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Remain or leave? Carmakers confront hard Brexit choices

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ST ATHAN, Wales/GAYDON, England (Reuters) – In three cavernous former Royal Air Force hangars at an old airbase in Wales, luxury carmaker Aston Martin is forging ahead with construction of a new vehicle assembly plant.

A general view of the Aston Martin production line at their world headquarters in Gaydon, Britain, February 14, 2019. REUTERS/Andrew Yates

The paint shop is in, robots are being unpacked, and production of the company’s critical new sport utility vehicle is on track to start this year – Brexit deal or no deal.

“I still have to believe that we’ll get to a proper and right decision because a no-deal Brexit is frankly madness,” Aston Martin CEO Andy Palmer told Reuters at the company’s Gaydon headquarters in England, where designers are working on a diverse lineup of vehicles for the 2020s and beyond.

Headlines have focused on plant closures and job losses ahead of Britain’s divorce from the EU.

Nissan has scrapped plans to build its new X-Trail SUV in the country, while Honda will close its only UK car plant in 2021 with the loss of up to 3,500 jobs – though it said the decision was not related to Britain’s exit from the EU.

However many auto companies – from luxury marques like Aston Martin to mass-market brands such as Vauxhall – are working on ways to survive after March 29.

On the outskirts of London, workers at Vauxhall’s operation in Luton are preparing to produce a new line of commercial vans following fresh investment from the brand’s owner PSA which they are counting on to sustain over 1,000 jobs.

While post-Brexit market conditions remain a big unknown, Vauxhall boss Stephen Norman told Reuters Britain’s exit from the European Union could present an opportunity to increase the brand’s market share. He is pursuing a marketing campaign to boost demand for the company’s modestly priced cars and SUVs.

The continued investment by some carmakers and the potential sales upside seen by Vauxhall reflect the conflicting decisions and opportunities that brands face depending on their size, their customers and where they are in the production cycle.

All automakers in Britain will anyway have to find ways make Brexit work, even if only in the short term. 

Nissan builds nearly 450,000 cars and multiple models, making it hard to pull out of the country any time soon. Toyota builds just one model in Britain, the Corolla, but has only just started making it – in an industry where vehicles tend to have a seven-year production life cycle.

RACKS OF DASHBOARDS

Aston Martin and Vauxhall are as different as two auto companies can be. Now Brexit has thrown Palmer and Norman into the same precarious boat as, like their rivals, they seek to minimize the potential harm of a disorderly British exit.

The two companies have significant British manufacturing operations and together have thousands of employees in the country. Palmer and Norman both said in interviews that the impact of Brexit would be more complicated, more pervasive and take longer to play out than policymakers and the public appreciated.

For Aston Martin, which sells sports cars at prices well above 100,000 pounds ($130,380), new European tariffs on British-built cars are not a significant concern, Palmer said.

Like other smaller players such as Bentley, Rolls-Royce and McLaren, Aston has much larger margins on its cars and extra costs can be more easily passed onto wealthy customers. That’s not a luxury enjoyed by mass-market players.

What concerns Palmer more is the disruption to his company’s network of suppliers and its meticulously scheduled production system.

As he walks through Aston’s Gaydon factory, Palmer points to several rows of dashboards mounted on carriers and crowded into a corner of the plant.

Aston is building stockpiles of key parts in case an abrupt, no-deal Brexit results in trucks with components getting delayed by chaos at British ports. It is increasing the days of stock it holds from three days to five days and could fly in parts if ports become clogged up after March 29.

Aston receives many of its engines from a Mercedes-Benz factory in Germany, and new border checks and tariffs could delay those shipments.

Reverting to a regime of cross-border tariffs and World Trade Organization rules, after decades of free trade, would force Aston and its suppliers to trace and document where all the parts in a vehicle come from, Palmer told Reuters.

“When you’ve got 10,000 parts on a car and then you’ve got all of the sub-parts and the sub-parts, you quickly get up to hundreds of thousands of parts. And do you honestly know where they’ve all come from? Often not,” he said.

That’s one reason why Palmer said he hired a supply chain chief, an appointment announced last month. “His obsession right now is planning for Brexit,” he said.

