Brexit

Forth Bridge Brexit

The British have a saying for when a job is never finished – “painting the Forth Bridge”. The Forth Bridge is a nineteenth century railway bridge, nearly 2.5km long, near Edinburgh. It has a very distinctive cantilevered design, painted in red. Supposedly when you have finished repainting it, it is time to start again at the other end.

Brexit looks like a Forth Bridge for UK based businesses – just when you think you have made preparations for whatever deal is done, a fresh round of negotiations and possible outcomes appear.

My database of all the Japanese companies in the UK is another Forth Bridge. Every time I think I have the definitive picture, I find more data to add. There is a free online government database, Companies House, to which all companies incorporated in the UK must submit their annual reports. If they are above a certain size, they must also give an account of the risks they face and what they are doing to mitigate them.

By reading these reports, I can cross check other records of employee numbers, turnover and capital. I can therefore say with some confidence that there are over 1000 Japan originated entities in the UK (including branches) and they employ over 160,000 people, with total turnover of around £100bn. I can also see what steps Japanese companies have taken to prepare for Brexit.

Much of this has been in the news already. Those companies who are physically moving products – whether in the automotive supply chain, or pharmaceuticals or electronics – have stockpiled, expanded their warehousing and reviewed their logistics. Those companies who are in regulated sectors such as finance or pharmaceuticals have strengthened their EU bases and made the necessary applications to EU authorities for approval for their services or products.

There have also been structural changes. Plenty of the larger Japanese companies were already in a holding company structure across Europe, with holding companies mostly in the UK, Netherlands or Germany. Electronics and trading companies are turning their UK companies into branches of EU holding companies, or turning their UK companies into “commission agents” so that the principal in a sales contract is in the EU. Some have reduced the capital they have in the UK.

This has not caused an immediate or dramatic negative impact on jobs, but in the long run I worry about the loss of influence and budget that this may have for UK business.

The mood at the Japanese Chamber of Commerce & Industry in the UK’s New Year party was very positive, however. The message of the speeches was that Japan and the UK have so many common interests, they need to stick together. Membership of the Chamber is at a record high as new Japanese companies continue to invest in the UK, largely in domestic oriented businesses such as food, retail or public sector outsourcing, symbolised by the stunning flower arrangement provided by Aoyama Flower Market, who opened their first UK branch in London in 2018.

This article was originally published in Japanese in the Teikoku Databank News. It can also be found in “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” available as a paperback and Kindle ebook on Amazon.

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Service sector dominates Japanese investments in the UK

Although most people think of car manufacturers such as Nissan, Honda and Toyota when they think of Japanese investment in the UK, our Top 30 Japanese employers in the UK very much reflects the way the UK economy itself has shifted from manufacturing to services.

The three car groups are still in the Top 30 – in the Top 10 in fact – employing over 18,000 people – although many hundreds of them are not actually working on the factory floor, and are design engineers or in sales and marketing.

There are over 200 companies in the Top 30 employers (each consolidated group is counted as one employer) and 15-20% are manufacturers. They employ over 33,000 (36%) of the 92,000 or so people employed by the Top 30. This reflects why countries want to retain manufacturing – manufacturers are relatively larger employers, providing decent jobs in often deprived areas, creating a ripple effect of suppliers and further jobs.

Comparing these numbers with Roger Strange’s 1991 figures given in his “Japanese Manufacturing Investment in Europe” shows that while Nissan has grown from 2,500 employees to over 8,000, Honda from 400 to over 7,000 and Toyota from 1,900 to over 3,000, some have shrunk. Sony used to employ 1,800 in Pencoed, making TVs – it is now a technical centre manufacturing high end audio visual products and employing around 500-600 people

Other companies have changed their product mix – Hitachi used to employ around 1,000 people in Aberdare, making TVs, video recorders and microwave ovens and another 500 at Maxell in Telford making audio tapes and floppy disks. Now most of its manufacturing employees are working at Hitachi Rail and there are around 85 employees at Maxell, making plastic moulded products for the food, pharmaceutical and automotive industries and another 100 or so in Horwich making engine control systems.

Some have stayed the same – Ricoh had 650 employees in Telford in 1991 making fax machines and photocopiers, and still has 650 employees there 27 years’ on, making printing devices.

