Category: Trade

Top issues for Japanese companies in Europe, Middle East and Africa for 2022/3

The annual survey by JETRO of Japanese multinationals shows that many are struggling to return to pre-COVID levels of profitability. 65% of the 7,000 companies surveyed expect to be profitable by the end of FY 2022 (March 31 2023) but the automotive parts sector is forecasting widening losses.

Expectations for profitability are slightly higher in Europe than the global average and within the region, on a country by country basis, business prospects are overall more positive for Japanese companies in the Netherlands and Germany than for those in France or the UK. On the other hand, due to logistics, procurement and energy costs, 35% of Japanese manufacturers in Eastern Europe are expecting their business prospects to worsen, only just balanced out by the 36% who expect their business prospects to improve. Increasing labour costs and hiring and retention even outweigh the impact of the Ukraine war for Japanese companies in Europe as the key challenge.  This is also seen as a challenge in Western Europe, but with more focus on white collar, managerial workers, particularly in Germany and the Netherlands.

More than 70% of Japanese companies in the Netherlands, UK, Germany and UAE are expecting to achieve profitability in FY2022. However only 37.9% of companies in the region expect profits to improve, 11.8% lower than 2020/21. More than half of the Japanese companies based in Finland, Ireland, Italy, Sweden, Czech Republic and Portugal are expecting profits to improve –  compared to 46.7% of Japanese companies in the Netherlands, 44.4% in the UK, 38.1% in France, 36.4% in Germany, 35.3% in UAE and 31.1% in South Africa. Manufacturers in the UK, having not recovered as quickly as in the rest of Europe from the pandemic, are now more optimistic about profitability for 2022/23 than other manufacturers in the region.

45% of Japanese companies are expecting to expand their business in their region over the next 1-2 years, but do not expect to return to full pre-COVID levels because of rising costs. One bright spot is increasing investment in the human resources and hospitality sectors, thanks to the lifting of coronavirus restrictions.

Within EMEA, more than 50% are expecting to expand their business in Denmark, Portugal, Switzerland, Italy, Spain, Ireland and Romania. When asked about expanding “functions”, Germany, UK and the Netherlands were the top 3 for expanding sales functions, Germany, Netherlands and Czech Republic for expanding manufacturing and Germany, France, Spain, UK and Belgium were top for R&D.   Overall, particularly for the UK, the  mood seems to be “keeping things as they are”

Trade

Over 50% of Japanese companies in the UK say that Brexit has had a negative impact on their business, mainly due to (in rank order) increased customs clearance processes, delays and costs of logistics, imposition of tariffs, responding to new UK regulations (eg the CE vs UKCA mark), customers leaving the UK and difficulties in hiring. 40% of Japanese manufacturers in the UK say they are experiencing problems in exporting to the EU.

37.9% of UK based companies say they are using the EU-UK Trade and Cooperation Agreement for their exports to the EU, 12.9% up on the previous year. The main reason given for not using it was that their exports were already tariff free, or did not fall within the agreement. The main challenges in using the TCA were setting up their own internal systems, getting the cooperation of EU based suppliers or customers and interacting with customs. Securing human resources was cited by 50% of the Japanese companies in the UK as a negative impact of Brexit (61.5% for manufacturers), compared to only 9.8% of Japanese companies in the EU saying they were concerned about this as a result of Brexit.

49% of Japanese companies in the EU are using the EU Japan Economic Partnership Agreement for importing from Japan to the EU and 34% are using the agreement to export from the EU to Japan. More than half of Japanese companies in Austria, Italy, Czech Republic, France and Spain are using the EPA to import to the EU. The sectors with the highest use of the EPA are chemicals, wholesale, foods, plastic products and transportation equipment.

Localization of supply chains and staff

60% of Japanese manufacturers globally are expecting to review their supply chains in the future months.  Localization of procurement, production and sales is accelerating due to rising raw material and transportation costs and the emergence of supply chain disruption risks. Within Europe, 48.2% of all companies have reviewed their supply chains and 55.5% expect to review them in the coming year.

