Japan’s plans to channelise investments from China to India hits supply chain roadblock

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Japan’s single-minded focus on high precision seems to be clashing with India’s chalta hai (we’ll make do) attitude in its efforts to persuade its manufacturers to diversify investments from China to the country.

Despite India featuring prominently in the list of Asian countries promoted by Japan as an alternative destination to China through subsidies and a separate ¥1-billion fund assigned for supporting businesses in the country, there haven’t been too many takers for it so far.

“India insists on the companies bringing their entire supply chains to India but Japanese companies want to move ahead step by step by sourcing highly sophisticated inputs from other countries in the beginning. Because of this many Japanese companies are moving their investments to other South Asian countries rather than coming to India,” a Japanese government official explained to BusinessLine.

In order to configure supply chains for products with complex manufacturing processes, such as medical devices and batteries, at the fastest possible speed, it is necessary to have step-by-step and careful discussions for each product, based on the supply chains that are currently spread around the world, the officer pointed out.

“We have been trying to explain to India that Japanese companies are not comfortable moving their entire supply chains of sophisticated products to the country all at one go as it might affect the quality of the finished products. If it is done in phases, it will work out well for both countries,” the official said.

Based on the examples of other countries, a step-by-step discussion is likely to result in the fastest and most efficient growth of Indian industry, he added.

Fifth largest investor

Japan is the fifth largest investor in the Indian economy with cumulative FDI inflows of $34.5 billion in the April 2000 to December 2020 period accounting for 7 per cent of total FDI inflows in the same period. Some of the prominent Japanese investments in India include Maruti Suzuki, Uniqlo, Mitsubishi Group, Mitsui and Honda.

In its 2020 supplemental budget, Japan allocated 23.5 billion yen to fund subsidies meant to encourage firms to partly exit China and disperse their manufacturing sites across the ASEAN region. It later extended it also for investments in Bangladesh and India.

But this has not yet led to any substantial additional investments from Japan as companies initially want to keep sourcing high-precision inputs from other countries while doing the assembly in India. Japanese businesses are apprehensive about the predictability of Indian policies as the recent curbs on trade and investment flow from bordering countries including China by India has upset the production plans of several Japanese companies already manufacturing in India with inputs sourced from Beijing.

“The Japanese government has decided to use the budget for supply chain resilience in the best way possible given the present scenario. We are planning to subsidise projects like visualisation/upgradation of manufacturing sector. These will help realise supply chain resilience and industrious competitiveness through digitalisation of supply chain of sectors such as automobile, appliances, medical equipment and food processing sectors,” the official said.

Logistics projects to realise supply chain resilience and optimisation of logistics through establishment of system to understand logistics in real-time may also be funded. Projects to reduce time for customs clearance through establishment of systems to predict arrival timing of the freights and diversification of supply chain are also on the list.