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FY2019 JETRO Survey on Business Conditions for Japanese Companies in U.S. (38th annual survey)

Feb 28, 2020

Business Sentiment among Japanese Companies in U.S. Was Negative, Percentage of Profitable Companies Fell to 60th Percentile Range

JETRO has conducted a survey on the state of Japanese manufacturers (producers and sellers) operating in U.S. The results are summarized below, with corresponding page numbers from the attachment included.

Method Distribution of a questionnaire
Dates From October 23, 2019 to November 27, 2019
Scope Japanese manufacturers operating in U.S.
670 responses received from 1,258 surveys sent (response rate of 53.3%)
Topics
  1. Sales performance,
  2. Future business direction,
  3. Supply chains,
  4. Management challenges,
  5. Trump administration policies,
  6. Changes in the trade environment

Key Points Regarding the Survey Results

  1. The percentage of profitable Japanese companies in U.S. fell below 70% for the first time in eight years, with the DI indicating business sentiment in the negative range for the first time in a decade. The percentage of profitable companies fell in nearly all industries, with many companies identifying a “sales decrease in local markets” as the leading factor. In particular, decreased sales in the field of transportation equipment parts (motor vehicles, motorcycles) had a major impact. Increased labor costs and other costs were also cited as main factors.
  2. With regard to management challenges leading to the rising costs, recruiting workers and labor costs were the top responses given. With the U.S. unemployment rate held at its lowest level in nearly 50 years, labor shortages have become a prominent issue for Japanese companies, and they are making efforts to secure personnel by raising wages, enhancing company benefits and providing training programs.
  3. This is our first survey in which we asked respondents about their company benefits (e.g. medical insurance) and wages. The results showed that 96% of the respondents provided medical insurance, 89% provided dental insurance and 80% provided 401(k) plans for their employees. The median value for monthly base salaries was $3,000 for factory operators.
  4. The U.S.-China trade war and other changes in the trade environment have had negative effects on 40% of the companies surveyed. In particular, procurement and import costs have been significantly affected, and some 40% of companies affected have changed procurement sources. The changes from China to the U.S., Japan, Thailand, Vietnam, and Mexico are noticeable.

Note 1: The totals in the surveys in this report may not be 100 because the numbers are rounded off to the first decimal point.

Note 2: The rates are calculated based on the numbers of answers collected.

*The attached document: “FY2019 JETRO Survey on Business Conditions for Japanese Companies in U.S. (38th annual survey)PDFファイル(2.3MB)

Summary of Survey Results

JETRO had conducted a survey questionnaire of approximately 700 Japanese companies operating in U.S. (manufacturers only) in October to November 2019, with the results showing that the percentage of profitable companies fell below 70% for the first time in eight years. The leading factor behind the deterioration was “sales decrease in local markets,” while “increase of labor costs” and “increase of procurement costs” were also cited as main factors. Labor shortages continue to be a challenge for Japanese companies in U.S., and these companies are making efforts to secure personnel by raising wages, enhancing company benefits and other methods. In addition, the trade war and other changes in the trade environment have had negative effects on 40% of the companies surveyed. The effects have been especially significant on their import and procurement costs, and 40% of the companies which were being affected in some manner reported that they were engaged in changing their procurement sources.

1. Percentage of Profitable Japanese Companies Active in U.S. and Their Business Sentiment DI

The percentage of profitable Japanese companies active in U.S. fell below 70% for the first time in eight years since the FY2011 survey. Meanwhile, the DI indicating business sentiment was at -4.6 points, falling into the negative range for the first time in 10 years since the FY2009 survey.

