PHNOM PENH - Hiroshi Uematsu had a tough start in Cambodia, where he heads an economic zone that aims to attract business from his native Japan. He arrived just before the global financial crisis sent the Asian economic minnow's exports into a tailspin and dried up investment interest.
A man prepares to construct a new building at the Phnom Penh Special Economic Zone on the outskirts of Phnom Penh November 1, 2012. REUTERS
Now, though, business is looking up.
About a third of the lots on the 365-hectare (900-acre) site on the outskirts of the capital Phnom Penh remain vacant and overgrown, roamed by scrawny cattle. But they are being snapped up by household Japanese company names such as Yamaha Motor , food maker Ajinomoto and electronics firm Minebea.
Next to Uematsu's office, a convenience store sells several brands of sake, "Tokyo burgers" and a variety of Japanese savoury treats for homesick executives.
The turnaround in Uematsu's fortunes mirrors a broad trend of surging Japanese investment in Southeast Asia as China's appeal is undermined by rising wage costs and spiking tensions with its neighbour over territorial disputes.
"China used to be the factory of the world," said Uematsu, a 45-year-old from Japan's mountainous Gifu prefecture who says he gets calls every day from companies interested in the Phnom Penh Special Economic Zone. "We can't say so anymore."
Almost a quarter of Japanese manufacturers are re-thinking their China investment plans, according to a Reuters Corporate Survey carried out after the recent tensions between the nations over disputed islands.
Japan's tsunami disaster and flooding in Thailand last year provided another sharp reminder of the need to diversify operations to avoid another rupture in global supply chains.
Japan's net foreign direct investment (FDI) into the 10-country Association of Southeast Asian Nations (ASEAN) more than doubled last year to a record 1.55 trillion yen ($19.5 billion), data from Japan's Finance Ministry shows. Japan's net FDI into China is still rising, jumping 60 percent in 2011 to a record 1 trillion yen.
But Japanese firms, encouraged to expand abroad by a strong yen, are increasingly using Southeast Asia as an alternative manufacturing base to balance their China risks. Japanese government and business leaders have also been among the fastest to tap the potential of Myanmar's dramatic opening, pouring in billions of dollars in infrastructure spending, debt forgiveness and refinancing.
NOT JUST CHEAP
It's not just about cheap wages. The region of 600 million people also offers a growing source of demand for Japanese cars, electronics and services as robust growth expands the middle class. Malaysia and the Philippines, where wages are higher than Vietnam or Cambodia, have also seen rising Japanese interest.
Infrastructure investment in railways and roads is booming and ASEAN is working towards establishing a European Union style single market by the end of 2015, making it easier for multinationals to link up their cross-border operations. The region's economies have been resilient this year to weak growth in the United States, Europe and China.
Japan's net investment in ASEAN came to 418 billion yen in January-August, finance ministry data show, but those figures may not reflect many pledged deals. In the April-June quarter, net FDI in ASEAN rose 37 percent from a year ago.
ASEAN countries' latest FDI data also suggest the trend of strong Japanese investment is intact.
In Vietnam, for example, Japanese pledged investments jumped to $4.9 billion in January-October, double the total for all of last year, government data show.
"In 2011, Japanese companies were given a lesson from two disasters," said Hirokazu Yamaoka, Hanoi chief representative for Japan's JETRO trade promotion agency. "This year, the risk of China has been recognized and they study more about risk sharing for manufacturing."
Approved Japanese investments in Thailand nearly tripled in January-September to around $8.1 billion, data from the Board of Investment of Thailand show. Nissan Motor Co, which aims to more than triple its ASEAN sales to 500,000 vehicles by 2017, said on Friday it will build a second assembly plant in Thailand for $358 million.
"The reason we're investing in Thailand more is because we trust in the growth in the ASEAN region and Thailand," Nissan Executive Vice President Hiroto Saikawa said. "China's economy is Slowing down, but is still growing and is a very important market for us."
In Indonesia, Southeast Asia's largest economy, Japan's net direct investment is on course for a record year after surging to 288 billion yen in 2011 from 41 billion yen in 2010. In the first eight months of this year, net Japanese investment already totalled 237 billion yen, according to Japan's Finance Ministry.
Japan said last month it plans to provide $13 billion in funding for infrastructure projects in Indonesia, where the growing wealth of the 220 million population makes for a huge domestic consumer market.
Car makers Honda Motor Co and Suzuki Motor Corp have announced major expansion plans in Indonesia this year, and Toyota Motor Corp is considering building a third car plant as it aims to triple annual output there to 300,000 vehicles, according to Japanese media reports.
THAI FLOOD WARNING
Japanese companies are also diversifying within Southeast Asia, prompted by last year's severe floods in Thailand, which has long been their favoured regional manufacturing hub.
Malaysia's northern Penang state, which aims to become a regional logistics hub, and surrounding areas near the Thai border have seen an influx of Japanese firms in recent years.
The Philippines is winning higher-tech Japanese investments in areas such as laser printers and advanced lenses for digital cameras. Japan's net FDI flows there doubled in 2011 to 81 billion yen.
The Thai floods also gave a shot in the arm to Cambodia's burgeoning manufacturing industry, where wages can be up to a quarter of those in China, although the country remains focused on relatively low-tech assembly work for now.
Minebea, for example, trucks components from Thailand to be assembled at the Phnom Penh economic zone before transporting them back to Thailand for higher-end work. The company, which makes tiny motors used in electronic gadgets, recently bought up a second factory lot to expand its capacity in Cambodia, and expects to have 8,000 workers by the end of next year.
"Japanese investors are hard to convince, but once they are they move very fast," said Peter Brimble, the Asian Development Bank's senior country economist for Cambodia.
On Cambodia, he said, they have "made the decision," despite concerns over a lack of qualified labour and weak transport infrastructure in one of the region's poorest countries. Japanese investment in Cambodia is already at $300 million this year, up from $75 million in 2011, Cambodian figures show.
Uematsu said interest among Japanese firms in producing in Cambodia picked up in 2010, rose after anti-Japan protests in China that year and surged again after a fresh wave of protests in September. China, Uematsu said, has also become a "headache" for Japanese firms because of sharply rising wages and sometimes testy labour relations.
"Young Chinese people don't want to work in a factory any more. There are many other opportunities," he said.
Japanese companies increasingly see Thailand, Cambodia and Vietnam as a single production corridor, he said, comparing the Mekong region to the main industrial cities in his home country.
"It's getting to be nonsense to divide it into three countries. It's one region," he said. "Bangkok is Tokyo, Phnom Penh is Nagoya and Ho Chi Minh is Osaka."