Fujitsu focusing on education of employees to improve overseas profitability

Fujitsu, one of the largest Japanese employers in Europe, has drastically reduced its hardware product range over the years, withdrawing from personal computing, mobile phones and semiconductors. Its CFO, Hidehiro Tsukano has said “we are no longer a manufacturer”, according to the Nikkei. The turning point was the appointment of Tatsuya Tanaka as President in 2015, himself from the industrial solutions sales side of the business rather than an engineer, with experience in Asia.

Tsukano believes profit should come from the value added by human beings rather than things. Because of Japan’s labour shortage, Fujitsu has been focusing on IT investment in retailing and service sectors, working closely with Microsoft.

However the consolidated operating profit margin to March 2018 was 3.6%, still far from the stated goal of 10%.  Profitability per head (Y1.23m) is higher than NEC (Y0.58m), but still significantly below the misnomered Nomura Research Institute (Y5.35m) and Itochu Techno-solutions (Y4m). Tanaka said at the recent annual results meeting that his aim to hit 10% operating profit margin within his term of office may have to be revised.

One major cause of this inability to reach higher profitability is Fujitsu’s overseas business, which is around 40% of turnover. The hardware sales model, based on sales of servers and PCs still remains and Fujitsu is in a price war with Lenovo and HP. It has not yet switched to the business model in Japan of adding value through IT services and the most recent quarter still showed a Y6.8bn loss.

Human resource development might be the key to improving overseas profitability. Tsukano has said he wants to use some of the cash freed up from a change in the pension scheme to invest in employee education.

A management policy briefing will take place in October, and although analysts are saying there is steady progress in reforms, they need to see some concrete measures for improving the profitability of the overseas business.

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Trends in Japanese company expatriation to Europe – or why are there so many Japanese women in Malta?

Despite a small decrease over the past three years, the UK continues to be the favourite destination in Europe for intra-company transferees – 8,684 as of October 2017 according to Japan’s Ministry of Foreign Affairs, compared to 8,518 in Germany.  Japanese company sponsored expats in Germany and the UK make up about 58% of all Japanese corporate expats (around 30,000) in the EU/EEA.

If you add in their dependents, it comes to over 50,000 Japanese living in Europe, at the behest of their employer. This compares to over 250,000 in Asia and just under 120,000 in North America, out of 463,000 Japanese intra company transferees and their families in globally.

Of course the number of company transferees in a country is not purely a function of the market size.  We crunched the numbers against population size and this interesting map showed up.  The tiny dark spot is Luxembourg, where the population is only just over half a million and there are 175 Japanese intra company transferees resident. The UK has the next highest density, then Belgium, the Netherlands, Germany, Switzerland, France. The highest density in Eastern Europe is in the Czech Republic.

 

The Ministry of Foreign Affairs sticks to the old fashioned breakdown of male/female employees and Luxembourg is also an outlier there, with 41% of transferred employees being female, only surpassed by Ireland (46% 95/205 transferees), Malta (90% 19/21) and Cyprus (50% 2/4 transferees).  There are very low numbers of Japanese female employees  in Eastern European countries, and also Belgium. Maybe this has something to do with Toyota’s regional headquarters being in Brussels.

The average overall of female employees transferred to Europe is 25% of the total, and there has not been much movement in this over the past three years. The reason there are far more females proportionately in some countries than others has the same root cause as why there are more dense groups of Japanese in some countries than others – it depends on the industrial sector and the nature of the operation – whether it is manufacturing or services, or a regional headquarters.

The UK has a high density of Japanese company expatriates partly because of the three large Japanese automotive production sites there, but also because of the high density of financial services and holding companies in London and the South East. Japanese banks, trading companies and insurance companies send a lot of Japanese expats to their regional HQs, which are usually in the UK, including trainees on short term secondment, many of whom are female. Technology companies such as Sony, Ricoh and Canon also have large regional HQs in the UK and a high number of expats. Similarly Ireland has a lot of financial services companies, particularly aircraft leasing.  Luxembourg does have a couple of large manufacturers headquartered there – FANUC and TMD Friction – however, as you might expect, most of the other companies are financial services related.

There also tend to be large numbers of expats every time production sites are set up – engineers on short term projects, involved in technology transfer. Double digit increases have occurred over the past three years in Japanese expats being sent to Poland, Sweden, Hungary and Slovakia following investments there.

