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Honda plant closure causes ripple effect through UK supply chain

Automaker to shift resources out of Europe into electric vehicles in China

TOKYO -- Honda Motor's decision to shutter its U.K. plant is threatening to set off a domino effect in the country's auto industry, forcing suppliers to weigh options as they lose a key customer amid uncertainty over Brexit.

Honda on Feb. 19 announced that it will close by 2021 its factory in Swindon, west of London, which is its only production facility in Europe. In addition to sluggish sales on the continent, the U.K.'s scheduled departure from the single market forced the automaker's hand. "This is the best option for optimizing our global production," Honda CEO Takahiro Hachigo said.

Component makers operating across the U.K. have suddenly found themselves without a key customer. Yokohama-based Unipres employs about 100 people at a Birmingham plant where car frames are assembled for Honda. But with the automaker planning to exit the country, "we will start considering our options, including shutting down," a Unipres representative said.

As concerns grow in the British industrial sector that the U.K. is headed into a no-deal Brexit next month, other companies are also scaling back their presence. Honda's latest move served as a stark reminder that a messy divorce from the EU could prompt a mass corporate exodus to the detriment of the U.K. economy.

G-Tekt operates two plants near the Honda factory almost entirely dedicated to producing Honda parts. "We are still gathering information," the Japan-based company said.

"We will consider shifting our sales toward other automakers," another Japanese supplier, car seat maker TS Tech, said.

Honda's closure is expected to affect far more than the 3,500 employed at the plant, possibly two or three times as many when people who work at suppliers are included.

Many in Swindon are disappointed by Honda. Its plant kept employment up even in difficult times, so the company's decision was a big shock, Matt Griffith, an official with the local branch of the British Chambers of Commerce, told Nikkei.

Prime Minister Theresa May "said she had spoken to the president of Honda to express her disappointment at the decision," her spokesman said on Feb. 19.

The British auto industry logged 82 billion pounds ($107 billion) in sales and employed about 900,000 in 2017, according to the Society of Motor Manufacturers and Traders. The industry accounts for 44 billion pounds, or 13%, of U.K. exports, and could suffer a heavy blow should Brexit negotiations fail.

In a no-deal Brexit, British cars would face a 10% tariff in the EU immediately after the U.K. leaves the bloc at the end of March. This means automakers would have to spend more time and money getting through customs and building up inventory.

Jaguar Land Rover is laying off 4,500 workers, while Nissan Motor shelved plans to produce a key model there. BMW is considering moving some output to the Netherlands. British vacuum manufacturer Dyson is even moving its headquarters to Singapore.

Honda's decision "makes logical sense" given Brexit and Japan's new economic partnership agreement with the EU, said Osamu Tanaka, a chief economist at the Dai-ichi Life Research Institute.

"Many factories are shutting down and impacting jobs in less urban areas, an ironic outcome" for voters in those places who were the main backers of Brexit, Tanaka said.

Still, Honda stresses that the closure, a first among its overseas production hubs, has nothing to do with Brexit. As a midsize player, the automaker is choosing to focus its resources on growing fields like electric and self-driving cars.

Honda sold about 140,000 vehicles in Europe last year -- just 10% or so of its sales in the U.S. or China, and a measly 3% of its global total. Its share of the European market was less than 1%.

Meanwhile, the EU has been promoting a shift toward electric vehicles, with the U.K. and France planning to ban sales of gasoline and diesel cars by 2040. The Japanese automaker decided it made little financial sense to produce costly electric cars in a market where it struggles for recognition.

Instead, Honda is prioritizing China. "We want to supply electric vehicles to Europe from Japan and China, so we can once again build up the Honda brand in Europe," Hachigo said.

Honda is set to release nearly 20 new models, including electrics and hybrids, in China by 2025. The automaker also positions the market as an export hub for electrics, given the low cost of making automotive batteries there.

With total annual sales of about 5 million cars worldwide, Honda is less likely to see economies of scale than compatriots like Toyota Motor, which has double the sales. It has been working to boost its operating profit margin for four-wheeled vehicles, which is under 4% compared with Toyota's over 8%.

Honda previously announced plans to close a plant in Japan's Saitama Prefecture and to streamline a factory in Brazil. Its latest decision in the U.K. only furthers its campaign to overhaul its production structure to better compete in an age of electrics.

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