Justin Cox, Director, Global Production Forecast
11 February 2019
11 February 2019
Hard cheese: A turning point in Japanese localisation in Europe
Over the past 30 years or so, Japanese OEMs have been significant investors in the UK’s automotive industry. However, Nissan’s recent decision to cancel capacity expansion plans, and not build the next X-Trail model at its UK flagship plant in Sunderland, could potentially mark a more general turning point in Japan’s commitment to the automotive industry in Britain.
While a declining outlook for the European diesel X-Trail had much to do with the fading commercial viability of Nissan’s UK expansion plans, recent changes to the trading environment will also have made it easier for Nissan to simply import the new model from its home plant, Kyushu, in Japan.
From 1 February 2019, the EU-Japan trade agreement, dubbed ‘Cars for Cheese’, ensures that the EU’s 10% tariff on Japanese car imports will be tapered to zero over the next ten years.
While Japanese OEMs will be encouraged by the competitive boost that a cut in tariffs provides, they may also increasingly choose to import new models rather than invest and localise production in their European ‘transplants’. Not only will the financial hurdles for European localisation be higher, but global trade concerns and the anticipated fall in Japanese domestic plant utilisation may encourage Japan’s OEMs to steer new investment back home.
For the UK, Brexit adds another dimension. Should Britain leave without a deal and WTO tariffs are applied to UK vehicle exports, the same cars made in Japan may well end up costing less to import into the EU than those produced just over the Channel in England.
This has the potential to significantly shrink the UK auto industry in the medium term. And there is much at stake. In 2018, the three UK Japanese transplants of Nissan, Toyota and Honda collectively produced over 730,000 cars, which represent almost half of all Light Vehicles built in Britain.
The ‘Cars for Cheese’ deal could indeed mark a turning point for the growth prospects of Europe’s Japanese transplants. Those single-model smaller facilities may be most vulnerable to import substitution, cancelled investment and, ultimately, closure. Even before Brexit, the UK’s 40% share of Europe’s total transplant production volume arguably placed the country’s auto industry at the greatest risk. In the event of a ‘hard’ Brexit, however, the risks would be magnified significantly.