But the biggest increases numerically have been 602 more expats in Germany (up 8% over three years), 359 more in the Netherlands (up 23% over 3 years) and 252 more in France (up 7%) compared to drop of 62 (1%) in the UK.

The Netherlands has been the choice of quite a few Japanese financial services companies, along with Luxembourg and Germany, for strengthening EU presence post Brexit, as well as a stronghold for logistics companies. Its tax regime has also been attractive for holding companies – more brass plate up till now, but it would seem, now with actual physical presence too.

So why are there proportionately so many Japanese women employees transferred to Malta? Maybe they’re working at Konica Minolta‘s service operation there for 35 countries in the region*. A lot of smaller countries, with English and other language speaking graduate populations – such as Portugal – are becoming popular bases for outsourced support.

This suggests to us that the UK may be slowly losing its grip on being the preferred base for regional, functional and services headquarters for Japanese companies, and therefore the preferred destination for Japanese expatriates.  There is a long way to fall however.

* Andre Spitieri (non resident Ambassador to Japan from Malta) contacted me after I posted this blog to say that there are a lot of Japanese women working in Malta in the tourism industry. According to the Ministry of Foreign Affairs, there is only one Japanese company in Malta, and JETRO says it’s Konica Minolta. It may well be that there are branches of the big Japanese travel agencies in Malta, to which Japanese female employees have been posted, who are counted among the 19 female intra company transferees there.

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Making sure the Toray brand cuts through in the global fibre industry

Still from Toray’s Blue Butterfly campaign

“Intel Inside” translated brilliantly into Japanese as “Interu Haitteru”.  Now Toray, Japan’s largest synthetic fiber manufacturer and another successful Japanese B2B company that nobody has heard of outside of Japan, would like to do the same thing by having “Toray Inside” tags for products containing Toray fibres.  According to Kei Shimabara, Director of the Toray Marketing Planning Office in the Nikkei Style, this collaborative marketing has worked with Boeing’s 787s and UNIQLO’s Heattech clothing, but has not permeated much beyond that.

As Shimabara acknowledges, Toray is not a well known brand outside of Japan and this needs to be worked on in order to expand Toray’s business overseas.  Shimabara sees Toray’s marketing as inseparable from sales – there is not a separate marketing department for each business unit at Toray.  Sales representatives are also supposed to be marketers.

The supply chains are long in Toray’s businesses, and start with Toray’s textile fibres and resins – with many B2Bs before reaching the C(onsumer).  They have several plants across Europe, some making luxury car interior fabrics, some making carbon fibre for the blades of wind turbines.  In the UK their factory weaves polyester and nylon fabrics for fashion, industrial and medical uses.  Europe is bundled together with “North America and other areas” in the annual report – representing around 16.6% of revenues – the same proportion as China and “other Asian” markets, with Japan making up the other half.

Presumably North America and Europe are combined as a result of the legacy of Toray acquiring American company Zoltek in 2014, and with it some production in Europe. This acquisition will make it even more critical that employees as well as customers understand what Toray stands for. Shimabara says he is bringing together company wide project teams, including HR and PR to work on this.  “Digital marketing is going to be a powerful tool” says Shimabara, “but, embarassingly, I have not touched it up until now, so have just started studying it.”

The Toray website has some nice TV ad videos, with the theme of a blue butterfly and “Materials can change our lives” but the current annual report has the rather generic “Toray Way” on its cover, and uses a corporate mission statement that I have seen in many, many other Japanese technology companies of “Contributing to society through the creation of new value with innovative ideas, technologies and products”. It looks like Mr Shimabara has his work cut out to cut through.

 

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Hard Brexit alternatives for Japanese service sector companies in the UK

The UK government’s “soft” Brexit proposal, to allow freedom of movement of goods between the UK and the EU, is unlikely to be acceptable by the EU or even a practical solution for the UK economy.  It’s politically understandable why the government is trying to protect the just-in-time delivery of manufacturing supply chains, in which many Japanese companies are involved. The manufacturing regions mainly voted in favour of leaving the EU but it might be possible to persuade those voters to accept a soft Brexit if they realise their jobs are under threat from a hard Brexit.  However, 80% of the UK economy is in the services sector – predominantly in cities and in the south east – where the vote was largely to remain in the EU.

