| Japanese FDI in the white goods sector in India | |

IMI DelhiRohit AgarwalPGDM 2011-1306/01/13 |

Contents Ownership Advantage 3 Location Advantage 4 Internalization Advantage 5 Government initiatives/ polices then and now 5 Before 1990: Pre Liberalization Era 5 1991-2000: Post Liberalization Phase-1 6 2000-Onwards: Post Liberalization Phase-2 6 Japanese Investment in India - Past and Present 8 Overseas Development Assistance (ODA) 8 FOREIGN DIRECT INVESTMENT (FDI) FROM JAPAN 8 SECTOR-WISE DISTRIBUTION OF FDI INFLOWS 8 Why was Japanese FDI less? 9 India as a manufacturing hub for global exports 10 R&D facility in India 11 Japanese vs. Koreans (Strategies to replace the incumbent Koreans) 12 Summary 13 References 13

The FDI decision of a firm is guided by the OLI model as discussed by Dunning. We tried to study the OLI advantages enjoyed by the Japanese firms that invest through FDI in India. We studied the Japanese firms in the white goods industry namely Sony, Daikin, Hitachi, Sharp, Toshiba and Panasonic.
Ownership Advantage
Most of these firms, when it comes to ownership or firm specific advantages score very high. They have a wide array of monopolistic advantages like patents, IPR, brand name as well as advanced technology advantages as a result of huge R&D facilities at home and other locations. These firms also enjoy economies of scale and scope. They also benefit from the international diversification of risks and assets. These firms have a global supply chain network in place along with the best managerial practices. These ownership advantages help these firms to compete with the local players and compensate for the advantages that the local players enjoy in terms of local market knowledge, cultural and language benefits, etc. Some of the ownership advantages are: * Global Brand Recognition: The Japanese companies have a very good global brand image. For example, Panasonic caters to global customers spread throughout the world and has a trusted brand name across the globe. The company put “Panasonic” as its global brand in May 2003 and set its Global Brand Slogan as “Ideas for Life”. The company’s basic “Panasonic” corporate brand trademark is registered in approximately 190 countries worldwide. Sony has also created a brand throughout the world. Sony is well positioned in the Indian TV market with the strongest brand image and highest number of brand shops which acts to reassure consumers that the brand is doing well. Toshiba is also one of the top brands globally. In 2011, Toshiba was able to achieve solid growth in its brand value, increasing it by 4 per cent. Toshiba Corporation was ranked 9th in terms of Global brand recognition among the Japanese firms. * Intellectual Property: The Japanese firms are strengthening an intellectual property strategy dedicated to the creation, acquisition, and maximum utilization of intellectual property. With 2483 patents, Toshiba is ranked 5th in terms of patents assigned in U.S. Sony has a number of Japanese and foreign patents relating to its products. Sony is also licensed to use a number of patents owned by others, covering a wide range of products. As of March 2011, Panasonic held 41,630 patents in Japan and 59,002 patents overseas maintaining its preeminent position in the world for intellectual property rights held. Panasonic was ranked first in the world for second time for second consecutive year in 2010 for international patent filings under the Patent Cooperation Treaty (PCT). * R&D and Technology: The Japanese firms give utmost importance to innovating and improving on the quality of their products. This gives them an advantage over other firms. Toshiba has R&D facilities around the world and this extensive R&D network provides it a cutting edge over competitors in terms of technology. Outside Japan, Toshiba has R&D facilities in the U.S., the United Kingdom and China, and software development centers in India, China and Vietnam. Panasonic has established R &D sites at optimal locations globally so that it can make the most of engineers and technologies in Japan, North America, Europe, China and ASEAN region.
Location Advantage
Some of the location advantages that the Japanese companies enjoy by investing in India are: * High Growth potential of the local market: At present, the consumer electronics and durables industry in India is estimated to be about Rs. 34,000 crores, which is expected to touch Rs. 52,000 crores in 2015. This can be attributed to the rising disposable income of the Indians. The consumer electronics and durables market in rural and semi-urban areas is growing at about 30 per cent CAGR. The overall Indian consumer electronics market is projected to grow at a CAGR of around 18 per cent during 2011-14. Also, it is projected that household income in the top 20 boom cities in India will grow at 10 per cent annually over the next eight years, which is likely to increase consumer spending on durables. * Availability of cheap labor: Southeast Asian countries including India have the availability of cheap labor force which enhances the FDIs in those countries. On top of that India has comparatively lower wage rates than China and many other Asian countries like Thailand and Malaysia from where Panasonic currently imports its products and sells to Indian market. Therefore, it’s better for foreign firms to manufacture in India than to import from elsewhere. * Rise of the Middle Section & Changing Demographics: The middle income group section (household with disposable income between 200, 000 to 1, 000,000) which currently constitutes 5 per cent of the population is expected to become 41 per cent by 2025 and also the disposable income is also increasing among the middle-class which means that the middle-income group would be able to afford the products of firms like Sony as it has products for the premium market. Rural poverty is expected to decline to 26 per cent by 2025.Changed lifestyle, higher disposable income, changed taste, boom in housing and real estate industry, widened market- expansion of rural market, increased scope for advertising, easy financing- zero interest EMI, easy loans and credit card purchases are the other factors which have contributed towards the location advantages of Sony in India. * Increasing GDP & Economic Growth: Continued economic growth demonstrated through 8.4% CAGR growth in GDP over last 5 years which offers an attractive opportunity for Japanese companies like Sony, Daikin, Hitachi, Panasonic, and Toshiba etc. to establish their business in India. India is becoming one of the most important markets for Japanese firms, is highly profitable and has potential to figure amongst the largest markets in three years. * Untapped Rural Market: Rural market in India remains underpenetrated and there exists a huge potential for white goods companies. The consumer durables and electronics market in rural and semi-urban areas account for about 40 per cent of the overall market and is growing at about 30 percent CAGR. But will the Japanese firms which are known for their quality and price tag be interested in the rural market remains a fact to be seen. * Favorable Demographics: India will have the largest projected working-age and youngest population by 2015, with 535 urban dwellers and 864 million middle class consumers. As on 2010, half of India’s population was below 25 years, 62 % of its population was in the working age group and India, thus accounted for 17.5% of world’s total working age population. From 2010 to 2030, India’s total working population is poised to rise from 749 million to 962 million; accounting for about 28 per cent of total increase in world’s working age population over the period. This provides a huge opportunity for the Japanese firms to capitalize on this.
Internalization Advantage
Most of the firms studied have either been in India for long with manufacturing capacities set up here or are in the process of doing it. Firms like Hitachi have plants set up in Gujarat and Jammu. Panasonic is going to set up a plant by the next year. Licensing would require the Japanese firms to share their knowhow with the licensee which they are reluctant to. Firms like Panasonic, Hitachi and Sharp entered India through joint ventures. But now after the FDI policy allowing 100% stake, they are acquiring the controlling stakes in the joint ventures and aggressively setting up manufacturing operations. Moreover Internalization also insulates the Japanese firms from exchange rate fluctuations. Also most of these firms have long term plans for India and see it as a strategic location for their revenue stream. So it is only natural for them to give their full attention and resources to the country.
Some Government policies which favor internalization (controlling) of foreign firms in India are: * Foreign investment up to 100 per cent is allowed in Indian electronics industry. * Procedure for approval: Once the investment in equity has been approved, the import of capital goods, components and raw materials or the engagement of foreign technicians for short duration does not require any further approvals. * Approval of Ministry of Home Affairs is not needed for hiring foreign nationals holding valid employment visa.
Government initiatives/ polices then and now

