Business Environment and Key Challenges
Highly Uncertain Business Environment with Tight Logistics and Material Procurement Difficulty Due to the COVID-19 Pandemic
Although the situation with the spread of COVID-19 since 2020 is pulling out of the worst part, economic activities are still affected in numerous countries and regions, including Japan. While the large-scale restrictions on business operations induced by the activity constraints imposed immediately after the emergence of this infectious disease, are gradually relaxed, Japanese companies are in a highly uncertain business environment with a stagnant supply of parts and raw materials due to regional lockdown, continued shortages of semiconductors, which are an important material, and the geo-economics risk heightened by the situation in Ukraine.
The “FY2021 Survey Report on Overseas Business Operations by Japanese Manufacturing Companies” JBIC released in January 2022 revealed that Japanese manufacturers found “disruption and pressure on logistics” the most threatening external factor for their supply chain and “diseases” less threatening. This suggests that logistics stability is of the greatest importance for manufacturers that operate with large, complex networks of supplies. The survey results also show that a wide range of industries, mostly on the demand side, are having a negative impact by semiconductor shortages in particular, in addition to other hardships such as difficulty in material procurement and a cost increase.
Rebuilding and Enhancing the Resilience of Supply Chains and Creating New Business Opportunities Overseas
Nowadays, sustainable business management and initiatives for decarbonization are being promoted in many countries and regions, including Japan, and there are such concerns as a rising manufacturing cost, but at the same time, new business opportunities are expected as there are consumer needs pertaining to the new normal. It is challenging to both address social issues such as realizing of a decarbonized society and contributing toward achieving the SDGs and make a profit simultaneously in the business management of Japanese companies, as well.
Under these conditions, Japanese companies are striving to enhance and rebuild the resilience of supply chains, and create overseas business opportunities. In addition to making capital investment overseas, centralizing or dispersing production bases, and adjusting the production process between production bases, Japanese companies resumed M&A activities. Although the number of overseas M&A deals by Japanese companies dropped from 826 in 2019 to 557 in 2020 by reason of COVID-19, the number recovered to 625 in 2021 as the travel restrictions were relaxed and companies increasingly adopted online research in their study on potential businesses to acquire or merge with (Figure 1).
Japanese companies are expected to continue to expand overseas through the innovation of production processes and energy transition from fossil fuel to hydrogen, ammonia, etc. to achieve carbon neutrality by 2050, technological development for the innovation or transition, investment in digital transformation, and M&As.
Overseas Business Deployment of Mid-tier Enterprises and SMEs
Despite being in the abovementioned business environment, Japanese mid-tier enterprises and SMEs are seeking business opportunities outside Japan by moving to directly cultivate demand in overseas markets and expand business opportunities, in addition to responding to the needs of major Japanese manufacturers for local procurement of parts and equipment. Some of them are in fact already operating outside Japan with a business model that addresses such social issues as healthcare and recycling. Diversification has been seen in the fields of business invested in by Japanese mid-tier enterprises and SMEs, their investment destinations, and funding needs.
JBIC annually surveys Japanese manufacturers regarding their medium-term prospects for overseas operations and reports its findings in the Survey Report on Overseas Business Operations by Japanese Manufacturing Companies. In the FY2021 survey, 99.0% of mid-tier enterprises and SMEs that responded to the survey stated that they will “maintain present level” or “strengthen/expand” their overseas business operations. This indicates that their willingness to conduct overseas operations remains high (Figure 2). As the constraints imposed due to the COVID-19 pandemic are gradually relaxed, Japanese mid-tier enterprises’ and SMEs’ activities pertaining to overseas business operations are expected to recover and grow.
JBIC’s Activities
Supporting through the Emergency Window for Overcoming the COVID-19 Crisis and Supporting Japanese Companies’ Overseas Business Expansion in Various Industries
Off-highway tire plant in India
7-Eleven convenience stores in the U.S.
