In 2016, the UK voted to leave the European Union. It’s been almost three years since and the Brexit imbroglio shows no signs of resolving. Such opacity is already affecting jobs, investments and profits in the automotive industry, threatening to undermine its hard won successes.
Bracing for Upheaval
A Brexit agreement could assume any of three possible contours:
1. A comprehensive trade agreement, similar to the Canada-EU agreement, resulting in minimal or no tariffs being imposed
2. A ‘soft’ Brexit allowing for the trade of goods, but not services
3. A ‘hard’ or ‘no-deal’ Brexit, culminating in a scenario with no trade agreement and the introduction of new tariffs
Even before the 2016 vote, almost every business in the UK lobbied hard to ask citizens to vote to ‘remain’. They cited job losses due to companies moving out of the country, warning of the devastating impact that this would have on the economy. But in the end, the ‘leave’ supporters won with 51.9% of the vote.
This mandate pitchforked the UK into new territory, with political leaders and policy makers struggling to frame a coherent Brexit policy. Negotiating with companies to ensure their uninterrupted functioning in the UK, despite the overwhelming uncertainties, were a critical part of these parleys. In the last few months, however, the UK parliament has rejected the Prime Minister’s deal three times, thereby creating a political stalemate. On April 10th 2019, the EU offered the UK a reprieve, giving it until the end of October 2019 to finalise the terms of its exit deal.
This has only aggravated uncertainties and extended the period of confusion for businesses. This is especially true for automotive companies, and with good reason.
Impact of Brexit: Automotive Trade, UK and EU, 2017
Glimmers of Hope Amid More General Gloom
Currently, 54% of vehicles assembled in the UK are exported to the EU, while almost 80% of vehicles registered in the UK are made in the EU. Therefore, a Brexit deal has to be as close to the current arrangement as possible to ensure continued harmony. This gains urgency especially when one considers the significant volume of cross-border traffic in automotive parts; UK manufacturers import 79% of their components from the EU, while 65% of parts built in the UK are exported to the EU.
A ‘no-deal’ scenario would result in the EU taxing British-made cars by 10% and vice versa. This would increase the total cost of vehicles coming into the UK by a colossal £2.7 billion, while the total cost of vehicles coming into the EU would increase only by about £1.35 billion. In addition, it is estimated that customers could end up paying an additional £70 per year in car maintenance, while bearing the additional burden of increased automotive part costs.
Car manufacturing has fallen continuously over the last nine months as a result of buyer nervousness around the impending Brexit process. Industry investment in 2018 halved from the previous year. Even though weak demand in export markets is being blamed, domestic uncertainty has certainly also had a major impact on the demand for diesel engines decreasing. It doesn’t stop there.
Despite earlier statements to the contrary, Nissan announced in February 2019 that it would not produce its popular ‘X-Trail’ model in the UK and, instead, manufacture it in Japan. At around the same time, Japan and the EU entered into a free trade agreement, which effectively reduces or almost eliminates the need to make cars in the UK for EU consumption.
Honda announced in March 2019 that it was going to close its UK manufacturing site by 2021. As late as the second week of April, the iconic British brand, Jaguar Land Rover, shut down its factories in the UK for almost a week to recalibrate production, even as it increased output in Slovakia. Approximately 70% of suppliers are also looking at moving to production sites outside the UK. But rather unexpectedly, there’s actually some good news in the midst of this meltdown.
Hoping to catch the electrification wave in the UK early, Toyota recently announced that it would make a new hybrid electric Suzuki model at its UK facility. BMW is also in talks to take over Honda’s production facility to produce its popular compact SUV models, owing to increased local demand.
These are just small consolations, however, for an economy that was lauded not so long ago as an automotive powerhouse.
So What’s Next for Companies Driving Down This Road?
As mentioned before, companies in the UK are going through the process of temporarily stopping production to prevent excess inventory build-up. Both car manufacturers and parts suppliers are already stockpiling some of this inventory at transit points, such as ports and warehouses, on opposite sides of the border. They’ll end up releasing this inventory once a deal has been agreed on, so that tariffs are not added. But the sad reality is that companies will most likely have to move production out of the UK or, at the very least, minimise production in the country in order to remain competitive.
Until the point that the UK actually leaves the EU, companies will aim to minimise the risk of this political stalemate by taking drastic steps. But it’s the people of the UK who will suffer the biggest impact of this indecisiveness, which could turn the country back to the dark days of 2008.
Perhaps it’s time for a second referendum?