Increasing Attention towards CCUS Projects Development in ASEAN and how to be involved in the Market

Increasing global attention is being paid towards CCUS technology

The International Energy Agency’s Sustainable Development Scenario (SDS), with the premise that we will achieve the 2°C target in the Paris Agreement, assumes that CCUS will account for about 15% of emission reductions in 2070, and CCUS is considered an indispensable technology for achieving net zero emissions in the future (Figure 1). One reason for the emphasis on CCUS is that there are unique values in CCUS that are difficult to achieve it with other CO2 reduction methods. Specifically, according to the IEA, there are mainly four strategic values of CCUS:
  • Tackling emissions from existing energy assets
    • CCUS is one of the few technologies that can remove CO2 emissions from thermal power plants.
  • Solution for sectors with hard-to-abate emissions
    • The industrial sectors such as cement, iron and steel, chemicals, or long-distance transport are said to be the most difficult to reduce CO2 emissions due to the nature of the their processes. In this context, CCS is currently one of the most cost-effective options.
  • Platform for low-carbon hydrogen production
    • Hydrogen (green hydrogen) is needed to be produced by water electrolysis with electricity derived from renewable energy. Depending on the cost of renewable energy, blue hydrogen is considered cost-competitive for the time being.
  • Removing carbon from the atmosphere
    • In case emissions remain in sectors where CO2 reduction is difficult to achieve for zero emissions, they need to be compensated by CDR. Biomass power generation with CCS (BECCS: bio-energy and CCS) and DAC+CCS (DACCS) are positioned as important options as CDR technologies in the long term.²
Each country aims to increase the number of CCS projects in the future due to the factors above. CCS projects in operation are 38 Mtpa in scale currently, but they are expected to reach to 650 Mtpa (around 17 times compared to present) by 2030 and 9,533 Mtpa (around 250 times compared to present) by 2070 (Figure 2). Most of the current CCS development projects in operation are mainly in Europe and the U.S., whereas in Southeast Asia region, there are no commercialized CCS projects that are in operation phase at present. Major reason for this situation is that the legal system related to CCS is still underdeveloped in Southeast Asia, while Europe and the U.S. have incentivized initiatives such as the Emission Trading System and Tax Credit (45Q). As a result, it is difficult for project developers to invest in PJ development because they have no prospect of its profitability at this point.  

High potential demand and potential supply capacity of CCUS in ASEAN are gradually attracting more attentions from investors

While the issues for the commercialization of CCS in Southeast Asia have been indicated above, the CCS potential in Southeast Asia, especially in Indonesia and Malaysia, is considered to be very high. Generally, the size of the storage potential is considered important when assessing the potential of each country for the development of CCS projects. As shown in the figure below, there are many countries in Southeast Asia that have huge storage potential (Figure 3). For example, in Indonesia, there are old oil fields and deep saline aquifers near Java where CO2 emission sources are concentrated. Also, there are depleted oil fields and a number of gas fields. Japanese government and companies have started to promote the development of CCS projects in Southeast Asia against this high potential. For example, in the Gundhi CCS Project in Indonesia, JGC HOLDINGS CORPORATION and Electric Power Development Co., Ltd. are collaborating with Pertamina and the Bandung Institute of Technology to develop the first large-scale CCS project in ASEAN, and the number of similar projects is expected to increase in the future.  

Collaboration with the local governmental entities is the key to penetrate ASEAN

Currently, most of the CCUS projects in Southeast Asia are in the prefeasibility or feasibility study stage and are just starting to explore the project developments in the area. By entering the early CCUS market, it is highly likely that the new entrants will be able to benefit from the expected future expansion of the market itself in the area. An analysis of actual CCS development projects in Southeast Asia reveals that most of them are joint demonstrations by state-owned O&G companies (Pertamina in Indonesia and Petronas in Malaysia) and non-local companies (Japanese trading companies, O&G companies, and European and U.S. O&G companies). This may be due to the fact that the cooperation of the local government is indispensable in securing reservoir sites and conducting field surveys for project development, and also because the capital cost of CCS is so large that some type of government subsidy is indispensable for improving profitability of the project. Therefore, relationships with state-owned O&G players are the key to the market entry in the region, and it may be necessary to secure government connections or partner with other companies that have connections with the government to enter the market.  

Recently, IGPI Singapore has supported multiple clients with regards to CCUS Projects

Against the backdrop of growing interest in CCUS as mentioned above, IGPI Singapore has been supporting multiple clients with their global CCUS market entry studies, and has extensive knowledge in this area. To find out more about how IGPI can provide Japanese consulting support for business in Singapore and the region, browse through our insight articles or get in contact with us.     **************************************************************************************************** [1] IEA (2020) [2] IEA (2020) [3] IEA (2022) [4] Global CCS Institute (2019) ****************************************************************************************************

About the author

Mr. Tatsushi Sasakura is a Senior Manager of IGPI Singapore. Tatsushi has worked in Mizuho Bank and Deloitte Tohmatsu Financial Advisory (DTFA) in Japan. At DTFA, he belonged to the Corporate Strategy team specializing in business strategy planning, M&A advisory, and business due diligence. He was also engaged in crisis management, supporting clients to tackle emergencies. He has profound experience in the energy, consumer, and financial industries. He covered a wide range of clients including Private Equity Funds and large-sized companies. Tatsushi graduated from Waseda University with a B.A. in International Political Science and Economy.      

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premier Japanese business consulting firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around fund supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support towards commercialization and monetization of technologies.   * This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Key Major Regulation Updates in Indonesia

Below are some of the selection of Indonesia’s key major regulation updates: * Note: Abbrev: PR – presidential regulation; GR – Government Regulation
Period of announcementKey regulations Issuer Summarised key content on the regulation
September 2022Personal Data Protection Law Bill (to be soon enacted as Law)House of representative – which will become Law once it is ratified by the PresidentThe Personal Data Protection (“PDP”) Law will be the first comprehensive law in Indonesia to govern personal data protection in both electronic systems and non-electronic systems.
September 2022Acceleration of Renewable Energy Development for Electric Supply (“PR 112/2022“)President of IndonesiaTo accelerate the usage of renewable energy as an energy source as well as reducing greenhouse gas emission (“GHG“). restriction of operational period for steam power plants, limitation of new steam power plants construction, obligation to use local components in order to implement Electric Supply Business Plan by PT Perusahaan Listrik Negara (“PLN“), pricing of electricity based on a renewable source, electricity procurement, and many other provisions.
October  2021Harmonisation of Tax Regulations (“Law 7/2021”)Government of Republic of IndonesiaSeveral tax provisions in Indonesia which had previously been regulated in separate regulations are now being amended simultaneously. Some of these regulations are Law on General Provisions and Tax Procedures (General Provisions of Taxation Law), Law on Income Tax (Income Tax Law), Law on Value Added Tax on Goods and Services and Sales Tax on Luxury Goods (VAT and Luxury Goods Sales Tax Law), Law on Excise (Excise Law), and other tax regulations issued during the Covid-19 Pandemic.
March 2021Risk-Based Business Licensing Concept as part of the implementation law of Omnibus Law (“GR 5/2021“) Government of Republic of IndonesiaBusiness licensing is the legality which is granted to business actors to start and run their business and/or business activities,1 and risk is the potential loss caused by hazards.2 Thus, risk-based business licensing is a business licence based on the risk level of such business (“Risk-Based Business Licensing”). The implementation of Risk-Based Business Licensing is aimed to improve the investment ecosystem and business activities, through4:  a. the implementation of the issuance of business licences is more effective and simpler; and b. transparency, structured, and accountable supervision of business activities in accordance with provisions of laws and regulations.
March 2021Investment Line of Business – as part of the implementation law under the Omnibus Law  (“PR 10/2021“)President of IndonesiaOffers ease of investment through amendment regarding the lists of lines of businesses that are open to investment, lines of business that are closed to investment, and lines of businesses that shall be carried out only by the central government
Source: Indonesia Government Officials (regulation database of Republic of Indonesia – JDIH BPK RI), SSEK, ARMA The recent enactment of Omnibus Law (Law No.11 of 2020 – regarding Job Creation), which has refreshed previously approved laws, alongside its implementation regulations, has brought about a fresh restart to the country’s business regime, including the easing off foreign investment restrictions in key industries such as retail, pharmaceutical and telecommunication and the introduction of risk-based business licensing, a major revamp from previously business-by-business licensing regime; all have resulted in reduction of red-tapes. However, investors still need to remain cautious, as Indonesia remains a complex business place to navigate. In the context of doing M&A in Indonesia specifically, we would like to suggest a framework that investors could apply (as shown in the figure below). The framework analyses the Indonesia M&A legal aspect by looking at regulations at different tiers (on a vertical axis) and regulations at an operational level (on a horizontal axis). In the context of Indonesia, the different tiers of regulations generally can include, in descending order, the governmental level, the ministerial/sectoral level (e.g. Financial Service Authority (also known as the Otoritas Jasa Keuangan or OJK) governs the financial institution and the Ministry of Energy and Minerals (also known as Kementerian Energi dan Sumber Daya Mineral or ESDM) governs the energy and mineral resources), and at the provincial level (i.e. within the province that the business is based). It is worth noting that at the ministerial level, we have divided this into two forms – sector-specific and function specific. The former is self-explanatory, whilst the latter plays a special role; the Ministry of Investment and its Investment Coordinating Board (also known as Badan Koordinasi Penanaman Modal or BKPM) will need to approve any shares acquisition of an Indonesian company by a foreign party. BKPM is the key ministry on risk-based business licensing by operating the online single submission system, which you will need to use when you apply for a licence. Also, any transfer of shares will need to be registered to the Ministry of Law and Human Rights, which oversees all registers pertaining to the limited liabilities companies. At each of these regulatory tiers, any regulation hurdles may provide significant risk to completing your M&A transaction, or even if completed, certain legal implications may ensue – hence, many times, these form the “conditions” to any M&A transactions you contemplate. Going through in descending order in terms of regulatory tiers and becoming familiar with the applicable rules and regulations on each is highly advisable. The horizontal axis represents the various regulations that will generally be applicable to various M&A transactions. These regulations, among others, include tax laws, labour laws, import/export laws, environmental laws and property laws. An oversight on any of these aspects of the law may not bar you from completing the M&A transaction, but may require some changes to your business operations or to a certain extent, may require you to pay fines for any oversights.

Indonesia M&A General Legal Analysis Framework

For example, say you, an overseas investor operating in the mining services business, are looking to acquire a coal mining Operating Company that also owns a coal mining licence in East Sumatera. This exercise itself can be quite broad and complex, but as a start, you have to look into the latest regulation aspects governing your acquisition – including whether the transaction is allowed under positive investment list and to also understand the various steps needed to complete your transaction, including having it approved by the Ministry of Law and Human Rights, the BKPM and if necessary the anti-trust regulatory commissioner (or also known as Komisi Pengawas Persaingan Usaha or KPPU). You will also need to understand the latest regulations governing coal mining operations and ownership as this is governed by the ESDM – specifically, there is a foreign ownership restriction on the company that owns the coal mining licence, and the need to follow rules on how to transfer such mining business licences in the event there is a change of ownership. At times, the government through ESDM may also issue temporary restrictions on certain business activities for example, on the export of coals, which happened in early 2022[2]. The target’s mining company operation may also be subject to the local provincial government – for example in the case of Tanjung Enim (an area known for Coal mining) there have been provincial rules (also known as Peraturan Daerah or “perda”) issued to govern the coal mining operations within that precinct[3]. In addition to all these, aspects pertaining to tax, environmental, labour, trade (including any ban of exports/ imports on coal-related commodities) and real estate law (esp. on land ownership) have to also be considered in your transactions. The framework that we outlined above is to help you to have an overview of the regulatory framework that is applicable in Indonesia. This helps to at least provide a basic concept and an early guideline in performing M&A transactions. Besides the framework above, below are also additional tips we believe would be important to consider when you are looking to perform M&A in Indonesia:

1. Understand the basic nature and mechanics of Indonesian limited liability company regulations Gaining an understanding of the mechanics behind the Indonesian Limited Liability Company is your key first step to navigate this complexity. You may start by gaining an understanding of the Indonesia Standard Industrial Classification (or formally known as Klasifikasi Buku Lapangan Indonesia (KBLI)) and the various licences needed to operate certain businesses (or also known as Surat Izin Usaha Perdagangan (SIUP)). Beyond that, it is also important to understand the basic structure of Indonesia Limited Liability Company as coded by Law No.40 of 2007 (Company Law) as amended by Law No.11 of 2020 of Omnibus Law and Law No.25 of 2007 on Capital Investment (Investment Law), which governs the basic legal framework of investing into the country.

