, Rico Daruhera, Sona Steering, Hero Honda, Bajaj, Denso Haryana and AG Industries all have faced unrests at different points in time.  In Maruti’s case, an open disparity in shop floor remunerations (payroll Vs contractual workforce) was always an open invitation to potential unrest. And so it happened. Worse, it took a rather ugly turn with the violence and the casualties.

A closer look at the tragedy will reveal our age-old manufacturing realities – the beleaguered strife between trade unions and corporate managements (more so, MNC managements) that call for immediate sensitive attention from respective state government authorities, more so, given the impressive line-up of Indian companies and MNCs having production facilities in the region.

At the same time, the Manesar incident is in no way a deterrent to the growing India-Japan ties in trade and industry, a deep-rooted legacy of mutual respect and admiration that’s now all set to scale new heights.  A one-off event cannot suddenly dampen India’s investment climate for Indo-Japanese ties that can be traced centuries back to the cultural exchanges in the wake of Buddhism’s spread in Japan.

Looking back, both countries have made impressive joint forays predominantly in the areas of trade, economy and technical know-how. Japan is the 6th largest foreign investor in India with foreign direct investment (FDI) equity inflows amounting to US$ 5511.34 million, a figure that forms 4.15 % of the India’s total FDI inflows during April 2000 to April 2011. The Japanese Bank for International Cooperation lists India as a favoured destination for long-term Japanese investment. 70% of Japanese manufacturers cite India as the most attractive business destination. Since 1991, Japan has actively invested in Indian industries like automobile (31%), electrical equipment (14%), telecommunications (9%), trading (8%) and services (7%) with total trade aggregating USD 10.4 billion last year. The who’s who of Japanese giants are in India and many more are about to make their debut.

Cross border investments have enabled Japanese majors like Toyota, Honda and Mitsubishi to tap India’s colossal R&D expertise.   Japanese blue chips like Hitachi, Panasonic and Sony are doing roaring business in the Indian markets.  Prominent aspirants include Nippon Life Insurance, NTT Docomo, Aeon and Yamada Denki. In Pharma, the Japanese have made great inroads by virtue of the Daiichi Sankyo stake in India’s largest drug manufacturer Ranbaxy.

And yet, the impressive statistics amount to only about 2% of total Japanese world trade. That gives us a fair idea of the immense potential that yet lies untapped and which in fact gets a huge fillip in the form of the upcoming Delhi-Mumbai Industrial Corridor and the Comprehensive Economic Partnership Agreement between the two nations.

So, if all is hunky dory, then where is the weak link? Well, it lies in India’s infrastructural challenges and institutional deficiencies that affect some Indian States more than the other. So, Japanese investors – aspiring and existing – may want to conduct a more agile study of India’s demographic and regional realities before they set up shop and expand their manufacturing base.  This is extremely important as we have a different work culture, and the nuances and peculiarities greatly vary amongst geographical regions.  So, there can’t be a ‘one-size fits all’ investment and management strategy that applies to the whole of India. 

Japanese investors primarily should see beyond the investment-friendly claims of each state in India.  Whilst it is important to consider fiscal incentives in making an investment decision, it’s also crucial to check the social and cultural stability and FDI conduciveness of the state’s business environment.  Else, the perceived fiscal concessional advantage may in fact turn out to be a hidden burden in the long run.  A progressive state like Maharashtra, or very lately Gujarat with its rich history of freewheeling enterprise, an English speaking workforce and largely peaceful production environments would be a far better choice than some states offering desperate incentives, more to conceal hidden truths like criminalization of labour movements and industry-averse situations. It is therefore no wonder that some Indian states, prominently Maharashtra, have attracted a host of MNCs and FDI right from the days of independence while some of the other states still lag behind.   It would not be out of place to mention that according to the Industry Ministry Data Maharashtra and the Delhi’s National Capital Region accounted for more than 50% of foreign direct investment inflows into the country during the first half of 2010-11.   Maharashtra attracted the maximum foreign direct investment (FDI) of about $2.67 billion (Rs 12,275 crore) during April-September 2010, accounting for 34 per cent of the total FDI in the country during the period.

Whilst structuring long term investment proposals with Indian partners it is also imperative to seek matured financial, legal and administrative intelligence in scanning a region for its local business practices, reputation of the local partners, and approach regulatory towards prevalent laws and potential reforms.   This will help them in making informed decisions based on the exact specifics of each circumstance, not based on derived, hasty conclusions that may be at times be facts lost in translation.

To conclude, there could not have been a more opportune time for Japanese investments into India, given our evolving transformation on the business and industry front and the solidification of social and political will as a direct consequence of the lessons learnt. Notwithstanding Manesar and beyond Maruti-Suzuki, several milestones yet beckon Japanese players from the mists of the imminent future.

 
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