Refrigerated trailers of PLM Fleet, LLC
In the Fourth Medium-term Business Plan, JBIC designated execution of policy-based finance functions that are adapted to changes in the economic situation as one of the priority areas to focus on. In FY2021, JBIC made 156 financial commitments to projects that involve Japanese companies affected by the COVID-19 pandemic under the Emergency Window for Overcoming the COVID-19 Crisis, which was established in April 2020 and offered to projects where the financing documents are to be signed by the end of December 2021.
JBIC’s another priority is supporting the strengthening of the international competitiveness of Japan’s industries in the era of industrial and social transformation. JBIC established the Post-COVID-19 Growth Facility in January 2021 and helped to enhance and rebuild international supply chains of Japanese companies, and also supported overseas M&As of Japanese companies.
For instance, JBIC financed an off-highway tire manufacturing and sales business in India, automotive parts manufacturing and sales businesses in the United States, the acquisition of a British analog semiconductor company, and the acquisition of a U.S. convenience store business, all of which are conducted by Japanese companies.
JBIC also provided support for projects that assist resolving social issues to realize sustainable growth for the purpose of addressing global issues toward realizing sustainable development for the global economy and society as one of the priority areas of the Fourth Medium-term Business Plan. Examples include financing for the synthetic structural protein material manufacturing business of a Japanese startup in the U.S., business of manufacturing and selling medical devices such as dialyzers in Vietnam, business of manufacturing and selling medical devices such as infusion kits in the Philippines, and business of manufacturing and selling medical devices such as surgical devices in the U.S., all of which are performed by Japanese companies. Furthermore, JBIC provided support for financing the businesses conducted by Japanese companies that would lead to the enhancement of the food value chain resilience, such as a refrigerated trailer leasing business in the U.S., business of manufacturing and selling processed foods in Thailand and business of manufacturing and selling frozen foods in Vietnam.
JBIC's efforts to contribute toward maintaining and improving the international competitiveness of Japanese companies continued in the maritime and aviation industries as well. These industries are greatly affected by the COVID-19 pandemic. While the demand for containerships is on the increase for the stay-at-home demand under the pandemic, some companies are impacted by a slump in the tourist demand and lockdowns. JBIC guaranteed repayments of loans owed by a Japanese airline to private financial institutions for purchase of aircraft and swiftly financed overseas business operations of Japanese companies in the aircraft-related leasing industry and marine resource development industry. Also, JBIC financed a Japanese company’s acquisition of a leading marine container leasing company of the U.S. to support the company in expanding its business and increasing profit-earning opportunities.
Supporting Overseas Business Deployment of Mid-tier Enterprises and SMEs
JBIC has enhanced its capability to assist Japanese mid- tier enterprises and SMEs in expanding abroad through its business units dedicated to this purpose at its Head Office and Osaka Branch. In FY2021, in close collaboration with such organizations as regional financial institutions, JBIC made a total of 116 financial commitments to mid-tier enterprises and SMEs in loans and guarantees, including 102 commitments for businesses that involve Japanese companies affected by the COVID-19 pandemic.
The diversified recipients of this support include startups as well as enterprises that resolve social issues and cultivate local markets, regardless of whether these are not necessarily in traditional-type industries. JBIC supported mid-tier enterprises and SMEs in expanding business overseas by providing loans in local currencies, such as Thai baht, and supporting the procurement of long-term local currency funds of the regional financial institutions themselves by setting credit lines (two-step loans) for regional financial institutions.
Compared with larger companies, mid-tier enterprises and SMEs might face greater constraints on various fronts, such as the collection of information about overseas investment. Due to this, JBIC provides further detailed support to mid-tier enterprises and SMEs by offering various information such as on the overseas investment environment and holding seminars utilizing its overseas representative offices and individual consultation meetings, while strengthening partnerships with public institutions, economic organizations, agencies that support SMEs and overseas business deployment as well as regional financial institutions that serve as a major financing source for those companies.
