Japan: Japanese Investment In Australia — Lessons Learnt

Last Updated: 20 March 2017
Article by Ian Williams, Damien Roberts and Natalie McDowell

SECOND INVESTMENT WAVE

Australia and Japan share an enduring history of business collaboration that has created significant value for both economies. From its need for secure energy, minerals and food supply, Japan became Australia's leading export destination in 1966-67 and remained so until 2009-10. Today, Japan is Australia's second largest foreign direct investor and trading partner.

Japanese investment into Australia commenced in the 1960s and was primarily achieved through minority interests in primary production joint ventures. As the relationship matured, the last decade has seen a distinct 'second wave' of direct investment in the Australian domestic market. These recent 100 per cent acquisitions have targeted revenue and profit growth as Japanese investors seek a natural hedge to Japan's demographic challenges of an ageing and declining population.

Learning

The economic opportunity for both countries from the second investment wave is immense. The potential learnings are also invaluable. Which factors were key to success, and are there other factors that could help maximise value from an Australian investment?

To test this question, Herbert Smith Freehills spoke with more than 30 leaders of Japanese and Australian businesses at the forefront of the second investment wave. Leaders were asked what factors they see as critical to extracting maximum value from an Australian investment.

The responses identified a number of 'success factors' considered crucial to extracting value. Unsurprisingly, Japanese and Australian businesses were seen as already adept at implementing many of these:

  • long term planning and available capital
  • an early circle of trust
  • robust and flexible corporate governance

At first glance, these elements might seem typical to any cross-border investment — however, they take on a unique form in the Australia-Japan business context.

Responses also pointed to areas where investors and their Australian counterparts could give more focus to maximise value from an investment.

SUCCESS FACTORS

Advantages from long-term planning and available capital

Two key post acquisition benefits from Japanese investment stood out:

The rigour of long-term planning a Japanese parent company brought to the Australian business

The disciplined approach to planning (sometimes with strategic horizons of 20 years or longer) caused the Australian business to think more strategically. This was especially true for companies which had been ASX-listed and focused on reacting to short-term market pressures. Some respondents also observed the longer term focus was attractive to both existing employees and talented people wanting to join the business.

Availability of attractively priced debt

Funding coordinated centrally from head office in Japan immediately improved operating returns.

Coupled with a strong parent company balance sheet providing equity to finance growth, this allowed for business expansion both organically and by acquisition.

Shinrai kankei – the circle of trust

A common observation was a relationship of trust entrenched among Japanese and Australian management at an early stage of engagement was key to bridging inherent differences in language, culture, time zone, operating assumptions and business style.

Three factors were regarded as key:

Leveraging the collective 'sempai' experience of the bilateral business community

A mentor relationship with an individual senior statesperson or a masterclass from specialists with a proven track record engaging with Japanese businesses were both identified by Australian business executives as helpful when contemplating engagement with a Japanese business partner.

These helped to informally or formally fast track the Australian business' understanding of the Japanese counterparty's business plan, motivations and cultural perspective.

On the Japanese side, there was less evidence senior management drew on external guidance prior to or during an investment. Japanese acquirers tended to focus on understanding the financial and operational aspects of the Australian business. After the initial acquisition phase, sometimes steps such as training on Australian workplace regulation and culture were taken. Feedback suggested that there was some value to be gained from this type of training earlier in an acquisition process.

Internal 'bridging champions'

The role of a visionary leader in the Australian operations with an understanding of the Japanese shareholder's objectives was one of the main keys to successful integration of the Australian business.

Leaders also said the appointment of a coach to guide senior management in Australia and Japan on expectations around communication and codes of conduct was invaluable. Often the shareholder representative director or another secondee from Japan to the Australian business was best suited for this role, due to their familiarity with the culture and processes of both organisations.

Test driving the relationship

A minority shareholding can provide a sheltered environment for management within the 'circle of trust' to become familiar with the strategy, business plan and practices of a shareholder business, without the market pressure for rapid positive results associated with an upfront 100 per cent acquisition.

An initial minority shareholding in the Australian business has often served as a proving ground for parties to test the compatibility of a relationship. According to Lion CEO Stuart Irvine, a high degree of trust now exists across the global Kirin and Lion business — helped by the longer term relationship formed from Kirin's initial minority 46.13 per cent shareholding in Lion Nathan acquired in 1998. Kirin completed the takeover in 2009. Similarly, Dai-Ichi Life's initial 29.7 per cent shareholding in TAL acquired in 2008 prior to takeover in 2011, allowed relationships of understanding and trust to develop.

Robust and flexible corporate governance

For a business to succeed in the bilateral context, it must have a corporate governance culture that balances the needs of Japanese investors — which identified transparency and control as priorities — with those of Australian business, who in many cases saw flexibility and clarity of purpose as paramount.

Respondents cited four main factors as fundamental to establishing this equilibrium:

Clear and decisive direction on strategic vision at an early stage

Australian respondents valued Japanese management who had a clearly communicated strategy for the business post acquisition and drove the process of testing that strategy with local management from an early stage of the acquisition process.

Firm, dynamic stewardship from senior Japanese management who were visionaries in their field also had a significant positive impact on being able to move swiftly from first engagement to completion of initial integration.

