Written evidence from Honda Motor Europe (BRA0008)

About Honda Motor Europe

 

  1. Honda is the largest engine manufacturer worldwide and a leading car, motorcycle and power products producer. In 2016 Honda sold over 1.5 million products in Europe.

 

  1. Honda’s Swindon factory is the global hub for the new Civic 5 Door and Honda’s European Headquarters are located in Bracknell. Honda’s UK footprint also includes an R&D operation in Swindon and a Formula 1 facility in Milton Keynes.

 

  1. We employ 4,000 people at our Swindon factory, and a further 500 people in our UK and EU headquarters in Bracknell.

 

  1. Our EU headquarters is located in the UK, supporting our integrated sales and manufacturing operation across Europe. Our manufacturing footprint includes a car factory in Turkey, motorcycle factories in Spain and Italy, as well as a power products plant in France.  Around 15% of the products produced at our European plants are destined for the UK market.

 

Executive Summary

 

  1. With highly integrated European manufacturing and sales operations, Honda is concerned about the impact the UK’s departure from the EU might have on:

 

 

 

  1. A meaningful transition period is required to allow Honda, and our suppliers, the time needed to adapt systems, processes and resources to the new EU – UK trading environment. Given our complex operations and integrated supply chain, a transitional arrangement should be based on current arrangements - continued membership of the Single Market and Customs Union – in order to avoid more than one point of change. Given our experience of the level of work required for previous changes to customs regimes, a transitional period should be at least two years.

 

  1. Honda has recently announced that be 2025 we aspire for two thirds of our sales in Europe to be electrified. A strong agreement with the EU on regulation, customs and trade and access to talent would strengthen the case for our UK manufacturing operation to play a role in this electrification strategy. 

 

  1. For Honda, an optimal future EU – UK would maintain the benefits of the Customs Union, by delivering tariff-free trade between the UK and the EU and specifically, as frictionless as possible trade and customs procedures and continued mutual recognition of Type Approval and other regulations.

 

Response to BEIS Select Committee questions

 

Market access: how important is free access to the Single Market? What would be the impact of trading with the EU under WTO rules and tariffs? How significant are tariffs compared to other costs?

 

  1. With 35% of exports from our Swindon factory exported to the EU, and 40% of the components used to build cars at Swindon imported from EU27 suppliers, frictionless, tariff free access to the Single Market and Customs Union is vital to our competitiveness.

 

  1. Membership of the Single Market and Customs Union provides Honda with several important benefits, including: tariff free access to the European Market, a frictionless border and regulatory certainty. Additionally, the UK’s membership of the Single Market and Customs Union provides us tariff free trade with important markets around the world.

 

  1. The impact of defaulting to WTO rules and tariffs are outlined below:

 

  1. Exports of completed vehicles:

 

    1. Outside of the EU and Customs Union, with no Free Trade Agreement in place, an average tariff of 10% would be applied to finished vehicles exported from the UK to the EU27 under WTO rules.

 

    1. Honda also benefits from tariff free access to Turkey, thanks to Turkey’s membership of the Customs Union. Applying WTO tariffs to the 5,100 finished vehicles exported from the UK to Turkey in 2016 would result in a duty impact of £7 million. We also export components, including engines, from our Swindon factory to our operation in Turkey, which would also be impacted by a 4.5% tariff.

 

    1. Although we are looking to increase our share of exports to non-EU destinations, the US in particular, 35% of Honda’s UK production would still be exposed to tariffs, ‘resulting in increased costs to’ Honda’s business, loss of competitiveness and potential cost increases for consumers. As we have experienced with the Israel market, when failure to meet Rules of Origin thresholds resulted in the need to pay tariffs, a 10% tariff would make our vehicles uncompetitive, and would impose costs we cannot afford to absorb.

 

  1. Imports of components:

 

    1. The average WTO tariff on automotive components is 4.5%. As a significant proportion of component parts for vehicles manufactured at Swindon are imported from outside the UK, if the UK were to impose tariffs at this level, we would see a large increase in production costs.

 

    1. There is an existing system in the UK, Inward Processing Relief, that would enable us to recover some of these tariff related costs, but only if the current arrangements and rules are maintained following the UK’s departure from the EU.

 

    1. A large proportion of the companies in our supply chain, Tier 2 and below, are SMEs, which would struggle to deal with the increased costs, cash flow, and administrative burdens that the imposition of tariffs would imply.

 

Non-tariff barriers: how significant are non-tariff barriers potentially arising from leaving the Single Market and Customs Union? What are the most significant ones? How best could impacts be mitigated?

