Eastern Capital

Editoria: Market Focus Data: 17/10/2014 Eastern Capital Tokyo, whose name translates as “Eastern Capital”, plays host to the International Bar Association’s annual conference later this month, but it is likely to be eastern capital of a different kind that will dominate the conversation among delegates. Joe Rowley speaks to lawyers on both sides of the Pacific about the impact Japanese investment is having on countries across Latin America Credit: Perati/iStock Editorial/Thinkstock Since the first Japanese immigrants arrived on Peru’s shores in the late 1880s, Japan has played an important role in the economic and cultural development of countries across Latin America. Initially a source of cheap and hard-working labour, Japanese immigrants became employers themselves by the early twentieth century, owning coffee plantations in Brazil or small businesses in Peru or Argentina, while Mitsui opened its first representative office in the midst of the Mexican Revolution in 1910. With Japanese businesses playing an increasingly significant role in the local economies across the region, in the 1950s Japan’s large, diversified trading companies – known in Japanese as sogo shosha – entered the fray, acting as pathfinders into new industries and large-scale industrial production. Usiminas, which today is one of Brazil’s largest steel producers, was the first joint venture between the two countries, signed that decade. In Chile, the Japanese established the country’s farmed salmon industry in the late 1960s, which now ranks as the second largest worldwide. Even Brazil’s rise to becoming the world’s largest soya bean producer is partly indebted to a Japanese agricultural scientist, who helped transform the vast, tropical savannah region (which as recently as the 1970s was believed unsuitable for farming) into large-scale production. While early investment by the six largest sogo shosha (Mitsubishi, Mitsui, Sumitomo, Itochu, Marubeni and Sojitz) was largely concentrated in energy and natural resources, recent years have seen the trading companies diversify into infrastructure and agriculture. Bolstered by growing interest from smaller companies, financial institutions and Japanese car manufacturers (which have invested heavily in Mexico), Japan now ranks third only to the US and China as Latin America’s largest trading partner. Their activity is particularly pronounced in Brazil. Noting three recent M&A transactions involving Japanese companies in the pharmaceutical, logistics and energy sectors, Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados partner Bruno Werneck says that on the industrial side Japanese companies have increasingly been visible acquiring companies in Brazil; on the infrastructure side, Japanese companies have sought to take advantage of the country’s large infrastructure deficit by entering into joint ventures for greenfield sites or acquiring minority stakes in large existing projects. Elsewhere in Latin America, Mexico has been a particular focus as Japanese car manufacturers have poured into the country to take advantage of its liberal network of free-trade agreements, its proximity to the US and a favourable exchange rate between the yen and the dollar. Nissan, Honda and Mazda have recently invested more than US$4 billion establishing new car plants in the country, while related sectors – such as car parts manufacturers and auto financing – have also benefited from Japanese attention. Rogelio López Velarde, Ricardo Sanches and Matias Langevin Efforts to diversify Japan’s energy supply following the Fukushima nuclear power plant disaster three-and-a-half years ago have also seen Japanese trading companies increase their attention on the region. In Brazil, the first-ever auction of pre-salt oil and gas concessions last year attracted the interest of Japanese investors (although the eventual bid was awarded to a Chinese consortium). In Mexico, Mitsui is known to be among those keeping a close eye on the country’s progress following sweeping energy reforms, while Japan’s prime minister Shinzo Abe announced a raft of deals in Mexico’s energy sector during a recent whistle-stop tour of Latin America. “Japanese energy clients have become more active,” reflects López Velarde, Heftye y Soria partner Rogelio López Velarde. “The most active have been Spanish companies and then the Japanese. The Japanese already have a large presence and this will become larger because the reform will allow them to participate more fully, as they are very knowledgeable, and financially and technically capable to efficiently operate,” he predicts. Institutional lenders such as Japan Bank for International Cooperation (JBIC) are also making it easier for Japanese financial backers. As the number and type of investments made by Japanese companies in Latin America have expanded, Dias Carneiro, Arystóbulo, Flores, Sanches and Thomaz Bastos Advogados partner Ricardo Sanches says growing demand from a greater number of Japanese companies for financing has helped loosen former rules, such as back-up guarantees from national or state governments or restrictions on investments in private companies. Furthermore, with Japanese megabanks such as Mizuho and Sumitomo and rival lenders from East Asia also entering the market, he adds many may have had to become more flexible to compete, moving away from Japan-centric business models and opening regional headquarters in Singapore, the US and elsewhere. “Previously, Japanese companies acquiring assets abroad would have had to resort to Japanese banks with a minor, or no, local presence to finance the transaction, but now Japanese banks are becoming increasingly active in the region through expansion of their activities and acquisition of local banks,” he says. For Matias Langevin, partner at Chile’s Morales & Besa, part of the increased participation of Japanese lenders in Latin America can be traced back to the global financial crisis in 2008, when commercial banks from the US and Europe launched fire sales of their investment portfolios and retrenched to their domestic markets. Japan’s Mizuho Corporate Bank was one beneficiary, turning to Shearman & Sterling and Pinheiro Neto to acquire the Brazilian corporate banking arm of Germany’s WestLB in 2010. “Japanese banks appeared because they had the liquidity to finance projects and after the financial crisis they started learning more about collateral and enforcement in Chile and about the regulatory and political risks,” notes Langevin, who thinks the experience is likely to have increased their confidence and the speed with which they are able to close transactions today. Maurizio Levi-Minzi, Akifusa Takada, Daniel Bartfeld and Bruno Werneck Competitive edge Despite Japan’s presence, the focus remains on the growing influence of China in Latin America, with many arguing Japan is playing catch-up in the region. Some within Latin America’s legal communities challenge this view, arguing that while Japan and China may compete directly within certain sectors (notably natural resources and infrastructure), the two countries’ economies are at very different stages of development, meaning the industrial relations they have forged with countries and governments across the region often differ. Rather than it chasing China, they argue Japan may have helped guide some of China’s strategies, such as loans for oil deals, thanks to its long history in the region. But the region’s challenging legislative landscape still puts off cautious Japanese companies. “[In Brazil] we need to make our greenfield projects more predictable, better planned and with a better of allocation of risk, because this scares foreign investors in general,” says Werneck. “When you look at the high- speed railway project, we didn’t have a single Japanese bidder and we should have had different Japanese companies bidding for that as they are very strong in that area.” For Japanese companies, a further threat is likely to come from East Asian countries with similar economic profiles, such as South Korea and Singapore. A case in point is South Korean car manufacturer Kia, which last month unveiled plans to enter Mexico’s auto industry by building a new US$2.5 billion factory. Meanwhile, Singapore’s sovereign investment fund GIC is particularly visible in Brazil; investing in a string of sectors ranging from private education, to shopping centres and sportswear. Looking to the future, legal practitioners on both sides of the Pacific are bullish about relations between Japan and Latin America. Debevoise & Plimpton LLP partner Maurizio Levi-Minzi says Japan’s long history in the region and successful investments in sensitive industries, such as mining and agriculture, have helped establish a deep trust that will stand the country in good stead for future investments: “The Japanese already have a track record of being good investors,” he says. “When they invest [in sensitive industries] they don’t make waves... and are very sensitive to the needs of the local community.” With Japan’s domestic market shrinking as the population continues to decline, what is certain is Japanese companies will increasingly cast their gaze overseas to boost their earnings. Baker & McKenzie partner Akifusa Takada says more companies are positioning themselves to take advantage of Latin America’s growing middle classes. Alongside the traditional automotive and electronic sectors, he predicts niche sectors, such as medical devices, will receive greater attention. Other “hot potential industries” may include the financial

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