Earth-movers halted by high pound

Komatsu may not be the most famous of Japanese firms but, in its unglamorous way, it has done its bit for Britain.

Komatsu may not be the most famous of Japanese firms but, in its unglamorous way, it has done its bit for Britain.

The company makes earth movers, the metal leviathans found on building sites all over the world, and in 1985 - towards the peak of Tokyo's boom but well ahead of many Japanese investors - Komatsu opened a manufacturing plant in Birtley, Co Durham, where 600 workers build hydraulic excavators.

These days, the plant is working at almost full capacity and, in normal circumstances, Komatsu would be planning to expand the operation, with benefits all round.

The company would then be able to meet the rising demand for its steel monsters and the people of Birtley would benefit from the hundreds of new jobs that would be created. But that will not be happening. "If we saw the possibility of Britain joining the euro we might make a new investment, but in the present circumstances we can't think of that," says Hideto Echigo, of Komatsu's Tokyo headquarters.

"The problem is the high pound. As a company, we've cut our costs by 3 to 5 per cent - but it doesn't cover the increase in the pound. It's beyond our control, and making a new investment is just too risky."

Fewer than a fifth of the hydraulic diggers are sold in Britain. Most go to Europe. Komatsu buys many of its parts and pays its workers in expensive sterling - but is paid by its customers in European currencies pegged to the much weaker euro. If the firm set up a new plant in euroland (it has two factories in Germany and one in Italy), the complications of exchange rate fluctuations and currency conversion charges would be a thing of the past.

"I think the situation is the same for other Japanese companies manufacturing in Britain," says Mr Echigo. This is the fear articulated by Sir Stephen Gomersall, Britain's ambassador to Japan.

After all the hard work done by successive governments - the diplomatic lobbying, grassroots promotion campaigns and tax incentives - Japanese investment into Britain risks being scuppered by Tony Blair's reluctance to commit unequivocally to the euro.

As well as Komatsu, the ambassador's leaked memo mentions companies from the Nissan and Toshiba to Japan Tobacco and Nippon Sanso Thermos Flasks whose British operations are reckoned to be suffering from euro-lag.

Britain does well out of Japanese manufacturers. In 1999, says the Japan External Trade Organisation, 1.3 trillion yen worth of new projects were set up in Britain last year - 17.6 per cent of Japan's overseas direct investment. For many companies, Britain is the natural first choice for a European operation, for reasons economic, cultural and sentimental.

"Sweeping generalisations about the euro are misleading," says Kazuyuki Kimbara, of the Keidanren, Japan's equivalent of the CBI. "There are other factors which make Britain attractive: the openness of the business environment, deregulation, lower wages and a good quality of workers."

Surprisingly, English is the foreign tongue Japanese are most likely to know. Many speak of an emotional affinity with Britain which does not extend towards France and Germany, an identification with the inhabitants of another island nation of tea drinkers on the edge of a continent with which they have sometimes difficult relations.

But such considerations are giving way to the bottom line - that the single open European market which the EU has promised to international investors is less straightforward in Britain than in the euro-zone.

"These companies aren't interested in domestic political disputes, they're interested in profit," says Mr Kimbara. "And in the UK, some of them are losing money."

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