How do Japanese Companies Invest in Emerging Markets Like Turkey?

BBC Türkçe — Tokyo

Reuters news agency reported last week that Turkey’s Yıldız Holding has been preparing to sell Japanese operations of one of its brands, the luxury chocolate producer Godiva, to an undisclosed buyer.

This rumor has not yet been confirmed by Godiva. However, the possibility that the prospective buyer could be a Japanese company turned the attention to emerging markets like Turkey.

Some Japanese companies continue to invest in Turkey, which has struggled with exchange rate fluctuations during summer.

So far, 224 Japanese companies have entered Turkish market via mergers and acquisitions.

According to data from the Central Bank of Turkey, capital inflow in the last eight years from Japan to Turkey totals 2 billion 537 million dollars.

Japanese investors are mostly interested in sectors catering to young consumers or those based on small-medium enterprise (SME) economics: consumer electronics, ready-to-eat food, beverages, automotive, and SME office equipment and logistics.

Brand name is premium 

Those businesses ranked first or second in their markets and have strong sales network are the most sought-after ones in Japanese companies’ eyes. They value brand name so much that there is not even one contract manufacturing company among those they have acquired in the past 5 years.

Some buy companies in order to enter a new sector, others acquire the supplier or the distributor they already work with.

Almost all purchase corporate businesses or family businesses that have achieved institutionalization. For example, Marubeni has a 49 percent stake in Temsa, a manufacturer of buses and light commercial vehicles with ties to Sabanci family holdings.

In 2015, Japanese beverage company DyDo bought 90 percent of Yıldız Holding’s brands such as Cola Turka and Çamlıca for 13.4 billion yen (112 million dollars at the time).

In service sector, Japanese advertising giant Dentsu became partners with Sesli Harfler, an Istanbul-based digital agency.

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Vibrant domestic market, educated workforce, high manufacturing capability

Turkey is a large market. It has a population of 80 million and the average age is 30 years. Per capita income of nearly 10,000 dollars is very high compared to other similar countries in the region.

The average age of Japanese population is 49 years. And it is rapidly aging and shrinking.

Erol Emed is an experienced fund manager living in Japan for the past 31 years. He advises on mergers and acquisitions between Japan and Turkey.

Emed mentions as an example Pigeon, the leading Japanese manufacturer of bottle and breast feeding products, which has a factory in Gaziemir district of Izmir in western Turkey for the past three years.

“When I first talked to them, they said remarkably of Turkey that ‘it has a quality growth rate which we have never seen anywhere in the world’,”he says.

Indeed, Turkey’s 10.5% growth rate last year was surpassed only by India.

Turkey’s other attractive aspects for the Japanese are its robust production and distribution base. They find the internal and external logistics structure provided by hinterland such as İzmir, İstanbul and Mersin ports very valuable.

English-speaking, trained workforce is also an advantage.

Demir Sadıkoğlu is a founding partner at Reimei Global, a Tokyo-based company specializing in mergers and acquisitions between Japan and Turkey, and was a consultant in the Dydo-Yildiz Holding deal.

“In the current economic climate of the Middle East, of the three major centers [Egypt, Iran and Turkey] Japan prefers Turkey due to the maturity of its legal, political and economic laws,” he says.

Turkish companies’ eagerness to go to foreign markets and their risk-tolerant attitude also works for the Japanese side.

For the Japanese whose economy whose economy was completely destroyed in the Second World War and only bounced back years later, it is a must to be present in the same markets as their Western rivals. In this sense, Turkey is an extremely good starting point in terms of access to Western Europe, Middle East and Africa.

Poland is a European country similar to Turkey. But Poland does not have the geographical location of Turkey, which enables it to reach a total of 1.5 billion consumers in all four directions by a flight just under 4-hours.

Japan brings global technology and capital, expects trust in return

Perihan İnci is a member of the Turkish-Japanese Business Council at the Foreign Economic Relations Board (DEIK). She is also on the board of directors of İnci Holding — a family owned company that has a partnership with Japanese GS Yuasa in battery production in Manisa in western Turkey since 2015.

İnci thinks that Japan and Turkey complement each other like yin and yang: Japan as the modest partner who likes to stay in the background, and Turkey as the equally wise but go-getter counterpart when it comes to sales and execution:

“They bring planning, time management, listening skills and technology. We provide the ability to convince, crisis management, and hardworking workforce,” she says.

How does the partnership process work?

The process starts when one of the two sides, more often the Turkish one, approaches the other side.

