Politics goes ahead of economics in relations improvement between Russia and Japan, but strengthening of business communications is only a matter of time in this case
Sixty four Japanese companies have applied for participation in Innoprom -2017, an international industrial exhibition, which will take place in Yekaterinburg on July 10 — 13, and 150 Japanese companies more will be also represented by correspondence. Nearly 600 Japanese businessmen and officials are going to visit the exhibition, where The Land of The Rising Sun appeared to act as the partner this time. The intensification of two-sided business contacts In Ural region shows the trend of political and economic rapprochement between Russia and Japan, observed over the last few years. This conclusion was made by the participants of the round table “Prospects for Russian-Japanese cooperation and the role of Sverdlovsk region in this process”, which took place on June, 2 in the capital of the Urals on the eve of Innoprom`2017 and was organized by "The Expert" analytical centre and "The Expert-Ural" magazine under support of the Ministry of International and Foreign Economic Relations of the Sverdlovsk Region (MIFER).
— Thanks to the signs coming from Moscow and Tokyo, an atmosphere of trust is forming between our countries. It was absent previously, which prevented successful project implementation. Identification of priority directions for cooperation occurred, including the interregional level, — declared Andrey Sobolev, the head of the regional MIFER, speaking at the round table.- Sverdlovsk region and the Urals are extremely interested in development of cooperation with Japanese colleagues across the full range of trade, economic and investment relations. First of all, these are questions of technology transfer, implementation of joint cooperation projects in such fields as metallurgy, machine building, timber processing, pharmaceutical industry, medical equipment manufacturing, chemical industry. Today looking at the stories of success of some companies, we learn how to build mutually beneficial relations with our Japanese colleagues.
The view through the glass
Indeed, Sverdlovsk region have a long and vast experience of cooperation with Japanese partners. Thus, “Pumori” Corporation has been promoting technical re-equipment of the Ural enterprises since 1990th, supplying with modern metal-cutting equipment and tools from six leading machine-tool companies from Japan. Since 2013 at the production area of “Pumori” Corporation in Yekaterinburg a project for the production of machines by Japanese technology “Okuma-Pumori” with high degree of localization is being implemented. In 2012 a joint Russian-Japanese venture “Mishima-Mashprom” for production and restoration of the walls of molds for continuous casting machines was established in Nizhny Tagil. One of the latest examples is the long-term contract signed in March 2017 between the Bogdanovich Refractory Plant and Taiko Refractories. The Japanese company will transfer to the Russian partner a unique formula for creation of fire-resistant materials for blast-furnace production, and the parties will be engaged in joint development of new types of production and its adaptation to the needs of metallurgical plants.
In 2012 Japanese Nipro Corporation has invested in the production of pharmaceutical glass creation at the Ural glass factory (the Ufimsky settlement, Achit District of Sverdlovsk region). Today the cooperation is expanding.
— Last year the decision of realization at our enterprise of “Matryoshka” project was set, the name was created by the Japanese side, — Ilya Markovsky the director of the Ural glass factory has reported. — The project goal is to increase the capacity of production of ampoules from 90 million pieces up to 180 million this year and to start a production of cartridges for pharmaceutical companies with a capacity of 40 million pieces per year. The new facilities are focused primarily on exports, and on the supply of products mainly to European countries.
— Out of the total amount of our export — import operations work with Japan is about 4%, — said Svetlana Kazakova, director of development of “Uralcontainer” company. — We have been working with Japanese customer for seven years already, constantly increasing the volume of cargo. The structure of goods also changes. We do not only carry the raw materials that the Japanese are purchasing in the Urals, but also deliver Japanese equipment for the companies which develop business in our country.
Certainly Russia is in great need of high technology and modern equipment, which are produced by Japan. Especially if it concerns technical re-equipment of Russian industrial enterprises in need to improve quality of the product, reducing its production cost, a significant increase in productivity. But are the Japanese interested in such cooperation themselves today?
— Definitely they are, — Andrey Rusakov, director of the Centre for Euro-Asian studies is convinced. — First of all, Japan and Russia have to build a security system in the Asia-Pacific region, where because of the irrepressible North Korea the nuclear problem is particularly acute. Today at the highest level of the two countries the question of the Southern Kuril Islands is discussed to find the solution. Considering economic aspects we represent a huge market for Japan - not only Russian, but also the Eurasian Economic Union with a common customs space and with quite predictable GDP tied to world oil prices. There are not many such big markets in the world.
In search of trust
However, today the arrival of Japanese high-tech companies in Russia is constrained by a number of factors. However the sanctions joined by Japan are not a major barrier that is recognized by the Japanese themselves.
