Brexit's Just One (Car) Accident Waiting to Happen

(Bloomberg Opinion) -- Automakers, Brexit isn’t your only problem.

Honda Motor Co. is planning to shut down its Swindon plant in the U.K in two years, a local member of Parliament said on Twitter. On Tuesday, Honda confirmed it will close the site where it makes 150,000 Civics a year, citing “unprecedented changes” in the industry for its global restructuring. The company also said it will stop producing the Civic sedan in Turkey, where it makes about 38,000 units a year.

It’s unlikely Brexit is to blame. No doubt, prospects are scary for the European auto market, with upheaval across supply chains and potential tariffs posing a real threat. Cross-border auto trade is almost $70 billion a year, according to analysts at Nomura Holdings Inc. But since 2016, there’s been no tangible change to businesses’ operations; the major impact has been from the value and volatility of sterling, as Brexit’s outcome remains in limbo.

Honda’s car sales in Europe (which includes the U.K., Germany, Belgium, Turkey and Italy) have been sagging for a while, down around 5 percent in the third quarter. Operating profit from the region remain tiny compared with Japan and North America, accounting for less than 1 percent of the total in the quarter ended Dec. 31. Net income margins overall have been shrinking, too. The company’s market share fell to less than 1 percent last year from around 2 percent in 2006.

A hard Brexit is expected to shave just 1 percent off net profit.

Honda has its sights beyond the U.K. anyway, on areas such as electric cars. The automaker is hoping more than two-thirds of its sales come from this category by 2030. It has tied up with Contemporary Amperex Technology Co., a large Chinese battery maker known as CATL, and committed $2.75 billion to General Motor Co.’s self-driving car unit GM Cruise LLC.

With the need for cash, and costs rising elsewhere, why dig your heels into a region with declining sales and a gloomy outlook? (Nomura analysts expect car sales in Europe to fall 2.9 percent this year.) The backdrop is partly due to new emissions lab tests for cars. Meanwhile a switch from diesel has some carmakers adjusting their business models, anyway.

The reality is that Brexit’s impact will vary across auto manufacturers. Tata Motors Ltd., for instance, could see more than 70 percent of its profits wiped out in the next fiscal year if a hard Brexit deal yields a 10 percent tariff on cross-border auto trade, as most of Jaguar Land Rover’s production is based in the U.K. The company has said a “bad Brexit deal” could cost it more than 1.2 billion pounds ($1.55 billion) a year, but noted that no audit can be expected to predict the full range of consequences. 

Others like Nissan Motor Co., Ford Motor Co. and Kia Motors Corp. could feel the pain, too. Toyota Motor Corp., on the other hand, may be able to hedge its pain as hybrid sales in the region have held up. 

Brexit’s potential victims have been harping about its risks for a while now. Fallen auto executive and former Nissan head Carlos Ghosn was blunt about the impact: “We are preparing for the worst, but I do not want to tell you how we are preparing because you will say I am trying to scare people,” he said at last year’s Paris Motor Show.

From trade war-related tariffs and regulation, to China’s slowdown and tech disruption, automakers have been exposed to almost every global concern. Over the past year, auto stocks have fallen sharply. That's why contingency plans – on which plants to shut down, for instance – just make for good business planning and management.

Depending on where Brexit ends up on trade and tariffs, carmakers may have options like building in Europe and exporting to the U.K. Yet that would likely leave a skeletal car industry in the U.K.

Companies will have to restructure, regardless. Honda won’t be the last.

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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