February 4, 2019 / 2:43 PM / 18 days ago

Breakingviews - Nissan’s real Brexit problems have not yet started

A worker is seen completing final checks on the production line at Nissan car plant in Sunderland, northern England, June 24, 2010. REUTERS/Nigel Roddis

LONDON (Reuters Breakingviews) - Brexit supporters like Jacob Rees-Mogg are both right and wrong about carmakers in Britain. The eurosceptic member of parliament correctly argues that Nissan Motor’s U-turn on production at its Sunderland plant has little to do with Britain’s impending departure from the European Union. But he’s mistaken to be blasé about the sector’s prospects if Britain crashes out of the EU without a trade deal.

The Japanese carmaker is reneging on a 2016 pledge to make new X-Trail sports utility vehicles in northeastern England. The $33 billion group will instead ship the cars to Europe from Kyushu in Japan. British Business Secretary Greg Clark called it “a warning sign” for the country’s car sector after Brexit; Rees-Mogg insists the two were unrelated.

In a narrow sense, Rees-Mogg is right. The main change for carmakers since 2016 is a collapse in demand for diesel vehicles. UK sales in December were one-quarter below the level a year earlier, according to the Society of Motor Manufacturers & Traders; diesel accounted for less than 30 percent of cars sold, down from almost 40 percent previously.

The result is that Nissan is unlikely to bother offering X-Trails with a diesel engine, which are cheap to make because they’ve already been developed for other models. Instead, it will need to offer cleaner engines fitted with pricey electric batteries. One way to absorb those expenses is to consolidate production in Kyushu, the X-Trail’s main global production hub. The new trade deal between the EU and Japan, which will remove Europe’s 10 percent tariff on Japanese-made cars by 2027, also helps.

Still, Nissan’s employees in Sunderland have much to fear from a “no-deal” Brexit. The Japanese group will send UK-made cars worth about $5.7 billion to Europe this year, using Exane BNP data, and just $500 million in the other direction. That would make little sense if British-made cars were subject to a 10 percent European tariff at the border. If Nissan absorbed the cost, the group’s pre-tax profit would be about 8 percent lower. And that’s before factoring in any disruption from border checks to the 5 million parts the Sunderland plant uses daily. Nissan’s real Brexit problems have yet to start.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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