Another Nail in the Brexit Fantasy Coffin: Germany’s Car Makers Are Not Cowed

One argument that surfaces regularly in the comment section, and echoes views voiced often by British pundits and politicians, is that the UK has considerable bargaining leverage against the EU because the EU won’t want to lose access to UK demand. The example routinely cited is the auto industry, that Germany can’t possibly stand the loss.

We’ve argued against that regularly because, among other things, many of the “exports” to the UK are in fact intermediate parts where the UK provides additional value added or final assembly for goods that will be sold in Europe. The reason for locating production in the UK is that it is still in the EU, but it has more permissive labor laws than other EU members.

I’ve done some quick looking for breakdowns and have not found any good research yet. However, Lambert saw an important story in the Guardian on precisely this issue, that of the importance of the UK to the German auto industry. It focuses on Bavaria, the most exposed region. This is the bottom line:

The problem is that German car manufacturers no longer build all their cars in Germany, and even if they do, they do not necessarily build them with fully “German” parts.

In other words, German automakers are the ultimate multinationals, and even for German automakers, the value added in Germany is much lower than superficial analyses would lead you to believe. For instance, when auto parts are exported from Germany to the UK, the value of the import as recorded in the UK is the transfer price from Germany to the UK. But that auto part in turn had components that were made outside Germany, so that “German” price considerably overstates the impact the German economy if that sale were to go “poof”.

Moreover, the fact that a large chunk of these imports are for ultimate export means that portion of the manufacture can and will be shifted elsewhere, albeit at considerable cost and inconvenience to foreign carmakers.

As a result, again from the Guardian story, it would be hugely disruptive to shift production out of the UK:

[Tobias] Nickel [Dräxlmaier’s head of corporate communications] likens trade relations between Britain and Germany to the onboard systems that his company produces: complex, hand-thatched strings of colourful cables that come in billions of variations. “British and German manufacturing are so deeply intertwined, untangling these ties is basically impossible,” he said. “In the 1950s, maybe, but not now. You can bake English bread using only English flour. But you can’t make English cars from English parts. It’s impossible.”…

At Bavaria’s Chamber for Industry and Commerce the main fear is that Britain leaving the EU will lead to more bureaucracy. When Bayern Munich travels to Moscow for a football match, the chamber currently has to issue them with a Carnet ATA, an international customs document that certifies the country of origin and confirms that the team will return its coach, shirts and boots after the match rather than selling them outside the single market.

If Britain were to end up radically breaking trade ties with the EU, [Frank] Dollendorf [director of economic affairs for the Bavarian Chamber for Industry and Commerce] fears that his trade body would end up having to spend approximately one extra day a week processing documents of this kind. Medium-sized, or Mittelstand, companies without their own tariff department, he said, would be hit especially hard.

As a result, both Nickel and Dollendorf make clear that they will press hard against erecting trade barrier against the UK. But their views are nowhere as widely shared as you would think, even among the Mittelstand companies that have long been the engines of German economic success:

A majority of medium-sized and large companies indicated support for the EU taking a hardline stance against Britain after the referendum, with 56% saying they were in favour of the advantages of EU membership being revoked for the UK.

The study also shows 58% of German business and political leaders surveyed said they believed an exit from the EU would do “massive damage” to the UK economy, while 77% believed the referendum outcome would only have “minor consequences” for the German economy.

And that view holds true even in the auto industry:

David Davis, the British minister in charge of Brexit negotiations, argued in a recent article on Conservative Home that Britain could import more tariff-free electronic parts from Asia in the future, boosting its manufacturing base and eventually exporting cars rather than importing them from Germany.

Confronted with such an argument, Dräxlmaier’s Nickel remained calm. “Britain has to understand that it can’t produce a Rolls-Royce on its own. It would really surprise me if the UK would sacrifice its last remaining industry on the altar of Brexit.”

Time to wake up and smell the coffee.

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  1. Christer Kamb

    Good example. Another one but a bit different(BA ownership) would certainly be the Airbus-wingproduction in the UK. One of the big manufacturing obstacles with Brexit are component-“EU-(and world)outsourcing”. Logistics are very complex systems built for i.e “just in-time”-production. That is also why there has to be motivation for very small changes to rules/tariffs and fast. EU-laws seems to reduce such a scenario.

    “The study also shows 58% of German business and political leaders surveyed said they believed an exit from the EU would do “massive damage” to the UK economy”(etc).

    Source? Details are desirable to understand the economic realities. Not just opinions! Tariffs and competion-capabilities?

    1. PlutoniumKun

      The Airbus wing production issue is an interesting one, and can perfectly illustrate the dangers for the UK. Because Britain never liked the European tradition of state backed business, they never joined the Airbus consortium, which was essentially a French government initiative. BAE is simply a contractor, albeit a very important one. Airbus is already having political troubles due to its use of US contractors – the US congress recently put a ban on component licensing for Iran, costing Airbus a multi-billion contract. There will therefore be a strong political/economic incentive for the French to simply say to BAE ‘if you want to maintain your contract, you will have to move your manufacturing to France’. And BAE will do it, because they have to.

      1. Christer Kamb

        True, BAE sold their shares in Airbus SAS 2006(not EADS). BAE became owner in the Airbus-project through the Hawker Siddely acquisition.

