Brexit Archives - Rudlin Consulting

Japanese corporate integrity in a disintegrating Europe

I’ve made a screencast (12 minutes with captions – ably edited by my son) of my keynote speech at a Dutch Embassy event for Japanese companies on a clipper ship on the Thames last month. It looks at the challenges facing Japanese companies trying to build their employer brands in a disintegrating Europe. I explain how difficult is is for Japanese companies to build ‘virtual trust’ across Europe when they are used to implicit communication, sticking to Japanese processes and working as homogenous, Japanese speaking teams huddled into one office.

I introduce the five competencies Japanese companies and their employees need to build trust across cultures – ability to communicate, understanding mutual interests, respecting European and Japanese processes and regulations, being reliable and accountable and having a shared vision and values.

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Brexit and Japanese jobs in the UK – growing by acquisition or “new” jobs?

Those looking for “despite Brexit” good news may be reassured that employment in the UK by the biggest Japanese companies has grown by 22% since 2014/5, right in line with the growth in Japanese jobs across Europe, Middle East and Africa (EMEA). About a quarter of the 750,000 people we estimate work for Japanese companies in the region are working in the UK, and so far there is no obvious divergence between the UK and the rest of EMEA in terms of overall job growth.

Big ticket acquisitions are the main driver of Japanese growth in the UK

But as we pointed out in previous posts looking at the trends across Europe, a distinction needs to be made between “new jobs” created in EMEA by Japanese greenfield investment, and investments which are acquisitions of existing jobs. Eastern Europe is the beneficiary of the former, particularly for the automotive sector, whereas the UK has been the target of the latter with big ticket acquisitions like SoftBank acquiring ARM, Mitsui Sumitomo acquiring Amlin, Sumitomo Rubber acquiring Micheldever, and NEC acquiring Northgate Public Services as well as Outsourcing acquiring various staffing and outsourcing companies.

Where are the “new jobs”?

These acquisitions account for the new entrants to the Top 30 ranking we have compiled below. They push out Fujifilm, Sumitomo Corporation, Japan Tobacco (who shut their factory in Northern Ireland last year) and Toshiba. The original Top 30 in 2014/5 have grown a more modest 10% if the acquisitive newcomers are not included. One of the highest climbers from the original 2014/5 ranking is the main Japanese creator of new jobs in the UK- Hitachi – in particular via their rail manufacturing and assembly plant at Newton Aycliffe.

There has not been a decline in automotive sector jobs in the UK – yet – however. In fact quite the reverse – there has been some growth in jobs in all three of the big Japanese car companies. But the trend is clear, as pointed out in previous posts, that even without Brexit, the drift of investment and jobs in the automotive sector is eastwards and to Africa. It’s easy to see how British people in those areas where Japanese automotive supply chains are active could blame the EU for job losses. Even though there actually weren’t that many EU grants enabling Japanese companies to transfer production from the UK to Eastern Europe – despite the rumours – merely by being members of the Single Market, and having lower labour costs, Eastern European countries are an obvious destination for new manufacturing investment.

Will Japan’s investment in the UK services sector be Brexit proof?

The investment in the UK by Japanese companies over the past three years has largely been through acquisitions in the services sector. This is not surprising, as services are 80% of the UK’s GDP and the UK’s comparative advantage in the region. It is also relatively Brexit proof in the sense that services sector investment will not be directly affected by any supply chain disruptions. Clearly if the UK economy takes a hit from Brexit, however, this will dampen demand for services. There has also been a shift of regional headquarters away from the UK by Panasonic and Sony and others, and of financial services companies, but as yet this has not hit UK jobs.

Eastern Europe has also been attractive to Japanese companies for business process outsourcing. Although Fujitsu is still – just – the top employer in the UK, employee numbers have dropped 29% – and there are now 13,000 people working for its service centres in Poland. NTT and its subsidiary NTT Data has also shot up the Top 30 both for the UK and the EMEA region – again through acquisitions – and has decided to base its new global ex-Japan headquarters in the UK.

