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  • Hard Brexit alternatives for Japanese service sector companies in the UK

    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 and also appears in “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe”  – available as a paperback and Kindle ebook on  Amazon.

  • Hard Brexit alternatives for services

    Hard Brexit alternatives for services

    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. 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.  But 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, however, 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 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.

  • Diversity and creativity

    Diversity and creativity

    I’m writing this in the cafe of the Royal Academy, having just visited the Summer Exhibition. This annual art exhibition is one of the events of the London Season, a summer of parties and events such as the Chelsea Flower Show, the Epsom Derby and the Henley Royal Regatta.

    You might expect the Summer Exhibition to be very traditionally British, but this year, to mark the 250th anniversary of the Summer Exhibition, the not very traditional, self-described “transvestite potter” Grayson Perry was asked to curate the exhibition, on a larger, more diverse and inclusive scale than ever before.

    Just as in previous years, the members of the Royal Academy – professional artists – exhibit their recent work at the exhibition and non-members are also invited to submit works of art. Perry and his team viewed a record 20, 000 works for selection and as a result the rooms were crammed with all kinds of paintings, sculptures, videos, embroideries and architectural models created by people of many nationalities, including some Japanese artists such as Katsutoshi Yuasa.

    It could have been an incoherent mess, but actually I think it succeeded in capturing the UK right now: creative, humorous, political, multicultural, celebrating the amateurish and the outsider, but also the British countryside, cityscapes and people.

    Before visiting the exhibition, I attended a lunch at which a British trade minister spoke. He was trying to be positive about Brexit, emphasising that the UK would continue to be a good place to invest because of our excellent research-oriented universities, skilled and creative workforce and stable legal and financial infrastructure. He pointed out that Rakuten and Fujitsu have both invested in UK based fintech and technology initiatives in the past year.

    He did not of course mention that manufacturing operations in the automotive supply chain are beginning to shift to the EU. Jaguar Land Rover announced it will move production to Slovakia, which is also where at least one Japanese automotive components supplier with production in the UK has set up a plant in the last year.

    Most of the questions from the audience of Japan-related businesspeople were about immigration however. The cap for visas for non-EU immigrants (which includes Japanese intra company transfers) has been reached every month for the past 6 months and EU immigrants have started returning to their home countries or not coming to the UK in the first place.

    UK unemployment is at a historic low. One Japanese recruitment agency told me that their UK vacancies have increased 50% year on year. Firms are worried that after Brexit it will become even more difficult to recruit EU and non-EU workers.

    One proposed solution, which will take some time, is to train low skilled British people in higher levels of skills and replace low skilled labour with robotics. But as the Summer Exhibition proved, diversity and multicultural influences are what have defined and made the UK an attractive place for innovation in the first place.

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

  • Gender pay gap in UK’s largest Japanese employers is lower than average

    Gender pay gap in UK’s largest Japanese employers is lower than average

    Any company in the UK that employs over 250 people is supposed to have submitted their gender pay gap estimates by 4th April 2018.  We ran our Top 30 Japanese companies through the Companies’ House database and found that all have submitted data for those subsidiaries which qualify.

    The average pay gap of their 50 subsidiaries is around 15%, slightly lower than the national average of 18.4%.  There are some interesting patterns in that there is a gender pay gap in women’s favour in the automotive and tyre businesses – Kwik-Fit and Stapletons (both owned by Itochu) and Micheldever (acquired by Sumitomo Rubber in 2017) and also Toyota Motor Manufacturing and NSG Pilkington Automotive.  Looking at the detail, it seems this is to do with there being a lot of men in the lower paid jobs (presumably tyre fitting, shopfloor, delivery) and some well paid women in the higher paid, presumably managerial/executive jobs.

    The gender pay gap is particularly bad in finance, although no worse for Japanese banks than for other UK based investment and retail banks.

    The wooden spoon goes to Hitachi subsidiary Horizon Nuclear Power with a 41.9% pay gap, closely followed by Fujifilm, with a 41% pay gap.

