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Results of JETRO’s 2016 Survey on Business Conditions of Japanese Companies in the U.S. and Canada

Japanese-affiliated companies in the United States promote local production for local consumption, having limited deals with NAFTA partner countries

Jan 16, 2017

From September 15 to October 28, 2016, the Japan External Trade Organization (JETRO) conducted its latest survey on the current status of management among Japanese-affiliated companies in the U.S. and Canada. The results of this survey are presented as follows.
*Only manufacturing companies were surveyed in the U.S., while both manufacturing and non-manufacturing companies were surveyed in Canada.

  • Survey method/period: Questionnaire survey from September 15 to October 28, 2016
  • Questionnaire sent to:
    • 1,027 Japanese companies in the U.S. (manufacturing only), 706 respondents (68.7% response rate)
    • 189 Japanese companies in Canada (manufacturing/non-manufacturing), 143 respondents (75.7% response rate)
  • Topics: (1) Business performance, (2) Direction of future business expansion, (3) Responses to changing business environment

Highlights of survey on business conditions of Japanese companies in the U.S.

  • 77.5% of the companies forecast an operating profit. This is the fifth consecutive year in which it was over 70%.
  • A majority of procurement and sales are in the U.S., at average ratios of 57.2% and 81.5% respectively. 27.2% of Japanese companies in the U.S. utilize NAFTA, but procurement from and sales to NAFTA partners (Canada and Mexico) are limited at average ratios of 2.7% and 8.5% respectively.
  • While a majority of the companies suffer a negative impact from exchange rate fluctuations, the impact from lower crude oil prices is evenly divided between positive and negative.
  • The IT/cloud/mobile field takes the lead for the first time as the market considered most likely to grow in the next two to three years, at 51.5%. This reflects companies’ interest in development of IoT technology in the U..S.

Highlights of survey on business conditions of Japanese companies in Canada

  • 72.3% of the companies forecast an operating profit. This is the fifth consecutive year in which it was over 70%.
  • Procurement and sales in Canada are at average ratios of 42.5% and 67.1% respectively. 41.3% of Japanese companies in Canada utilize NAFTA, and procurement from and sales to NAFTA partners (United States and Mexico) are at average ratios of 27.9% and 14.2% respectively.

Detailed results of survey on business conditions of Japanese companies in the U.S.

