Japanese business in Europe

Japan – into Africa

Many Japanese companies have set up European regional headquarters, largely in the UK, Germany or the Netherlands and use this as a base for consolidating their administrative activities across the region. Increasingly these days the designated region covered is not just Europe, but EMEA – Europe, Middle East and Africa. The historical ties that the UK in particular has with Africa and the Middle East, means that it is not only easy to access the Middle East and Africa from London, but also that it is relatively easy to get hold of information about countries in those regions in the UK as there are many expatriates and experts on those countries based in the UK.

One such expert is Professor Sir Paul Collier, a professor of economics at Oxford University, whose speech to a group of Japanese businesspeople in London I attended a while back. Sir Paul had met Shinzo Abe at a G8 meeting, and his speech was largely in support of the recent initiatives by Abe and Japanese businesses to become more involved in Africa, recently reinforced by the TICAD meeting in Nairobi.

He is realistic, however, saying that “I am not going to tell you Africa is wonderful. Africa is complicated and has a small economy, but it has got significant opportunities.” The opportunities fall into four main areas – natural resources, the infrastructure needed to exploit those resources, growth in sectors such as electric power, construction, consumer goods and the “e-economy” such as payments by mobile phone.

He also pointed to the specific attractions that Africa would have for Japan. Firstly that as African growth is very commodity price dependent, and Japan is a big commodity importer, having investments in Africa is a useful “hedge” against commodity price movements. Secondly, Japan is apparently welcome in Africa. “Africa is tired of Europe and doesn’t like being told what to do”. The USA behaves like a colonial power but does not have any money to invest into Africa. China was hugely popular in Africa 10 years ago, but apparently many African leaders are now feeling frightened of becoming too dependent on China and are trying to push back on deals.

The biggest negative for Japan, in Sir Paul’s opinion, is that culturally, “Africa is Japan upside down. Japanese society is one of very high trust and very high social cohesion, and Africa isn’t”. And of course, Africa isn’t one country but 54 countries and the levels of opportunities and risk vary considerably from one country to another. Sir Paul’s recommendations were to focus on Lagos and Nairobi, with possibly a sub office in Rwanda. With regard to corruption, the risk is reputational rather than financial, and he recommends having a policy and making it very clear to counterparts what that policy is.

He also reinforced the view that approaching Africa from the UK was a good tactic. “The UK, public and private sectors, have the knowledge, network and the contacts but not the products that Africa wants.” Japan has those products, so, teaming up with the British should bring plenty of mutual benefit.

This article originally appeared in Japanese in the Teikoku Databank News on 14th May 2014 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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At a stroke, the Brexit vote has increased Japan’s perception of the risk of investing in UK and EU

Japan’s (heartfelt) message to the UK and the EU regarding Brexit surprised many by its directness and the way it was shared publicly. Not so surprising was the underlying theme, of wanting to maintain arrangements as they are. As is often said, business (and particularly Japanese business) hates uncertainty. Companies and governments desperately want to be kept in the loop of any developments so they can make plans accordingly. As Japan’s message pleads: “we request the both [EU and UK] to heed the voices of Japanese businesses to the fullest extent… some Japanese firms may not be able to respond sufficiently to the drastic changes in the business environment that could be caused by BREXIT and they also have difficulty in articulating their requirements publicly”.

As well as this hint that Japan worries it is not listened to, and is not good at putting its case, I also get a whiff of a feeling of betrayal and loss of trust. “In light of the fact that a number of Japanese businesses, invited by the Government [my italics] in some cases, have invested actively to the UK, which was seen to be a gateway to Europe, and have established value-chains across Europe we strongly request that the UK will consider this fact seriously and respond in a responsible manner to minimise any harmful effects on these businesses.” Well it made me wince, and I hope it made our government wince too.

Having spent some time working in the regional coordination department of a major Japanese investor in the UK, I know full well how much political and economic risk factors are constantly reviewed and investments made or retracted accordingly by Japanese multinationals. Softbank is the exception rather than the rule when it comes to appetite for risk amongst Japanese companies.

I know Brexit supporters will immediately counter that Japanese companies are highly unlikely “to cut their noses off to spite their faces” by closing down operations and moving away from the UK when the UK represents an important market for their products. Furthermore, they will no doubt argue that the much cheaper pound will counterbalance any 10% tariffs if we revert to WTO rules.