    Top 30 Japanese employers in the UK (April 2018) & gender pay gap
    Rank Company UK employees 2016-7* Gender gap
    1 Fujitsu Services 9,326 17.9%
    2 Nissan 7,755 -11.3%
    3 Honda Motor Europe (sales) 6,539 27.1%
    Honda of the UK Manufacturing 4.5%
    4 Itochu 6,515
    Kwik-Fit -15.2%
    Stapleton’s (Tyre Services) -24.9%
    5 Hitachi Hitachi Consulting 3,998 30.3%
    Horizon Nuclear 41.9%
    Hitachi Capital 33.5%
    Hitachi Vantara 27.0%
    Hitachi Rail -0.9%
    6 Mitsubishi Corp Princes Foods 3,532 8.7%
    7 Ricoh UK 3,484 17.4%
    Ricoh UK Products 10.4%
    Ricoh Europe 32.2%
    8 Sony Europe 3,143 27.2%
    Sony Music 22.7%
    Sony DADC 8.7%
    Sony Interactive 12.8%
    9 Toyota Motor Manufacturing 3,098 -6.4%
    Toyota (GB) (sales) 29.7%
    9 Marubeni (Agrovista) 2,294 36%
    10 Dentsu Aegis London 2,757 14.5%
    Dentsu Aegis Manchester 1.8%
    11 Canon 2,693 15.8%
    12 SoftBank (ARM) 2,173 15.5%
    13 Nomura 2,166 36.9%
    14 NSG Pilkington Automotive 2,128 -12.1%
    Pilkington Technology Management 31.7%
    Pilkington UK 8.3%
    15 Mitsubishi UFJ Financial Goup 1,987 35.6%
    16 Denso Manufacturing 1,897 24.2%
    Denso Marston 6.6%
    17 NYK Group (Yusen Logistics) 1,855 4.0%
    18 Mitsui Sumitomo & Aioi Nissay Dowa (Insure The Box) 1,809 19.0%
    19 Calsonic Kansei UK 1,778 3.6%
    Calsonic Kansei Sunderland 3.6%
    20 Konica Minolta 1,572 18.2%
    21 Sumitomo Rubber (Micheldever Tyre Services) 1,543 -19.9%
    22 Brother Industries (Domino UK) 1,384 15.1%
    23 Olympus Keymed 1,348 27.7%
    24 Fujifilm UK 1,257 41.0%
    Fujifilm Speciality Ink Systems 8.7%
    Fujifilm Diosynth 16.0%
    25 Sumitomo Corporation (Howco Group) 1,249 17.5%
    26 Unipres 1,237 3.1%
    27 JT Group (Gallaher) 1,086 14.0%
    28 Sumitomo Mitsui Banking Corporation 1019 34.9%
    29 Toyoda Gosei 1,192 0.9%
    30 Mitsubishi Heavy Industries (Primetals) 1,152 38.1%
    TOTAL 84,966 15.1%

     

  • Global Japanese companies have a diversity problem in their Japan HQ (and it’s not just gender)

    Global Japanese companies have a diversity problem in their Japan HQ (and it’s not just gender)

    Mid career hiring seems to me a good indicator of the degree of acceptance of diversity in its broadest sense, and Toyo Keizai obviously agrees, as they have published a ranking showing the percentage of employees in Japan who are “graduate hires” in the total year’s intake as part of their Corporate Social Responsibility data publications.

    Companies in our EMEA and UK Top 30 largest Japanese employers who are also in the Toyo Keizai rankings of companies with the highest proportion of Japanese graduate hires are therefore in a rather paradoxical position of having a high number of non-Japanese employees in their overseas subsidiaries, being managed by a very traditional Japanese group of employees in their Japan headquarters.

    Most of the companies in these categories are trading companies, banks and major manufacturers – the latter two having substantial domestic branch networks or domestic manufacturing and markets to cater for I suppose.  They include:

    • NYK 65 graduate hires in April 2017, 2 mid career hires in 2016
    • NTT Data 385/13
    • Canon 475/15
    • Toyota 1935/98
    • Sumitomo Corporation 157/8
    • Itochu 149/12
    • Marubeni 135/11
    • Sumitomo Mitsui Financial Group 1347/115
    • Mizuho Financial Group 1394/175
    • Toyota Industries 284/27
    • MUFG 1206/111
    • Dentsu 145/19
    • Fujitsu 740/110
    • Mitsui 180/30
    • MS&AD Insurance 1183/254

    No sign of Mitsubishi Corporation in the rankings – which may be due more to non disclosure of data rather than not being in the top 150.  When I was working at Mitsubishi Corporation, we used to refer to the hiring of similar Mitsubishi graduate types every year as having led to  a “Kintaro ame” situation in terms of diversity – Kintaro ame (Kintaro sweets) are rather like British sticks of rock, the same wherever you cut through them.

