As Japanese companies continue to shift their business models from export-oriented domestic production to FDI-driven overseas production, Japan has become one of the world’s largest sources of outbound investment. Lawyers assisting Japanese companies in their forays into Asia and the Middle East talk about both the opportunities and risks in these regions. 

 

The global pandemic may have slowed down Japanese companies’ plans to invest overseas, but as the COVID threat recedes, the outbound push is set to resume in earnest. According to a PwC report, 65 percent of Japanese companies are seeking opportunities abroad for their medium-term growth, with 54 percent planning to reinforce or expand their overseas businesses.

Junzaburo Kiuchi, managing partner, and Dan Matsuda, partner at EY Law, says that while the U.S. continues to be the top country for acquisitions and expansions by Japanese clients, other popular places include western Europe, China, Australia, Southeast Asia, and India.

Another high-growth region drawing hundreds of Japanese companies is the Middle East. Christopher Gunson, partner at the Dubai office of Amereller, says that there are about 500 Japanese companies with a presence in the United Arab Emirates or Saudi Arabia. Many companies have been drawn to set up their regional headquarters in Dubai thanks to its geographical convenience.

“Dubai is a hub for not just the Gulf and the Middle East, but the broader region, and many major multinationals cover as many as 80 countries from a Dubai regional headquarters (all of Africa, Turkey, Pakistan, Central Asia, the Caucasus, since 2022 some companies cover Russia and Belarus from the UAE),” notes Gunson. In addition, Dubai’s zero income tax and other low tax regimes also are an advantage.

Also, major industries such as oil and gas in the Middle East are appealing to Japanese companies. “Many companies in the oil and gas sector are present in Saudi Arabia, Qatar, Abu Dhabi, and other countries that are major hydrocarbon producers,” says Gunson.

Close to the Middle East is India, which has also become a popular destination for Japanese companies.

Gaurav Dani, senior and founding partner, and Saurav Kumar, partner, at IndusLaw, say that the primary sectors Japanese investors have invested in India are automobile and auto components, electronics system design and manufacturing, consumer goods, and chemicals.

Given the rise of the green economy, some new sectors have also seen investment opportunities, such as green energy, digital economy, textiles, and electric vehicles.

With the spurt of innovation and growing start-up culture in India, Japanese investments have increased multi-fold in Indian start-ups.

“In particular, Japanese private equity and venture capital funds have been investing in technology and communications, health-tech, fintech, mobility sectors,” say Dani and Kumar.

DEALING WITH COMPLEXITIES

However, the complexities of local markets have also brought some pain points for such business expansion plans. “This is always a big challenge when clients enter a new market,” note Kiuchi and Matsuda. “Differences in business practices and legal systems, speed and complexity, negotiation dynamics, and post-merger integration and governance” have always been the challenges for Japanese clients.”

Gunson echoes this. “Each region has its challenges and characteristics, and the Middle East is a very different environment from many other regions,” he says, adding that the biggest area of support that Japanese companies require in the Middle East concerns distribution and agency agreements. His law firm deals with issues regarding distribution, agreements, and related issues.

“Given the high per capita GDP and high income of the Gulf region, many businesses in the automotive to watches industry have the region as a major market, per capita spending on automotive is reported to be more than 20x per capita that of India,” says Gunson.

When Japanese companies take the area as a target market for high-end goods, they are selling products through plenty of distributors, with different distributors for each country, product, and brand.

“One Japanese company could have an office in Dubai and looking at more than 100 distributors, and even to parts of the world. There are some Japanese companies which have set up an office in Dubai and cover more than 80 countries and that include a lot of Africa, Central Asia, sometimes even India and sometimes even Eastern Europe and the CIS,” said Gunson.

Gunson added when expanding the business, the direct investment, or pure M&A, which means acquiring 100 percent of the shares of a company is not common in the Middle East. The area is both geographically and culturally far from Japan. Instead, setting up joint ventures is usually the approach to expanding their businesses.

“That could be a so-called ‘green-field’ set-up. We set up a new company with a Japanese company with a majority of 51 percent ownership, and 49 percent is controlled by some of the local investors,” says Gunson.

For India, challenges lie in aspects such as infrastructure, legal compliance, and land acquisition.

In the case of infrastructure, there is a dearth of developed and technologically advanced infrastructural avenues in India. But Dani and Kumar note that the government has put effort to address such shortcomings by developing Japanese Industrial Townships (JITs), which provide various incentives to provide a congenial environment for Japanese investments.

The legal compliance for acquiring an entity requires registrations and permits from multiple authorities, which could be time-consuming. “To resolve this, the government has undertaken initiatives such as updating its incorporation form for providing a single-window clearance for several registrations,” say Dani and Kumar.

Land acquisition is another concern in India. “For a foreign investor, land acquisition in India can be arduous. For instance, agricultural land cannot be used for setting up a factory, unless consent for changing its land-use pattern is obtained from authorities,” they add. “Further, acquisition of private land can also be challenging due to issues like land fragmentation and compliance with local land ceiling laws.”

Therefore, industrial parks have been introduced, which provide land ready for industrial use and are equipped with basic infrastructure amenities like power, water, and internal roads.

India also has a requirement that FDI can be made only to the extent of the percentage as specified in the FDI policy for the relevant sectors.

“Such investments can be made either through the automatic route (where no approval is required from the government) or the government route (where prior approval of the government is required),” say Dani and Kumar.

In addition, when investing in specific industries, companies may need to comply with specific laws requiring seeking licenses and registrations. Therefore, a company needs to plan holistically when making an investment decision.

KEY TAKEAWAYS

In the era of globalisation, governments are trying to attract Japanese companies to expand in their market, and to exchange business and ideas. Lawyers have their own two cents about how Japanese companies should approach local markets.

Dani and Kumar of IndusLaw suggest that Japanese investors consider the benefits offered in the form of incentives when they are making investment decisions and structuring their transactions.

In recent years, the Indian government has undertaken various initiatives to improve the investment regime in India, which includes “offering a range of fiscal incentives and easing compliance issues.”

In addition, the government “is working with t Japan International Cooperation Agency, a government body of Japan, which provides assistance with loans and grants as well as technical cooperation, for various projects in India across sectors such as healthcare, transportation, power, energy,” say Dani and Kumar.

Gunson of Amereller says an appropriate approach to due diligence and working with local partners should be priorities for Japanese clients who wish to seize the opportunities in the Middle East area.

Kiuchi and Matsuda say that picking the right advisors is vital. “Choose advisors who are not only good at their area of expertise but also good at collaborating with other advisors so that the client can make informed decisions promptly, manage its internal stakeholders expectations at the right level, have upbeat conversations with the other side to create a momentum, and foresee and plan for the post-merger phases,” they say.

When making a deal, try to “manage internal stakeholders’ expectation and allow room for flexibilities as to the pricing, timing, structuring and other terms and conditions of the deal,” they add. “Try to make them ready to be called upon at a short notice to make key decisions.”

Also, making it clear to the other party how serious one is a key factor in closing a deal. “Demonstrating your seriousness to the other side by having conversations frequently, bringing senior-level people and advisors to key meetings, keeping the other side warm even if you are facing an internal delay,” said Kiuchi and Matsuda.

 

ALB Japan In-House Legal Summit 2022 will be held in Tokyo on June 1 & 2, and speakers from organisations such as Amereller, IndusLaw and EY Law will be there to share their expertise. To find out more, visit www.legalbusinessonline.com/node/82412.