Category: M&A

Fujitsu and NEC: same woes in Japan, diverging in Europe and Africa

Increased sanctions on Huawei should benefit Japanese ICT (Information & Communication Technology) companies NEC and Fujitsu, yet both seem to be struggling after years of restructuring, says the Nikkei. They were at the core of what used to be known as the Den Den Family – suppliers to Japan’s former Ministry of Post and Telecommunications, now NTT.  However their telecoms business seems to be undermining rather than helping their restructuring efforts.

“Fujitsu is no longer a manufacturer, because of its shift to IT services, and NEC has lost its strengths in technology, they are no longer globally competitive”, says an NTT executive.  NTT was not using Huawei for its DoCoMo mobile network business anyway, so this will not be a source of new business.

Years of restructuring with little result

NEC started an early retirement program in Japan for employees over 45 in 2018, with 2,170 employees leaving at the end of the year. Fujitsu also transferred some of its Japan based employees who are not in customer facing divisions to customer facing divisions, resulting in 2,850 people leaving the company by March 2019.

Both companies have sold off businesses in areas such as semiconductors, smartphones, PCs and internet service provision.  Compared to 2000, when both achieved operating income of Y260bn, NEC’s revenues have dropped 42% and Fujitsu  has fallen by 25% and operating income has fallen by half or more. Employee numbers have dropped by 29% at NEC and 30% at Fujitsu.

Neither company have achieved operating profit margins of over 5% since 2000, despite repeated restructuring.   Market capitalization is down 80% for NEC and 73% for Fujitsu.

The new president of Fujitsu, Takahito Takada, recognises that there are still issues that need to be resolved, domestically and overseas.  His predecessor Tatsuya Tanaka had also tried to increase operating income but delays in restructuring in Europe meant this was not achieved.  NEC has also repeatedly missed profit targets.

Reluctance to merge, difficulty in partnering for 5G

Both NEC and Fujitsu have been focusing more on developing IT systems for private and public sector clients, and telecoms is becoming more peripheral to the business.  There are moves afoot to integrate the optical transmission equipment business of both companies into one unit that is globally competitive, involving the Japanese Ministry of Economy, Trade and Industry, the Ministry of Internal Affairs and Communications and NTT.  However, given that NEC and Fujitsu have always been competitors, and have never integrated any of their businesses before, there is a strong reluctance on their part to proceed.  Furthermore, NTT itself says if the result of such a merger is continuing high prices, then this will not be viable.

Even though NTT was the first in the world  to introduce 3G, Fujitsu and NEC did not capitalise on this or for 4G, and were outstripped by Huawei. The question now is whether they can catch up with 5G.  Both are seeking partners overseas – NEC with Samsung and Fujitsu with Ericsson.  Previous partnerships like this for 3G and 4G, with Alcatel-Lucent, Siemens and Nokia did not bear fruit. NEC is hoping to get business from Rakuten’s entry into mobile phone services, setting up a communication network with US startup Altiostar Networks.

Unable to compete with Google or Microsoft in IT services

Even in the core business of IT systems, with Industry 4.0, AI and IoT, Fujitsu and NEC do not seem to be showing any signs of new growth sources.  Amazon is eating into their cloud offerings and it is difficult to compete with the massive R&D budgets of companies like Google.

NEC is trying to get away from reactive, passive IT system building based on customer requests. They are investing in anticipation of customer needs, in areas such as food waste reduction, building a demand and supply platform to ensure more accurate forecasts.

Fujitsu is aiming to become more competitive by shifting new business creation out of Japan.  It has set up an AI HQ in Vancouver. This is an attempt to escape from the model it has relied on in the past, of developing hardware in Japan and then selling it overseas.

Both companies are also having to compete with Google and Microsoft or startups for talented IT people. NEC introduced a system this  year to recruit outstanding researchers with a starting salary of $93,000.

Europe, Middle East, Africa

NEC and Fujitsu diverge in their strategies for the Europe, Middle East and Africa region. Fujitsu has been cutting employees in EMEA (or as they call it EMEIA – including India). This is happening particularly in Germany and the UK where it could be argued it is overweight, thanks to the legacy of the acquisition of ICL in the UK and the joint venture with Siemens. It announced in the past year it will close the factory in Augsburg, Germany – the last remaining computer factory owned by anyone, in Europe.

