SINGAPORE: As more Japanese small- and medium-size enterprises (SMEs) seek to expand in Southeast Asia, banks in Singapore are eyeing lending opportunities.
United Overseas Bank (UOB), for example, has reported a sizeable jump in deposit flows from Japanese clients. The bank has recently received approval from Japan’s Foreign Bank Agency Business to offer regional financial products and services in the country, and extend regional Foreign Direct Investment (FDI) advisory services to companies venturing out.
Deposit flows from Japanese clients in the first quarter of this year amounted to more than 80 per cent of deposit flows from all of its Japanese clients in the whole of 2015, UOB said.
Based on data from the Japan External Trade Organization (JETRO), annual foreign direct investment (FDI) to the 10-member Association of South East Asian Nations (ASEAN) bloc reached US$20 billion in 2015, double that of the combined FDI to China and Hong Kong.
Last year was the third straight year in which Japanese investment volumes to Southeast Asia outstripped investment volumes to China, as the relative attractiveness of the world’s second-largest economy dims.
“After 2010, there was a pretty sharp acceleration in investment in ASEAN. There are both push and pull factors – factors that are pushing (Japanese) companies out of China, or at least getting them to consider more of a 'China plus one' strategy as opposed to concentrating almost all production in China,” said Ms Izumi Devalier, a Hong Kong-based economist at HSBC.
Some of these push factors include rising labour costs in China and simmering political tension between the two countries, while the pull factors include relatively low wages in ASEAN countries and the growth potential of ASEAN markets for Japanese goods and services.
Southeast Asian countries have been attracting more Japan investment than China. (Source: Japan External Trade Organization; Graphic: Linette Lim)
SINGAPORE BANKS TOUT REGIONAL LINKS
Singapore banks can position themselves as being able to serve a niche, as Japanese SMEs venturing out may not always be well-served by the Southeast Asian offshoots of Japanese mega banks like Mizuho, Sumitomo Mitsui Banking Corporation and Bank of Tokyo-Mitsubishi UFJ.
“Even Japanese SMEs are accelerating the offshoring process. The mega banks didn’t really cater to the needs of these Japanese SMEs doing business in ASEAN,” said Ms Devalier. “The main customers of the mega banks are the big blue-chip firms like Toyota, Hitachi. They just took that business model and client rolodex and replicated that service in ASEAN.”
DBS and UOB – respectively the largest and third-largest bank in Southeast Asia in asset terms – told Channel NewsAsia that their advantage lies in their regional network and connections. For UOB, this translates into linking Japanese clients seeking joint ventures with potential business partners.
“Many of our customers are saying they find it effective that we connect them to the region and the right party very quickly,” said Mr Sam Cheong, the 46-year-old head of UOB’s Group FDI Advisory Unit.
“For example, when our clients enter an emerging market such as Vietnam, we have the partnerships with government agencies and professional service providers to help them understand the relevant regulations and policies.”
Since late 2015, Mr Cheong has been leading a dedicated team serving Japanese clients. The other team members are Mr Tan Hong Chen, 35, and Ms Naoko Inoue, 34.
The Japan specialists in UOB's FDI Advisory Unit (left to right): Mr Tan Hong Chen, Ms Naoko Inoue and Mr Sam Cheong. Mr Cheong heads the unit, which has nine centres across Asia. (Photo: UOB)
To date, UOB has helped Japanese SMEs expand into the region’s automotive, food and beverage (F&B), electronics, professional services and information technology sectors.
UOB said it collaborates with Japan Finance Corporation and regional banks in Japan to help Japanese SMEs explore business and investment opportunities in Southeast Asia.
In Indonesia, DBS has had a partnership with Sumitomo Mitsui Trust Bank (SMTB) since 2012.
“Working with SMTB, DBS Indonesia provides Japanese companies with wider and more sophisticated banking products and services such as trade finance, cash management and foreign exchange services,” said a DBS spokesperson.
BUOYED BY ABENOMICS, JAPANESE SMES LOOK FOR OVERSEAS GROWTH
Policy banks and quasi-government financing institutions in Japan, like Japan Finance Corporation, have a “strong mandate” to support the overseas expansion plans of Japanese firms, said Ms Devalier. Under Prime Minister Shinzo Abe’s "Abenomics" growth strategy, they encourage firms to expand by providing low-cost or zero-interest loans to their projects overseas.
Japan's Prime Minister Shinzo Abe. (Photo: AFP/Yoshikazu Tsuno)
“Since the late 1980s, an increasing number of Japanese companies have established their overseas bases in ASEAN countries and this number is now on the rise,” said Mr Masaya Hasebe, managing director of JETRO Singapore.
“In order to operate regional business and invest in ASEAN on behalf of the headquarters in Japan, a growing number of Japanese companies have been locating their regional headquarters here since around 2010.”
Given Singapore’s role as an intermediary bridging Japan with the region, it is unsurprising that the Republic is the top destination for Japanese FDI within ASEAN, receiving about a third of the total in 2015, according to JETRO data.
This FDI includes both manufacturing FDI and non-manufacturing FDI like mergers and acquisitions (M&A).
“From an M&A perspective, ASEAN companies in general continue to be attractive targets given the growth potential in the region. Japanese companies will continue to be active in scouting for assets abroad, given the need to seek growth outside of their domestic markets,” said Mr Andrew Lim, managing director and Head of SEA Real Estate and Hotels at HSBC.
Mr Lim, who looks after HSBC's advisory business in Southeast Asia, added: “Japan is betting on GDP growth in markets with large populations such as Indonesia, Thailand and the Philippines. Sectors such as consumer and retail, heathcare and financial services will benefit going forward. We may also see some activity in the power and agriculture sectors in the quarters ahead.”