Brother is in the Top 30 not because it grew its manufacturing operations in Wrexham (in fact there are only 164 people there compared to 634 in 1991) but through the other big Japan-UK investment story – acquisition. It now owns Domino Printing Sciences, who develop and manufacture printing systems in Cambridge.

Also growing through acquisition is NEC. A couple of years’ ago it seemed like it was fading out of the UK and focusing on developing markets. It was no longer manufacturing – for obvious reasons – video recorders, car telephones, TVs and faxes in Telford. But in 2018 it acquired Northgate Public Services and through its acquisition of JAE in Japan, their UK operation and now it has over 2000 employees in the UK. Other big acquisitions have been SoftBank acquiring ARM, Dentsu acquiring multiple marketing agencies, Sumitomo Rubber acquiring tyre dealer Micheldever and Outsourcing acquiring various recruitment and debt collection agencies. The reason Fujitsu is still at the top of the ranking – just – dates back to its acquisition of ICL in 1990. All, notably, service sector companies.

A final thought on the current hot Brexit topic of location of regional HQ. It’s becoming increasingly difficult to identify one country location as the sole European headquarters – I’ve left the HQ column in the chart below, largely on the basis of where the historic HQ was and where most of the key regional people are based – but many companies are moving to a more virtual, dispersed structure, with Brexit and Japanese tax haven laws providing added incentive to do so.

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How will Hitachi weather the storms of Brexit and industry turmoil, not just in nuclear energy but also rail?

The Japanese business media is asking the question I’ve been wondering about too – what might the impact be on Hitachi Rail’s global HQ in the UK, now that Hitachi have shown they can take the tough decision to suspend their Wylfa nuclear power project, amid the continuing uncertainty of how Brexit will play out?

Toyo Keizai’s Naoki Osaka details the history of how Hitachi’s first step into the UK rail market was as a preferred bidder for the UK HS1 in 2004, supplying 174 carriages, which were built in Japan. Hitachi then won the IEP bid in 2012, for 866 carriages and a contract for First Great Western. They then invested £82m in the Newton Aycliffe factory i 2015, which is now making around 40 carriages a month for IEP and Abellio Scotrail. Not all parts are made in the UK. The 700 employees mostly do not have any rail manufacturing experience but are learning fast, according to Osaka. The 25 expatriate Japanese have been reduced to 6. Including the maintenance operations, there are now 7 sites in the UK, expecting to expand to 13 by 2020, employing around 2000 people.

Osaka was told when he visited the factory last December that there were plenty of future projects to bid for, so no worries for the future. However Diamond magazine says their Hitachi contact told them that since Hitachi lost the London deep tube bid last year and also lost their attempt to overturn the decision, they only have an order book through to the end of 2019, and no orders beyond that, as yet. Diamond describes the formerly warm relationship between Hitachi and the UK government as “frosty” as a result of both this and the failure of the government and Hitachi to agree on how to move forward on the finances for the Wylfa nuclear power project.

If there is a no deal Brexit, customs inspections will be significant for carriage manufacturing, says Osaka. 70% of the parts are made within 40 miles of the factory. So although there are fewer logistical concerns, there will be plenty of issues around rules of origin that are likely to cause supply chain problems for suppliers to Hitachi.

Furthermore, the Italian factory which Hitachi acquired in 2015 is improving productivity beyond expectations and will no doubt play an important role in developing Hitachi’s rail business in Continental Europe.

Hitachi is also keeping an eye on the Siemens/Alstom rail business merger. It may well be blocked by the EU, and as Alistair Dormer, CEO of Hitachi Rail predicted, Alstom is offering to sell of some of its businesses to avoid this, for which Hitachi could be a buyer. Hitachi was hoping to become one of the Big Three of the global rail business, with a target of Y1trn turnover – Siemens and Alstom’s merger will produce a Y2trn business. Now it has turned its back on nuclear business, can Hitachi become a global player in the rail business, in the face of storms caused by Brexit and industry restructuring?

The skills shortage in Europe

Seven in ten British employers have been having difficulties in filling vacancies, and 40% say it has become harder over the past year to find the staff they need, according to a 2018 survey of 1000 companies by the Chartered Institute of Personnel Development and Adecco, a staffing company.

