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.

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!        

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^[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

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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!  

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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  

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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.

 

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 14^th 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)

12. Interflour Group – About us
13. DFAT – Business envoy (2018)
14. WHO – Human resources for health country profiles Vietnam (2016)
15. Vietnam Investment Review – Vietnam’s private hospital chains keep attracting foreign investment (2020)
16. Austrade – Icon Group to pioneer treatment-plan exports to Southeast Asia
17. Ibid.
18. CPA – About us
19. Austrade – Cerebral Palsy Alliance looks to Vietnam to grow its impact (2019)
20. Austrade – Digital banking in Vietnam: A guide to market (2020)
21. World Bank – Vietnam mobile cellular subscriptions (per 100 people)
22. Vietnam Briefing – Education in Vietnam: Opportunities and Challenges (2020)
23. RMIT University, About RMIT
24. Austrade – Vietnam edtech scoping study (2020)
25. Ibid.
26. Baker McKenzie – Vietnam: New Decree Relating to Implementation of New Law on Anti-Corruption (2019)

 

What is Proof of Concept?

Proof of Concept (PoC) is a small exercise conducted to validate that a solution is feasible for commercialization. PoC describes the idea and functionality of the solution including its general design or specific feature, and how achievable they are. It is a method used in many industries such as manufacturing, software development and banking, and in the startup scene as well. In the current business environment, it is important for businesses to constantly innovate and come out with new solutions to stay competitive in the market. It is always exciting for businesses to strategize about new solutions. However, before they can go ahead with development and production, they need to demonstrate that their solutions have the potential to work, is commercially viable, can realistically be implemented and is worth the investment. PoC can help to achieve these goals.

What is the use of PoC in corporate startup cooperation?

Many startups conduct their own PoC to attract investors or potential corporate partners. Startups can also carry out a PoC in cooperation with interested corporate partners. The focus of a jointly conducted PoC differs from the former, as the feasibility of the solution has already been proven. Corporates and startups usually conduct PoC together to assess whether the solutions proposed by the startup are applicable in the corporate’s industry. During the joint PoC between corporate and startup, both parties get to better understand the working cultures of each party, and to identify and resolve any differences. This helps create the foundation for a long-term cooperation between both parties.

PoCs in ASEAN

You can find PoC tests conducted across various industries in ASEAN such as financial services, healthcare, SMART cities etc. Multiple stakeholders are involved in the PoC process with the aim of understanding if the proposed solutions can solve the current issues faced by customers in their respective industries. Some examples include¹:

• Financial services industry: Know Your Customer (KYC) blockchain PoC jointly conducted by a few banks (both local and foreign) and a government agency in Singapore²
• Healthcare industry: Healthcare startups partnered with a private healthcare provider in Singapore on adoption of its AI-powered tool³
• Manufacturing industry: Smart factory joint PoC between a Japanese conglomerate and a listed company in Thailand⁴

¹ This PoC list is non-exhaustive and are just some examples of PoCs conducted in ASEAN based on desktop research ² Digital News Asia News Article ³ Economic Development Board website ⁴ Thailand Listed Company website

What are the advantages of PoC?

A PoC can value add to different stakeholders involved in the process. The following are some of the benefits to be obtained from conducting a PoC:

1. Validating that the idea is feasible with lesser resources involved Companies undertake various steps to test the solution before fully committing to the development and production of the final product. These steps include the PoC, Prototype and Minimum Variable Product (MVP). PoC is one of the first steps undertaken to ensure the idea is practical and feasible at a reasonable cost. It is also completed within a relatively shorter timeframe than a prototype or MVP. (Note: PoCs validate the feasibility of an idea, while prototypes are made to demonstrate how the idea can be developed.)

2. Uncovering potential issues and obstacles during the product launch PoCs help to identify any potential problems that might occur when production or implementation takes place. Potential problems can be related to technical, legal or functional aspects or the like. They should be resolved before the product is launched in the market. By conducting a PoC, companies are able to identify risks and obstacles and find ways to eliminate, mitigate and address these problems. This increases the likelihood of success when launching the products.

3. Helps to determine chances for scalability When proposing an idea on a new solution to key management, one of the main questions frequently asked will likely include: “how scalable is the end product?”. Through a PoC, companies can understand if the proposed solution complements their current product portfolio, or can be sold to different customers across different categories, geographical region, etc.

A PoC can also help companies assess their current capacity and capabilities in meeting the escalating demand of the products. It prompts companies to reflect on how to go about growing and mass-producing the product taking into consideration things like production capability, human resources, workflow standardization, among other things. This results in better planning and preparation for the production stage.   

4. Helps gain funding from stakeholders After the PoC is conducted, the project team can better illustrate the usability and profitability of the idea to the stakeholders. They can support the idea of the new solution in detail with illustrations and sufficient data. A PoC serves as evidence to stakeholders that the idea proposed is practical, attractive for the target market, and achievable for the company. It helps to convince stakeholders that the investment is worthy, and to get their approval for more resources and funding to develop the proposed idea.

What are the key steps when running a PoC?

1. Plan the project Similar to any other projects taking place in an organization, it is essential to create a project plan before proceeding with the execution. A project plan should include: goals and requirements, stakeholders involved, budget and funding required, a timeline, expected outcomes and next steps. 2. Set goals and requirements It is important to understand the problem statements or the issue that can potentially be solved by the proposed ideas/solutions. Thereafter, set clear goals on what to achieve from the PoC testing. Some questions to cover in this step include: 　・What are the customers’ pain points? 　・What are the gaps/weaknesses of similar products in the market? 　・What are the strengths of similar products in the market? 　・Who are the target customers? 　・What are the expected outcomes and the KPIs to measure said outcomes? 3. Gather the right team Key stakeholders or specialists (both internal or external parties) should be gathered and involved in the PoC testing. Stakeholders can provide input on different aspects of the PoC. For example, internal stakeholders help ensure that the proposed ideas/solutions align with the ultimate goals of the organization and share the key criteria for measurements of success. External stakeholders such as professional services firms work closely with the internal project team, help gather relevant industry players for discussion sessions, coordinate communications etc. to ensure smooth implementation of the PoC. 4. Execute, evaluate and refine the results Execute and document the results of the PoC. Review the results of the PoC among the team and compare the actual outcome against the expected outcome. Identify any gaps or issues noted during the PoC and clearly document down the findings. The project team can then brainstorm on how to overcome these gaps or issues before they proceed to the production phase.

