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Will U.K.’s Auto Business Be Doomed By Brexit?

Will U.K.’s Auto Business Be Doomed By Brexit?

Will U.K.’s Auto Business Be Doomed By Brexit?

“It’s not the economy, stupid”

“A free trade deal (with Britain in the event of Brexit) is very, very likely because it is in the interests of both sides”

“Either way, in or out, frankly, the sun will rise and the industry will continue in Britain as a good location for investment”

    Conventional wisdom contends that if Britain votes June 23 to leave the European Union (E.U.), its large, prosperous, and mainly foreign owned automotive industry would be fatally undermined.

    Those saying Britain should remain in the E.U., mainly establishment political and business leaders, are claiming that it is case closed. But experts like Professor Garel Rhys from the Cardiff Business School beg to differ. And some auto makers seem to think the issue is simply about economics, when many British voters see it as a matter of liberation from an unaccountable bureaucracy. 

    In fact, as the date of the referendum approaches, a cacophony of hysterical predictions has swamped the U.K.’s media suggesting dire consequences if the British dare to decide they no longer wish to tolerate what many consider to be unaccountable, undemocratic and bureaucratic rule from Brussels.

    Latest opinion polls suggest Britain is edging towards voting to leave the E.U. Two Guardian/ICM polls show voters split 52% -48% in favor of Brexit, whether surveyed online or by phone.

     Britain joined the European Union in 1972 which was then known as the Common Market. A referendum approved membership in 1975 after the country was promised the deal had no political connotations and was purely about trade. Since then there has been a creeping political power grab from Brussels which has reached the level where more than half (the exact number is a bone of contention) of Britain’s laws come directly from Brussels, bypassing Parliament.

    Wake up to NAFTA
    For Americans, this would be like waking up one day to find that NAFTA had somehow acquired a veto over the Congress.

    Even President Barack Obama has joined in the arguments over Britain’s exit, now known by the shorthand “Brexit”. On a recent visit here Obama said that if Britain voted for independence, ending its free trade deal with the E.U., it would have to wait for any trade deal with the U.S.

    Cameron-RRPrime Minister David Cameron has led the shrill campaign with assertions that Europe could be threatened by war if Britain left the E.U. His government has published data purporting to show that vote “Leave” (the other choice in the vote is “Remain”) would sharply curtail foreign trade, the economy will tank, and living standards too.

    This use of data, considered by the “Leave” side to be tainted and politically motivated, has been heavily criticized in the media. The weekly political magazine “The Spectator” published an article by veteran columnist Peter Oborne accusing Cameron of “monstrous deceit”.

    German strategy consultants Roland Berger has joined in this argument with a report called “Engineering Brexit – British industry must fight to remain”, and said Brexit poses an existential threat to its automotive business.

    Britain’s auto industry almost died in the 1970s, undermined by crippling strikes. The traditional names like Austin, Morris, Riley and Wolseley, Rover, Singer and Hillman disappeared and were replaced by mainly foreign owned mass market companies like Honda, Toyota, and Nissan. Luxury brands were kept alive as BMW acquired Rolls Royce and Mini, VW bought Bentley and Tata of India took-over Jaguar and Land Rover. Last year Britain produced about 1.6 million cars, according to Berger, about 60% more than its low point in 1980, of which 77% were exported, 44% to the E.U.

    Loss of jobs
    Berger, in its report, said that even if Britain negotiates a free trade deal with the E.U., it will lead to the loss of a third of the industry and 80,000 jobs in the two years it would take to seal a deal. Brexit will mean at least a big slowdown in investment by foreign auto makers. The supply chain – only 33% of automotive components for Britain’s manufacturers are sourced in the U.K. compared with 60% in Germany – will be jeopardized.

    “(Manufacturers and suppliers) will rightly defer investment in the U.K. pending clarity on whether or not it intends to be part of the world’s largest free trade area (the E.U.’s Single Market),” the report said.

    Roland Berger partner Tim Longstaff, asked in an interview to explain how the 80,000 job loss figure was established, said this was based on the likely time it would take for new trade agreements to be negotiated, during which time new investment would stop.

    “All the time you are not investing in the next model you are effectively reducing the size of your future industry. It takes six years to replenish the capex cycle – a third of the industry and that’s where the 80,000 jobs come from,” Longstaff said.

    Longstaff said the survey was based on industrial logic, not on economic forecasts. If Britain voted “Leave”, left the Single Market and negotiated tariffs based on World Trade Organization rules, this would be an “absolute disaster” for the auto industry. Even the small WTO tariffs would wipe out the modest profit margins involved in sourcing parts for Britain’s auto industry.

    Free trade retained
    The “Leave” campaign assumes that if Brexit won, the old free trade system would be retained until a new free trade system was negotiated. “Leave” assumes this because countries like Germany and France have huge trade surpluses with Britain and were unlikely to insist on terms which disadvantaged them.

    Garel Rhys, emeritus professor of Motor Industry Economics and director for Automotive Industry Research at the Cardiff Business School, agrees. He sees no negative implications from a U.K. exit, with a free trade deal very likely.

    “It’s possible I suppose that there could be a massive trade war, with protection and trade barriers but I think that’s very unlikely. Firstly the WTO (World Trade Organization) would have a view on that. But much more importantly, Britain has a huge balance of trade deficit with the rest of the E.U. It’s a tremendous market for E.U. countries for a whole range of goods and especially for upmarket BMWs, Audis and Porsches,” Rhys said in an interview.

    A couple years ago Ford closed a van factory in Britain and moved it to Turkey, outside the E.U.
    “Industry protests (about Brexit) also fly in the face of its actions in investing in factories in places like Russia and Turkey, which assume free trade access to European markets.

