/Chief Representative, Ulaanbaatar Representative Office
Bank of Tokyo-Mitsubishi UF, Ltd/
Granted with the right to open a representative office by the Bank of Mongolia on December 20, 2013, the Bank of Tokyo-Mitsubishi UFJ officially opened its representative office in Ulaanbaatar, Mongolia. The economic growth of Mongolia has been on a stable path since it started producing and exporting its minerals.
There is immense potential for Mongolia to export minerals such as coal and copper from Umnugobi province (under the spotlight of the whole world) to the Asia-Pacific region. Many mining-oriented projects and programmes must be developed in order to attract foreign direct investment, not to mention the need to prioritise the importance of strengthening the domestic production and infrastructure industries. Japan and Mongolia have agreed to put an emphasis on the outlook of their strategic cooperation between the two countries and therefore have put into place two framework policies: creating an attractive investment environment and further strengthening economic cooperation. Both parties hope to advance the industrial sector by giving a significant boost to the economy.
Bank of Tokyo-Mitsubishi UFJ has been a consistent financier and supporter of the Japanese industrial production through its outreach to the Mongolian market via trade financing and project financing. The purpose of opening a representative office in Ulaanbaatar was to collect abundant information and meet the needs of our clients. This article will provide information about the success stories of Japanese companies, business opportunities in Mongolia and foreign relations.
First of all, let’s cover the entrepreneurial paths of Japanese companies and the potential business opportunities in the Mongolian market. Of all the companies with Japanese investment, Mobicom Corporation—the largest representative of the telecommunications industry—has been at the forefront in achieving huge success. As of today, more than half of the cellphone owners in Mongolia receive their services from Mobicom alone.
A year before Mobicom was established in 1994, a tender bid was announced by the government of Mongolia for a permit to start a business in the telecommunications sector. At the time, Japan had only a 3 percent penetration rate in the cellphone carrier market, and increasing that was considered a challenge for Japan. Nevertheless, Mobicom was established as a joint venture between Japan and Mongolia during a challenging time.
It must have been difficult to justify this investment idea for Mongolia’s telecommunications market to the Japanese company. There were many businesses with no real leadership; there was no apparent winner in the telecommunications sector to speak of at the time as well. However, many successful business stories have been made in Mongolia as one of the representatives of burgeoning economies.
Additionally, a Japanese company has been contracted by the Civil Aviation Authority of Mongolia to lead construction of a new international airport. The total cost for construction is estimated at 50 billion yen, and one of the loan requirements will be that Japanese technology represent over 90 percent of all applicable technology at the airport. The new airport will have a 3,600 meter runway, receive 2 million passengers annually and have 33,000 square meters available for its terminal. The total size of the airport will be equivalent to the size of the Komatsu Airport in Japan.
There are four business arenas which are attractive to Japanese companies in Mongolia.
The foremost attractive area is agriculture. The agriculture sector is considered a sector of strategic importance, and Mongolia has demonstrated a desire to ease off dependence on food and agricultural goods produced in China. In spite of the vast terrains across the country, Mongolia lacks the technological capability to manage agricultural goods, and hence, storing vegetables and fruits by acceptable standards is deemed an attractive business opportunity.
One of the most recent examples of this was a Japanese company’s introduction of green house production. It is impossible to plant greens and other vegetables outdoors during the wintertime. Moreover, imported vegetables don’t ensure food security. Therefore, the all year round production of rare vegetables and greens has been initiated and the produce is currently available in the market.
Japanese technology for water treatment and artificial lighting has been applied to the production of fresh vegetables and greens in greenhouses. The moisture, carbon dioxide and calorific value are controlled by a remote system.
An over 100,000 square area at close promixity to Ulaanbaatar has been devoted to greenhouses that will produce a variety of fruits and vegetables, such as strawberries, cucumbers and salad greens. Recently, modern technology has allowed shrimp farms in dry places. Some Mongolian entrepreneurs have shown interest in shrimp farms and some projects that will utilise Japanese technology are well underway.
Mutton and beef are widely used in Mongolia, whereas fish consumption had for a long time been next to none. However, Mongolians have been consuming seafood for a decade, which is considered a relatively young business opportunity.
The second most attractive sector is the construction sector. Major infrastructure work and development are on the rise, and more residential apartments, bridges, roads, canals and water pipes are needed for further growth. These inftrastructure development initiatives cannot be sourced locally, hence the reliance on Japanese technical capacity and investment. Experts from Mongolia have been continuely sent to the construction factory of Hokkaido in order to learn about the leading Japanese technology with resistance to the cold. Many Japanese companies have stepped forward to take part in the construction of apartments and houses in Mongolia. Looking at the fact that the Japanese style of kitchen and its user friendly electronic goods are widely respected for their ease of application in modern households, Japanese technology has great market potential in Mongolia.
The third attravtive sector is the autotrading business. One phenomenon that puzzles everyone is that more than half of the automobiles in Mongolia are from Japan. Gasoline in Mongolia is very expesinsive because it is mostly imported from Russia. Morever, road conditions are not so great, and the temperature reaches -30 degrees Celsius due to the harsh climate. Japanese cars are high in demand because of their safety, durability and better gas milage, especially the SUV and hybrid cars. If the tax on car exports from Japan was reduced, the market for car sales and automobile services would expand significantly. Other services related to cars include repairs to motors and electrical damage incurred because of repairs made by inexperienced auto repair workers and a lack of spare parts found locally. Accordingly, there will be a new market if Japanese companies with a high technological capacity fill in the services gap for automobiles.
