Japanese business in Europe

No sacred cows for NEC’s President Niino

I was reminiscing a couple of days’ ago with a Japanese business person about how in the 1990s there was a Silicon Glen in Scotland hosting many Japanese electronics and semiconductor factories, including NEC’s semiconductor plant in Livingston. After the IT bubble burst in 2000, most of these plants disappeared, including NEC’s. Silicon Glen has remade itself, focusing more on software and semiconductor design and development. NEC has also reinvigorated its presence in the UK with the acquisition of Northgate Public Services in 2018.

NEC is not out of the woods yet, however. In a tough interview in the Nikkei Business, President Niino seems willing to slaughter several sacred cows and even commits to taking responsibility (presumably by resigning) if his revival plan to FY 2020 does not succeed.

He said he was open to merging with rival Fujitsu, even if it meant the NEC name disappeared. I certainly recognised from his descriptions some similar characteristics in the way they operate.

NEC, like Fujitsu, was part of the so-called Den Den Family, where stable, dependable business came from government contracts from what is now NTT. “Customers would make very stringent requests of us and we would always try to respond with the best possible technical solutions, and deliver 100%. This is an important quality, but you cannot survive globally just on this”.

Niino thinks there were many reasons for the halving of NEC’s turnover since 2000. They had relied on introducing new technology in areas such as semiconductors, PCs and mobile phones, but once these became volume businesses with many newcomers, spending far more on R&D, NEC was no longer able to compete.

Niino is focusing on profit targets rather than turnover and sees NEC’s future strength as being in “safer cities” – using AI and software development rather than hardware. Clearly China will be a major competitor in this, but I guess NEC and other Japanese suppliers will be preferred by many who might view China as a threat.

Niino has brought in an HR director from Microsoft Japan to shake up the HR system. He has appointed 31 “change agents” and made evaluations more visible, and the distinction between specialists and managers more clear. Corporate officers on the board have all been asked to step down temporarily and then are being rehired on 1 year contracts. “I won’t be firing them if they don’t meet targets within one year, but if they miss two years’ running, it might be that they are better off working outside NEC”. As Niino is himself a Corporate Officer, no wonder he has to commit to taking personal responsibility for any failure too.

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Brexit and Japanese jobs in the UK – growing by acquisition or “new” jobs?

Those looking for “despite Brexit” good news may be reassured that employment in the UK by the biggest Japanese companies has grown by 22% since 2014/5, right in line with the growth in Japanese jobs across Europe, Middle East and Africa (EMEA). About a quarter of the 750,000 people we estimate work for Japanese companies in the region are working in the UK, and so far there is no obvious divergence between the UK and the rest of EMEA in terms of overall job growth.

Big ticket acquisitions are the main driver of Japanese growth in the UK

But as we pointed out in previous posts looking at the trends across Europe, a distinction needs to be made between “new jobs” created in EMEA by Japanese greenfield investment, and investments which are acquisitions of existing jobs. Eastern Europe is the beneficiary of the former, particularly for the automotive sector, whereas the UK has been the target of the latter with big ticket acquisitions like SoftBank acquiring ARM, Mitsui Sumitomo acquiring Amlin, Sumitomo Rubber acquiring Micheldever, and NEC acquiring Northgate Public Services as well as Outsourcing acquiring various staffing and outsourcing companies.

Where are the “new jobs”?

These acquisitions account for the new entrants to the Top 30 ranking we have compiled below. They push out Fujifilm, Sumitomo Corporation, Japan Tobacco (who shut their factory in Northern Ireland last year) and Toshiba. The original Top 30 in 2014/5 have grown a more modest 10% if the acquisitive newcomers are not included. One of the highest climbers from the original 2014/5 ranking is the main Japanese creator of new jobs in the UK- Hitachi – in particular via their rail manufacturing and assembly plant at Newton Aycliffe.

