Suddenly, businesses across Europe are waking up to the realisation that the UK is currently on course to leave the European Union (EU) on 29 March next year, without a deal on trade and customs. As Katherine Bennett, the UK boss of aerospace giant, Airbus, warned on Friday:
“This is not project fear, this is dawning reality.”
As the BBC reported on Friday: “Airbus has warned it could leave the UK if it exits the European Union single market and customs union without a transition deal…It also said the current planned transition period, due to end in December 2020, was too short for it to make changes to its supply chain. As a result, it would “refrain from extending” its UK supplier base. It said it currently had more than 4,000 suppliers in the UK.”
BMW, which makes the iconic Mini and Rolls Royce, added:
“Clarity is needed by the end of the summer.”
Similarly Tom Crotty, group director at INEOS, the giant petrochemicals group, said several companies were putting investment decisions on hold because of Brexit uncertainty:
“The government is relatively paralysed … it is not good for the country.”
THE RANGE OF TOPICS COVERED BY THE BREXIT NEGOTIATIONS IS VERY LARGE
This is why my IeC colleagues and I have now launched Ready for Brexit on the 2nd anniversary of the UK’s referendum to leave the EU. We are particularly concerned that many small and medium-sized businesses (SMEs) – the backbone of the European economy – are failing to plan ahead for Brexit’s potential impact.
As our Brexit Directory above shows, Brexit creates a wide range of challenges and opportunities:
- Customs & Tariffs: Export/Import Registration, Labelling, Testing, VAT
- Finance: Payment Terms, Tax & VAT, Transfer Pricing
- Legal: Contracts, Free Trade Agreements, Intellectual Property
- Services & Employment: Banking, Insurance, Investment, Property
- Supply Chain: Documentation, Regulation, Transport
And yet, today, nobody knows on what terms the UK might be trading with the other EU 27 countries after 29 March. Or indeed, all the other countries where UK trade is currently ruled by EU agreements.
The EU is a rules-based organisation, and the legal position is very clear:
- The UK has notified the EU of its intention to leave by 29 March
- Negotiations are underway over a possible Withdrawal Agreement, which would set new terms for UK trade with the EU 27 after this date
- The proposed Transition Agreement, which would extend the deadline for leaving until 31 December 2020, will only apply if this Withdrawal Agreement is finalised in the next few months
Ready for Brexit will keep its subscribers updated on developments as they occur, as well as providing news and insight on key areas of business concern.
A NUMBER OF VERY DIFFERENT OPTIONS EXIST FOR FUTURE UK-EU TRADE ARRANGEMENTS
The UK has been in the EU for 45 years. Unsurprisingly, as the slide above confirms, the negotiations are proving extremely complex. Both sides have their own objectives and “red lines”, and compromise is proving difficult.
The negotiators not only have to deal with all the trade issues covered in the Ready for Brexit Directory, but also critical political questions such as the trading relationship between N Ireland and Ireland after Brexit. That, in turn, is complicated by the fact that the UK government depends on Democratic Unionist Party (DUP) votes for its majority, and the DUP is opposed to any “special deal” on customs for the Irish border.
BUSINESSES NEED TO RECOGNISE THERE MAY BE “NO DEAL” AFTER 29 MARCH
I have taken part in trade negotiations, and negotiated major contracts around the world. So I entirely understand why Brexit secretary David Davis has insisted:
“The best option is leaving with a good deal but you’ve got to be able to walk away from the table.”
Similarly, International Trade Secretary Liam Fox is right to warn that:
“The prime minister has always said no deal is better than a bad deal. It is essential as we enter the next phase of the negotiations that the EU understands that and believes it… I think our negotiating partners would not be wise if they thought our PM was bluffing.”
The issue is simply that many businesses, and particularly SMEs, have so far ignored all these warnings.
According to a poll on the Ready for Brexit website, only a quarter have so far begun to plan for Brexit. Half are thinking about it, and almost a quarter don’t believe it is necessary. This is why we have produced our easy-to-use Brexlist checklist, highlighting key areas for focus.
