News & Updates

Results of 2018 JETRO Survey on Business Conditions of Japanese Companies in Europe

Dec 25, 2018

Key Challenges are Adjusting Company's Internal Structure when Using Japan-EU EPA and Changes in UK Regulations and Legislation due to Brexit

Between September 27th and October 25th 2018, the Japan External Trade Organization (JETRO) conducted its latest survey on the business conditions of Japanese-affiliated companies in Europe. 763 valid responses were received (84.0% response rate) out of 908 to whom we sent questionnaires.

Survey Items :

Operating Profit Forecast
Current Domestic Market and Future Prospects
Operational Challenges
Changes in Number of Employees
Britain's Exit from the European Union
Local Procurement
Business Outlook For Next 1 or 2 Years
High Value-Added & Differentiation Initiatives
Future Promising Sales Destinations
EPA/FTA

Summary Points :

As the UK leaves the EU, the main concern for both UK and other EU state based Japanese-affiliated companies is "Economic slump in the UK".
Top concern for UK based companies regarding changes to UK regulation and legislation after Brexit, is "Adjusting the company's internal structure".
If the UK were to leave the EU with "No Deal", the most common contingency plan cited was "Stockpiling goods".
In terms of how Brexit has affected business so far, Ireland based companies gave the highest response rate for "Negative Impact". Whereas for future business, the highest response rate for "Negative Impact" came from UK based companies.
This year the response rate amongst UK based companies for "Positive Impact" from the Japan-EU EPA fell sharply.
Top issues cited to be potentially problematic when using the Japan-EU EPA, were "In-house system improvements", "Cooperation with supplier/business partners" and "Proof of origin procedures (self-certification)".

1. Operating Profit Forecast, Current Domestic Market and Future Prospects

Operating Profit Forecast Continues at a High Standard and Increasing Labour Costs in Czechia are Seen to be the Main Impact to Shrinking Profits.

Although the 2018 operating profit forecast indicated that the percentage of Japanese-affiliated companies in Europe predicting that they will be profitable has decreased by 1.1 percentage points to 73.9%, a high standard has continued to be maintained, as this is still the second highest percentage since 2012; the same year that the non-manufacturing sector started to be included in this survey. However this year the percentage of Japanese-affiliated companies in Europe predicting a loss of profit was 12.8%. Although when the European economy started to recover in 2014, the response rate predicting loss greatly reduced (13.0%), despite remaining low since 2015, this years' result indicates it is again beginning to increase.
Amongst UK based Japanese-affiliated companies, despite that the UK's withdrawal from the EU (Brexit) negotiations are uncertain, the overall response rate for predicting a profit has increased by 3.8 percentage points to 75.4%. Companies gave reasons such as improvement in profit margin by increasing prices.
Comparing `DI: 2019 Operating Profit Forecasts compared to 2018' and `DI: 2018 Operating Profit Forecast compared to 2017 Operating Profit Results' by country, for both years, Czechia's DI operating profit forecast has been in the negative. When looking at the company's domestic market, companies based in Czechia gave the highest response rate that their domestic market is better at 59.1%. Combining this percentage with companies who responded that the market is slightly better 31.8% amounts to over 90%. Although this gives an impression that the local economy is really improving, operational challenges for companies in Czechia can be seen, caused by issues such as "Rapid labour cost growth", low unemployment and securing human resources are restricting profits.

2. Operational Challenges

Securing Human Resources Remains Top Challenge, For Companies in the UK Political and Social Stability Continues to be a Challenge due to Brexit Negotiations.