The situation has been exacerbated by Brexit. The numbers of workers born abroad in Britain fell by 58,000 year on year, whereas it had increased 263,000 over the previous 12-month period. This was mainly due to a drop in the number of workers coming to the UK from the EU.

It’s not just a UK problem, however. According to a JETRO survey at the end of 2017, “securing human resources” was the number one operational challenge for Japanese companies in Europe. This includes Germany, the Netherlands and even Central and Eastern European countries such as Hungary and the Czech Republic.

So how can Japanese companies compete with local employers chasing the same skilled workforce?

I like to use a model developed by Fons Trompenaars and Charles Hampden-Turner to explain to Japanese companies where they can win as an employee brand.[1] It’s a matrix, based on degree of hierarchy and degree of task versus relationship orientation, resulting in four corporate cultures – the Guided Missile, The Eiffel Tower, the Incubator and the Family.

Guided Missiles are typical American, sales-oriented organisations where the employees are motivated by targets, achievement and reward.

The Eiffel Tower organisation is more hierarchical, focused on structure. People are motivated by their status in the organisational hierarchy and promises of promotion.

Many people in Europe are used to the Eiffel Tower style of company and when they join a Japanese company, they are concerned by the lack of defined paths to progress their career and also an absence of clear, strategic direction.

Other Europeans, particularly in the R&D, creative, IT, design engineering sectors, are more used to the Incubator type of company. Here the main motivation is not money or status, but rather developing and using one’s skills to innovate.

Most Japanese companies belong to the Family style company. Employees want to contribute to the longevity and good reputation of the family, as a respected family member. It is difficult for Family style companies to motivate employees with money or status, as these are dependent on seniority, rather than performance.

Japanese companies in Europe have a reputation for good benefits, but only average pay. There is also a sense that there is a limit to how far you can be promoted if you are not Japanese, in other words, a family member.

Japanese companies are appealing to Europeans because they are “different” and “interesting” and also because they are seen as good corporate citizens. But Europeans also need to be made to feel it is possible to become a family member, by helping them understand the company’s vision and values – including through secondments to Japan headquarters – if you want to retain them.

[1]Riding the Waves of Culture: Understanding Cultural Diversity in Business, Fons Trompenaars & Charles Hampden Turner, (Nicholas Brearley: 2003), 159

The original version of this article can be found in “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” available as a paperback and Kindle ebook on Amazon.

Some Japanese companies in the UK see Brexit as a business opportunity

In an article for the Teikoku Databank News in October 2016, I wrote about how Japanese business people in the UK were surprised that many British people’s reaction to Brexit was to try to be positive and seek out new business opportunities – I particularly pointed to Africa and the Middle East, infrastructure projects in the UK and M&A in the UK.

Now Nikkei Business magazine also has an article on Japanese companies in the UK that have indeed seen there are business opportunities in Brexit.

First up is NTT Data, who expect that clients will be looking to introduce new IT systems as a result of Brexit. For example, to cope with any new tariff and customs checks, goods might need IC tags. Also, there will be more need to check the work permits of EU citizens in the UK.

NTT Data has added over 200 IT consultants and digital design specialists in the past year, to its existing 700 staff and expects to add another 100 this year. It also acquired UK software development MagenTys company in May 2018 and opened up a design studio in London aimed at collaboration with start-up companies.

Brexit may also mean that the UK’s distribution system needs to adapt – there will be more need for warehousing and holding zones. The Japanese logistics company Nippon Express is therefore looking at strengthening its warehousing business. “We get a lot of enquiries for warehousing, so we want to be ready for any needs arising from Brexit”, says UK MD Toshinori Sakai.

Japanese security company SECOM is also expecting there to be greater needs for security systems arising from Brexit. Up until now security companies had been able to rely on hiring low wage immigrant security guards but if immigration is cut back then there will be greater need for SECOM’s security cameras and other automation, to replace those guards. SECOM’s UK MD, Minoru Takezawa predicts that the cost of providing security will rise as a consequence of cutting off the supply of cheap labour, so technology-based solutions will become more competitive.

SECOM started a new service in 2017 alerting retail chains when people with criminal records are entering their outlets. They have increased the staffing of their monitoring centre from 40 to 100 and acquired a Northern Ireland headquartered Scan Alarms & Security Systems in March 2017.