“NOTHING IS AGREED UNTIL EVERYTHING IS AGREED”
As the UK and EU negotiators have said many times over the past 2 years, “nothing is agreed until everything is agreed“. These 7 words should be written above every business’s boardroom table:
- They remind us that it may prove impossible to agree a Withdrawal Agreement between the UK and EU27
- And without a Withdrawal Agreement, there will be no Transition Agreement
Instead, the UK would then simply leave the EU in 278 days time on World Trade Organisation terms.
If you don’t know what WTO terms would mean for your business, you might want to visit Ready for Brexit and begin to use its Brexlist checklist *.
* Ready for Brexit offers users a free one-month trial including access to the Brexlist. After this there is an annual fee of £195 to access the platform. Discounts are available for companies who want to help SMEs in their supply chains to prepare for Brexit, and for trade associations who would like to offer the service to their members.
The post Airbus warns of “dawning reality” there may be no Brexit deal appeared first on Chemicals & The Economy.
Something strange is happening in the European auto market, as the above chart from the industry association shows:
- Normally there are seasonal patterns, with March seeing the highest sales of the year
- But the trend of increase or decline is normally fairly stable in either direction
- This year, however, both March and now June have shown bumper percentage increases
- March was up 10.6%, well above the rest of Q1: June was up 14.6%, again well above the rest of Q2
It seems unlikely that seasonal patterns have suddenly changed quite so much, especially as March has always been a strong month.
Instead, it seems more likely that dealers are self-registering new cars in order to meet quarterly sales targets from the manufacturers. Thus the Financial Times reports that in reality UK sales are actually flat or falling – even though 7% more cars were registered as sold in H1 2015 versus 2014. It note:
- “More than a quarter of registrations in June came on the last day of the month
- “As many as half the registrations were being recorded in the final four days of the month as dealers push to meet targets
- “(These are) so-called self-registrations, where dealers sell the cars to themselves to meet incentive targets from manufacturers. The cars are typically held for 90 days and then sold on as used vehicles.”
Estimates for UK self-registration suggest it now accounts for at least 11% of total UK sales, and higher percentages in other key markets such as Germany. And this is despite average discounts in Germany now reaching 20%.
Leading manufacturers, of course, know that this is simply putting a sticking-plaster on the problem. Ford, GM and BMW are all now pushing hard into the car-sharing market, even though they know this will reduce their overall sales:
- Opel (part of GM) will offer “car sharing for everyone” via a dedicated Opel app on its CarUnity programme
- From next year, BMW will allow Mini buyers to rent their car via its DriveNow network in London and in the US
- Ford are allowing 12k London customers to rent their cars via peer-to-peer platform easyCar Club
As GM’s president said last month about owning a car in a city:
“It’s the last thing you should do because you buy this asset, it depreciates fairly rapidly, you use it 3 per cent of the time, and you pay a vast amount of money to park it for the other 97 per cent of the time”.
Auto manufacturers, unlike car dealers, have alternatives when it comes to confronting the challenge of car-sharing. Smart ones will realise that increasing numbers of people are no longer interested in owning cars. And so instead, they will focus on developing new income streams based on the megatrend of mobility.
May was “another fantastic month for US auto sales”. Or, it took the industry “one month closer to an inevitable downturn”. All depends on which analyst you talk to:
- Ward’s Autos called May’s sales the best since July 2005
- LMC Automotive suggested growth rates were slowing, and could possibly even contract next year
It also depends on how many questions you ask.
The headline numbers are clearly good. And they are not being achieved by major discounting, which was the position last year. Then, average incentives had hit $2633 in February, and headed higher into the peak spring selling season.
But look a little deeper, and problems quickly emerge. Prices in the used car market have begun to fall, with those for some “near-new” compact vehicles down 2.8%, and midsize values also weakening. The reason is better availability, as buyers trade-in used cars for new leases.
The US Federal Reserve’s cheap credit policy has meant that 4 out of 5 auto sales are now bought with credit or leased. Effectively, therefore, it is helping to grow the “sharing economy”, where drivers no longer feel the need to actually own the vehicle they drive.
