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A revived Japan must adjust its ASEAN business sights

by Simon Tay

Japanese interest is surging across South and Southeast Asia for both economic and political reasons. Yet, while welcome by many in the region, the reasons for the renewed focus must be considered.

There are also new factors that the Japanese must look at and indeed re-learn. Otherwise expectations from both sides will be frustrated.

One economic push factor comes from unconventional “Abenomics” as the new administration and the Bank of Japan pump out more money at low interest rates. Domestic production cannot absorb all, given that labor and other costs remain high despite the managed drop in the value of the yen. The triple tragedy of 2011 also shows the potential vulnerability of keeping too much production at home.

The strongest push for the Japanese comes from China. The recent spat between the two Asian giants over the Senkaku/ Diaoyu Islands is much larger than the rocks and islets themselves. Some security analysts regard the issue as a potential trigger point to a wider conflict.

The riots that followed in 2012 across Chinese cities against Japanese producers and products, moreover, suggest that Beijing cannot or will not rein in its citizens. Some in Tokyo also feel that China is assuming an air of superiority to assert pressure on Japan as never before.

There are also pull factors in looking to the 10-member Association of Southeast Asian Nations (ASEAN) and to India. Amid global uncertainties, these emerging markets represent some of the best commercial prospects. Especially for larger markets like Indonesia and India, being in or near them is necessary to better understand and deal with barriers to imports and doing business.

The opening of Myanmar has also captured the attention of many.

Japanese companies are no strangers to the region and can build on past ties and experience. There is, however, a need to re-examine and realize that not all things are as they were. Three key changes bear special notice.

First, more countries are democratic and complex. Some investors will long for the days of strongmen like Indonesia’s Suharto or when China first opened — when deals were pushed quickly from the top down, whether corrupt or clean.

India was never like that; nor was today’s Indonesia. Land grabs, poor conditions and wages for workers and ill effects of pollution: All of these are resisted these days, and the media brings attention quickly to the woes.

Societies will be better off for that awareness to better manage foreign investment. But foreign investors must learn to navigate and manage a much more multifaceted landscape.

Take corruption and special relations. Many countries will not move without grease and connections. With freer media, however, there is a public outcry against the old ways of sealed envelopes and secret bank accounts.

A second new dimension is that a more regional approach is required. Past investments were largely in one country or the other and then linked back to Japan. This is changing.

Disruptions — like the 2011 floods in Thailand — show the risk of choosing just a single base abroad. Spreading out production across more countries will lessen that exposure but can only be possible if the countries are more closely integrated.

Japanese and other multinational investors will do well, therefore, to give attention to ASEAN’s plans for Economic Community by 2015 and further links between ASEAN and India.

As rules change, corporations must also adjust internally to take a truly regional approach. In this, many Japanese corporations face some disadvantage. Many that come out to the region simply import managers from Japan.

Anecdotally Western multinational corporations seem more likely to have their regional operations headed by a local.

Yet the present and emerging demands across ASEAN and India will be for more localization — both in company leadership and higher value product content. Government incentives and social expectations will, therefore, push Japan to change the ways in which it operates in Asia. Although the precise levels differ, these trends are evident from Singapore to Thailand and Indonesia to newly opened Myanmar.

If Japanese companies return looking for the old Asia of strongmen, cheap land and servile, low-wage labor, their expectations will be frustrated.

In the Fukuda doctrine of the 1970s, the Japanese were gracious to speak of an equal relationship. The reality of that period was that the rest of Asia lagged several steps behind. Today, however, leading companies and more developed economies in Asia show a more substantial equality in working with Japan.

The renewed interest and vigor of Japan — both in the government and corporations — can build new partnerships across the region. However, it will need more than a wish to be anywhere but China.

Japanese will need to look at engaging other Asians in new ways.

Simon Tay, chairman of the Singapore Institute of International Affairs and associate professor at the National University of Singapore Faculty of Law, is also senior consultant at WongPartnership, a Singapore-based law firm.