Category: Brexit

Poland, migration and the future of the EU

It has just been announced that Polish immigrants now represent the largest group of foreigners living in the UK. There were around 831,000 Polish born residents in the UK in 2015, overtaking Indian born residents.  This represents a ¾ million increase on 2004 when Poland joined the EU, showing the scale and speed of the increase in immigrants from Eastern Europe – one of the root causes of the British vote to leave the EU.

Poland’s connections to the UK go back further than this, however.  A large group of Poles settled in the UK after WWII, and were welcomed because of the well-known heroism of Polish pilots who flew in the Battle of Britain.

Trading links with Poland date back even further, to medieval times and the Hanseatic League of merchants who did business with each other from Russia through the Baltics to Germany, the Low Countries and into the UK.

But it would be wrong to think of this as a European Union style alliance of nation states.  League membership was by city.  Many of the European countries as we know them now did not exist then. Member cities such as Gdansk or the Hanse capital of Luebeck were semi-autonomous, or controlled by the Holy Roman Empire, or Prussia, or Denmark.  And of course more recently the eastern part was under the domain of Soviet communism.

If you visit Gdansk now, the old part of the city is in fact a beautiful, partly imaginary, post-war reconstruction of a pre-Germanic past.  The actual old city had been obliterated by WWII.  Also worth a visit is the European Solidarity Centre which commemorates the Gdansk shipyard union Solidarnosc and asserts that its strike in 1980/1 started the process which culminated in the Berlin Wall coming down in 1989.

British people who are sceptical about the European Union say it should only be about trade, and that they want control back of UK borders, money and laws.  For other EU members, the EU was a way of regaining control of their lives, by ensuring peace and democracy. This aim was not so appealing to the UK, who had no such recent experience of ground wars, dictatorships or being occupied by other countries.

Many people and political leaders in other EU member countries – including Poland – are beginning to say the EU represents a threat to their national sovereignty too. Border controls are being reinstated and there is a strong possibility eventually the EU itself will disintegrate.

Polish residents in the UK are worrying what will happen to them post Brexit and the millions of British who live elsewhere in the EU are also nervous for their future.

Many of the people working for Japanese companies in the EU are migrants, so I think the best thing Japanese companies can do right now is reassure them that they will look after them, and if necessary offer relocation to subsidiaries in other countries, including Japan.

This article was originally published in Japanese in the Teikoku Databank News on 11th October 2016 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.

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Brexit accentuates structural trends and cultural differences in Europe

Whatever the outcome of the Brexit negotiations, there are two conclusions we can already draw from what has happened so far in terms of how Japanese businesses may need to respond.  One is that structural trends in business which were already apparent in Europe will be accelerated and the second is that differences in negotiating approaches in Europe have not disappeared, despite nearly 25 years of the European Union and single market.

In terms of organisational structure, there is a strange mix of physical disintegration and integration on a virtual level.  Currently, over half of the biggest Japanese companies in Europe have their regional headquarters in the UK.  This is because of the depth of financial and other support services that are available in the UK, the free movement of people that enables hiring many different nationalities in the UK and the ease of doing business in the English language.  The latter advantage will not disappear with Brexit of course, but if the UK does not keep its EU financial ‘passport’, it’s possible a lot of the financial and other services will shift to Amsterdam or Frankfurt.  Brexit may also bring an end to the free movement of people between the EU and the UK.

In any case, many of the back office, functional, coordinating jobs were already moving out of the UK.  Cheaper, English speaking, well-educated employees can be found elsewhere in the EU.  Larger Japanese companies are already developing a pan-European management structure, where teams are scattered across several countries.  This is proving very challenging for Japanese employees who are more accustomed to a team working physically together, seated in a cluster of desks.  Japanese companies will have to put processes in place to enable discussions and decisions to be made via remote communications and maintain a generous budget for travel.

The second conclusion is that Europe is still split between the pragmatists and the principles and rules based groups.  The pragmatists, often traditional trading nations such as the UK, Netherlands and Denmark, tend to negotiate step by step, concession by concession, whereas Japanese companies prefer to acquire all information and know all the risks before making one big decision.  Principles and rules based countries such as France or Germany clash with the pragmatists because they refuse to make concessions on what they would consider key principles (such as the free movement of people) or deviate from the rules which have been set in place.