  • The percentage of companies that responded with expectations of positive operating profits for 2019 (profitability ratio) was 66.1%, reflecting a drop of 8.4 points from last year’s survey (74.5%) (p.9). This marked the first time that the profitability ratio fell under 70% in eight years since the FY2011 survey (67.5%). The DI indicating business sentiment (obtained by subtracting the percentage of companies expecting a “decrease” in operating profits vs. the year before from the percentage of those expecting an “increase”) also deteriorated significantly, falling over 20 points from last year’s figure of 17.2 to -4.6 (p.10).
  • Even when viewed by industry, the profitability ratio was lower than in last year’s survey for nearly all industry types. In particular, transportation equipment parts (motor vehicles, motorcycles) - which account for slightly less than 20% of the respondents - came in a 52.3%, reflecting a fourth straight year of decline (83.6→82.5→70.4→64.8→52.3%).

    Figure1. Trends in Percentage of Profitable Japanese Companies Active in U.S. and Their Business Sentiment DI (2007-2020)

    Figure 1 shows trends in percentage of profitable japanese companies active in the U.S. and their business sentiment DI from 2007 to 2020. Regarding expectations of positive operating profits, the persentage of profitable companies has remained above 70% since the FY2011 survey, but for 2019, it was 66.1%, falling below 70% for the first time in eight years. The DI indicating business sentiment also deteriorated significantly, falling over 20 points from last year’s figure of 17.2 to -4.6.

    Source: JETRO

  • When the respondents were asked to single out one factor behind the deterioration in operating profits, the top response was “sales decrease in local market” (51.9%), far outstripping the number-two response, which was “negative effects of trade restrictive measures by governments (e.g. raising of tariffs)” (8.5%). In particular, 60% of respondents in the transportation equipment parts (motor vehicles, motorcycles) sector now gave “sales decrease in local markets” as a main reason. The rising popularity of SUVs in U.S. automobile market has led to lower sales and manufacturing of basic passenger vehicles (sedans), and this development is thought to be translating into lower profits for Japanese parts manufacturers who mainly focus on components for sedans.
  • Meanwhile, when respondents were asked to provide multiple reasons for their decreasing operating profits, the top response was “sales decrease in local markets” (71.5%), followed by “increase of labor costs” (38.7%) and “increase of procurement costs” (30.6%) as the main cost factors cited by many companies.

2. Factors for Increased Costs

Recruiting workers, labor costs etc. remain persistent challenges.

  • When asked about the management challenges leading to the rising costs, 68.8% of respondents said “recruiting workers,” making this the leading factor again after last year (69.0%), followed by “labor costs (salaries/bonuses)” at 64.6% (65.6% last year) and then “retention” at 49.8% (46.3% last year) (p.24).

    Figure2. Management Challenges: Factors for Increased Costs (Multiple Answers)

    Figure 2 shows management challenges (factors for increased costs). “Recruiting workers” was the top factor at 68.8%, followed by “labor costs (salaries/bonuses)” at 64.6%, “Retention of workers” at 49.8%, “Healthcare costs” at 49.8%, “Increase of tariff rate (Trade-restrictive measures)” at 37.7%, “Raw material, natural resource and/or commodity prices” at 31.9%, “Transportation costs (including gasoline price)” at 23.8%, “Cost of dispatching Japanese expats (such as setting up living conditions)” at 20.6%, “Foreign exchange risks (yen/U.S. dollar)” at 17.1%,“Travel expenses (including airfare)” at 10.0%, “Financing costs” at 7.6%, “Related regulations” at 4.5% and other at 3.3%.

