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Results of JETRO’s 2017 Survey on Business Conditions of Japanese-Affiliated Companies in Europe

Dec 04, 2017

Increasing expectations on Japan-EU EPA, while Economic Slump in the UK emerged as the biggest concern for Brexit

Between September 25th and October 23rd 2017, the Japan External Trade Organization (JETRO) conducted its latest survey on the business conditions of Japanese-affiliated companies in Europe. 952 valid responses were received (82.5% response rate) out of 1,154 to whom we sent questionnaires.

Survey Items:

  1. Operating Profit Forecasts and Future Prospects for Domestic Markets
  2. Operational Challenges
  3. Business Outlook for the next 1 or 2 years & Future Promising Sales Destinations
  4. Brexit Response
  5. Economic Partnership Agreements /Free Trade Agreement advantages & Local Procurement

Summary Points:

  • As the European economy recovers, the percentage of Japanese-affiliated companies in the EU reporting "Profit" has been increasing each year. However, the percentage companies based in the UK has only increased slightly, widening the gap between companies in the UK and other EU countries. For domestic market future prospects, over 30% of UK based companies responded "Slightly worse". "UK economy slowdown" ranked the top of concerns regarding Brexit for both UK and EU based Japanese-affiliated companies, followed by "Regulation or legislation changes in the UK". "Customs tariff" were also one of the key concerns for both UK and EU based companies.
  • In the scenario where the UK does not remain in the EU single market and customs union, if customs procedures were to be required for trade between UK and EU countries even with a zero percent tariff rate, about 60% of Japanese-affiliated UK based manufacturers responded that they would still need a transitional period of more than one year after the 31st of March 2017 withdrawal date. For UK based manufacturers, the average rate of local procurement is more than 20%, whereas the procurement from the EU is also nearly 20%, meaning if there were a necessity to bring in customs tariff, the companies would have to review their supply chain.
  • For Brexit contingency plans, out of 54 UK based companies who responded that they were currently reviewing or considering to review the location of their base, approximately 60% selected reviewing relocation of their Sales function. Furthermore 50% selected relocation of regional headquarter functions. Over 80% of companies responded that they were already preparing or considering to prepare to "Partly Relocate to another EU member state" and a little under 20% responded "Completely Relocate to another EU member state". The top 2 countries cited as potential places to relocate to were Germany (23 responses) and the Netherlands (6 responses).
  • 54.3% of all respondents said that the Japan-EU EPA would be a major advantage for their business, showing a substantial increase of 16.5 percentage points compared to the previous year, revealing increasing expectations on the final agreement. This was particularly seen for companies based in Central & Eastern Europe at approximately 70% responding that it is a major advantage for their business. Looking at companies most selected reasons for the Japan-EU being a major advantage, the most popular was "Tariff Reduction or Abolition for Imports from Japan" with a response rate of nearly 80%.
  • This year "Securing Human Resources" emerged as the biggest operational challenge of which more than 60% of all respondents were based in Germany, the UK, the Netherlands and Central Eastern & European countries, indicating that the tightening of their labour markets has pushed securing talent to become the biggest issue. Last year's biggest operational challenge "European social & political situation" remains the second due to the Catalonia independence issue and the uncertainty over the UK withdrawal negotiations from the EU.

1. Operating Profit Forecast and Current Domestic Market and Future Prospects

Operating Profits are steadily increasing Year by year, however the UK's forecast has slightly worsened causing concern.

  • Operating profit forecast trends over the last 6 years show that the percentage of Japanese-affiliated companies in Europe predicting that they will be profitable is continuously increasing each year. For the 2017 operating profit forecast, 75% of all respondents answered that they would be profitable. 13.4% estimated that they would break even and 11.5% at a loss. Although 71.6% of UK based companies estimated "profit", the response rate from all other EU countries was 76.6%, a difference of 5.0 percentage points showing a widening gap from last year's results of 3.1 percentage.(page.6, 7)
  • Although 48.2% of all respondents answered that their 2018 operating profit forecast expected to remain the same as 2017, 42.7% did expect to see a profit increase and only 9.1% predicted a decrease in profits. By Sector, the highest proportion of companies who answered "Increase" were the ‘Food/processed food, agricultural & fishery' at 66.7% (14 companies), and ‘Hotel/Travel/Restaurant' sector at 63.2% (12 companies). 15 companies (78.9%) of "Hotel/Travel/Restaurants" sectors estimated an increase in profit in 2017 compared to 2016 operating profit results, claiming that the reason for this increase was due to "Increase in tourism from Japan".(page.8,9)
  • The overall DI business sentiment for the 2017-2018 of UK based companies amounted to 23.9 percentage points, ranking second lowest from the bottom. Furthermore, compared to other countries, UK based companies gave an overwhelmingly high response that the British domestic market's future prospects had slightly worsened (33.5%), revealing companies growing concern over the economic slowdown as a consequence of Brexit. (page.11,13)

2. Operational Challenges

"Securing human resources" emerged as the biggest operational challenge, whereas for certain countries "European political and social conditions" remains the biggest operational challenge.

