Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Brexodus? :Britain’s car industry gets a Mini boost but faces major problems

Posted by hkarner - 29. Juli 2017

Date: 27-07-2017
Source: The Economist

BMW announces a welcome investment. But the road ahead looks bumpy

BRITAIN’S car industry has been running at high revs. Over 1.7m vehicles rolled off production lines last year, the most since 1999. If growth continued at recent rates, the all-time record of 1.9m, set in 1972, would be broken within a couple of years. On July 25th BMW, which owns the Mini brand, announced that it would build an all-electric model of the compact car in Oxford from 2019, rather than making it in the Netherlands, as it had threatened in the wake of the Brexit referendum.

Yet the mood among British carmakers is a mixture of nervousness and gloom. In spite of BMW’s announcement, few feel reassured about the long-term future of the industry. Indeed, some fear that last year’s vote to leave the European Union could run them off the road.Manufacturers are aware that it was joining the EU that helped to rescue carmaking in Britain. The amalgamation of various car brands under British Leyland had been a catastrophe. Competition was stifled, investment faltered and labour relations soured to the extent that managers straying onto the shop floor had to dodge flying bolts. Production plunged until Japanese carmakers, led by Honda in 1979, sought a base for exporting to Europe. Britain’s accession in 1973 to what was then known as the EEC gave such firms access to a giant market. Britain’s flexible labour laws and engineering expertise were added enticements.

The worry is that Brexit will make foreign firms think again. The official line from Toyota, Nissan, Honda and most other carmakers is that they will wait for the outcome of the negotiations in Brussels next autumn. Businessfolk report that since she lost her majority in an election in June, Theresa May has become more willing to listen to them. The cabinet seems at last to have recognised that a transition period will be necessary after Britain leaves the EU in March 2019. But the country is still heading for a “hard Brexit”, leaving the EU’s single market. And the instability of Mrs May’s minority government could yet lead to no deal at all.

The uncertainty has already taken a toll. Investment in carmaking plunged to £322m ($406m) in the first half of 2017, compared with £1.7bn in all of 2016 and £2.5bn in 2015. Production has dipped. One boss thinks the chances of getting special single-market access for cars, as Mrs May once hinted that she wanted, are “zero”. Mike Hawes of the SMMT, an industry body, says that even if there is a deal it is certain to be on worse terms than the current one.

In the worst-case scenario, with no trade deal reached, World Trade Organisation rules would mean tariffs of 10% on vehicles and 4.5% on parts. That would hurt: the average British-made car has 60% of its components imported from the EU; some parts travel several times between Britain and Europe during a car’s manufacture.

Overcoming tariffs would be difficult for mass-market carmakers, says Mr Hawes. Margins in Europe average 5-10%. Heavy investment has made most plants in Britain highly efficient, so there is little scope to cut costs. One hope is that firms are willing to gamble that Brexit will bring a permanent devaluation of sterling to offset tariffs; since the referendum, the pound has fallen by 15% against the euro.

Yet tariffs may not be the worst problem. The introduction of customs controls would hold up the flow of parts across the English Channel in a way that hampered factories’ planning. Wafer-thin inventories keep costs down. Stocks of many parts cover just half a day of production, so a predictable flow is vital. Some deliveries to Nissan’s plant in Sunderland are scheduled to within 15-minute time slots. Allowing for customs inspections would mean keeping bigger stocks, at higher cost.

Will other carmakers follow BMW and invest in Britain despite these snags? BMW is not the only one to have announced new projects since the referendum. In October Nissan said it would make the next generation of its Qashqai and X-Trail SUVs in Sunderland. In March Toyota said it would invest £240m in a factory in the Midlands. Brexiteers cite these as evidence that the industry will rumble on regardless.

That is optimistic. One reason for the recent investments is that the timescale of the car industry is long: five years may pass between inception of a new model and production, so decisions are taken far in advance. Nissan had intended to invest in Sunderland for some time. BMW’s other option, in the Netherlands, would have meant using a contract manufacturer rather than a BMW-owned factory—a risky option for an important model.

And making a new version of an existing model—such as the electric Mini—makes sense if a factory is already churning out cars of that variety. When it comes to building all-new models from scratch, carmakers may be more likely to look overseas. There is already a hint of that in BMW’s plans. Although the Minis will be assembled in Oxford, the batteries and motors, containing all the clever new technology, will be developed in Germany.

Another factor in the post-referendum announcements is intensive lobbying by the government. Nissan and Toyota received unspecified “assurances” from ministers that their commitments would not leave them out of pocket after Brexit. The government has declined to say exactly what was promised; whatever it was, it is unlikely that there will be enough of it to go round for every prospective investor, nor every industry, nor indefinitely.

Some factories face more immediate peril. The takeover in March of Opel, which makes Vauxhalls in Britain, by France’s PSA Group could be bad news for Vauxhall’s workers. PSA will look for costs to cut to justify the takeover, and Vauxhall’s two factories could be on the list.

Not all carmakers would quit. As Andy Palmer, the boss of Aston Martin, points out, his expensive luxury sports-cars are not for the price-sensitive. The same is true of Rolls-Royce, also owned by BMW, Bentley, owned by Volkswagen, and McLaren. Jaguar Land Rover, Britain’s biggest carmaker, exports just 20% of its output to the EU. The domestic market is big enough to sustain some local production.

Nonetheless, hefty tariffs would cause a “slow, inexorable migration”, says Nick Oliver at the University of Edinburgh Business School. Even a deal that reduced or abolished them would damage competitiveness. Carmakers would find it harder to source parts as the network of domestic suppliers shrank with the rest of the industry. And without big investments in new technologies such as electric power and self-driving, British assembly plants would become more reliant on imported components. Car crashes happen in the blink of an eye. Brexit could have a slow-motion impact that will be no less harmful.

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