Brexit! It’s a word! And thanks to a vote yesterday, it’s a Thing! Most simply, it means that the United Kingdom is going to leave the European Union. But it might mean a hell of a lot more than that simple explanation for the Britain’s auto industry, and the rest of the globalized car world.
In addition to British (but now foreign-owned) staples like Jaguar, Land Rover and Mini, automakers including Honda, Nissan and Ford all have substantial manufacturing bases in the UK, and are major exporters to the rest of Europe and the world. All eyes are on how Brexit could affect them.
The emphasis here, for now at least, is on “could” and “might.” The truth of the matter is we don’t know. As virtually every economist and media hack on Twitter will tell you, we’re in uncharted territory. There are financial and geopolitical models, sure, but sometimes the world works in ways we don’t expect.
Which is actually sort of what happened when the votes came rolling in last night. Most polls and bookies said that the UK was going to choose to stay in the EU, we’d all forget about it by next week, and then we’d move on to the next thing. Done. But instead, we’re now discussing a very different scenario. Maybe.
What We Don’t Know
There’s a lot we don’t know upfront. Shifting an entire nation out of a large geopolitical bloc like the European Union doesn’t just happen overnight—it will likely take years to negotiate.
It’s not like there’s a switch the Queen flips from “EU” to “not EU” The EU is a massively complex political and economic system involving treaties, agreements, trade, parliaments, taxes, spending, and a whole bunch of other stuff.
None of Britain’s disentanglement from all of that is yet finalized. So we don’t know what Britain’s trade agreements with the rest of the world will end up looking like, and we don’t know what will result from any trade tariffs or restrictions on the free movement of people.
But we CAN speculate! And wild speculation is always fun.
A History Of Mediocrity
We’re not just going to go off the rails here, with tales of fire and brimstone. What we are going to do, however, is look at the past. A time of ancient history, before anyone currently on this planet was even alive: 1973.
Back then the United Kingdom had wanted to join the European Economic Community, the predecessor to the E.U., for years. Though it was not a signatory of the Treaty of Rome, which created the EEC, it subsequently applied to join in 1963. French President Charles de Gaulle, being the irascible nut that he was with a foreign policy that seemed to be predicated on the notion of “just annoy everyone for no discernible reason, even the Canadians,” made sure that application was turned down. He did it again when Britain applied for the second time in 1967.
But by 1973, de Gaulle was no longer the president of France and also he was dead, so he couldn’t block British membership in the EEC anymore. The British applied, they were accepted, and in 1975 the UK had a referendum on whether it should leave the EEC or stay, much like it did last night.
Overwhelmingly, the British voted to remain in the EEC, and everyone thought that with free trade, the British economy would change. Especially the British car industry.
As James May explained his BBC series James May’s Cars of the People, it did change. For better or worse, depending on whom you ask:
That meant we were free to sell our cars in places like Germany. Germany were also free to sell their cars in places like England.
And theirs were better.
Britain’s previously protectionist trade policy meant that British carmakers, like Austin and MG, were free to sell objectively terrible cars in the United Kingdom without fear of much competition. It enabled British carmakers, and British factory workers, to thrive despite their collective mediocrity.
In the 1970s, British carmakers didn’t realize how terrible their cars were, or that nobody in their right minds would want them. They thought that British people bought their cars because they were just grand, and not because they didn’t have another option. The logical conclusion from that line of thinking was that continental Europeans would also eat up these terrible cars, and that the British car-buying public would loyally stick to British terribleness.
What Actually Happened
None of that actually happened. The end result was that by the 1990s, the British car industry was in a state of virtually total collapse. Mini, Land Rover, and Rolls-Royce were sold to BMW. Land Rover was then sold to Ford. Aston Martin was sold to Ford. Aston Martin was sold to Dubai. Bentley was sold to Volkswagen. MG was sold to China, but that didn’t matter as no one bought MGs anymore anyway. Land Rover was sold to Tata. Jaguar was sold to Tata.
Of the all the cars sold in the United Kingdom in the first half of 2016, not one of the top 10 most popular models is made by a British-owned company.
In fact, if you’re looking for a British-owned company, you have to go small. Really small. Like Morgan- and Marcos-small.
