Surfing Synergies: The Perfect Ride Ahead for Japanese Investment in Australia

Japanese investment in Australia is building on its traditional base in energy and resources and encompassing new sectors including retail and consumer, health sciences and technology.

The investment base of Japanese companies in Australia is rapidly broadening as leading firms pursue targets in Australia that can help safeguard and diversify earnings growth.

"There is external pressure to enhance shareholder value.  Global geopolitical risks and macroeconomic factors, such as the weak yen, have led foreign investors, particularly funds, to increase their investments in Japanese equities," says Akane Yoshida, Group Vice Chair, Chief Commercial Officer and Chief Investment Officer of PwC Japan. 

"The reduction of cross-shareholdings among Japanese firms and the rise in foreign shareholders have resulted in a higher proportion of foreign ownership in Japanese companies. This shift has driven Japanese companies to enter growth markets and acquire businesses with innovative business models," she adds.

The recent acquisitions of Australia’s Blackmores (Kirin), Bondi Sands (Kao Corporation), 7-Eleven (Seven & i Holdings), and other deals in retail and consumer-orientated sectors typify this trend. 

This trend promises to have significant ramifications for the Australian economy and further deepen the economic ties between Australia and Japan.

In this third instalment of PwC’s Opportunity Knocks series, we look at what’s driving this trend in terms of “push” factors from Japan and “pull” factors in Australia.

We look at what this means for businesses in Japan and Australia and how they can benefit from the next wave of the Japan-Australia trade and investment story.

^{The Next Wave: Japanese Investment in 2023-24}

^{Source: PwC Research}

The past year has seen a host of Japanese acquisitions of profitable Australian companies in a diverse range of sectors from retail and consumer to technology.

The trend arguably began a decade ago with investment (both organic and acquisition) in Australia's food and beverage, fashion and financial services sectors from giant Japanese names such as Kirin, Uniqlo, Muji, Asahi, Dai-ichi Life and more.

The success of these investments has paved the way for more growth with record deal volume and value in 2023-24, including some of the largest acquisitions listed in the table above.

In the case of Link Administration, Japan’s Mitsubishi UFJ loomed as something of a saviour after years of challenges and financial underperformance.

For brewing giant Kirin, Australian health supplement manufacturer Blackmores offered a chance to grow its health sciences business to offer a point of difference to the core beer business and diversify the company's revenue streams.

And for Blackmores, Kirin was a partner that they felt would continue to grow the business.

“I got fairly comfortable with them. They’re ethical, they’re strong on culture. Private equity, they would have slashed and gone around sacking people,” founder Marcus Blackmore told The Australian Financial Review.¹

Melbourne-based self-tanning company Bondi Sands found a partner in Japan’s Kao Corporation that its founder believed shared their principles and values, as well as offered a compelling price and an ability to grow the brand beyond Australia, in particular the markets in North America, South America and Asia.

For 7-Eleven, the Japanese owner of the brand was a logical acquirer. A successful operator of convenience stores in Japan and abroad, it had the capital and the knowledge to take the Australian family-owned business even further.

Japanese convenience stores are world famous for their innovation, range of products and shopping environment and it is safe to assume that methods, ideas and products from the Japanese operation could be used to create value and differentiate 7-Eleven in Australia from its competitors.²

And in the largest deal of all, Japanese chip maker Renesas concluded the biggest ever Japanese takeover of an ASX listed company when it acquired Altium for A$9.1bn.

The Australian firm offers design tools for creating electronic circuit boards and will help Renesas to fulfil its aim to be a global leader in chip production.

^{Source: Japan-Australia Investment Report 2023}

Toru Aikawa, PwC Australia's Japan Deals Leader says: "The M&A expenditure of Japanese companies in 2023 has significantly increased compared to the previous year, with cross-border M&A leading the surge. The number of Japan-Australia cross-border M&As, which we analyse annually, has also seen an increase in 2023.

"In terms of investment amounts, the resource and energy sector continues to play a critical role, with FDI from Japan showing a net increase over the past decade. Looking at the number of Japan-Australia cross-border M&A deals, in addition to deals in the resource sector, many cases have been announced in the non-resource sectors over the years. This trend persisted in 2023. The sectors involved are diverse, including renewable energy and decarbonisation, information technology, financial services, wholesale, retail, real estate construction, and others.

PwC Australia’s Retail and Consumer Deals partner Andrew Pryde says Australian retail and consumer businesses are often considered 'fast followers' in terms of trends and technology and are open to overseas expansion.

“At a certain size, successful consumer will 'outgrow' the Australia/New Zealand market  and look to tackle larger international markets.