Nikkei Business acknowledges that many of Japan’s manufacturers – particularly in the automotive sector – are preparing for the worst, in terms of Brexit related disruption. But many multinationals in the IT sector, such as Google and Apple, have invested further in London, Cambridge and Oxford, in pursuit of a high skilled workforce and overall Japanese investment into the UK continues to increase in 2016 and 2017, and not just because of SoftBank acquiring ARM in 2016.

Law firm Ashurst’s Hiroyuki Iwamura points out that the UK is a pivot to global markets, particularly to the US. Theresa May is showing particular consideration for Japanese businesses – If they worry too much about the negative impact of Brexit, they may miss some good business chances, Nikkei Business London bureau chief Takahiro Onishi concludes.

If you would like to purchase a detailed list (address, company size etc) of acquisitions made by Japanese companies in the UK in 2016 (24 companies), 2017 (21 companies), 2018 (8 so far), please contact Pernille Rudlin (pernillerudlinrudlinconsultingcom)

Brexit brings turning point for Japanese automotive suppliers in the UK

“We don’t have any room to store increased stocks” says Hiroshi Seko, the UK MD of G-TEKT, a Japanese automotive supplier. According to the Nikkei newspaper, BMW have asked the automotive body work supplier stock 3 months’ worth of supplies for the Mini because of concerns about the impact of Brexit on supply chains, when normally they only hold around a week’s worth. G-TEKT imports 60% of the raw materials from France but does not actually have anywhere in their factories’ grounds to store these raw materials.

G-TEKT has just started up its fourth factory in the UK (2 in Gloucester, 2 in Wales), to supply Jaguar Land Rover and Toyota. It has increased employees from 568 to 808 over the past 3 years but is struggling to hire all it needs, particularly from continental EU, because of Brexit.

UK sales represent around 7% of G-TEKT’s global turnover, most of its sales in Europe. It has also just started to build a factory in Slovakia, again to supply JLR, from 2019.

Similarly, Takayuki Furuuchi the UK MD of Japanese automotive supplier Faltec, whose only production in Europe is their factory in Sunderland to supply Nissan, is also wondering if current lead times are sustainable. Faltec imports more than half of its metal materials from outside the UK and is worried that with a no deal Brexit, ithere will be difficulties in the logistics of supply of stainless steel from France and other EU supplier countries. These supply trucks pass through the Channel Tunnel to Dover. The Dover port authority estimates that a two minute inspection time would lead to a 27 mile tail back of traffic.

Faltec currently has a 2 day lead time from when Nissan orders the parts to when they expect delivery. Faltec is wondering whether it needs to adjust its procurement, but it has taken many years to build up a supply chain which meets car manufacturers’ rigorous standards and it will likely take a long time to make any changes to this.

According to a Japanese automotive supplier executive, “if there are logistical hold ups, then suppliers will just have to hold more stock”. Faltec is currently investigating holding stock at its own risk and whether there are any warehouses available nearby.

Nissan is starting production of its next generation SUV Qashqai for the European market from 2020. Expecting that suppliers will be expanding production as a consequence, the local authorities have given the go ahead for a new industrial park near the Nissan factory in Sunderland. But if chaos after Brexit affects the supply chain, there will be an impact on companies’ European strategy. Both Faltec and G-TEKT have been successfully expanding in the UK for over 20 years – Faltec increased employee numbers over the past few years in the UK, from 341 to 396. With UK sales at around 6-7% of turnover for both companies, they are not facing a huge hit on a global scale from Brexit, but as suppliers, they have to accommodate whatever car manufacturers request.

“It has been 40 years since Japan’s automotive industry first set up shop in the UK. The British automotive industry is facing a turning point, not just for car manufacturers but for parts suppliers who have invested so much time and money into the UK”, concludes the Nikkei.

“We will stick with the UK as a global supply base, despite Brexit” says Honda President

“Europe is the heart of global car culture” says Takahiro Hachigo, Honda’s President since 2015. Although Honda has less than 1% market share in Europe, it competes with European car brands in its main markets of the USA and China. The UK factory has been streamlined, and production lines consolidated as a global production centre, exporting Civics to Europe and the USA. Hachigo says that they are therefore committed to the Swindon factory as a global supply base, regardless of Brexit. “If there is a no deal Brexit, there will be temporary disruption, so I am very much hoping that this disruption will be avoided and outstanding issues resolved”, says Hachigo.