It’s not so easy these days to make a distinction between services and manufacturing for the purposes of customs checks and regulatory compliance, even in the car industry. 10% of Nissan’s workforce in the UK work in a technology design center in the south east, not in the factory in the north east, developing software and services, not just components for cars.

Fujitsu – the largest Japanese employer in the UK – may be a manufacturer in Japan, but only provides IT services in the UK. The number of Fujitsu staff in the UK has been falling over the past few years, whereas it has been increasing in Global Delivery Centers in Portugal and Poland. Fujitsu is now the largest Japanese employer in Portugal – employing around 1000 people who provide technical support to global customers by phone and internet.

Both Poland and Portugal can provide the low cost, multilingual, well-educated workforces needed by the services sector.  Although it is not a big market in its own right, the Portuguese economy has recovered since the euro zone crisis – the budget deficit is the lowest in 40 years, the unemployment rate has improved and it is politically stable.

For my own business, as an insurance against a “hard Brexit” for services, I might register for “e-residency” in Estonia. This will allow me to set up a company in Estonia and open a euro denominated bank account there so we can easily send and receive euros, within the eurozone.  It will also allow me – under EU data protection regulation and the new deal with Japan – to share client data freely with my colleagues in the EU and in Japan.

Similarly, any UK based companies in strongly regulated sectors such as financial and legal services are making sure they have credible presence in the EU, so they can continue to do business there.

Nobody is expecting the service export sector to move entirely away from the UK if there is a hard Brexit.  Alternatives to the UK have other disadvantages – political instability in Eastern Europe, or high costs and scarcity of good office locations and employees in Western Europe – but I predict this current trend of dispersed locations across Europe will accelerate.

This article by Pernille Rudlin originally appeared in Japanese in the Teikoku Databank News August 8 2018

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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.

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Who’s looking grumpy in Japan’s summer bonus season?

If you’ve noticed your Japanese colleagues looking grumpier than usual and making pointed remarks about the amount of money overseas offices soak up, you may need to be aware that it’s not just the heat and the typhoons getting to them, but the fact that despite Prime Minister Abe’s push, some companies are still cutting salaries –  and employee numbers are shrinking.  The summer bonus season, which will have been added to their monthly pay cheque in June or July, may have reminded them that their salaries have not increased much in real terms over all for some years, but they are supposed to be grateful they have a secure job, with bonuses, benefits and a pension.

It’s surprising to see who tops the list in Toyo Keizai’s ranking of companies who have had the biggest reductions in pay and number of employees over the past five years – trading company Mitsui Bussan is at #1. Toyo Keizai reckons this is because their business was badly hit by falling resource prices over the past few years.  Although average annual income at Mitsui is high – around Y12.3m (US$111,000), it has dropped by Y1.48m compared to five years’ ago.  The number of employees has also fallen by 201 to 5,971.  Sumitomo Corporation, another major trading company is at #9 – average income falling Y1.255m but personnel numbers only falling by 23.  Mitsubishi Corporation is at #78 – total average income has fallen by around Y260,000, and numbers of staff have dropped by 579 to 5,217.

As you might expect, given its recent problems and selling off of businesses, Toshiba is in the top rankings, at #15, having reduced the number of employees by 4,401, to 32,353, with average income falling by Y880,000. Similarly Sharp has also reduced total average income by around Y600,000 and cut staff at almost double the rate of Toshiba, by 8,175, to 13,363.  Sony has reduced staff even more, by 10,391 to 6,185, and total average income has fallen by Y410,000.

Eisai, the pharmaceuticals company, is at #23, having cut its staff by 938, to 3,246 and average income falling Y710,000.  There has been no obvious negative issues for Eisai over the past five years, so maybe this is the work of the CFO, Ryohei Yanagi, trying to keep ROE above 8%, as we previously blogged.

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Will the next CEO of Mitsubishi Motors be French?

Eyebrows are being raised about Guillaume Cartier’s appointment as a senior executive at Mitsubishi Motors.  Not only is he “only” 49, and French, but he was appointed a year ago by Nissan’s Carlos Ghosn to head up overseas sales, a position usually reserved for people who have been seconded from Mitsubishi Corporation (my old employer), such as the current CEO Osamu Masuko.

In his first interview with the Japanese media, in Diamond magazine, Cartier says that working at Mitsubishi Motors is “an interesting challenge” and that the company has a strong desire to change.  He sees his mission as “to grow the company – it is very simple”.

