Trade

Brexit watch – Top 30 Japanese companies in the UK

We’ve been tracking the 30 biggest Japanese employers in the UK for over 3 years now, so it seems a good moment as Brexit draws nearer to see what changes they have made over the past three years, explicitly or implicitly, to prepare for Brexit and beyond. Overall, the top 30 Japanese companies in the UK have had a good 3 years’ in the UK, with total number employed increasing by nearly 15% to just under 90,000, out of the 140,000 employed by 1000 Japanese companies that is usually cited. I even wonder whether that 140,000 ought to be revised substantially upwards, as I believe the estimate dates from 2015.

However the average increase conceals some hefty drops (Fujitsu, Nomura and Yazaki) and substantial increases – the latter largely due to acquisitions.

Nearly every annual report from the companies that make up the 30 biggest Japanese employers mentions Brexit, but few state explicitly what actions they have taken to deal with the risk, unless they are financial services companies facing regulatory issues. Most note that the outcome is uncertain, and that they are monitoring and planning.

No tax haven please we’re Japanese

As well as Brexit, another factor that some Japanese companies in the UK have to take into account is the tightening of the Japanese tax haven law. Passive income such as dividends and royalties, if received in a country with a corporate tax below 20%, will be subject to charges from the Japanese tax authorities. The UK corporation tax rate is 19%, due to go down in stages to 17% and Theresa May has recently promised “whatever your business, investing in a post-Brexit Britain will give you the lowest rate of corporation tax in the G20.”

As I stated in my speech to the UK Tax Forum, because of their long term, stakeholder oriented, risk averse ethos, Japanese companies are not really interested in the UK as a tax haven. Panasonic, seen as a bellwether in terms of corporate governance in Japan, cited the tax law as the reason to move its headquarter function from the UK to the Netherlands, where the headline rate of corporate tax is 25% (although sweetheart deals can be done). I also think that the decision of the European headquarters in the UK of trading companies Sumitomo Corporation and Mitsubishi Corporation to sell their shares in investments such as Princes and Triland Metals in the UK to their Japan headquarters is part of this drive – to avoid being seen as using the UK as a tax haven for their dividend earnings.

Whose standards are they anyway?

Japanese companies would be more interested in the second part of May’s statement – “you will access service industries and a financial center in London that are the envy of the world, the best universities, strong institutions, a sound approach to public finance and a consistent and dependable approach to high standards but intelligent regulation”.

But of course the question they will be asking is “whose high standards?”

There are around 200 Japanese companies with manufacturing in the UK, and we estimate around 50% of their production on average goes to the EU (excluding the UK). 30% is to the UK and the remainder to the rest of the world. In Toyota’s case, over 80% of their production in the UK is exported to the EU. So it’s no surprise that, as repeatedly stated, including in the Japanese Ministry of Finance’s “Message to the UK and the EU” of a couple of years’ ago, Japanese business want harmonised regulations and standards across the UK and the EU.

All the Japanese financial services companies affected by EU regulation have taken action – Hitachi Capital and MUFG have strengthened or set up bases in Amsterdam, MS&AD in Brussels, Sompo International in Luxembourg, SMFG, Mizuho and Nomura in Frankfurt.

The rise of the pure UK plays

Looking at who’s in and who’s out of the Top 30, the rise of “pure services” is noticeable, largely through acquisitions such as MS&AD acquiring Lloyds underwriters Amlin and InsureTheBox, Dentsu acquiring multiple advertising and marketing agencies in the UK, Outsourcing acquiring recruitment agencies and government debt collectors. Bubbling under are Park24, now the owner of National Car Parks. Many of these investments are very domestic UK market oriented, so Brexit proof in the sense that they are not reliant on the European single market in terms of supply chains, regulation or freedom of movement.

Conversely manufacturing companies have dropped out – such as JTI, with the closure of its Gallaher factory in Northern Ireland last year and Fujifilm, who have three different production sites in the UK.

