The paradigm of the Indo Pacific: Business imperatives

Nikkei Global Management Forum I Tokyo
28-Oct-2019

Remarks as prepared for delivery

It is an honor to be here with you in Tokyo at the 21st NIKKEI Global Management Forum.  

It has been a little over two years since I last visited. This impressive city, one of the world’s finest, continues to enhance its modernity as it prepares to host the Olympic Games next year.  Indeed, it will be a case study on how a bustling city and its people can work so seamlessly in their preparation for the biggest sporting event in history, with minimal disruption, vaunted precision and a welcoming smile. Let me whole heartedly compliment this great city, its proud citizens and the Government for this inspiring work. 

I will speak today about the Indo Pacific, what it means for businesses within the region, and for India and Japan working together.  

I will share perspectives from my current role, as Chairman & CEO of KPMG India — as well as my previous assignment, in the Obama Administration, where I was Assistant Secretary of Commerce for Global Markets and Director General of the US & Foreign Commercial Service.  In that role, I oversaw the export and inward investment promotion activities of the US, with teams located in 78 countries and all the 50 states of the US.

Today, more than ever before, businesses need to be aware of the opportunities and threats from geo-economic and geo-political trends. The boundary between global and local is blurring. Just think of inner-city transportation and the Uber phenomenon!

Today, the picture in the geopolitical arena, as it impacts trade, is a veritable tale of two cities.  The famous opening line of the Charles Dickens novel, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness” well describes what we see.

On the one hand, we see areas of dramatic fragmentation.

And on the other, grand initiatives towards integration.

The fragmentation and withdrawal are driven from the US and the UK.

The US is acting protectionist.

Brexit has the UK and Europe confused.

And we see elements in other democracies that have turned their governments inward or altered political landscapes in France, Germany, Italy, and Turkey and emerging markets such as Brazil.   

The trend towards openness seems to have taken a pause.

And the biggest economic rivalry in history is playing out just now – the US-China trade dispute – and this is a factor in any discussion on the Indo Pacific.

With that context, let us take a look at the narrative of the Indo-Pacific region.

This is an ‘imagined space’ stretching across two great oceans connected by the Malacca Straits, from the west coast of America to the eastern shores of Africa and the Arabian Peninsula. The Indo Pacific has emerged to the forefront of global geo-strategic and economic thinking in recent years.

The recent strength of this idea dates in large measure to Prime Minister Abe’s articulation of the concept of the ‘confluence of two seas’ in his historic speech to the Indian Parliament in June 2007.

The ascent of this region in the global worldview has been accelerated by two important trends.

First, the shifting strategic equations between China and the United States, [as also the revival of the ‘Quad’ led by Japan, a security partnership with India, Australia and the United States as the other three countries].  

We see the rise of a stronger China under the assertive leadership of President Xi. The United States has also intensified its focus on this region, symbolically underlined by rechristening the US Pacific Command as the Indo-Pacific Command.

This is also the region of the world where statecraft, military planning, and trade and economic policy closely intersect and influence each other.

Second, by the rise of this region as a global engine of growth, trade, and innovation.

This region of the globe accounts for 60% of global GDP and for two-thirds of global growth

At the Shangrila dialogue last year, Prime Minister Modi spoke of the three cardinal tenets that should govern political relations and economic activity in the region: freedom, openness, and inclusivity.

This translates into the principles of freedom of navigation, rule of law, respect for sovereignty, private enterprise, and open markets.  He declared that “rules and norms should be based on the consent of all, not the power of the few”.

India’s vision of the Indo-Pacific region, as articulated by Prime Minister Modi, is of one that is ‘open, stable, secure, and prosperous’; informed by the precept of inclusivity, rather than by the historic legacies of great- power rivalry.

The vision informing the Indo-Pacific region was also articulated by President Trump in his speech at the APEC CEO Summit in June 2017. He declared that “this region has emerged as a beautiful constellation of nations, each its own bright star, satellites to none.”

The Japan-America-India [JAI] trilateral meeting between the two Prime Ministers and the US President on the sidelines of the G-20 Summit in June 2019 deliberated on how the countries in this region can work together better to promote better connectivity and infrastructure improvement, as well as to ensure that peace and security are maintained in these waters.   

And a week from today, on November 4, an Indo Pacific Business Forum will convene in Bangkok, on the sidelines of the East Asia Summit.  Senior level government and business delegations from the Indo Pacific countries, led by the US, will discuss how governments and the private sector can work together to unleash the potential of the region.

In the Indo-Pacific region, new trade arrangements and economic integration initiatives are taking shape.

While the US and the UK are looking inward and provoking reversals of market integration, here in Asia, new configurations are on the rise.

First, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which came into force at the beginning of 2019.

Remember that the Trans Pacific Partnership led by the US would have created the world’s largest free trade area. Unfortunately, President Trump pulled down the TPP on his first day in office in 2017.

The other 11 Pacific Rim countries decided to go forward without the US and created the CPTPP that was concluded in March 2018.

These countries, including Japan, constitute 13.3 percent of global GDP.

Japan played a central role in guiding the CPTPP’s entry into force early this year.   

