For: Roundtable Seminar on Japanese FDI in ASEAN

FOREIGN DIRECT INVESTMENT IN ASEAN September 9, 2005

The Bank of Tokyo-Mitsubishi, Ltd. Asian Business Division

Masakatsu Fukai 1

Table of Contents I. TRENDS IN THE SIX MAIN ASEAN COUNTRIES – Overview – Investment Profile of Each Country II. JAPANESE INVESTMENT RESURGENCE IN ASEAN – Overview – Factors of Investment Resurgence – Issues – Outlook 2

I.TRENDS IN THE SIX MAIN ASEAN COUNTRIES Overview (1) Chart 1: Approved Foreign Direct Investment (FDI)

1. Summary Total FDI rose 4.0% to US$30.2 Billion, the 2nd consecutive year of increases

(US$ 00mil) 800 700

(YoY) 80 60

Vietnam (7)

40

Philippines (9)

20

Indonesia (34)

0

Thailand (26)

-20

M alaysia (11)

100

-40

Singapore(12)

0

-60

Growth Rate

600 500

2. Country Details

400

Investment growth in 2004 compared to the previous year

Increase

Decrease

300 200

95 96 97 98 99 00 01 02 03 04 (FY)

- Philippines (356.4%) - Thailand (54.0%) - Vietnam (14.3%)

- Indonesia (-24.4%) - Malaysia (-15.9%) - Singapore (- 4.3%)

Source EDB, MIDA, BOI, BKPM, NSCB, MPI *The percentages for 2004 are given in brackets.

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I.TRENDS IN THE SIX MAIN ASEAN COUNTRIES Overview (2) 1. Last Decade

Chart 2: Approved FDI Growth Per Country

Slowing FDI to ASEAN - Unstable political situation in Indonesia and the Philippines, which persisted even after the Asian crisis. - Foreign investments surged to China as it developed into an attractive production base.

( YoY) 200. 0

150. 0

100. 0

2. Present Signs of recovery as a whole while disparate in each member country - Shifting investments away from China to mitigate concentration risk. - Surge in large-scale investments in 2004 Thailand -the car manufacturing and electronics industry The Philippines - the natural gas industry

3. Classification by Investor Country Increase - Japan 30.1% - Europe 21.2%

Decrease

J apan i 14j USA i 11j Eur ope i 16j Ot her s i 59 j

50. 0

0. 0

- 50. 0

- 100. 0 92 93 94 95 96 97 98 99 00 01 02 03 04 ( YR)

Source EDB, MIDA, BOI, BKPM, NSCB, MPI *The percentages for 2004 are given in brackets.

- USA (-6.9%

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I.TRENDS IN THE SIX MAIN ASEAN COUNTRIES - Singapore 1. Overview Chart 3: Approved FDI Historical Trend in Singapore - S$6 billion, a 4.3% decrease in 2004 - Growth has declined consecutively in the past 2 (S$ mil) (YoY) years 10,000 40 30

2. By Country

8,000 20

Increase

Decrease

10

6,000

- China - India

- Japan (-14.1%) - USA (-4.7%) - Europe (-2.0%)

- Electronics - Chemical

Europe USA

4,000

-10

Japan

-20

Growth Rate

2,000

3. By Industry Increase

0

Others

-30

Decrease

0

-40 95 96 97 98 99 00 01 02 03 04 (YR)

- Biotechnology medical (due to huge investments in the prior year)

(Source) EDB

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I.TRENDS IN THE SIX MAIN ASEAN COUNTRIES - Malaysia 1. Overview RM13.1billion, a 16.2% decrease in 2004

Chart 4: Approved FDI Historical Trend in Malaysia (YoY) 100

(M $ mil) 30,000

2. By Country

80

Increase - Europe (24.5%) (Mainly from Germany)

Decrease

60 20,000

- USA (-51.5%) - Japan (-22.1%)

40

Others

20

Europe USA

0

10,000

-20

-60

0

- Electronics (Mainly semiconductor)

Growth Rate

-40

3. By Industry Increase

Japan

Decrease - Transport Equipment

95 96

97 98 99

00 01

02 03 04

(FY)

(Source) MIDA

- Paper, Print, Publication (Mainly from pulp manufacture)

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I.TRENDS ON THE SIX MAIN ASEAN COUNTRIES - Thailand 1. Overview - THB31.7 billion, a 49.3% increase in 2004 - Remarkable recovery to reach levels prior the Asian financial crisis 2. By Country

Chart 5: Approved FDI Historical Trend in Thailand to (T HB 000mil) 450

(YoY) 200

400 150 350

Increase - Japan (29.0%) (Mainly Car Industry) - USA (23.7%) (Mainly Electronics) - Europe (7.5%)

300

100 Others

250 50 200

Europe USA

150

0

Japan Growth Rate

100 -50

3. By Industry

50 0

Increase - Transport Equipment (156.6%) - Chemical (147.1%) - Electronics (112.9%)

