The Japan External Trade Organization (JETRO) released the results of its latest annual survey of Japanese manufacturers operating in the US. A total of 621 companies replied to this survey, which JETRO's six US offices (Atlanta, Chicago, Houston, Los Angeles, New York, and San Francisco) conducted in July and August 2006. JETRO began this annual survey in 1981.

The percentage of companies forecasting operating profits for 2006 was the highest ever at 80.9%. 55.3% of the respondent companies expect to increase operating profits next year, demonstrating optimism despite price hikes of raw materials such as crude oil, iron and steel.

The main reason given for this improvement was an "increase in sales in the domestic (US) market" (65.4%). Since the last survey, the "increase in the overseas market" (30.9%) gained 10 points, suggesting that companies are increasingly turning to export.

An increase in Chinese imports has affected 59.3% of respondents, causing a "decline in sales prices"; 51.1% reported a "decrease in sales due to intensifying competition."

96.2% of Japanese manufacturers polled considered "low price" to be the strongest selling point of Chinese products. To compete with these inexpensive goods, 46.0% of respondents either are or are planning to offer higher value-added products. 48.7% reported that increasing imports from China will enable them to "procure cheaper parts and raw materials".

Regarding Korean products, 48.1% of respondents find value in a fair cost-quality balance; 38.2% of respondents plan to offer higher value-added products, especially in the electric/ electronics products and precision machinery industries, to remain competitive.

372 companies, or 76.4% of respondent companies, named the US as the most suitable FTA partner, and fostered the greatest expectations for a US-Japan FTA.

Over 60% of companies have local (US) procurement ratios of 51% or more, maintaining a high domestic procurement ratio. Countries enjoying increasing popularity as sources of procurement are: China (up 4.0 points to 66.1%), Mexico (up 3.2 points to 39.4%), and ASEAN countries. Meanwhile, an increasing number of Japanese manufacturers are reducing procurement from Japan (up 3.8 points to 33.3%) and from Europe (up 8.9 points to 16.7%).

Production shifts to China and Mexico seem to continue. 9.2% of companies reported plans to shift at least a portion of manufacturing processes overseas "within a year or two," in contrast to the 8.2% companies who shifted "a year or two ago". China (20 companies) and Mexico (14 companies) are the top two favored relocation destinations, suggesting that many Japanese manufacturers, especially within the automobile industry, are venturing into these countries due to an increased international division of labor.

9.5% of the companies polled have offshore operations. Outsourcing to Indian firms is popular in software development; system database development and maintenance; and IT-related helpdesks. About 30% of the companies planning offshore operations are eyeing India, proof of the country's growing popularity.