- Introduction of Rental factories with allied services are the need of the hour for India to invite more international SMEs.
- Smaller industrial townships across the country are more practical for SMEs than large industrial townships
- The lack of industrial infrastructure for SMEs in India puts Thailand, Indonesia, and Vietnam at advantage.
The global attention was on Japan a couple of days ago as Prime Minister Shinzo Abe led Government announced a major ₹16790 Crore incentive for Japanese firms, to shift their operations from China back to Japan or other countries. The growing mistrust over China is projected as a gain for India, but are we prepared to get these manufacturing shifted to India?
Japan External Trade Organisation (JETRO), is a government-related organisation that is responsible for promoting mutual trade and investment between Japan and the rest of the world. Their Indian office is working for many years to develop trade between both the countries and expecting a healthy Indo-Japan relationship, which is becoming stronger with great bonding between both PMs Modi & Abe.
We were able to have a detailed interview with Deepak Anand, Research Director, JETRO, Bengaluru, in various subjects like Japan’s current strategical move and how it can impact India, opportunities, requirements, and way forward, etc. Despite the fact that these are difficult times, JETRO feels that India is the only market that has the potential to grow many folds.
India & Japan: Natural Partnership
“Even before the COVID 19 pandemic, India thrived as the largest growing economy and at the same time China was not doing well compared to India There will definitely be a short-term effect on the Indian market due to COVID 19 but it will grow and JETRO is optimistic about it” shared Mr. Anand.
Despite all the challenges India is faced with, things are slowly changing in view of Japanese SMEs as the Japanese government signed a memorandum of understanding (MOU) with the Ministry of Commerce, India, in 2016 to develop Japanese industrial townships across India.
With regard to the prevailing situation of COVID 19, the Japanese government is keen on reducing their dependency on China and establishing supply chains in other nations. For Japan, India is a potential and prominent candidate along with Vietnam and Indonesia; however, JETRO feels that India has an advantage over the other two competing nations because India in itself is a huge market and the potential to grow is enormous. These advantages play a key role in the decision making of Japanese SMEs to set up their factories.
Adding to these, the healthy Japanese-Indo relationship that already exists and the positive political allies between the two countries also play vital roles in the decision-making process. In view of these advantages, JETRO feels that out of 2.2 billion USD stimulus the Japanese government has allocated to relocate their firms, the majority might be channeled to India.
India vs China, Thailand, and Other Southeast Asian Countries
China has more than 30,000 Japanese companies that are primarily SMEs and the main reasons are, Chinese government’s development of very good industrial infrastructure and the abundant availability of raw materials, apart from these, proximity to Japan and cultural similarities are some of the other reasons.
These advantages that China had over other countries directly led to Japan’s manufacturing dependency on China by almost 70%. Due to the recent events surrounding COVID 19 pandemic, the Japanese government realised the importance and need of developing another supply-chain ecosystem, since complete dependency for all aspects of the manufacturing industry on a single country is extremely dangerous. Moreover, a high level of distrust on China has emerged among most countries including Japan due to the recent effects of COVID 19.
Apart from China, Japan has been present in most parts of Asian countries. For instance, Thailand has around 6000 Japanese countries, and similar to China, Thailand has also developed a very good industrial infrastructure and has created an ecosystem for SMEs. The thought process of SMEs is to establish themselves in a country where rules and policies are not complex and the manufacturing infrastructure is ready. India does not yet have the plug-and-play infrastructure for the manufacturing industry and the concept of the rental factory, which is available in other countries.
The concept of rental factories in countries like Thailand and China is a cluster of manufacturing companies that provide plug-and-play facilities. This model of rental factories provides maximum output in less volume of space, which is again lacking in India.
Furthermore, Deepak said that services such as availability of labour, registration, visa, etc., are provided as allied services in Thailand through the Bureau of Investment (BOI), which is part of the Ministry of Investment Promotion of the Thailand government.
The BOI has set up its offices in all the industrial clusters in Thailand and all approvals are granted within a week and by the second week, the SMEs are ready to bring in their machines and start their production, because a dedicated team of BOI manages travel, accommodation, visa, registration, and all other allied services. This enables the company to focus purely on their business and not be diverted with all other peripheral compliances.
Challenges in India:
Deepak feels that one of the major drawbacks with the Indian government’s industrial policy i.e. the government’s plan of industrial areas is always big (in excess of few 1000 acres) despite the percentage of occupancy lingering at 30%. This results in the remaining land being unutilised.
There is also a fundamental difference between China or other Asian countries and India, which is again a major challenge in India. He stated “we have a good labour force and we have cheaper labour force, but we do not have the infrastructure. In India, we do reverse development, we first sell the land and then we create the infrastructure but in China and other Asian countries they develop the infrastructure and then they sell them”. He further said that Vietnam and Indonesia are also replicating this tried and tested model.
Some of the other challenges are, unlike in China, Thailand or other Southeast Asian countries, India lacks industrial infrastructure and a conducive ecosystem for SMEs, the concept of rental factories in India is a just a simple shed and lacks plug-and-play services other allied services, and compliances are made complex and complicated, which is burdensome for SMEs.