    # of respondents: 642

    Source: JETRO

  • U.S. unemployment rate held at its lowest level in nearly 50 years (Dec. 2019: 3.5%), and for Japanese companies in U.S., labor shortages have become a prominent issue. When questioned about this, respondents voiced concerns about “being unable to secure staff in all positions” (miscellaneous manufacturing industries), “particularly struggling to secure engineers” (chemical and allied products/petroleum products), “the image of the manufacturing industry declining overall, and younger generations not finding it appealing” (electrical machinery, electronic devices) etc., and so hiring conditions remain difficult regardless of industry type.
  • When respondents were asked about their countermeasures for these challenges, their top answers included “reducing expenses other than payroll” (49.0%), “enhancing internal communications” (42.5%), “improving the working environment” (e.g. enhancing benefits) (38.7%), and “increasing wages” (37.7%) (p.25). The responses gave a distinct indication that these companies are looking to cut expenses besides personnel costs while also making efforts to secure personnel by enhancing company benefits, raising wages, and improving communication with their workers.
  • Respondents expressed that they were making efforts with regard to working conditions, e.g. by “raising wages in consideration of average wages in surrounding areas,” “establishing higher-than-average benefits such as healthcare,” and “introducing an opportunity announcement system for internal posts, and giving motivated workers opportunities for raises."
  • Many companies are introducing internal and external training systems, and a number also said that they were partnering with local community colleges to implement engineer training programs and job fairs and making other efforts in cooperation with neighboring communities. JETRO has also been involved in networking among local universities/support organizations and Japanese companies, as well as events for matching Japanese companies with students, in efforts to improve the hiring prospects for these companies. In FY2019, JETRO also conducted events in Illinois and Kentucky to match colleges and students and local government support agencies etc. together with Japanese companies.

3. Company Benefits, Wages

This is our first survey that looks at the kinds of benefits companies provide and their wages. Many companies offer medical insurance, dental insurance, and 401(k) plans (defined-contribution pension plans). The median wages (monthly base salary) ranged from $3,000 to $6,683.

  • In this year’s survey, we asked for the first time what kinds of benefits Japanese companies in U.S. are providing their employees. The top responses were “medical insurance” (96.2%), “dental insurance” (88.6%), “401(k) plans (defined-contribution pension plan)” (79.8%), and “vision insurance” (74.5%), with the results making it clear that many companies offer such benefits (p.26).

    Figure3 Company Benefits for Local Employees (Non-salary, Multiple answers)

    Figure 3 shows company benefits for local employees (non-salary). The top responses were “medical insurance” (96.2%), “dental insurance” (88.6%), “401(k) plans (defined-contribution pension plan)” (79.8%), and “vision insurance” (74.5%).

    # of respondents: 639

    Source: JETRO

  • We also asked about wages for the first time in this year’s survey. The median values for base salary (monthly) by occupation in 2019 are as shown in the graph at the bottom right (p.27).

    Figure 4 Wages (Monthly Base Salaries): Median Values

    Figure 4 shows the median values for base monthly salaries by occupation. 
The pay for production managers was $6,683; general administration section chiefs, $6,275; mechanical engineers, $5,100; general clerks, $3,750; and operators, $3,000.

    Note: Companies whose business activities consist of “Manufacturing” (“Manufacturing” or “Manufacturing and sales”) responded with regard to the following occupations: operators (job types engaged in machine operation in the manufacturing process), mechanical engineers (technical positions for designing, manufacturing and managing machines and equipment), production managers (section chiefs of production management departments), general clerks (general office workers), and general administration section chiefs (section chefs of general affairs departments). Those engaged in “Sales” responded about the occupations of general clerks and general administration section chiefs.