Foreign Direct Investment (FDI) matters more than trade in terms of Brexit impact, in my view. Increased trade volumes are an outcome of FDI in these days of integrated supply chains, not the origin of economic prosperity as they might have been in some mercantilist world of the past. The voice of every economics teacher I have ever had (from O level to MBA) keeps echoing in my mind: “an export is simply a means to buy an import”.

Foreign Direct Investment (FDI) is an ongoing process, not a one off. What matters is not just whether any more Japanese companies will invest in the UK (they will, if there’s something alluring in its own right above and beyond being part of the Single Market) but where they will put further investments.

To me, what really matters is the jobs that result from investment in existing operations and the trade that investment generates, not trade on its own.

So with that in mind, here’s my analysis of what a hard Brexit (ie tariff barriers, loss of financial passporting, end to freedom of movement) might mean for our Top 30 Japanese companies in the UK. We have ranked them according to the number of employees, including employees at any acquisitions and subsidiaries and together they represent nearly 90,000 of the 140,000 or so jobs that Japanese companies directly generate in the UK.

My conclusion in short is that Japanese companies will probably be able to adjust to a hard Brexit better than they might fear, and the direct impact on British jobs might not be so severe, except in the automotive industry, and even then, it will be a longer term impact.

But, 20 out of the Top 30 Japanese companies in the UK are regional headquarters. If a hard Brexit means that the centre of the action – in terms of regulatory influence, access to a diverse and talented workforce and selling into a large and growing market – shifts to the continent, then those regional headquarters will shift too, and with them will go the purchasing power for all of those services which the UK has become so good at providing – not just financial but legal, consulting, IT, R&D and creative.

If our trade negotiators really can pull off some good deals with the Middle East and Africa, the best defensive countermeasure UK regional headquarters can take is to position themselves as EMEA headquarters. Many of them already cover not just Europe, but the Middle East, Africa and in the case of IT companies such as Fujitsu, India too. But I worry that this will not be enough, given the relative size of these markets.

Technology companies (9 of the Top 30) such as Fujitsu, Hitachi, Sony, Ricoh, Canon, Fujifilm, Konica Minolta, Olympus and Toshiba have been increasingly moving from B2C to B2B and from products to services in the UK and no longer mass manufacture consumer products in the UK. Sony’s last manufacturing operation in the UK, in Wales, produces professional audio visual equipment. The bulk of Sony’s employees are in Sony Music or Sony Computer Entertainment, or in the European sales and marketing operation. Ricoh’s Telford factory produces 3D printers. Fujifilm’s facility in the UK is nothing to do with cameras – it is a contract drug manufacturer for the biotech industry. Hitachi has shifted away from TVs and other consumer electronics and has its global rail headquarters in the UK, with a rail vehicle assembly manufacturing facility recently opened in Newton Aycliffe, as well as being the owner of Horizon Nuclear Power.

Canon’s European HQ already moved from the Netherlands to the UK a few years ago, and no doubt the Netherlands would like it to move back. There is a constant tug of war between Germany and the UK for Fujitsu’s regional power centre. Olympus has Keymed in the UK, but its regional HQ is in Germany. Toshiba splits its regional HQ by business between Germany, Netherlands and the UK but is currently restructuring. Konica Minolta’s regional HQ is Germany anyway, as is Fujifilm’s. Hitachi (UK HQ) has just acquired an Italian rail company, so could use that as a European Union base.

Prediction: even a hard Brexit might not have that much impact on Japanese technology companies (who are mostly headquartered in Germany anyway), as in the UK their businesses have already moved into high end, high margin, relatively price inelastic segments, drawing on specific local expertise. Their regional HQs may feel pulled back towards the continent however, particularly in B2B businesses.

Automotive companies (7 of out the Top 30) such as Nissan, Honda, Nippon Sheet Glass, Toyota, Yazaki, Denso and Calsonic Kansei all have factories in other parts of the EU or inside the EU customs union (ie Turkey). Nissan (headquartered in Switzerland) has a factory in Spain, Honda (HQ in the UK) has a factory in Turkey. NSG (acquired UK based Pilkington) makes automotive glass in Finland, Spain, Italy, Poland and Germany. Toyota (HQ in Belgium) produces vehicles in France, Turkey, Czech Republic and Portugal. Yazaki (HQ in Germany) doesn’t have any factories in the UK anyway (but plenty of sales engineers). Denso (HQ in the Netherlands) has 2 factories in the UK but also in Spain, the Czech Republic, Hungary, Turkey Italy, Poland and Portugal. Calsonic Kansei (UK HQ) also has 2 factories in the UK but also in Spain and Romania. Nissan, Honda and Toyota all export around 75-80% of what they manufacture in the UK, mostly to the European Union.