  • Size matters when choosing a Japanese company

    Size matters when choosing a Japanese company

    Whether you’re looking to work for or supply to a Japanese company, size matters.  The most obvious reason being, as bank robber Willie Sutton apparently never said, “that’s where the money is”.  That’s why we started our Top 30 Japanese Employers rankings  – we’ve found them useful in understanding our customer base and the likely concerns of participants in our seminars.

    We use the number of employees as a proxy for size rather than turnover or profit, and although there is a degree of correlation between employee numbers globally and in Europe and overall profit, there are some exceptions.

    Toyo Keizai have recently listed up the companies* who made the biggest cumulative profit in the past 10 years and it’s absolutely no surprise that Toyota, one of the biggest companies in Japan and #9 amongst Japanese companies in Europe, made a whopping Y11 trillion ($99bn) cumulative profit from 2007 to 2017, far outstripping NTT and NTT Docomo at #2 and #3 who made less than half that amount.  NTT and NTT Docomo are not in our Top 30 Japanese companies in Europe, although another group company, NTT Data, is.

    However NTT and NTT Docomo never made a loss, whereas Toyota did go into the red – with a loss of $.8.6bn in 2008/9.  Honda, who has had a tough time in Europe (and is #23 in our rankings), has also never made a loss, and accumulated a $36bn profit over the decade.  Nissan, who made a loss but was famously turned round by Carlos Ghosn, is 10th largest in Europe in our rankings and has the 6th largest cumulative profit.

    I was surprised to see my old employer Mitsubishi Corporation at #5, as they too had some rough patches particularly with losses in the commodity side, but clearly overall the Japanese trading companies have been very profitable, despite their death being heralded every decade – Mitsui is at #9, Itochu at #11, Sumitomo Corp at #14 and Marubeni at #21.

    Unsurprisingly, almost none of the Japanese electronics companies feature in the top 30, apart from Canon at #10 and Mitsubishi Electric at #25.  Other industries in the top 50 most profitable are automotive (Denso, Bridgestone) and pharmaceutical (Takeda, Astellas) related, and also heavily domestic businesses such as telecommunications (KDDI, SoftBank as well as NTT mentioned above), rail and retail (7&I, Fast Retailing).

    Two of the largest Japanese companies in Europe – Fujitsu and Hitachi – are at #69 and #70 – Hitachi’s cumulative profit was heavily dented by the historic loss of $8bn in 2008/9.  The largest company in the Europe and Africa region – Sumitomo Electric Industries (due to its labour intensive automotive manufacturing operations) is at #38, with a $6bn cumulative profit.

    *Excludes banks, insurance and other financial services companies

  • Chinese students in West, Japan, don’t want to return to China

    Chinese students in West, Japan, don’t want to return to China

    “Don’t bother telling a Chinese person to stick to a schedule” said Ke Long (of the Fujitsu Research Institute) in his opening remarks to a Japanese business lunch I regularly attend – confirming Prof Erin Meyer’s conclusions covered in our previous post on Chinese and Japanese attitudes to time keeping.

    He was only 5 minutes late in finishing, but I don’t think anyone minded as his talk was thoroughly entertaining in fluent and only lightly accented Japanese – funny and revealing. Although he warned us he would not stick to the slides in the handout, he did in fact manage to cover all the key points, interlaced with many amusing stories.

    He was born and brought up in Nanjing, which as he pointed out, did not have a happy history with Japan.  So in 1983 when he was graduating from high school, he had no interest in Japan and had in fact applied to study English literature at the local university.  He thought there had been a mistake when he received a letter saying he had been awarded a place to read Japanese.  It turned out that the Chinese government, in an effort to prepare enough interpreters for a major Japanese government mission in three years, had cut all English, French and German courses and replaced them with Japanese courses.