Infrastructure, energy, transport should be the future for Japanese jobs in the UK

The UK’s strength as a global services provider will not disappear overnight, however hard the Brexit. But it’s hard to imagine how the kinds of secure, high quality automotive manufacturing jobs that those who voted for Brexit might have wanted to see return to the UK will come back, however soft the Brexit. The potential sunlit upland is in infrastructure – energy and transport. These sectors were needing investment regardless of whether the UK is in or out of the EU and are not so reliant on just in time supply chains across the region. Transport, environment and energy are areas where cooperation and financing on an EU-wide basis makes business and environmental sense though. But unfortunately Brexit has provided a distraction that has resulted in Hitachi freezing its Horizon nuclear power projects in Wales and Gloucestershire from lack of government financial support, and the recently called review of HS2 must also be giving Hitachi’s rail business and other Japanese executives cause for concern. Risk averse Japanese companies are not going to want to make multi million investments in infrastructure projects in a country which is politically unstable and unreliable.

	Top 30 Japanese employers in the UK – 2015-8
Rank 2017/8	Rank 2014/5	Company	UK employees 2017-8	UK employees 2014/5	% change UK 2014-8
1	1	Fujitsu	8,351	11,694	-29%
2	2	Nissan	8,190	7,440	10%
3	9	Hitachi	7,210	2,747	162%
4	4	Honda	7,062	5,268	34%
5	3	Itochu*	6,737	6,779	-1%
6	14	Dentsu*	4,394	2,127	107%
7	7	Ricoh	3,506	3,331	5%
8	6	Toyota	3,467	3,352	3%
9	5	Sony	3,410	3,777	-10%
10	10	Canon	2,828	2,643	7%
11	8	Mitsubishi Corp*	2,815	3,085	-9%
12	18	NTT	2,569	1,779	44%
13	13	Marubeni	2,549	2,137	19%
14	–	Mitsui Sumitomo & Aioi Nissay Dowa	2,384	305	682%
15	15	Mitsubishi UFJ Financial Goup	2,310	2,100	10%
16	11	Nomura	2,208	2,628	-16%
17	19	Calsonic Kansei	2,189	1,571	39%
18	12	NSG	2,140	2,348	-9%
19	16	Denso	1,986	1,930	3%
20	17	NYK Group	1,911	1,780	7%
21	–	Sumitomo Rubber	1,762	92	1815%
22	–	NEC	1,725	297	481%
23	25	Konica Minolta	1,657	1,278	30%
24	23	Mitsubishi Electric	1,610	1,344	20%
25	–	Outsourcing	1,595	10	15850%
26	22	Olympus	1,589	1,368	16%
27	21	SMFG	1,569	1,372	14%
28	29	Mizuho	1,434	1,060	35%
29	26	Brother Industries	1,411	1,254	13%
30	27	Unipres	1,396	1,095	27%
			92,568	76,896	20%
	*Estimates for EMEA/Europe as official figures not available
	© Rudlin Consulting Ltd If you would like more detailed analyses, by sector or individual companies, please contact pernillerudlinrudlinconsultingcom

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Top 30 Japanese companies in Europe – who’s in, who’s out and which countries are benefitting

In my previous post I looked at the growth drivers or otherwise at the top 5 largest Japanese companies in Europe, Middle East and Africa (EMEA) – Yazaki, Sumitomo Electric Industries, NTT Data, Fujitsu and Canon. Overall employee growth for the largest Japanese companies in the region has been a healthy 22% over three years (see table below). But of the top 5, only NTT Data has beaten this average.

Yazaki and Sumitomo Electric Industries are automotive manufacturers who have consolidated their position as the biggest employers by further greenfield investments in new plants in Moldova, Serbia and Bulgaria over the past three years.

