Pernille Rudlin - Rudlin Consulting

About Pernille Rudlin

Pernille Rudlin was brought up partly in Japan and partly in the UK. She is fluent in Japanese, and lived in Japan for 9 years.

She spent nearly a decade at Mitsubishi Corporation working in their London operations and Tokyo headquarters in sales and marketing and corporate planning and also including a stint in their International Human Resource Development Office.

More recently she had a global senior role as Director of External Relations, International Business, at Fujitsu, the leading Japanese information and communication technology company and the biggest Japanese employer in the UK, focusing on ensuring the company’s corporate messages in Japan reach the world outside.

Pernille Rudlin holds a B.A. with honours from Oxford University in Modern History and Economics and an M.B.A. from INSEAD and she is the author of several books and articles on cross cultural communications and business.

Since starting Japan Intercultural Consulting’s operations in Europe in 2004, Pernille has conducted seminars for Japanese and European companies in Belgium, Germany, Italy, Japan, the Netherlands, Switzerland, UAE, the UK and the USA, on Japanese cultural topics, post merger integration and on working with different European cultures.

Pernille is a non-executive director of Japan House London, an Associate of the Centre for Japanese Studies at the University of East Anglia and she is also a trustee of the Japan Society of the UK.

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Here are my most recent posts

The successes and failures of Japan’s era of big overseas acquisitions

The era of Japan’s big overseas acquisitions began with domestic mega M&As in the 1990s according to Nikkei Business magazine. Following the bursting of Japan’s economic bubble in 1990, a wave of M&As happened in the financial sector, giving birth to Mizuho from Fuji Bank, Daiichi Kangyo and the Industrial Bank of Japan and Sumitomo Bank and Sakura Bank producing SMBC. In the steel sector with NKK merging with Kawasaki Steel and becoming JFE and in the pharmaceuticals sector with Yamanouchi and Fujisawa merged to become Astellas.

The key concept for these M&As in the 1990s was “restructuring” – to rationalise the back office and integrate R&D. Then in the second half of the 2000s came a wave of overseas acquisitions, to counter the business impact of the shrinking, ageing population of Japan by growing overseas but also to benefit from further restructuring and rationalisation.

Mega overseas acquisitions of the 2000s

In 2007 Japan Tobacco acquired the UK’s Gallaher from RJR, becoming the third biggest tobacco company in the world. In 2006 SoftBank acquired Vodafone Japan and then the US company Sprint Nextel, then British ARM Holdings in 2016. Takeda acquired US Millennium Pharmaceuticals in 2008, then Swiss Nycomed in 2011, with the biggest M&A ever by a Japanese company, acquiring Ireland’s Shire in 2019.

“Growing overseas means the development of our human resources has become an urgent necessity” said the President of Takeda in 2006, Yasuchika Hasegawa. Hasegawa was seen as “an alien from outerspace” for his dry, rational management style, arising from many years working in the USA. Although Takeda had been the biggest pharmaceutical company in Japan for some years, it only ranked around 17 in the world before its acquisition spree and urgently needed to find new drug development sources. It felt it was lagging competitors.

The need for global management skills

Hasegawa decided to globalise the company internally by recruiting a foreign successor to himself in 2014 – Christophe Weber from GlaxoSmithKline. Three out of the seven current Takeda directors are not Japanese.

Japan Tobacco‘s managers sent overseas after the Gallaher acquisition found themselves caught between overseas executives determined to defend their patch with rational, logical arguments about productivity, logistics and profitability. After years of painful discussion, it was agreed to close the factory in Northern Ireland. Even now, says Masamichi Terabatake, the current President of Japan Tobacco, a Japan based executive needs to be prepared to travel around the world regularly to discuss strategy with local executives. “You need to keep global staff motivated. Investment and marketing cannot be left vague, they have to be quantitative so they can be transparently discussed. That’s probably why executives in the West are a bit younger!” he says.

NSG acquired UK’s Pilkington in 2006, becoming heavily indebted to do so. From being very domestic, it became a company whose sales were 80% overseas. Unfortunately this proved to be terrible timing as the automotive and architectural glass market crashed after the Lehman Shock.