2. Go to the source and have your local Indonesian team vet through the regulations When in doubt, you should always go back to the source and not just rely on the interpretation of the law itself (or as reviewed/ commented by many legal advisors). Where necessary, it is definitely very important to have your Indonesian team members or representatives look into the original regulations as issued by the official source.

3. Seek advice from government investment services It is always important to get advice from not only your legal key person but also from government investment services and relevant trade associations. This is probably the only time that getting multiple pieces of advice from various sources is an efficient way to do business in the context of performing M&A in Indonesia, as a simple wrong step may cause a significant setback. Hence, other than getting reliable advice from your trusted legal advisor, it may also be necessary to contact the investment service department of the Investment Coordination Board (BKPM) OR your contacts in the relevant trade associations.

4. Always keep yourself updated and aware that many regulations are not always permanent In the example above, there was a ban imposed on the exports of coal – but this was only ephemeral – at the end of January 2022, which is just a few days from when the ban was announced, these regulations have been updated and there is no longer a ban imposed on such exports. This is to show that rules do change frequently.

At IGPI, we believe that it is very important to understand the local regulatory customs governing your business needs. We hope that the legal framework and advice above would be of great assistance when you explore M&A in Indonesia. Feel free to reach out to our M&A advisory team for any further discussion.   **************************************************************************************************** [1]  https://www.tmf-group.com/en/news-insights/publications/2022/global-business-complexity-index/ [2] https://www.esdm.go.id/en/media-center/news-archives/preventing-power-outages-govt-temporarily-bans-coal-export [3] The various provincial rules issued pertaining to PT Tambang Batu Bara Bukit Asam (Persero) Tbnk at Tanjung ENIM ****************************************************************************************************

About the author

Mr. Erwin Thio is the Senior Manager of IGPI Singapore. Before joining IGPI, Erwin was part of KPMG Corporate Finance team in Indonesia, where he led various cross-border transactions, working with both local/ regional and global players. He also acted as engagement lead for a handful of Corporate Finance strategy/ advisory engagements for Indonesian state-owned enterprises, including an engagement for a major strategic national project, a government-to-government cooperation between a consortium of Indonesia state-owned enterprises and a consortium of leading Chinese corporations. Erwin’s areas of expertise are in M&A deal management (both buy-side and sell-side), deal structuring, valuation and commercial due diligence, market analysis, and project management. He has also spent a number of years working within the investment and fund management (particularly for Real Estate Private Equity Funds) division of major developers such as Mapletree, Lendlease, Savills IM, and CFLD, where he helped with deal execution and origination, capital raising, fund creation/ development, and management. Erwin graduated with a Bachelor of Business Management from Singapore Management University with a Major in Finance and he is also a CFA Charterholder.   

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premium Japanese management consulting and M&A advisory firm headquartered in Tokyo with offices in Singapore, Hanoi, Shanghai and Melbourne. IGPI has 14 institutional investors, including prominent Japanese mega-corporations such as Nomura Holdings, SMBC, KDDI, Recruit and Sumitomo Corporation to name a few.  IGPI has vast experience of supporting Fortune 500s, Govt. agencies, universities, SMEs and startups across Asia and beyond for their strategic business needs such as market entry and growth strategies, various aspects of M&A, innovation advisory, new business creation etc. IGPI is consciously an industry agnostic firm (work in 10+ industries) and this coupled with it making its own venture investments (30+ till date) adds to its uniqueness. IGPI has a JV with Japan Bank of International Cooperation (JBIC) – one of JV’s initiative is a VC fund in Europe (EUR 100mn fund) with participation from Honda, Panasonic and Omron.   *This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Highly priced and rare coffee shops Only 400 coffee shops can be transacted

Singapore is a country with a small land area but active property investments with daily transaction reports rising. Examples of typical transaction reports: 1) In July 2022, the CEO of Three Arrows Capital, a virtual currency hedge fund that filed for Chapter 11 bankruptcy protection in the US, to sell a luxury bungalow (GCB) he had just purchased for S$48.8 million (approximately JPY4.7 billion). 2) In July 2021, the family of Grab’s (A super app platform) CEO, and the CEO of Secret Labs (manufacturer of gaming chairs) bought a GCB for S$40 million (approximately JPY 3.9 billion) and S$36 million (approximately JPY 3.5 billion) respectively. 3) In October 2020, it was also reported that the founder of British home appliance giant Dyson sold his penthouse, which he had purchased a year earlier for S$74 million (approximately JPY7.2 billion), for S$62 million (approximately JPY 6 billion). These expensive housing transactions are not limited to a few wealthy people. In HDB, where 80% of the population lives, the transaction price of resale properties is also at an all-time high, with a series of cases reported where properties were sold for more than S$1 million (approximately JPY 97 million). Alongside housing, the sale and purchase of coffee shops are increasingly reported in the press. Coffee shops are a collection of several small-scale eating and drinking establishments located usually on the ground floors of the busy town centre, HDB, and industrial estates. Many of which are owned by private companies and individuals, in contrast to “Hawker Centres” which are owned by the National Environment Agency (NEA). In June 2022, the news of the Eastern 21 Street Eating House in Tampines being sold for S$41.6 million (approximately JPY 4 billion) and KPT Kopitiam in Yishun in the north for S$40 million (approximately JPY 3.9 billion) hit the headlines. More surprisingly, both coffee shops were sold at a new historical high price. The Tampines coffee shop was purchased from the Housing and Development Board (HDB) for S$3.45 million (approximately JPY 330 million) in 1992, and 30 years later, it was sold for 12x the price, while the Yishun coffee shop was purchased for S$6 million (approximately JPY 580 million) in 2007 for 15 years after it was sold for nearly 7x the price. It is also astonishing to note that the acquisitions are leasehold (fixed term usage) and not freehold (unlimited term usage) and that the selling prices are comparable to a ground-floor shop in a prime location on Orchard Road, Singapore’s busiest shopping street (Figure 1). Why are suburban coffee shops trading at such high prices? We believe there are two main reasons. The first reason is the limited number of outlets available for trading in the first place. There are about 2,200 coffee shops and similar eateries in Singapore, and about 770, equivalent to one-third, are set up by HDB on the ground floors of HDBs out of which 400 of these are sold to private companies and individuals in the early 1990s. In 1998, NEA has stopped selling them and switched to renting the owned coffee shops to private companies and individuals. In other words, only 400 coffee shops that are set up in public housing can be transacted. The second reason is that the coffee shops in Tampines and Yishun, which were sold at a historical high price, are large and scarce. The two coffee shops have 18 and 14 stalls of small-scale restaurant space, respectively, and are expected to attract a more significant number of customers as they can develop a wider variety of restaurants than many coffee shops, which typically have less than 10 plots. However, the sale and purchase of coffee shops at high prices risk becoming a social problem in the form of increased rents borne by the tenants, small restaurants, which subsequently are passed on to consumers through increased food prices resulting in a larger burden on the household budget for consumers. In this context, National Development Minister Desmond Lee, in his parliamentary reply in July 2022, emphasised that an average of 15 coffee shop transactions in public housing have occurred every year since 2010, but that 70% of these transactions are for less than S$10 million (approximately JPY 970 million), with limited impact on household finances.  

Coffee shops are like a ‘second kitchen’ Coffee shops perform well in the COVID-19 pandemic

Singapore is often called the “Nation filled with food critics”. This article examines the critical role of food and drink and coffee shops in their socio-economic activities. The most recent household survey conducted by the Singapore government shows that the average monthly household expenditure on food is S$1,199 (approximately JPY 116,000), the largest of all categories (Figure 2). Looking further at food by detailed category, it can be seen that the average monthly household expenditure of S$437(approximately JPY 42,000) per month on categories in addition to coffee shops, including hawker centres and food courts is higher than food and non-alcoholic beverages (S$389) and restaurants, cafés and pubs (S$296) (Figure 3). The fact that more was spent on coffee shops and hawker centres than on food and non-alcoholic beverages suggests that eating out or taking food away from home is more common in Singaporeans’ lives than cooking for themselves. Furthermore, looking at average monthly household expenditure by income quintile in the three food service categories, including fast food, it shows that the largest expenditure is on coffee shops and hawker centres, except for the highest income quintile with an average monthly household income of S$10,070 (approximately JPY980,000) (Figure 4). It is often believed that the main customers of coffee shops and hawker centres are low-income households, but in reality, coffee shops and hawker centres are almost like a ‘second kitchen’ for many Singaporeans, who use them daily. These food and beverage purchasing behaviours by Singaporeans will continue to grow as a result of new behaviours stemming from the outbreak of COVID-19, namely the increasing use of coffee shops adjacent to suburban HDB rather than restaurants in office blocks due to the spread of work-from-home. In fact, 30 new coffee shops are expected to be built in council housing over the next four years. A comparison of the performance of typical food service companies in COVID-19 also provides a glimpse of the reality of the assumed impact of changing consumer purchasing behaviour. Among the major food service companies listed on the Singapore Exchange (SGX), Kimly Group, which operates a total of 136 multi-brand outlets with 84 coffee shops (as of October 2021), and JUMBO Seafood, which is famous for its seafood dishes, operates total 42 restaurants under 12 restaurant brands. Looking at the sales figures for the first half of the year (ending September) over the past three years, using the example of the JUMBO Group, which operates domestically and internationally, it is possible to understand the strong performance of the Kimly Group (Figure 5). Moreover, the JUMBO Group, which has mainly targeted tourists and business customers, has announced plans to acquire a 75% stake of the shop “國記雲吞麺” in the hawker centre for S$2.1 million (approximately JPY 200 million) in November 2020 under COVID-19 and to open multiple outlets both domestically and internationally. As of August 2022, “國記雲吞麺” has expanded to eight outlets, mainly in coffee shops in Singapore, and this is an excellent example of large food and beverage companies, which until now have mainly opened outlets in street shops and shopping malls, accelerating the opening of outlets in hawker centres and coffee shops based on changes in the business environment and consumers’ purchasing behaviour.

What measures can be taken to increase the profitability of coffee shops? It is vital to implement measures without thinking outside the box.

Regardless of whether the investment is in a coffee shop or a shopping mall, there is a common need to increase the earning power of the tenants so the property owner can benefit from the rental income and future gains from the tenants. So what measures can coffee shops take to increase the profitability of their tenants, i.e., small-scale restaurants? The following are five ideas to consider. The first is to optimise the tenant mix (the combination of restaurant types and business categories in which they open) and merchandise (the product range and pricing strategy offered by each restaurant) to maximise the number of customers and customer spend for the coffee shop as a whole, rather than for each individual restaurant. For example, a coffee shop owner regularly adds high-profile restaurant brands to his tenants to prevent existing customers from leaving and attract new customers at the same time. Another owner, who also manages several tenancies himself, attracts more customers to the coffee shop by offering lower-priced food at a lower price point, while another tenant, who offers higher-priced but comparable quality food to restaurants in the city, ensures that the coffee shop is profitable. The second is to change not only the menu offered but even the signage of the shop in order to respond to the needs of the customers who visit the shop on different days of the week and at other times of the day, as well as the consumer profile of the area around the coffee shop. Even though the rent for the tenants of coffee shops is a fixed cost, many shops are only open for a limited number of hours, such as from morning to evening on weekdays. For example, coffee shops in office areas are surrounded by restaurants and bars that are busy after five on weekdays and cafés that are packed with cyclists, mainly Westerners, on weekend mornings; however, they are not open after the evening on weekdays or weekends. We believe that sales can be steadily increased by developing a menu such as smoothies that stick with the health-conscious attribute immediately after exercise on weekends, and alcohol and snacks in the evenings on weekdays. The third is to develop menus and stimulate potential demand, not only for in-store dining in coffee shops but also for takeaway and food delivery, in order to increase turnover and occupancy rates per tenant. While the small number of seats means a waiting time before being seated, there is high demand for takeaway food in coffee shops adjacent to offices and residences. In addition, food delivery, which has become more popular due to COVID-19, is expected to continue to be used on a daily basis as the new normal (Figure 6), and small-scale restaurants in coffee shops must develop their services in line with the changing purchasing behaviour of consumers. The fourth is to focus on digital marketing activities using social media such as Facebook and Instagram. In particular, Generation Z, born between 1996 and 2015, are also known as “digital natives” as they were born in an age where digital is commonplace, and it is not uncommon for them to decide what to eat and where to eat based on information obtained from social media. Therefore, it is essential to develop menus that stick with Generation Z while simultaneously providing effective promotional information on social media, which they are in contact with at all hours of the day. The fifth is to ensure thorough cleaning of the coffee shops, including tables, chairs and toilets as well. In order to prevent losing consumers who are unhappy with the cleanliness. Overall cleanliness of a coffee shop is an important factor that consumers subconsciously evaluate along with other factors such as the taste and price of food and beverages.  

