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Results of JETRO’s 2013 Survey on Business Conditions of Japanese-Affiliated Firms in Europe and Russia

Jan 21, 2014

Between October and November 2013, the Japan External Trade Organization (JETRO) conducted its latest survey on the business operations of Japanese-affiliated firms in Europe as well as Russia (In Turkey, all firms surveyed were manufacturers.). This is the first year this survey was conducted on Japanese-affiliated firms in Russia. From Europe, we received 1,000 valid replies (a 66.8% response rate) out of 1,498 to whom we sent questionnaires. From Russia, we received 63 valid replies (a 53.8% response rate) out of 117 to whom we sent questionnaires. The question items covered areas including:

1.Management status and business outlook
2.Challenges in management
3.Merits of joining the WTO and FTAs

Below is a summary of the results.

Summary points:
1.Business outlook for the next one or two years: Firms in Europe to recover, those in Russia to expand business
・Among Japanese-affiliated manufacturers in Europe, 49.9% reported that they plan to expand their business in the next one or two years, which is a 2.6 points increase from the 47.3% in 2012. However, figures have not returned to the level before Lehman’s fall and the European debt crisis (52.7% in 2007).

・Including non-manufacturers, 52.9% of Japanese-affiliated firms in Europe reported that their business will expand over the next one to two years, 42.8% reported that current business conditions will be maintained and 3.5% reported they will downsize business. Among Japanese firms in Russia, 77.8% reported business will expand, 20.6% will maintain current business conditions and 1.6% will downsize business. Due to the strong business expansion trend in Russia, Japanese firms in Europe consider Russia to have the most potential for sales (334 firms), which is the same as the previous survey in 2012, followed by Turkey (319 firms).

・The top reason for business expansion for both Japanese firms in Europe and Russia was a “sales increase” (83.2% in Europe and 85.7% in Russia). The second reason, “high growth potential,” was higher in Russia at 79.6% than in Europe at 37.3%, showing high confidence in the growth potential of the Russian market. Meanwhile, the third reason, “high receptivity of high value-added products” (25.0% in Europe), was low in Russia, revealing a difference in the maturity of the markets.

2.Three points in the surveys on business conditions of Japanese-affiliated firms in Europe
(1)For 2013, 67.5% of respondents expected a surplus and for 2014, approximately 90% of respondents expected results to improve or remain at the same level.
・For 2013, 67.5% of respondents expected a surplus in operating income, 15.9% expected to reach a balance and 16.6% expected to have a deficit. For 2014, 51.8% of respondents expected operating income to improve from the previous year, 41.5% expected it to maintain the same level and 6.7% expected it to become worse.
・For 2013, 66.8% of respondents expected an increase in sales and 33.2% expected a decrease. The number of manufacturers in Central and Eastern Europe and Turkey expecting increased sales was particularly high at 74.7%.
・In regard to the European economic forecast, while only 7.3% of respondents indicated that they have recovered from the economic recession, 68.5% indicated that recovery will take more time. Although there are some signs of business recovery, many respondents are still cautious about the future economic outlook.

(2)“Economic recession and shrinking of markets” and “high labor costs” are managerial issues. Chinese firms continue to be competitors.
・45.7% indicated “economic recession and shrinking of markets” as managerial issues, followed by “high labor costs” (39.9%) and “securing good workers” (37.8%).
・In regard to those who answered that the “entry of new competitors” (32.6%) was an issue, 55.9% of respondents indicated Chinese firms as new competitors, followed by Korean firms (37.2%) and European firms (32.2%). In Europe, Chinese firms have been actively acquiring European firms.
・As approaches to management localization, many companies indicated “Hiring director or manager-level employees” (53.2%) and “focusing on the training of local employees” (50.8%).

(3)High expectations for the Economic Partnership Agreement (EPA) between Japan and the EU
・In regard to the impact of the free trade agreement (FTA), 44.1% of respondents expected the EPA between Japan and the EU to have significant merits (42.6% in 2012), revealing higher expectations than seen with other FTAs that the EU has promoted. Looking at regions, this outlook was higher for Central Europe, Eastern Europe and Turkey (55.6%) than for Western Europe (42.3%), revealing high expectations in regions where production bases for Japanese parts manufacturers are located.
・The FTA between the large markets in the EU and ASEAN was thought to bring significant merits (20.7%), followed by the FTA between the EU and Thailand (19.7%) and the FTA between the EU and the US (18.9%).

3.Three points in the surveys on business conditions of Japanese-affiliated firms in Russia
(1)For 2013, 55.6% of respondents expected a surplus in operating income and for 2014, all respondents expected results to improve or remain at the same level.
・For 2013, 55.6% of respondents expected a surplus in operating income, 30.2% expected a deficit and 14.3% expected to reach a balance. A total of 39.7% of respondents expected operating income to improve from the previous year, with 30.2% each expecting it to maintain the same level or become worse.
・As factors related to improved operating income, 84.0% of respondents indicated an increase of sales in local markets, which was the highest. As factors related to worsened operating income, 78.9% of respondents indicated a decrease of sales in local markets, followed by fluctuation in exchange rate (47.4%), an increase in labor costs (36.8%) and “insufficient reflection in sales prices” (36.8%).
・In regard to operating income in 2014 compared to 2013, 55.6% of respondents expected it to improve and no respondents indicated that it would become worse. Expectations for increased sales in local markets were a major reason for the anticipated improvement in operating income.

(2)Growth of Russian markets highly anticipated, while complexity of administrative procedures and terror considered as risks
・As merits of investment, “market scale and growth potential” marked 91.9%, which was the highest.
・Among risks of investment, many respondents indicated “complicated administrative procedures” and “complicated tax procedures,” both of which accounted for 79.0%, and a “rising in labor costs” (67.7%) as issues related to the investment environment. Many respondents indicated “security and terrorism” (88.7%) and “discord or ethnic/religious conflicts” (61.3%) as safety issues.
・Regarding problems in local production, many respondents indicated “difficulties in quality control” (46.2%). Other problems cited were a“rising procurement costs” and “difficulties in local procurement of materials/parts,” both of which accounted for 38.5%.

(3)Only 20% of respondents reported merits in joining the World Trade Organization (WTO).
・Only 22.6% of respondents indicated that Russia’s joining the WTO (August 2012) was beneficial, revealing that nearly 80% of firms did not see any advantage. The reasons were that the reduction of tariffs will take four to eight years, while the opening of other markets will also take a certain number of years after joining the WTO.
・In regard to merits of Russia’s joining the WTO, many respondents chose “reduction of customs tariffs” (71.4%), which was the highest, followed by “simplification of customs procedures” and “easing of regulations regarding foreign investment,” both of which accounted for 14.3%.

For more information, please contact:

Usui (Mr.) and Kosuge (Mr.)
Europe, Russia and CIS Division
Tel:+81-(03)3582-5569 E-mail:ord@jetro.go.jp

Umetsu (Mr.) and Asamoto (Mr.)
Russia CIS team, Europe, Russia and CIS Division
Tel:+81-(03)3582-1890 E-mail:ord-rus@jetro.go.jp