Changes that Cartier has undertaken in the past year included persuading Sojitz, (another Japanese trading company) to sell its 49% share in the Philippine production and sales company, making it a 100% subsidiary, after initial resistance from Sojitz to the proposal.  This approach could also impact joint ventures that Mitsubishi Motors has with Mitsubishi Corporation.

In Europe, Mitsubishi Motors only owns 25% of some dealers (France, Germany,Switzerland) and Mitsubishi Corporation owns 100% of Colt Car in the UK. There are two Russian subsidiaries, one of which is a joint venture between Mitsubishi Motors, Mitsubishi Corporation and Sinoco.  Mitsubishi Motors also owns 30% of PCMA Rus, a joint venture manufacturing cars and parts with Peugeot Citroen – which raises questions of how that is seen by Renault, Nissan’s alliance partner.

Cartier says the key is whether performance is good, not so much whether it is a subsidiary or a joint venture.  He says 12 of his 15 major markets are steadily growing.  If the performance of a region is below expectations, then all options need to be considered.  The new style is not to rely on trading companies, but to review the business looking at performance first of all.

Mitsubishi Motor’s performance is currently good – 1.1 million cars were sold in 2017, and increase of 19% since the fuel efficiency scandal of 2016.  It introduced new models like the Xpander and Eclipse Cross and also positioning ASEAN and Oceania as the backbone of its sales and marketing. The Xpander is manufactured in Indonesia and being introduced into Thailand and Vietnam.

Cartier hopes this V shaped recovery will improve employees’ confidence, which has been missing up until now.  “We must change our mindset, which means accepting risk.  Mitsubishi’s new brand message is “Drive your ambition” and this is also a message for our employees.  I want them to make decisions, to drive forward and not be afraid of growth”

Mitsubishi is an “abnormal” company, according to Cartier – because despite being a small manufacturer, it pioneered electric cars and plug in hybrid vehicles.  By becoming a member of a 10 million unit alliance, it will be able to expand its business options.  For example if US tariffs are raised on car imports, this would have a big impact on Mitsubishi, who export all their cars to the USA from Japan, but there is now the option of producing Mitsubishi cars at other alliance member factories in the USA.

Diamond finished the interview asking whether Cartier was prepared to live for a long time in Japan as an executive, clearly hinting about the possibility of him taking over from Masuko as CEO.  Cartier’s response was that he has already brought his family over, and both he and his family are happy.  So the answer is “yes”.

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What is a Japanese company? An investment perspective

Ryohei Yanagi is a self-styled untypical Japanese business person – not only is he holding down several jobs – as CFO of Eisai pharmaceutical company and also a Visiting Professor at Toyo University and a Visiting Lecturer at Waseda University, but he has changed employers in his career, even more unusually switching from a foreign company (UBS) to a Japanese company, rather than the other way round.

ROE of 8% was not plucked from nowhere

He is also a very dynamic speaker, and not low on ego.  In his talk to the Daiwa Anglo-Japanese Foundation earlier this month he claimed credit for setting the ROE target of 8% in the Ito Review instigated by Prime Minister Abe as part of his Abenomics structural and governance reforms.  Yanagi was criticised for plucking this figure out of nowhere, which was seen as unrealistic given that ROE in Japan had been averaging at just over 5% over the past 30 years.

He took us through his research, to point out that the Price Book Ratio only moves into positive territory (in other words the company is valued on the stock market at a higher rate than the cash and assets it has) when ROE is 8% in Japan.  Apparently investors are discounting cash held by Japanese companies by 50%, because they fear that the company might make a stupid investment, and overpay, or just sleep on the cash instead of using it productively.  By contrast, US companies’ average ROE over the past 28 years has been around 14%.

Shareholder value destruction rooted in Japan’s main bank governance system

Yanagi sees the root cause of this shareholder value destruction as being the main-bank governance system that used to dominate Japanese blue chip companies – whereby each major company had a “main bank” from one of the keiretsu, who provided most of their funding, governance and cross shareholding along with other keiretsu members. This main bank system was crumbling even before the Ito Review set the ROE target and other corporate governance reforms.  Foreign shareholders now represent the largest shareholder group on average – owning around 30.8% of listed Japanese companies’ shares, up from less than 10% 30 years’ ago.  Since the governance reforms of 2012-2015, Japanese companies’ ROE has increased to 9% and the Price Book Ratio has become positive.