Freedom of movement and solutions

As well as emphasising the need to harmonise regulations and standards, and ensure tariff free trade, the Japanese government “Message to the UK and the EU” of two years ago also pointed out that Japanese companies in all sectors employ large numbers of non-British EU nationals in the UK. Because many of them have UK -based regional headquarters, or have design and engineering or customer support centres in the UK, they rely on the freedom of movement of these non-British EU nationals as well as the freedom of movement of British employees themselves, to visit or be seconded to client sites to provide pre sales, installation and aftercare support. This also applies to Japanese engineers visiting the UK from Japan who at the moment are finding themselves being turned away because they gave the wrong answer at the border, saying they have come to the UK “to work”.

This last issue is likely to be raised quite insistently in any post Brexit trade deal between Japan and the UK, and if not solved, I would expect to see the numbers employed by the Top 30 in the UK to fall in the years to come.

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How Japanese risk aversion explains reactions to Brexit and whether UK should join the CPTPP

I was a panellist for the UK Trade Forum on 25th September 2018, on Japanese business and government viewpoints in response to the UK’s request to join the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP, TPP as was, often known in Japan as the TP11)

The Chatham House rule was invoked, but I believe that I am allowed to report what I said, so long as I don’t attribute any comments to the other speakers.

As I only had 10 minutes, I decided to focus on risk aversion to explain Japanese reactions to Brexit and the UK joining the CPTPP. Even so, I had to drop the final part of my speech, so I will add this back in at the end:

“I have spent more than 45 years now living in or visiting Japan and working with or for more than 200 Japanese companies, and one generalisation I feel I can make, even though I am well aware of the dangers of stereotyping, is that Japan as a nation – as well as Japanese companies – are highly risk averse.

The geopolitical angle

I was reminded of this when I attended a lecture by Koji Tsuruoka last week, the current Japanese Ambassador to the UK, who was also the chief negotiator for Japan for the TPP. He gave a very powerful, thought-provoking speech, tackling head-on controversial subjects like Japan’s behaviour in WWII, whaling, defending Big Pharma IP interests in trade negotiations and so on, in a way that didn’t seem strictly necessary given it was an audience of Japanophiles, but I think his message, on reflection, was very clear. Japan feels very vulnerable, with neighbours such as China and North Korea and Russia, and supposed allies and defenders such as the USA now behaving unpredictably, and it needs a rules based international order because it is energy and resource poor and relies on other countries for imports of these things. WIthout a rules based international order being adhered to, countries behave unpredictably, and this can lead to war.

So this is why Tsuruoka and other Japanese government representatives and ministers have been very positive and welcoming of the UK wanting to join the CPTPP or roll over the EU-Japan EPA, even if the practicalities of this are not clear. They worry that the UK leaving the EU means the UK is also leaving that rules based international order, so needs to be roped back in somehow.

Why are Japanese companies so risk averse?

So that’s the geopolitical side to this – for the rest of my ten minutes I want to look at the Japanese business side, and three sectors in particular, what kind of trends we are seeing and how they are reacting to Brexit and what TPP might contribute in terms of mitigation or otherwise.

So why are Japanese companies so risk averse? I think it’s because they operate on a very different model to the Anglo Saxon, short term, shareholder value model. It could be called a stakeholder model, but primarily the motivation is not to make a quick profit, but long term survival. So they don’t want to do anything so risky as to jeopardise that, and they are very hot on ESG – Environmental, Social and Governance – issues. It’s one of the really good things about Japanese companies, why I am still a fan.

So when the Japan bashing started happening in the 1980s, and many Japanese remember Americans taking hammers to Japanese cars, Japanese companies decided that foreign direct investment was the way forward, and started up factories in the USA and of course also in the UK, with Nissan, and then Honda and Toyota.

They chose the UK – and the UK is the recipient of 40% of Japan’s cumulative FDI into the EU, and has the largest Japanese population in the EU, including intra-company transferees – (but both those numbers are declining these past couple of years – I leave that to you to conclude why, but a hostile environment certainly isn’t helping) – because the UK was seen as a stable, rules based system, low risk place to invest, and of course because we were then members of the EU and a gateway into the EU.