Prediction: investment for production of new models will go to factories in the EU. As much as a consequence of this than any tariffs, production volumes and jobs in vehicle factories will slowly decline in the UK to a level which mainly supplies the UK domestic market, but this may not be a viable production volume so plants may have to close. Parts manufacturers will cut production and sales engineers in the UK accordingly. Automotive design, a traditional strength for the UK, may even have to relocate to the continent, to be near to the regional HQs and the main markets.

Financial services companies (7 of the Top 30) such as Nomura, Mitsubishi UFJ Financial Group, Mitsui Sumitomo & Aioi Nissay Dowa, Sumitomo Mitsui Financial Group, Mizuho Financial Group, Tokio Marine Holdings and Sompo Holdings are all headquartered in the UK, but all already have other offices in EU countries. Some already have, and others no doubt will, strengthen their operations in EU, transfer some functions and apply for passporting for other offices. Amsterdam seems to be a favourite (both MUFG and Mizuho have licensed offices there), both for its regulatory environment and also because of the ease of using English, plus long standing friendly relations between Japan and the Netherlands. The insurance companies MS&AD, Tokio Marine Holdings and Sompo Holdings have all recently acquired Lloyd’s Underwriters and London is the historic heart of underwriting, so it is hard to imagine their operations in London fading away that much. Swiss Re and Zurich are both headquartered in Switzerland, outside the EU – so life outside the EU is possible in insurance and could be viewed as an escape from burdensome EU capital requirements.

Prediction: UK HQs position themselves as EMEA HQ. EU functions move to an EU-based capital. Some reduction in high paying top level jobs in UK. Back office jobs might stay in UK if sterling stays cheap but there could well be a drift eastwards to Poland or even India.

Companies who own major UK brands (5 out of the Top 30) such as the trading company Itochu (who own Kwik Fit), Japan Tobacco (Silk Cut, Mayfair etc), Suntory (Lucozade, Ribena), trading company Mitsubishi Corp (Princes Foods), Mitsubishi Chemical Holdings (Lucite). Japanese trading companies (Mitsubishi Corp, Mitsui, Sumitomo Corp, Itochu, Marubeni) have always had their regional HQs in London for 100 years+ in some cases and they usually cover Africa and the Middle East from there too. Although they are very traditional, I know, as an ex employee, that the debate never stops about how to structure and where to invest in their global operations, and the political and economic risk that Brexit has introduced may well tip the balance not just away from the UK but away from Europe and back to Asia again. Furthermore, for certain of their business lines such as chemicals there has always been a strong pull to Germany. Mitsubishi Chemical Holdings is headquartered in Germany, and although Lucite is in the UK, it is a global business in terms of operations and customers.

Japanese companies tend to be honourable, even sentimental about keeping the operations of brands in the country in which they were born. Having said that, Japan Tobacco (headquartered in Switzerland) has shut down the last of its former Gallaher UK factories in Northern Ireland recently. Suntory’s CEO is a Harvard Business School graduate with a correspondingly unsentimental view of business and as Suntory also owns Jim Beam and Orangina, it may not feel that wedded to the UK as a regional base. Kwik-Fit may seem quintessentially British, but is in fact a market leader in France and the Netherlands too.

Prediction: Japanese companies are getting less sentimental and more globally hardheaded. They will do what they have to do in search of stable growth.

B2B services suppliers – The remaining 2 companies in the Top 30, Dentsu (advertising) and NYK (logistics) have different histories as well as businesses. Dentsu has been on an acquisition rampage recently, and has formed out of its acquisition of Aegis, the Dentsu Aegis network, headquartered in the UK. The UK is traditionally strong in terms of advertising and marketing expertise, but again, the industry will have to follow wherever its customers go, so if more Japanese clients shift their headquarters to the European continent, I would expect Dentsu Aegis headcount to follow. Although advertising, PR and marketing agencies like to claim they can work globally, my experience is that they are not quite so globally integrated as they seem – wherever the client budget is will be where most of the work is being done.

