Brexit

Hard Brexit alternatives for services

The UK government’s “soft” Brexit proposal, to allow freedom of movement of goods between the UK and the EU, is unlikely to be acceptable by the EU or even a practical solution for the UK economy. It’s politically understandable why the government is trying to protect the just-in-time delivery of manufacturing supply chains, in which many Japanese companies are involved. The manufacturing regions mainly voted in favour of leaving the EU. It might be possible to persuade those voters to accept a soft Brexit if they realise their jobs are under threat from a hard Brexit. But 80% of the UK economy is in the services sector – predominantly in cities and in the south east, where the vote was largely to remain in the EU.

It’s not so easy these days, however, to make a distinction between services and manufacturing for the purposes of customs checks and regulatory compliance, even in the car industry. 10% of Nissan’s workforce in the UK work in a technology design center in the south east, not in the factory in the north east, developing software and services, not just components for cars.

Fujitsu, the largest employer in the UK, may be a manufacturer in Japan, but only provides IT services in the UK. The number of Fujitsu staff in the UK has been falling over the past few years, whereas it has been increasing in Global Delivery Centers in Portugal and Poland. Fujitsu is now the largest Japanese employer in Portugal – employing around 1000 people who provide technical support to global customers by phone and internet.

Both Poland and Portugal can provide the low cost, multilingual, well-educated workforces needed by the services sector. Although it is not a big market in its own right, the Portuguese economy has recovered since the euro zone crisis – the budget deficit is the lowest in 40 years, the unemployment rate has improved and it is politically stable.

For my own business, as an insurance against a “hard Brexit” for services, I might register for “e-residency” in Estonia. This will allow me to set up a company in Estonia and open a euro denominated bank account there so we can easily send and receive euros, within the eurozone. It will also allow me – under EU data protection regulation and the new deal with Japan – to share client data freely with my colleagues in the EU and in Japan.

Similarly, any UK based companies in strongly regulated sectors such as financial and legal services are making sure they have credible presence in the EU, so they can continue to do business there.

Nobody is expecting the service export sector to move entirely away from the UK if there is a hard Brexit. Alternatives to the UK have other disadvantages – political instability in Eastern Europe, or high costs and scarcity of good office locations and employees in Western Europe – but I predict this current trend of dispersed locations across Europe will accelerate.

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Brexit proofing has already started for Japanese manufacturers

On the face of it, it looks to have been a good couple of years’ for Japanese manufacturers in the UK, despite concerns over Brexit. 214 Japanese companies with production sites in the UK employ around 63,000 people, generating revenues of around £23.8bn. More increased their employee numbers than cut back, and overall employee numbers rose by around 5% on the previous year.

The Brexit risks

Although there are 214 companies, a handful dominate, and their reactions to Brexit will impact other Japanese companies who are suppliers to them. Nissan, Sony, Honda, Toyota and Princes (a food processor owned by Mitsubishi Corp) account for over 50% of the revenues, and over a quarter of the employees of Japanese manufacturers in the UK. Increased recruitment by Honda, Nissan and Hitachi Rail (the 6th largest Japanese manufacturer in the UK, which has just started production) and various automotive suppliers account for most of the rise in employment over the past couple of years, whereas Toyota had the biggest reduction in workforce.

It’s clear from the breakdown in sales by region (where given) that the UK is indeed a gateway to Europe for Japanese manufacturers. More than half of their combined turnover derives from sales to Europe (excluding the UK) and UK sales account for around a third of revenues. Any damage to their ability to export to Europe will therefore impact 50% or more of their revenues.

A third of the 214 companies are involved in the automotive supply chain and their fortunes are tied up in not only what Japanese car makers are doing but also other car makers such as Jaguar Land Rover and PSA (Peugeot, Citroen, Vauxhall etc). Japanese automotive suppliers have been keen to diversify over the past few years, to avoid over reliance on one customer or supplier or geography.

What the car makers do in response to Brexit in the long run is obviously key for them, but there are a couple of shorter term risks. One which has already had an impact is exchange rate volatilty. The cheaper £ can of course be a benefit, if they are exporting, and for most the exchange rate risk is manageable. As half of the parts in a UK made car are imported, mainly from Europe, and around 80% of cars are exported, again mostly to Europe, there is a natural hedge. Some Japanese UK companies even report in euros, as they are selling and purchasing in euros.

