Australian companies stand to benefit from a steadily increasing surge of Japanese investment.
Japanese investment is surging as companies in the Asian nation look offshore for growth opportunities, takeovers and joint ventures. To benefit from the wave of capital, Australian companies need to invest time in getting to know the Japanese investors and understanding how governance and management differ.
With its migration-fuelled population growth and comparatively young population, Australia offers a growing market that can’t be matched by Japan’s declining and ageing population. As a stable country with a strong rule of law, Australia is also seen as a relatively safe investment destination. Additionally, the two countries have become more geopolitically-aligned as global uncertainty has increased.
Many Japanese companies are flush with cash, with strong balance sheets swelled by record corporate profits. In March 2023, the Tokyo Stock Exchange (TSE) urged companies trading at share prices below their book value to map out and announce measures to shore up their figures. This has prompted some to look offshore.
An increasing focus on environmental, social and governance targets is also pushing capital to Australia, with ESG considerations an important factor in an acquisition, according to the Herbert Smith Freehills (HSF) Japan-Australia Investment Report 2023. Other governance changes in Japan include a goal to have 30 per cent of board seats filled by women by 2030, up from 13.5 per cent in 2023, and for the 1600 companies listed on the TSE’s prime market to disclose key information in English by March 2025.
Certainly, more Japanese capital is flowing into Australia. Japanese foreign direct investment rose to a record $133.8b in the 2023 financial year, making up 12 per cent of all foreign investment to Australia, the report found.
Mergers and acquisitions also increased significantly in 2023, even as global M&A declined. Notable acquisitions included Kirin’s $1.9b takeover of vitamin company Blackmores, the $1.7b acquisition of 7-Eleven Australia by Seven & i Holdings (7-Eleven Japan), and Mitsubishi UFJ Trust Bank’s $1.2b takeover of ASX-listed Link Group, a superannuation and share registry administrator. Takeovers of ASX-listed companies were generally executed via a scheme of arrangement, whereby the bidder arranges a fixed price with the target company. Japanese acquirers appear to favour the certainty this provides.
Australia is the largest supplier of energy to Japan, and along with LNG, the Japanese are also investing in renewables, according to the HSF report. Resources and real estate remain a popular investment, particularly in the build-to-rent sector.
More recently, Japanese companies have been investing in Australian innovation and technology companies, such as Link Group, and the $9.1b acquisition of software maker Altium by Japanese chipmaker Renesas Electronics earlier this year. HSF identifies medical/healthcare, defence/space/ cyber, and tourism as emerging trends.
Ian Williams GAICD, a consultant with HSF, who wrote the law firm’s Japanese investment report, expects Japan’s investment wave to continue due to its ongoing need for energy and its demographic profile. As Japanese companies make acquisitions, they are adding Australian directors to boards, either of their Australian subsidiary, or in some cases, to the main company board in Japan.
Cultural differences
According to Williams, a key difference between Japanese and Australian boards is that where the Australian directors might bring ideas to meetings for a decision, in Japan, the work is done and the decision often made before the meeting. In a practice known as nemawashi, Japanese directors hold discussions among themselves ahead of the meeting. But this isn’t just rubber stamping a decision. Vigorous discussion takes place before a meeting while a consensus is being built.
“The results are the same, the quality of governance is the same, it’s just a different way of getting there,” says Williams, a director of several Australian companies and chair of home builder NEX Building Group, majority-owned by TSE-listed Asahi Kasei. “You have a lot more time to tease out issues and for different perspectives to be taken into account in building consensus.”
Williams points to other differences that Australians should be aware of. Where Westerners might itch for a quick response, many Japanese executives are a lot more contemplative and will come back to a topic a couple of times. “You have to be very careful to understand if they are expressing a personal view as opposed to what the company would like to do, or the group would like to do,” he says. “Sometimes, we would mistake politeness for agreeing with something.”