But that doesn’t mean no cars are made in the U.K. today. Honda’s got a manufacturing plant in Swindon. Toyota has factories in Burnaston and Deeside. Minis are still made in Oxford, and Jaguars are still made in Birmingham. Nissan owns a factory in Sunderland. Bentleys are still made in Crewe, but Rolls-Royces are now made in Chichester, which I’m told is a real place.
So the British car industry isn’t dead, it just looks a lot different.
And free trade and the free movement of people made it look that way.
What Might Happen Now, With Brexit
Right now, the British car industry is in a bit of a panic, though they won’t tell you that. We emailed officials from Toyota, Honda, BMW, Jaguar Land Rover, Nissan, Bentley, Volkswagen, McLaren, and Morgan, and (except for the last two, which have yet to respond) from each and every one we heard variations of either “no comment” or “we respect the vote, we don’t know what’s going to happen yet, we’re watching very closely, we don’t know what we’re going to do, I guess we’ll see how this all shakes out.”
Which isn’t something you hear from car manufacturers most of the time. They’re huge, vast enterprises full of smart people who make contingency plans for everything under the sun. Except, apparently, for a Brexit.
But while they’re all being a bit tight-lipped, some did let slip some of their biggest concerns. Take BMW, for example, which said this in a statement e-mailed to us:
Today, we know that many of the relevant conditions for supplying the European market will have to be re-negotiated, but of course we cannot say what this means for our UK operations until those future regulatory and legislative arrangements are agreed. We will not speculate about the outcome of these negotiations nor about any possible effects that might have on our production operations in the UK.
Or Toyota, which said this:
Going forward we will closely monitor and analyse the impact on our business operations in the UK, and how we can maintain competitiveness and secure sustainable growth together with the UK automotive industry and other stakeholders.
It was pretty much the same from the other U.K. manufacturers, and the common thread was just that—manufacturing.
In a free trade zone, there are no tariffs between countries. That means you can make a car in Country A, and sell it in Country B, without any necessary change in the price.
But without free trade, a car made in Country A might have its sales taxed in Country B, meaning the car could cost much more in the new country, often up to double the amount. Or more. Which means people won’t really want to buy it any more. Which means that if you want to sell a car in Country B, you better be making that car in country B.
So for Honda, which makes the Civic in the United Kingdom, it might make more sense to just move that manufacturing plant over to France so that it can continue to sell Civics in continental Europe without penalty. Which is why Honda told us that “at this moment, it is not clear what conditions and rules will ultimately replace the UK’s membership of the EU. We will therefore carefully monitor developments,” and that it will “continue to prepare for the production launch of the 10th generation Civic from our Swindon plant.”
And all of that may as well just have the doom-and-gloom sounding words of “for now” appended to it.
If the UK decides to increase its economic autonomy by raising tariffs on products, and what remains of the EU decides to do the same, it could lead to a disaster for British manufacturing. Though they have not yet said they will do so, all of those car manufacturers could conceivably pull certain cars, or whole brands, out of the British market in order to preserve their European sales.
That sounds a bit crazy, but let Automotive News drop some knowledge on you:
Toyota produced about 190,000 cars in the UK last year. Of that, 75 percent went to the EU. Only 10 percent was shipped and sold within Britain.
Nissan, the UK’s second-biggest car producer, declined to comment. Nissan has been in Britain for three decades and builds 475,000 cars a year in the country, most of them for export inside the EU. Sunderland in northern England, where Nissan has its operations, was among the constituencies that surprised pundits by voting for Brexit.
If Britain ditches free trade, it could say goodbye to all of those factories. And even if they don’t lose the factories, it can hurt British corporations in other ways. Sources at JLR, for example, told Reuters they can expect to see losses of up to a billion pounds as a result of a Brexit.
It could also mean some companies will stop selling their cars in the UK. Or, at the very least, cars will become a hell of a lot more expensive to buy for the British public.
And with the large-scale British-owned and operated car industry effectively dead, Britain would have to start a new car industry from scratch.
Not that starting big car companies from scratch is impossible these days, as Tesla has shown. It’s just very difficult. And rare.
So it’s nearly impossible.
Right now, it appears as if Britain has three options. Preserve its free trade agreements with the E.U., and have its manufacturing base survive to live another day. Or it could rescind the agreements, watch all of its current manufacturing flee, and try to innovate out of that gaping maw of automotive oblivion.
Or they could just do something else.
I hear the British like horses.