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The car industry and Brexit: hard truths

Published: 13 December 2018

► UK car factory output stutters
► Investment dipping with Brexit
► The challenges facing industry 

The UK’s automotive industry is under serious threat from the ‘wrong’ Brexit. So what could happen to car companies, to dealers and to the cars we buy when we exit the EU on Friday 29 March? Right now, unless the government somehow appeases everyone and scores a great deal from the EU, it’s looking pretty gloomy, especially for the 856,000 employed in the business across the UK.

How could a no-deal Brexit cripple UK car production?

UK car manufacturers like borderless trading with the EU. Their web of supplier networks across Europe involves an estimated 1100 trucks crossing the Channel each day, bringing parts straight to the assembly line at factories in Sunderland, Cowley, Halewood, Swindon or one of the other 32 vehicle manufacturing plants in the UK. It’s a delicate operation that any border stoppages would disrupt in a major way.

A no-deal withdrawal will mean no transition period. That’ll throw sand into the slick parts delivery system from Europe and could stop production lines dead. ‘It’s becoming more and more difficult to justify investment in the UK because of the uncertainty,’ Jaguar Land Rover boss Ralf Speth (below) told CAR at the Paris motor show.

Ralph Speth, CEO of Jaguar Land Rover: not a fan of Brexit

‘Every day we build around 3000 cars in the UK. That’s about 25 million parts. If we miss just one part, we cannot build a vehicle… and stopped production will cost us £60m a day.’

How angry are car company bosses? 

Very. After the vote in 2016, car companies were sanguine, saying they respected the wishes of the people and would await the outcome of negotiations. Two years on and faced with the ‘total ineptitude’ of the government negotiators, as one analyst put it, the usually mild CEOs are baring their teeth.

‘Hard Brexit is a red line,’ Steve Armstrong, CEO of Ford of Europe, said in a recent statement. ‘It could severely damage the UK’s competitiveness and result in a significant threat to much of the auto industry, including our own UK manufacturing operations.’ He hinted that could mean shutting down its two engine plants (Bridgend and Dagenham). ‘We will take whatever action is necessary to protect our business in the event of a hard Brexit.’

The UK car industry employs 856,000 people (SMMT data)

BMW has said it could take some Mini production out of Oxford and transfer it to the Netherlands, and JLR’s Speth has warned it could take planned investment into electric cars elsewhere. In addition, BMW is so worried it has brought forward the annual summer shutdown of its Mini plant in Cowley to 1 April, a few days after Brexit. ‘While we believe this worst-case scenario is an unlikely outcome, we have to plan for it,’ a BMW spokesperson said.

Why will manufacturers pull out of the UK?

There’s no way of knowing how serious the manufacturers are when they talk of pulling production in the event of a no-deal. But we do know that a no-deal and immediate switch to World Trade Organisation (WTO) rules – with 10 per cent import tariffs – will hurt car makers shipping to or from the EU. ‘Profit margins in our industry are significantly lower than 10 per cent. These extra costs will either be passed on to the consumer or will have to be absorbed by the manufacturers,’ said Erik Jonnaert of the car makers’ European lobbying association, ACEA. ‘That will put the competitiveness of our operations under threat,’ Toyota Motor Europe CEO Johan van Zyl said.

The wrong Brexit deal would give manufacturers the excuse they need to up sticks and leave, particularly given our weaker labour laws compared to France or Germany. ‘It’s easy to get rid of people in the UK, so it’s easy to pull out of,’ said David Bailey, professor of business at Aston University. ‘I’m not saying that’s going to happen when models are mid-cycle, but when they are being replaced that’s when manufacturers make those locational choices.’

Vauxhall's Ellesmere Port plant has been left vulnerable by a reduced focus on fleet sales

Which car plants could close?

The following car factories are believed to be at risk of closure in a worst-case scenario:

  • Ellesmere Port (above), where Vauxhall makes the Astra, a model hit by the firm’s reduced focus on fleet sales.
  • Ford’s Bridgend engine plant. Loses JLR as a customer in 2020.
  • JLR’s Castle Bromwich plant. Currently on a three-day week after the popularity of Jaguar models made there slumped.
  • Honda Swindon. Revived by the current Civic but vulnerable again because of the threat of US tariffs.

What will a no-deal Brexit do to car sales?

A no-deal scenario will badly hit already weakening car sales, according to market analysts LMC Automotive. The firm believes can and van sales would continue to fall, bottoming out at 2.55 million in 2020, compared to three million in 2016. 

UK car buyers: getting less for their money

On the other hand, if we manage to negotiate a nice free-trade agreement involving an orderly transitional period, that would be enough to halt the sales slide next year and increase demand to 2.81 million by 2021. The difference between the two potential 2020 figures is huge: 270,000 vehicles. 

Will our post-Brexit air be dirtier?

One of the many Brexit unknowns is whether we’ll remain in Europe’s average CO2 agreement, which fines manufacturers that don’t hit targets for average emissions across their range.  

‘If the UK dropped out there would be no reason for manufacturers to sell plug-in vehicles in the UK because they would no longer count to CO2 targets,’ said Greg Archer of green pressure group Transport & Environment (T&E). ‘That would create a shortage.’

Manufacturers might be more willing to sell us less-fuel-efficient engine options, some of which have already been canned, knowing it wouldn’t impact their overall EU score.

Are there any reasons to be cheerful?

Well, although new-car sales are down, it’s not by much – dealers have been saved by the mass migration to finance, which has softened the blow of the price rises on Eurozone imports caused by the weak pound. This pattern is likely to continue after Brexit. Daksh Gupta, CEO of the Marshall Motor Group dealership chain, said: ‘Customers are used to paying the £300 a month. They like the idea of PCP.’ They just don’t get quite as much for their £300 as they used to.

