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Japanese companies in the UK are shrinking – is Brexit to blame?

The number of Japanese companies and their employees in the UK is starting to decline. Given that this is against the trend elsewhere in Europe, it is hard to avoid the conclusion that this is a reaction to Brexit.

Brexit has put up barriers to the UK trading within the Single Market, damaging sectors it used to have a comparative advantage in such as automotive manufacturing and financial services. The UK is now left with its global strength in services such as professional services, IT, design, marketing and education. It remains to be seen how much of this strength was also reliant on being part of the Single Market, in terms of being able to sell those services to the EU and benefit from the freedom of movement of the people providing or benefiting from those services. So far, Japanese companies seem to be happy to continue to access these services by basing their regional head offices in the UK, regardless of Brexit, or through acquiring British companies in the services sector.

The decline is from a high base. The UK has the highest stock of Japanese foreign direct investment, the highest number of employees of Japanese companies, and the most resident Japanese nationals in Europe.

The decline in numbers of Japanese companies in the UK is mainly due to a reduction in Japanese companies in the manufacturing and financial sectors. There has also been a drop in the number employed in automotive manufacturing. On top of this, the main driver of the past few years behind the rising employee and company numbers – big-ticket M&As followed by expansion in employee numbers – has been less of a force more recently.

To understand more about the trends in Japanese companies in the UK in terms of investment and employee numbers, how this compares with Germany, France, the Netherlands and Italy and what this might mean for the UK in future years, please download our report below:

Japanese companies in the UK

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Mitsubishi Electric in the UK – 1979 to present

In January 1979 Mitsubishi Electric UK took over a colour TV plant in Haddington, East Lothian from bankrupt Norwegian company Tandberg, saving 120 jobs. Exports of colour TVs from Japan to the EU and particularly the UK had risen rapidly in the early 1970s, even though they were restricted to small screen sets. Then demand in the UK came to a sudden end and TV manufacturing in the UK had excess capacity. So the British government encouraged Japanese companies to take over existing plants. Japanese companies also chose the UK for manufacturing in Europe because there were no domestic manufacturers with government connections as there were in France (Thomson-Brandt) and the Netherlands (Philips). (1)

Mitsubishi Electric already had a representative office in London from 1969 and had turned it into subsidiary in 1972. This then became a branch of Mitsubishi Electric BV in the Netherlands in 1996. It has continued as a branch of the Netherlands based European regional HQ since.

By 1987 Mitsubishi Electric had established video recorder production facilities in Livingston, along with many other Japanese manufacturers starting production in Europe, in response to pressure and anti dumping proceedings from the European Commission. (2)

It acquired Britain’s Apricot Computers in April 1990, with a plant in Glenrothes and R&D in Birmingham, employing 442 in 1991. PC production was scheduled to treble to 100,000 per annum in 1993, with exports accounting for 25% of production, half to Japan. (3) Glenrothes was shut in 1999, blaming cheap competition in Asia.

The Haddington plant continued to make colour TVs and also microwave ovens, but when the price of TVs dropped, it was no longer profitable. In 1998 production ended, with 500 jobs lost. Production was transferred to Turkey.

Alister Jack, the then Scottish Tory spokesman on economic affairs, who later became Secretary of State for Scotland, attacked the Labour government on the closure: “There is little point of introducing a New Deal programme if they cannot hold on to existing jobs.”

Mitsubishi Electric hoped to focus on video recorder production and air conditioning at their Livingston plants. However, in 1999 it announced it would cut 6.100 jobs overseas and 8,400 jobs in Japan due to losses caused by falling semi-conductor prices and weak demand for consumer products.

The Livingston operation entirely focused on air conditioning and R&D for Europe moved there in 2013, with Mitsubishi Electric investing £20 million into the operation.

In 2017 air conditioner production started at Mitsubishi Electric’s new factory in Turkey. Thanks to the customs union with the EU, air conditioning exports from Turkey to the EU are tariff free.

Mitsubishi Electric Air Conditioning UK employed over 1000 people In 2019. 77% of its sales of £200m were to non-UK EU countries, 20% to the UK. The plant was profitable despite a large increase in gas and transportation costs.

The UK is seen as a growing market, despite any Brexit impact, because of the need for green, affordable public sector housing. Mitsubishi Electric is dependent on imported components, but it is standard industry practice to hold 2.5 months of inventory, so it is hoping to weather any post Brexit logistics impact.

(1) Japanese Manufacturing Investment in Europe: Its impact on the UK economy” Roger Strange, Routledge, 1993 p 196

(2) ibid p 201

(2) ibid p 264

Photograph of Campbell Gill ~ Personnel Manager and Eric Murray the General Manager with the joint Managing Director Yoshio Noguchi 1984, credit: Angus N Bathgate https://www.facebook.com/groups/oldeastlothain/permalink/2402751853280700

“Japanese companies are weak at the top” – Horiba’s CEO

I was recently asked what Japanese company’s mission statement I most admired and I said Horiba’s “Omoshiro okashiku” which is translated into English as “Joy and Fun” (but the fun also means quirky, or as Horiba says “interesting” which is what I think many Japanese companies are to Western eyes, and that’s a good thing). I know from reports from our consultants in Germany that this ethos is transmitted to the overseas subsidiaries too. This interview with the President of Horiba in Nikkei Business by Higashi Masaki, the Editor, is so interesting, I have not made a precis, rather with big help from Google Translate, have left it pretty much as is.

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Since Horiba Atsushi took office as president, sales have increased more than five times, and overseas employees are now the majority, transforming it into a global company. He has also developed a unique corporate culture, including calling employees “Horibarians” regarding them as part of the family. We asked about Japan’s challenges as seen by companies competing globally in technology development.