Disruption to the supply chain from Brexit is another risk also mentioned in annual reports. Although they are mostly manufacturing in the UK for UK based car companies, so should be able to maintain just-in-time delivery even if there is a hard Brexit, Japanese automotive suppliers still have to take account of the whole supply chain and likely reaction of the car manufacturers should there be prolonged problems.

Brexit-proofing has started

It’s clear some contingency plans are already being enacted. Japanese companies have been warned since at least 2013 to my knowledge that Brexit could happen, so I suspect many of them have made plans with that in mind. These plans might well be something they would have considered doing anyway, but the added risk of Brexit tipped them towards it. For example:

G-TEKT, which designs and manufactures pressed steel bodies and coachwork, primarily for Honda, had no other production in Europe apart from 3 plants in Gloucester, Ebbw Vale and Tredegar employing around 800 people. 90% of its sales are to UK customers. Production will start in Slovakia in 2019 – presumably it’s no coincidence that JLR is also building a factory in Slovakia.
Tsubakimoto, manufacturing automotive timing systems in Nottingham with around 100 employees, is transferring some of its existing business to a new plant in the Czech Republic. 72% of its sales are to non-UK European customers, 27% to UK customers.
Daido Industrial Bearings, employing around 180 people in Somerset, is transferring the sales function for its automotive and polymer accounts to Germany. 84% of its sales are currently to non UK European customers. It also has plants in Montenegro, Czech Republic and Germany.
Senju Manufacturing, who make solder for the automotive and electronics industries, have started manufacturing in the Czech Republic in 2017, as requested by a customer, presumed to be Toyota, who have a joint manufacturing facility with Peugeot and Citroen there.
Kasai, who make interior components for Nissan, Honda and JLR for the UK only, have set up a plant in Slovakia, to add to their existing UK plants in Washington and Merthyr Tydfil, which employ 793 people, down 31 from the previous year.
TS Tech who make car seats for Honda, with 100% of sales to UK customers, started production in Germany in 2016 for VW, in addition to their Swindon UK (where employee totals rose by over 200 from 2015/6 to 2016/7) and Czech Republic plants.

Some examples in the non-automotive sector include:

Sony DADC, who manufacture DVD and other digital products in Southwater, West Sussex, employing around 300 people. The organisation has been merged with Sony’s Austria branch, and will cease manufacturing in the UK and transfer all production to the Austrian plant.
Olympus Keymed have transferred sales to the Middle East and Africa region from the UK to its Germany based regional HQ
Sun Chemical has closed its plant in Orpington in 2017. It has plants in Germany, France, Spain, Italy, Denmark, Austria and Poland.
Sekisui Alveo is transferring production of polyolefin foams from its plant in Merthyr to the Netherlands.

I estimate there are around 70 Japanese companies whose only production in Europe is in the UK. Many of these are relatively Brexit-proof – they are highly specialised, or local unique brands (whiskey, fashion etc). There are around 150 Japanese manufacturers in the UK who have production elsewhere in Europe, so can be considered relatively Brexit-proof already.

New investment into UK from Japan, but no sign of on-shoring in manufacturing

There are also examples of companies who are expanding in the UK – such as Graphic Controls, Hitachi Rail and various automotive companies, as outlined above. However I am not seeing a lot of “onshoring” going on, despite encouragement from the UK government and car manufacturers such as Nissan. I estimate there are around 35 Japanese automotive suppliers who do not have production in the UK, but not one of them has started manufacturing in the UK. There have been no acquisitions or newcomers into the UK in the automotive industry for the past three years. The new Japan-owned companies that have arrived over that period are mostly in the services (financial, recruitment), food distribution, hi tech or pharma/biotech sector.

A more detailed version of this post is available as a free pdf here.

If you are interested in purchasing a spreadsheet giving full details of the 214 companies, or the 70 companies who might be looking for alternative production locations in the EU (address, ownership/M&A history, European HQ, business sector, European structure, turnover broken down by UK vs Europe, employee figures for past 2 years, constituency and MP), please contact Pernille Rudlin.