A need to fully understand the industry structure and consumers’ purchasing behaviour Start with the daily use of coffee shops

Finally, we would like to discuss the business opportunities Japanese companies should know about coffee shops in Singapore. Firstly, Japanese food and beverage companies should consider opening coffee shops as an option. We have an impression that most Japanese food and beverage (F&B) companies only consider opening new outlets in street shops and shopping malls in prime and downtown areas of Singapore. Many Japanese F&B companies are not even aware of the existence of coffee shops. However, as mentioned above, many Singaporeans spend more on eating out and takeaways in coffee shops, hawker centres, and food courts rather than in restaurants, cafés, and pubs. The ignorance of the importance and potential of coffee shops could be a risk and lead to lost opportunities. Whether or not they are aware of this consumer purchasing behaviour, some Japanese restaurants and cafés have recently become prominent in opening outlets in coffee shops; however, only a few have been expanding steadily. For example, Li Yuan Mee Pok, which has six outlets on the island, is gaining a growing presence as a popular restaurant in coffee shops across the country, offering “Japanese Fusion Mee Pok”, combining a local dish called mee pok, thick noodles similar to Japanese kishimen noodles, with a sour sauce and unique flavours such as miso and soy sauce, and toppings such as pork. Furthermore, Japanese food companies seeking to develop sales channels along with the local authorities and banks supporting these companies should also consider coffee shops as a sales channel. Some Japanese food companies that engage in what they call ‘sales channel development’ activities in Singapore are often satisfied with the fact that their products are used in pilot or temporary events at only a few high-end restaurants or supermarkets and are not concerned about making money through permanent sales or increasing sales volumes. Although it depends on the type and price range of local products sold, the growing importance of merchandising in coffee shops and the fact that almost no Japanese products are sold in coffee shops, compared to the popularity of Japanese products in Singapore, make it difficult to differentiate Japanese food and beverages from other products on the menu. It is strongly recommended that these Japanese companies, as well as local governments and banks, consider business opportunities based on an essential understanding of the structure of Singapore’s F&B industry and consumers’ purchasing behaviour from a frontline perspective, with a focus on coffee shops and hawker centres. The vast majority of Japanese people living in Singapore do not even use coffee shops, let alone know the difference between coffee shops and hawker centres. We would like to conclude this business consulting report by recommending that consumers start using coffee shops daily and understand through first-hand experience how easy they are to use and how essential they are to their daily lives.     **************************************************************************************************** IGPI can provide strategy consulting for multiple aspects of your business.  Get in touch with us on internationalization, strategic planning and fund raising related topics! ****************************************************************************************************

About the author

Mr. Ryota Yamazaki is the Director of IGPI Singapore. Before joining IGPI, Ryota worked in Deloitte Consulting in Singapore, where he was a leader in the areas of Consumer Business and Supply Chain & Logistics in Southeast Asia. His areas of expertise are Strategy & Operations, such as market entry, Route-to-Market (RTM) strategy, business due diligence, and PMI. He started his career with A.P. Moller-Maersk Group as a management trainee and also worked for Kurt Salmon, where he had vast project experience, especially in Supply Chain & Logistics for the retail and consumer goods clients. Ryota graduated from the Faculty of Economics at Keio University.      

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premium Japanese management consulting and M&A advisory firm headquartered in Tokyo with offices in Singapore, Hanoi, Shanghai and Melbourne. IGPI has 14 institutional investors, including prominent Japanese mega-corporations such as Nomura Holdings, SMBC, KDDI, Recruit and Sumitomo Corporation to name a few.  IGPI has vast experience of supporting Fortune 500s, Govt. agencies, universities, SMEs and startups across Asia and beyond for their strategic business needs such as market entry and growth strategies, various aspects of M&A, innovation advisory, new business creation etc. IGPI is consciously an industry agnostic firm (work in 10+ industries) and this coupled with it making its own venture investments (30+ till date) adds to its uniqueness. IGPI has a JV with Japan Bank of International Cooperation (JBIC) – one of JV’s initiative is a VC fund in Europe (EUR 100mn fund) with participation from Honda, Panasonic and Omron.   *This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

In Australia, the minimum weekday wage is over 2,000 yen per hour with up to doubled hourly rates on Sundays

  The minimum wage in Tokyo is ¥1072 per hour (effective October 1, 2022), whilst in Australia it is A$21.38 per hour (as of September 11, 2022) or approximately ¥2010 (calculated as A$1 = ¥94). In some cases, hourly wages on Saturdays are guaranteed to be 1.5 times higher than on weekdays, up to double the weekday rate on Sundays.   If one were to work part-time for three days on weekdays and two days on weekends, each for eight hours, their total annual income would be close to ¥5.5 million at minimum wage. Granted, this cannot be directly compared with Japan as there are other factors such as the exchange rate, income tax rate, price of goods and services.   A resource-rich country, Australia has long been plagued by the Dutch disease (which will be covered later in this article) and has been unsuccessful in building the infrastructure to support its vast lands. However, thanks to various measures, Australia sits in 12th place among Asia-Pacific countries in the World Happiness Report, ranking far ahead of Japan in 62nd place.   In this article, I would like to share some insights on what we can learn from Australia in order to improve the current labor productivity in Japan. The concept of “analogical thinking” to learn from external sources is an essential skill to achieve quick improvements in this era of rapid change and future uncertainty.    

Population density of Australia is 1/100 of Japan. Automotive industry driven out of business by Dutch disease

  With a population of 25 million, Australia’s population density of 3 persons/㎢ is much lower than Japan’s 333 persons/㎢ or the United States’ 34 persons/㎢. By city, Sydney has 430 people/㎢, Melbourne 453 people/㎢, and the capital Canberra 443 people/㎢, all far below the 15,428 people/㎢ of Tokyo’s 23 wards, Singapore’s 8,358 people/㎢, and New York City’s 11,000 people/㎢.   A resource-rich country, Australia has a GDP per capita of US$57,000, much higher than Japan’s US$39,000. However, its economy has been suffering from a serious Dutch disease for a long time and industrial diversification is urgently required for future economic development.   A Dutch disease refers to the phenomenon where trade surplus resulting from the export of abundant natural resources leads to the appreciation of the country’s currency and the loss of international competitiveness, mainly in the manufacturing industry due to higher labor wages. The automotive industry was in fact once a major industry but came to meet its end in 2017.    I would like to explain how Australia has addressed this, via implementing good national management policies to address the low population density and supporting the creation of new industries in this environment.

1) Investment and management policies with good intentions that support low population density

There are many industries that are not suitable for countries with low population density. Cell phone base stations, EV charging facilities, retail chains, and public transportation are some examples of extremely inefficient investments when population density is low. In Australia, there are existing policies to ensure minimal unsound or unnecessary investments or operations in these areas.

For example, only Sydney and Brisbane have train services from the international airport to the city center, while other airports offer cab or bus services. In addition, many gas stations are unmanned, and retail stores are closed at times of the day when customer traffic is low.

2) Technology to support low population density

In Australia, a number of technologies have been developed to support low population density. For example, there are innovative technologies to support the operation of gyms that are open 24 /7 or to automate agriculture. Among these, a company that provides IoT technology called Myriota is attracting particular attention. Starting as a spin-off venture from the University of South Australia in 2015, the company aims to build a large-scale, low-cost, low-power consumption satellite communications network using nano-satellites. Its technology is currently being used in a wide range of applications, from monitoring wind farms to water tanks on farms.

It has raised more than A$50 million in funding to date, and investors include Innov8, a Singapore-based venture capital firm run by SingTel, one of Asia’s largest telecommunications companies, and HorizonX, Boeing’s venture capital arm.

3) Role of the federal and state governments in supporting the creation of new industries

A key factor in creating new industries in Australia is the federal government’s management of industry portfolios and state governments’ focus on specific industries. For new industries, startups in each state’s region focus on a specific business area, such as FinTech in New South Wales, AgriTech and HealthTech in Victoria, and CleanTech and SpaceTech in South Australia.

Moreover, each state governor has made efforts to develop their cities to maximize the growth of the industries they are focusing on. For example, in South Australia, the incubation hub Stone & Chalk is located within walking distance of the University of South Australia, the University of Adelaide, and research institutes. Myriota, introduced in 2) above, is also a university startup born in such an environment.

  In the past, excessive population growth was considered a social issue in Japan – today, the paradigm has shifted and key challenges include a declining population due to the falling birthrate and aging population, as well as depopulation of regional cities.   Instead of viewing environmental change as a risk, let us acquire and apply the skill of analogical thinking to find reference cases that will help us solve our current problems. Looking across the world, there is an abundance of solutions and resources that we can and should tap on. **************************************************************************************************** IGPI can provide strategy consulting for multiple aspects of your business.  Get in touch with us on internationalization, strategic planning and fund raising related topics!

 

About the author

Kohki Sakata is CEO of IGPI Singapore. After joining Cap Gemini and Coca Cola, Kohki joined Revamp Corporation, where he managed projects on global expansion and turnaround in various sectors, including F&B, healthcare, retail, IT, etc. After joining IGPI, Kohki has managed projects mainly on global expansion and cross border M&A in various sectors such as logistics, IT, telecom, retail, etc. In addition to his broad experience in implementing solutions that have been developed in Western countries, he has developed multiple methods to turnaround Asian companies with a focus on setting a clear vision and employee empowerment. He has proven the practicality of these methods by turning around Asian companies not only as an advisor but also as senior management. He graduated from Waseda University Department of Political Science and Economics and IE Business School.  

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premium Japanese management consulting and M&A advisory firm headquartered in Tokyo with offices in Singapore, Hanoi, Shanghai and Melbourne. IGPI has 14 institutional investors, including prominent Japanese mega-corporations such as Nomura Holdings, SMBC, KDDI, Recruit and Sumitomo Corporation to name a few.  IGPI has vast experience of supporting Fortune 500s, Govt. agencies, universities, SMEs and startups across Asia and beyond for their strategic business needs such as market entry and growth strategies, various aspects of M&A, innovation advisory, new business creation etc. IGPI is consciously an industry agnostic firm (work in 10+ industries) and this coupled with it making its own venture investments (30+ till date) adds to its uniqueness. IGPI has a JV with Japan Bank of International Cooperation (JBIC) – one of JV’s initiative is a VC fund in Europe (EUR 100mn fund) with participation from Honda, Panasonic and Omron.   *This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Japanese companies should consider venturing abroad amid a shrinking domestic market, to explore opportunities that lie in neighbouring ASEAN countries

Japan’s population has registered 11 straight years of decline since 2011, experiencing the steepest fall in 2021 after a drop of 644,000 people compared to the previous year. The population is also rapidly greying, with the proportion of those age 65 or older hitting a record high of 28.9% while the younger population reaches a historic low[1]. A shrinking and ageing population could spell trouble for domestically focused companies, as they are essentially competing for a smaller pie and human capital. Outside Japan, ASEAN is experiencing quite the opposite where member states are gaining affluence with a rising GDP and a growing middle class. The 10 ASEAN countries have a combined population of around 660 million, making it the third most populous region after China and India. The region’s GDP has increased exponentially from just US$0.6 trillion (~13% of Japan’s GDP) in 2000 to US$3.1 trillion (~61% of Japan’s GDP) in 2020. It is expected to reach US$6.8 trillion in 2030 (~108% of Japan’s GDP), exceeding Japan’s GDP. Due to rapid urbanisation, a wide gulf is observed in terms of the population density and GDP capita in capital cities. The middle and higher classes also make up a larger proportion of the total population today[2]. These factors highlight the opportunities that lie outside Japan’s national borders. Put together, these push-and-pull factors have implications for domestically focused Japanese businesses to come up with a strategy for diversifying their revenue streams, increasing their earning potential by looking beyond national borders and considering market entry in neighbouring countries, especially in rapidly developing ASEAN countries.  

Why Southeast Asia and in particular, Singapore?