In Europe, however, there is more interest in localising procurement within the EU than within the country of location. 21.4% of Japanese companies in Western Europe, 32.1% of Japanese companies in Central and Eastern Europe and only 9.5% of Japanese companies in the UK are expecting to increase domestic procurement, whereas 34.3% of Japanese companies in Western Europe and 45.8% of companies in Eastern Europe are expecting to increase their procurement within the EU. No UK companies are expecting to increase their procurement from the EU and no Eastern European Japanese companies are expecting to increase their procurement from the UK either.

Around 20% of European companies are expecting to increase procurement from Japan, but significantly more (around 35%) are expecting to increase procurement from ASEAN countries.

Japanese companies are also planning to reduce the number of expatriate staff sent from Japan, and increase the number of locally hired staff, particularly in Asia.  The pandemic has accelerated the ability to manage the business remotely, from Japan. Within EMEA, 28.9% are expecting to increase their Japanese expats to the Netherlands, compared to a 22.1% increase to UAE, 19.3% increase to Germany, 18.1% to the UK and 13.3% to France and 6.6% to South Africa. 13.3% are expecting to reduce the number of Japanese expats in the Netherlands, 12.4% in Germany, 6.4% to the UK, 16.7% to France.

In terms of hiring more local employees, Japanese companies in Germany came top with 44.3% wishing to do so, then South Africa with 39.5%, Netherlands with 38.9%, France with 37.7%, UK with 36.1%, UAE with 35.9%. 10% of Japanese companies in Germany and the Netherlands were planning to reduce local staff numbers, compared to 11.3% in the UK, 9.8% in France, 9.3% in South Africa, and 4.9% in the UAE.

Whereas automation and reduction of the workforce had been a top priority for manufacturers before 2020, while this is still at number 2, the top priority for the next few years is investment in new equipment and new projects. The third highest priority is revising manufacturing location. The reasons underpinning these priorities are the need to optimise production costs, the high cost of labour and the high cost of raw materials.

CSR and supply chains

A third of Japanese multinationals are doing due diligence on human rights in their supply chains, particularly in Europe, where regulations are being introduced. 46.2% of Japanese companies in the UK are already doing due diligence – compared to 42.9% in France, 30.3% in Germany and 23.2% in the Netherlands. Sectors which are particularly concerned with human rights are mining and minerals, plastic products, non ferrous metals, textiles, construction and foods.

42.4% of Japanese multinationals have started taking steps to reduce their carbon emissions, 9% up on the previous year. 20% of Japanese companies are proceeding with “green procurement” for their suppliers. Portugal, Switzerland, Ireland, Austria, Spain and France score particularly highly in terms of taking steps to reduce carbon emission with over 70% of companies in those countries already having done so, compared to 63.6% in South Africa, 58.3% in the UK, 55.2% in the Netherlands, 51.5% in UAE and 50% in Germany.

Actions taken include reducing energy usage, using  more electric power, using more renewable or new energy sources, with solar being the most popular. Other actions have included developing new environmentally friendly products, green procurement and revising procurement and logistics. The interest in green investments is at a record high, greater than digital investments or eco friendly transportation or tourism.

Sales

The most promising sales destination for Japanese companies in Europe continues to be Poland, for the fourth year running. Turkey has overtaken Germany for the first time in 7 years and the UK is back in the top 10. Other Eastern European countries in the top 10 are Hungary, Czech Republic and Romania – mainly for their economic growth prospects. The other Western European countries in the top 10 are France, Italy and Spain.

Japanese companies in the UK are showing an increasing focus on the UK domestic market for their sales, with an average of 49.4% of sales to the UK market, 2.4% up on 2021/2, compared to a European average of domestic sales of 37.7%. UK companies are selling on average 16.5% of sales to EU countries, compared to 37.6% of sales to other EU countries (excluding their own country) for Japanese companies located in the EU.  Unsurprisingly, Japanese companies in the UK have become more UK oriented since Brexit, as many of the EU sales and coordination functions have shifted from the UK to the EU – and is now potentially stabilising after the sharp decline over 2019/20 to 2021/2

Although the proportion of sales to non-EU Europe (presumably Norway, Switzerland, maybe Turkey) is higher for the UK (16.3%) than for Europe overall (4.4%), there is not much evidence that the UK is being used as a base for sales outside Europe – the proportion of sales to North America (1.7%) or China (1.3%) is actually slightly lower than for the whole of Europe. Sales to Japan have been falling steadily since 2019 (possibly related to Honda Civic sales to Japan). The proportion of sales to “other” countries is higher – 8.5% compared to 6.5%, perhaps showing that some Japanese companies in the UK are indeed Europe, Middle East and Africa headquarters, with sales focused more on the latter regions. ASEAN only accounted for 1% of the 7% of sales to other countries in 2019/20.