NYK has both shipping and ground logistics arms – both very integrated into the automotive supply chain. Again, they will have to follow their customers.

Pharmaceutical companies – none of the Japanese pharmaceutical companies employ enough people in the UK to be in the Top 30. The biggest is Astellas, which has its EMEA HQ in the UK, but also a strong R&D and manufacturing operation in the Netherlands. The well documented concern for pharmaceutical companies is that the European Medicines Agency will move out of the UK with Brexit, probably to Spain, as Spain has plaintively pointed out that it does not host any EU agencies. Eisai also has a major R&D campus in the UK. Takeda has already announced it is closing its Cambridge R&D facility. I would expect a major negative impact if the EMA moves out of the UK.

Regional headquarters tend to do business with other regional headquarters. If a hard Brexit means Japanese and other multinationals shift their headquarters out of the UK, the negative impact for the UK will be deep and far reaching.

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Why the British and the Japanese are less productive than the Dutch

When I was visiting the Netherlands last week, one of the Japanese managers I met said his main concern was how to motivate his staff. I hear this question often from Japanese managers working in Europe, and I always want to ask – what do you mean by motivation – what would it look like?

Usually a motivated employee is thought to be an employee who makes an effort and perseveres. This is hard to measure objectively, and it is a worry amongst Europeans that Japanese managers evaluate employee motivation by how many hours employees are at their desk. This is a justified concern, reinforced recently by a report I heard regarding a Japanese GM in Spain who was worrying why his Spanish staff were away from their desks far more than Japanese or even British staff.

If you ask Dutch people what motivates them, according to a long-standing Japanese resident in the Netherlands, they will say “boss, just don’t waste my time.” In other words the main way to demotivate the Dutch is to waste their time.

The Dutch have high productivity (usually defined as GDP per hour worked), and also the happiest children, according to various OECD and UNICEF surveys. The connection between the two is pretty obvious when you look out of the window in Amsterdam – the streets are full of mothers and fathers on their bikes, with their children in little carts or on a tandem, going to and from school. Dutch families like to eat supper, together, at 6pm. They also like to spend the evenings doing sports or other hobbies – and allow their children plenty of freedom to come and go as they please. The streets and housing seem clean, safe and spacious, with offices, schools and housing all mixed together, so commuting time is relatively short.

The Dutch people I met said it was quite normal to work one or two days at home, particularly those who had jobs which required regional or global coordinating activities, so didn’t need to be in the office to see their team. It is also quite normal for men and women to work part time if they have children, but retain their management roles. So in other words the best way to motivate Dutch employees is to ensure they feel productive – that they can get a lot done in a short amount of time.

However, I overheard a pair of British managers in the hotel at breakfast talking about their Dutch colleagues. They agreed – “the trouble is, although the Dutch are efficient at getting things done, they just wander off on their own and do it, and you end up with everyone going their own way, it’s really hard to coordinate.”

Maybe this is why Japanese and British productivity, particularly in the services sector, is lower than the Dutch. We spend a lot of time coordinating and monitoring other people’s work rather than producing added value ourselves – perhaps too much time?

This article originally appeared in Japanese in the Teikoku Databank News and also is published 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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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

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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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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Japanese companies move into sort-of reassurance mode re Brexit

Both Nomura and Toyota have moved to reassure their employees their jobs in the UK are safe – for the time being. The devil is in the detail of course – Toyota says plans through to 6 or 7 years from now have already been made, after which, no one can predict anyway, and Nomura’s new COO says London will remain the main brokerage in Europe and there are no plans to move jobs to elsewhere in Europe in the next two years.

Both companies are in our Top 30 Japanese companies in the UK, employing around 5,500 between them. Toyo Keizai magazine’s recent article on whether Japanese companies will move away from the UK has helped us update the ranking further, and we can now say just under 100,000 people are employed by the Top 30. The article goes on to speculate what Hitachi might do about its rail business if the UK was to leave the single market and default to tariffs of 10%. The global headquarters were moved to the UK in 2014 and a factory has been built in Newton Aycliffe. Hitachi is competing with Bombardier (Canada), Siemens (Germany) and Alsthom (France) – the latter two being in the European Union and the eurozone of course.