NEC, on the other hand, has grown in the region. They acquired Northgate Public Services in the UK and KMD in Denmark in 2018. They are also proactive in Africa, looking at getting involved in Japanese development aid projects.

The market in developing countries could be where NEC is a strong alternative to Huawei, whereas the investment in AI in Canada suggests to me that Fujitsu is still pursuing its dream of being a leader in AI and supercomputing, taking on North America.

 

 

 

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Murata – reinjecting enjoyment into corporate philosophy

Murata is one of Japan’s most quietly successful companies, with a 40% share of global sales of the tiny ceramic capacitors that are essential to the electronics industry.

Tsuneo Murata, 3rd president from the founding family, says in an interview in Nikkei Business that the bursting of the dotcom bubble in 2001 was a turning point for the corporate culture. They had become too arrogant during the IT bubble of the 1990s and had stopped listening to customers. They did not recover as quickly in the early 2000s as rivals did. Tsuneo Murata, who was then EVP, asked board members and employees for their views on the company culture and what was preventing recovery. He was told the company had become conservative, cautious, inflexible, bureaucratic and slow.

So he set up an organisational cultural reform committee It was tasked with ensuring that the culture became one which adapted rapidly to a changing environment, where the genba (shopfloor) had autonomy and people could freely discuss, create and challenge.

The need for persistence in cultural reforms

Murata became President in 2007. Even with the Lehman Shock walloping profits shortly after, he insisted on continuing with cultural reforms. He went back to the founding philosophy of Akira Murata, to rediscover the sense of freedom that Murata used to have. Actually the philosophy does not mention freedom. In translation it says pretty much what many Japanese corporate philosophies say – contributing to society through innovative technology, building trust, working in partnership, etc.  The one part that isn’t translated into English is the word “yorokobi“, meaning to enjoy.  To me that’s the most important bit – a lot of Japanese companies have lost their sense of fun since the 2000s.

It sounds like the success of Murata is as much to do with Tsuneo Murata’s personality.  Since becoming President he continues to eat in the same canteen as workers in the headquarters in Kyoto and does not use the executive elevator (unless in an emergency). “I don’t think there’s a single employee that does not like him” says one employee.

He is asked by Nikkei Business how he ensures a common understanding of corporate culture when Murata acquires other companies – for example, IPDiA in France in 2016.  “It takes time, especially when it’s a foreign acquisition, because generally overseas employees are not as loyal to their companies as in Japan anyway. But if we introduce our corporate philosophy to them, they have empathy with it. I think it’s important to communicate it thoroughly.”

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“Let’s be lovers first” is a high risk approach to acquiring overseas for Japanese companies

Most Japanese companies assume overseas acquisitions are high risk – and yet continue to acquire in pursuit of growth. But according to research from Daiki Tanaka (formerly of McKinsey and now running his own consultancy) Japanese overseas acquisitions of companies in the same industry from 1996 to 2018 had a lower failure rate (2.8%) than domestic Japanese acquisitions where the acquiring company is “jumping” into new sectors (3.4%).

The money at stake is are far bigger however for overseas takeovers.  The average price tag of an overseas acquisition is Y24.5bn (over $200m), whereas the average domestic acquisition in Japan is around Y1bn (over $9m). This would be partly skewed by recent mega acquisitions such as Takeda acquiring Shire for  $62bn and SoftBank acquiring ARM for $32bn.

Tanaka also concludes from his research that a “let’s be lovers first” approach is actually a higher risk strategy for overseas acquisitions. Taking a minority stake and then gradually raising it to full ownership/marriage can mean that due diligence is insufficient and the minority shareholder has not been able to participate fully in corporate governance.

Tanaka expects Japanese companies to continue to acquire overseas companies from the same industrial sector, because lower risk domestic acquisitions will not necessarily help to access higher growth overseas markets. If they want to escape the low growth, ageing Japanese market, acquiring overseas is the obvious quick route out.  It would seem that a virgin marriage is recommended however.

