This article first appeared in The Edge Malaysia Weekly, on November 23 - 29, 2015.
Japan takes huge pride in its railways, especially its high-speed rail (HSR) technology, which has seen unrivalled commercial and operational success on the home front. But when it comes to competing abroad, Japan seems to have lost out to China, for instance, the bid for Indonesia’s US$5 billion HSR line from Jakarta to Bandung.
The loss is surely an upset, but not only because the Japanese were confident in their technological edge over the Chinese. Exporting infrastructure is also one of the core pillars of the so-called third arrow in Prime Minister Shinzo Abe’s brand of economic stimulus — Abenomics.
“The Indonesian side explained to us that Jakarta reviewed the project and made it a medium-speed railway project and that the details would be given later to companies, including Japanese ones, so as to fairly provide opportunities for them to participate in the project.
“However, this policy was suddenly changed, and on Sept 29, Sofyan Djalil, head of the Indonesian National Development Planning Agency, told the chief Cabinet secretary of Japan Yoshihide Suga in Tokyo that Indonesia would welcome the Chinese proposal. It is difficult to understand and extremely regrettable,” Japan’s Ministry of Foreign Affairs tells The Edge.
The counsellor of the Cabinet Secretariat Naoto Hisajima tells The Edge that the Japanese government has set an ambitious target, to achieve ¥30 trillion in infrastructure exports by 2020 — triple the ¥10 billion achieved in 2010. Surprisingly, transport-related exports only make up about 5% of Japan’s infrastructure exports, which are dominated by energy and information communications technology.
To expand infrastructure exports quickly, Japan will have to export its HSR technology, according to Hisajima. And the next HSR project up for grabs in the region is the Kuala Lumpur-Singapore line, where the Japanese once again find themselves squaring off against the Chinese.
While the Chinese are bidding through state-owned companies, the Japanese private sector will be bidding for the project. As per their usual modus operandi, the Japanese private companies are said to have banded together to form a consortium, with Sumitomo Corp taking the lead in the Malaysian bid.
It might be presumptuous to assume, however, that the Chinese have outright advantage when it comes to pricing. In order to support the export of infrastructure, the Japanese government has set up several agencies that are able to provide infrastructure projects abroad with financing, insurance and human resources support, Hisajima points out.
In a nutshell, the Japanese government channels funds abroad to support projects undertaken by Japanese companies as an indirect way of stimulating its private sector. The Japan International Cooperation Agency (JICA), for example, is able to provide Official Development Assistance funding directly to governments at extremely low, near-zero interest rates.
JICA also offers private sector financing, not unlike the Japan Bank for International Cooperation. Lending further support are agencies like Nippon Export and Investment Insurance, which helps offload some of the project’s risks.
Nonetheless, these agencies have been around for a long time and even with this support in place, Japan has yet to see much success in terms of exporting HSR.
Since Abe released his three arrows, additional agencies have been set up, like the Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development last year. Japan has also committed to provide ¥13 trillion over the next five years in collaboration with the Asian Development Bank.
The challenge for Japanese companies, however, is not the quality of the technology or the price, but the competitiveness of the HSR companies.
That is not to say that the Shinkansen (HSR in Japanese) is expensive. After all, the Japanese were able to recover the cost of the Tokaido Shinkansen line in about eight years. Even after Japanese National Railways was privatised in 1987, the Shinkansen network continued to expand. Private companies were able to finance new lines without much government support.
Furthermore, this did not come with any cost-cutting measures. From a safety perspective, Japan boasts an astounding track record with zero fatalities in over 50 years of operations. There was one derailment, but that was caused by an earthquake and there were no fatalities.
The average delay per trip for the Shinkansen is less than one minute. This is especially impressive, given that Tokyo Station handles over 420 trains every day.
Interestingly, Japan’s private sector was able to achieve this despite the lack of competition in train building, which falls to Kawasaki Heavy Industries and Toshiba Corp. The many components that are needed to build the train, however, are broken up among many other private companies.
Japanese companies can achieve this because railway companies and equipment suppliers are able to work closely together to produce high-quality trains at a very reasonable cost. But this approach might not be so useful in an international tender.
That said, this does not mean that Japan has not exported HSR before. However, it did not involve a fierce open tender on the international stage.
One of the countries that Japan has exported HSR technology to is China, back when the latter was just beginning to build up its HSR network. Today, China has the longest HSR network in the world and easily the largest manufacturing capacity as well. The irony is not lost on the Japanese, that it might well have contributed to its own demise. Of course, the Germans and the French also contributed to China’s HSR know-how.
In 2007, Japan exported its HSR technology to Taiwan. However, there was not much competition for the project since the Taiwanese had pretty much set their sights on adopting Japanese technology.
Hence, while the Japanese were very capable of producing optimal outcomes when working among themselves, they found it challenging to compete in Indonesia where the circumstances were more fluid.
Going forward, the Japanese will have to learn quickly from the lessons of Indonesia, as it prepares to bid for the KL-Singapore HSR line.