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Results of JETRO’s 2015 Survey on Business Conditions of Japanese Firms in Latin America

Feb 15, 2016

Between October 26 and November 29, 2015 the Japan External Trade Organization (JETRO) conducted its 16th survey on the business operations of Japanese firms (both manufacturers and non-manufacturers) in seven countries in Latin America: Mexico, Venezuela, Colombia, Peru, Chile, Argentina and Brazil. The survey received valid replies from 400 firms (a 51.5% response rate) out of 776 to whom we sent questionnaires. The question items covered areas including:
1.    Status of operations
2.    Future business outlook
3.    Managerial issues and countermeasures

Below is a summary of the results.

Summary points:

(1) With booming automobile industry, Mexico ranks highest in business confidence and motivation to expand business among major investment destinations across world
Japanese-affiliated companies in Mexico are performing well. Mexico marked the highest out of 37 countries, in both the diffusion index (DI) for 2015, which measures business confidence*, and the proportion of companies indicating business expansion within the next one or two years, with more than 30 valid responses. The reason most likely being that many Japanese companies operating in Mexico are engaged in the automobile industry and that Mexico has experienced positive influences of the stable US economy as a hub for manufacturing and exporting automobiles mainly to the US market.
* The figure is calculated by the proportion of businesses reporting increased operating profits minus those reporting decreased operating profits.
(2) Latin America, particularly oil-producing countries, experiences sluggish growth in business confidence due to low crude oil prices and weakened local currencies
Across Latin America, in 2015, business confidence of Japanese-affiliated companies operating in resource-rich countries decreased due to a decline in natural resource prices caused by such factors as the slowdown of the Chinese economy and a possible rise in US interest rates, along with a decrease in value of local currencies. The impact spread over a wide range of industries from companies engaged in natural resources to those manufacturing products from imported essential parts and those selling imported consumer goods. Although Mexico is an oil producing country, there was no decline in business confidence resulting from the drop in crude oil prices and a weakened local currency, the reason being that a majority of Japanese-affiliated companies are involved in export manufacturing industries such as automobiles.

(3) Brazil’s business environment further worsens
Among risks and issues of the investment environment in Brazil, with the Olympic games expected to be held in August this year, the percentage of respondents indicating unstable political and social conditions increased remarkably from 37.5% in the previous year to 74.3%, affected by a political corruption scandal concerning a state-owned petroleum company, Petrobras. The political chaos caused a delay in financial reforms and a fall in the value of its currency, the real. This resulted in a surge in the percentage of companies reporting the unstable exchange rate to be a concern from 45% last year to 82.4%. A significant drop in currency value triggered a rise in interest rates, also resulting in decreased domestic demand. Companies unable to add the increase in import costs to sales prices are especially facing a tough situation. Meanwhile, a trend has been seen of encouraging exports by taking advantage of the weakened currency, with some companies shifting to local procurement of raw materials in Brazil.

(4) High expectations for improving business environment in Argentina
Argentina saw a substantial increase in the DI for 2015, from the negative 10.7 points of the previous year to 32.3 points, with business confidence placing second behind Mexico among the countries in Latin America. In addition, the percentage of respondents expecting business to expand within the next one or two years saw a considerable increase from 21.4% in the previous year to 45.2%, while those indicating downsizing decreased from 14.3% to zero.
Considering that business activities were limited by such factors as foreign currency restrictions and import curbs in Argentina’s persistent economic downturn in 2015, many of the companies that expect operating profits to improve are likely to have endured hardship by restructuring through reduction of personnel costs (53.3%) and of other expenditure (33.3%). In this tough management environment, Japanese-affiliated companies seek hope in a new government to change economic policies. In November 2015, Mauricio Macri was elected president on the promise of reform by shifting to an open domestic economy and took office on December 10. Among the reasons to expect business expansion within the next one or two years, “easing restrictions” marked 57.1%, notably high among Latin American countries. The new administration has been presenting an array of policies regarding currency exchange and trade, which has contributed to increasing the expectations of Japanese-affiliated companies for the business environment to improve.

Mr. Kojiro Takeshita, Mr. Takao Nakahata and Mr. Yusuke Nishizawa
Americas Division, Overseas Research Department
Tel: (03) 3582-4690 Fax: (03) 3587-2485