Results of JETRO’s 2016 Survey on Business Conditions of Japanese Firms in Latin America

Jan 23, 2017

Between October 11 and November 29, 2016 the Japan External Trade Organization (JETRO) conducted its 17th 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 358 firms (a 44% response rate) out of 814 to whom we sent questionnaires. The question items covered areas including:

Below is a summary of the results.

Across Latin America, the percentage of companies reporting their operating profits for 2016 to be a surplus is 61.5%, a five-point increase from a year earlier. However, the portion of companies indicating a deficit in Peru, Colombia, Chile and Brazil is increasing. Corporate performance varied throughout the region.
Meanwhile, the ratio of those experiencing improved operating profits from last year is 41.9% — almost the same as that of last year (41.8%) — on the back of a delay in economic recovery and unstable exchange rate.
Regarding the business outlook in the near future, Colombia and Argentina saw an increase in positive responses; the percentages of companies expecting their business to expand in the next one or two years rose from 57.1% to 75% and from 45.2% to 56.5% respectively.
For the first time this year, JETRO has included an item on whether initial investment has been recovered. Among companies tapping into Latin America since 2011, those in Mexico and Colombia have generally been recouping upfront investments sooner, while those in Brazil and Argentina have taken longer.

In the first half of 2016, Mexico's domestic demand bolstered its economic growth. In the second half of the year, however, internal demand affected by a weaker Mexican peso and following worsening inflation caused economic deceleration. Continuing depreciation in the local currency — on the back of speculation over the rise of US interest rates and the US Presidential election — is a factor that Japanese-affiliated companies are concerned about. Among investment environment risks or issues, the ratio of those concerned about an unstable exchange rate increased significantly from 43.7% to 63.4%, bringing this answer to first place from forth in the previous year.

The business environment in Argentina has been improving through economic reforms made by the administration of Mauricio Macri, which started in December 2015. Among issues on the financial, monetary and foreign exchange front, the ratio of those pointing out "restrictions on foreign remittance" drastically dropped from 96.8% the year earlier to 17.4%.
Other issues previously cited have also been reported as being improved, such as slow easing of regulations (down from 67.7% to 17.4%), and among issues in the trade system, high non-tariff barriers (down from 35.5% to 17.4%) and restrictions and taxes on export (down from 41.9% to 17.4%).
These improvements in the business environment are likely to encourage Japanese-affiliated companies to strengthen their local structures. The percentage of respondents expecting to transfer more Japanese employees was 21.7%, similarly high to Colombia (25%) and Mexico (23.2%).

Reflecting progress in the peace process between the Colombian government and the left-wing guerrilla force the Revolutionary Armed Forces of Colombia (FARC) — which was eventually ratified as a peace deal by the Colombian Congress on November 30, 2016 — among investment environment risks or issues, fears of both terrorism and crimes targeting foreign people and companies decreased from 33.3% last year to 20.8%.
The rate of companies expecting to expand their business in the next one or two years increased by 17.9 points to 75%.

Regarding the forecast for operating profits in 2016, the percentage of companies reporting a surplus increased by 8.2 points from 44.9% last year to 53.1%. However, reflecting a delay in Brazil's economic recovery, the ratio of respondents indicating a decline compared with the previous year is also as high as 44.8%. Of reasons for the decreased profits, decreased sales in local markets marked the highest ratio at 72.1% among Latin American countries.
Looking at reasons contributing to improved operating profits cited by respondents experiencing increased profits from last year, the percentage of "reduction of personnel costs" ranked first within the region. Companies have continued to endure hardship.
Regarding recovery of initial investment, Brazil showed different results than other countries. Among 14 companies tapping into the country since 2011, no companies reported that they have recovered their upfront investment. It is likely due to high business costs, collectively referred to as "Brazil cost," such as its complicated tax system, high transportation costs and careful protection of workers.