Before 1990: Pre Liberalization Era
India followed a protectionist policy after Independence, with a strong emphasis on import substitution, industrialization under state monitoring, and state intervention at the micro level in all businesses especially in labour and financial markets, large public sector, business regulation, and central planning. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s.Elaborate licenses, regulations and the accompanying red tape, commonly referred to as License Raj, were required to set up business in India between 1947 and 1990.In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly reduced License Raj and also promoted the growth of the telecommunications and software industries. India and Japan have a long history of trying to strengthen trade relations that began with Agreement on Commerce between India and Japan in 19581which provided equal rights to both the countries regarding import and export of products, remittances and transfer of funds. However, India and Japan’s bilateral trade during this period was stagnant as most of India’s effort was directed towards European and US markets because of its cultural and colonial past.
1991-2000: Post Liberalization Phase-1
Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the rupee devalued and economic reforms were forced upon India. Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalization was slowly embraced. The overall India-Japan trade talks on bilateral trade and investment began in 1978 .The impact of these reforms may be gauged from the fact that total foreign investment (including foreign direct investment, portfolio investment, and investment raised on international capital markets) in India grew from a minuscule US$132 million in 1991–92 to $5.3 billion in 1995–96.In 1992, Dr. Manmohan Singh the then finance minister launched ‘Look East’ policy to seek out and develop economic ties with members of ASEAN and major East Asian economies. However ‘Look East’ policy did not capture Japan on its radar and failed to stimulate Japanese investment into India. Although in the beginning there was a surge of Japanese companies arriving in India through Joint ventures, the flow did not gain momentum and hovered around US$900 million. The sectors that attracted Japanese investment were automobiles, telecommunications, fuel, chemicals and trading. Though the number of approvals steadily increased, average investment was steadily low. Major approvals were regarding technical collaborations. Honda in the automobile sector and Sony in the electronics sector were the major brands that made their entry in India in 1991.
2000-Onwards: Post Liberalization Phase-2
The year 2000 saw a major policy change with foreign participation being allowed up to 100 per cent in most sectors. Following this, Government rapidly relaxed conditions and enacted FEMA. In 2005, a significant change was brought about when companies operating in one sector were allowed to reinvest in other sector through the automatic route. This permitted the foreign company to be treated as an equivalent of a domestic company allowing it to access the sectors that had so far been denied to it. This gave a further impetus to investments in India. India’s liberalized FDI policy in 2005 allowed up to a 100% FDI stake in ventures. Industrial policy reforms substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment (FDI). A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields which require relaxation in FDI restrictions include civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining.
In 2005, a joint study group was formed during Japanese Prime Minister Junichiro Koizumi’s visit to India in line with Japan’s intention of strengthening economic ties with India through trade and investment. By 2006, this study was completed and concluded that there was a huge untapped potential to develop and diversify economic engagement between two countries. As a result the two countries negotiated traditional bilateral FTA consisting of tariff elimination and reduction at the core with the aim of realizing a CEPA (Comprehensive economic partnership agreement) in a way consistent with the WTO principle. Meanwhile, while the negotiations for CEPA were on, in 2006 the leaders of two countries declared The India Japan Special Economic partnership Initiative (SEPI) to promote the enhancement of investment from Japan to India and develop India’s manufacturing and infrastructure capacity.
On Oct 25, 2010 the negotiations between the two countries ended and CEPA was signed on 16th February 2011.The Agreement covered (but was not limited to) trade in goods; trade in services ; measures of trade promotion; promotion, facilitation and liberalization of investment flows and measures for promoting economic cooperation in identified sectors.
CEPA would abolish duties on more than 90% of the trade between two countries during the next 10 years. The deal would eliminate tariffs on 90% of Japanese exports to India, such as Auto parts and electrical appliances, and 97% of imports from India including agricultural and fisheries products until 2021.India and Japan have set a target of achieving US$ 25billion worth of bilateral trade by 2014 from the present US$ 10.3 billion. India stands to gain significantly through this agreement as 90% of tariff lines are covered while Japan has covered 5% more tariff lines than India. On a trade value basis while Japan has agreed to 97% tariff reduction in trade in goods, India has consented for 90% duty abolition. Liberalization of trade in goods under the CEPA would improve trade flows between the two economies and promote further intra industry and inter industry trade. CEPA will also serve as a building block for regional economic integration on a larger scale. In order to reap the maximum benefits of this economic partnership, India needs to accelerate its structural reforms to remove behind the border barriers by strengthening its infrastructure, policies and regulations.

