Car Makers To Benefit From Falling Pound

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Automotive Brexit myths – busted

UK automotive industry puts the record straight on ‘no deal’ Brexit impact, as Parliament debates the meaningful vote

Many commentators and politicians cite the automotive industry in Brexit discussions, so the Society of Motor Manufacturers and Traders (SMMT) has published a clear rebuttal of some of the many arguments that have been used about the sector in recent years. The industry has been consistent and united – a ‘no deal’ Brexit would have a devastating impact on the sector and the hundreds of thousands of jobs it supports.

MYTH 1: The auto industry shouldn’t worry about leaving the EU with no deal

TRUTH: Leaving without a deal would trigger the most seismic shift in trading conditions UK Automotive has ever experienced. Overnight, it would be hit by an immediate end to free and frictionless trade with its biggest market, an end to preferential trade with a further 70 countries worldwide, the imposition of billions of pounds of tariffs, severe disruption to supply chains and production, and lasting damage to the global reputation of the UK as an attractive and stable investment destination.

MYTH 2: This is just the automotive industry scaremongering

TRUTH: The past two years have seen a significant drop in investment, car sales and manufacturing, driving the industry off course to meet its production target of 2 million cars by 2020. This is a cyclical sector and other issues are also undermining global growth but companies surveyed said that Brexit was costing jobs and competitiveness – one in five automotive companies have already lost business; thousands of jobs are being lost – and the UK hasn’t even left yet. 1 This is reality.

MYTH 3: Industry is blaming Brexit but the real problem is falling diesel sales and the slowdown in global markets, including China

TRUTH: These are all issues challenging the global industry – it faces a perfect global storm. Significantly, Brexit has not happened yet, but it has been consistently cited by business as a cause of job cuts and reduced investment (now down to a fifth of the recent average), which undermines future competitiveness. 2 Uncertainty is causing investors to look elsewhere.

MYTH 4: The EU market is in decline and growth markets are in the emerging economies. A ‘no deal’ Brexit will let us focus on those countries for export

TRUTH: EU car demand is slowing, but the Chinese market is also in decline, with UK-built cars exported there down by a quarter. We already export to some 160 markets worldwide including the emerging economies, but the EU, which accounts for more than half of this trade, is a 15 million-strong car market on our doorstep.

MYTH 5: A fall in the pound makes exporting cheaper so UK car makers will benefit

TRUTH: Sterling devaluation may make exporting cheaper, but it makes automotive manufacturing more expensive and will not offset the cost of tariffs. UK automotive manufacturing is integrated into the European supply chain network with the majority of parts used to build cars here imported, thereby negating any cost advantage.

MYTH 6: A ‘no deal’ Brexit will help reduce car prices and increase choice

TRUTH: Unless the UK reaches agreement with the EU, tariffs will increase. Consumer choice depends on profitability; importers to the UK already have to engineer cars for right-hand drive, which is a significant added cost, while currency devaluation since 2020 has slashed margins. If prices rise, the market will contract, further squeezing margins and causing consumer choice to shrink.

MYTH 7: EU rules stifle innovation – the industry will be better off without them

TRUTH: The EU and the UK produce arguably the most technically advanced cars in the world, especially in safety and efficiency, and EU automotive rules are often the basis for global regulations. If the UK wants to sell cars to the EU and other global markets, it must comply with these rules. We currently have a say in their creation. We won’t once we leave but we will still have to abide by them.

MYTH 8: Leaving with no deal will mean more automotive jobs for British people

TRUTH: ‘No deal’ will cost jobs, not create them. Thousands of cuts have already been announced, with one in eight companies reducing headcount as part of contingency planning. 3 The sector depends on accessing talent; we develop our own but look globally for the best people to fill any skills gaps and need our UK employees to develop international experience.

MYTH 9: We can readily strike trade deals with big global automotive markets

TRUTH: Recent announcements have shown how difficult it is to replicate trade deals, never mind strike new ones. Free trade agreements such as those between the EU and Canada and Japan take many years to negotiate and agree, and negotiating strength depends on size. The UK is large and relatively affluent but small compared with the EU, China, US, Japan and other countries.

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MYTH 10: Tariffs would give UK auto manufacturers a competitive advantage at home

TRUTH: Only 12% of cars sold here in the UK are built here. We export more than 80% of the cars we produce, with two-thirds of these sold in the EU and markets such as Canada, Japan, South Korea and Turkey with which the EU has preferential trade agreements. Tariffs would disadvantage UK car manufacturers in all of these markets.