This is why the European Union has become bogged down so often in processes and discussions and seems remote, bureaucratic and corrupt to ordinary citizens.  Many Europeans – particularly the British – don’t understand or are not attracted to a European vision for the future. There are two further lessons to be learnt from this for business.  One is that, no matter what happens in Europe, the British provide an important counterbalance to the French and the Germans in a management team, if you want pragmatic solutions to problems.  The second is that management must not become so inward looking that it fails to communicate its vision to the rest of the employees.

This article can be found in Pernille Rudlin’s recent book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” available as a paperback and Kindle ebook on  Amazon.

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Why has Japan not had a populist uprising

John Plender sought in a recent Financial Times article to answer the question of why Japan has not had a populist uprising, as so much of the Western world has.   One of the possible factors he mentions – the lack of much immigration – was of course immediately taken up in the comments section by various Brexit supporters.

Weeding through the comments and looking at those from people who are actually Japanese or have lived or live in Japan gave some further possible answers and also prompted me to add a few of my own:

Japan already has a nationalist, nativist, populist government

Shinzo Abe – on course to be the longest serving Prime Minister in post-war Japan – is openly nationalist, elected on a ticket of making Japan not “great” again but “normal” – not just to get the economy growing, but also as in being able to defend itself.  He was the first foreign leader to visit Trump after his election.

On the immigration front however, his government has quietly been making all kinds of exceptions to the rules in allowing immigration, in particular sectors that are suffering labour shortages, such as the care sector (elderly and childcare).  More Asian immigrants, on company traineeships, have been arriving – although there has been controversy over whether they are just cheap, exploited, temporary labour in disguise.

Different histories of immigration

It is true that Japan has not had any large scale immigration, for more than 2000 years.  Some Chinese and Korean immigration happened before and during WWII and this remains controversial to this day as much of it was forced labour.  Many ethnic Chinese and Koreans have not taken up Japanese nationality.  Koreans in particular have been the targets of occasional abuse from far right groups.

But to see this as a lesson for the UK would be a failure to see the utterly different starting points for the two countries.  98% of the Japanese population is Japanese.  Whereas across Europe we have been migrating around each other’s countries for more than 3000 years, and more recently large scale migrations from former colonies and war zones – most countries in Europe have over 10% of the population who are not “native”.  If you want to go back to ethnically homogenous nations, then some elaborate and intricate ethnic cleansing will have to happen.  I for one will be suspect, as by German definitions, I am an immigrant as my mother was not born in the UK.

The cultural argument

A subtle point was made in one of the FT comments, lost on the Brexiteers perhaps, that because Japan does not have a large immigrant population, immigrants cannot be blamed by Japanese people for any woes they may have.  Indeed, one of the strongest cultural characteristics of Japanese people is their urge for self improvement, to the point of blaming themselves or pointing to other’s personal failings, rather than blaming the economy or politicians or the “elite”.

The economic argument – why Donald Trump might be right

Although income inequality is rising in Japan (and surveys show it is the number one concern for Japanese people – whereas in the UK it was immigration and for the US it was terrorism), unemployment remains low.  The workforce is shrinking and the population is ageing.  Japan leads the world in robotics yet has retained a strong manufacturing base.  Real wages have not increase much, rather decreased over the past few decades.  The rate of post retirement employment is high.

Initially I was repelled by the bullying way Trump seemed to have forced Ford to rethink its plans to expand manufacturing in Mexico and instead increase production in its Michigan factory, but as another comment in the Financial Times points out, these decisions are hotly contested inside multinationals too.  Many managers would rather keep production in their home base, or near the target market if there is sufficient incentive or momentum to do so.  The success of Nissan and Toyota factories in the UK shows that the UK could have kept more of its manufacturing base, if we had the management capability and will to do so.  Robotics create jobs too, if companies are prepared to invest.

The economic argument part 2 – why Theresa May might be right

One of the factors behind Japan’s relative economic stability and a lack of economic and social disenfranchisement amongst the Japanese “working class” has been the lifetime employment system that still prevails in the larger Japanese companies.  In exchange for being multi-skilled generalists, willing to relocate where necessary, Japanese companies offered security of employment right through to retirement and often beyond.

It is generally felt this system – put in place after WWII to deal with labour shortages – has reached the natural end of its life.  The number of workers on short term, insecure contracts has been rising steadily.  However, I have felt for many years now that it should not be thrown out wholesale in favour of Anglo Saxon shareholder value based capitalism, and despite many adjustments, it still persists.

