Ben Poole reports on how Japanese companies are extending their supply chains throughout the region in an effort to diversify their risk exposures, and ponders Tokyo’s ambitions as a global financial centre.
Over the past few years, Japan has been increasingly focusing on its trade flows with the rest of Asia.
In the past, Japan invested in Asia by looking for cheap manufacturing sites, primarily for the purpose of exporting from these sites to markets in North America and Europe to some extent. But now Japanese companies are going out to Asia to sell their products within the region. Japan is also importing from Asia.
“When Japan is concerned, the importance of trade cannot be understated,” says Joseph Sum, head of corporate trade product, Asia Pacific, at Bank of America Merrill Lynch (BofAML). “Trade has always been a vital component to the Japanese economy, and its substantial role will not diminish.”
As a country with limited natural resources, Japan has historically relied on imports of raw materials to establish itself as a global leader in exports of high-end consumer goods such as high-tech electronics and automobiles. These industries continue to provide significant national revenues, much of which is linked to trade. However, with rising commodity and manufacturing costs, it has become necessary for Japanese companies to offshore manufacturing to its Asian neighbours, while transforming itself into a more knowledge-based, service-oriented economy.
“Under this new economic paradigm, managing a stable supply chain and mitigating risks in trade with emerging markets has become critically important – and for Japanese corporations it has been no different,” says BofAML’s Sum. “Specifically, with the Japanese economy now intricately linked with countries such as China, deploying tools to manage risks with the associated trade flows is a primary focus for Japanese companies.”
Drivers of change
Natural disasters in the recent past have had a profound effect on the way that Japanese companies operate. 2011 saw two such catastrophic events – severe flooding in Thailand and the magnitude 9 earthquake in Japan and subsequent aftershocks.
“The earthquake in Japan and the flooding in Thailand have led Japanese manufacturers to diversify the suppliers that they use and also the locations where these suppliers are based,” says Yasukazu Aiuchi, head of global transaction banking, Japan at Deutsche Bank. “They are looking for where there is the highest level of technology or the cheapest cost of production, and are beginning to diversify procurement.”
Japanese manufacturers that were selling in Asia used to buy parts from Japanese suppliers that had followed them around the continent, but over the past 18 months this has changed. Japanese manufacturers have found themselves forced to go out and negotiate for cheaper production sites and suppliers. As a result, they have started buying products from local regional companies rather than from Japanese suppliers.
The focus is now firmly on establishing multiple locations, multiple suppliers, and the diversification of procurement from local companies. All of these tactics are used by Japanese companies to mitigate supply chain risk.
They have taken an innovative approach in order to remain competitive in Asia against cheaper local suppliers. The motorcycle industry provides a good example of this. Companies in other Asian countries were attempting to copy the production process of Japanese motorcycle manufacturers at a fraction of the cost. Instead of fighting against this, there are examples of Japanese companies going in and offering to put equity into the local company, with the aim of helping them improve the quality of their production. Some are even willing to put their official badge on the new machines.
“Some Japanese manufacturers are creating opportunities with local companies in other Asian countries, either through equity or partnership,” says Deutsche Bank’s Aiuchi. “They are transferring capital from Japan to develop superior products using local companies. Japan is no longer a low-cost producer, but its corporates are offering technology and industry intelligence in other Asian countries.”
Mitigating risk
In addition to simply diversifying supplier base, there are a number of financial instruments that Japanese companies are turning to in order to mitigate risk in their supply chain. One such tool is trade receivables finance. This offers the opportunity to accelerate cash conversion and to monetise receivables immediately at a competitive rate, improving overall cashflow.
“Trade receivables finance with export credit agency structures, such as those provided by Nippon Export and Investment Insurance (Nexi), is another trade solution that has implications for trade-based corporations in Japan,” says BofAML’s Sum. “Specifically the tailored financing solution element with risk mitigation programmes, providing capital access at attractive rates while minimising risk.”
Two other tools are key to driving Japan trade – commitment to purchase (CTP) and document purchase (DP) programmes. “CTP allows companies to purchase and/or negotiate compliant documents under unconfirmed export letters of credit (LCs) on a non-recourse basis,” explains BofAML’s Sum. “DP discounts compliant documents under unconfirmed export LCs on a non-recourse basis after the issuing bank accepts the document – only for usance transactions. Both programmes accelerate cashflow and mitigate LC risk due to the non-recourse structure.”