(Interviewer: Masaki Higashi, Editor-in-Chief of Nikkei Business)

PROFILE

Atsushi Horiba was born in 1948 in Kyoto Prefecture. After graduating from Konan University Faculty of Science in 1971, he joined Olson Horiba, Inc. of the United States. He then joined HORIBA, Ltd. in 1972. He is also graduated from the Department of Electronic Engineering, Faculty of Engineering, University of California, USA in 1977. After that, he directed the overseas expansion of the group, and after working as a director in 1982 and managing director in 1988, became president in 1992. He has also served as chairman since 2005. He has been in his current position for18 years. He is also the face of the local business community, such as serving as the vice chairman of the Kansai Economic Federation. He is the eldest son of Masao Horiba, the founder of HORIBA, Ltd.

The automobile industry is greatly affected by the new coronavirus.

It was a difficult time for car makers even without the coronavirus. This is because there is a dramatic switch towards “CASE” (Connected, Autonomous, Sharing, Electric). It is necessary to move from the “hard” industry, which competes through productivity gains to steadily manufacture high-quality cars, to the “light” industry, which has become IT (information technology) intensive. What was a simultaneous equation with one variable has now become treble the pain.

HORIBA has the largest share of car exhaust gas inspection equipment in the world. The main business is conventional car-related products.

Electric vehicles will be the mainstream in urban areas. However, the combustion type will not disappear in areas with harsh climates. Regulations will also become stricter. However, it is not a growing market, so I would like to expand the CASE field.

How to secure human resources is very important. In 2015, we acquired a British company called Mira (which supports the development of automobiles). We wanted the excellent R & D unit of about 600 people, but it also had test equipment related to CASE. Mira’s test track has research bases for automobile manufacturers such as Toyota (automobile) and major parts manufacturers, so tests and research can be done together.

The company motto is “Joy and Fun”, but is that feeling the same even with the coronavirus?

Now more than ever is the time to have “joy and fun”. All managers are at a loss now. Even so, we don’t feel so sad because we are working in various fields under this company motto. “Fun” does not mean “funny” but “interesting”. With that idea, we shifted our direction. It’s not absolute, but I feel that this helps us be responsive.

It is necessary to strike a good balance between being extremely advanced in a specific field and expanding the range in order to foster new businesses?

To be honest, I don’t think this is managed properly. But that’s what’s interesting, and it’s made up of the enthusiasm of each unit. Trust is at the base. For example, if you are studying optics, you can think of many people who would be good to consult with within the company.

It is unreasonable to expect people who are developing the products that are profitable now think about what the future needs will be. There is no Superman in the world. In many cases, human resources are crushed in search of Superman.

What kind of human resources are you looking for?

I often say that I don’t want a guy who has a good memory, that is, a guy who just graduated from a good university with good grades. Some of the students who are considered to be excellent in the world outside join us, but from our point of view, they are also “stupid” children (laughs). I often join in on the quiz shows for highly educated people on TV, but they are just competing for memory and have no sense.

What does ‘sense’ mean?

Whether you are interested. That is, whether you can do “joy and fun” However, if only “sharp angled” human resources are hired, the company will collapse. That is the balance.

In order to maximize the breadth of the business, it is necessary to have an organizational structure for that purpose.

Now, the biggest issue is the wall between each department. In a pyramid-type organization, individual departments do their best, but there is no interface to connect the results. But if the organization is flat, it’s not necessary. It’s in a mixed state. Instead, the person above needs to be a Superman who can figure out where and what is going on (laughs).

Is the solid financial structure with an equity ratio of over 50% also a factor that guarantees the realization of “interesting and funny”?

Companies with weak internal reserves will have a hard time during coronavirus. When it was said that it was bad to retain earnings, I thought that retained earnings should definitely be increased. This is to ensure that opportunities for M & A (merger / acquisition) are not missed. If you have to ask the bank for money, it may be too late and the target is acquired by someone else.

What do you see as the challenges facing the Japanese economy now?

We manufacture all the key products such as detectors, filters and electronic boards in-house. The problem with Japan is that we have go outside to get the basic science for these key products. You cannot apply knowledge if you do not have the basic science. Nevertheless, Japanese industry and academia are only doing applied science.

We have R & D units in France, Germany and the United States because the academia of these countries never let go of the basic science. Not only is China accumulating product know-how, but it is also conducting basic research. China is the best-selling market for the latest optical analyzer developed in France. It’s neither Japan nor the United States. We need to be aware of the fact that China is doing this very thoroughly.

It is a worry that China’s technological capabilities are rising rapidly.

Japan has not lost yet. I just don’t know after 4-5 years where we’ll be. They are thinking very clearly about the combination of academia and industry. The winners and losers in a battle of comprehensive strength are becoming clear. How do you get around this? I don’t like the word “niche,” but we’ve survived because we’ve put more people and money into a specialty than a giant company.

The Japanese, and Japanese technology and schools are excellent. However, various regulations and past shackles are in the way. For example, why does the faculty council have personnel rights even at universities? At Tsinghua University in China, the top management is steadily being replaced with excellent human resources. But in Japan, once you get tenure, you stay in academia until retirement. This is such an unfair situation.

Are there any other obstacles to your competitiveness?

If I weren’t Japanese, I would have headquartered in California, USA, and the company would have been three times as large as it is now. Taxes are high and fixed costs are high in Japan. Our main medical base is located in France because of problems with Japanese regulations. We just pay lip service to “deregulation” and in the meantime Japan declines.

Industry-academia-government must think about industrial policy and decide what to make a strength.

Even if the government and others hold meetings to gather the top executives of large companies, they cannot take the plunge because they have a company. When I first became President I was called by the Ministry of International Trade and Industry (currently the Ministry of Economy, Trade and Industry), and when I talked about what I thought, I wasn’t called on again. The people around me just gave textbook answers.

However, the current Ministry of Economy, Trade and Industry is different from that time. What is worrisome is that bureaucrats who are trying to reform in line with our opinion tend to be off the career track.

Do they not want to change?

Perhaps they prioritize their own lives rather than the country. The sense of life or death of officials and politicians of the Meiji era is not there. I’m afraid that there is no sense of crisis about the fact that Japan is buying in more and more technology now.

