International Business: JAPAN
UNLOCKING JAPAN--AT LAST?
It's no stampede, but foreign investment is on the rise
Stay away. For years, that has been the world's perception of Japan's policy on outside investment. Critics in the U.S. and Europe said the Japanese government barred the way to any foreign companies that wanted stakes in Japanese corporations or Japanese facilities of their own. There have always been exceptions, of course, and the Japanese love to point to IBM in Japan or the McDonald's Corp. outlets that have sprouted in Tokyo. But the feeling of not being welcome has been largely warranted. In 1995, for example, foreign direct investment in Japan was a mere $3.1 billion. Compare that with the $68 billion in investments that foreigners made in the U.S. last year, and you see what a fortress Japan has been.
Yet there are signs that the door is opening. Although not all the numbers are in, it seems overall foreign investment in Japan may have jumped more than 50% in 1996. Just in mergers and acquisitions, foreigners did $2.5 billion worth of deals in 1996, well ahead of 1995's $585 million, according to KPMG Corporate Finance & Management Consulting. The deals involve big names, too--food-processing plants by Dole Food, Glaxo Wellcome's full acquisition of its local joint venture, and moves byGE Capital to get into consumer finance (table).
The spurt of activity undercuts the faddish notion that foreign companies are bypassing Japan to invest in seemingly more promising Asian markets. If the money keeps coming in, Japan's reputation as a rough place to invest could start changing.
True, this is no tidal wave. A recent paper by the American Chamber of Commerce enumerates a host of remaining obstacles to investing in Japan. But there's no denying that some progress is being made, and for good reason. "Foreign companies should get serious about increasing their stake in the Japanese economy," says Jesper Koll, vice-president and head of research at J.P. Morgan Securities Asia Ltd. in Tokyo. For one thing, there are signs of a rebound in the long moribund economy, which grew by 3.6% last year. As the world's second-largest economy, Japan boasts per capita purchasing power almost twice that of Hong Kong and 80 times that of China.
AFFORDABILITY. What's more, the weakening yen, combined with plunges in real estate and stock prices, are making Japanese assets much more affordable. Commercial land prices in Tokyo have plunged from a peak of about $285,000 per square meter in 1990 to about $57,000 now. Last month, Pacific Century Group, headed by the son of Hong Kong tycoon Li Ka-sheng, stunned the Japanese by forking over $707 million for a prime plot near Tokyo station. Foreigners are also prospecting on the stock market. Five of last year's 10 largest acquisitions by foreigners were of listed companies. This included Ford Motor Co.'s $430 million purchase of an additional 8.9% of Mazda Motor Corp., boosting its stake to 33.4%.
Foreigners are also benefiting from restructuring moves by local companies. Both ball-bearing maker Minebea Co. and trading giant Itochu Corp., for example, have exited the consumer lending business, which has little to do with their core operations. They sold their credit companies to General Electric Capital Services Inc., which has spent $1.6 billion on such deals in Japan in the past two years. "The consumer credit business is very attractive in Japan," says Rone Baldwin, president ofGE Capital Japan. Baldwin notes that Japan is the second-largest consumer credit market in the world and boasts among the lowest delinquency rates.
The investment action isn't limited to the big boys. Last year, Menlo Park (Calif.) software designer Intuit Inc. paid $52 million in stock for Milkyway, a financial software specialist. Then, in February, Intuit put up an additional $39 million to acquire Nihon Mikon Co., which sells small-business accounting software.
The Milkyway and Nihon Mikon sell-offs represent a new trend at small Japanese companies, says Nicholas E. Benes, senior managing director at investment banker Kamakura, which brokered the deals. Japanese entrepreneurs are getting frustrated with the ordeal of taking their companies public. That's a problem, since stock offerings are the best way to get a payback. "So an M&A deal [with a foreign company] looks attractive if the price is right and the acquirer is sexy and can give you the potential to learn," says Benes.
Where acquisitions don't make sense, many foreign investors try joint ventures. DirecTV International Inc., a subsidiary of Hughes Electronics Corp., holds 35% of a six-company consortium that plans to beam satellite broadcasts to Japanese viewers. Declining to divulge the size of the investment, DirecTV Japan Vice-Chairman Joel Silverstein says: "It's a big bite. That's why there are six partners." They include Japanese satellite operator Space Communications Corp. and video rental chain Culture Convenience Club.
Also trying a joint venture is Sports Authority, the Fort Lauderdale-based chain of sporting-goods megastores. The company holds 51% of a partnership with Japanese retailer Jusco Co. and has opened three Sports Authority stores in Japan. "The Japanese consumer is madly, unequivocally in love with what the U.S. consumer is using in fitness apparel and sporting goods," says Jack A. Smith, chief executive of Sports Authority. Another 22 stores are planned by 1999.
A START. A big factor in the rise in activity has been the Japanese government. Eager to accelerate growth and help industries restructure, the government last year said it would welcome more M&A activity, even by foreigners. A few years earlier, it helped establish the Foreign Investment in Japan Development Corp. (FIND) to help newcomers get established. During the just ended fiscal year, FIND helped 70 such companies, says President Keiji Natori. "The number is gradually increasing," he says.
The upshot could be more exports to Japan and some relief in the trade wars with the U.S. and Europe. Data developed by Dennis Encarnation, a professor at the center for business and government at Harvard University's Kennedy School of Government, show a correlation between foreign direct investment and trade. More Japanese-owned factories in the U.S., for example, mean more Japanese exports to the U.S. of parts, materials, and finished products. Similarly, U.S.-owned plants in Japan will import U.S.-made goods.
Of course, if Japan wants to attract a lot more investment, it must still deregulate the economy, revise tax and land policies, and provide incentives. But even failing this, more foreign companies are taking the plunge. That's good for investors, and good for Japan.By Robert Neff in Tokyo, with bureau reportsReturn to top