 

 

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The good and bad of no longer being “Japan owned”

I’ve been wondering for a while whether Japanese employees of companies such as Sharp or Takata have been feeling any change in corporate culture since being acquired by Taiwanese or Chinese companies and whether those companies could still be considered to be “Japanese”.

Nikkei Business has inteviewed employees from Sharp, Toshiba memory division and also from the laptop division of NEC (now owned by Lenovo) and come up with  13 aspects that have caused difficulties for Japanese employees who have been “bought” (as the Nikkei puts it) and 7 positive effects.

Difficulties:

1. Having to work much harder than before – due to increasing focus on short term profitability – even longer hours than is the norm in Japan.

2. Loss of right to evaluate staff – a sense that Taiwan HQ is now in charge of career development

3. Increase in employees who have a “Taiwan First” mindset

“If you don’t like doing things the Hon Hai way, then start your own business, or go and work for Nidec or Panasonic. If you can’t do that, then suck it up, seems to be their attitude” says one employee.

4. Rigid management by numbers

5. English skills are now compulsory

6. Nemawashi (stakeholder management/consensus) no longer works

7. Large cuts in salary

8. Reduction in autonomy

9. Sudden changes in supplier relationships

10. Reduction in  management positions

11. Being posted to unwelcome locations

12. Collapse of succession planning

13. Low capability managers being seconded to your company

Some of the above could happen to any acquired company in any country, but I guess 1, 4, 5, and 6 are particularly acutely felt for Japanese companies acquired by foreign companies.

Some employees saw an upside however:

1. Structural problems are removed

2. Disappearance of bullying bosses

3. Job becomes more fulfilling

4. “Rags to riches” when previously your career history or educational record counted against you

5. Increased salary

6. Improved credit rating

7. More opportunities for promotion

Again many of these are the result of issues arising from having worked for a failing company, and now being owned by a more successful one – but I can see that for many Japanese who were stuck – with their careers blocked by bullying bosses, or considered lower status because of not being a lifetime employee since graduation or not coming from a top university –  it is refreshing to be evaluated and promoted purely on ability.

 

 

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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.

 

 

 

 

 

 

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Will Japan’s NTT put its global base in the UK despite – or because of – Brexit?

While Panasonic and Sony have announced they are shifting their European headquarters out of the UK because of Brexit (and Japanese tax haven laws), NTT are likely to place not just their European but their global (ie excluding Japan/domestic) headquarters in London. Is this despite Brexit, or even because of?  As previously blogged, NTT Data have been hiring by the hundreds in the UK, and staying positive about Brexit with one eye on public sector contracts for Brexit related IT systems such as border security and customs.

The President of NTT until 2018, Hiroo Unoura, had said in an interview five years’ ago that the US would be a global pivot for NTT, but I suspect, rather as my former employer Fujitsu has found, that it is very hard to take on the big US IT/telecoms giants in their home territory.  Some of the acquisitions that NTT and NTT Data have made over the past decade have been US companies such as Keane and Virtela, but some of the biggest acquisitions were in the EMEA region – Everis (Spain), Dimension Data (South Africa) and Value Team (Italy).

Cleaning up an organisational mess

As I said in a previous post, the result was an organisational mess.  NTT Data was kept separate from NTT as a brand and tried to unify across all its global acquisitions whereas Dimension Data, in some ways a competitor, was directly owned by NTT.  NTT also had a separate organisation NTT Communications, to manage its global businesses.

From this summer, NTT is setting up a global holding company, and putting 5 subsidiaries including NTT Communications, NTT Security, NTT Data and Dimension Data under its umbrella. The organisation of the 4 companies excluding NTT Data will be split between domestic Japanese and global, and the global businesses will be unified.

The last time NTT changed its structure this drastically was 20 years’ ago. They have faced two challenges since then, first with the attempted global expansion of NTT DoCoMo, particularly into the US, which led to large losses, after the dotcom bubble burst. For 10 years, no further investments were made outside of Japan.

The challenge of global profitability

The second challenge is profitability. The reason they structured themselves in such a complex way in 1999 was to open up NTT (which originated as a partially privatised former ministry of telecommunications organisation) to competition domestically. So merging the company back into a holding company is likely to be regarded with suspicion by its competitors in Japan. However, NTT has reached a limit of how much it can cut costs domestically, and although overseas turnover has risen thanks to all the acquisitions, profitability is not on target. So it was felt more radical steps were needed.

