LONGREAD: the Rising Sun rising again in Australia

“I was shocked,” he recalls with wry honesty at seeing all the organic noodles on the shelf. “I started thinking maybe we can survive if we sell in Australia, not just Japan.”

" Some entirely new business models are slowly breathing new life into a relationship which began with the wool trade more than a century ago"
Greg Earl, Ex-Japan Correspondent & Pacific Editor, AFR & Former Member of the Australia Japan Foundation board

This was the beginning of the renaissance of his plan in the 1990s to make udon noodles from Australian wheat where the grain came from and then export them back to Japan where his family’s Hakubaku company had been in the udon business since 1941.

“I never expected we could be so successful,” Nagasawa now says as he reflects on how he had to readjust his business plan to accommodate unexpected factors and straddle a bi-cultural business environment. There was, for example, less interest in organic udon in Japan than he expected and a lower quality of packaging standard in his Australian plant than his Japanese customers expected.

Hakubaku now has a profitable noodle business in Ballarat which exports about a third of its output to the US and markets a third domestically while selling only a modest amount in Japan.

His story captures the essence of a sea-change in Australia’s oldest sustained business relationship in Asia. It was a current strongly felt at the recent annual conference of theAustralia Japan Business Co-operation Committee in Melbourne. The old business of exporting unbranded Australian resources to Japan to be turned into unbranded (at least from the Australian perspective) steel and electricity is being replaced by a new paradigm.

NEW JAPAN-AUSTRALIA RELATIONS

The challenge is to find the pockets of growing consumer demand – in a climate of overall lower growth in both countries - in a time of fast changing consumer tastes and demographic ageing.

The longstanding business approach, where Japanese trading houses took minority stakes in resources projects with long term export contracts, is still crucial to the overall value of bilateral trade where Japan is Australia’s second largest annual trading partner after China.

But the key themes from the Melbourne conference suggest some entirely new business models are slowly breathing new life into a relationship which began with the wool trade more than a century ago. They include:

• Joint business opportunities in broader Asia
• Japanese investors taking control of new Australian investments
• Japan’s emerging role as testing ground for new pharmaceuticals
• Pooling of skills to meet demand for better pension products
• Australian companies looking for “patient” capital from Japan
• Japanese companies learning about farm exports from Australia

The conference discussions occurred against a background of gloom amongst some participants that many Australian companies are ignoring investment in Japan due to concerns about slow growth in favour of faster growing countries such as China.

ANZ Bank Japan chief executive Grant Knuckey characterises this as like having two teams: one kicking goals in exports after the 2014 bilateral trade deal but the investment team is largely staying at home. “There’s a perceptions issue here that needs to be addressed. We need our companies to be more ambitious,” he says of the fact there are only about 50 companies on the ground in Japan compared with 300 in China.

ONGOING VALUE

But two new studies suggest in quite different ways there is still a lot of substance in the relationship despite the distracting options with other faster growing countries. And with little fanfare Japan actually overtook Britain last year to become the second largest foreign direct investor in Australia after the US, although Britain remains a bigger overall investor, when portfolio investment is included.

A survey of Japanese and Australian executives involved in recent Japanese investments in Australia by lawyers at Herbert Smith Freehills found there were some key success factors underlying these new partnerships.

The Australian businesses benefited from the way a stable new investor with cheaper capital allowed them to do longer term strategic planning. But the new arrangement depended on a 'circle of trust' being developed early on between the new managers from both countries, ideally during an initial period minority ownership.

The second study by economist Manuel Panagiotopoulos for the Australia-Japan Foundation has put this new business engagement in a much bigger strategic context by re-weighting the various sorts of economic contact between the two countries to emphasise the greater relative value of Japan’s patient, diverse long term direct investment by comparison with, for example, exports to China.

“What distinguishes Japanese FDI into Australia is its diversity. It does not flow into just real estate, coal and agriculture. In the past few years Japanese companies have made investments into IT services, manufacturing, recruitment, advertising, financial services, insurance, logistics, construction, distribution, the establishment of retail chains and the expansion of housing construction firms,” Panagiotopoulos says.

And he argues this patient, reliable capital at the heart of the Australian economy has to be seen within the broader strategic alliance between the two countries with shared values and shared economic interdependence.

FLAGBEARERS

So where are the flagbearers of this new more diverse business relationship between the two countries?

AJBCC chairman Rod Eddington says the conference underlined the new business opportunities in the Southeast Asian region between the two countries.

“It’s clear if we are going to meet the challenges and create opportunities we need to find new ways to work together,” he says.

Southeast Asia has been on the agenda for greater cooperation since Australian and Japanese companies conducted a joint trade mission to Indonesia looking for infrastructure project at possible areas where they could mount joint bids.

But there have been few concrete examples of the idea so far despite the suggestion that businesses from the two countries each have specific skills and contacts which could be pooled. Kirin’s plans to combine its Asian marketing links and new technology with its Australian food products acquired between 2007 and 2009 and has stepped up its focus on selling dairy products in the past year although the progress has been slow.