The Brexit vote in mid-2016 came as Aston Martin was pursuing a multi-year strategy, unveiled in 2015, to go from making about 3,500 sports cars a year to building up to 14,000 sports cars and SUVs annually.

The St Athan plant will start building DBX SUVs, and then is expected to begin assembling a new line luxury electric vehicles under the Lagonda brand early in the 2020s.

Scrapping that investment is not Aston’s plan.

“People have asked me: what keeps you awake?” Palmer said. “It very much is the supply chain and the capability of that supply chain to absorb all the macroeconomics that are thrown at them.”

Aston is not alone in this concern: Volkswagen, the biggest car seller in Britain, and Honda have both said they are stockpiling parts while Jaguar Land Rover has been talking to warehousing companies and Bentley has leased storage space.

IN CHAOS, OPPORTUNITY?

At Vauxhall, boss Norman said Brexit could be an opportunity for a brand that struggled under its former owner, U.S. automaker General Motors, and is charting a new strategy under French group PSA.

Vauxhall believes a no-deal Brexit would lead to as much as a 20 percent fall in British new vehicle demand but a bigger market share for Vauxhall.

PSA has committed last year to fresh investment to launch new models at its Luton van factory. But it faces a decision next year on whether to keep Vauxhall’s Ellesmere Port plant open after the current run of Astra Sports Tourer ends.

That decision is not a simple one, Norman said.

“It would not be true to say that a hard Brexit automatically means the closure of plants in the United Kingdom, neither for us, nor for other manufacturers, but it would certainly mean they come under greater scrutiny,” he said.

British workers would have to deliver productivity gains that offset tariffs and supply chain friction.

Currently Vauxhall, which was bought by Peugeot parent company PSA in 2017, accounts for 7.5 percent of British car sales.

Slideshow (8 Images)

Added to the group’s Peugeot, Citroen and DS brands the total rises to 13 percent, making PSA one of the biggest sellers in Europe’s No.2 auto market.

If the market takes a hit, Vauxhall’s emphasis on functional, economically priced models could be an advantage, Norman said.

“People will look very long and hard,” he said. “And they will say: do I need this enhanced brand strength which I’m actually paying for that has no material value or should I not look more seriously at the offer from Vauxhall … and have just as good a vehicle and not have to pay through the nose for the privilege.”

Reporting by Costas Pitas and Joseph White; Editing by Pravin Char

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Hong Kong protests create potential problems for Ottawa, says academic

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There are four or five flights a day from Vancouver to Hong Kong during the summer season. When they land this weekend, passengers will be met by a sea of protesters staging a three-day occupation of the Hong Kong airport’s arrivals hall.

The protesters are seeking international attention as the city enters its tenth straight weekend of political demonstrations that have, at times, been chaotic and violent.

Airport authorities are taking extra security measures and the Canadian government has raised its travel advisory.

Aside from monitoring local media and avoiding areas where large protests are unfolding, there are several issues for Canadians and Ottawa to consider.

“It’s a perfect storm of domestic tensions playing into international views on Beijing’s intentions and policies,” said Paul Evans, a global affairs professor at the University of B.C. “The dissatisfaction fuelling the protests is, in part, about feelings about freedom, democracy and Hong Kong’s autonomy. But it is also about material concerns related to housing, social services and career prospects.”

The oft-quoted number of Canadian passport holders in Hong Kong is about 300,000. This is an estimate made in 2011 by the Asia Pacific Foundation, which, at the time, said it was based on “conservative assumptions” and that a higher estimate would be over half a million.

There are concerns that, should the situation spiral out of control, there would be protection issues for the federal government to manage. After the Tiananmen Square massacre in Beijing in June 1989, several thousand Canadians were airlifted out of China. But the large number of Canadians in Hong Kong would make evacuation and consular protection much more challenging.

A more immediate issue is Ottawa’s response to the prospect of protesters fleeing arrest by Hong Kong authorities and seeking refuge in Canada.