What are some key elements of a successful PoC?

1. Clearly defined goals – It is important to keep in mind what the organization would like to achieve from PoC testing. Different problems might arise during the PoC but with clearly defined goals, the project team can then put in effort to achieve these goals according to available resources and budget. 2. Get the right people involved – Understand who is essential to the success of the launch of the ideas/solutions and keep them involved in the PoC testing. Gathering their opinions and feedback helps to identify areas for improvement or any refinements needed for the proposed ideas/solutions. 3. Detailed and proper documentation – Documentation is important in PoCs because no PoC is successful during the first trial. With proper documentation, the company can identify issues or obstacles and make adjustment to correct them. They can then avoid encountering the same issues or obstacles when replicating the PoC for further testing. This improves the efficiency of future PoCs, saves on the budget and increases the chances of success for future ones.

How can IGPI make a difference to corporates and startups?

Corporates need to come out with new, innovative solutions and products to maintain their share in the market. They need to be the first to move when any new opportunities arise. This presents a strong motivation for corporates to explore collaborations with startups that own unique propositions or technology. IGPI is pleased to offer business and strategy consulting services to our clients. We have supported clients who are interested in collaborating with startups across various industries such as healthcare, logistic, etc. IGPI first conducted an ideathon for the twofold purpose of gathering insights and feedback on issues faced by end-users within the relevant industries, and to better understand the proposed solutions available in the market. IGPI also acts as the bridge connecting the startups with our clients. Discussions were held to explore the possibility of joint PoCs.       Additionally, IGPI has also supported our clients’ projects of various nature such as strategy consulting support, running an accelerator etc. Some examples are as follow:

• SEA Point, a partnership between KK Fund and IGPI, which serves as an accelerator program helping corporates collaborate with startups and SMEs across Southeast Asia
• Developed the concept of an ideathon – created a business model from the shortlisted ideas to allow for a global fortune 500 to enter a new space in the technology-driven health and wellness sector in Southeast Asia
• Supported KDDI in their accelerator program including the selection of startups, service development in KDDI∞Labo, business matching, “Demo day”, etc.

IGPI provides consulting services for multiple aspects of your business. Whether you seek a digital transformation strategy to ensure your business’ relevance in the digital economy, or desire to reinforce your company’s position in the current market, get in touch with us to create a strategy that works for your business!      This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. 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.

Industrial Growth Platform, Inc. (IGPI) is Japan’s premium strategy & M&A advisory firm with an APAC wide coverage, including Australia. This makes it well-established in providing knowledge, networks, and guided business consulting services to Australian startups for their Japan market ambitions. Using its experience from over 10 industries, IGPI can provide sincere advisory and consulting support on the Japanese market to ensure appropriate decision-making (go/no-go) and help mitigate cross-border risks. Furthermore, the tech entrepreneurs can be introduced to apt and established Japanese conglomerates, which can potentially provide the necessary local know-how, proof-of-concept (POC) opportunities, and financial capital to be successful in the Japanese market and beyond.

What makes Japan an interesting market to consider?

As we are aware, Japan is the world’s third-largest economy with a GDP of ~US$ 5 trillion¹. The country boasts a highly industrialized market economy with a progressive per-capita income and a well-educated workforce. After World War II, Japan’s economy grew rapidly and stably. As a result, Japan achieved a high employment rate among developed countries and established a relatively equal class structure. It thus comes as no surprise that the Japanese have a preference for premium high-quality goods, services, and overall high quality of living.   The Japanese market differentiates itself from many other global markets by prioritizing quality and innovation. Japan has consistently been ranked in the top three for investment in research & development globally, spending over 3.0% of its annual GDP on R&D. For every 1,000 employees in Japan, 10 are research professionals engaged in the conception or creation of new knowledge, products, processes, methods, and systems². Japan was the third-highest patent-holding country globally in 2018 and in the same year announced more than 1,000 offshore acquisitions totaling a record $191 billion ($26 billion of that total was investment into Australia)³. Built on strong foundations of innovation, Japan is the birthplace of mega-corporations in the world, which are well-diversified across sectors. They have a strong global orientation and willingness to invest in sustainable, long-term products and services. In fact, as per modelling by Australian and Japanese Economic Intelligence Institute shows that Japan’s FDI into Australia by 2019 had reached $116 billion. In addition, the Japanese portfolio investment into Australia in 2019 was $90 billion, twelve times that from China⁴. Furthermore, with Japanese companies in possession of more than $890 billion in cash (2019), the scale of investment is likely to continue⁵ (one can imagine that the number would still be sizable despite the impact of Covid-19). Having said that, the Japanese economy is facing several issues particularly in the Energy, Agriculture, Healthcare etc. (as explained in the table below). Therefore, Australian startups that can provide solutions to the country’s social, economic, and environmental challenges will be able to tap into new and attractive market opportunities, especially by leveraging any form of Japanese consulting support. From an Australian business’s perspective, the strong bilateral ties between Japan and Australia will give more reasons to consider such market opportunities closely. To corroborate further, at a 20,000ft view since this article is not intended to be sector-specific, below are some high-level themes (non-exhaustive) across select sectors that offers an abundance of opportunity areas: Many more themes/opportunities exist in other segments too e.g., finance, smart cities, mobility, space, and more. The opportunities vary across B2B, B2B2C, and B2C segments. It is noteworthy to mention that Japan has lagged in its total number of entrepreneurs due to the perceived lack of job stability. In 2018, the number of entrepreneurs preparing to start their business, and entrepreneurs that had been around for less than 3.5 years equated to 5.3 people for every 1000¹⁴. All the above coupled together may yield opportunities for Australian startups to capitalize upon.

