This article first appeared in Forum, The Edge Malaysia Weekly on December 25, 2023 - January 7, 2024

In the previous article, “Deciphering why Malaysia is alluring for Japanese investors and what it means for SMEs” (Issue 1503, Dec 18), we highlighted the close relationship between Malaysian and Japanese businesses. We would like to analyse now how specific industries are affected. At Nihon M&A Center Malaysia, we have been observing industry consolidation in key sectors in Japan during the past two decades. We believe that in the coming years, Malaysia might experience a similar development.

Consolidation is a strategy to curtail costs, enhance operational efficiency and phase out underperforming product lines. Disruptive technological breakthroughs may be a factor leading to consolidation. We have seen blockchain technology impacting banking and how recent advancements in satellite technology, notably Starlink, could be affecting the telecommunications sector.

Malaysia has a timely opportunity to anticipate this consolidation across its critical industries. Let’s have a closer look at how these might be impacted, particularly the IT, banking, pharmaceutical, logistics and telecommunications sectors.

In the IT industry, especially between Japan and Malaysia, key players such as Hitachi Group, Japan System Techniques, Itochu Techno-Solutions Corp (CTC) and Suncorporation have been fervently engaged in strategic partnerships and acquisitions. The sector stands out due to its strong financials and growth potential, and thus offers a promising investment opportunity.

Attributes such as technological innovation and a formidable market presence are highly valued in IT companies. Enterprises that invest significantly in research and development, pioneering novel technologies, tend to attract potential partners.

Furthermore, companies with well-established domestic and international market outreach appear particularly attractive, given their potential for expansion. The strategic alignment of goals and visions also plays a pivotal role, as companies with shared objectives create fertile ground for mutual growth.

Japanese megabanks, including Mitsubishi UFJ Financial Group (MUFG) and Sumitomo Mitsui Financial Group (SMFG), have been resolute in expanding their presence in Asia-Pacific, despite global economic risks. MUFG, which derives a substantial portion of its net operating profit from overseas, foresees significant acquisitions in the region.

SMFG aims to amplify its profits from existing ventures. However, this expansion comes with heightened risks intertwined with the global economic downturn, underscoring the need for a delicate equilibrium between growth and risk management.

Meanwhile, Malaysia’s banking sector has undergone significant transformation, with the top five lenders now collectively commanding about 48% of the market share. This transformation was spurred by the central bank’s issuance of digital banking licences. The emergence of digital banks, exemplified by the likes of the Grab-led GXBank, signals a potential reshaping of the industry’s competitive dynamics, with prospects for consolidation and operational streamlining.

Malaysia’s pharmaceutical landscape is prone to transformation, with several indicators pointing to an impending wave of consolidation. The number of independent pharmacies has dropped due to stiff competition from major chains, compelling them to contemplate alternatives.

While the sector has grown by 38% in three years, the proportion of independent pharmacies has declined from 66.5% to 61%. The driving force behind this shift is the fierce competition from major chains such as BIG Pharmacy, Alpro Pharmacy and Health Lane Family Pharmacy, prompting independent outlets to explore consolidation. This trend has become evident in several strategic mergers.

In the logistics sector, especially cold chain, we also saw some recent movements. Earlier this year, NL Cold Chain Network, which focuses on warehousing and transport, became a wholly-owned subsidiary of Nichirei Logistics, which had previously already acquired 49% of the issued shares of NL Litt Tatt Group. Meanwhile, Tasco Bhd took over Sabah-based cold chain logistics firm Hypercold Logistics, which has a large customer base among fast-moving consumer goods retailers, F&B players and pharmaceutical groups.

A main reason for consolidation in this sector is the high capital expenditure needed for companies to grow. At the same time, they experience a shortage of human resources, and mergers and acquisitions (M&A) would allow the players to take over entire teams.

Telecommunications operators grapple with financial challenges stemming from the substantial investments needed for 5G and digital transformation, which are further aggravated by rising interest rates. Operators are turning to strategic mergers to mitigate costs and reallocate capital. Noteworthy examples include the Celcom Axiata and Digi.Com merger in 2022, which significantly altered the market consolidation dynamics within Malaysia’s telecommunications sector.

As these industry dynamics continue to evolve, regulatory oversight is paramount. Potential partnerships and mergers will shape the future of the Asia-Pacific telecommunications sector. The interplay of financial pressure, technological advancements and regulatory considerations underscore its pivotal significance as an industry to closely monitor in the coming years.

For businesses in Malaysia, especially those in auxiliary roles to the aforementioned industries, there are a few key considerations that will help them to sustain growth, if not ensure their survival.

It is vital to recognise how the economic climate influences M&A dynamics. Whereas growth periods typically favour sellers, economic downturns increase the number of businesses available for sale, thereby benefiting potential buyers. A buyer’s market is also more common in more mature industries.

The current economic environment has been challenging for Malaysia’s businesses, especially its SMEs. By adapting to current trends, seizing collaboration opportunities and aligning their strategies with the evolving M&A landscape, they will have the opportunity to not only survive but also to thrive.

Yusuke Ojima is managing director of Nihon M&A Center Malaysia

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