95

96

97

98

99

00

01

02

03

-100 04 (YR)

(Source) BOI

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I.TRENDS IN THE SIX MAIN ASEAN COUNTRIES - Indonesia 1. Overview US$10.2 billion, a 26.8% decrease in 2004

Chart 6: Approved FDI Historical Trend in Indonesia (US$ mil) 50,000

(YoY) 60

2. By Country

40 40,000

Increase

Decrease

20 30,000

- Europe (54.9%) - Japan (34.0%)

- South Korea, Taiwan, and others (-40.3%) - USA (-24.4%)

0

Others

-20

USA

Europe

20,000

Japan

-40

3. By Industry

Growth Rate

10,000 -60

Increase

Decrease 0 95

- Chemical - Automobile

96

97

98

99

00

01

02

03

-80 04 (YR)

- Paper and Pulp (Large-scale investments already made in the previous year)

(Source) BKPM

8

I.TRENDS IN THE SIX MAIN ASEAN COUNTRIES - Philippines 1. Overview - PHP156 billion , a 356.4% growth in 2004 - Turnaround after a seven-year slump

Chart 7: Approved FDI Historical Trend in Philippines (PHP bil)

(YoY)

300

400 350

250

300

2. By Country Increase

Decrease

250

200

200 150

- Japan (198.6% ) - Europe (-35.3%) - Republic of Nauru - USA (-13.7% ) and the Man island occupy 70% of the share

100

Others

150

Europe

100

USA

50

Japan Growth Rate

0

50

-50 -100

0 95

96

97

98

99

00

01

02

03

04 (YR)

3. By Industry Increase - Electronic Power

Decrease

(Source) NSCB

- Mining

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I.TRENDS IN THE SIX MAIN ASEAN COUNTRIES - Vietnam 1. Overview - US$2.2 billion, a 14.3% increase in 2004 -Two-digit rise in growth rate for the past two consecutive years

Chart 8: Approved FDI Historical Trend in Vietnam

(US$ mil)

(YoY)

10,000

80

2. By Country

60 8,000

Increase

40 6,000

- USA (67.6%) - Japan (185.4%) - Taiwan and South Korea (Combined) (8.4%)

20

Others Europe

0

4,000

USA Japan

-20

Growth Rate

2,000 -40

3. By Industry -60

0

Increase - Electronics - Nonmetallic mineral - Telecommunication - Tourism

Decrease - Textile, Food, Consumer - Products

95 96

97 98 99

00 01 02

03 04

(YR)

(Source) MPI

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II. JAPANESE INVESTMENT RESURGENCE IN ASEAN

Overview z

ASEAN After the Asian monetary crisis in 1997, investment has decreased relatively compared to China. However, investments in ASEAN has improved significantly in recent years.

z

JAPAN Investment is limited to high value-added products - Electronics company Factory for liquid crystal (Investment Amt: U$500 Mio) - Electronics company Factory for digital camera (U$140 Mio) - Electronics company Factory for LSI (U$13 Bio) - Machinery tool company Factory for construction machine (U$300 Mio)

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II. JAPANESE INVESTMENT RESURGENCE IN ASEAN Factors of Investment Resurgence

1. Long Investment History in ASEAN 2. China Plus One 3. Establishment of AFTA

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II. JAPANESE INVESTMENT RESURGENCE IN ASEAN

Factors of Investment Resurgence 1. Long Investment History in ASEAN z

History of Japanese companies’ investment in ASEAN 60’s ~ Establishment of manufacturing base for domestic demand in the region ‘85~

Appreciation of the yen progress since Plaza Accord Installation of export base for the third country < ASEAN investment boom >

‘97~ Reorganization of business in the region after introduction of AFTA z

Amount of accumulated investments from Japan (‘85~’04) To ASEAN → U$1,137 Billion To CHINA → U$ 654 Billion

ASEAN’s value to Japan will remain unchanged 13

II. JAPANESE INVESTMENT RESURGENCE IN ASEAN

Factors of Investment Resurgence 2. China Plus One z

China will remain as a favored investment destination for Japanese companies

z

Investor perceived risks in China – Complexity of administration procedure – Problem of the trademark and the intellectual property right – Problem of electric power supply – SARS Due to increased risk in concentrating investments in China, Japanese companies are considering diversifying their investments

z

The attractiveness of ASEAN has increased from the viewpoint of the China plus one (diversification of risks) * Parallel production base in China and ASEAN: - Motor manufacturer:The manufacturing and sales of a small motor in both China and Vietnam - Electronics company:The system of production that shifts from the Philippines to China is returned to the Philippines again * Segregation of manufacturing process between China and ASEAN: - China : Production of low-end products - ASEAN : Production of high-end products

