Japan’s investments miss mark in Australia

A PwC report proposes ways to enhance the mutual benefit from mergers and acquisitions.

Japan’s cashed-up corporations are set to spend even more on international growth

With Japan’s stockmarket smashing 20-year records, its largely cashed-up corporations are set to spend even more on international growth. They already invest about $213.5 billion in Australia, but risk failing to extract full value due to cultural mismatch.

This is the core conclusion of a new PwC report, “Unlocking Japan’s Potential,” proposing ways to enhance the mutual benefit from mergers and acquisitions. Japan has become the biggest investor in Australia after the US.

The 225 top companies comprising the Nikkei — which on Friday topped 21,000 points for the first time in almost 21 years on the Tokyo stock exchange — hold about $2.4 trillion in cash reserves, the report points out.

The report was prepared for PwC’s clients ready for the Australia Japan Business Co-operation Committee’s major conference in Tokyo this week.

Jason Hayes, a PwC partner and Japan practice leader, an author of the report, told The Australian that viewed from Japan, “Australia is a low-risk, high return market with a stable economy. We are also situated on the doorstep of Asia.”

He said many more Japanese companies would continue to look outside their domestic market, and “we need to be the location of choice because if we can address the culture gap quickly, the foreign direct investment figure will grow exponentially”.

Even more appealing for Australia, he said, is the prospect that “if we can demonstrate a business culture that works for Japan, it means they will prioritise our management teams ahead of other countries such as the US or Britain, as they look to build out their Asia businesses”.

Most Japanese companies, he said, would point to their strong desire to have international talent to help them succeed in Asia — since the markets there also have differing cultural environments that need to be understood in order for success.

“We have to make ourselves attractive to help Japan build industries in Asia,” Mr Hayes said. “In doing so, the benefits to Australian business become more obvious.”

Crucial to success in building that attractiveness, he said, is finding a way to effectively align Australia’s culture with that of others. Otherwise “you won’t succeed in new markets”.

He stresses an OECD paper that warns that the education systems of the industrialised countries including Australia “are designed to have our people educated and employed in the home territory, and don’t cater” for the prospect of working in other environments.

The PwC research struggled, apart from the “shining light of successful integration,” Kirin’s takeover of Lion Nathan, to find other positive examples of such mutual success between Japanese HQs and Australian managements, including in conglomerates that may have been operating in Australia for many years. This perception emerged from many workshops, surveys and interviews.

The report says that despite the latest equities surge, long-term domestic growth prospects remain limited for now, prompting more companies to expand abroad where markets are growing faster.

It says the corporate track record to date, however, is poor in successfully integrating newly acquired foreign businesses.

Decades of cheap finance, PwC says, has allowed poor-performing foreign investments to survive, but pressure is mounting for Japanese companies to deliver higher returns.

The report recommends five ways to integrate new subsidiaries more effectively.

● Involve subsidiaries in strategy formulation, and run cross-cultural strategy sessions.

● Develop global mobility strategies to ensure managers are appropriately selected, prepared, deployed and managed when moving overseas.

● Redesign performance management, and ensure authentic feedback from discussions.

● Increase communications across functions, countries, and headquarters, to maximise business opportunities through collaboration.

● Involve subsidiaries in decision making, with the roles of expatriates clarified, and with reporting lines made clear.