Hybrid working and pay rises

European employees of Japanese companies are not returning to the workplace at anything like the rate they are in South West Asia, North West Asia or ASEAN. During 2021, 14.6% of Japanese companies in Europe said that 90% or more of their employees were working at their office or factory and only 29.6% were expecting this to happen in 2022/3 in Europe. In Asia, around 30% of companies said their over 90% of employees were working at the office or factory in 2021 and this is expected to be near to 70% in 2023. This may reflect that there are proportionately more manufacturing companies in Asia than in Europe.

In terms of reviewing management and personnel policies and structure, by far the most popular choice for review was human resource development and training – chosen by 61.6% of Japanese multinationals. Second was reviewing working from home policies, at 35.3%, closely followed by reviewing staff remuneration at 32.3%. The next three topics were all chosen by around 27% of Japanese companies – digitization of workflows, reviewing the expat staff structure and localising management.

Pay rises are highest in emerging markets such as Brazil, India, Mexico, Vietnam and South Africa and in Europe – Hungary, Poland, Romania and Czech Republic – at around 6 to 9% over the past two quarters, whereas despite the high inflation rates, pay is only expected to rise by 2.7% to 4.6% in the Netherlands, Germany, UK, France and UAE.

Update – this article has been added to since the publication of a European focused version of the survey by JETRO in December 2022. 

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77% of Japanese companies in Europe say the Ukraine war has had a negative impact on their business

77% of Japanese companies in Europe have had their business negatively impacted by the war in Ukraine, according to a survey conducted by JETRO in September 2022. The manufacturing industry was particularly hard hit, at 83.7% and Japanese companies in Belgium (92.5%), France (87.5%) and Spain (86.2%) had the highest proportion of all countries reporting a negative impact. This may be linked to the industries most expressing concern about negative impacts – food, automobiles/motorcycles and electrical and electronic equipment. France is host to a number of Japanese food related companies and Belgium is the European headquarters of Toyota and other related automotive companies.

The main negative impacts were an increase in energy price, an increase in raw material and resource price and confusion and congestion of logistics.

The main responses to negative impacts of the invasion of Ukraine were “passing on price rises to customers” (50.5%) and diversifying procurement sources (27.5%). Manufacturers were also increasing inventory more than they were trying to find new customers.

More general concerns were rising and persistently high costs, including energy, and the extension of the frontiers of the war, the use of nuclear weapons and attacks on nuclear power plants, as well as any increase or prolongation of uncertainty about the future – when the war would end, when it would be possible to resume business with Russia.

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A very timely introduction of a new trade compliance diploma from the International Trade Institute

We thought the new trade compliance diploma from the recently-established International Trade Institute would be of interest to Japanese companies operating in Europe, struggling with additional complications post-Brexit. Now that various sanctions are being introduced against Russia, it seems even more timely.

It is the first University-recognised diploma that is international in scope – recognised as a qualification not only in the UK but also Ireland and at the EU level. The facilitators are trade experts themselves, with many years of consulting on trade compliance around the world.  The course is a programme of seven modules of a high level but practical curriculum, spread over three months at times convenient to participants, with online modules and live sessions.

The Institute has had early success in attracting participants with job roles such as logistics specialist, trade compliance manager, warehouse supervisor and shipping manager from global brand US and other multinational companies to the Diploma Programme.
The next course is starting on June 9th, and a further intake is scheduled for September. Further information is available from www.internationaltradeinstitute.com.

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Survey of Japanese companies in Europe

Normally by this stage of the year, JETRO (the Japan External Trade Organization) would have issued the English translation of the top level findings of their annual surveys of Japanese companies in Europe (and internationally), but this does not seem to have happened this year. What is happening in Ukraine and the impact on Europe may well make any conclusions meaningless, but here, for what they’re worth, are the points which stood out for us.

