The Asia Pacific deal landscape has taken a hit in recent years. In 2023 deal value across the region fell to 147bn USD, 59% below the 2021 high of 359bn USD, according to Asia Venture Capital Journal. Slow economic growth, high interest rates, regulatory uncertainty and stock market volatility have all contributed to the downturn, exacerbated by escalating tensions between the US and China and ongoing global conflict.
At the centre of it all is the evolving Chinese economy, with dealmaking in China seeing a sudden drop after decades of forward momentum. While the long-term viability of China as an investment target is not in jeopardy, this offers little comfort to investors right now, who are naturally looking to leverage opportunities elsewhere in the region. But what are the alternatives?
India has grabbed much of the spotlight—with its growth potential and, like China, huge population base ready to be customers and labour. But both investment data and our experience suggest that investors still seem cautious. Southeast Asia also shows potential, particularly for venture capital. But for major players, it can be hard to find the necessary scale and consistency across the panoply of markets in the region. Many of the deals are simply too small for the mega investors.
Instead, we have found that investment is heading toward the region’s “developed” countries: Japan, South Korea and Australia. In the current climate of heightened risk, these countries offer scale, deep capital markets and relative political and regulatory stability. And these jurisdictions are more than just safe havens. The re-ordering of global supply chains, partnerships and customer relationships has created new avenues for opportunity.
With investment in these three markets looking increasingly favourable, considering the potential risks is critical. Investors can get a good sense of both the risks and opportunities for each market by looking at each through four different lenses: geopolitics, ESG / corporate governance, energy transition and demographics.
Japan
Geopolitics
Japan has broadly been a beneficiary of geopolitical tensions with China, North Korea and Russia. It has also benefited from uncertainty over trade restrictions, emerging as strategic friend of the west. The main opportunities here for investors are in critical minerals, renewable energy and battery storage, semi-conductors, and the mixed-use technologies that are adjacent to the uptick in Japan’s military spending. While there is some anxiety over what a potential second term of former President Donald Trump would mean for this dynamic, optimism is high.
ESG / corporate governance
The regulatory landscape in Japan is also being updated to facilitate better governance. While the weaker yen has led to foreign investors piling into Tokyo’s capital markets, there is nonetheless a perception that many of Japan’s large listed conglomerates are lagging behind their G7 counterparts. But Japan is implementing an increasingly sophisticated corporate governance regime benchmarked with global best practices. And outside pressure has started to move boards in a new direction, while shareholder resolutions are influencing pro-investor corporate finance strategies.
Energy transition
As mentioned above, geopolitical tensions are creating opportunities in Japan for investors looking at renewables. But the sector faces a distinct problem in the country itself: ineffective energy-output control that undermines the ability of renewable energy firms to sell to the power grid. But this can also be seen as an opportunity. Emerging technology around systems that can store excess energy for distribution during peak demand—namely, projects for energy storage facilities and battery production—will require investment.
Further down the road, there is potential for Japan to mine critical minerals in its seabed. Not only do Japanese companies know how to harvest the minerals; they are the most advanced (aside from Chinese firms) in the downstream processing required to get them to battery specification. Japan also has battery manufacturers and end users. Investors should watch the sector closely.
Demographics
Like Australia, Japan’s population is aging rapidly. This is creating labour shortages, and for private businesses in Japan, this means a shortage of successors. While there is a growing willingness to accept investment as a succession solution, there remains resistance to foreign ownership. Investors should bear this in mind. Careful negotiation skills and cultural sensitivity are more important in Japan than having a war-chest of funds.
South Korea
Geopolitics
South Korea’s dependence on exports makes it acutely vulnerable to geopolitical shifts. It has also been on the faultline of US-China tensions and supply chain movement, given its key role in the semi-conductor sector. While consecutive governments have focused on efforts to hedge geopolitical risk, the emphasis can shift significantly with changes in leadership.
Uncertainty hangs over leadership and policy changes abroad as well. Under Trump, the US administration forced Seoul to renegotiate a key existing free trade agreement. South Korea has also faced punitive economic measures and intense diplomatic pressure from Beijing over perceived pro-US or anti-China moves. Korean firms will continue to face potential risks of restricted market access from both the US and China. Investors should pay close attention to how exposed their investment targets are.
ESG / corporate governance
The Korean economy is intensely concentrated with highly dominant and expansive chaebol (Korean conglomerates). The family-run nature of these companies means they often do not have the usual governance systems you would expect to see in companies of their size. Recent years have seen some of the most intense activist campaigns, designed to push through reforms that will release increased value to shareholders. Investors should have a clear vision of their non-negotiables and conduct thorough diligence on targets before signing a deal.