A confidentiality agreement is signed and a non-binding pre-tender is submitted. If the proposal is attractive enough for the seller, accounting, tax, law and business financing experts get involved; they gather detailed information about the company and store it in what’s called an “information room”.

In the final stage,  product value, projected future sales, and various expenses are taken into account to determine the value of the company. The purchase and sale agreement is signed at the end of 2-4 weeks and provided that the sale passes through the Competition Board, the deal is completed.

Japanese businesses are affected by economic fluctuations and tough competition

Until a month ago, negative effects of the dollar exchange rate and economic uncertainty that came with it made Japanese companies rather uneasy.

Japanese printing ink manufacturer Toyo Ink, which bought 75 percent of the paint company DYO for $ 45 million 3 years ago, postponed until January 2019 the construction of a factory in Manisa, which had been planned to start in the second half of 2018.

In August, Mitsubishi sold its 47 percent stake in its Turkish partner Intercity, the car rental company.

Itochu, one of Japan’s largest trading companies, announced that they will leave the consortium set up for the 4500 megawatt Sinop nuclear power plant, citing increased security costs after the Fukushima nuclear disaster.

Historically, most Japanese investments are directly proportional to the rise and fall in per capita income, such as automobile, air conditioning, and consumer electronics.

Japan: one of 5 to increase investment despite challenges

As the exchange rate increases the cost of supplying materials from abroad, it raises the price of Japanese products such as Toyota cars and creates demand pressure on the domestic market.

However, Turkey has one more advantage which is unique to this country.

In 2016, Turkey had to deal with various attacks, cross-border operations and a coup attempt. According to Central Bank data o the same year, of the 104 countries tracked, 99 reduced their investment in Turkey while 5, including Japan, increased it.

Toyota is a good example. The company brings parts from Japan to manufacture in Turkey and sells in the domestic market. As Turkey’s second biggest exporter, it also exports to countries outside Turkey. In 2016 when so much happening, they doubled the capacity of the factory in Sakarya, a city about 150 km from Istanbul.

Perihan İnci of İnci Akü says that Japanese companies come from a very stable economic environment and need the flexibility of Turkish companies:

“They call the natural disasters as crisis. In our case, economic conditions outweigh [other factors]… They need to develop their crisis management muscle, and we, our non-crisis management muscle.”

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In this respect, Turkey-Japan Business Council meeting held on September 19th was very important. About 100 Japanese representatives gathered in Istanbul received from their Turkish business people counterparts first hand information instead of speculative comments they heard abroad. They also had the chance to experience ordinary course of everyday life in Turkey.

Turkey-Japan Free Trade Agreement set to be signed in 2019

Japan is attracted to Turkey’s broader Free Trade Agreement (FTA) network with the European Union and other major economies.

Murat Yalçın, Turkish Chief Commercial Counsellor in Tokyo, spoke at the same business council meeting. After mentioning Turkey’s geographical advantages, he said: “There’s strong support from the private sectors of both countries to complete negotiations for a free trade agreement between Turkey and Japan.”

In fact, such an agreement between Japan and Turkey has already been drafted. Both sides are trying hard to have it completed and signed when President Recep Tayyip Erdoğan will visit Japan next year for the G20 meeting in Osaka.

Japanese prefer taking advantage of opportunities, but not opportunism

There is also a false impression that Turkish companies will be cheaper with the rise of the currency and that foreign investors will snap them up.

Demir Sadıkoğlu of Reimei says: “The Japanese do not want to buy a company in financial difficulties. They look at companies that have proven their success, brand value, market share and human resources in terms of quality. They operate with medium and long-term plans for 20-30 years. They have the opportunity to invest, but think ‘wait and then invest.'”

In Japan, there are rules imposed by the shareholders that Japanese companies must strictly adhere to. As such, they have very narrow maneuvering space. Even if they buy a company abroad cheaply, they fear that they will have difficulty in explaining to the shareholders the slightest loss of value due to the exchange rate.

Currently, there is also a “local and national” debate on Turkey’s agenda. Sadıkoğlu has a different perspective on the sale of  legendary Turkish brands like Çamlıca to foreign companies:

“These brands are still local and national brands. Japanese think long term, so they bring such proven brands in Turkey technology, capital, employment, and a boost to domestic market and export power. In that sense, their contribution to Turkey is immense.”

This article has been edited and published by the BBC News Türkçe with the headline “Japon şirketleri Türkiye’de nasıl daha fazla yatırım yapar?”

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