Diversity and creativity

I’m writing this in the cafe of the Royal Academy, having just visited the Summer Exhibition. This annual art exhibition is one of the events of the London Season, a summer of parties and events such as the Chelsea Flower Show, the Epsom Derby and the Henley Royal Regatta.

You might expect the Summer Exhibition to be very traditionally British, but this year, to mark the 250th anniversary of the Summer Exhibition, the not very traditional, self-described “transvestite potter” Grayson Perry was asked to curate the exhibition, on a larger, more diverse and inclusive scale than ever before.

Just as in previous years, the members of the Royal Academy – professional artists – exhibit their recent work at the exhibition and non-members are also invited to submit works of art. Perry and his team viewed a record 20, 000 works for selection and as a result the rooms were crammed with all kinds of paintings, sculptures, videos, embroideries and architectural models created by people of many nationalities, including some Japanese artists such as Katsutoshi Yuasa.

It could have been an incoherent mess, but actually I think it succeeded in capturing the UK right now: creative, humorous, political, multicultural, celebrating the amateurish and the outsider, but also the British countryside, cityscapes and people.

Before visiting the exhibition, I attended a lunch at which a British trade minister spoke. He was trying to be positive about Brexit, emphasising that the UK would continue to be a good place to invest because of our excellent research-oriented universities, skilled and creative workforce and stable legal and financial infrastructure. He pointed out that Rakuten and Fujitsu have both invested in UK based fintech and technology initiatives in the past year.

He did not of course mention that manufacturing operations in the automotive supply chain are beginning to shift to the EU. Jaguar Land Rover announced it will move production to Slovakia, which is also where at least one Japanese automotive components supplier with production in the UK has set up a plant in the last year.

Most of the questions from the audience of Japan-related businesspeople were about immigration however. The cap for visas for non-EU immigrants (which includes Japanese intra company transfers) has been reached every month for the past 6 months and EU immigrants have started returning to their home countries or not coming to the UK in the first place.

UK unemployment is at a historic low. One Japanese recruitment agency told me that their UK vacancies have increased 50% year on year. Firms are worried that after Brexit it will become even more difficult to recruit EU and non-EU workers.

One proposed solution, which will take some time, is to train low skilled British people in higher levels of skills and replace low skilled labour with robotics. But as the Summer Exhibition proved, diversity and multicultural influences are what have defined and made the UK an attractive place for innovation in the first place.

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.

A Chequered Brexit – impact for the Japanese automotive supply chain

“1000 Japanese companies in the UK, employing around 140,000 people” are the figures usually given when talking about the impact of Japanese companies on the UK economy, and therefore what impact their reaction to various shades of Brexit might be. This reaction will depend on which sector they operate in, so I will undertake over the next few blog posts to break the 1000 down into groups of similar companies and draw out relevant data on them from our Rudlin Consulting database (if you would like to purchase a customised version of this database, please do contact us).

I have picked on the automotive sector first, and in particular those companies which have production sites in the UK.

There are 55 Japan affiliated companies who manufacture automotive components or vehicles in the UK, employing around 26,125 people – this represents 5.5% of all Japanese companies in the UK and nearly 19% of all employees of Japanese companies. Here’s an interactive map of where they are located.

Why the focus on the automotive supply chain?

You can immediately see why automotive production has been the focus of a lot of debate about the need to stay in the single market and a customs union with the EU, protecting just-in-time supply chains between the UK and the EU. Not only does this sector employ a proportionately larger number of people per company than average, but production in this sector is based in areas which are badly in need of secure, skilled, blue collar jobs.

As you might predict if you have been following Brexit, most of these regions in which these companies’ production sites are located were strongly in favour of leaving the European Union. According to our data (using the BBC’s tool), the average vote for Leave in the regions with Japanese automotive production was 58%.

Automotive supply chain jobs not threatened by Brexit?

As other researchers have pointed out, voters may have had stronger reasons for voting Leave than concerns about automotive jobs. Or maybe they did not believe that these jobs were under threat.