“Japanese car manufacturers underpin the UK automotive industry”, says Toyo Keizai. Honda, Nissan and Toyota represent half of the 1,590,000 cars that were produced in the UK in 2015, with Nissan being the second largest manufacturer in the UK after Jaguar Land Rover. Around 80% of Nissan’s cars, manufactured in Sunderland, are exported to the EU and elsewhere. NIssan directly employs around 8000 people across the UK, and indirectly a further 32,000.

Yet 61% of Sunderland voters supported Leave, despite the fact that if access to the EU market is restricted, they are likely to lose their jobs. For Honda and Toyota, the UK only represents 2% of their total production, compared to 10% for Nissan. As the utilisation of Nissan partner Renault’s factories is not high, it’s likely production will shift to France.

However it takes time to shift production. “What sort of deal Carlos Ghosn can get from the UK government will influence how the rest of the Japanese car manufacturers will view production in the UK” says Takaki Nakanishi of the Nakanishi Research Institute.

Other issues for Japanese companies are whether the UK retains financial passporting, and for Takeda and other pharmaceutical companies, whether the European Medicines Agency stays in the UK or not.

Japanese companies in the UK

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“Japan should forget about a UK which has lost its value through Brexit”

“The UK referendum to leave EU is similar to Republican party in that it was a decision on emotional grounds”,says Atsushi Osanai, Professor at Waseda University, formerly of Sony, in a column for Diamond Online. The Republican party’s nomination shows how American society has become deformed, now superseded by Brexit. Other than self respect as the Great British Empire, it is hard to see how the decision has any merit, and instead beckons a world financial crisis, and destabilising the global economy.

Although most of the Japanese media has focused on what the effect on the Japanese economy might be, what is the real impact on Japanese companies? In Osanai’s opinion, although there will be short term impacts in terms of a high yen and weakening share prices, as it will take at least 2 years for the UK to leave the EU, the chaos will not last in the long term.

“In the immediate future, there will be a reduction in profits for Japanese exporters because of the higher yen and a reduction in in-bound tourism to Japan. On the other hand, Japanese outbound tourism will become cheaper, and it will be easier to afford Burberry. So long as it is only the UK that leaves the EU.”

One further possibility, is that unexpectedly drastic changes in the exchange rate and share prices might put the spotlight on Abenomics leading up to an election, but Osanai expects that the Japanese people will be reasonably objective in their assessment of this.

“Another not inconsiderable impact of Brexit is that the EU will lose around 10% of its funding and also that the UK may well cease to be a financial centre for the EU. There is also a possibility that Japanese car manufacturers and companies like Hitachi which have been expanding their rail business may find that their export hub to the rest of the European Union has been undermined.”

“This will depend on whether the UK and the EU can come to an agreement on tariffs. Of course for Japanese companies the ideal would be for export tariffs to be as low as possible. But Osanai thinks that in the long term, the EU should impose penalisingly high tariffs. As the world economy is stagnating, major countries are becoming more cautious and putting their own needs first, and it is of concern that a huge economic region like the EU might fragment, producing a situation like the eve of another world war.”

“So for Japanese companies, it’s not just a UK shock, but whether the EU as whole will be stable in the future. It’s not just about investment in one country, but whether to expand in the whole region.”

A benefit from the EU that the British themselves do not recognise

Osanai asks whether for Japanese companies the UK itself is that attractive, and replies “no”

“Europe itself is a large market, however there are several unaligned small-medium scale countries and at a country level, they are not that strong economically. The merit of the EU is that through a strong currency in the EU (which the UK is not part of), goods can flow freely and people can move freely, which stimulates regional trade and mobility of the labour force.”

“For 20^th century UK, which had a stronger economy and manufacturing sector than even major European countries such as Germany and France, there might have been a reason for keeping the country more closed in terms of tariffs and immigration. If the UK as market was attractive, it would still be worth Japanese and other multinationals investing there.”

“However present day UK is not so attractive. Because it was in the EU, it had attraction as a gateway into the EU. And thanks to the free movement of people, it meant cheap labour could still be hired. Post Brexit, there will be high tariffs and high labour costs.”

“There are other countries in the EU who are starting to put their own country first and movements which want to leave. Because of this it is unlikely the EU will give the UK favourable terms to leave. Frankfurt could easily take over from London as the financial centre of the EU.”

