BREXIT the implications for Asia. Fujitsu Research Institute Dr. Martin Schulz

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1 BREXIT the implications for Asia Fujitsu Research Institute Dr. Martin Schulz

2 BREXIT the implications for Asia Asian EU trade not at risk EU investment strategies strongly affected Brexit shock is a governance shock 1

3 BREXIT the implications for Asia Trade will be affected but not disrupted 2

4 Asian Supply Chains China Channel through UK China (350 Bn) (right scale) US (248 Bn) Japan (60 Bn) Note: Korea, Thai imports as 6-month averages Source: Data from CEIC (2017). EU Import (1999=100; (Euro Bn)) 400 1,500 UK Import (1998=100) GER Import (2000=100) 350 1,300 China (right scale) Thai Korea Japan , US Korea Japan Thai (20 Bn) China (right scale) Thai US 3 Copyright FUJITSU RESEARCH INSTITUTE

5 BREXIT the implications for Asia Investment faces greater challenges 4

6 十億 十億 Japanese & Chinese Investment Boom Japan s M&A (Cases; Bn USD) China s M&A (Cases; Bn USD) US Cases US Cases 50 EMEA Cases EMEA Cases Amount Amount Note: All initiated crossborder cases, including canceled deals. Amounts as 5-quarter averages Source: Data from from Bloomberg (2017). 5 Copyright FUJITSU RESEARCH INSTITUTE

7 Chinese M&A: Investing in Technology & Trade Barriers China s EMEA and US M&A by Sector (Cases; EMEA %) US EMEA UK Germany Holland Total Cases % 17.20% 7.18% Industrial 10.60% 21.44% 8.25% 27.84% 6.19% Consumer, Cyclical 11.40% 17.35% 19.11% 21.66% 7.64% Trade Barriers? Consumer, Non-cyclical 23.50% 15.14% 16.79% 10.95% 10.22% Financial 7.80% 10.39% 28.72% 11.70% 7.45% Energy 4.30% 9.17% 15.66% 12.05% 6.02% Technology Technology Technology 20.40% 8.29% 14.67% 6.67% 12.00% Basic Materials 2.30% 7.18% 12.31% 12.31% 4.62% Communications 14.30% 5.08% 30.43% 15.22% 2.17% Utilities 0.60% 1.99% 16.67% 5.56% 0.00% Diversified 0.70% 1.66% 6.67% 53.33% 13.33% Note: All initiated crossborder cases, including canceled deals. Source: Data from Bloomberg (2017). 6 Copyright FUJITSU RESEARCH INSTITUTE

8 BREXIT the implications for Asia Japan Investment in Europe 7

9 Surprisingly Strong EU Incomes for Japanese Companies 1,800 1,600 1,400 Japan s Regional Income Balance (Billion Yen) US 1,200 1, Europe Asia 0 Note: Current Account, Primary Income, Net Balance. Source: Data from CEIC (2016). 8 Copyright FUJITSU RESEARCH INSTITUTE

10 Corporate EU-Strategy: Growth vs. Value EU Value Investment Low Market Growth Low Growth of Single Markets High Regional Imbalances Limited Political Integration High Market Value Strong Integration Gains Low Japanese Market Share Globalization & Regulation Leader Trans-National Strategy in a Value Market Regional headquarter in manufacturing or service centers R&D in EU regional manufacturing and service centers Sourcing in low cost markets EU-wide Distribution Customer & shared services in EU regional service centers 9

11 EU Regional Potentials Real Disposable Income Net Operating Surplus Labor Productivity 150 Swiss 140 Germany 130 US 120 EU UK Japan 110 Spain Spain US 140 UK EU Germany Spain Japan US EU UK 105 Japan Germany 100 Swiss Swiss Note: 2008= prices. Based on local currencies. Source: Data from AMECO Database (2016). 10

12 Japan s Corporations in Europe follow Value Strategies Japan FDI Activities in UK, Germany and Poland (Case Numbers ) 100% 90% Services 80% 70% 60% 50% 40% 30% 20% 10% 0% Sales, HQ, R&D Design HQ Mfg, Sales Logistics Japan in UK Japan in Germany Japan in Poland Customer Contact Centre Recycling Shared Services Centre Extraction ICT Techn. Support Centre Education & Training Maintenance & Servicing R&D Business Services Design, Development Retail Headquarters Logistics, Distribution Sales, Marketing Manufacturing Source: FRI Data: FT FDI Database Copyright Copyright 2010 FUJITSU 2017 FUJITSU RESEARCH INSTITUTE