Perhaps Leavers thought Nissan, Toyota and Honda’s production in the UK would be fine because the British are continuing to buy Qashqais, Yaris’s and Civics, but actually 88% of Toyota’s UK production is exported, 67% to Europe, 80% of Nissan’s UK production is exported, 76% to Europe and 75-80% of Honda’s UK production is exported to Europe. As we noted previously, the UK’s car market is not big enough on its own to support a full scale car production industry.

Since Brexit, there have been reassurances from the UK government that Nissan (and presumably other car companies) will not be impacted by tariffs or regulatory impediments in their exports to Europe and all three companies have announced further investments in their UK operations.

On-shoring is not happening

But all three Japanese car companies have also emphasised that they need frictionless supply chains. So the obvious answer might be for all their suppliers to move production on-shore or at least set up bigger warehouses or assembly facilities in the UK. Nissan has indeed encouraged its suppliers to set up near it in an industrial park in Sunderland. Those 55 companies who already have production in the UK might see a rise in orders and indeed some mention in their annual reports that there are potential benefits as well as costs to Brexit for them.

The problem with on-shoring is that, depending on where the company is in the supply chain, their own suppliers might be based in the EU, and in fact the same component may need to pass back and forth between the EU and the UK several times, in which case they face higher costs if there is further instability in the exchange rate between sterling and the euro post Brexit and also frictions at the border when rules of origin and regulatory compliance need to be checked.

So for a truly frictionless supply chain and complete currency hedge, the whole chain will have to produce on-shore. This represents a substantial cost to suppliers, who are mostly trying to spread the risk by dual sourcing or globally sourcing and making sure that they are not too reliant on one car manufacturer as a customer.

In fact 40 of the 55 companies who already have production in the UK have production sites elsewhere in the EU, and the trend seems to be to open production sites in Slovakia or transfer production from the UK to the Czech Republic rather than onshore – reinforced by Jaguar Land Rover’s new factory in Slovakia and the Toyota Peugeot Citroen manufacturing joint venture in the Czech Republic.

Many of the 15 who only have production in the UK also supply other industries beside the automotive sector, or are highly reliant on Honda or Nissan so will presumably stay so long as they stay. Or, if they supply other customers outside the UK, they can hope that the soon to be signed EU-Japan Economic Partnership Agreement’s reduction of tariffs and regulatory harmonization for car parts means they can easily import components made in their factories in Japan into the EU.

It’s not just about manufacturing though

Since the Chequers’ agreement amongst the Conservative cabinet was announced, which, if accepted by the EU, would enable the continuing frictionless production supply chains, various other sectors have been pointing out that as 80% of the UK’s GDP is actually generated by services, their exclusion from any single market-type deal does not make sense for the British economy. Furthermore, the distinction between services and manufacturing is not as obvious as it used to be. 10% of Nissan Motor Manufacturing’s 7500 staff are in design and development. Most of these staff are based at the technical centre in Cranfield. They represent a huge variety of nationalities and travel frequently across Europe and to Japan, working with counterparts in Nissan technical centres in Belgium, Russia and Spain. If it becomes difficult for them to travel for work, or send prototypes back and forth to clients – and if the UK no longer has any influence on the regulatory standards that they need to comply with – then it won’t just be production jobs that are in danger of being offshored.

Just-in-time solution to Brexit for Japanese automotive suppliers

The report on Sky News about the Dutch government advising Dutch companies not to use British made parts in goods for export before Brexit spurred me to do some more analysis into the impact this kind of advice might have on Japanese automotive suppliers based in the UK. In fact I even stayed up until 1am last night doing it – I’m that obsessed.

The results of tweaking my database of Japanese companies in Europe reveal that there are around 40 Japanese automotive suppliers in the UK who have production facilities in the UK. They range from solder suppliers to paint production to car seat manufacturers, from 7 to over 1000 employees, employing around 13,600 in total.

Are 13,600 jobs in UK-based Japanese automotive suppliers at risk?

So should those 13,600 people be worried about their jobs right now? 75% of those Japanese companies have similar production sites elsewhere in the European Union. So supply to EU car plants could easily shift to those sites.

