Oct 24, 2013, 17:40 JST

Japan Inc.becoming global but not hollowing out

2013 will be another record year of Japan’s acquisition abroad

Japan Inc.’s acquisition abroad is gathering momentum in the second half of 2013. The 22 billion USD worth acquisition of Sprint by Softbank, concluded in July this year, boosted the total year to date amount significantly. All in all, outbound direct investment between January and August totaled 9.7 trillion yen (100 billion USD), up 54% year on year on average. If Japan Inc. is to maintain a similar pace for the rest of the year, the annual total could reach 15 trillion yen and surpasses the 13.2 trillion yen historical record set in 2008. 

2013 will be another record year for Japan’s acquisition abroad

Source: MoF, JMA

Note: 2013 is annualized based on the reported January-August figures, assuming the same YoY growth for the rest of the year.   

Regardless of how 2013 turns out to be, it is safe to say that Japanese companies have been on a shopping spree in the last 5 years, taking advantage of the strong yen and the relative financial stability within Japan. Japan’s direct investment outstanding rose to 104 trillion yen at the end of June 2013, up from 62 trillion yen at the end of 2007.   

Expansion aboard is indeed imperative for Japanese corporate managers. With the shrinking population, there are natural limits to how much Japanese economy could grow. According to IMF’s current projection, the world economy is forecast to grow by 3.8% per year on average between 2013 and 2018 while Japan is forecast to grow by 1.3% per year on average. In our view, even an average 1.3% growth seems rather optimistic. For Japan Inc. to keep growing, they must seek opportunities abroad.   

Japan Inc.’s investment is well diversified

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 invest as much in US and in Europe as in Asia

Source: MoF, JMA

Note: Figures for 2013 are for January-August. 

Manufacturers 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. As we observe in the next table, Asia tends to be a constant and the largest receiver of investments by manufacturers, but non-manufacturers’ investment destinations seem to be more diverse and vary each year.

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

Source: MoF, 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 calculation, the ratio of sales generated by overseas subsidiaries has more than doubled from 10% to 24% in the last 15 years. Our note for the following chart explains how we calculate this ratio.

Japanese manufacturers’ subsidiaries now generate 24% of total sales

Source: METI, MoF, JMA

Note: The ratio shown in the chart is based on METI’s quarterly sales estimates for overseas subsidiary of Japanese companies. 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 44% of their worldwide sales outside Japan. The rise in their 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 44% of their total revenue

Source: METI, MoF, JMA

Chemical makers tripled the sales generated by overseas subsidiaries

Perhaps a similar story could be told for Japan’s 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’ subsidiary ratio has remained almost constant at about a mere 5%. 

Base-material makers are also expanding overseas

Source: METI, MoF, JMA

Including exports and excluding reverse imports, overseas sales ratio rises to 39%

Now, we would like to introduce another ratio to assess the progress of globalization of Japan Inc. While overseas subsidiary ratio is an appropriate measure to see where Japan Inc. produces, it is not an appropriate measure for where they sell. Some of the sales of oversea subsidiaries’ are exported back to Japan. More obvious point is exports from Japan that serve overseas demand. In order to assess this aspect, we calculated 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 following chart for the definition of the overseas sales ratio. As you can see in the chart, the trend of the overseas sales ratio has been quite similar to that of the subsidiary sales ratio, only it begins and ends higher. We see that in the most recent quarter, April-June 2013, 39% of the goods manufactured by Japanese companies serve foreign demands.

Japan Inc sells 39% of their wares oversea

 

Source: METI, MoF, JMA

Note: Overseas sales ratio = (Exports + Overseas subsidiary sales – reverse imports to Japan) / (Domestic sales + Overseas subsidiary sales)

Car makers’ overseas sales ratio rose to 58% in 2013

By industries, transportation machinery makers have the highest ratio among industries at 58%. 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 produces of 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

Base-materials industries also sell increasingly overseas 

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

Conclusion: Becoming global but not hollowing out

Japanese companies have been intensively diversifying away from Japan. Manufacturers’ overseas subsidiaries now generate 24% of their total sales, up from 10% in 1997. When we include exports from Japan, 39% of Japan Inc's worldwide sales now cater to 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 61% of Japanese manufacturer's sales are still generated by domestic demand, exposing them to the slow growth trend 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 overseas subsidiary sales ratio has risen, the rise is leading to a similar rise in the overseas sales ratio. This shows that the direct investment abroad by Japanese manufacturers is not leading to 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.