    2. Yves Smith Post author

      Thanks for the additional example. Yes, I am frustrated at the lack of good data. There seems to be no good reporting due to the massive complexity of the supply chains as well as issues like transfer pricing v real economic value added at various points in the supply chain. So there will be a lot of what the sort of analysis that was described at McKinsey as “illustrative” and was called internally “McKinsey intuition”.

      1. Frenchguy

        Indeed as far as I know the data on value chains is quite patchy.

        But, if you have time, the best place to go is the World Input-Output database.

        The OECD does also some work on the subject (probably linked to the WIOD). See their brief on the UK below:

        The UN also has a paper on the subject:

        Not sure what to say but, overall, the UK is clearly far from auto sufficient (according to the UN, only 58% of exports are domestically produced).

        “Large economies, such as the United States or Japan, tend to have significant internal value chains and to rely less on foreign inputs. There are important exceptions, including China, Germany and the United Kingdom.”

  2. PlutoniumKun

    I think an important additional point that the article didn’t make is that the greatest fear the German car industry would have is that Brexit is a catalyst for further exits. While the UK is an important component in the supply chain, it is not as remotely important as, for example, Poland or the Czech Republic, or even Spain (SEAT) for the VW Group at least. For any of those countries to exit would be genuinely deeply painful for many major German companies, probably far more so than for the UK. Therefore, there is an obvious strategic imperative for them in ensuring that the UK is seen to suffer pour encourager les autres (I’m sure there must be a German word for that). And lets not forget that other EU countries might like to put the squeeze on to see if they can attract the Honda, Ford, GM and Nissan plants in England.

    But the ultimate point is – and I think this simply hasn’t sunk in yet with the broader UK political and economic establishment – is that they simply don’t have any cards to play, and they have few if any friends in the EU. I was talking this week to a mid level UK civil servant I know (who regularly deals with foreign issues) and he was remarkably laid back about it – he said the consensus internally seemed to be that the UK would join EFTA and that they would accept the majority of EU Directives as law as at present in order to maintain continuity. It doesn’t seem to occur to them that just as Greece was humiliated in order to maintain internal discipline even at some significant political and economic cost, there are many within the EU who will see the price of taking a very hard line against the UK as a price worth paying. I just don’t see what possible leverage the UK has to prevent this.

    1. Yves Smith Post author

      Excellent point re additional exits representing even greater downside, and I was remiss in not mentioning it.

      And this also fits Merkel being somewhat accommodating on timetable to open negotiations but firm re “You need to have your ducks in a row and formally pull the trigger first.” It is bloomnin’ obvious that no one in a position of authority in UK has engaged any of the practical issues in a serious way, and here we are, almost a full month after the vote. Admittedly, the UK has had a total leadership meltdown in both of the top parties, but you’d think some members of the punditocracy would have rolled up their sleeves by now. The EU side does not dare say it out loud because they saw how Obama meddling backfired, but I am sure they hope the UK will wake up and realize what a clusterfuck this would be and somehow find a way to beat an orderly retreat.

      Philosophically this is all too bad, since there is a lot that is dysfunctional with the EU, and the Germans are determined not to fix it. But the UK has a very good deal, and as we know, the Leave vote was in many ways a vote against decades of Thatcherite policies aimed at the only means for expressing low wage worker revolt. And competition from EU immigrants for work and housing is a real part of the story but so is competition from non-EU immigrants, and austerity policies, both of which were completely under Government control.

        1. vlade

          at best irrelevant, at worst backfire, hard to measure. I’d probably go with “slightly backfired”

        2. PlutoniumKun

          I suspect it was largely irrelevant (which must surely have put a bruise in Obama’s epic self regard), but I think collectively with other foreign leaders it backfired (predictably). People just don’t like being lectured and I’m pretty sure the line up of foreign leaders telling British voters what to do was very counterproductive.

          1. NotTimothyGeithner

            My sense Is Brexit sympathizers who didn’t care that much or were too busy to vote would have found time, but Tony Blair oozed out of his hole to offer his opinion. Being on the opposite side of Tony Blair is probably just a good strategy at this point and would be more relevant to the UK electorate.

            Was relatively low minority, youth, and labor turnout for Kerry in 2004 (there were plenty of votes left on the table) the result of European leaders saying they would prefer Kerry over Shrub? No, Kerry just ran the usual Clinton style doomed campaign strategy. Local politics is still everything.everything . Trying to tie boogeyman Putin and Trump together will ultimately be a waste of resources for Clinton Inc because it doesn’t matter to the choices voters make.

      1. inhibi

        So once again I’m incredibly confused about the conclusion that (1) Britain has “no cards to play”, (2) how the car industry would care at all about Brexit one way or another (3) how an increasingly fragile EU (Germany) would be so stupid as to cut off their own noses to spite the UK.

        First of all, globalization of German car makers doesn’t necessarily mean that all of a sudden, Britain’s position as a large importer is not as strong. In fact it is quite opposite.

        As Germany continues down the road of domestic wage suppression and other means to remain competitive, ANY shock to the market would only further outsource German manufacturing, which is Germany’s only true economic might. While outsourcing may enrich the already wealthy, it rarely does any good domestically, especially if one’s main industry is manufacturing.

        Secondly, Germany’s financial institutions are on the brink. A study by the DIW economic research institute in Berlin suggests that Germany lost €600bn, the equivalent of 22% of GDP, on the valuation of its foreign portfolio investments between 2006 and 2012. In addition, Deutschebank is exposed to some 50 trillion euros. “But don’t worry!” the German accountants say. “Positions are balanced and the net exposure is only 20.3 billion euros.”