The downsides of the system have been that while it works in times of economic growth, in times of low growth, when you might want to shrink middle to senior management cohorts, or the shopfloor workforce, you can’t and end up with a large number of expensive, underemployed managers and workers, which are a drain on morale, barriers to change and of course, costly.

Secondly, because people are secure in their jobs, and generalists, there is a lack of clarity about expectations and performance management.  Loyalty is rewarded and pay is seniority based rather than performance based.  Consequently many Japanese employees have found themselves proving their dedication by working long hours, rather than trying to be as productive as possible in a normal working day.  This has resulted in it being almost impossible to have a two career family, as it is just not practical to have children and have both working until late at night every day, however good the childcare provision is.  Furthermore, the mental stress caused is clear, as illustrated by the recent suicide of an overworked graduate recruit at Dentsu, the Japanese advertising giant.

Thirdly, Japanese corporate governance has been poor, as the company executives are mostly lifetimers who cover up for each other, and don’t realise when the company is behaving perversely, because they have no experience of other corporate cultures.

The Japanese government response to these pressures is in part to legislate, but mainly to put pressure on Japanese companies themselves to reduce overtime, hire and promote more women and improve their corporate governance.

The view which still persists in Japan is that companies themselves have obligations to society – both to the people they hire and to contribute in terms of taxes and corporate social responsibility and environmental sustainability.

Although I was not happy to be accused of being a “citizen of nowhere” by Theresa May, looking at the context of what she was saying – which was in part about the social obligations global businesspeople have – and the clumsy suggestion from Amber Rudd that companies should tally up their non-native employees, I acknowledge that there is a point to be made that companies in the UK need to take more responsibility for who they hire – British and non-British.

The education argument

The UK’s economy is now 80% services based, but this should not mean that companies should get away with zero hour contracts and pressurising British workers with the threat of using cheaper temporary labour from the EU. They should indeed be offering apprenticeships and job security but also multi-skilling opportunities to counterbalance that.  They should help and expect their workers to relocate or retrain them (or as in Japanese factories, spend time on cleaning and maintenance if production has to be ratcheted down) rather than simply shut down and fire.

We need better managers and companies willing to invest in training and technology, but the UK also needs a better educated workforce to begin with.  That’s where government does have a role, as all the evidence shows early intervention in children’s education is the most effective in reducing later inequalities.  And that’s probably the final factor in Japan’s lack of a populist uprising – a highly skilled, highly educated workforce.

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Overcoming British negativity

According to a FT/ICSA Boardroom Bellwether poll in 2015, only 7% of UK companies were willing to speak out in favour of the UK staying in the European Union, even though two thirds believed leaving the EU would be damaging for them.  Of course the Greek crisis made it difficult to say anything positive about Europe, but I also think the British have a strong preference for talking negatively rather than positively, when asked to make a commitment to something, particularly if they feel there are plenty of downsides to getting involved.

Then, like the British professor of economics I met recently – who not only forecast the 2008 Lehman shock but also advised the UK against joining the euro – we can say, smugly, “I told you so”, when things go wrong.  This apparent wisdom does not, however, take into account what might have happened if we British had got involved.  Maybe the Eurozone would have been better structured and managed, or a more balanced approach taken to Greece’s membership conditions and current difficulties if the UK had participated, not only to point out the problems, but find solutions.

I’ve noticed when working in European teams that British pragmatism acts as a good counterbalance to French rhetoric and German methodological rigour.  Both Japanese and American managers are united however, in finding the British urge to be upfront about all the likely problems and obstacles, without suggesting any solutions, very frustrating.

Americans want to “just do it” and are not interested in the past, whereas the British look to history and their own experience, so as not to repeat mistakes.  A Japanese manager who had become used to the American management style said to me recently “how do I motivate British staff?  In the US, my team will do as I ask, because I can promise them a bonus or threaten to fire them if they don’t do it, but the British team don’t seem to be so motivated by money, and they know it’s a lot harder to fire them here than in the US.”

Some British employees are of course motivated by money, particularly in the financial sector, but for most British workers the motivation is more around self-fulfilment, a chance to put their expertise and experience into practice, to make a difference.  So if they believe that they will not be able to do something, they won’t even try, as they know how demotivating and humiliating failure will be.