If the investor approached the acquisition with a 'launch and see' approach, it risked creating a period of strategic vacuum post acquisition. In the instances where this did happen, there was a loss of momentum while Australian and Japanese management came to a landing on who would drive post acquisition strategy for the Australian business.

Well-developed governance principles clearly delineating authority

Clearly defined authority limits documented at an early stage of the acquisition were commonly raised as a factor of success.

Lion chairman Sir Rod Eddington observed having foundation governance principles jointly developed at the outset gave Australian management the right degree of autonomy to use local industry knowledge for the benefit of the global business.

Authority limits were typically high level written principles stating the matters over which Australian management could exercise authority without separate approval from Japanese management and matters for which separate approval from Japan was required.

Although respondents reported ongoing negotiation between Australian and Japanese management over the scope of these limits, all respondents who had these arrangements in place agreed early stage implementation established a clear framework for decision-making that placed the business on a steady footing.

A balance of independent oversight and operational risk management

A flexible balance between adequate transparency for the Japanese shareholder and operational risk management for Australian management was repeatedly identified as a critical success factor.

Unsurprisingly, what constitutes balance differed significantly from sector to sector. In businesses operating in highly regulated industries like finance, a majority of external directors was key to achieving this balance.

In another highly regulated business, board composition featured an Australian managing director and shareholder representative non-executive directors. Over time this was supplemented by a separate advisory board of independent business people with recent industry-specific expertise and understanding of Australian regulatory requirements.

Shareholder representatives with high EQ (emotional intelligence), a strong understanding of the Australian business and a meaningful executive function

Japanese shareholder representatives were seen not only as critical to the Japanese investor but as adding significant value to the Australian business. This was maximised where the shareholder representative had:

  • a clear understanding of the drivers of the Australian business.
  • early experience with or an appreciation for the culture of the Australian business (whether based on comprehensive pre-arrival briefings or exceptional person-to-person skills).
  • a meaningful executive function within the Australian business. This aided in aligning interests with Australian employees and in maximising the value of reporting back to Japanese headquarters.
  • an ability to draw on an existing network of relationships across the Japanese business to make new connections at many levels between the Australian and Japanese parts of the business.

WHAT MORE CAN BE DONE?

Many respondents observed that synergies envisaged when first embarking on the acquisition had not been fully realised in the way initially anticipated. Often in these cases, the Australian business continued to operate as an integrated but essentially separate part of the global business.

This suggests opportunities remain to maximise the value of Australian investments. Responses touched on three main areas where additional value stands to be realised:

More rigorous testing of the original rationale for the investment

In one example, the initial business case for the acquisition was predicated on an ability to leverage the Japanese investor's existing broad relationships to cross-sell products of the Australian business to the investor's existing Australian customers and others globally. This assumption was not rigorously tested with Australian management at an early stage. As a result, the investor did not factor in the impact of a different client-service provider relationship in the Australian market. The ultimate outcome was a limited ability to introduce the product to markets that had been earmarked for expansion in the initial business case.

The need for an innovation champion to introduce knowhow in the Japanese market

Unless there is a champion within senior Japanese management, it can be difficult for operations in Japan to make effective use of Australian expertise.

Several Australian operations interviewed were highly profitable and had been acquired as a natural hedge to a Japanese market constrained by demographic, economic or digital disruption factors. However, some respondents reported resistance or a lack of interest in introducing knowhow or efficiencies acquired through the Australian business into other parts of the business.

Conversely, Toll Group Managing Director Brian Kruger said senior executives of Toll's Japanese parent company had a strong awareness of the parent company's strengths and platform gaps. This awareness gave those senior executives a keen interest in making the most of learnings from the newly-acquired Australian subsidiary.

A fresh approach to movement of people

The practice of exposing Japanese employees to Australian operations is well established and has been an important factor in the development of those critical relationships of trust.

Some respondents, like Japan Post/Toll, were taking steps by seconding high potential young people from Japan into the Australian business with the vision that ideas seeded in Australia would in the future be taken to other parts of the network, as well as Japan and across Australia.

Although the practice of exposing Japanese employees to Australian operations is well established, the survey confirmed programs for the reverse — transferring Australian employees to Japan or other parts of the business, even for short periods — remain extremely limited. Even in 2016, a perception exists that the cultural context and different language environment of the Japanese parent business poses barriers to ideas flowing from Australia to Japan.

Nevertheless, many respondents could identify individuals from the Australian business who had excelled within, or collaborated closely with, Japanese head office. These individuals tended to have high emotional intelligence and openness to change.

Feedback from leaders in both Australia and Japan suggested a fresh approach is needed to systematically better identify and equip talented future leaders in the Australian business with knowledge of the parent company and personal networks, if the value of Australian talent is to be maximised across the business.

APPLYING THE LESSONS LEARNT

In an increasingly competitive global business environment, it is important for Japanese businesses to draw on lessons learnt in Australia by:

  • applying the M&A integration experience gained to larger and more strategically ambitious acquisitions in other parts of the world.
  • drawing on expertise of Australian management in making regional and global decisions.
  • implementing Australian knowhow where it presents a solution in other parts of the business.
  • encouraging innovation through moving people's ideas across geographic, linguistic and cultural borders within the business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.