China’s “brain” is talented people educated in the United States. There is no brain in Japan. People who are active (at the forefront) don’t end up leading government councils. Even if the technology and the times change, Japan still has excellent human resources, but they cannot “overtake” the incumbents. It’s the same with the top executives of large companies.

Because the term of office is fixed, the number of “salarymen” in top management has increased.

There is absolutely no business that will produce results in 6 years [the usual stint as President of a Japanese company] after investing from zero. It just means continual losses.

It takes at least two years for our products to be researched, tested, designed and finalized. It will be five years if the basic research is redone. It will take another 2-3 years to make a profit from it. Many things can be done with technology and machines, but this is useless if you do not develop people as well.

When the top executive who started a growth business retires after six years, and that business is making losses, he is said to be the “worst executive”, and when the next top executive harvests from what his predecessor has sown, he is celebrated as “great”. That shouldn’t be the case.

Don’t avoid developing leaders

What does it take to enable top management to think about things in the long run?

Japan is overwhelmingly strong in terms of both technology and human resources. The only weakness is the top. The United States and China are working hard on how to raise the elite. If we don’t train leaders, society won’t progress. On the other hand, in Japan, “elite” is a forbidden concept. In Japan, both politicians and business owners are a disorderly mob.

Japan is in a very dangerous state now. It has become a bogus democracy. True democracy has competition, and everyone is different. In the United States, they first educate elementary school pupils about how different each person is. But in Japan, it’s like “stop it, you’re annoying the old guy.” The responsibility of the media is also heavy.

It’s rare for a person at the top of a listed company to have a beard.

I nearly died of hepatitis when I was about 35 years old. Until then, I was just being the diligent president’s son. But at that time, I thought this is a turning point and I thought I would live a life where I do what I think is best, no matter what others say. My beard is a proof of that. From then on it became a lot easier.

You don’t know what works and how it works.

It feels like God only knows the future (laughs). However, there is a belief that we will make the best decision at that time by listening directly to the stories of people on the front line. I’ve done my best so I can’t help if it doesn’t work. However, people end up worrying about seeking more than the best.

You end up just wanting the correct answer.

The difficulty of management is that there is no correct answer. Everyone has the illusion that there is a correct answer, but there isn’t. The answer will come.

Side note from the interviewer Higashi Masaki

I don’t know if it’s because Japan has become richer or there is more inequality now, but as Mr. Horiba points out, “how individuals live” rather than the desirable way of organizations such as countries and companies should be has become increasingly the priority. It is important to note that the pursuit of personal well-being can sometimes be inconsistent with the interests of the organization.

For example, there is a tendency for top management to change and quickly write off assets of unprofitable businesses to generate a deficit. Then their predecessor has not made a loss, and the successor is certain to recover in a V shape during his term. The rewards for the two executives may be good, but is the timing as an organization optimal? As the mobility of talent increases, the relationship between individuals and organizations can become more difficult.

Pork for cars and a fog lamp

As the UK-Japan Free Trade Agreement is in its final stages, it seems a good moment to revisit our Top 30 Japanese companies in the UK. Although the headlines seem to be heading towards “pork for cars”, the most important win-win for the UK and Japan should be protecting Japan’s investments in the UK. Japanese companies employ around 170,000 people in the UK by our estimates, and many thousands more indirectly.

The EU-UK deal is still the biggest source of concern for Japanese companies

There is a limit to what the UK-Japan deal can do to protect those investments, however. For Japanese companies in the UK, the EU-UK trade deal is the bigger source of concern. Many of them have their regional headquarters in the UK or have invested in the UK as their base for exporting to the rest of Europe.

The shape (or non-existence) of a UK-EU trade deal will determine not only whether it is worth continuing with manufacturing in the UK for Japanese companies but also whether Japanese companies will continue to coordinate services regionally out of the UK such as finance, legal, IT, HR, engineering, R&D etc. These services account for why the UK has a trade surplus in services exports to Japan – it’s largely due to Japan HQ sending money to their UK based regional operations to fund professional support services needed both for acquisitions and day to day operations.

If the barriers between the UK and the EU to mutual regulatory recognition and movement of people become too high to run European operations from the UK effectively, and as a consequence UK companies are no longer attractive investment targets, Japanese regional HQs and acquisitions will begin to drift to the continent. In fact, they already have started to shift piecemeal to the EU. No amount of bilateral recognition of services and data regulations between the UK and Japan is going to help stem this.

According to our estimates, the number of people employed by Japanese companies in the UK levelled off comparing 2018/9 to 2017/8 – rising by only 0.2% to 170,187, having risen around 6% a year in the previous two years.

Japanese automotive sector dominates Japanese jobs in UK, but is declining

Our Top 30 Japanese employers in the UK employment total has also levelled out at around 94,000 or 55% of the 170,000 people employed by Japanese companies in the UK.

Nissan (#1), Honda (#5) and Toyota (#8) employ around 18,400 – 11% or so of the total. If other Japanese automotive suppliers are added such as Denso (#20) and Unipres (#30), the total number employed is 37,489 (22% of the total employed by Japanese companies), down 2.8% on 2017/8.

Making sure that there are tariff free automotive components from Japan for manufacturing in the UK will help sustain Japanese manufacturing in the UK at least in the short term, if tariffs are imposed on EU automotive imports as part of the UK-Japan FTA or there’s a no deal. But the shift in automotive production to eastern Europe has been going on for some time.

Japanese trading companies growing steadily in the UK but no acquisitions

The UK, or more especially London, has been the commercial and trading location of choice for Japanese companies in Europe for over 100 years. At the heart of this are Japan’s trading companies – Mitsubishi Corporation, Mitsui & Co, Sumitomo Corporation, Itochu, Marubeni and Sojitz. They are still involved in commodity trading but also financing and more recently acquisitions – although there have not been any UK acquisitions since 2017. The most notable recent European acquisition was Mitsubishi Corporation acquiring Dutch energy company Eneco in 2019 for €4.1bn.

