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 Japan’s Supply Chain Resilience: Stage Set For Accelerating Japanese Investment In India – Analysis

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In 2020, Japan adopted two policies to strengthen supply chain resilience.   Big subsidy was provided to stimulate Japanese investors to diversify offshore investment and invest in domestic market  for supply chain resilience. The main aim  was  to reduce overdependence on China. Focuses were made on  South East Asian countries for offshore diversification. 

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Currently, China is  the biggest source for supply chain for Japan. Nearly one-fourth of parts, components  and intermediates of Japanese imports come from China. Nevertheless, 2020  policy  for dwarfing overdependence on China was not new. Over the decades, Japanese companies have been shifting from China, though gradually. According to a survey, there were 13, 934 Japanese companies in 2016. It dropped to 13, 685  in 2019. Further, according to  an estimation, share of parts and components from China was  already on declining trend. It has declined from 29.5 percent in 2015 to 26.1 percent in 2021. 

During COVID 19 , China was the major trading partner of Japan. In 2021, it accounted for 22.9 percent of Japan total trade. Export to China was  21.6 percent of Japan’s global export  and import from China was  24.9 percent of Japan’s global import. Japan had adverse trade balance with China.

In the offshore diversification for reducing  overdependence on China, thrusts were given to Thailand, Vietnam, Malaysia, Indonesia and Philippines. India was pitched less potential for diversification. But, the irony is that in 2021 Japanese investment  in India increased  . In contrary Japanese investment fell in Thailand, Indonesia and Philippines – the preferred nations for diversification for supply chain. 

To the surprise ,  Japanese investment in India increased substantially in 2021 and more than in Vietnam and  Malaysia , the  preferred  destinations for supply chain diversification.  Japanese investment in India  increased by  72 percent in 2021,  as compared to increases by 58.5 percent and 47.9 percent  in Vietnam and Malaysia respectively ( according to Japanese statistics) .  This reflects that there was  a perceived difference between Japanese government   and Japanese business interests towards the potential of the countries for  offshore supply chain diversification. 

There were few takers of Japanese  supply chain resilience initiative. According to JBIC ( Japan Bank  for International   Cooperation ) , most of the Japanese investors surveyed lamented the inadequacy of Japanese clusters in the preferred destinations in South East Asia for diversification as compared to the clusters   built  up in China. Besides, fast recovery of China compared to other Asian countries led them   to have a second thought to diversify to other Asian countries  in the attraction of subsidy.  

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Nevertheless, pro-Japanese  analysts in India are upbeat   for  active role to be played by  Japanese investors. They argued that if India can be hotbed  for contract manufacturing for leading USA company , such as Apple, by alluring investment by Foxconn, why not it has potential to be alternative destination for Japanese  supply chain.  The truth of the matter is that even though Japanese foreign policy  is less influential in catalyzing India’s global political landscape, in economy Japan has uninterrupted contributions for changing the Indian economy into a modern manufacturing and eco-friendly  solution . Automobile, Metro Rail, rapid transport system ( like Bullet train) , electronics  are the cases in point.

Given these , how can India reap the benefits of Japanese supply chain resilience initiative ? JBIC survey reveals  the road ahead . It is an annual survey by the Japanese bank. According to the survey, India was voted one of the most promising business destinations for Japanese investors in the medium term. Even for the longer period, say 10 years, the respondents were upbeat to do business in India. 

The reasons sighted for preference to India were better growth in the economy and larger  local market size, low labour costs and  supply base assemblies and low cost components and raw materials. The sharp bounce back in the economy with the fastest growth recovery  impressed Japanese investors.  GDP of India is forecasted to notch  8 percent growth in 2022-23, after a fall by 7 percent in 2021-22. India is expected to excel Chinese growth, which is forecasted at 4 percent over the same period. 

 Investment in supply chain resilience in Indo-Pacific Region , which  has garnered increasing interest,  is another factor to set the stage for Japanese investment.   This paves the way for India to reap opportunities from its  low cost hub, laden with high IT technology ,  for supply chain in the region. The launching of IPEF (Indo-Pacific Economic Framework) throws challenge to Vietnam , Thailand, Malaysia and Philippines, after India withdrew from RCEP.   Eventually, Japanese government has supported the initiative by granting financial support to 6 Indian projects under the “ Programme for Supply Chain Resilience in Indo Pacific Region”. 

Rupee convertibility can pose a new challenge to India to reap the supply chain resilience market in Japan.  Till now, Indian rupee was not convertible. Recently, RBI permitted Indian rupee to be convertible in trade. It permitted invoicing as well as settlement in Indian Rupee for export and import.  This will help in reducing  the  foreign exchange risks. Rupee will help Indian manufacturers to supply component, parts and intermediates to the assemblers across the borders at a more stable prices , amidst the global volatility in foreign exchange rates.  

Eventually, this will ensure assemblers to repose dependence on India for low cost supply chain, which will offer sustainability.   

Therefore, India is equally competent to be the preferred destination for China +1 strategy.    

Subrata Majumder

Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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