Overall trends

More Japanese companies were forecasting profitability for 2021/2 than the previous year (65.7% vs 48.5%) but this is not yet back up to the pre-pandemic levels of profitability. The only countries where more than half of the Japanese companies there expected to see improved profitability – even compared to pre-pandemic levels – were Slovakia, Italy, Portugal and Sweden. Less than half of the Japanese companies in the UK, Czech Republic, Belgium, Spain, Denmark or Romania expected to see improved profitability in 2021 compared to 2019 or 2020.

This can be explained by the fact that in terms of sectors, ceramics and minerals, rubber, foods, machinery and wholesale were expecting a recovery, but banking, automotive, electronics and trading companies were all expecting conditions to worsen – sectors which are particularly active in the UK, Czech Republic and Belgium.

Many companies said that they were reviewing their supply chains and purchasing. Procurement costs and lead times have become new issues for manufacturers. UK based Japanese manufacturers seemed more pessimistic than in other countries in their forecasts, with nearly a quarter expecting conditions to worsen.  Most Japanese companies were looking to procure more from central and Eastern Europe and between 14 to 28% were looking to reduce their procurement from the UK, dependin g on location and sector.

EU-Japan Economic Partnership Agreement

Nearly 50% of the respondents to the survey said they were using the EU Japan EPA for their imports into the EU – this was 80% for Japanese companies in Hungary, 65% Czech Republic, 64.3% Belgium, 53.3% Poland, 53.8% Netherlands, 48.4% Germany. This would probably reflects imports of automotive components into the EU from Japan, for at least the first 4.

EU UK TCA

25% of companies who are involved in UK-EU trade were using the TCA for exports from the UK to the EU and 10.4% were using it for exports from the EU to the UK. Around 50% of Japanese companies in the UK were using the UK Japan EPA to import from Japan to the UK and 39.1% were using it to export from the UK to Japan. 39.1% of Japanese companies in the UK were procuring from Japan, a 3.6% increase on the previous year.

More than 40% of Japanese companies in the region said that they did not know if the TCA had an impact on them or not and were concerned about the burdens of coordinating with suppliers and partners and the cost of making changes and self regulating.

Top issues

As in pre-pandemic years, employee recruitment and retention and high labour costs continue to be top concerns, with logistics and procurement costs also climbing up the list of priorities.

Brexit

Brexit has continued to be the top concern of Japanese companies in the UK, but less concerning than in 2020. Nonetheless, nearly 50% of Japanese companies in the UK see Brexit as having had a negative impact, two thirds if looking at manufacturers alone. Nearly half of Japanese manufacturers in the UK were experiencing issues with exporting to the EU from the UK and around 35% were experiencing problems with importing from the EU to the UK.

The second most concerning issue for Japanese companies in the UK is the pandemic, with employee recruitment and retention moving up from 5th to 3rd place, customs clearance still in 4th place (but a growing concern) and labour costs and GDPR at about the same level as the previous year.

Over half of Japanese companies in the UK were concerned about any deviation by the UK from GDPR, and 44% about having to deal with a UK CA mark in addition to the CE mark. 42% were worried about the movement of people between the UK and the EU – more so in the services sector than manufacturing. A third or so were also concerned about the REACH regulations and regulations on the movement of capital.

Unsurprisingly, there was an increased proportion of domestic UK sales by Japanese companies in the UK and a corresponding fall in sales to the EU.

Sales prospects

Poland was cited as the most promising sales destination for the third year running, with Germany second for the third year running too. Czech Republic, Hungary and Turkey are next most popular, then France and then Russia, with Slovakia and Spain also in the top 10. Overall, even including the UK, most Japanese companies were expecting to expand in the region in 2021/22. How the events of 2022 will affect this remains to be seen.

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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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Gravity still matters for Japanese trade and business expansion

TThe Japan External Trade Organisation has published its annual survey of the international operations of Japanese companies. An overview in English is available here, but not the full version that is available in Japanese only.

The English language overview only mentions Europe once, in the context of China, the US and Western Europe comprising 60% of the export destinations that Japanese companies are focusing on.  The more detailed Japanese version breaks Western Europe into the UK and Western Europe excluding UK. As a consequence, the UK didn’t make the top 10 of future export destinations.  56.7% selected China (up from 49.1% in 2012), then the USA (50.3% – a large increase on 34.1% in 2012), Taiwan, Vietnam and Thailand. Western Europe excluding the UK was next, at #6, selected by 39.8%, up from 23.2% in 2012.  Clearly the gravity model of trade is not dead yet, but a less hostile presidency or an Economic Partnership Agreement helps.