Many of the acquirers also struggled because they did not have managers with experience of managing overseas businesses. As Nikkei Business magazine says, mega M&A means mega complexity for which plenty of preparation and a high level of management know-how, with the ability to spread this know-how horizontally and vertically is needed for success. It’s still not clear how far Japanese companies have progressed in this.

Rudlin Consulting has assisted many European companies acquired by a Japanese parent. Please contact Pernille Rudlin for further details.

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The enduring Japanese family firm

I attended a Japan Society talk last month on shinise (Japanese family firms) – given by academics Innan Sasaki and Davide Ravasi. Sasaki and Ravasi argued that shinise have survived over 100 years, by keeping small and focused on traditional crafts like sweet making, sake brewing, and textiles. They are very much embedded in the society and community in which they operate – the highest concentration is in Japan’s old capital, Kyoto. In return for their commitment to the local community, they gain a social status and support from the community. They are meant to have a higher moral purpose than pure profit and therefore do not seek to take risks and grow much beyond their current geography and sector – which means they are more resilient to external economic shocks. When downturns happen locally, they survive through the strength of local support. This contrasts with what Sasaki and Ravasi call “instrumental” firms, who exist for a purely economic purpose.

Even large Japanese multinationals behave like Kyoto shinise

Listening to their descriptions of shinise‘s motivations and behaviours, I realised they were very similar to the way I describe bigger, multinational Japanese firms in my seminars. Even though Japanese multinationals have taken the risk to expand overseas, and are often no longer owned by the founding family, the ethos of having a higher moral purpose than shareholder value, of corporate contribution to society and strong risk aversion to ensure longevity still endures.

And like the shinise, the darker side is the sacrifices needed to be regarded as a proper member of the family firm and the difficulty of becoming a senior manager if you were not born into it – or at least recruited straight from university like Japanese headquarter permanent staff.

Nikkei Business magazine had a feature last month on family firms in Japan showcasing research that family owned firms in Japan perform better than non-family owned firms in terms of Return on Assets. “They don’t hold on to unnecessary assets” says Professor Yasuhiro Ochiai of Shizuoka University.

Japanese family owned multinationals that have performed well

DMG Mori is still owned by the Mori family and has been particularly active recently in M&A overseas since the current Mori took over as President in 1999, most notably in their merger with German machine tool manufacturer DMG. Apparently quite a few of DMG Mori’s employees come from the wider “family” of customers and suppliers.

Of course the most famous Japanese company still managed by a founding family member is Toyota. However the current President Akio Toyoda is adamant that the company name is Toyota, the family name is Toyoda, and Toyota is not a Toyoda family company, “it’s everyone’s company.”

Those that are listed on the Tokyo Stock Exchange and also active in Europe were:

Suntory (Torii family – founded by Shinjiro Torii in 1899) – chairman is from the founding family.
Aisin (automotive parts maker in the Toyota group founded in 1949 – chairman is part of the Toyoda founding family)
Shimano (Founded 1921, president is a Shimano)
DIC (Dainippon Ink) founded in 1908 by Kijiro Kawamura, a Kawamura is on the board of directors

And how to avoid toxic family rows

It’s not all joy in a family of course. Nikkei Business also looks at the family rows that have affected the performance of companies like Idemitsu (petroleum company) founding family shareholders fighting a merger with Showa Shell and the rebellion against founding family member Yoichiro Ushioda and chairman by executives of LIXIL (owners of German bathroom fittings company Grohe).

Nikkei Business’s prescription for avoiding trouble is:

Frequent communication between family members
Treat family members who are employees the same way as other employees in terms of company regulations
Don’t withhold information for family only, be transparent in management
Don’t appoint a successor from the family if there is noone suitable
Keep family assets and company assets separate
When there is a generation changeover, keep criticisms to yourself
Avoid too many family members as employees
Ensure a structure is in place to stop family members going rogue

For more on what being a “family” means for Japanese firms and the non-Japanese employees that work for them, this was one of my most popular articles in recent years.