The 40 automotive suppliers with production sites in the UK can of course continue to supply the UK based car manufacturers, if there is enough demand to sustain viable production levels. There is a theory (blog post here) in the Japanese automotive world that viable production levels require a market of 100 million people, which is greater than the UK population. Of course UK based car plants are not just supplying the UK, but the EU and in the case of Honda, their Civic model is also exported to the USA and even to Japan. In fact almost 80% of British car production is exported, the majority of this to the EU.

What were the secret UK government promises to Japanese car manufacturers in the UK?

So the 13,600 jobs are less at risk, if the UK based car manufacturers can sustain their exports to the EU after Brexit. Which is why there is the concern that a lack of a deal with the EU means 10% tariffs on British car exports to the European Union. Presumably the secret promises that the UK government has made to Japanese car manufacturers include some kind of bung to ensure that any cost of the tariffs is compensated for. Whether this is allowed under WTO rules or acceptable to the EU, I leave to the trade wonks. I suspect the answer is no. It also explains why the UK government is so keen on the customs partnership solution and max fac. Presumably they see this as enabling them in real time to have a grip on what is being traded and tariffs imposed, so they can compensate UK car manufacturers accordingly or set up a fast lane for them in processing at the borders.

The quandary facing Japanese automotive suppliers with no UK production base

The UK government presumably also pitched max fac to the car manufacturers as the technical solution to the worries flagged up in the report in the Financial Times yesterday, of delays at the borders disrupting just-in-time supply chains for automotive parts coming in from the EU. This is why Japanese car manufacturers like Nissan have been pressurising automotive suppliers to set up in the UK, preferably in the new industrial park right by Nissan’s factory in Sunderland.

Weeding through my database, I have identified 33 Japanese automotive suppliers with sales arms in the UK but who do not have production in the UK. So should they now consider setting up production bases in the UK? They have to take a view on how likely it is that UK based car production will be maintained after Brexit. How will the Nissan-Renault alliance resolve itself – will Renault become dominant, in which case, expect French production to be prioritised? Nissan also has another EU based plant, in Spain. Honda wants its UK plant to be a global hub, but also has a factory in Turkey (which exports car models such as the CIvic to the EU under the EU-Turkey customs union). Toyota has car plants in France and Russia.

Consolidate supply chain within EU, leave importing to UK to the last possible minute

A further complication is that the import and export of automotive components is not just a one off – the same part may go back and forth several times between multiple factories, having solder/paint/other components added. Concerns about rules of origin and the paperwork involved, and possible delays at the border, along with the car manufacturers themselves essentially saying to suppliers “that’s your problem not ours” might lead a supplier to conclude that the best solution is to consolidate the supply chain within EU borders, until the final moment when the component has to be brought to the car manufacturers’ UK site for assembly. There might be some more warehouses at the Sunderland industrial park, and maybe some finishing/assembly facilities, but a safer, cheaper bet would be to put most production in Eastern European countries such as Slovenia or Slovakia, which does indeed seem to be what has happened over the past year or two.

UK is the only top 10 European economy where the number of Japanese residents has fallen – why?

The UK is the only top 10 European economy where the number of Japanese residents has declined from 2015 to 2016.

The number of Japanese residents in the UK hit an all time high in 2015 of just under 68,000, according to Japan’s Ministry of Foreign Affairs. This fell by 4.5% in 2016. The last time there was a significant fall in Japanese residents in the UK was 2007-9. Presumably this can be attributed to the Lehman Shock, and numbers have been climbing steadily since 2010. So why has there been another drop? Brexit might be the easy answer, but the referendum vote was in June 2016, so it seems a rather immediate impact.

There are more Japanese in the UK than anywhere else in Europe, both in absolute and relative terms. The second highest population of Japanese in Europe is in Germany (44,027) and the third highest is France (41,641), with other countries having substantially less Japanese presence (4th is Italy, with 13,808).

I was surprised there were that many Japanese people in France as there are fewer large Japanese companies and regional headquarters in France relative to Germany or the UK. Fortunately, the Ministry of Foreign Affairs breaks down the total by whether they are permanent residents or long term residents – broken down by intra company transfers, self-employed and students/academic related. France has a relatively larger proportion of students, self employed and government related people, whereas the UK has relatively more permanent residents and Germany relatively more intra company transferees.

