Japanese business in Europe

Service sector dominates Japanese investments in the UK

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is “chutzpah” in Israel the same as “not reading the air” in Japan?

Japanese investment in Israel has shot up the past five years. According to JETRO there are 66 Japanese companies based in Israel as of 2017, 16% up on the previous year. Nikkei Business estimates the total of investment asY130bn (around $1.1bn) – the main contributor being Mitsubishi Tanabe Pharma’s acquisiton of Neuroderm for $1.1bn in 2017.

PM Abe’s visit to Israel in 2015 brought about many further visits from Japanese business people. The attraction is, unsurprisingly, Israel’s expertise in IoT, AI, cyber security and other technologies. But the big obstacle, certainly according to many people I have spoken to about this, is the big cultural communication gap.

According to Shintaro Hirado, who has set up a business support company in Israel, it can be seen as a positive, that Israelis are very straight with you, and once you get over the shock of that, then you can build good trusting relationships.

Japanese expatriates in Israel compare “Chutzpah” (cheek, nerve, audacity) to the KY (Kuuki Yomenai) phenomenon in Japan of a few years ago, when younger Japanese were accused of not being able to “read the air” (usually of disapproval).

Israeli owners of companies acquired by Japanese companies such as Rakuten have asked for earn outs before the final agreement was signed, or left due diligence meetings days before they were over, not out of anger, but just “I’ve said all I need to say.”

Japan Intercultural Consulting – whom Rudlin Consulting represents in Europe, Middle East & Africa – has just started a partnership with Charis Intercultural Consulting, who have a presence in Israel, so this communication gap could be a business opportunity for us too.

The skills shortage in Europe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What role did Carlos Ghosn’s status as a foreigner have in terms of his downfall?

And what does this mean for any other foreigner leading or looking to reach the top of a Japanese company? Obviously the Nissan story is evolving hour by hour, so what follows is based on my current understanding as of 20th November 2018.

The specific accusations are that Carlos Ghosn received share price-related compensation and the Dutch holding company of which he was a director along with Greg Kelly, as part of the Nissan-Renault alliance, used its funds to acquire and refurbish houses which were his residences. These were not declared, not as an income tax issue, but as a fiduciary/governance issue, in terms of declarations to the Japanese securities and exchange commission.

Is the way this possible misuse of funds was exposed specifically because Ghosn was not Japanese? Actually a lot of Japanese Presidents and Chairmen are allowed to use company funds for personal reasons, and because of the blurring of personal/private and employer in Japanese companies, it is quite common for companies to provide housing and other benefits far beyond the norm in the West, particularly to senior executives, who are not, on paper, paid that well. This is particularly true of companies where the President is also the founder or has a high degree of autonomy.

Terrie Lloyd, a long term resident and entrepreneur in Japan wrote an interesting piece on this recently – https://www.terrielloyd.com/terries-take/tt-970-imploding-one-man-shacho-listed-companies-e-biz-news-from-japan/

You also can’t help wondering what had been going on over the years in terms of internal checks and corporate governance at Nissan if they did not know and challenge what kind of “benefits” and compensation Ghosn was getting – as illustrated by this blog post from a Japanese corporate insider https://bdti.or.jp/en/blog/en/nissanltr/?77

So the next question is, as it often is with Japanese corporate scandals, why is this particular accusation being exposed and why now? The official story is that it was made by a whistleblower, which necessitated an internal investigation, and then this led to a plea bargain which would reduce the penalties to Nissan.* There is only one other instance of this happening – with Mitsubishi Hitachi Power Systems and a Thai bribery case – and it was a Japanese manager who was involved.

But I suspect, as do other analysts, that Nissan chose to pursue this and publicly expose it because they didn’t like the direction Ghosn was taking the company in and couldn’t work out another way to get rid of him. There was undoubtedly a long running worry about the degree of control/interference by Renault and the French government and Ghosn’s intention to make the alliance irreversible by the time he finally stepped down in 2022. I also just read a story in the Nikkei Business magazine that Ghosn was very keen for the alliance to partner with Google, Microsoft and Daimler and Chinese companies to create a CASE (Connected, Autonomous, Shared, Electric) strategy. That degree of “foreignness” and with the US, and China, and Daimler with whom Mitsubishi Motors already had a failed alliance might have elicited an allergic reaction from Japanese executives at Nissan and Mitsubishi Motors.

But also, which accounts for the strong words from current President Saikawa, indulgence of senior executives is tolerated so long as they still seem to be working for the good of the company, and Ghosn not turning up for the public apology after the inspection scandal, and the sense that it was his corporate culture of imposing aggressive targets on employees that might have caused that scandal – and yet he blamed Saikawa, might have tipped Nissan executives further into exposing the issue publicly rather than dealing with it in the usual way.

The usual way (see Fujitsu/President Nozoe resignation in 2009), when other executives decide that a President has to go sooner than the usual carousel of 6 years as President and another 6 years as Chairman because they think he’s gone beyond what is morally acceptable and/or they don’t like his strategy, is that they try to let the executive exit honourably, by getting him to resign due to illness or some similar blamefree excuse.

Maybe this option was offered to Ghosn – who had after all been leading Nissan as President and Chairman for nearly 20 years, so way beyond the norm for Japan. But I can imagine that he refused it – and this could be attributed to him being “foreign” – instead of understanding Japan’s “shame” culture, he would have gone down the Judaeo-Christian and legalistic route of saying he had a contract until 2022 and as far as he was concerned he had done nothing wrong, innocent until proven guilty, so bring it on.