    He then wanted to study at Nagoya University in Japan, but struggled to get a passport.  He was called in time and time again by officials who asked him why he wanted to go to Japan and what he was intending to do after his studies there.  “You must not give the real answer, of course.  So I said I wanted to study for the sake of my mother country and that I would return immediately. Neither were true.”

    He was told to apply for a private university first before trying for more prestigious state universities like Nagoya.  So he ended up at Aichi university, thinking that as it was named after the prefecture, which was bigger than Nagoya city, it should be correspondingly better, not knowing a well known dictum in Japan that the larger sounding the name, the worse the university.

    To his amazement, he discovered that the entire Economics faculty were Marxists.  “This is what I have escaped from!” he protested.

    His insights on China, the US, Japan and the UK in his talk were:

    • He highlighted greater inequality in the US compared to Japan and how it has increased rapidly. The top 1% wealthiest in the USA had 280 times more wealth in 2010 than the median, compared to the previous peak of 190x in 2004.  He said on his regular trips to the US he is invited to houses of wealthy Americans, where 30 servants are not uncommon.  Whereas the President of Fujitsu lives an ordinary life in a standard Japanese family house.
    • Chinese people are so suspicious of the quality of goods they can buy in China that they prefer to import the exact same product, made in China, from Japan.
    • China had a population bonus which explained its phenomenal growth, but this is ending. The male/female imbalance – particularly the fact that there are 30 million more males under the age of 20, is storing up trouble, socially and economically.  The population is declining and ageing.
    • China has to increase its Total Factor Productivity as a result, which means more innovation, but China is not there yet (despite spanking both Japan and US in supercomputing recently).
    • His view on why American share prices are booming is that it is not Trump’s policies or that American companies are so wonderful, rather that Chinese money is pouring into American equities. It’s not going to Europe or offshore.  Chinese diaspora funds are channelling the money from Chinese banks, even though China is trying impose tight controls on outward flows of money – since December 2016 investment in overseas properties and financial products has been banned.  Presumably this will hit the UK property market too. Hundreds of regional bank officials have been arrested recently as the central government tries to crack down.
    • Although relations between China and Japan have their tense moments, it was not likely that China would ever attack Japan as its sea and air forces are not sufficient. Its army is huge but largely manned by young only children, whose commitment to fighting Ke doubts.  Furthermore army leaders are highly corrupt and wealthy.
    • He thinks China would like to continue with friendly relations with the UK, as a counterbalance to the US. There is unlikely to be a trade war, but what should worry China and Japan is what to do about North Korea.  It’s about time Japanese politicians stopped worrying about rightist kindergartens “amusing though it is” and came up with a strategic foreign policy.
    • He does not fear a China economic collapse, but points to the slow pace of reform, particularly in the over investment in capital by state companies and the continuing stumble of the zombie companies. The fear in China is that reforming these companies will lead to unemployment, and China is not like Japan in terms of how it reacts to this.  There are riots, with local government officials’ cars set on fire, he says.
    • As for the wave since 2010 of Chinese students studying abroad in the UK and elsewhere, he says this is quite different to previous waves. The UK government will be dismayed to learn that there is no intention on the part of the Chinese students to return to China.  This is education with the intent of immigration.  Their parents also no longer want their children to come back to China and become civil servants as in the past, given the crack down on corruption going on. Many came to the West as children, studying at private schools, and have developed a taste for the Western life.
  • Not just Toyota – the Brexit rebalancing has already started

    Not just Toyota – the Brexit rebalancing has already started

    Toyota‘s warnings at Davos that it was having to consider how to survive in the UK after Brexit were preceded by a very under-the-radar announcement that it would be making some redundancies at its Burnaston plant.  It is a sign of what is to come for Japanese companies in the UK and our research (see below) shows that a rebalancing is already being undertaken by many.  Whereas Japanese companies increased their employment across Europe, Middle East & Africa by nearly 10% from 2015 to 2016, UK employment levels remained unchanged.*

    Toyota said that a reduction was necessary as the initial burst of production needed for new models introduced in 2015 is now stabilising.  Indeed, Toyota’s total workforce in the UK had already fallen by 3.6% in 2015/6 and by 9% across Europe.