4 cultures of controlling overseas subsidiaries

During a recent trip to Japan I visited Amazon’s offices to have lunch with an acquaintance who has been working there for 1 year and 3 months. He told me that Amazon has expanded so rapidly this past year that he is now in the upper half of a chart which shows all employees ranked by their length of time working for the company.

He also told me that almost all the non-Japanese people working there were, like him, locally hired and that there were hardly any expatriate staff from the US headquarters. I therefore wondered how Amazon HQ could control a subsidiary which is growing so rapidly without any expatriate managers to keep monitor it.

Amazon also tries to minimize the number of processes and procedures it has, in order to maintain the speedy, fast to market, start up mentality it had when it first began over twenty years’ ago.

The 3 usual ways to control overseas operations

In the various multinationals and their subsidiaries I have worked in or with, you can usually find three types of headquarter control. American, sales focused companies tend to control their subsidiaries by setting numerical targets. If the subsidiary employees and managers hit the targets, they get bonuses, if they miss them, they get fired. Many multinationals who are not American in origin use these systems because numbers are easy for everyone to understand, regardless of language.

Another way of managing subsidiaries which both European and American multinationals also use is to ensure compliance through having strong regulations, processes and systems, and clear hierarchical chains of command, so everyone knows who has responsibility and authority for each part of the business.

A third way, which is more common among Japanese companies and also companies such as the German Mittelstand, family owned companies, is “control by the family” – in other words members of the headquarters family are sent out to subsidiaries to monitor what is going on and promote the corporate culture.

Amazon’s way

My Amazon contact explained that Amazon ensures its employees behave in compliance with Amazon’s core values by having a very rigorous hiring process. Candidates are interviewed several times by multiple employees and asked questions about past experiences, to reveal what kind of mindset they have.

I can imagine, however, that it is difficult for Japanese companies to use this method if their overseas subsidiaries were the result of an acquisition, or if the company has already been operating overseas for several decades. There will already be a substantial legacy of staff who may have rather different values and behaviours to those of the Japanese headquarters.

It would also be a mistake, and damaging to the benefits of having diverse, localised operations that are close to their customers, to impose too rigid a set of behaviours and values on all overseas employees.

Nonetheless, I strongly recommend that Japanese companies who are about to acquire or set up operations overseas ensure they have a clear, globally understandable company mission and values (rinen) and hire or promote their overseas employees accordingly.

This article appears in Pernille Rudlin’s latest book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” available as a paperback and Kindle ebook on Amazon.

Murata – reinjecting enjoyment into corporate philosophy

Murata is one of Japan’s most quietly successful companies, with a 40% share of global sales of the tiny ceramic capacitors that are essential to the electronics industry.

Tsuneo Murata, 3rd president from the founding family, says in an interview in Nikkei Business that the bursting of the dotcom bubble in 2001 was a turning point for the corporate culture. They had become too arrogant during the IT bubble of the 1990s and had stopped listening to customers. They did not recover as quickly in the early 2000s as rivals did. Tsuneo Murata, who was then EVP, asked board members and employees for their views on the company culture and what was preventing recovery. He was told the company had become conservative, cautious, inflexible, bureaucratic and slow.

So he set up an organisational cultural reform committee It was tasked with ensuring that the culture became one which adapted rapidly to a changing environment, where the genba (shopfloor) had autonomy and people could freely discuss, create and challenge.

The need for persistence in cultural reforms

Murata became President in 2007. Even with the Lehman Shock walloping profits shortly after, he insisted on continuing with cultural reforms. He went back to the founding philosophy of Akira Murata, to rediscover the sense of freedom that Murata used to have. Actually the philosophy does not mention freedom. In translation it says pretty much what many Japanese corporate philosophies say – contributing to society through innovative technology, building trust, working in partnership, etc. The one part that isn’t translated into English is the word “yorokobi“, meaning to enjoy. To me that’s the most important bit – a lot of Japanese companies have lost their sense of fun since the 2000s.

It sounds like the success of Murata is as much to do with Tsuneo Murata’s personality. Since becoming President he continues to eat in the same canteen as workers in the headquarters in Kyoto and does not use the executive elevator (unless in an emergency). “I don’t think there’s a single employee that does not like him” says one employee.