Japanese Investment in India - Past and Present

Overseas Development Assistance (ODA)
An important aspect of Indo-Japanese economic relations is the official development assistance (ODA) provided by Japan. Japan has been India’s largest bilateral donor since 1957. In 1958, Japan started providing ODA to India in the form of yen loans. This was Japan’s first case of yen loans since the beginning of its ODA policy in1952. Since then, most ODA (95 per cent of the total) has been in the form of yen loans. The focus areas of Japan’s ODA to India have been:

* Infrastructure sectors including power and transportation * Agricultural and rural development * Environmental protection through afforestation and improvement in the quality of water and * Health and medical care

FOREIGN DIRECT INVESTMENT (FDI) FROM JAPAN

Cumulative FDI equity inflows received during April 2000- Jan 2011 were Rs. 570,104.69 crores (US$ 127.37 billion). Out of this, FDI inflows from Japan (which ranks 6th) are Rs. 23,074.84 crores (i.e. US$ 5.08 billion), which represents 3.99% of the cumulative inflows received (this amount does not include inflows received prior to April 2000, as such data prior to that date was not centrally maintained by the RBI).

SECTOR-WISE DISTRIBUTION OF FDI INFLOWS

On perusal of the sector-wise distribution of FDI equity inflows received from Japan, from April 2000- Jan 2011, it is seen that the highest FDI equity inflows have been in the Automobile industry, which accounts for about 27% of FDI inflows from Japan. Services sector, with over 14%, is in the second place and Electrical equipment, with over 11% is in the third place.

