Brexit

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.

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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.

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.

Hard Brexit alternatives for Japanese service sector companies in the UK

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 but 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. However, 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 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 Japanese 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.

This article by Pernille Rudlin originally appeared in Japanese in the Teikoku Databank News August 8 2018 and also appears in “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” – available as a paperback and Kindle ebook on Amazon.

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.

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.

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.

Category: Brexit