Responding to the Diverse Needs of and Crises Faced by Japanese Companies
The international economic conditions surrounding Japan, such as political conditions in each country and economic trends in emerging countries, are constantly changing. In 2021, many companies continued to address the impact of the COVID-19 pandemic and strived to enhance the supply chain resilience or rebuild supply chains. Although the global economy started to recover in 2022 from the pandemic-induced, serious stagnation, it is still full of uncertainties attributable to the ongoing semiconductor shortages, surging raw material prices, and the rise of long-term interest rates. The Russian invasion of Ukraine is also prolonging these unstable global situations. JBIC, while accurately responding to these changes, to trends in the global economy, and to the funding needs of Japanese companies, continues to provide support to maintain and improve the international competitiveness of Japanese industry, utilizing its Global Investment Enhancement Facility, which, established in July 2022, is offered to projects where the financing agreement are to be signed by the end of June 2025.
The Industry Finance Group will continue to provide support in accordance with the issues faced by numerous Japanese companies large and small, including mid-tier enterprises and SMEs. We will accurately grasp the post-pandemic issues and needs of Japanese companies and will strive by multiple means including capitalizing on various financial instruments and enhancing our risk-taking capability to contribute toward exploring and creating new business opportunities for Japanese companies that can lead to Japan’s sustainable growth. This includes addressing global issues and providing support for enhancing supply chain resilience and acquiring technology through M&As for the digital transformation of Japanese companies, as prescribed in the Fourth Medium-term Business Plan. By doing so, we will continue to play a role in connecting Japan to the world.
Notable Examples of JBIC’s Financial Support
Loan for Acquisition of British Company Dialog Semiconductor Plc by Renesas Electronics Corporation
Supporting Overseas M&A of Japanese Company
JBIC concluded a loan agreement with Renesas Electronics Corporation (Renesas) to finance part of the funds necessary for Renesas to acquire British company Dialog Semiconductor Plc (Dialog). Dialog is an analog semiconductor company with expertise in connectivity technologies including Wi-Fi and Bluetooth. By acquiring Dialog, Renesas aims to broaden its product portfolio and provide stronger and more comprehensive solutions for the fast-growing IoT, industrial, and automotive markets. This loan supports the overseas business deployment of Renesas, thereby contributing toward maintaining and improving the international competitiveness of Japanese industry.
Loan for the Factory Construction and Leasing Business of Sumitomo Electric Industries’ Philippine Subsidiary for Automotive Parts Manufacturing and Sales
Supporting Overseas Business Expansion of Japanese Company’s
Wire harnesses (Photo courtesy: Sumitomo Electric Industries, Ltd.)JBIC concluded a loan agreement with IWS Realty Corporation (IWSR), a Philippine subsidiary of Sumitomo Electric Industries, Ltd. (Sumitomo Electric) to finance, through IWSR, the funds necessary to construct and lease factories for Sumitomo Electric’s subsidiaries in the Philippines to manufacture and sell automotive parts such as wire harnesses.
Sumitomo Electric globally manufactures and sells a wide range of products including wire harnesses, and IWSR supports the supply chain of Sumitomo Electric’s products including wire harnesses in the Philippines through its factory construction and leasing business.
Wire harnesses are laid throughout an automobile to transmit power and information. They require advanced technologies to reliably send numerous pieces of information despite intense vibration and heat. With its advanced technologies for wire harnesses, Sumitomo Electric has the top share and established such a prominent presence in the market that one out of four automobiles in the world uses Sumitomo Electric's wire harnesses*1. The advanced technologies for wire harnesses are essential for realizing electric vehicles and autonomous driving, which are expected to be in widespread use. Through this financing, the supply chains in the Philippines are expected to be more resilient, including the supply chain of Sumitomo Electric’s wire harnesses.
The loan provides financial support for the overseas business expansion of Sumitomo Electric, thereby serving to maintain and improve the international competitiveness of Japanese industry.
Note
- *1
Based on market share estimates from Sumitomo Electric’s survey.
Loan for the Acquisition of U.S. Company by Glory Ltd.