He is asked by Nikkei Business how he ensures a common understanding of corporate culture when Murata acquires other companies – for example, IPDiA in France in 2016. “It takes time, especially when it’s a foreign acquisition, because generally overseas employees are not as loyal to their companies as in Japan anyway. But if we introduce our corporate philosophy to them, they have empathy with it. I think it’s important to communicate it thoroughly.”

“Let’s be lovers first” is a high risk approach for Japanese overseas acquisitions

Most Japanese companies assume overseas acquisitions are high risk – and yet continue to acquire in pursuit of growth. But according to research from Daiki Tanaka (formerly of McKinsey and now running his own consultancy) Japanese overseas acquisitions of companies in the same industry from 1996 to 2018 had a lower failure rate (2.8%) than domestic Japanese acquisitions where the acquiring company is “jumping” into new sectors (3.4%).

The money at stake is are far bigger however for overseas takeovers. The average price tag of an overseas acquisition is Y24.5bn (over $200m), whereas the average domestic acquisition in Japan is around Y1bn (over $9m). This would be partly skewed by recent mega acquisitions such as Takeda acquiring Shire for $62bn and SoftBank acquiring ARM for $32bn.

Tanaka also concludes from his research that a “let’s be lovers first” approach is actually a higher risk strategy for overseas acquisitions. Taking a minority stake and then gradually raising it to full ownership/marriage can mean that due diligence is insufficient and the minority shareholder has not been able to participate fully in corporate governance.

Tanaka expects Japanese companies to continue to acquire overseas companies from the same industrial sector, because lower risk domestic acquisitions will not necessarily help to access higher growth overseas markets. If they want to escape the low growth, ageing Japanese market, acquiring overseas is the obvious quick route out. It would seem that a virgin marriage is recommended however.

Rudlin Consulting has assisted many European companies acquired by a Japanese parent. Please contact Pernille Rudlin for further details.

The good and bad of no longer being “Japan owned”

I’ve been wondering for a while whether Japanese employees of companies such as Sharp or Takata have been feeling any change in corporate culture since being acquired by Taiwanese or Chinese companies and whether those companies could still be considered to be “Japanese”.

Nikkei Business has inteviewed employees from Sharp, Toshiba memory division and also from the laptop division of NEC (now owned by Lenovo) and come up with 13 aspects that have caused difficulties for Japanese employees who have been “bought” (as the Nikkei puts it) and 7 positive effects.

Difficulties:

1. Having to work much harder than before – due to increasing focus on short term profitability – even longer hours than is the norm in Japan.

2. Loss of right to evaluate staff – a sense that Taiwan HQ is now in charge of career development

3. Increase in employees who have a “Taiwan First” mindset

“If you don’t like doing things the Hon Hai way, then start your own business, or go and work for Nidec or Panasonic. If you can’t do that, then suck it up, seems to be their attitude” says one employee.

4. Rigid management by numbers

5. English skills are now compulsory

6. Nemawashi (stakeholder management/consensus) no longer works

7. Large cuts in salary

8. Reduction in autonomy

9. Sudden changes in supplier relationships

10. Reduction in management positions

11. Being posted to unwelcome locations

12. Collapse of succession planning

13. Low capability managers being seconded to your company

Some of the above could happen to any acquired company in any country, but I guess 1, 4, 5, and 6 are particularly acutely felt for Japanese companies acquired by foreign companies.

Some employees saw an upside however:

1. Structural problems are removed

2. Disappearance of bullying bosses

3. Job becomes more fulfilling

4. “Rags to riches” when previously your career history or educational record counted against you

5. Increased salary

6. Improved credit rating

7. More opportunities for promotion

Again many of these are the result of issues arising from having worked for a failing company, and now being owned by a more successful one – but I can see that for many Japanese who were stuck – with their careers blocked by bullying bosses, or considered lower status because of not being a lifetime employee since graduation or not coming from a top university – it is refreshing to be evaluated and promoted purely on ability.