I discussed with the Japanese manager the concept of “jinji wo tsukushite, tenmei wo matsu” (do all that is humanly possible, then wait for the heavens to decide) – that Japanese also have a sense of fatalism, but that does not preclude doing whatever you can to make something work.  I described this conversation to a senior British executive, and she started smiling ruefully.  It turned out she had insisted to a Japanese boss that a particular course of action was not feasible.  He had persuaded her (I expect through appealing to her expertise and experience) and so she eventually went ahead, and to her surprise, she succeeded.

This article was originally published in Japanese in the Teikoku Bank News on 12 August 2015 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.

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The story of Japanese companies in the UK continues to be the story of the UK economy overall in 2016

The number of people employed in the UK by the biggest Japanese companies in the UK rose by around 1% to 76,103 in 2016 – representing over half of the 140,000 or so the Japanese Embassy to the UK estimates are employed overall in the UK by Japanese companies.

Just as 80% of the UK economy is services, so too with Japanese companies in the UK.  Although Nissan, Toyota and Honda attract most of the headlines thanks to Brexit – understandably as they represent around 15,000 of the 76,000 jobs – the vast majority of the rest are in the services sector.

Even Sony has only one small factory left in the UK, making high end audio visual equipment and employing less than 100 people.  The rest of 3000 or so jobs are in Sony Interactive Entertainment, music and film & TV or in marketing.

Fujitsu is still the biggest Japanese employer in the UK but the gap with Nissan at #2 is narrowing, as Fujitsu have reduced their headcount by over 15% in the past year or so.  Although Fujitsu is still seen as an IT & telecomms manufacturer in Japan, in the UK it is largely an IT services company.

Trading company Itochu may be a surprise at #3, but this is largely due to its ownership of tyre fitting chain KwikFit.

The Hitachi group of companies (#7) has grown by 17% over the year – thanks in part to expansion at Hitachi Rail and Horizon Nuclear Power – but the bulk of its employees continue to be at consumer loans company Hitachi Capital.

Dentsu Aegis Network, part of the Dentsu advertising agency, has continued to acquire across the UK and Europe, resulting in a 21% increase in headcount.  Other notable increases thanks to acquisitions include Mitsui Sumitomo & Aioi Nissay Dowa acquiring Lloyds underwriters Amlin and of course Softbank, a new entrant to the top 30, with its acquisition of ARM.

The story of Japanese companies in the UK continues to be the story of the UK economy overall – a trend which will no doubt continue in 2017, with Japanese banks already strengthening and relocating to their other European Union based operations, or threatening to do so.

Customised reports, profiles and other research on the Top 30 largest Japanese companies in Europe, Middle East and Africa are available – please contact pernilledotrudlinatrudlinconsultingdotcom for further details.

 

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Why Nissan matters more to the UK than the UK matters to Nissan

It will be interesting to see how far Ghosn’s well documented ruthlessness and unsentimentality which he demonstrated in turning around Nissan in Japan will come to the fore in next month’s decision about where to invest for the new Qashqai, because really, to Nissan, the UK is not as important as a market or a manufacturing base as the UK might like to think.  Plus, Ghosn has now got Mitsubishi Motors to worry about as well.

Here’s some figures to illustrate:

  • UK based employees represent around 5% of Nissan’s global workforce
  • UK based production represents around 10% of Nissan’s global production and around 70% of its European production (the rest is manufactured in Spain and Russia).
  • Car sales in the UK market represent around 3% of Nissan’s total units sold worldwide. Europe & Russia represent around 15% of total units sold.  So the UK market is about 20% of Nissan’s Europe & Russia regional sales.

From the UK perspective:

  • Nissan is the third largest Japanese employer in the UK, with around 8000 employees – not only in the Sunderland factory but also several hundred working in design at Nissan Technical Centre Europe in Cranfield (ultimately registered in Belgium so that should make a quick getaway easier) and a design centre in London
  • Nissan is the 8th largest Japanese employer in Europe – around 16,000 employees in total – so around half are in the UK.  However the European regional headquarters is in Switzerland, to which the UK factory sells all its production. The operational headquarters and holding company for the rest of Europe is based in France.
  • Nissan Sunderland’s plant accounts for nearly 1/3 of the UK’s car production.  80% of it is ultimately exported, 76% to Europe.