    Source: JETRO

4. Effects of the US-China Trade War and Other Changes in the Trade Environment

  1. Some 40% of companies said they have been negatively affected by changes in the trade environment. The effects on their procurement and import costs have been especially significant. The specific policies having the greatest impact were said to be “additional tariffs imposed on Chinese products based on Section 301 of the U.S. Trade Act” (52.3%) and “additional tariffs of U.S imposed on steel and aluminum (Section 232 of the Trade Expansion Act in 1962)” (42.4%).
  2. In terms of responses, some 40% of companies experiencing these effects have changed their procurement sources. That said, nearly half of these companies have kept the scale of these procurement changes to under 10%, meaning that they have not changed all of their procurement sources. Meanwhile, 10% or less of those respondents said the duration of these procurement source transitions would be “temporary,” while 70% said these were “mid to long-term.” Given that changing procurement sources requires a certain period of time and effort, some respondents stated that “once we have changed procurement sources, we will not switch back even if the additional tariffs are eliminated.”
  3. When we look at the changes in procurement sources, the main procurement sources before such changes were in China, Japan, and U.S. After the changes, the top locations other than U.S. and Japan are Southeast Asian countries (e.g. Thailand and Vietnam) and Mexico. Meanwhile, the respondents pointed out certain challenges with their new procurement sources, stating for instance that in U.S., the shortage of suppliers and engineers makes it difficult to procure similar parts to those from China, while in Southeast Asia, their costs went up after the transition due to a lack of dock and harbor etc. infrastructure.
  • In terms of the impact felt at present from the changes in the trade environment, 40.8% of respondents (252 companies) reported experiencing “negative effects” (p.40). The main area where these effects are being felt was said to be “procurement and import costs” for as much as 80% of respondents.

    Figure5 Current Impact Due to Changes in Trade Environment

    Figure 5 shows current impact due to changes in the trade environment on Japanese companies in the U.S. by occupation. In terms of all industries, 40.8% of companies answered “negative impact,” 9.7% answered “both positive and negative impact,” 2.1% answered “positive impact,” 21.0% answered “no impact,” and 26.4% answered “not sure.”

    Note 1: Only industries for which at least 10 companies gave valid responses are listed.
    Note 2: The numerals in parentheses indicate the number of respondents.

    Source: JETRO

  • When asked which specific policies were having a negative impact on their business, 52.3% of respondents (127) cited “additional tariffs imposed on Chinese products based on Section 301 of U.S. Trade Act” (against Chinese imports), while 42.4% of respondents (103 companies) answered “additional tariffs of U.S. imposed on steel and aluminum” (steel and aluminum tariffs) (p.41). Moreover, when this is viewed by industry, the companies who cited the additional tariffs on Chinese goods referred most often to electrical machinery, electronic devices (28 companies), transportation equipment parts (motor vehicles, motorcycles) (25 companies), chemical and allied products/petroleum products (8 companies), while with regard to the steel and aluminum tariffs, most respondents named transportation equipment parts (motor vehicles, motorcycles) (34 companies), iron and steel (8 companies), and electrical machinery, electronic devices (7 companies).
  • In terms of responses, 38.6% of companies (129 companies) - i.e. nearly 40% - said they had “changed procurement sources” (p.42). Among these, 55.2% (69 companies) said they had already begun making such transitions. Regarding the scale of these changes in procurement sources, 47.9% (58 companies) said they had changed sources for “1% to less than 10%” of goods.

    Figure 6 Change of Procurement Sources

    Figure 6 shows change of procurement sources in response to changes in the trade environment by industry. In terms of all industries, 38.6% of companies said “changed procurement sources,” 41.9% said “no,” and 19.5% said “not sure.”

    Note 1: Only industries for which at least 10 companies gave valid responses are listed.
    Note 2: The numerals in parentheses indicate the number of respondents.

