Japan: rising direct investment in Southeast Asia
18 March 2016
Economics
Japan: rising direct investment in Southeast Asia DBS Group Research
18 March 2016
• Japan’s FDI investment in Southeast Asia is on the rise • The share of ASEAN-6 in Japan’s total FDI in Asia has exceeded 50% • Strong growth prospects and a high degree of market openness are the main factors attracting Japanese investment • Although the costs of doing business remain high in this region, it is not a binding constraint for Japanese investors • The Japan-ASEAN investment ties are expected to further strengthen on the back of the TPP and increased cooperation in the infrastructure field
Japanese investors are allocating more capital to Southeast Asia. FDI flows to the ASEAN-6 countries (SG, TH, MY, ID, PH, VN) have averaged USD 20bn per year for the past five years (except for 2012 when investment in Thailand fell sharply after the floods). This is a big jump compared to the annual flows of USD 7-10bn in 2006-2010 (Chart 1). The share of FDI headed to the ASEAN-6 has increased significantly, exceeding 50% since 2013 (Chart 2). According to the Japan Bank for International Cooperation (JBIC), about 56% of Japanese firms intend to expand business in ASEAN in the coming three years. The interest is especially strong for the markets of Vietnam, Indonesia and Thailand (Chart 3, next page). By contrast, the share of Japanese firms planning to expand in China has fallen to 48% in the latest survey. Initially, the surge of Japan’s FDI in Southeast Asia might be a strategy of diversification, responding to the Japan earthquake disaster in 2011 and the deterioration in Japan-China political relations in 2012. The sustained rise in recent years, however, could reflect broader considerations.
Chart 1: Japan's FDI in ASEAN
Chart 2: FDI in ASEAN / Japan's total invt in Asia
annual flows, USD bn
% share
25
SG
MY
TH
ID
PH
65
VN
60 20
55 50
15
45 10
40 35
5
30 25
0 2005
2007
2009
2011
2013
2015
2005
2007
2009
2011
2013
2015
Ma Tieying • (65) 6878-2408 •
[email protected] 1
Japan: rising direct investment in Southeast Asia
18 March 2016
Chart 3: Japanese firms' business plans in ASEAN and China over the next 3 years VN ID TH PH CN MY SG 0%
10%
20%
30%
Strengthen/expand
40%
50%
60%
70%
Maintain present level
80%
90%
100%
Scale back/withdraw
Hungry for returns According to the JBIC survey, future growth potential of the local markets is the paramount factor that entices Japanese firms to expand business in ASEAN (Table 1). For a long time, Japanese firms have been actively searching for growth opportunities in Asia’s emerging markets (1). Japan’s domestic economic growth has been anemic for two decades due to the burst of asset/credit bubbles in 1990s and the deterioration of demographics since 2000s. Notwithstanding the monetary and fiscal policy stimuli introduced under Abenomics in recent years, the economy grew just 0.6% on average in 2013-2015. Lending rates and bond yields have fallen further as the Bank of Japan pursued quantitative and qualitative easing together with negative rates on banks’ excess reserves. Low growth and low interest rates provide strong incentives for Japanese companies and financial institutions to explore opportunities overseas. Table 1: Reasons for Japanese firms to expand in ASEAN & China (% of respondents) ID
TH
VN
PH
CN
8.6
24.1
14.6
Qualified human resources
4.9
Inexpensive source of labor
35
36.7
49.1
47.9
13
8
12.5
7.8
2.1
12.3
Supply base for assemblers
23.9
27.3
14.7
25
25.9
Concentration of industry
12.9
22.7
9.5
8.3
18.5
4.9
3.9
19
20.8
0.6
Inexpensive components/raw materials
Risk diversification to other countries Base of exports to Japan
8.6
4.3
11.7
11.2
4.2
3.1
11.7
24.2
19
12.5
12.3
4.3
6.3
2.6
2.1
11.7
Current size of local market
38.7
35.9
15.5
12.5
67.9
Future growth potential of local market
83.4
55.5
71.6
64.6
59.9
9.8
10.9
10.3
8.3
9.9
Base of exports to third countries Advantage in raw material procurement
Profitability of local market Base for product development
0
2.3
0
0
8.6
Developed local infrastructure
3.7
23.4
6.9
6.3
13.6
Developed local logistics services
0.6
4.7
4.3
0
4.9
Tax incentives
3.1
14.8
1.7
18.8
1.2
Stable policies to attract FDI
1.8
8.6
5.2
6.3
1.2
Social/political situation stable
9.8
7
20.7
16.7
1.9
Sources: JBIC, 2015
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Japan: rising direct investment in Southeast Asia
Chart 4: GDP growth in selected Asian countries % YoY
18 March 2016
Chart 5: Japanese firms' FTA utilization ratio in ASEAN 50%
8
45%
7
40%
6
35%
5 4
JP VN
3
ID CN
PH
30% Exports
25%
2
20%
1
15%
Imports
10%
0 2013
2014
2015
2016F
2017F
2007
2009
2011
2013
2015
ASEAN markets are attractive from the Japanese perspective. Many economies have great potential to grow, thanks to relatively low per capita incomes and a young population profile. GDP growth in Vietnam and Philippines, which is currently running at about 6%, is almost on par with that of China (Chart 4). Whilst the market size of ASEAN remains small compared to China’s, the growth gap between the two has started to diminish. This might be considered as an important development by Japanese investors who are eagerly searching for return.
