Thread by @davidfickling

A few thoughts on Honda and Brexit:

1. Europe, including the UK, just isn't a big market for Honda any more. About 10% of Hondas were sold in Europe 10 years ago. Now it's about 5%.

2. The UK is, by a substantial margin, Honda's biggest European market, accounting for about 1/3 of sales across the EU:

3. Europe was also a pretty low-margin market for Honda. Operating income per vehicle sold in 2018 was about €670, vs €1,100 in Japan and North America.

4. In car manufacturing there's a concept called minimum efficient scale -- the smallest number of cars you can produce each year from a plant and reasonably expect to turn a profit.

Estimates differ but it's generally thought to be in the region of 200,000 to 300,000 vehicles.

5. You can see from the first chart in this thread that European Honda sales have been below minimum efficient scale for local manufacturing for nearly a decade now.

6. Next, throw the EU-Japan FTA into the mix. IMO, the trade-off in this deal is that the EU gets a better market access for agriculture, food, textiles, leather etc and for high-end car exports, while Japan gets better access for low-end cars and industrial products.

7. That really does benefit German carmakers (Daimler, BMW, VW/Audi/Porsche) who'll gain better regulatory alignment to sell their pricey cars in Japan over UK-based, Japanese-owned mass-market car plants who will lose their cost advantage as tariffs come down.

8. But bear in mind the most crucial FTA negotiations were happening in 2016-2018 when the UK had already voted for Brexit. There wasn't all that much reason for EU negotiators to sacrifice anything for a country that was leaving the union anyway.

9. The way Brexit deals a final blow is that when you put a customs border up, that sub-sized 180,000-unit European market becomes a 60,000-unit UK market and a 120,000-unit EU market, with a highly uncertain tariff relationship between the two.

10. Frankly, for long-term purposes there's more certainty about the tariff relationship between Japan and the 120,000-unit EU market, which is embodied in the FTA.

11. Conclusion? It's not right to say it's all about Brexit, or a stab-in-the-back FTA, or globalization, or any of the above. If Brexit wasn't happening, perhaps the FTA would have been kinder to UK manufacturing plants. But for Honda this market was sub-scale anyway.

12. The same may be true of Toyota, which makes fewer cars in the UK than Honda and may be in trouble.

Nissan on the other hand is a much bigger player so ought to be able to survive on its own feet. But a lot depends on the ecosystem.

13. The UK car industry as a whole is still a long way from danger. By car volumes it's very nearly in the global top ten, about 1.7m a year.

The danger, though, is that as subscale manufacturers withdraw it puts pressure on the whole supply chain.

14. We saw this in Australia, where Toyota's reasonably viable plant couldn't survive once Ford and GM withdrew: bloomberg.com/news/articles/…

15. The UK is still a long way from that, but it's one to watch over the years ahead. (ends)

Oh, one postscript: You should read this great @anjani_trivedi piece if you want to know where the next shoe is going to drop: bloomberg.com/opinion/articl…

The UK focus has been on the job cuts at Jaguar Land Rover but the scarier question is about its financial condition.

@anjani_trivedi JLR is the UK's biggest car manufacturer by volume and cash is looking uncomfortably tight even absent Brexit. If that domino falls the industry is in for some very scary times.