EcoFlash

Foreign subsidiaries, a key driver of the Japanese industry

ECO FLASH  
N°22-10  
9 June 2022  
FOREIGN SUBSIDIARIES, A KEY DRIVER OF THE JAPANESE INDUSTRY  
Guillaume Derrien  
In 2021, sales by foreign subsidiaries of  
JAPAN’S MANUFACTURING OVERSEAS SUBSIDIARY SALES RATIO  
Japanese industrial companies accounted for  
(
AS % OF TOTAL SALES)*  
nearly a quarter of total sales. China is the main  
anchor country, particularly for the automotive  
industry.  
2
2
1
1
5
0
5
0
5
0
Despite this, Japan has retained a larger  
industrial base than most other OECD countries.  
The sector accounted for more than 20% of  
total national value added in 2021. The share  
of goods exports in GDP has also increased,  
reaching 16.4% in Q1 2022.  
This production structure for Japanese compa-  
nies, based on the complementarity between  
domestic facilities and foreign subsidiaries,  
has helped support profits, which climbed to a  
record as a share of GDP in Q1 2022.  
8
7
89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21  
*
Total sales by Japanese foreign subsidiaries and Japanese companies based in the domestic market (METI metho-  
dology)  
Note: overseas production ratio based on all domestic companies = Sales of overseas affiliates (manufacturing  
industries) / (Sales of overseas affiliates (manufacturing industries) + Sales of domestic companies (manufacturing  
industries)) × 100.0  
SOURCE: METI, BNP PARIBAS  
CHART 1  
Industrial production in Japan is continuing  
to shift towards capital goods and away from  
final consumption goods, largely in response  
to the increasing competition from other Asian  
countries in the latter segment.  
At a time when the debate around the concept of de-globalization is gaining traction, it is inte-  
resting to focus on Japan, where many industrial companies have chosen to set up subsidiaries  
abroad. The subject is even more relevant today, given the significant depreciation in the yen  
and the growing geopolitical tensions in Asia. One would expect that this would influence the  
organisation of Japanese production in the medium and long term.  
In recent decades, Japanese manufacturing companies have expanded their share of interna-  
tional activity. Initial estimates from the Ministry of the Economy, Trade and Industry (METI),  
indicate that sales by foreign subsidiaries in 2021 reached JPY 132 trillion (USD 1 trillion). This  
was nearly a quarter (22.3%) of total sales by Japanese companies, if we add these foreign sales  
1
to those made by Japanese companies located in Japan (Chart 1) . Progress has been impressive  
over the past thirty years, as this figure was only 10% in the early 2000s and just 5% in 1990.  
However, it has stabilised since 2014.  
1
This calculation follows the methodology employed by METI. See Summary of the 2020 (50th) Basic Survey on  
Overseas Business Activities (page 6).  
The bank  
for a changing  
world  
Eco Flash 22-10 // 09 June 2022  
economic-research.bnpparibas.com  
2
Several factors have encouraged Japanese companies to strengthen  
their presence abroad. The gradual strengthening of the yen between  
JAPAN OVERSEAS SUBSIDIARY SALES (AS % OF TOTAL SALES, 2019)*  
1
980 and 2012 (the date of the introduction of ‘Abenomics’ and the  
2
beginning of a new phase of depreciation in the currency) , was the  
first key factor, but is not the only explanation. According to a METI  
50 44.2  
4
0
0
3
survey conducted in July 2018 , companies wanted to get closer to local  
28.7 28.2  
3
markets where “demand is strong or expected to be so in future” (68.6%  
20.0  
18.1 18.0 17.4 17.0  
14.6 14.4 13.2 12.5  
of companies agreed with this statement) in order to compensate for  
20  
10  
0
10.0 9.8  
4
6.7  
structurally low growth in demand in Japan . The same survey indicated  
3.1  
that the cost and quality of foreign labour had a less important role  
(
16.0% agreeing). The extension of global production chains and Japan’s  
integration into them have also driven the expansion of businesses  
beyond the country’s borders.  