One model for this might be Japan Tobacco, says Kazuyuki Okudaira in the Nikkei. JT was also part privatised and acquired RJR Nabisco’s non-US tobacco business in 1999 and also Gallaher in the UK in 2006. Japan Tobacco’s global headquarters is in Switzerland, and 60% of its sales are now overseas.  “Whether NTT can repeat JT’s success remains to be seen” says Okudaira.

Is not being the US or China enough?

NTT has said it won’t confirm the decision about where it will base its global HQ until July, but has already moved into a swanky new office in the City of London. Dimension Data has 2,500 employees, over 10% of its global workforce, in the UK and its global hub and executives are in London.  In the short term at least, London remains the global financial capital in need of the kind of data centres and infrastructure NTT provides, and has a multinational, multilingual IT workforce. It’s also not the USA, and Japan is not China (see Huawei controversy).  In the longer run, however, if Japan Tobacco is meant to be the model, it’s worth remembering JT shut down the Gallaher factory in Northern Ireland in 2017, with the loss of 1,000 jobs. Even though it has a 41% share of the UK market, the factories and the bulk of the jobs are elsewhere in Europe, Middle East and Africa.

As we found at Fujitsu, even if you try to base your global marketing out of Europe, you still have to compete with US rivals – not only with IBM but Google and Amazon – in IT B2B services. NTT has a big brand recognition challenge on its hands which may mean that global profitability is elusive for a while yet.

 

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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.

 

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Will Hitachi lop off one of its three branches?

I keep blogging about Hitachi, because they are one of the most influential companies in Japanese business circles, along with Toyota and Panasonic. The way they have reinvented themselves since their record breaking loss in 2009 is watched closely by other Japanese blue chips.

According to the Nikkei Business magazine last month, discussions are well advanced to sell off Hitachi Chemical and Hitachi Construction Machinery. Both have appointed financial advisors – a non-Japanese investment bank  in Hitachi Construction Machinery’s case.  Hitachi Chemical is one of Hitachi’s three largest and longest surviving subsidiaries, known as the Three Branches (Hitachi Metals and Hitachi Cable being the other two).

Hitachi has already reduced 900 subsidiaries down to 500 and finalised the sale of car navigation system subsidiary Clarion to the French company Faurecia last month. The company will be delisted, ending 56 years of history as a listed company, leaving Hitachi with only 4 listed subsidiaries.

Clarion used to have a close relationship with Nissan, who in turn held a small share of Clarion,. With Ghosn’s restructuring of supply chains in the 2000s, Clarion began to struggle, and Hitachi stepped in, ending with over 60% share in the company. Faurecia says its interest in Clarion is to strengthen its autonomous driving capabilities. It also aims to improve Faurecia sales to Japanese and American car manufacturers and Clarion sales to European manufacturers. It may even invest in Clarion’s plant in Hungary, which is currently underutilized.

Social Innovation, not commoditization

Hitachi meanwhile is focusing its business on what it calls “Social Innovation” – the Internet of Things and social infrastructure. It is hiving off any businesses which are product focused and in danger of becoming commoditized. This would include Hitachi Chemicals, who have a stable profit margin of 5%, mainly providing chemicals for semiconductors and smartphones.  Hitachi Construction Machinery is trying to move more into the services sector, and its profit margins are not as healthy as competitor Komatsu.

Neither company wants to be sold off, according to an investment banking insider, but are under pressure from Hitachi. So rather then be bought by a new parent company that they did not choose, they are making defensive moves. This won’t be the first time that one of Hitachi’s subsidiaries chose their own buyer. Hitachi Power Tools led the negotations themselves that ended in being sold to KKR, the American private equity fund in 2017.

Conversely, Hitachi is buying up businesses where it feels it needs strengthening, such as its acquisition last year of Swiss company ABB’s power grid business.  Hitachi needs the cash for growth, which is another reason for selling off its listed subsidiaries.

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Are Japanese companies leaving the UK because of Brexit?

I’m afraid the answer to this question is yes, and no.  Bits of Japanese companies are leaving. What will be left in  the long run is some kind of UK-based training ground for Japanese companies’ star recruits to learn global management, with a local sales workforce attached.

