Brexit Extremely Bullish For Tesla And The Automotive Industry

| About: Tesla Motors (TSLA)

Summary

Brexit will enable the UK to cut taxes, cut government spending, and reduce red tape. That alone is bullish for business in general.

Brexit will enable the UK to offer tariff-free trade with the U.S., Mexico and other places, attracting manufacturing capacity.

Brexit would enable US companies such as Tesla, GM, Ford and FCAU to export to the UK on better terms than today.

Brexit would enable UK exporters such as Jaguar Land Rover, Aston Martin, Rolls Royce and Bentley to export to the US on better terms than today.

Brexit is the dawn of a new free-trade era, plus a new UK regime with lower taxes and less red tape. Hugely bullish for the automakers and the economy.

There is no shortage of empty arguments in favor of centralizing political power in Brussels at the expense of national governments and otherwise free people around Europe. If you are a politician whose lifestyle depends on money and power distributed from government coffers in, and associated with, Brussels, it is indeed in your interest to scare people away from upsetting this most cushy of apple carts.

However, there is a totally different case to be made, which supports the proposition that the UK, the rest of Europe and the world as a whole will see higher economic growth as a result of a full implementation of Brexit. It's all about competition between governments.

Currently, the regime in Brussels is constraining the abilities of national governments to forge their own policies on taxation, government spending and red tape. In the relative absence of such competition, politicians are caught in a spiral of taxing too much, spending too much, and promulgating too much red tape.

This is so because as 1986 Nobel Prize winner in economics, James Buchanan, showed in The Calculus of Consent, first published in 1962, people do not get the government they want.

What do you mean? Don't people vote?

Yes, people vote, but the way in which politicians are able to tax and spend causes a one-way bias in the system in favor of more government spending and red tape. How come?

This is what James Buchanan's work explains, and the reason he won the 1986 Nobel Prize in economics. Benefits from government spending and red tape are concentrated, whereas its costs are dispersed.

The government may give a "monopoly" benefit to a small class of people - think Yellow Cab taxi medallions in NYC - or simply a cash grant to a small group of companies of a limited class of people. That may be a lot of value for that particular group.

As a result, those people know very well how their bread is buttered, and they have a huge incentive to organize and make sure that this government money or red tape protection doesn't go away.

However, for the population as a whole, it's different. They may not even know what's going on. A company may get a $100 million incentive - such as a tariff - from the government, but in a population of 300 million people that's $0.33 per person. Who is going to take time and organize, demonstrate and lobby for a $0.33 gain?

The people for whom $100 million is at stake, know all about it, and will spend - you guessed it - up to $100 million to organize and advocate. Almost nobody whose wallet will be impacted by $0.33 will do so.

The same thing goes with a welfare benefit for which an individual is making $18,000, or whatever, a year. It's a lot of money for that person, but on a per-taxpayer average, it's not worth someone's time and effort to fight.

As a result, there is an inherent bias to grow the size of government. Unchecked, we always get a bigger government than we really want.

But there is at least one check on this system - and that's the ability to vote with your feet. It's an imperfect check, because nobody wants to move - language, family, culture, etc. - but at least it's possible as a last resort. If nothing else, you can at least move your money and a business with few or no physical assets.

That's where Brexit comes in. Europe has entangled itself into a regime with too high taxes, too much government spending and too much red tape.

With the UK inside the EU, the situation is trapped. You don't like the high taxes, etc., in Europe? Tough luck, because you have to move really far away, perhaps to a culture and language that is at best unfamiliar, and at worst hostile/lethal.

Those policies directed by a centralized government with very little effective competition, is what led us to anemic economic growth rates in Europe, which in turn is a partial reason for social unrest, especially in combination with out-of-control government spending and oppressive red tape.

If the Brexit actually gets executed upon, a new dawn for economic freedom suddenly opens. The UK would be able to cut taxes, spending and red tape without having to take into consideration any directives from Brussels. Greece is not the last country on the verge of fiscal collapse.

Let's start with banking. If the UK was able to lower - or even abolish - capital gains taxes, along with personal and corporate taxes, it would attract financial resources from the rest of Europe and the world alike. It would make the UK significantly stronger.

If you think London was strong as a financial center already, you haven't seen anything yet. Thanks to Brexit, the UK could make the terms for financial transactions even better. No need to force itself to be hampered by the Eurocrats in Brussels.

With lower taxes and less red tape, investment capital will be attracted to the UK financial markets to a greater degree than today. The terms for investors will improve. Want to start a business, including building a factory? Well, now you're better off doing it in the UK than elsewhere.

Let's say you're a global automaker, and have the choice of building a new factory or expand an existing one. If the UK suddenly had better terms - say zero income tax instead of 15% or 20%, and no cumbersome red tape around conducting your business - you would now be more inclined to do it in the UK than anywhere else in Europe or elsewhere.

You may even have a new startup boom in the UK, whether in the automotive industry or in any other industry. With the UK able to offer better terms, it will attract not only global businesses, but also smaller ones. Instead of organizing your LLC in a tax haven, you could now do so in Sheffield or Manchester.

But wait, there's more!

Liberated from its unelected overlords in Brussels, the UK will now be able to offer free trade with the US and other geographies around the world. Let me give you one example: Tesla (NASDAQ:TSLA).