People in Southeast Asia generally have a positive perception of Japanese brands, as they are commonly associated with reliability, craftsmanship, and simplicity. This grants Japanese companies greater pricing power, provided they are able to meet higher quality expectations. Among ASEAN countries, Singapore is by far the most affluent with the highest GDP per capita of ~US$60k, exceeding Japan’s GDP per capita of ~US$40k in 2020[3]. Consumers in Singapore have relatively high spending power. In turn, this aligns with the value proposition of many Japanese companies, which prefer to compete based on quality rather than on price. Located at the heart of Asia, Singapore is a popular destination for companies looking to establish a presence in SEA, with over 4,200 regional headquarters based in the country as of 2019[4]. Key reasons include its business-friendly environment, strong regulatory body, stable political system, ready access to a highly skilled workforce, and the list goes on. Singapore has capitalised on its strategic strengths to become the global hub for business and innovation. Notably, out of the ~35 unicorns that exist in SEA, ~15 hail from Singapore[5], dwarfing Japan’s ~10 despite its significantly larger size[6]. Having an affluent consumer base and a conducive business environment makes Singapore a highly viable choice for Japanese companies that are looking to explore growth outside Japan. However, as with any form of entry into a foreign market, forming strategic alliances with a suitable business partner equipped with the necessary market intelligence and connections could be one of the determinants of success.  

Japanese companies face both ‘hard’ and ‘soft’ issues when identifying a suitable business partner in Singapore

 ‘Hard’ issues are those related to having the requisite capabilities and knowledge about a new market, while ‘soft’ issues refer to challenges faced on an individual and interpersonal level.  

Common ‘hard’ issues faced by Japanese companies in Singapore include limited knowledge about local business practices and language barriers

Other than cultural differences between Japan and Singapore, business practices between the nations also vary. For instance, large Japanese companies tend to do business with their subsidiaries, especially if they operate in related fields or different stages of the value chain. As a result, some companies are able to thrive by serving the parent company as its major customer and excel in the domestic market without aggressively pursuing new clients or exploring new markets. On the contrary, Singapore companies prefer not to do business with related companies in a culture that advocates transparency and fairness. A tendering process is usually conducted to identify the companies that are able to fulfil requirements with the best quality at a reasonable price, thus embodying meritocracy rather than relationships. This strategy, in turn, ingrains a greater sense of accountability and motivation to ensure continuity after the initial business relationship has been secured. It is important to be aware of such country and industry-specific business practices prior to the market entry in order to have productive discussions with prospective business partners during the business matching process. Compared to Japan, which has a relatively homogenous society, Singapore is a multiracial country that is predominantly made up of Chinese, Malay and Indians, and other races. English is the common tongue that bridges language differences between the various races. Naturally, doing business in Singapore necessitates making business presentations and doing negotiations in English. However, only a minority of the Japanese population possess English skills, which could hinder the progress of Japanese companies that are looking to do business in Singapore. With that being said, Singaporeans do not expect non-English speakers to converse fluently and will try to accommodate by speaking slower and using simple terms. As long as an effort is made by both sides to be understood, language barriers should not be a hindrance when it comes to finding a suitable business partner in Singapore.  

Conversely, common ‘soft’ issues faced by Japanese companies in Singapore include the speed of decision-making and lack of management support for overseas expansion.

Japanese companies are known for being cautious in decision-making and placing great emphasis on making a consensus. Major decisions, especially those related to doing business overseas, are subject to a lengthy evaluation process by the HQ. Japanese companies also tend to prefer devoting more time to building relationships before entering into any definitive agreements with third parties, to minimise risks of the alliance falling apart due to irreconcilable differences in the future. In contrast, the decision-making power in Singapore companies tends to be vested in a few senior executives at the top of the organisational chart, which makes the process significantly faster. Singapore companies also tend to be more result-oriented, which makes them more agile and better positioned to seize opportunities as they come by. Finding a balance between building relationships and achieving results would be key to reaching a mutually beneficial agreement between both parties. Lastly, Japanese companies may face a lack of management support for overseas expansion. This is because the company has established a strong local presence in Japan with healthy revenue streams and stable profit margins. The motivation for change is low as the company is likely to continue doing well in the future by remaining status quo, and managers prefer to avoid the uncertainty associated with any form of business exploration. Therefore, convincing the management about the merits of overseas expansion will be an uphill battle, and likely to rank secondary to business activities that are ongoing domestically. The lack of commitment from the top management and lack of determination to succeed would prove to hamper efforts in venturing outside Japan, resulting in missed opportunities.  

Japanese companies can navigate through these issues by deploying the right human resources, obtaining management buy-in through an objective process, and engaging management consulting firms with a sound understanding of local markets

To address the ‘hard’ issues, Japanese companies should be selective in terms of the human resources involved in managing the overseas expansion to Singapore. Project members should be able to communicate in English to build a positive impression when dealing with prospective business partners. It’s less about having a strong command of the language, but more about putting in a genuine effort to promote two-way communication and understanding the other party better. Prior to any meeting, a significant amount of work needs to be done to understand the local business practices and industry context, while having a strategic view of what the company intends to achieve in Singapore. This would help to guide conversations and enable the representatives to ask the right questions to make the most out of each meeting. As for the ‘soft’ issues related to decision-making and securing management buy-in, the key is to minimise subjectivity and use a framework for decision-making. Instead of simply biding time to get a better understanding of the other party with no ‘finish line’ in sight, decision-making tools, such as a selection framework and evaluation matrix, could be adopted. These tools are tailor-made, depending on the use case. They take into consideration inputs from relevant internal stakeholders and are able to provide an ‘answer’ at the end of the process (e.g. decision as to which business partner to select). Other decision-making tools could be adopted to secure management buy-in, such as building a business case to explain and quantify the basis for overseas expansion (e.g. potential new revenue streams, new capabilities, return expectations, etc.). Japanese companies can also consider engaging management consulting firms with experience operating in the Singapore market to address any gaps in their organisational capabilities. Since its establishment in 2013, IGPI Singapore has supported established Japanese companies hailing from diverse industries in realising their overseas expansion plans. We understand that the success of overseas expansion hinges upon multiple factors that extend beyond a company’s internal capabilities. Identifying and forming strategic alliances with the right local partner could contribute significantly to its success in venturing overseas.  

Recently, IGPI Singapore worked closely with an established Japanese company to identify a suitable business partner to support its market entry into Singapore.

Key activities in the business matching process include:
  • Conducting a market assessment, including trends, opportunities, challenges and case studies of prominent players to gain an understanding of the industry landscape
  • Longlisting and shortlisting prospective partners using a selection framework
  • Arranging and conducting sounding interviews to gauge interest level
  • Facilitating face-to-face meetings with prospective partners
  • Determining the most suitable partner using an evaluation matrix
We hope the information provided some insight into the key challenges faced by Japanese companies when finding a suitable business partner in Singapore. IGPI can support your company in its market entry and maximise its chances of success – Get in touch with us!        
[1] The Japan Times (Apr 2022): https://www.japantimes.co.jp/news/2022/04/15/national/population-drop-japan-record/ [2] Previous article published by IGPI Singapore (June 2022): https://www.igpi.com.sg/transformation-of-organizational-capability/ [3] The World Bank, GDP per capita (current US$) – Singapore, Japan [4] EDB Singapore (Apr 2022): https://www.edb.gov.sg/en/business-insights/insights/futuristic-workspace-spore-a-hub-for-corporate-headquarters.html [5] The Straits Times (May 2022): https://www.straitstimes.com/business/weekly-money-fm-podcasts-understanding-south-east-asia-startup-scene%E2%80%99s-diversity [6] Nikkei Asia (Mar 2022): https://asia.nikkei.com/Business/Startups/Japan-s-top-business-lobby-wants-to-see-100-unicorns-by-2027
 

About the authors

Mr. Ryota Yamazaki is the Director of IGPI Singapore. Before joining IGPI, Ryota worked in Deloitte Consulting in Singapore, where he was a leader in the areas of Consumer Business and Supply Chain & Logistics in Southeast Asia. His areas of expertise are Strategy & Operations, such as market entry, Route-to-Market (RTM) strategy, business due diligence, and PMI. He started his career with A.P. Moller-Maersk Group as a management trainee and also worked for Kurt Salmon, where he had vast project experience, especially in Supply Chain & Logistics for the retail and consumer goods clients. Ryota graduated from the Faculty of Economics at Keio University.

 

Mr. Zhi Hao Thean is an Analyst in IGPI Singapore. Zhi Hao started his career with IGPI. He graduated from Singapore Management University with a Bachelor of Business Management, majoring in Finance. During his penultimate year, Zhi Hao embarked on an internship in Corporate Advisory, where he was engaged in M&A, financial due diligence, and valuation projects across various industries. He also worked as a Research Assistant at SMU, where he performed academic research on real estate investment trusts. Zhi Hao is proficient in English and Mandarin. He enjoys keeping up with the latest developments in consumer technology such as smartwatches and mobile operating systems in his free time.


 

About IGPI

 Industrial Growth Platform Inc. (IGPI) is a premier Japanese business consulting firm with a presence and coverage across Asian markets. IGPI was established by former members of the Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around funds supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap jointly established Nordic Ninja, a €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus on the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support for the commercialisation and monetization of technologies. IGPI Australia is a branch office of IGPI Singapore. The latter, which was established in 2013, focuses on management consulting and M&A advisory in Southeast Asia across various sectors. We act as a bridge between Japan and wider APAC, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan and acted as sell-side advisors for SMEs and private equity funds looking to divest. IGPI Australia was established in 2020 with a dual focus of helping Australian businesses enter and grow in ASEAN / Japan and attracting Japanese investments into Australia. We have since successfully helped to connect multiple Australian businesses with Japanese businesses within IGPI’s network.

  Get in touch with us on internationalisation, strategic planning and fund-raising-related topics!  
This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.  
The result of the joint research with JETRO Singapore suggests that for Japanese companies to succeed in creating new businesses and continue to grow in emerging Asian countries, there is an urgent need for organizational transformation for exploration. To achieve the transformation, it is necessary to form and operate a local team that is autonomous and cross-functional and to get sufficient support from the group CEO. There are also eight key factors for the formation and operation of the team. * This article is based on a research project conducted jointly by Japan External Trade Organization (JETRO) and IGPI Singapore, and it is published with JETRO’s permission. The detailed report is available on JETRO’s website (Only in Japanese).    

In ASEAN, where the environment is changing rapidly, business opportunities are expanding, and the “Exploration” is being required more than before

The population of 10 ASEAN countries is about 660 million, making it the third-largest region after China and India. In recent years, GDP has increased rapidly with the rise in per capita income, rising from $ 0.6 trillion in 2000 to only 13% of Japan, to $ 3.1 trillion in 2020, 61% of Japan. It will account for 6.8 trillion yen in 2030, which is expected to exceed Japan’s GDP (see Figure1[1]). In ASEAN, along with the urbanization, in which more and more people gather in cities, the ratio of the middle class is increasing in many countries, promoting economic development in the area. In many ASEAN countries, the ratio of middle-class or higher households is more than 50% nowadays. It is even expected that not only the middle class but also the wealthy class will increase in the future (see Figure2[2], 3[3]). Furthermore, in ASEAN, the penetration rate of smartphones is increasing more rapidly than in developed countries such as Japan, and people in ASEAN use smartphones much more frequently and longer a day compared to people in Japan. As a result, the leapfrogging (accelerating development by skipping inferior, less efficient, more expensive or more polluting technologies and industries, and moving directly to more advanced ones) has also occurred, and the business environment has changed significantly (see Figure 4[4]). The rapid changes mentioned above have given not only opportunities in the growing market, but also opportunities from the rising demand for solutions to various social issues such as traffic congestion, medical shortages, and lack of service quality. However, amid such rapid changes, the ability related to exploration is required more than before. It mainly consists of the creativity to make a new business concept through careful observation of the site, and the agility to repeat the planning and verification of new business hypotheses at high speed. In response to these changes, emerging digital and tech companies such as Grab and Go To (Gojek & Tokopedia) are achieving continuous transformation and growth while developing new businesses one after another through quick top-down decision making, etc in Singapore and other countries in Southeast Asia.  

Acquiring organizational capability for exploration is a challenge for many large Japanese companies in general

Three or forty years ago, when the environmental changes in ASEAN were gradual, Japanese companies were very successful in ASEAN with the strength of operational excellence (organizational capability of “Exploitation” to make better things faster and cheaper) in mainly manufacturing industries such as automobiles. However, the mindset and customs cultivated by this successful experience, and the various systems that supported this success such as the lifetime employment system have been hampering many large Japanese companies to change. As such, they are having a hard time creating new businesses in the current changing environment in ASEAN. On the other hand, some Japanese companies have been engaged in exploration activities and have achieved certain results. For example, in an emerging country in Asia, a Japanese company in the medical equipment industry has co-created a service with a startup that provides digital services that are expected to have synergistic effects with its high-quality product, released the service in a short period, and achieved financial performance exceeding the initial plan. In fact, Japanese companies that have strengths in exploitation activities have the potential to realize further growth in emerging countries in Asia by acquiring organizational capabilities of exploration. Organizational transformation is an urgent issue for many large Japanese companies.  