“Vancouver is already in the global spotlight as a result of the (Huawei executive) Meng Wanzhou arrest and hearings,” said Evans. “Considering the huge number of connections between the two cities, managing requests for political asylum has the potential to put Vancouver in the spotlight in an even bigger way.”

Despite the advisory, many in Hong Kong report a sense of order now that they have adjusted and life is continuing around the protests.

“Local social media is providing good updates regarding the locations and times of the protests,” said Eric Li, a professor of marketing at the University of B.C. Okanagan who is visiting family in Hong Kong and doing some research.

He added that some visitors might be getting limited information if they are only relying on official announcements from government channels.

Li said he feels safe, but “there has been more tension and conflict between the government and police and citizens as well as businesses. The pro-(Beijing) camp and protesters are criticizing each other and there are also (arguments) within families and between friends and colleagues.”

Li has been trying to be “neutral” as a “personal choice. As a person who calls Canada ‘home,’ and Hong Kong ‘my hometown,’ I should say the young protesters are very well-organized and disciplined. The government should actively engage youth in their planning rather than excluding them in the process or putting them in an opposition position.”

“It’s crucial for the Hong Kong government to take a few steps to resolve conflicts through providing open conversation with key stakeholders and young leaders. And protesters should remind themselves the purpose of the (protests) as well as the consequences of their (actions).

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PROREIT buying office, industrial buildings in Ottawa, Halifax

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(PROREIT) will use some of the proceeds from its latest, and largest, share offering to help it purchase two office and industrial properties in Ottawa, and five industrial properties in Halifax for $97.8 million.

(PROREIT) will use some of the proceeds from its latest, and largest, share offering to help it purchase two office and industrial properties in Ottawa, and five industrial properties in Halifax for $97.8 million.

“These acquisitions provide meaningful increases in our industrial sectors and expand our presence in Ontario and the strengthening Halifax market,” president and chief executive officer James Beckerleg told RENX.

PROREIT (PRV-UN-T) is acquiring a fully occupied boutique office building in Ottawa’s central business district. It’s surrounded by tourist sites, multiple restaurants and retail offerings.

PROREIT is also purchasing a class-A mixed-use, multi-tenant flex industrial property in the west-end Ottawa suburb of Kanata. It includes an office and a research and lab facility with what the trust calls exceptional power, air handling and cooling specifications.

The building is fully leased and its tenants are in the material sciences, defence, communications and medical technology fields.

The two Ottawa properties have a combined gross leasable area of 338,000 square feet and a weighted average lease term of 6.6 years. Many of the leases include contracted rent steps.

While the property addresses and additional details are confidential until the deals close, which is expected this quarter, Beckerleg said they’re both institutionally owned and have been maintained to high standards.

The addition of the Ottawa properties will increase PROREIT’s portfolio exposure to the Ontario market to 29.1 per cent by gross leasable area and 29.3 per cent by base rent, making it the REIT’s largest provincial market. It increases the Ottawa portfolio to approximately 620,000 square feet.

“We entered the Ottawa market with our $52-million portfolio acquisition of five office properties last year,” said Beckerleg. “This fits our strategy of investing in strong markets where we can increase our exposure to both of these industry sectors.

“Ottawa is seeing significant growth in office and industrial properties.”


PROREIT’s new Halifax acquisitions

PROREIT has a contract to acquire five light industrial buildings with clear heights of between 18 and 24 feet in Halifax’s Burnside Industrial Park. The portfolio represents 358,000 square feet of gross leasable area.

The buildings are 93 per cent occupied with a weighted average lease term of 4.1 years. Many of the leases include contractual rent steps.

While more details won’t be made available until the deals close, which is expected this quarter, Beckerleg said the condition of the buildings is similar to its Ottawa office purchases. The five buildings have been institutionally owned and maintained at a high level.

“The Halifax industrial market has enjoyed declining vacancies in line with the expanding Halifax economy,” said Beckerleg. “There has been a marked increase in institutional interest in the Halifax industrial sector.

“We like this market. Again, it fits our strategy of focusing on mid-size cities with strong investment metrics.”

