Trade In Goods & Services With Japan
A FICCI STUDY
December 2006
TRADE IN GOODS
Indian exports to Japan have often been replaced by exports from subsidiaries of
Japanese companies in South-East Asia and China. This has happened to chemicals
exports. Japanese chemicals subsidiaries in Thailand are exporting some of the
chemicals, which used to be exported from India. Singapore, Thailand and Malaysia
have received a good deal of investments from Japanese majors, which are now
exporting to Japan.
Overall, our strategic approach toward building economic ties with Japan should be
holistic. It should not be only in trade or investment; we should strive for a
comprehensive economic co-operation agreement (CECA), taking into account the
changes in the Japanese trade and investment scenario, changes in the Japanese
economy and its demographics. This should further take into consideration in the
global changes and trading patterns. We may involve Japan in regional co-operation
platform like the BIMS-TEC, by tapping the South-East Asia and ASEAN countries for
critical entry into segments of the Japanese market, by using the large Japanese
trading houses in pushing exports.
Since Japanese economy is undergoing a restructuring by phasing out old low-value
high-volume industries to high-value high-technology industries, we should establish
synapses with critical sections of Japanese knowledge bases. For example, with
Japan going into industrial engineering and designing and development of new
products, our strategy should be to establish links between such institutions in the
two countries. Thus, National Institute of Design can become a focal point for such
collaboration between Japan and India. For the textiles sector, the National Institute
for Fashion Technology should become another center to push for collaboration and
joint development activities for the textiles sector. For knowledge-based industries,
we should proactively explore the possibilities of setting up captive research and
development centers for Japanese companies. We should undertake more vigorous
intermediate outsourcing. Above all, if we have to effectively exploit the Japanese
market, we should also develop the language skills to more meaningfully interact
with Japanese companies and the market.
Focus Products for promoting Indian exports to Japan
For India to penetrate the Japanese market there is an imperative need to diversify
India’s export basket to Japan focusing on value added products. Given below is an
indicative list of products, which can form the future focus for promoting Indian
exports to Japan:
Textile and garments
Light engineering products
Pharmaceuticals
Marine products like shrimps and lobsters
Herbal products like Henna, Aloe etc
Indian handicrafts
Leather garments and products
Coffee
Fruits like Mangos, Grapes and Bananas
Diary products-Milk and Milk products
Computer software
Gems & jewellery especially platinum based jewellery
Processed foods-fruit pulps, juice squashes
Cut flowers
In the case of textiles, while textiles exports are continuing, China has taken up a
large slice of the Japanese market because of its speed in reacting to changes in
fashions and for its reliable delivery schedule. China takes about two weeks to
deliver new orders based on changes in fashion designs. Chinese manufacturers not
only produce volumes but they have demonstrated surprising agility in responding to
changes in market demand and fashions. Textiles business is particularly sensitive to
changes in fashions and these determine the presence in market. Any slippage in
delivery schedule consequent upon changes in fashions results in total rejection of
consignments. Japanese trading houses, which play critical role in this business,
point out the speed with which China reacts to these market changes in Japan.
In addition, China has much better transport linkages with Japan, which helps
them in servicing the market much more effectively and faster. Since speed and
reliability of supplies are major concerns in the trade, India’s transport network with
Japan needs to be improved substantially if Indian exports are to make any major
headway.
In the case of agricultural exports, although Japan provides a huge market, this
cannot be effectively tapped for want of reliable supplies on a long-term basis. The
trade sources point out that government intervention against exports of items like
wheat in case of a shortfall in domestic product works as a major disincentive for
Japanese importers and trading houses. Trade sources point out that this is "not a
spot business and it has to be nurtured and cultivated over the long period". Stable
supplies assurance is the basic premise on which the business could be built. Hence,
it is important that government intervention in exports is minimized in case there is
production shortfall. This is particularly so for agricultural products like wheat that is
acceptable to food trade in terms of quality.
Trading houses also are optimistic about other agricultural commodities. Similarly,
quality and standards compliance should be encouraged and two countries should
continue to negotiate on these issues. In general Japan has a very large market for
import of food items and India can exploit it effectively provided it also establishes
its image as a clean and hygienic producer of these items. India has to undertake a
major exercise for image building in this respect. Traditionally, India has been a
major exporter of shrimp, tea and castor oil, among a number of items, and has
stable volumes of exports.
Reliable supplies of some items, irrespective of developments in the domestic
market, have created a fairly stable market for some Indian exports. Steel exports
are an example. Steel manufacturers and trade sources have committed to export a
minimum portion of their total production for the export market, whether there is
higher demand in the domestic market or not. This has created a sense of confidence
among the importers and therefore has created a stable market for Indian steel. Of
course, the market for iron ore exports to Japan has been very stable particularly
because of the long-term contract between the ore exporters and Japanese steel
mills. In this context, long-term contracts in pricing also have a critical role to play.
Export contracts will have to have longer term pricing than spot pricing which varies
over the short run.
For exports of automobile components, forging and castings, while there is
good market in Japan, Indian exports can make entry into the market only they are
able to establish R and D contracts with Japanese users of these items, namely,
engineering and automobile companies. For automobile components in particular, the
components are designed and developed years before the launch of specific models
and products. Hence, associations with the automobile companies will have to be
established at the time new models are conceived.
Two alternative models can be considered for these exports.
First, Indian companies can establish long term development and supply
contracts with Japanese automobile and engineering firms for production in
India.
Secondly, they might even consider setting up manufacturing units in Japan
itself. Since Japanese workers have very high wages and yet have refused to
undertake strenuous and dirty work like working in forging and casting plants,
Indian companies can send their own workers to Japan for running these
units. This will, of course, call for visa and work permits for these workers,
which will have to be worked out by the two governments. Since, Japan’s
working population is dwindling and preferences for certain types of work are
getting more and more acute, sending workers for captive units is becoming
increasingly a distinct possibility.
