JBIC TODAY JULY 2003 - JICA · 4 JBIC TODAY JULY 2003 The ASEAN 4 and Japan in the age of global competition Domestic consumption fuels new growth in ASEAN Direct investment by Japanese

2 JBIC TODAY JULY 2003

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JBIC TODAY JULY 2003 3


The ASEAN 4 and Japan in the age of global competition

Domestic consumption fuels new growth in ASEAN

Direct investment by Japanese companies in Asia took off in earnest with the sharp appreciationof the yen that followed the signing of the Plaza Accord in 1985. Asian countries seized this oppor-tunity to encourage foreign investment through liberalization and deregulation, and increasingnumbers of Japanese manufacturers sought to maintain their export competitiveness in the face ofthe high flying yen by shifting to local production in Asian countries. Data from the Ministry ofFinance shows that the pace of Japan’s annual foreign investments in Asia outnumbered those inthe United States by 1995, with a total investment value of ¥1.9 trillion, or about half the sum invest-ed in the U.S. This brisk investment by Japanese businesses triggered a period of rapid growth inthe economies of Asian countries.

From 1991 to 1995, GDP in the ASEAN 4 expanded at a remarkable average annual rate of6.9%. With the Asian monetary crisis of 1997-98, however, GDP shrank precipitously in 1998—by13.1% in Indonesia, 7.4% in Malaysia, 0.6% in Philippines, and 10.5% in Thailand. Observers believethat one of the major causes of the Asian monetary crisis was that the financial sectors of thesecountries were too fragile to withstand the sudden exodus of the speculative capital which foreigninvestors had poured into the region, seeking to capitalize on Asia's growth potential. By 1999,however, these countries managed to put the crisis behind them, succeeding in expanding exportsand IT infrastructure. Maintaining current account surpluses, they had in fact accomplished animpressive turn around.

In 2000, exports from Asia suffered a sharp blow from the downturn in the IT market in theU.S.. It appeared likely that the ASEAN economies would face some challenging times. Since 2002,however, they returned to a growth path, this time fueled by expanding domestic consumption.

A foreign-owned footwear factory in Indonesia


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Cooperation among ASEAN countries has potential to faciliatelarge-scale industrial clusters

Among the Asian countries that have shown steady economic growth, China is the only countrythat has succeeded in continuously maintaining a high GDP growth rate of over 7%. China owes itsconsistent economic growth to growing domestic demand in addition to exports, and to the factthat, with textile and light industry products comprising a large share of its industrial base, it hasmanaged to avoid significant impact from the IT slowdown.

The allure of China to foreign investors lies in the abundant availability of low-cost labor,and a huge and as yet largely untapped domestic market. Foreign investment has been furtherspurred by China’s accession to WTO, as it implies certain intentions on China’s part. Theseinclude removing the remaining barriers to trade and investment and complying with internationallyaccepted standards in such areas as the protection of intellectual property rights. Recently, invest-ment in the manufacture of high value-added products such as IT-related products and transportequipment has grown considerably, and with its products receiving increasingly high marks forquality, China has become a formidable rival of other industrializing Asian countries.

China’s impressive track record might give the impression that the country will continue todisplay the same winning growth, but there are many who express concern about uncertainties inChina. Much will depend on whether China can remain competitive when labor costs eventuallyrise. Other key factors are China’s capacity to achieve reform of state enterprises and the overalleconomy, maintain a sound market, deal with bad debts, develop the infrastructure required tosupport increasingly large-scale industry, and realize the formation of industrial clusters that isvital to nurturing advanced businesses.

Having long allowed direct foreign investment by Japan and Western industrialized nations,the ASEAN 4 are ahead of China in all of these respects. Road networks, power supply and otherindustrial infrastructure have all undergone steady development in the ASEAN 4 for many years.Their industrial base has also evolved over the years from what was once primarily product assem-bly to include the manufacture of parts, materials production and processing. As such, the ASEAN4 could, by working together, achieve broad-ranging industrial clusters that would be difficult forany single country to achieve. In this respect, many observers are closely watching the future ofthe ASEAN Free Trade Area (AFTA).

