Tuesday, February 28, 2017

Japanese investor sentiment doesn’t match high profits

Jose M. Galang

Despite expectations of sustained sales and profits growth, Japanese investors in the Philippines do not seem to be as enthusiastic as Prime Minister Shinzo Abe in pouring huge amounts of investments into the country. 
Of the Japanese firms operating in the Philippines, 54.4 percent plan to expand their business in the next one to two years, while 44.7 percent will simply maintain their present activities, according to results of a recent survey conducted by the Japan External Trade Organization (JETRO).
A small 1.0 percent of the Japanese companies surveyed also indicated plans to transfer to a third country or withdraw from the local markets.
In the 2015 survey, the proportion of Japanese firms that bared plans to expand their business in the Philippines comprised 55.1 percent of the polled companies. The lower level recorded in the 2016 survey indicated a slightly weaker sentiment among Japanese investors.
And yet a high 77.5 percent of the Japanese companies in the latest survey were projecting profits from operations in the Philippines — the highest rate among countries in Southeast Asia, and the second-highest rate in all of Asia (topped only the profit forecast by 81 percent of Japanese firms in South Korea).
The survey of investor sentiment is conducted yearly by JETRO among top executives of its member-companies that have operations in the Asia and Oceania region. In the Philippines, the survey covered 357 companies although only 103 submitted responses.
Conducted from October 11 to November 11 (with the results released only this week), the 2016 survey coincided with the Tokyo visit of President Duterte on October 26 during which his administration’s economic managers and a big number of Philippine business leaders presented growth targets to a forum attended by Japanese investors.
It remains to be seen how the investor sentiment reflected in the survey would impact on the Japan’s status as the Philippines’ top export market and a leading source of direct investments and bilateral development assistance, particularly in the face of the Duterte government’s bid to deepen economic relations with China, seen as Japan’s rival in the region.
Profits expected
Of the large industries covered in the survey, 83.9 percent were expecting operating profits for 2016 while 9.7 percent predict losses. Among Japanese small and medium enterprises, 67.5 percent project profits from Philippine operations while 12.5 percent expect losses.
Japanese companies in the Philippines that target more the domestic than export markets appear to be more profitable, accounting for 79.5 percent of those that expect profits for 2016, with 7.7 percent seen to incur losses. On the other hand, of those that aim primarily for the export markets, 76.7 percent are projecting profits while 11.7 percent expect to be in the red.
There are several reasons cited by Japanese firms for possible expansion plans in 2017 and 2018. The leading incentive is the potential for increased sales — it was cited by 73.2 percent of the survey respondents in the Philippines, although is actually the lowest rate among Southeast Asian nations.
Other reasons listed by the survey respondents in the Philippines include: high potential for growth (cited by 55.4 percent of the Japanese firms), relationship with clients (23.2 percent), high receptivity for high-value added products (14.3 percent), reviewing production and distribution networks (10.7 percent), reduction of procurement and labor costs (3.6 percent), deregulations (5.4 percent), and easy to secure labor force (7.1 percent).
As to business functions that the surveyed companies intend to expand, 51.8 percent of the respondents in the Philippines listed “sales function”, 23.2 percent said “production of high-value products”, 37.5 percent cited “production of ubiquitous products”, 21.4 percent pointed to “logistics”, 7.1 percent going for “administrative functions in providing services (such as shared services center, call center)”, and small proportions that listed such functions as “regional headquarters” and “research and development”. 
While 40.2 percent of the Japanese firms reported increases in the number of local employees last year, a bigger proportion of 49.5 percent indicated plans to hire more in the coming year. The proportion of Japanese companies reducing work forces, meanwhile, went down from 14.7 percent in 2016 to 8.9 percent planned for this year.
Biggest problems
What are the problems encountered by Japanese firms in the Philippines? The five top concerns raised were: “difficulty in local procurement of raw materials” (listed by 62.1 percent of the respondents), “quality of employees” (57.3 percent), “difficulty in quality control” (53.5 percent), “wage increases” (44.7 percent), and “volatility of the local currency’s exchange rate against the US dollar” (40.2 percent). Except for local procurement, the other problems were raised by more respondents in the 2016 survey compared to the year before.
The survey also queried the respondents about common problems encountered by Japanese businesses in the region. The responses showed “complicated customs clearance procedures” to be on top in the Philippines, cited by 40 percent of the respondents. However, seven other countries in the region posted higher rates.
Other region-wide concerns listed by the Japanese executives in the Philippines are: “volatility of the local currency’s exchange rate against the Japanese yen” (35.3 percent), “difficulty in developing new clients on the market” (noted by 31.1 percent of the respondents), “major clients requesting lower prices” (28.2 percent), and “no more room for cost-cutting” (25.9 percent). 
The JETRO survey covered 20 countries — 5 in Northeast Asia (including China), 9 in the ASEAN region, 4 in Southwest Asia, and 2 in Oceania — and concluded that on the overall, business confidence in emerging countries is “improving” and that the “low intention to expand business in China and Southeast Asia was likely to bottom out and continue decreasing in Southwest Asia.”

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