News & Updates

Results of JETRO’s 2016 Survey on Business Conditions of Japanese-Affiliated Companies in Europe

European political and social conditions remerged as the main operational challenge, while Brexit’s impact still limited towards business outlook

Dec 05, 2016

Between September 20th and October 18th 2016, the Japan External Trade Organization (JETRO) conducted its latest survey on the business conditions of Japanese-affiliated companies in Europe. We received 1,000 valid responses (a 71.3% response rate) out of 1,403 to whom we sent questionnaires.

Summary points:

1. Operating Profit Forecasts

European operating profit forecasts maintained a high level, however 2017 forecasts for UK based Japanese affiliated companies indicates a slight deceleration.

  • Looking at the operating profit forecasts over the last 5 years, Europe overall has yearly been forecasting an increase in profit amount. 2016 operating forecast for “profit” was 72.7%, “breakeven” was 14.8% and “loss” was 12.6%. However different to Europe overall, UK-based Japanese affiliated companies’ response rate for profit was 70.4%, a 0.7pp decrease compared to last year. (Fig .1, 2)
  • Comparing 2017 and 2016 operating profit forecast for Europe as a whole, almost half the companies 45.0% responded “remain the same”, 43.0% responded “Increase”, whereas 12.0% responded “Decrease”. Looking at the number of companies that responded “Increase” by each country, Slovakia responded “increase” the highest at 85.7%, whereas Greece had the lowest at 14.3%. The UK was 2nd from the bottom at 31.6%. (Fig .8, 12)
  • Over the past 5 years, comparing the trends of operating profit forecasts found by this annual survey, it can be seen that Japanese- affiliated companies in the UK and Japanese-affiliated companies in Europe have shown similar trends. However for the 2017 forecast, UK based companies could see the effects from the UK’s EU referendum result. The number of respondents answering “Increase” has drastically fallen by 9.1 percentage points compared to the previous year and the number of respondents selecting “No change” also rose by 3.8 percentage points. (Fig. 15)

2. Operational Challenges

European social and political conditions emerged as the biggest issue and there is rising competition between European companies in Central & Eastern Europe.

  • Overall “European political and social conditions” was rated as the main operational challenge at 47.9%, increasing by 12.9 pp from last year’s 4th place. This could indicate increasing political uncertainty such as rising populism and EU scepticism as well as growing concerns about the impact on consumption and decreasing tourism, caused by terrorism and migration crisis. In the non-manufacturing category it was even higher at 50.2% (+13.1pp). (Fig.16)
  • "Exchange rate fluctuations" rose from 5th place to 2nd place, increasing by 13.5 pp to 47.8%. Showing that the UK’s withdrawal from the EU seems to have had a big influence. Especially in the manufacturing industry, who responded that it was the biggest challenge at 51.4%, (+12.2 pp). “Securing Human Resources” was also the same rate as “Exchange rate fluctuations” 47.8%(+4.4pp). (Fig.16)
  • Looking at UK based companies, this year the two highest responses are “Exchange rate fluctuations” increasing by 18.1pp to 59.8% and “European political and social conditions” increasing by 19.9pp to 55.0 %. Although “Economic recession and shrinking markets” had had a low response since 2013, in 2016 it suddenly increased by 16.3 pp to 5th place at 39.5%, showing possible concern about the economic impact of the UK's withdrawal from the EU has strengthened. (Fig.19)
  • In Particular, Central & Eastern European Non-Manufacturing firms cited “Entry of new competitors” as an operational challenge (32.4% in Europe, 39.6% Central & Eastern European non-manufacturing sector, see Fig. 16&18). When asked the specific nationalities of these new competitors, the top answer was “Chinese companies” at 57.1% (+ 1.3 pp last year), followed by “European companies” at 44.5% (+4.5pp) and “S. Korean companies” at 21.0%(-1.6pp). In Central & Eastern Europe, the largest response by far was “European companies” at 76.3%. (Fig.21)

3. Business Outlook for the next 1 or 2 years & Future Promising Sales Destinations

Brexit’s Impact is still limited towards business outlook and Germany is emerging as the most promising future sales destination