So what is happening now with Brexit in terms of Japanese risk aversion, is that it is tipping them into making decisions and directions they were going in anyway. Looking at the three main sectors of Japanese investment in the UK – automotive and supply chains, IT and electronics and “pure” services – these sectors make up the bulk of the around 1000 Japanese companies in the UK, employing around 140,000 people. Actually many of the 1000 don’t really count because they are paper companies, brass plates, or several versions of the same company, but there are 30 or so really big employers who make up more than half of those 140,000 employees.

Automotive supply chains – a pivot to a new chain of right hand driving nations?

So for Japanese companies, trade negotiations aren’t really about trade in products so much any more, more about protecting their foreign investments. Even then, to be realistic, the EU only makes up around 10% of Japanese companies’ turnover. Asia is still the really big market outside of Japan, and within that, China, and then secondly the US. And the UK is probably only around 10% of the EU total. But the UK is also host to a lot of regional HQs and of course the three car plants.

The main trends you see in the automotive supply chains is that they are shifting eastwards in Europe, to the Czech Republic, Slovakia, and Japanese car manufacturers also have factories in Russia and Turkey, and the suppliers – of wire harnesses for example – have factories in Africa. So Brexit is accelerating that shift.

Can the CPTPP help with this? Well I suppose there are a large number of CPTPP members who are right hand driving like the UK, but when you look at what sells in Australasia for Toyota, it’s pick up trucks like the Hilux, whereas Toyota in the UK is manufacturing the Auris/Corolla. I suppose that shift could happen – at least then there is access to a market of over 100 million, which is supposed to be the minimum to sustain an automotive supply chain. Honda is already trying to sell half of its Civic production from Swindon to the US, so it could happen, despite the distance.

Information technology and electronics – integrated disintegration

You’re also seeing a shift in the power balance in those supply chains, towards the components suppliers, and IT, because of Big Data, the Internet of Things and so on. Which brings me to the second major sector – information & communication technology, electronics etc. Here you’re seeing what I call an integrated disintegration. Japanese companies are becoming more B2B, solutions based, and trying to integrate back office functions, but also customer support, technical support into low cost locations with multilingual educated workforces – so in Europe this would be Portugal, or Poland.

But at the same time, the regional management and sales are becoming more dispersed. Anyone who has worked in a multinational as I did working at Fujitsu will know what this means – endless fights about who gets what in terms of money or actually doing the work, and whereas the UK often won those fights, I am beginning to see signs that Japanese companies are reverting back to the country model, are finding the matrix system just too tough. If you’ve ever run a global or regional virtual team, as I did, you can understand why. So there is a drift away from the UK and to Germany or the Netherlands, as we’ve seen with Panasonic, and it would seem also Sony now, accelerated by Brexit. And that’s bad news for UK suppliers of services to those Japanese companies.

Pure services also need a rule based international order

But Panasonic did not just cite Brexit as a reason for moving its headquarters to the Netherlands. It was also to do with the tightening of Japan’s tax haven rules from April of this year. Dividends and other “passive income” in Japan’s overseas subsidiaries will be the subject of attention of Japanese tax authorities, regardless of how much real business activity they are undertaking, if the corporate tax rate is below 20%. And of course the UK’s is 19% and due to decrease further – reiterated by the Chancellor after the referendum to show that the UK is still open for business.

But actually this is not appealing to Japanese companies. Nor is the “chlorinated chicken” approach about deregulating or having looser environmental or other regulations of much interest to Japanese companies. They want to maintain high standards, and like robust, thorough rules – again, because of the risk aversion.

But there are cultural issues beyond the need for a rules based international order

Although Japanese companies really like being in the UK and I think a lot of the commercial and financial sector companies, like Japanese banks, or trading companies like Mitsubishi Corporation that I used to work for, have no intention of entirely shifting their regional headquarters out of the the UK despite Brexit, if they can help it, one thing that keeps me in business is the cultural gap between Japan’s very process and rule oriented way of managing and the more principles based, some might say “winging it” approach of British management.