Jakarta-Merak Toll Road Project, Indonesia

Japanese companies strike a balance between business development in China and ASEAN

JBIC's 2002 survey on the overseas operations of Japanese manufac-turers provides a clear view of how Japanese manufacturers regardthe ASEAN countries. To sum up the results, 79.6% of the companiesparticipating in the survey responded that they were planning tostrengthen and expand their overseas operations in the medium term.Japanese manufacturers are achieving an increasing division of rolesfor their overseas and domestic operations, optimizing production andsales locations as they seek to penetrate new markets and maintainprice competitiveness. When asked whether they regarded China orASEAN as the more promising location, 26% favored China—consider-ably more than the 5.6% that favored ASEAN. However, it is notewor-thy that 53.8% responded that they would seek to diversify risk andachieve a good balance between the two.

"Good balance" can be interpreted as showing a division ofmanufacturing processes in line with the particular strengths of differ-ent countries. For example, one electronics manufacturer commented,"We take advantage of the high technological level of ASEAN countriesto develop systems for local markets, while we conduct downstreamproduction processes in China for the Japanese market." Other respon-dents see good balance in terms of diversifying risk, as the followingcomment from a vehicle manufacturer shows: "The risk of concentratingproduction in any one country is the impact that any changes in theinvestment and trade policies of that country might have, in restrictingexports, for example. We strive to mitigate such risk by locating our pro-duction bases in a balanced way throughout the region."


Car manufacturing in China

The ASEAN 4 and Japan in the age of global competition

Companies Companies Companies Companies Companies Companies Companies Companies

A production line in the plant of a medium-sizedMalaysian manufacturer

JBIC's 2002 survey also showed that the level of satisfaction among Japanese companieswith sales and profitability of overseas operations worldwide, including in China, has dropped. Andan increasing number feel a need to restructure their overseas business operations. Satisfactionwith operations in ASEAN countries, on the other hand, increased slightly compared with the 2001survey, while 15% fewer companies felt a need to restructure their operations in ASEAN countries.

These results may indicate that Japanese companies are more comfortable with operatingin ASEAN countries. This interpretation is corroborated by the many favorable comments made,such as this one from a automobile manufacturer: "We've had operation bases in ASEAN countriesfor a long time, so local managers have a solid understanding of head office practices. As a result,the localization of our management in ASEAN countries is ahead of that of other areas, and thereare a fair number of local full time board members and directors." An electronics manufacturercommented: "We use our base in China to carry out downstream coding processes for systems forJapan after first designing the systems in Japan, but in ASEAN, we carry out all processes, fromdesign onwards, in the local counties. This means that the skill levels of system engineers in thesecountries are already high enough to solve problems by themselves."


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ASEAN Operations Require a Proactive ApproachTakashi Marukami, Senior Economist & Director, Research Institute for Development and Finance, JBIC

Recently, whenever I speak at seminars on overseas invest-ment, both in Japan and elsewhere, I get the impression thatChina is not the only destination that Japanese companies areinterested in, although it is their major focus. And when I talkabout the importance of ASEAN countries, which have beencultivated through many years of investment by Japanesecompanies, I find that participants frequently agree with thepoints I make.

I do not wish to imply anything negative about China as atarget for business development, and wish only the best for anyJapanese company that has decided that China's growth offersa good opportunity for business expansion. However, JBIC sur-veys and other sources have shown that, although Japanesecompanies have great expectations for business in China, theyare facing a number of serious problems there. As such, it isimportant for Japanese companies considering going into Chinato have a very clear market strategy based on their core compe-tence, as well as a good understanding of the realities of China'sinvestment environment. And as for ASEAN, I would recommendJapanese companies to re-identify and make the most of theadvantages offered by these countries.