CASE STUDIES

But PwC chief executive Luke Sayers points to BlueScope Steel’s joint venture since 2013 with Nippon Steel Sumitomo Metals Corporation as a god example of an Australian company expanding into the regional market for building materials.

NS BlueScope, which has manufacturing plants operating or approved (Myanmar) in seven out of the ten Southeast Asian countries was driven by BlueScope’s need for capital back in 2013. But it is now producing in its Thai plants specialist Nippon Steel coated products used to make home appliances and then selling the metal sheet to appliance factories.

NS Bluescope senior vice president Simon Linge says: “It (the joint venture) helps us get access to the Japanese customers which manufacturer home appliances and also in the building and construction market.”

Transport company Toll’s global logistics chief Chris Pearce, who is based in Singapore, says under its new Japan Post ownership the company is seeking fresh business opportunities across the region with Japanese companies which already have operations there.

“Prior to acquisition by Japan Post we probably didn’t focus so much on Japanese business outside Australia,” he says.

A senior executive of Mitsui, Masayuki Kinoshita, says his company’s new focus on building food businesses in Australia in sectors such as wheat, beef and salt was driven by a strategy of exporting to ASEAN countries and other parts of Asia.

“We want to expand investment in food and to expand Australian exports to Asia,” he says.

Mitsui has long made a virtue of how it has made itself probably the largest single Japanese investor in Australia with minority stakes in most of its businesses.

But in an interview when he finished his posting earlier this year former local chairman Yasushi Takahashi said the company was planning to join the trend emerging amongst other Japanese investors and run many local businesses as fully controlled subsidiaries in contrast to its traditional strategy of having a "meaningful minority interest". He said his diversification moves into mostly Australian focused businesses had been the main achievement of his three years in the country.

THE FOOD BOWL

Another Japanese company that has made fast progress in the much talked about food export business is Mitsubishi group spin-off Kaiteki Fresh Australia which now has a fresh green leaf vegetable export business out of Melbourne into Singapore and Hong Kong.

The company has largely done this by itself using Japanese hydroponic technology with some assistance from the Victorian government on water management with the intention of creating a year-round production cycle spanning the alternate northern and southern growing seasons.

Nevertheless Kaiteki Fresh director Shoji Yamaguchi sees broader scope for his Japanese colleagues to learn in Australia how to get Japan’s own high quality horticulture products into other Asian markets. “Japan is trying to emulate Australia in making an export business of farming products. We can collaborate together to do more,” he says.

The trend towards Japanese companies buying control was demonstrated in a dramatic way by Japan Post’s takeover of Toll and by Kirin’s much earlier gradual assembly of a consumer food business from National Foods, Berri and Lion Nathan.

But Nippon Life Insurance Company’s 80 per cent takeover of National Australia bank’s MLC life insurance arm finalised late last month has underlined this trend and the growing focus on the financial sector where executives say the countries each have expertise in dealing with ageing populations.

Nippon executive officer Toshihiro Nakashima says his company believes it has a lot of insurance products which don’t exist in Australia but will now be tried out.

MLC chief executive Andrew Haggar told the conference the deal was one where the “world of economics (low interest rates and ageing populations) met the world of business.”  He said Nippon Life had a deep understanding of managing ageing and low rates which it could apply in Australia where the economic circumstances were more positive but potentially on the same trajectory.

SUPER CYCLE

And Challenger chief executive Brian Benari says the build-up of superannuation assets in Australia to the fourth highest level in the world has created the basis for a new 'super-cycle' in the Australia-Japan business relationship which could play a similar role to the way the resources industry once sustained the relationship.

Speaking before Challenger announced an agreement with Mitsui Sumitomo Primary Life Insurance Company to sell Australian dollar-denominated annuities to Japan, Benari said his experience managing assets in Japan over a decade had convinced him the two countries had retirement income management expertise which would lead to further cooperation.

For example, while Japanese companies had long experience of managing retirement income products on a large scale while Australian companies had more skills at managing growth assets.

“These complementary capabilities and demographic trends provide a huge opportunity for both Australia and Japan to extend their relationship in financial services,” Benari says.

But financial services are only one part of the emerging joint business opportunities emerging from demographic, according to Silviu Itescu, the chief executive of pharmaceutical company Mesoblast.

In a tribute to one of the less well heralded aspects of Prime Minister Shinzo Abe’s economic deregulation program, Itescu says Japan has now made itself the second most important test market after the US for new pharmaceuticals like his company’s new stem cell product Temcell which treats graft versus host disease.

He says Japan has a visionary approach to regenerative medicine with good intellectual property protection and openness to innovations which made it a good place for Australian companies in this field to find partners.   

Greg Earl is a former Japanese correspondent and Asia Pacific editor for The Australian Financial Review and a former member of the Australia Japan Foundation board.