Japan’s (heartfelt) message to the UK and the EU regarding Brexit surprised many by its directness and the way it was shared publicly. Not so surprising was the underlying theme, of wanting to maintain arrangements as they are. As is often said, business (and particularly Japanese business) hates uncertainty. Companies and governments desperately want to be kept in the loop of any developments so they can make plans accordingly. As Japan’s message pleads: “we request the both [EU and UK] to heed the voices of Japanese businesses to the fullest extent… some Japanese firms may not be able to respond sufficiently to the drastic changes in the business environment that could be caused by BREXIT and they also have difficulty in articulating their requirements publicly”.
As well as this hint that Japan worries it is not listened to, and is not good at putting its case, I also get a whiff of a feeling of betrayal and loss of trust. “In light of the fact that a number of Japanese businesses, invited by the Government [my italics] in some cases, have invested actively to the UK, which was seen to be a gateway to Europe, and have established value-chains across Europe we strongly request that the UK will consider this fact seriously and respond in a responsible manner to minimise any harmful effects on these businesses.” Well it made me wince, and I hope it made our government wince too.
Having spent some time working in the regional coordination department of a major Japanese investor in the UK, I know full well how much political and economic risk factors are constantly reviewed and investments made or retracted accordingly by Japanese multinationals. Softbank is the exception rather than the rule when it comes to appetite for risk amongst Japanese companies.
I know Brexit supporters will immediately counter that Japanese companies are highly unlikely “to cut their noses off to spite their faces” by closing down operations and moving away from the UK when the UK represents an important market for their products. Furthermore, they will no doubt argue that the much cheaper pound will counterbalance any 10% tariffs if we revert to WTO rules.
Foreign Direct Investment (FDI) matters more than trade in terms of Brexit impact, in my view. Increased trade volumes are an outcome of FDI in these days of integrated supply chains, not the origin of economic prosperity as they might have been in some mercantilist world of the past. The voice of every economics teacher I have ever had (from O level to MBA) keeps echoing in my mind: “an export is simply a means to buy an import”.
Foreign Direct Investment (FDI) is an ongoing process, not a one off. What matters is not just whether any more Japanese companies will invest in the UK (they will, if there’s something alluring in its own right above and beyond being part of the Single Market) but where they will put further investments.
To me, what really matters is the jobs that result from investment in existing operations and the trade that investment generates, not trade on its own.
So with that in mind, here’s my analysis of what a hard Brexit (ie tariff barriers, loss of financial passporting, end to freedom of movement) might mean for our Top 30 Japanese companies in the UK. We have ranked them according to the number of employees, including employees at any acquisitions and subsidiaries and together they represent nearly 90,000 of the 140,000 or so jobs that Japanese companies directly generate in the UK.
My conclusion in short is that Japanese companies will probably be able to adjust to a hard Brexit better than they might fear, and the direct impact on British jobs might not be so severe, except in the automotive industry, and even then, it will be a longer term impact.
But, 20 out of the Top 30 Japanese companies in the UK are regional headquarters. If a hard Brexit means that the centre of the action – in terms of regulatory influence, access to a diverse and talented workforce and selling into a large and growing market – shifts to the continent, then those regional headquarters will shift too, and with them will go the purchasing power for all of those services which the UK has become so good at providing – not just financial but legal, consulting, IT, R&D and creative.
If our trade negotiators really can pull off some good deals with the Middle East and Africa, the best defensive countermeasure UK regional headquarters can take is to position themselves as EMEA headquarters. Many of them already cover not just Europe, but the Middle East, Africa and in the case of IT companies such as Fujitsu, India too. But I worry that this will not be enough, given the relative size of these markets.
- Technology companies (9 of the Top 30) such as Fujitsu, Hitachi, Sony, Ricoh, Canon, Fujifilm, Konica Minolta, Olympus and Toshiba have been increasingly moving from B2C to B2B and from products to services in the UK and no longer mass manufacture consumer products in the UK. Sony’s last manufacturing operation in the UK, in Wales, produces professional audio visual equipment. The bulk of Sony’s employees are in Sony Music or Sony Computer Entertainment, or in the European sales and marketing operation. Ricoh’s Telford factory produces 3D printers. Fujifilm’s facility in the UK is nothing to do with cameras – it is a contract drug manufacturer for the biotech industry. Hitachi has shifted away from TVs and other consumer electronics and has its global rail headquarters in the UK, with a rail vehicle assembly manufacturing facility recently opened in Newton Aycliffe, as well as being the owner of Horizon Nuclear Power.
Canon’s European HQ already moved from the Netherlands to the UK a few years ago, and no doubt the Netherlands would like it to move back. There is a constant tug of war between Germany and the UK for Fujitsu’s regional power centre. Olympus has Keymed in the UK, but its regional HQ is in Germany. Toshiba splits its regional HQ by business between Germany, Netherlands and the UK but is currently restructuring. Konica Minolta’s regional HQ is Germany anyway, as is Fujifilm’s. Hitachi (UK HQ) has just acquired an Italian rail company, so could use that as a European Union base.
Prediction: even a hard Brexit might not have that much impact on Japanese technology companies (who are mostly headquartered in Germany anyway), as in the UK their businesses have already moved into high end, high margin, relatively price inelastic segments, drawing on specific local expertise. Their regional HQs may feel pulled back towards the continent however, particularly in B2B businesses.