I’ve come back from a recent trip to Japan clutching the brand new Toyo Keizai directory of Japanese companies overseas, which provides the data to dig into this question more deeply. It provides some clues as to whether, for example, Honda ending production in Europe is in part due to the EU-Japan Economic Partnership Agreement reducing tariffs to zero on cars and car parts imported from Japan. If that was the case, there might be a general shift of automotive production away from the EU.

Asia is far more important to Japan than Europe

The number of Japanese companies overseas has increased 37% from 2008 to 2018, according to the Toyo Keizai data, to 31,574.  The true number will be bigger, as I know from my researches into the UK, there are many Japanese companies that Toyo Keizai has not managed to track down, or who maybe just don’t respond to their surveys. 62% of Japanese companies overseas are in Asia (excluding Japan obviously), 15% in Europe, 14% in North America, 5% in Latin America, 2% in Oceania, 1% in Africa and 1% in the Middle East.

If you look at it by employee number, the proportion is roughly the same – 68% in Asia, 11% in Europe, 11.8% in North America, 6.6% in Latin America, 1.5% in Oceania, 0.7% in Africa, 0.4% in the Middle East. An obvious factor in why there are proportionately more employees to number of companies in Asia and Latin America is the greater number of manufacturing operations in those regions.

So already we see Europe represents 11-15% of the business of Japanese multinationals, and those companies are relatively less likely to be manufacturing operations than in Asia or Latin America.

The number of Japanese companies in Europe has increased 35% in ten years

Japanese companies have not been pulling out of Europe, however. There was a 35% increase in the number of companies in Europe 2008-2018, so not far off the average global increase of 37%.  The biggest growth was in Latin America – 47%, then the Middle East (45%) and Africa (43%) – but from a small base.  The number of companies in Asia grew 38% and only 30% in North America.

Growth in the number of Japanese companies overseas has been more muted in the past 4 years – a 7.9% increase 2015-2018.  But the  increase in the number of Japanese companies in Europe was above average – at 12.5%.  The increases in companies in Asia (7.6%) and Latin America (5.6%) were below average – so there was a boom in Japanese investment in developing countries during the 2008-2014 period, but this died down in the past 4 years.

Japanese automotive manufacturers are not pulling out of Europe – quite the reverse

So how about investment in automotive manufacturing – the sector that has made the most noise in Brexit UK?  The number of Japanese companies overseas in the “transportation machinery manufacturing” category that Toyo Keizai uses (which presumably corresponds to automotive manufacturing) rose 6% 2015-2018, so significantly slower growth than overall.  Again, Europe showed above average growth of 13%, but only represents 10% of transportation machinery manufacturers overseas operations.   Over 64% of automotive manufacturer sites are in ex-Japan Asia. So although Japanese automotive companies are not pulling out of Europe – rather the reverse – the major part of Japanese automotive investment is and continues to be in Asia.  So no surprises really that Honda and others are choosing to focus on Asia for electric vehicle development – that is where the largest ecosystems and supply chains are based.

UK is still has the most automotive manufacturers in Europe, but is not getting any new investment

How about the UK in all of this?  The UK had and continues to have the largest number of automotive related manufacturers in Europe, according to Toyo Keizai – 32 in 2015 (out of 192 in Europe) and 30 in 2018 (out of 217). I haven’t been able to identify both of the companies that have withdrawn from the UK, but one is almost certainly Keihin, 41% owned by Honda, who shut down production of vehicle engine management systems and climate control systems in the UK in 2014-5 and shifted production to the Czech Republic.  The other might be more to do with renaming and consolidation rather than withdrawal of manufacturing.

Keihin’s move is clearly “pre-Brexit” but what is obvious is that the UK is not getting any new investment in the automotive sector since Brexit. Of the 29 new automotive manufacturing operations started in Europe in 2015-2018, 8 were in Germany, 4 in France, 4 in Slovakia, 3 in Spain, 3 in Italy, 3 in Hungary and 2 in the Czech Republic but none in the UK.  Germany, France and the Czech Republic are now not far behind the UK in the number of automotive production sites that they host.