Why was Japanese FDI less?

There are a variety of reasons which explain the lack of interest of Japanese investors in India initially. Some of them are mentioned below. Even though most of the issues mentioned still remain to date but Japanese firms have learnt to live with them as they can no longer ignore the growing Indian market. Moreover India’s growing trade with South Korea and the success of LG and Samsung in the white goods sector have forced Japanese to take a note of India. Japanese firms like Sony and Panasonic are running into losses globally while India operations are earning profits. This is encouraging other Japanese firms to invest. The reasons for low investment by Japanese firms initially were mainly:

* The Indian market started showing major surge in demand for these goods only in the late 90s. Till then there was little disposable income or demand for white goods. The rise of middle class led a tremendous growth in demand which the Japanese failed to capture while the Koreans encashed upon it. * India, with a diverse culture and complex socio-economic factors was a challenge to Japan. In fact, language itself is a major barrier and restricts easy interaction between business representatives of the two countries. There is lack of awareness and information about each other’s market. This was reinforced by varying legal provisions, policies and regulations in different parts of India. * Japanese companies feel that Indian consumers are price sensitive and look for cheap products. Japanese are conscious of the quality of their products and thus cannot compromise with it to lower their prices. Korean firms like Daewoo, Hyundai, LG, Samsung and Goldstar entered the Indian market aggressively after the mid-nineties. Japanese firms like Toshiba, Sanyo and Sharp lost out to the competition posed by Korean products. The only exception was Sony. Korean products appear to have fared well in the price-sensitive Indian market. One reason is that Korean companies have localized the production of components and parts and used local labour. * On India’s part, no image building exercise was carried out to project India as an industrial hub. * Japanese investors describe the tax system in India as too complicated and difficult to understand. * India’s land acquisition and utilization procedures are also cited as a major obstacle to Japanese investment in India because they are both complicated and non-transparent. * The failure to fulfil contractual obligations such as those relating to power and water supply, drainage etc. is another major issue. * India's investment climate, poor infrastructure, high tariffs, red-tapism, labour troubles are some other reasons cited for the same.

India as a manufacturing hub for global exports
Most of the Japanese firms we studied had a presence in India much before the arrival of the Korean giants LG and Samsung. Companies like Panasonic, Toshiba, Hitachi, Sony, and Sharp entered India in the late 80s and early 90s. Daikin is the only relatively new entrant in the white goods sector. Some of these companies had manufacturing base in India while others like Sony, Panasonic and Toshiba imported products from their plants in Thailand, China and Japan. But things are changing fast and apart from Sony all the brands have opened their manufacturing plants or are planning to open (Panasonic and Toshiba) in India to serve the local market. Initially, even Sony had a manufacturing base in India, but later it stopped all production activity. These firms are now actively considering India as a manufacturing hub not only to cater to the local market but also as a hub for global exports. India’s free trade agreement negotiations with the African Union, Gulf Cooperation Council, Australia, Japan and other emerging countries was an important factor that made the country a major hub. Trade agreements with Japan also helped in sourcing cheaper raw material.
Some instances which depict the resolution of the companies towards developing India as an export hub are as follows: * According to Panasonic India's president Daizo Ito, Panasonic is looking at investing Rs 1,000 crores in a new consumer appliance manufacturing plant at Jhajjar in Haryana by 2012. The facility, which will manufacture air conditioners and washing machines, will later be looked at as an export hub by 2015. * Almost 40% of the products made at Daikin’s Neemrana factory, is exported. Daikin uses it as an export hub for countries in the Southwest Asia, the Middle East and Africa. * Sharp announced plans to start feasibility study to manufacture AC at its Pune factory as it plans to evolve India as an Asian manufacturing hub. * Hitachi manufactures ACs at its Kadi unit in Gujarat, and exports to South-East Asia, the Middle-East and SAARC countries. About 20% of its total production of nearly 1 lakh units comprises of exports.