        But of course how do they balance their sheet? By buying derivatives from other banks within the EU and abroad. The UK holds some 17% of the balance sheet, as analyzed by McKinsey.

        Secondly, Germany’s economy is more sickly than you can imagine. Just because they export a large portion of the car market doesn’t mean much given that they’ve simply cut costs to keep up with globalization. This still hasn’t stalled globalization (its just allowed their car export to double since 2000): in 1995, Germany’s automakers were at about 75% domestic value added labor. Now they are at 53% (I think its actually less than this if it was a thorough analysis. VW is in China and Mexico now, that assemble all their most bought models for the Asian and NA markets. Of course, VW in Mexico uses components made in Mexico by other Tier 1 & 2 manufacturers that moved along with them).

        Since 1999, Germany’s GDP growth has averaged only 1.2% a year, placing it 14th out of what until this January had been the 18 countries in the Eurozone, less than France and well behind Britain (1.7%) and America (1.9%).

        They have ZERO entrepreneurship. Its basically next to impossible to start your own business in Germany. Germany ranks 114th globally according to the World Banks Doing Business metric, behind Tajikistan. They have no software presence, besides SAP which was developed in 1972 (and is horrible software, bloated, slow).

        In Germany, as a worker, you make next to nothing. While German workers’ productivity has advanced by 17.8% over the past 15 years, their pay has actually fallen when set against inflation. This is largely due to Schauble’s and Merkel’s artificial wage suppression to keep German export at all time highs. But exports require demand. How long do you think American’s will keep buying German cars? The millennial generation is around 20-30 years old right now. I don’t expect many will be buying German cars for which repairs cost 2x the amount of Japanese/Korean cars, and are $10,000 more expensive between similar models. This is the generation that is loaded with student debt and cant even afford a home let alone a fancy(er) car.

        The picture I’m trying to paint is that Germany is a glass house: all it would take is a derivative fallout or a drop in car exports to send it reeling. They have no fall back, no “silicon valley”, no large telecom or internet related corporations. Siemens is dying a slow death due to the meteoric rise of competition on most segments of their business, including CAD software, systems control, etc. And as China becomes more and more efficient and technologically advanced in their manufacturing, and as the middle class around the world crumbles amidst the “austerity” measures imposed by totalitarianism, the value of “Made in Germany” will be less and less.

        Germany has tried, for a very long tme, to support the Eurozone. However, it is a completely unrealistic endeavor from the beginning. While Brexit may pose some risks for Britain, time is on their side.

        1. Yves Smith Post author

          If you don’t understand the argument, it suggests that you either need to read it more carefully, or your deeply held views make you resist the implications.

          It is not inconsistent for the car industry to say, “We’d prefer to have the German government give the UK a break and we’ll press the German government for that. But we can live with losing, since we’ll only take some damage, while the UK will be hit hard and is separately in no position to become a competitor.” That means they clearly do not regard winning as a survival issue. By contrast. EU politicians clearly do see a Brexit as an existential threat to the EU and Eurozone, and they want to make sure the UK bears the full brunt of the consequences of its actions pour decourager les autres.

          And Merkel, as even more so Schauble in the finance ministry, are both very much aware of the auto industry issues as well as the banking issues. Yet Merkel, who is a famously cautious politician and rarely does more than adjust or clarify previous positions (as in she is extremely consistent) has repeatedly said that for the UK to have access to the single market, it must accept all the four freedoms, and one of them is freedom of movement, meaning immigration. She has also said that any country that leaves the EU must have clearly lesser rights than a full member.

          And Schauble has been making even tougher noises that Merkel towards the UK, for instance insisting that the new PM pull the Article 50 trigger immediately upon assuming office. That was clearly a ridiculous position. But the fact that he said it means that being tough on the UK has big following not just among Germany citizens, where polls show only 9% want to give the UK breaks, but also among big businesses.

          As to German banks, the big problem is Deutsche Bank. Being tough on the UK helps Continental banks. The City is hugely vulnerable to a Brexit, and banks like Deutsche are licking their chops at being able to take advantage of the disruption to them of losing passporting rights and losing Euroclearing in London (the latter is certain if the UK leaves the EU). London would lose out to the Continent. Even if the UK banks were able to hold on to much of their business, they and the US and Continental banks will wind up being required to shift a meaningful chunk of their operations to the EU for regulatory reasons. The biggest winners are expected to be Amsterdam and Frankfurt.

          In addition, you don’t know what the mix of those derivatives are. Plain vanilla interest and FX swaps are almost certainly the overwhelming majority of the exposures. Those are low risk. And what the German (and all major bank) are exposed to is wrong-footting markets. They can be just as wrong on Italy’s banks. or the Fed’s next move. or what Abe will do next with his QE to infinity, or an international blow-up, like a sudden escalation in the South China Sea, or Trump becoming president.

          It doesn’t mater what you think of Germany. Germany is convinced it has much less to lose in these negotiations that the UK does. Even the members of the supposedly most exposed industry think that. A big premise of the UK Brexit boosters is that the Germans will be desperate to preserve access to the UK and thus will be forced to accommodate the UK’s demands. That assumption is incorrect.