And of course there’s the supply chain and the jobs it provides – the UK car industry likes to say it supports around 800,000 jobs.

Calsonic Kansei is a supplier to Nissan, and is also in our Top 30 Japanese companies in the UK, employing over 1300 people – with factories in Llanelli and Sunderland – and Spain.  Nissan has a substantial stake in Calsonic Kansei, but the cosy mutually supportive supply chains of 20 years’ ago have long disappeared, thanks in part to Ghosn.  So it’s not hard to see Calsonic Kansei and others responding as quickly as they can to any shifts in location of demand.

It’s legendary in Japan that when a Nissan employee went to Ghosn to beg him not to axe one of the suppliers totally dependent on Nissan because it was headed up by a member of their own family, Ghosn responded “which is it to be?  That Nissan collapses or your uncle’s company collapses?”

For how complex and tough life is these days in the global automotive supply chain, this comment in the Financial Times recently was very revealing:

“We manufacture part of one component for the Nissan Qashqai. We purchase raw materials from Taiwan, we manufacture in the UK in a Japanese owned factory. Our customer is in Germany, where our product is bonded together with products from other countries. Our customer’s customer is in France, where the bonded component is integrated into a car component. The component is shipped to Sunderland and becomes a part of a “British” car.

How Mrs May and her merry band are going to sort this mess out is beyond me, and I suspect beyond them.

The development time lines for the most basic of automotive components is two to three years, which means that we are already “post Brexit” for new business development. How do I persuade customers to invest in new product development with us when nobody has a clue on what basis I might sell eventually sell my product to them, and given rules of origin, in some cases on what basis they might sell their product to their customer. We have good relationships with our customers, but at the end of the day they are running their business for their benefit and may well decide its just not worth the uncertainty and risk.”

Carlos Ghosn is “reassured” by Theresa May saying that the British government would be “extremely cautious” in maintaining  Nissan’s Sunderland UK factory’s competitiveness.  But he may nonetheless think some rebalancing is in order.

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What steps we will take next – Japan’s insurance, automotive, aerospace post Brexit

The Nikkei Business magazine has started a series called “Brexit shock”, where they ask various leading executives with business interests in Europe what they think the impact will be.  This week they’ve interviewed Tsuyoshi Nagano, CEO of Tokio Marine Holdings (property and casualty insurance) and Yoshihisa Kainuma, President of Minebea (another one of those Japanese secret successes with dominant shares in vital but unglamorous sectors such as ball bearings and pivot assemblies)

Tokio Marine acquired Kiln, a Lloyds underwriter in 2007 and the US company HCC Insurance, which also has a presence in the UK.  “The UK has developed as the centre of our European business” says Nagano.  HCC and Kiln put a plan together to grab more European business.  Both companies have set up internal teams to review our response. “One area we have to check immediately is what will happen to our insurance licenses.  Up until now, if we qualified in the UK then we could do business anywhere in Europe.  With Brexit, we may have to gain licenses in each EU country or increase our capital per branch or subsidiary.  We think the direct impact on our performance will be small.  Our earnings from the UK and Europe only represent around 3% of our total sales.  However, because it is unclear how Brexit will roll out, there are many unclear areas for our future development.  If our clients, who are mainly Japanese companies, start moving their operations and expatriates from the UK to other countries, then absolutely we will have to follow them. This is just a possibility, but for example HCC has an operation in Spain, currently a branch of London – this could be changed into an incorporated subsidiary to coordinate our European Union business.  Kiln’s headquarters are in London, but we could strengthen their operations in Germany or France.”

“Of most concern to us is the impact on life insurance business.  Yields on 30 year bonds are going below 0.05%.  Brexit has also pushed Japan into negative interest rates.  If a high yen continues, and more relatively safe Japanese bonds are bought, then interest rates will go even lower, with impacts on the Japanese economy.

“I also wonder if this does not represent the collapse of the postwar UK/US centered liberal global system.  Our biggest concern is the worst case of unpredictable political and economic turmoil that may follow”

Minebea employs around 1500-2000 people in Europe, with 1 factory in Lincoln, UK, 3 factories in Germany, 1 factory in Slovakia and 1 in Czech Republic and sales offices in Germany, Italy, France and Austria.