“Non EU multinationals such as Japanese companies may find themselves being approached by France or Germany. In the second half of the 20^th century, the UK was a leader in the EU, and as the English language was the world’s common tongue, it was an obvious place to have a subsidiary. However, Sony has recently moved its TV production from the UK to Spain and the Czech Republic.”

“Furthermore, the fact that the only countries that welcomed Brexit were Russia and China is very disturbing, says Osanai. China is increasing its investment in the UK, so perhaps it is hoping that after leaving the EU, the UK will come begging to it, increasing China’s sphere of influence.”

“And the UK itself may disintegrate into Scotland and Wales and Ireland.”

“The world needs to show the UK how little merit there is in leaving the EU, and the need to avoid the disintegration of the EU. For that reason, Japan should dump the UK.”

“Although we shouldn’t ignore China’s investment in the UK, the main rivals to Japan’s manufacturers are not in the UK but in Germany and France. So Japan’s manufacturers need to get over their UK shock and build a foundation for competing with EU countries for market share. There are two years of breathing space at least. Electronics and automotive manufacturers should start looking at the continent.”

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What will happen to Japan’s supply chains in Europe post Brexit?

I found the lack of understanding of how trade actually works – particularly in regard to the complex supply chains – amongst those campaigning for the UK to leave the EU, really worrying. The idea that you could, for example, say something was a “German car” which the Germans would be desperate to sell to the UK, when it might have been designed, financed and maybe even built with wire harnesses from the UK – and could be a Japanese brand! This worry is confirmed by an article which recently appeared in the Nikkei Online, by Takanori Sakaguchi, a purchasing consultant.

“To be frank, like most of our readers, I was not expecting the UK to vote to leave the EU. Sterling plummeting, the Yen strengthening, share prices falling, this scenario was just a simulation”

Sakaguchi thought it would be like the Scottish referendum, with 55% voting to stay. “Economists warned the economic damage would be unavoidable. Over half of UK’s exports go to the EU. The majority of multinationals’ European HQ are in the UK, where business can be conducted in English.”

The writer’s contacts who were expatriates in the UK all said that if the UK left the EU, then the reason for being in the UK would be eradicated. Employment rights were also protected by being in the EU.

“If the UK left the EU, it will take an extraordinary amount of time and effort to reach free trade agreements with each country. Furthermore, once it has left the EU, it would take 10 or 20 years before it could return.”

“It is unclear what the 2 year negotiation is going to be like, as there is no precedent. It is likely, in order to discourage others from leaving, that EU countries will take a tough stance. It is unclear if the UK will be able to avoid immigration inflows and if that will lead to a reduction in unemployment for its own people.”

“There is a 100 million theory in the automotive industry – if 1 country has more than 100m population then should be able to sustain a car industry – acquiring all parts and technology locally. Japan and the USA can therefore sustain a home-grown car industry. None of the countries in Europe has a population greater than 100 million, so that was a good reason to create the European Union. For it to work, there needs to be standardization of legislation, systems, policies and engineering methods. There is no alternative.”

Short term

“In the short term, there will be a cheaper pound, a fall in asset prices and share prices. There will be those who try to make use of a cheaper pound to “buy UK”. For retailers, it will be beneficial.”

“However, currently companies are cutting back on investing in UK capital investment, and will become even more cautious about this if the UK leaves the EU. It’s likely that those who have invested and have not made their money back, will withdraw.”

Medium term

“Although they may benefit short term from a cheap pound, manufacturers will think about shifting to other countries in order to protect their competitiveness, so in the mid term, jobs will shift. Companies will also be assessing whether to keep factories and suppliers in the UK.”

“Also there will be new UK-only labour laws, which may mean increased costs – another reason to leave the UK.”

“Supply chain costs to the UK are likely to increase as the main labour supporting it is on the continent, particularly if there is a labour shortage in the UK as well. It will make manufacturing in the UK even less competitive.”

“Supply chains are also likely to become more complex if the UK starts to implement its own rules and regulations.”

“The key thing about supply chains is that they are a way of spreading the risk in case one part is affected – as per ASEAN economic cooperation and concerns about tsunami or earthquakes.”

“Yet the UK chose independence and control over any negative economic impact. It is difficult for supply chains to read what is going on, but surely as any country leaves an economic area, they will adjust their strategy. This is a never-ending fight between sovereignty and free markets.”

