JETRO Japan External Trade Organization : Results of “JETRO’s 2016 Survey on Business Conditions of Japanese Companies in the U.S. and Canada”

Detailed results of survey on business conditions of Japanese companies in the U.S.

1. Operating profit forecast: 77.5% of companies forecast a profit, maintaining high level

• 77.5% of Japanese companies in the U.S. forecast an operating profit for 2016. This is slightly lower than the result of 81.4% in the previous year, but performance is still strong. The percentage of companies forecasting an operating profit has exceeded 70% for the fifth consecutive year since 2012. The percentage of profitable companies is particularly high in the 'parts for transportation machines' and 'machinery' industries, and the Midwest region where many of these companies are located maintains an 80% ratio of profitability. (Materials - Page 3)
• Business confidence (calculated by subtracting the ratio of the companies who predict a decreased operating profit compared to the previous year from those predicting an increase) dropped by 9.8% from the previous year. The ratio of replies anticipating increased operating profit for 2016 dropped by 6.5 points, and the ratio of replies anticipating decreased operating profit rose by 3.3 points. (Materials - Page 4)
• 53.4% of the respondents plan to expand their business in the next year or two, which was down 3.3 points from the previous year. Major functions for expansion include strengthening sales and production (high value added products). By industry, high ratios of companies are expected to expand in the 'chemical and oil products,' 'processed food, agricultural or fishery products' among others. (Materials - Page 5)
• The ratio of respondents indicating increased local employment in the past year and plans to increase employment in the future remains over 40%, while respondents in general answered that their number of Japanese expat employees will stay the same. (Materials - Page 6)

2. Procurement, production, sales: Trend toward strengthening local production for local consumption in U.S.

• The average ratio of Procurement of raw materials and parts from within the U.S. is 57.2% (Japanese affiliates in the U.S.: 18.6%; U.S. domestic companies: 36.5%; other foreign affiliates: 2.1%). The average ratio of procurement from Japan is the second highest at 27.3%. Future plans for expanding procurement sources are most focused on U.S. domestic companies (145) and Japanese affiliates in the U.S. (89), while 26.0% of the respondents plan to reduce procurement from Japan, which was up 6.7 points from the previous year. (Materials - Page 7)
• The average ratio of U.S. production for the U.S. market is 70%, the same level as the previous year. The U.S. is the most commonly selected country for expanding future production for the U.S. market, given by 170 companies, followed by Mexico with 68 companies. Yet 25.8% of the respondents plan to reduce production in Japan, which was up 1.2 points from the previous year. (Materials - Page 8)
• The U.S. market accounts for an average ratio of 81.5%, and the NAFTA market accounts for an average ratio of 90% of sales destinations of the products made at the U.S. facilities. 303 companies plan to expand sales in the U.S., while 189 companies plan to expand sales to Mexico. The 'parts for transportation machines' and 'chemical and oil products' industries in particular plan to expand sales routes to Mexico. (Materials - Page 9)

3. Utilizing FTAs: Nearly 30% of Japanese affiliates in the U.S. utilize NAFTA

• 27.2% of the companies utilize NAFTA for either imports or exports. (Materials - Page 10) Aggregating these while excluding companies that do not export/import or did not answer, nearly 50% of the respondents utilize NAFTA to export to Mexico or Canada, and nearly 60% utilize NAFTA to import from these countries. Also, if an FTA is realized between Japan and the U.S., there is high expectation toward utilizing the FTA for exports and imports. (Materials - Page 11)

4. Causes of increasing costs/sales restraint: Rising wages and recruiting labor, as well as severe price competition, continue to pose challenges

• The top three management challenges (causes of increasing costs) are increased labor costs, recruiting workers, and increased burden of healthcare. Rising wages continue to be the leading cause from last year, rising from 64.1% to 65.7%. Many respondents reply that liquidity of workers and upward pressure on wages have both risen due to the U.S. economic recovery. (Materials - Page 13)
• Top management challenges (causes of sales restraint) are the same as in previous years, with 'intensified price competition' and 'popular products from competitors' taking the top two places. (Materials - Page 14)

5. Impact of exchange rates/crude oil prices: More than half of companies suffer negative impact from exchange rate fluctuations, while impact from lower crude oil prices evenly divided between positive and negative

• 53.2% of the respondents suffer negative effects from exchange rate fluctuations as the Japanese yen gained in value against U.S. dollar until October 2016. Specific effects include 'increased raw materials prices' and 'exchange losses.' Since the ratio of respondents using U.S. dollars for merchandise transactions reaches 90% and the ratio of respondents procuring materials from within the U.S. are also high, 30% of the respondents reply they are 'not affected.' (Materials - Page 15)
• 23.8% of the respondents expect to be negatively affected by crude oil prices in 2016, which exceeds the percentage of those expecting to be positively affected (20.8%). The ratio of respondents expecting to be positively affected decreased by half from the previous year, when they were closer to half of all the respondents. Given the situation in which crude oil prices have remained at a low level in 2016 but have risen compared to the previous year, some industries have experienced both positive and negatives effects. (Materials - Page 16)

6. Interest in policies of the new administration: 'Diplomacy' and 'trade' rank high, chosen by around 60%

• 'Diplomacy' (455 companies), 'trade' (416 companies), and 'tax regime' (360 companies) claim the top three fields of interest regarding policies of the new administration. Looking at interest in diplomatic policies by country/region, Japan (378 companies), China (200 companies), and Mexico (169 companies) rank in top three. More than half of the respondents are concerned about diplomatic relations with Japan, which have a major direct impact on business. (Materials - Page 17)
• Regarding specific areas of interest in trade policy, interest in the TPP is the highest (298 companies), followed by NAFTA (109 companies) and anti-dumping duties (AD) and countervailing duties (CVD) (104 companies). 165 companies show interest in infrastructure, with 'ports' (73 companies), 'railroads' (64 companies), and 'highways' (48 companies) ranking in the top three. (Materials - Page 18)

7. Markets most likely to grow next: IT/cloud/mobile ranks the highest, nearly 80% of companies focus on South

• 'IT/cloud/mobile' was chosen by the most companies as the market most likely to grow in the next two to three years, at 51.5%. Although 'medical' (46.9%) and 'environment' (43.2%) both went down in rank, they continue to attract great interest as in the previous year. In addition, both 'robotics/mechatronics' (17.1%) and 'nanotechnology' (5.5%) rose in rank. (Materials - Page 19)
• Nearly 80% of companies focus on the South as the region most likely to grow. The top three states are the same as the previous year, which are Texas (273 companies), California (175 companies), and Georgia (88 companies). In addition, Michigan rose from seventh to fifth place and Illinois dropped from 12th to sixth place compared to the previous year. (Materials - Page 20)