PROREIT’s $50-million offering

As part of its funding for the purchases, PROREIT will issue 7.15 million shares on a bought-deal basis at a price of seven dollars per unit, for gross proceeds of approximately $50 million, to a syndicate of underwriters.

PROREIT has also granted the underwriters an over-allotment option to purchase up to an additional 1,072,500 units on the same terms and conditions, exercisable at any time, in whole or in part, up to 30 days after the closing of the offering. It’s expected to close on or about Aug. 16.

“This capital raise, our first since graduating to the TSX, is the largest in PROREIT’s six-year history,” said Beckerleg. “We believe listing on the TSX and consolidating our units to trade in the seven-dollar range has substantially broadened our potential investor base. We believe the success of this capital raise confirms that.”

The Ottawa and Halifax acquisitions will be funded with approximately $30.8 million in cash from the offering and approximately $67 million in new mortgage financing at a weighted average interest rate of 3.4 per cent.

PROREIT intends to use $13 million from the offering to repay debt.

Impact of acquisitions on PROREIT’s portfolio

Upon completion of the acquisitions, PROREIT will own 91 income-producing commercial properties representing approximately 4.4 million square feet of gross leasable area and $625 million of gross book value, with a weighted average lease term of 5.7 years.

The acquisitions will also increase PROREIT’s industrial and mixed-use exposure by another 636,726 square feet to more than 2.8 million square feet. That represents 64 per cent of its total gross leasable area and 46 per cent of its total base rent.

While PROREIT has no other immediate acquisition plans, Beckerleg said opportunities are always being reviewed.

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Moncton Airport Receives $8.34-Million From Ottawa To Boost Cargo Export Capacity

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MONCTON – The federal government is investing $8.34-million and creating 140 temporary construction jobs to expand the cargo operational infrastructure at the Greater Moncton Roméo LeBlanc International Airport.

The airport’s cargo business has been quickly expanding in recent years, mostly because of the demand for live and fresh seafood products in China. In 2018, it posted a record for the shipment of cargo abroad, with 16 flights carrying over 1,000 tonnes of live seafood to Asia and Europe. It was the first time the airport saw a steady flow of local products being exported to international markets on large, dedicated cargo flights.

Airport CEO Bernard LeBlanc says the rapid growth makes new investments necessary. Passenger and cargo planes share runway space, he says, which restricted flights in and out of the airport for both types of traffic. The new investments will “eliminate bottlenecks” for cargo and passenger travel.

“We’ll be able handle cargo traffic 24 hours a day, seven days a week,” said LeBlanc in a phone interview with Huddle. “It opens up possibilities for more growth.”

The federally funded project includes the following upgrades:

  • Expanding Apron 8 to accommodate more cargo flights without affecting passenger aircraft traffic.
  • Expanding the de-icing pad to allow for de-icing of cargo aircraft and passenger aircraft.
  • A new de-icing fluid management system to comply with environmental regulations.
  • Overhauling and reconstructing the road connecting the airport apron to cold storage and cargo staging facilities.

The new investments will help grow the live and fresh seafood exports with more regularly scheduled flights to places like China. But LeBlanc says it will also open up opportunities for other products too. For example, the airport recently received a call from Malley Industries about shipping an ambulance to Israel.

Accommodating these kinds of requests is harder when the airport has mostly chartered flights that have to work around passenger travel services, he says.

“Once you get more regularly scheduled cargo flight services, it makes it easier to ship other products as well,” said Leblanc.

LeBlanc says work could begin next spring and be completed by October of the next year.

The federal government is making these types of investments in airports that are seeing increased economic activity from cargo exports. Last November, the Halifax Stanfield International Airport received $23-million in government funding to expand its cargo facilities to reduce congestion, among other things. As in Moncton, the investment was driven by strong demand for fresh seafood in China and Europe.

Ginette Petitpas Taylor, Minister of Health and Member of Parliament for Moncton-Riverview-Dieppe, sayS the airport drives export growth by opening up new opportunities for local businesses.

“The Greater Moncton Roméo LeBlanc International Airport is a key factor in the growth of the Moncton economy,” said Petitpas Taylor in a release. “The improvements will create more options for cargo aircraft and help businesses get more products to market.”

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