  • This year "Securing human resources" emerged as the biggest operational challenge at 51.7%, increasing by 3.9 pp from 2nd place the previous year. 65% of all respondents were based in Germany, the UK, the Netherlands and Central Eastern & European countries, indicating that the tightening of their labour markets has pushed securing talent to become the top issue. Furthermore when analysing the response rate by country, the highest for this issue was Hungary 85.7%, Denmark 83.3% and the Czech Republic 68.4%. Companies from these countries responded they intend "Strengthening technical training resources and increasing the number of skilled workers" in order to differentiate or add value to their products and services. Also companies in Denmark, Poland (69%) and the Czech Republic revealed that the "Increase" in number of local employees had been high over the past year. (page.15,19,23,24)
  • Even though last year's top operational challenge "European political and social conditions" (48.8%) also increased this year by 0.9%pp, it still did not achieve the same growth rate as "Securing human resources" for this year. In 2017 major European countries were dealing with political events such as elections, however some response rates for certain countries rose more sharply than others, slightly increasing the overall response rate for Europe. For example Spain had the highest response rate of 82.9%, due to the increasing tensions over the Catalonia Independence issue, followed by the UK at 64.7% due to the start of EU withdrawal negotiations. (page. 15,19)
  • Last year's second top operational challenge for all companies in Europe "Exchange rate fluctuations" (30.9%) has greatly reduced by 16.9pp. This was due to less currency fluctuation this year. Also the EU General Data Protection Regulation (GDPR) has become recognized as a new operational challenge ranking 9th place at 26.3%, due to take effect in May 2018. This has especially become a big problem for Belgium based companies. (page.15,20)
  • Central & Eastern Europe cited "Rapid labour costs growth" as the biggest challenge at 74.7%, increasing by 34.9 percentage points since the previous year. Since 2016 the nominal wage rate has increased by 3% for Bratislava, Warsaw and Prague. For Budapest and Bucharest it has increased between 7-9%. (page.17)

3. Business Outlook For Next 1 or 2 Years and Future Promising Sales Destinations

The number of UK based companies citing Expansion is slowly decreasing, Germany is the top promising sales destination

  • For the next 1-2 year business outlook across all sectors in Europe, 51.2% indicated "Expansion", 45.1% said that their outlook "Remained the same" and only 0.6% replied "Relocation to a third country or withdrawal from the present country". Looking at the break down by country, continuing the same trend as last year, more than 70% of respondents from both Italy and Poland indicated "Expansion". For the UK only 34.7% of respondents forecasted "Expansion", remaining in the same position as last year, the second lowest from the bottom. (page.25,26)
  • For all companies in Europe, the UK's vote to leave the EU has not yet seemed to have had much impact on their 1-2 year business outlook. The response rate for "Expansion" from UK based non-manufacturing companies has reduced. The number of UK based companies indicating "Reduction" has slightly risen since the previous year to 5.7%. Some companies gave reasons such as "Due to the impact of the UK's exit from the EU, plans to relocate to other EEA countries are now under consideration". (page. 26)
  • Looking at the countries where companies responded that they planned to expand their "Function of regional headquarters"; 8 UK Based companies responded that they planned to expand their "Function of regional headquarters", ranking the UK in 3rd place. However it can be seen that the number has more than halved compared to 2015 (19). Less than 10 companies have reported intentions to expand since 2016, when the UK voted to leave the European Union. These results suggest that the UK's decision to leave the EU has affected Japanese-affiliated companies decision making of where to expand their functions to regional headquarters. (page.31)
  • Continuing the same trend as the previous year, the number of companies selecting Turkey and Russia as promising sales destinations has continued to decline since 2014. Companies are continuing to choose Germany as the top sales destination, as well as Western Europe and Central & Eastern Europe. Over the years, trends can be seen where companies are re-examining their primary sales destinations due to impacts such the economic recovery in Europe, EU's economic sanctions against Russia and the political situation in Turkey. (page32)

4. Britain's Exit from the European Union

Impacts from changes such as "Exchange rate fluctuations" to "Custom Tariffs", "Changes in UK Regulations and Legislation"and "Economic slump in the UK"