MYTH 11: The UK could use import tariffs to support the automotive industry

TRUTH: Using tariffs to support domestic industry is strictly regulated under World Trade Organisation rules. Some financial support is allowed but other countries could retaliate by taxing imports of the subsidised vehicle or component to protect their own industries. This would undermine the automotive industry’s principle of free and fair trade.

MYTH 12: The German car industry sells 750,000 cars in the UK – it will demand a deal to protect its own interests

TRUTH: The German and EU car industries have been clear: the single market matters more to them than a deal with the UK. The UK is an important car market but it only accounts for around 10% of EU production volumes, 4 while we ship more than 40% of everything we make to customers in the EU.

MYTH 13: The demise of UK automotive manufacturing would be a price worth paying for ‘no deal’; the economy would cope without it

TRUTH: Automotive manufacturing is one of the UK’s most important economic pillars, producing high value goods, creating skilled jobs and driving exports. It delivers an annual £82 billion direct to the Treasury, employs 168,000 people and supports local economies, and is responsible for 14.4% of the UK’s export in goods. However, the true scale of its contribution is significantly larger, at around £175 billion 5 once the impact on adjacent sectors, including raw materials; R&D; logistics; retail; finance; insurance; tech and more are taken into account.

Why the U.K. Auto Industry Is Stalling Over Brexit Risks

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The British auto industry today is facing one of its worst crises ever thanks to declining car sales and the uncertainty over Brexit. Global automakers have put off or canceled fresh investments, and invested instead in cheaper locations like Slovakia, while at the same time shutdowns or relocations of existing plants are imminent, according to experts.

Layoffs have already begun in the industry, with the U.K.’s biggest automaker, Jaguar Land Rover, announcing 4,500 layoffs, or more than a tenth of its 40,000-strong workforce. The country’s auto industry at last count employed 860,000 people, which includes supporting segments such as repairs and financing, generated 82 billion pounds ($108 billion) in annual revenues and had an economic impact of $266 billion, according to data from the Society of Motor Manufacturers and Traders (SMMT), the trade body of the U.K. automotive industry.

“Car company executives are literally pulling their hair out, and in the state of disbelief that we are in, such political chaos in the U.K. has not been seen,” said David Bailey, professor of industrial strategy at Aston University’s business school in Birmingham, U.K. Bailey is also author of the new book Keeping the Wheels on the Road: U.K. Auto Post Brexit.

Bailey offered an example of how the uncertainty over Brexit is playing out for automakers. Visualize cars made in the U.K. and loaded onto ships headed for Japan or Korea. “The car companies don’t even know when they arrive whether or not they’ll face tariff barriers. At the moment, the U.K. benefits from an EU trade deal with Japan and Korea or other countries. If we fall out, we’ll no longer benefit from that.”

Automakers could also permanently move more and more of their production facilities to other countries that are not only cheaper, but also offer more stable business environments. “Auto companies are very global in their orientation — they have to be,” said John Paul MacDuffie, Wharton management professor and director of the Program on Vehicle and Mobility Innovation at Wharton’s Mack Institute of Innovation Management. “Free movement across borders of products, of components, of people is just hugely important to them. They’re well familiar with making investment decisions in different parts of the world and sometimes backing away from one or deciding to grow faster or some other place.”

If the business environment looks unfavorable in the U.K., automakers will simply move somewhere else, MacDuffie said. “It will not in the end have that big an impact on their overall global strategy, [although] they won’t necessarily be happy about having to do it,” he added. “But [there will be] consequences for the U.K. economy, for the people holding those very good jobs, and other multiplier effects that go out from the assembly plants into R&D and into suppliers. That’s the real potential loss here, and it’s huge.”

“Car company executives are literally pulling their hair out and in a state of disbelief that we are in such political chaos in the U.K.” –David Bailey

Bailey and MacDuffie discussed the implications of Brexit-related issues and other dampeners for the U.K. auto industry on the [email protected] radio show on SiriusXM. (Listen to the podcast at the top of this page.)

Costs of a No-deal Brexit

If British premier Theresa May secures Parliament approval for a plan to remain in the EU customs union and common market, the exit date would be pushed to May 22. Further extensions are not ruled out if fresh elections or a second referendum on Brexit look likely, but a no-deal Brexit is “very likely,” the EU’s chief negotiator Michel Barnier said April 2, as May’s latest proposals failed to win support among MPs.

