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Wednesday, July 28, 2010
Infrastructure abroad key focus
Government, Japan Inc. join to pursue bids
Building so-called social infrastructure has huge potential abroad, prompting Japanese companies to form broad corporate alliances, often with government support, to win contracts for overseas projects.
Heavy electric equipment makers Hitachi Ltd., Toshiba Corp. and Mitsubishi Heavy Industries Ltd. aim to make inroads in building social infrastructure overseas because there is little perceived need for new projects at home, whereas emerging economies appear to have huge potential, experts said.
Demand for railways, energy plants, information technology, water supply systems and other infrastructure is surging. The Organization for Economic Cooperation and Development estimates the market will amount to $40 trillion by 2030.
"The scale of overseas projects is too big, so one company alone can't take the whole risk," said Hiroki Shibata, an analyst at Standard & Poor's Ratings Japan K.K.
Earlier this month, Hitachi, Toshiba, Mitsubishi Heavy and three utilities — Tokyo Electric Power Co., Chubu Electric Power Co. and Kansai Electric Power Co. — said they will form a new company this fall, aiming to win contracts for nuclear power plants in Vietnam and other developing nations.
They will draw up proposals not only to build the plants, for which equipment makers have expertise, but will offer plant operations and maintenance knowhow, and training for engineers.
The consortium will seek financial and legal assistance from the government, the companies said in a joint statement.
"Regarding countries that introduce nuclear power plants for the first time, we are required to provide all kinds of support," Toshiba spokesman Hiroki Yamazaki said.
The new venture's prime purpose will be to win the next Vietnam nuclear plant bid, in 2011, he said.
"It is quite rational for these makers to shift focus to infrastructure business from electronics because they already have a strong business background in heavy industry," Standard & Poor's Shibata said.
"Also, they don't have to get involved in heated price competition (in the infrastructure business) like what they experience in the electronics and semiconductor sectors," Shibata said. "They can also take advantage of their technology for safety and environmental friendliness in the infrastructure business."
Hitachi and Toshiba have been hit hard in recent years by low-priced South Korean, Taiwanese and Chinese home appliances and semiconductors.
Another big reason these companies and the government are uniting against overseas competitors is the recent, and stunning, failure of Japanese firms to win international bids for nuclear plants in the United Arab Emirates and Vietnam.
The United Arab Emirates, which plans to start operating its first nuclear plant in 2017 and another three by 2020, in December selected a South Korean consortium that made a $20 billion bid. Experts say a visit by South Korean President Lee Myung Bak and his negotiations played a big role in the successful bid.
Then came Vietnam's reported decision in February to select Russia's state-run Rosatom Corp. to build two of four nuclear plants that were approved last November by Hanoi as the nation's first atomic plants. Russia reportedly even offered a submarine in a package deal.
Hitachi's efforts are bearing fruit in the railway sector.
The company grabbed the spotlight in December when it rolled out Britain's first bullet trains, the Class 395. Now 174 of them run between London and Kent at a maximum speed of 225 kph. Hitachi won the order in 2005 amid competition with overseas giants.
Hitachi, which specializes in building trains, had support from East Japan Railway Co. to meet the demand for rail operations and maintenance in Britain. Hitachi also tied up with Mitsubishi Heavy in June to widen the train lineup, Hitachi spokesman Katsunori Shimokawara said.
Hitachi's experience in London led to a much bigger order — up to 1,400 trains for the Intercity Express Program that runs between London and Edinburgh, although the order is now under reconsideration by Britain's new government.
Hitachi is waiting for Britain's final decision on the IEP, which was delayed by Britain's general election in May.
Meanwhile, Hitachi plans to ship about 600 Crossrail commuter trains to London starting in 2015 and have HS2 rapid trains running between London and Midland from 2020.
"We believe Britain and China will become the big markets for us," Shimokawara said. "Hitachi is aiming for ¥350 billion in sales in fiscal 2015, 60 percent of which will be earned overseas."
The company hopes to win orders in Brazil, India, Vietnam and Indonesia, he said.
Unlike in Japan, where train manufacturers do only that, overseas they can engage in a wider range of business, including rail system maintenance.
In emerging markets, train makers not only provide maintenance but also run operations.
Because of the wide need for support to introduce energy plants and railways overseas, governmental involvement is inevitable to win contracts, Shibata said.
There are also several risk factors involved with international contracts, including volatile raw material prices and additional financial burdens coming from changes in specifications, he said.
Eiji Yamada, who specializes in social and industry design at Japan Research Institute Ltd., said the government needs to export Japan's social infrastructure to make it the de facto standard.
To this end, the government must support emerging nations' education and human resources to facilitate the acceptance of the high standards of Japanese technology. "We have to lay these countries' foundations so they can accept our specs," he said.