    “A free trade deal (with Britain in the event of Brexit) is very, very likely because it is in the interests of both sides and the behaviour of the industry shows they can make it work using suppliers outside of the E.U to supply the E.U. market,” Rhys said.

    SMMT
    Britain’s Society of Motor Manufacturers and Traders (SMMT), which promotes the U.K. industry, disagrees with Berger’s estimate that 33% of components are sourced locally, saying it now stands at 41%, up from 36% in 2011.

    But it agrees that Brexit will hurt profitability.

    SMMT CEO Michael Hawes told Automotive News Europe in an interview if Britain voted to leave, vehicles exported to the E.U. could attract a 10 per cent tax and components might face a 2.5% tariff.

    The SMMT is dominated by the big foreign companies operating in Britain.

    Professor Stefan Bratzel of the Center of Automotive Management in Bergisch Gladbach, Germany shares the view that Brexit would be bad news for Britain’s auto business.

    “I think it will have negative mid and long-term effects based on higher costs and logistics and the extra effort involved in trade. It will have a strongly negative effect. There will be a negative impact on long term investment decisions. Will we build a new plant or increase capacity in the U.K.? Companies will think three times about it if the U.K. isn’t in the E.U. anymore,” Bratzel said.

    Prominent British Conservative politicians supporting “Leave”, like government cabinet member Michael Gove and charismatic former Mayor of London Boris Johnson, say they expect a seamless change after Brexit with free trade quickly reinstated. They point to the huge number of German and French cars sold in Britain as evidence that any attempt to upset these arrangements would hurt these countries more than Britain. They also point out that the reason for Brexit is more political than economic. It’s about sovereignty, not trade.

    Before the campaign ends one of them is bound to say “It’s not the economy, stupid”.   

    Previous false claims
    These arguments saying Britain faces economic disaster if it leaves the E.U. remind voters of earlier false claims.

    In September 1992, Britain was forced out of the European Exchange Rate Mechanism (ERM). The conventional wisdom predicted dire consequences for the British economy, but the outcome was years of solid economic growth. In 2002, leading politicians, expert opinion and leaders of the automotive industry led by Ford Motor Co and General Motors, said if Britain didn’t join the Euro single currency, the economy would be toast and the auto industry would die. But the Euro devastated many smaller European economies, while Britain’s did relatively well outside, and the auto industry positively thrived.

    Cardiff Business School’s Rhys said the industry’s position on the ERM and the Euro showed its questionable judgement on big economic questions.

    “When Britain faced the choice of joining the euro single currency in 2002, the manufacturers were almost unanimously shrill in claiming that if Britain didn’t sign up, it would be the end of its economic prospects for good. If it didn’t sign up, car makers would leave Britain on mass. Since then of course, the industry has thrived in the U.K. and many eurozone members have crippled economies likely to be basket cases for years, because adherence to the euro meant loss of exchange rate flexibility.

    Not a great judge
    “The car industry hasn’t been a great judge of its best interests. They promised the end of civilization as we know it if we didn’t join (the euro). We are thanking our lucky stars that we didn’t. They were looking at a narrow self interest and the costs of not having to convert currencies, and didn’t take account of big economic factors. That decision was bordering on the juvenile, and they don’t have a great background to pontificate about this issue (Brexit) now,” Rhys said.

    Rhys said fear of change probably accounts for the hostility to Brexit, and worries that they will face a series of challenges and problems.

    Michael Burrage, in a series of reports for Civitas, the London-based social policy think-tank, has made clear that many of the assumed benefits to Britain of membership of the E.U.’s single market have never actually materialized, and the future outside would pose no problems. Many of the claims made by politicians and business leaders don’t stand up to examination.

    “The claim that 80,000 jobs will go is a fantastical figure, sort of snatched from the air. For it to make sense you need to do a detailed analysis because there are plenty of other countries’ car manufacturers which export to the E.U. from the outside. Why should the British ones suddenly not be able to do it? Non E.U. members have a better exporting record to the E.U. than Britain does,” Burrage said in a telephone interview.

    Procurement contracts
    “Also international companies have invested a lot of money setting up headquarters and lobbying in Brussels. They don’t want to change that. And many of them receive substantial funds from the E.U in grants and procurement contracts,” he said.

    Anyone bored with the debate and hoping it will all be over soon could be in for a shock. Burrage, a director of Asia Pacific corporate strategy researcher Cimigo, said in his report that if and when the public realizes the extent of manipulation by government, if “Remain” wins, it may well lead to a second referendum.

    Cardiff Business School’s Rhys said whatever the result of the referendum, Britain’s auto industry will prosper.

    “Multinational companies have long experiences of operating under a huge variety of circumstances, dealing with problems far worse than they face with Britain outside the E.U. This is simply a knee jerk reaction. Either way, in or out, frankly, the sun will rise and the industry will continue in Britain as a good location for investment,” Rhys said.

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One Response to Will U.K.’s Auto Business Be Doomed By Brexit?

  1. Jeremy Walton June 16, 2016 at 10:35 am #

    Good summary, surprising depth and a bold position to take after so many industry warnings that UK automotive will be wounded by exit.
    I agree BMW-Mercedes-Audi-VW-Porschge do too well here in UK to want any kind of impediment to our buying habits–but believe BMW and VW owned factories from MINI to Rolls Royce via Bentley] would see a reduction in investment until we proved Brexit’s financial worth.
    I
    Japanese Nissan and Toyota UK factories turnout the big numbers for Euro export and they will go where access to European mass markets is most viable. That could be a longer term problem for UK…

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