JETRO Projects in India:
JETRO has identified twelve places to develop its SMEs including Vasanthnarasapura Industrial Area in Tumkur, Karnataka, which has been designated as “National Investment and Manufacturing Zone”. It is a massive industrial cluster that is coming up with a landmass of almost 13,000 acres. Phase 1, 2 & 3 are already developed with necessary infrastructure and the government has allocated 600 acres exclusively for Japanese companies, where the infrastructure will be developed according to the Japanese specifications and the same model will be executed in all the 12 locations across India.
The 12 locations have the provision for setting up rental factories with the necessary infrastructure that is needed for Japanese SMEs. This kind of plug-and-play model helps SMEs to immediately set up their shop and start their production by simply installing their machines.
Japan and other nations focus on building small clusters of factories with full operational capacity because assemblies are the backbone of any economy. Deepak further stated “if you create the infrastructure at a smaller level, they (SMEs) will do much better and then you grow the same model in different places. This will help in developing a decent economy and will be a successful model”.
Toyota & Bidadi: A great model to follow
Toyota’s plant in Bidadi, Karnataka, has developed a plug-and-play facility and is working successfully for more than 20 years. Deepak said that the Toyota industrial park in Bidadi houses more than 60 small vendors and provides them with allied services along with the infrastructure. The vendors are willing to pay higher rents as they are free from the compliance constraints, this works out for Toyota in terms of profitability as well.
Toyota is planning to replicate this proved model in Gujarat and Chennai as well. With this perspective, the Japanese government is encouraging India to develop small clusters of industrial areas across the nation rather than developing large industrial areas in limited places, which will attract the Japanese SMEs.
Furthermore, Deepak said that similar to the Japanese’s 600-acre industrial township that is being developed in Vasanthnarasapura, Tumkur, Karnataka, smaller industrial townships of even 100 or 50 acres can be developed across the country with the necessary infrastructure. According to JETRO, if they are able to ready the infrastructure before the COVID 19 situation could get back to normalcy, they would be able to attract a good number of SMEs as soon as the current situation becomes normal.
Japan in India
In India, there are currently more than 1500 Japanese companies that have more than 6000 establishments across the nation and Japan is also the third-largest country contributing to the foreign direct investment (FDI) of India. Deepak said that in view of this Japan is an important business partner for India and is also one of the largest contributors to the manufacturing FDI of the nation.
Most of the 1500 Japanese companies in India are large tier-1 multinational corporations and the supply for these tier-1 companies is exceptional, but the supplies for tier 2 and tier 3 are still inadequate. Deepak said that this is one of the main concerns as to why there is lesser number of Japanese small and medium enterprises (SMEs) in India. JETRO’s primary focus is and will always be to generate Japanese revenue and building a strong SME base in India.
To understand the context behind the inadequacy of Japanese SMEs in India than in other Asian countries, Deepak said that they need to assess what has been differently done in other nations that India has failed to do or is unaware of.
JETRO in India:
The organisation was established in 1958 with an original purpose to promote Japanese exports abroad, and now JETRO’s primary aim is to promote foreign direct investment into Japan and to help small to medium size Japanese firms maximise their potential in global exports.
Currently, JETRO has 74 overseas offices across 54 countries worldwide and 46 offices exclusively in Japan including its headquarters in Tokyo and Osaka. The organisation provides copious information to foreign investors on all aspects of doing business in Japan. It also offers expert consultation and even free temporary office spaces across Japan. JETRO conducts several business activities on a regular basis in achieving its purpose.
JETRO has a dedicated team that has been working with the government for about 12 years. The committee has been responsible in raising concerns of the Japanese industry to the government of Karnataka and most of them have been successfully addressed by the government officials.
Deepak said that due to this initiative, JETRO and the Japanese industries have witnessed a lot of changes right at the policy level that has been modified and incorporated in the new industrial policies. With the changes that have taken place, the government has realised its importance and Deepak said that the current government and the bureaucrats are very supportive.
Time for Real Action
The Japanese government’s decision to relocate its firms back from China to Japan and other countries is a crucial move at a critical time. With all the pros and cons India has a good chance of attracting the majority of the Japanese SMEs, provided the Indian government buckles up and works on the industrial infrastructure, provides plug-and-play and allied services, creates the ecosystem for SMEs, and makes the compliances easy.
Remember, along with India there are two other contenders i.e. Indonesia and Vietnam to make the most of the Japanese’s decision. Although the nation is fighting against COVID 19 the officials need to focus and strategize on fixing up all the loose ends, because if done right, this greatly boosts the Indian economy and lead other countries also to invest in India.
The initiative needs to be collaborative, constructive and we don’t have any time to waste. With both Government, industry bodies, business corporations, come together and see this as the opportunity, am sure Japan SMEs will be happy to be part of Making In India. Let's take our steps towards building our future.
For more details, you can write to Deepak Anand at deepakjetroblr@gmail.com
