Southeast Asia urgently needs new investment in infrastructure as mass urbanisation spreads across the region.
At the same time, Japan’s government is in the middle of a major effort to crank up long-sluggish economic growth.
This confluence is encouraging Japanese companies to pursue development of needed infrastructure in the region, Standard & Poor’s Ratings Services said in a report published today entitled “Japanese Corporates Hitch Growth Plans To Southeast Asian Infrastructure, But Face A Bumpy Ride.
According to the report, infrastructure requirements in Southeast Asia include power plants, transmission and distribution facilities, and intracity transit systems.
Such projects are a promising source of income for Japanese corporates at a time when most domestic technology companies are losing their competitiveness in export-oriented high-tech hardware businesses.
Because infrastructure projects have become larger and more complex, Japanese companies are working together, in consortium, to secure more contracts in the region.
However, Southeast Asia’s growing infrastructure business is attracting plenty of competition from larger Western rivals, which have stronger customer bases and better track records, and from highly cost-competitive Chinese and Korean rivals.
Standard & Poor’s thinks Japanese capital goods companies, core players in consortia, will need to strengthen their risk management systems and improve their profit margins, with a shift to more stable operational and after-service business from hardware sales, to offset higher business risk in such projects and maintain their creditworthiness.
Until now, Japanese consortia raised adequate financing in the form of project loans from lender banks, including Japanese megabanks, and direct lending from export credit agencies.
However, as funding requirements grow to meet the demands of larger projects, new regulatory requirements may force key Japanese banks to become more cautious and restrict funding in the medium term.
Consequently, finding new sources of financing would become a fresh challenge.
Recently, the rating agency said it has seen signs that Japanese pension funds and second-tier banks aim to enter the market as new funding providers.
But it believes they will find this difficult and will take time to realise their aspirations.
In the meantime, it said Japanese consortia need strong relationships with key Japanese banks to overcome this challenge and win a constant flow of infrastructure projects in the region.