Of the other three, IT services company NTT Data has more than doubled in size over the past three years in the region through acquisitions. Fujitsu, however, has shrunk as it shifts from hardware manufacture and sales to IT services. Canon has grown by 15%, partly through taking on Toshiba Medical Systems.

Toyota group strength in Europe

The rest of the Top 30 shows a similar pattern – the automotive sector growing through greenfield investment in new or expanding plants, with the electronics/ICT sector growing through acquisition, or shrinking through consolidation and moving towards B2B in automotive and medical fields. Panasonic more than doubled in size in the region, through acquiring Spanish automotive company Ficosa and Belgian technology company Zetes.

Honda’s employee total in EMEA hardly changed over three years, Nissan’s only grew 2% whereas Toyota grew 16% – which shows something about the relative fortunes of those car brands in the region recently. Toyota will presumably expand further once it fully takes over the joint venture factory with PSA in the Czech Republic. Other Toyota group companies have also expanded – such as Denso, Toyota Industries and Toyota Tsusho via its French/African trading company CFAO acquired in 2012.

Bridgestone employee numbers have grown 43% partly through acquisitions in France but also expansion and greenfield investment in Eastern Europe and Russia. Japanese automotive glass manufacturers (who also make architectural glass) Asahi Glass grew 33% but Nippon Sheet Glass only expanded its employees by 4% – still recovering from the bad timing and heavy debts of its acquisition of Pilkington Glass in 2006.

Fastest growing, fastest shrinking companies

The fastest growing Japanese employer in the region was electric motor manufacturer Nidec – more than tripling in size over the past three years, having been on a spending spree around the world – with around 25 acquisitions, many of them in Europe, since 2015. Nidec is the only new entrant into the top 30 over the three years, pushing out Fast Retailing (owner of Uniqlo, Comptoir des Cotonniers, Princesse TamTam etc). Fast Retailing grew too, opening new Uniqlo stores in Spain, Belgium, Sweden and the Netherlands in the past couple of years, with further stores to come in Italy and Denmark.

Sony and Ricoh have both shrunk by over 10%, however, with neither making any major acquisitions. Konica Minolta, which grew 25%, acquired various IT services providers in Germany, France, UK and the Czech Republic. Bubbling under the Top 30, at #31, NEC also grew rapidly, by 47%, after the acquisition of IT services companies like KMD in Denmark and Northgate Public Services in the UK.

European hot spots

Climate change has sparked investments from Mitsubishi Electric and Daikin in European air conditioning manufacturing and alternative energy production. Mitsubishi Electric has an air conditioning factory in Scotland employing 1000 people and expressed quite clearly its concerns regarding Brexit to a parliamentary committee in 2018 (by the way, I think there must be a typo in the submission, as it says 20% of its UK employees are EEA, which is considerably more than the figure of 13 they state). In December 2017 it announced it had started production of airconditioners at its new factory in Turkey.

So yes, it’s true that the UK has taken a ‘lion’s share’ of Japanese investment in recent years and therefore Japanese company employment in the EU. I estimate around 160,000 jobs out of 750,000 or so in the region (21%) are in the UK. But this share of investment is largely due to big ticket acquisitions by Japanese companies in the UK (SoftBank/ARM, MS Amlin etc) and also that investment in real estate is counted as “greenfield” investment.

Around a quarter of Japanese jobs in the region are in the automotive sector, and they’re moving eastwards

If we look at greenfield investment, largely in manufacturing, generating thousands of new jobs, with the exception of Hitachi’s rail factory in the UK, this has been going to Eastern Europe, CIS, Turkey and North Africa. The automotive sector is particularly key. I estimate around 250,000 of the 750,000 or so people employed by Japanese companies in the region are in the automotive sector. Brexit is giving extra impetus to automotive and other supply chain manufacturing jobs to accelerate their move eastwards.

