Tokyo Unlikely To Expand Influence In Africa

BMI View: Japanese Prime Minister Shinzo Abe's three-country tour of Africa is a sign that Tokyo is seeking to expand its political and economic links to the continent. While Japanese firms are influential in certain sectors of the African economy - notably automotives - we doubt that Prime Minister Abe will succeed in establishing his country as a major player in the region. Japanese demand for natural gas, however, could make the world's third largest economy a key customer for East Africa's new energy exporters.

Prime Minister Shinzo Abe's quest to reinvigorate Japan's flagging economy took him on a whirlwind tour of Côte d'Ivoire, Ethiopia, and Mozambique in early January 2014, all fast-growing economies with which the conservative premier is seeking to build closer ties. The visit follows a major Japan-Africa summit held in Yokohama in June 2013, and we believe it represents a concerted effort to address worries that Japan has fallen behind Asian rival China in expanding its economic and political influence over the fast-growing continent.

Despite this attempt, however, BMI believes that Japan will remain a relatively minor player on the African scene. Japanese firms will be key players in certain sectors, but total trade will be dwarfed by the strong economic links between African states and their existing commercial partners. Tokyo's political influence in Africa will be minimal, posing no threat to established powers such as France or rising ones like China or India. The area in which Japan-Africa ties are most likely to strengthen is energy; BMI's Oil & Gas team believes that Japanese demand for liquefied natural gas (LNG) will make the country a key customer for East African energy exporters.

Keeping In Touch?
Africa - Embassies In Africa, Selected Major Economies

BMI View: Japanese Prime Minister Shinzo Abe's three-country tour of Africa is a sign that Tokyo is seeking to expand its political and economic links to the continent. While Japanese firms are influential in certain sectors of the African economy - notably automotives - we doubt that Prime Minister Abe will succeed in establishing his country as a major player in the region. Japanese demand for natural gas, however, could make the world's third largest economy a key customer for East Africa's new energy exporters.

Prime Minister Shinzo Abe's quest to reinvigorate Japan's flagging economy took him on a whirlwind tour of Côte d'Ivoire, Ethiopia, and Mozambique in early January 2014, all fast-growing economies with which the conservative premier is seeking to build closer ties. The visit follows a major Japan-Africa summit held in Yokohama in June 2013, and we believe it represents a concerted effort to address worries that Japan has fallen behind Asian rival China in expanding its economic and political influence over the fast-growing continent.

Keeping In Touch?
Africa - Embassies In Africa, Selected Major Economies

Despite this attempt, however, BMI believes that Japan will remain a relatively minor player on the African scene. Japanese firms will be key players in certain sectors, but total trade will be dwarfed by the strong economic links between African states and their existing commercial partners. Tokyo's political influence in Africa will be minimal, posing no threat to established powers such as France or rising ones like China or India. The area in which Japan-Africa ties are most likely to strengthen is energy; BMI's Oil & Gas team believes that Japanese demand for liquefied natural gas (LNG) will make the country a key customer for East African energy exporters.

Overtaken
Sub-Saharan Africa - Total Trade With Major Asian Trade Partners, US$bn

Japan's comparative irrelevance in Africa is a recent phenomenon; as recently as 2002 the country was Sub-Saharan Africa's largest Asian trading partner. In the following decade, however, trade between the region and China grew twentyfold due to a combination of Chinese demand for African commodities and surging exports of Chinese consumer products. Less dependent on mineral resources and largely focused on the export of expensive high technology goods, Japan has had less ability to tap into African growth.

China Dominant
Sub-Saharan Africa - Destination Of Exports to Asia, % Of Total Exports To Asia

China now accounts for half of all exports sent from Sub-Saharan Africa to Asia, with Japan falling behind India into third place. Commercial exchanges are still large in value terms - Japan bought US$15.9bn worth of African goods in 2012 - but this is comparable to mid-sized European economies such as the Netherlands (US$18.2bn) or Spain (US$14.3bn). Not a single African country counts Japan as its leading export destination.

Though complex negotiations and China's opaque state owned enterprises (SOEs) make comparable figures for foreign investment difficult to analyse, Japan's investment in Africa is a small fraction of China's, usually totalling under a billion US dollars annually. Few Japanese firms see Africa as a key priority, with the country investing significantly more in the Philippines than it does in the entire African continent.