Japanese investment
In Asia, Hong Kong and Singapore are regional hubs where Japanese companies look to set up treasury centres. Beyond this, there are a number of countries that are of interest to Japanese investors, including China, India, Thailand, Vietnam, Malaysia and Indonesia.
The one new trend that has been particularly visible over the past nine months is a huge movement of Japanese interest, on both a government and industrial level, into Myanmar. Japan is one of the key players, along with the US, to provide support to Myanmar and invest in the country’s industrial development. “There is a lot of interest from leaders of Japanese industry in Myanmar,” says Deutsche Bank’s Aiuchi. “Some news reports say that around 80 Japanese companies have already set up some sort of presence in Myanmar, while a couple of large Japanese banks have also just recently opened representative offices in the country.”
The Japan International Cooperation Agency (JICA) is playing a key role in arranging financing for Myanmar. Through schemes such as buyer’s credit, Myanmar is able to source products and engineering skills from Japan using Japanese government money.
A huge industrial park in Myanmar has been mooted that would be able to accommodate the operations of up to 2,000 Japanese companies. In addition, the Myanmar pro-democracy campaigner Aung San Suu Kyi has recently been in Japan to meet with the country’s business leaders.
Japanese industrial leaders are committed to continue investing in Asia. This includes China, despite whatever political tensions may exist between the two countries. This outward investment is supported by Nexi, which offers products and services to cover Japanese companies operating abroad. These include products such as overseas untied loan insurance, buyer’s credit insurance, export bill insurance and overseas investment insurance. Programmes such as these also help Asian countries build infrastructure and buy Japanese products by offering credit. “By investing in different Asian countries, Japanese corporates are helping these countries focus on their industry,” says Deutsche Bank’s Aiuchi. “This will improve their production capacity and capability, which will in turn benefit Japanese businesses.”
Looking at Indonesia, Japanese investment is often with local enterprises. Therefore they always have to mention whether they are 100% owned. Nexi provides loans to ensure that a joint venture is able to get credit at a competitive rate. Large banks operating in the region can also support this sort of activity, for example, by purchasing credit in receivables from the company so that their liquidity position is more comfortable.
Japanese investment is moving a lot more aggressively into India. A current trend for Japanese companies when going abroad is to go to the countries where the population is relatively large and everything benefits from a scale merit.
Another trend is the growth in intra-Asian trade. The Japanese are buying parts from countries such as Indonesia and China. Japanese companies are also investing in multiple locations in Asia. They are then exporting their products to, for example, a Japanese electronics company in China, a Japanese automotive company in Thailand, and so on. There is growth in the intra-Asian trade flow from Japan, and very often manufacturing companies are setting up joint ventures with local companies.
Returning to the point regarding mitigating supply chain risk, Japanese companies are striving to have a number of suppliers within Asia – using different countries and different companies – so should there be any issue they can quickly move the location of a manufacturing site from one country to another or switch a supplier. The old adage about not putting all of your eggs in one basket rings very true here.
Tokyo’s position
There is a question mark over whether Tokyo can become a global financial centre, capable of competing with New York and London. While there may be a strong desire on the part of the Japanese government for this to happen, key challenges remain.
“One of the challenges faced by Japan if Tokyo is to become a true global financial centre is the yen,” says Deutsche Bank’s Aiuchi. “The yen is an international currency, but when you look at Japan’s trade with foreign countries, the US dollar still dominates. The euro follows, but in terms of volume, it generally represents around 15% of the dollar amount. When you combine these two currencies they dominate around 90% of the trade flows into and out of Japan. So if Japan wants to become a global financial centre, it may need to find ways to make yen more prevalent in cross-border trade.”
Yen is traded in every big market, but the actual trade flow is not overly significant. There will also need to be major social changes if Tokyo is to become a global financial centre, including language skills, the availability of labour, and a change of direction in regulatory policy. Japan is known for having some of the tightest financial regulation in the world, which in itself is not a bad thing, but many players find that operating in Japan is costly because regulation prevents them from doing many things in the most efficient way.
