Brexit

Impact of Brexit on Japanese companies in the UK, 6 months on

(This article was first published in Japanese in the Teikoku Databank News in July 2021)

It has been six months since the UK left the EU and the transition period ended.  According to my research and also a recent survey compiled by METI and MUFJ Research, the impact on Japanese companies in the UK has not been as severe as many were expecting.

This is partly because Japanese companies have been thorough in their preparations for a worst-case scenario over the five years since the 2016 referendum. The METI survey points out that larger (over Y10bn/$90m revenue companies, which is around 60% of the Japanese companies in the UK) are more positive about further expansion in the UK than smaller ones. They have had the resources and the networks to stockpile, set up logistics and warehousing on the continent and bear the costs of increased paperwork at the customs borders. They still see the UK as an important market and a useful base for regional coordination across Europe, Middle East and Africa.

Even amongst the larger companies, however, there is some diversion in views. The METI survey summarises the Japanese automotive companies as viewing the outlook for the UK market as bleak  whereas chemicals, pharmaceuticals, foods and electrical machinery manufacturers are more positive. This diversion is clear in the employee totals – Nissan has 11% fewer employees year ending 2020 compared to a year previously. Honda is closing its UK plant in July and its employee numbers were 14% down in the year ending 2020 compared to the year before. Other double digit falls in UK employee numbers were Nomura and Konica Minolta.

It is becoming increasingly difficult to be accurate about employee trends, however, as one impact of Brexit has been that some of the larger companies such as Sony and Panasonic have moved their incorporated European subsidiaries to the Netherlands and Germany. The UK operations are now branches, so do not have to file their full accounts, including employee numbers, with Companies House.

Many of the financial services companies such as Mizuho and MUFG were branches of Japan or a European subsidiary anyway, and several others have moved to this model, as well as opened up subsidiaries on the continent, to ensure they are still approved to offer financial services in the EU. The EU has indicated it may put further pressure on financial services companies to move decision making and client facing personnel to the EU.

The UK is increasingly a services sector economy, and this shows in the Japanese companies where employment is growing – NTT, who have moved their global headquarters to London and Outsourcing, who continue to acquire recruitment companies across Europe.

According to METI’s survey, the reasons for choosing to continue to expand in the UK were the ability to use English, the presence of other multinationals and a transparent legal system. It would seem that the UK is still going to be the base for coordinating an increasingly dispersed network of people and businesses across the region.

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Trends in Japanese companies and Japanese nationals in Europe in 2020 – did the pandemic have any impact?

The number of Japanese nationals resident in Western Europe had grown steadily over the past seven years to reach over 220,000 by 2019. But by October 2020, according to Japan’s Ministry of Foreign Affairs,  that number had dropped 5% to around 212,000. Of course the pandemic may have been an influence on this, evidenced by the fact that the number of Japanese residents overseas fell consistently around the world, with a global decline of 3.7% from October 2019 to 2020. But the latest statistics also show that some longer term trends continue and that the UK, while dominant as a host of Japanese companies and nationals, is also something of an outlier.

I’m surprised the numbers only fell 5% in Western Europe, as anecdotally I had heard of Japanese managers who were supposed to be moving to Europe staying in Japan, and ending up doing European working hours, trying  to do their coordination job in a Japanese time zone. I have a sinking feeling they were also glued to their laptops during Japanese working hours too.

The fall in numbers of Japanese nationals resident in the UK had been a long term trend since 2015, but had shot back up in 2019. Since Japan’s Ministry of Foreign Affairs stopped giving breakdowns by visa category in 2017, it’s hard to work out what was behind this decline. It seems likely as I mentioned in previous posts, that it was more to do with how student visas were classified, with a secondary impact of Brexit on corporate expatriation to the UK.

The number of Japanese nationals in the UK fell 5%, the Western European average, from October 2019 to October 2020, compared to an 6.7% drop for Germany and an 8.4% drop for France.  The UK is still the biggest host of Japanese nationals in Europe, with 63,000, compared to Germany with 42,000 and France with 31,000.

The Nordics buck the trend?

Some European countries hosted more Japanese nationals in 2020 compared to 2019 – mostly the Nordics – Finland, Norway, Denmark – and Austria. If this was anything to do with which countries were safer in the pandemic, this must have been more to do with perception than reality, as no country in Europe had been particularly badly affected until November 2020, just after the statistics were collated.

As the Financial Times charts show, in the winter of 2020, UK, Austria and Denmark all had a higher number of cases and the UK and Austria had a higher number of deaths than the European Union average. But it does seem that Norway and Finland were good choices in terms of staying healthy.

The rising phenomenon of non-resident Japanese directors

I’ve also seen a rise in Japanese directors of UK companies, who used to be resident in the UK, now being resident in the Netherlands. Although the Netherlands is still a much smaller host of Japanese nationals than the UK, Germany or France, the trend for Japanese nationals resident there is strongly upwards, with only a slight (-1%) downward turn in 2020.

Maybe the trends and impact of coronavirus will become clearer when the statistics for October 2021 are published in autumn of next year. It may turn out that COVID-19 accelerated trends that were already there, of consolidating and reducing the number of Japanese corporate expatriates, as Japanese directors and managers of UK and other European Japanese companies decided that they can manage their European subsidiaries remotely.

Turning to the statistics for Japanese companies in Europe, the rise in the number of Japanese nationals in Netherlands clearly has something to do with the numbers of Japanese companies in the Netherlands shooting up these past two years. I had previously speculated as to what was the cause of the sudden rise in Japanese companies in the Netherlands and also Italy. Both have continued at that level for 2020, so it was clearly not a glitch and more a rebasing or redefinition of what counted as a Japanese company as there is no evidence that a sudden jump in the number of new Japanese entrants happened in either country.