There has not been a decline in automotive sector jobs in the UK – yet – however. In fact quite the reverse – there has been some growth in jobs in all three of the big Japanese car companies. But the trend is clear, as pointed out in previous posts, that even without Brexit, the drift of investment and jobs in the automotive sector is eastwards and to Africa. It’s easy to see how British people in those areas where Japanese automotive supply chains are active could blame the EU for job losses. Even though there actually weren’t that many EU grants enabling Japanese companies to transfer production from the UK to Eastern Europe – despite the rumours – merely by being members of the Single Market, and having lower labour costs, Eastern European countries are an obvious destination for new manufacturing investment.

Will Japan’s investment in the UK services sector be Brexit proof?

The investment in the UK by Japanese companies over the past three years has largely been through acquisitions in the services sector. This is not surprising, as services are 80% of the UK’s GDP and the UK’s comparative advantage in the region. It is also relatively Brexit proof in the sense that services sector investment will not be directly affected by any supply chain disruptions. Clearly if the UK economy takes a hit from Brexit, however, this will dampen demand for services. There has also been a shift of regional headquarters away from the UK by Panasonic and Sony and others, and of financial services companies, but as yet this has not hit UK jobs.

Eastern Europe has also been attractive to Japanese companies for business process outsourcing. Although Fujitsu is still – just – the top employer in the UK, employee numbers have dropped 29% – and there are now 13,000 people working for its service centres in Poland. NTT and its subsidiary NTT Data has also shot up the Top 30 both for the UK and the EMEA region – again through acquisitions – and has decided to base its new global ex-Japan headquarters in the UK.

Infrastructure, energy, transport should be the future for Japanese jobs in the UK

The UK’s strength as a global services provider will not disappear overnight, however hard the Brexit. But it’s hard to imagine how the kinds of secure, high quality automotive manufacturing jobs that those who voted for Brexit might have wanted to see return to the UK will come back, however soft the Brexit. The potential sunlit upland is in infrastructure – energy and transport. These sectors were needing investment regardless of whether the UK is in or out of the EU and are not so reliant on just in time supply chains across the region. Transport, environment and energy are areas where cooperation and financing on an EU-wide basis makes business and environmental sense though. But unfortunately Brexit has provided a distraction that has resulted in Hitachi freezing its Horizon nuclear power projects in Wales and Gloucestershire from lack of government financial support, and the recently called review of HS2 must also be giving Hitachi’s rail business and other Japanese executives cause for concern. Risk averse Japanese companies are not going to want to make multi million investments in infrastructure projects in a country which is politically unstable and unreliable.

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The successes and failures of Japan’s era of big overseas acquisitions

The era of Japan’s big overseas acquisitions began with domestic mega M&As in the 1990s according to Nikkei Business magazine. Following the bursting of Japan’s economic bubble in 1990, a wave of M&As happened in the financial sector, giving birth to Mizuho from Fuji Bank, Daiichi Kangyo and the Industrial Bank of Japan and Sumitomo Bank and Sakura Bank producing SMBC. In the steel sector with NKK merging with Kawasaki Steel and becoming JFE and in the pharmaceuticals sector with Yamanouchi and Fujisawa merged to become Astellas.

The key concept for these M&As in the 1990s was “restructuring” – to rationalise the back office and integrate R&D. Then in the second half of the 2000s came a wave of overseas acquisitions, to counter the business impact of the shrinking, ageing population of Japan by growing overseas but also to benefit from further restructuring and rationalisation.

Mega overseas acquisitions of the 2000s

In 2007 Japan Tobacco acquired the UK’s Gallaher from RJR, becoming the third biggest tobacco company in the world. In 2006 SoftBank acquired Vodafone Japan and then the US company Sprint Nextel, then British ARM Holdings in 2016. Takeda acquired US Millennium Pharmaceuticals in 2008, then Swiss Nycomed in 2011, with the biggest M&A ever by a Japanese company, acquiring Ireland’s Shire in 2019.

“Growing overseas means the development of our human resources has become an urgent necessity” said the President of Takeda in 2006, Yasuchika Hasegawa. Hasegawa was seen as “an alien from outerspace” for his dry, rational management style, arising from many years working in the USA. Although Takeda had been the biggest pharmaceutical company in Japan for some years, it only ranked around 17 in the world before its acquisition spree and urgently needed to find new drug development sources. It felt it was lagging competitors.