Key factors of organizational transformation for Japanese companies to succeed in new businesses in Southeast Asia

Therefore, IGPI Singapore, in collaboration with JETRO Singapore, conducted interviews with more than 30 Japanese companies that are actively engaged in exploration activities. We have found out there are two main points for Japanese companies to transform and acquire their organizational capabilities of exploration (see Figure 5). The first is to form and operate an autonomous and cross-functional local team. If the headquarters empower the local team and it can engage in various activities related to creating new business autonomously by itself, the agility of the team will be improved. In addition, by increasing the diversity of the organization (adding members with various backgrounds to the team), it is possible to easily conceptualize business plans from a new perspective, and even if they encounter problems, they will be able to come up with the ideas of solutions from various angles. The other is for the group CEO to commit to ensure that such a local team is formed and operated properly. Since the nature of exploitation of existing businesses and exploration for new businesses are different, there are often conflicts in terms of resources, etc., and it is often required that the CEO take the initiative in providing support to the local team. Then, what should be done to realize the formation and operation of an autonomous and cross-functional local team? There are eight key factors (see Figure 6).

  (1) Co-creation and penetration of MVV (Mission, Vision, Value) and Strategy

  • The headquarters and overseas offices work together while discussing missions, visions, values, and strategies in the region in a two-way manner, and they are penetrated to each member in overseas offices.

  (2) Appointment of capable leaders and appropriate delegation

  • Appoint a person who can think in a new way and try hard to make a thing happen as a leader of an overseas office regardless of his/her nationality.
  • Sufficiently delegate to overseas offices/local teams after clarifying the scope of delegation.

  (3) Sufficient resource allocation

  • Management allocates resources with direct involvement and support.
  • Provide resources separated from the existing business.

  (4) Effective monitoring

  • The headquarters and overseas offices co-create monitoring indicators to reduce unnecessary reporting work.
  • Make business decisions based on rational standards and make proper decisions.

  (5) Generation of “knowledge” at overseas offices

  • Accumulate the knowledge and know-how gained/formed at overseas offices, and learn lessons from failure to be successful next time (do not find a person who is to blame when you fail).

  (6) Sharing of “knowledge” at the headquarters / overseas offices

  • Accelerate growth by horizontally utilizing the knowledge and know-how accumulated at the headquarters / overseas offices in other regions.
  • Overseas offices share local business opportunities with the headquarters and collaborate with it for business development.

  (7) Appointment of appropriate management members

  • Add those who have an understanding of creating new businesses in emerging Asian countries to management members.

  (8) Building a foundation to support new business creation

  • Separate the organization that engages in new business creation from the existing organization.
  • Develop and allocate human resources (coordinators between the headquarters and overseas offices, etc.) to promote local new business creation activities
  • Establish and properly operate personnel-related systems (evaluation, remuneration, placement, etc.) to secure excellent local employees and improve the motivation of Japanese dispatchers.
 

It is important to derive a unique solution considering the situation of your company

The above eight factors are general solutions that inductively derived success factors and failure factors from the cases of each company interviewed. However, because management is highly individual, it often fails for any company to apply the general solution or the success stories of other companies as they are. The important thing is to identify the essence of the main point as a general solution, interpret it correctly in light of the company’s unique circumstances (including strengths and weaknesses), and apply it (see Figure 7).  

The value provided by IGPI

Whether for digital or traditional organizations, smart transformation is key to growth. Since its establishment in 2013, IGPI Singapore has been exploring many Japanese companies for market research, strategy planning, execution support including partner search and approach, ideation, and related training for new business creation in Southeast Asia. We have provided various services to support our activities. By providing these services in the form of accompanying, not only the results of exploration activities but also the value of strengthening the organizational capabilities of each company is provided. ————————————————————————————————————————————– [1] Created by IGPI from IMF, NLI Research Institute [2] Created by IGPI from Jetro, World Population Review, Demographia, World Meter, CITIE, IMF, C-GIDD etc. [3] Same as above [4] Created by IGPI from Ministry of Economy, Trade and Industry  
   

About the author

Jongwoo has worked in ABeam Consulting Ltd, where he engaged in various consulting projects including the development of business plans, creating go-to-market strategy, and hands-on support in several B2B industries such as energy, automotive, ve, IT, etc. He not only develops strategy but also supports clients’ execution of the plan, such as searching for strategic alliance partners and approaching them. He started his career as an auditor in KPMG Japan, leading an audit team for foreign investment banks, and also provided regulation-related advisory services to Japanese financial institutions. He has a bachelor’s degree in economics from the University of Tokyo.    

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premium Japanese management consulting and M&A advisory firm headquartered in Tokyo with offices in Singapore, Hanoi, Shanghai, and Melbourne. IGPI has 14 institutional investors, including prominent Japanese mega-corporations such as Nomura Holdings, SMBC, KDDI, Recruit, and Sumitomo Corporation to name a few.     IGPI has vast experience in supporting Fortune 500s, Govt. agencies, universities, SMEs, and startups across Asia and beyond for their strategic business needs such as market entry and digital transformation and growth strategies, various aspects of M&A, innovation advisory, new business creation, etc. IGPI is consciously an industry agnostic firm (work in 10+ industries) and this coupled with its making its venture investments (30+ till date) adds to its uniqueness. IGPI has a JV with the Japan Bank of International Cooperation (JBIC) – one of JV’s initiatives is a VC fund in Europe (EUR 100mn fund) with participation from Honda, Panasonic, and Omron.    Get in touch with us on internationalization, strategic planning, and fundraising-related topics!  

This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness, and accuracy of such information. All rights reserved by IGPI.

 
 
“We are a large Japanese company with a long history. The management team, including myself, has been telling our employees about the necessity of innovation and the importance of digital transformation at every opportunity, but we have not seen any signs of change nor any tangible results. To be honest, I am beginning to feel that it is difficult for a large company to innovate like a start-up. Do you have any advice for us?”

 

Products have lifecycles

A product has a lifecycle, which may be long or short depending on its characteristics, as shown below. The lifecycle of introduction, growth, maturity, and decline is easy to understand if we compare it to the life of a human being. Naturally, infants and adults, as well as the young and old have different values and use money differently. In the case of business, our way of looking at sales and profits should also be different, as shown in the figure below. This is also similar to the life of a human being. Initially, there is no income earned during our childhood and money is continuously spent on necessities such as food, education, etc. However, we can think of this as an “investment for the future” rather than a mere expense. As we grow up, our expenses increase while income rises and as we move from middle age to old age, our investments for the future decrease and our priority shifts to how to control expenses while being conscious of saving sufficient money. In business, the number of competitors also change over the different phases of the lifecycle. This number, which was small in the introduction phase, increases rapidly in the growth phase, decreases again in the maturity phase and decline phase due to weeding out and eventually is reduced to a few companies through acquisitions and mergers. This is what happens in every industry.

 

Management styles differ depending on the stage of the lifecycle

The person posing the question mentions startup innovation, but the products deployed by startups are in the introduction to growth phase, while most of the products deployed by large companies are in the maturity to decline phase. This is a natural change, and the business is sustained by recovering the investment made during the introduction and growth periods in the mature period. The company grows by having more products in the mature stage and continues its business by investing the generated cash to create new products. The key point is that the management style of a business differs depending on which stage of the lifecycle it is standing in. From the introduction to the growth phase, the company needs to focus on new customer needs and social issues and clearly articulate its vision. This is more easily understood by imagining visionary managers such as Steve Jobs or Elon Musk. In the mature stage, a fluid and adjustable style of management is required as it is important to identify how to generate stable profits in the formed market. This is the PDCA type of management that Japanese companies excel at, increasing sales and reducing costs in order to raise profits from the previous year.

 During a period of decline, fact-based, top-down decision-making is required to determine whether to remain in the declining market or to withdraw from it. Making a decision to withdraw from a declining market, even if it is an inherited business or still profitable at that point in time, requires autocratic management.

 

Ageing of organisations is inevitable

In its early days, every company strives to solve the problems of their customers, but as soon as they reach the growth stage, they start to focus on their competitors. In order to beat the competition, they adopt a variety of measures to hire talented employees and introduce a number of systems to retain them. The gaze of the management and employees gradually turn inward to their own company, and the ageing process is rapidly exacerbated in an organisation that has become insensitive to external stimuli. This is the reason why startups lose their liveliness when people coming from large companies introduce various HR systems and management structures, or why their decision-making process becomes slower than before after being acquired by a large company. Also, since ageing is an irreversible process, even if we can slow it down slightly, we cannot stay as young as a teenager forever. Per the question above, it is not easy to make the same innovations in a large company as compared to a startup. The stages they are in are different, the problems they need to solve are different and the goals of their management may be different. Don’t be seduced by the words “innovation” and “transformation,” but think about whether you have a clear idea of the issues your company needs to address now. If the overall concept of problem-solving drawn from these issues is not shared with your employees, it will be inevitable that your frontline will not proceed in the direction intended by management. Though you may be able to accumulate small improvements, you cannot expect to transform the organisation as a whole. Innovation and digital transformation is not the goal, but rather, the first priority is to listen to the voices of your customers and frontline, identify the issues that need to be solved and share them with the entire company. For example, Sony recently announced that it is working with Honda to develop an electric car. Sony is much older than when it launched the Walkman, but continues to innovate at an age-appropriate rate. There is no need to be pessimistic just because your organisation has aged.

 

Architects are unlikely to be born from a well-developed organisation

An entrepreneur is the equivalent of an architect of a company. Entrepreneurs are business architects who are generally:
  • Able to draw a vision from a blank sheet of paper
  • Consider all facets of the company
  • Possess the ability to think in solitude
  • Free from constraints of existing ‘common sense’ and rule in their thinking
  • Able to incorporate a personal touch to their company
Therefore, we may presume that many entrepreneurs are more or less capable of practising Architectural Thinking. However, it is not enough if only entrepreneurs can practice it.

 

Innovation and new ideas are needed at various levels and in various situations

The reason why I advocate Architectural Thinking is because this way of thinking is required at many business scenes. The age of “鶏⼝⽜後 (Better be the head of a dog than the tail of a lion)”, brought about by digitalisation, requires innovation and new ideas at different levels and in a variety of situations. While the architect of the company as a whole is the entrepreneur, Architectural Thinking is also required at the “upstream” level in each department and project. However, although Architectural Thinking can be applied in various situations, it is a difficult skill to develop in certain organisations. This is because the organisation itself exists as a product of Architectural Thinking by its founders and other upstream people. The reason why it is difficult to create architects from established organisations is because there are few opportunities to utilize such abilities even if there were people who possessed them.

 

Governance reform to bring diversity to the management is important

While it is difficult to create architects from established organisations, architects are essential for developing new products and new businesses. Thus, in order for ageing companies to survive, it is important to raise basal metabolism and ensure that this metabolism is working properly. So, what can we do to achieve these goals in the organisation? One solution is to create a mechanism for selecting a diverse management team. For example, OMRON, which has been actively promoting governance reforms, has established the President Nomination Advisory Committee and the Personnel Advisory Committee for the purpose of selecting the management team with an objective viewpoint. The current president does not sit on this committee. In the case of a startup, an entrepreneur can focus on driving the growth of the company as an architect. However, as mentioned earlier, management skills such as adjustment and autocracy are required in addition to playing the role of an architect in large companies, so diversity of management personnel is key to further growth. In order to continue running a large company while monitoring businesses in the mature or declining phase, it is important to find people with Architectural Thinking skills that have little to no opportunities in the established organisation and assign them to the right places to create new businesses or develop new products after assessing their potential. This is applicable not only to the management of a company as a whole but also to each department. Especially in the age of VUCA (Volatility, Uncertainty, Complexity, and Ambiguity), where things are changing rapidly, it is imperative that as many departments as possible make profits from existing products while investing for the future. So, how can we achieve governance that is both diverse and balanced as an organisation?

 

Issues are occurring on-site

When talking about governance reform, we tend to focus on formalisms such as increasing the number of external directors or inviting women and foreigners as external directors. The fact is there is no such general solution in management. As mentioned above, the management team of a large corporation needs to be diverse. If the current president is an autocratic architect with overwhelming influence, the others in the management team may be of the adjustment type. As long as management diversity is ensured according to the lifecycle stage of each company and business and there is fundamentally no issue with having a male-only, female-only, or Japanese-only management team in each company. However, we must keep in mind that even if the management team is renewed, new products will not be created, and sales and profits will not increase unless the behaviour of the frontline changes. When undertaking management reform, keep a high perspective and analyse the stage your company is in and at the same time, pay close attention to what is happening on-site. By going back and forth between concrete and abstract to develop an overall concept from scratch, we can create a balanced view of the big picture. It is also important to share this vision with on-site employees. There is no doubt that a group of people who are forced to walk without knowing where they are heading and a group of people who each recognise their destination and walk with purpose, will have different strides and completely different views.