    Now it is clear that the UK really will leave the Single Market and the Customs Union, where there are long term trends in place already, such as automation or phasing in and out of models, Brexit will provide the impetus to rebalance resources across Europe and beyond, to maintain integration in the Single Market or ease of serving other growth markets if Europe disintegrates further and/or growth slows.  Hardline Brexiters, Trump and Putin may welcome the disintegration of regional arrangements, but multinationals are moving in the opposite direction, integrating their operations regionally and globally both in terms of supply chains and people.

    Fujitsu already made similar move in announcing 1800 redundancies in the UK in October 2016 – part of 3300 job losses across Europe.  It stated it was not related to the Brexit referendum result, but part of a longer term transformation programme – mainly to do with moving more of its IT services support to lower cost bases.

    Our latest compilation of the Top 30 Japanese companies in Europe and the UK – now most annual reports for year ending March 2016 have been published –  shows that this process had indeed started before the referendum.  Fujitsu has reduced its workforce in the region it calls EMEIA (Europe, Middle East, India and Africa) by 3% from 2015/2016 and in the UK (in which it was possibly overweight anyway, thanks to the legacy of having acquired ICL) by far more – 15%.

    Fujitsu is still the biggest Japanese employer in the UK, with over 10,000 employees, but if it dips much below 8000 as a result of the latest round of redundancies, then Nissan, currently with 7,657 employees, might well overtake it.  Nissan’s UK workforce grew 2.9% in 2015/6 and actually shrank across Europe by 2% in the same period.  Calsonic Kansei, one of Nissan’s key suppliers, also grew its workforce by 10% in the UK to 1,729.  Presumably this will hold until the new Nissan models will come online in 2019 giving a year or two of high production and sales, until, well, see Toyota above.  As previously posted, car manufacturers operate on the basis that a factory needs to serve a market of at least 100 million consumers in order to be sustainable.  The EU qualifies, as does Russia – but the UK on its own does not.

    Other big increases in the UK workforce were due to acquisitions – Mitsui Sumitomo & Aioi Nissay Dowa group acquiring Lloyds underwriters Amlin and Insure The Box, Softbank acquiring ARM  and Dentsu Aegis acquiring various agencies in Europe and the US, absorbing their UK workforce with it. Organic growth highlights were Hitachi (18.8% up) – building on its Hitachi Rail acquisitions – soon to be employing 900 at its Newton Aycliffe plant, Ricoh (up 11% in the UK but only 1% in Europe) and Fast Retailing, expanding their Uniqlo and Comptoir des Cotonniers retail business, with 1100 employees, up from 700 the previous year.

    However Hitachi expanded 70% across Europe, presumably due to the acquisition of Ansaldo rail businesses in Italy and NTT Data also expanded across Europe by 20% to 18,000 employees  (NTT Data’s UK workforce is surprisingly small compared to Fujitsu, at around 450 as of 2015). Automotive supplier Yazaki grew by almost a quarter, to reach 45,200 – a large part of this being its manufacturing in Eastern Europe and North Africa – similar locations to the largest Japanese employer in Europe, Sumitomo Electric Wiring, whose workforce shrank slightly to 56,273.

    What next for the UK and Japanese companies in Europe?

    I would give up any hope of expanding automotive manufacturing in the UK.  As outlined above, the shift eastwards in Europe, to Turkey and also to north Africa has already taken place.  Which would seem to negate the need for suppliers to be in the Single Market, but note that the EU already has free trade deals with Egypt, Tunisia, Morocco and Algeria and Turkey is in a customs union with the EU.  Yazaki (headquartered in Germany) and Sumitomo Electric Wiring (tripartite headquarters across Italy, UK and Germany) used to have manufacturing in the UK but are now largely focused on pre-sales engineering.  Calsonic Kansei still has manufacturing in the UK, but has recently invested in plants in Spain and Russia where – not at all coincidentally – Nissan has factories.

    The UK still has strength in the design side of the automotive engineering, and I wonder whether the UK government deal with Nissan didn’t have some kind of grant or tax break for supporting this, to cushion the blow to the manufacturing side from any tariffs.  Although Nissan’s European headquarters are in Switzerland, there is a large design centre in the UK.  Similarly Honda has an R&D operation as well as a Formula 1 engine team based in the UK.

