How global is Japan Inc?

Expansion abroad is a top priority for Japanese CEOs

With Japan’s shrinking domestic market, an expansion abroad has become imperative for Japanese corporate managers. The strong yen and easy financing conditions in Japan are also encouraging Japanese companies to make foreign acquisitions. Indeed, their overseas direct investments have intensified in the last 10 years. 2012 is likely to see massive overseas investment, close to 10 trillion yen (125 billion USD) in our estimation.   

Overseas investments intensified in the last 10 years

Source: MoF, CEIC, JMA
Note: 2012 is our forecast based on actual data upto September 2012

Europe and US receive as much investments from Japan as Asia does

By area, Asia has certainly been one of the main destinations for direct investments from Japan. However, it is interesting that its shares are not overwhelmingly large. U.S. and Europe have also been constantly receiving significant portions of investments. 

Japan's overseas direct investments since 1996

Source:MoF, CEIC, JMA
Note: Figures for 2012 are for the first half of the year

Manufactucturers love Asia, non-manufacturers’ investments are more diverse

When we analyze by industry and by area matrix, we see that direct investments by non-manufacturers are as big, or even bigger, as those by manufacturers. Asia tends to be a constant and the largest receiver of investments by manufacturers, but non-manufacturers’ investment destinations seem to vary each year; the size of their investments tend to be larger and less frequent than that of manufacturers. In 2011, Europe tied with Asia by receiving 3.1 trillion yen (40 billion USD) direct investments from Japan. The 1.1 trillion yen acquisition of Nycomed, a Swiss pharmaceutical, by Takeda Pharmaceutical likely boosted the figure for Europe in 2011 (see the table below). For 2012, the 1.6 trillion yen (20 billion USD) acquisition of Sprint, an US telecom company, by Japan’s Softbank should feature prominently. On the other hand, a bulk of non-manufacturer’s investment into Latin America needs to be discounted, as they are often SPE (SPV) investments into Cayman Islands and not ‘real’ direct investments.    

Japan's overseas direct investment: It is not just Asia

Source: MoF, CEIC, JMA

How much have these investments helped Japan Inc. become global?

With many acquisitions over the years, how much has Japan Inc succeeded in diversifying away from Japan? In our estimate, the ratio of sales generated by overseas subsidiaries has doubled from 10% to 20% in the last 15 years. Our note of the chart below explains how we estimated this ratio.

Japanese manufacturers’ subsidiaries now generate over 20% of total sales

Source:METI, MoF, JMA

Note: The ratio projected is based on METI’s quarterly sales estimates for overseas subsidiary of Japanese companies and MoF’s quarterly estimates for domestic corporate sales. Note that MoF’s estimates include companies that have no overseas subsidiary. Estimates are for companies with capital larger than 100 million yen. 

Car makers lead the globalization race

There are wide variations across industries, machinery makers have been ahead of the pack in increasing their overseas subsidiary sales ratio. Overseas subsidiaries of transportation machinery makers now generate 40% of their worldwide sales outside Japan. For transportation machinery makers, the rise in the ratio was brought about with their overseas subsidiary sales quadrupling in the last 15 years. On the other hand, while subsidiary sales ratio did rise for electrical machinery makers, the rise is partly due to a modest decline in their domestic sales.    

Car makers' overseas subsidiaries generate 40% of total revenue

Source: METI, MoF, JMA

Chemical makers tripled the sales generated by overseas subsidiaries

Perhaps a similar story could be told for base material industries. Chemical and nonferrous metal makers raised their subsidiary sales ratio by more than tripling their overseas subsidiary sales. On the other hand, steel makers’ overseas subsidiaries sales have risen by only 40% over the last 15 years and subsidiary ratio has remained almost constant at about a mere 5%. In other words, steel makers have remained very much Japanese.  

Base-material makers are also expanding overseas

Source: METI, MoF, JMA

Including exports and excluding reverse imports, overseas sales ratio rises to 36%

Now, we would like to introduce another ratio to assess the progress of globalization of Japan Inc. Not all the sales by overseas subsidiaries are directed toward local demands. Some of the sales are exported to Japan, and some are directed toward a third country. Similarly, significant part of domestic sales includes sales that eventually are exported. In order to assess this aspect, we estimated what we call overseas sales ratio. The ratio measures the portion of the world-wide sales that are directed to the overseas demand. See our notes in the chart below for the definition of the overseas sales ratio. As you can see in the chart below, the trend of the overseas sales ratio has been quite similar to that of the subsidiary ratio, only it begins and ends higher. We see that 36% of the goods manufactured by Japanese companies serve foreign demands.

Note: Overseas sales ratio=(Exports + Overseas subsidiary sales – reverse imports to Japan) / (Domestic sales + Overseas subsidiary sales)
Source: METI, MoF, JMA

Car makers’ overseas sales ratio rose to 55% from 30% in the last 15yrs

By industries, transportation machinery makers have the highest ratio among industries at 55%. However, it is interesting to see that general machinery makers’ ratio is almost as high. As the general machinery makers’ subsidiary sales ratio was around 20%, this shows that general machinery makers are meeting their overseas demand through exports from Japan, while car makers are trying harder to meet overseas demand by overseas subsidiaries. In contrast, electrical machinery makers’ overseas sales ratio is distinctively lower than the other two machinery makers, showcasing the dependency of electrical machinery makers on the Japanese domestic demand.  

Overseas sales over 50% for car makers and general machinery makers

Source: METI, MoF, JMA

We see that base material industries have doubled their overseas sales ratio in the last 15 years and chemical makers seem to have made the biggest progress.

Overseas sales over 30% for chemical makers

Source: METI, MoF, JMA

Summary and a few observations:

-Becoming global but not hollowing out their domestic base-

Japanese companies have been intensively diversifying away from Japan. Manufacturers’ overseas subsidiaries now generate 20% of their total sales, up from 10% in 1997. When we include exports from Japan, 36% of their sales are now generated by overseas demand. Car makers and general machinery makers have succeeded in making themselves truly global by generating majority of their sales from overseas demand, and the ratio will only rise in future.  

On the other hand, we see that 67% of Japanese manufacturers sales are still generated by domestic demand, exposing them to slow growth in Japan. Electrical machinery makers have lagged behind its machinery maker peers in diversifying away from Japan and that may explain their current woes. 

It is also interesting to observe that while subsidiary sales ratio has risen, the rise was in line with the rise in overseas sales ratio. This shows that the expansion of overseas subsidiaries has not resulted in a 'hollowing out' of manufacturing jobs in Japan. The rise in overseas subsidiary sales is matched by the rise in overall overseas sales ratio and exports still remain Japan’s power horse.