There may also be a political aspect – again nothing specifically to do with Ghosn being foreign – but Nissan may have got the hint from Japanese government agencies that they would be supported in taking Ghosn down because they were not politically in favour of the direction he was taking the alliance in – see what happened to Horiemon/Livedoor.

So in summary, I doubt Ghosn was treated differently because he was foreign per se, but because he was foreign he probably reacted differently, just as Michael Woodford did when asked to resign after uncovering scandals at Olympus, believing his own innocence and not fearing public exposure.

But underlying this there could be a resistance in Nissan and beyond, to any further globalizing, whether it results in French or Chinese or American or German control or influence. If I was a foreign executive, particularly if I was Christophe Weber at Takeda, I would be watching further developments in this case like a hawk and making sure I built as many strong, trusting relationships with my Japanese executives as possible.

*The story has indeed evolved – it now turns out that Nissan itself was not part of the plea bargaining deal, it was the two officials, one non-Japanese SVP who managed the Dutch subsidiary and one Japanese who was Ghosn’s chief of staff, who agreed to cooperate with the investigation under a plea bargain.

I was also quoted in the New York Times on this subject.

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

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

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

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

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

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

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

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

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

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

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

Nissan and Ghosn – the cycle of coups d’état reaches back to the 1960s

I always prefer coincidence or cock-up to conspiracy, and former journalist and PR consultant Masaki Kubota clearly feels the same way, judging by the first few paragraphs of his article on Carlos Ghosn and Nissan in Diamond magazine.

As he says, in his years as a journalist, it was the standard defence of any Japanese executive caught up in a scandal that it was a conspiracy of people out to get him.

With Ghosn, you could easily claim, as many have, that this was a conspiracy, born of some kind of alliance between insiders at Nissan who wanted to get rid of Ghosn, his ex-wife and the Japanese government, and this kind of accusation is handy both for Ghosn and the French government or Renault who might have wanted Ghosn to continue to be influential.

But then Kubota does a classic kishotenketsu twist, pointing out the history of Nissan, going back to Ghosn’s installation and even before, is one of a cycle of coup d’etats.

Starting with the most recent history, of the inspection scandals – the exposure of the problem was a way of resisting the inspection system that Ghosn’s management team had introduced, shortly after Saikawa (identified as one of Ghosn’s team) became the new President of Nissan. It was in effect an abortive coup d’état.

Going further back to 1999 the then President Yoshikazu Hanawa was in negotiations with Daimler Chrysler and Ford but instead installed three Renault executives, without even consulting the previous Presidents who were advisors to the company at the time. “It was a kind of a coup d’état” the Nikkei said at the time.

Purging the Don

Even further back, to the 1980s, when the Chairman and former President for 16 years from 1957 was Katsuji Kawamata, there was a coup which led to the purge of union power at Nissan in Japan. It was well known that Kawamata gained his power through cooperating with the Nissan group labour union leader Ichiro Shioji. But then in 1984, Shioji, who was seen as the main obstacle to Nissan opening its factory in Sunderland UK and before that in the US, was hit by a scandal – photos appeared in the weekly magazine Focus, of Shioji on a yacht with a beautiful young woman. Criticism of Shioji, as “the Don”, mounted and he resigned on 22^nd February 1986. The Nikkei reported on this as “the 2.22 coup d’état” a reference to the 26^th February Incident, a failed coup attempt in Japan in 1936. It was said that the power behind the 2.22 coup was Takashi Ishihara who was in favour of global expansion, and was the President at the time.

Ishihara had been involved in an earlier coup, when he was still at managing director level in 1969. Documents were leaked to the media about an incident involving a Nissan microbus. It became clear that this was done in order to purge the upper ranks of the company.

As Kubota says, when there is a fraud in a company, this is often results in a clear out of those in the upper levels of management who are to blame. In fact, this kind of incident has been quite rare at Nissan, so when it happens, it is likely that it is part of a major change in strategic direction. So, Kubota asserts, it is definitely a coup d’état. In Kubota’s experience, it is hard to change a corporate culture that easily, so if Nissan is used to changing strategies by coup d’état, then it will continue to use this mechanism.

Corporate culture will not change just because foreign executives are put in place

Corporate culture will not change just because foreign executives are put in place. Kubota reminds us that for Saikawa to criticize Ghosn so strongly, when Ghosn has not yet been put on trial, is certainly a change from the usual crisis management of Japanese companies.

Kubota sees this singling out of Ghosn by Saikawa, who worked so closely with Ghosn for many years, as a kind of personal insurance.

So where does Saikawa fit in? Kubota has dug out the fact that Saikawa was executive assistant to the President from 1992, Yoshifumi Tsuji. Tsuji had taken over from Yutaka Kume, who had succeeded Ishihara, the instigator of the coup against union Don Shioji. Saikawa was therefore part of the team that survived the Renault coup.

So it goes round. As Kubota puts it, even in the midst of this coup d’état, there will be people wondering whether they will be the next to be stabbed.

Brexit brings turning point for Japanese automotive suppliers in the UK

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

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

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

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

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

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

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

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

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

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

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

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

Brexit watch – Top 30 Japanese companies in the UK

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

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

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

No tax haven please we’re Japanese

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

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

Whose standards are they anyway?

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

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

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

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

The rise of the pure UK plays

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

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

Freedom of movement and solutions

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

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

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Category: Japanese business in Europe