The main advantages of ASEAN countries to Japanesebusinesses are: (1) a long track record of extensive anddiverse investment; (2) industrial clusters that enableJapanese companies to take the initiative; (3) the widespreadadoption of Japanese management practices; (4) stringentproduction management that, with the exception of laborcosts, enables cost-efficient production that matches China;and (5) a well-developed, stable investment environment.

However, Japanese businesses need to take a new

approach to utilizing these strengths in the future. Rather thanseeking to achieve total production within any one ASEANcountry, Japanese companies should seek to raise the level oftheir manufacturing capabilities in the region as a whole. Inrelation to this, they should also focus on nurturing synergiesamong the clusters of industry in each area, establishing newbusiness model, increasing use of local procurement of rawmaterials and human resources, and strengthening local salesand management structure.

According to a survey conducted by the InternationalInstitute for Management Development (IMD), which rankedinternational competitiveness in 2002, China placed 31st andJapan 30th, while Singapore was 5th. Singapore received par-ticularly high marks in such areas as the development andmaintenance of basic infrastructure, efficient logistics infra-structure, and IT deployment in business. Japanese compa-nies tend to think that Singapore and other ASEAN countriesare losing their competitive edge as production bases due torising the cost of labor and other factors, but the world as awhole takes a very different view, and rates their competitive-ness highly.

In contrast to regarding labor merely as a cost factor,treating it as a from of capital helps one to consider ways ofdeploying it to advantage in generating added value. Labor maybe more expensive in Singapore, but it is of superior quality.Where the ASEAN nations are concerned, the key for businessdevelopment is adopting the proactive approach of makingmaximum use of each country's strongest resources. The soon-er such an approach is adopted, the greater the possibilities tobecome a winner become in the age of global competition.


More Open ODA Loan Operations andKnowledge Assistance

In its “Basic Strategy of Japan’s ODA Loan: Medium-TermStrategy for Overseas Economic Cooperation Operations”announced in April 2002, JBIC stressed the following threedimensions: 1) selective support in the face of various develop-ment needs in individual countries; 2) promotion of knowledgeassistance to help improve the policy framework of developingcountries and building of institutional capacities for implementa-tion, operation and maintenance of development projects; and,3) promotion of more open ODA loan operations through activeinformation disclosure and Japanese public participation in ODAloan projects.

To provide ODA loans more effectively and efficiently,JBIC selects and supports priority projects in areas wheredevelopment needs are high. Amid the recent trend of globaliza-tion, developing countries are increasingly facing such newissues as poverty alleviation and environmental conservation.For example, in countries where private-sector financing isavailable for provision of economic and social infrastructure,such as power, transportation and telecommunications facili-ties, JBIC’s focus will be shifted to areas with lower returnssuch as poverty reduction, human resource development, envi-ronment conservation and public health.

Financing of developing projects alone is not enough toachieve the greatest favorable impact from development assis-tance. More knowledge assistance to go hand in hand withproject financing is needed, in areas such as policy formulationand implementation in developing countries as well as capacitybuilding of implementation, maintenance and operation of devel-opment projects.

Furthermore, JBIC is active in information disclosure andparticipation of Japanese citizens in ODA loan operations, so asto gain understanding among the Japanese public regardinginternational cooperation.

After World War II, Japan overcame many issues thatdeveloping countries are now facing, such as local revitalizationand anti-pollution initiatives. JBIC provides support by usingsuch wisdom and knowledge accumulated in Japan in order topromote knowledge assistance and more open ODA loans, asoutlined in its basic strategy on ODA loan operations.

Case Studies of Public Participation in ODALoan Operations

Local governments in Japan possess abundant experience andknowledge in anti-pollution initiatives and local revitalization. Inrecent years, they have capitalized on their experience and

expertise to increasingly foster friendship ties with cities indeveloping countries so as to revitalize and internationalize theirlocalities. There are also NGOs that provide assistance in closecooperation with the communities in developing countries, anduniversities that carry out research in overseas locales.Additionally, there are examples of private companies undertak-ing international cooperation activities in an effort to shareJapan’s extensive experience and technologies.

