In September 2018, Ian Howells, Honda’s highest-ranking UK executive, said that Honda’s Swindon factory would remain operational post-Brexit. However, this commitment was short lived with Honda confirming on February 19th that the plant will close in 2021. Speaking to BBC Radio 5Live last year he said: “The UK forms part of our global network of manufacturing plants, so the only place we produce the vehicle we produce at Swindon is in Swindon itself. The logistics of moving a factory the size of Swindon would be huge and as far as we’re concerned, we’re right behind supporting continued production at Swindon”. Fast forward five months and Mr Howells is explaining away Honda’s planned closure of its Swindon plant by 2021, citing the size of the European market as the factor limiting the viability of continued investment. Whilst this is true, Mr Howells’ reasoning omits to mention one key factor behind the company’s decision: Brexit.
Currently, Honda’s predicted annual revenue is $41,512 million in China and $36,010 million in the USA, compared to a relatively meagre $1,322 million in the UK and $484 million in Germany. This illustrates perfectly that Howell is correct in saying that the European market is just not a top priority for Honda. The closure of . After this, most Civic production will take place in the USA where demand is greater and Trump’s tariffs can be avoided, if only on the finished products and not the parts imported to build them. This is certainly favourable for Honda as transport costs will be cut and tariffs on parts are less then tariffs on cars. With Honda’s biggest market being China, there seems little sense in Honda focusing on Europe. China is already the world’s largest economy by purchasing power parity and is estimated by the International Monetary Fund to be largest in nominal terms by 2030.
Given the earlier declaration of confidence, why shut down the Swindon plant so suddenly? The overarching, but not sole, factor is the recent signing of the EU and Japan’s Economic Partnership Agreement that came into force on the 1st February 2019. This means that by 2027, Japanese car manufacturers will be able to export tariff-free into the EU. There is no need for extensive production in the EU if cars can be produced cheaply in Japan due to the large internal and external economies of scale that Honda can exploit in their home country. This is because the reduction in average costs resulting from the grand scale of production are large enough to overcome the extra transport costs that will be incurred. This should not be a problem considering the rise of the labour-saving roll-on-roll-off transport method where port workers handle the loading and unloading of the vehicle. There is no need to pay for the crating, container packing, flat rack loading and port delivery at the export factory so transport costs are lower.
It appears that even if Britain were to remain in the European Union’s Common Market, its purpose as a launchpad from which to export to the EU would be threatened by this new deal. Since Honda’s Swindon plant is only very small, there is no clear reason why Honda should maintain its operation when it can produce the vehicles more efficiently back home in Japan and freely export them to EU states. In any Brexit outcome, there would be little incentive for Honda to retain operations in the UK. Irrespective of whether Anglo-Japanese trade is free or subject to barriers, the aforementioned economies of scale will ensure it is cheaper to produce units destined for UK consumption in large Japanese plants than in the small Swindon plant. EU demand will be satisfied by Japanese production regardless.
Add Brexit into the equation and it becomes clear that Honda has little reason to wait until 2027 to end its three-decade long presence in Swindon. Honda employs a “just-in-time” production method, which means that it holds hardly any inventories and instead receives small, yet frequent, deliveries throughout the working day. When employed correctly, this just-in-time method maintains high-quality standards as problems can be immediately fixed as they arise, and the firm does not face the cost of storing and maintaining inventories. The EU’s single market facilitates this for Honda’s operation in Swindon because parts can be effortlessly delivered across the border from continentally-based suppliers.
Speaking to the Business Select Committee in 2017, Honda said it held only an hour’s worth of parts at the production line and relied upon deliveries made by 350 trucks each day. If the final Brexit deal introduces any regulatory and customs divergence between the UK and the EU, Honda may struggle, as the production line will quite simply lack the parts it requires to operate. Statisticians employed by the Port of Dover estimated that, in the event of a no-deal Brexit, where such divergence will certainly take place, two more minutes of processing for each lorry would cause seventeen-mile tailbacks; whilst an Imperial College London report found that tailbacks could be as long as twenty-nine miles. This would be catastrophic for the Swindon plant, as Honda believes that every fifteen minutes of customs delay would cost the firm up to £850,000 a year. Not only would traffic at the Channel ports grind to a halt, so too would the Honda production line. The cost incurred by Honda if this were to happen post-Brexit would be too high to justify – especially since the firm has two European plants in Belgium that could satisfy any excess demand this would leave until Honda appropriately adjust their business strategy.
The Brussels-Tokyo deal and weak demand in Europe relative to China and the United States are the main causes of the closure of the Swindon plant, but the impact of Brexit has been to hasten this move from 2027 to 2021. Perhaps when Honda committed to post-Brexit Britain they were expecting the British government to have delivered a clear and structured deal by now that would protect businesses producing in the UK. Instead the car manufacturer finds itself in a situation where a messy no-deal Brexit is increasingly probable. Honda has no better idea than the rest of us how Brexit will play out. What is certain though is that they have a lot to lose by continuing their UK operations. The fear of the huge costs resulting from a static production line post-Brexit is the catalyst for the early closure of the Swindon plant. This will cost 7,000 jobs, 3,500 at the plant and a further 3,500 in the supply chain; with a high proportion of these losses being concentrated in the Swindon area, the unemployment resulting from Honda’s decision will impose a significant human cost upon the community.