Of course this analysis provoked quite a lot of questioning from the audience – many of whom were investing in Japanese companies, and had qualms about any notion that Japan should adopt wholesale the Anglo Saxon short term shareholder value maximization model.  Yanagi was not saying that Japanese companies should drop their commitment to the environmental and social elements of ESG, but should look at the return on equity of such initiatives too.

An investment in a Japanese company is not just an investment in the Japanese economy

He gave the example of Eisai’s commitment to manufacturing – for free – medicine to eliminate the neglected tropical disease lymphatic filariasis. He believes Eisai will see a return to the cost of this, as it will increase the capacity utilization of Eisai’s factory in India, and improve their skills, and this factory then has the capability to produce other profit making drugs which can be exported to Europe.

There are quite a few investment funds in the West focused on Japan, and also several funds that exclude Japan because of its historically low returns. Most emphasise that they are aiming for long term capital growth, rather than quick returns. Usually they define a “Japanese company” as listed in Japan, or if listed elsewhere, having the majority of their business in Japan.  As mentioned in another post, looking at companies like Takeda or SoftBank, or at this increase in foreign shareholdings, and more emphasis on return on equity – I do wonder whether the definition needs to be refined further.

An investment in a Japanese company is not just an investment in the Japanese economy.  Many Japanese companies have the majority of their revenues from outside Japan.  Takeda has more non-Japanese than Japanese executives.  Whilst no shareholder should tolerate value destruction, the Japanese company’s traditional long term perspective, with emphasis on positive environmental and social contribution, rooted in specifics of the Japanese market and society, and now with added improved corporate governance, is surely an attractive one.

 

 

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A Chequered Brexit – impact for the Japanese automotive supply chain

“1000 Japanese companies in the UK, employing around 140,000 people” are the figures usually given when talking about the impact of Japanese companies on the UK economy, and therefore what impact their reaction to various shades of Brexit might be. This reaction will depend on which sector they operate in, so I will undertake over the next few blog posts to break the 1000 down into groups of similar companies and draw out relevant data on them from our Rudlin Consulting database (if you would like to purchase a customised version of this database, please do contact us).

I have picked on the automotive sector first, and in particular those companies which have production sites in the UK.

There are 55 Japan affiliated companies who manufacture automotive components or vehicles in the UK, employing around 26,125 people – this represents 5.5% of all Japanese companies in the UK and nearly 19% of all employees of Japanese companies. Here’s an interactive map of where they are located.

Why the focus on the automotive supply chain?

You can immediately see why automotive production has been the focus of a lot of debate about the need to stay in the single market and a customs union with the EU, protecting just-in-time supply chains between the UK and the EU. Not only does this sector employ a proportionately larger number of people per company than average, but production in this sector is based in areas which are badly in need of secure, skilled, blue collar jobs.

As you might predict if you have been following Brexit, most of these regions in which these companies’ production sites are located  were strongly in favour of leaving the European Union.  According to our data (using the BBC’s tool), the average vote for Leave in the regions with Japanese automotive production was 58%.

Automotive supply chain jobs not threatened by Brexit?

As other researchers have pointed out, voters may have had stronger reasons for voting Leave than concerns about automotive jobs.  Or maybe they did not believe that these jobs were under threat.

Perhaps Leavers thought Nissan, Toyota and Honda’s production in the UK would be fine because the British are continuing to buy Qashqais, Yaris’s and Civics, but actually 88% of Toyota’s UK production is exported, 67% to Europe, 80% of Nissan’s UK production is exported, 76% to Europe and 75-80% of Honda’s UK production is exported to Europe. As we noted previously, the UK’s car market is not big enough on its own to support a full scale car production industry.

Since Brexit, there have been reassurances from the UK government that Nissan (and presumably other car companies) will not be impacted by tariffs or regulatory impediments in their exports to Europe and all three companies have announced further investments in their UK operations.

On-shoring is not happening

But all three Japanese car companies have also emphasised that they need frictionless supply chains. So the obvious answer might be for all their suppliers to move production on-shore or at least set up bigger warehouses or assembly facilities in the UK.  Nissan has indeed encouraged its suppliers to set up near it in an industrial park in Sunderland. Those 55 companies who already have production in the UK might see a rise in orders and indeed some mention in their annual reports that there are potential benefits as well as costs to Brexit for them.

