Results of JETRO’s 2015 Surveys on Business Conditions of Japanese-Affiliated Firms in Middle East and Africa

Between September and November 2015, the Japan External Trade Organization (JETRO) conducted its latest surveys on business operations of Japanese-affiliated firms in the following two regions: the Middle East and Africa.

<Survey for the Middle East>
・Targets: Three countries—the United Arab Emirates (UAE), Saudi Arabia and Turkey
・Period: September 28 to October 22, 2015
・Response rate: 191 valid responses (a 46.6% response rate) from the 410 companies to whom we sent questionnaires
<Survey for Africa>
・Targets: 24 countries including South Africa, Egypt, Morocco, Kenya, Nigeria and Cote d'Ivoire
・Period: September 28 to November 10, 2015
・Response rate: 228 valid responses (a 64.4% response rate) from the 354 companies to whom we sent questionnaires

The questionnaire covered areas such as future business outlook, managerial issues and advantages and disadvantages of the investment environment. Below is a summary of the results.

Summary points:

1. Middle East: Despite security risks and low crude oil prices, majority of respondents expect surplus and show high motivation to expand business

(1) Over half of respondents forecast surplus for 2015
Among respondents, 56.2% of companies expected a surplus in operating profits for 2015, with the UAE marking the highest at 64.3%. Meanwhile, the rate of respondents indicating a deficit remained at 15.7%. Compared with Turkey (15.2%) and the UAE (11.3%), Saudi Arabia marked 33.3%, with almost no change from the 35.5% of the previous year. Companies in Saudi Arabia appear to be facing relatively severe business conditions.

(2) Over 40% of companies expect business confidence to improve
Regarding business forecasts for 2016, 44.1% of respondents expect improvement in operating profits, an increase from the previous year. Among the reasons, increased sales in local markets was most commonly cited at 74%, followed by increased sales due to expanded exports at 51.9%.

(3) 67.7% of respondents intend to expand business
Both when looking at each country and when looking at the region as a whole, approximately 70% of companies expect to expand business within the next one or two years. Among the reasons cited by those expecting to expand business, high growth potential and increased sales came in at 68.3% and 67.5%, respectively. As for functions companies intend to strengthen, sales made up a majority of responses at 75.6%.

(4) Management localization prompts more employment of local staff than transferred Japanese staff
Among answers given regarding efforts by companies to develop management localization, “enhancement of training and developing local human resources” marked the highest at 54%, followed by “mid-career recruitment of work-ready local employees” (44.4%) and “promotion of local employees to management positions and store managers” (40.6%). Meanwhile, “ability and awareness of local human resources” (43.2%) and “difficulty in finding executive candidates” (39.3%) were brought up as problems. Based on the above factors, companies forecasting an increase in employment of local personnel accounted for 60.7%. Meanwhile, a majority of companies, or 71.2%, reported no change in the number of Japanese employees transferred from headquarters.

(5) Investment environment of UAE: Taxation system and free zones as advantages, increasing costs as disadvantage
In a survey conducted exclusively in the UAE regarding the advantages and disadvantages of the investment environment, the advantages pointed out included exemption of income and corporation taxes (78.2%), one-stop services and lack of restrictions on foreign investment in free zones (70.6%) and stable political and social conditions (63%). Meanwhile, “rising costs” was highly cited as an issue in areas such as office rent, labor costs and various commissions.


2. Africa: High motivation to expand business. Kenya as attractive investment destination. High expectations for support from Japanese government.

(1) Majority of respondents intend to expand business
Among respondents, 55.6% expect to expand business within the next one or two years, although this figure decreased from 69% a year before. It is expected that 52.3% of respondents have produced a surplus.

Regarding business forecasts for 2016, companies anticipating no change in performance marked highest at 44.3%, while those anticipating an improvement marked 41%. With expectations for increased sales in local markets, many companies are enhancing training or cultivating local human resources to develop localization (53.3%), while also expanding their sales function (73.1%).

(2) Managerial issues: Exchange rate fluctuations of local currencies, quality of personnel and the time spent to clear customs procedures
Among managerial issues, “exchange rate fluctuations of local currencies” was cited by 58.5% of total respondents, with the answer particularly high in resource-rich countries such as Zambia (80%), Nigeria (70.6%) and South Africa (66.7%). Meanwhile, “quality of personnel (skill level)” (with a 50% response rate) was commonly cited in Portuguese-speaking countries.

(3) Investment environment: “Market size and potential” rated promising, while “undeveloped infrastructure” concerning
Among advantages in local investment environments, “market size and potential” marked 66.5%, with the figure especially high in Tanzania (90%) and Nigeria (86.7%). Meanwhile, a commonly-cited risk was “undeveloped infrastructure” (61.9%), of which electricity was most concerning at 92.1%.

(4) Market potential encourages business expansion. Companies meeting or exceeding expectations for profitability came to 61.5%. Kenya to be center of attention.
Market potential (90.5%) and size (73.8%) were reported as the two strongest motivations for starting operations in Africa among Japanese-affiliated companies new to the continent. Although only 31% stated that expectations for profitability were a motivating factor, 61.5% of companies responded that their ventures were indeed profitable after entering the market. Kenya ranked first among countries for which companies had high expectations, with 37.2%.
 
(5) Three quarters of respondents desire enhancement of support by Japanese government
A majority of companies, or 58.7%, requested the Japanese government to communicate their requests, such as for establishment of systems and providing guidance for improvement, to local governments. “Financial support such as enhancement of investment finance, trade insurance and standby credit” (46.4%) and “conclusion of bilateral agreements including FTAs/EPAs, tax treaties and investment protection agreements” (42.9%) also received high portions of responses. In Angola, Cote d'Ivoire and Madagascar, all the respondents answered that the Japanese government should strengthen its support for Japanese-affiliated companies.