Japanese Companies Go in a Post

In the aftermath of the United Kingdom’s June 23 vote to leave the European Union (the British exit, or “Brexit”), one critical uncertainty has been overlooked. How will companies around the world change their approach to Europe’s consumer and industrial market? This is a more important question than many people realize, because those changes will affect patterns of investment and supply chain flows everywhere. From my own vantage point, as a long-term advisor to Japanese manufacturers helping them strengthen their positions around the world, I see a major reorientation coming.

Many Japanese business leaders — and many of their counterparts in North America, East Asia, Australia, and elsewhere — have come to regard the United Kingdom as their primary gateway into the European Union. After the referendum’s unexpected outcome, they hoped at first that the leaders of the U.K. government would find some way to undo the decision, perhaps through a reversal by Parliament. But even though the U.K. high court ruled that Parliament must be involved, a full reversal is unlikely. Japanese business leaders have been forced out of their comfort zone. As they seek new ways to establish a presence in the European market, global companies will change the footprints of their global activity.

To understand the potential consequences, one must recognize the subtle dynamics of the Japan–U.K. relationship, going back to the 1992 Maastricht Treaty, which launched the European Union and included the United Kingdom among its signatories. Before then, creating a business presence in Europe was a daunting proposition, because there was no obvious place to build regional headquarters and factories. In West Germany, and all of Germany after reunification, labor was relatively expensive. It was easier to hire people in Spain, Italy, and France, but few global companies did well in those countries, in part because of the inconsistent labor laws and ever-changing government guidance. Nissan, for example, dissolved its short-lived joint venture with Alfa Romeo in Italy in 1989. Other countries, like the Netherlands and Belgium, were too small or were simply not oriented to the kinds of logistics and labor training that robust manufacturing requires.