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UK’s Automotive Industry feeling the heat of Brexit


  • Background of the UK automotive industry
  • Deep integration between the UK & EU automotive industry
  • Implications of Brexit on the UK automotive industry

 

The UK is due to leave the EU on 31st October 2019 which would essentially alter its relationship with the bloc on security, trade and migration while ending its EU membership of nearly 5 decades. Brexit, however, is expected to have far greater consequences than what the voters had originally anticipated, during their referendum vote in June 2016. Since the vote, the Brexit process has been far from smooth. It is widely proclaimed as the country’s worst constitutional and political crisis ever since the second world war. While the political brass in the UK is grappling with the Brexit chaos, several industries, including the automotive industry, accredited for generating trade worth c. £82 bn, in the nation is facing the heat.

UK’s automotive industry had previously benefitted from frictionless trade as well as free movement of goods between the EU and UK, apart from preferential trading relationships with South Korea, Japan, Turkey and Canada due to its EU membership. In addition, UK’s ability to tap EU talent as well as movement of employees freely to-and-fro in the UK and Europe further added benefits reaped by the UK automotive industry.

UK’s automotive industry is best known for sports and premium car marques including Bentley, Aston Martin, Caterham Cars, Lagonda, Lister Cars, Land Rover, Lotus, MG Motors, McLaren, Morgan Mini and Rolls-Royce. Volume car manufacturers with a major presence in the UK include Toyota, Nissan, Honda & Vauxhall Motors (fully owned subsidiary of Groupe PSA).  On the commercial vehicle manufacturer front, companies active in the UK include Ford, Leyland Trucks (owned by Paccar), IBC Vehicles (owned by Groups PSA), Alexander Dennis, and London EV Company (owned by Geely).

The country has still not been able to pass a favourable Brexit policy and has already breached several deadlines set forth by it. Even worse is a scenario of a no Brexit deal resulting in the UK leaving the EU pact without a deal set in place. Amidst all this, UK’s automotive industry, the country’s biggest exporter, is facing its worst crisis ever. The stakes are high for the industry: UK exports more than 8 out 10 domestically manufactured passenger cars while EU customers purchased c. 51% of exported UK-manufactured cars. In contrast, just 4 out of 10 cars (or 38.3%) manufactured in the EU are exported with approx. 12.5% of their exports making their way to the UK. In addition, UK exports c. £5.2 bn worth of components as well as £2.9 bn worth of engines to enable the building of vehicles across the continent.

Severing ties with the region that purchases the highest proportion of UK’s domestically produced cars, is bound to hit the UK automotive industry not only in terms of falling sales, rising costs but also a major hit to the job market. As per data from SMMT (Society of Motor Manufacturers and Traders), UK’s auto industry employs approx. 823,000 workers. This includes the supporting sub-industries like repairs and maintenance as well as financing. Furthermore, walking away from the EU is expected to bring in new complications in the supply chain- reinstating supply chains to their current operationally efficient and cost-effective standards will possibly take a lot of time, if at all.

UK-based manufacturers have been particularly vocal in this regard and have unequivocally declared that a no Brexit deal is quite not an option adding that such a scenario would be devastating for the sector along with the hundreds and thousands of jobs that it supports. In a way to grapple with the situation, global car manufacturers are cancelling or putting off fresh investments and instead exploring cheaper options such as Slovakia. The industry is already experiencing layoffs. UK’s biggest automaker- Jaguar Land Rover is said to have laid off approx. 10% of its 40,000 strong work force already. Millions of dollars are being blown away on contingency planning in case of a no Brexit deal. As per estimates provided by IHS Automotive, Brexit could cost the UK automobile manufacturers more than 2.8 mn sales over the next two years.

New estimates by SMMT suggest a potential £50,000/minute cost to UK automakers caused by delay in production due to friction at the border. An end to borderless trade could cripple the industry’s JIT operating model. Every delay of 60 seconds in shipment of parts to manufacturing plants could cost £50,000 in GVA approximating to c. £70 mn/day in the most extreme scenario. WTO tariffs which alone cost the industry c. £4.5 bn/year would further compromise the industry’s competitiveness.

Prior to Brexit, UK was perceived as a rather strategic location geographically enabling companies to penetrate the European markets. Toyota, for example, had established plants in Britain for its Avensis and Auris models to cash in on this. The company had earlier reported that Brexit could add 10% duties to UK-built cars, something that could force them to drastically cut down on their production costs or increase prices. In addition, Toyota’s Europe CEO recently warned that it could end production in Britain by the year 2023 in case of a no Brexit deal. Similarly, companies like BMW, which sells c. 11% of its vehicles in the UK is also being hit by the progressive pound value loss. In this scenario, the company would be forced to increase their price points thereby locking out some prospective customers. The same fate is shared by the rest of the automotive manufacturers as well including, but not limited to, Nissan, Peugeot, PSA, Honda, Ford, General Motors etc. Automakers could have a harder time after EU starts imposing new tariffs on UK manufactured cars. In this scenario, automakers would invariably try to move their plants out of the UK.

Free & frictionless trade provided by EU customs union & free market has allowed the automotive trade value to rise by c. 118% to £101 bn in 2018 from £47 bn in 2009. However, a no Brexit deal would mean risking revering a decade of industry growth- ending frictionless trade, adding billions to the cost of importing and exporting as well as causing large-scale layoffs.  While Brexit already cost the former PM, Theresa May, her job, the automotive industry continues to suffer from uncertainty on several fronts. While all these impacts are merely predictions for now, the real impact will roll out once there is a concrete decision on Brexit.

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