Business

Doubts remain over Japanese automakers' plans after British exit

by William Hollingworth

Kyodo

Despite Nissan Motor Co.’s decision to keep automotive production in Britain after its exit from the European Union, industry experts have mixed views over whether other Japanese carmakers will follow suit.

Experts interviewed are unsure how freely British firms will be able to trade in cars and automotive components with the 28-nation bloc after the so-called British exit. Nissan’s recent decision to build two new models at its Sunderland plant has been seen as a vote of confidence in the Brexit strategy.

The government says it will push for a continuation of tariff-free trade with the European Union in cars and parts, as well as assist with training, capital investment and research and development.

But Nissan’s decision to stay did not come as a surprise, given the size of its facilities and the success of its models in northeast England. Less certain is the long-term presence of its two main rivals — Toyota Motor Corp. and Honda Motor Co. — which have smaller, less successful plants.

In a report published just after the June 23 Brexit referendum, PA Consulting Group identified Toyota and Honda as potential “leavers” should Britain vote to quit the European Union. This is because both of them export strongly to the bloc on relatively low margins.

Over the next few years, Toyota and Honda are expected to make decisions on whether to build new models of the Auris and Civic, respectively, in Britain.

In the meantime, the nature of any new deal brokered between London and Brussels remains unclear.

Faced with this uncertainty, the Japanese firms may instead decide to produce new models elsewhere in the European Union, said Tim Lawrence, head of manufacturing at PA Consulting Group.

He said both Honda and Toyota are in very different positions than Nissan, which has been extremely successful with the design and development of its Qashqai SUV in Britain.

“The Honda Civic has been a pretty poor seller and isn’t making that much money,” Lawrence said. “They have alternatives in the EU for its manufacture. There are questions over the sustainability of its plant in Swindon over the medium term. The key will be how well the Civic model does and whether it can gain market share.

“Toyota has made encouraging-sounding statements about remaining in Britain, but that doesn’t mean that over time they couldn’t shift the balance of their production to Europe where they have plants. The products they have made in the U.K. have, once again, not been that profitable and they are making saloon cars, which is not such a growing market.”

Speaking to a Parliament committee recently, Mike Hawes, the chief executive of the Society of Motor Manufacturers and Traders, cautioned against assuming other manufacturers will follow Nissan’s lead, adding that the companies are in different positions and that most will have “alternatives” to producing in Britain.

Garel Rhys, emeritus professor of motor industry economics at Cardiff University, said, “Honda is probably the most vulnerable but they have just announced that they are going to build the 10th-generation Civic in the U.K. — their only plant in Europe — with the aim to export it to the United States.

“And, although Toyota has a facility in France, they need the capacity of the British plant. The probability is that all the Japanese manufacturers will stay, as long as there is some kind of compensation. Some argue that’s not possible, but you can give aid for skills, building new plants, and for putting new products in.”

According to some reports and experts, London is leaning toward striking a free trade deal with the European Union that could offer deeper integration, especially for the car industry.

As well as tariff-free trade in cars and components, which is very important given the complex supply chain across Europe in assembling cars, the special arrangement would reduce customs bureaucracy and allow auto-related manufacturers to retain the benefits of the free trade deals that have already been negotiated by the European Union with other countries.

Whatever materializes in the talks, both Rhys and Lawrence are reasonably optimistic Britain will secure a favorable deal on cars, given that the country imports more automotive items from the European Union than it exports.

But Lawrence cautions some EU states will be less enthusiastic than others on free trade. Slovakia and the Czech Republic, for example, do not export many cars to Britain and neither do they import many components from the country.

Protracted negotiations over two years in Brussels could deter investment in Britain and any deal could ultimately place restrictions on incentives offered to Japanese investors.

Rhys is optimistic that Japanese manufacturers will stay even if no deal is reached and tariffs are imposed on cars (at about 10 percent) and components (2.5 percent). This is because firms are already benefitting from the slide in the pound compared to the euro.

He also argues there are many factors which “anchor” the Japanese to Britain, including the supply chain, skills, scales of operation, research and development, the state of industrial relations, government support and the cachet of products being “Made in Britain.”

“Whatever shape Brexit takes, the most important task is to ensure the conditions that have allowed U.K. automotive to thrive remain in place and that barriers that could inhibit trade or undermine competitiveness are not created,” said Tamzen Isacsson, director of international and communications at the SMMT.

“We are encouraged to hear government wants to secure the future competitiveness of the U.K. automotive sector, which is recognized as a leading global player.”

Japanese manufacturers remain extremely concerned about their ability post-Brexit to recruit skilled production engineers and designers from the European Union.

However, experts appear to be relatively confident that any eventual deal with Brussels will ensure the free movement of skilled labor.

Britain exports over 1.2 million cars per year, with over half going to the European Union. Currently, Nissan produces about 500,000 cars per year, Toyota 180,000 and Honda 140,000.