Japanese trading companies currently employ around 14,700 people in the UK, and this has grown just under 2% a year over the past couple of years

Japanese financial services holding steady in the UK

The next biggest Japanese sector in the UK is financial services, including MS&AD (#15), MUFG (#16), Nomura (#17), SMFG (#22), Mizuho (#29). It accounts for around 13,000 employees and growth has been around 1% to 2% a year.

All Japanese financial services companies that are impacted by Brexit have set up or strengthened their subsidiaries in the EU, but the scale of these organisations is still far smaller than their UK operations. There may be an issue eventually not so much about the quantity as the quality of these EU subsidiaries for the EU – they will want to see the decision makers based in the EU as a condition for regulatory approval. But as most decisions are ultimately made by multiple people in Japan headquarters, it is not clear how Japanese companies can respond to such a demand. In the meantime, Japanese financial groups are repositioning their London operations as EMEA (Europe, Middle East and Africa) headquarters.

Electronics, ICT and acquisitions

Fujitsu (#3), the pioneer of big acquisitions in the UK (ICL in 1990) is no longer the biggest Japanese employer in the UK, having shrunk its workforce by 38% since 2014/5. Sony (#9) has also cut its workforce by 11% over the past four years. Canon (#12) and Ricoh (#7) have grown by less than 10%, Brother (#28) grew around 15%, Mitsubishi Electric (#27) by 17%. Konica Minolta (#24) has grown over 40% in the past 4 years through acquisitions but seems to be shifting more towards the Czech Republic recently.

NTT (#11) and Hitachi (#2), both with ex Japan global HQ in the UK, have grown 60% and 175% respectively over the past 4 years, partly through acquisitions but also in Hitachi’s case through organic growth, with the investment in the rail manufacturing and assembly plant in Newton Aycliffe.

Other new entrants over the past four years have been through acquisitions too – Outsourcing (#26) in recruitment, Sumitomo Rubber (#19) through its acquisition of Micheldever in 2017 and SoftBank acquiring (and soon to be disposing of) ARM.

A holding pattern until the fog clears

The years of double digit growth and acquisitions by Japanese companies in the UK seems to be coming to an end, or at least is on hold until the picture is clearer after the fog lifts from the UK-EU negotiations and the coronavirus pandemic. The UK-Japan FTA does not clear this fog, but at least lays out a path for the UK, which Japan very much would like it to follow, of reintegrating itself back into the rules based international order, towards joining the CPTPP and continuing to be one of Japan’s closest allies in terms of digital security and strategic interests.

Japanese companies in the UK

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Are Japanese companies leaving the UK because of Brexit yet?

I asked this question just over a year ago and the answer is still yes and no. To which I would add, it’s more a case that Japanese companies aren’t investing in or coming to the UK as much as they used to, replacing the ones that are leaving or downsizing.

Asia continues to dominate as location for Japanese companies overseas

The number of Japanese companies overseas is, according to Toyo Keizai*, continuing to increase – up 65% from 2008, but the rate of increase has been slowing since 2013. The number of Japanese companies overseas grew 2% from 2018 to 2019, with growth in all regions – higher growth in Africa/Oceania (from a small base) but only 1% growth in Europe compared to 3% in North America and Asia.

63% of Japanese companies overseas are in ex-Japan Asia – up from 62% in 2018 and 69% of the employees of Japanese companies abroad are in Asia. Around 15% of Japanese companies abroad are in Europe and 14% in North America, with both regions having around 11% of employees. As pointed out last year, the obvious factor in why there are proportionately more employees to number of companies in Asia compared to Europe and North America is the greater number of manufacturing operations in Asia, with larger workforces.

The number of UK employees of Japanese companies has fallen for the first time, by 9%

Within Europe, the number of people employed by Japanese companies rose 18% from 2015 to 2019. Those countries where the number of Japanese company employees has fallen are countries where there has been a rise in populism, civic unrest and political risk. UK employee numbers fell 9% 2018-9 (the first decline since at least 2015), Spanish employee numbers fell 19% 2018-9, Hungary’s fell 18%, Turkey’s 10%, Poland and Italy also showed small decreases in employee numbers.

Countries where Japanese employee numbers are growing are the Netherlands (up 11% 2018-9), France (10%), Germany (2%) and the Czech Republic (2%). Employee numbers in Romania doubled from 2018-9 but this is largely due to Toyo Keizai recording employee numbers at Alcedo (acquired by Sumitomo Corporation in 2011) as being 20,284, having been 318 in 2018. The 2018 number is more in line with other available data.

Number of Japanese companies in UK has fallen for first time

The number of Japanese companies in the UK has fallen by 1% 2018-9, from 972 to 966, the first drop since at least 2015, having risen 11% 2015-2018. France also saw a 2% drop in the number of Japanese companies, even though employee numbers are up. Germany attracted a 4% increase in Japanese companies from 2018-9, having risen 13% 2015-8. Netherlands had a 1% increase 2018-9 (13.5% 2015-8) and Italy had a 2% rise in Japanese companies 2018-9, and an increase of 11.8% 2015-8.

It’s hard to work out where Toyo Keizai derives the net drop of 6 Japanese companies in the UK from. Their list of the 7 companies which have closed down in the UK 2019 shows that this was mainly due to reorganization of holding companies or merging of companies rather than full withdrawal from the UK. Of the 8 new Japanese companies in the UK in 2019, 5 were indirect investments into energy companies by Nippon Koei, a civil engineering company and 2 were indirect investments by WDI, a Hong Kong originated Dim Sum chain which is registered in Japan.

Germany now hosts more Japanese automotive companies than the UK

The Japanese automotive sector is of course the sector being most carefully watched for Brexit impact. Japanese automotive manufacturers are continuing to set up overseas – the total number globally has increased 10% in 2019 on 2015. And “despite” the EU-Japan EPA, 15 more Japanese transportation equipment manufacturers set up in Europe in 2019, a 20% cumulative increase on 2015. Of the 15 new companies, 4 are in Germany, 3 in Poland, 2 in Spain, 2 in Portugal, 1 in France, 1 in Italy, 1 in Slovakia and 1 mystery one. This means Germany now hosts more automotive/transportation equipment companies than the UK – 31 to the UK’s 30.

