Japanese M&A steamrolling ahead

Japanese M&A steamrolling ahead, illustration photo - source: shutterstock

Last week, Miki House, a leading Japanese premium fashion brand for babies and children, officially made inroads into Vietnam by launching its first store in Ho Chi Minh City. Located at Akuruhi trade centre in District 1, the store brings a diverse range of high-quality childrenswear.

The group’s entry to Vietnam follows five years of thorough market research to capitalise on market opportunities.

Miki House inked a deal with its local exclusive distributor Vi Bien – Akuhushi Trading and Service Co., Ltd. to expand its presence in Vietnam. Their local partner has been selling “Made in Japan” products for 20 years.

If the first store is successful, Miki House is planning to launch two more stores in Ho Chi Minh City and extend its reach to Hanoi and the central city of Danang.

According to the latest survey by the Japan External Trade Organization (JETRO), Japan is the fourth-largest investor in Vietnam with $2.89 billion worth of foreign direct investment registered in 2019. Japanese enterprises highly appreciate the scale and growth potential of the Vietnamese market, as well as the stable political and social situation and low labour costs.

In addition to direct investment, Japanese investors are also active in mergers and acquisitions (M&A) activities. Research by RECOF Corporation, Japan’s leading M&A advisory service company, shows that Japanese investors conducted 33 transactions in Vietnam last year, a 50 per cent increase compared to 2018.

Masataka “Sam” Yoshida, head of the Cross-border Division and CEO of Vietnam RECOF Corporation, said that 2019 was the year of highest M&A activity for Japanese investors in Vietnam, recording a record number of transactions between the two countries. The increase in the number of deals is simply because more Japanese companies have accumulated knowledge of the Vietnamese market to act on their already keen interest in growing markets.

On the same note, Hirai Shinji, chief representative of the JETRO’s Ho Chi Minh City office, said that Japanese companies are betting on the bright prospects of the Vietnamese market. In the region, Vietnam only trails behind the Philippines, Indonesia, and China in terms of estimated profits for 2019, with around 65.8 per cent of Japanese firms in the green last year.

While Japanese companies began investing in the Philippines, Indonesia, and China 50 years ago, they have only been present in Vietnam for 25 years. The success stories of Japanese companies gaining stellar profits in such a short time make Vietnam an attractive investment destination for Japanese investors.

Shinji noted that the recent emergence of top fashion brand UNIQLO in the country reflects the growing interest of Japanese businesses. In particular, the retail and services market has great potential for growth due to the country’s large population, rising income, and expanding middle class.

When comparing the number of new investment certificates granted in 2019 by sector, the manufacturing industry was on even footing with retail and services, both making up 21 per cent. The situation has changed from Vietnam being a major investment destination for the manufacturing industry to being a lucrative retail market with rising consumption and high purchasing power.

Recently, the JETRO and the Japanese Chamber of Commerce and Industry conducted a survey on the impacts of the COVID-19 outbreak. It showed that Japanese companies from the manufacturing industry have started to feel the bite of supply chain disruptions. Some Japanese companies are facing weeks of disruptions to secure input materials, which will lead to a dramatic rise in material prices.

Although Japanese businesses have yet to be affected, they predict that the impacts will start being visible in March. Many of them continue efforts to balance inventory, find alternative materials and goods supplies, seek new suppliers, and change manufacturing locations.

Shinji said that the JETRO will review the impacts of the outbreak on Japanese businesses when they release their reports at the end of the financial year. However, he was positive that while the epidemic wreaks havoc on both local and overseas businesses, it will not dampen the interest of Japanese investors in Vietnam’s fast-growing market.

According to RECOF’s Yoshida, most Japanese companies are becoming more cautious with their investment decisions and tend to take more time with M&A deals to avoid undue risks. “We believe the COVID-19 outbreak may become one of the hurdles to delay transactions. However, this is just a delay in time and has no bearing on interest in Vietnam itself,” he said.

“Regardless, we predict that 2020 will continue to be a promising year for Japan-Vietnam M&A transactions as more Japanese investors show interest, driven by growth pressures,” he said, adding that some of the attractive sectors will be consumer goods, food and beverage, human resources, real estate, logistics, energy, and financial services.

“While we believe there will be a lot of M&A transactions between Japan and Vietnam this year, Japanese investors should take into account some of the potential challenges that may arise in the course of the M&A process with local companies,” Yoshida added. “We highly recommend that they engage professional advisors who are familiar with the market practices of both countries in orsder to minimise these issues.”