The need for global management skills

Hasegawa decided to globalise the company internally by recruiting a foreign successor to himself in 2014 – Christophe Weber from GlaxoSmithKline. Three out of the seven current Takeda directors are not Japanese.

Japan Tobacco‘s managers sent overseas after the Gallaher acquisition found themselves caught between overseas executives determined to defend their patch with rational, logical arguments about productivity, logistics and profitability. After years of painful discussion, it was agreed to close the factory in Northern Ireland. Even now, says Masamichi Terabatake, the current President of Japan Tobacco, a Japan based executive needs to be prepared to travel around the world regularly to discuss strategy with local executives. “You need to keep global staff motivated. Investment and marketing cannot be left vague, they have to be quantitative so they can be transparently discussed. That’s probably why executives in the West are a bit younger!” he says.

NSG acquired UK’s Pilkington in 2006, becoming heavily indebted to do so. From being very domestic, it became a company whose sales were 80% overseas. Unfortunately this proved to be terrible timing as the automotive and architectural glass market crashed after the Lehman Shock.

Many of the acquirers also struggled because they did not have managers with experience of managing overseas businesses. As Nikkei Business magazine says, mega M&A means mega complexity for which plenty of preparation and a high level of management know-how, with the ability to spread this know-how horizontally and vertically is needed for success. It’s still not clear how far Japanese companies have progressed in this.

Rudlin Consulting has assisted many European companies acquired by a Japanese parent. Please contact Pernille Rudlin for further details.

The enduring Japanese family firm

I attended a Japan Society talk last month on shinise (Japanese family firms) – given by academics Innan Sasaki and Davide Ravasi. Sasaki and Ravasi argued that shinise have survived over 100 years, by keeping small and focused on traditional crafts like sweet making, sake brewing, and textiles. They are very much embedded in the society and community in which they operate – the highest concentration is in Japan’s old capital, Kyoto. In return for their commitment to the local community, they gain a social status and support from the community. They are meant to have a higher moral purpose than pure profit and therefore do not seek to take risks and grow much beyond their current geography and sector – which means they are more resilient to external economic shocks. When downturns happen locally, they survive through the strength of local support. This contrasts with what Sasaki and Ravasi call “instrumental” firms, who exist for a purely economic purpose.

Even large Japanese multinationals behave like Kyoto shinise

Listening to their descriptions of shinise‘s motivations and behaviours, I realised they were very similar to the way I describe bigger, multinational Japanese firms in my seminars. Even though Japanese multinationals have taken the risk to expand overseas, and are often no longer owned by the founding family, the ethos of having a higher moral purpose than shareholder value, of corporate contribution to society and strong risk aversion to ensure longevity still endures.

And like the shinise, the darker side is the sacrifices needed to be regarded as a proper member of the family firm and the difficulty of becoming a senior manager if you were not born into it – or at least recruited straight from university like Japanese headquarter permanent staff.

Nikkei Business magazine had a feature last month on family firms in Japan showcasing research that family owned firms in Japan perform better than non-family owned firms in terms of Return on Assets. “They don’t hold on to unnecessary assets” says Professor Yasuhiro Ochiai of Shizuoka University.

Japanese family owned multinationals that have performed well

DMG Mori is still owned by the Mori family and has been particularly active recently in M&A overseas since the current Mori took over as President in 1999, most notably in their merger with German machine tool manufacturer DMG. Apparently quite a few of DMG Mori’s employees come from the wider “family” of customers and suppliers.

Of course the most famous Japanese company still managed by a founding family member is Toyota. However the current President Akio Toyoda is adamant that the company name is Toyota, the family name is Toyoda, and Toyota is not a Toyoda family company, “it’s everyone’s company.”