 

About the author

Kohki Sakata is CEO of IGPI Singapore. After joining Cap Gemini and Coca Cola, Kohki joined Revamp Corporation, where he managed projects on global expansion and turnaround in various sectors, including F&B, healthcare, retail, IT, etc. After joining IGPI, Kohki has managed projects mainly on global expansion and cross border M&A in various sectors such as logistics, IT, telecom, retail, etc. In addition to his broad experience in implementing solutions that have been developed in Western countries, he has developed multiple methods to turnaround Asian companies with a focus on setting a clear vision and employee empowerment. He has proven the practicality of these methods by turning around Asian companies not only as an advisor but also as senior management. He graduated from Waseda University Department of Political Science and Economics and IE Business School.

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premium Japanese management consulting and M&A advisory firm headquartered in Tokyo with offices in Singapore, Hanoi, Shanghai and Melbourne. IGPI has 14 institutional investors, including prominent Japanese mega-corporations such as Nomura Holdings, SMBC, KDDI, Recruit and Sumitomo Corporation to name a few.  IGPI has vast experience of supporting Fortune 500s, Govt. agencies, universities, SMEs and startups across Asia and beyond for their strategic business needs such as market entry and growth strategies, various aspects of M&A, innovation advisory, new business creation etc. IGPI is consciously an industry agnostic firm (work in 10+ industries) and this coupled with it making its own venture investments (30+ till date) adds to its uniqueness. IGPI has a JV with Japan Bank of International Cooperation (JBIC) – one of JV’s initiative is a VC fund in Europe (EUR 100mn fund) with participation from Honda, Panasonic and Omron. Get in touch with us on internationalization, strategic planning and fund raising related topics!

 

*This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

 

What makes Vietnam an attractive destination?

Vietnam is among the most dynamic emerging countries in the East Asia region1. The transformation of its economy since the 1990s has lifted Vietnam from one of the poorest countries 25 years ago into a middle-income country2. Vietnam’s economic growth was ranked second in 2019 and first in 2020 (Figure 1) amongst its peers in Southeast Asia – one of the few countries in the world to achieve a positive GDP growth rate (2.9%) during the Covid-19 pandemic.

 

Figure 1: GDP growth rate of ASEAN countries during 2014 – 20203

  Vietnam’s economic growth is driven by export-oriented manufacturing, foreign direct investment and increasing domestic consumption demand.
  • Exports increased at a remarkable average annual rate of 12.8% during 2015 – 2019 and nearly 5% in 20204, allowing Vietnam to enjoy a trade surplus for 5 consecutive years from 2016 to 2020.
FDI inflows in Vietnam witnessed constant growth and achieved USD 16.1 billion in 20195. Over 70% of FDI is accounted by technology manufacturing sector, indicating that Vietnam is being considered as the new manufacturing hub in Asia6 with the advantages of cost-competitive labour,
  • young population, investment incentives and preferential treatment created by various Vietnam’s FTAs such as CPTPP and RCEP.
  • Vietnam’s population is expected to expand to 120 million by 2050 from 96.5 million in 20197. The workforce is young, dynamic, better educated and digital-savvy.
Vietnam has a high internet penetration rate of 68.7% (among total population in 2019) and the middle class is expected to reach 26% of the population by 20268, making it an attractive destination for foreign brands to provide high value-added products and services.

How does Australia – Vietnam bilateral trade relationship facilitate Australian businesses?

Vietnam and Australia have a strong bilateral trade relationship. The agreement of two countries in August 2019 to develop the Enhanced Economic Engagement Strategy (published in Dec’21) with the aim of becoming top 10 trade partners and doubling bilateral investment9 reinforced the relation. The two countries are currently partners under a growing network of free trade agreements (FTAs):
  • ASEAN-Australia-New Zealand Free Trade Area (AANZ)
  • Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
  • Regional Comprehensive Economic Partnership (RCEP)
Australia was the 14th largest export market of Vietnam in 2020 (major exports include coal, education, iron ore, live animals, wheat, aluminium, steel, meat and fruits etc.). The total two-way trade between Vietnam and Australia in 2020 was USD 8.0 billion, of which USD 4.42 billion was from Australia and USD 3.62 billion was from Vietnam10.

Opportunities for doing business in Vietnam

1. Agriculture  

Agriculture is an important economic sector in Vietnam (contributing 14.9% to Vietnam’s GDP in 2020)11. Science and technology are key to rising product capacity, quality of products and improving farmers’ lives. There is a rising trend that Vietnam cooperates with other developed countries’ agtech and foodtech businesses who introduce smart farming, machinery and software, the internet of things, genetic and breeding and pest management. Key issues in Vietnam (agriculture)
  • Food-borne illness and food poisoning due to bacterial contamination caused by poor hygiene.
  • High use of antibiotics, pesticides and chemical fertilisers above recommended level and lack of traceability are other elements causing food safety concerns.
  • Low technology adoption leads to volatility in agriculture production
Common modes of entry into Vietnam: acquisition and joint-ventures.

SUNRICE – One of Australia’s leading food exporters with 30 brands in 50 countries

About the company : One of the largest rice food companies in the world and one of Australia’s leading branded food exporters

Mode of entry : In 2018, SunRice accomplished the acquisition of a rice processing mill in Dong Thap Province to establish a fully vertical integrated supply chain in Vietnam.

How it solved issues : The investment helps to introduce advanced production know-how accompanying agronomic expertise to upskill and improve the quality, safety standards and reputation of Vietnam’s rice exports.
CBH Group – Western Australian grain grower co-operative About the company : grain grower’s cooperative that handles, markets and processes grain from the wheat belt of Western Australia Mode of entry : Created a joint venture (Interflour Group) with another regional player through the acquisition of six flour mills in Indonesia, Malaysia and Vietnam12.   How it solved issues : Using grain from Australian and around the world, Interflour supplies better quality flour to Vietnam domestic market for baking, noodle and confectionery production and malt to supply Vietnam’s drinks industry
With the rise in middle-class population expected, the Government of Vietnam is actively seeking foreign participations to shift towards high-tech agriculture applications. This support, along with CPTPP and ratification of RCEP, makes investment in Vietnam even more attractive13

2. Healthcare

Vietnam’s public healthcare system is organised into four levels: Central, Provincial, District and Communal. Central and provincial-level hospitals usually consist of general and specialised hospitals and medical centres. District health centres and commune health stations offer primary care alongside some medical and preventative services14. Vietnam’s private healthcare sector is growing. According to the Ministry of Health, the number of Vietnam’s private hospitals in 2020 was 250, accounting for 17% of the total 1,400 hospitals countrywide15. Key issues in Vietnam (healthcare)
  • Shift of focus from communicable to non-communicable disease due to increasing prevalence of chronic diseases in Vietnam such as diabetes, cancer, cardiovascular disease and etc.
  • Greater healthcare demand is expected in Vietnam as Vietnam is identified as one of the world’s fastest-ageing societies
  • Overcrowding and high-occupancy rates in rural areas due to limited resources (doctors, hospital beds etc.)
Common modes of entry into Vietnam: strategic partnership and foreign direct investment.
Icon Group – Australia’s largest dedicated cancer care provider About the company : Reshaped cancer care by integrating distinct treatment disciplines. It has expanded globally, including some Asian countries such as Singapore, China and Hong Kong16. Mode of entry : Entered partnerships with two of Vietnam’s leading healthcare providers – The National Cancer Hospital in Hanoi (the K Hospital) and the Military 175 Hospital in Ho Chi Minh City. How it solved issues : The partnership helped upgrade Vietnam’s cancer care infrastructure to a larger scale, applying an international standard in medical excellence across hospital management and utilise innovative technologies to provide remote care as necessary17. They have also brought in experts from Icon Group’s Australian and Singaporean businesses to assist the Vietnamese healthcare providers.
Cerebral Palsy Alliance (CPA) – leading Australian care and research centre for cerebral palsy and other neurological disorders About the company : Non-profit organisation providing family-centred therapies, life skills coaches, equipment and support for people and their families living with cerebral palsy and other neurological and physical disabilities18. Mode of entry : Collaborated with key stakeholders in Vietnam’s healthcare industry through joint research19. How it solved issues : CPA has been conducting research, composing clinical management guidelines and delivering clinical care/advice across Vietnam.
There are growing demands for more accessible and higher-quality healthcare in Vietnam as the growing middle class is becoming more aware of their health and experience when receiving medical treatment. Australia’s advanced technology and expertise in healthcare will be able to help satisfy the demand in Vietnam.

3. Banking

Currently, Vietnam’s banking sector consists of 4 state-owned commercial banks, 31 joint-stock commercial banks, 9 wholly-foreign-owned banks, 2 joint-venture banks, 2 policy banks, 1 cooperative bank and 48 foreign bank branches. Commercial banks in Vietnam are currently engaged in a competition of using modern banking technology to provide quality services, thus attracting both Vietnamese customers and foreigners. As of 2019, there are 78 banks offering internet payment solutions, 47 banks offering mobile payment and 29 banks accepting QR code payment20. Key issues in Vietnam (banking)
  • Vietnam has one of the lowest bank penetration rates in ASEAN
  • Low access to credit by SMEs due to guarantees and collateral requirements
Common modes of entry into Vietnam: strategic partnership and foreign direct investment.
ANZ – a successful Australian bank with a proud history spanning over 175 years About the company : ANZ is one of the world’s leading financial service groups, operating in 32 markets. Mode of entry : Invested directly and set up a branch in Vietnam and was granted a banking license to operate a fully foreign-owned bank in the country. How it solved issues : ANZ provided financial services to retail and small to medium-sized enterprise banking business across eight branches in Ha Noi and HCMC, serving 125,000 customers before selling its retail and SME in 2017
Raiz Invest Limited – an Australian fintech startup About the company : Australian fintech startup operating in Australia, Indonesia and Malaysia that allows customers to round-up everyday purchases and pool their spare change to invest in equities, bonds and other securities. Mode of entry : It is expected for Raiz to enter into strategic partnership with a local player similar to their strategy in Malaysia where they partnered with a local unit trust player How it can solve issues : Raiz provides a platform that increases the access to capital for the users (e.g. access to larger sum of money for investment).
Vietnam has high digital readiness (internet penetration rate of 68.7%, mobile subscriptions of 141.2 per 100 people in 201921), meaning that there is high potential for fintech solutions. To support banking digitalisation initiatives, the State Bank of Vietnam’s Steering Committee on Fintech was set up in 2017 to encourage the development of fintech.

4. Education

Traditionally, education is of great importance to the Vietnamese. Since 2000, the government has committed approximately up to 20% of public expenditure on education – one of the highest in ASEAN22. Vietnam’s local rising middle class prefers the private education sector over the public school method due to the better quality of services. This has translated into a strong market for private institutions and vocational schools and services. Key issues in Vietnam (education)
  • Demand for talent and highly-skilled workers in Vietnam far surpasses supply as local qualifications in many fields are not well acknowledged
  • Lack of e-learning platform further limiting access to education in major cities which is further emphasized due to Covid-19 movement control
 Common mode of entry into Vietnam: strategic partnership and foreign direct investment.
RMIT University – an internationally recognised Australian university of technology, design and enterprise About the company: Innovative university in Melbourne, recognized for its study and research in technology, design and enterprise23. Mode of entry: In 2001, RMIT entered Vietnam by investing directly and opening its first campus in HCMC with services and facilities mirroring the Melbourne campus. A second campus opened in Hanoi in 2004 and in 2017, an English language centre opened in Da Nang. How it solves: RMIT Vietnam is assisting in the development of human resources capability in Vietnam. Degrees are awarded by RMIT University in Australia, allowing Vietnamese students to receive an overseas education without having to leave home.
English Learning Company (ELC) – an Australian award-winning English language school About the company: ELC offers a range of major English courses which are supplemented by a choice of electives. ELC has partnerships with a number of Australian universities and education providers. Mode of entry: In 2017, ELC entered Vietnam via a partnership with HUTECH University (Vietnam) to establish ELC Vietnam in HCM City to meet the demand for English in Vietnam. How it solved issues: Operating as a private English language centre, ELC Vietnam aims to provide students with a quality on-campus option for English language lessons. ELC works with a number of educational organisations in Vietnam to offer a paid teaching internship working in local primary and high schools with competitive prices for all English programmes.
The digital economy in Vietnam is already booming, with ICT being one of the fastest-growing sectors. The high internet penetration rate, a significant number of digital consumers and a rapidly emerging middle class underpin the demand for diverse and higher-quality education in Vietnam. This condition has paved the way for Australian edtech businesses and education providers into Vietnam24. Particularly, edtech was among the top five most profitable areas for Vietnamese start-ups behind fintech, e-commerce, traveltech and logistics in 201825.    

