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.
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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