The report also highlights the interest of Japanese companies, particularly SMEs, in using e-commerce to trade abroad. However, digital trade does not seem to be overcoming the gravity model either. Again, China is by far the most popular sales destination for e-commerce, then the USA, Taiwan, Hong Kong, Singapore, South Korea and Thailand. France just pips the UK at 8th, cited by 16.3%, up from 10.4% in 2016. The UK was cited by 14.9% of companies, not much changed from 14.2% in 2012.  In terms of where Japanese companies are focusing their future e-commerce efforts, China was selected by 40% (for food, drink, cosmetics, clothing, machinery, and haircare products), then the US for food – particularly tea and rice – cosmetics, clothing and machinery. Germany was selected by 5.2%, France by 4.9% and the UK by 3.4%.

In terms of where Japanese companies are planning to expand their business (not just via exports), a leap in the USA’s popularity stands out again – up 8% from 31.9% in 2019. Western Europe (including the UK) was 6th most popular, after China, Vietnam, the USA, Thailand and Taiwan, selected by 30.4%, up 5% on a year ago.  Japanese companies who are looking to expand in Western Europe are mainly manufacturers of ICT and electronic devices, clothing and apparel and “other manufacturing”.  Expanding in Western Europe was the fourth highest choice as a destination for expanding the R&D function for new product development, the fifth highest choice for expanding R&D for localisation, high value added manufacturing, regional coordination functions and logistics. The UK did best as the destination for R&D for new product development, coming in at 8th, after China, Vietnam, USA, Taiwan, Western Europe, Thailand, Indonesia and Singapore. It was the tenth ranked choice for R&D for localisation and for regional coordination, 11th for logistics, 12th for high value added manufacturing, 13th for sales and not in the top 15 for applied engineering.

The UK has become the world’s fifth largest economy again, having dropped to 6th, after India  was hit by a recession. You might, therefore, have expected the UK to rank higher if market size were all that counted. That it has not is partly due to gravity, but also the maturity of the UK-Japan business relationship and Japanese companies’ search for growth, not to mention the uncertain impact of Brexit in the longer run.

 

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Japanese companies in Ireland

I have been visiting Ireland about once a year recently for business, but also for family reasons. The business side is to provide training for companies there that have been acquired by a Japanese company, or in one case, had acquired a company in Japan via its US parent.

My parents also now live in Ireland. After 25 years’ working in Japan, they initially retired to France but never felt completely at home there.  My stepfather’s father was Irish, so he has family in Ireland. It was also easy for my stepfather to get an Irish passport, as an insurance against Brexit so that he can continue to receive free healthcare and a state pension.  My mother has become Danish for the same reason – and was able to do so because her father was Danish.

They now live close to my cousins, near the city of Cork, which has become a hotspot for technology companies, particularly American ones.  Trend Micro and Alps have factories there, with the latter employing around 850 people making electronic components.

Cork also has a pharmaceuticals and biotech cluster, as does the capital of Ireland, Dublin, which is where Astellas and Takeda* have plants.  Astellas employs over 400 people manufacturing raw materials and immunosuppressants and Takeda employs around 300 people making cancer therapies and active ingredients for various drugs. Ireland is the biggest net exporter of pharmaceuticals to the EU.

Multinationals are attracted to Ireland because of the young, well-educated, English speaking workforce, and also the very low corporate tax rate of 12.5%.  

Aircraft leasing in particular has benefitted from Ireland’s low tax policies. Nine out of the ten top aircraft lessors are based in Ireland, and over half the world’s airplanes are owned and managed there.  Japanese companies such as Orix Aviation and SMBC Aviation Capital have substantial operations in Dublin.

Locating operations in Ireland purely for tax reasons may turn out to be unsustainable in the long term however, as the EU, the OECD and Japan are all taking steps towards international tax cooperation and clamping down on tax avoidance.