I believe Japan is still very reluctant to open up its public procurement and professional services sector, even to the UK, and I can see why. There is not really a developed set of professional specialists the way we have in the UK. Most Japanese employees follow a generalist track. So in trade negotiations, such as the CPTTP or the EPA, it must be very difficult to find common terminology in order to agree any rules for recognition of qualifications, or mutual understanding of governance principles for services, much more difficult than defining standards for products. “Risk” in Japanese is the same word that is used for “crisis”. So it has a very negative meaning, and the neutral concept of risk management is not translatable into Japanese as a result.

Brexit proofing has already started for Japanese manufacturers

On the face of it, it looks to have been a good couple of years’ for Japanese manufacturers in the UK, despite concerns over Brexit. 214 Japanese companies with production sites in the UK employ around 63,000 people, generating revenues of around £23.8bn. More increased their employee numbers than cut back, and overall employee numbers rose by around 5% on the previous year.

The Brexit risks

Although there are 214 companies, a handful dominate, and their reactions to Brexit will impact other Japanese companies who are suppliers to them. Nissan, Sony, Honda, Toyota and Princes (a food processor owned by Mitsubishi Corp) account for over 50% of the revenues, and over a quarter of the employees of Japanese manufacturers in the UK. Increased recruitment by Honda, Nissan and Hitachi Rail (the 6th largest Japanese manufacturer in the UK, which has just started production) and various automotive suppliers account for most of the rise in employment over the past couple of years, whereas Toyota had the biggest reduction in workforce.

It’s clear from the breakdown in sales by region (where given) that the UK is indeed a gateway to Europe for Japanese manufacturers. More than half of their combined turnover derives from sales to Europe (excluding the UK) and UK sales account for around a third of revenues. Any damage to their ability to export to Europe will therefore impact 50% or more of their revenues.

A third of the 214 companies are involved in the automotive supply chain and their fortunes are tied up in not only what Japanese car makers are doing but also other car makers such as Jaguar Land Rover and PSA (Peugeot, Citroen, Vauxhall etc). Japanese automotive suppliers have been keen to diversify over the past few years, to avoid over reliance on one customer or supplier or geography.

What the car makers do in response to Brexit in the long run is obviously key for them, but there are a couple of shorter term risks. One which has already had an impact is exchange rate volatilty. The cheaper £ can of course be a benefit, if they are exporting, and for most the exchange rate risk is manageable. As half of the parts in a UK made car are imported, mainly from Europe, and around 80% of cars are exported, again mostly to Europe, there is a natural hedge. Some Japanese UK companies even report in euros, as they are selling and purchasing in euros.

Disruption to the supply chain from Brexit is another risk also mentioned in annual reports. Although they are mostly manufacturing in the UK for UK based car companies, so should be able to maintain just-in-time delivery even if there is a hard Brexit, Japanese automotive suppliers still have to take account of the whole supply chain and likely reaction of the car manufacturers should there be prolonged problems.

Brexit-proofing has started

It’s clear some contingency plans are already being enacted. Japanese companies have been warned since at least 2013 to my knowledge that Brexit could happen, so I suspect many of them have made plans with that in mind. These plans might well be something they would have considered doing anyway, but the added risk of Brexit tipped them towards it. For example:

G-TEKT, which designs and manufactures pressed steel bodies and coachwork, primarily for Honda, had no other production in Europe apart from 3 plants in Gloucester, Ebbw Vale and Tredegar employing around 800 people. 90% of its sales are to UK customers. Production will start in Slovakia in 2019 – presumably it’s no coincidence that JLR is also building a factory in Slovakia.
Tsubakimoto, manufacturing automotive timing systems in Nottingham with around 100 employees, is transferring some of its existing business to a new plant in the Czech Republic. 72% of its sales are to non-UK European customers, 27% to UK customers.
Daido Industrial Bearings, employing around 180 people in Somerset, is transferring the sales function for its automotive and polymer accounts to Germany. 84% of its sales are currently to non UK European customers. It also has plants in Montenegro, Czech Republic and Germany.
Senju Manufacturing, who make solder for the automotive and electronics industries, have started manufacturing in the Czech Republic in 2017, as requested by a customer, presumed to be Toyota, who have a joint manufacturing facility with Peugeot and Citroen there.
Kasai, who make interior components for Nissan, Honda and JLR for the UK only, have set up a plant in Slovakia, to add to their existing UK plants in Washington and Merthyr Tydfil, which employ 793 people, down 31 from the previous year.
TS Tech who make car seats for Honda, with 100% of sales to UK customers, started production in Germany in 2016 for VW, in addition to their Swindon UK (where employee totals rose by over 200 from 2015/6 to 2016/7) and Czech Republic plants.