— Japan is a member of the G-7, and when sanctions are imposed against Russia, we try to adhere to them, - explains Kunio Okada, director of the Institute of Economics of Russia and Newly Independent States of the Japan Association for Trade with Russia and the Newly Independent States (ROTOBO). — Sanctions create difficulties for Japanese companies in getting financing for trade and economic cooperation with Russia. Nevertheless, we see that the current policy of our Prime Minister Shinzo Abe and the Government of Japan is aimed at strengthening relations with your country. But the main difficulty is that the Japanese are poorly informed about the Russia market and the Ural region market. To develop a joint investment projects it is necessary to search for reliable partners, this should be promoted by business associations of both countries. For example, almost all successful stories of our cooperation in Sverdlovsk region were set under support of the ROTOBO Association.
According to Teikoku Databank, there are currently about 250 Japanese companies in Russia. Turnover is only 1 — 2% of the total indicators of external trade of both countries. The amount of mutual investment is measured in figures less than one percent of the total volume of foreign investment in our countries.
— A number of organizations in Japan carry out annual survey of Japanese businessmen already working or wishing to start a business with Russia. One of such organizations is the Federation of Economic Organizations of Japan, KEIDANREN. This is the largest association of private companies, nearly 1300 members, which has a huge influence in the country. Last September the Japan-Russia Committee for Economic Cooperation of the Federation published “The results of a questionnaire survey regarding the conditions for doing business with Russia (fiscal year 2016)”, — says Oleg Ryabov, a leading researcher at the National Institute of Advanced Industrial Science and Technology of the Ministry of Economy, Trade and industry of Japan, who has been living for a quarter of a century in this country. — Here are some figures from this report. 80% of respondents who already have business in our country answered optimistically the question about assessing the prospects of business with Russia, and only 13% of those who have never worked in it. 34% of respondents intend to expand their business in Russia, 31% are going to maintain the current state, and 1.1% plan to leave the market. Among the regions of Russia the Urals Federal district was rated as a promising by 12.6% of respondents. The low figure is only in the Southern Federal district — 9.4%. These figures make you think. Studying a business partner is the key to success.
Undoubtedly a radical change in the dialogue between the leaders of Russia and Japan is a good sign of the new era, which gives an opportunity for economic cooperation to emerge from the shadow of a territorial dispute, Oleg Ryabov emphasizes:
— Here, however, our countries have faced a new problem — a serious shortage of Japanese experts in Russia and, accordingly, Russian experts in Japan in economic and industrial fields. The situation is clear and the solution is obvious: we need to raise new cadres at both the federal and regional levels; it is necessary to create portals for the information exchange of the specifics, nature and standards of doing business in Russia and Japan. We should start conversation with a study of the Japanese opinion about Russia and the prospects for cooperation to find out how we can attract the interest of Japanese entrepreneurs to the region.
Read the air
However we in Russia are already thinking of improving the structure of exports to Japan.
— Mainly the products of our metallurgy are exported from the Sverdlovsk region to Japan for the time being. These are ferrous and non-ferrous metals, although with high added value, - Andrei Sobolev has noted. - Therefore, we can say that all brands of Russian steel and brands of our companies working in the field of non-ferrous metallurgy are well-known in this country. But that`s not quite the same that we would like. Our task is to create innovative joint ventures, to bring small and medium-sized enterprises to the Japanese market. We already have been making such attempts, and in the future this policy will be continued.
Thus, one of the Sverdlovsk companies specializing in the production of coagulants and reagents to address the impacts associated particularly with accidents at nuclear power stations begins a dialogue for entering the Japanese market. And the government of the region supports this activity. Therefore we see that the Ural, Russian technologies could be demanded in the Japanese market.
Regarding this, the experience of those companies who are already working on two much specific for Russians and Europeans the Japanese market turns to be very valuable:
— Dmitry Ulupov, Manager of Scientific Affairs, Phillip Morris International, Russia:
In many ways, the Japanese consumer market sets trends for the entire world. The uniqueness of this market lies in the openness of the Japanese consumer, and in their interest in innovations. Therefore, we specifically started the implementation of our innovative IQOS product in Japan, which is now present in 25 countries globally. This is a system for heating tobacco to a temperature that allows nicotine and aromatic substances to be extracted, but no burning occurs, as the main harm to the human body during smoking is caused by the combustion of products
The launch and commercialization of IQOS in Japan proved particularly successful. The consumer benefits of IQOS are well aligned with the social and cultural customs of the Japanese. For Japanese smokers, the decisive factor in choosing IQOS was not the fact that, on average, the harmful substances released by IQOS tobacco vapor are 90 — 95% lower than the smoke of a regular cigarette. They take great care not to inconvenience others, and for them it is especially important that the IQOS tobacco vapor, in contrast to the smoke of a cigarette, has less odor and does not adversely affect indoor air quality.