So the idea that the zero tariffs on cars and car part imports from Japan which would eventually arise from the EU-Japan Economic Partnership has meant that it is no longer attractive to manufacture cars and car parts in the UK or the rest of the EU also does not seem to hold – yet.  In fact I was surprised to see that Western Europe has held up well against the cheaper Eastern European countries.

UK employees of Japanese companies up 20% on 2015, mainly due to acquisitions

Generally, the number of Japanese companies in the UK is still rising – 972 in 2018 according to Toyo Keizai, 11.1% up on 2015. The other countries in the top 5 – Germany, Netherlands, France and Italy are all hosting more Japanese companies too, and the numbers have grown slightly faster than in the UK, by between 11.8% to 13.5% over the past 4 years.

Many of the new Japanese in companies in the UK over the past few years have been acquisitions in biotech/pharma, high tech, outsourcing/staffing, automotive services and new arrivals have been in fintech, or investment/holding companies.

So what about the companies that have said they are leaving the UK because of Brexit, such as Panasonic and Sony?  Well, rather like Keihin, they are not actually leaving the UK, just moving some functions, in this case the regional headquarters functions rather than manufacturing, to the Netherlands or Germany.  This kind of “leaving” – turning what were incorporated subsidiaries into branches, has emerged in other Japanese companies too, as one reaction to Brexit.  Invoicing, tax on sales, royalties etc will all be taken care of by the regional headquarters, and the UK branch will be funded by management fees.

So although the numbers employed by Japanese companies in the UK continue to rise (by 20% since 2015), this is more the result of acquisition of existing staff, rather than the creation of large numbers of new jobs that greenfield manufacturing investment brings.

During my trip to Japan last week I met with Leo Lewis, Financial Times Tokyo Correspondent, and it is to him that I owe the insight that Japanese companies will never leave the UK completely, as it is too attractive an incentive to their highflyers, to be able to promise a couple of years early in their career to learn the ropes of global business in the UK. But bits will nonetheless leave, as the recent news about Nomura’s restructuring shows.

 

 

 

 

 

 

 

 

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Hitachi acquisition of ABB power grid business is a “Black Ship” to push globalization

It’s been 10 years since Hitachi made its record breaking loss and Takashi Kawamura became Chairman and President.  Kawamura was chairman when Hitachi decided to buy Horizon Nuclear Power in the UK in 2012, and he now says he was one of the more cautious faction. “Costs pile up long before you’ve even produced one kilowatt of energy so I made it clear that we needed to set various points at which we will decide whether to proceed or not with the project”.  Takashi Kawamura is now chairman of Tokyo Electric Power, so has not managed to escape the nuclear power industry despite his cautiousness.

Hiroaki Nakanishi lasted 4 years as President from 2010 to 2014, when Toshiaki Higashihara, also interviewed in the same Nikkei article, became President. Higashihara has not only frozen the Horizon project but acquired Swiss company ABB’s power grid business in 2018.   “Globalization has not been achieved yet” for Hitachi he believes. He tells employees that the ABB acquisition is a Black Ship he has invited in, just like the foreign pressure to open up Japan in the Meiji Revolution, to change Hitachi and push globalization further.

Hitachi is shifting more into services and believes it has the right product and solution mix to for the “Internet of Things”.  Sales may not grow much – for services business the point is to improve profitability, rather than sales volume, Higashihara points out.

Kawamura also says the old ways, of life time employment and being a generalist have to come to an end.  Hitachi offered retraining for people employed in the businesses he shut down or spun out, like the semi conductor business, but many of them had expected to stay at Hitachi all their life, and not to have to find work elsewhere.

Higashihara goes on to say the next leader needs to be able to manage globally, in particular, to be able to communicate, across generations, nationalities, sexuality and gender.  “If they seem to have the right balance of qualities, it would not be a surprise if it was a foreigner” who succeeds him.  That is likely to be soon, as Higashihara has been president for 5 years now, and 6 years is usually considered to be the maximum for Presidents in companies such as Hitachi.  Maybe the Black Ship has brought some potential candidates with it, or Hitachi Rail’s former CEO Alistair Dormer, now Representative Executive Officer, Executive Vice President and Executive Officer of Hitachi Ltd is being lined up for the job.

 

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