Japanese firms eye India as part of 'China Plus One' strategy

New Delhi: Post the Covid-19 pandemic, Japanese companies are eyeing India as a base as they adopt the 'China Plus One' strategy to diversify their manufacturing and supply chains to reduce dependence on China, experts from Deloitte said.

The strategy involves establishing production facilities in alternative countries, with India emerging as a significant beneficiary.

"Post-Covid, Japanese companies have been actively exploring China-plus supply chain strategies, with India emerging as a key destination. While some companies returned to Japan, others are looking at India not just as a manufacturing hub, but as a gateway to high-growth markets like the Middle East and Africa," Deloitte Japan CEO Kenichi Kimura said.

While the sheer scale of India's domestic market is a major draw, what makes India even more compelling is its well-established business and talent networks across these regions.

"While Japanese businesses have yet to fully tap into this potential, we see India as not just a market, but a critical supply chain hub that can drive regional and global success," Kimura said.

The Japanese government has actively supported this shift by allocating substantial funds to encourage companies to relocate production either domestically or to Southeast Asia. Japanese corporations are forming strategic partnerships and expanding operations in India to tap into its large domestic market and competitive labour costs.

Deloitte South Asia CEO Romal Shetty said the 'China Plus One' strategy has prompted Japanese companies to explore and invest in India, aiming to diversify their supply chains and leverage the country's economic potential.

"India has overtaken China as the biggest destination of Japanese FDI," he said, quoting data from Japan External Trade Organization (JETRO).

Foreign direct investment (FDI) Balance of Payments Basis from Japan to China has declined significantly, from $13 billion in 2012 to around $3 billion in 2023. In contrast, India has experienced a steady rise in Japanese FDI, reaching $6 billion in 2023 -- marking the first time India has overtaken China in FDI inflows from Japan.

Japanese investment in ASEAN nations has also been tapering off, as these markets have already absorbed substantial capital from Japanese corporations over the years.

India is poised to attract a significant portion of the capital being redirected from China -- a potential 'Wall of Capital' that could reshape the region's investment landscape.

Throughout the period from 2000 to 2024, Japan has maintained its position as a premier source of foreign capital for India, channelling approximately $44 billion into the Indian economy over two decades.

Among nations investing in India, Japan holds the fifth position in terms of cumulative FDI inflows, he said.

India ranks No.1, significantly ahead of other countries in the JBIC Report on Overseas Business Operations by Japanese Companies -- indicating a shift away from being seen as a "promising" market to one with concrete business prospects.

Shetty said M&A deals are also rising as Japanese companies see merits in acquisitions to scale up operations.

Over the past 10 years, over 200 inbound deals have taken place (20+ deals a year between the Japan-India corridor).

This shift has driven Japanese companies to enter growth markets and acquire businesses with innovative business models, he said.

Shetty said not just manufacturing but Japanese companies are betting big on Indian startups that offer technology-driven innovative solutions. The Japanese interest in the startup ecosystem is something not seen before.

"Japanese companies are showing a growing interest in India's dynamic startup ecosystem, recognising its immense potential for innovation and scalability. With strengths in deep tech, fintech, and digital solutions, Indian startups present valuable opportunities for collaboration. Our weekly 'Morning Pitch' events have attracted significant interest from large Japanese corporations and venture capitalists keen on exploring innovations from India," said Kimura.

Additionally, Japan's Deloitte Venture Support has sent an expatriate to Bengaluru, to leverage the potential in India.

"We intend to work closely with local organisations to help Japanese corporations partner with startups in India and expand into local markets.

"By investing in these cutting-edge technologies, Japanese firms are not only driving their own growth but also contributing to India's thriving entrepreneurial landscape," Kimura said.

Shetty said India's digital ecosystem and fintech sector is a big success story. Digital payment adoption in India is bigger than Japan.

Kimura said M&A-driven FDI is playing an increasingly significant role in Japan-India economic ties, with over 200 inbound deals in the past decade and a notable shift toward strategic majority transactions.

As Japanese companies adapt to changing global dynamics, including reduced cross-shareholdings, and rising foreign ownership, they are actively seeking growth markets like India and investing in businesses with innovative models.

Asked about the areas where India needs to improve, Kimura said India has made significant strides in creating a business-friendly environment, which is reflected in the growing presence of Japanese companies -- from just 267 in 2006 to 1,439 in 2023.

"To further accelerate Japanese investments, continued efforts in areas such as simplifying the tax ecosystem, streamlining land acquisition, making labour laws more flexible, and improving domestic supply chains will help. India is already on the right path, and with these refinements, it can unlock even greater opportunities for Japanese businesses looking to expand in the region," Kimura said.