“They are often torn between the US and the UK/EU, which are culturally similar to Australia in terms of consumer preferences but have their challenges whether it be intense competition in the US, or economic stagnation in the UK and EU.

 "Asia offers close proximity, but different consumer preferences depending on the product offering.

"Being acquired by or partnering with a Japanese parent can often provide the best of both worlds.  It opens up opportunities both in the APAC market, but also gives Japanese business' strong reputation globally and open doors in North America, Europe and beyond."

It’s clear from the breadth and value of deals that the investment relationship is entering an exciting new phase.

Australia and Japan have had a strong economic relationship since the 1957 Australia-Japan Commerce Agreement that’s largely dependent on investment from Japan to help facilitate commodity exports from Australia to Japan in the agricultural, mining and resources sectors.

Public sentiment towards Japan is very strong in Australia.

Japan has continued to be Australia's "best friend in Asia", the most trusted country that "acts responsibly in the world" and for Australia, according to the annual Lowy Institute poll, which surveys the Australian public's views on foreign relations.

This year marks the 10th anniversary of Japan-Australia Economic Partnership Agreement (JAEPA). The Agreement between the two countries cemented the status of the relationship and has helped create the foundation for the latest wave of investment from Japan.  "JAEPA has been a great success not only on the forefront of bilateral trade, but also in strengthening the principles that both countries stand for, economically”,³ according to H.E. Justin Hayhurst, ambassador of Australia to Japan. 

Japan remains Australia’s second-largest trading partner and second-largest export destination, and recent years have seen even greater collaboration.

But more than that there are strong “push” factors in Japan and “pull factors” in Australia that have combined to create an especially fertile environment for investment that’s helping to fuel this trend.

There’s a range of compelling reasons for Japanese companies to seek investment opportunities abroad.

A shrinking population and dwindling consumption in Japan have made seeking growth offshore a necessity for many firms.

Japanese companies have the financial firepower to start acquiring offshore subsidiaries including access to the lowest cost of capital in the high-income countries and deep pools of household savings cash.

The Japanese government and regulators are actively encouraging companies to look abroad with tax concessions designed to help them to establish foreign streams of revenue.

The PwC 27th Annual Global CEO Survey shows that an increasing number of Japanese CEOs are considering major acquisitions as a means to unlock value creation opportunities.  And the percentage of Japanese companies planning to make a major acquisition in the next three years has increased significantly compared to the last three years to 45%.

^{Q. Have your company made a major acquisition (more than 10% of assets) in the past three years ? / in the next three years? (Showing 'Yes' responses)}

^{Source: PwC 27th Global CEO Survey}

After a slowdown in M&A activity in 2022, 2023 saw the value of M&A deals involving Japanese companies climb sharply, accounting for 22% of Asia’s entire transaction volumes for 2023.⁴

And that momentum has continued into calendar 2024, with the London Stock Exchange reporting that more than $17bn of overseas acquisitions by Japanese companies have been announced this year.

Akane Yoshida says Japanese firms are under pressure to increase shareholder value through offshore acquisition and they are well placed to execute on that.

“They can access capital at low rates helping to drive up the rate of return of offshore acquisition,” she says.

“The actual interest rate remains exceptionally low compared to other high-income countries. Japanese companies have large pools of retained earnings and large amounts of cash on hand, which makes it easier for Japanese companies to make major acquisitions."

In Australia, 2023 saw a dramatic increase in M&A activity from Japanese firms with both deal volume and value up significantly.

Australia is a familiar investment destination with a stable policy framework for foreign investment, particularly from a long-term economic partner with shared values. Australia’s recently announced changes to foreign investment regulations are likely to benefit friendly nations such as Japan.

Nothwithstanding productivity challenges and slowing growth, on the whole Australia remains a vibrant economy where Japanese investment is welcome and can fulfil a need.  Australia has been Japan’s second-largest foreign direct investment destination in the past two years and has ranked in nineth, third and seventh in the prior years.

Australia's attractiveness is bolstered by its relatively high GDP per capita and consumer spending, making it the sixth largest consumer market globally. It also benefits from robust and transparent legal, governance, and regulatory frameworks, including ESG regulations.

^{Japan's outward foreign direct investment (FDI) flows in 2023-2019, by destination (in billion Japanese yen)}

^{Source: PwC Research & Ministry of Finance, Japan}

Australian companies have seized on Japanese investment as a way to source capital to develop a business or make a strategic exit from a business.

The smaller scale of the Australian economy means, for many companies, the sources of domestic capital or acquirers are relatively few.

Even successful Australian companies can end up a big fish in relatively small pond lacking the building blocks to expand in other countries.

Andrew Pryde says size also counts in terms of the relative scale of companies.