The fourth attractive sector for Japanese companies is improving air pollution. Ulaanbaatar, the capital city of Mongolia, becomes the most polluted city in the world during its peak cold period in winter. Over 500,000 city residents consume coal and wood logs in order to fend off the cold weather. Residential apartments and accomodations built 20 years ago are heated by coal, which emits a significant amount of air pollution. Additionally, Ulaanbaatar is surrounded by four mountains, which leaves the level of air pollution at dangerous levels.
Recently, a Japanese waste disposal company opened negotiations for the installation of an air pollution filter that would filter out pollution emitted from a coal-fired boiler at a school construction site. The Mongolian government has pledged to improve the environment, which I think is a significant step in itself in fighting against air pollution.
The next significant point of importance is to discuss cooperation between Mongolia with Japan, China and Russia. Strategically located between China and Russia, Mongolia is able to balance relations with both its neighbours, in addition to the “Third Neighbour” nations such as Japan, America, Europe, and Middle Eastern countries.
Between July and September of 2014, the Mongolian government signed agreements with Japan, China and Russia. On July 22, President of Mongolian Ts.Elbegdorj visited Japan and met with Shinzo Abe, the prime minister of Japan, where they collectively agreed on an economic partnership agreement. The Mongolian president proposed cancelling the existing 5 percent customs tax on Japanese car exports in the next 10 years.
Miso, soy sauce, Japanese alcohol and vodka are also proposed to become customs duty tax-free so that Japanese food products will have a better opportunity to spread through the market. Concurrently, Mongoia has canceled an 11 percent customs duty tax on Mongolian cashmere products to Japan. This is the fine result of the 15th Japanese-Mongolian Economic Partnership Agreement. The first bilateral economic partnership agreement was aimed for offsetting the dependency on China and Russia. The Ministry of Education and Science of Mongolia in partnership with JICA announced that they would send 1,000 outstanding students to Japan for physics and other technical training initiatives under the umbrela framework of supporting the education system of Mongolia.
This educational program will produce professionals who are experts in the field of engineering across air transport, roads and buildings which meet international standards. In addition, the Trade and Development Bank of Mongolia (TDB) opened a representative office in Tokyo on July 22. TDB shall be responsible for providing information about the Mongolia market economy to Japan in order to increase foreign direct investment, obtain capital and bring investors.
Let’s focus on China again. Xi Jinping, China’s president, paid an official visit to Mongolia on August 21 and 22. This visit of the president of the People’s Republic of China was the first high-level visit of a Chinese official to Mongolia after 11 years. Over 26 cooperation agreements have been signed across various fields such as China-Mongolia diplomatic relations, economy, trade, transportation, banking and finance, culture, and minerals and mining.
Foreign trade between the two countries by 2020 is expected to reach a target of USD 10 billion. The additional agreement stipulates that in three years’ time, foreign trade will reach as much as USD 2.44 billion, or about 1.5 times today’s total trade. That would have a large impact on increasing Mongolia’s foreign exchange reserves. Within the framework of the foreign exchange trade, China will additionally supply more currency, equivalent to USD 810 million. Foreign currency reserve risk will be minimized with further financial support from China.
On September 3, Vladimir Putin, the Russian president, paid an official visit to Mongolia. Russia currently owns 51 percent of the Ulaanbaatar Railway Joint Stock Company, and 49 percent of Erdenet Mining Corporation. On the back of rail transportation for minerals, the trade turnover between the two countries by 2020 is targeted to reach USD 10 billion, from USD 1.6 billion in 2013. Mongolia intends to build a dual-gauge railway line by 2020 with routes from Sukhbaatar, Ulaanbaatar, Sainshand to Zamyn-Uud, and the capacity for 100 million tonnes of freight annually. Thus, it will be the nearest railway link to connect Asia with Russia and Europe.
Russia has announced its support for meeting the demand for beef, mutton and meat products from Mongolia. Russia and Mongolia have reached an agreement that Mongolian passengers will travel to Russia visa-free. In general, Vladimir Putin’s visit to Mongolia lasted only five hours, which did not imply much significant support compared to the presidential vist to Mongolia by China.
Hereby, we have intended to give a clear picture of the current situation and the general overview of Mongolia.
There are three concerns we must consider with importance:
First, the underground mine development for the second phase of the Oyu Tolgoi mine is still uncertain.
Second, macro-economic trends are worthy of discussion. It is crucial to pay attention to foreign exchange reserves as it is not easy to control and strengthen economic stability. There is no optimal level of foreign exchange reserves as clearly defined in textbooks, but there are benchemarks. The “foreign exchange reserves/import” ratio should be more than three months of imports while “the foreign exchange reserves/short-term debt” ratio should be the equivalent of one year’s payments.
Third, foreign direct investment towards the mining sector is once again becoming active, and China seems to be taking the lead. In other words, it is important to carefully watch direct investment from China. As a developing country, Mongolia has medium and long-term growth potentials on the back of copper, coal and other mineral resources despite some management issues. Thus, keeping the above-mentioned three concerns in mind, we will carefully watch future development trends of the Mongolian economy. The Bank of Tokyo-Mitsubishi UFJ Representative Office will do its best in assisting with the potential economic growth.
SOURCE: Mongolian Economy