However, as the Nikkei points out in their interview with Hachigo, if there is a no deal Brexit, without a transition period to 2020, Honda’s exports to Europe will be affected immediately and supply chain issues may make it difficult to export so easily to the USA too.

Honda has committed to a 30 year plan with a goal of “pursuit of quality” – to develop cars that will still sell at a high price, in an age of car sharing and electric vehicles. Hachigo also seems very keen in the interview to keep participating in Formula 1 (another UK strength). UK has that “luxury car maker” image, with Rolls Royce and Bentley, so it is understandable that Honda still wants to keep a base there, but as the Nikkei says “difficult management decisions will be needed in the future” to realise this strategy. I also wonder whether Honda’s current brand image, in Europe at least, really is convincing as a luxury, higher price positioning.

Brexit watch – Top 30 Japanese companies in the UK

We’ve been tracking the 30 biggest Japanese employers in the UK for over 3 years now, so it seems a good moment as Brexit draws nearer to see what changes they have made over the past three years, explicitly or implicitly, to prepare for Brexit and beyond. Overall, the top 30 Japanese companies in the UK have had a good 3 years’ in the UK, with total number employed increasing by nearly 15% to just under 90,000, out of the 140,000 employed by 1000 Japanese companies that is usually cited. I even wonder whether that 140,000 ought to be revised substantially upwards, as I believe the estimate dates from 2015.

However the average increase conceals some hefty drops (Fujitsu, Nomura and Yazaki) and substantial increases – the latter largely due to acquisitions.

Nearly every annual report from the companies that make up the 30 biggest Japanese employers mentions Brexit, but few state explicitly what actions they have taken to deal with the risk, unless they are financial services companies facing regulatory issues. Most note that the outcome is uncertain, and that they are monitoring and planning.

No tax haven please we’re Japanese

As well as Brexit, another factor that some Japanese companies in the UK have to take into account is the tightening of the Japanese tax haven law. Passive income such as dividends and royalties, if received in a country with a corporate tax below 20%, will be subject to charges from the Japanese tax authorities. The UK corporation tax rate is 19%, due to go down in stages to 17% and Theresa May has recently promised “whatever your business, investing in a post-Brexit Britain will give you the lowest rate of corporation tax in the G20.”

As I stated in my speech to the UK Tax Forum, because of their long term, stakeholder oriented, risk averse ethos, Japanese companies are not really interested in the UK as a tax haven. Panasonic, seen as a bellwether in terms of corporate governance in Japan, cited the tax law as the reason to move its headquarter function from the UK to the Netherlands, where the headline rate of corporate tax is 25% (although sweetheart deals can be done). I also think that the decision of the European headquarters in the UK of trading companies Sumitomo Corporation and Mitsubishi Corporation to sell their shares in investments such as Princes and Triland Metals in the UK to their Japan headquarters is part of this drive – to avoid being seen as using the UK as a tax haven for their dividend earnings.

Whose standards are they anyway?

Japanese companies would be more interested in the second part of May’s statement – “you will access service industries and a financial center in London that are the envy of the world, the best universities, strong institutions, a sound approach to public finance and a consistent and dependable approach to high standards but intelligent regulation”.

But of course the question they will be asking is “whose high standards?”

There are around 200 Japanese companies with manufacturing in the UK, and we estimate around 50% of their production on average goes to the EU (excluding the UK). 30% is to the UK and the remainder to the rest of the world. In Toyota’s case, over 80% of their production in the UK is exported to the EU. So it’s no surprise that, as repeatedly stated, including in the Japanese Ministry of Finance’s “Message to the UK and the EU” of a couple of years’ ago, Japanese business want harmonised regulations and standards across the UK and the EU.

All the Japanese financial services companies affected by EU regulation have taken action – Hitachi Capital and MUFG have strengthened or set up bases in Amsterdam, MS&AD in Brussels, Sompo International in Luxembourg, SMFG, Mizuho and Nomura in Frankfurt.