- Automotive companies (7 of out the Top 30) such as Nissan, Honda, Nippon Sheet Glass, Toyota, Yazaki, Denso and Calsonic Kansei all have factories in other parts of the EU or inside the EU customs union (ie Turkey). Nissan (headquartered in Switzerland) has a factory in Spain, Honda (HQ in the UK) has a factory in Turkey. NSG (acquired UK based Pilkington) makes automotive glass in Finland, Spain, Italy, Poland and Germany. Toyota (HQ in Belgium) produces vehicles in France, Turkey, Czech Republic and Portugal. Yazaki (HQ in Germany) doesn’t have any factories in the UK anyway (but plenty of sales engineers). Denso (HQ in the Netherlands) has 2 factories in the UK but also in Spain, the Czech Republic, Hungary, Turkey Italy, Poland and Portugal. Calsonic Kansei (UK HQ) also has 2 factories in the UK but also in Spain and Romania. Nissan, Honda and Toyota all export around 75-80% of what they manufacture in the UK, mostly to the European Union.
Prediction: investment for production of new models will go to factories in the EU. As much as a consequence of this than any tariffs, production volumes and jobs in vehicle factories will slowly decline in the UK to a level which mainly supplies the UK domestic market, but this may not be a viable production volume so plants may have to close. Parts manufacturers will cut production and sales engineers in the UK accordingly. Automotive design, a traditional strength for the UK, may even have to relocate to the continent, to be near to the regional HQs and the main markets.
- Financial services companies (7 of the Top 30) such as Nomura, Mitsubishi UFJ Financial Group, Mitsui Sumitomo & Aioi Nissay Dowa, Sumitomo Mitsui Financial Group, Mizuho Financial Group, Tokio Marine Holdings and Sompo Holdings are all headquartered in the UK, but all already have other offices in EU countries. Some already have, and others no doubt will, strengthen their operations in EU, transfer some functions and apply for passporting for other offices. Amsterdam seems to be a favourite (both MUFG and Mizuho have licensed offices there), both for its regulatory environment and also because of the ease of using English, plus long standing friendly relations between Japan and the Netherlands. The insurance companies MS&AD, Tokio Marine Holdings and Sompo Holdings have all recently acquired Lloyd’s Underwriters and London is the historic heart of underwriting, so it is hard to imagine their operations in London fading away that much. Swiss Re and Zurich are both headquartered in Switzerland, outside the EU – so life outside the EU is possible in insurance and could be viewed as an escape from burdensome EU capital requirements.
Prediction: UK HQs position themselves as EMEA HQ. EU functions move to an EU-based capital. Some reduction in high paying top level jobs in UK. Back office jobs might stay in UK if sterling stays cheap but there could well be a drift eastwards to Poland or even India.
- Companies who own major UK brands (5 out of the Top 30) such as the trading company Itochu (who own Kwik Fit), Japan Tobacco (Silk Cut, Mayfair etc), Suntory (Lucozade, Ribena), trading company Mitsubishi Corp (Princes Foods), Mitsubishi Chemical Holdings (Lucite). Japanese trading companies (Mitsubishi Corp, Mitsui, Sumitomo Corp, Itochu, Marubeni) have always had their regional HQs in London for 100 years+ in some cases and they usually cover Africa and the Middle East from there too. Although they are very traditional, I know, as an ex employee, that the debate never stops about how to structure and where to invest in their global operations, and the political and economic risk that Brexit has introduced may well tip the balance not just away from the UK but away from Europe and back to Asia again. Furthermore, for certain of their business lines such as chemicals there has always been a strong pull to Germany. Mitsubishi Chemical Holdings is headquartered in Germany, and although Lucite is in the UK, it is a global business in terms of operations and customers.
Japanese companies tend to be honourable, even sentimental about keeping the operations of brands in the country in which they were born. Having said that, Japan Tobacco (headquartered in Switzerland) has shut down the last of its former Gallaher UK factories in Northern Ireland recently. Suntory’s CEO is a Harvard Business School graduate with a correspondingly unsentimental view of business and as Suntory also owns Jim Beam and Orangina, it may not feel that wedded to the UK as a regional base. Kwik-Fit may seem quintessentially British, but is in fact a market leader in France and the Netherlands too.
Prediction: Japanese companies are getting less sentimental and more globally hardheaded. They will do what they have to do in search of stable growth.
- B2B services suppliers – The remaining 2 companies in the Top 30, Dentsu (advertising) and NYK (logistics) have different histories as well as businesses. Dentsu has been on an acquisition rampage recently, and has formed out of its acquisition of Aegis, the Dentsu Aegis network, headquartered in the UK. The UK is traditionally strong in terms of advertising and marketing expertise, but again, the industry will have to follow wherever its customers go, so if more Japanese clients shift their headquarters to the European continent, I would expect Dentsu Aegis headcount to follow. Although advertising, PR and marketing agencies like to claim they can work globally, my experience is that they are not quite so globally integrated as they seem – wherever the client budget is will be where most of the work is being done.
NYK has both shipping and ground logistics arms – both very integrated into the automotive supply chain. Again, they will have to follow their customers.
- Pharmaceutical companies – none of the Japanese pharmaceutical companies employ enough people in the UK to be in the Top 30. The biggest is Astellas, which has its EMEA HQ in the UK, but also a strong R&D and manufacturing operation in the Netherlands. The well documented concern for pharmaceutical companies is that the European Medicines Agency will move out of the UK with Brexit, probably to Spain, as Spain has plaintively pointed out that it does not host any EU agencies. Eisai also has a major R&D campus in the UK. Takeda has already announced it is closing its Cambridge R&D facility. I would expect a major negative impact if the EMA moves out of the UK.
Regional headquarters tend to do business with other regional headquarters. If a hard Brexit means Japanese and other multinationals shift their headquarters out of the UK, the negative impact for the UK will be deep and far reaching.
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