Those that are listed on the Tokyo Stock Exchange and also active in Europe were:

Suntory (Torii family – founded by Shinjiro Torii in 1899) – chairman is from the founding family.
Aisin (automotive parts maker in the Toyota group founded in 1949 – chairman is part of the Toyoda founding family)
Shimano (Founded 1921, president is a Shimano)
DIC (Dainippon Ink) founded in 1908 by Kijiro Kawamura, a Kawamura is on the board of directors

And how to avoid toxic family rows

It’s not all joy in a family of course. Nikkei Business also looks at the family rows that have affected the performance of companies like Idemitsu (petroleum company) founding family shareholders fighting a merger with Showa Shell and the rebellion against founding family member Yoichiro Ushioda and chairman by executives of LIXIL (owners of German bathroom fittings company Grohe).

Nikkei Business’s prescription for avoiding trouble is:

Frequent communication between family members
Treat family members who are employees the same way as other employees in terms of company regulations
Don’t withhold information for family only, be transparent in management
Don’t appoint a successor from the family if there is noone suitable
Keep family assets and company assets separate
When there is a generation changeover, keep criticisms to yourself
Avoid too many family members as employees
Ensure a structure is in place to stop family members going rogue

For more on what being a “family” means for Japanese firms and the non-Japanese employees that work for them, this was one of my most popular articles in recent years.

4 cultures of controlling overseas subsidiaries

During a recent trip to Japan I visited Amazon’s offices to have lunch with an acquaintance who has been working there for 1 year and 3 months. He told me that Amazon has expanded so rapidly this past year that he is now in the upper half of a chart which shows all employees ranked by their length of time working for the company.

He also told me that almost all the non-Japanese people working there were, like him, locally hired and that there were hardly any expatriate staff from the US headquarters. I therefore wondered how Amazon HQ could control a subsidiary which is growing so rapidly without any expatriate managers to keep monitor it.

Amazon also tries to minimize the number of processes and procedures it has, in order to maintain the speedy, fast to market, start up mentality it had when it first began over twenty years’ ago.

The 3 usual ways to control overseas operations

In the various multinationals and their subsidiaries I have worked in or with, you can usually find three types of headquarter control. American, sales focused companies tend to control their subsidiaries by setting numerical targets. If the subsidiary employees and managers hit the targets, they get bonuses, if they miss them, they get fired. Many multinationals who are not American in origin use these systems because numbers are easy for everyone to understand, regardless of language.

Another way of managing subsidiaries which both European and American multinationals also use is to ensure compliance through having strong regulations, processes and systems, and clear hierarchical chains of command, so everyone knows who has responsibility and authority for each part of the business.

A third way, which is more common among Japanese companies and also companies such as the German Mittelstand, family owned companies, is “control by the family” – in other words members of the headquarters family are sent out to subsidiaries to monitor what is going on and promote the corporate culture.

Amazon’s way

My Amazon contact explained that Amazon ensures its employees behave in compliance with Amazon’s core values by having a very rigorous hiring process. Candidates are interviewed several times by multiple employees and asked questions about past experiences, to reveal what kind of mindset they have.

I can imagine, however, that it is difficult for Japanese companies to use this method if their overseas subsidiaries were the result of an acquisition, or if the company has already been operating overseas for several decades. There will already be a substantial legacy of staff who may have rather different values and behaviours to those of the Japanese headquarters.

It would also be a mistake, and damaging to the benefits of having diverse, localised operations that are close to their customers, to impose too rigid a set of behaviours and values on all overseas employees.

Nonetheless, I strongly recommend that Japanese companies who are about to acquire or set up operations overseas ensure they have a clear, globally understandable company mission and values (rinen) and hire or promote their overseas employees accordingly.

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

No Japanese visitors please, we’re busy, say Estonian start ups

Estonian e-residency was something I considered for my business as a possible Brexit contingency plan. It wouldn’t have helped me keep my EU citizenship, but I could at least run the European side of the business from Estonia, and have a euro bank account for invoicing in euros. In the end I decided to ask my German partner to take over the euro business, but I was very tempted, having had an enjoyable business trip there a couple of years’ ago, combined with a holiday.