Some examples in the non-automotive sector include:

Sony DADC, who manufacture DVD and other digital products in Southwater, West Sussex, employing around 300 people. The organisation has been merged with Sony’s Austria branch, and will cease manufacturing in the UK and transfer all production to the Austrian plant.
Olympus Keymed have transferred sales to the Middle East and Africa region from the UK to its Germany based regional HQ
Sun Chemical has closed its plant in Orpington in 2017. It has plants in Germany, France, Spain, Italy, Denmark, Austria and Poland.
Sekisui Alveo is transferring production of polyolefin foams from its plant in Merthyr to the Netherlands.

I estimate there are around 70 Japanese companies whose only production in Europe is in the UK. Many of these are relatively Brexit-proof – they are highly specialised, or local unique brands (whiskey, fashion etc). There are around 150 Japanese manufacturers in the UK who have production elsewhere in Europe, so can be considered relatively Brexit-proof already.

New investment into UK from Japan, but no sign of on-shoring in manufacturing

There are also examples of companies who are expanding in the UK – such as Graphic Controls, Hitachi Rail and various automotive companies, as outlined above. However I am not seeing a lot of “onshoring” going on, despite encouragement from the UK government and car manufacturers such as Nissan. I estimate there are around 35 Japanese automotive suppliers who do not have production in the UK, but not one of them has started manufacturing in the UK. There have been no acquisitions or newcomers into the UK in the automotive industry for the past three years. The new Japan-owned companies that have arrived over that period are mostly in the services (financial, recruitment), food distribution, hi tech or pharma/biotech sector.

A more detailed version of this post is available as a free pdf here.

If you are interested in purchasing a spreadsheet giving full details of the 214 companies, or the 70 companies who might be looking for alternative production locations in the EU (address, ownership/M&A history, European HQ, business sector, European structure, turnover broken down by UK vs Europe, employee figures for past 2 years, constituency and MP), please contact Pernille Rudlin.

Why Nissan matters more to the UK than the UK matters to Nissan

It will be interesting to see how far Ghosn’s well documented ruthlessness and unsentimentality which he demonstrated in turning around Nissan in Japan will come to the fore in next month’s decision about where to invest for the new Qashqai, because really, to Nissan, the UK is not as important as a market or a manufacturing base as the UK might like to think. Plus, Ghosn has now got Mitsubishi Motors to worry about as well.

Here’s some figures to illustrate:

UK based employees represent around 5% of Nissan’s global workforce
UK based production represents around 10% of Nissan’s global production and around 70% of its European production (the rest is manufactured in Spain and Russia).
Car sales in the UK market represent around 3% of Nissan’s total units sold worldwide. Europe & Russia represent around 15% of total units sold. So the UK market is about 20% of Nissan’s Europe & Russia regional sales.

From the UK perspective:

Nissan is the third largest Japanese employer in the UK, with around 8000 employees – not only in the Sunderland factory but also several hundred working in design at Nissan Technical Centre Europe in Cranfield (ultimately registered in Belgium so that should make a quick getaway easier) and a design centre in London
Nissan is the 8th largest Japanese employer in Europe – around 16,000 employees in total – so around half are in the UK. However the European regional headquarters is in Switzerland, to which the UK factory sells all its production. The operational headquarters and holding company for the rest of Europe is based in France.
Nissan Sunderland’s plant accounts for nearly 1/3 of the UK’s car production. 80% of it is ultimately exported, 76% to Europe.