  • When companies were asked how they expected the UK's exit from the EU to impact their future business, 28.2% of all respondents replied "No Impact", followed by 26.9% for "Negative Impact".Comparing the future business impact by sector to the impact seen so far, "No Impact" has greatly reduced by 37.9 pp, but the number of "Negative Impact" responses have increased by 12.8 pp. 46.9% of UK based businesses responded that the UK's exit from the EU would have a "Negative impact" on their future business, the highest response rate amongst all countries in Europe. The most given reasons for negative impact were: "Customs tariffs", "Securing Human Resources", "Changes to regulations and legislation" on top of "Exchange rate fluctuations" and "Increasing import prices due to cheapening of the pound" which were mentioned in previous survey. Whereas the most common responses for companies based in other EU states, were "Customs Duties", "Complex import/export procedures" and "Changes to EU and UK trading regulations". 5.7% UK companies said there had been a positive impact seen so far due to "Increasing exports due to cheapening of the pound". (page.35,36)
  • The top two concerns for both Japanese-affiliated companies in the UK and in other EU states are "Economic slump in the UK" and "Changes in UK regulations and legislation". The response rates for both choices were 20 points higher for UK based companies. Regarding future changes to UK regulation and legislation, both companies based in the UK and other EU states expressed "Customs Tariffs" as their main concern. UK based companies were more concerned regarding complying to the future EU General Personal Data Regulation (GDPR) 17.8pp higher than other EU companies. (page.37,38)
  • For Companies who responded that they were currently reviewing or considering to review the Location of their base,the largest percentage was UK based companies who selected reviewing relocation of their Sales function at 57.4%, followed by regional headquarter function at 48.1% and manufacturing function at 20.4%. Over 80% of companies from both the UK and other EU member states responded that they were already preparing or considering to prepare to "Partly Relocate to another EU Member State". Less than 20 % of them selected "Completely Relocate to another EU Member State" When companies were asked the name of the country that they were potentially considering to relocate to; amongst UK based companies, the two most mentioned candidate countries were Germany (23 companies) and the Netherlands (6). Other candidates named were Ireland (2), France (2), Italy (2), and Belgium (2). (page.40)
  • Concerning necessary actions or preparation for if the UK does not remain in the EU single market or Customs Union, Both UK and EU based companies gave the highest response that no special preparation or response would be necessary respectively at 31.9% and 43.1%. "Deal with new custom clearance procedures even if the tariff rate is 0%" followed second. (page.42)
  • Companies were asked if the UK does not stay in the EU single market or customs union, how long would the transition period need to be? For dealing with "new customs clearance procedures, including cases where there are 0% tariffs", both UK and other EU based companies gave a significant response that these issues could potentially be resolved by the withdrawal date, respectively at 50% and 73.9%.For "reviewing supply chains", UK based companies responded that a transition period of at least 2 years would be necessary in the scenario where "tariffs are imposed" was higher than compared to the scenario where "customs procedures occur even if tariffs are 0%".Concerning compliance with new UK standards and certification, a large number UK based non-manufacturing companies replied that at least a year would be necessary after the withdrawal date. This same trend was also confirmed for EUbased manufacturing companies. (page.43,44,45)

5. EPA/FTA Advantages and Local Procurement

More than half expect the major advantages of Japan EU EPA, and about 20% of UK based Japanese-affiliated manufacturing companies procure from the EU

  • The largest number of respondents for utilizing future FTA/EPAs said they will use the Japan-EU EPA once it has been concluded. 400 companies responded that they were considering or planning to use the Japan-EU EPA for export and Import, increasing by 107 companies from the previous year. Especially Central and Eastern European based non-manufacturing companies cited it as a major advantage with a response rate of 77.3%. According to 303 companies the most popular reason for the Japan-EU EPA being a major advantage "Tariff Reduction/Abolition for Imports from Japan" with a response rate of 78.5%. (page.48,49,51)
  • After the UK has withdrawn from the EU, 14.3% of all companies from Europe as a whole cited that the future possibility of the Japan-UK EPA would be a major advantage. Even when narrowed down to UK based companies 26.7% said it would be a major advantage, which was a much lower proportion compared to their response rate for the Japan-EU EPA at 45.1%. These results indicate that even for UK based companies the benefits of the Japan-EU EPA currently is a higher priority than a future Japan-UK EPA. (page.48)
  • For each company's response the average procurement percentage was calculated based on the purchasing value. Looking at the EU as a whole, the average procurement rate for "Local" (in other words domestic market) was an average of 29.6%, For "EU excluding local" the average procurement rate was 21.3%. For "Europe excluding EU and Local" the average procurement rate was 1.4%. Therefore the overall average procurement rate for Europe totaled at 52.3%, breaking over 50% whereas Japan's average procurement rate reached over 30% at 31.2%. (page.52,53)
  • For companies based in the UK manufacturing industry, whilst the average procurement rate was 25.2%, for "EU excluding local" it was 18.4%. This creates concern about the impact of customs duties imposed on business between the UK and EU, after the UK withdraws from the EU. (page.52)

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