Today, sticks hold 11.9% of the tobacco market in Tokyo, and generally, globally, already 2 million adult smokers have given up smoking, instead switching to the use of our innovative product. We believe that in order to stimulate the process of switching adult consumers to alternative products with potentially lower risk, a balanced, science-based legislative regulation of this new category is needed.
— At our department we train specialists in the field of foreign economic activity, — Olga Plyusnina noted, an associate professor of the department of foreign economic activity of the Ural State Economic University (Yekaterinburg). — Our graduates have a sufficient level of professional competence, they work at customs, and at enterprises dealing with export-import operations. Recently we have been cooperating with China, we have trained a group of Chinese specialists of 12. Next year we are going to accept a group from China again. Also it would be very important to start training Russian specialists for working in Japan and Japanese — to work in Russia. Our University has a good basis for this purpose.
Training of such specialists is also important because of the significant difference in the mentality of our people. Maria Tchamovskih, the teacher of Japanese language from the department of Oriental studies of the Ural Federal University has got some experience working at the Russian-Japanese company in Moscow. She is convinced that it`s important to take into account specific features of the Japanese national character and peculiarities of the business culture in the Land of the Rising Sun when forming partnership with Japanese:
— Dialogue with Japanese involve a lot of non-verbalized communication. They have the concept of “honne and tatemae”, which determine the contrast between the true intent of a person and the external manifestation of these intentions. The ratio between “honne and tatemae” penetrates into all spheres of life of Japanese society, including the sphere of business relations. Japanese society is a society of group consciousness, where individual interests are subordinated to the interests of the group, and it is very important for the Japanese to maintain harmony in the team. They avoid forms of direct refusal and categorical judgments in order not to offend the partner and show a respect to him. For example, the phrase “I will consider your offer in a constructive way” or “I will do my best” may mean an evasive refusal depending the context. That is when dealing with the Japanese, one should not try to obtain from them any reality, it is necessary after all to be able to adapt to the situation, be sensitive to the partner's moods, and as the Japanese themselves call this feature “be able to read the air” that is to be able to read between the lines. Instead, some Russian businessmen make a typical mistake of considering some prior arrangement which actually mean nothing for Japanese, as a done deal. I would also like to draw attention to the fact that the Japanese do not welcome attempts to establish informal relations with them. In dealing with the Japanese remember the rules of propriety: avoid tactile contacts and use respectful suffixes of names and positions. The most acceptable version of the address is a combination “a surname plus a valid suffix - san”. Persistent attempts to establish a visual contact with the Japanese can cause him psychological discomfort, because it isn't accepted to stare into the eyes in Japan. Owners of light eyes: green, gray, blue, which is unusual for the Japanese perception, should be especially careful.
When projects get off course
When implementing joint projects with foreign partners, one should take into account the risks of changes in the exchange rate difference of currencies, says Konstantin Kropantsev, head of the Urals office of GrottBjorn Financial Service (ZAO “SBC”):
-It is important to realize that changes in the exchange rate of currencies is an unpredictable phenomenon because it is influenced not only by economic but also political, and even technogenic factors. If the currency is mentioned in terms of the contract with foreign contractors, the problem of currency risks arises. And as a rule, we have long-term projects. Then one of the parties runs the risk to receive the unexpected financial result.
Here is an example. In July 2015, the representative office of the Japanese company in Russia agreed to supply equipment for the Russian state-owned enterprise. The contract value — 47 million rubles, payment in rubles. The prepayment was 20%, the rest of the payment — after delivery and adjustment. But during the execution of the contract from July to November , 2015 the yen`s exchange rate against the ruble increased from 0.47 to 0.54. As a result, the actual revenue of the representative office of the Japanese company was less than expected for 10 million yen.
Thus, without insuring currency risks, the enterprise risks incurring losses comparable to the rate of profit. It is necessary to use different tools and the strategy of insurance of currency risks depending on the business processes of the enterprise. For example, raising funds for the purchase of currency, the use of option strategies, forward contract with the bank, exchange rate fiduciary compensation, fixing the exchange rate swap. Each tool has its own characteristics and value, it is important to be able to estimate their differences. Our company specializes in providing direct access to the foreign exchange market of the Moscow stock exchange (by the way, in the third quarter the Moscow Stock Exchange announced the beginning of trading in the yen) and on currency risk insurance. In our practice we distinguish nearly 20 strategies that should be applied depending on the company's business processes.