Staying Closer To Home
Japan - Foreign Direct Investment Destinations, US$mn

Buying Favour?

Tokyo's traditional strategy for managing its relationship with Africa has been characterised as 'chequebook diplomacy', hoping that a combination of development grants and concessional loans will help to build political influence and develop closer ties. This has been less successful than China's policy of providing commercial investments, loans for infrastructure projects, and boosting trade links, a strategy which has financed the entry of large Chinese infrastructure firms into African markets. BMI therefore believes that Prime Minister Abe's decision to focus on funding for Japanese companies seeking to invest in African countries will be a more effective strategy. Half of the US$32bn in loans and grants announced at a 2013 Japan-Africa summit were designed to boost foreign direct investment.

The move, which in many ways emulates Chinese policy, was met with hostility in Beijing. Foreign Minister Wang Yi - who had only recently returned from his own African trip - criticised 'certain countries' for using aid to promote their own interests, while a government spokeswoman said that 'any country' attempting to 'use Africa for rivalry is making a wrong mistake which is doomed to fail'.

Not Just About Money

A lack of cultural, linguistic, or historical connection will prevent Japan from having France's dominant - and often criticised - influence in West Africa. The Prime Minister's spokesman blamed his country's lack of commercial success in some African countries on an unwillingness to bribe African leaders with 'beautiful houses or ministerial buildings', a thinly veiled criticism of Chinese investments in Angola and elsewhere. Others point to a lack of political will; Prime Minister Abe's trip is the first visit by a Japanese premier to the continent in eight years. Chinese President Xi Jinping travelled to Tanzania, South Africa, and Congo-Brazzaville within two weeks of taking office in March 2013.

Bright Spots

While BMI believes that Japan is unlikely to become a key player in Africa, certain Japanese firms will continue to succeed. Indeed, we note that many African political and business leaders hold Japanese companies in high esteem, believing that they are professionally-run, technologically advanced, and law abiding. Ivorian President Alassane Ouatara used Prime Minister Abe's visit to praise the 'quality and competitiveness' of Japanese firms, calling them 'essential' for his country's development.

Driving Ahead
Nigeria - Lagos State New Vehicle Registrations, 2011

The automotive sector is one area where Japanese firms are highly competitive. For decades Africa has been a major importer of used cars from Japan, and rising incomes are seeing Africans seek out new vehicles from Japanese brands which they already know and trust to be reliable. BMI's automotive research team reports that Toyota sold 237,000 cars in Sub-Saharan Africa in 2012, and had a market share of 14% of total sales in the region (see 'Toyota Looks For Lead In High-Growth Region', 7 October, 2013). Other Japanese firms are also active in the region, but Toyota's investment in assembly plants it both Kenya and South Africa makes it one of the region's leading car makers . The firm has been the top-selling brand in South Africa for 34 years running.

Tokyo's Hino brand is also assembling trucks in Kenya, catering to booming demand for commercial vehicles across East Africa (see 'Toyota Looks Beyond Kenya For Growth' 11 June 2013). Other Japanese firms are building motorcycles in Tanzania and South Africa, tapping into the far larger market of African consumers for whom personal cars remain out of reach. Established supply chains and decades of providing high quality vehicles at low prices will help Japanese firms retain market share in the face of rivals from emerging markets.

Gas Future

One area where BMI believes that Japan will increase its economic influence is East Africa's gas industry. The shutdown of Japan's nuclear generating capacity following the Fukushima Daiichi nuclear disaster has further increased demand in what was already the world's largest importer of LNG. Tokyo is eying energy-rich Mozambique - the third leg of Prime Minister Abe's three-country tour - as a potential supplier (see 'Japan Intensifies Official Efforts For Gas', 16 January 2014).

The Key To A Beautiful Friendship?
Japan - LNG Imports, US$bn

The prime minister pledged US$672mn in development aid over the coming five years, including funding for a large gas-fired power plant. Japanese investment could help to address the significant infrastructure deficit which is currently holding back the development of Mozambique's energy potential.

Funding could also help the cause of Japanese firms hoping to enter the market. Tokyo Electric Power Corporation, Tokyo Gas, Osaka Gas, and Kansai Electric Power Corporation are all negotiating for gas sales, while Yokohama-based Chiyoda is bidding for large infrastructure contracts in the country.

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This article is tagged to:
Sector: Country Risk, Oil & Gas, Autos
Geography: Africa
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