British voters wanted to send a message with the Brexit vote, and it was certainly heard loud and clear by manufacturers in West Michigan.
Global markets have been rattled since the United Kingdom voted in mid June to leave the European Union, and industry watchers worry about the long-term implications for manufacturers, particularly those with heavy exposure to the market.
The lingering aftermath of the referendum could spawn prolonged headwinds ranging from a decline in global economic activity to further strengthening of the U.S. dollar, which could harm exports. The situation has even led some economists to predict Brexit could hasten the start of the next economic downturn.
For their part, manufacturing industry observers can sum up the impact of Brexit in one word: uncertainty.
“Uncertainty is the death knell for business investment,” said Charles Chesbrough, executive director of strategy and research and the senior economist at the Original Equipment Suppliers Association (OESA). “Long-term planning for the (U.K.) will be put on hold until the dust settles.”
Analysts believe the automotive industry could be one of the heaviest hit by Brexit in the long term. The uncertainty caused by the vote could push global light vehicle sales lower than originally expected by 2.6 million units through 2018, according to research firm IHS Automotive. Under the latest industry scenario, IHS still projects the global industry to grow — 3 percent in 2016, 1 percent in 2017 and 2.5 percent in 2018 — but just at a slower rate than it had previously forecast.
That slower rate of growth in vehicle sales could hamper earnings for suppliers such as Zeeland-based Gentex Corp. that have a high exposure to international markets.
A supplier of automatic dimming rearview mirrors, Gentex exported 45 percent of its automotive components to European markets during its 2015 fiscal year, according to its annual report. A spokesperson from Gentex did not respond to a request for comment. The company is set to release its second-quarter earnings on July 22.
Despite analysts’ predictions, some automotive suppliers have taken a wait-and-see approach to what Brexit will mean for their operations.
“The view of our team in Europe is it’s going to take a long time to sort out what that exit means, how it will happen, and how fast,” said Mark Los, president and CEO of Holland-based BuhlerPrince Inc., a manufacturer of large aluminum die casting machines.
Los recently returned from a trip to Europe to discuss Brexit and other international issues with executives at Bühler Group AG. BuhlerPrince is the North American subsidiary of the company’s die casting division, which has manufacturing operations in the U.K.
Overall, executives at Bühler Group see no reason to change the company’s strategy for Europe as a result of Brexit, Los said. While there could be a small decrease in automotive sales in the U.K., “it won’t be a major shift,” he said.
A SILVER LINING?
Mike Wall, director of automotive analysis at IHS Automotive in Grand Rapids, believes most suppliers will move forward with the majority of their investments both domestically and overseas.
“The biggest thing is to not overreact to any one piece of data,” Wall said. “There’s that reactionary assessment in your gut that says the wheels are going to fall off, but it doesn’t mean we leave automotive in Europe altogether.”
Instead, Wall suggests that suppliers fall back on their strategic planning to assess their individual risks.
“I think what you’re going to see is a triage of some of the business to cordon off the risk as much as possible,” Wall said. “The European market is huge and critically important.”
Industry insiders worry that OEMs with operations in the U.K. could be significantly impacted in two years when many expect tariffs to be levied on the flow of goods between the U.K. and Europe.
The U.K. represents the third-largest market for Ford Motor Co. and the fourth-largest for General Motors Co. — both of which have manufacturing facilities in the country, according to a report in Automotive News.
“With this Brexit, do we see automakers delaying launches or investments in their own operations? If we can contain this in the broader EU, then automakers could continue along their investment path,” Wall said.
While most industry watchers have expressed grave concern over the Brexit vote, there could be a silver lining for entrepreneurial suppliers.
Savvy auto suppliers could pick up additional business in Europe by stepping into the void left by other manufacturers that want to distance themselves from the international market following the vote, Wall said.
“This could breed opportunities for suppliers as well,” he said. “Maybe with suppliers taking a duck-and-cover approach, others could come in and may be able to find some compelling opportunities.”
Even some industry executives join Wall in finding some sort of bright spot resulting from Brexit. In an interview with Automotive News, GM Chief Economist Mustafa Mohatarem said he believes the vote will stall the Federal Reserve from hiking interest rates, which could help buoy sales in the U.S. in a period of global economic uncertainty.
CHOPPINESS: ‘THE NEW NORMAL’
Outside of the automotive industry, manufacturers vary in their outlooks on the global market in the wake of Brexit.