However, the scale of this phenomenon varies from one sector to  
the next. The automotive industry and companies in information and  
communication electronic equipment have expanded their production  
facilities abroad to a much greater extent than those in the food, metals,  
oil or coal sectors, where businesses remain more heavily focused on  
Japan (Chart 2). Most production of Japanese foreign subsidiaries are  
sold into their host region: this accounted for three quarters of the  
sales in 2021; the remaining quarter are sales outside the area of  
operation, and mainly directed back to Japan.  
*
Total sales by Japanese foreign subsidiaries and companies based in Japan (METI  
methodology)  
SOURCE: METI, JAPAN’S MINISTRY OF FINANCE  
CHART 2  
JAPAN OVERSEAS SUBSIDIARY SALES, BY REGION (AS % OF TOTAL SALES)  
4
7.6  
5
0
CHINA, THE MAIN FOREIGN BASE  
1998  
2021  
Japanese companies have mainly strengthened their presence in Asia  
40  
(
Chart 3), and particularly in China. At the end of the 1990s, sales by  
Japanese subsidiaries in China accounted for just 5% to 6% of total sales  
30  
20  
10  
0
26.6  
5
24.6  
of Japanese subsidiaries around the world . This figure has increased  
fivefold over twenty years, with a peak of 24.6% reached in 2021.  
2
2.5  
21.2  
The move into China came alongside growth in bilateral trade between  
the two countries. Over 20 years, trade (exports and imports com-  
bined) has doubled, whilst exchanges between Japan and the US have  
contracted by 20 percentage points (Chart 4). 2001 represented a tur-  
ning point, as this is the year when China joined the World Trade Or-  
ganisation.  
1
1.8  
7
.8  
6.7  
5.7  
5.9  
North  
America  
China (incl.  
Hong Kong)  
ASEAN*  
Europe  
Others  
Rest of Asia*  
In China, the automotive industry is by far the sector where Japanese * Data not available for 1998  
companies have the greatest presence: in 2021, this industry repre-  
SOURCE: METI, BNP PARIBAS  
CHART 3  
sented more than half of sales by Japanese subsidiaries in the country  
(
Chart 5). As the METI survey suggests, the presence of Japanese com-  
panies in China is an efficient way to get closer to the Chinese market,  
which is growing faster than its Japanese counterpart, and thus bolster  
their market shares in the country. This presence reduces the exposure  
to the risk of a raising of trade barriers targeting Chinese imports.  
JAPAN TRADING PARTNERS (% OF TOTAL EXPORTS & IMPORTS)  
Italy  
Mexico  
UK  
France  
2001  
2021  
The other major bases for Japanese companies are North America and  
ASEAN countries. These accounted for 26.6% and 22.5% respectively  
of total sales by subsidiaries in 2021, whilst Europe accounted for a  
smaller share (11.8%).  
India  
Russia  
Canada  
Philippines  
Singapore  
Saudi Arabia  
Indonesia  
United Arab Emirates  
Malaysia  
Hong Kong  
Vietnam  
Germany  
Thailand  
Australia  
South Korea  
Taiwan  
United States  
China  
2
Between 1980 and 2012, the yen strengthened against the dollar, rising from  
JPY226/$ to JPY79.8/$.  
0
%
10%  
20%  
30%  
40%  
50%  
3
4
See Summary of the 48th Basic Survey on Overseas Business Activities, METI.  
This trend is confirmed by the substantial share of sales made by subsidiaries in the  
country or region where they are based.  
CHART 4  
SOURCE: INTERNATIONAL TRADE CENTRE, BNP PARIBAS  
5
These figures include Hong Kong.  