Kainuma comments that he thought up until now that the UK had been good at integrating immigrants – he visits UK regularly and had been unaware that there were resentments around immigration among the lower socio-economic groups.  He didn’t think it would end in Brexit.  “However the UK is the mother of democracy, so if the people will it, it can make sudden changes.  So I am feeling optimistic.”

“Direct impacts will be felt by the UK’s own aerospace parts manufacturers.  We are currently selling into Airbus, but as the pound has gone down, we have actually become more competitive.”

“What we are concerned about is whether there will be any tariffs imposed once the UK leaves the EU, but I don’t expect this for aerospace.  The EU is in fierce competition with Boeing.  So they need to maintain a stable framework for procuring parts cheaply.  As for household electrical goods, the UK hardly has any manufacturing and most products are made in Eastern Europe.  So it may be that sales in the UK will slacken because of the cheap pound.”

“As for the automotive industry – EU manufacturers are competing fiercely amongst themselves, so I think it is quite likely that tariffs will be imposed both on parts and on vehicles.  This will have an impact on European car manufacturers’ export strategies.  There may be some influence on vehicle sales into the UK for some brands, but generally the car industry is in good shape in Europe, so that will be compensated for by other manufacturers.”

“Minebea is supplying to car manufacturers around the world, so overall we can hedge and I don’t think there will be a big impact on overall orders.  However we need to keep an eye on UK domestic demand and the European economy overall. Even though our share price decreased when the Brexit vote was announced, I think this was an overreaction.”Save

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It’s not about trading in silk and tea any more

Interesting comment from Brussels based trade lawyer and economist Hosuk Lee-Makiyama on any future Japan-UK trade negotiations, in oral evidence to the Treasure Committee on the future of the UK’s economic relationship with the European Union (July 13th 2016):

“Japan is quite an exception from this [the UK having interests that are sensitive to the counterpart country], because the outstanding issues in the EU-Japan negotiations are basically products where Europe is asking for TPP-plus concessions. Europe would like to have more from Japan than what Japan has given to the United States, Australia and New Zealand, because our offensive interest in agriculture towards the Japanese consumer market is different from the ones for the United States. The United States is interested in exporting rice, made in California, to Japan. We do not export rice. Our interests are primarily in dairy, high-quality cheeses and wines, pasta, certain types of meat. It is not an offensive interest of the UK. We could probably sign a deal with Japan tomorrow. However, the question is whether Japan would be interested in doing so, because if you look at the Japanese firms—and this applies to not only Japan but most of the third country economies— they have invested in the UK after 1973 on a specific guarantee that the UK will be a part of the single market. I am not really sure that the rationale exists, although the defensive interests are less.”

Confirms my previous posts that 1) agricultural trade is hugely sensitive for Japan (and in that respect, the UK has less to worry about in negotiations with Japan) 2) What’s important to UK-Japan economic relations is the direct investment that has been made by Japanese companies into the UK over the past 40 years on the premise that the UK was part of the Single Market, not “offensive vs defensive” mercantilist bilateral dealing in modern day counterparts of silk, wool and tea.

I saw Dominic Raab, pro Brexit Tory MP, claiming in the Times that the UK could offer Japan a better deal to export Mazdas to the UK outside the EU because they could be tariff-free rather than the current 10% the EU imposes on cars.  It’s telling that he chose Mazda of course, because it is the only Top 5 Japanese car company that does not have a factory in the European Union or Turkey (which is inside the EU customs union).  So as a bargaining chip, tariff free cars does not really present much of an incentive to Japan to open up its public procurement, or reduce non-tariff trade barriers such as pharmaceuticals regulations, in return.

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Japanese negotiation – lessons for Brexiting UK

Maybe in these highly globalised times it is OK to rock up  to any country with a fantastic product or service, good command of English and a well thumbed copy of Getting to Yes, but I somehow doubt it, especially when it comes to negotiating at government level.

I attended a talk by the new Japanese Ambassador to the UK, H.E. Mr Koji Tsuruoka earlier this week.  He gave a detailed explanation of his most recent role, as chief negotiator in the Trans Pacific Partnership (TPP, not to be confused with TTIP) talks.  These started in 2010 between the 8 countries of New Zealand, Singapore, Chile, Brunei, USA, Australia, Peru and Vietnam and were finally concluded (but not yet ratified by any participant countries) in February 2016 between 12 countries, Japan having joined in 2013, along with Malaysia (2011) and Mexico and Canada (2012).