The rise of the pure UK plays

Looking at who’s in and who’s out of the Top 30, the rise of “pure services” is noticeable, largely through acquisitions such as MS&AD acquiring Lloyds underwriters Amlin and InsureTheBox, Dentsu acquiring multiple advertising and marketing agencies in the UK, Outsourcing acquiring recruitment agencies and government debt collectors. Bubbling under are Park24, now the owner of National Car Parks. Many of these investments are very domestic UK market oriented, so Brexit proof in the sense that they are not reliant on the European single market in terms of supply chains, regulation or freedom of movement.

Conversely manufacturing companies have dropped out – such as JTI, with the closure of its Gallaher factory in Northern Ireland last year and Fujifilm, who have three different production sites in the UK.

Freedom of movement and solutions

As well as emphasising the need to harmonise regulations and standards, and ensure tariff free trade, the Japanese government “Message to the UK and the EU” of two years ago also pointed out that Japanese companies in all sectors employ large numbers of non-British EU nationals in the UK. Because many of them have UK -based regional headquarters, or have design and engineering or customer support centres in the UK, they rely on the freedom of movement of these non-British EU nationals as well as the freedom of movement of British employees themselves, to visit or be seconded to client sites to provide pre sales, installation and aftercare support. This also applies to Japanese engineers visiting the UK from Japan who at the moment are finding themselves being turned away because they gave the wrong answer at the border, saying they have come to the UK “to work”.

This last issue is likely to be raised quite insistently in any post Brexit trade deal between Japan and the UK, and if not solved, I would expect to see the numbers employed by the Top 30 in the UK to fall in the years to come.

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How Japanese risk aversion explains reactions to Brexit and whether UK should join the CPTPP

I was a panellist for the UK Trade Forum on 25th September 2018, on Japanese business and government viewpoints in response to the UK’s request to join the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP, TPP as was, often known in Japan as the TP11)

The Chatham House rule was invoked, but I believe that I am allowed to report what I said, so long as I don’t attribute any comments to the other speakers.

As I only had 10 minutes, I decided to focus on risk aversion to explain Japanese reactions to Brexit and the UK joining the CPTPP. Even so, I had to drop the final part of my speech, so I will add this back in at the end:

“I have spent more than 45 years now living in or visiting Japan and working with or for more than 200 Japanese companies, and one generalisation I feel I can make, even though I am well aware of the dangers of stereotyping, is that Japan as a nation – as well as Japanese companies – are highly risk averse.

The geopolitical angle

I was reminded of this when I attended a lecture by Koji Tsuruoka last week, the current Japanese Ambassador to the UK, who was also the chief negotiator for Japan for the TPP. He gave a very powerful, thought-provoking speech, tackling head-on controversial subjects like Japan’s behaviour in WWII, whaling, defending Big Pharma IP interests in trade negotiations and so on, in a way that didn’t seem strictly necessary given it was an audience of Japanophiles, but I think his message, on reflection, was very clear. Japan feels very vulnerable, with neighbours such as China and North Korea and Russia, and supposed allies and defenders such as the USA now behaving unpredictably, and it needs a rules based international order because it is energy and resource poor and relies on other countries for imports of these things. WIthout a rules based international order being adhered to, countries behave unpredictably, and this can lead to war.

So this is why Tsuruoka and other Japanese government representatives and ministers have been very positive and welcoming of the UK wanting to join the CPTPP or roll over the EU-Japan EPA, even if the practicalities of this are not clear. They worry that the UK leaving the EU means the UK is also leaving that rules based international order, so needs to be roped back in somehow.

Why are Japanese companies so risk averse?

So that’s the geopolitical side to this – for the rest of my ten minutes I want to look at the Japanese business side, and three sectors in particular, what kind of trends we are seeing and how they are reacting to Brexit and what TPP might contribute in terms of mitigation or otherwise.

So why are Japanese companies so risk averse? I think it’s because they operate on a very different model to the Anglo Saxon, short term, shareholder value model. It could be called a stakeholder model, but primarily the motivation is not to make a quick profit, but long term survival. So they don’t want to do anything so risky as to jeopardise that, and they are very hot on ESG – Environmental, Social and Governance – issues. It’s one of the really good things about Japanese companies, why I am still a fan.

So when the Japan bashing started happening in the 1980s, and many Japanese remember Americans taking hammers to Japanese cars, Japanese companies decided that foreign direct investment was the way forward, and started up factories in the USA and of course also in the UK, with Nissan, and then Honda and Toyota.