Supporting Overseas M&A of Japanese Company
Banknote- and coin-depositing/ dispensing unit of RRS (photo provided by GLORY LTD.)JBIC concluded a loan agreement with Glory Ltd. (Glory) to finance part of the funds necessary for Glory Global Solutions Inc., Glory’s U.S. subsidiary, to acquire U.S. company Revolution Retail Systems, LLC (RRS).
Founded in 1918, Glory is the developer of Japan’s first coin counting machine. It develops, manufactures, sells, and provides maintenance services for cash handling machines and automatic service equipment. Its business fields include electronic payment services, biometric solutions, and robot SI. Glory holds the lion’s share in the Japanese market and operates in more than 100 countries with its sales and maintenance bases in 36 countries, mostly in Europe. By acquiring RRS, which manufactures, sells, and provides maintenance services for cash handling machines in North America, Glory intends to exert the synergistic effects of, inter alia, cross-selling to both companies’ customer bases, the enhanced sales activities with a wider range of solutions and products, the improvement of business efficiency, primarily in the maintenance services. By doing so, Glory plans to expand its business in the logistics and retail markets in North America.
Loan for Medical Device Manufacturing and Sales Business of JMS Healthcare Phl, Inc., a Philippine Subsidiary of JMS Co., Ltd.
Supporting Overseas Business Expansion of Japanese Company
JBIC concluded a loan agreement to finance the funds necessary for JMS Healthcare Phl, Inc. (JMSHP), a Philippine subsidiary of JMS Co., Ltd. (JMS), to conduct the business of manufacturing and selling medical devices. JMS was established as Japan Medical Supply Co., Ltd. in Hatsukaichi City, Hiroshima, in 1965, to manufacture and sell disposable (i.e., pre-sterilized, immediately usable and not to be reused) medical devices made of plastic, which reduces the risk of hospital-acquired infections attributable to blood transfusions. The corporate name was changed in April 1994. With the capability of performing the process almost entirely in-house from material procurement to production, JMS is able to flexibly address the needs of users and has developed products that contribute toward safer and more efficient medical care and better quality of life of patients. JMS’s variety of medical devices include infusion kits, syringes, needles for syringes and AVF, hemodialysis machines, cardiopulmonary blood tubing sets, blood bags, and systems for blood component donation.
Expanded across the seas in the 1970, JMS currently has three sales bases and five production bases abroad, including JMSHP, and sells medical devices in nearly 90 countries through these eight JMS group companies. The financing to JMSHP, which manufactures medical devices such as infusion kits that help to prevent infections, is intended to support the supply of these products to Japan, Europe, the U.S., and Southeast Asia through the JMS group companies. The loan is therefore expected to contribute toward raising the level of health and hygiene in the countries.
Loan for Acquisition of Leading Marine Container Leasing Company of the U.S. by Mitsubishi HC Capital Inc.
Supporting Overseas M&A of Japanese Company
Containers of CAIJBIC concluded a loan agreement with Mitsubishi HC Capital Inc. to finance part of the funds necessary to acquire CAI International, Inc. (CAI) of the U.S.
Seeing high-value-added “Global Assets” that can find high liquidity as one of its focus areas, Mitsubishi HC Capital intends to enhance and globalize, inter alia, its marine container leasing business. CAI, established in the U.S. in 1989, is one of the world’s largest marine container leasing companies in the number of containers held. It operates at 13 locations in 12 countries and has contracts with 180 container depots in 39 countries to flexibly meet the global demand. With CAI being wholly owned by Mitsubishi HC Capital through this acquisition, the Mitsubishi HC Capital group becomes the world’s second rank group in the size of fleet on an TEU*2 basis. Mitsubishi HC Capital aims to make more profit-earning opportunities by fulfilling the marine container leasing demand, which is expected to grow largely.
This loan provides the necessary long-term foreign currency funds for the M&A by Mitsubishi HC Capital, thereby supporting the overseas business expansion of the Japanese company.
Note
- *2
TEU: twenty-foot equivalent unit