Thirdly, Indian auto components units might also have understanding with
suppliers in Thailand and elsewhere in South East Asia for supplies to final
Japanese users.
There is scope for exports of oil and petroleum products to Japan. India imports
crude oil and refines these and in the process gets a large number of by-products
many of which do not ready and full market in India. Hence these are exported.
Japan has a large market for such oil by-products. However, the full potentials
cannot be tapped since the Indian exporters, led by the Indian Oil Corporation, adopt
a tender based approach to such exports. That is, the Indian refiners sell these by
open tender and whoever is the highest bidder is awarded the contract. This has
stood in the way of developing long-term export links with the Japanese importers.
In fact, the major public sector exporters have suffered precisely for their insistence
on tender sales rather than long-term export deals, excepting in the case of iron ore
exports.
Pharmaceuticals and agro-chemicals have emerged as star export items and
India can double exports of these items. Because of the demographic dynamics of
Japan, the demand for medicines and the range of medicines required are expanding
very fast. Several of the Japanese trading houses and importers have looked at
Indian medicines and are satisfied with the quality. Some of the pharmaceutical
companies have also entered the Japanese market. Efforts for exports of pharma
products have to be redoubled.
What is however, important for pharmaceuticals exports is that importers are not
always keen on imports of complete drugs. There is huge market for supplies of
intermediate drugs and chemicals. This needs to be exploited. What is happening in
the industry in Japan is "outsourcing of intermediate processes". That is, some parts
of the processing could be undertaken in India and subsequent processing of the
materials could be completed in Japan. For this purpose, high-quality laboratories
and production process centers may be set up in India in collaboration with Japanese
drug and chemicals firms in select centers. Since these are high value items, the
exports will be by and large airfreighted. These centers will by virtue of their
operations have to be in centers having ready air service and links with Japan. In
fact, for high-value exports it is essential that air links between the two countries are
upgraded and should be available at multiple points in India. The scope for such
businesses between India and Japan is large, particularly since India is viewed much
more positively in such knowledge-based industries than China.
As far as software exports are concerned, these need to break from its now
traditional modes. Japan has a huge demand for applications software in various
industries. As Japan concentrates on more and more high-value and high technology
industries, demand for embedded software in these products are rising. Japan is
facing shortage of highly trained software engineers. These demands are currently
being met through supplies from China. However, India could step in if such
specialized software is developed by Indian engineers. One requirement here is that
the Indian engineers learn Japanese language, without which it is difficult to break
into this market. An immediate area to tap here is the need for specialized software
for the passenger car industry that is putting in place an ever more variety of
software and gadgets in passenger cars.
India has an edge over China in the knowledge-based industries and should
concentrate on these sectors. China has already acquired a massive muscle power in
high-volume cheaper manufacturing industries. So it will be more strategic for India
to concentrate on these areas.
TRADE IN SERVICES
An analysis of recent global service export and import figures for both India and
Japan shows that while Japan is a net importer of commercial services, India is a net
exporter of commercial services. While figures for bilateral trade in services are not
available, feedback received from members of the Indian industry shows that the
Japanese market deserves a good look. Segments where there exists good potential
for the Indian service providers include -
1. Information Technology Services
2. Biotech Services
3. Medical and Health Services
Information Technology - According to data made available by Japan’s Ministry of
Economy, Trade and Industry, information service industry in Japan recorded sales
of approximately Yen 9 trillion in 2003 and is the second largest software market in
the world. While software development accounted for 61% of the sales, software
products made up 13% and management and operation services including systems
management accounted for 11%. The information services industry in Japan is
poised for strong growth and there are already apprehensions of the industry facing
shortage of highly qualified engineers in the coming years. Although the Japanese
companies have till now not made extensive use of the services being offered by
Indian companies, there is an increasing realization that given the cost matrix
offshore services from India are now an important play for remaining competitive.
The IT companies in India, which have already established a name for themselves in
the markets of US and Europe, are looking forward to offering services in the
Japanese market. The Indian companies that have forayed into the Japanese market
have adopted a step-by-step approach. Companies are first targeting business in the
low value added areas through tie-ups with Japanese companies. Once familiar with
the market, the Indian companies move up the value chain and start approaching
the end users directly through their direct marketing channels. However, before the
Indian companies can see a reasonable presence in the Japanese market the
following issues will have to be dealt with.
Building competency among professionals of Japanese language
communication skills
Familiarization with Japanese business practices
How to deal with competition offered by local companies
Inadequate / lack of business information
Institutional issues related to visas, taxation, local
compensation mechanisms etc
Biotech Services - India has notable strengths in the biotech industry. These
include a vast pool of technically qualified and skilled human resources with English
speaking capability, low cost of manufacturing, advanced chemical synthesis
technologies, manufacturing practices conforming to US and EU norms, and diverse
biological resources. As a number of EU and US companies are already using India as
a base for clinical trials and commissioned research, Indian companies are well set to
offer these very services to Japanese clients. The Japanese pharmaceutical
companies are under pressure to bring down their drug development costs and here
Indian companies can partner with them successfully.
Medical and Health Services - India’s low cost high quality health care system has
already attracted patients from the Middle East, US, EU as well as South East Asia.
India’s offering in this field need to be marketed in Japan. Given the aging population
of Japan, the demand for medical services is going to put pressure on the existing
health infrastructure in the country and this can to some extent be relieved by
easing rules for movement of trained professionals, nurses, physicians etc from India
to Japan. Further, investment by Indian companies in the Japanese health care
market also needs to be promoted by both the sides.
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