They chose the UK – and the UK is the recipient of 40% of Japan’s cumulative FDI into the EU, and has the largest Japanese population in the EU, including intra-company transferees – (but both those numbers are declining these past couple of years – I leave that to you to conclude why, but a hostile environment certainly isn’t helping) – because the UK was seen as a stable, rules based system, low risk place to invest, and of course because we were then members of the EU and a gateway into the EU.

So what is happening now with Brexit in terms of Japanese risk aversion, is that it is tipping them into making decisions and directions they were going in anyway. Looking at the three main sectors of Japanese investment in the UK – automotive and supply chains, IT and electronics and “pure” services – these sectors make up the bulk of the around 1000 Japanese companies in the UK, employing around 140,000 people. Actually many of the 1000 don’t really count because they are paper companies, brass plates, or several versions of the same company, but there are 30 or so really big employers who make up more than half of those 140,000 employees.

Automotive supply chains – a pivot to a new chain of right hand driving nations?

So for Japanese companies, trade negotiations aren’t really about trade in products so much any more, more about protecting their foreign investments. Even then, to be realistic, the EU only makes up around 10% of Japanese companies’ turnover. Asia is still the really big market outside of Japan, and within that, China, and then secondly the US. And the UK is probably only around 10% of the EU total. But the UK is also host to a lot of regional HQs and of course the three car plants.

The main trends you see in the automotive supply chains is that they are shifting eastwards in Europe, to the Czech Republic, Slovakia, and Japanese car manufacturers also have factories in Russia and Turkey, and the suppliers – of wire harnesses for example – have factories in Africa. So Brexit is accelerating that shift.

Can the CPTPP help with this? Well I suppose there are a large number of CPTPP members who are right hand driving like the UK, but when you look at what sells in Australasia for Toyota, it’s pick up trucks like the Hilux, whereas Toyota in the UK is manufacturing the Auris/Corolla. I suppose that shift could happen – at least then there is access to a market of over 100 million, which is supposed to be the minimum to sustain an automotive supply chain. Honda is already trying to sell half of its Civic production from Swindon to the US, so it could happen, despite the distance.

Information technology and electronics – integrated disintegration

You’re also seeing a shift in the power balance in those supply chains, towards the components suppliers, and IT, because of Big Data, the Internet of Things and so on. Which brings me to the second major sector – information & communication technology, electronics etc. Here you’re seeing what I call an integrated disintegration. Japanese companies are becoming more B2B, solutions based, and trying to integrate back office functions, but also customer support, technical support into low cost locations with multilingual educated workforces – so in Europe this would be Portugal, or Poland.

But at the same time, the regional management and sales are becoming more dispersed. Anyone who has worked in a multinational as I did working at Fujitsu will know what this means – endless fights about who gets what in terms of money or actually doing the work, and whereas the UK often won those fights, I am beginning to see signs that Japanese companies are reverting back to the country model, are finding the matrix system just too tough. If you’ve ever run a global or regional virtual team, as I did, you can understand why. So there is a drift away from the UK and to Germany or the Netherlands, as we’ve seen with Panasonic, and it would seem also Sony now, accelerated by Brexit. And that’s bad news for UK suppliers of services to those Japanese companies.

Pure services also need a rule based international order

But Panasonic did not just cite Brexit as a reason for moving its headquarters to the Netherlands. It was also to do with the tightening of Japan’s tax haven rules from April of this year. Dividends and other “passive income” in Japan’s overseas subsidiaries will be the subject of attention of Japanese tax authorities, regardless of how much real business activity they are undertaking, if the corporate tax rate is below 20%. And of course the UK’s is 19% and due to decrease further – reiterated by the Chancellor after the referendum to show that the UK is still open for business.

But actually this is not appealing to Japanese companies. Nor is the “chlorinated chicken” approach about deregulating or having looser environmental or other regulations of much interest to Japanese companies. They want to maintain high standards, and like robust, thorough rules – again, because of the risk aversion.

But there are cultural issues beyond the need for a rules based international order

Although Japanese companies really like being in the UK and I think a lot of the commercial and financial sector companies, like Japanese banks, or trading companies like Mitsubishi Corporation that I used to work for, have no intention of entirely shifting their regional headquarters out of the the UK despite Brexit, if they can help it, one thing that keeps me in business is the cultural gap between Japan’s very process and rule oriented way of managing and the more principles based, some might say “winging it” approach of British management.