          You continue to reject information that is at odds with you pet beliefs. Cameron got effectively none of the pre-Brexit concessions he sought. Merkel has been completely consistent in warning the UK it won’t be allowed to cherry pick in the negotiations. She has the backing of all the rest of the EU save Poland on that, which is tantamount to a unified position.

          And as for your hopes for the UK going forward, tell me what does it have? The economy depends on the City. Finance globally is overly large and needs to shrink. This is not an industry with a bright future, and that’s before you get to what Brexit would do to it. Manufacturing? The biggest industry is transport, and the managerial expertise is foreign. There are no UK champions. The few remaining UK marks were sold years ago because industry economics favor large, multinational players. It may be able to preserve some auto parts supplers, but it will be at a disadvantage being outside the single market. Pharmaceuticals? The firms do R&D in the UK, but the production is done largely offshore. That’s not a lot of jobs in the UK. North Sea production is in decline. Please tell me your post-Brexit strategy for the UK, since I don’t see one, nor have I heard any from Tory leaders, save exhorting the UK’s greatness.

          1. WorldBLee

            I think a simpler assessment is that both Britain and Germany have many logical, self-benefiting reasons to work together post-Brexit but there is much more intuitive evidence that both will show themselves incapable of acting in the best interest in their citizens–leading to a Greece-like treatment of Britain by the EU and Germany and a lack of vision and strategy by Britain as they expect to “keep doing what we’ve been doing”. This is likely to hurt the EU and Britain significantly, although (wait for it) mostly at the citizen level rather than the super citizen level where the 0.01% live in Cloud City.

    2. vlade

      Arguably, Slovakia and Czech Republic are the two most important ones (IIRC, Slovakia is the second in cars produced per capita, and Czechs are third). Czechs are euro-sceptics (Slovaks much less so), but even they have little appetite for an EU exit – right now. The openly anti-EU party in CR didn’t even get into the parliament in the last elections, although it has one MEP.

      But you’re absolutely right on the second point. If it becomes too hard for the UK factories to work with EU, they WILL relocate them, and there’s a plenty of cheap options in the EU (and often ones where closing one, or even two, eyes over some pesky labour law can be encouraged..). Given that even after the emissions scandal VW sits on tons of cash and can raise capital cheaply, mothballing in the UK and moving it to (say) Slovakia is a definite option.

      1. The Realist

        The Visegrad Four (Czech Republic, Hungary, Poland and Slovakia) have formed a political union to counter leftist EU elites.

        They are using this coordination to pound nails in the coffin containing Merkel’s immigration policy and political future. I have a hard time believing that Germany will reward insolence with investment.

        1. vlade

          Merkel immigration policy is disliked by Germans and Austrians as much as by V4. I doubt it will have much impact on the investment.

        2. vlade

          Also, V4 (originally V3) existed decade before any of these countries entered EU. Indeed, their original goal was to coordinate their efforts to enter NATO and EU, which their then leaders (mostly dissdents from communist regimes, such as Havel for CS then), saw as critical for their states to “return to Europe” and escape the Soviet (by then still Soviet) sphere of influence for good.

          After the entry to EU was achieved, Visegrad struggled to to have something to do (especially lately, as the regimes in the V4 countries are often very different, and there’s a lot of tensions. I could write pages on that). The last years immigration crisis gave them some common issue, but it’s still not on the top of their agenda.

      2. PlutoniumKun

        If I’m not mistaken, its BMW that has the biggest stake in the UK, but they are an enormously rich company which could easily afford to just shift its UK plants and partners to cheaper eastern European countries.

        Of course, its not just the Germans. French car companies have long had manufacturing based in the UK (Nissan of course is now largely French owned). Given internal French politics, there must be a very great incentive for the French government to pressurise Renault and Peugeot/Citroen to ‘repatriate’ some manufacturing, although they will be reluctant to lose their share of the very large UK car market. But if the UK goes into a deep recession, which seems very likely, this may act as both an excuse and a spur to any moves.

        US and Japanese companies would likely be more purely economic in their thinking – but I wonder if Ford and GM might we wondering if it would be safer to move to a cheaper eastern European base.

        I’m no expert on car supply chains, but I suspect that most UK based car plants are much less rooted in local suppliers than their German or French equivalents. The major UK based companies don’t have the same tradition of maintaining long term relationships with local suppliers that is the norm in Germany and numerous smaller British component suppliers have shifted out of the UK or disappeared since the 1970’s. While this may mean their loss would not be quite as catastrophic as it would appear at first glance, it also means that they would be much easier to shift if it proves convenient for their head offices.

  3. The Realist

    Actually, you have just provide key information proving that the UK can win the “Battle of Brexit”. Here is your quote:

    The problem is that German car manufacturers no longer build all their cars in Germany, and even if they do, they do not necessarily build them with fully “German” parts.

    Here is the reality that the EU refuses to see:

    If the EU decides to create a trade war. German brands would be putatively taxed out of the market. The 3rd party, non-EU auto part suppliers will be free to create new contracts with manufacturers that have rights to sell in the UK. The catastrophic job losses in Germany will fall on the highest wage, final assembly line workers.

    The winners:

    — All non-EU auto component manufacturers. (Most fully offshore)
    — All non-EU auto final assemblers/brands. (Many in the UK, but also offshore)

    The losers:

    — EU auto company employees
    — EU auto company stockholders
    — Europe as a whole.