1. Operating profit forecast: 77.5% of companies forecast a profit, maintaining high level
  • 77.5% of Japanese companies in the U.S. forecast an operating profit for 2016. This is slightly lower than the result of 81.4% in the previous year, but performance is still strong. The percentage of companies forecasting an operating profit has exceeded 70% for the fifth consecutive year since 2012. The percentage of profitable companies is particularly high in the "parts for transportation machines" and "machinery" industries, and the Midwest region where many of these companies are located maintains an 80% ratio of profitability. (Materials - Page 3)
  • Business confidence (calculated by subtracting the ratio of the companies who predict a decreased operating profit compared to the previous year from those predicting an increase) dropped by 9.8% from the previous year. The ratio of replies anticipating increased operating profit for 2016 dropped by 6.5 points, and the ratio of replies anticipating decreased operating profit rose by 3.3 points. (Materials – Page 4)
  • 53.4% of the respondents plan to expand their business in the next year or two, which was down 3.3 points from the previous year. Major functions for expansion include strengthening sales and production (high value added products). By industry, high ratios of companies are expected to expand in the "chemical and oil products," "processed food, agricultural or fishery products" among others. (Materials – Page 5)
  • The ratio of respondents indicating increased local employment in the past year and plans to increase employment in the future remains over 40%, while respondents in general answered that their number of Japanese expat employees will stay the same. (Materials – Page 6)
2. Procurement, production, sales: Trend toward strengthening local production for local consumption in U.S.
  • The average ratio of Procurement of raw materials and parts from within the U.S. is 57.2% (Japanese affiliates in the U.S.: 18.6%; U.S. domestic companies: 36.5%; other foreign affiliates: 2.1%). The average ratio of procurement from Japan is the second highest at 27.3%. Future plans for expanding procurement sources are most focused on U.S. domestic companies (145) and Japanese affiliates in the U.S. (89), while 26.0% of the respondents plan to reduce procurement from Japan, which was up 6.7 points from the previous year. (Materials – Page 7)
  • The average ratio of U.S. production for the U.S. market is 70%, the same level as the previous year. The U.S. is the most commonly selected country for expanding future production for the U.S. market, given by 170 companies, followed by Mexico with 68 companies. Yet 25.8% of the respondents plan to reduce production in Japan, which was up 1.2 points from the previous year. (Materials – Page 8)
  • The U.S. market accounts for an average ratio of 81.5%, and the NAFTA market accounts for an average ratio of 90% of sales destinations of the products made at the U.S. facilities. 303 companies plan to expand sales in the U.S., while 189 companies plan to expand sales to Mexico. The "parts for transportation machines" and "chemical and oil products" industries in particular plan to expand sales routes to Mexico. (Materials – Page 9)
3. Utilizing FTAs: Nearly 30% of Japanese affiliates in the U.S. utilize NAFTA
  • 27.2% of the companies utilize NAFTA for either imports or exports. (Materials – Page 10) Aggregating these while excluding companies that do not export/import or did not answer, nearly 50% of the respondents utilize NAFTA to export to Mexico or Canada, and nearly 60% utilize NAFTA to import from these countries. Also, if an FTA is realized between Japan and the U.S., there is high expectation toward utilizing the FTA for exports and imports. (Materials – Page 11)
4. Causes of increasing costs/sales restraint: Rising wages and recruiting labor, as well as severe price competition, continue to pose challenges
  • The top three management challenges (causes of increasing costs) are increased labor costs, recruiting workers, and increased burden of healthcare. Rising wages continue to be the leading cause from last year, rising from 64.1% to 65.7%. Many respondents reply that liquidity of workers and upward pressure on wages have both risen due to the U.S. economic recovery. (Materials – Page 13)
  • Top management challenges (causes of sales restraint) are the same as in previous years, with "intensified price competition" and "popular products from competitors" taking the top two places. (Materials – Page 14)
5. Impact of exchange rates/crude oil prices: More than half of companies suffer negative impact from exchange rate fluctuations, while impact from lower crude oil prices evenly divided between positive and negative
  • 53.2% of the respondents suffer negative effects from exchange rate fluctuations as the Japanese yen gained in value against U.S. dollar until October 2016. Specific effects include "increased raw materials prices" and "exchange losses." Since the ratio of respondents using U.S. dollars for merchandise transactions reaches 90% and the ratio of respondents procuring materials from within the U.S. are also high, 30% of the respondents reply they are "not affected." (Materials – Page 15)
  • 23.8% of the respondents expect to be negatively affected by crude oil prices in 2016, which exceeds the percentage of those expecting to be positively affected (20.8%). The ratio of respondents expecting to be positively affected decreased by half from the previous year, when they were closer to half of all the respondents. Given the situation in which crude oil prices have remained at a low level in 2016 but have risen compared to the previous year, some industries have experienced both positive and negatives effects. (Materials – Page 16)
6. Interest in policies of the new administration: "Diplomacy" and "trade" rank high, chosen by around 60%
  • "Diplomacy" (455 companies), "trade" (416 companies), and "tax regime" (360 companies) claim the top three fields of interest regarding policies of the new administration. Looking at interest in diplomatic policies by country/region, Japan (378 companies), China (200 companies), and Mexico (169 companies) rank in top three. More than half of the respondents are concerned about diplomatic relations with Japan, which have a major direct impact on business. (Materials – Page 17)
  • Regarding specific areas of interest in trade policy, interest in the TPP is the highest (298 companies), followed by NAFTA (109 companies) and anti-dumping duties (AD) and countervailing duties (CVD) (104 companies). 165 companies show interest in infrastructure, with "ports" (73 companies), "railroads" (64 companies), and "highways" (48 companies) ranking in the top three. (Materials – Page 18)
7. Markets most likely to grow next: IT/cloud/mobile ranks the highest, nearly 80% of companies focus on South
  • "IT/cloud/mobile" was chosen by the most companies as the market most likely to grow in the next two to three years, at 51.5%. Although "medical" (46.9%) and "environment" (43.2%) both went down in rank, they continue to attract great interest as in the previous year. In addition, both "robotics/mechatronics" (17.1%) and "nanotechnology" (5.5%) rose in rank. (Materials – Page 19)
  • Nearly 80% of companies focus on the South as the region most likely to grow. The top three states are the same as the previous year, which are Texas (273 companies), California (175 companies), and Georgia (88 companies). In addition, Michigan rose from seventh to fifth place and Illinois dropped from 12th to sixth place compared to the previous year. (Materials – Page 20)