Number of permanent Japanese residents in the UK has risen, but academic, corporate and diplomatic residents have fallen

The number of permanent Japanese residents in the UK has risen by 4.5% to 19,785 (30% of all Japanese in the UK) and the number of long term residents has dropped 7.9% to 45,813.

The UK still has the highest number of intra company transfers in Europe – 17,841 – but this is 4% down on 2015. The bigger falls were in students/academics/researchers – 13.8% (from 19,100 to 16,461) and government related – a 25.7% decrease from 934 people to 743. So is this due to young Japanese becoming more reluctant to study overseas? Is the UK losing its centrality as a diplomatic posting?

Comparing the UK to trends in Germany and France shows that Japanese are still studying in Europe, just increasingly more in Germany or France (also large Japanese student populations in Italy, Spain and Switzerland and significant increases in the Netherlands and Ireland). Diplomats and other government officials are also gravitating more towards Germany and France (there are also a large number of Japanese government people in Switzerland).

Germany hosts almost double the number of Japanese companies than the UK does (1811 compared to 998) so the other key difference between Germany and the UK is the density of Japanese people on intra company transfers per Japanese company. The UK has by far the highest density – of around 18 Japanese residents per company, then Belgium with 12, then France with 11, Germany, Netherlands and UAE with 9. This is due to the large number of regional headquartered financial services and trading companies in London.

So what has changed since 2015 that has not impacted the other European countries so much, apart from Brexit? I conclude it must be the increasing difficulty of obtaining Tier 2 intra company transfer visas (as I mentioned in my comments to the Financial Times recently) and also student visas (as explained in this 2016 report). Government agency/diplomatic visas are dealt with separately I assume – maybe this is an element which can be explained by the UK’s declining international influence and more a question of reduced demand rather than reduced supply? Either way, Brexit and visa restrictions will be a combination precipitating further rebalancing away from the UK and to the continent, I predict.

Data visualisation depersonalizes discussions, but you still need the people to make a judgement

I often advise Europeans who are trying to communicate a proposal, or want to have a discussion with Japanese counterparts to try to put their idea into a visual format. This has several benefits. One is that it should reduce the amount of English text that the Japanese person has to plough through to understand what is being proposed. A second reason is that it depersonalizes the discussion if there is a graphical representation – a “thing” that can be pointed at and disagreed with during the argument, rather than having to argue with someone’s abstract idea.

Thirdly, Japanese written language – kanji – is highly graphical as a communication method, so Japanese people are more receptive to complex concepts being communicated in a graphical and holistic way rather than the textual, linear form common in the West.

So I was quite surprised to hear a young Japanese expatriate woman tell me that her colleagues in the UK based market research agency she works for are much more accustomed to representing their findings in a graphical way than she was used to in Japan. Specifically, she said that they use infographics and sometimes even send the report to clients as a video, using the infographics and clips of customers being interviewed.

With the advent of “Big Data”, data visualization is a growing industry. So should Japanese companies be acquiring companies or hiring people who have those skills, or is this another area which will simply be automated, and all that is needed is to buy in or develop some software?

Automation tools already exist for data visualization, but the key is to think about why you want to put the data into a visual format in the first place. It is usually to give insights which will then provoke a discussion. An infographic does not of itself provide the solution. Discussions require human beings to provide their different interpretations of the infographics and ideas about how to act on them. The infographic provides the “thing” that can be pointed at and disagreed with, but also allows people of diverse backgrounds and native languages to have a more equal chance of contributing to the debate, because there is less of a language or technical barrier.

The market research agency at which the Japanese woman worked was founded in the UK and acquired by a Japanese company in 2014. But it also has offices across Asia, multinational staff who travel across Europe and a call centre based in the UK covering over 30 languages.

The UK is the obvious location for global marketing services, not just because it is the home of English language communication, but because of its multinational workforce, who can ensure the data is interpreted appropriately for different cultures. This is why Japanese marketing and advertising agencies have been acquiring many British companies recently. I just hope Brexit does not damage this advantage by putting up too many barriers to immigration and free movement across Europe.