What challenges Australians may encounter in entering Vietnam?

  • Difference in culture between Australia and Vietnam: Compared to Australia, Vietnam may not have a formal bidding/tenure procedure in many business scenarios. Relationships with local stakeholders such as suppliers, industry associations, local government and central ministries are key. Thus, Australian partners need to show their commitment and invest time in building trust. Third-party introduction or recommendations can be a good start.
  • There are still grey areas in Vietnam laws and regulations. This may result in difficulties in interpretation, application and compliance for foreign investors. However, as part of Vietnam’s commitment to a variety of FTAs, the Government is focusing on reforming the legal system to make them consistent with international standards and result in a more business-friendly regulatory environment. Australian businesses can also find local partners to assist in understanding and complying with regulations, permits and laws.
  • Corruption still remains a challenge in Vietnam. Vietnam ranked 107 (out of 180) on Transparency International’s 2017 Corruption Perceptions Index. Anti-corruption has moved up the political agenda recently. With the determination of the Government of Vietnam in anti-corruption, a new Law on Anti-corruption was issued in November 2018. The Decree guiding the implementation of the Law was passed in 201926, which improves Vietnam comprehensive ant-corruption legal framework.
   

Wrapping up

There are vast opportunities for doing business and investment in various sectors of Vietnam such as agriculture, healthcare, banking and education. The timing is ripe for both established Australian businesses and startups to engage with Vietnam. Proved to be a resilient economy, Vietnam has achieved positive economic growth instead of falling into recession like several regional peers during the Covid-19 pandemic. With Vietnam’s strong endeavour in regulatory reform to facilitate business environment, sturdy support for digital transformation and technology transfer as well as a profound network of FTAs, expanding middle income population and a high internet penetration rate, opportunities are unfolding for Australian businesses, who are willing to participate and adapt to local market conditions, cultural difference, and leverage Australia’s distinctive advantages.

IGPI insights and how we can make a difference for Australian business?

Vietnam is one of the fastest-growing economies in ASEAN. Local government and companies are often looking for opportunities to collaborate and partner with foreign companies who possess technologies and innovations that can help solve key issues in Vietnam and create a new business. Having some form of business collaboration or partnership with local firms is one of the most popular and common ways to effectively enter a new market. Finding a suitable Vietnamese partner may be easier than you think if you get help from the right people. We understand that the Vietnam market and corporations may not be that easy to navigate. Truth being said, there is also no “one size fit all” approach and companies need to employ different strategies based on the unique needs and environment they are operating in. IGPI has vast experience in supporting Fortune 500s, Government agencies, SMEs and funded startups across Asia and beyond for their strategic business needs, including hands-on consulting support and innovation advisory, which allows us to understand the nuances of market entry holistically. Our non-exhaustive list of capabilities to assist foreign companies entering Vietnam includes:
  • Market landscape study and strategic options for go/no-go
  • Custom hands-on support for strategy implementation
  • Business matching support through our established network in Vietnam
 

About the authors

Mr. Rachit Khosla is the Country Manager of IGPI Australia. Rachit is a seasoned strategy consulting professional with over 12 years experience in leading and executing market entry and growth strategy (both organic and inorganic) and open innovation engagements for Fortune 500 businesses and large MNCs across the Asia Pacific. He has advised clients in a diverse range of industries, including automotive, fin-tech, industrial and manufacturing, med-tech & healthcare, smart cities, construction materials, travel, IT & telecom to name a few. Rachit was the former Country Manager and Director for YCP Solidiance (Japanese owned) and Founder and CEO of an online B2B marketplace startup for professional advisory services focused on Emerging Markets. Ms. Hang Nga Nguyen is an Intern at IGPI Australia (Jul-Oct 2021). Hang is currently pursuing her Master of International Business from the University of Melbourne. Prior to this, she has completed a Bachelor of Commerce, majoring in Accounting and Finance. Hang is from Vietnam (Hanoi capital) and is currently based in Melbourne.  

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premium Japanese management consulting and M&A advisory firm headquartered in Tokyo with offices in Singapore, Hanoi, Shanghai and Melbourne. IGPI has 14 institutional investors, including prominent Japanese mega-corporations such as Nomura Holdings, SMBC, KDDI, Recruit and Sumitomo Corporation to name a few. http://igpi.co.jp/     IGPI has vast experience of supporting Fortune 500s, Govt. agencies, universities, SMEs and startups across Asia and beyond for their strategic business needs such as market entry and growth strategies, various aspects of M&A, innovation advisory, new business creation etc. IGPI is consciously an industry agnostic firm (work in 10+ industries) and this coupled with it making its own venture investments (30+ till date) adds to its uniqueness. IGPI has a JV with Japan Bank of International Cooperation (JBIC) – one of JV’s initiative is a VC fund in Europe (EUR 100mn fund) with participation from Honda, Panasonic and Omron. https://nordicninja.vc/ Get in touch with us on internationalization, strategic planning and fund raising related topics!   IGPI Australia – contacts:  

Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp

Rachit Khosla Country Manager – Australia +61 414 433 572 r.khosla@igpi.co.jp This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI. __________________________________________________________________________________________
  1. World Bank – Vietnam overview (2021)
  2. World Bank – Vietnam: Achieving Success as a Middle-income Country (2013)
  3. World Bank – GDP growth (annual %)
  4.  World Bank – Vietnam exports of goods and services (annual % growth)
  5. World Bank – Vietnam exports of goods and services (annual % growth)
  6. Austrade – Export markets: Vietnam
  7. World Bank – Vietnam overview (2021)
  8. World Bank – Vietnam overview (2021)
  9. DFAT – Vietnam country brief
  10. United Nations COMTRADE database
  11. Vietnam Briefing – Why the agtech industry will aid Vietnam’s hi-tech growth (2021)
  1. Interflour Group – About us
  2. DFAT – Business envoy (2018)
  3. WHO – Human resources for health country profiles Vietnam (2016)
  4. Vietnam Investment Review – Vietnam’s private hospital chains keep attracting foreign investment (2020)
  5. Austrade – Icon Group to pioneer treatment-plan exports to Southeast Asia
  6. Ibid.
  7. CPA – About us
  8. Austrade – Cerebral Palsy Alliance looks to Vietnam to grow its impact (2019)
  9. Austrade – Digital banking in Vietnam: A guide to market (2020)
  10. World Bank – Vietnam mobile cellular subscriptions (per 100 people)
  11. Vietnam Briefing – Education in Vietnam: Opportunities and Challenges (2020)
  12. RMIT University, About RMIT
  13. Austrade – Vietnam edtech scoping study (2020)
  14. Ibid.
  15. Baker McKenzie – Vietnam: New Decree Relating to Implementation of New Law on Anti-Corruption (2019)
 
More recently, an outbreak at the Pasir Panjang Wholesale Centre, which handles about half of Singapore’s vegetable imports, led to a temporary supply disruption in September 2021. These events brought food security into the limelight as it has a direct impact on the livelihood of Singaporeans. The Singapore Food Agency (SFA) revealed its ambitious ’30 by 30’ target in 2019. the goal is to locally produce 30% of Singapore’s nutritional needs locally by 2030. A myriad of government schemes such as the S$60 million Agri-food Cluster Transformation Fund and the S$39.4 million ‘30×30 Express’ grant were introduced to provide financial support to innovative companies which have risen to the challenge. The SFA has also launched tenders for more than 10 carpark rooftops in 2020 and 2021 to be used as alternative spaces for urban farming. On the demand side, consumers were generally receptive to purchasing locally cultivated vegetables that carried an ‘SG Fresh Produce’ Logo. Many upscale restaurants and hotels have incorporated local produce into their menus to reduce the carbon footprint of their food supply and ensure the freshness of their ingredients. The strong push by the government coupled with an increase in demand for locally produced vegetables contributed to a heightened interest in urban farming. As at October 2021, there are at least 20 urban farms in Singapore operating in both indoors and in rooftop environments.

Urban farms such as Sustenir and Edible Garden City have experienced a certain degree of success

Sustenir Agriculture was established in 20142. This urban farm was conceived when the co-founder came across a Facebook article on the future of vertical farming. This inspired him to leave a banking career in baking in pursuit of urban farming3. It took the company several iterations to alter the taste profile of its produce to appeal to the taste buds of local consumers. Today, Sustenir cultivates non-native vegetables such as kale and arugula in an indoor farm using controlled environment agriculture. It is best known for its kale products which retail at many supermarkets including Cold Storage and FairPrice Finest, and are even used in the menus of dining establishments such as SaladStop! and Les Amis Group.Sustenir has also secured financial backing from Temasek Holdings and other institutional investors to catalyse its growth locally and regionally. Edible Garden City was founded in 2012. It is a social enterprise that aims to create change in the environmental, social and community spaces while strengthening Singapore’s food resilience. To date, it has built over 260 edible gardens by offering ‘foodscaping’ services to companies, and operates both indoor and outdoor farms including an 8,000m2 farm at Queenstown and a rooftop farm at Funan Mall. Rather than selling to consumers through supermarkets like Sustenir, Edible Garden City focuses on B2B sales and supplies ingredients to more than 220 dining establishments spanning across local cafes to Michelin-starred restaurants.

Major challenges to overcome include high operating costs and stiff competition

Even though some urban farms such as Sustenir and Edible Garden City have been successful in getting their products to market, urban farms which aspire to create a viable business needs to be aware of the potential challenges that are unique to this industry. The three main cost components of urban farms in Singapore are energy, manpower and rent. Energy is the primary cost driver for indoor farms that rely on a controlled environment to cultivate its crops. A significant amount of energy is required to ensure that conditions such as lighting, humidity and temperature are optimal so as to obtain a good harvest. Manpower costs are high due to a skilled workforce and a high cost of living in Singapore. Lastly, space constraints in Singapore contribute to the high rental cost of farming spaces. These cost concerns will make a tangible difference to profitability and highlighting the need for urban farms to adopt cost-effective measures when conceptualising their business models. Following the announcement of the ’30 by 30’ goal, Singapore has seen the emergence of numerous new urban farms since 2019. One such new entrant is &ever, a German indoor vertical farming company that already has another operational farm in Kuwait. Using proceeds from the ’30×30 Express’ grant awarded in 2020, &ever is in the process of setting up an high-tech farm with the ability to produce up to 1.25 tons of vegetables a day using its proprietary grow systems4. I.F.F.I (Indoor Farm Factory Innovation), a local company which was awarded a similar grant, is also looking to set up a mega indoor farm that is expected to yield close to 1 ton of vegetables per day5. Looking ahead, the number and scale of new players will intensify competition in the urban farming space, which may lead to consolidation and smaller players exiting over time.

Knowing the potential pitfalls in this market, aspiring urban farms need to be cognizant of the following key success factors

Assortment With the right technologies in place, urban farms can essentially cultivate any crop in a controlled environment. Rather than producing a wide array of crops to appeal to a broad consumer base, it may be more prudent for urban farms to position themselves in a niche market with a narrow assortment to serve a well-defined customer segment. The cost of producing the crops should also commensurate with the selling price to ensure a viable business model. Sales channel When coming to a decision on the assortment, urban farms need to consider how to best bring their produce to market. If the farm opts to sell B2B (e.g. to restaurants and hotels), it may be able to command a higher volume of sales to a single customer at the expense of a lower wholesale price. Conversely, choosing to sell B2C through supermarkets or even D2C via its own e-commerce site or a subscription model comes with its own set of considerations. It is thus imperative for urban farms to carefully weigh the pros and cons before coming a decision. Engaging a business consulting advisory firm may help different firms map out their overall strategy in greater clarity Marketing Even though urban farming is a relatively new concept, the end-product is a commodity that people consume on a regular basis. Consumers are generally unwilling to pay a premium due to the ubiquity of vegetables unless there is a clear differentiating factor. Marketing could be an important tool to aids brands in communicating their value proposition and to enhance its perceived value in the mind of its consumers. Technology Technology is a key enabler that sets the limits as to the type of crops which can be cultivated, while directly controlling the cost structure of the farm. Unique technologies such as autonomous drones provided by local start-up Polybee can be used for precision pollination, further stretching the variety of crops which can be grown in an indoor controlled environment.