“Japanese companies can acquire a company that’s a market leader in Australia that is still comparatively small from their perspective,” he says.

Companies are looking for deep pools of patient capital to provide stability and support. One example is home builder Henley Homes, which actively promotes that it has a $7bn parent company in Sumitomo Forestry Group. It’s a valuable point of difference for them amid a string of collapses in the Australian home building sector.

Australian companies are also looking for the technological advances and a broader global footprint that Japanese partners can often provide.

The Japan-Australia Economic Partnership Agreement (JAEPA) of 2014 formalised the Japan-friendly investment climate in Australia and paved the way for further economic co-operation, while at the same time investment from China has declined.

In this environment, companies have watched Japanese investors execute a string of Australian acquisitions, and that momentum has put investment from Japan on the radar of companies across a range of sectors.

Australians are also familiar with the benefits of foreign investment, including the recent wave of Japanese investment in retail. Consumers benefit from new and innovative products, pricing pressure and improved service and customer experience in some cases.

“Australia is very comfortable with Japanese investment," Richard Andrews, CEO of the Australia Japan Business Co-operation Committee (AJBCC) says. “Our shared economic history and values, as well as the trust built over decades of mutually beneficial business activity, are growing more important in light of increased global and regional geopolitical uncertainty, and recent years have seen several large Japanese acquisitions in Australia.

“They haven’t all been successful, but many deals have resulted in financial and strategic success for the acquirer and the target.

“The business world in Australia knows that Japanese investors represent a deep source of patient capital and Japanese acquirers are normally focused on helping the subsidiary to grow beyond the limitations of its previous owners.”

Finally, Pryde adds that the relatively similar time zones of Australia and Japan is attractive from the point of view of fostering alignment between head office and local management.

Culture is Key to Successful Australia-Japan M&A

PwC’s report “Unlocking Japan’s potential: how culture can drive success in post-merger integration” pointed out that cultural factors can have a significant negative impact on business performance by as much as 57 per cent, compounded by challenges in engaging overseas teams, communication across borders, conflict resolution, retaining talent and adequately preparing executives to manage overseas subsidiaries. 

^{Ranking of cultural dimensions}

^{Source: 2019 PwC Strategy& Research}

Cultural considerations are vital in successful M&A deals between Japanese acquirers and Australian targets.

For Australian firms contemplating selling to a Japanese suitor, PwC Australia's Deals, Strategy & Operations partner Tom Sorrell says often a change of perspective is needed for target companies used to dealing with Western investors and governance boards.

Japanese firms, he says, are focused as much on the medium to longer term than the immediate horizon.

He tells firms: “Don’t sell the dream about next year, you are better presenting a vision for the 10 or 20 years.

Sorrell says Australian firms are often unprepared for the level of due diligence Japanese suitors will want to perform before committing to the deal, as well as after Day 1. This involves providing a thorough assessment of relevant markets, the company’s strategy, management of risk and cultural comparability.

They also need to be cognisant of the time needed to reach decisions under the consensus-driven model of management in a Japanese company and for documents and manuals and presentations to be translated back and forth.

“Be ready and be patient,” he says.

On the Japanese side, acquirers need to be conscious that extended delays can mean paying a higher price.

"The decision making time required by many Japanese companies is much longer than that of many foreign companies," PwC Japan's Akane Yoshida says.

“There are multiple levels of hierarchy within Japanese companies, and the consensus and approval for decision making is based on a bottom-up system.5

“This is a disadvantage when trying to get the best terms for an acquisition of a foreign business, and it could potentially lead to relatively high acquisition prices.”

Yoshida says its important to get buy in from employees on both sides of a deal as soon as possible to speed the process through.

“Successful M&A organisations understand that transactions create significant uncertainty for employees in both the acquirer and target companies,” she says.

“They commit to inclusive change management programs early in the deal life cycle, increasing employee understanding and improving the speed and effectiveness of decision making to bolster workforce confidence.”

Challenges to M&A success

In most M&A deals there will be a range of suitors for a target. And if one suitor is from abroad and represents a different language and different culture, then there are clearly barriers to overcome.

Culture is critical for high-performing organisations. It is the catalyst that brings together all the key building blocks of a company – the strategy, the operating model, the workforce, and more.

M&A with an Australian or Western company might be easier, but in some cases that will result in an inferior option and value left on the table.

But to crystalise this additional value, both parties need to meet in the middle and recognise the fundamental role that culture plays.

Some challenges to overcome in this kind of cross border M&A are perceptions of risk, time horizons and communications.