No Japanese visitors please, we’re busy, say Estonian start ups

Estonian e-residency was something I considered for my business as a possible Brexit contingency plan. It wouldn’t have helped me keep my EU citizenship, but I could at least run the European side of the business from Estonia, and have a euro bank account for invoicing in euros. In the end I decided to ask my German partner to take over the euro business, but I was very tempted, having had an enjoyable business trip there a couple of years’ ago, combined with a holiday.

I wrote a couple of articles about Estonia and e-residency for a Japanese magazine after that, and it would seem the word has got out to Japanese businesses about Estonia’s digital economy as according to Kota Alex Saito, co- founder of SetGo, an e-residency business in Estonia, he is constantly having to field enquiries from Japanese businesses wanting to visit start ups there.

The dreaded hyoukei houmon

The Estonia Briefing Centre says that 146 groups of 1135 Japanese people visited Estonia in 2018, the second biggest grouping after Germany. However, as Saito points out, very few of them actually then start businesses or invest in Estonia or bring Estonian business to Japan. It is more what the Japanese call 表敬訪問 (hyoukei houmon – usually translated as “courtesy call”).

For Estonian start ups, it is more of a discourtesy to give up your time to show round groups of visitors, and get nothing in return except maybe some rice crackers. As Saito says, they are expecting visits to lead to some sort of business proposition, so “let’s keep in touch” is really not a good enough result. Hyoukei houmon were the bane of my life when I worked for Mitsubishi Corporation in London too – trying to persuade busy European executives that meeting Japanese “missions” would not be a waste of their time.

A difference in scale and mindset

For the Japanese visitors, the main point seems to be simply to see the petrie dish of a digital economy. But as Saito says, Estonia only has a population of 1.3 million, so trying to scale that up by 100 times to a Japanese scale is not a simple process. Furthermore, Estonia has a highly transparent system of data on companies, government and people, so e-government is less feared. There is a big difference in mindset that Japan could learn from, but may find hard to imitate.

Saito gives advice which I often give in my seminars to Japanese and Europeans working together – make the purpose of your meeting clear, do your research beforehand, make sure there are action points at the end that you follow up on.

How to hire and retain top staff in Japan – send them abroad

The most frequent complaint I hear from British and other multinationals with subsidiaries in Japan is around staffing. They can’t get the staff they want and they are not sure the employees they have are really the best for the job. This complaint is particularly focused on sales, as most “gaishi” (foreign multinationals) in Japan are primarily sales focused.

Many suspect that this is a cultural issue and contact me because they want to understand how sales and marketing work in Japan. They are aware that customer relationships are all important, and far more long term and personal rather than transactional. So expecting an instant result from a sales call to a new prospect is unrealistic. Incentivising aggressive sales behaviour with bonuses does not seem to work either.

I confirm that sales and marketing are different in Japan but I also explain that it is going to be tough for them to hire the “elite” from Japan’s top universities, who might have the necessary status and connections to approach blue chip Japanese prospects. This elite usually want to join Japanese blue chip companies, and view gaishi as high risk, low status employers.

Good staff can be found amongst those alienated by traditional Japanese companies

Good staff can be found amongst the groups that feel rejected or alienated by the Japanese blue chip companies – the salaryman who has worked in a Japanese company for 25 years and now finds himself being given a madogiwazoku (window gazing) job or young female graduates who understandably feel that a foreign owned company is more likely to reward them and promote them on merit rather than on how much overtime or drinking with the boss and customers they do.

Another promising group are those Japanese who have been educated outside of Japan. A recent survey by DISCO – a Japanese recruitment company – of most popular choices for Japanese graduate recruits shows the clear contrast in mindset between the top 10 for graduates of Japanese domestic universities and those who graduated from an overseas university.

Japanese graduates of foreign universities prefer to work for foreign companies

The top 7 choices for Japanese graduates of foreign universities are Deloitte Tohmatsu, PwC, Amazon, Google, Goldman Sachs and McKinsey. Mitsubishi Corporation and All Nippon Airlines are the only Japanese companies in the top 10, at number 8 and number 9, with KPMG bringing up the rear at number 10.