Currently, Tesla sells cars to most European countries. For the EU countries, the cars undergo a completely artificial "manufacturing" process in Tilburg, Netherlands, before the cars are sent out to the respective EU countries. This is nothing but a way to avoid an EU tariff otherwise imposed on cars made in the US. It is completely inefficient. The cars are built in California and it would of course be best to send the finished car to a customer just like it is sent to someone living in Chicago or Atlanta. Instead, the car has to be messed with in a "factory" in Holland that serves no rational purpose. It only adds cost and, if anything, risks reducing the build quality.

Said differently, the way that Tesla is induced to reassemble its cars sold into the EU, in its Tilburg, Netherlands, facility, is akin to a government edict causing you to dig holes in the ground, and then fill them up again. It is pure insanity, only adding cost to the consumer.

This process works differently for Norway and Switzerland, because they are not part of the EU. Tesla ships its cars directly to those countries, just like they ship to New York or Los Angeles. No special and inefficient local assembly needed or required.

This means that once Brexit has been completed - hopefully as soon as possible - Tesla and all other automakers will be able to ship cars directly to the UK, tariff-free. No stupid local re-assembly in The Netherlands (or elsewhere) needed or required.

This will obviously be good for Tesla, all the other automakers, and the UK consumers alike. The cars will be less expensive as a result of lower cost, which means that Tesla can improve its profit margins, or lower prices, or a combination of both. It's a win-win-win.

All the other automakers will also benefit from this. Ford (NYSE:F) has just started exporting the Mustang to the UK, which would now incur less cost post-Brexit. GM (NYSE:GM) will make the all-electric Opel Ampera-E (the European version of the Chevrolet Bolt) in 2017, exporting it to the UK. Fiat Chrysler (NYSE:FCAU) exports the Jeep products from the US to the UK, and with the UK leaving the EU, it would be able to export them tariff-free to the UK without any consent from Brussels.

It works the other way as well. With the UK out of the EU, the UK factories would be able to conduct free trade with the US, for example. The UK exports numerous kinds of cars, from Jaguar Land Rover (NYSE:TTM) to Nissan (OTCPK:NSANY) and Aston Martin. Bentley and Rolls Royce are owned by German companies (Volkswagen (OTCPK:VLKAY) and BMW (BAMXY), respectively), but they also export to the US.

As a result of Brexit, they would now be in a position to export to the US tariff-free, which previously would be a negotiation that would go through Eurocrats in Brussels. That would help those UK exporters and the US consumers alike - lower prices and/or higher profit margins.

You thought that was good enough? It most certainly would be fantastic enough, but it doesn't stop there.

Take competition with Mexico. As it turns out, automakers from Audi (OTCPK:AUDVF) to Nissan, Mercedes, Kia, Hyundai (OTC:HYMLF), FCA and others have set up shop in Mexico so that they can sell tariff-free to the US and Europe alike.

Most recently, Audi is on the cusp of opening up its new factory in Mexico. It is moving the production of the Audi Q5 from Europe to Mexico. Imagine that such a decision to locate the factory had been made after a Brexit. Then, such a decision might have been made in favor of the UK instead.

In other words, thanks to Brexit, the UK could position itself as the Mexico of the automotive world. Almost every automaker has rushed into Mexico to set up plants in recent years. They did not consider the UK because the UK was part of the restrictive overlords in Brussels. With that constraint gone, it should result in a boom to automaker capacity in the UK.

Conclusion: The dawn of a new free trade era

The scaremongers around the Brexit debate have focused on the theoretical possibility that in response to Brexit, the rest of the EU would suddenly start to impose tariffs on UK-made goods. It's not impossible that it could happen that way, although that would punish those EU countries just as much as it would punish the UK. It would make no sense.

In any case, there is no requirement that the EU would suddenly impose tariffs on UK goods, so why automatically assume that it would happen? It's a theoretical possibility, but not in any way a requirement.

However, all of those arguments totally ignore that the Brexit also opens up a major new dawn for free trade with the rest of the world. US automakers could now be able to give UK customers much better terms, and avoid artificial "manufacturing" processes such as the one Tesla is doing in Tilburg, Netherlands. UK automakers could be able to export to the US under better terms, just like Mexico can today. Those are all huge improvements to both UK manufacturers and consumers.

And just like Mexico, the UK could now be allowed to be an automotive manufacturing tax and free trade haven, dramatically boosting UK manufacturing. This would attract tons of foreign investment into the UK, in order to obtain better trade terms as well as lower taxes, and lesser red tape than elsewhere in Europe.

One final point: The knock-on effects. Assuming that the UK completes the Brexit and proceeds down the path of major global free trade along with lower taxes and less red tape, the pressure it puts on the rest of the world - not only Europe - will have strong follow-on effects. Other European countries, as well as those in the Americas and Asia, would have to cut their taxes and lessen their red tape, in order to compete with the new free-market industrial power that would be the post-Brexit United Kingdom.

In Tesla's case, this would mean that the EU would hopefully reconsider its inducement to have Tesla undergo its most inefficient and useless Tilburg, Netherlands, reassembly scheme before distributing the finished vehicle to their final destinations. If this happened, the efficiency Tesla enjoys in Norway and Switzerland today - and hopefully soon in the UK thanks to the Brexit - could then be enjoyed by the rest of Europe as well. And this would not have happened without the Brexit.

And that would further spur global economic growth.

Bottom line: Brexit is good news for Tesla, good news for all US and other global automakers, good news for the consumer, and good news for how Europe will once embrace free trade and a liberated wealth-generating capitalism. It's hard to think of a more bullish event for the world economy, even though the benefits will take a few years to show up.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA and long FCAU. However, positions can change at any time. The author regularly attends new vehicle launches, press conferences and equivalent, hosted by most major automakers.