In line with the basic strategy of promoting knowledgeassistance and more open ODA loans, JBIC conducts operationsin conjunction with Japanese local governments, NGOs, privatecompanies and universities throughout the many stages of theproject cycle, including formation, implementation and evalua-tion of ODA loan projects. The following case studies showexamples of such public participation in ODA loan operations.

Case Study 1: Cooperation with Local Government (1)Melamchi Water Supply Project in Nepal (Matsumoto City, Nagano Prefecture, et al.)

In Nepal’s capital city of Kathmandu, a water treatment plant iscurrently being constructed using ODA loans from JBIC. In thatthe water distribution network in Kathmandu is decrepit, improve-ment of the network is expected to generate greater beneficialeffects of the new water treatment plant. Accordingly, JBIC car-ried out a study to develop basic strategies to improve the waterdistribution network and water supply management.

Upon conducting the study, JBIC called on water supplyexperts from Matsumoto City as well as Tokyo and Yokohama Cityto oversee it as advisors. They provided the Nepalese authoritieswith their accumulated knowledge and experiences from theirrespective municipalities through discussions and workshops.Their input was incorporated in the above study accordingly.

Aside from being sister cities, Matsumoto City (locatedwithin the valley of Japan’s northern alps) and Kathmandu aregeographically very similar in that they are both situated in val-


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Surveying underway in Nepal


Case Study 3: Cooperation with NGOsAfforestation and Vegetation Cover Project in InnerMongolia and Gansu Province(OISCA-International)

In Inner Mongolia and Gansu Province, severe desertification isspreading unabated due to harsh environmental conditions suchas low precipitation. To address the issue, the provincial govern-ment made use of ODA loans for afforestation in an effort tostem the advance of the desert.

The Organization for Industrial, Spiritual and CulturalAdvancement-International (OISCA), a Japanese NGO, has along history of working to disseminate agricultural technologiesand pursue afforestation efforts in developing countries. Since2000, it has been conducting afforestation projects in coopera-tion with communities in China. Consequently, JBIC decided tocall on OISCA’s expertise in this area to cooperate in ODA loan-financed afforestation projects. In a survey conducted in 2002,JBIC called on specialists from OISCA as advisors and enteredinto discussions with local governments and OISCA on the feasi-bility of forming an alliance.

OISCA will likely be involved in undertaking the“Children’s Forest Program*,” a cooperative program for ele-mentary and junior high schools within Inner Mongolia andGansu Province.

*“Children’s Forest Program” (CFP): The Children’s ForestProgram is an activity that promotes tree planting at schools indeveloping countries. CFP was immediately launched and pro-moted on a massive scale. Currently, over 2,600 schools inroughly 24 countries & territory are participating in the program.

leys and have roughly similar volumes of water supply. For thisreason, Matsumoto City’s knowledge and experience proved tobe very effective for the study.

The result of this survey was presented to the ThirdWorld Water Forum held in Kyoto, Osaka and Shiga Prefecturein March 2003.

Case Study 2: Cooperation with Local Governments (2)Environmental Improvement Project in China’s Henan and Anhui Provinces(Osaka Prefecture and Osaka City, et al.)

China is a country achieving rapid, ongoing economic growth.However, air pollution continues to spread from the effects ofsuch toxic substances as sulfur oxide, nitrogen oxide, andsmoke and dust due to the fact that roughly 70% of its energyconsumption is dependent on coal.

Being particularly dependent on coal, the governmentsof these provinces have drawn up a plan for converting fromcoal to the “clean energy” source of natural gas.

In 2003, it was agreed that the portion of the plan callingfor construction of gas supply facilities in the city would beimplemented by using ODA loans. In the appraisal study con-ducted by JBIC, specialists from Osaka Prefecture, Osaka Cityand the Global Environment Centre Foundation participated asadvisors and suggested the need for creating a plan for reduc-ing air contaminates through the use of air pollutant diffusionsimulations and other scientific methods.

