Asked about expanding business overseas, 65.4% of respondents are planning expansion in the coming three years or so, nearly matching last year's high figure of 65.6%. By country/region and function (sales operation, production, R&D, etc.), India and Vietnam ranked higher in the sales operations and production of mid to low-end products categories, compared to the 2005 survey. Brazil, Russia and other Commonwealth of Independent States (CIS) nations also ranked higher in the sales operations category, indicating that more firms are eyeing expansion in emerging markets. Willingness to expand sales operations in India and Vietnam grew for the second straight year, reflecting strong economic growth and expanding markets in these countries.
Regarding realignments (complete transfer of production bases, and partial transfer of production items and/or production functions) of Japanese and/or overseas production bases and their functions in the past three years or in the next three years, notable transfers are: from Japan to China, from Japan to Thailand and from China to Vietnam. Transfers from China to Vietnam were attributed to "increase in production and labor costs" and "high risks of placing all functions in the same place", as firms adopted the "China plus one" strategy (i.e., investing in China and another country to reduce over dependence on China).
According to the survey, China ranked highest in all functions in the business expansion category. While still high, the percentage of respondents planning to expand production of mid to low-end products was down for the second straight year (it fell 3.1 points in this latest survey), reflecting changes in China's investment environment, such as rising labor costs and concerns over impacts from the reduction of refund rates for value-added tax applied to some products.
Thailand ranked second for production expansion in both the mid to low-end and high-end products categories, despite reductions in almost all functions; the production of mid to low-end products category was down 2.7 points from the 2005 survey figure. Regarding Thailand's political changes in September 2006, the majority of firms doing business/planning to do business in Thailand (430 firms in total) saw "no impact on business plans", while 27.7% reported "few impacts on business plans but will be more cautious in the future". These results suggest that some respondents were slightly affected by the political changes.
Asked about risk factors for doing business in/with major Asian countries (China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam), "underdeveloped legal system and problems with legal procedures", "problems with protection of intellectual property rights" and "tax issues" ranked highest among firms business in/with China.
These results suggest that Japanese firms are well aware of the risks surrounding China's legal system, in particular those related to intellectual property rights protection and taxation. Risks from "underdeveloped infrastructure" ranked highest among firms doing business in/with India and Vietnam. While citing obstacles ahead—mainly due to poor or inadequate infrastructure, in particular in electricity and logistics fields—firms showed increased interest in these countries. Risks from "high/increasing labor costs" ranked highest among firms doing business in/with Singapore, followed by China, Thailand and Malaysia.
The survey also revealed that 13.3% of all respondents are "utilizing or planning to utilize preferential tariff schemes" under FTAs (including early harvest schemes) already in effect within the Asia Pacific region. The majority of firms (42.7%), however, are not utilizing/do not plan to utilize such schemes in future; more than a third of respondents (34.2%) were undecided, suggesting that benefits under FTAs are not widely known.
Regarding the FTA(s) in Asia Pacific region, survey results underscore three points: 1) AFTA is utilized most because it covers the ASEAN region, where Japanese firms have established production and procurements networks; 2) firms have been vigorously utilizing schemes under the recently introduced Japan-Malaysia FTA (July 2006); and 3) Thailand, an important production base for Japanese firms, is becoming an export base for some firms to ship their products to markets outside of the ASEAN region, as firms make increasing use of Thailand's FTAs with countries like India and Australia. The Thailand-India FTA and Thailand-Australia FTA-ranked high among firms "utilizing" and "planning to utilize" the scheme, indicating that Japanese firms have high expectations not only for the ASEAN+3 FTA but also for the ASEAN+6 FTA (including India, Australia and New Zealand).