The 12 countries represent 40% of world GDP (US and Japan being the main) and 10% of the world’s population.  A consequence of the treaty will be the percentage of Japan’s trade covered by Free Trade Agreements increasing from 22.3% to 37.2% (higher than the EU).  Areas covered were not just tariffs but also liberalisation of services and investment, Intellectual Property, electronic commerce and government sector business.

I took three lessons from Tsuruoka’s talk:

1. Be clear from the start about non-negotiables

For Japan the most contentious area was agricultural products.  Although most participating countries reached nearly 100% removal of tariffs on agricultural products, Japan refused to liberalise its “Five Sacred Product Categories” of rice, wheat, beef and pork, dairy products, and sugar, so only reached around 85%. Tsuruoka said Japan was able to do this, despite coming late to the negotiations, by saying loudly and clearly, from the beginning, that these were “non negotiable”.

2. Polite persistence

A team of 300-400 Japanese negotiators then visited each country repeatedly, patiently going through item by item each country’s individual requests.  Japan showed that it would not give up – after each defeat, it would pick itself up and start again, but always politely and respectfully.

3. Sincerity

Tsuruoka said being “seijitsu” – sincere or honest, was the key point.  He also mentioned humility and “kenmei” – wisdom or prudence – as being specifically Japanese characteristics which came in useful.

It’s going to take time

What are the lessons for the UK as it faces rounds of trade negotiations?  Firstly, multilateral free trade agreements take time.  TPP took 6 years, and  has still not been ratified by any country.  This is a problem for post Brexit negotiations, not only because of the uncertainty it would cause for investors in the UK in the meantime but also because global markets are so fast moving.  Agreements that would have made sense years ago for specific products or services are outdated by the time they are ratified.

Get comfortable with uncertainty

It’s sometimes said that the traditional Japanese “awase” (adjusting style) of negotiation is better in this situation than the more American “erabi” (selecting style) – where you can adjust to an ever changing environment rather than turn up with a game plan, and expect both sides to make choices leading to a desired goal.  But this may not be acceptable if you are trying to avoid uncertainty and ambiguity. You can already spot American trade negotiators advising that the UK needs to put all its cards on the table – tough when the UK still isn’t sure what hand it has been dealt – by itself or by the EU.

Bilateral is better?

So would it be better to go for quicker bilateral agreements?  That seems to be the wish of the British politicians heading up negotiations – but would any counterpart countries be willing to give up time to do this, when they are still negotiating these multilateral agreements – Japan-EU and TTIP most obviously springing to mind – and no clarity on what the UK will agree with the EU?  And would the UK really be able to get any better a bilateral deal than these multilateral deals anyway?

Inexperience vs opportunity

Secondly – not an original point I know – but think for a minute about how a fresh, new, bright-eyed and bushy tailed but completely inexperienced bunch of Brits would fare, coming up against 300-400 experienced Japanese trade negotiators who already know what their non-negotiables are and are masters of “polite persistence”.

As to why the UK should care about Japan in terms of Brexit and trade negotiations, and vice versa, 16% of Japanese exports to the EU go to the UK, and 45% of its investment in the EU is in the UK.  The UK’s biggest export to Japan is services – the 4th biggest UK balance of trade surplus after EU, USA  and Switzerland.  Further evidence, I would argue, that this is not going to be a negotiation about tariffs on wool and tea, rather UK’s role within Europe as a service provider to Japanese companies invested there.

Tsuruoka was kind enough to say that he agrees that the UK needs time to prepare before triggering Article 50, and that it would be irresponsible to trigger it “just to see what happens”.  He also said that Japanese companies should make constructive proposals, and not just be negative and complain about Brexit.  The other Japanese people on my table did indeed mention how surprised they were by their British colleagues’ ability to bounce back quickly, see the positive side of Brexit and start looking for business opportunities.  My response was “what other choice do we have?”

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Putting the Softbank/ARM deal in context – an exception in so many ways, is also not

To understand the sheer scale of the proposed £24bn Softbank acquisition of UK based chip designer ARM –   we estimate it would increase  investment by Japanese companies in the  UK by over a half of the current cumulative total.  Britain benefits more from Japanese investment than any other country in the world apart from the US and this deal would certainly maintain that claim, despite Brexit.  By the end of 2014, the total value of Japanese investment in the UK was £38bn – to which should be added Mitsui Sumitomo Insurance’s acquisition of Amlin for £3.5bn in 2015.