The problem with on-shoring is that, depending on where the company is in the supply chain, their own suppliers might be based in the EU, and in fact the same component  may need to pass back and forth between the EU and the UK several times, in which case they face higher costs if there is further instability in the exchange rate between sterling and the euro post Brexit and also frictions at the border when rules of origin and regulatory compliance need to be checked.

So for a truly frictionless supply chain and complete currency hedge, the whole chain will have to produce on-shore. This represents a substantial cost to suppliers, who are mostly trying to spread the risk by dual sourcing or globally sourcing and making sure that they are not too reliant on one car manufacturer as a customer.

In fact 40 of the 55 companies who already have production in the UK have production sites elsewhere in the EU, and the trend seems to be to open production sites in Slovakia or transfer production from the UK to the Czech Republic rather than onshore – reinforced by Jaguar Land Rover’s new factory in Slovakia and the Toyota Peugeot Citroen manufacturing joint venture in the Czech Republic.

Many of the 15 who only have production in the UK also supply other industries beside the automotive sector, or are highly reliant on Honda or Nissan so will presumably stay so long as they stay. Or, if they supply other customers outside the UK, they can hope that the soon to be signed EU-Japan Economic Partnership Agreement’s reduction of tariffs and regulatory harmonization for car parts means they can easily import components made in their factories in Japan into the EU.

It’s not just about manufacturing though

Since the Chequers’ agreement amongst the Conservative cabinet was announced, which, if accepted by the EU, would enable the continuing frictionless production supply chains, various other sectors have been pointing out that as 80% of the UK’s GDP is actually generated by services, their exclusion from any single market-type deal does not make sense for the British economy.  Furthermore, the distinction between services and manufacturing is not as obvious as it used to be. 10% of Nissan Motor Manufacturing’s 7500 staff are in design and development. Most of these staff are based at the technical centre in Cranfield. They represent a huge variety of nationalities and travel frequently across Europe and to Japan, working with counterparts in Nissan technical centres in Belgium, Russia and Spain. If it becomes difficult for them to travel for work, or send prototypes back and forth to clients – and if the UK no longer has any influence on the regulatory standards that they need to comply with – then it won’t just be production jobs that are in danger of being offshored.

 

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Three ways Japanese businesses can grow when they’ve been booted out by their parents

Japanese blue chip companies such as Hitachi, NEC, Panasonic,Sharp, Sony and Toshiba have been hiving off non-core business since 2011, through sales to private equity funds such as KKR, or to Chinese companies or other Japanese blue chips.  It often seemed like the kiss of death to the employees concerned at the time, but in many cases has resulted in successful turnarounds.

Fujitsu, having absorbed Toshiba‘s mobile phone business, then sold off the unit to Polaris, a domestic Japanese investment fund. According to Nikkei Business magazine’s article on how to dispose of non core business, Polaris’s President Yuji Kimura is confident of future growth, despite the stagnation of the Japanese  mobile phone market.  Polaris has decided to focus on the Raku Raku range of models, which are simplified smartphones, aimed at the elderly.

However other spin offs, such as Hitachi, Sony and Toshiba‘s LCD businesses merging to form Japan Display and Haier’s acquisition of Sanyo‘s white goods business from Panasonic, are still struggling.

Nikkei Business magazine highlight three points for success:

1. Review business scope

WIthdraw from markets were there is strong price competition even if it is an area that the company has a strong technological edge and look for other markets where the technology can be put to use.  Even if this means shrinking the size of the business, build up a structure which is profitable.

2. Understand where you can win and make nimble, strategic investments

For example, only 1 year and 3 months after KKR acquired Panasonic‘s healthcare business in 2013, they surprised everyone by acquiring the diabetes healthcare business unit from Germany’s Bayer.  The company was renamed PHC Holding.  Its CFO Masahiro Uda says “we never could have done this if we remained within Panasonic”

3. Change the organisational structure

When Pioneer sold off their DJ audio unit to KKR in 2015, they had to switch from a mass production product development mentality to a small scale production mentality.  Many processes became obviously unnecessary and were consquently realigned and development cycles became much shorter.

KKR Japan’s CEO Hirofumi Hirano adds a further point – that you must not forget to have a dialogue with employees, to explain to the union what the aim of the acquisition is, and what you see as the potential for the company.  “There is still a strongly rooted mistrust of investment funds in Japan” he says.  In the 1990s they were seen as asset strippers, and even though their image has improved recently, you still hear them being called “vulture funds”.

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