Striving for consensus
Melanie Brock has lived in Japan for 30 years, after first visiting the country as a student, and is a non- executive director of Nikkei 225 companies Asahi Group Holdings, Kawasaki Heavy Industries Ltd and Mitsubishi Estate Co Ltd. She says there’s a common misconception that there isn’t the same opportunity for spirited and robust debate as on Australian boards, but this hasn’t been her experience. Even so, there are differences, such as fewer interjections around a Japanese board table.
“Japan is a group versus individual and consensus-based society, so there's a hope that when presenting your ideas, somebody could at least see your point of view, understand the risks you might see, and therefore understand the reason for you having put that viewpoint forward,” says Brock.
As a foreigner, Brock can provide a perspective on how to change or adapt to meet the needs of other markets. She also advises how the story of “Japan Inc” can be better told to demonstrate what it brings to the table. “There is a great deal of willingness to hear from the non-executive director and to understand how their views might be different and how they could impact on the business in a positive way,” she says.
Brock expects Japanese investment in Australia will continue to grow, but cautions against taking this for granted. “We need to learn more about the challenges that face corporate Japan — and/or Japan in general — and find out what is driving some of these shifts,” she says. “Then we can make sure we’re providing opportunities that fit within that.”
Paper chase
David Martin GAICD was CEO of ASX-listed paper distributor Spicers Australia when it was bought by Kokusai Pulp & Paper Co Ltd five years ago. His experience of selling the business was that the Japanese buyers did a lot of analysis prior to any meetings and had a stronger opinion on what the value of the business was, compared with private equity buyers from the US or UK, for instance.
“The negotiation process was actually quite short,” says Martin.
He remained CEO of Spicers after the acquisition and sat on the Australian subsidiary’s board, which he says is mostly operational and focused on transparency and helping Japanese board members understand what is going on in the business. “You’re telling the trust story as much as the operational performance,” he says.
In June, he joined the main board of the parent company. He notes that the Japanese are more likely to be interested in a business with a long track record. “A 25-year-old business with strong bones and strong professional management would certainly be more attractive than a startup that’s done great things for three years,” he says.
The timeframe fits with the longer-term view that Japanese businesses typically take — working to a six-year plan rather than the three years favoured by many Australian businesses. And while Japanese boards will still look at monthly numbers, it’s mainly to be sure that the six-year plan is still on track. Martin says Japanese business leaders can also have a broader view of the stakeholder than is sometimes the case in Australia.
Learning the ropes
Debra Hazelton GAICD, vice president of the Australia-Japan Business Corporation Committee, says that sitting on a Japanese board requires a lot of patience and dealing with ambiguity.
“When people first come to Japanese decision- making, it can drive you nuts, because everything seems to take so long and there’s so much detail and analysis required,” says Hazelton, a non- executive director of Persol Holdings Co Ltd, a TSE-listed human resources company.
“But once the decision is made, then implementation is smooth, fast and reliable. You don’t get second-guessing and re-investigation halfway through.”
She says there is also an asymmetry of information between directors, more so than in Australia, because the executives who sit on the board could well have spent their entire careers with the company. Therefore, Australian directors will occasionally have to deal with some scepticism from their Japanese colleagues that they have anything much to contribute.
Make it personal
Tom Yates PSM GAICD, who has spent much of his career at the Australian Trade and Investment Commission (Austrade) focused on Japan, says Australian businesspeople need to spend more time building up personal relationships with Japanese counterparts and to demonstrate a long- term interest. He suggests that business leaders wanting to engage with Japan take advantage of some of the Austrade visits programs.
“Australian companies that have put the effort into the Japanese marketplace will rarely come away with nothing,” he says.
Yates outlines a few more important things to be aware of. The person who speaks English in a meeting might not be the most important person there. Prompt follow-up on a meeting is expected. Decisions are often made on a consensus basis, rather than by an individual.
“If you put in this time and investment, follow up and do the things you say you're going to do, you can almost be guaranteed of repeat business from the Japanese,” says Yates.
This article first appeared under the headline 'Big in Japan: Trade Tide Rising’ in the September 2024 issue of Company Director magazine.
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