This has good and bad results. In the short-term, it means automakers can increase prices and margins, and still make sales as the cost is spread over a longer period. But in the medium-term, it means they must expect to see lower sales in future years. The reason is simply that lease terms have been rising to unheard-of levels.
The average US auto loan is now at 69.7 months, which means it will be 2021 before the buyer comes to the end of the loan period. And as the chart shows, these changes in the market are challenging the dominance of the “Big 4′ US manufacturers:
- Their combined share of the total market is now just 60%, well down from the 73% seen in Q2 2005
- GM’s share is down at 18% versus 32% then (blue); Ford has slipped to 15% from 18% (green)
- Toyota has recovered to 15% after its recalls (purple); FiatChrysler has slipped to 12% from 15% (red)
Volkswagen highlights the pressure they are under. With an ageing fleet line-up, it is now forced to offer its Jetta model on a lease costing just $39/month in San Jose California, or between $89 – $99/month more generally. You could end up paying more per month for some mobile phone packages.
And, of course, there is always car-sharing itself. Ford have now followed BMW and Mercedes in entering the market with its new Go!Drive brand. And each shared car takes 17 privately owned vehicles off the road, according to industry estimates.
Of course, many people will still want to drive their pick-up trucks and SUVs. But there are clearly an increasing number of people who are looking for new ways of meeting their need for mobility. As a result, it seems likely that the US auto market will look quite different in 5 and 10 years time.
Our 13th annual World Aromatics & Derivatives Conference takes place in Berlin next week. Jointly organised as always by International eChem and ICIS, it features a must-hear list of speakers:
- ExxonMobil: Europe Business Director Tim Stedman will give a global market overview
- Dow Chemical: Global Business Director Pieter Platteeuw will discuss the future for benzene
- BASF: Business Manager Klaus Ries will look at the styrene value chain
- Shell: General Manager Elise Nowee will ask the question, “What about Europe?”
In addition, we will benefit from expert presentations on key issues:
- International Energy Agency: Analyst Fabian Kesicki will present the IEA’s energy outlook to 2035
- BMW: Senior Researcher Peter Phleps will look at how Mobility trends will impact car markets
- Nexant: Global Manager Stewart Hardy will focus on the outlook for paraxylene and polyester
- VCI: Senior Economist Christian Buenger will analyse global economic megatrends
- Biorizon: Business Development manager Florian Graichen will look at opportunities in the bio area
- ICIS price reporters Rhian O’Connor and Rob Peacock will highlight toluene and phenol/acetone developments
I will also be giving a presentation discussing the likely impact of the Great Unwinding of policymaker stimulus on the industry.
As the chart above highlights, chemical markets suggest a major economic slowdown is underway, caused by China’s new policies. We are therefore in the New Normal world of slow demand growth and deflation. How can companies create new markets for the future?
Full details of the agenda and registration details can be found by clicking here.
As promised yesterday, the blog today looks at the wider impact of the major changes underway in housing markets. Driven by the ageing BabyBoomers these changes are, in effect, like throwing a series of large stones into the middle of a pool of water – the ripples spread wider and wider as the impact grows.
One key change, as the Pew Institute continues to report, is that the US is steadily moving back to high levels of multi-generational homes:
- As many as 1 in 4 young adults were living at home in 1950.
- But by 1980, only 1 in 10 young Boomers were still living at home with parents.
- Today we are ‘going back to the future’, with 1 in 5 young adults living at home with parents
- And their numbers are rising all the time.
This has wider implications as housing is also a motor for other parts of the economy. Multi-family units require only half the number of people to build them – 1.8 people are employed to build each multi-family, versus 3.7 for a single family home. They also use less material when being built – bad news for the chemical industry, for example, when each new single home uses $15k of chemicals, according to American Chemistry Council data.
Unsurprisingly, US house prices are beginning to weaken again as the impact of stimulus policies disappears. Last week’s S&P Case-Shiller Index showed average prices in the 10 largest cities back at September 2013 levels. And the outlook is not good, with affordability being hit with mortgage rates now at 4.5% versus 3.6% last May.