In China, specialists from the local governments of KobeCity, Kumamoto Prefecture, Shiga Prefecture and Kyoto Prefectureare cooperating in numerous ODA loan-financed projects.

OISCA afforestation activities in Inner Mongolia (Planting trees with children)

A young girl draws water from a public tap in Kathmandu

Public participation in economic cooperation

Case Study 5: Cooperation with UniversitiesForestry Sector Project in the Philippines(Kochi University)

In the 1960s and 1970s in the Philippines, large-scale commer-cial logging and slash-and-burn agricultural practices resultedin severe degradation of the country’s forests. In the latter halfof the 1970s, the Government of the Philippines began afforesta-tion projects through a contract with private firms, but with mod-est results. From the 1990s, the government initiated Community-Based Forest Management projects featuring the involvement oflocal community people in the management of forests.

Through the Forest Sector Project, which was launchedin 1993 using ODA loans, JBIC has financed afforestation activi-ties directed by local community people in 36 sub-project areasin the Philippines. The project is nearing its completion, andJBIC is currently formulating a new project where it can use thelessons learned from the Forestry Sector Project up to this point.

When it began drawing up plans for other future proj-ects, JBIC felt it necessary to make a general review ofapproaches used in the Forestry Sector Project and reflect uponthe lessons learned so far for use in future projects. To that end,JBIC conducted local surveys in collaboration with ProfessorRyozou Yorimitsu, who is a highly knowledgeable and respectedscholar of afforestation activities in the Philippines. ProfessorYorimitsu and his team at Kochi University conduct forestryresearch, forest preservation and watershed preservation inJapan, the Philippines, China and Central and South America.They also have conducted independent research on Community-Based Forest Management on Cebu Island in the Philippines forsome time.

The Forestry Sector Project is a public-participatoryproject not simply concerned with the reforestation of landdegraded through long years of slash-and-burn agriculture andthe reforestation of mangroves, but also with the alleviation ofpoverty through such initiatives as mango tree planting and live-stock breeding and fattening. With these objectives in mind, thelocal survey assessed a broad range of elements, includingafforestation work, measures for improving the livelihood oflocal people, and construction of such core infrastructure asroads, as well as functions and performance of the local com-munities in these activities.

As a result of the survey, Professor Yorimitsu and histeam at Kochi University recommended the use of sustainableforest and mangrove management methods, which would entailincorporating the opinions of local community people whenmaking afforestation plans, as well as pursuing controlled lum-ber production that preserves biodiversity and accounts fully forany possible effects on the environment.

Case Study 4: Cooperation with Private CompaniesRehabilitation of a Power Plant in Ulaanbaatar, Mongolia(Ishikawajima-Harima Heavy Industries Co., Ltd.)

The fourth thermal power plant in Ulaanbaatar is Mongolia’slargest thermal power plant, providing roughly 70% of the powerand around 60% of the heat for the capital city. To renovate thisplant, which was designed and built in the Soviet era, and ensurea stable supply of electricity, JBIC has thus far financed a total ofsome ¥10.6 billion in ODA loans for the Mongolian government.

In 2002, seven engineers from Ishikawajima-HarimaHeavy Industries Co., Ltd. (IHI) were stationed at this powerplant as technical advisors under the Senior Volunteer Programof the Japan International Cooperation Agency (JICA). Toensure the effective management of this power plant, whichwas modernized using JBIC ODA loans, these seven volunteerswill stay there for one year and provide the more than 1,000engineers of the power plant with comprehensive instruction onthermal power plants administration and technology rangingfrom operational, maintenance and technology management andenvironmental protection to labor relationship management.

Mr. Toshiyuki Iwata, one of the members of the group with along career in constructing many power plants overseas, noted:“The technologies and skill level that Japanese engineers haverefined in their long experience maintain Japan’s sustainable powersupply. I’d like to disseminate as much of this accumulated wisdomto the Mongolian people as possible, and thus contribute to agreater partnership between our two countries.”

