UK OEM's and car factories face uncertain future following Brexit

30 September 2016 4 min. read
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Several car factories and automotive suppliers based in the United Kingdom face an uncertain future following Britain’s vote to leave the European Union, according to new research released.

The UK automotive industry has seen significant growth over the past years. In 2015, production increased by 5.2%, employment in the sector rose by 3.15% and turnover was boosted by 7.3% to £71.6 billion. Yet the Brexit decision may bring the sector’s fortunes to a halt, finds an analysis by PA Consulting Group.

The UK is a major player in the European automotive industry – last year, almost one in every five cars registered in the EU was produced in the UK. Most of the production (around 1.2 million cars) is exported, with over half going to European members states. At the same time, the domestic market is heavily reliant on imports.

The research suggests that, if current high levels of uncertainty following the Brexit vote continue, a number of economic impacts would trickle down on UK-based car dealers, manufacturers and OEM players. Car sales in the UK could fall by 5% to 10% – globally car sales are set to rise to around 88 million this year, implying that dealers will face hardening markets conditions and, across the board, the UK may lose ground vis a vis other international markets. 

UK automotive market

For manufacturers and OEM players, the uncertainty mean that changes may be made to investment decisions. A period of ambiguity in the talks between the UK and the EU over Brexit may prompt some overseas carmakers with UK plants to invest on model upgrades and new car launches elsewhere in the world. Based on the risks involved, PA grouped OEM firms into three categories. Car plants run by Honda and Toyota are according to the assessment most at risk of closure after Brexit (the ‘leavers’). They are highly reliant on exports to Europe and have relatively low margins and profitability. “These companies will have to make key investment decisions in the next two to three years when trade arrangements for Brexit may still be unclear,” comments Tim Lawrence, head of manufacturing at PA Consulting Group.

If companies decide to shift production to mainland Europe, it would be a massive blow for the UK automotive industry – combined, Honda and Toyota account for approximately 20% of the vehicles made in the UK. “As the supply chain investment tends to move with Original Equipment Manufacturers’ volumes, the impact on UK jobs and the economy will be felt beyond the automotive industry”, reflects Lawrence.

Mini and Vauxhall are considered as ‘question marks’. Although they have a strong British heritage, especially Mini, they have several European options they can flirt with. BMW could for instance divert production to the Netherlands (in Born), where it opened a production line for Mini’s in 2014, and last year added a line for Mini convertibles. Jaguar Land Rover is, in the view of PA’s analysis, a stayer.

Car factories at risk from Brexit

Investment decisions are typically made across a two to five year time frame, so Lawrence says he doesn’t foresee an immediate reversal of investment decisions already made, but decisions taken in next 12 months will impact investments that come into effect from 2018 onwards. Globally OEM suppliers are riding high, found a study by Roland Berger and Lazard released two month ago – average EBIT margins amounted to 7.4% last year.

Another recent analysis from PA’s automotive group found that several European car manufacturers are struggling with abiding by new emission legislation that the European Union will introduce in 2021, and as a result, they risk facing hefty fines of up to €2 billion. Jaguar Land Rover, BMW, Volkswagen, Daimler, GM and Ford are the car manufacturers that find themselves deepest into the danger zone.