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Japanese manufacturers see Sri Lanka as new strategic base

Workers at Inoac's factory on the outskirts of Colombo remove tiny dust particles from urethane foam sheets.

COLOMBO -- The rise of a pan-Indian Ocean economic zone is prompting some forward-looking Japanese companies to shift their strategic priorities.

     Up to now, most internationally active Japanese companies have been heavily focused on North America, Europe and the Association of Southeast Asian Nations. Trailblazers among them are now pushing their way into the largely untapped region to the west of Asean.

     Sri Lanka is one country that has caught their eye. The island nation to the south of India is small, roughly one-sixth the size of Japan, but its location makes it an ideal launchpad for Japanese companies looking to expand in South Asia, the Middle East and Africa.

Western frontier

Plastics maker Inoac is one business that has spotted Sri Lanka's potential. At its 2 billion yen ($19.3 million) factory on the outskirts of Colombo, workers slice 1.5 meter x 1 meter hunks of urethane foam that start out 60 meters long into 2mm-thick sheets. The work requires a high degree of precision; the sheets are cut to a tolerance of just 0.2mm.

     Inoac equipped the factory with a precision cutting machine and went into production in August of last year. The company has high hopes for the plant, which has a capacity of 12,000 tons annually. The urethane foam goes into a number of products, especially lingerie. The factory's output thus finds its way to apparel makers, and from there into bedroom drawers around the world.

     The Japanese company built the factory at the urging of its clients, many of whom have been moving production to Sri Lanka from China to escape rapidly climbing labor costs in the country. But Inoac has bigger ambitions for its new plant. "We will use this location as a base to move into India, the Middle East and Africa," said Masahiro Iyo, director of the company's Sri Lanka unit.

     The top Japanese maker of urethane foam for clothing, automobiles and electronic components began operating in Sri Lanka in the 1950s.  But after shuttering the operation in 1990s, the company lost its connections with countries in South and Southwest Asia. "Now this is our westernmost factory," Iyo said.  "We are creating a foothold for areas west of Indochina."

     Iyo has been busy cultivating ties in this new western frontier. The company recently received an order from an Indian furniture maker and he is eager to explore new opportunities. "We want to start making contacts with African companies soon," he said.

New world view

Magnifying glasses are used to process high-precision metal dies and metal mold components at Lanka Precision Engineering's factory just outside Colombo.

Many Japanese companies have traditionally concentrated on the Pacific Rim -- North America, East Asia and Asean in particular.  On a map that puts Japan at the center, their sphere of activity appears relatively balanced, stretching both east and west. But if the "prime meridian" of this map is shifted to run through India and Sri Lanka, the picture looks highly unbalanced: Japanese companies are active largely on the eastern side.

     But much of the world's future economic growth is likely to come from areas west of the India-Sri Lanka axis, increasing Sri Lanka's strategic importance in the eyes of many Japanese companies. The island nation's free trade agreement with India also adds to its value.  

     Lanka Precision Engineering, a local company that has been making precision metal dies and metal mold components for the auto industry and others for 30 years, already does business with India. "We want to cultivate the Indian market by taking advantage of the FTA," said Keiko Ishibashi, the company's Japanese president.

     Sri Lanka's domestic market is too small to justify expanding production, but the FTA will give Lanka Precision Engineering the opportunity to tap demand in India. Ishibashi extols the benefits of manufacturing in the country. "You find skilled, artisan-like engineers at factories in Sri Lanka, very similar to what you see at Japanese factories," she said.


The region, which is dominated by the U.S. and European companies in terms of foreign investment, will not be an easy one for Japanese newcomers to conquer, but some are making inroads.

     "I am too busy to rest, but I want my company to succeed in Sri Lanka," said Thilanka Gayathri Ratnayake, Rohto Pharmaceutical's country manager. The Japanese maker of health care and beauty products entered the Sri Lankan market last year. It sells beauty products such as face cleansers and lip balm through a tie-up with a local distributor.

     Ratnayake came to Japan to study and joined Rohto afterward. For eight years she was in charge of the company's operations in Asia, but returned to her native Sri Lanka to oversee operations there. Her efforts have helped Rohto achieve 30% annual sales growth.

     "It is not easy to claim a significant chunk of the market," Ratnayake said. Anglo-Dutch giant Unilever is dominant in the sector, drawing on its long history and local production base.

     South Korean competitors are increasingly active in Sri Lanka as well, much as they have been in India. They are particularly visible in the consumer electronics market, with products from Samsung Electronics and LG Electronics seemingly on every store shelf.

     "We used to see many products from Japan, but South Korean products have started flooding into the market," said one Sri Lankan man in his 40s, adding that he replaced his old Japanese TV with an LG model.

     Japanese automakers are still strong in Sri Lanka, but here, too, South Korean rivals are gaining ground in a challenging, high-tariff market. Toyotas and Hondas are a frequent sight on the roads, but a sport utility vehicle from Kia Motors, a unit of Hyundai Motor, is a recent hit with drivers.

     New competitors from Southeast Asia are also popping up. Hartono Istana Teknologi, an Indonesian consumer electronics maker, has begun supplying products to a major local player, called Singer, under a contract manufacturing arrangement. Hartono has little experience with such deals outside its own borders, but it hopes to develop new business with Singer by making the most of its cost-competitiveness.

     Despite the stiffer competition, however, Japanese companies still have a reputation for high technology and quality. The Sri Lankan government is wooing Japanese high-tech concerns, according to Investment Promotion Minister Lakshman Yapa Abeywardena.

     Despite their reputation for technological superiority in many areas, Japanese companies cannot afford to be complacent. They must embrace a longer-term perspective and change their East Asian-centered worldview. Looking west for new opportunities is only the first step.

Nikkei staff writers Sadachika Watanabe in Jakarta and Atsushi Tomiyama in Tokyo contributed to this article.



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