The other risk to consider is of course Brexit.  The UK forms a “land bridge” to the EU for Ireland. Around 85% of Ireland’s freight trade goes to British ports, and about 40% (around 190,000 freight containers a year) of that is re-exported to elsewhere in the EU.

Pharmaceuticals and electronic components are often shipped by air and various EU shipping companies have started up new routes connecting Ireland to the EU recently. So the main concern is any friction caused to trade that is only between the UK and Ireland.

This is partly why the land border between Northern Ireland and the Republic of Ireland has become the key issue for resolving Brexit.  But the most important concern has nothing to do with business – there are many more families like mine, living in both countries, who do not want to lose the peaceful coexistence that the open border has brought with it.

This article by Pernille Rudlin was originally published in Japanese in the Teikoku Databank News on November 13 2019

*Takeda acquired Shire for $62bn in 2019, who relocated their HQ from the UK to Ireland in 2008 for tax reason. Takeda is now liquidating Shire Holdings in Ireland and transferring the assets to Takeda Ireland, to make repatriation of dividends to Japan easier – presumably avoiding Japan’s tax haven laws.

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Video: the Brexit agreement one month on

Pernille Rudlin, Managing Director of Rudlin Consulting and David Henig, Director, UK Trade Policy Project at European Centre for International Political Economy participated in a Japan Society webinar on February 4th 2021, talking and answering questions about the Brexit agreement one month on, the impact on Japanese companies in the UK so far and what the future might hold. A video of the whole session is available below:

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Germany, Netherlands and Eastern Europe favoured in Japanese companies’ plans for in Europe

The annual JETRO (Japan External Trade Organisation) 2020 survey of Japanese companies in Europe has just been published and shows the impact of the EU-Japan and UK-Japan EPAs  – largely in increasing Europe-based Japanese companies’ procurement from Japan.

Japanese companies’ view of the next couple of years show that growth is expected in Eastern Europe and Germany, with Germany increasingly providing a regional coordination function. It looks like the number of employees and Japanese expatriates may be reduced over the next couple of years and there will be more  investment in digital transformation and interest in green technology and digital technology state supported projects.

Of the 949 companies who responded, 286 were in Germany, 162 in the UK, 111 in the Netherlands.

Brexit

The biggest concern for Japanese companies in Europe regarding Brexit is the impact on the UK economy.  Other concerns  are potential changes in UK regulations and laws and how this will differ from the EU. For manufacturing, the use of the CE mark and for services, the movement of people between the UK and the EU were of particularly concern.

60% of Japanese companies in Europe felt no impact of Brexit during the transition period. 40% of Japanese companies in the UK expect a negative impact from Brexit in 2021 whereas only 19.6% of Japanese companies in the EU expected a negative impact.  More than a third of Japanese companies in the UK and the EU were not sure what the impact would be.  Unsurprisingly, 70% of Japanese manufacturers in the UK were worried about their exports to the EU and of those nearly 90% were most concerned about customs processes. 80% of Japanese companies in the UK and the EU were worried about delays in logistics. Around 50% had made preparations for no deal, including increasing stocks, changing transportation routes, restructuring their organisations, changing procurement and setting up new locations.

EU-Japan EPA and UK-Japan EPA and procurement

The impact of the EU-Japan EPA and future impact of the UK-Japan EPA has also become apparent. The proportion of materials/components (particularly plastic components/automotive parts) sourced from Japan by Japanese companies in the EU has risen 5.2% to 36.6% from before the EU-Japan EPA and more than 70% of Japanese companies in the UK are considering or are using the UK Japan EPA to procure from Japan.  Importing from Japan under the EPA was particularly focused in the Czech Republic, Netherlands, Belgium, Italy and Germany.  Exporters to Japan that have been most keen to make use of the EPAs are in the chemicals/petrochemicals sector.  Around 30% of Japanese companies in the UK see some merit in the UK-Japan EPA.

Nonetheless, there is a clear trend towards procuring more within the EU, particularly in Central and Eastern Europe. However procurement from the UK by EU based Japanese companies looks set to continue, with only 10% planning to decrease their purchasing from the UK. Conversely, 25% of Japanese manufacturers in the UK are expecting to decrease their procurement from the EU.  I wonder whether this will change now the rules of origin in the UK-EU FTA have become clear.