Mitsubishi Corporation and All Nippon Airlines are also in the top 10 choices for Japanese graduates of domestic Japanese universities – at number three for Mitsubishi Corp after fellow trading company Itochu at #1 and Toyota at #2 and at #6 for All Nippon Airlines. All the other Top 10 choices are Japanese too – Suntory, MUFG (financial services), Shiseido, JTB (travel), Japan Airines and Tokio Marine and Fire Insurance.

My old employee Mitsubishi Corporation made a conscious effort to target Japanese graduates of foreign universities and schools more than 20 years’ ago. In fact I was asked to help interview such graduates – whether to make them feel more at ease or to show that Mitsubishi Corp really was global in mindset, I’m not sure.

Twenty years’ on, many Japanese companies are scrabbling to recruit “global human resources”, but as the DISCO survey points out, Japanese graduates of foreign universities have very different ideas of what they are looking for in a career, compared to domestic graduates.

Japanese graduates of foreign universities want a job which helps realise their dreams and pays well, over stability and long term employment

When asked whether they felt a job should be a way to realise your dreams or a way to make sure you have a secure lifestyle, 40% of graduates of foreign universities chose the former with a further 25% saying they had some preference for the former, whereas for the domestic graduates, nearly 60% said they preferred the secure lifestyle.

As for wanting high pay versus wanting a secure lifestyle regardless of high pay, nearly 80% of foreign graduates strongly or somewhat preferred high pay, compared to under 60% of domestic graduates. Only 40% or so of foreign graduates wanted to work for one company for a long time, compared to 70% of graduates of Japanese universities.

Foreign companies in Japan need to offer overseas opportunities to Japanese graduates

And as Japanese companies have long suspected, most Japanese graduates of Japanese universities prefer to work in Japan rather than overseas. Whereas 70% of the graduates of foreign universities want to work outside Japan.

So for foreign companies in Japan, as well as offering higher pay and work which is more engaging, offering a chance to transfer to an operation outside Japan may also be needed to attract and retain foreign university graduates. That is the card which Mitsubishi Corporation and other trading companies have been playing for decades now and it has paid off for them.

A no deal Brexit will put the boot in for Japanese companies in the UK

My first job at Mitsubishi Corporation was exporting British made shoes from companies like Trickers and Crockett & Jones to Japan. They are high end shoes anyway, and Japanese tariffs of 30% on shoe imports certainly pushed them even further upmarket. So when I was in Japan last month I was happy to see that one of our customers still had its Trading Post flagship shop in Aoyama, despite the so-called two lost decades in terms of economic growth. They must be one of the few businesses enjoying the fact that Brexit delays have improved their profit margins. Thanks to the new EU-Japan Economic Partnership Agreement, tariffs on European shoe exports to Japan were reduced to 21% from February of this year. They will eventually be eliminated over the next 10 years.

Trickers and Crockett & Jones are presumably shipping out shoes to Japan as fast as they can make them while the UK’s membership of the EU lasts. Although Japan has entered discussions with the UK on a trade deal, they have made it clear that they are not going to concede as much as they did to the EU, and leather goods is one of the categories they are going to use as a bargaining weapon.

No roll over is bad for British shoes, cheese and booze

So a no deal Brexit or a Brexit before a UK-Japan free trade agreement is struck is bad news for the UK shoe industry, (and British cheese makers and whisky distillers will also miss out on the EPA’s tariff reductions). But not rolling over the EU-Japan EPA in to a UK-Japan trade agreement as soon as the UK leaves the EU will only have a small direct impact on both economies. According to a JETRO survey of over 3,000 Japanese companies, from March of this year, only 8.6% import from the UK, compared to 24.1% importing from Western Europe (excluding the UK) 66.2% from China and 24.2% from the USA.

Conversely, 22% of Japanese companies export to the UK, compared to 35% exporting to non-UK Western Europe, 49.6% to the USA and 59% to China. It’s obvious from these figures why the US-China trade war is more concerning to Japan than Brexit.

You could argue that a UK-Japan free trade agreement would improve those percentages, but that’s an awful lot of shoes, cheese and booze to make any impact. Furthermore, a lot of the imports and exports between the UK and Japan may be EU related, rather than purely bilateral. Think car parts from Japan to build cars for European consumers, or UK generated professional services for a Japanese EU headquarters and its European subsidiaries.