Top 30 Japanese employers in EMEA 2018
Rank 2018	Rank 2015	Company	Total global employees 2017/8	no in EMEA 2017/8	% in EMEA 2017/8	Employee growth 2015-2018
1	1	Sumitomo Electric Industries	255,133	60,537	23.7%	7%
2	2	Yazaki	306,118	57,661	18.8%	19%
3	9	NTT Data	118,000	36,000	30.5%	140%
4	3	Fujitsu	140,365	27,000	19.2%	-8%
5	4	Canon	197,776	25,623	13.0%	15%
6	5	Toyota	369,124	22,147	6%	16%
7	18	Panasonic	274,143	21,931	8%	116%
8	13	Bridgestone	142,669	17,510	12.3%	43%
9	10	Asahi Glass	53,224	17,400	33%	19%
10	8	Toyota Tsusho*	56,827	17,000	29.9%	10%
11	7	Nissan	138,910	16,807	12%	2%
12	11	Denso	171,992	16,688	10%	15%
13	6	Ricoh	97,878	16,680	17.0%	-10%
14	16	Hitachi	307,275	16,000	5.2%	36%
15	14	JT Group	57,963	15,410	26.6%	27%
16	30	Nidec	107,554	12,917	12%	223%
17	15	NSG	26,957	12,500	46%	4%
18	17	Dentsu*	62,608	12,176	19.4%	11%
19	21	Toyota Industries	61,152	11,837	19.4%	48%
20	12	Sony	117,300	11,730	10.0%	-11%
21	19	Konica Minolta	43,299	10,825	25.0%	20%
22	24	Kyocera Group	75,940	10,024	13.2%	40%
23	25	Daikin	70,263	9,227	13.1%	36%
24	20	Honda	215,638	8,591	4.0%	0%
25	23	JTEKT	49589	8,128	16.4%	12%
26	26	TDK	102,883	8,045	7.8%	20%
27	22	Itochu*	102,086	7,382	7.2%	-5%
28	27	Olympus	35,124	7,353	20.9%	15%
29	31	Mitsubishi Electric	142,340	7,300	5.1%	46%
30	28	Mitsubishi Corporation	77,476	7,189	9.3%	19%

		TOTAL	3,977,606	529,619	13.3%	22%
		*based on estimates as official figures not disclosed
pernillerudlinrudlinconsultingcom"}">© Rudlin Consulting Ltd 2019 If you would like more detailed analyses, by sector or individual companies, please contact pernillerudlinrudlinconsultingcom

Pernille Rudlin’s latest book, Shinrai:Japanese Corporate Integrity in a Disintegrating Europe is available on Amazon.

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Brexit for Hitachi – like bees on a tearful face

We blogged earlier this year that Alistair Dormer, first foreign EVP of Hitachi and former CEO of Hitachi Rail in the UK might be in line to become the next (and first foreign) president of Hitachi Japan.

It seems – according to Diamond magazine – that the current chairman of Hitachi, Hiroaki Nakanishi, has deliberately set up a competition between Dormer and the other candidate, Koji Kojima. Dormer is now heading up the global elevator and rail business, where 80% of sales are overseas. Kojima is leading Hitachi’s “internet of things” business, which also means reviving the stagnating home appliance business in Japan.

The Hitachi rail factory in Newton Aycliffe, UK assembles carriages from domestic and imported parts from Japan and elsewhere to sell locally and re-export. It is “plagued by the risk of Brexit”, says Diamond magazine. On top of which losing the London deep tube rail bid to Siemens was like “bees on a tearful face” – a Japanese expression meaning adding to add insult to injury, or to make matters worse. The Newton Aycliffe plant is currently finishing back orders, and if it does not win any further projects, will have to start reducing employee numbers.

Dormer moved to Tokyo after being made EVP and is, according to a Hitachi official, “rapidly gaining popularity” with his British sense of humor and gentle handling of employees who are not good at English – which I take to mean he has not, thankfully, imported any British sarcasm, irony or bantz.

