Category: M&A

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.

Higashihira 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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The fourth industrial revolution should not be mercantilized

UK is the birthplace of innovation and will not sink, despite Brexit, says Toru Sugawara, the deputy editor of the Nikkei Business magazine – Japan’s equivalent of The Economist (only with more business, less economy).

He acknowledges that Brexit is casting a shadow on the world economy, and that the problems will not end just with an extension, as the negotiations will drag on, unless the result of the referendum is reversed.

He points to how employment remains buoyant in the UK, despite GDP growth being the lowest in 6 years, and says that this could be because immigration from the EU is decreasing – which was one of the reasons people voted to leave. He does not mention that net immigration has not dropped, as more people are coming from non-EU countries.  So unless you believe that EU immigrants only have jobs which UK natives could do, and non-EU immigrants only do jobs that UK natives couldn’t do…

He believes the UK’s resilience derives from an inner strength which helped it to lead the industrial revolution as the “birthplace of innovation.” Because the UK has worldclass universities  “UK research levels are extremely high. Even if they leave the EU, there are researchers who want to learn from the UK” – according to  an engineer from a major Japanese electronics company.

The UK is similar to Japan, Sugawara notes, in that neither was able to match Silicon Valley in terms of being able to turn innovations into world changing businesses.  He thinks the UK is changing, however, dating from when the British Business Bank launched in 2014, bringing together various funds for startups and small businesses and also the introduction of the regulatory sandbox, to allow new kinds of financial services to test their products.

Venture capital funding in the UK in 2018 was $7.9bn, double that of Germany or France (although what he doesn’t say is that this was down from a high of $8.1bn the previous year, and that Germany and France seem to be catching up) . Dr Yuri Okina of the Japan Research Institute points out that the UK’s strength is that as well as having the world’s financial centre, there is a rich source of accountants, lawyers, consultants and other specialists who support an ecosystem for new business.

If this network could be boosted further, then the UK could lead the 4th wave of the industrial revolution, asserts Sugawara. He warns that Japan, who puts its funds into propping up zombie companies, with regulatory systems that impede new industries from growing, will get left behind. “That’s the bigger worry” he concludes.

So he seems to be turning an encouraging pat on the back for the UK into a kick up the backside for Japan.  What he says is not going to be news to many Japanese companies, who have reacted to the difficulties they face in Japan by investing in the UK (and elsewhere in Europe). Sugawara mentions SoftBank‘s acquisition of the UK’s ARM, but there have been plenty of other less spectacular investments. Much of it has to do with CASE (Connected, Autonomous, Shared, Electric) in the automotive industry –  Sony Innovation has invested in What3Words (a geocoding system) – also invested in by Daimler. Itochu has invested in Hiyacar and I realise now that its acquisition of UK car repair chain KwikFit probably also fits into this automotive services play. Similarly Sumitomo Corporation has invested in the Nordic parking company Q-Park and Sweden’s car sharing service Aimo.  Japan’s Park24 acquiring National Car Parks in the UK is probably also looking to a CASE future. Panasonic acquired Spanish automotive systems and parts company Ficosa in 2017.

So really, it’s not about any one country leading the fourth industrial revolution – it will be collaborative and global by its very nature. Both Japan and the UK need to keep their doors as wide open as possible to let everyone get on the ride.

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Acquire or be acquired – predictions on the future of Japanese mergers and acquisitions

Japanese companies used to be seen as very reluctant to acquire and merge with other companies, but the record breaking £46bn acquisition, finalised in January 2019, of Irish pharmaceuticals company Shire by Japan’s Takeda may not even be the peak of what has been at least 10 years’ of an overseas spending spree by Japanese companies.  Faced with a declining, ageing domestic market, Nikkei Business magazine expects Japanese companies to continue their spending spree in 2019, even if there is not a big ticket purchase like Takeda/Shire.

Autonomous vehicles, Internet of Things and other new technologies are likely to be the focus of future M&A.  For example Japan’s tyre maker Bridgestone has acquired the telematics business of Dutch company TomTom. “Tyre companies are also entering the era of CASE (Connected, Autonomous, Sharing Electric)” says Bridgestone’s CEO Masaaki Tsuya. Sensors can be placed in tyres to understand driving conditions, for example.