    Source: JETRO

  • As many as 68.5% of respondents (85 companies) said the duration of their procurement source changes would be “mid to long-term.” Multiple respondents answered that in changing procurement sources, a certain amount of time was required before a decision was reached, for instance to get customer approval, to comply with various regulations, or to get permits and approvals. In addition, some respondents commented that given other factors such as the sharp rise in personnel costs in China, once they had changed procurement sources, they would not be reverting back even if the additional tariffs were to be eliminated.
  • Looking specifically at where goods are being sourced, whereas main procurement sources before the change were China for 108 companies (84.4%), Japan for 37 companies (28.8%), and U.S. for 28 companies (21.9%), now only 12 companies (9.4%) procure from China, while 53 companies (41.7%) procure from U.S., 45 companies (35.4%) procure from Japan, 31 companies (24.4%) procure from Thailand, 27 companies (21.3%) procure from Vietnam, and 22 companies (17.3%) procure from Mexico (p.43).
  • Meanwhile, some respondents mentioned the challenges they are having with the procurement sources they changed to. Companies who have started switching to U.S. procurement sources said that “U.S. isn’t as strong in manual manufacturing, and it has a shortage of engineers. Some also answered that it is “difficult to procure the same kinds of parts as those from China” (rubber products), or that they “cannot find available U.S. suppliers, and uncertainties about the future of U.S.-China relations are making suppliers reluctant to expand their manufacturing capacities” (transportation equipment parts (motor vehicles, motorcycles)). Also, companies that have switched to Southeast Asian procurement sources indicated that “with the prices of Chinese goods being massively lower, our costs savings effect from changing procurement sources has been limited” (miscellaneous manufacturing industries), and “once we transitioned to Southeast Asia, the lack of infrastructure/ports and harbors has meant higher-than-expected transportation costs” (electrical machinery, electronic devices).
  • Regarding the impact from these trade environment changes on operating profit forecasts, 43.7% of respondents (269 companies) said there were “no changes” in 2019, while 31.0% (191 companies) said they were “not sure” and 20.6% (127 companies) said their forecasts had “decreased” (p.46).

Other Salient Trends

  1. U.S.-Mexico-Canada Agreement (USMCA) Having Negative Impact on 24% of Respondents in Transportation Equipment (motor vehicles, motorcycles)
    • Regarding the comprehensive effects of U.S.-Mexico-Canada Agreement (USMCA) that has replaced the North American Free Trade Agreement (NAFTA), 57.4% of respondents stated there has been “no impact”, while 30.7% said they were “not sure,” and a mere 3.9% (25 companies) answered that the deal has had “negative effects” (p.35). However, when viewed by industry, the survey showed that 23.5% of companies in the field of transportation equipment (motor vehicles, motorcycles) were seeing negative effects, and more respondents in this area gave this response compared to other industries.
    • As the main factors having an impact on company management, 46.8% of respondents (65 companies) cited “exclusion from Section 232 measures of the Trade Expansion Act with respect to passenger vehicle and light truck and automotive parts if U.S. imposes such measures,” while 38.1% (53 companies) named the “requirement to purchase 70% North American steel and aluminum,” and 37.4% (52 companies) said “review of Product Specific Rules (PSR).”
    • In terms of measures for dealing with the USMCA, 42.4% of respondents said “no change,” yet among those who intended to take measures , “change some or all of procurement sources” was the most common response at 12.2%, followed by “adjust sales prices” (11.2%), “transfer some or all production to U.S.” (8.3%) and “transfer some or all production sites from U.S. to other places” (6.8%) (p.36). As for the change of procurement sources, seven companies were considering shifting to Mexico, while five were looking at switching to U.S. In addition, 11 companies said they were looking into changing their production sites from Japan or Mexico etc. to U.S., whereas five respondents were thinking of switching from U.S. to Mexico.
  2. [Comparison of Three Countries’ Surveys] Japanese Companies Seeing Different Effects from USMCA in U.S., Mexico, and Canada
    • Separate surveys were conducted for Japanese companies doing business in Mexico and Canada on the USMCA’s impact. A comparison of the survey results for all three countries revealed that for the manufacturing industry overall, 24.5% of companies were seeing negative effects in Mexico, whereas this was true of only 4.6% of companies in Canada and 4.3% of those in U.S. (p.37). Meanwhile, in the field of Transportation equipment (motor vehicles, motorcycles), 23.1% of companies in U.S. saw negative effects, which was more than in the other two countries, while in Transportation equipment parts (motor vehicles, motorcycles), this was true for 36.8% of companies in Mexico, a higher percentage than in Canada and U.S.

      Figure7 Degree of Impact from the Enactment of USMCA (U.S., Mexico, Canada)

      Figure 7 shows degree of impact from the enactment of USMCA in the U.S., Mexico and Canada. Throughout the manufacturing industry, 24.5% of companies were seeing negative effects in Mexico, whereas this was ture of only 4.6% of companies in Canada and 4.3% of those in the U.S.

