What now for the UK automotive industry post-Brexit?

A month on from the UK’s referendum vote to leave the EU and the focus has quickly shifted onto how the relationship between the EU and the UK will be managed in the future, and indeed whether the UK may benefit or suffer from its decision to leave the EU.

One industry that has a particular interest in this changing landscape is the UK’s automotive industry. With around 80% of its output heading for international markets (more than 50% alone heads to other EU countries), and with the majority of components used by the industry imported, the UK’s automotive industry will be a keen observer of how the UK’s international trading relations develop over the coming years.

The UK’s steel industry will also be watching with interest.

While not the UK’s largest-consuming sector of steel – the automotive industry accounts for some 15-20% of UK steel consumption – it has been a strong growth area in recent years, with car output up by some 4% last year and on course to rise at an even quicker pace this year.

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The industry itself certainly appeared to be firmly in favour of remaining in the EU prior to the referendum vote.

Executives from some of the UK’s leading car manufacturers, as well as the industry’s trade association, the Society of Motor Manufacturers and Traders (SMMT), both issued pro-EU statements prior to the referendum vote. A poll carried out by SMMT found that 77% of their members were in favour of staying in the EU.

So what now?

In the immediate future the outlook remains mostly positive. The only thing that has fundamentally changed since the referendum vote is the value of the pound, which has weakened by almost 10% against the euro since the referendum vote, and by slightly more against the US dollar.

With UK exports therefore priced more competitively in overseas markets, and vice-versa with regard imports into the UK market, the UK’s automotive industry should be well placed to benefit.

On a similarly positive note, fears about UK-based manufacturers such as Nissan, Jaguar Land Rover and MINI deciding to leave their UK facilities behind are probably overdone at this point. Hasty decisions about existing investments are very unlikely.

But beyond the immediate short term and also with regard to future investments, the picture becomes more complicated and uncertain.

 

Long-term prospects uncertain

Given the nature of the automotive industry, large changes tend to come when new models arrive or existing models are updated. With life cycles on car models generally varying from 7-10 years, decisions on where to produce new models are likely to have an impact on the UK’s automotive industry in around 2-3 years given the life cycles of the cars currently being manufactured there.

In particular to the UK, decisions being made by Jaguar Land Rover and Nissan will carry the most weight, given that each company accounted for about 30% of UK car output last year.

And with both companies there are causes for concern as far as UK steelmakers are concerned.

Jaguar Land Rover (JLR) for its part has begun construction on a new £1bn facility in Slovakia this year – initially capable of producing 150,000 cars per year from 2018 but with scope to double output.

On a note unrelated to the referendum vote, the company is also increasingly committed to producing cars with aluminium bodies in place of steel as it looks to deliver more lightweight vehicles, much to the dismay of steelmakers (JLR is ironically part of the Tata Group, owner of Tata Steel).

But at the same time, Jaguar Land Rover is very unlikely to relocate entirely to the EU given the relatively small share of its sales that head to other EU markets when compared to other carmakers.

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The company also operates as a manufacturer of premium cars and so competes less on price when compared to the likes of Nissan, Honda, and Toyota. The relatively high margins enjoyed by the company, as well as the fact that it has increasingly sought to increase the percentage of components sourced in the UK, should protect it to some degree from changes in trading conditions.

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The future of Nissan’s UK operations is more uncertain.

Perhaps the biggest decision to be taken by the company revolves around where to produce the next generation of its Qashqai cars, likely to enter production around 2020.

Currently produced at the company’s plant in Sunderland, the Qashqai alone accounts for about 20% of all cars made in the UK and has been hugely successful for Nissan.

But as a producer more focused on price and operating at lower margins than JLR (see above chart), as well as depending on sales to EU markets to a much greater degree, it is likely to be more susceptible to any adverse changes in trading conditions.

Certainly a 10% import duty on UK cars entering the EU for example (the standard EU duty on car imports from those external countries without trade agreements, as per WTO-based rules) would cause the company to look into alternative options. Likewise various import duties on automotive components entering the UK (they typically stand at around 3% for external countries without trade agreements) would act against the Sunderland plant.

It should be pointed out, however, that the prospect of trade between the EU and the UK reverting to the above WTO-based rules is very unlikely. Germany in particular would look to avoid such a fate given the large volume of automotive exports it sends to the UK.

But while a lot will clearly depend on the future trading arrangement reached between the EU and the UK, a lot too will depend on how the value of the pound fluctuates over the coming years, particularly against the euro.

Indeed, as mentioned toward the beginning of this article, the relative weakness of the pound against the euro at present should in fact act as a short-term boost for the UK’s automotive industry. Were it to remain relatively weak, one could understandably conclude that the UK would remain a good base from which to export cars, to both other European countries and farther afield, even under applicable third-country tariffs.

Certainly we are still a long way from the strength of the pound seen at the turn of the century, when £1 was equivalent to around €1.65 and executives from Honda, Nissan, andToyota were all openly questioning the future of their respective UK operations.

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Potential positives and negatives

Clearly there are both potential positives and negatives for the UK’s automotive industry as a result of the UK’s decision to leave the EU.

In the short term, UK carmakers could benefit from a weakened pound.

The degree to which they will benefit from currency weakness, however, depends on company-specific dynamics i.e. what percentage of sales head to export markets and what percentage of components are sourced from within the UK.

In the longer term, meanwhile, the trade agreement eventually reached between the EU and the UK is of fundamental importance.

Should an agreement close to existing arrangements be reached then there is little reason to think that UK facilities would be impacted too much. Moves toward more protectionism, however, would be likely to see carmakers such as Nissan reconsider their operations given their low margins and dependence on sales to EU markets.

Sources: Bank of England, BBC, BMW, FT, General Motors, Honda, Jaguar Land Rover,Nissan, SMMT, Toyota

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