    80% of the UK economy is services, and we are a net exporter of services.  Delivery of services requires you to be close to the customer.  So what the UK needs to ensure is that the customers with the biggest budgets – the regional headquarters of multinationals, Japanese or otherwise – stay in the UK.   Our professional services – not just finance but R&D, design, IT, consulting, accounting, legal, marketing – all thrive because they are supporting these regional headquarters. Lower taxes and deregulation might keep some headquarters happy, but ultimately they have to worry about their proximity to customers too.  By leaving the European Union, the UK will be perceived as less close to EU customers (and also the regulatory environment).  We have to hope that the positive, proactive “global” UK that Theresa May outlined in her recent speech really does come together, and deals are quickly negotiated with African and Middle Eastern countries, so that the UK can position itself as the EMEA (Europe, Middle East & Africa) regional headquarters of choice.

    The UK is currently the regional base for over half of the top 30 Japanese companies in Europe or EMEA.  Keeping it that way will also, as the Japanese government itself pointed out, need a free movement of people in the region and a liberal immigration policy.  If this becomes an issue, which it already has of course, the other trend I have highlighted elsewhere, of an increasingly virtual structure, where regional management and functions are scattered around a region, will intensify and will be increasingly difficult to service from one location, particularly if that location is not part of the Single Market or immigration has become a sticking point in free trade agreements.

    If this happens, then UK services companies are going to have to open more offices across the EMEA region and relocate their personnel accordingly – as various banks have already announced.

    (*Percentages calculated only for those companies where annual report figures for the EMEA or Europe region and the UK were available.)

    Reports, profiles and other research on the Top 30 largest Japanese companies in Europe, Middle East and Africa are available from Rudlin Consulting  – please contact pernille.rudlin@rudlinconsulting.com for further details.

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  • The story of Japanese companies in the UK continues to be the story of the UK economy overall in 2016

    The story of Japanese companies in the UK continues to be the story of the UK economy overall in 2016

    The number of people employed in the UK by the biggest Japanese companies in the UK rose by around 1% to 76,103 in 2016 – representing over half of the 140,000 or so the Japanese Embassy to the UK estimates are employed overall in the UK by Japanese companies.

    Just as 80% of the UK economy is services, so too with Japanese companies in the UK.  Although Nissan, Toyota and Honda attract most of the headlines thanks to Brexit – understandably as they represent around 15,000 of the 76,000 jobs – the vast majority of the rest are in the services sector.

    Even Sony has only one small factory left in the UK, making high end audio visual equipment and employing less than 100 people.  The rest of 3000 or so jobs are in Sony Interactive Entertainment, music and film & TV or in marketing.

    Fujitsu is still the biggest Japanese employer in the UK but the gap with Nissan at #2 is narrowing, as Fujitsu have reduced their headcount by over 15% in the past year or so.  Although Fujitsu is still seen as an IT & telecomms manufacturer in Japan, in the UK it is largely an IT services company.

    Trading company Itochu may be a surprise at #3, but this is largely due to its ownership of tyre fitting chain KwikFit.

    The Hitachi group of companies (#7) has grown by 17% over the year – thanks in part to expansion at Hitachi Rail and Horizon Nuclear Power – but the bulk of its employees continue to be at consumer loans company Hitachi Capital.

    Dentsu Aegis Network, part of the Dentsu advertising agency, has continued to acquire across the UK and Europe, resulting in a 21% increase in headcount.  Other notable increases thanks to acquisitions include Mitsui Sumitomo & Aioi Nissay Dowa acquiring Lloyds underwriters Amlin and of course Softbank, a new entrant to the top 30, with its acquisition of ARM.

    The story of Japanese companies in the UK continues to be the story of the UK economy overall – a trend which will no doubt continue in 2017, with Japanese banks already strengthening and relocating to their other European Union based operations, or threatening to do so.

    Customised reports, profiles and other research on the Top 30 largest Japanese companies in Europe, Middle East and Africa are available – please contact pernille.rudlin@rudlinconsulting.com for further details.

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

    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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