This article by Pernille Rudlin originally appeared in Japanese in the Teikoku Databank News and also appears in Pernille Rudlin’s new book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” – available as a paperback and Kindle ebook on Amazon.

A second look at France

I have written previously about the difficulties of doing business in France, particularly the amount of bureaucracy that has to be dealt with. The new French government under Emmanuel Macron has been trying to overcome this image problem by promising to deregulate and lower taxes, particularly for banks. There have even been advertising campaigns promoting the charms of Paris in an attempt to lure banks from London post Brexit.

So far this does not seem to be working for Japanese banks and financial services companies, who are largely choosing either Frankfurt or Amsterdam for their post Brexit EU base and in any case look likely to keep their broader European or EMEA coordination functions in London.

Financial services companies need to be based near where their customers are, so it is not surprising Japanese banks would choose Germany or the Netherlands over France, and not move too much out of the UK for the time being, as there are far more large Japanese companies, regional headquarters, and also Japanese expatriate staff in the UK, Germany and the Netherlands than in France.

I found, through my researches, that the Japanese companies with substantial presence in France reflect France’s traditional strengths of food and drink, imaging technology and fashion and beauty, along with automotive companies, which have a dominant presence across the EMEA region.

The EU Japan trade agreement and partnership will boost trade in the food and automotive sectors so it may well be that more Japanese companies will be looking at France again and French companies will also be trying more actively to do business in Japan.

Nonetheless, I am very reluctant to have a registered company in France, even though it is becoming clear it will be difficult for us to provide training to our clients in France if I do not have a legal entity there.

My researches into Japanese companies in France also revealed that Sony has shrunk its French workforce considerably over the past few years and that reminded me of the incident where the Sony France CEO and HR director were held hostage overnight by the workers of a Sony factory that was being closed down.

France has a long tradition of striking, protest and direct confrontation between workers and employers and citizens and their government. This attitude also impacts the way they do business – the City of London Envoy to the EU described in a recent memo how shocked he was to discover in his meeting with Banque de France that the French wanted a hard, disruptive Brexit, even if it came at a cost to the EU overall, and saw the City of London as adversaries, not partners.

I am not at all surprised by this, nor was it particularly surprising to read that the French military, teachers and local authorities are starting to protest about Macron’s proposed cuts and deregulation. We can expect plenty of strikes, demonstrations and blockades in the months to come.

This article originally appeared in Japanese in the Teikoku Databank News on 9th August 2017 and also appears in Pernille Rudlin’s new book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” – available as a paperback and Kindle ebook on Amazon.

Hitachi Rail’s CEO Alistair Dormer on Brexit, speeding up and the need to speak simple English

Hitachi’s rail business is only 5% of the whole group’s turnover, but is growing rapidly and moving from being “double domestic” to a truly global business. Overseas sales are now 83% of turnover, having been 28% of the business in 2012.

Nikkei Business interviewed Alistair Dormer (subscription only, in Japanese), the CEO of Hitachi Rail who is also a Senior Vice President and Executive Officer of the Hitachi Group about his four years as CEO – at a time when the railway business is undergoing major change, with Siemens and Alstom joining forces in Europe for their rail business.

Dormer talks about the importance of being able to scale multilaterally through M&A, with the acquisition of Ansaldo Breda and other companies, which resulted in acquiring customers across 27 countries – 26% of business is now in the UK, 17% in Japan, 10% in Asia Pacific. Hitachi Rail is also moving, like every technology business, into “solutions” adding a services side, including communication technology, software development, signalling systems and operations.

Speed up every aspect

Dormer says the most important thing for Hitachi Rail as a Japanese company was to speed up every aspect. “It is a strength of Hitachi as with other Japanese companies that business advances on a consensus basis, carefully harmonizing in-house planning and business negotiations with partners. This leads to stable quality standards and organizational cohesion, but it is also a weakness in that it takes too much time when you face global competition. The leader needs to be able to make quick decisions and communicate rapidly.”

Of course this is even more difficult when communication and decisions have to be made across long distances such as between the UK and Japan. So Dormer decided the best way was to move people around, to raise the frequency and density of communication. So there has been substantial exchange of people between the factory in Japan and manufacturing bases in UK and Italy.