    The UK will do whatever it takes to “win” the trade war, and given their much stronger starting position than the EU/EZ they will. However, the UK will not capture 100% of the losses. Europe as a whole will be a net loser as some of that economic activity flows overseas.

    1. vlade

      As stated above, German automakers have options to make up for the UK parts – expanding existing factories and creating new ones. Of course they will fight for no-change-to-status-quo, because it’s the cheapest option, but they do have options.

      Moreover, I doubt that there’s really a large proportion of critical-path parts made in the UK (but am happy to be shown wrong by someone with the hard numbers).

      On the other hand, UK has to a) import the car parts (it’s definitely not self-sufficient), and b) most of its finished product market is in EU.

      While in theory VW doesn’t care whether the car sold in US was manufactured in UK or EU, in practice, unless the difference is very large, they will prefer closing a UK factory to closing a German factory.

      So, when you say “German brands would be taxed out of the market” – what market, pray? The only one UK can control is the UK market. Sure, German cars can be made more expensive there, but I somehow doubt that a lot of the BMW buyers in the UK will switch to Toyotas…

      1. Yves Smith Post author

        And on top of that, if the UK loses passporting rights for financial services (likely) a lot of those high-end car buyers in the City will be looking to work on the Continent or their job will be moved there. whether they get to keep it or not.

        1. The Realist

          People keep repeating this myth that “passporting” is the stake through the heart of Brexit vampire. This is demonstrably false.

          All of the major UK banks have Irish hubs that are fully EU/EZ compliant, and would remain so even in the face of Gibbering EU Elite Mouth Frothing. At most, a small number of hourly wage, back office jobs will move to Dublin. And, a great deal of legal handwaving will be performed to let those offices meet the passporting requirement.

          All of the high wage work will remain in the UK. In fact it may actually increase the amount of high paying work performed in London as it will escape the EU’s restrictive compensation regime.

          No jobs are going to Paris or Frankfurt. That is a myth being spun by local politicians looking for votes. The only city that may have marginal gains is Dublin.

          1. Yves Smith Post author

            You are really not up to speed on this issue.

            You need to have a securities license in Ireland, which none of them have, and you need to have your infrastructure and people in Ireland. This is like the US pre interstate banking, where you had to have your ops in state.

            There are not remotely enough extant large buildings with high enough ceilings to accommodate trading floors and back offices in Dublin. No one in Dublin expects the City to move there in any meaningful way. Dublin is at the dead bottom of the list of possible replacement locations for the services that will need to migrate, like Euroclearing. Amsterdam is now the top choice.

      2. The Realist

        I was replying above while you were replying here. See above, investment flowing to the V4 nation’s seems unlikely if Merkel wins given that they are trying to spike her.

        It will be unnecessary if both Merkel and Hollande lose. With those two governments gone, the chances of a rational approach from the EU greatly increases.

        1. vlade

          Merkel is more friendly to the UK than German electorate, who feel that UK had a great deal (rightly so), but wants even better, w/o doing anything for it.

          French electorate is pretty much the same.

          If anything, either would get punished for being too nice to the UK

        2. Uwe Ohse

          It will be unnecessary if both Merkel and Hollande lose. With those two governments gone, the chances of a rational approach from the EU greatly increases.

          1) why do you expect a more rational approach from the next german government?
          This will not happen. If AFD scores a major victory, so that they are included into the government, they still do not have any clear plan at all, and are very, very likely to continue the Schäuble approach to the EU and it’s problems.
          If the AFD achieves a victory, but is excluded from the government, then we will get a very instable situation, in which german politics will focus on germany alone. Don’t expect rationality then.
          If the AFD does not score a victory, everything will continue as before. This is germany.

          2) Will Merkel lose? Really? Are you sure? I’m not.
          Schulz, Gabriel, Seehofer, von der Leyen – why should germany vote against Merkel, just to get one of those?
          May be i’m to pessimistic, but i don’t see why we should get rid of a known evil for a reincarnation of the very same bad ideas.

    2. Uwe Ohse

      German brands would be putatively taxed out of the market.

      i don’t think so. british and continental industries are interwoven. High taxes are guaranteed to backfire.

      The winners:

      — All non-EU auto component manufacturers. (Most fully offshore)

      It isn’t easy to switch suppliers. Well, it’s easy enough to switch tire manufacturers, but it is totally non-trivial to exchange any supplier providing anything coupled to the electronics. Like, for example, brakes.
      Of course non-trivial isn’t impossible, but exchanging a whole lot of sub-systems at the same time will be suicidal, anyway.

      And that’s even more true for the aerospace industry, or the medical technology.

      I really hope the british divorce from the EU works out OK, but don’t expect it to. Big changes need good plans, and i still do not see those.

      1. Synoia

        You appear to confuse design with production. They are very separate.

        Production, in manufacturing, is relatively easy to relocate, especially when changing versions of the items produced.

        1. Uwe Ohse

          Production, in manufacturing, is relatively easy to relocate, especially when changing versions of the items produced.

          Meaning the production needs to brexit, which is something TheRealist doesn’t expect.

          Anyway: especially when changing versions of the items produced.
          A complete redesign of a car takes 3 to 4 years. And that’s peanuts compared to the aerospace industry.
          This really does not fit the expected brexit time frame.

          1. The Realist

            It is somewhere between the two extremes. Keeping Work In Process [WIP] inventory costs down has led to some information systems integration along parts of the manufacturing chain.