How do typical Australian startups commence their Japanese expansion plans and how can the Government provide assistance?

Every startup is in its own unique situation, so their market journey can vary. But below are some of the ways startups approach the Japanese market:

• There are several accelerator programs which help provide appropriate cross-cultural training and educational resources for Australian startups. One example is the Startup Boot Camp (SBC) program – it is a global family of industry-focused programs that support early-stage tech founders globally expand their companies. These programs provide direct access to an international network of the most relevant mentors, partners, and investors with useful financial capital and influential marketing resources¹⁵. In particular, the Startupbootcamp Scale Osaka program is the specific program which is hosted in Japan.
• Several proven/mature startups usually use a variety of resources for their strategy planning. These include initial knowledge build-up, approaching both Australian and Japanese Govt. bodies for initial advice and engaging industry experts and consultants for consulting support to scratch beyond the surface, and custom hands-on-support to make their dent in Japan.

Also, Australia and Japan have a bilateral trade agreement and are both member countries of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

• The Japan External Trade Organization (JETRO) is a Japanese government organization that provides free business consulting support services to companies expanding to Japan. With the support of JETRO’s dedicated staff, companies can incorporate their business; receive Visa, immigration, and HR support; find dedicated office space; identify local government subsidies; get tailored market studies; and more¹⁶.
• As the Australian government values entrepreneurs that seek to enhance Australia’s international reputation, there are often grants/financial assistance that is made available to Australian businesses to further help strengthen international ties between the two nations (e.g. Australia Japan Foundation Grant Program)¹⁷. Subject to eligibility and aptness, such grants can prove beneficial to Australian business contributing to the Japan-Australia relations.

What are the key challenges that Australian businesses need to be aware of in IGPI’s view and experience?

1. Many Australian businesses underestimate the cultural differences between the two economies. Among Japanese corporations, the English language is not widely spoken in business and government environments, except for trading partners who regularly work with their given international ties. More often than not, meetings that are in English are rare, making an interpreter a necessity. Furthermore, the country has a number of social norms, practices, and procedures that differ from the inherent customs of Australia. As Japan is largely a homogenous country while Australia is very multicultural, it can be difficult for people from both sides to understand the nuances of each other’s culture. However, taking steps to understand and appreciate the differences can prove very beneficial to commence and nurture a journey based on trust and mutual respect. Although the internet is flooded with resources on this (deep) topic, a good and highly recommended starting point is an online publication –“A Guide to Bridging the Cultural Divide” The Australia Japan Business Co-Operation Committee (AJBCC) & The Japan Australia Business Co-Operation Committee (JABCC).
2. The internal decision-making processes associated with large Japanese companies can be a long and tedious process. This is predominantly due to the systemic hierarchical decision-making processes that govern Japanese organizational structures. The Japanese people are typically detail-oriented, careful, and value ‘Nemawashi’ – an informal process of laying the foundations for a proposed change or project by talking to the people concerned so as to gather support and feedback. Additionally, it is also due to the risk averseness in the Japanese culture that typically, Japanese executives will have to consult a number of individuals before concluding on a solution. Australian startups must be prepared to wait long periods of time for final decisions to be made and executed.
3. Japanese laws and regulations are known to be more strict and conservative in comparison to Australia. As a result, it can be challenging to overcome or work around regulatory hurdles associated with operating in Japan. For example, Japanese employees are strongly protected by labor laws and judicial precedents. Therefore, it is more difficult to lay off workers there than it is in Australia. This is why companies are encouraged to consult and attain the support of a specialist who is well-versed in the Japanese structures before hiring staff.

In 2019, the failure rate of startups was around 90% – with 21.5% failing in the first year, 30% in the second year, 50% in the fifth year, and 70% in the tenth year¹⁸. This failure rate is only heightened when entrepreneurs seek profitability in foreign destinations. It should be noted that the aforementioned challenges are faced by even the largest multinational companies. For instance, the Walmart supermarket chain failed to recognize the differing purchasing habits of local Japanese consumers, e.g., their love of luxury goods and preference towards purchasing in smaller amounts (as opposed to the American habit of ’stocking up’). Therefore, if the big retail giants can fall victim to the nuances of the Japanese market, startups that are still growing their business and have less financial cushion to help mitigate business risk must be cautious and educated. Ultimately, Australian businesses should ‘seek to understand before they seek to be understood’.

What are examples of some Australian startups that are making inroads in the Japanese market?

In recent years, the popularity of the Japanese market has been gaining good traction amongst Australian startups. This can be observed by seeing Japan focused accelerators who help connect Australian startups with Japanese partners; and Government led initiative such as the 2018 Japan visit by Austrade which organized a business visit for selected Australian Fintech startups to Japan (activities included briefings on Japanese government incentives, pitching opportunities to investors, and a B2B conference). Below are two examples of Australian companies that have been making in-road into the Japanese market: (1) B2B/B2C: Canva, an Australian unicorn, was founded in Sydney in 2012 and specializes in design and publishing through an accessible graphic-design tool. Through extensive market research and product development initiatives, the company has been able to localize aspects of their design tool software to provide appealing templates for the typical Japanese consumers. As Georgia Vidler (Canva’s Director of Product) explained – “as Japan continues to be one of our fastest growing markets, the addition of our new vertical text feature means we are one step closer to becoming the go-to platform for all project-based learning in every school in Japan”.¹⁹ (2) B2B: iCetana is a Perth-based Australian listed startup that produces Artificial Intelligence (AI) software for automatic identification of anomalous behaviors in large video camera installations. This startup was selected in the Startupbootcamp Scale Osaka program (SBC) in 2019 and grabbed the attention of Hankyu and Sakura internet between November (2019) and January (2020). iCetana considered the Japanese market as they identified issues that their solution can address. Japan is faced with a declining population and a lack of younger people wanting to be physical security guards. iCetana enables security guards to be super human and have better situational awareness of their facility.