Japanese acquisitions of UK companies reduced in scale and number

Toyo Keizai’s data is reliant on companies filling in their surveys, so tends to underreport and often misses acquisitions. From my database, I estimate 20 British companies were acquired by Japanese companies in 2019-2020, although some of them were indirect acquisitions through acquiring a parent company with a subsidiary in the UK. Dentsu and Sony continued to acquire UK based companies, and other acquisitions were of British companies in software, gaming, hotels, seafood, recruitment, a manufacturer of drives for electric motors and paper wholesale. The scale is far less than in previous years, both in terms of numbers of acquisitions and value of the deals.

Even adding these acquisitions in shows a 3% drop in the number of people employed by Japanese companies in the UK from 2018/9 to 2019/20 according to my database – the first drop since I started tracking these numbers in 2015.

* Toyo Keizai Data Bank: Directory of Japanese Companies Abroad 2020

UK’s priority in Japan trade agreement is not increasing exports, it’s protecting Japan’s investments in UK

My view on Brexit was that it was accelerating trends that were already there for Japanese business in Europe, and gave them cover to do things they were already wanting to do.

The COVID-19 pandemic seems set to provide similar cover and if the UK is not careful, this will mean a further withdrawal of Japanese investment from the UK.

Japanese companies are still in search of growth outside the ageing, declining population of the Japanese market, and this includes in Europe. According to Japanese Ministry of Foreign Affairs data, the number of Japanese companies in Europe grew 16% from 2012-2018 and the number of Japanese nationals in Europe also grew over the same period by 12%.

At the same time Japanese companies are very risk averse. Brexit was seen as a risk from around 2013 onwards, and this is reflected in the number of Japanese companies and nationals in UK falling by 11% and 7% respectively over 2012-2018 – the only country in Europe to show such significant decreases. Germany already hosts more Japanese companies than the UK and is catching up in terms of hosting Japanese nationals too.

Although Japan is still more of a manufacturing, exporting nation than the UK is, both the UK and Europe are just as – if not more – important to Japan as a destination for investment than as a market for exports of finished goods. As the DIT itself estimates, around 59% of Japanese exports to the UK are intermediate goods, used in supply chains. So in other words, a large number of Japan’s investments in the UK and the Europe boost Japanese exports to the UK and Europe.

The trends in current Japanese trade and investment in Europe and the UK need to be examined for their impact in the four areas where Japan has influence over the UK economy

1. Existing UK jobs reliant on Japanese companies

The Japanese automotive sector is a key source of existing jobs for the UK as it accounts for around a quarter of the 163,000 people I estimate are employed in the UK by Japanese companies. There was a 3% decline from 2017/8 to 2018/9 in employment in the Japanese automotive sector in the UK, however, whereas employment in Japanese automotive companies grew elsewhere in Europe, particularly in Eastern Europe.

So while zero tariffs on automotive parts from Japan to the UK will help – this might just be trying to hold back the tide. The possibility of tariffs on exports of cars made in the UK to the EU is obviously a concern for Japanese companies too. Maybe sterling will fall far enough or there will be sufficient government subsidies to mitigate this extra cost but ultimately Japanese companies will choose to manufacture where there they can access not just the lowest costs but also a market sufficiently large to ensure full production capacity.

Obviously there is a strong need to focus on electric vehicle development, and the UK has strength in automotive design, but Japanese car manufacturers will be wanting to develop EVs in line with EU regulations and to be able to influence EU regulations – which is easier done from inside the EU than outside.

2. Where the new Japanese jobs are in the UK

Hitachi is the most significant recent contributor to organic job growth in Japanese companies in the UK – largely due to Hitachi Rail. Hitachi has also invested in Horizon Nuclear Power, which is currently “on ice”. Hitachi’s focus is on social infrastructure, and various commitments by UK governments on investing in transportation and energy are key to this. Many other Japanese companies are also interested in social infrastructure business in Europe.

A UK Japan trade agreement can support further job growth by facilitating the export of parts for these industries from Japan. Hitachi has also invested in rail manufacturing in Italy so if there are any tariffs making exports from the UK to the EU uncompetitive, they have an alternative manufacturing location within the EU.

Other Japanese companies that are expanding in the UK include NTT, the ICT/telecommunications giant, who have put their non-Japan global HQ in London and SoftBank, who acquired ARM and committed to expand the workforce. Presumably this is why DIT is emphasizing free data flows between Japan and the UK, which would be welcomed by Japanese ICT companies and Japanese regional headquarter functions based in the UK.

I’m seeing some positive impacts of the EU-Japan EPA on investment elsewhere in Europe. There have been quite a few acquisitions by Japanese companies of food businesses in France for example. Japanese trade statistics show that food and alcohol exports to Japan from Europe have risen after the EPA came into force. If a similar agreement on food, textiles and leather goods to the EU Japan EPA is reached between Japan and the UK as the DIT is asking, there may be similar acquisitions by Japanese companies in the UK – as well as the growth in exports for UK SMEs that the DIT seems to be focusing on. There already have been a few food related acquisitions by Japanese companies in the UK. This might see some increase in new jobs in the UK as a result. But this is marginal compared to the jobs that could be created by Japanese investment in the UK infrastructure sector.

3. UK exports of services to Japan are M&A driven

It seems likely that Japanese companies will continue to use their piled-up cash to acquire – perhaps in Asia initially as it is opening up first after COVID-19. In the past, Japan established companies in the UK as gateway to EU but recent Japanese acquisitions in the UK have been increasingly pure domestic (recruitment, car parking, outsourcing, advertising) or pure global (SoftBank, financial services).