The UK managed to claw back some of the 12% decline in the number of Japanese companies it hosts since 2012, but is the only country in Europe, along with Belgium, to show a decline over the 9 years, when the numbers rose 23% on average for the whole of Europe.  As we have outlined before, this decline is less about a complete withdrawal from the UK, and more about some long overdue tidying and consolidation, accelerated by Brexit, of shifting European regional bases to the continent and turning UK subsidiaries into branches.

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Japanese companies’ preparations for Brexit pay off

I was relieved to see that the prediction I made in September 2019 that Japanese companies would be well prepared for a hard Brexit has proved to be correct. I would imagine Japanese logistics companies had a large part to play in this.

Japanese car manufacturers have had to halt production in the UK, but this has been more to do with the impact of coronavirus and a shortage of semiconductors than any Brexit related problems.

According to a JETRO survey at the end of last year, the main countermeasure adopted by Japanese manufacturers in the UK to cope with a hard Brexit was to stockpile. Other British companies have stockpiled too, and as a consequence there have not been as many trucks backing up in the UK or France as was feared. But I suspect Japanese companies have also faced few problems because many have adopted the second most popular countermeasure chosen by Japanese manufacturers in the JETRO survey – to reconfigure their supply chains. I estimate at least 30 Japanese companies in the UK have moved their EU supply hubs to the continent over the past few years.

The companies who are suffering the most from Brexit are those smaller British companies who are reliant on supplying EU countries. Up until now they had been able to ship small quantities to EU based customers cost effectively, without any worries about certifications or customs clearance.

Now they have to fill in all kinds of forms and if they are supplying food or livestock, they need health and hygiene certification. Some European logistics companies are refusing to supply the EU from the UK because they cannot cope with the paperwork. They also do not want to send trucks with imports into the UK if they cannot find a load to take back to the EU to justify the expense.

This may all resolve itself eventually, but I suspect that many of the measures that Japanese companies have taken are not temporary and reflect long term trends, as well as the impact of Brexit. For example, the number of Japanese companies manufacturing in the UK has fallen by 22% since 2014, according to Ministry of Foreign Affairs data. This is greater than the 11% overall drop in Japanese companies in the UK. Many of them have converted to sales companies and others have become branches of EU parent companies. As a consequence, there has been a 31% increase in the number of branches in the UK, and a 16% drop in the number of incorporated subsidiaries. Companies who have converted to branches include financial services companies ensuring they can continue to trade in the EU.

Japanese companies are continuing to start up in the UK, but they are mostly in the energy and lifestyle sectors, which are very domestic in orientation. Japanese logistics companies may find that their expertise in international goods trade is more in demand from British companies than Japanese companies in the UK from now on.

This article originally appeared in Japanese in the Teikoku Databank News in March 2021

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Pernille Rudlin interviewed on the history of Japanese companies in the UK and Brexit

Pernille Rudlin is in conversation with Tom Hayes of BEERG (Brussels European Employee Relations Group) on how Japanese companies have responded to Brexit, tracing the progress of UK/EU/Japanese trade relations from Margaret Thatcher’s promotion of Britain as a Japanese gateway to the EU in the early 1980’s, through to the present day.

The video and podcast links are as below

BEERG Byte #32 from Derek Mooney on Vimeo.

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Latest Top 30 Japanese companies in UK shows significant divergence

Our latest Top 30 Japanese companies in the UK shows a 1.3% drop overall in employee numbers from 2019 to 2020*, the first fall we have seen in the seven years we have been tracking the Top 30. As most Japanese companies in the UK use an April 1 to March 31 financial year, the fall in employee numbers dates to before COVID-19 pandemic began to have an impact. The small drop masks significant divergences – there were companies whose workforce shrank by over 10% such as Nissan, Honda and Nomura, and also companies which grew significantly, such as NTT and SoftBank.

This tallies with a recent report from Japan’s Ministry of Economy, Trade and Industry (METI) which reported in March 2021 that whereas automotive sector companies have a bleak outlook on the UK market, manufacturers in sectors such as chemicals, pharmaceuticals, electrical machinery and foods are far more positive about future expansion in the UK. According to METI, manufacturers represent around 39% of Japanese companies in the UK, the remainder being in the services and wholesale sectors.  Services sectors, particularly IT related, would seem to be positive too from our researches, apart from Fujitsu, which has slipped down a further place to being the 4th largest Japanese employer in the UK, having been the largest for many years previously, to 2017/8.

The 96,000 who work for the Top 30 Japanese companies in the UK represent around 55% of the 176,000 (down from 179,000 the previous year) or so people who work for over a 1,000 Japanese companies in the UK, according to our estimates.  The METI survey shows that despite the small drop in the numbers employed by the Top 30, larger companies (defined by METI as having over £600m turnover) will have weathered Brexit far more easily than smaller ones, having the resources and networks to set up agents in the EU, stockpile and open up new logistics and warehousing hubs on the Continent.

Certainly the 50 or so Japanese companies that have withdrawn from the UK over 2019-20 have been smaller in size (under 50 employees) and the larger ones who have shut down operations have usually not withdrawn entirely but rather turned their subsidiaries into branches or merged them with another UK based operation.

As we have said for some years now, Brexit has brought about an acceleration of trends which were happening anyway, and precipitated some long overdue tidying up.

You can download our Top 30 Japanese Companies in the UK below:

*2020 defined as the year ending 2020, where most of the year was in 2019, ie April 2019 to March 2020 or January 2019 to December 2019.

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