If there is a substantial geographical and time distance, then people prefer not to have meetings about trivial things, but these details can later become obstacles. So having more regular interaction is necessary. Hitachi Rail thererefore also has regular video confererence and Dormer himself visits sites, holding meetings with 50-80 people to exchange opinions.

Only use simple English

With English as the common language, Dormer (as a native Brit) instituted a rule that only simple English should be used. “When native English speakers are talking, they speed up. It should be easy to say, “I don’t understand, I can’t follow what you’re saying”, but it’s difficult to do this in a teleconference or an important meeting. So then the meeting ends inconclusively and you find out later that people did not understand. So not only should you use simple English, but also I put in a process to confirm understanding after the meeting. The productivity of our meetings has greatly improved as a result”

Hitachi Rail has also introduced common standards across all countries for HR reviews, cost, engineering performance etc. “Each country, the UK and Italy and Japan, have different cultures and ways of doing things, so we did not force conformity, but respected each others’ cultures while working to Hitachi’s values as the common standard.”

Brexit – nobody knows what the future will hold

With regard to Brexit, Dormer says he is repeatedly asked about it, but at the moment there has been no change. “Hitachi has good relations with the UK government. All we can do is continue to ask that companies like us who have their regional base in the UK can continue to access the EU market as seamlessly as possible. There is no choice but to believe this. A transition period is being discussed, so it’s possible the environment will not change for the foreseeable future. However it is still a shock to me on a personal level that the UK made such a decision – even when we knew there was nothing to gain from leaving the EU. There are many people in our offices who were born in the European Union outside the UK, and they are worried. My priority is to reassure them, but the only thing I can say is that nobody knows what the future will hold.”

Profitability of Japanese companies in the UK lags rest of EU, pessimistic about 2018

The lag between the UK’s growth rate and the rest of the world noted by Christine Lagarde today has also been felt by Japanese companies in the UK. According to the recently published JETRO survey on business conditions of Japanese companies in Europe, whereas the percentage of Japanese companies in the EU reporting profitability has increased year on year, reaching 75% overall this year, this breaks down into 71.6% for UK companies and 76.6% for other EU countries. This might only be a 5% gap, but business sentiment is also taking a hit – with the UK coming second from bottom amongst EU countries in terms of expectations of profit growth for 2017-8, beaten only by the Czech Republic.

As for Brexit contengency plans, of the 952 responses received, 245 were from UK based companies. Around 25% of these said they were currently reviewing or considering a review of their location in the UK. Of these, 60% are reviewing the relocation of their sales functions, and 50% looking to review the location of their regional headquarters functions and 20% are looking to relocate manufacturing. Over 80% said they were preparing or considering preparing to partly relocate to another EU country, and 20% were looking to completely relocate. The top 2 countries cited as potential relocation destinations were Germany (23 responses) and the Netherlands (6 responses).

Nearly half of UK based Japanese companies were expecting a negative impact on their business from Brexit, citing customs tariffs, securing human resources and changes to regulations and legislation as their main areas of concern.

On a more positive note, the new Economic Partnership Agreement between Japan and the EU is seen as being a major advantage for their business by over half the respondents, particularly for companies based in Central and Eastern Europe. Even UK based Japanese companies did not see as much merit in a UK-Japan EPA however. The most selected reason for welcoming the EU-Japan EPA was “tariff reduction or abolition for imports from Japan” – which is mostly in the automotive sector, so I guess this means more imports to Central and Eastern Europe of Japanese cars and automotive components can be expected.

The biggest operational challenge was seen as securing human resources – for more than half of the companies based in Germany, the UK, the Netherlands and Central and Eastern Europe, again echoing recent news about labour shortages in the UK – both in terms of skills and incoming EU migration. Labour shortages outstripped last year’s biggest operational challenge of “European political and social conditions” – but the latter challenge did not fade away and in fact concerns strengthened slightly, thanks to worries in Spain regarding Catalonian independence, and in the UK regarding Brexit negotiations.

Over half of respondents expected to expand their business, over 70% in the case of Japanese companies in Italy and Poland. So, happy days if you’re an automotive sector worker in Poland.

Category: Brexit