These acquisitions do not necessarily create more jobs, but financial, legal and other services around the acquisitions is, I would guess, a large component of UK services exports to Japan. Allowing UK professionals to operate in Japan is not a key driver – it is more that UK based professionals are supporting Japanese companies in Europe and globally. I even know of one UK based, American owned advertising agency that deals directly with the Japan HQ of a Japanese sports brand on their global campaigns, even though the advertising agency have a Japanese office.

Japanese companies may well buy up more British companies in the near future, as they will be cheap. However, there does seem to be a decline in big ticket acquisitions in the UK – the most recent major European acquisition by a Japanese company that I am aware of is Mitsubishi Corporation acquiring the Dutch Energy company ENECO – my understanding is that Netherlands based services companies mainly supported this.

4. Export of services because of UK as European/EMEA hub

Another element in the UK’s export of services to Japan is that the UK subsidiaries of Japanese companies often perform a regional headquarters function for Japanese firms – and receive management fees for this. Brexit (but also changes in Japanese laws on treatment of offshore profits) has caused some Japanese companies to move their regional HQ from UK (Panasonic, Sony) in a legal and financial sense. But there is still a critical mass of people in the UK working for such companies, because the UK provides marketing, IT, design, engineering, legal, financial, accounting services that are of a high, globally accepted standard.

This is why, as the JETRO survey of 2019 of Japanese companies in Europe pointed out, the biggest regulatory concern of Japanese companies is that the UK or the EU might change regulations regarding the freedom of movement between the UK and EU for their employees. Continuing that regional coordination role requires regional employees to move around the region – or can this all now be done by web conferencing?

The UK is still seen by Japan as an attractive place to send students but also employees for education and development. Japanese students only want short term, under 1 year courses, however and many are looking at cheaper, nearer options. Both students and Japanese professionals would want ease of acquiring visas, including work visas and a safe, stable environment to live in.

UK offensive interests

Looking at the recent DIT paper on the UK-Japan FTA, clearly there are some non-tariff barriers to the UK accessing the Japanese market – as there have been for decades. But my overwhelming impression is that most British companies have not been very proactive in approaching the Japanese market – it’s a big commitment, opening an office in Japan is needed, not just exporting from afar. It’s relatively easy to set up a company in Japan but not so easy to hire the right people. There is a labour shortage, particularly of capable salespeople who are English speakers. This is not something that can be solved in a trade agreement.

A final point regarding the DIT paper’s claim that the UK is a “technology superpower” – not in Japanese eyes I’m afraid – possibly in fintech and there have been some Japanese investments in that sector in the UK. But they’re fairly small scale. Japanese technology companies such as Panasonic are basing their innovation arms in Silicon Valley. The US, China and the EU are more important to Japan than the UK – in many ways.

Japanese shift to Germany continues

Germany has historically been the main rival to the UK in Europe for Japanese investment. The UK absorbs about 40% of total Japanese investment into the EU but according to the Japanese Ministry of Foreign Affairs, there are actually 50% more Japan originated companies (703) in Germany compared to the UK (471).*

The reason for this discrepancy in numbers may be to do with the difference in the sectors that are investing in Germany and the UK and also the scale of the companies that are being acquired. According to my own research there are more employees on average at Japan affiliated companies in the UK than there are for Japan affiliated companies in Germany.

More Japanese employers in Germany but fewer employees than UK

This may be because the big employers – Japanese car manufacturers – do not have production in Germany – unlike the UK with Nissan, Honda and Toyota. There are plenty of Japanese automotive component manufacturers in Germany, but they tend to be what is known in German as “Mittelstand” or medium sized companies.

Manufacturing represents around 20% of German GDP, similar to Japan. Germany has of course always had a strong reputation for engineering and German cultural values such as risk aversion and process orientation fit well with Japanese corporate mindsets.

Japanese expats in UK mostly in regional HQ and services roles

By contrast, only 11% of the UK’s GDP is derived from manufacturing and 80% of UK GDP is services, particularly financial services such as banking and insurance. This sector accounts for quite a few of the Japanese companies who have multiple subsidiaries in the UK, as well as trading companies, holding companies and services companies providing financing and other functions across Europe.

This might explain why UK has more Japanese residents than Germany – presumably acting as liaison and coordinators with Japan HQ for the region – around 63,000 compared to 46,000 in Germany. However, this number is falling for the UK, and increasing for Germany.

A drop in Japanese students and intra company transferees in UK since 2015

Does this mean that the UK is losing its role as the services centre for the region to Germany? Looking at the detail, it seems the main factor behind the drop in the number of Japanese in the UK is that there are 3,000 fewer Japanese students and academics in the UK compared to a year ago.**

Intra company transferees to the UK fell by 1% from 2015 to 2017 whereas there are now many hundreds more Japanese transferees living in Germany, the Netherlands and Eastern Europe than three years’ ago.

As Japanese manufacturing shifts eastwards in Europe, sales hubs are moving with them

Looking at the recent investments into the UK and Germany, the trends of the past few years still seem to hold. Investments into the UK are in the form of establishing regional holding companies, or M&A in biotech, information technology and services for the UK market such as car parking. Investments into Germany are mainly for the wholesale of electronic components and machinery. Sometimes these are German sales offices for Japanese companies who already have sales or manufacturing in the UK. As manufacturing shifts eastward in Europe, so the sales hubs are moving with them.

Update for 2019-2020

The above article was written for the Teikoku Databank News in October of 2018. Since then, the Ministry of Foreign Affairs has published further data on Japanese nationals resident in Europe and Japanese companies operating in Europe, but unfortunately without the level of detail that was available previously.

The chart below summarises the data available for the UK and Germany – showing the continuing long term trend of an increase in Japanese companies and nationals in Germany, and a decline in Japanese companies and nationals in the UK. Overall across Europe, the number of Japanese companies and nationals has increased in the past five or so years, but more in Eastern Europe recently.

This is reinforced by the data collected by Toyo Keizai of Japanese expatriates working for Japanese companies, which also shows that the increase in Japanese nationals in Germany is primarily in non-manufacturing, with a corresponding decline in Japanese nationals working in non-manufacturing in the UK.