JBIC aims to build further alliances with private compa-nies possessing both a deep understanding of internationalcooperation as well as specialized technologies.


The seven engineers from IHI

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To Run, or Not to Run

I learned of the international charity marathon in Angkor Watfrom the head office in October 2002. A nongovernmental organi-zation called Hearts of Gold, or HOG, was to host the SeventhAngkor Wat International Half Marathon in December. HOG wasestablished in Japan in 1998 by Olympic silver medallist of thewomen’s marathon Ms. Yuko Arimori to help victims of anti-per-sonnel land mines in Cambodia. The NGO with this rather uniqueacronym has also been active in supporting self-help efforts bydisaster- and conflict-afflicted people in the world and in pro-moting sports for the handicapped. In fact, we had been dis-cussing HIV/AIDS prevention measures in the JBIC-financedSihanoukville Port Urgent Rehabilitation Project with them, aswell as possible future partnerships in promoting sports.

In the Angkor Wat International Half Marathon, citizensfrom Japan and various other countries run with land mine vic-tims, many of whom are physically handicapped. I became espe-cially excited by the announcement that Olympic medallistArimori would participate in the race. I recalled I had beenimpressed by her talk on HOG activities during the NGO’s report-ing session in Tokyo. Also, I had a wonderful memory of my pre-vious visit to Cambodia, namely, its natural beauty and gentle,mystic atmosphere. I immediately set out to enlist participants inour Bangkok office.

Despite my enthusiasm, I did not believe I couldenter the race. Since being posted to Bangkok,oppressive humidity and exhaust-filled streets did notlead me to entertain any idea of becoming a roadrun-ner. My chronic back problem didn’t help either. Butafter much procrastination, I finally decided to try the20 km run. My race strategy was that I figured mybasic physical fitness, with the help of being cheeredon and enjoying the scenic beauty, would carry methrough the first 10 km in roughly an hour. Beyondthat, I could shuffle my way to the finish line.

* Taisuke Miyao is a representative at the Representative Office in Bangkok, which covers JBIC operations in Thailand, the third largest recipient of JBIC loans, Myanmar, Laos and Cambodia. He says working in Bangkok has given him the sense that he is at the crossroads of Indochina, in which a mere hour’s flight will take him to the capitals in neighboring countries.

To the Finish

In the youth sports festival held one day before the race, my sonenjoyed football with local kids, who disregarded any notion of alanguage barrier.

And then, the big day arrived. My race unfolded just as Ihad planned. Along the way, I struck up a conversation with afellow runner who turned out to be a World Bank staff memberin the Vientiane office. We talked about economic and socialconditions in Laos while running (and walking) shoulder toshoulder. My adrenaline level went up when Ms. Arimoribreezed past us with a beaming smile. At one point in the race,tourists waved at the runners from atop an elephant’s back.There were far too many memorable scenes along the raceroute to write about here.

Almost exhausted, I finally MADE IT! In the home stretch,my sons joined in, running hand in hand with me to the finishline. I was overjoyed with a sense of accomplishment because Ihad run (and walked) the whole distance! And more than any-thing else, I felt the pricelessness of peace and was inspired bythe fact that the NGO’s grassroot efforts had made this annualevent a fixture in Cambodia.

After watching the award ceremony, one of my sonsasked me, “Dad, don’t you get a medal?” “There’s always nextyear,” I replied.

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A Run for Peace: Angkor Wat International Half Marathon

From the Journal of an Overseas Staff Member

By Taisuke Miyao

ThailandThailand*

Right before crossing the finish line – Going the last stretch with my sons

Before the start of the marathon(still sleepy?)

Cover: Market in Bali, Indonesia

Documents

JBIC TODAY JULY 2003 - JICA · 4 JBIC TODAY JULY 2003 The ASEAN 4 and Japan in the age of global competition Domestic consumption fuels new growth in ASEAN Direct investment by Japanese