Brexit impact still being evaluated

WASHINGTON/LONDON (July 5, 2016) — In the fortnight since citizens of the United Kingdom voted for the U.K. to leave the European Union (EU), officials of the tire, auto and auto parts industries are still trying to determine what Brexit will mean to their global businesses.

Reactions within the rubber and tire sectors and their supplier industries have been mainly of disappointment, although many have tried to put on a brave face.

“The U.K. is an important market for Goodyear,” the tire maker said June 27, four days after 17.4 million British voters, representing 51.9 percent of the votes cast, decided that their nation should get out of the EU. “Like all global companies, we shall continue to assess the situation as it evolves.”

Continental A.G. CEO Elmar Degenhart called Brexit “a cause of great concern” to the EU in a written statement to European Rubber Journal (ERJ), a United Kingdom-based sister publication of Tire Business.

Brexit will have a limited financial effect on Conti, which derives less than 3 percent of its global revenue in the UK, Mr. Degenhart told ERJ. However, the prospect of the U.K.'s leaving the EU is “not the answer to the challenges we face from global competition with America and Asia,” he added.

Despite a decline over recent years, the U.K. is still a significant hub for tire-making in the E.U. with a 10-percent production share and the presence of major players.

From an impact point of view, Cooper Tire & Rubber Co. potentially has the most at stake among tire makers. Its European headquarters and largest European plant are in Melksham, England, where Cooper has been located since 1997 after buying Avon Rubber P.L.C.'s tire operations.

The plant is Cooper's primary location for its Avon motorcycle and Avon and Cooper racing tire businesses.

Findlay, Ohio-based Cooper said it is monitoring the market reaction and other repercussions of the Brexit vote.

“We are currently assessing what impacts, if any, Brexit will have on our business,” the company said. “Cooper's footprint in Europe, with operations in the U.K. and continental Europe, positions us well to meet customer demand and respond to any changes.”

The tire maker said it will address the effects of Brexit — along with other issues related to its business — when it releases its second-quarter results Aug. 4.

Besides Cooper, Dunlop Aircraft Tyre, Group Michelin and Pirelli Tyre S.p.A. have tire manufacturing operations in the U.K.

For the past several years, Michelin has sourced radial truck tires for the U.S. market from its Ballymena, Northern Ireland, plant; that factory, however, is slated to close by mid-2018 as part of a European-wide restructuring that will result in more than 1,600 job cuts.

In the debates prior to the referendum vote, former Cumbria Member of Parliament Eric Martlew reportedly warned that the Pirelli tire plant in Carlisle, England, would close “within five years” in the case of a leave vote.

However, this view was refuted by a local chamber of commerce official, who was hopeful that companies like Pirelli would stay, if the U.K. could strike a favorable trade deal with the EU.

Pirelli did not respond to ERJ's request for comment on the warnings by Mr. Martlew, but did provide a more general statement about the impact of Brexit on its business in the U.K.

Brexit, Pirelli stated, should have little or no impact on its operation in the U.K, though costs and pricing would need to be balanced for the internal market.

With regards to exports, the Italian tire-maker said higher raw material costs should be offset by sterling devaluation and control of operating costs.

Of the EU member states, The Netherlands stands to lose the most by the vote according to the country's Bureau for Economic Policy Analysis (CPB).

The CPB predicted in June that the Dutch economy could lose up to 1.2 percent of its GDP with the Brexit, with chemicals and rubber and plastics industries among the most impacted.

In 2015, the U.K. imported $3.4 billion worth of plastics and organic chemicals from The Netherlands.

In addition to that, the U.K. will also be highly impacted by the devaluation of currency when it comes to imports.

These could, for instance, include tire imports, particularly from sources that trade in dollars.

“Basically, all the Chinese imports, which are in dollars right now, will be more expensive as the pound has mainly slipped against the dollar,” according to industry veteran and consultant Peter Taylor.

U.S. tire retailers expressed little concern about Brexit. There have been no calls to Tire Industry Association (TIA) headquarters about the vote, and the subject did not come up during a TIA Board of Directors meeting the weekend after the Brexit vote, TIA Executive Vice President Roy Littlefield told Tire Business.

Rough ride in Europe

However, the European auto industry is bracing for a rough ride, as reported by Automotive News Europe, another sister publication of Tire Business.

France's PSA Group, which comprises the Renault and Peugeot brands, said it probably would have to raise prices for its cars because of Brexit, according to a June 27 Automotive News Europe article.

The same report noted that the U.K. would no longer be guaranteed tariff-free access to European auto markets unless it could negotiate that as part of its departure agreement with the EU.

“This is not a good day for Europe — and, in my view, certainly not for the UK,” said Daimler A.G. CEO Dieter Zetsche in the article. “Geographically, the country may be an island; politically and economically, it is not.”

As of June 29, prior to Tire Business' press deadline, the British pound stood at about $1.35, up slightly from a low of $1.31 but still down sharply from the $1.50 range it traded at just before the Brexit vote.

Meanwhile, world stock markets began recovering from the steep declines triggered by Brexit. The Dow Jones Industrial Average, which fell by nearly 900 points to 17,140 in the two days after the vote, rose 269 points to 17,409 on June 28 and stood above 17,500 in early trading June 29.

Meanwhile, news reports on June 29 showed oil prices on the rise again, with Brent crude above $49 per barrel and U.S. crude near the $49 mark.

Effect on U.S. economy

The potential effects of Brexit on the U.S. economy are still unclear, but are unlikely to be devastating, according to Alan Tonelson, founder of the economic and trade blog RealityChek.

Although the U.K. is one of the few countries with which the U.S. runs a trade surplus, there is relatively small potential for a substantial blow to U.S. trade, Mr. Tonelson said in a telephone interview with Tire Business.

“We have an enormous, continent-sized trade structure, and we are still largely self-sufficient,” he said. “Since the U.S. is so insulated from global economic downturns, it's hard to believe that Brexit will deal the U.S. a significant blow.”

On the other hand, there are some potential points of damage, according to Mr. Tonelson. One is that a stronger dollar against the pound and euro will give Britain and Europe opportunities to increase the percentage of their goods in the U.S. market, he said.

Another is that Brexit may magnify the efforts of China — a major customer of the UK as well as the U.S. — to devalue its currency, the yuan, according to Mr. Tonelson.

“The yuan has already been devalued substantially this year,” he said. “There was a move by the Chinese central bank that brought the yuan to a 5½-year low.”

Brexit also will complicate efforts to complete the Trans-Atlantic Trade and Investment Partnership (TTIP), a major trade agreement between the U.S. and the E.U., Mr. Tonelson said.

In his June 24 RealityChek article on Brexit, Mr. Tonelson noted that the possibility of Brexit was a factor in Federal Reserve Chair Janet Yellen's June 15 decision to keep interest rates at current levels.

“Until business-as-usual in the world economy resumes, don't expect any rate hikes,” he wrote.

“Good news if you believe that the U.S. desperately needs super-easy credit to sustain its current feeble recovery, and bad if you believe that prolonged near-zero rates have prevented the post-financial crisis adjustments needed to restore real health to the economy.”

Michelin North America Inc. declined comment for this article. Bridgestone Americas could not be reached for comment.

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This article is a compilation of articles written by Miles Moore, Senior Washington Reporter for Tire Business, and Shahrzad Pourriahi, reporter with European Rubber Journal, a sister publication of Tire Business. Additional reporting by Bruce Davis, Tire Business staff