R&D facility in India

With the growing importance of Indian market, the Japanese firms have understood that if they need to gain a share of the growing Indian market pie, they need to serve the consumers better. They can no longer dump products which are suitable for European consumers in India. They have realized that they need to develop products which cater to the taste and needs of the Indian consumer. To this cause they have decided to open up R&D centers in India. These R&D centers will not only cater to the Indian market but also to other emerging markets. Another benefit of choosing India as a R&D center is that products suitable for India, can also be suitable for Africa, the Middle East, and some parts of America. With minor changes, they can be adapted to suit other countries, like Brazil. Few Japanese white goods companies which have set up R&D facilities in India are given below: * Hitachi’s R&D Centre in Bangalore is the first research base for the Hitachi Group in India, as part of its efforts to promote efficient business development based on local needs in the rapidly growing Indian economy. The researchers will study the local market need, and promote market-oriented technology to improve and enhance current products. * Panasonic established its first R&D subsidiary in India, the Panasonic Research & Development Centre India (PRDCI), in Gurgaon, Haryana. The PRDCI is in line with Panasonic's plans to make India a hub for the development of products that would contribute to the future Indian market. The focus areas for the center will be to develop products relating to the future needs of the Indian market. * Daikin is planning to set up a development center in India as part of plans to roll out products specially designed for the market here and is in line with its global strategy to cater to the demands of the local market.

Japanese vs. Koreans (Strategies to replace the incumbent Koreans)

The Indian consumer electronics( white goods) market is today dominated by the two Korean giants Samsung and LG. Korean companies currently account for almost half of the market shares of all key product categories including TVs, refrigerators, washing machines and air-conditioners. Japanese electronics makers although lost the battle in the fast growing Indian market to the Koreans in the last decade., but these firms now are applying new strategies to make up for the lost ground. The key strategies adopted by the Japanese firms are: * They have overhauled distribution strategies: For e.g.: As per the MD of Hitachi India, they are planning to double its outlets from 1,500 to 3,000. At present, Hitachi is present mainly in Tier 1 and some parts of Tier 2 cities. The company is going to expand to 317 towns from the present 236. * Stepped up their marketing push: For e.g.: Sharp is aggressively targeting all metros across India such as Delhi, Mumbai, Bangalore, Chennai, Kolkata and Hyderabad as well as mini-metros such as Coimbatore, Viyayawada, Mangalore and Vishakapatam to name a few. As per the VP of Sharp India Ltd it is planning to spend Rs. 100 million on print advertising and outdoor advertising as well as has plans to regularly participate in exhibitions such as ICE, Mait Sponsored Digital Exhibitions and organize road shows. They are also planning to improve their after sales service as a part of marketing strategy. * Hired aggressively and vastly experienced hands: For e.g.: Sony India recently announced it would be hiring at least 500 more people in India. Panasonic is going to hire a lot of people for their upcoming manufacturing plant at Jhajjar in Haryana. Sales and marketing will continue to be the focus areas of headcount additions for Panasonic as per the Head of Human Resources and General Affairs. * Developing India specific products: The Japanese players have realized that the needs of the Indian consumers are very different from that of a Japanese or European consumer. If they need to capture this market they need to provide products which suit their needs and the conditions of India. For e.g. Sharp's new India strategy is to launch a series of one-of-a-kind products at affordable prices. They plan to catch the consumer's eye with Sharp patented products that are unique. Hitachi, Panasonic, Daikin have opened R&D centers in India to develop products which will serve the local needs of the rapidly growing Indian economy. * Most Importantly Japanese brands are reducing their price premium-ness to appeal to the Indian consumer. They have realized the fact that even though Indian consumers are price sensitive they are also brand conscious. Japanese electronic brands stand for value and an assurance of quality amongst Indian consumers. They have carefully reduce their prices to compete with the Korean brands but still maintain that price differential which is just about enough for the Indian consumer to shift the buying decision in their favour. For e.g. Daikin reduced its prices to 10% more than LG and Samsung, down from an average 30% premium over popular brands earlier. Sony products had 10%-30% higher pricing than the Korean brands till a couple of years back but today they are carrying a premium of 5-10%.

Summary

It is wrong to say that Japanese white goods firms were late to enter India. Most of the Japanese firms under study had a long presence in India either in the form of joint ventures or subsidiaries. Even then these firms lost out to the Koreans mainly because of their inability to adapt to the Indian conditions of doing business. The Japanese have quiet late but finally realized that they can no longer afford to ignore India and its market. Although it is also true that govt. policies and initiatives regarding investment from Japan have also been encouraging. The Japanese not only enjoy superior brand value over the Koreans but also have superior technological capabilities. They have started employing these strengths to develop manufacturing plants in India not only for domestic markets but also for exports in other emerging markets. Most of the firms under study have plans to open R&D centers to cater to the Indian market and develop products which better reflect the needs of the Indian consumer. Armed with new resolve from the headquarters in Japan, these firms are up in arms against the “incumbent” Koreans and all set to displace them. For this they are employing various strategies including alliances with Indian partners as well as amongst themselves. They are also using innovation, scaled up distribution, aggressive marketing and most importantly reduced price premium-ness to compete and win this battle.
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