 

  1.     Non-tariff barriers would potentially have a greater impact than tariffs. The most significant non-tariff barriers that could arise from the UK leaving the Single Market and Customs Union would be:
    1.             Disruption to just in time manufacturing due to customs controls
    2.             Regulatory divergence and/or a regulatory cliff-edge preventing the UK from issuing EU “e” Type Approvals.

Customs:

  1.     Vehicle manufacturing is a low margin activity, and there is little scope to build in extra costs or complexity to mitigate disruption to our Just in Time production model. Just in Time is the most efficient way to manage automotive supply chains, and enables us to avoid tying up large amounts of capital in stock and warehousing.

 

  1.     Additionally, tying up capital in mitigating customs risk would reduce the amount of resource we could dedicate to introducing new hybrid and electric vehicles into the UK marketplace.

 

  1.     As mentioned above, a large proportion of components used at Swindon are imported from outside of the UK. In practical terms, this translates into a complex and finely tuned logistical operation.

 

    1.             To support the two million daily component movements through the Swindon factory, 350 lorries a day deliver EU sourced parts, often directly to the manufacturing line.

 

    1.             Components for 1 hours’ worth of production are held line side, while local warehousing holds a half days’ worth of UK and EU sourced components supply and 3.5 days’ worth of components from outside of the EU.

 

    1.               Any delays in deliveries could result in line stoppage, which would imply significant direct costs to Honda, as well as to our suppliers, workforce and customers.

 

    1.               There is still no clarity on how long delays might be. The Port of Dover estimate that customs controls could add an extra 15 minutes clearance time per truck. With our 350 trucks a day moving across the border, this could build in around 90 hours of delay overall. At current trucking rates, this could create costs of £850,000. 

 

    1.              Other companies have modelled delays on the time it currently takes to clear imports from non-EU countries, which leads to possible delays of 3 to 5 days.

 

  1.     Mitigating against the impact of possible delays would require doubling warehousing capacity to store a greater portion of components on-site, increasing the amount of stock in transit and the introduction of new processes. These investments would amount to tens of millions of pounds in extra costs annually.

 

  1.     Alongside the impact on the supply chain to the factory, customs controls and lack of capacity at ports could impose bottlenecks on the import and export of finished motorcycles, cars and power equipment to and from the EU, impinging on our ability to supply products to our markets.

 

  1.     The import of goods from outside of the EU would also be complicated, as it would no longer be possible for Honda to operate under our current single European Authorised Economic Operator permit. An additional system for imports into the UK would have to be developed, with specific UK authorisations, processes, controls and systems.

 

  1.     Authorised Economic Operator (AEO) status seems to be a key part of the Government’s strategy to reduce bottlenecks at ports. It is important to highlight some issues around this. Currently, only 600 companies in the UK have AEO status, in comparison to 5,000 in Germany. HMRC will need to build up additional capacity to handle a surge of around 12 applications a day as the UK leaves the Customs Union.

 

  1.     The impact of customs controls on the SMEs in our supply chain must also be taken into account. A recent Business West survey showed that almost a third of exporting businesses have no experience of using customs documentation to trade with other countries. With limited resources, these businesses may struggle to manage the increased administrative burden, which could lead to friction in the supply chain.

 

Regulation:

 

  1.     Honda benefits from the simplicity of complying with a single regulatory regime across Europe, for the manufacture and sale of cars, as well as motorcycles and power products. The ability to place goods on the market across the EU on the basis of a single Type Approval is a particularly important benefit.

 

  1.     Honda would like to see the continuation of the validity of pre-existing Type Approvals after Brexit, both those issued from any EU-27 Type Approval Authority and presented in the UK, as well as those issued by the UK’s Vehicle Certification Agency and presented in the EU-27. It should also remain possible to guarantee the validity of the extensions issued by the VCA after Brexit to pre-existing EU Type Approvals.

 

  1.     The issue of the continuing validity of Type Approvals in a “Hard Brexit” scenario is of critical importance to Honda’s European operations and supplier base across EU-27 Member States. If EU and UK Type Approvals issued after Brexit are no longer mutually recognised, we would be unable to place products onto the market. Additionally, if approvals for parts and components are no longer recognised, we would face significant difficulties sourcing appropriately approved components from suppliers in the UK and EU. Both of these factors would have a very significant impact on our production activity.

 

  1.     In order to mitigate this risk, and to ensure we are able to continue to place vehicles on the EU market, Honda would either have to relocate Type Approval activity to another Member State, or the UK would have to negotiate to ensure that the EU continues to recognise UK Type Approvals – and vice versa.