*This is the number of individual incorporated companies in 2018 – if you include all branches, and multiple subsidiaries, the figure is 966 Japanese entities in the UK compared to 1,839 in Germany as of Oct 2018 MOFA report

** Based on later conversations with the British Council, this steep drop in Japanese students coming to the UK may well be to do with changes in visa categories that are being monitored rather than an actual decline – most Japanese students prefer to study abroad for less than a year.

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

Which Japanese companies to work for in Europe

We’ve been publishing our top 30 Japanese companies in Europe intermittently for 5 years now. We regularly receive enquiries for recommendations on which Japanese companies to approach as potential employers. We’re not a recruitment consultancy so we don’t have any inside track on what jobs are available (please talk to our friends at Centre People Appointments for more practical assistance), but I would say that size in Europe and growth are important factors to consider.

Relative size in Europe is a key factor

If the European operations of a Japanese company represent a substantial part of their business, then it’s more likely that Europeans will have some influence within the organisation. There will also be more promotion opportunities and career paths than working for a smaller organisation in Europe. For that reason, it’s worth trying to join the organisation in the European/EMEA headquarters.

Companies with a relatively high proportion of their employees in EMEA (25%+) include NSG (Pilkington), Asahi (brewery company recently acquired Grolsch, Peroni, Pilsner Urquell etc brands), NTT Data, Toyota Tsusho (acquired French company CFAO with a big presence in Africa), Asahi Glass, JT International, Konica Minolta.

Has the company been growing?

Not only are growing companies more likely to have job openings, but they are more fun to work for. Japanese companies are still growing their operations in Europe overall. However some have been undergoing substantial restructuring, which has resulted in significant headcount reductions in some countries, and significant growth in others. For example Fujitsu is reducing headcount in the UK and Germany, but growing rapidly in Poland and Portugal.

Companies that have grown the most rapidly in Europe (more than doubling) over the past five years are Nidec, NTT Data and Panasonic.

Working for an acquired company

The rapidly growing companies have mostly expanded through acquisition – for example Dentsu, Nidec, Panasonic (Ficosa, Zetes) and NEC (Northgate Public Services), Toyota Industries (Vanderlande), Hitachi (Ansaldo). Working in those acquired companies might also be an attractive option, as there will be more autonomy, and less domination by Japanese management layers than Japanese subsidiaries which have grown organically.

Companies who score highly in terms of growth and significant European presence are NTT Data (third largest company in Europe) and Dentsu (8th).

In terms of sectoral growth – as well as IT companies that are moving into services and solutions like NTT Data, Konica Minolta and Panasonic – Daikin (# 27) and Mitsubishi Electric (#30) have both grown substantially recently, probably due to expansion of their eco friendly air conditioning businesses.

For new graduates, many of the top 30 have graduate trainee schemes, which would be worth considering if you are looking for a chance to be seconded to Japan.

Top 3 largest Japanese employers in Europe, Middle East and Africa:

1. Sumitomo Electric Wiring

Large numbers of employees in manufacturing, as making automotive wire harnesses is still a fairly manual job. Manufacturing jobs will tend to be in North Africa and Eastern Europe. There are plenty of jobs in design engineering and sales as well, and will be future proof as apparently electric vehicles also require complex wire harnesses to operate.

EMEA headquarters: UK (SEWS-E), Italy (CABIND), Germany (Bordnetze)

No graduate trainee scheme, but this page gives a flavour of the jobs available in the region for SEWS-E https://www.sews-e.com/current-vacancies/

2. Yazaki

Very similar to Sumitomo Electric Wiring in terms of business and jobs but privately owned, so more of a family style corporate culture. Has a YEA!cademy (Yazaki Europe training academy) https://www.yazaki-europe.com/career.html

EMEA headquarters: Germany

3. NTT Data

Owned by Japan’s NTT (formerly Ministry of Post and Telecommunications, now partly privatised). NTT Data has acquired various companies in Europe and elsewhere such as itelligence, Cirquent, Value Team, Intelligroup, and Keane. NTT is in the middle of restructuring and have put a new global headquarters, NTT Limited, in London. NTT Data will be kept as a separate organisation, however.

Lots of training and chances to go to Japan, however recruitment seems more by country/company than centralised and as you can see here https://www.nttdata.com/global/en/careers

EMEA headquarters: UK

If you would like a consultation on working for a Japanese company, then you can book an hour with Pernille Rudlin here.

We also recommend doing the e-learning modules from the leading global intercultural training firm focused on Japanese business – Japan Intercultural Consulting – on working in a Japanese company – each module comes with a certificate – proof that you know what you’re letting yourself in for!

It’s not over yet for Honda in the UK

“Don’t be ordinary, Honda” urges a 20 page special feature in Nikkei Business magazine. It points out that Honda occupies a similar space to Sony in Japanese people’s hearts. They both had maverick founders, produced quirky, innovative products for decades, lost their edge and then had to undergo deep restructuring to survive.

The loss of face for Swindon

Part 1 of the special feature starts in Swindon, lamenting that it has come to a point where Honda, “the face of Swindon”, is having to shut down. “Falling European sales and the chaos of Brexit are not the only reasons”. Honda says it is because of the need to respond to the rise of electric vehicles, a recognition that it had not set up the necessary structure in Europe to deal with the EU’s strict environmental regulations and supply electric and hybrid vehicles.

Going it alone made it difficult to innovate

This lack of preparedness may have been because Honda was going it alone, in contrast to Toyota working with Mazda, Suzuki, Subaru and Daihatsu and Nissan’s alliance with Mitsubishi and Renault. Even adding in Honda suppliers like TS Tech, Keihin, Showa, Musashi and Nisshin, its total supply chain sales amount to a tenth of Toyota’s. Toyota’s supply chain includes other large multinationals like Denso, Aisin, Toyota Industries, JTEKT and Toyota Boshoku. R&D expenditure is similarly tiny compared to Toyota’s spend.