‘They’ve come down a model or even migrated across brands. They’re still buying the cars, but the richness is decreasing,’ he said. That’ll get worse in a no-deal scenario – another 10 per cent will be wiped off the pound’s value again if we leave with no deal, LMC predicts. So although we’ll still buy cars, we just won’t get as much for our money. Not very cheerful after all then.

Read on for our earlier news and background information on Brexit.

Brexit and the UK car industry

Brexit and the UK car industry: the background

British car factories are feeling the pressure ahead of Brexit, with UK production slumping by 17% in September, the trade body has warned. The Society of Motor Manufacturers and Traders (SMMT) warned that 127,051 vehicles were produced last month, down from 152,661 the year before.

The industry is under attack from all sides:

  • Brexit uncertainty, hitting investment and sales
  • Weaker consumer demand, registrations falling
  • WLTP emissions regulations disrupting production

Great Britain plc has enjoyed a strong few years of production, peaking at nearly 1.8 million units in 2017; but as the SMMT graph below demonstrates, that's quickly sliding as political uncertainty bites:

Mike Hawes, SMMT chief executive, said: 'It has been a turbulent year and the industry needs stability, something which appears elusive given the lack of resolution to Brexit negotiations. The UK government has recognised the importance of a deal that maintains free and frictionless trade with the EU, but it is up to all sides to deliver this to safeguard the hundreds of thousands of jobs depending on the sector.'

Car bosses queue up to warn over Brexit

The boss of Jaguar Land Rover has already warned that uncertainty over Brexit negotiations is putting £80 billion of future investment at risk. Chief executive Ralph Speth said that JLR was reconsidering its future options as it prepared for a worse-case scenario of no deal being struck over the UK's exit from the EU.

‘A bad Brexit deal would cost Jaguar Land Rover more than £1.2bn profit each year,’ Speth warned. ‘As a result, we would have to drastically adjust our spending profile. We have spent around £50bn in the UK in the past five years - with plans for a further £80bn more in the next five. This would be in jeopardy should we be faced with the wrong outcome.’

He added that the company's 'heart and soul is in the UK,' but in an interview with the Financial Times he admitted that JLR would consider closing UK factories if necessary. 'If I'm forced to go out because we don't have the right deal, then we have to close plants here in the UK and it will be very, very sad. This is hypothetical, and I hope it's an option we never have to go for.'

The UK car industry and Brexit: growing warnings

JLR joins the chorus of different manufacturing giants warning about the perils of a no-deal solution, which could add tariffs and red tape for a complex, multi-national car making industry that relies on frictionless movement of people and parts to build cars in Britain.

Mini (above) has also warned that uncertainty over Brexit is damaging its business.

It's not just damaging manufacturers: why importers are at risk too

We caught up with Paul Philpott, the CEO and president of Kia Motors UK. 'We import 55% of our cars from Slovakia, the other 45% from Korea, and are worried about how we get cars and parts into the UK. What are the implications of tariffs to my business? What regulatory changes might we face? The honest answer is, until a deal is done we just don't know.'

He warned that this ongoing uncertainty was damaging to business. 'There's just no clarity - it's really hard to plan for all the different scenarios. If this uncertainty goes beyond November, we will be in trouble.'

Paul Philpott, boss of Kia in the UK: 'We might have to stockpile cars because of Brexit uncertainty'

Kia normally holds around 7000 cars in stock across the dealership network, Philpott (above) said. 'And we can store an additional 15,000 cars at the Immingham docks [where Kia imports cars in Lincolnshire]. We can store over 20,000 cars, or around two months' stock and are considering how much we need to do this to balance the risk from Brexit.'

Manufacturers, importers, dealers and others in the supply chain all face an anxious wait for a deal to be done. 

Why investment in the UK is at risk from Brexit

Uncertainty over Brexit is already damaging the UK car industry in other ways. The SMMT has proved that investment in British car making is slumping. It said that £347m had been earmarked for new models in the first half of 2018 - almost half the sum announced in the same period of 2017, as car makers continued to take a waiting brief on Brexit and its impact on UK plc.

‘It’s becoming more and more difficult to justify investment in the UK because of the uncertainty,’ JLR chief Speth told CAR at the Paris motor show. ‘Every day we build around 3000 cars in the UK. That’s about 25 million parts. If we miss just one part, we cannot build a vehicle… and stopped production will cost us £60m a day.’

The SMMT wants the government to maintain a customs union with the EU, bringing single market benefits and less red tape and the prospect of tarrifs. Doing so may assuage fears at manufacturers such as BMW and Mini, who have indicated they may reconsider UK investments unless clear and swift measures were put in place to protect automotive trade after Brexit.

'There is growing frustration in global boardrooms at the slow pace of negotiations,' warned SMMT boss Hawes. 'The current position, with conflicting messages and red lines goes directly against the interests of the UK automotive sector which has thrived on single market and customs union membership.

Brexit and the UK car industry

'There is no credible "Plan B" for frictionless customs arrangements, nor is it realistic to expect that new trade deals can be agreed with the rest of the world that will replicate the immense value of trade with the EU. Government must rethink its position on the customs union. There is no Brexit dividend for our industry, particularly in what is an increasingly hostile and protectionist global trading environment.'

The UK car industry turned over a record £82 billion in 2017, the eighth year of growth. A recent SMMT study put the overall contribution to the UK economy at £202bn - around a tenth of national GDP.

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