There have been plenty of other acquisitions these past 15 years of UK iconic companies by Japanese companies, such as Nippon Sheet Glass acquiring Pilkington for £2.2bn in 2006 (interesting to note that ARM’s chairman is Stuart Chambers, who was CEO of Pilkington when NSG acquired it).  The number of acquisitions probably accounts for the discrepancy between the Japanese Ministry of Foreign Affairs estimate of the number of Japanese companies in the UK of 879 – rather lower than that of the Teikoku Databank figure of 1380 noted previously.   Of these, 470 are classified as incorporated (as opposed to branch offices) and many, as we pointed out previously, cover the whole European region.  As well as concerns about losing “financial passporting” and the impact of tariffs on supply chains, a further 158 are R&D or design centres, which may well benefit from EU funds – which may mean relocating should those funds no longer be available post-Brexit.

JETRO, the Japan External Trade Relations Organisation surveyed 54 Japanese companies in the UK just before the EU referendum vote.  64.8% saw Brexit as having a negative impact on their business, with “Don’t know” 25.9% and “no impact” 9.3%.  Several responded that they were looking at relocating to Germany, the Netherlands or Ireland.  As JETRO points out, all three countries have strong economic links to the UK, so relocation there will not avoid being influenced by what happens to the UK and how Brexit impacts the EU.

The Japanese Chamber of Commerce & Industry in the UK has compiled the UK-Japan trade statistics for the past 15 years and it is noticeable that there is no clear trend in imports of goods from Japan – fluctuating between a high of £9bn in 2001 and a low of £6.7bn in 2009, and currently at £6.9bn for 2015.  There has been an upward trend in UK export of goods to Japan, from around £3.5bn 15 years’ ago to over £4.5bn in recent years.  A £3bn or so trade surplus in Japan’s favour nonetheless persists.  But it is only literally half the story,  The UK’s exports to Japan are actually around £9.9bn as of 2012 according to the UKTI.  The other half are exports of services, primarily financial, but also legal, advertising, media, consulting etc.

The Japan-EU Free Trade Agreement is supposed to be finalised by the end of the year, and apparently may be worth £5bn a year to the UK.  It will mean the elimination of the vast majority of trade tariffs, boosting imports and exports in agriculture, car manufacturing and clothing. There are still issues to be resolved on auto and agricultural tariffs as well as government procurement.  And of course, how it will apply to the UK once it leaves the EU is a big unknown.

Looking at the development of Japanese companies in the UK over the past 40 years, apart from the big automotive manufacturers, it is clear that, as I wrote in my history of Mitsubishi Corporation, the UK has become a coordination and financing/marketing hub for Japanese companies in the region.  Most of the famous Japanese names, such as Sony, no longer have mass production in the UK.  Sony has a manufacturing centre in Wales, but it develops and produces low volume professional audio visual equipment.  Even in the automotive sector, if you look closely at parts manufacturers such as Sumitomo Electric Wiring, which acquired Lucas SEI in 1999, or Yazaki, their operations in the UK are mostly development, design and engineering, or regional coordination.  Their UK factories were shut down and production moved east or to North Africa years ago.

So Softbank’s acquisition of ARM, an exception in so many ways, is also not.  It is buying into the UK’s design and technology expertise, as well as multinational marketing and management skills. Forty plus years of trade in the EU and the development of the Single Market has done exactly what the textbooks would predict, which is to make it clear where the UK’s strengths are – design, engineering, finance, marketing, legal and other services and some high end manufacturing.  The revival of mass car production in the UK is because of our membership of the Single Market.  The UK on its own is not enough to sustain a car industry (see the paragraph in my blog post here regarding the 100 million market theory).

The Japan-EU FTA is meant to cover services as well as products but the EU single market in services has not progressed for a while and it looks like the Transatlantic Trade and Investment Partnership, which would cover EU-USA services, is faltering. It does seem like the UK is going to end up spending enormous amounts of its resources and energy on unpicking 40 years of trade arrangements which have already had a profound impact on its economy, at a time when those resources would have been better devoted to developing agreements which would help the UK play to its strengths.

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