This year "Securing human resources" 43.6% still continues to be the key operational challenge for all companies, despite the response rate reducing by 8.1 percentage points from 2017. Notably in Central and Eastern Europe more than 70% of companies (70.4%) cited it as an issue; of which it was observed that response rates from Czechia 90.5%, Hungry 66.7%, Romania 64.3% and Poland 60.0% all exceeded 60%. These 4 countries also cited that "Rapid labour cost growth" is an issue at 90.5%, 83.3%, 50.0% and 64.0% respectively.
Europe based companies responded that within the "Securing human resources" operational challenge, "Management personnel" was cited as most needed at 57.1%, followed by "Factory workers" at 33.5% and "IoT/AI specialists" at 18.7%. Amongst companies in Central and Eastern Europe, 61.4% responded that "Factory workers" were needed the most. For "IoT/AI specialists", looking by country high response rates were observed from German based companies at 28.9% (24 companies) and Poland based companies at 33.3% (5 companies).
This year "European social and political situation" was the third biggest operational challenge at 37.8%, falling by 11.0 percentage points from 2017. By country, the highest response rate was from UK based companies at 57.1% (101 companies), with Brexit negotiations continuing, Romania also shared the same response rate at second place (8 companies). Although the third highest response rate came from Spain based companies at 54.2%, this has fallen greatly by 28.7 percentage points from 2017, as the situation in Catalonia calms down.

3. Britain's Exit from the European Union and Local Procurement

UK Economic Slump is the Key Concern, Some Companies Especially From Finance & Insurance Sectors are Partly Relocating Their Regional Headquarter Offices.

As the UK prepares to exit the EU, companies were asked what impact has there been to their business so far: the overall response rate for "Negative Impact" was 16.1%, 2.0 percentage points up from last year; amongst Ireland based companies the response rate was as much as 38.1%, a huge increase of 25.1 percentage points since last year. Also it could be seen that there is a fixed supply chain between Ireland and the UK, as Ireland based companies have the highest procurement rate of goods from UK suppliers at 15.3% compared to other EU states. Furthermore the response rate for "Negative Impact" from UK based companies was 25.3%, similar to the previous year (26.2%).
When companies were asked how the UK's exit from the EU will affect their future business: 60% of UK based companies gave the highest response rate for "Negative Impact" (59.8%), up 12.9 percentage points since 2017. Many reasons were given such as: "custom duties", "custom procedures" and "reviewing the UK as European headquarters or logistics hub", that is to say the consequences of Brexit have begun to appear.
Addressing the concerns of Japanese-affiliated companies, for both UK based as well as other EU states based companies the key concern is "Economic slump in the UK". Amongst UK based companies the top 3 concerns remain the same from last year and the response rate has slightly increased. The top 3 concerns are "Economic slump in the UK" at 71.3% (up 1.9 percentage points from 2017). "Changes in UK regulations and legislation" at 58.0% (up 3.9 percentage points) and "Pound continues weakening" at 54.1% (up 2.0 percentage points). However the top 3 concerns for EU (excl. UK) based companies are "Economic slump in the UK" at 46.1% (1.0 percentage point down), "Exporting from EU base (excl. UK) to UK" at 38.0% (5.9 percentage points up) and "Changes in UK regulations and legislation" at 34.5% (1.7 percentage points down).
Companies were asked to expand on why "Changes in UK Regulations and Legislation" is a big concern: 77.3% of all companies said it was due to "Compliance with EU Regulation" (UK based companies 74.3% and EU (excl.UK) 79.9%); for UK based companies the largest response was "Adjusting the company's internal structure to comply with UK Regulations and Legislation Changes"; also another top concern for both UK based and EU (excl.UK) based companies were "Customs Tariffs" at 68.2% and 75.3%, notably it was higher in the manufacturing sector at 86.4% and 82.9%, other particularly high concerns are "Non-tariff barriers" 41.2% and 46.8% and "Standards and certification" 30.6% and 31.2%. For UK based manufacturing companies the response rate for "Personal data protection (consistency with EU rules)" at (41.2%) was higher than "Standards and certification" indicating that they are working on these issues for when Brexit has occurs.
In preparation for the UK's withdrawal from the EU, when companies were asked if they had already decided to relocate/withdraw or already have relocated/withdrawn from its base location: the "Regional Headquarter Office" function received the largest response rate at 61.0% (25 companies), followed by `Sales' functions at 29.3% (12 companies) and `Manufacturing' at 14.6% (6 companies). Also within the "Regional Headquarter Office" function category, more than 80% of respondents (80.4%, 21 companies) said they would "partly relocate" this function. Destinations of companies who had already decided to relocate or already have relocated: finance/insurance hub destinations such as Germany, Luxembourg and the Netherlands were cited for relocation of regional headquarter offices; Germany was mentioned for relocation of "Sales" functions; and Poland, the Netherlands and the Philippines were mentioned for "Manufacturing".
Concerning companies' contingency plans for if the UK were to leave the EU with "No Deal": there was no significant difference in proportion between UK based and other EU state based companies who selected "Plan already made" and "Currently planning". However when combined with the choice "Intending to plan", it was indicated that 26.8% of UK based companies were undertaking contingency plan measures, whereas only 12.8% of EU (excl.UK) states companies had undertaken any planning procedures at all. Companies who responded that the status of their contingency plan was "Plan already made", "Currently Planning" or "Intending to plan", were asked to provide more details; 95 companies gave individual responses about what kind of plans were being made, of which each company cited a variety of different measures. Overall the most common plan cited was "Stockpiling goods", which was given by 20 companies (21.1%).