The bank  
for a changing  
world  
Eco Flash 22-10 // 09 June 2022  
economic-research.bnpparibas.com  
3
INDUSTRY CONTINUES ITS TRANSFORMATION  
JAPAN SALES OF OVERSEAS SUBSIDIARIES BASED IN CHINA,  
SHARE BY SECTOR  
Despite this underlying trend in the expansion of Japanese companies  
abroad, the process of de-industrialisation in Japan has been more li-  
mited than in most Western economies. In 2019, manufacturing indus-  
try still accounted for more than 20% of the country’s total value added  
60  
50  
40  
30  
20  
10  
0
5
1.6  
(
20.9%), whilst the comparable figures for France, Spain, the UK and  
6
21.1  
the US are all below the 12% mark (Chart 6). Meanwhile, the share of  
goods exports in real GDP has continued to grow for more than twenty  
years now, reaching 16.4% in the first quarter of 2022 (Chart 7). The-  
refore, Japan remains a major exporting power. The yen’s depreciation  
10.1  
4.9  
3.1  
3.1  
1.1  
1.1  
1.0  
1.0  
0.9  
0.8  
which continued in June – is thus likely to provide substantial support  
to industrial activity in Japan again.  
Nevertheless, the expansion of foreign subsidiaries has contributed  
to holding back industrial production in Japan, which is close to 20%  
below its October 2007 peak. Activity in the transport sector, the big-  
gest in terms of industrial production (a weight of 18%), has fallen by  
nearly one-third relative to its level at the end of 2007 (Table 1). Nor  
is this the only sector to have seen a substantial contraction. The fall  
in output has continued relentlessly in information and communication  
electronics equipment (-61% between 2008 and 2021) and in ‘other  
manufacturing sectors’ (-25%), two categories consisting primarily of  
final consumption goods (computers, TVs, telephones, apparel, sup-  
plies, musical instruments, toys, etc.). Of the 15 major sectors making  
up the industrial production index, only two now have production le-  
vels greater than 15 years ago: production machinery and electronic  
components. Both of these cover mainly intermediate goods used in  
the production of other final consumption goods. The latter includes,  
for example, integrated circuits, LCD screens and other micro-electro-  
nic components. Industrial activity in Japan has therefore pursued its  
transformation, focusing increasingly on products upstream in produc-  
tion chains, rather than on final goods.  
CHART 5  
SOURCE: METI, BNP PARIBAS  
SHARE OF MANUFACTURING IN NATIONAL VALUE ADDED  
Japan  
France  
US  
Italy  
Germany  
UK  
2
2
2
1
4
2
0
8
16  
14  
12  
10  
8
This is a response to changes in international competition: there is much  
greater competition from emerging Asian economies in final goods than  
in advanced industrial products, that are greater value-added goods,  
and Japan’s specialism. This specialisation has allowed the country  
to retain significant non-price competitiveness (which is manifested,  
most notably, in the preservation of high profit margins for companies;  
Chart 8) and strong exports. This has avoided an excessive deteriora-  
tion of the country’s trade balance, even though its surplus is not as  
9
7 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20  
CHART 6  
SOURCE: WORLD BANK, BNP PARIBAS  
7
large as it was in the early 2000s .  
GOODS EXPORTS (AS % OF REAL GDP)  
Profit levels at Japan’s industrial companies show the sector’s resi-  
lience. According to the latest Ministry of Finance report (published  
8
18  
on 1 June 2022 ), manufacturing profits hit JPY9.39 trillion in the first  
quarter of 2022 (Chart 8), slightly below the record of JPY9.44 trillion  
set in Q2 2018, but the highest as a share of GDP, at 6.9%. Profit mar-  
gins have also remained strong. However, profits for Q2 2022 will suffer  
from the closure of factories in China, due to lockdown measures; these  
had a severe effect on production chains for Japanese automakers,  
1
6
4
1
9
12  
which, as we showed above, are highly active in the country .  
1
0
8
6
6
7
Source: France, Spain, United Kingdom: Eurostat; United States: BEA  
The trade balance worsened significantly between 2008 and 2014 (the deficit has  
since been reduced), but this was mainly due to two exogenous factors: the collapse  
1994  
1997  
2000  
2003  
2006  
2009  
2012  
2015  
2018  
2021  
9
3
See Shanghai Lockdowns Slam Japanese Automakers’ Production in China, Bloomberg,  
0 May 2022.  
CHART 7  
SOURCE: CABINET OFFICE, BNP PARIBAS  
The bank  
for a changing  
world  
Eco Flash 22-10 // 09 June 2022  
economic-research.bnpparibas.com  
4
Shortages of electronic components will be a further brake on activity  
over the short and medium term. That said, the production structure  
for Japanese companies, based on the complementarity between do-  
mestic facilities and foreign subsidiaries, has been effective so far, as  
shown by the strong profit numbers.  