            Changing suppliers, especially initiating a new supplier, does take time and effort. However, given lead time, New suppliers can be added/switched. For components that are shared across models each final assembler tries to have multiple suppliers in the pipeline. Necessary in case a single supplier has extended down time due to weather, labor unrest, government attempted coup de tat, etc.

  4. RabidGandhi

    BREAKING: Farage, Johnson and May present plan on how Britain can exit the EU, retain all previous trade advantages, and limit immigration:

    How to Do It

    (Disclaimer: this video is a re-enactment by professional actors)

  5. Synoia

    The threat of moving production is always extant, because of “free trade.”

    Dyson moved manufacturing the Malaysia. He stated his savings funded his entry into the US market.

    The German Industrial threat is empty in the context of an ever present cost saving opportunity, moving jobs to cheap labor.

    Regarding the sanguine UK mid-level civil servant, his job and pension are not threatened, and he will remain sanguine, unemotional, and analytic; because neither his job nor the UK will not sink into the ocean as a result of Brexit.

    The Brexit process will not be fast. Only a fool would proceed quickly. The Germans and the Powerless in Europe can splutter as much as they will; the UK is under no obligation to be precipitate and not deliberate, and any potential punishment by the Germans will be considered and frustrated by a considered, deliberate process.

    The UK wants to be sovereign, and in a world determined not to be sovereign will slowly come to the realization that to be sovereign requires a break from the neo-liberal order. There appears little middle ground for the typical English “fudge” in the face of German intransigence.

    As I have written before, when the British ruling class have a plan or program which is to their benefit, they will execute with a great deal of precision, and condemn the British masses, and the Europeans, to whatever happens. Twas ever thus.

  6. Sound of the Suburbs

    You have just got to get away from the globalist status quo.

    Whatever it takes.

    Beware the liberals.

    The Liberals are descendents of the Whigs, whose last days in the sun were before the majority got the vote.

    The Whigs/Liberals/Neo-Liberals/liberals are an elitist Left that appeal to few outside the metropolitan elite.

    An elitist left are neither one thing nor the other.

    Too elitist for the masses and too Left for the wealthy.

    The liberals worry about every minority and vigorously pursue any LGBT issues.

    They don’t worry at all about a privileged privately educated elite and a second class, state educated majority of 93% because they and their children are in first class.

    The UK isn’t going to be liberal when 93% are in second class.

    Liberals are good for minorities but not for the downtrodden majority.

    The US economy isn’t working for 81% of the population.

    “In a startling finding, the report said that 65 to 70% of households in 25 advanced economies were in income segments that had flat to falling incomes between 2005 and 2014, up from less than 2 percent between 1993 and 2005. More troubling is that for some of the biggest supposed winners from globalization such as the US, this number is as high as 81%, while in Italy it soars to just shy of 100%!”


  7. Uwe Ohse

    The German Industrial threat is empty in the context of an ever present cost saving opportunity, moving jobs to cheap labor.

    especially since the german industry uttered no threats.

    They did warn often about risks, sometimes exaggerated, sometimes not. They may have been right, or they may have been wrong.

    But threats? No. They kept remarkably calm.

    As I have written before, when the British ruling class have a plan or program which is to their benefit, they will execute with a great deal of precision, and condemn the British masses, and the Europeans, to whatever happens. Twas ever thus.

    But they don’t have a plan, though they really should have had one.
    Which reminds me of some people ruling brussels and berlin, who seem to have no plans for anything important, too. Which is really too bad.

    1. Synoia

      They do not have a plan yet, true. They will at some time in the future.

      The English will take the statements by the German manager as threats, spoken quietly or not.

      I suspect there are some deep cultural differences separating our differing understanding of the situation.

      My view is not argumentative, it is contemplative.

      I personally have only one interest in this matter, disruption to the progress of loss of sovereignty, as I dislike surrendering democracy.

    2. DarkMatters

      Yes, the apparent lack of planning is disconcerting. I feel like I must be missing something going on behind the scenes. (I also felt that way about Merkel’s & the EU’s reactions to immigration.) I’ve no clear sense of what political forces are determining strategy.

      1. The Realist

        The 27 countries of the EU have vastly different opinions, which is why they have no visible strategy beyond puffery.

        A limited number of EU Elites claim there is some mythical link between migration and free trade. The EU citizens who will VOTE the issue are quite different on this issue than what the Elite Apologists try to sell.

        Here is a good illustration of two questions that should be posed to average, non elite workers in France and Germany:

        1) Do you believe freedom of movement is important?
        2) Would you accept a permanent reduction in your wages to assure Romanians the freedom to relocate in the UK?

        Apologists solely ask, report, echo chamber, and deceive themselves that question #1 is important. In fact, it is irrelevant.

        Those who are not Elitists realize that #2 is in fact the critical question. Will EU citizens in bulk, with strong conviction and willingness to offer personal sacrifice, fight for the right of other nationalities to migrate in quantity?

        There is no reason to believe one EU nationality will sacrifice for another. Experience in Greece and Cyprus shows that a better analogy would be spectators at the Colesseum demanding other nations be fed to the lions for their bloody amusement.

        To help you help you visualise the situation, imagine the:

        — UK as being full of highly motivated NRA members.
        — EU as those who want to restrict the 2nd Amendment.