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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.

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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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Fewer Japanese in the UK, but more are making it their permanent home – thanks to Brexit?

The UK is still overwhelmingly the most popular place for Japanese residents in the EU to live, according to Japan’s Ministry of Foreign Affairs. There are nearly 63,000 Japanese nationals living in the UK, compared to 46,000 in the next most popular country, Germany. The Japanese community in the UK has shrunk by 6% since 2014, however, whereas Germany’s Japanese community has grown by 22% over the same period.

In fact all other major EU countries have more Japanese people living in them than four years’ ago. It is only the UK that has shown a net fall in numbers. The Netherlands has had the biggest proportionate rise in Japanese residents since 2014 – 41% from 6,532 to 9,223.

On the face of it this would seem to be a Brexit related shift. The Netherlands and Germany have been the most popular alternative bases for shifting headquarters and sales staff to, away from the UK, as we noted in a previous post.

UK loss of global prestige as a destination for media and diplomats

But looking more closely at the different categories used by the Ministry of Foreign Affairs for classifying Japanese nationals reveals some other non-business factors too. The biggest proportional decrease is in Japanese people in the government related category – a 44% fall from 1,286 to 722. In a further indication of the UK’s drop in global prestige perhaps, the number of media related Japanese nationals has dropped 26% from 371 to 273. The largest drop in numbers is in the academic/student category – down nearly 7,000 from 20,000 in 2014 – peaking at 21,000 in 2015 and declining since.

Japanese students also put off by hostile environment

The fall in student/academic numbers is worrying, as this is a good source of income for UK universities. When we looked at this a year ago, we noted that Japanese students are still studying in Europe – just more in Germany or France. Or, like one participant in my seminar yesterday, they’ve realised they can learn English by studying in Asian universities – which are cheaper and nearer to Japan.

Talking to Japanese specialist recruiters, it may also be that the UK’s “hostile environment” has made it more difficult for Japanese students to stay on in the UK after graduating, to find a job. The 27% increase in permanent residents who have Japanese nationality over the past 4 years suggests that Brexit and visa worries may have caused a large number (nearly 22,000 now) of Japanese resident in the UK to take the leap of acknowledging that they are going to stay in the UK permanently and need to make sure their status is secure.

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Will Japan’s NTT put its global base in the UK despite – or because of – Brexit?

While Panasonic and Sony have announced they are shifting their European headquarters out of the UK because of Brexit (and Japanese tax haven laws), NTT are likely to place not just their European but their global (ie excluding Japan/domestic) headquarters in London. Is this despite Brexit, or even because of? As previously blogged, NTT Data have been hiring by the hundreds in the UK, and staying positive about Brexit with one eye on public sector contracts for Brexit related IT systems such as border security and customs.

The President of NTT until 2018, Hiroo Unoura, had said in an interview five years’ ago that the US would be a global pivot for NTT, but I suspect, rather as my former employer Fujitsu has found, that it is very hard to take on the big US IT/telecoms giants in their home territory. Some of the acquisitions that NTT and NTT Data have made over the past decade have been US companies such as Keane and Virtela, but some of the biggest acquisitions were in the EMEA region – Everis (Spain), Dimension Data (South Africa) and Value Team (Italy).

Cleaning up an organisational mess

As I said in a previous post, the result was an organisational mess. NTT Data was kept separate from NTT as a brand and tried to unify across all its global acquisitions whereas Dimension Data, in some ways a competitor, was directly owned by NTT. NTT also had a separate organisation NTT Communications, to manage its global businesses.

From this summer, NTT is setting up a global holding company, and putting 5 subsidiaries including NTT Communications, NTT Security, NTT Data and Dimension Data under its umbrella. The organisation of the 4 companies excluding NTT Data will be split between domestic Japanese and global, and the global businesses will be unified.

