Osaka - Saturday, March 13, 2010

Following the previous article Why Production Shift from Japan to Overseas? in which electronic component production of Japanese companies shifting from Japan to overseas is explained, how investment of major foreign capital is shifting from Japan to emerging countries is explained in this article.

Lately major foreign capital companies have been withdrawing from Japan business (production and sales) one after the other. According to balance of payments statistics, direct investment to Japan for 2009 has decreased by 55.7% vs. 2008. This is because major foreign capitals have been prominently shifting their investment destination from Japan to other countries, especially to emerging countries. Japan may well need to review and improve investment environment such as decreasing corporate tax and de-regulation.

1. How is investment from major foreign capitals shifting from Japan to overseas (emerging countries)?

According to Nikkei's article issued on March 10, major foreign capitals such as Michelin, a tyre manufacturer giant based in France, Hyundai, automobile giant based in Korea, and fuel cell system giant based in Canada are withdrawing from Japan. They have been increasing their investment in emerging countries, and therefore this means they are shifting their investment destination from Japan to emerging countries, with the objective of making the most of rapidly growing demand of emerging market.

Major Foreign Capitals That Have Downsized / Withdrawn from Business in Japan
(Source: Nikkei, edited and translated by the author)
Company Name / Based In / Business Type / Decision/Action
Michelin / France / Tyre production / Close Ohta Plant in Gunma Prefecture
Liberty Global / U.S. / CATV / Sell share holding of JV and withdraw
Prudential / U.K. / Life insurance sales / Terminate new sales by PCA Insurance under umbrella of Prudential
Carrefour / France / Supermarket / Terminate contract (name usage etc.) with AEON
Hyundai / Korea / Passenger car sales / Negotiate with dealers to terminate passenger car sales
Versace / Italy / High-end brand apparel sales / Close stores and withdraw
Office Depot / U.S. / Office equipment sales / Withdraw from sales (excluding mail order)

Michelin will close its Ohta plant in Gunma Prefecture (380 employees) in July 2010. It has been successfully manufacturing high quality tyers but profitability deteriorated with the worldwide economic crisis. On the other hand, Michelin will construct a new plant, investing 40 billion rupee (approximately 76 billion yen) in South India that manufactures tyers for buses and trucks.

Hyundai Motor Japan, Japan office of Hyundai located in Tokyo, terminated its　new sales of passenger cars. They will continue sales of buses. Instead, Hyundai will invest 8,000 million USD (approximately 70.4 billon yen) in China to construct their new plant in Beijing, which will be their third plant in China. They aim to start operating the new plant in the end of November, 2010.

Withdrawal is in process even in promising industries. Ballard Power Systems, a fuel cell giant based in Canada (British Columbia), has liquidated joint venture with a Japanese fuel cell manufacturing giant in 2009. Ballard Power Systems do not intend to continue business in Japan. Instead, they have invested to a telecommunication equipment manufacturer based in Denmark in January 2010.

Liberty Global, a media giant based in the U.S., sold JCOM stock it had owned by over 360 billion yen to KDDI and withdrawn from Japan CATV business. The reason is, according to Liberty spokesman, "roadmap to increase penetration rate for households of paid content in Japan to the level of western countries cannot be developed and executed". Liberty has acquired CATV giant based in Germany by approximately 3.5 Euro (approximately 420 billion yen) in the end of January 2010.

Withdrawal from Japanese capital market is also prominent. Number of non-Japanese companies listed in TSE (Tokyo Stock Exchange) was at the peak with 127 companies in 1991 but has been on the decline and currently only 15 as of March 9, 2010. And in the end of March 2010, Aegon based in Holland is to be de-listed, and in April UBS based in Switzerland. There has not been new listing since 2008.

2. How is Japan attractive as investment destination？ (From a survey result)

According to the survey result of a global leading consulting company, attractiveness of Japan an investment destination is drastically decreasing. The survey was implemented to management executives from 1000 global companies. The result was that Japan, which was #15 in 2007, fell to below #26 (ranking is available for the top 26 only) in 2010. China has been #1 for 6 consecutive years from 2002, and Brazil rose up to #4.

A retail giant based in China planning to invest to Laox, a Japanese leading mass merchandiser of consumer electronics; however, such a case is an exception.

3. Why Japan's attractiveness as an investment destination decreasing?

The main reason why Japan's attractiveness as an investment destination is decreasing is that Japan's expected growth is low, especially compared with emerging countries such as China and India, after the worldwide economic crisis. This attributes highly to low birthrate and to deflation mentioned in the previous article How Japan Can Get Out From 10 Year Deflation? Thus, more and more global companies are not counting Japan as an investment destination.

4. How could Japan's attractiveness as an investment destination recover?

With low expected growth, possible way that Japan's attractiveness as an investment destination can be recovered is by improving its investment environment. First measure is lowering corporate tax because as mentioned in the previous article Japanese Tax Haven Application Rule to Change, corporate tax of Japan is as high as 40%, which is much higher than other countries. Second measure is de-regulation. The author would say that the industry that needs de-regulation the most is agriculture, although its regulation has softened around 1990 once, when import of beef and oranges was de-regulated. The author also feels that there are other industries that need de-regulation if Japan is to become competitive.

Japan need to improve its global competitiveness, attracting investment and business (production, sales etc.) of global companies regardless of its nationality, to survive, grow and increase tax. This is the requirement for Hatoyama administration to achieve its goal and realize its strategy, mentioned in the previous article How Japan's Growth Strategy Shoud Be?