In the IT sector, NEC has acquired the UK company Northgate Public Services in January 2019 and in December of the previous year acquired Denmark’s KMD Holding and is looking to acquire a stake in India’s Mindtree.

Food and drink companies are also active – Mizkan, Ajinomoto and Asahi Beer have all made acquisitions recently in Europe.

In the financial sector, Nikkei Business speculates that a Japanese company like SMFG or Orix might be interested in acquiring GE’s aircraft leasing business GECAS, headquartered in Ireland – although GE has since denied GECAS is for sale.  MUFG might be interested in the US Bank of the West.

Most of the acquisitions of Japanese companies have been by Chinese companies, but Nikkei Business also wonders whether some of the big Western automotive suppliers such as Bosch, Continental, ZF, or Magna might not be interested in acquiring Japanese automotive suppliers.

Declutter and dispose

M&A is also an opportunity for Japan’s keiretsus (conglomerates and company groupings) to do a bit of tidying up. The trendsetter in this has been Hitachi, who have been pursuing a rigorous policy of “selection and focus” in rearranging their business portfolio. Over the past 10 years or so they have sold off Hitachi Global Storage Technologies to Western Digital, Hitachi Logistics to SG Holdings, sold a 27% share in Hitachi Capital to MUFG, sold Hitachi Power Tools and Hitachi Kokusai Electric to KKR and Clarion to Faurecia.

Japanese investors and banks are keeping a watch on Hitachi High Technologies, Hitachi Chemical, Hitachi Automotive Systems, Hitachi Construction Machinery and Hitachi Metals as the next possible candidates.  Hitachi Chemical and Hitachi Metals were supposed to be two of the “Three Branches” of Hitachi along with Hitachi Cable, so the idea that they could be sold off would be heresy to some Hitachi old timers.  As the Nikkei Business magazine says, Hitachi is trying to compete as a global company, so any business that has no synergy with its “social innovation” vision is likely to be dropped.

Panasonic already sold off its security camera business and foreign funds are eyeing up Panasonic Avionics – an inflight entertainment company – as a likely next candidate. “It has nothing to do with Panasonic’s main business”, one investor commented.

Takeda seems to be preparing to dispose of its consumer healthcare business to help fund its acquisition of Shire, as it has spun off its vitamin drinks and other products into a separate company.

Fujitsu has also been disposing of its hardware businesses – mobile phones, car electronics and PCs and Sony‘s mobile phone business is still struggling, and rumours that it could be sold continue.

Spark surprise

Nikkei Business concludes with some surprise predictions from the experts it spoke to:

  • Astellas and Daiichi Sankyo merging
  • Pioneer and JVCKenwood merging
  • SoftBank acquiring NEC
  • Fast Retailing acquiring Gap
  • Google acquiring Recruit
  • Amazon acquiring 7&i (7-11 convenience store chain)

Unsettling though it may be for the employees concerned, if clarity in the focus and business of Japan’s iconic companies results from these M&As, ultimately it should make for a more confident Japan Inc.

 

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Lessons from the decline of Japanese electronics manufacturing in the UK for the automotive industry

Although around 10,000 manufacturing jobs in Japanese electronics companies in  the UK were lost in the 1990s-2000s, about the same number have been added, either created by Hitachi Rail or in the automotive or air conditioning sectors. Japanese electronics companies such as Sony, Fujitsu, Panasonic, NEC, Mitsubishi Electric and Hitachi still all employ thousands of people in the UK.

It is a story of how industrial policy cannot ultimately stop product obsolescence, shifts of manufacturing to cheaper locations or the transformation from mass manufacturing of products to supply chain ecosystems providing solutions and services. Recent investment from Japan in the UK is in services and infrastructure, for the domestic UK market, and at least for now, the EU. But this has meant fewer jobs in the areas that voted Brexit.

Bunging £10s of millions at Nissan to compensate for tariffs was not going to stop these shifts. Over 10% of the 7,000 Nissan employ in the UK are working in design centres, not on the factory floor. Being a gateway to the EU now, even in manufacturing, needs regulatory alignment and free movement of people so suppliers can visit and base themselves at client sites and provide services and ship prototypes around the region.