The last time NTT changed its structure this drastically was 20 years’ ago. They have faced two challenges since then, first with the attempted global expansion of NTT DoCoMo, particularly into the US, which led to large losses, after the dotcom bubble burst. For 10 years, no further investments were made outside of Japan.

The challenge of global profitability

The second challenge is profitability. The reason they structured themselves in such a complex way in 1999 was to open up NTT (which originated as a partially privatised former ministry of telecommunications organisation) to competition domestically. So merging the company back into a holding company is likely to be regarded with suspicion by its competitors in Japan. However, NTT has reached a limit of how much it can cut costs domestically, and although overseas turnover has risen thanks to all the acquisitions, profitability is not on target. So it was felt more radical steps were needed.

One model for this might be Japan Tobacco, says Kazuyuki Okudaira in the Nikkei. JT was also part privatised and acquired RJR Nabisco’s non-US tobacco business in 1999 and also Gallaher in the UK in 2006. Japan Tobacco’s global headquarters is in Switzerland, and 60% of its sales are now overseas. “Whether NTT can repeat JT’s success remains to be seen” says Okudaira.

Is not being the US or China enough?

NTT has said it won’t confirm the decision about where it will base its global HQ until July, but has already moved into a swanky new office in the City of London. Dimension Data has 2,500 employees, over 10% of its global workforce, in the UK and its global hub and executives are in London. In the short term at least, London remains the global financial capital in need of the kind of data centres and infrastructure NTT provides, and has a multinational, multilingual IT workforce. It’s also not the USA, and Japan is not China (see Huawei controversy). In the longer run, however, if Japan Tobacco is meant to be the model, it’s worth remembering JT shut down the Gallaher factory in Northern Ireland in 2017, with the loss of 1,000 jobs. Even though it has a 41% share of the UK market, the factories and the bulk of the jobs are elsewhere in Europe, Middle East and Africa.

As we found at Fujitsu, even if you try to base your global marketing out of Europe, you still have to compete with US rivals – not only with IBM but Google and Amazon – in IT B2B services. NTT has a big brand recognition challenge on its hands which may mean that global profitability is elusive for a while yet.

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Are Japanese companies leaving the UK because of Brexit?

I’m afraid the answer to this question is yes, and no. Bits of Japanese companies are leaving. What will be left in the long run is some kind of UK-based training ground for Japanese companies’ star recruits to learn global management, with a local sales workforce attached.

I’ve come back from a recent trip to Japan clutching the brand new Toyo Keizai directory of Japanese companies overseas, which provides the data to dig into this question more deeply. It provides some clues as to whether, for example, Honda ending production in Europe is in part due to the EU-Japan Economic Partnership Agreement reducing tariffs to zero on cars and car parts imported from Japan. If that was the case, there might be a general shift of automotive production away from the EU.

Asia is far more important to Japan than Europe

The number of Japanese companies overseas has increased 37% from 2008 to 2018, according to the Toyo Keizai data, to 31,574. The true number will be bigger, as I know from my researches into the UK, there are many Japanese companies that Toyo Keizai has not managed to track down, or who maybe just don’t respond to their surveys. 62% of Japanese companies overseas are in Asia (excluding Japan obviously), 15% in Europe, 14% in North America, 5% in Latin America, 2% in Oceania, 1% in Africa and 1% in the Middle East.

If you look at it by employee number, the proportion is roughly the same – 68% in Asia, 11% in Europe, 11.8% in North America, 6.6% in Latin America, 1.5% in Oceania, 0.7% in Africa, 0.4% in the Middle East. An obvious factor in why there are proportionately more employees to number of companies in Asia and Latin America is the greater number of manufacturing operations in those regions.

So already we see Europe represents 11-15% of the business of Japanese multinationals, and those companies are relatively less likely to be manufacturing operations than in Asia or Latin America.

