Thursday, 27 July 2017

Brexit and The Mini Decision

As the British economy begins its inevitable descent, following the Brexit decision, and decades of being sustained on little more than a constant drip feed of credit, to fuel consumer spending, and speculation, the Tories have seized on the decision of BMW to assemble its electrically powered Mini at Cowley as a sign of confidence in the British economy. It isn't.

The important thing to note is that the main value component of the Mini will be created in Germany. All that is happening at Cowley is that the existing body shell will continue to be built there, whilst the new electric batteries and motor for the car are being developed in Germany, and will be exported to Britain to be fitted into the car bodies. It doesn't represent additional capital investment in Britain, just not an end yet to the current investment. But, the main value component of the car is the technology for the development of the new batteries, and of the electric motors etc.

It makes sense for BMW to keep the current mini assembly at Cowley because it has huge amounts of capital employed there assembling the current Mini, and 20% of all Mini production is sold in Britain. With the Pound falling, the need for BMW to import the electric motors and batteries from Germany will give the company a direct currency boost to its profits, in a similar way to say British oil companies who make their profits overseas in dollars, but then ship those profits back to Britain, in Sterling. Anyone watching yesterday's BBC Four documentary on robots will also have seen that the car assembly at Cowley is now done exclusively by robots. Although 650 people are employed at Cowley alongside the robots, their jobs are not those of car workers of the 1960's/80's. They are now skilled technicians, who program computers, place sensors and so on.

Governments across Europe, including yesterday the UK, have committed themselves to banning the sale of petrol and diesel powered cars by 2040. That means these governments already know that the car companies themselves will have stopped internal combustion engine production long before then. Volvo has said it will not produce any more petrol/diesel only vehicles by 2020. Battery technology is now developing at such a pace that by 2020, electric cars will be cheaper than petrol/diesel powered cars, and already electric cars are capable of running for around 350 miles on a full charge. Charging technology is also developing quickly, so that one company is now able to offer a full charge in just 15 minutes. That is likely to fall further, although the real development may come from either the ability to charge batteries on the move, from power loops located beneath roads, or else to be able to simply drop out batteries and replace them, within seconds, at service stations, in the way motor racing teams do with wheel changes etc.

If Britain does leave the EU, it will make sense for BMW to keep the final assembly plant at Cowley, because the actual main value creation will be in Germany, whilst it will be able to not only sell the finished vehicles in the UK, but have the potential for onward export to the US etc. Britain would then become just a convenient location for this final low value, assembly work, in the same way that 90% of the value of an Apple iPhone is created in the US, by the highly skilled designers, software engineers, etc. with only the other 10% coming from the actual assembly of the phones by workers in China.

In China, however, over the last thirty years, as in Singapore, Malaysia and elsewhere, there was a conscious decision by the state to develop the economy by moving up the value chain of production whenever the opportunity arose. It was a conscious decision after development began to take off, to pursue a policy of pushing up wages, and encouraging investment in productivity-raising technology. As a result, some of the low skilled jobs previously undertaken by workers in China have started to come back to the UK and US, as Chinese wages have risen, whilst wages in the UK and US have stagnated. Both Apple and Foxconn have announced in the last few days that they intend to start new assembly factories in the US, for example. When government critics talk about it pursuing a policy of turning Britain into Singapore, they actually do Singapore a great disservice!

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