        If you look only at the surface polls 2nd amendment restrictions generate favorable looking numbers. If you look at who is willing to vote, fight, give money, and endure personal sacrifice you understand why the NRA keeps winning. And, why the UK will inevitably win if they do not let themselves be deceived by EU Elitist lies and propaganda.

        1. Yves Smith Post author

          Stop making stuff up. It’s against house rules. You have done it before and have been warned (we recognize you’ve switched identities, which is also against house rules, to evade having been banned for that.). All future comments will be expunged.

          First, the EU leaders took a remarkably unified stance the core principle of “you need to adhere to all the four freedoms to have access to the single market. Merkel specifically said no cherry picking on top of that. They won’t go beyond basic principles until the UK invokes Article 50 and puts forth a proposal. And those principles are devastating in terms of what the Leave side promised voters and what Tory moutthpieces are touting as achievable outcomes.

          Second, we’ve linked to and cited poll that show EU citizens in the countries surveyed, (Germany, Spain, France, Italy, and others) are overwhelmingly opposed to giving the UK a break on immigration in the Brexit talks. The levels of voters wiling to cut the UK slack are in the low-mid teens save in Gerrmany, where it is a mere 9%. So it isn’t just that the EU pols are acting to do what they think it takes to preserve the EU; it would also be political suicide to be seen to be too accommodating to the UK. And if U leaders feel they need to firm up support further, they have access to national press, and can easily show the sort of data we’ve presented in recent posts, that the UK now takes fewer EU immigrants as a percent of its population than other countries that are outside the EU but are in the EEA or have access to the single market via bilateral deals (Switzerland).

  8. Carolinian

    One thing about car manufacturers is that they will often put assembly plants near target markets but keep the engines–by far and away the most expensive component–in house. I believe our local BMW plant does this and the engines continue to be manufactured in Bavaria.

    So it’s not just trivial items like leather dashboards that are at stake.

    In America there was a tariff on Japanese cars for awhile and the Japanese responded by moving assembly to low wage states in the US. However there too the high value parts often continuued to be Japanese while things like seats and sheet metal were sourced locally.

    1. vlade

      I believe Skoda in CZ manufactures (and even develops) a lot of engines for VW factories around the world. That includes engines for classier brands like Audi

  9. Sally

    Is the US in Europe? No, and no American politicain would ever sign up to an organisation that gutted it’s soverignty like the EU does. Funny that because there is no shortage of Microsoft, coke, Pepsi, Ford, Apple, Star bucks , Amazon and many others trading in Europe. Why do you have to be in the EU to trade with Europe? Europe’s % of global trade is down to nearly 17%. It was about 38% when the UK joined in 1975 and this was at a time of high trade tariffs. Those tariffs have no gone for much of the world.

    I realise that the U.S. is determined to keep the UK and other countries in Europe because it is easier for the US to enforce things like NATO and The Trans Atlantic trade deals. I suspect all is being done to stitch up the BREXIT vote. The EU is a big piece of the new world order one world govt. The last thing they want is it fracturing. It’s a shame you have to push this pro EU/American propaganda that comes straight out of the White House.

    The UK has a huge trade deficit with Europe. This a weakness, but it is also a strength in the negotiations. Seeing as the US has cut off trade for Europe with Russia, I can’t see many European companies wanting to lose more business opportunities. It’s a shame you have to keep pushing this Pro EU line. You did the same with Greece last year. There are some 200 countrys in the world who are not in the EU. Please stop this constant clap trap that being outside of the EU is fatal. It’s not. As to the British economy many things are now coming Home to roost from the austerity policies of the last 6 years. They will no doubt all be blamed on BREXIT. How convienient? But here is a clue, it’s why George Osbourne as been sacked. Nothing to do with BREXIT.

    1. Yves Smith Post author

      This is not a pro-EU line. I am debunking pro-Leave prpaganda. Shame you can’t see the difference.

      It seems to to be lost on you that the referendum was proposed as a power play within the Tory party with not a whit of serious consideration by Johnson as to what it would actually mean. He’s the dog that caught the car. And the overwhelming majority of the UK press and political figures have not begun to deal with how weak the UK’s position is. And you are in denial. We present data that shows that a a majority of German businesses, which is the group that British pundits have all asserted have the most to lose and will pressure the German government to be nice to the UK. oppose that view. And an very larger majority think that Germany will not suffer much in the event of a Brexit. But presented with actual information, you stick your fingers in your ears and say, “nyah nyah nyah.”

      1. The Realist

        What you are presenting today is that EU Corporate leaders are trapped in the same echo chamber as EU Government leaders. This is hardly a revelation as they have the same government/corporate revolving door and paid lobbyist problem as the US. It is not a reason for the UK to back down.

        Your side has yet to explicitly spell out how any enforceable mechanism at the disposal of a disharmonious and fractured EU with upcoming elections can be used as coercion forcing the UK to give ground. No formal negotiations until Article 50 filing may be enforceable, but all it does us kick the can down the road. Again, no reason for the UK to back down.

        I need to do a great deal of research, but it looks like the opposite may be true. By staying in the EU, the UK can use poorly written EU provisions to create havoc in the system. No idea if/when I will find the time to do enough research, but perhaps someone else has the resources.

        The original EU position was that Article 50 must be filed immediately. Even if people can swallow the flexible German position as “restatement”, France now has given ground on the issue. At this point it looks like the the EU bluff was based on the assumption a premature Article 50 filing could be to “punish” the UK. Bluff Called — The UK did not fold. And the All-In Call Stakes = Massive Uncertainty spread over years perhaps decades.