Ongoing friction between President Yoon Suk Yeol and the country’s unions means many factors could trigger labour activism. Investors should map out the unions which are active among the labour force and understand the history of relations between the workforce and management. Labour activism and its attendant operational challenges will remain a key risk for any opportunity.
Energy transition
Korea has been at the forefront of emerging technology for the energy transition, such as batteries and alternative energy technology, as well as the diversification of supply chain for semiconductors. The Korean government is committed to preserving its technology lead in cutting edge memory chips by developing the world’s largest semiconductor mega cluster at Yongin. This project involves over USD 470bn investment by chipmakers SK Hynix and Samsung Electronics. A combination of government incentives and international coordination with the US and Japan has supercharged innovation and growth in these sectors.
However, the supply chain for these sectors, particularly access to critical minerals, will remain challenging and is a crucial element for the success of any emerging- or high tech project. Korea has been seeking independent bi-lateral relationships with critical minerals providers in places like Africa to diversify and strengthen their supply chains.
Demographics
In June, President Yoon called South Korea’s rapidly aging society a “national emergency”: the country has the lowest fertility rate of all OECD countries. This has implications for the country’s defence system. The government has announced a five-year plan to drive high-tech innovation to manage the demographic impact. The expectation is that this will in turn drive innovation into military-adjacent research and development in the private sector.
Australia
Geopolitics
Since 2020 Australia has been adjusting to a raft of trade restrictions imposed by China on selected Australian industries. Industries as varied as barley, beef, wine, lobster, and coal were the most adversely impacted. While a lot of work has gone into reorienting exports to other markets, China has recently sought to renormalise relations.
The allure for Australian exporters to return to China will be strong, though investors would do well to remember long-term structural barriers still remain to smooth trade between the two countries. Australian companies may again find themselves exposed to an export market vulnerable to diplomatic interference.
As a result, China de-risking will remain part of the Australian government’s agenda, favouring investments from other actors in key sectors of the economy. For any potential deal, investors must understand the exposure risk and the diversification options available.
ESG / corporate governance
In the domain of ESG, Australia has long had a reputation of being less stringent on areas like anti-bribery and corruption, or human rights enforcement, than, for example, the EU or even the US. However, ESG standards and corporate governance expectations have been widening in Australia for several years. In 2022, there was more climate-related litigation in Australia than anywhere else in the world, other than the US.
Companies in Australia that fail to meet certain benchmarks are facing adverse action from an expanding group of stakeholders, including regulators, activist shareholders and public interest groups. Not recognising the increasing importance of these matters can have a negative impact on overall value, not just reputation. It is increasingly important for investors to understand the depth and reliability of a target organisation’s governance and sustainability structures.
Energy transition
Evolving ESG standards are also bound to impact the renewable energy sector in the country, which presents a big opportunity for investors. In Australia’s economy, resource extraction has been a mainstay for many years. But with the country’s recent drive to aggressively decarbonize, the renewables industry has become one of the top growth sectors for foreign direct investment. The federal Rewiring the Nation programme has allocated AUD 20bn to upgrade Australia’s electricity grid and transmission infrastructure, as well as many other federal, state and local initiatives.
The renewables industry in Australia is something of a goldrush sector – attracting massive investment but also its share of rogues and other questionable characters. Investors should understand the complete background and reputation of other parties in investments. And the high turnover of federal governments could introduce uncertainty in policymaking, especially when it comes to energy, which is a key point of difference between the two main parties.
Demographics
Though Australia presents a sense of safety, a long-term investment strategy must consider the potential for a changed Australian operating environment. An aging population and the continuing trend of low productivity could undermine its stability. The first preference vote share earned by the two major political parties in Australia, the ALP and LNP, has been steadily declining. If this dissatisfaction continues, minority governments could become the norm, making policy certainty less likely with each election.
Re-evaluating old beliefs
For decades now developed Asia has taken a back seat to the tigers of North and South East Asia for investors. Relatively low, some might even say stagnant growth, and expensive operating environments meant that these markets have traditionally been lower down the wish list.
However, in the face of higher interest rates, uncertain geopolitical times and a more cautious approach to risk, investors are re-evaluating long held beliefs about Japan, Australia and South Korea. And all three markets are embracing the potential for innovation made possible by emerging technologies, particularly in the energy transition space, as well as shifting business norms, to create more dynamic investment opportunities.
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