Thus mortgage lending fell in Q1 to a 14-year low, leading to talk of a shakeout getting underway in the mortgage finance industry. As the CEO of the Mortgage Bankers Association warned:
“This change is much more structural and will be longer lasting. It’s a classic supply-and-demand scenario. We have an excess supply of lenders and a lack of demand.”
Equally important, as the chart shows, is that the changes taking place in housing markets (red line) are likely to impact new auto sales (blue line). These markets have moved in parallel over the past 40 years, and it is already possible to see what is likely to happen:
- One obvious point of connection is that “as we age, we driver fewer miles“, as the US Dept of Transport notes
- Their data shows those aged 74+ drive 60% fewer miles than those aged 34 – 43
- Not only do the kids no longer need a taxi service, but retired people no longer need to drive to work
It is also becoming clear that we are only in the very early innings of these changes. One key trend, as the blog will discuss tomorrow, is that older Boomers are now choosing to move back into cities in large numbers.
Companies that missed the first wave of these changes are already on the back foot. They need to catch up quickly, before they are completely left behind.
THURSDAY EVENING UPDATE: 43% of US homes were bought with cash in Q1, according to RealtyTrac. This was more than twice the 2013 level, and confirms not only the shakeout now underway in mortgage lending, but also the weak outlook for housing itself. First-time buyers are being priced out of the market, and can’t easily get mortgages as they are more likely to belong to lower-earning minority communities.
Q1 saw record global auto sales volumes, as the chart above shows:
- US and EU manufacturers cut prices and offered great financing deals to boost sales
- Chinese buyers raced to beat new quota restrictions on the main cities
- Japanese consumers brought forward purchases ahead of April’s sales tax increase
- Only India disappointed of the 5 major markets, with sales continuing to slip as the economy slows
- Overall, 2014 sales at 14m (red square) were up 8% versus 2013 (green line)
This may well mark not only a temporary peak, but also an absolute peak, however. US and EU sales should continue to be supported by major incentives in Q2. But China will probably slow as quotas and credit tighten, whilst Indian manufacturers are cutting 200k jobs as the auto sales slump continues.
Japan sales are forecast to fall 15% due to the sales tax, and will clearly continue to decline. 1 in 4 of its population is now over the age of 65, and there are almost as many people aged 75+ as there are children aged under 14. Equally important is that the working age population continues to hit new lows each year as the overall population declines.
WORLD NOW REACHING ‘PEAK CAR’ MOMENT
More important for the long-term, as Bloomberg report, is the fact that the world is reaching its “peak car” moment. As the blog has noted before, the average car is only driven for 1 hour a day. Car sharing, as argued by BMW and Mercedes, is clearly a far more affordable business model for cities in the future, as it operates on a ‘pay to use’ basis.
The key issue is that cars are only a mechanism for going from one place to another for most people. Only a minority of people actually like owning and driving them. So the need that will be filled in the future will be for ‘mobility’, not car-ownership. This has major implications for anyone supplying the car industry, of course, as we describe in chapter 9 of Boom, Gloom and the New Normal.
The arguments against further increases in car volumes speak for themselves:
- Each vehicle in a car-sharing fleet replaces 32 new car sales, according to Alix Partners
- Even the current level of car-sharing has reduced total US sales by 500k
- Self-driving cars such as Google’s offer greatly improved journey times, if they can operate safely
- Younger people no longer see car ownership as part of growing up, and prefer to live in walking neighbourhoods
- Gridlock and pollution make the practicalities of more cars in towns impossible
Of course, it is always hard to accept that major change is inevitable. As Bloomberg report, the world’s first urban planning conference in 1898 spent its time worrying that an inevitable rise in the use of horse-drawn vehicles would lead to manure levels reaching 3rd-storey windows in New York.
As General Casey argued recently, leaders need to learn to “see around corners“. They must resist the wishful thinking that says things will never change. The coming decline in global car sales will be a good example of his message coming true.