Brexit likely to hit UK automotive manufacturers hard

27 March 2017 Consultancy.uk

Brexit is likely to have a predominantly negative impact on the UK automotive manufacturing industry. Companies that export largely to the EU are the most likely to be forced out of the UK, while those with rich histories in the UK, as well as premium products, are more likely to weather the storm or seek profitability elsewhere.

Brexit and its final effects on the UK economy remain hard to divine. The process is likely to be complex, cumbersome and for a range of industries – costly. One estimate by Bain & Company puts the cost of the leaving at up to £3 billion in lost profits, with automotive industry profits particularly hard hit by the decision to leave, losing £2 billion.

In a new report from PA Consulting Group, titled ‘Brexit: the impact on automotive manufacturing in the UK’, the effects of Brexit on the automotive industry are explored In some depth.

UK automotive industry, imports and exports

Of the around 1.6 million cars produced in the UK each year, around 0.6 million are exported to the European Union and the rest sent over the world. In terms of cars added to UK roads each year, approximately 2.2 million are imported or taken from stock in the UK. Even in the EU imports from the UK were important last year, representing around a fifth of total imports.

The six years prior to the Brexit decision were a period of relatively strong growth for the automotive industry, in 2015 alone, production was up by 5.2%, employment in the sector grew by around 3.1%, and the industry’s revenue increased to £71.6 billion, up by 7.3% on the year previous.

Brexit has the potential to hit UK-based manufacturing hard in the sector, with the additional costs from unfavourable tariffs on exporting 200,000 cars to the EU estimated at £460 million per year, which, after two years, would pay for a manufacturing plant located on the continent itself. Which, given the industry’s relatively low margins, could be devastating.

Current and future investment plans

The effect of Brexit on the factory location investment activities of key automotive industry players, is likely to happen in waves – the decision itself taking place for difference manufacturers over an extended period.

Some decisions, such as those by Land Rover for its Evoque and New Defender lines have already been made; however, additional decisions will take place for investments into 2020, for which the final decisions remain partly dependent on the outcome of negotiations. Jaguar, Nissan, Mini and Vauxhall too have noted more than one factory decision point between 2020 and 2015.

Likely effect on various players in the UK market

According to the firm’s study of the wider economic fundamentals affecting various players in the market, three broad categories can be identified, ‘The leavers’, ‘the question marks’, and ‘the stayers’.

Toyota and Honda are categorised as likely ‘leavers’, largely due to their dependence on access to the EU market and already squeezed margins and profitability. Mini, Nissan and Vauxhall, fall into the ‘question marks’ category according to the firm’s analysis. Nissan has recently invested significantly in the UK market, which means it is less likely to pull out, while Vauxhall continues to sell to the regional market. The ‘stayers’ category includes Jaguar Land Rover and Aston Martin Bentley. The latter remains a British institution with close ties to the country, while benefitting from high sales into the US market, while the former recently invested heavily in the UK, continues to be strongly committed to the country and continues to invest globally.

Negative effects of Brexit on industry more widely

According to the firm, the decision to leave the EU, and its consequences, has a number effects on the wider automotive industry value chain. These include, among others, an unattractive investment profile; divergence of domestic and EU regulatory frameworks and the loss of the UK’s voice in shaping that framework; UK OEMS may be isolated from wider EU ‘club’; component costs are likely to see manufacturing in the UK become more expensive; decreased local demand from higher car costs; effects on technological advance of industry in the UK.

Remarking on the effects of Brexit on the sector, Tim Lawrence, PA 's global head of manufacturing says, “Both the EU and the UK would benefit from keeping free trade and supply chains unaffected because any tariffs would be damaging for both sides based on today’s complex supply chain arrangements. Car makers will have to review their manufacturing and supply chain network and investment decisions and plan for scenarios based on extra tariffs and charges/incentives on corporation tax. Some may consider investment options into the UK, but equally some may consider investing into the EU.”

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