I wrote a couple of articles about Estonia and e-residency for a Japanese magazine after that, and it would seem the word has got out to Japanese businesses about Estonia’s digital economy as according to Kota Alex Saito, co- founder of SetGo, an e-residency business in Estonia, he is constantly having to field enquiries from Japanese businesses wanting to visit start ups there.

The dreaded hyoukei houmon

The Estonia Briefing Centre says that 146 groups of 1135 Japanese people visited Estonia in 2018, the second biggest grouping after Germany. However, as Saito points out, very few of them actually then start businesses or invest in Estonia or bring Estonian business to Japan. It is more what the Japanese call 表敬訪問 (hyoukei houmon – usually translated as “courtesy call”).

For Estonian start ups, it is more of a discourtesy to give up your time to show round groups of visitors, and get nothing in return except maybe some rice crackers. As Saito says, they are expecting visits to lead to some sort of business proposition, so “let’s keep in touch” is really not a good enough result. Hyoukei houmon were the bane of my life when I worked for Mitsubishi Corporation in London too – trying to persuade busy European executives that meeting Japanese “missions” would not be a waste of their time.

A difference in scale and mindset

For the Japanese visitors, the main point seems to be simply to see the petrie dish of a digital economy. But as Saito says, Estonia only has a population of 1.3 million, so trying to scale that up by 100 times to a Japanese scale is not a simple process. Furthermore, Estonia has a highly transparent system of data on companies, government and people, so e-government is less feared. There is a big difference in mindset that Japan could learn from, but may find hard to imitate.

Saito gives advice which I often give in my seminars to Japanese and Europeans working together – make the purpose of your meeting clear, do your research beforehand, make sure there are action points at the end that you follow up on.

A no deal Brexit will put the boot in for Japanese companies in the UK

My first job at Mitsubishi Corporation was exporting British made shoes from companies like Trickers and Crockett & Jones to Japan. They are high end shoes anyway, and Japanese tariffs of 30% on shoe imports certainly pushed them even further upmarket. So when I was in Japan last month I was happy to see that one of our customers still had its Trading Post flagship shop in Aoyama, despite the so-called two lost decades in terms of economic growth. They must be one of the few businesses enjoying the fact that Brexit delays have improved their profit margins. Thanks to the new EU-Japan Economic Partnership Agreement, tariffs on European shoe exports to Japan were reduced to 21% from February of this year. They will eventually be eliminated over the next 10 years.

Trickers and Crockett & Jones are presumably shipping out shoes to Japan as fast as they can make them while the UK’s membership of the EU lasts. Although Japan has entered discussions with the UK on a trade deal, they have made it clear that they are not going to concede as much as they did to the EU, and leather goods is one of the categories they are going to use as a bargaining weapon.

No roll over is bad for British shoes, cheese and booze

So a no deal Brexit or a Brexit before a UK-Japan free trade agreement is struck is bad news for the UK shoe industry, (and British cheese makers and whisky distillers will also miss out on the EPA’s tariff reductions). But not rolling over the EU-Japan EPA in to a UK-Japan trade agreement as soon as the UK leaves the EU will only have a small direct impact on both economies. According to a JETRO survey of over 3,000 Japanese companies, from March of this year, only 8.6% import from the UK, compared to 24.1% importing from Western Europe (excluding the UK) 66.2% from China and 24.2% from the USA.

Conversely, 22% of Japanese companies export to the UK, compared to 35% exporting to non-UK Western Europe, 49.6% to the USA and 59% to China. It’s obvious from these figures why the US-China trade war is more concerning to Japan than Brexit.

You could argue that a UK-Japan free trade agreement would improve those percentages, but that’s an awful lot of shoes, cheese and booze to make any impact. Furthermore, a lot of the imports and exports between the UK and Japan may be EU related, rather than purely bilateral. Think car parts from Japan to build cars for European consumers, or UK generated professional services for a Japanese EU headquarters and its European subsidiaries.

But no deal with the EU is even more of a headache for Japanese companies in the UK

Japanese companies that have a presence in the UK (just under 10% of the companies surveyed) have made it very clear that a No (UK-EU) Deal Brexit would be a disaster for them – far more than the UK no longer being part of the EU-Japan EPA. As frequently pointed out, they invested in the UK as a gateway to the rest of Europe.