        What will EU leaders give in negotiations to end the spectre of paralyzing uncertainty? Over time, one expects that new EU leaders will have the maneuvering room to back down from (or at least partially decouple) immigration and trade.

        Once the EU comes to the table they can gain things of value, even on migration. Possibilities migration terms include:

        · If the UK uses a points system, EU citizenship will be a points paying credential.
        · Guarantees of a special EU citizen immigration status that provides more rapid family reunification visas if a breadwinner is employed in the UK. Or, other acceleration. Vice versa for UK Citizens migrating to the EU.
        · A guarantee that a certain % of UK immigration will be EU citizens.
        · Specific rights for employeed EU citizens and their families currently in the UK. Again, vice versa for UK families with an EU based breadwinner.
        · Or, feel free to propose alternate possibilities. If it can fit within the UK spending purse it is conceivable. The UK goal is not immigration zero, it is immigration that is fiscally sound.

        Until the EU comes to the table the situation is at best on hold, and possibly declining for everyone in the EU and UK alike. Once the EU comes to the negotiating table, the search for “WIN-WIN” can begin and there ARE possibilities.

        From this side of the debate the UK looks like the Adults sitting at the table waiting patiently. The EU side appears to be the Children going “nyah nyah nyah” or holding their breathe until they turn blue. Worse yet some of the advocacy from other sources (not here so far) comes across as condemnation of democracy itself, “The Voters Were Stupid.”

        I think there are many on this side who will hold out their hand out in good faith. “The Voters gave spoken” and “However we got here, We are here.” Both sides are going to have to find ways to give ground to find a WIN-WIN.

        1. Yves Smith Post author

          Are you serious? The UK is the baby that threw all the toys out of the pram. And to switch metaphors, after Cameron resigned, Larry the Cat, more officially known at the Chief Mouser at the Prime Minister’s Residence at No. 10 Downing Street, was in charge of the government for a couple of days. This took place during a total meltdown on of both major parties , a spectacle with no ready analogy in any advanced economy in the last 50 years. The only close comparison was Belgium not having a government for about a year. Turkey was in better shape during its coup.

          And the UK is not “sitting at the table patiently waiting.” It’s perfectly capable of triggering the negotiations but refusing to do so because it has no idea what it is prepared to propose and clearly has yet to even engage with what it need to do to prepare. It doesn’t even have the right staff in the Foreign Office to handle the task and has to hire them from big ticket mercenaries even to get started.

          And that’s before you get to the fact that the High Tories still believe they can undo this once May has dragged the process out a few months and a recession takes hold. I think it’s going to be much harder to walk this back than they believe.

          As for “the initial EU position,” there was in fact no “initial EU position” on triggering Article 50. Merkel insisted from the very beginning, contrary no to other EU leaders and even Christine Lagarde of the IMF, that the UK be allowed some time, but not an inordinate amount of time. Even US early on was encouraging the UK to hurry up. Merkel’s view has prevailed. And this is the one point on which the EU has little leverage unless they chose to get vindictive (by enforcing rules strictly that are seldom observed), which would poison negotiations.

          As to “forcing the UK to give ground,” what are you taking about? Once the UK invokes Article 50, a two year clock starts running. No negotiations before then. The EU is not reversing itself on that issue. If the UK does not invoke Article 50, then it has abandoned Brexit.

  10. Gaylord

    Automobiles and their makers, like gasoline and the oil companies, should be taxed to the hilt in order to pay for the impending disasters that climate change will (continue to) bring. It’s high time we realized that the infernal combustion engine is driving the last nail into our coffin.

  11. KPL

    Can UK do these things if the Germans act tough…

    1. Can they levy high import duty on German cars?
    2. Can they provide fillip through favourable export incentives, tax measures, investment allowance, depreciation etc. on manufacturing in the UK?

    If so, I would like to see how German manufacturers react when they lose market share to other car manufacturers. Cutting your nose to spite your face is what you get if Germans act tough in an interconnected world. Germans are also sure to lose. After all UK is not Greece, more so with a separate currency. In fact Italy and France to introduce Lira and French Franc and not be caught napping after coming to power. Independent currency gives you the power to act.

    I belong to the camp that believes that a country should be able to decide its future and independence is more important than anything else including short or medium term economic pains. After all, the world has not come to an end as David Cameron, Mark Carney had predicted on Brexit becoming a reality. I also believe that even if world had come to an end human beings would rebuild it again. I am tired of these scaremongers who believe that economic pain should be avoided at any cost including independence.

  12. John k

    I continue to think Germany will become flexible if Japan and Korea look to be replacing them in autos… Remember their unions accepted lower wages, leaders don’t want to lose jobs on account of political intransigence.

    But regardless of relative costs, Brexit has left the station. Every terrorist incident, rape, assault by immigrants either on the continent or in Britain makes those that want out, and some that previously voted remain, more convinced they should take advantage of the channel. And every incident encourages more.
    Just as every incident helps trump.
    Now imagine if locals get screwed in Italy…

    Greece was different, weak, locals wanted to stay in, plus currency nightmare. Are they doing better than if they left several years ago? Whatever, Britain is not Greece.

  13. Russell

    US or Canada if it is shove.&Push. No nothing on Germany & Greece seen by all out of Germany.

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