I believe Japan is still very reluctant to open up its public procurement and professional services sector, even to the UK, and I can see why. There is not really a developed set of professional specialists the way we have in the UK. Most Japanese employees follow a generalist track. So in trade negotiations, such as the CPTTP or the EPA, it must be very difficult to find common terminology in order to agree any rules for recognition of qualifications, or mutual understanding of governance principles for services, much more difficult than defining standards for products. “Risk” in Japanese is the same word that is used for “crisis”. So it has a very negative meaning, and the neutral concept of risk management is not translatable into Japanese as a result.

No surprise it’s the Netherlands as the Japanese preferred alternative to the UK post Brexit

The choice of the Netherlands for Panasonic’s new financial and tax base for its pan European business, to be shifted out of the UK in October of this year to prepare for Brexit comes as no surprise – even though most of Panasonic’s regional business coordination is in Germany. In fact I even predicted Amsterdam would be a top choice for Japanese companies in 2013 when Brexit proofing strategies were first being discussed.

As pointed out in a previous post, the Netherlands has a relatively high density of Japanese company transferees, 4th in Europe after Luxembourg, UK and Belgium. This population has been expanding rapidly since 2015 too – 23% more Japanese people on company transfers in 2017 compared to 2015. The number of Japanese companies in the Netherlands has not risen much over the three years, however. So most of these transfers will have been in order to strengthen presence there, rather than start up a new operation.

The attractions of the Netherlands as an alternative to the UK over Germany are not only that is easy to function in English, but also that Amsterdam/Amstelveen area has long had a good infrastructure of networking opportunities with an active Japanese Chamber of Commerce and the Dutch & Japanese Trade Federation, and plenty of lawyers and financial services companies with experience of supporting Japanese companies (who have been busy recently offering Brexit seminars and advice). The Amsterdam lifestyle is congenial, and there is a long history of mostly good relations between the Netherlands and Japan.

Which is not to say that Germany has been left out either – according to Japanese Ministry of Foreign Affairs figures, Germany still has the most number of Japanese companies in Europe – 703, if only incorporated subsidiaries are counted, rather than branches. This represents a net increase of 20 companies over the past three years,with 8% more Japanese company expats in Japan in 2017 compared to 2015.

The UK is home to the second largest number of Japanese companies in Europe – 471*, and this has remained more or less unchanged in the past three years, and there has been a small decline in the number of Japanese expats posted there. As can be seen in the map below, Japanese companies are still most concentrated in the big Western European economies:

Crunching the numbers against population size reveals some interesting results – Netherlands has a high density, as you might expect, but Finland turns out to have a higher density – with a larger number of Japanese companies than you would expect, given the size of its market. Most of the 46 Japanese companies in Finland in our database are technology or machinery sector, often with production in Finland. The highest density country, just as it was with numbers of Japanese expats, is Luxembourg – but of course it only has a half million population. The Czech Republic and Hungary also have a high density of Japanese companies – again a large proportion being manufacturing. Of the big Western European economies, Spain and Italy have relatively fewer Japanese companies than you might expect.

The really interesting story is where the shifts have been over the past three years – there is one clear winner – Czech Republic – it is home to 82% more Japanese companies than three years’ ago. Other growth spots are Sweden, Norway, Poland, Slovakia, Hungary, Lithuania and Switzerland. Big losers have been Italy, Austria, Bulgaria, Denmark, Greece and Latvia (although admittedly, some of these did not have many Japanese companies to start with).

Newcomers to the Czech Republic that we are aware of have mostly been in the automotive industry: Central Glass, Linical (clinical research organisation), Nippon Paint Automotive Coatings, Hakuto (trading company), Obara (automotive welding products) and Tsubaki Automotive.

So the growth in company numbers is to the east and Nordics, mainly in manufacturing. The consolidation and integration of services sector business and functions across Europe is benefitting the Netherlands most of all.

*The commonly used figures for Japanese companies in the UK are 800 or 1000. There at least that many Japanese entities in the UK but some of them are multiple branches, or joint ventures or brass plate only. I have used the narrow definition of what is called “honten” in Japanese – the main organisation/parent company, to aid accuracy and comparisons.