The number of Japanese companies in Europe has increased 35% in ten years

Japanese companies have not been pulling out of Europe, however. There was a 35% increase in the number of companies in Europe 2008-2018, so not far off the average global increase of 37%. The biggest growth was in Latin America – 47%, then the Middle East (45%) and Africa (43%) – but from a small base. The number of companies in Asia grew 38% and only 30% in North America.

Growth in the number of Japanese companies overseas has been more muted in the past 4 years – a 7.9% increase 2015-2018. But the increase in the number of Japanese companies in Europe was above average – at 12.5%. The increases in companies in Asia (7.6%) and Latin America (5.6%) were below average – so there was a boom in Japanese investment in developing countries during the 2008-2014 period, but this died down in the past 4 years.

Japanese automotive manufacturers are not pulling out of Europe – quite the reverse

So how about investment in automotive manufacturing – the sector that has made the most noise in Brexit UK? The number of Japanese companies overseas in the “transportation machinery manufacturing” category that Toyo Keizai uses (which presumably corresponds to automotive manufacturing) rose 6% 2015-2018, so significantly slower growth than overall. Again, Europe showed above average growth of 13%, but only represents 10% of transportation machinery manufacturers overseas operations. Over 64% of automotive manufacturer sites are in ex-Japan Asia. So although Japanese automotive companies are not pulling out of Europe – rather the reverse – the major part of Japanese automotive investment is and continues to be in Asia. So no surprises really that Honda and others are choosing to focus on Asia for electric vehicle development – that is where the largest ecosystems and supply chains are based.

UK is still has the most automotive manufacturers in Europe, but is not getting any new investment

How about the UK in all of this? The UK had and continues to have the largest number of automotive related manufacturers in Europe, according to Toyo Keizai – 32 in 2015 (out of 192 in Europe) and 30 in 2018 (out of 217). I haven’t been able to identify both of the companies that have withdrawn from the UK, but one is almost certainly Keihin, 41% owned by Honda, who shut down production of vehicle engine management systems and climate control systems in the UK in 2014-5 and shifted production to the Czech Republic. The other might be more to do with renaming and consolidation rather than withdrawal of manufacturing.

Keihin’s move is clearly “pre-Brexit” but what is obvious is that the UK is not getting any new investment in the automotive sector since Brexit. Of the 29 new automotive manufacturing operations started in Europe in 2015-2018, 8 were in Germany, 4 in France, 4 in Slovakia, 3 in Spain, 3 in Italy, 3 in Hungary and 2 in the Czech Republic but none in the UK. Germany, France and the Czech Republic are now not far behind the UK in the number of automotive production sites that they host.

So the idea that the zero tariffs on cars and car part imports from Japan which would eventually arise from the EU-Japan Economic Partnership has meant that it is no longer attractive to manufacture cars and car parts in the UK or the rest of the EU also does not seem to hold – yet. In fact I was surprised to see that Western Europe has held up well against the cheaper Eastern European countries.

UK employees of Japanese companies up 20% on 2015, mainly due to acquisitions

Generally, the number of Japanese companies in the UK is still rising – 972 in 2018 according to Toyo Keizai, 11.1% up on 2015. The other countries in the top 5 – Germany, Netherlands, France and Italy are all hosting more Japanese companies too, and the numbers have grown slightly faster than in the UK, by between 11.8% to 13.5% over the past 4 years.

Many of the new Japanese in companies in the UK over the past few years have been acquisitions in biotech/pharma, high tech, outsourcing/staffing, automotive services and new arrivals have been in fintech, or investment/holding companies.

So what about the companies that have said they are leaving the UK because of Brexit, such as Panasonic and Sony? Well, rather like Keihin, they are not actually leaving the UK, just moving some functions, in this case the regional headquarters functions rather than manufacturing, to the Netherlands or Germany. This kind of “leaving” – turning what were incorporated subsidiaries into branches, has emerged in other Japanese companies too, as one reaction to Brexit. Invoicing, tax on sales, royalties etc will all be taken care of by the regional headquarters, and the UK branch will be funded by management fees.