Honda is not in Boston Consulting Group’s Top 50 most innovative companies of the world – whereas Toyota is at #37. It’s not even in the top 50 of Japan’s own ranking of most innovative domestic companies. Toyota is at #2, Honda at #105.

Only 70% of Honda’s sales are 4 wheel vehicles however – 13% are motorbikes, 2.2% power products like lawnmower engines and 14.9% is financial services. Honda has been innovating in these areas as well as becoming active in Mobility as a Service, investing in electric vehicle charging, including in the UK and Sweden.

Honda still has roots in the UK

In fact it’s not over for Honda in the UK by any means. Nikkei Business’s special feature takes a nostalgic look at whether Honda can grab back the “speed” and “challenge” spirit that Honda showed in the Isle of Man TT races, illustrated by a headline from the Daily Mirror in 1961 “The Japs are Laps in Front”. It described the 3 times Honda has left Formula One, only to come back again. Honda R&D and Honda Motor Europe are still based in the UK, and Honda has mainly supplied engines to UK based Formula One teams over the years – most recently to Red Bull in Milton Keynes.

The special feature finishes with an interview with Honda’s President Hachigo Takahiro – who was himself posted to the UK during his career. He shows no interest in merging with Toyota or Nissan in order to achieve scale. “We are not thinking about making a bid for Nissan…We are innovative when we face challenges, like we did with Formula One. As for Toyota, we won’t get very friendly, we will have a fight occasionally. Otherwise the Japanese car industry would be very dull. We have different personalities. We should be good rivals, and help Japan rise up. We have no intention of taking Toyota’s money.”

Even if Honda is shutting down its manufacturing in the UK, the hope seems to be that the UK can play a part in recharging its innovative spirit.

How a failed merger led Tokyo Electron to a world class HR system

Tokyo Electron originally sold car radios when it was founded in the 1960s, but reinvented itself as a manufacturer of semi conductor making equipment in the 1980s. A failed merger (following objections from anti trust regulators in the US) has led it to reinvent itself again. This time, the reinvention is just as much around management as it is product lines.

In 2013 Tokyo Electron spent a year planning a merger with the US’s Applied Materials. They even had a new name and were planning to put their global headquarters in the Netherlands.

To prepare for the merger, Tokyo Electron reduced its stake in an affiliated trading company, Tokyo Electron Device, and withdrew from the solar cell business. This renewed focus on the core business has led to increased profits and turnover.

Role not potential

One area on which it proved difficult to reach agreement with Applied Materials was how the HR system should be configured. Tokyo Electron was still focused on having lifetime employment and salary boundaries based on potential (the untranslatable Japanese word nouryoku) with actual performance influencing take home pay upwards or downwards each year. This was very different from Applied Materials system of having a transparent relationship between actual job roles and compensation and ensuring the appropriate person was assigned to that role, without much thought for maintaining long term employment.

Howevever when younger Tokyo Electron employees heard about the Applied Materials HR system they had high expectations as they felt frustrated by the traditional Japanese system. Tokyo Electron realised it would have to change its HR system to motivate its younger staff. They recognised, however, that there was a big difference between Japan and the USA, where people job hop frequently in their career.

The new system was introduced worldwide in 2017-8. 6 role categories which were applicable globally were introduced – operations, engineering, sales and marketing, business support, management and executive management – up from three previously: the untranslatable sougoushoku (generalist management), ippanshoku (generalist administration – usually for women) and technical. The number of levels increased from 7 to 20 and they applied to all categories (apart from executive). So someone in a senior business support role at level 8 could be considered to be “doing a highly complex job, with a strong influence over the results of their department” just as much as someone in engineering or sales and marketing.

This might seem vague, but Tsuchii Nobuhito, HR General Manager, justifies it by saying that as the semi conductor business is fast changing, roles need to be kept flexible.

Further changes included making it possible to be promoted in consecutive years. Previously Tokyo Electron employees had to stay in one grade for three years before being considered for the next promotion. Before, the criteria for a job role were evaluated relatively but now there are evaluated by an absolute standard. This is intended to make it more transparent to people where their job role and grade sit within the whole organisation and what their future career path might be.

Inevitable changes as the semiconductor industry globalizes

These changes were inevitable, says Nikkei Business. Japan’s semi conductor industry has hollowed out and most of the customers are overseas. 80% of Tokyo Electron’s sales are outside of Japan and 40% of its employees are overseas. Only around 500 employees in Europe and the Middle East out of 12,500 total. Unsurprisingly, Asia has the largest number – around 2,800. Japan headquarters also has more Asian employees. Nikkei Business interviews one Korean employee in Japan who says she was surprised to have stayed so long. She started as a Chinese/Japanese translator but enjoyed the challenges in her job and stayed on.

Higher than average salaries probably also helped. Tokyo Electron pays an average Y12.7m a year (around US$115K) compared to the industry average of around US$60K. As a result of the new HR system 90% of staff had a pay rise – mainly the younger and middle ranking employees.

Global employee communication

President Kawai has been careful to communicate company strategy and objectives as clearly as possible around the world. He has held 35 employee meetings around the world and also holds smaller discussion meetings with staff to talk about the direction of the semi conductor industry, or whether to continue with M&A activities. He asks them whether the strategic direction is getting through to people, and if it is appropriate for their workplaces.

There are still some issues – how far it is possible to be objective in evaluations, for example. “It will take another 3-5 years before the system really beds in” says Tsuchii. Kawai has set some ambitious targets and is confident there is room for further growth. Whether Tokyo Electron can continue to motivate its staff will be key, says Nikkei Business.

Their website certainly reflects the brand values they aspire to – clear and transparent, with an emphasis on “people, technology, commitment” – although just like every other Japanese technology company, their mission pretty much boils down to “contributing to society through innovative technology”, with added “reliable service and support”.

One of the puzzles of Japanese HR is how employee engagement is so low and yet the employees seem so dedicated and diligent. Kawai at least seems to have found a solution – transparent career paths.

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