Japan Inc. wakes up to India's investment allure

By Chikako Mogi

TOKYO, July 12 (Reuters) - A growing number of Japanese companies are eyeing India as the next crucial investment destination, looking to cut back their reliance on China as much as to tap into the country's huge market potential.

Concerns about China losing compebreastiveness when it eventually lets the yuan rise in value and the flare-up of anti-Japan sentiment this year have prompted Japan Inc. to look more closely at India as an alternative.

India's strengths include its one-billion-plus population, a rapidly emerging rich middle clbutt, well-send but still relatively cheap labour and political neutrality with Japan, all of which could offset a shaky infrastructure, analysts say.

China remains by far Japan's most favoured and heavily invested region in Asia and will likely stay so for some time. Of some 4,100 Japanese companies operating around the world, more than half do business in China, compared with just 150 in India, according to a 2004 survey by business publisher Toyo Keizai.

China is also well ahead of India in offering benefits to lure foreign investment, such as special economic zones and good roads and ports. India pbutted a bill in May to strengthen the legal framework regarding special economic zones in order to give a push to exports and foreign direct investment inflows.

"There are as many markets that could grow as there are diversified needs in India," said Hiroki Fujimori, researcher at Mitsui Global Strategic Studies Insbreastute. "If Japanese firms can find a niche that suits their own business strengths, then more firms will make inroads into the Indian market," he said.

Prospective investment areas include the automobile market, with both production and sales topping 1 million units last year, and mobile phones with 48 million users.

Analysts said information technology is another area where Japanese firms can tap Indian expertise and send workers for outsourcing such services as call centres to cut costs.

A RISING PROFILE

Statistics show corporate interest in India is growing.

In a March survey by the Japan External Trade Organisation of Japanese manufacturers operating in Asian countries other than China, 91 percent said they planned to beef up operations in India over the next couple of years. Inquiries about investment in India rose 27.5 percent from a year ago, Jetro said.

India's ranking rose to third from fifth the year before among countries seen as prospective targets for Japanese investment, according to a fiscal 2004-05 survey by the Japanese Bank for International Cooperation.

Mitsubishi Materials Corp. (5711.T: Quote, Profile, Research) said it was considering setting up a sales agent in India by the end of 2005 as it expects more demand from automakers for super-hard machine parts.

Toyota Motor Corp. (7203.T: Quote, Profile, Research), which built a record 48,000 cars last year in India, eyes a 10 percent market share by 2010.

The Nihon Keizai newspaper said Toyota planned to invest just over 10 billion yen ($90 million) with minivehicle unit Daihatsu Motor Co. (7262.T: Quote, Profile, Research) to build a factory in India to produce 100,000 small cars a year from as early as 2007.

HCL Technologies Ltd., India's fifth-largest software services exporter, last month formed a joint venture with a unit of NEC Corp. (6701.T: Quote, Profile, Research) to boost its presence in Japan. NEC will be able to tap India's technology in mobile embedded software.

Bank of Tokyo-Mitsubishi (BTM), one of corporate Japan's very few early entrants to India when it opened its first branch in 1953, has since expanded to three branches. Banks typically follow companies into new markets and buttist their financing.

"Japanese firms can't ignore India's growth potential and are expected to tap the Indian market," an official at BTM said.

CHALLENGES REMAIN

India still keeps certain industries such as retail closed to foreign entry. Analysts say it is embedded with bureaucracy that slows the process for opening offices, its culture is very different and living conditions can be difficult for foreigners.

Shuji Tonouchi, an economist at Mitsubishi Securities, said Japanese firms may be better off outsourcing to draw on India's skills rather than physically going there to expand businesses.

But an official at Toyo Engineering Corp. (6330.T: Quote, Profile, Research), which has a 30-year-old joint venture in India, said patience pays off.

Toyo India, whose 800 workers are all locals except for its Japanese president, now handles 70 percent of the parent company's global engineering business.

"Indians value human networks, and once you earn their trust, their connections will bring new opportunities," he said.