So although the numbers employed by Japanese companies in the UK continue to rise (by 20% since 2015), this is more the result of acquisition of existing staff, rather than the creation of large numbers of new jobs that greenfield manufacturing investment brings.

During my trip to Japan last week I met with Leo Lewis, Financial Times Tokyo Correspondent, and it is to him that I owe the insight that Japanese companies will never leave the UK completely, as it is too attractive an incentive to their highflyers, to be able to promise a couple of years early in their career to learn the ropes of global business in the UK. But bits will nonetheless leave, as the recent news about Nomura’s restructuring shows.

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The fourth industrial revolution should not be mercantilized

UK is the birthplace of innovation and will not sink, despite Brexit, says Toru Sugawara, the deputy editor of the Nikkei Business magazine – Japan’s equivalent of The Economist (only with more business, less economy).

He acknowledges that Brexit is casting a shadow on the world economy, and that the problems will not end just with an extension, as the negotiations will drag on, unless the result of the referendum is reversed.

He points to how employment remains buoyant in the UK, despite GDP growth being the lowest in 6 years, and says that this could be because immigration from the EU is decreasing – which was one of the reasons people voted to leave. He does not mention that net immigration has not dropped, as more people are coming from non-EU countries. So unless you believe that EU immigrants only have jobs which UK natives could do, and non-EU immigrants only do jobs that UK natives couldn’t do…

He believes the UK’s resilience derives from an inner strength which helped it to lead the industrial revolution as the “birthplace of innovation.” Because the UK has worldclass universities “UK research levels are extremely high. Even if they leave the EU, there are researchers who want to learn from the UK” – according to an engineer from a major Japanese electronics company.

The UK is similar to Japan, Sugawara notes, in that neither was able to match Silicon Valley in terms of being able to turn innovations into world changing businesses. He thinks the UK is changing, however, dating from when the British Business Bank launched in 2014, bringing together various funds for startups and small businesses and also the introduction of the regulatory sandbox, to allow new kinds of financial services to test their products.

Venture capital funding in the UK in 2018 was $7.9bn, double that of Germany or France (although what he doesn’t say is that this was down from a high of $8.1bn the previous year, and that Germany and France seem to be catching up) . Dr Yuri Okina of the Japan Research Institute points out that the UK’s strength is that as well as having the world’s financial centre, there is a rich source of accountants, lawyers, consultants and other specialists who support an ecosystem for new business.

If this network could be boosted further, then the UK could lead the 4th wave of the industrial revolution, asserts Sugawara. He warns that Japan, who puts its funds into propping up zombie companies, with regulatory systems that impede new industries from growing, will get left behind. “That’s the bigger worry” he concludes.

So he seems to be turning an encouraging pat on the back for the UK into a kick up the backside for Japan. What he says is not going to be news to many Japanese companies, who have reacted to the difficulties they face in Japan by investing in the UK (and elsewhere in Europe). Sugawara mentions SoftBank‘s acquisition of the UK’s ARM, but there have been plenty of other less spectacular investments. Much of it has to do with CASE (Connected, Autonomous, Shared, Electric) in the automotive industry – Sony Innovation has invested in What3Words (a geocoding system) – also invested in by Daimler. Itochu has invested in Hiyacar and I realise now that its acquisition of UK car repair chain KwikFit probably also fits into this automotive services play. Similarly Sumitomo Corporation has invested in the Nordic parking company Q-Park and Sweden’s car sharing service Aimo. Japan’s Park24 acquiring National Car Parks in the UK is probably also looking to a CASE future. Panasonic acquired Spanish automotive systems and parts company Ficosa in 2017.

So really, it’s not about any one country leading the fourth industrial revolution – it will be collaborative and global by its very nature. Both Japan and the UK need to keep their doors as wide open as possible to let everyone get on the ride.

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Last updated by Pernille Rudlin at 2019-11-02.