Brexit and the BMW Fallacy

The main strategy in the ‘new, better, free-er deal with the EU’ is of course give us as free access as possible or we’ll burn you BMWs. Figuratively speaking. The UK accounts for 17% of BMW sales we are told. This is just one of the main thousand of market opportunities the EU won’t want to lose, we’re laughing at them ! Ha Ha!

Well he who laughs last, laughs loudest. Or maybe just tuts and lets little britain default to WTO rules. Firstly any targeted, high value product approach faces instant retaliation. Salmon, luxury cheeses and not in the least of course UK luxury cars themselves who probably have more than 17% of their sales from the EU. This isn’t going to be such a titt-for-tatt negotiation, although that would be the threat, the fall back ‘no deal is a better deal’, which is in reality Russian roulette for the economy.

Second up on that point on ending up hurting your own economy, take those high value BMWs. They steal all other manufacturers top models with their base models holding more kudos and being in the opinion of many, over priced and under spec’ed. They sell a lot of base models of the 116 series, the new 200 and the redoubtable 3 and 5. The flasher 6 and 8 cyclinder “mow-tas” drag up the brand perception, and earn nice margin. So you would think the Munchen Smugbach would be terrified of the potential loss. Well who is making the biggest lost? Over 50% of the cost of a new BMW goes between the dealer in the UK, and of course in taxes to the exchequor. Being higher value, the chancellor makes more out of them than the Ford range say.

Now we get onto supply chain and life cycle. BMWs are very, very expensive to service although you do get treated like a king at the dealer of course. The lifcycle of ten to fifteen services not only costs  most all the purchase value of the car, it also takes more man hours to fix than to make. And those man hours, pretty highly paid auto-technicians as grease monkeys are called these days, so they do well and the exchequor does well out of full time employees in the service sector, a rare thing perhaps.

So what the WTO would just impose a 10% tariff or the like. Well the EU could vote to have a higher tariff on UK cars, or block their export due to May’s offer to pay the tariff, which is against both WTO and EU rules, and the US won’t like that one bit even if their consumers are interested in Sub Compact SUVs made in Sunderland. BMWs will cost more due to tariffs, the pound may get weaker in a default to WTO and then they cost even more. The EU on the other hand may seek to compensate the manufacturers for loss of market due to unforseen disruption, which may be inside the WTO rules and would be voted for by an EU seeking to not quite punish the UK, but soften the blow they get internally from the pain the UK thinks it is going to impose.

 

Now we move onto supply chains. In particular car manufacturing, electronics, defence and then that very staple of living, food. Disruptions to costs are here already due to the weakened pound. Next we have suppliers actively seeking new markets from this day onwards for their produce, or seeking to vertically integrate to increase value to make up for the loss of volume. The CAP is believe it or not, moving towards a free market for produce, as we see the hurt for the UK dairy cattle farmers. Much maligned for its lakes and mountains of wine and cheese, milk and corn, it was based on the 1950s model of standing up to a soviet attack and feeding our people. It has moved away to what are still complex rules “single farm payments” being the outcome.

Maybe UK farmers will find it a lot easier to operate and sell their produce in the UK, but as with milk today, maybe they will find that supply starts to outstrip demand and that there is not such a big domestic market for the value added produce they export from small and medium sized farms and food processor companies today. Some of those UK processors are reliant on cheap imports of commodities and specialities, or a low price on the common market for local supply. Some of their products will become more expensive for the UK consumer, and exports will perhaps dry up in a trade war.

Comp0nents are the same as food in that respect. Higher prices and of course any delays in deliveries caused by longer customs queues at the ports. Rare components and materials may in fact be withheld by the EU to favour their suppliers first, and the source may see that as sensible, cutting out the UK. Anything that upsets a modern factoryu with just-in-time delivery and lean supply means that money is lost. Also the same is true in delivery to EU customers or export routes.

Then we get onto the real reason for Brexit, immigration or rather freedom of movement of labour. A “simple work permit system” which allows the uk to “get the talent it needs” is not a great thing for securing labour on the spot, for the season, or when actually competing for rare skills. The weak pound works against the UK as an attractive place to work, while of course the sky high costs of housing and transport also erode that little send-home profit margin Poles and other migrant or relocated workers make. The reason there came so many of these people was not because they were looking for a tawdry life on benefits, they were wanting to work and get cash. Live five to a caravan, not go out at the weekends, get two maybe three jobs. Money plain and simple. It will take the UK a very long time to make up skills if there is any real incentive to train and for young people to go into debt chasing training for quite low paid jobs with what they see ans antisocial conditions, such as fish processing or picking crops.

By intention of course , post brexit policy on immigration will create a shift  of poorer, lower skilled workers back to the EU over time, so those UK workers without any real skills who have been ‘precarious’ in and out of benefits and top ups, will stand a little more on their own two feet. However threats on quotas and tax tariffs per head, disclosures and protests outside ‘named and shamed’ companies is likely to put a stop on inward location and a lot of investment. Once you give the mob a good simplisitic, economic argument based on xenophobia and excluding those xeno-workers,  it tends to run off in the worst possible directions.

In the new global corporate wage and conditions climate which will now rush into the UK, in “deregulating the labour market”, better skilled UK workers in those “cube farm offices”  will find that that promise of better pay from a tighter labour market is replaced by the price parity with back room agreements against wage rises, and 12 hour day, no over time, of the USA system. ( You read it here folks). White van man will not be happy about autonomous vehicles either, hastened by the acceptance of USA regulations over EU caution on the technology.

The final point is what does the UK consumer say, and who voted in Brexit. UK consumers are not going to enjoy this year’s round of exchange rate driven inflation, coupled to more austerity in the public sector pay and employment suppressing private sector wages too. Putting up the price of a beloved BMW; the birth right of middle management, by 20% will be less popular again in light of flat wages. Immigration is in the very back of people’s minds by 202o, and the common market solution is what they want to be reaching for.

Political strategies are often to talk really hard, tough and far and then back down to a compromise which is actually futher than the opposition would have allowed you to go, or is a necessary, pragmatic fall back position which saves the UK, while behind the scenes major shifts in worker’s rights, the privatisation of the health service and more austerity have been implemented during the confusion while of course, the media attention is on the trade deal. I predict the common market re-entry by 2020.

 

 

 

 

Advertisements