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II. JAPANESE INVESTMENT RESURGENCE IN ASEAN

Factors of Investment Resurgence 3. Establishment of AFTA z

Tariff reduction in Southeast Asia - Stimulate economic activity - Creation of a huge market with 500 million population

z

Product specialization within ASEAN (Example) Automobile Company

Thailand D ieselengine Steering w heelcolum n B ody panel

The P hilippines Transm ission V elocity collaboration C om bination sw itch

M alaysia Steering w heellink Engine com puter W iper arm

Indonesia G asoline engine D oor lock D oorfram e C lutch

Mutual Supplementation of Part Supply in ASEAN

Expansion of benefits in ASEAN

The importance of ASEAN as an investment destination is continuously high for Japanese enterprises

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II. JAPANESE INVESTMENT RESURGENCE IN ASEAN Issues - Investment Environment z

z z

z z z z z

Issues Shortage of skilled worker (or staff) Shortage of parts makers Complex administrative procedure and bureaucracy Inadequate infrastructure Security Graft and corruption Labor issues Violation of intellectual property rights

Actions z

Expansion of investment related to infrastructure

z

Improvement in legislation, tax system, administrative procedures etc.

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II. JAPANESE INVESTMENT RESURGENCE IN ASEAN Issues - Financial System -

Issues

Actions

Occurrence of another Asian monetary crisis

Development of a stable financial system z

Financial cooperation among countries - Secure short-term flow capital e.g. Chiang Mai Initiative (2000) - Secure long-term funding e.g. Creation of an Asian Bond market

z

Measures to be taken - Enactment of capital restrictions - Increase of the foreign reserves - Formation of a sound forex system

Deregulation of financial markets Encourage inflow of capital investment while maintaining an orderly financial structure

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II. JAPANESE INVESTMENT RESURGENCE IN ASEAN Issues - AFTA -

Issues The ratio of the trade using the CEPT (Common Effective Preferential Tariff) scheme in ASEAN region is limited to about 10% on average. * The requirement of CEPT is not satisfied. (Especially 40% value-added rule) * High dependency on trade with countries outside ASEAN

Actions How to promote CEPT → Necessary to simplify and speed up the application procedures * Introduction of unified tariff code and application of new standard * Simplification of * Expansion and easing of the rule of origin

* Importation of certain parts and raw materials are already tax-free

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II. JAPANESE INVESTMENT RESURGENCE IN ASEAN

Outlook Survey to Japanese Company The mid-term promising country in business development FY 00 Survey Response Ranking Country Rate (%) 1 China 65 2 USA 41 3 Thailand 24 4 Indonesia 15 5 Malaysia 12 6 Taiwan 11 7 India 10 8 Vietnam 9 9 Korea 9 10 Philippine 8

FY 01 Survey Response Country Rate (%) China 82 USA 32 Thailand 25 Indonesia 14 India 13 Vietnam 12 Taiwan 11 Korea 8 Malaysia 8 Singapore 6

FY 02 Survey Response Country Rate (%) China 89 Thailand 28 USA 26 Indonesia 15 Vietnam 15 India 13 Korea 8 Taiwan 8 Malaysia 8 Brazil 5

FY 03 Survey Response Country Rate (%) China 93 Thailand 29 USA 22 Vietnam 18 India 14 Indonesia 13 Korea 9 Taiwan 7 Malaysia 6 Russia 5

FY 04 Survey Response Country Rate (%) China 91 Thailand 30 India 24 Vietnam 22 USA 20 Russia 10 Indonesia 10 Korea 9 Taiwan 8 Malaysia 6

(Source) JBIC

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II. JAPANESE INVESTMENT RESURGENCE IN ASEAN

Outlook Promising Countries:Thailand, Vietnam, Indonesia, and Malaysia

Survey to Japanese Company Investment factors

1

Thailand (146 companies) Growth potentialof 56.8% market

2

Cheap manpower

3

Stability of politics and social environment

43.9%

Vietnam (108 companies) Indonesia (45 companies) Cheap manpower Growth potentialof market

75.9%

Cheap manpower

68.9%

48.1%

Growth potentialof market

62.2%

35.2%

The third country exportbase

M alaysia (26 companies) Stability of politics and 38.5% social Growth potential ofmarket

30.8%

Cheap manpower 39.7%

Top-class personnel

26.7%

Enhancementof infrastructure

26.9%

(Source) JBIC 20

II. JAPANESE INVESTMENT RESURGENCE IN ASEAN

Outlook Major investment considerations in Thailand, Vietnam, Indonesia, and Malaysia z

Growth in domestic markets - Total population of 400 million in four countries → Existence of a potential market - Promising industries → Increase in consumer purchasing power (ex) Retail (food), fiber, steel, chemical, Service industry (finance, tourism, consulting, game, amusement etc.)

z

Cheap manpower - ASEAN will remain popular for labor-intensive industries. 21

Questions & Answers

22

Presenter’s Contact Details Masakatsu Fukai General Manager Asian Business Division The Bank of Tokyo-Mitsubishi, Ltd. +65-6231-1701 [email protected] www.btm.co.jp/english/index.htm 23

Thank you.

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