Tips for Indian firms looking to strike deals with Japanese investors
Manoj Patkar, Executive director & Partner, 7i Advisors LLP

Over the past few decades Japanese companies have turned to overseas destinations to deliver growth to their shareholders as the local economy stagnates. China has traditionally been the largest overseas investment destination for Japanese companies because of its proximity, cultural similarities and a fast-growing market.

However, the Japanese government is increasingly providing guidance to its companies to diversify their investments outside of China due to political reasons.

These companies have now turned to India and Southeast Asia as their next potential investment destinations for growth. Southeast Asia is a fragmented market, with high political risks and low growth rates. But India is a consolidated market, with higher growth rates and lower political risk, and hence has emerged as a favourable investment destination for Japanese companies.

Also, India and Japan have always enjoyed cordial relationships guided by common ideologies of religion, democratic principles, tolerance and traditional family values. As countries which have a high degree of congruence of political, economic and strategic interests, the two view each other as partners that can respond to global and regional challenges in a complementary manner.

Ever since 1978, when Suzuki Motor Corporation became the first Japanese company to enter India, investments from the land of the rising sun have seen rising steadily. As of October 2016, there were 1,305 Japanese companies registered in India, up 13% from 2013. Bilateral trade between India and Japan stood at $16.31 billion in 2013 and is expected to reach $50 billion by 2019-20.

Between April 2014 to March 2017, Japan ranked third with 8% share of the total foreign direct investment (FDI) into India. FDI from Japan increased 62% from $2,614 million in 2015-16 to $4,709 million in 2016-17. Japan has also backed a Make in India Fund, worth about $12 billion. Talks are also on for setting up industrial townships and incentives for Japanese companies to invest in India.

During a 2016 visit to Japan, Prime Minister Narendra Modi along with his host Prime Minister Shinzō Abe undertook a comprehensive review of the Special Strategic and Global Partnership as outlined in the ‘India and Japan Vision 2025’. Its aim was to strengthen bilateral relations by synergising partnerships, ease of doing business and empowering Japanese investments.

Today, Japanese investments have moved beyond the traditional sectors into healthcare, industrials, business services, infrastructure, information technology, food processing and agri-business.

However, dealmaking with a Japanese investor is quite unique and nuanced, much different from western investors.

First, the Japanese corporate structure is very hierarchical and many deals don’t conclude because a potential investment opportunity is not presented to the right senior management in the company.

Second, for the Japanese investor, decision-making is a collaborative and consensus-based process, for which every person in the evaluation team is taken on board before making any major decision.

Further, communication is a key factor. The Japanese are very cautious in their communication and take utmost care to ensure any correspondence from their end is not misconstrued. As a result, careful observations of the Japanese team’s non-verbal signs of communications are required to gauge their interest levels and thought processes while evaluating any opportunity.

Patience is also a crucial factor as the Japanese devote a significant amount of time and energy for a deal to materialise. The Japanese are also detail-oriented. Due diligence is given prerogative, as is meticulous planning of the most minute details at each step of the process, like pre-decided seating arrangements for any crucial meetings between counterparties.

The most important decision drivers in the Japanese decision-making process are personal connect with the Indian promoters or top management team, and alignment of long-term business strategies. Valuation, though crucial in decision making, is usually negotiated only after comfort is established on the above factors.

The Japanese business style is long-term oriented and focuses on the relationship. An indispensable approach to working with the Japanese is to nurture and develop the alliance between partners, investors and companies. They have combined western work ethics with traditional value systems. Punctuality, humility in communication, respect to seniors and clients, giving gifts to counterparties during first meetings, are just some of the traditions which are greatly cherished by Japanese even in their business dealings and relationships.

Assessing the developments and pace at which Japan and India are progressing in cross-border transactions, the future looks bright. The Japanese Official Development Assistance is actively working along with the Indian government to accelerate development in the power, transportation and environmental sectors. With the wheels in motion, cross-border investments and strategic partnerships between the countries are poised for major positive movements in the next few years.

Manoj Patkar is executive director and partner at investment banking firm 7i Advisors LLP.

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