With the deadline for the U.K.’s withdrawal from the European Union fast approaching, the question for Japanese manufacturers and other businesses with operations there is not as simple as whether to stay or go.
Some companies say they must balance a complex equation, and weigh the potential costs against their broader global strategies and the benefits of maintaining a presence in the country.
Experts contend the high cost of moving, together with the enduring appeal of the U.K. as a base, are holding businesses back from taking drastic measures. And with the prospects of Brexit still unclear — with or without a deal — Japanese companies are having trouble planning ahead.
“As the terms of a Brexit deal haven’t been reached, all we can do is to handle the situation in a manner to minimize the negative effects,” said a spokeswoman at Toyota Motor Corp.
Toyota said it would suspend production for one day at its Burnaston plant in central England on Nov. 1, the day after the Brexit deadline, to assess the impact on logistics.
Nissan Motor Co. and Honda Motor Co. are also reviewing their manufacturing plans.
The head of Nissan Europe, Gianluca de Ficchy, has told the BBC that the company’s overall European business model “won’t be sustainable” if a “no-deal” exit from the bloc results in 10 percent duties being applied on vehicles exported from the U.K. to the EU.
“The only message I can pass on is that if a ‘no-deal’ will be associated with application of 10 percent duties under the WTO rules, that will create an enormous problem for the overall European activities of Nissan Europe,” de Ficchy said. But “We don’t know still what the ‘no-deal’ means.”
Honda plans to shut its U.K. factory in 2021, but has denied Brexit was the trigger.
Since the U.K. voted to split from the EU in a national referendum in 2016, global companies doing business there have been forced to rethink their European strategy.
And with the latest deadline only weeks away, a “no-deal” exit looks likely — the worst-case scenario for businesses.
A “no-deal” Brexit would mean the nation would leave the EU’s customs union and single market — which respectively ensure no tariffs or non-tariff barriers to trade between the member states and the free movement of goods, services and people across their borders — all at once. The British government says it is planning measures to soften the blow.
A Brexit with a deal, on the other hand, means the U.K. would be granted a transition period until Dec. 31, 2020, during which the country would remain in the customs union and single market, and could negotiate a free trade agreement with the EU. This period would also give foreign businesses time to prepare.
As things currently stand, manufacturers like automakers, which have assembly plants in the U.K., would be among the hardest hit by a no-deal exit, said Yasuo Sugeno, senior economist at Daiwa Institute of Research.
This would suddenly subject automakers to tariffs and long waits for customs checks.
“It would take much time to clear customs on parts procured from Germany, for example, and more time to export the finished cars to continental Europe,” Sugeno said.
The change is expected to upset automakers and other businesses with tight production schedules and inventory controls, an approach that precludes the need for large parts warehouses or parking lots to hold inventory like finished cars.
Sugeno predicts the time needed to deliver a car to Germany could hence become three weeks instead of three days.
“Simply put, this will drag down sales,” he said.
The backlog of inventory would also force manufacturers to build warehouses, which would require a sizable investment, he said.
Hitachi Ltd., which keeps its rail headquarters and a factory in the U.K., said its decentralized production network in Europe mitigates the risks from Brexit.
For trains to be exported to a European country outside the U.K., using its Italy-based factory could be an option to avoid post-Brexit tariff costs and delivery delays, a spokesman said.
The spokesman stressed that “Brexit is merely a factor to consider when we decide on a production site,” and added it also looks at other factors comprehensively, such as delivery deadlines and production capacity.
At this point, the company has made no changes to its plans for rail exports from the U.K. to the rest of Europe, he said.
But at least one small Japanese manufacturer has offered a hint at what might be to come.
At the end of September it was learned that Senju Metal Industry Co., which supplies soldering products used in the electronics and automotive sectors, closed its plant near London in June and moved production to the Czech Republic.
The company said in a filing to the U.K.’s Companies House for corporate registration that it “faced demands from European customers that their products be made in the Czech Republic” and not the U.K., due to Brexit concerns.
Other Japanese companies are likely to be affected by Brexit as well.
Nearly 1,000 Japanese firms operate in the U.K., making it Japan’s second-most popular base in Europe behind Germany, according to the Foreign Ministry. Direct investment from Japanese businesses on a flow basis in the country hit nearly ¥2 trillion in 2018, the second-highest after the United States, according to data from the Japan External Trade Organization (JETRO).
What Japanese firms fear most is the U.K. entering an economic slowdown that will affect their business.
According to a JETRO survey in 2018, 71.3 percent of Japanese companies in the U.K. say a slump in the British economy after Brexit was their biggest concern, followed by a change in legislation regarding trade with other countries.
But despite the uncertainty and bleak prospects, the U.K. remains an attractive regional headquarters for many, making it difficult to simply pack up and move out.
The U.K.’s appeal “won’t be lost completely,” said Susumu Tanaka, JETRO director in charge of Europe, Russia and the Commonwealth of Independent States, noting the size of its economy and consumption compared with other nations on the continent.
Tanaka said having English as the native language is also an advantage because it makes it easier for Japanese workers to communicate and read administrative papers.
The U.K.’s access to regions adjacent to Europe also makes it an attractive base.
Hiroaki Sugiura of accounting giant KPMG’s U.K. office, who heads the division responsible for helping Japanese firms overseas, said the U.K. is a good gateway not only to the rest of Europe but also the Middle East, Africa and the CIS, and that losing opportunities from these regions would pose a “big threat.”
But the U.K.’s break with the EU has implications that cross industries. Financial institutions, for example, have taken steps to make sure they don’t lose access to EU markets.
Mitsubishi UFJ Financial Group Inc., one of Japan’s three megabanks, has opened a new base for its securities operations in Amsterdam. The new subsidiary is aimed at continuing “to provide services to EU clients, even if the cross-border passport is lost as a result of Brexit,” it said in a statement.
Still, London will “remain the group’s headquarters for Europe,” a MUFG spokeswoman said.
For similar reasons, fellow megabank Sumitomo Mitsui Financial Group Inc. has set up banking and securities subsidiaries in Frankfurt.
Trading house Marubeni Corp. is also bracing for a no-deal Brexit.
“We are preparing and considering a contingency plan including creating a new EU subsidiary to move parts of our operations,” the trading house said in a written response.
In the event of a Brexit with a deal, the company said there would be relatively minimal economic turmoil and negative impact.
“We expect that the post-Brexit relationship between the U.K. and EU or other third countries would be defined during the transitional period, allowing us to monitor the arrangements and impact on our business activities and take more reasonable and effective measures,” Marubeni said.
For now, the lack of clarity over what will happen with Brexit, and whether there will even be a Brexit, is forcing Japanese companies to wait and see.
Because it is “very expensive to change,” companies act “more slowly than you might expect,” said Tim Sarson, who is in charge of the issue at KPMG.
“You don’t want to spend hundreds of millions on major European restructuring if there’s a second referendum, you don’t leave after all, and it was all a waste of time.”
This is the last of a three-part series examining what could happen to British and Japanese companies affected by Brexit.