IGPI can support your expansion in Singapore and SEA

Urban farming in Singapore is just one of the many opportunities that lie in the fast-growing Southeast Asian region. Having a comprehensive understanding of the target country and industry will enable your business to evaluate opportunities and come to a sound business decision. IGPI has an extensive track record in supporting large corporations, SMEs and start-ups in the ASEAN region since 2013. We offer a wide range of business and strategy consulting services including market entry advisory, new business creation and identifying local partners. Some of our past experiences include:
  • Entry support for a Singaporean start-up hoping to enter the Japanese market
  • Creating a business strategy with a Singapore deep tech start-up for a Japanese specialized trading house
  • SEA Point, a partnership between KK Fund and IGPI, which served as an accelerator program to help corporates collaborate with start-ups and SMEs across Southeast Asia
IGPI can support your business in realizing its growth aspirations. Get in touch with our firm today!

About the authors

Mr. Ryota Yamazaki is the Director of IGPI Singapore. Before joining IGPI, Ryota worked in Deloitte Consulting in Singapore, where he was a leader in the areas of Consumer Business and Supply Chain & Logistics in Southeast Asia. His areas of expertise are Strategy & Operations such as market entry, Route-to-Market (RTM) strategy, business due diligence, and PMI. He started his career with A.P. Moller-Maersk Group as a management trainee and also worked for Kurt Salmon, where he had vast project experiences especially in Supply Chain & Logistics for the retail and consumer goods clients. Ryota graduated from the Faculty of Economics at Keio University. Mr. Zhi Hao Thean is an Analyst in IGPI Singapore. Zhi Hao started his career with IGPI. He graduated from Singapore Management University with a Bachelor of Business Management, majoring in Finance. During his penultimate year, Zhi Hao embarked on an internship in Corporate Advisory, where he was engaged in M&A, financial due diligence, and valuation projects across various industries. He also worked as a Research Assistant at SMU, where he performed academic research on real estate investment trusts. Zhi Hao is proficient in English and Mandarin. He enjoys keeping up with the latest developments in consumer technology such as smartwatches and mobile operating systems in his free time.

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premier Japanese business consulting firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around fund supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support towards commercialization and monetization of technologies. IGPI Australia is a branch office of IGPI Singapore. The later which was established in 2013 focus on management consulting and M&A advisory in Southeast Asia across various sectors. We act as a bridge between Japan and wider APAC, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan and acted as sell-side advisor for SMEs and private equity fund looking to divest. IGPI Australia was established in 2020 with a dual focus of helping Australian businesses enter and grow in ASEAN / Japan and attracting Japanese investments into Australia. We have since successfully help to connect multiple Australian businesses with Japanese businesses within IGPI’s network. Get in touch with us on internationalization, strategic planning and fund-raising related topics!

 

IGPI Singapore – contacts:

Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp

 

Ryota Yamazaki Director – IGPI Singapore +65 8608 0413  r.yamazaki@igpi.co.jp
 
This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.
  https://www.sfa.gov.sg/food-farming/sgfoodstory/our-singapore-food-story-the-3-food-baskets 2 https://www.mti.gov.sg/FutureEconomy/Leaders-of-Transformation/Sustenir-Agriculture 3 https://www.cnbc.com/2019/01/11/cnbc-transcript-benjamin-swan-co-founder-and-ceo-sustenir-agriculture.html 4 https://www.todayonline.com/singapore/high-tech-vertical-farms-begin-operations-next-year-and-bring-fresher-leafy-greens https://www.businesstimes.com.sg/companies-markets/emerging-enterprise-2020/planting-the-seeds-for-the-future-of-farming
However, with or without the government pressure, Japanese companies  operating overseas had already been under strong pressure to decarbonize from NGOs, institutional investors, lenders, insurance companies and customers for several years, and been trying to tackle this issue and survive. This is true of companies in Southeast Asian countries as well. Some countries and companies have recently set ambitious long-term goals based on the Paris Agreement. The following points will be discussed in this article:
  • Southeast Asian countries’ long-term goals and initiatives on tackling climate change
  • Examples of Southeast Asian companies’ carbon reduction targets
  • New businesses arising from climate change issues in Singapore and Southeast Asia
  • Corporate strategy planning on climate change issues

Southeast Asian countries’ long term goals and initiatives on tackling climate change

Southeast Asia’s economic and energy presence in the globe is growing. This region is one of the fastest growing drivers of energy demand in the world. Looking back in time, it can be seen that coal and oil have satisfied the energy needs of Southeast Asian countries. [1] However, in accordance with Paris Agreement, six major ASEAN countries are also setting their targets to reduce greenhouse gases (hereinafter “GHG”) by replacing fossil fuels with renewable energies. Nonetheless, when examining their National Determined Contributions (hereinafter “NDCs”), it is necessary to bear in mind that most countries propose two frameworks towards achieving their target, one includes financial assistance from the international community, and the other without[4]. This means that foreign companies who wish to do business related to carbon reduction need proposals tied to the financial support framework. In addition, many countries adopt future targets compared against a business-as-usual (hereinafter “BAU”) levels, meaning they pledge to reduce CO2 emissions compared to their projection in the absence of major climate change policies. Additionally, Malaysia adopts their reduction target on carbon intensity against GDP basis. The table here-below lists the NDCs and major initiatives by governments in Southeast Asia:

Examples of Southeast Asian companies’ carbon reduction targets

Many companies in Southeast Asia as well as Japan have started to declare net carbon ambitions. However, it is necessary to bear in mind that different companies will often use different standards and refer to different scopes. Many companies are still struggling to capture their Scope 3 emissions. Scope 3 refers to carbon emissions that occur indirectly in a company’s value chain. This is an area that is difficult to reduce because it requires cooperation from suppliers, and sometimes drastic changes in the value chain. The larger the company with influence over the supply chain, the more significant it is to address it. The same is true for investors, who have influence over their investments. For example, Temasek incorporates ESG considerations into their investment decision-making and management.[5] In terms of tackling climate changes, Temasek has committed to reducing the net carbon emissions to half the 2010 levels by 2030. They have signaled their ambitions for net zero carbon emissions by 2050, extending to their equities portfolio. Temasek also adopts an internal carbon price of US$42 per tCO2e to inform their investment decisions. The table below shows examples of initiatives by companies in Southeast Asia to combat climate changes.

New businesses arising from climate change issue in Southeast Asia

With the momentum for de-carbonization in Southeast Asia as a backdrop, apart from renewables and its associated technologies, there are already new businesses focusing on scaling of GHG, trading them, and making platforms. For example, in May 2021, it was reported that a new global carbon exchange will be launched in Singapore within the year. Companies unable to reduce emissions can purchase a carbon credits through this platform. It will be interesting to see how much the platform will be utilized internationally. In other countries such as Thailand, businesses related to the Renewable Energy Certificate (REC) trading market are flourishing, as are startups offering blockchain technology. Please refer to the table below for examples of companies engaging in scaling, trading, and making platforms in the region:

Corporate strategy planning on climate change issues

Following are a few points regarding strategy planning amid a carbon neutral era. As shown in the image below, there are many factors to be incorporated in corporate activities starting from governance to disclosure, which means that comprehensive strategy planning is inevitable. There are two types of risks that companies need to be aware of: physical risk and transition risk. Transition risk refers to the risk posed by changes in, for example, climate change policies and regulations, technological developments, market trends, and market assessments. In other words, it is necessary to follow the policies of each country and act in advance so as not to fall behind. In addition to hedging against these risks, there is also the possibility of seizing new business opportunities and the need for a major change in policy from traditional businesses. While financial institutions have withdrawn from fossil fuel-based businesses, options such as green finance have emerged. It is necessary to consider both risks and opportunities when formulating strategies for the existing companies or future businesses.   The above paragraphs served as a general discussion. Internal carbon price (hereinafter “ICP”) will be used as an example to explain factors that need to be taken into consideration. Businesses use ICP to evaluate the impact of mandatory carbon prices on their operations, and as a tool to identify potential climate risks and revenue opportunities[7]. ICP was introduced in Europe and the US over five years ago, and an increasing number of Japanese companies have adopted it in the past few years. When introducing ICP, the most important thing to keep in mind is to set a clear objective and design business strategies accordingly[8].  If objectives are not properly set, the business will end up on the Carbon Disclosure Project (CDP) list as “ICP introduced” but it is meaningless to be satisfied with this. It is easy but it is meaningless to only refer to competitor’s pricing. If companies want to invest in expensive but low-carbon equipment, compared to conventional equipment, in their factories or offices, the price must be at a level that makes low-carbon equipment more economically advantageous. As an oft-cited example, Microsoft has adopted a model in which each department pays an amount based on its CO2 emissions, whose price is determined by dividing necessary investment amounts to offset annual CO2 emissions[9]. This pricing mechanism is reasonable. CO2 emissions are also reflected negatively in Microsoft’s sales departments’ internal profit and loss statements, which incentivizes carbon reduction efforts.   In the case of business investments, it is one way to refer to price levels that may have influenced investment decisions in the past (this is a pattern called “implicit carbon price”), not only referring to market price of carbon. Many companies adopt a market price such as the EU ETS (EU Emissions Trading System). While this makes a certain amount of sense from the perspective of scenario analysis, there is no guarantee that the carbon pricing imposed in different countries in future will be close to the current EU ETS price. Moreover, ICP is not a solution for everything. Even if a project pays off economically under a scenario where ICP is applied. There remains the possibility that the project may be forced into cancellation due to opposition from activists or institutional investors. While ICP can be useful if introduced wisely, it is not a panacea, but a tool in the overall strategy for businesses looking to reduce their carbon footprint.

How can IGPI add value?

As stated above, climate change issues as well as other ESG-related issues require a comprehensive approach towards governance, funding, operations, and the creation of new businesses. IGPI’s Singapore office was established in 2013. Since then, our consulting services have supported many Japanese companies with business planning, new business creation, finding partners as well as market entry research. To find out more about how IGPI can provide Japanese consulting support for business in Singapore and the region, browse through our insight articles or get in contact with us.

About the author

Having worked for Sumitomo Corporation for 12 and a half years, one of the major general trading firms in Japan, Miyoshi Nishimura has rich experience in risk management and industry & strategic research areas.  She was engaged in multiple M&A deals including on-site D.D. aboard, valuation, negotiations and collaboration with internal/external counterparties. As leading Strategic Research Team at Sumitomo Corporation Global Research, Miyoshi researched and analyzed new business areas and reported to the managements. She graduated from Law faculty of Chuo University.

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premier Japanese business consulting firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around fund supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support towards commercialization and monetization of technologies. IGPI Australia is a branch office of IGPI Singapore. The later which was established in 2013 focus on management consulting and M&A advisory in Southeast Asia across various sectors. We act as a bridge between Japan and wider APAC, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan and acted as sell-side advisor for SMEs and private equity fund looking to divest. IGPI Australia was established in 2020 with a dual focus of helping Australian businesses enter and grow in ASEAN / Japan and attracting Japanese investments into Australia. We have since successfully help to connect multiple Australian businesses with Japanese businesses within IGPI’s network. Get in touch with us on internationalization, strategic planning and fund-raising related topics!  

IGPI Singapore – contacts:

Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp
 
Miyoshi Nishimura Consultant – Singapore +61 9187 1152  m.nishimura@igpi.co.jp
 
This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.
  [1] https://iea.blob.core.windows.net/assets/47552310-d697-498c-b112-d987f36abf34/Southeast_Asia_Energy_Outlook_2019.pdf [2] https://www4.unfccc.int/sites/NDCStaging/Pages/All.aspx [3] https://www.greengrowthknowledge.org/sites/default/files/downloads/policy-database/Philippines%20-%20NDC.pdf [4] Although not discussed in detail in this report, there has been ongoing debate for many years on the framework for financial assistance from developed countries to developing countries on climate change. This means that there are unknown factors in the GHG reduction targets of developing countries. [5] https://www.temasek.com.sg/en/sustainability/focusing-on-climate-change#metrics-targets [6] The company also stated to set the carbon neutral goal throughout the entirety of its supply chain but it is not clear the timeframe is the same. (https://www.bangkokpost.com/thailand/general/2137519/cp-takes-on-climate-change-vows-to-be-carbon-neutral) [7] https://carbonpricingdashboard.worldbank.org/what-carbon-pricing [8] “Executive Guide to Carbon Pricing Leadership: A Caring for Climate Report” by United Nations, etc. is useful material (https://www.unglobalcompact.org/library/3711) [9] https://download.microsoft.com/documents/enus/csr/environment/microsoft_carbon_fee_guide.pdf