It’s the economics, stupid.
Yes, this is a play on words based on Bill Clinton’s successful 1992 Presidential campaign slogan.
But "it's the economics, stupid" is a much more apt reason behind the recent decisions byJapanese car manufacturers to reduce their UK-based production capacity rather than simply “it’s Brexit”.
While Brexit has to take the blame for much of the UK’s economic slowdown at the moment, Honda’s decision to follow Nissan back to Japan has less to do with Brexit and everything to do with monumental shifts in consumer demand for cars.
Big global car brands appear to have been caught flat-footed.
The recent introduction of stricter emission tests, talk of new US tariffs, government plans to phase out diesel engine sales and the expansion of low emission zones in cities like London, Beijing and Shanghai have left consumers bewildered and sales of conventional combustion-engine driven cars faltering.
The solution is thought to be pure electric (known as plug in electric vehicles, or EVs) or hybrid cars as an interim step.
However over the past decade, the big car brands have altered their product mixes and promoted diesel cars. This strategy was seen as the only one that had a chance of aligning average fleet consumption with western society’s ambitious global warming CO2 reduction targets.
Development cycles in the car industry take many years, so the sudden switch from the diesel preference to EV is not achievable overnight.
Taking a closer look
It’s against this backdrop we have to view the news that Honda was set to close its Swindon plant, even if much of the media pinned it on Brexit uncertainties.
The reality is the Japanese car company is ceasing all European car production, and its Turkish factory will also close.
Honda’s market share was just 1 per cent of Europe’s total car market, or around 6 per cent of Honda’s global sales. To make matters worse, European operating profitability fell 48 per cent year-on-year.
Despite its low diesel dependency, Honda struggled to meet European consumer preferences with its model and design mix.
Swindon operated at just 65 per cent capacity in 2018, with production destined primarily for the US market – which is why production was shifted to North America.
Europe was just simply too small for Honda.
Contrast this to its healthier Asian business, where sales rose 10 per cent even as other peers faced challenges. This resulting in Honda now producing over 25 per cent of its units there.
Profit margins in Asia are 9 per cent, five times their European margins. Additionally, Honda’s motorbike sales in India are decent and the company is one of the strongest brands amongst vehicle manufacturers in China.
While this is a clear blow to UK plc in terms of manufacturing, the simple truth is that Swindon at 150,000 units per year was not globally competitive for Honda, particularly when logistics, labour, procurement and other costs are factored in.
Honda’s Swindon closure will impact 3,500 jobs directly and a further 3,500 indirectly through supplier relationships.
Nissan’s recent decision to build the new X-Trail SUV in Japan rather than Sunderland builds on the same business rationale. Given EV-powering lithium ion batteries are largely produced in Asia, it means the company can streamline production and lower its costs.
Brexit probably brought the decision forward, given the current lack of clarity on the UK’s future terms of trade.
At the same time, Japan’s new EU trade deal removes European tariffs of 10 per cent on Japanese cars by 2027. The relative attraction of producing in the UK for the European market would fall away if the UK ended up without a comprehensive free trade agreement with the EU.
While last year’s declines in global vehicle sales have already dealt a blow to manufacturers worldwide, there are darker clouds on the horizon in the form of stricter CO2 targets across the EU from 2021.
By then, manufacturers’ fleet average of CO2 per kilometre has to fall by another 20 per cent to just 95g. Failure to achieve this will mean car companies face substantial fines of €95 per gram and for every car sold over the limit.
With a majority of diesel-powered vehicles the target was thought achievable, but with petrol cars and the recently rising popularity of SUVs the target is very unlikely to be met. This leads to suggestions that firms like VW may face fines as high as £1.4bn per annum, which would be yet another significant blow to manufacturers’ profitability.
The debate on diesel
Against this backdrop, it is perhaps understandable why car companies have embarked on a vehement campaign against the diesel vilification.
It is telling that in a car country like Germany – which probably also has the most eco-receptive public in the EU – recent months have seen a continuous stream of widely published challenges by professional bodies to the political consensus that diesel powered vehicles are a higher hazard to public health than petrol cars.
They argue that:
(a) diesels now emit lower levels of nitrogen oxides (NOx) than petrol engines; and
(b) the danger of NOx to human health has been vastly exaggerated, or at least that the scientific foundations of what has become accepted wisdom are based on what they regard as dubious empirical evidence.
It will be interesting to see where this debate ends up. But given how much more than the UK countries like Germany depend on the health of their car industry, we would not be surprised if we saw a political U-turn on the subject of NOx emissions.
It would not be the first time this had happened around diesel engines, as many readers will remember from the diesel particulate pollution debate in the late 1990s.
As the French yellow vest movement has only recently proven, CO2 and NOx emissions are more of a focus of liberal thinking urban elites.
Car-based transportation and jobs in vehicle production are far more important to those parts of western society who also support the populist political movement.
Politicians may therefore be tempted to rethink, and to weigh up their position on reaching environmental targets versus the changing odds of getting re-elected.