How can IGPI add value to the Australian startups?

Japanese companies are often looking for opportunities to collaborate and partner with foreign companies who possess technologies and innovations that can help them start a new business or encourage technological advancements constantly in Japan. IGPI has been discussing and hearing the terms “digital transformation” (DX) more than ever before amongst its wide array of Japanese clients. Having some form of business collaboration/partnership with local firms is one of the most popular/common ways to complement each other’s’ strengths and effectively enter a new market. We understand that the Japanese market and corporations may not be easy to navigate. But in all honesty, there is also no “one size fits all” approach that will effectively address this and companies need to employ different strategies based on the unique needs and environment they are operating in. IGPI has vast experience of supporting Fortune 500s, Government agencies, SMEs, and funded startups across Asia and beyond for their strategic business needs. Some of our business consulting services include hands-on support and innovation advisory which allows us to holistically understand the nuances of market entry. Our non-exhaustive list on capabilities to assist foreign companies enter Japan includes:

• Market landscape study and strategic decision making for go/no-go
• Tailored Japan market entry strategy (organic/in-organic)
• Custom hands-on support for strategy implementation
• Identifying and matching companies with relevant partners through our established network in Japan (IGPI have direct access to relevant department / personnel in many Japanese conglomerates, trading houses and SMEs)

 

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 of leading and executing market entry and growth strategy (both organic and inorganic) and open innovation engagements for Fortune 500 businesses and large MNCs across 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 & telecommunications 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. Mr. Hui Fu Chua is an Analyst in IGPI Singapore. Hui Fu started his career with IGPI, where he performs research and data analysis to support the team in strategic planning and decision making. In IGPI, he has been involved in assignments across different sectors such as renewables, mining, agriculture, healthcare amongst many others with high focus in the Australia, Japan and Southeast Asia markets. Prior to joining IGPI, he had multiple internships in the Hospitality, Venture Capitalist and Tech-startups industries with roles revolving around Business Development and Operations Strategy. Ms. Julia Clarke is an Intern at IGPI Australia (March-May 2021). Julia is currently pursuing her Master’s in Management from the University of Melbourne. Prior to this, she has completed a Bachelor of Commerce, majoring in Management Studies. She has had previous work experience in the Australian banking sector – Australian and New Zealand Banking Group Limited (ANZ).  

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 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 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 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.

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¹ World Bank (2021) ² Japan External Trade Organization (JETRO) ³ Austrade – Australian Trade and Investment Commission ⁴ Japan External Trade Organization (JETRO) Australia ⁵ Bloomberg Quint (2019) ⁶ World Bank (2020) ⁷ Japan Times (2020) ⁸ OECD Library (2020) ⁹ U.S. Energy Information Administration (2019) ¹⁰ The Guardian 2020 ¹¹ Federation of Electric Companies of Japan (2020) ¹² Bloomberg (2020)   ¹³ Cable News Network (CNN) ¹⁴ Australia Japan Business Co-operation Committee (2019) ¹⁵  Startupbootcamp (2021) ¹⁶Japan External Trade Organization (JETRO) Australia ¹⁷ Australian Government (2020) ¹⁸ Investopedia (2020) ¹⁹ PR Wire (2021)

On the other hand, startups gain access to funding, resources and customer networks through the collaborations. Increasing collaborations between corporates and startups are observed at each corner of the world. In Southeast Asia, number of corporate venture capitals (CVCs) jumped by ~8x between 2010 and 2018, with the number of investment made by CVCs in Southeast Asia increased to 50 in 2018 compared to 26 in 2015. However, not all collaborations between corporate businesses and startups turned out to be successful. There are many cases where both parties parted way along the collaboration journey. In a study conducted by Bain Consulting Group (2018), 45% of corporates and 55% startups rated themselves as either “somewhat dissatisfied” or “very dissatisfied” with the relationship between both parties. And, only 5% of collaborations work well; 95% either do not work at all or are just mediocre. Why did this happen? 1. Corporate plan to set innovation direction and partnership goals are not clear Corporates know that they need to innovate but the main challenge faced by them is they are not clear of what to innovate. Staff could be given mandate to search for partners to collaborate for open innovation but were not given a clear direction on what the corporate would like to achieve. Hence, they search for partners with innovative ideas, relevant services, and form partnerships that begin without a clear goal in mind. Needless to say, most of these partnerships ended halfway through the collaboration journey. 2. Key managers or stakeholders are not closely involved in the innovation process Seeing innovation as critical and one of the top priorities, most corporates set up an open innovation department or a dedicated team for this. However, one of the issues noted is that teams work on silo basis and do not have much interaction with the decision makers within the corporates (especially C-suite) or the business units to make sure that they are internally aligned as the discussion with startups take place. The involvement of key decision makers or stakeholders are only required at a later stage of the partnership project. Lack of engagement of these key stakeholders from the corporates from the start of the partnership results in:

• the project progressing without executive sponsorship
• partnering startups that might be a misfit to the strategy

  3. Different work culture and misaligned project expectation Work cultures and priorities of both corporates and startups are very different. Startups are more agile and work at a faster pace whereas corporates with its bureaucratic structure take longer time for the multiple layers to approve activities or make investment decisions. For example, in a Japanese corporates, data is gathered and analyze, consensus need to be reached and the most senior people need to be convinced and their approval need to be obtained. This can be time-consuming but when executed correctly after consulting and obtaining support, it ensure that all parts of organization are onboard with a decision and are prepared and commit to implement it together. In addition, corporates have many initiatives taking place at the same time and hence, there might be different priorities for each collaboration initiative with the startups. This also influences the working speed and decision-making time of the corporates.  Other than the above, as both parties embark on the collaboration journey, they find that there are gaps and misalignment on expectations of roles and project approach:

• What are the outcome to be achieved from the collaboration?
• What are the roles and responsibilities of each party?
• What expertise should each party bring to the collaboration?
• What are the decision rights of each party? What is the level of autonomy given to the startups in business decision?
• What are the key milestones expected and the timeline to achieve such milestones?