45% of the turnover of Japanese companies in the UK is sales to Europe according to figures from the annual reports of the 200 or so who give regional breakdowns of sales. The range is anywhere from close to 0% for companies selling everything from lighting to metal pressing to seeds just to the UK, through to 100% – largely automotive parts manufacturers who export almost all of their production to Europe, or at least sell it via their European headquarters in continental Europe.

Many of those who are focused on domestic UK sales are importing from Japan, China and Asia, or are at the end of a complex supply chain stretching across Europe. Some are not involved in trade of goods at all – for example NTT Data and Building Design Partnership. The latter is one of the many of the services sector companies that have recently become Japan-owned via acquisition. NTT is aiming to grow its UK government business after Brexit, but if the UK economy tanks thanks to a no deal, it may have to wait a while. A JETRO survey last year highlighted that a UK economic slump because of Brexit was at the top of the list of concerns for Japanese companies in the UK and the rest of the EU, even more than changes in regulation or currency fluctuations.

The UK looks to lose its crown as the top European destination for Japanese acquisitions

Japanese acquisitions of British companies continued after the referendum, but the 2019 JETRO survey shows that it is likely the UK will lose its crown as the top destination in the EU for Japanese foreign direct investment. Non-UK Western Europe is in the top five destinations for expanding business for manufacturing textiles, clothing, foods, petrochemicals/plastics, electrical machinery, electronic components, fine engineering and also specialist services. The UK does not feature at all in the top five of any of these sectors.

The UK’s service sector functions as a gateway to Europe is still the biggest influence on Japanese investment – the UK is a top 20 destination for expanding services such as regional coordination(#9), logistics (#13), R&D (#14), sales (#15) and localisation (#17), as well as high value added manufacturing (#17). However, non-UK Western Europe ranks higher and is in the top 10 destinations for all of these categories.

Brexit yanks the lid off some stinky realities for Japanese business in the UK

My least favourite Japanese expression is “kusai mono ni futa” – when it stinks, put a lid on it. It is at the root of many Japanese corporate governance scandals. Mistakes are made or problems surface and instead of exposing them and causing loss of face all round, they are swept under the carpet, in the hope that they will somehow magically disappear. But of course stinky things with lids on just get stinkier.

On the face of it, there was nothing stinky about Japanese companies in the UK. The very fact that the UK was such an easy place to do business – on a European and global scale – lulled Japanese companies into complacency. Japanese expatriates like living in the UK, particularly around London, where the vast majority of Japanese business people are based. A couple of years’ traineeship in London is also a great incentive to lure scarce young English speaking Japanese into your graduate recruitment scheme.

Brexit exposed complacency about profitability in the UK

Over 125 Japanese companies in the UK are the European headquarters, employing over 25,000 people (of the 160,000 UK employees in total who work for 1000 Japanese companies), with a combined turnover of over £40bn. Much of that turnover derived from management fees from Japan headquarters, dividends from European subsidiaries or royalties from intellectual property, so the profitability or otherwise of the UK business itself was not so exposed.

Profitability in manufacturing is far more obvious. Nissan, Honda and Toyota’s factories in the UK had high levels of productivity – they had to be to win the right to make each new model. But Honda never managed to sell enough of its cars in Europe for Swindon to reach full capacity. The car industry is going through a shift away from petrol and diesel to electric. Japanese manufacturers like to be near their key markets to develop new models, and for electric vehicles, China is a far bigger and more promising market than Europe. The supply chains for electric vehicles are more developed and close knit in their Japan base.

Brexit yanked the lid off some stinky realities. As the JETRO annual survey on business conditions for Japanese companies in Europe details, 60% of UK based Japanese companies predicted the future impact of Brexit on their business would be negative, and 25% said it had had a negative impact already. Most cited the threat to the supply chain of customs duties and customs procedures or divergence in regulations being introduced as their top concerns.