PROFIT MARGINS & CURRENT PROFITS OF JAPAN’S MANUFACTURING SECTOR  
Profit margins (%)  
Current profits (% of GDP)  
1
2
0
8
6
4
2
0
1
TOWARDS A TURNING POINT?  
The prospects of a slowing in trade globalisation (without going as  
far as using the concept of de-globalisation) raise questions on the  
process of Japanese companies creating foreign subsidiaries, which  
has already somewhat stalled since 2014 (Chart 1). Several factors  
suggest that this slowdown will continue: (i) logistics problems during  
the Covid-19 pandemic and the Japanese authorities’ desire to shorten  
production chains; (ii) the increase in geopolitical tension in Asia and  
the desire for greater autonomy, particularly in strategically important  
sectors; and (iii) rising labour costs in China which reduce the country’s  
price competitiveness. Countries’ labour costs are also becoming a less  
significant factor, given the increasingly automated nature of produc-  
tion. Companies rely increasingly more on highly-qualified employees  
than low-wage workers, which is likely to help a development of acti-  
vity in Japan.  
-2  
-
4
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022  
CHART 8  
SOURCE: JAPAN’S MINISTRY OF FINANCE, BNP PARIBAS  
INDUSTRIAL PRODUCTION BETWEEN  
AUGUST 2007 (PEAK) AND APRIL 2022  
Even before the global pandemic, the Japanese government had intro-  
duced fiscal incentives, admittedly still on a modest scale, to encou-  
rage Japanese companies to invest in their home country. In April 2020,  
the authorities launched a JPY 248.6 billion (USD 1.9 billion) scheme  
of this kind. In November 2021, the Government also released funding  
of JPY 774 billion (USD 6 billion) to help develop new semiconduc-  
tor production facilities within the country, of which more than half  
Gap (%) between  
April 2022 &  
October 2007  
Weight in  
industrial  
production  
Sectors  
(
peak)  
-19.0  
8.7  
Manufacturing  
99.83  
5.81  
7.08  
10.93  
5.97  
4.42  
1.52  
13.14  
2.27  
5.77  
Electronic parts & devices  
Production machinery  
Chemicals  
(
JPY 400 billion) will be dedicated to the construction of a new foundry  
in the Kumamoto Prefecture.  
2.3  
However, shifting the balance by developing activity in Japan rather  
than abroad will not be easy, nor is it the government’s sole priority.  
It is also pursuing greater diversification of production chains in Asia,  
in order to reduce dependence on China. It will be particularly difficult  
to relocate highly capital-intensive or knowledge-intensive production  
chains, given the vast sums invested in them and/or the knowledge  
ecosystems that have been created around them. Moreover, reloca-  
tion of industrial activity to Japan would imply higher production costs,  
which would affect company margins. Although more onshoring is ex-  
pected, this phenomenon could be slow to materialise.  
-5.9  
Electrical machinery  
Plastic products  
-6.2  
-12.1  
-12.6  
-14.0  
-17.2  
-17.4  
Business-oriented machinery  
Food and tobacco  
Pulp & paper  
General-purpose machinery  
Ceramic, clay, stone products  
-23.8  
3.22  
Fabricated metal products  
Other manufacturing  
-26.4  
-27.4  
-28.8  
-30.3  
-32.4  
-70.1  
-35.3  
4.38  
7.52  
6.25  
1.18  
17.97  
2.42  
0.17  
Iron & steel  
Petroleum & coal products  
Transport equipments  
Info & com electronics equipment  
Mining  
TABLE 1  
SOURCE: METI, BNP PARIBAS  
The bank  
for a changing  
world  
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