But no deal with the EU is even more of a headache for Japanese companies in the UK

Japanese companies that have a presence in the UK (just under 10% of the companies surveyed) have made it very clear that a No (UK-EU) Deal Brexit would be a disaster for them – far more than the UK no longer being part of the EU-Japan EPA. As frequently pointed out, they invested in the UK as a gateway to the rest of Europe.

45% of the turnover of Japanese companies in the UK is sales to Europe according to figures from the annual reports of the 200 or so who give regional breakdowns of sales. The range is anywhere from close to 0% for companies selling everything from lighting to metal pressing to seeds just to the UK, through to 100% – largely automotive parts manufacturers who export almost all of their production to Europe, or at least sell it via their European headquarters in continental Europe.

Many of those who are focused on domestic UK sales are importing from Japan, China and Asia, or are at the end of a complex supply chain stretching across Europe. Some are not involved in trade of goods at all – for example NTT Data and Building Design Partnership. The latter is one of the many of the services sector companies that have recently become Japan-owned via acquisition. NTT is aiming to grow its UK government business after Brexit, but if the UK economy tanks thanks to a no deal, it may have to wait a while. A JETRO survey last year highlighted that a UK economic slump because of Brexit was at the top of the list of concerns for Japanese companies in the UK and the rest of the EU, even more than changes in regulation or currency fluctuations.

The UK looks to lose its crown as the top European destination for Japanese acquisitions

Japanese acquisitions of British companies continued after the referendum, but the 2019 JETRO survey shows that it is likely the UK will lose its crown as the top destination in the EU for Japanese foreign direct investment. Non-UK Western Europe is in the top five destinations for expanding business for manufacturing textiles, clothing, foods, petrochemicals/plastics, electrical machinery, electronic components, fine engineering and also specialist services. The UK does not feature at all in the top five of any of these sectors.

The UK’s service sector functions as a gateway to Europe is still the biggest influence on Japanese investment – the UK is a top 20 destination for expanding services such as regional coordination(#9), logistics (#13), R&D (#14), sales (#15) and localisation (#17), as well as high value added manufacturing (#17). However, non-UK Western Europe ranks higher and is in the top 10 destinations for all of these categories.

Brexit yanks the lid off some stinky realities for Japanese business in the UK

My least favourite Japanese expression is “kusai mono ni futa” – when it stinks, put a lid on it. It is at the root of many Japanese corporate governance scandals. Mistakes are made or problems surface and instead of exposing them and causing loss of face all round, they are swept under the carpet, in the hope that they will somehow magically disappear. But of course stinky things with lids on just get stinkier.

On the face of it, there was nothing stinky about Japanese companies in the UK. The very fact that the UK was such an easy place to do business – on a European and global scale – lulled Japanese companies into complacency. Japanese expatriates like living in the UK, particularly around London, where the vast majority of Japanese business people are based. A couple of years’ traineeship in London is also a great incentive to lure scarce young English speaking Japanese into your graduate recruitment scheme.

Brexit exposed complacency about profitability in the UK

Over 125 Japanese companies in the UK are the European headquarters, employing over 25,000 people (of the 160,000 UK employees in total who work for 1000 Japanese companies), with a combined turnover of over £40bn. Much of that turnover derived from management fees from Japan headquarters, dividends from European subsidiaries or royalties from intellectual property, so the profitability or otherwise of the UK business itself was not so exposed.

Profitability in manufacturing is far more obvious. Nissan, Honda and Toyota’s factories in the UK had high levels of productivity – they had to be to win the right to make each new model. But Honda never managed to sell enough of its cars in Europe for Swindon to reach full capacity. The car industry is going through a shift away from petrol and diesel to electric. Japanese manufacturers like to be near their key markets to develop new models, and for electric vehicles, China is a far bigger and more promising market than Europe. The supply chains for electric vehicles are more developed and close knit in their Japan base.

