Japan's investment in ASEAN on the wane

Japan's investment in ASEAN on the wane

Patrick Chalmers, Reuters, Kuala Lumpur

Cheap labor, a pollution-free setting and good infrastructure
drew Canon's camera-making arm to build a sparkling plant in Shah
Alam, southwest of the Malaysian capital back in 1989.

Faced with the same investment decision today, the Japanese
firm would choose China instead, according to Katsuro Mochizuki,
managing director of Canon Opto (Malaysia).

Such talk sits uncomfortably with Japanese Prime Minister
Junichiro Koizumi's five-country swing through Southeast Asia to
push his agenda for investment and trade in the region. Koizumi
arrived in Malaysia on Thursday after visiting the Philippines.

After a decade or so of high growth, albeit marred by the
1997-1998 Asian financial crisis and a recent tech market slump,
inward investment into Malaysia and most of its neighbors has
become far less attractive.

Market reforms to the north in China, with its vast, cheap
workforce and recent entry into the World Trade Organization,
present an increasingly powerful allure.

"If now, we were to make the decision, we would definitely
invest in China," Mochizuki told Reuters in an interview.

"First, because in China the labor cost is rather cheap.
Secondly, because many of the manufacturers have shifted to China
so we could procure very cheap components," he added.

Canon remains loyal for now to Shah Alam, where it recently
began making digital cameras at its plant in place of the
analog models whose production it shifted to China.

By asking local components suppliers to match unit prices
offered by their equivalents in China, Mochizuki says production
economics can still work.

Canon's example is typical of Japanese firms in Malaysia, with
many others such as Sharp, Matsushita, Fujitsu and JVC based
within hundreds of metres (yards) of the camera maker.

While the golden age of Japanese foreign direct investment
(FDI) may have ended, the 1,400 companies now based in Malaysia
are not about to disappear overnight. But the investment trend is
looking increasingly sour.

Japanese FDI to Malaysia peaked at 6.9 billion ringgit (US$1.8
billion) in 1999, dropping almost by half in 2000 to end years of
strong growth.

The picture is much the same for other senior members within
the Association of South East Asian Nations (ASEAN).

"Labor costs in China are cheaper compared to the Philippines
and the people there also work very hard," said Shoichi Kameyama,
President of Japanese Chamber of Commerce in the Philippines.

"After weighing the option of investing either here or there,
some companies have started to choose China," he added.

Overall China's FDI was forecast to reach $47 billion in 2001,
up from $40.7 billion in 2000, the Financial News reported last
week. The official newspaper gave no source for the forecast.

Investing in China does represent its own problems though,
Kameyama said, such as discrepancies between political and
economic policies, the poor condition of state-owned firms and
copyright issues.

In Indonesia, Japanese investment slipped to below half the
previous year's $1.9 billion for the first 11 months of 2001,
according to Jakarta officials.

But lower FDI is unlikely to halt Japanese firms' dominance
and interest in the automobile sector, where they control 85
percent of the business.

"This is an important market for them and I don't think they
will abandon this market, which has one of the biggest potentials
in the region after China," said Bambang Trisulo, head of the
Indonesian Automotive Association.

Andy Xie, Morgan Stanley's chief economist Asia Pacific, was
downbeat on the future of Japanese FDI in ASEAN, saying the bloc
should kick its addiction to manufacturing for export and accept
what was a permanent drop in related investment.

"That doesn't mean they cannot do manufacturing, it's just
that manufacturing shouldn't drive employment generation," he
told Reuters by telephone from Hong Kong.

Xie said Japanese investment in Southeast Asia was driven
historically by Tokyo's desire to cut its ballooning U.S. trade
surplus by shifting production away from home.

With the surplus no longer a burning issue, and after a decade
of economic stagnation in Japan, FDI flows had ebbed.

"The foundation for Japanese FDI in Southeast Asia was never
solid. Even without China, it would have been affected," he said.

ASEAN comprises Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, the Philippines, Singapore, Thailand, and Vietnam.