And of course there’s the supply chain and the jobs it provides – the UK car industry likes to say it supports around 800,000 jobs.

Calsonic Kansei is a supplier to Nissan, and is also in our Top 30 Japanese companies in the UK, employing over 1300 people – with factories in Llanelli and Sunderland – and Spain. Nissan has a substantial stake in Calsonic Kansei, but the cosy mutually supportive supply chains of 20 years’ ago have long disappeared, thanks in part to Ghosn. So it’s not hard to see Calsonic Kansei and others responding as quickly as they can to any shifts in location of demand.

It’s legendary in Japan that when a Nissan employee went to Ghosn to beg him not to axe one of the suppliers totally dependent on Nissan because it was headed up by a member of their own family, Ghosn responded “which is it to be? That Nissan collapses or your uncle’s company collapses?”

For how complex and tough life is these days in the global automotive supply chain, this comment in the Financial Times recently was very revealing:

“We manufacture part of one component for the Nissan Qashqai. We purchase raw materials from Taiwan, we manufacture in the UK in a Japanese owned factory. Our customer is in Germany, where our product is bonded together with products from other countries. Our customer’s customer is in France, where the bonded component is integrated into a car component. The component is shipped to Sunderland and becomes a part of a “British” car.

How Mrs May and her merry band are going to sort this mess out is beyond me, and I suspect beyond them.

The development time lines for the most basic of automotive components is two to three years, which means that we are already “post Brexit” for new business development. How do I persuade customers to invest in new product development with us when nobody has a clue on what basis I might sell eventually sell my product to them, and given rules of origin, in some cases on what basis they might sell their product to their customer. We have good relationships with our customers, but at the end of the day they are running their business for their benefit and may well decide its just not worth the uncertainty and risk.”

Carlos Ghosn is “reassured” by Theresa May saying that the British government would be “extremely cautious” in maintaining Nissan’s Sunderland UK factory’s competitiveness. But he may nonetheless think some rebalancing is in order.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Interesting comment from Brussels based trade lawyer and economist Hosuk Lee-Makiyama on any future Japan-UK trade negotiations, in oral evidence to the Treasure Committee on the future of the UK’s economic relationship with the European Union (July 13th 2016):

“Japan is quite an exception from this [the UK having interests that are sensitive to the counterpart country], because the outstanding issues in the EU-Japan negotiations are basically products where Europe is asking for TPP-plus concessions. Europe would like to have more from Japan than what Japan has given to the United States, Australia and New Zealand, because our offensive interest in agriculture towards the Japanese consumer market is different from the ones for the United States. The United States is interested in exporting rice, made in California, to Japan. We do not export rice. Our interests are primarily in dairy, high-quality cheeses and wines, pasta, certain types of meat. It is not an offensive interest of the UK. We could probably sign a deal with Japan tomorrow. However, the question is whether Japan would be interested in doing so, because if you look at the Japanese firms—and this applies to not only Japan but most of the third country economies— they have invested in the UK after 1973 on a specific guarantee that the UK will be a part of the single market. I am not really sure that the rationale exists, although the defensive interests are less.”

Confirms my previous posts that 1) agricultural trade is hugely sensitive for Japan (and in that respect, the UK has less to worry about in negotiations with Japan) 2) What’s important to UK-Japan economic relations is the direct investment that has been made by Japanese companies into the UK over the past 40 years on the premise that the UK was part of the Single Market, not “offensive vs defensive” mercantilist bilateral dealing in modern day counterparts of silk, wool and tea.

I saw Dominic Raab, pro Brexit Tory MP, claiming in the Times that the UK could offer Japan a better deal to export Mazdas to the UK outside the EU because they could be tariff-free rather than the current 10% the EU imposes on cars. It’s telling that he chose Mazda of course, because it is the only Top 5 Japanese car company that does not have a factory in the European Union or Turkey (which is inside the EU customs union). So as a bargaining chip, tariff free cars does not really present much of an incentive to Japan to open up its public procurement, or reduce non-tariff trade barriers such as pharmaceuticals regulations, in return.