IGPI has rich and diverse experience supporting collaborations between corporates and start-ups

Due to the Covid-19 pandemic, many new challenges and opportunities are emerging for businesses. This presents a strong motivation for open innovation collaborations between corporates and startups. SEA is a region with very vibrant startups scene and ecosystem. IGPI is well connected within the region and would be glad to assist corporates that are looking to explore open innovation collaboration within the region with our consulting services. Recently, IGPI supported JETRO SG and Enterprise Singapore (ESG) in building a digital transformation platform (DXPF) to facilitate the matching of and promote open innovation collaboration between Japanese corporations and ASEAN based (mainly Singapore) startups/tech companies. Three DXPF virtual events were conducted in the month of June and July 2020, where ASEAN based startups/tech companies were invited to share their solutions with Japanese corporates, followed by initial meetings between the interested parties post event. During the project, we leveraged on our past experience and knowledge on open innovation to ensure that the DXPF was built with all key aspects being considered and thus, able to achieve its objective and act as a platform to link Japanese corporates with ASEAN based startups. IGPI has rich and diverse experience in the startups scene and we have also provided consulting services and support to our clients on projects of various nature such as strategy planning support, running an accelerator, etc. Some examples are as follow:

• Developed the concept of ideathon and developed a business model from the ideas shortlisted from the ideathon for a global fortune 500 to enter a new space in the technology-driven health and wellness sector in SEA
• Organized startup event in Japan (Hongo AI) where yearly pitch contest is organized and outstanding AI startups are being awarded
• Supported KDDI in their accelerator program including selection of startups, service development in KDDI∞Labo, business matching, Demo day, etc
• SEA Point, a partnership between KK Fund and IGPI, which serves as an accelerator program to help corporates collaborate with startups and SMEs across Southeast Asia

  IGPI can provide supports in multiple aspects of your business – Get in touch with us! This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive. 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.

Let’s start with the backstory:

Right before the onset of the pandemic, Industrial Growth Platform Inc. (IGPI) established its Australian office in early 2020 in Melbourne. IGPI is a premier Japanese consulting and M&A advisory firm with offices in Japan, China, Singapore, Vietnam and Australia. One of the aspects that adds to our uniqueness is the fact that apart from providing strategic advice to Fortune 500s, Governments and startups, IGPI also makes principal investments (~40+ till date) and is associated with diverse array of investment initiatives in several countries. This includes investing in established transportation businesses, university-born startups, concession projects such as airports and VC with prominent LPs such as Honda and Panasonic. As a result, when IGPI was evaluating the Australian market, it was paramount to see it through diverse lenses which led to a number of candid in-country interactions (~150 meetings) before we finally decided to set shop. One of the interesting things that we spotted during the meetings and innovation events was that the quality of innovation in Australia across sectors (e.g. agritech, cleantech, healthtech, fintech, spacetech etc.) is promising with a strong enthusiasm for building and scaling startups. However, wearing our Japan/Asia hats, we struggled to recall many names when it comes to Australian startups that ‘made it big’ internationally. The result was quite similar in other casual conversations that we had in professional circles in Singapore and Japan. This made us investigate this disconnect further. If the number of unicorns is considered any appropriate yardstick to measure a country’s startup ecosystem’s success, around 80% of the ~500 unicorns of the world (as of Oct 2020) hail from USA and China alone compared to a modest 6 from Australia, namely Afterpay, Airwallex, Canva, ZipMoney, Zoox and 10X Genomics¹. Even if we compare the number of unicorns in proportion to their populations, Australia lags behind the likes of Singapore, USA and UK (see Figure 1). The burning question is: what is stopping Australian startups from making it big in the international scene?

Figure 1: Statista, World Bank

The key aspects that IGPI came across during our interactions and reflections are:

1.) Small home market size and notion of ‘far away’ makes the journey to achieve scale tougher

⇒ Australia is a developed country with a respectable GDP and economic track record over the past decades. However, its small and scattered population for this massive country (land size wise) makes for a humble ~0.3% of the global population². As a result, there is a concrete ceiling on the scalability of the Australian startups for most industries if they only focus on domestic business. This coupled with Australia’s (distant) location to other major markets makes the journey of scaling a startup even longer as there is a notion of ‘far away’ associated with it (which also implies issues such as time zone differences). As per World Economic Forum’s Enabling Trade Report, Australia ranks 127 out of 136 countries in foreign market access rankings, based on aspects such as trade barriers and margin of preference in destination markets³. This gives some flavor of the challenges faced by conventional Australian businesses in general when it comes to accessing foreign markets and adds to the notion.

⇒ Even if one would argue for the selective lucrativeness of the Australian markets, e.g. startups in mining/METS that are targeting and catering to Australia’s mega-mines have potential to do fairly well domestically without having to rely much beyond the Australian borders, there is a growing focus away from resources and such startups should also look at building more use cases with their capabilities in mid to long term. And those new use cases may not have lucrative markets within Australia and will sooner or later also feel the need to internationalize to achieve their true potential. This view can have applicability to other startup areas too – after all we live in a globalized world! Therefore, apart from fueling growth, scaling up beyond Australian shores is always healthy from a risk diversification perspective too.

