Investment Trends for Japan and China in the Midwest Larry Ingraham Senior Fellow, Sagamore Institute President, Ingraham & Associates, Inc.

Setting the Scene  Economic recession hits the U.S. in late ’70s, early ’80s  Double-digit unemployment (Anderson, Indiana led nation with 20% unemployment)  Double-digit inflation  Double-digit mortgage rates  Record lines at gas stations  No U.S. companies making investments

At Home in Indiana... §... Governor Robert Orr and Lt. Governor John Mutz were looking for ways to offer hope to struggling Hoosier communities. § They came to two conclusions:  Encourage creation of Local Economic Development Organizations (LEDOs)  Target Japanese companies for outside business

Indiana Meets Tokyo § In 1978, the state of Indiana opened an office in Tokyo* § *Indiana was one of original 14 states to open offices in Japan. Others were Illinois, Michigan, Ohio, Kentucky, Virginia, North Carolina, South Carolina, Tennessee, Alabama, Georgia, Florida, Washington and Oregon § Goals of Indiana office:  Attract Japanese investment to Indiana in order to...  Provide jobs for Hoosiers  Increase the tax base for Hoosier communities  Bring new technology to Indiana  Promote Hoosier industrial & agricultural exports to Asia

Introducing Larry Ingraham In 1983, Governor Orr hired Larry Ingraham to serve as the second director of the Indiana Japan office. At that time... Indiana had recruited 18 Japanese companies Half in manufacturing Half in sales/distribution Larry’s Mission: Take Indiana’s relationship with Japan to the next level.

Tokyo, 1984 (Left to Right) Larry Ingraham, Director of Indiana Tokyo office Indiana Lt. Governor John Mutz Ms. Yoko Kudo, Secretary of Indiana Tokyo office

June 1983 – Sony comes to Indiana First CD manufacturing plant in U.S. comes to Terre Haute, Indiana Turned light “green” for Indiana and Japan’s continuing economic relationship In front of Gov. Orr’s residence, (left to right): Norio Ohga, President, Sony; Gov. Robert Orr; Sony U.S. official; Alan Kimbell, Deputy Director, Indiana Dept. of Commerce

June 17, 1983 SONY President Norio Ohga, Governor Robert Orr, and Lt. Governor John Mutz speak at the commencement of CBS/SONY in Terre Haute, Indiana

Business kept rolling in Enkei Auto Parts starts manufacturing plant in Columbus, Indiana

And then... disaster!  Japanese press identifies Indiana as a “unitary tax” state  Unitary tax: A state corporate income tax on worldwide income  Sony Chairman Akio Morita leads a movement against unitary tax  Unitary tax states become “off limits” to Japanese companies

Larry works with Orr administration to craft a bi-partisan resolution to eliminate unitary tax wording from state’s tax codes June 7, 1984 – Sony Chairman Akio Morita leads a press conference at Keidanren Mission in summer of 1984 Governor Orr announces that Indiana will be the first state to do away with the “unitary tax”

Japan is given a green light to continue investing in Indiana...

1980s: Trends in Japanese Investment  “Trade Friction” prompts Japanese car companies to invest in U.S.  Japanese auto parts makers target Midwest  Target business with the “Big Three”  Interested in “country side” locations with “green”  Site searches usually take 6-12 months  Average factory investment: $10-20 million  Average # employees:

Japanese Process of Selection  Considered each state closely  Created complex analytical charts comparing states/communities/sites  Engaged in detailed and exhaustive questioning  Final decisions were made by subjective observation

Car Wars  Honda: Marysville, Ohio, late 1970s  Mazda: Flat Rock, Michigan, 1983  Nissan: Symrna,Tennessee,1984  Mitsubishi: Bloomington-Normal, Illinois, 1985  Toyota Camry: Georgetown, Kentucky, 1985 § Indiana... no Japanese car plant.

So Indiana went to work...  In 1980s, incentive amounts were very important to Japanese companies; indicators of a state’s “sincerity” in their project  Indiana as small state could not “outbid” larger, neighboring states  Instead, Indiana stressed that companies consider long-term costs of operating, not up-front monies  Indiana’s creed: Give an incentive package both parties can live with!

Finally... in 1986 § Subaru-Isuzu – Lafayette, Indiana

And then...  Toyota Tundra – Princeton, Indiana (1996)  Toyota Camry at Subaru plant – Lafayette, Indiana (2004)  Honda – Greensburg, Indiana (2005) § Indiana is the only state... §... with 3 different Japanese car plants §... where Toyota has two separate manufacturing locations

Larry and Lt. Governor Mutz celebrate Subaru plant in Lafayette

In 1983 In 2012 Japanese companies in Indiana  18 firms  Half manufacturing offices  Half sales offices  250 firms  45,000 Hoosiers employed  $10+ billion investment  Indiana #3 overall in U.S. for most Japanese firms, but #1 for Japanese investment per capita

Across the Midwest  1,140 Japanese companies in 10 Midwestern states by 2010  Indiana, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wisconsin § “From a long term perspective, the Midwest remains particularly attractive to Japanese direct investment due to its central location, top quality workforce, strong transportation network, and favorable business environment.” § survey report of Consulate General of Japan at Chicago

3/11 Events... Photograph by Mainichi Shimbun, Reuters

Why?  Power shortages; rising corporate electricity rates  Auto supplier network forever changed  High value of Japanese Yen  Shrinking domestic labor force Example: On February 8, 2012, Toyota announced a new $400 million expansion in Princeton, Indiana, adding 400 jobs... more Japanese investment

Who’s Next?

Over the next 5 years... §... China will bring the newest “big wave” of foreign investment into the U.S.  In 2009, Chinese direct investment in U.S. hit $5 billion (compared to Japanese peak of $148 billion in 1991)  Desire to escape potential trade friction  Once they reach $100 million in domestic sales, they must think globally  Access to raw materials and end market  Opportunity to escape costly transportation costs  Chance to avoid rapidly rising labor rates at home

Zhejiang Province  80 Chinese companies from Zhejiang Province (Indiana’s sister state) are interested in investing in Indiana  2010 – Yuankai Furniture invested $25 million in furniture factory in Marian, Indiana  2011 – Nanshan Aluminum invested $100 million in aluminum extrusion plant in Lafayette, Indiana

ChinaJapan China vs. Japan  Entrepreneurs  Short company history  Industry variation  Some government ownership  Difficult to investigate  Inexperienced in foreign investment  “Stand alone” companies  Unfamiliar with Midwest  Tedious banking situation  No brand name recognition  Interested in acquiring U.S. firms  Numerous Chinese students in U.S.  Established companies  Long company history  Mainly auto industry  No government ownership  Easy to investigate  Knowledgeable in foreign investment  “Group based” companies  Very familiar with Midwest  Ease of banking  High brand name recognition  Mostly desire direct investment  Few Japanese students in U.S.

Recommendations for U.S. communities and companies:  Create marketing materials in Chinese and Japanese; send to interested state’s overseas offices  Visit Chinese and Japanese consul generals in Chicago  Join Japan-America Society and participate in events  Learn nuances of conducting business with Chinese and Japanese businessmen  Travel on business trips to Asia whenever possible  Consider utilizing Chinese students as interns  Hire a seasoned, competent consultant!

Questions?