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Top 30 Japanese companies in the UK – Brexit impact

I’d been avoiding doing a Top 30 Japanese employers in the UK ranking to accompany our Top 30 Japanese employers in Europe, as officially disclosed data per country are much harder to get hold of than regional totals. But with Brexit, more data has been disclosed about employee numbers and where there are still no data from the company itself, I took the top figure from publicly available sources.

Credit research agency Teikoku Databank, for whom I write a monthly column, estimate there are 1,380 Japanese companies with operations in the UK, with the manufacturing industry accounting for 40%. The estimate commonly used by the Japanese Embassy in the UK is that Japanese companies directly employ around 140,000 people. Our Top 30 employ nearly 100,000 of those employees, so they represent around 2/3 of the total number who are employed by Japanese companies in the UK.

Manufacturers do indeed represent more than half of the Top 30, although the largest company (12,000 employees), Fujitsu, is an IT solutions and services provider in the UK. 16 of our Top 30 companies have factories in the UK, half of which are automotive related. Automotive factories are part of a highly integrated European supply chain, both exporting a high proportion of their production to Europe and importing parts from Europe. The rest range from food processing to electronics to medical instruments. The automotive factories export more than half of their production to the rest of Europe, and also import plenty of parts from Europe for assembly.

In terms of Brexit impact, most of these companies have other factories in Europe, such as in Spain, Romania, Portugal and Poland, so my guess is that over the next few years, depending on the deal which the UK makes with Europe, some production and jobs might transfer to other locations.

The remaining companies are almost all financial services companies. Again, they all have offices elsewhere in Europe and I have already heard that some of them have opened “European Union” branches and built up capabilities in Amsterdam, for example. If the UK loses its “EU passport” to operate freely across EU financial markets, then undoubtedly more jobs will shift. In any case, just as with the manufacturers, there have been shifts eastwards of middle and back office jobs to Continental Europe, particularly Poland.

According to the Teikoku Databank, 18.7% of the 1,380 companies are wholesalers/sales operations, 17% are in the services sector, and 11.5% are financial/insurance. The biggest group (29.5%) have consolidated turnovers of between £75-£750 million/Y1bn-Y10bn/$100m-$1bn and 22.8% have turnovers of over £750m/Y1bn/$1bn, so the larger Japanese companies are well represented, in contrast to ASEAN, where most of the Japanese companies who have presence there are classified as small-medium size enterprises in Japan. 55% of the UK Japanese companies have their headquarters in Tokyo, 8.5% in Osaka and 5.9% in Kanagawa prefecture (Yokohama and Kawasaki).

But the outstanding feature of the Top 30 that most concerns me, both for my own business and for the future of the UK, is the large proportion of the Top 30 that are the product of an acquisition. Having put a stake in the ground, they may well stay in the UK despite Brexit, but will the UK really see many more major acquisitions from now on? And despite their British roots, might the European HQ gradually shift away? 21 of the Top 30 currently have their regional HQ in the UK, but I have seen many of them become more virtual and integrated in the way they manage the region, so that actual physical location is less important for management level regional executives.

Fujitsu – ICL
Sumitomo Electric Industries – Lucas
Itochu – Stapleton Tyres, Kwik-Fit
Mitsubishi Corporation – Princes Foods
Hitachi – The Railway Engineering Company, Horizon Nuclear Power
NSG – Pilkington Glass
Dentsu – Aegis
Calsonic Kansei – Llanelli Radiators, Marley Foam
Suntory – Lucozade, Ribena
Olympus – KeyMed
Mitsubishi Chemical Holding – Lucite
Mitsui Sumitomo Insurance & Aio Nissay Dowa – Amlin, Insure The Box
Sompo Holdings – Canopius

My sense is, UK based people might want to get ready to move eastwards too in the next few years, if they want to work for the Japanese Top 30. Ironically, Poland looks a good bet, the source of so much immigration to the UK recently and in the more distant past.

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Category: Japanese business in Europe

Japan – into Africa

At a stroke, the Brexit vote has increased Japan’s perception of the risk of investing in UK and EU

Why the British and the Japanese are less productive than the Dutch

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

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

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

Japanese companies move into sort-of reassurance mode re Brexit

Japanese companies in the UK

“Japan should forget about a UK which has lost its value through Brexit”

What will happen to Japan’s supply chains in Europe post Brexit?

Top 30 Japanese companies in the UK – Brexit impact

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