Financial Times - Japanese firms: Feeding India through Sri Lanka

With Japanese companies in Colombo happy to do business in this country, authorities are now promoting second-tier companies to set up base here to supply Japanese assembly plants in India – courtesy the FTA between the two countries.

Japanese companies, totalling 60, with 30 manufacturers, already present in Sri Lanka are very satisfied with how business is going. “Noritake Porcelain has been in the country since the 1970s and has trained many Sri Lankan in the fine skills needed to produce the end product,” Yoshio Koyama, Senior Advisor. Japan International Cooperation Agency (JICA), told The Sunday Times FT in an interview.

He said the advantages of moving 2nd-tier business to Sri Lanka from India for Japanese companies, and other more developed Asian countries, include India’s high costs caused by an inferior infrastructure (roads and electricity), labour dispute problems, high turn-over rate of managers and workers, complex and frequently changing tax rules.

“Such problems have scared off Japanese small and medium enterprises that could supply the second tier product lines, where there are only around 150 in trade and manufacturing in India, while in China that figure is around 10,000, and 1,000 in Thailand.”

On Friday Koyama made a presentation at the Ceylon Chamber of Commerce on the “Creation of New Parts Supply Industries in Sri Lanka for Japanese Assembly Industries in India”.

The presentation was a follow-up to one entitled “Towards a New Industrial Strategy of Sri Lanka” given in June. The basic idea is to move away from natural resources (tea, rubber, gems) to more foreign direct investment-led industries, especially those that can be used in India.

“Most multinational companies won’t invest in large factories in the country due to its size, whereas they will in India, so being situated so close is a great advantage where automotive and electronic/electronics parts could be produced at very competitive prices and exported,” Koyama said.

He said, “Presently the country is in transition from garment-centered industry to a FDI-led one, where with the abolition of the quota system, countries like India, China and Vietnam are going to make the former industry’s future uncertain: so new value-added industries have to be found.”

He said what needs to be done is those Asian countries presently exporting parts to India have to be targeted for investment promotion in Sri Lanka. “An extensive study should be done to identify the target industries, where the automotive and electrical industries look very promising.

This is also true for precision work, where German and Japanese companies have already successfully trained skillful workers.”

Second-tier suppliers for those targeted industries should be invited to the country to see first hand what was available at very competitive prices. Another incentive offered was the huge potential of the Indian market, where 11.3 million TV sets were sold in 2003, where 1.9 million refrigerators were sold the same year, where 28.4 million cellular phones were bought last year. “These are markets that will just grow in the coming years,” the senior advisor said.

As for the automotive side, over a million new passenger vehicles were assembled last year, a figure that will also only grow.

“The precision metal processing industry is still small due to a lack of demand, but it has already been proven that a workforce can be trained. To move into these industries there admittedly has to be certain changes in the mind set, but it has happened in Thailand were not too long ago agriculture was the main earner, where now industry is taking the leading role,” he said.

Another positive factor is that presently the local purchasing rate for parts in many of the industrial areas in India is relatively low, meaning there is room for those products, such as transmissions car seats, car lamps and carburetors to be manufactured in Sri Lanka and still find a wanting marketplace.

As for what needs to be done here: well-targeted investment promotion programmes have to be prepared, international standard industrial parks prepared, improved transportation from Colombo to Chennai and Bangalore, local SMEs need to be encouraged to take the initiative, as well as their support system being strengthened. For the regain overseas suppliers need to be identified as potential investors, such as Japan, Thailand, Malaysia and Singapore. “And the precise needs of Japanese companies in India need to be found, and then inviting those companies to Sri Lanka to show off the country’s potential,” Koyama said.

With the plan only beginning last year, there is still along way to go, where the Japanese foreign aid budget is not announced for next year until January/February. But the senior advisor feels that there is a good chance of the project being accepted, where around Rs 100 million will be needed for the initial official study.

But the country does need alternative investment in sectors outside agriculture, and having a country the size of India so close, it would seem a waste if that advantage (not to mention that population) was missed in the years to come.