Brexit shock to hit the UK car industry as manufacturers curb production

Automotive carmakers and suppliers could move production elsewhere if the EU imposes tariffs on UK-made vehicles, according to a report on the impacts of Brexit. A number of manufacturers have already unveiled plans to limit production as negotiations between Brussels and the UK fail to yield concrete results, and the prospect of a dreaded ‘no deal’ scenario becomes increasingly likely.  

While UK government incentives in corporation tax may lead component suppliers to locate their operations in the UK to avoid tariffs and improve agility, automotive manufacturers and suppliers could move production elsewhere if the EU imposes tariffs on UK-made vehicles.  Engine suppliers in the UK could also be forced to relocate to the EU to reduce price increases.

While the deadline for negotiations is still just over a year away, these predicted impacts of Brexit are already beginning to hit the UK car industry. Jobs have been cut at Vauxhall, where around 250 roles will be lost on top of around 400 cuts announced last year, while Jaguar Land Rover have also announced plans to curb production, in what employees and union bosses fear may be a prelude to an exodus from Britain, once it leaves the EU.

At present, the UK imports around 2.4 million vehicles from the EU per year, worth a total of £30 billion. Of the 2.5 million engines built in the UK in 2016, meanwhile, 1.4 million were exported to the EU free of charge under current free trade arangements.

According to a report from PA Consulting, under a ‘no deal’ scenario where a World Trade Organisation (WTO) tariff on components is imposed, the London-based consulting firm estimates that a 10% finished goods tariff could see a finished car cost rise by up to £2,090. Meanwhile the cost of assembling a car in the UK could increase by £2,372. Potentially, a significant proportion of the cost will be transferred to the consumer, per car.

A potential negotiated tariff of 2.5%, in a better-case-scenario, would still see an additional cost of up to £1,202, which would likely be transferred to the customer, making cars more expensive as carmakers seek to avoid dents in profitability. At present, without tariffs as the UK is still within the EU’s free trade deal, components make up approximately 50% of a car’s value, giving an average component cost of £10,450. 60% are imported from the EU with their value being £6,270.

PA’s researchers state that this will see engine and component suppliers initiate cost reduction programmes to negate the part price reductions driven by the carmakers. To set up operations in the UK if they want to continue to supply UK carmakers with components. Brexit could have a two-way impact on logistics providers, potentially decreasing the movement of goods but also providing opportunities for duty and tax services. Dealers will face margin erosion as they compete with non-tariff effected competitors. Extended lead times could lead to lost sales.

The British automotive sector may not be the only one hit by Brexit, however. Employment in the German automotive sector could downsize by more than a quarter following a ‘No Deal’ Brexit, according to a report from Deloitte. The knock-on effect of a dreaded “Hard Brexit” could endanger up to 14,000 of the 42,500 jobs in Germany’s car industry.

While PA concludes that most at risk are the UK-based engine plants and vehicle plants that rely on exports to the EU, then, the authors state that both the EU and UK would benefit from keeping free trade and the supply chains unaffected. Increased tariffs will increase the price of imported vehicles from the EU for UK customers, meaning that they are likely to see falls in sales due to their pricing, which would likely lead to job losses on the mainland, while UK consumers would also find it more difficult to invest in new transportation. Any tariffs would therefore be likely to damage both sides based on today’s complex supply chain arrangements.