To understand the sheer scale of the proposed £24bn Softbank acquisition of UK based chip designer ARM – we estimate it would increase investment by Japanese companies in the UK by over a half of the current cumulative total. Britain benefits more from Japanese investment than any other country in the world apart from the US and this deal would certainly maintain that claim, despite Brexit. By the end of 2014, the total value of Japanese investment in the UK was £38bn – to which should be added Mitsui Sumitomo Insurance’s acquisition of Amlin for £3.5bn in 2015.
There have been plenty of other acquisitions these past 15 years of UK iconic companies by Japanese companies, such as Nippon Sheet Glass acquiring Pilkington for £2.2bn in 2006 (interesting to note that ARM’s chairman is Stuart Chambers, who was CEO of Pilkington when NSG acquired it). The number of acquisitions probably accounts for the discrepancy between the Japanese Ministry of Foreign Affairs estimate of the number of Japanese companies in the UK of 879 – rather lower than that of the Teikoku Databank figure of 1380 noted previously. Of these, 470 are classified as incorporated (as opposed to branch offices) and many, as we pointed out previously, cover the whole European region. As well as concerns about losing “financial passporting” and the impact of tariffs on supply chains, a further 158 are R&D or design centres, which may well benefit from EU funds – which may mean relocating should those funds no longer be available post-Brexit.
JETRO, the Japan External Trade Relations Organisation surveyed 54 Japanese companies in the UK just before the EU referendum vote. 64.8% saw Brexit as having a negative impact on their business, with “Don’t know” 25.9% and “no impact” 9.3%. Several responded that they were looking at relocating to Germany, the Netherlands or Ireland. As JETRO points out, all three countries have strong economic links to the UK, so relocation there will not avoid being influenced by what happens to the UK and how Brexit impacts the EU.
The Japanese Chamber of Commerce & Industry in the UK has compiled the UK-Japan trade statistics for the past 15 years and it is noticeable that there is no clear trend in imports of goods from Japan – fluctuating between a high of £9bn in 2001 and a low of £6.7bn in 2009, and currently at £6.9bn for 2015. There has been an upward trend in UK export of goods to Japan, from around £3.5bn 15 years’ ago to over £4.5bn in recent years. A £3bn or so trade surplus in Japan’s favour nonetheless persists. But it is only literally half the story, The UK’s exports to Japan are actually around £9.9bn as of 2012 according to the UKTI. The other half are exports of services, primarily financial, but also legal, advertising, media, consulting etc.
The Japan-EU Free Trade Agreement is supposed to be finalised by the end of the year, and apparently may be worth £5bn a year to the UK. It will mean the elimination of the vast majority of trade tariffs, boosting imports and exports in agriculture, car manufacturing and clothing. There are still issues to be resolved on auto and agricultural tariffs as well as government procurement. And of course, how it will apply to the UK once it leaves the EU is a big unknown.
Looking at the development of Japanese companies in the UK over the past 40 years, apart from the big automotive manufacturers, it is clear that, as I wrote in my history of Mitsubishi Corporation, the UK has become a coordination and financing/marketing hub for Japanese companies in the region. Most of the famous Japanese names, such as Sony, no longer have mass production in the UK. Sony has a manufacturing centre in Wales, but it develops and produces low volume professional audio visual equipment. Even in the automotive sector, if you look closely at parts manufacturers such as Sumitomo Electric Wiring, which acquired Lucas SEI in 1999, or Yazaki, their operations in the UK are mostly development, design and engineering, or regional coordination. Their UK factories were shut down and production moved east or to North Africa years ago.
So Softbank’s acquisition of ARM, an exception in so many ways, is also not. It is buying into the UK’s design and technology expertise, as well as multinational marketing and management skills. Forty plus years of trade in the EU and the development of the Single Market has done exactly what the textbooks would predict, which is to make it clear where the UK’s strengths are – design, engineering, finance, marketing, legal and other services and some high end manufacturing. The revival of mass car production in the UK is because of our membership of the Single Market. The UK on its own is not enough to sustain a car industry (see the paragraph in my blog post here regarding the 100 million market theory).
The Japan-EU FTA is meant to cover services as well as products but the EU single market in services has not progressed for a while and it looks like the Transatlantic Trade and Investment Partnership, which would cover EU-USA services, is faltering. It does seem like the UK is going to end up spending enormous amounts of its resources and energy on unpicking 40 years of trade arrangements which have already had a profound impact on its economy, at a time when those resources would have been better devoted to developing agreements which would help the UK play to its strengths.