Over 90% of Japanese companies could withdraw their European headquarters from the UK because of Brexit

61% said that they had already decided to relocate/withdraw or had already relocated or withdrawn certain functions from their regional headquarters in the UK and another 32% are considering it – mostly as a partial relocation to another EU member state. As is well known, Panasonic and Sony have already done this. It was not just the threat of Brexit disrupting invoicing and customs clearance, but also in response as much to the new Japanese tax haven law. The UK’s lowering of the corporation tax rate of 17% to show Global Britain was still open for business meant revenue from dividends and royalties received in the UK would be considered as tax avoidance by the Japanese tax authorities.

More than two thirds of Japanese companies could withdraw their European sales functions from the UK

29% of Japanese companies in the UK have decided to relocate/withdraw or have already relocated/withdrawn their sales functions and a further 38% are considering doing so. Sharp Electronics has moved their inventory to Sharp in France along with responsibility for logistics and warehousing. Various automotive sector companies have moved customer accounts and product lines to Germany.

Moving sales or regional headquarter functions out of the UK does not have an immediate impact on jobs in the UK. In fact labour shortage is cited as the top concern for Japanese companies across Europe. So they are likely to try to hang on to the employees they have, and the regional management will just operate in a much more virtual way – Sharp says its UK base will still have an executive/board level responsibility for Europe, as that is where its European executives are currently based. For now.

Nearly two-thirds of Japanese manufacturers are withdrawing or considering withdrawing manufacturing from the UK

33% of Japanese manufacturers have decided to relocate or withdraw or have relocated or withdrawn their manufacturing from the UK and 30% are considering doing so. This may seem surprisingly low given the fuss made over the car companies and their supply chains being impacted by Brexit. But actually most Japanese manufacturers have alternative plants in Europe they can use if necessary. Those who do not are usually manufacturing highly specialised products that are less supply chain time critical, or for UK sales only or that they are presumably confident they can sell across Europe no matter what barriers there are.

No deal preparations

The JETRO survey did not specify the type of Brexit when asking Japanese companies in Europe in general about relocation or withdrawal plans, but did ask if any countermeasures had been taken for a no deal Brexit. Just over 10% of all Japanese companies – in the UK and Europe – had already made plans or were currently making plans. A further 15% of Japanese companies in the UK were intending to plan for no deal but only 4% of non UK EU companies were intending to plan (this was as of October 2018). The most popular countermeasure was stockpiling (21%), followed by reorganising functions within the company group (10%).

Financial services already prepared for all possibilities

All the Japanese financial services companies that would be affected by Brexit have already put their plans into action – most now have licenses for the UK and obtained financial passporting or licenses in the EU as necessary. Again, having to take a hard, cold look at their European operations has taken the lid off some long standing whiffy problems, particularly for Nomura, which looks like it will be shutting down its global wholesale side in London entirely.

No rollover and then there were none

Stockpiling as the main countermeasure for a no deal Brexit assumes that eventually a deal will be reached, before the stocks run out. But such deals take time. The EU-Japan European Partnership Agreement (EPA) started in 2013, finalised at the end of 2017, signed off in July 2018, and was in force from February 2019. Known as cars for cheese – it was actually meant to promote food and car exports both ways. Japan has already been promoting European wines and cheeses in its supermarkets and announced the first shipment of fully farmed tuna to Europe under the EPA agreement.

Similarly, reduction on tariffs on cars and car parts was meant to protect Japanese branded manufacturing in Europe (because they could easily import Japan manufactured parts) and help European car manufacturers export more cars to Japan.

Hard stinky cheese

If a no deal Brexit happens, although Japan started talks with the UK about rolling over the EPA, it has stated this would not be a cut and paste job. Japan is clear that it expects more concessions from the UK than in the EU deal – including cheese and cars. So British cheese makers may find their exports to Japan have a longer time to ripen than they were planning, in the event of a no deal.

Fewer Japanese in the UK, but more are making it their permanent home – thanks to Brexit?