Executives at Rockford-based footwear and apparel marketer Wolverine World Wide Inc. (NYSE: WWW) see the uncertainty caused by Brexit as just another factor to be considered in an already tumultuous global economy, said Chris Hufnagel, vice president of strategy, investor relations and communications at the company.
“We’re operating in a pretty choppy global macroeconomic market,” Hufnagel told MiBiz. “The Brexit vote was only more turbulence and noise in the system. We take a global view of the business and how we think about it, but the key theme is that it has been choppy and will continue to be choppy to some extent. Choppiness is the new normal.”
However, Wolverine is watching the effect Brexit could have on the strengthening U.S. dollar, the other major headwind stemming from the vote, according to most economists.
For the last several quarters, Wolverine has been addressing the negative impact from the strong dollar by hedging currency, Hufnagel said. However, it’s likely that the dollar will be buoyed even more, making U.S. goods less desireable in overseas markets and particularly in the U.K., as the British pound crashed to a 31-year low in the immediate days following the vote.
“Most businesses would tell you that rising currency isn’t always the best,” Hufnagel said.
HEDGING AGAINST UNCERTAINTY
While it’s hard to predict the exact ramifications from Brexit in the years ahead, manufacturers must rely on a strategy of serving multiple markets and diversification to weather its effects, sources said
Although it carefully watched the referendum process, Wolverine did not approach Brexit with any specific strategies to mitigate fallout from the vote, Hufnagel said. Instead, he said the company plans to rely on its diverse global platform to shield it from potential market turmoil associated with Brexit later down the line.
“Our model insulates us,” Hufnagel said. “We also operate in consumer soft goods concessionary where there’s volatility (already). We have a longer-term view of (the market) and that’s how we view the stewardship of our company.”
Wolverine currently does less than 15 percent of its overall business in the Europe, Middle East and Africa regions, so its exposure to the U.K. and neighboring European countries is limited, Hufnagel said. He declined to disclose how much of Wolverine’s business is related specifically to operations in Europe and the U.K.
Meanwhile, Benton Harbor-based appliance maker Whirlpool Corp. (NYSE: WHR) told investors it developed strategies ahead of time for dealing with both possible outcomes in the Brexit vote.
In a statement that sought to calm nervous investors as Whirlpool’s stock price tumbled more than 13 percent in two days of trading following the vote, Chairman and CEO Jeff Fettig said sales in the U.K. accounted for only 5 percent of the company’s total business.
“(W)e are prepared to take swift actions to offset the negative impact to our EMEA operations,” Fettig said in the June 28 statement. “The U.K. is an important country for us.”
Whirlpool sought to allay investors’ concerns by reaffirming its guidance for the 2015 fiscal year of earnings per share between $14 and $14.75, cash flow from operations of $1.4 billion to $1.55 billion, and free cash flow of $700 million to $800 million. Additionally, the company said it would go forward with planned pricing increases in the third quarter and enact programs to lower costs for the EMEA region.
After reaffirming its earnings guidance, Whirlpool’s share price rebounded somewhat, but had yet to reach pre-Brexit levels at the time this report went to press.
Whirlpool declined to comment further on the long-term implications of Brexit on its operations. The company will announce its second-quarter earnings the week of July 18.
As the global market speculates on the potential fallout from Brexit, some economic developers have expressed hope that the British Parliament will not act on the vote.
“Nothing has happened yet,” said Dean Whittaker, president and founder of Whittaker Associates Inc., a Holland-based economic development consultancy. “It’s an advisory referendum and not a legally binding requirement on their Parliament. They don’t have to do anything.”
Whittaker believes there is a “very good” chance that the British Parliament will nullify the vote, even though that means potentially angering a sizeable portion of the U.K.’s population.
In the meantime, Whittaker believes the Brexit vote will continue to throw “sand in the gears” of the global economy.
“What we’ve created is a whole pile of fear, uncertainty and doubt,” he said. “I wouldn’t want to be an economic developer in the U.K. right now because we added another hurdle for investors to convince them it was a good place to invest.”
Regardless of what happens with Brexit in the long-term, some industry watchers believe the uncertainty caused by the vote could precipitate the next downturn in the U.S. economy and hurt manufacturers in West Michigan.
“We’re much closer to the next recession than we are from the past one,” said Chesbrough of OESA. “With this uncertainty, it might hold back investment and result in a self-inflicted recession.”