Brexit

Continued fall in UK employment by Japanese companies

Around a half of the 1,100 or so Japanese companies in the UK have filed their annual reports for the financial year 2021/2. Most paint a positive picture of recovery from the pandemic and resilience to any impact from Brexit. However, the employee totals show a more worrying trend emerging.

Overall, the total number employed by those Japanese companies in the UK who have reported their results has fallen by 8% over the past year. This is an acceleration of a decline which started three years ago – employee numbers had fallen 3% the previous year, and 2% the year before that. This was preceded by a couple of years of growth from 2016/7 to 2018/9. Projected, this suggests that the number of people employed by Japanese companies in the UK will fall to 158,000 by the end of the financial year 2021/2, below the 161,000 that were employed by Japanese companies in 2016/7 and a 14,000 drop on the numbers employed in 2020/1.

A number of factors might be behind this rise to 2018/9, followed by a fall, and more recently a sharp fall. It could be that Japanese companies continued to invest in growing their UK businesses, until the likely Brexit deal became clearer towards the end of 2019, and then the impact of Brexit played out after 31 January 2020 through to when the transition arrangements ended on December 31 2020.

It could also be that Japanese companies laid off people during the pandemic (although the decline in employment started before early 2020 in some sectors) and then were hit further by the Great Resignation in the past year.

It is certainly partly due to the impact of Honda closing its Swindon factory in July 2021. That meant the loss of nearly 3,000 jobs and it looks likely a further 5,000 jobs will have been lost in the automotive sector over the past year – many of which were dependent on Honda.  The decline in employment in the automotive sector began in 2018/9, a year or two before other sectors began to lose jobs.

So what about the 6,000 jobs that look to be disappearing in other sectors?  Finance seems to have stayed steady, even growing slightly, employing around 14,000 people, but non-financial services, after years of high growth, are beginning to show a decline, maybe by 1,000 or so to around 55,000.

Wholesale (not including automotive), having grown strongly to 2019 has dropped around 5,000 or so jobs in the past couple of years, employing around 38,000 people. This could be reflection of the change in structure of Japanese wholesalers in Europe, who have moved their EU logistics and warehousing to the continent. There are also another 1,000 or so jobs likely to be lost in non-automotive manufacturing sectors.

We have not been able to publish a final Top 30 UK for 2020/2021 of the largest Japanese corporate groups, as there are still outstanding annual reports due to be filed at Companies House for NTT and NEC. Taking both of those groups out, it seems the biggest employers are cutting back, deliberately or through passivity, on their employee numbers in the UK. The decline represents around 5,000 jobs, 5% of the 97,000 who were employed by the big corporate groups in 2019/20, and it seems likely the total will fall further in 2021/2022. This is not just because of the Honda Swindon closure feeding through, but also from factoring in the 700 or so fewer staff at SoftBank-owned ARM, down from the 3,700 peak a year or so ago, when it fulfilled its 2016 promise to double its workforce in the UK.

The key question, particularly for Brexit watchers, is whether this decline in employment by Japanese companies in the UK is also occurring in the rest of the region. The Top 30 Japanese companies in Europe, Middle East and Africa employed around 577,000 people as of the annual reports for the year ending 2022. The data for Yazaki is yet to come in, but for the remaining 29 companies (which includes Honda), there was a 2% increase in employees in the region. Without the loss of 4,500 jobs at Honda UK companies, this would have been a 3% increase. So while EMEA has seen gradual growth in numbers employed by Japanese companies in the past couple of years, the UK has seen an accelerated decline. 

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The post-Brexit branchification of the UK for Japanese companies in Europe

The latest Japanese Ministry of Foreign Affairs data reveal that the number of Japanese businesses in the EU rose a further 2% from 2020 to 2021, to 8,464, up 28% on ten years ago.  The only EU country to show any decline was Belgium. The picture for the UK is rather different – an 11% decrease on ten years ago, from 1,083 businesses to 960. There has been a slight pick up in the past two years, from a low of 951 in 2019. 

The branchification of the UK

Digging further into the detail – and comparing the UK to other major hosts of Japanese companies such as Germany, France and the Netherlands – reveals some possible factors in this divergence. The numbers of businesses started in the UK by Japanese nationals showed the biggest decline. This could be because the businesses were bought out, the founder retired and shut down the company – or perhaps became British.

There is also a confirmation of a trend we noticed previously, that the number of subsidiaries incorporated in the UK has fallen, but at the same time there has been an increase in the number of UK branches of European subsidiaries of Japanese companies. This probably includes those operations which were incorporated subsidiaries but have now become branches of the European HQ in Germany or the Netherlands – such as Sony, Panasonic, Nikon, Bridgestone and Alps Alpine.

Switching to becoming a branch was partly a reaction to Brexit but in the former two cases may also have been a precautionary measure because of the change in Japanese tax haven laws. As we noted previously, the UK’s 2016 “open for global business” announcement that the corporation tax rate would fall to 17% in 2020 (it didn’t) would have meant that revenue from dividends and royalties received in the UK would be considered as tax avoidance by the Japanese tax authorities.

The decline in Japanese businesses in the UK had set in as early as 2012, long before Brexit, but accelerated after Brexit – it precipitated trends that were already there, and prompted Japanese companies to do some long overdue regional consolidation and tidying up.

This branchification of the UK and regional consolidation is reflected in the Ministry of Foreign Affairs data for Germany – the number of branches of Japan HQ in Germany has fallen by 45% and the number of incorporated subsidiaries has risen by 21% over the past 10 years. There has also been a significant decline, as in the UK, of the number of businesses started by Japanese nationals resident in Germany.

As for the Netherlands, there has been a quintupling of the number of business classified as “uncategorised” from 61 in 2015 to 393 in 2021. These may be brass plate type holding companies. All other categories (incorporated subsidiaries, branches of regional subsidiaries and joint ventures/investments) have increased as well, apart from branches of Japan HQ (which may have now become subsidiaries) and those started by Japanese nationals in the Netherlands. There was an overall rise of 86% of Japanese businesses in the Netherlands since 2015.

Cars for cheese?

The number of Japanese companies in France only increased by 3% since 2015, but this conceals significant changes in the composition of those businesses – the number of branches of Japan HQ has dropped 45%, the number of incorporated subsidiaries has also fallen, by 31%, whereas there has been a significant increase in joint ventures and part investments, as well as businesses started by Japanese nationals in France. This is particularly marked since 2019, when the EU-Japan Economic Partnership agreement entered into force. Perhaps the “cars for cheese” deal encouraged Japanese nationals to set up food exporting businesses in France.

* Some notes on the Ministry of Foreign Affairs data: “Companies” include branches of the Japanese parent company, subsidiaries incorporated in Europe, branches of those subsidiaries, companies started overseas by Japanese nationals and joint ventures/investments of 10% or more equity stake. There is no detailed break down by type of organisation for 2018, when MoFA changed their methodology.

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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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