The second, the Regional Comprehensive Economic Partnership (RCEP), encompassing 16 countries, 30% of world GDP, and 46% of the global population, is set to become the world’s largest trading partnership, though there are complex national sensitivities to be addressed before this block becomes a reality.

New agreements, though less comprehensive, can be seen in other markets and regions too.

In Africa, we are seeing the development of the African Continental Free Trade Area. 

Japan, the world’s third-largest economy, also signed a deal with the European Union, the world’s second-biggest economic region. Japan also concluded an agreement, relating to certain areas of market access, with the United States.

The EU, in turn, has been signing agreements from Canada to South America’s Mercosur nations. 

Many of the new trade agreements go beyond tariffs. They cover agricultural subsidies, address duplicative testing and labeling, allow companies from other countries to bid for government contracts and open up financial and telecommunications sectors. They help small and medium enterprises sell in other countries. They incorporate protections for workers and intellectual property much as the TPP aimed to do.

And major initiatives aiming at economic integration are taking place.

Most significantly, the Belt and Road Initiative, led by China.

This grand program is viewed through different lenses by the countries of this littoral. There is a desire not to miss out on the opportunities for infrastructure creation that it promises. There are also apprehensions about its impact on national economic sovereignty and sustainability.

The US response has been, most significantly, to view the Indo Pacific as a continuum to promote trade and connectivity and protect freedom of navigation.

This Indo Pacific region will drive global growth over the next decades.

It is anticipated that in the next 15 years, the world’s major economic powers in terms of purchasing power parity will be from the Indo-Pacific region.

The recalibration of trading relationships is creating new opportunities for countries in this region, for instance, when US firms seek to shift their manufacturing units to less exposed geographies like Vietnam, India, Malaysia and Bangladesh.

Export-dependent economies like Singapore, Malaysia, Vietnam, and Thailand would also stand to gain from the recent shift in trade equations with the US.

Therefore, the current trade frictions are also creating direct opportunities for third countries such as Vietnam, Bangladesh and Malaysia – and potentially for India.

India, with its favourable demographics, a growing economy and strong leadership, is well-positioned as a key stakeholder in the region.

India’s multi-layered engagements with the U.S. and ASEAN and its Act East policy are key enablers that aim to achieve a stable, open and inclusive Indo-Pacific region.  

The India-Japan partnership, described as one of the most rapidly advancing relationships in Asia, has emerged as a significant factor in the dynamics of the Indo-Pacific region.  In fact, it could be regarded as the most well-functioning alliance relationship in the Indo-Pacific.

This partnership has diversified to include a wide range of interests beyond economic relations: regional cooperation, maritime security and global climate.

This development is, in a sense, heir to a legacy of historic and religious ties dating back to the 8th century CE.

In the late 19th century, inspired by Japanese culture and philosophy, Swami Vivekananda, a philosopher-sage of India, was one of the early visitors to Japan.  Accompanying him on the ship was Jamsetji Tata – founder of the Tata business group, who subsequently joined hands with the famous Eiichi Shibusawa to launch a direct shipping service between the two countries to compete with European maritime traffic in the Indian Ocean.

Let us fast-forward a hundred years. A transformational development in commercial relations between India and Japan was Suzuki Motor Corporation’s path-breaking investment in the early 1980s that revolutionized the automobile sector in India.

Today, Japan is the fourth largest investor in India.  In addition to the Maruti-Suzuki collaboration becoming a household name in India, the remarkable success of the New Delhi Metro project and the US$ 90 billion New Delhi-Mumbai Industrial Corridor (DMIC) project indicate the future direction of Japanese investment in India.

Many of these projects are funded by the Japan Bank for International Cooperation [JBIC], which is one of the most significant sources of bilateral assistance for India’s infrastructure needs. India has also been ranked as one of the most attractive investment destinations in the latest survey (2018) of Japanese manufacturing companies, conducted by the Japan Bank for International Cooperation.    

Japanese investments in India have also diversified.  The traditional sectors of auto, industrial and consumer electronics, have been supplemented by investments in financial services especially in the insurance sector with players like Tokyo Marine, Sompo Holdings and Nippon Life Insurance being active investors.

Agriculture is yet another sector which has seen significant interest- with large investments being made in the last 3 years, led by companies like Sumitomo Chemicals, Yanmar and Kubota. This a priority sector for both countries. 

Real estate is emerging as a new area of collaboration – with Sumitomo Realty & Development committing huge investments in commercial space and Sumitomo Corporation and Mitsubishi Corporation in the residential segment.

Today, over 1400 Japanese affiliated companies are registered in India.

While the signing of the Indo-Japanese Comprehensive Economic Partnership Agreement (“CEPA”) in 2011 has progressed interests in strategic convergence and military cooperation, the volume of bilateral trade needs to increase. Such trade between India and Japan has increased only about 4 times in the last 18 years.

It is in the manifest interest of both countries to give more substance to their bilateral economic partnership.

Four key collaboration areas can be seen as emerging.

One, infrastructure creation.

Both countries are keen to take forward a ‘converging’ vision in the Indo-Pacific region under the Partnership for Quality Infrastructure (QI.)