 

Regulation: what are the opportunities and potential disadvantages of seeking regulatory divergence from EU product, safety and other standards? To what extent should the UK seek to retain influence on these standards? Is it preferable for the UK to: establish an EU association agreement (or equivalent); replicate EU regulation; diverge from EU rules and standards? What dispute resolution processes would be most desirable? Should the UK seek to align professional qualifications with those in the EU?

 

  1.     As mentioned above, Honda benefits from a single European regulatory regime that allows us to place goods on the market across the EU under a single Type Approval, while complying with a single set of standards. This extends to other compliance activities including CE Markings, REACH authorisations and Health & Safety compliance, which should continue to be recognised to ensure the continued status of goods after the UK’s exit from the EU.

 

  1.     Compliance with CAFÉ regulations on Co2 emissions following the UK’s exit from the EU is also a concern. Removing the UK fleet from the larger European pool would make it difficult to comply with the fleet wide cap on Co2 emissions. To meet targets, Honda would need to rebalance its sales and marketing strategy to increase the number low emissions vehicles on line in the EU earlier than planned, which would imply extra costs.

 

  1.     Regulatory certainty and convergence is also important for developing connected and autonomous vehicles. As connected vehicles move around Europe, and across the EU – UK border, they will transmit data between jurisdictions. An agreement on how cross-border data transfers will be required. Similar challenges will arise with the roll out of “e-call” systems in the next few years.

 

  1.     It is important to note that the EU is a world leader in automotive regulation. Jurisdictions around the world use EU rules as a model for their own regulatory systems. For example, China bases its emissions standards on European regulations, while the EU is also very influential in global regulation setting at the UNECE. It is therefore essential that the UK continue to keep a seat at the table to continue to influence regulation setting. If the UK moves away from the EU regulatory framework, the importance of global regulation setting at UNECE will increase.

 

  1.     If the UK cannot keep a seat at the EU rule-making table, then, given the importance of the European market for Honda’s UK manufacturing operations, it is vital that the EU and the UK develop a mechanism to ensure that divergence between automotive standards is kept to a minimum. If divergence begins to occur, it will be very difficult to continue to apply mutual recognition between EU and UK regulatory systems.

 

  1.     While the Withdrawal Bill will ensure environmental and safety regulations are precisely aligned at the moment of exit, continuing regulatory activity in Brussels could lead to divergence quite quickly after the UK has withdrawn from the EU. Until we know the shape of the future EU - UK relationship, it is hard to calculate the costs of divergence. However, the cost of divergent regulation between the EU and the US can provide evidence of potential impacts.  The European Commission estimates that the cost of regulatory divergence in the automotive sector between the US and EU is equivalent to a 26% tariff. According to the Center for Automotive Research (CAR), the cost of divergence between US and EU automotive safety regulations alone was between $3.3 billion and $4.2 billion in 2014. These costs are significantly larger than the costs imposed by tariffs on vehicle trade between the United States and the EU.  Vehicle tariffs totalled $1.6 billion in 2014.

 

Skills: how dependent is the sector on workers from EU countries, at all skill levels? What is the potential impact of restrictions on freedom of movement? How far can gaps be filled by UK workers?

  1.     Honda requires access to a mix of professional, skilled and unskilled labour, as well as the ability to transfer employees across the business, to support our European Headquarters, Formula 1, R&D, engineering and manufacturing activities. We currently employ some 4,000 people at the Swindon factory and around 500 people in our UK and EU headquarters organisation.

 

  1.     There are currently people from 48 different nationalities employed at the Swindon Factory. Given the very low rates of unemployment in Swindon, there is not a ready pool of people in the local area to easily replace EU27 nationals with. Removing EU27 Nationals, without a sufficient transition period, from the labour pool available to the Swindon factory would result in staffing shortages with a potential impact on manufacturing activity.

 

  1.     We are working to develop the pool of UK talent through initiatives such as our apprenticeship scheme. We have increased the number of apprentices at our Swindon factory from 6 in 2015/2016 to 16 this academic year.

 

  1.     Even with such schemes, and with unemployment rates below the national average in Swindon, we do not have sufficient volume of local labour to meet our needs in the near term. We recently launched a campaign to recruit 600 new temporary workers to support a production increase at the Swindon factory. A lack of UK applications resulted in 40% of this new workforce being non-UK nationals.

