June 18, 2014 5:07 am JST

Militants forcing Japanese companies to rethink Iraq strategies

HIROFUMI MATSUO, Nikkei senior staff writer

Caught flat-footed by escalating violence in Iraq, Japanese companies involved in large-scale construction projects are scrambling to reassess their business plans in this oil-rich country.

     The situation took a drastic turn for the worse last week, when Sunni militants seized Mosul, Iraq's second-largest city. And as the militants swept south toward Baghdad, Japanese engineering concerns, including Chiyoda, evacuated their employees from the country.

     "Up until then, there were skirmishes, but this is different," said a top official at a leading Japanese plant construction company. After Mosul was seized, the company's executives and employees fled the country.

     Prior to the turmoil, those companies had hoped to return to the heyday of 1979 and 1980, when Iraq was the biggest customer for plant construction projects. With many of those facilities still in operation today, and with the country appearing to get back on track after nearly a decade of war, Japanese builders had hoped to cash in on their brand recognition.

     They knew it would not be easy, since many of their former political and business contacts there are long gone. In addition, they face competition from rivals in other countries.

     To help Japanese businesses regain a foothold, the Tokyo government has decided to dole out yen loans worth 470 billion yen ($4.57 billion) to finance 20 projects.

     "The next one to two years will be crucial for Japan to re-establish a presence in the market," said one Japanese government source.

     But just as Japan began priming the pump with overseas development aid, the situation in Iraq turned dire.

     One of those yen loans has been offered to renovate aging equipment at a large oil refinery originally built by Chiyoda in the northern city of Baiji. Chiyoda put in a bid to create the basic plan for this project, but the Sunni militants staged fierce attacks there.

     And another yen loan of 30 billion yen was earmarked to help build the Al Akkaz gas-fired power plant in northern Iraq. Japanese companies are interested in winning construction orders for that project as well. But the power plant is situated near the border with war-torn Syria, part of the corridor Islamic militants have carved out to move back and forth between the two countries.

     The key question for Japanese businesses is whether or not to beat a full retreat. During the mid-2000s, a period of frequent terrorist attacks, Chinese and South Korean companies chose to remain in the country and ended up landing orders.