Japan: the forgotten opportunity

Japan: the forgotten opportunity

The $4.8 billion friendly bid by Tokyo-based advertising company, Dentsu, for Aegis Group made headlines last week, and today, Dentsu has hinted that it may make more headlines soon.

The Aegis deal was news here because the London-based ad agency bought most of the company of media-buying identity, Harold Mitchell, in 2008. If the deal goes through, another $200 million will slip into the coffers of the already-wealthy Mitchell.

Dentsu’s stated intent to do more deals reminds leading companies of Japan’s potential as a customer and a financial backer, a fact that has been obscured in recent years by the widespread business focus on China and India.

Japan is Australia’s second largest trading partner, and has recently become the third largest investor in Australian companies. As at December 31,2011, Japan had $117.6 billion invested in Australia, according to Australian Bureau of Statistics data.

Australian exports to Japan in 2011 were $50.5 billion, a 19% share of Japan’s imports and an increase in export value of nearly 16% from the previous year.

“Japan is still a big and rich economy,” says Christopher Findlay, the executive dean of the Faculty of Professions at the University of Adelaide, who has studied the economic relationship between Japan and Australia.

In 2010-11, the Foreign Investment Review Board approved 120 investments from Japan, worth $6.6 billion. Most of the money ($2.9 billion) went into minerals exploration and development, followed by finance and insurance ($1.3 billion) and, surprisingly, manufacturing ($1.2 billion). Real estate attracted $598 million, and services (the sector to which Aegis fits) received $590 million.

In an indication that the world is starting to take notice of Japan again, US company Dow Jones bought out its Japanese partner to take full control of the Wall Street Journal’s Japanese-language website, with editor in chief Robert Thomson reportedly saying: “It is a sign of our commitment to Japan, which is the world’s third-largest economy and seemingly at the start of a new phase of global expansion.”

So why has Japan fallen off the radar as a destination for sales and for foreign capital? “The sense of excitement and opportunity seems to focus on the fast growing economies,” Findlay says. “Change grabs attention.”

Japan has suffered a long period of economic stagnation during the ‘80s and ‘90s and still has low growth rate. It grew 4.4% in the 2010 calendar year, then shrank 0.9%  in 2011 following the devastating tsunami in March last year that wreaked havoc on the nuclear power plant in Fukushima, killing over 19,000 people, contaminating nearby farms and forcing manufacturing giants such as Toyota,  Fuji, Sony and GlaxoSmithKline to halt operations for a time.

The effects of the Tsunami are contributing to closer ties as Japan seeks to import foods it cannot produce locally (such as rice) until the tsunami and radiation issues are cleared up.

Another factor driving Australian and Japan closer together is the he economic troubles in Europe and the United States. Japan and Australia used to sell a lot of their goods to markets in these two regions. Now those markets aren’t buying as much as they used to

And with Japan’s local economy depressed for decades, some of its cashed-up companies are looking overseas for opportunities.

It is not an unexpected shift, Findlay says. “It is all part of the standard story as you go through the development process: as you get richer and richer you lose competitiveness in some sectors,” he says. “Japan is brilliant at organising very complicated supply chains all over Asia, and then figuring out what to keep in Japan.”

The service sector is likely to an area of interest in future, Findlay suggests. “They will take the same view of Australia. We are not the place where you would make too much, because we are too expensive, but they will want to buy our services. Design and marketing would be one area [of interest].”

Accepting foreign investment is an ideal way to build business relationships with the valuable Japanese market. “Foreign investment connects us to foreign markets,” Findlay says. “If people are going to become experts in delivering services to Japan, they have to build networks, manage contact with clients. Services is not like manufacturing where you deliver a car, it is hands on and face to face. Setting that up is a lot of work.”

Although there is no Japanese-Australia free trade agreement (as yet), and Japan still has tariffs on parts of its industry, many Australian companies already have with deep relationships with Japanese customers built up over many years.

Cultural barriers are a furphy, says Findlay. “I think that is overstated and not a major constraint. Sure, relationship management and context matter, but that is the case in all business relationships.”

Recent Japanese investments close to home

Purchasing Company

Target

Amount

Year

Dentsu

Proposed takeover of Aegis Group, as  Denstu looks to broaden its global footprint.

$4.8 billion

2012

Mitsubishi Corporation

Remaining fifty per cent of Murchison Metals’ infrastructure and supply chain company, Oakajee Port and Rail, Geraldton, WA

$325 million

2010

Japanese Bank for  International Cooperation (JBIC) – a government financial institution and export credit agency.

Has been charged by the Japanese government to invest in Infrastructure projects aimed at securing raw materials.

“A lot of Australian organisations have a great appetite to partner with Japanese investors as opposed to Chinese, who are traditionally more aggressive and want to take a greater stake.”

$100 billion

2010

Mitsubishi Corporation

Bought a stake in Tasmanian Dairy Products

24%. Amount undisclosed

2012

Nikko Asset Management

Invested in Australian government bonds

$2 billion

2012

Mitsui & Co and Mitsubishi Corporation

14.7 per cent stake in Woodside Petroleum’s liquefied natural gas construction projects.

$2 billion

2012

Source: LeadingCompany

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