Honda Closure

This is something of a follow-up of my previous post about car making but I thought I'd specifically cover Honda.

It's personally sad for me because I worked at the Honda factory last year. Wore the overalls like everyone else. They're a really good bunch of people and they care about what they do and constantly aim to improve quality. I wouldn't hesitate to recommend a Civic or a Type-R based on what I saw.

How much can I share? I never know, but I tend to avoid sharing anything that also isn't out in the public.

First of all, is Brexit a factor? Honda say no. There's people saying Honda are just being polite, but Honda were very much talking about there being an impact of leaving the customs union. If Brexit was the killer factor, why wouldn't they say it? If even no deal would have seriously affected them I think they would have made that threat.

As I said in the other piece, there's a lot of forces affecting car making around the world. But, none of those affected this. There's 3 things that I think are working on this.

• Japan-EU trade agreement. The explicit reason Japanese car makers set up car factories in Swindon, Sunderland and Derbyshire in the first place was because of tariffs. Make your cars in the UK, you take 10% off. That makes them competitive with the Renaults and Fiats. Tariffs on cars are being phased out and will be something like 5% in 2021 and fall to zero over the next few years.
• Decline in "car" sales. Overall, car sales are flat. but "car" sales are falling as people are preferring SUVs. The Honda factory in Swindon makes the Civic and Type-R, which are cars, rather than SUVs. Swindon cut 900 jobs 6 years ago because of this.
• Honda plan to be 2/3rds electric by 2025. This means huge factory investment. You can't just start making electric cars on an existing line. Diesel and petrol cars are on separate lines. Electric needs another line, or maybe they ditch diesel for electric. To fit that needs a factory closure to do the installation, lots of new equipment, retraining and so forth.

Put all that together, and someone figured that there were few advantages making in Swindon rather than Japan. The tariff saving is disappearing, so few financial savings and lots of downsides in investment and having one factory allows them to use the same workforce across multiple lines based on the shift from petrol to electric.

I'd also like to add that in typical media fashion, this is painted as a catastrophe for Swindon. Because all media know is giant factories. I'm not saying it's good, or even not that big a problem, but the factory is 3500 jobs in a town of 105000 jobs, and maybe another 3500 in local supply chain. Swindon has a couple of companies of a similar size: Nationwide and WH Smith. But most of it is SMEs you've never heard of in fields like software, machinery and healthcare. 

"LA Woman sues Honda over false 50 mpg claim"

Mombers reminded me about this story (nice to see that the character from a Doors song is still alive and well!) with his comment to an earlier post:

It can be argued that global warming is a myth or won't be that bad but two things can't be argued:

1.Mercury, lead and other chemicals in the air are never a good thing

2.Mahmoud Ahmajinedad, Hugo Chavez et al are real and they're not our mates. Giving them billions of dollars a day is not in our best interests. I think improving efficiency is lower hanging fruit in terms of reducing pollution and petrodollars. Doesn't sell as well as fancy green energy projects though.

1. Agreed. Not so much lead any more though, I thought.

2. Broadly agreed, but...

a) We (the UK) do not give them "billions of dollars a day". We consume approx. 600 million barrels of oil a year, and each barrel earns the producer country about $113 = £73 (£1 = $1.55 as at today's date), so that's about £44 billion a year (3% of GDP).

Maths check: One barrel crude = $113 = £73 ÷ 159 litres/barrel = 46p per litre. Fuel duty 60p + VAT 22p/litre = 82p + plus 7p for refining, transport, retail margin etc = £1.35/litre pump price. Total VAT + fuel duty receipts are about £55 billion a year. Which would give us a figure of 46/82 x £55 billion for cost of crude oil = £31 billion, so let's round that £44 billion down to £40 billion for crude oil imports.

b) As far as cars are concerned, there is little or no low hanging fruit left. I think we have pretty much reached the upper limit in terms of fuel efficiency in miles per gallon, assuming you want to travel with any dignity. Honda can't even manage to make cars which achieve 50 mpg (or maybe they can and LA Woman drives like an idiot).