 

  1.     The sector is also dependent on the government and regulators having the right skills available, particularly as new technologies such as electrification, connected and automated vehicles come to market. As this is an area where the UK will be competing with other Member States certification bodies, it is particularly important that the Vehicle Certification Authority (VCA) and its associated test laboratories have access to skilled engineers who understand new technologies and can work effectively with automakers to grant certification.

 

Trade opportunities: what opportunities are there for the UK to improve exports to countries outside the EU? Where should Government seek to prioritise in terms of trade deals?

 

  1.     We would urge the government to prioritise concluding a deep and comprehensive Free Trade Deal with the EU as soon as possible in order to provide the best conditions for our business to operate, and to support our ability to export to other regions.

 

  1.     With a deal with the EU in place, we would look to Government to replicate existing EU – 3rd country trade deals, including with Turkey, the EFTA counties and Switzerland, which provide us with significant benefits. Early Free Trade Agreements with Mexico and Japan would also support our competitiveness.

 

  1.     We would like to highlight the importance of ensuring replicated and new Free Trade Arrangements take account of the need to meet Rules of Origin requirements. Honda sources components from around the world.   With certain Free Trade Agreements (FTA) in place between the EU and third countries, Honda and its customers can benefit from lower/zero duty rates when certain defined origin conditions are met. On average, most FTAs require 60% local content to benefit from preferential treatment. It is essential, therefore, that an EU-UK deal allows for the bilateral cumulation of content.

 

  1.     If the UK were no longer a party to these FTAs, all product exported from the UK to third countries would attract full duty rates on imports, making these vehicles relatively less competitive than locally produced products. As mentioned above, this could result in us being unable to place products on price sensitive markets, such as Israel.

 

  1.     Honda exports engines and other parts from the UK to other Honda production sites across the world. Where there is an FTA between the EU and the country hosting the production site, and origin criteria are met, Honda can export these products with low or zero duty. This product, along with additional content from the third country, can be reimported into the EU at low or zero duty rates.

 

  1.     Where the UK strikes new trade agreements with third countries, government should ensure that content produced in both the UK and EU are considered as local. According to Automotive Council Research, it is only possible to source 40% of the parts needed to build a modern car from the UK supply chain. Given that UK suppliers also source materials from abroad, in realty only 25% of a car manufactured in the UK can be considered as “originating” under global trade rules.  The pool of UK and third country parts is, therefore, not deep enough to meet most FTA rules of origin criteria.

 

  1.     Irrespective of how generous the terms of any FTA might be, the need to comply with Rules of Origin processes will result in significant new administrative costs as we will need to generate and supply paperwork to demonstrate the origin of goods. This will also imply significant burdens for SMEs in our supply chain, who have not needed to undertake this activity previously.

 

  1.     Honda’s policy is to localise as much of our supply chain as possible. However, as a global manufacturer building global models, a significant share of components used at Swindon will always be sourced from outside of the UK.

 

Transitional arrangements: what should the UK seek in transitional arrangements and for how long should they apply?

  1.     The United Kingdom’s exit from the European Union will require a significant change in the way Honda operates its highly integrated European business. Given the complexity of our business, as well as the need to support SMEs within our supply chain, a meaningful transitional period is vital for us to adapt to the new EU – UK trading environment, while making only one set of changes.

 

  1.     Exiting the Customs Union will require us to make significant changes to our customs systems as well as put in place plans to mitigate against the possibility of customs controls creating increased friction on the EU – UK border. Planning for new customs procedures, building the necessary infrastructure and recruiting the new officials needed, must start now, not in 2019.

 

  1.     Honda benefits from free trade agreements between the EU and trading partners around the world. A transitional period would give the UK time to replicate these agreements, as well as agree a deep and meaningful trading and regulatory relationship with the EU.

 

  1.     As the UK leaves the Single Market, the EU and UK will need to develop solutions to ensure that regulatory activities, such as type approvals, continue to be recognised across the Single Market and for goods placed on the market before Brexit to be able to continue to circulate. A transitional period would provide time to find solutions for these complex issues. 

 

  1.     While the risks posed by Brexit are significant, they can be managed if we, our supply chain and our customers have sufficient time to put new procedures into place. A transitional deal would provide this needed time. 

 

  1.     In our view, a meaningful transition would see the UK remaining within the Customs Union and Single Market. Given the complexity of the changes to be made and there is not yet clarity about what we are transitioning too, an implementation period as the new UK EU relationship comes into force would be welcomed.  This would ensure that Honda, our suppliers and customers would only make one set of changes to our operating model, while avoiding a cliff edge when the UK leaves the EU.

 

20 October 2017