Detailed results of survey on business conditions of Japanese companies in Canada

1. Operating profit forecast: Although ratio of profitable companies decreased slightly, it remains at over 70%. Business confidence decreased due to impact of falling natural resource prices.
  • 72.3% of Japanese companies in Canada anticipate an operating profit in 2016. Although this was down from the ratio of 76.0% in the previous year, it has maintained the range of 70% for five years since the 2012 survey. Although respondents feel the effect of exchange rate and crude oil price fluctuations, few consider the economy itself to be getting worse. (Materials – Page 22)
  • Business confidence decreased by 5.2 points from the previous year. 41.1% of the respondents anticipate that operating profit will increase, which was down by 5.8 points from the previous year. Also, the ratio of those who anticipate decreased operating profits also dropped by 0.6 points from the previous year. The ratio of those who anticipate operating profits will stay the same rose by 6.3 points from the previous year. (Materials – Page 23)
  • 40.8% of the respondents plan to expand their business in the next one to two years, which was down 0.7 points from the previous year. By industry, the manufacturers planning to expand were up 2.2 points, but the ratio of non-manufacturing companies planning to expand went down 4.8 points from the previous year. (Materials – Page 24)
2. Procurement, sales: Increased procurement from within U.S. with same level of local procurement. Over 80% of sales destinations in NAFTA area.
  • The average procurement ratio from in Canada is 42.5% (Japanese affiliates in Canada: 9.0%; Canadian domestic firms: 31.4%; other foreign affiliates: 2.1%), but this was down 0.5 points from the previous year. The average procurement ratio from the U.S. is 26.6%, up 2.3 points from the previous year. The average procurement ratio from Mexico is 1.3%. (Materials – Page 26)
  • The average ratio of sales destinations of the products made at Canadian facilities are Canada at 67.1%, the U.S. at 13.5%, and Mexico at 0.7%, thus the average ratio of sales to NAFTA region overall accounts for over 80%. (Materials – Page 27)
3. FTA utilization: Over 40% of Japanese affiliates in Canada utilize NAFTA
  • 41.3% of the companies utilize NAFTA when importing from or exporting to the U.S. and Mexico. (Materials – Page 28) Aggregating these while excluding companies that do not import/export or did not answer, over 65% of the respondents utilize NAFTA, which exceeded the percentage from last year. Many companies show expectations for a free trade agreement with Japan, as well as the Comprehensive Economic and Trade Agreement signed with the EU in October 2016. (Materials – Page 29)
  • Regarding management challenges (causes of increasing cost), "Exchange risks with the U.S. dollar/Canada dollar" ranks the highest at 65.7%, followed by "increased labor costs (salary and bonuses) at 46.4%. (Materials – Page 31)
  • The percentages of respondents answering "positive" and "negative" are at the same level for the effect of exchange rate fluctuations until October 2016, when the trend of the weak Canadian dollar against the Japanese yen and U.S. dollar came to an end. At sales companies that import a high ratio of parts, many respondents anticipate negative effects from the exchange rate fluctuations. (Materials – Page 32)
  • 36.9% of the respondents anticipate negative effects from crude oil price fluctuations in 2016, while the ratio of respondents who anticipate positive effects decreased by 21.2 points from the last year. (Materials – Page 33)
  • "Diplomacy," "trade," and "tax regime" rank in the top three fields of interest regarding the policies of the new U.S. administration. In terms of "diplomacy", U.S. relations with Japan, Canada, and China rank in the top three. Some respondents are concerned that the business of Japanese companies in Canada will stagnate due to the enforcement of policies by the new U.S. administration that impact Canada. (Materials – Page 34)
  • "Environment," "medical," "health", and "IT/cloud/mobile" hold the same top three ranks as markets most likely to grow in the next two to three years. (Materials – Page 35)

Americas Division, Overseas Research Department
Mr. Akiyama, Mr. Nakamizo, Mr. Yabu
Tel: 03-3582-5545 Fax: 03-3587-2485