IIRC, when I was a lad, 30 mpg counted as good. My 1997 VW Golf Mk II achieves around 40 mpg overall. It has a 2 litre engine, which is not small relative to size of car or engine sizes in the 1970s or earlier, and I'm sure it's far less efficient than it was when it was new, or less efficient than a new car today.

So even if we could improve our overall average mpg from 40 mpg to 50 mpg*, this would only reduce the money we send abroad to people who are, frankly, "not our mates", by about £8 billion a year at current prices, which is £129 per capita. I mean, it's worth having, but nothing to lose sleep over; the cost of replacing all our cars would far outweigh this - The Golden Rule is to drive sparingly and to run your car until it falls to pieces.

* Derek in the comments points out that they mean smaller US gallons, and that 50 miles/US gallon = 60 miles/Imperial gallon.

Killer Arguments Against LVT, Not (124)

Flashman submitted the only vaguely coherent counter-argument over at HPC, which kicks off at comment 24:

... there are also such matters as LVT penalising large factories that own their own land. They would continue to pay large amounts of tax even when they are operating at a loss in a recession or when they are operating at loss because of a huge investment. A company like Honda would not tolerate such unjust treatment and they would fly into the arms of a more welcoming country….or would there also have to be some sort of large exemptions on taxing land?

Honda's current tax bill on their Swindon site appears to be over £500 million a year (see footnote).

If all existing taxes were replaced with LVT, their tax bill would be £41 million a year (370 acres x 4,840 x £23/sq yard/year, see earlier workings for SN3 4.. postcode sector).

That looks like a ninety per cent tax cut to me.

At comment 66, Flashman then says " You didn’t address the consequences of a business leaving because they resented (or were bankrupted by) being taxed heavily during a long-term loss-making period... . If you don't support struggling strategic businesses, they have a habit of disappearing or being transferred to foreign ownership."

Yes I did.

I pointed out that cutting somebody's tax bill by ninety per cent strikes me as 'light' taxation rather than 'heavy' taxation (a point which he refused to accept) and there is little need to worry about their factory being transferred to foreign ownership because, er, it's already in foreign ownership.

Anyways, to spell this out, Honda's factory has a capacity of 250,000 cars per year, so in a good year it would pay £900 million in taxes. They had a bad year or two during the recession when its production halved, so in that bad year, its tax bill went down to 'only' £500 million, and in one of those years it received the car scrappage scheme discounts worth maybe £139 million, bringing the net bill down to £361 million. That's still a heck of a lot more than £41 million.

And yes, maybe Honda would blackmail the local council and threaten to leave, knowing that there are one or two bad years ahead in which, of course, they'd prefer to pay £nil in tax rather than £41 million, but they're going to do that anyway in good times and bad, and realistically would they disappear abroad?

a) They've invested £1,380 million in plant and machinery, how much would it cost them to dismantle it all and reassemble it overseas? A damn' sight more than £41 million, I suspect, so if they gamble on things picking up in a year or two, they might well mothball the factory but they would not relocate.

b) And where would they go? That £41 million works out at an average tax bill per car of £311, there is nowhere else in Europe where they'd pay that little. And why would they go to all that trouble of avoiding a £41 million annual tax bill if they'd end up paying £500 million a year elsewhere, even in the bad years?
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To guesstimate Honda's current tax bill:

According to this:
- their factory site in Swindon is 370 acres,
- they have invested £1.38 billion in plant and machinery
- they have 5,000 'associates' (i.e. employees).

According to this, they have 3,000 employees and expect to manufacture 135,000 cars this year (reduced because of Japanese tsunami-related parts shortage).

Their cars sell for between £12,000 and £24,000, let's call it an average of £18,000= VAT of £3,000 per car; plus £1,000 worth of labour per car = PAYE of £400 per car; plus £1,000 profit = corporation tax of £300 per car. This gives us a total of £3,700 tax per car x 135,000 = £500 million a year, plus another £25 million or so in Business Rates.