I had led a US delegation to Tokyo in 2015 to discuss the initial contours of the Quality Infrastructure construct as a springboard to addressing opportunities in ASEAN with high quality Japanese and US offerings

Infrastructure is an area of significant potential in India as well.

The Indian infrastructure space is seeing large projects with Japanese assistance.

  1. The Shinkansen Project, connecting Mumbai and Ahmedabad, is at the top of the list.  Following the successful Delhi Metro project, where the private and public sectors of both counties partnered, the high-profile Shinkansen project, also funded by JBIC, will bring India on the global map of countries possessing high-speed rail. A total of 18 such trains is expected to be imported from Japan. 
  • Smart cities is another ambitious initiative of the current Indian Government, given India’s rapidly urbanizing population.  Japan is a trusted partner at various levels in supporting this transformative endeavor.

The Western Dedicated Freight Corridor, as well as infrastructural projects of strategic importance in northeastern India are also being developed with Japanese support.

KPMG Japan and India are proud to be in the midst of all of the above developments, advising on various collaborations across sectors, with several corporations and Government organisations. The focus, speed of decision making, adherence to timelines and long term

investment commitments in these projects are impressive. 

A second area of convergence for the two countries is joint investments in third countries, especially in Africa.

The bilateral relationship between Japan and India is steadily extending to the continents of Africa and Latin America.

India is becoming a logical gateway for Japanese companies to look at Africa.  In addition to geographical proximity, India has a long and deep association with various African countries – based significantly on the Indian diaspora who have been settled there for over a century.

India is a natural partner for Japan in Africa, providing critical experience, local knowledge, cultural connections and the soft capital of managerial talent and skillsets.   

Companies like Daikin, Panasonic, Yamaha and Yanmar are extending their impressive India presence and resources to Africa.  

Similar principles could hold true for Latin America, where Japan has long had deep associations.  Japan can act as a springboard for India to seek an enhanced collaboration with the Latin American region. 

Thus, Japan and India can create new narratives of collaboration at both ends of the Indo Pacific.

South East Asia as a region also offers tremendous appetite and commensurate opportunity for India-Japan cooperation.  Japan has made sizeable investments in infrastructure in South East Asia, a policy stance that converges with India’s Act East narrative. ASEAN countries like Singapore are supporters of the two nations strengthening ties through joint investments.

A third area that has been gaining currency is technology and digital connectivity.

The Indo-Pacific region is witnessing an accelerating pace of digital transition, as well as the exponential growth of connectivity. The mobile phone has become the primary instrument of access to the public as well as private services, to livelihoods, education and empowerment, to better urban living, and even to healthcare.

India’s web-based start-ups have attracted Japanese conglomerates like the Softbank Group, which completed its single largest investment in 2017 in the digital payments provider Paytm (US$ 1.4 billion) and subsequently invested US$ 2.5 billion in e-commerce retailer Flipkart. 

As Japan creates in Yokohama its own equivalent of Silicon Valley, there are possibilities and opportunities to create linkages and synergies with India, as seen in the establishment of Nissan’s global digital hub at Thiruvananthapuram in India. Importantly, Indian human resources are being recognized for talent and not just cost effectiveness.    

I am pleased to share that the partnership between KPMG Japan and India has been an integral part of the above journey, working on prestigious and critical cyber and digital projects for Japanese banks, corporations and Government departments. Our projects range from Olympics related security needs to digital payment systems.

The fourth area of joint interest is skill development.

Skill development forms one of the cornerstones of India-Japan cooperation.

Japanese companies in India are participating in Japan India Institutes of Manufacturing (JIM), a collaborative venture between the governments of India and Japan. Suzuki, Daikin, Yamaha, Toyota and Hitachi are some companies that took the lead in establishing skill development institutes.

A number of government-to-government (G2G) agreements focused on industrial testing centres and joint skilling programmes have also been concluded. A case in point is the Technical Intern Training Programme (TITP) of Japan, where Indian workers are trained in Japan.

Collaboration in this space could enhance India’s global competitiveness by increasing its labour productivity – which in turn can help create societal consensus in favour of opening markets to trade.

Thus the Indo-Japanese relationship is emerging as a pole of stability and progress, anchoring relationships across the Indo-Pacific littoral, and providing beneficial spinoffs to other partner nations.

In a common quest to make the Indo Pacific region a theatre of peace, as well as  sustainable and inclusive growth, the nations that share the Indo-Pacific littoral would need to focus their efforts around many axes of action: creating environments for ensuring sustainable public-private partnerships for infrastructure creation, addressing trade barriers, incentivising cross-border energy flows and migration to cleaner energy, deploying digital technologies for empowerment, creating new financial instruments for fostering development, and enabling access to the best technologies.

Moreover, as the traditional, internationalist powers turn inward, preserving global commercial norms will require countries like Japan and India to raise their voice and influence in the Indo-Pacific.

Let me conclude with the hope that all the nations that share the waters of the Pacific and the Indian oceans can come together to attain our common  goal of a peaceful, prosperous, and sustainable future for all its inhabitants, who constitute 65% of the global population.

Slide deck (PDF)