2.) Lack of funding pushes many startups into the valley of death

⇒ By developed world standards, Australia is considered quite risk averse⁴ as a country unlike its counterparts such as USA where startup culture is celebrated and VC investing is quite common (and fashionable) – especially early stages. The risk averse behavior can also been seen from the proportion of investment received by early stage companies as compared to more mature/established counter parts⁵ (see figure 2). As per a survey shared on StartupDaily, more than 70% of the VCs in Australia said that their average deal size in 2019 was in excess of A$ 1 million⁶ which reflects the graveness of the situation in especially in early stages. If we look at macro indicators, Australians are quite wealthy by global standards⁷ but probably the inherent conservatism has led them to make investments in more conventional asset classes such as real estate which has worked well for many in the past and that is possibly why angel / early stage funding is not as common as it ideally should be. Also, focusing on Government sources such as grants may not be the ideal answer to address this issue which primarily requires private participation and risk taking. This is the issue from the ‘supply side’ of early stage capital

Figure 2: Australia Bureau of Statistics

 

⇒ If we also evaluate this from the other side i.e. ‘demand side’ of the capital and look into the type of Australian startups and compare with the Silicon Valley, there is a higher percentage of “integrator” type startups⁸ (Integrator startups most frequently attack existing markets by providing a product that is cheaper than the alternatives) – which are usually considered “safer businesses” compared to the ones that challenge the status quo. Unfortunately, “integrator” type businesses have lower scalability than the “challengers” provided they ‘get it right’⁹ (see figure 3).

 

Figure 3: Testingsgblog

 

⇒ To corroborate the risk averseness further, as per a report titled Silicon Beach: A study of the Australian Startup Ecosystem, entrepreneurs in Silicon Valley explore new opportunities/markets 15% more frequently than Australian entrepreneurs, while entrepreneurs in New York seek new markets 12% more often⁸.

⇒ For both investors and investees alike, such factors impact the overall VC ecosystem and can especially dent early stage investing (later stage is relatively ‘safer’ since one can gauge the KPIs more realistically) which pushes startups in the valley of death and probably unknowingly killing the potential unicorns of tomorrow. At the end of the day, startup ecosystems run on a pyramid structure where the failure rate is surely high but if funding is not adequate, then the base of this pyramid will shrink (less startups) and hence lowering the chances of reaching the top of the pyramid i.e. scaled up success stories (irrespective whether a unicorn or not!).

3.) Limited knowledge / readiness for international markets results in selective internationalization

⇒ In our experience, some key factors that make startups successful are identifying the right issue(s) to solve, understanding the dynamics of the environment (3Cs), having a game plan (strategy; including internationalization) – and of course, a solid execution (apart from conventional aspects such as funding etc.)! In this competitive world, whether one is a B2B or B2C startup, internationalization and scaling seldom hurts anyone. In the larger scheme of this journey, building a startup and trialing/POCs in an Australian state can be compared to going to high school, expanding across Australia is like going to a university, and scaling internationally in complex (also less understood markets) outside one’s comfort zone is no less than attaining a PhD in that analogy! A general on-ground observation is that several startups aspire to go to USA and Europe (probably because of a comparable ease of doing business, notion of immediate market size and initial comfort etc.) and put other growing markets (as appropriate) on the back burner (e.g. Japan or ASEAN) which require more thought on aspects such as localization/product-market fit and also overcoming wider cultural barriers. But the journey can be worth the pain – whether through the lens of potential first mover advantage, risk diversification, geo-politics (at times) or with intent to uncover full market potential. For example, Japan continues to be one of the largest economy globally and ASEAN bloc is the 5th largest economy of the world¹⁰. Despite being a trading bloc (and a rapidly growing one), based on many on-ground conversations, Japan and ASEAN are not the first ‘port of consideration or entry’ on many startups’ lists. The common reason cited is lack of market understanding, language barriers and (perceived) market complexity of these markets! Generally speaking, even many listed Australian businesses and their leadership may not be ‘Asia ready’ but that may be where the next wave of opportunity lies for many¹¹ (see figure 4)

 

Figure 4: AsiaLink Business

Using healthtech as an example, Australia is considered to be quite promising in this sector.  Healthtech startups in Australia addressing issues relating to aging or infertility can evaluate potential markets based on commonality of issues and long term potential rather than just immediate attractiveness. For instance, several markets such as Japan could be potential markets as they face aging and fertility issues too¹². Another example can be in the agritech space, where some problems being addressed by Australia’s agritech can have applicability to some ASEAN markets and we see prominent Japanese companies making investments in similar spaces in countries such as Vietnam¹³. There is scope for Australian startups to turn to those markets, attempt to localize and engage in the race either directly or via partnering locally (there can be many ways to penetrate a market and we strongly believe it can’t be a “cookie-cutter” approach especially in Asia).

Strategic Partners: The All-encompassing Solution to These Concerns

It will be a battle half won if we only identify the key concerns of Australian startups that can keep them away from achieving their true potential and not find ways to address it. At the end of the day, successful scale up of any business depends on three aspects: (1) Information, (2) Know-how and (3) Execution. How fantastic would it be if someone can support Australian startups with all the three aspects and in-turn aiding the three issues identified i.e. small local market, funding woes and lack of holistic knowledge related to geographic expansion? The answer lies in finding a good strategic partner i.e. someone who brings you “more than just money” on the table – easier said than done but it can really prove to be beneficial. To complement this, many large Japanese companies are increasingly looking at building new businesses, digital transformation opportunities etc. and are welcoming startups that have differentiated offerings to collectively use the Japanese company’s wide Asia footprint, local knowledge and ability to invest along with the startup’s intellectual property for mutually beneficial long term value creation.

How can IGPI Australia help?