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A no-deal Brexit would mean the U.K. would leave the EU on April 12, plunging its auto industry into a chaotic mess of sudden tariff walls and customs checks. “That would make a mess of very integrated just-in-time arrangements and supply chains across borders,” said Bailey. In the immediate short-term after Brexit, the auto industry could see an output fall of around 175,000 units a year, and if companies do not replace car models at the end of their life cycles, that number could swell by another half -million units by 2025, he added.

Those production falls would have large impacts on an industry that is already operating on thin margins, said Bailey. The U.K. auto industry could take a $3 billion revenue hit in the event of a no-deal Brexit, and that would be “pretty damaging,” he added. He noted that Jaguar Land Rover alone has forecast the potential hit from a no-deal Brexit at $1.58 billion a year. “Remember, that’s a loss-making company already – $1.58 billion a year [in revenue losses] will mean plant closures.”

Planning Around Brexit

The auto industry typically plans years in advance, and in the case of Brexit, its unease set in with the June 2020 referendum that came “without a plan and high uncertainty,” MacDuffie said. “The auto industry has a relatively slow clock speed. Think of a four-year product replacement cycle unlike what we’re used to with electronics and in IT.”

At the same time, “there is no upside from Brexit for the U.K. car industry,” said Bailey. Its worries are all over the extra costs and trade barriers that Brexit will mean. “Regardless of what happens, it will make making cars in the U.K. more difficult. For much of U.K. manufacturing, it’s about damage limitation.” The U.K. economy would take a sizable hit as auto exports account for nearly 13% of its total exports.

Honda’s decision to close its Swindon plant is essentially a verdict that the U.K. will not be “an attractive place” to make electric cars in the early 2020s, Bailey suggested. “That’s quite a big criticism of the British government’s industrial policy, which is all about making electric cars,” he said. Further, the new EU-Japan free trade agreement will help companies like Honda to make cars in Japan and export them to the EU increasingly without tariff barriers, he noted.

Bailey also pointed out that Jaguar Land Rover, which is owned by the Tata group of India, recently invested in a plant in Slovakia. “That investment was partly because they wanted to access lower labor costs in Slovakia, but it was also a hedge against Brexit. “We might see Jaguar Land Rover shifting more production to Slovakia to produce inside the Eurozone for that market.”

“Do you want to [invest in auto manufacturing] in the U.K. if you’re not going to be able to export freely to the EU?” –John Paul MacDuffie

Many U.K. automakers are temporarily closing their plants in April. Those include Jaguar Land Rover, BMW, Peugeot and Opel Vauxhall. In February, Honda said it would close its Swindon plant in 2021, but it attributed that move to a restructuring of its global operations, and not Brexit. That shutdown imperils 3,500 jobs at the plant. Nissan has canceled plans to build SUVs at its Sunderland plant, and Toyota said it could end U.K. production by 2023 in the event of a no-deal Brexit.

Many car makers are stockpiling components, because they don’t know whether the U.K. will still be in the EU customs union, Bailey noted. “In the extreme case, you’ve got niche producers like Aston Martin prepared to fly in high-end components to keep their production lines going,” he said. “But it’s difficult for the companies to be doing the things that they need to do, which is transforming their business models towards electrified and connected vehicles, when they don’t know whether they’ll be able to make the cars in the U.K. and export them to Europe without tariffs and non-tariff barriers.”

How U.K. Auto Lost Europe

The British auto industry closed 2020 with new car registrations declining 6.8% to 2.37 million units, of which diesel vehicles saw a nearly 30% drop, according to the SMMT. A trend of nine straight months of production losses worsened in the first two months of 2020. Auto exports too decline, with those to China falling nearly 56% – telling for an industry that exports more than 80% of all vehicles made. Investment in the U.K. auto industry has fallen 80% in the last three years, and it has lost 10,000 jobs in the last two years, Bailey wrote in a recent article.

Bailey noted that the U.K. auto industry has lost out on the progress achieved since the 1980s, when British Prime Minister Margaret Thatcher attracted Japanese car companies to invest in the country. Companies like Honda and Nissan invested in the U.K. as a base to export to Europe, which over time has accounted for more than half of British car exports. MacDuffie agreed with Bailey and said that “the success back in the 1980s of attracting the Japanese companies to make the U.K. their beachhead or production base for all of Europe was a huge achievement.”