Utilizing FTAs Trade and investment liberalization in the ASEAN region is also attracting Japanese investors. According to a survey by Japan External Trade Organization (JETRO), the percentage of Japanese firms utilizing FTAs and other economic partnership agreements in the ASEAN market has reached 47% in 2015. This is a sharp rise compared to 21% in 2008 when the Japan-ASEAN Comprehensive Economic Partnership Agreement was initially established (Chart 5). It is also markedly higher than the FTA utilization ratio of about 30% in the Chinese market in 2015. Thus far, ASEAN has forged FTAs / quasi-FTAs with not only Japan, but other economies including South Korea, China, India, Australia and New Zealand. Free trade reduces tariff and other transaction costs for Japanese firms producing in and exporting from ASEAN. Moreover, free trade also eases the ownership and other restrictions for Japanese firms to tap local demand growth. This boosts investment not just the manufacturing but services as well.
Managing the costs Costs are always an important factor in the FDI calculus. Labor costs in Southeast Asia are lower than in China (Table 1). But wages in Southeast Asia are also growing rapidly nowadays. And the non-wage operation costs in this region are very high, due to the weakness in infrastructure. According to the JBIC survey, rising labor costs, difficulties in securing management-level staffs, unclear legal systems, underdeveloped infrastructures and social instability are the common problems facing the Japanese firms in ASEAN (Table 2, next page). Thankfully, Japanese investors have accumulated much experience in emerging markets. Through a combination of government guide and private sector due diligence, Japanese firms have established a comprehensive information system to monitor economic, social and political trends within the Asia region. They have also learned to respond to changes and adjust business strategies in a timely and flexible manner (2). Business costs shouldn’t deter Japanese firms from investing in SE Asia.
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Japan: rising direct investment in Southeast Asia
18 March 2016
Table 2: Problems facing Japanese firms in ASEAN and China (% of respondents) ID
TH
VN
PH
CN
Underdeveloped legal system
17.5
3.4
19.1
9.1
10.1
Execution of legal system unclear
40.3
12.7
30.9
29.5
54.1
Complicated tax system
14.9
4.2
7.3
2.3
8.2
Execution of tax system unclear
22.1
5.1
16.4
9.1
22.6
Increased taxation
17.5
9.3
6.4
13.6
27.7
Restrictions on FDI
23.4
12.7
12.7
11.4
22
Complicated procedures for investment permission
17.5
8.5
17.3
15.9
25.8
Insufficient protection for intellectual property rights
9.1
4.2
8.2
2.3
43.4
Restrictions on FX/transfer of money overseas
16.9
3.4
5.5
6.8
28.9
Import restrictions/customs procedures
18.8
6.8
12.7
9.1
22.6
Difficult to secure technical staff
17.5
19.5
16.4
15.9
9.4
Difficult to secure management-level staff
24.7
21.2
20
34.1
22
Rising labor costs
40.9
50.8
39.1
15.9
73
Labor problems
16.9
7.6
12.7
0
19.5
Intense competition with other companies
31.8
42.4
20.9
11.4
52.8
Difficulties in recovering money owed
7.1
3.4
4.5
0
25.8
Difficulties in raising funds
1.9
2.5
1.8
4.5
5.7
Underdeveloped local supporting industries
9.7
7.6
16.4
20.5
2.5
Sense of instability regarding currency/costs
20.1
5.1
11.8
6.8
4.4
Underdeveloped infrastructure
35.1
5.1
20
40.9
6.9
Security/social instability
23.4
28
5.5
22.7
28.9
6.5
5.1
10
9.1
1.3
Lack of information on the country Sources: JBIC, 2015
Further initiatives to follow Further initiatives are expected to drive Japan’s FDI in SE Asia in the years ahead. Japan and several ASEAN countries have joined the Trans-Pacific Partnership (TPP). If the deal is implemented, Japanese manufacturers would strengthen supply chains in TPP member countries, thanks to not only lower tariffs but also common standards in labor, environment, intellectual property and other aspects. The TPP also cuts trade barriers in service sectors, including financial, telecommunication, e-commerce and other new areas, making investment all the more attractive. Meanwhile, the Japanese government intends to further strengthen ties with its Asian neighbors (including Southeast Asia) through aiding of infrastructure development. Following China’s launch of the Asian Infrastructure Investment Bank and the “One Belt One Road” project, Japan has also announced it will provide USD 110bn to fund Asian infrastructure over the next five years. Southeast Asia has strong needs for infrastructures and should be an important recipient. And what goes around, comes around. Infrastructure investment is ‘circular’ in the sense that by reducing business costs it stimulates even higher levels of FDI down the road.
Sources: All data are sourced from CEIC, Bloomberg, JBIC, JETRO. Forecasts and transformations are DBS Group Research.
Notes: 1) Japan: a long-term investor in Asia, February 2014 2) Japan’s “go global” experience (2), July 2015
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Japan: rising direct investment in Southeast Asia
18 March 2016
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