The shift to electric vehicles means the car companies have to cooperate more than ever with ICT and electronics companies. Many of these ICT and electronics companies have joint European HQs spread across the UK, Netherlands or Germany, with senior management and teams scattered across the region, working virtually or at customer and partner sites. They have also integrated back office and technical support into cheaper locations such as Portugal or Poland.

Some examples of the history of Japanese electronics companies in the UK over the past 30 years:

Fujitsu

Fujitsu is the biggest Japanese employer in the UK with over 8,000 employees, 2,000 down on a few years ago, as it grows delivery and support centres in Portugal, South Africa and India and downsizes in the UK. It acquired 80% of UK’s ICL in 1990 (increasing to 100% 1998). ICL had 2,000 UK employees, 26,000 worldwide, with mainframe and PC factories in Letchworth, Manchester and the Midlands.  ICL was born out of 1960s industrial policy – the British government had a 10% stake in it for a while. To this day, Fujitsu provides a lot of  government IT infrastructure and services. Its last computer factory in Europe, in Augsburg in Germany, will shut down in 2019, retaining manufacturing in Japan only.

Hitachi

Hitachi used to employ around 1,000 people in its factory in Aberdare, Wales, making cathode ray TVs, video recorders and microwave ovens. It was shut in 2001, blaming low price competition from Asia. Hitachi has since shifted away from consumer products to infrastructure. In the UK it acquired the now stalled Horizon Nuclear Power projects in Wylfa and Oldbury and set up Hitachi Rail in the UK as the global headquarters with a new factory in Newton Aycliffe, employing nearly 2,000 people.

Hitachi employs another 4,000 people in the UK services sector – for example credit and loans company Hitachi Capital, IT consultants Hitachi Vantara and Hitachi Consulting and Vantec, providing logistics for Nissan.

Sony

Sony came to the UK in 1973, and had 2 plants in Pencoed making cathode ray TVs, employing 1,800 by the 1990s. As these started to shut down, Pencoed transformed itself into an innovation centre, developing and producing broadcast and professional equipment, employing 500-600 people.

Sony has been restructuring across Europe recently, consolidating back office functions into cheaper regions. It was still manufacturing DVDs in Enfield in the UK but this was shifted to Austria in 2017/8, reducing capital in UK by over £250m. It still employs nearly 2,000 in its music, home entertainment and interactive businesses in the UK.

Ricoh

Ricoh still has a factory in Telford (and two other plants in UK), employing the same number of people in 2018 as in 1991 – around 700 – but the product range has shifted from faxes to printers and consumables.

Mitsubishi Electric

Mitsubishi Electric acquired Apricot Computers in 1990, with a plant in Glenrothes and R&D in Birmingham, employing 442 in 1991. Glenrothes was shut in 1999, blaming cheap competition in Asia. It still has manufacturing in the UK, employing nearly 1,000 people (many of whom are non-UK EU citizens) in Livingston, at its airconditioning plant.

Panasonic

Panasonic, formerly known as Matsushita, had many plants in UK from 1970s to 1990s, employing 1,621 in Cardiff (TVs, microwaves), 469 in Gwent (electric typewriters, carphones), 160 in Port Talbot (components for TVs, video recorders, microwaves) and 63 in Reading (fax machines).  Most Matsushita/Panasonic plants in UK shut down in early 2000s, with production shifting to Eastern Europe. 1 plant remains in Wales, employing 400 people, manufacturing microwave ovens but also conducting R&D into fuel cell technology.  Panasonic has acquired Belgian IT company Zetes and Spanish automotive supplier Ficosa recently.

NEC

NEC is also shifting into IT services via European acquisitions. It used to have a semiconductor plant in Livingston (Silicon Glen, remember that?) which employed 1200 by 2001, when it shut down. NEC UK employees now number over 1000 again thanks to the acquisition of Northgate Public Services, in 2018.

Others

Oki Electric were relatively late in shutting down their Cumbernauld printer plant in 2018 – and now all production is in Asia.  JVCKenwood shut down their East Kilbride TV/CD player factory in 2008 and shifted production to Poland. Pioneer closed its CD player/TV factory in Wakefield in 2009. Toshiba had a factory in Plymouth, which used to make TVs, video recorders, but is now owned by a US company and makes air conditioners. Sharp (now owned by a Taiwanese company) still has a factory in Wrexham as does Brother.

 

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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 (pernilledotrudlinatrudlinconsultingdotcom)

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