However, the EU market also has shrunk, and U.K. car exports to Europe fell 15% in the first two months of this year. “The likes of Honda that came here are scratching their heads, thinking ‘what on earth is the U.K. doing?’ ” Bailey said, referring to the Brexit uncertainty.

Broader Changes

Brexit, of course, is not the only culprit behind all those woes. Bailey pointed to two other factors. One is “a huge shift” away from diesel cars. The second is the impact of an economic downturn in China.

MacDuffie noted that diesel vehicles have lost market share because they are being perceived “as not being green and clean, but being dirty and having major net negative health consequences.” European companies are now pushing to make electric vehicles, but consumers are responding “a little slower” to pick up that trend, he said. China happens to be the biggest market for electric vehicles, but demand from consumers is running slowly there as well, he added.

Broader changes in consumer preferences are also having an impact on British car exports. “The industry is about to transform itself, particularly in Europe, where a big shift towards electric cars is coming and autonomous cars in the future,” said Bailey.

How Brexit Could Affect The Automobile Industry

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It is becoming clear that Brexit does not just mean the UK is breaking away from the European Union. It comes with far greater consequences than voters previously anticipated. Analysts predict that it will progressively affect various manufacturing sectors, including the automobile industry. Sadly, it is not just limited to the UK but will also affect global markets.

According to a study conducted by IHS Automotive, the move by the UK to break away from the EU could ultimately cost vehicle manufacturers more than 2.8 million sales in the next two years. The report, which was presented by Autonews, predicts a drop of more than 200,000 in worldwide vehicle deliveries this year alone, a phenomenon purely triggered by Brexit alone. Over the next year, the drop is projected to increase to 1.25 million, and 1.38 million in 2020.

Although other markets will feel this impact, according to IHS Automotive analyst Ian Fletcher, the UK is expected to bear the brunt of it. At the beginning of 2020, the automobile industry in the UK was predicted to grow by 3.2%. However, due to Brexit, the growth could wane down to 1% by the end of the year and possibly drop even further in the next couple of years.

The biggest losers, of course, are companies based in the UK, including foreign automakers with vehicle manufacturing plants within the country. Before Brexit, UK was widely perceived as a strategic location to penetrate the rest of the European markets. Therefore, a bulk of companies, including the world’s largest motor vehicle manufacturer, Toyota, had already established themselves with Avensis and Auris manufacturing plants. Sadly, they now have to part with levies as high as 10% on these two models- something that could subsequently force them to increase prices or drastically cut production costs.

Going by the statement released by Ian Fletcher, Ford and General Motors also share the same fate as Toyota, Nissan, PSA, Peugeot, Citroen, and Honda. The two biggest importers of vehicles, Ford and Volkswagen, also face a significant risk from the fall of the pound against the Euro. This alone could see them reduce the number of vehicles directed to the UK market, and instead focus on making up for lost sales by capitalizing on other European markets.

Another company that could be substantially affected is BMW, which according to the Wall Street Journal, sells more than 11% of their vehicles in the UK. The progressive pound value loss could force them to increase their sale prices, consequently locking out some their prospective buyers.

This unexpected turn of events, especially in regards to UK and U.S. based companies, arguably prove London-based Evercore ISI analyst Arndt Ellinghorst right. According to him, “Brexit adds further ballast to an already struggling ship”. True to his words, automakers could have an even harder time when the EU begins imposing new tariffs on UK manufactured vehicles. To cushion themselves against the consequent losses, they could begin shifting their plants to other countries within the EU. General Motors’ plant at Ellesmere, for instance, could possibly be one of the first companies to shift, considering the high number of Astras produced in the UK.

Breaking away from the EU is also expected to introduce new complications in the automotive supply chain. If border crossings are restored, it could take a lot of time, possibly years, to reinstate the respective supply chains back to their current cost-effective standards.

Investment bank RBC Capital Markets further introduced a new twist to this, by weighing in the odds of a subsequent EU disintegration. If that occurred, countries would ultimately go back to their national currencies, including the strong Deutsche Mark, which would undoubtedly make Germany’s exports uncompetitive- an impact that would consequently be felt by U.S. suppliers.

As of today, however, these effects are yet to be felt. They are only predictions, which could potentially change, as vehicle manufacturers employ new strategies to cushion themselves.

The UK, with the help of its allies, is also working to maintain a stable market that’s attractive to not only automakers but also other manufacturing companies.

Only time will tell if they will ultimately be successful.

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