      Note: From the manufacturing industry in U.S., companies engaged in “Manufacturing” were sampled.

      Source: JETRO

    • In a three-way comparison among the countries’ surveys of factors impacting business management, the percentage of respondents who cited “exclusion from section 232 measures of U.S. Trade Exemption Act with respect to passenger vehicle and light truck and automotive parts if U.S. imposes such measures” was the highest in U.S. (49.5%), while “meeting the labor value content rule” was the most cited factor in Mexico (37.9%).
    • Regarding measures for dealing with the USMCA among the three countries, 40-50% of companies in all three surveys said “no change” (p.38). When viewed by specific measures, the percentage of companies who said “change some or all procurement sources” was 14.4% in U.S. and 14.2% in Mexico. Of note in Mexico’s case was the high percentage of companies who were going to “transfer some or all production sites from other places to ours” at 14.8%, which was higher than the percentages in U.S. (10.5%) and Canada (8.7%). When viewed by industry, in the field of transportation equipment parts (motor vehicles, motorcycles), Mexico had the highest percentage of respondents who were set to “transfer some or all production sites from other locations to ours” at 29.8%, more than in the other two countries. On the other hand, in the field of transportation equipment (motor vehicles, motorcycles), U.S. percentage was the highest at 42.9%.
  3. Regarding Investment in U.S. and Dealing with Export Control Regulations, Majority of Respondents Said “No Impact” or “Not Sure”
    • With regard to the Foreign Investment Risk Review Modernization Act (FIRRMA) established in August 2018, as this act concerns new investments, 60% of companies responded “no impact” (p.39), while 40% replied “not sure.”
    • As for the impact on companies’ export control systems from the 2018 Export Control Reform Act (ECRA), 29.5% of respondents “take no particular measures regarding export controls,” and 17.9% said they “expect no change in their measures regarding export controls,” so about half looked to deal with the effects under their existing systems. However, over 50% said they were “not sure.”
    • In both the FIRRMA and ECRA questionnaire, “not sure” accounted for 40-50% of responses, one reason for which could be that the “emerging and foundational technologies” that will be subject to investment screenings and export controls have not yet been announced, and therefore it is unclear what will specifically fall under the scope of the screenings/controls.
  4. Stricter Foreigner Work Visa Screenings Making Circumstances “More Difficult,” Said 35% of Respondents

    Concerning the stricter procedures for foreigner work visa screenings, most respondents said “it has not changed” in their respective situations (64.8%) compared to before 2016 when the Trump administration took office. However, 26.0% said “it has become slightly more difficult,” while 9.1% said “it has become much more difficult,” meaning that at least 30% of the companies felt circumstances had become tougher (p.31). The most difficult visas to obtain now were said to be the “L-1 Visa (Intra-company Transferee)” (41.4%) and the “E-2 Visa (Treaty Investor)” (35.0%). In terms of countermeasures, the top answers were “consulting with local immigration lawyers” (43.7%), “review of staffing system (including increasing the number of American employees)” (37.6%), and “strengthening system for information gathering” (21.6%).

    Figure 8 Types of Visas That Have Become Harder to Obtain (Multiple Answers)

    Figure 8 shows types of visas that have become harder to obtain. “L-1 Visa (intra-company transferee)” was 41.4%; “E-2 Visa (treaty investor),” 35.0%; “H-1B Visa (specialty occupation),” 19.5%; “E-1 Visa (treaty trader),” 15.9%; “Immigrant Visa (Green Card),” 9.5%; “J-1 Visa (exchange visitor),” 7.7%; “B-1 Visa (temporary visitor for business),” 5.5%; and “other,” 0.5%.

    # of respondents: 220

    Source: JETRO

Mari Fujii, Takashi Nakamizo and Hiroyuki Kaino
Americas Division, Overseas Department, JETRO
Tel: +81-3-3582-5545