The UK is still overwhelmingly the most popular place for Japanese residents in the EU to live, according to Japan’s Ministry of Foreign Affairs. There are nearly 63,000 Japanese nationals living in the UK, compared to 46,000 in the next most popular country, Germany. The Japanese community in the UK has shrunk by 6% since 2014, however, whereas Germany’s Japanese community has grown by 22% over the same period.

In fact all other major EU countries have more Japanese people living in them than four years’ ago. It is only the UK that has shown a net fall in numbers. The Netherlands has had the biggest proportionate rise in Japanese residents since 2014 – 41% from 6,532 to 9,223.

On the face of it this would seem to be a Brexit related shift. The Netherlands and Germany have been the most popular alternative bases for shifting headquarters and sales staff to, away from the UK, as we noted in a previous post.

UK loss of global prestige as a destination for media and diplomats

But looking more closely at the different categories used by the Ministry of Foreign Affairs for classifying Japanese nationals reveals some other non-business factors too. The biggest proportional decrease is in Japanese people in the government related category – a 44% fall from 1,286 to 722. In a further indication of the UK’s drop in global prestige perhaps, the number of media related Japanese nationals has dropped 26% from 371 to 273. The largest drop in numbers is in the academic/student category – down nearly 7,000 from 20,000 in 2014 – peaking at 21,000 in 2015 and declining since.

Japanese students also put off by hostile environment

The fall in student/academic numbers is worrying, as this is a good source of income for UK universities. When we looked at this a year ago, we noted that Japanese students are still studying in Europe – just more in Germany or France. Or, like one participant in my seminar yesterday, they’ve realised they can learn English by studying in Asian universities – which are cheaper and nearer to Japan.

Talking to Japanese specialist recruiters, it may also be that the UK’s “hostile environment” has made it more difficult for Japanese students to stay on in the UK after graduating, to find a job. The 27% increase in permanent residents who have Japanese nationality over the past 4 years suggests that Brexit and visa worries may have caused a large number (nearly 22,000 now) of Japanese resident in the UK to take the leap of acknowledging that they are going to stay in the UK permanently and need to make sure their status is secure.

Chipping away at the three treasures of Japanese HR

Several Japanese blue chip companies have announced some quite radical changes to their HR systems, just in time for the new Reiwa era. The so called three treasures of lifetime employment, seniority based pay and a company union have been looking a little tarnished for some years now. They seem a legacy not even of the Heisei era but of the post war Showa era of a booming economy and a need to retain a young workforce.

Hitachi had shown the way four years ago (as described in our blog post at the time), abolishing seniority based pay for its managers and replacing it with pay based on job roles. They have made further waves recently with the announcement of the first ever Hitachi subsidiary President to be in their forties. The newly formed Hitachi Global Life Solutions will be led by Jun Taniguchi, born in 1972.

Hitachi claim that this new system is needed for the company to be truly global and able to appoint and transfer managers around the world, regardless of where they were recruited. Beer and soft drink manufacturer Asahi Group Holdings has also been shifting to global standards. Around half their employees are non-Japanese, as a result of their acquisitions of European brands such as Peroni, Grolsch and Fullers. They have said their Presidents and CEOs will be evaluated on return on equity from now on, and given the boot if it is not maintained above 13%.

Japanese megabank MUFG says it will reduce new hires in Japan by 45% to 530 next spring, and will cut the 6000 employees in its Tokyo headquarters by half. Not all Japanese HR traditions are being thrown out of the window, however, as the surplus 3000 will not be made redundant, but rather redeployed to sales functions or sent overseas to areas where MUFG is expanding like the USA and Asia (but not it seems, Europe). MUFG is automating the functions that these staff performed, as well as cutting many of its retail branches in Japan. It will instead be beefing up its overseas compliance and digital payment systems divisions.

Some Japanese politicians and commentators have said that the “rei” of Reiwa sounds rather cold, as it can sometimes mean “order” or “command”. It also, when combined with the radical for water, becomes a character meaning chilly or freezing. It certainly feels like some icy winds will be blasting through Japanese cosy HR traditions in the new era.

Category: Japanese business in Europe