  • Business outlook for the next 1-2 years, 50.6% of respondents answered “Expansion”, 45.4% chose “Remain the same”, 3.3% “Reduction” and only 0.7% responded “Relocate to a third country or withdrawal from present country.” Central & Eastern European manufacturing sector responded “Expansion”, increasing by 15.1pp to 71.4% (56.3% in 2015). By country, Poland had the highest response rate for “Expansion” at 80.6% and Greece was the lowest at 14.3%. UK again was the 2nd lowest after Greece. (Fig.24, 25)
  • The data shows UK’s vote to leave the EU has not yet seemed to have had much effect on the business outlook for the next 1 or 2 years. Particularly if compared to the 2009 survey results after the 2008 financial crisis, the manufacturing sectors response seems also not have been too affected. Looking at the response rate for “Function of regional headquarters” by country, this year the UK ranked 6th place at 8.7% falling from last year's 2nd place at 18.6%. The UK’s vote to leave the EU seems to have started to impact Japanese-affiliated companies regional headquarter strategy (Fig.26, 27, 28, 33-1, 33-2)
  • For future promising sales destinations, this year Germany became first place and Turkey fell to 2nd place. Now that economic sanctions have been lifted, Iran suddenly rose to 10th place from last year's 19th place. Possibly due to the UK’s vote to leave the EU, the UK fell from last year's 8th place to outside of the top 10. (Fig.36)

4. Brexit Response

Many companies are contemplating how to deal with regulation or legislation changes and exchange rate fluctuation.

  • When UK-based companies were asked what factors would they take into consideration after the UK voted to leave the EU, manufacturing companies responded that “Planning risk management on effects of exchange rate fluctuation” was the biggest factor at 64.0%. Non-manufacturing replied theirs would be “Considering how to correspond to regulation or legislation changes” at 53.9%. Manufacturing’s priorities were “Reviewing supply chain” (36%), “Reviewing logistic routes” (23.7%) and “Reviewing product and service prices” (22.8%). Some companies made comments such as “considering to relocate somewhere in the EU” and “looking into shifting the overseas headquarters elsewhere” (Fig.40)
  • Looking at Companies based in the other EU countries excluding UK, manufacturing’s biggest response was they “Don’t Know” yet what factors should be considered at 41.6%. For non-manufacturing the largest response was “planning risk management on effects of exchange rate fluctuation” at 31.8%, however there is a difference in response ratio compared to UK-based non-manufacturing companies. (Fig.40)
  • UK-based manufacturing companies 10.5% said they were considering to decrease production. Looking at “Expanding sales” UK-based companies (7.9%) had a slightly larger response rate to other EU based companies (6.3%). (Fig.40)

5. EPA/FTA Advantages & Local Procurement

Companies anticipate that the EU-Japan EPA will improve price competitiveness in Europe by abolishing and reducing tariffs.

  • Looking at the impacts of Economic Partnership Agreements (EPA) and Free Trade Agreements (FTA) currently being negotiated by the EU, overall 37.8% responded that the EU-Japan agreement would have “major advantages” (+2.9pp since last year). This obtained the largest percentage compared to other EPA/FTAs. Especially in the case of Central & Eastern Europe based companies whose response rate for “major advantages” reached 46.3%, and in the manufacturing sector alone as high as 54.8%. There were many responses citing "improvement of price competitiveness" as a reason for the major advantage. (Fig.42)
  • When examining suppliers of parts and raw materials for EU based companies from all sectors, the supply percentage for “local” parts and materials is 29.3% (-0.4pp) and “Europe excluding local” is 22.5% (+3.3pp), these two ratios combined exceeds 50% (51.8%). When focusing suppliers parts and raw materials for EU based manufacturing companies, the percentage for two ratios combined “local” with “Europe excluding local” reaches 53.1%. (Fig.44, 45)
  • Looking at the breakdown of local suppliers for the manufacturing industry, the highest percentage of suppliers for EU-based companies is local at 73.0%. 13.8% were other foreign-affiliated companies and Japanese-affiliated companies were 13.2%. The ratio of local suppliers in Western Europe (excl. Switzerland) is 77.1%, this is much higher compared to Central & Eastern Europe at 48.2% showing that there are more local suppliers available in Western Europe. (Fig. 46)

*Totals of composition ratios for tables in this document do not always amount to 100%, as each figure is rounded.

Susumu Tanaka, Jun Washizawa, Kaoru Fukaya
Europe, Russia and CIS Division
Tel: (03) 3582-5569　E-mail:ORD@jetro.go.jp