Sales and profitability

Only 48.5% of Japanese companies in Europe expect to be profitable in 2020/1, the lowest proportion since 2012. Falling sales is the main cause, along with cross border restrictions and a drop in consumer demand because of the coronavirus. Unsurprisingly, Japanese hotels and travel companies are particularly hard hit.

The average proportion of sales of Japanese companies in Europe to EU countries is 73%.  25.4% of UK based Japanese companies say the proportion of EU sales of their total turnover has shrunk, but this is 8.1% lower than last year. Respondents were significantly more optimistic in Central and Eastern Europe than in Western Europe.  In particular 45.2% of manufacturers in Central and Eastern Europe expected to expand in the next 1-2 years. Poland was most cited as a promising sales destination, along with Germany, Hungary and the Czech Republic.

Forecasts and plans for 2021-2

30% expect business activity to normalize in the second half of 2021, 26.6% in the first half of 2021.  The most cited plans for 2021 are reduction of personnel and expatriates from Japan, as well as reviewing the product range, digital transformation (particularly in Italy, UK and Belgium) and reviewing of suppliers. Japanese companies are also showing interest in the green investment support and digital investment support being offered in European countries, particularly in Italy, UK and Belgium for digital and Spain, Ireland and Czech Rep for green investment.

Overall, more Japanese companies in Europe than ever are expecting business to continue “as is” over the next 1-2 years, with 14.5% of UK based Japanese manufacturers expecting business to shrink, 5.3% more than last year.  Japanese companies in Netherlands, Switzerland, Portugal and Germany are more likely to expect to expand over the next couple of years than in other countries, and there was a significant increase in the number of Japanese companies in Germany who said they were performing regional coordination functions in Europe compared to the previous year. More than 10% of Japanese companies in Hungary, Sweden, Italy, France and the UK were expecting their business to shrink.

 

 

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Anglo-Japanese partnerships, new and old

I occasionally buy objects in local antiques shops which are a hybrid of Japanese and British design and manufacturing. Most of these date from the late 19th or early 20th century when Japonaiserie was at its peak in Europe.

Last year I bought a milk jug decorated with a picture of Mount Fuji, junk boats and thatched houses on it. It’s a very simple traditional British shape and most of the decoration apart from the gold highlights are transfer printed rather than hand decorated.

What caught my eye most of all was that the jug had an unusual metal hinged lid. Inside the lid is stamped “Clarke’s Patented”. It seems the lid had a design patented in the UK by a Mr Clarke, to allow the jug to pour or be filled, while keeping the lid on.

It shows that even in the 19th century, trade between Japan and the UK wasn’t just a bilateral shipping of objects entirely made and designed in one country. Maybe the mould for the jug was exported to Japan. Was the transfer print made and designed in Japan or the UK? Was the gold highlighting applied in Japan or the UK? Was the metal lid added after the jugs arrived in the UK? It’s possible the entire jug was designed and manufactured in the UK – but was heavily influenced by Japanese export ceramics.

This long history of interaction is why the Free Trade Agreement being negotiated between Japan and the UK is likely to be fairly basic and without much additional positive impact. A deal also needs to be reached quickly to ensure there are no new tariffs after January 1st 2021 when the Brexit transition period ends. The sector likely to produce the most gains in terms of reducing tariffs is food and agriculture, which usually causes the most difficulties and prolongs trade negotiations – so it seems likely this part will not roll over from the EU Japan EPA for the time being.

The UK proposal reflects this, emphasising British small and medium enterprises exporting to Japan, access to Japanese government procurement and the free flow of data.

Government procurement can also be very controversial. Many people in the UK are nervous about a trade agreement with the USA resulting in American healthcare companies being able to push for the privatisation of the UK’s national health service. There is also plenty of concern about data flows and Chinese investment in UK ICT infrastructure.

The chief of the UN has said the world is facing the biggest crisis since World War II. For Japan and the UK the post-war period was one of austerity but also innovation. Companies such as Sony and Honda were founded in Japan and the UK established the welfare state – the nationalisation of the health service, transport and energy.

So let us hope this crisis will bring about mutually beneficial new Japan-UK partnerships in social infrastructure and services, as well as in technology start-ups.

This article was originally published in Japanese in the Teikoku News, on 8th July 2020.

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