IGPI is well networked with most Japanese mega corporations and SMEs across Asia – be it Japan (HQ), ASEAN (RHQ in many cases) and Oceania offices and support them for a number of initiatives. If you are an Australian startup, we can assist you find the right potential partner for your market expansion plans beyond Australia. IGPI provides highly customized Asia business advisory to its diverse range of clients including but not limited to:

• Market prioritization in Asia
• Market entry and growth strategy
• Strategic partner search
• Commercial negotiations support
• Custom hands-on support (in-market)

Authors

Mr. Rachit Khosla is the Country Manager of IGPI Australia. Rachit is a seasoned strategy consulting professional with rich experience of leading and executing market entry and growth strategy (both organic and inorganic) engagements for Fortune 500 businesses and large MNCs across Asia. Rachit has advised clients in a diverse range of industries including automotive, fin-tech, manufacturing, med-tech & healthcare, construction materials, travel, IT & telecom. Before joining IGPI, his experience includes country manager at YCP Solidiance Asia Pacific and head of an online B2B bidding platform for the consulting industry. Mr. Hui Fu Chua is an Analyst in IGPI Singapore. Hui Fu started his career with IGPI, where he performs research and data analysis to support the team in strategic planning and decision making. In IGPI, Hui Fu has been involved in assignments across different sectors such as renewables, mining, agriculture, healthcare amongst many others with a strong focus in the Australia, Japan and Southeast Asia markets. Ms. Shrutee Chitre is an Intern at IGPI Australia (Aug-Oct 2020). Shrutee is currently pursuing Master’s in Management from the Melbourne Business School. She has had previous work experience of 5 years with Reliance Life Sciences Pvt. Ltd., a group company of an Indian MNC Conglomerate – Reliance Industries in Mumbai, India.

About IGPI group

        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 focusing on management consulting and M&A advisory in Southeast Asia across various sectors. We act as a bridge between Japan and Southeast Asia, 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. Get in touch with us on internationalization, strategic planning and M&A 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 investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. 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.

Since its establishment in 2015, the KK Fund is a venture capital firm that has invested in more than 20 mobility and internet-related startups in Southeast Asia. By investing in startups in a wide range of industries such as FinTech, logistics, and healthcare from the seed stage and providing hands-on support to the founders, KK Fund has contributed to increasing the value of many startups. In Southeast Asia, there are many cross-industry business opportunities where the development of social infrastructure and the consolidation of SMEs are urgent issues. IGPI Singapore and KK Fund will support the creation of new businesses in Southeast Asia by combining IGPI’s corporate transformation (CX) know-how of large companies and KK Fund’s startup support know-how. In addition to supporting individual projects, we plan together to launch the SEA Point program as a platform for large companies to create new businesses in collaboration with Southeast Asian startups and conglomerates. Overview of KK Investment Management Pte. Ltd. Main Business: Venture capital business in Southeast Asia Date of Establishment: October, 2015 Representative: Koichi Saito, Representative Director Contacts: Kohki Sakata Tel: +65-8168-2503 e-mail: info_singapore@igpi.co.jp About Industrial Growth Platform, Inc. (IGPI) Founded in Tokyo in 2007, Industrial Growth Platform Inc. (IGPI) is a professional management consultancy that leverages strong partnership and collaboration with clients to enhance their long-term and sustainable corporate and business value. IGPI is a privately owned company with core staff of over 200 professionals with offices in Tokyo, Singapore, Hanoi, Melbourne and Shanghai. Its management team is headed by Managing Partner Takashi Muraoka.

Since the country began opening up its economy in the late 1980s, Vietnam has been an attractive destination for foreign investors. In 2019, data from the Foreign Investment Agency (FIA) shows that Foreign Direct Investment (FDI) reached USD38.2 bn an increase of 7.2% compared to the same period in 2018. Japan has been highly active in the field of M&A as illustrated in the chart -below. In 2019, total Japanese inbound M&A deals amounted to more than USD 450mn in Vietnam with 12 deals*. During the same year, Japan was the 3rd largest contributor of foreign M&A deals in Vietnam in terms of deal value after South Korea and Singapore.

  Source: Mergermarket, IGPI analysis * For disclosed deal value to be greater than or equal to USD 5 mn and / or the target’s turnover/revenue is greater than or equal to USD 10 mn

Financial services, agriculture, consumer among the key sectors of investments by Japanese firms

Historically, Japanese investors have been focusing on Vietnam’s rapidly growing financialservices sector. One of the notable transactions took place in December 2012 where Tokyo Mitsubishi UFJ purchased a 20% stake in Vietinbank for USD 743 mn. Local financial institutions are looking for strategic foreign investors to improve their business performance and to strengthen their balance sheet through capital injections. Recently in January 2020, Vietnamese mid-sized bank, Orient Commercial Joint Stock Bank (OCB Bank) divested 15% stake to Japanese Aozora Bank for USD 138 mn and the transaction currently represents the second largest deal in Vietnam by Japanese companies over the period 2019 – H1 2020 as shown in the table here-below:     Source: Mergermarket, IGPI analysis *For disclosed deal value to be greater than or equal to USD 5 mn and / or the target’s turnover/revenue is greater than or equal to USD 10 mn   Agriculture is also another driving force behind acquisitions as agricultural companies are looking to expand their technical capabilities. As the demand for increased productivity rises, the players in agriculture sector are looking into adopting technologies (i.e. agriculture technology or “Aggrotech”) to improve yield, efficiency, and profitability. In May 2019, Mitsui acquired a 35.1% stake in Minh Phu Seafood, a Vietnamese shrimp producer and processor for USD 153 mn and is the largest transaction by Japanese companies in Vietnam over 2019-H1 2020. According to Mitsui, this transaction will enable Minh Phu to achieve further growth through the application of digital technology including AI in farming ponds and processing plants and the enhancement of the efficiency in shrimp supply chain from farming to marketing. Additionally, manufacturing is another area of interest for Japanese investors since Japanese companies have higher technological capabilities in comparison to their Vietnamese counterparts and want to bring their expertise to the local companies to expand. Especially, during the current COVID-19 situation, many Japanese consumer and industrial goods manufacturers are considering to shifting their manufacturing bases from China to Vietnam in order to take advantage of more affordable labour costs here in Vietnam. Notably, Hoya Corporation, which manufactures hard-drive components, is expected to move from China to both Vietnam and Laos. Lastly, a large number of workers in Vietnam speak Japanese, which is a distinct advantage compared to other countries in the ASEAN region. On this matter, it is also important to highlight that around 300,000 Vietnamese people live and work in Japan, proving further benefits for both countries.