13 Strong UK Focus after the Financial/Euro Crisis Japanese M&A Cases in the UK and Germany ( ) U.K. No. Germany No. Commercial Services 13 Chemicals 11 Internet 10 Electronics 11 Food 9 Computers 9 Holding Companies 9 Machinery-Diversified 9 Computers 7 Auto Parts & Equip. 8 Alt. Energy 7 Commercial Services 5 Advertising 6 Misc. Mfg 4 Software 6 Pharmaceuticals 4 Entertainment 4 Biotechnology 3 Misc. Mfg 4 Hand/Machine Tools 3 Total 139 Total 109 UK Investment Services HQs, R&D Source: Bloomberg as of German Investment Mfg, Sales R&D

14 Brexit Challenges: UK Innovation Center at Risk? MSCI Stock Market Indices for the UK and EU (ex UK) (2003=100) UK IT Stocks EU Stocks UK Stocks EU IT Stocks Note: EU indices exclude UK stocks. UK s dynamic service, R&D and universities profited from EU Finance, mobility and machinery technology might be at risk Source: Data from Bloomberg. 13

15 Brexit Challenges UK with Swiss Potentials? Int.$ Real GDP per Capita Difference Relative to the EU (EU Level = 0 from 1991) Switzerland Germany UK Japan Note: Based on purchasing power parities (PPP) calculated as IMF international dollars. UK government estimates of Brexit costs: -6.2% lower GDP in 2030 with non-favorable EU trade terms -3.8% lower GDP when joining the general European Economic Area (EEA) Becoming another Swiss requires the opposite of Brexit intentions High immigration, currency peg to euro, industry restructuring, deflation Source: Data from IMF-WEO; UK Government 14

16 EU Integration: Mid-Size Company Performance is Key 700 Main Stock Indices (JPY Base) 700 Mid-Caps (JPY Base) Germany Austria Germany 400 Swiss UK Swiss 200 US EU US Japan 100 Japan UK 0 Italy Italy Source: Data from Bloomberg ( ). 15

17 BREXIT the implications for Asia Brexit shock is a governance shock 16

18 Stability in EMEA is Key to Asian Growth X TTIP US- EU FTA Single Market EPAs New Silk Road driven by China demand & investment AIIIB 2015 Asian Infrastructure Investment Bank (AIIB) driven by China connectivity shortfalls TPP creating a dynamic market for goods, services, investment X AEC 2015 ASEAN Economic Community (AEC) driven by trade Next generation agreement that covers 40% of world trade and promotes innovation and growth through far reaching deregulation Source: Map: Wikipedia.; Picture: Shutterstock.com

19 Europe Today Brexit and More Policy Challenges Brexit EU Market Integration EU Governance Reform Ukraine Russia Relations Cold War Security Risks Eurozone Reform New Financial Policy Structural Reform Middle East War Refugee Crisis Iran-Arabia-Turkey Strategies Brexit: Voters request a more attractive outlook for EU integration Eurozone Reform: Difficult push for structural reforms Ukraine Crisis: EU cannot intervene or stabilize partner countries Middle East Crisis: Instability requires new partnerships with Russia, Turkey, Iran, Arabia 18

20 EU: Supra-National to Inter-Government Governance supervision EU Governance arbitration Legislation & budget co-decision supervision Supra-National Integration appointment President EU Commission President Parliament New EU Governance President Council President (Heads of State) EuroGroup (Finance Ministers) Presidency Council of Ministers External Action Service Foreign Ministries Director Stability Mech. High Representative Brexit Russia Immigr. Euro Inter-Governmental Reform Troika Foreign Affairs Council (Foreign Affair Ministers) President Central Bank Strong inter-government EU Council enforces more executive powers Council still consolidating power and rules of the game External powers still defunct (border control, intervention force, intelligence & information sharing, Middle East & Russia strategy) US exit would leave large stability gap at a vulnerable time 19

21 Governance Challenge: Growing Trade Opposition? Canada-EU FTA (CETA) followed by Japan-EU FTA? Sources:

22 and Security Risks Require (Missing) Long-term Strategies Sunni Muslims Arabia Assurance ISIS Shi a Muslims Engaging Iran Map: 21

23 BREXIT the implications for Asia Japan, Korea, China overseas investment is increasing Stable EU markets are a prime target New Normal mature markets lack growth EU integration is key to value investment strategies EU governance is in flux Asian investors hope for the best 22

24 23 Copyright 2013 FUJITSU RESEARCH INSTITUTE