Brexit yanked the lid off some stinky realities. As the JETRO annual survey on business conditions for Japanese companies in Europe details, 60% of UK based Japanese companies predicted the future impact of Brexit on their business would be negative, and 25% said it had had a negative impact already. Most cited the threat to the supply chain of customs duties and customs procedures or divergence in regulations being introduced as their top concerns.

Over 90% of Japanese companies could withdraw their European headquarters from the UK because of Brexit

61% said that they had already decided to relocate/withdraw or had already relocated or withdrawn certain functions from their regional headquarters in the UK and another 32% are considering it – mostly as a partial relocation to another EU member state. As is well known, Panasonic and Sony have already done this. It was not just the threat of Brexit disrupting invoicing and customs clearance, but also in response as much to the new Japanese tax haven law. The UK’s lowering of the corporation tax rate of 17% to show Global Britain was still open for business meant revenue from dividends and royalties received in the UK would be considered as tax avoidance by the Japanese tax authorities.

More than two thirds of Japanese companies could withdraw their European sales functions from the UK

29% of Japanese companies in the UK have decided to relocate/withdraw or have already relocated/withdrawn their sales functions and a further 38% are considering doing so. Sharp Electronics has moved their inventory to Sharp in France along with responsibility for logistics and warehousing. Various automotive sector companies have moved customer accounts and product lines to Germany.

Moving sales or regional headquarter functions out of the UK does not have an immediate impact on jobs in the UK. In fact labour shortage is cited as the top concern for Japanese companies across Europe. So they are likely to try to hang on to the employees they have, and the regional management will just operate in a much more virtual way – Sharp says its UK base will still have an executive/board level responsibility for Europe, as that is where its European executives are currently based. For now.

Nearly two-thirds of Japanese manufacturers are withdrawing or considering withdrawing manufacturing from the UK

33% of Japanese manufacturers have decided to relocate or withdraw or have relocated or withdrawn their manufacturing from the UK and 30% are considering doing so. This may seem surprisingly low given the fuss made over the car companies and their supply chains being impacted by Brexit. But actually most Japanese manufacturers have alternative plants in Europe they can use if necessary. Those who do not are usually manufacturing highly specialised products that are less supply chain time critical, or for UK sales only or that they are presumably confident they can sell across Europe no matter what barriers there are.

No deal preparations

The JETRO survey did not specify the type of Brexit when asking Japanese companies in Europe in general about relocation or withdrawal plans, but did ask if any countermeasures had been taken for a no deal Brexit. Just over 10% of all Japanese companies – in the UK and Europe – had already made plans or were currently making plans. A further 15% of Japanese companies in the UK were intending to plan for no deal but only 4% of non UK EU companies were intending to plan (this was as of October 2018). The most popular countermeasure was stockpiling (21%), followed by reorganising functions within the company group (10%).

Financial services already prepared for all possibilities

All the Japanese financial services companies that would be affected by Brexit have already put their plans into action – most now have licenses for the UK and obtained financial passporting or licenses in the EU as necessary. Again, having to take a hard, cold look at their European operations has taken the lid off some long standing whiffy problems, particularly for Nomura, which looks like it will be shutting down its global wholesale side in London entirely.

No rollover and then there were none

Stockpiling as the main countermeasure for a no deal Brexit assumes that eventually a deal will be reached, before the stocks run out. But such deals take time. The EU-Japan European Partnership Agreement (EPA) started in 2013, finalised at the end of 2017, signed off in July 2018, and was in force from February 2019. Known as cars for cheese – it was actually meant to promote food and car exports both ways. Japan has already been promoting European wines and cheeses in its supermarkets and announced the first shipment of fully farmed tuna to Europe under the EPA agreement.

Similarly, reduction on tariffs on cars and car parts was meant to protect Japanese branded manufacturing in Europe (because they could easily import Japan manufactured parts) and help European car manufacturers export more cars to Japan.

Hard stinky cheese

If a no deal Brexit happens, although Japan started talks with the UK about rolling over the EPA, it has stated this would not be a cut and paste job. Japan is clear that it expects more concessions from the UK than in the EU deal – including cheese and cars. So British cheese makers may find their exports to Japan have a longer time to ripen than they were planning, in the event of a no deal.

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