ICT and digital transformation development

The information and communications technology (ICT) services is a fast-growing sector in Vietnam and will provide further foundation for the digital development of the country. In 2018, the country had an estimated 30,000 businesses across IT hardware, software, digital content and ICT services1. Vietnam benefits from a flourishing community of software developers and start-ups and developing digital products and services, attracting Japanese firms but also global attention as a significant regional hub. Though the digital transformation of Vietnamese firms is taking place slowly, the Vietnam government, large corporates and small-medium enterprises are playing the active roles of adopting and implementing digital transformation initiatives across their organizations. For example, FPT the leading ICT company in Vietnam, has set as one of its mission to be a pioneer in digital transformation to transform the country’s economy and society. On this aspect, in September 2020, IGPI and FPT Japan will jointly hold a webinar to provide insights on how corporates can design its digital transformation through corporate transformation in the Southeast Asian region. 1. Source: Vietnam Information Technology Outsourcing Alliance. 2018. Why Vietnam?  

Challenges in investing in Vietnam

The long-term outlook for further M&A activity by Japanese investors remains highly positive as Japanese firms continue to look outward and see Vietnam as an important and stable investment location that is growing. Vietnam has been a strategic market for Japanese companies investing overseas due to its close geographic proximity, low labour costs, large work force, its openness to investment by Japanese companies and the positive relationship that exists between the two countries. Furthermore, Vietnam targets to become the leading digital country and economy in the ASEAN region by 2030. Under the national e-commerce development master plan in 2021-25 and the national digital transformation programme to 2025, digital transformation represents a vital process to increase the competitiveness of the economy, while further developing the domestic market and increasing exports. Altogether, this will impact positively and transform multiple key sectors from manufacturing and agriculture to trade, payment, transportation, finance, healthcare and education. However, there are challenges to consider when foreign companies are investing and doing business in Vietnam. As with many developing economies, Vietnam is experiencing the rise of its cost of labor year by year. Therefore, it is necessary for Vietnam to create other advantages for itself. Another key challenge faced by foreign investors when acquiring Vietnamese companies is the lack of reliable and publicly available information on target companies. When conducting due diligence on a company in Vietnam, foreign investors often have to heavily rely on the documents and information provided by the target company and some private companies may also lack adequate financial reporting standards which provide further challenges for foreign investors. Finally, given the country still enjoys a strong economic growth compared to other ASEAN countries, foreign investors have to negotiate with high premium valuation of target companies particularly in fast growing sectors such as consumer, healthcare, retail, etc.  

Government support for M&A and other areas of investment opportunities

Despite the existence of these difficulties, we believe that M&A is still one of the most effective and rapid ways by which Japanese companies can gain access to the attractive Vietnamese market. Japanese companies are likely to continue to be one of the key countries leading the M&A investments in Vietnam. Moreover, the Vietnamese government has also streamlined the M&A process to encourage foreign investment. One the key initiatives is the upcoming equitisation process of state-owned enterprises. This represents great opportunities for foreign investors including Japanese firms to acquire a stake in large state-owned enterprises (SOE). Some examples of SOE include Vinacomin, VNPT, VinaPhone, MobiFone, VTV Cab, Thang Long Tobacco Company, Vinafood 1 and 2, Vinacafe, Vietnam Rubber Group, and Vietnam Chemical Group. In addition to SOE, the Deputy Prime Minister, Vuong Dinh Hue, has recently mapped out core fields for restructuring, all of which are to welcome capital injections from investors from Vietnam and abroad. These areas include finance and banking, public debts, and streamlining nonmanufacturing units, which will provide further business and investment opportunities for Japanese investors in the country.  

How can we help? IGPI Vietnam

IGPI Vietnam was established in 2016 to support the Vietnam government in the business revitalization of state-owned companies and disposal of non-performing loans of financial institutions. Through these projects, IGPI Vietnam supported the Vietnam government in reaching the ultimate goal of transforming and improving the quality and competitiveness of Vietnam economy. Today, IGPI Vietnam focuses on management consulting and M&A advisory supporting Japanese investors and local enterprises to expand their business and to find the best partners across sectors. We also act as a bridge between Japan and Vietnam and advise on a wide range of areas that include market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration. Our consultants are also able to speak both Vietnamese and Japanese languages fluently to assist our clients in their projects.  

About the Author

Kim-Lân Dang is Vietnamese born in France and is a Senior Manager at IGPI Singapore. He started his career in 2008 with PricewaterhouseCoopers Luxembourg and later joined in 2012 Ernst & Young Singapore. Before joining IGPI, he worked at BDA Partners and TC Capital in Singapore. Kim-Lân has vast experience in advising blue-chip private equity funds, entrepreneurs, and corporates on divestments and capital raises. He has executed M&A transactions across Vietnam and the rest of Southeast Asia covering various industries including consumer/retail, IT, telecommunications, financial services, and financial technologies.

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premier Japanese business advisory 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 USD 100 bn 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 EUR 100 mn 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. Get in touch with us on strategic planning, market assessment and M&A related topics! IGPI Vietnam and Singapore – contacts:     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.