^{10 key findings from PwC’s 2023 M&A Integration Survey}

^{Source: PwC 2023 M&A Integration Survey}

PwC Japan's Group Vice Chair Akane Yoshida says managing risk is paramount for Japanese companies in many deals with some acquirers putting a lot of focus on understanding threats to the target company’s operations and environment before committing.

“In many cases, Japanese companies are risk adverse, especially when acquiring a company in a growth market country,” she says.

“In some cases, they view the existence of risk as a problem and will not proceed with a deal unless it is completely certain risks are accepted and a plan to remediate them after the acquisition is drawn up and the deal is proceeded with.”

This all adds to the timeframe and it is important to communicate clearly on overcoming these barriers.

Another possible challenge, not just to Japanese M&A in Japan, but to Japan’s interests across the world is the weak yen. The devalued yen, is now at a 34-year low, has boosted earnings in local currency terms from existing offshore subsidiaries for Japanese companies, but it has made making new acquisitions more expensive.

Like the US dollar, the Australian dollar remains very strong against the yen.

Post Merger Integration

Successful post-merger integration necessitates meticulous planning guided by clear vision and strategy.  It also takes strong leadership, transparent governance and efficient execution, guided by culture and human capital integration. By concentrating on these imperatives, businesses can maximise the value of their merger or acquisition and achieve long-term success.

The extent to which an acquisition will be integrated into the parent company varies according to the priority of the acquirer.

If it is a bolt on acquisition with few obvious synergies, then it may be left to run its own race in terms of strategy and operations.

But if it is a business that is closer to the acquirer’s core, then expect a tighter integration perhaps with Japanese managers playing a hands-on role in the target company.

Whatever the case, post-merger integration requires careful thought and is often pivotal to the success of an acquisition. 

^{Post-merger integration common issues}

^{Source: PwC Research} 

It is important to communicate the strategy to the subsidiary effectively  and involve them in strategy design where appropriate.

From the acquirer’s point of view, it is important to have the right people involved in the integration. Having talent management and global mobility strategies helps to develop a bench of people who can perform key roles in integration.

Akane Yoshida says one common pain point to avoid is impatience developing within the acquired company with the slower pace of decision making in Japan in the aftermath of the acquisition.

“And the relationship during the M&A process that those leaders directly had with the Japanese parent company's executives may fade away, and those leaders may lose sight of their own career path and ultimately leave the company," she says. "In cases where the leadership of the acquired foreign company was highly valued, this can lead to an exodus of second-layer personnel, resulting in a significant loss of value.”

She says retention of key managers can be boosted by careful dialogue, so they understand the realities in the headquarters.

“It is also beneficial to establish appropriate KPIs for change management and flexibly design and provide incentives for achieving them.”

^{Integration spend has increased (% of deal value spent on integration)}

^{Source: PwC 2023 M&A Integration Survey}

Yasuhiro Hirabayashi, former PwC Japan Deals Leader, now on secondment at PwC Australia, says expanding into growing and stable markets such as Australia is an important strategy for Japanese companies looking to manage the growing complexities in the global economic environment amid geopolitical shifts and technological advancements.

"Success in this endeavor hinges on keenly observing market changes and having the capability to pursue a diverse range of M&A opportunities," he says. The trend of Japanese investment in Australia growing in scale and breadth is likely to continue.

The demographic trends and political settings in Japan continue to drive investment offshore in pursuit of returns.

And the strength of the business and political relationship between the two countries - underpinned by formal agreements - is another positive.

A recent report in Australia indicating that Japan could be included in the AUKUS expansion plan demonstrates the level of trust that exists in the bilateral relationship.⁶

The recent investments from Japanese consumer giants (Kirin, Uniqlo, Muji), financial services, real estate and technology firms provide clear proof points for new firms thinking of following in their footsteps.  Notably, as it was in the 1980s, the influx of Japanese investment is again having a noticeable impact on the Australian real estate market.  In 2023, Japan's outbound investment in real estate was $7.46bn of which 35% went to the US and 26% went to Australia (next was Canada at 14%). This investment in Australia was nine times higher than the past decade average.

One positive aspect of the return of Japanese investment in the real estate sector is that they are assisting in solving housing affordability and supply issues in Australia. For instance, driven by the growing demand for rental properties, the stability of the Australian real estate market, and supportive government policies, several Japanese companies have become major investors in the "Build-to-Rent" (BTR) sector. Many of these companies are collaborating through joint ventures with Australian firms, leveraging local expertise and resources to maximise their impact.

And as we've seen with Kirin which has made its third major acquisition in Australia in 2023 (see the case study below), having successfully entered the Australian market in 2007, it is much easier to sell your headquarters on stepping up investments in Australia.

The next exciting wave in the Japan-Australia trade and investment story is continuing to build.