4. Business Outlook for Next 1 or 2 Years

As Brexit Negotiations Continue, UK Japanese-Affiliated Companies Seek to Strengthen Company Brand and Add High Value to Products.

It still appears that Japanese-affiliated companies' business outlook for the next 1-2 years have not yet been greatly impacted by the UK's movement towards leaving the EU. However within the manufacturing sector, a trend is beginning to appear from both UK and other EU state based companies' response rate for "Remain the same", which both has increased by 4.4 and 2.9 percentage points respectively reaching 58.7% and 41.3%.
It was observed that ahead of the UK's withdrawal from the EU, UK based companies are attempting to shift towards differentiating from price-oriented products to quality-oriented and technological products. When UK based companies were asked which functions they intend to expand in the next 1-2 years, the most common answer was to expand "Sales functions" (46 companies, 19 companies less than 2017). Continuing from last year the second most common answer was expansion of "Production (high-value added products)" (17 companies), followed by R&D (11 companies). Also in terms of what initiatives were being undertaken to differentiate or add high value to their products and services being sold: high response rates were given for "Strengthening Company Brand" at 52.2% and "Strengthening Technical Skill Training Resources & Increasing number of Skilled Engineers" at 30.2%

5. EPA/FTA Advantages and Challenges

When Using the Japan-EU EPA Adjusting In-House System & Cooperation with Supplier & Business Partners Could be Problematic.

Concerning the Japan-EU EPA, which is expected to come into effect in 2019, the response rate from all Europe-based companies for "Positive Impact" was 42.0%, down by 12.3 percentage points from 2017. Overall compared to last year the response rate for "No Impact" and "Don't Know" has increased by 6.0 and 5.6 percentage points respectively to 25.3% and 30.9%. Amongst EU (excl. UK) companies, the response rate for "Positive Impact" was 48.1%, a similar result to last year. However for UK based companies the response rate for "Positive Impact" fell by 20 percentage points to 25.1%, appearing to show that the number of UK based companies who think that they cannot enjoy the same effects from the EPA as other EU members has risen, due to the UK's withdrawal from the EU.
In terms of items that may be problematic when using the Japan-EU EPA, the top issues were "In-house system improvements" at 47.4%," followed by "Cooperation with supplier/business partners e.g. completion of certificate of origin documentation" at 43.1% and "Proof of origin procedures (self-certification)" at 34.6%. When the details of the agreement became clear after the signing in July 2018, these issues have become more real as the date the agreement comes into effect draws closer.
Currently the EU is moving towards signing the EU-Vietnam FTA, it can be seen that all companies' expectations are rising as the response rates for "Planning to Utilize" and "Considering to Utilize" from companies who import were 39.5% (15 companies) and 34.2% (13 companies) respectively.
Regarding current EU EPAs and FTAs under negotiation as well as the potential future FTA negotiation with the UK, those that received large response rates for "Positive Impact" were: the EU-US (TTIP) FTA 14.2%, the EU-Thai FTA 13.9% and the EU-ASEAN FTA 13.6%. For European based Japanese companies, the response rates for positive impact from the Japan-UK EPA 12.2% and the UK TPP11 participation 7.7%, were lower. The reason that some companies cited the UK participation of TPP11 (the Comprehensive and Progressive Agreement for Trans-Pacific Partnership), as a "Positive Impact" was due to fact that many companies are manufacturing products in member countries such as Vietnam.