Brexit and Automotive: The Morning After

Boris Johnson car

My Q4 2016 column for Professional Manager

I had a terrible hangover recently. One of those bad heads that feels completely unjustified, given the previous night’s intake, yet unrelenting until well into late afternoon. Yet I awoke on 24 June with the feeling the whole country was going to be licking its wounds for considerably longer.

Whatever you think of the European Union, it’s impossible to work in automotive and not develop an acute sense of what membership of the EU means to business. Generally speaking the car industry is both small-C conservative and right-wing – yet members of the SMMT, the professional body that represents the industry in the UK, rejected the idea of Brexit by four to one. That, combined with the noises of anguish coming from Britain’s car industry, should give you some impression of just how much Britain relies on the EU to buy and sell cars – and how difficult it’s going to be to disentangle the UK from Europe.

Automotive is acutely sensitive to economic downturns and uncertainty: 2008 and its aftermath saw factories mothballed, jobs lost and production nosedive. While the current economic impact of Brexit remains opaque, no-one has any idea of what will happen next. Triggering Article 50, which gives notice that the UK will leave the EU within two years, may not happen until late 2017. Some say never – or only after a second referendum. As the complexities and realities become more apparent, Britain is left with a stark choice: withdraw without due diligence and risk an economic disaster or embark on a protracted and complicated negotiation to leave the EU and forge commensurate links with the rest of the world. The automotive industry will not regard either option with much enthusiasm.

The early signs are that UK car sales are already “showing signs of cooling”, according to the SMMT. But in coming years the most daunting issue facing car-makers in the UK is the risk of a levy on cars made in Britain. SMMT figures show that 81.5% of the cars produced in the UK in April 2016 were for export, around three quarters of them destined for the EU, accounting for 12% of Britain’s entire annual exports. The post-Brexit risk is that Europe slaps an extra 10% on the cost of selling a car to Germany, France or Spain. Tit-for-tat tariffs or import quotas could mean that importing cars to the UK will be more expensive in time too.

What Britain voted for, as far as the automotive industry is concerned, is a lengthy period of uncertainty – with no end in sight. Those modern-day Cassandras who speak with certainty on such issues should be treated with caution: the truth is that no-one has any idea of how the economy will perform, how to replaces vast swaths of European law and trade deals that make up much of our legislation and how long any of this may take. With that in mind, I can only offer the following observations with that same warning, based on what people in the industry are saying.

My view is that while the tumbling pound may have helped exports, the long-term picture is likely to be an increase in the price of cars and at least some domestic production moving abroad. That could mean that now is a good time to buy or lease a car, if prices rise in the coming months and years as countries readjust exchange rates. On the other hand it might mean hanging on to your current deals and trying to negotiate very short-term leases.

Nisssan Juke production line Sunderland

There are more oblique possibilities that should be considered in a post-EU Britain. When cars are cheaper in nearby markets – as they’re likely to be in Europe going forward – so-called grey imports tend to be more popular. These are cars purchased in another country to circumvent local taxes and tariffs. Franchised dealerships and car-makers don’t like the practice, but it’s legal and Brexit could result in a resurgent market for grey imports if there’s money to be saved.

One associated issue that’s been largely ignored is how leaving the EU will mean legislation designed to protect motorists may be dropped. Britain is currently part of the continent-wide Euro NCAP safety rating scheme, various laws on emissions and the European Union Block Exemption Regulation <>. Where Brexit would leave Europe-wide efforts to increase standardisation, safety and emissions is anyone’s guess, but there are unlikely to be wholesale changes anytime soon.

During the referendum campaign, the SMMT said it was “critical” to the future of UK automotive industry to remain in the European Union. Since we have voted to leave it’s reasonable to assume the sector is entering choppy waters. Purchasing plans, mileage agreements and contracts drawn up prior to June may all need to be reviewed too: with Brexit somewhere between 24 and 36 months away a three- or five-year plan made prior to June this year is obsolete. Increased telematics and lower-carbon vehicles may help running costs – and splurging on a new fleet when residual values are so fluid could be abandoned for short-term lease deals to reduce some risk. But fundamentally it’s back to the spreadsheets and red pens for fleet managers.

Perhaps we’ll look back and wonder what the fuss was all about in years to come. But for the time being working the car industry in the UK just got more costly and more complicated. It’s tempting to down an aspirin, go back to bed and throw the duvet over your head.

Seven key areas where Brexit will impact fleets

List prices

For the time being there seems to be little movement in new or used prices. That could change with a weak pound or EU trade tariffs in time though – and costlier imports could be passed on to fleet through fewer deals and higher rentals.

Pay at Pump

The weaker pound may drive up fuel prices and buying oil on the open market outside the EU may have the same effect in time. Fuel duty rises may be seen as an easy target if the economy slumps.

Insurance

Insurers are not allowed to discriminate by gender – remember Sheila’s Wheels? – following a European ruling in 2012. Outside the EU that may change, making some quotes cheaper and some more expensive. Insuring a car to drive abroad may become expensive post-Brexit too.

Servicing

An end to Block Exemption regulations may mean manufacturers force customers to have their cars serviced at franchised dealerships. Prior to 2003 using independent garages for maintenance risked manufacturer warranties.

Driving abroad

Fleet managers must be familiar with European driving regulations – such as keeping a high-vis jacket in the car when driving in France – post-Brexit.

Residual values

Most experts believe that we’ll start to see weaker residual values announced by the end of 2016. That means higher rentals if three-year used values do slump.

Reincarnation: Top Gear and Car Brands

My 2016 Q3 column for Professional manager Magazine

When’s it time to regenerate a brand, and when’s the moment to let it die? The UK car industry knows better than anyone

By the time you’re reading this magazine, a rejuvenated Top Gear will have made not just one, but two much-anticipated comebacks to television screens with a brand new team. To invoke another icon of BBC event television, the show has regenerated – and even mutated into a new weird cousin, The Grand Tour.

The Beeb’s Top Gear concept remains the same: cars, cars and more cars. With the Top Gear branding, the BBC gets to retain all that audience, goodwill and recognition. I’m particularly interested to see the thoughtful journalist Rory Reid’s pieces on the new-look Top Gear. I last saw him being told off for driving too quickly on the Millbrook testing ground’s fearsome Hill Route, in what now strikes me as a very Top Gear-esque moment.

There are parallels in the car industry itself, where diversifications off successful brands are the stuff of life.

The story of how the Citroen DS line was spun off from the main Citroen brand perfectly encapsulates the importance of brand evolution.

Back in 2010, Citroen launched a prettified version of the solid if unspectacular C3 supermini. It was called the DS after that motoring history legend, one of the most beautiful cars ever made: the Citroen DS.

With some pleasant bells and whistles and an awesome turbo petrol engine, the new Citroen DS3 yielded more margin than its plain Jane sister model. Citroen scented cash, and DS versions of the C4 and C5 followed.

Fast forward a few years, and the DS is now a brand of its own. Why? Because people simply will not spend £30,000 on a car with a Citroen badge on it. With a bit of rub from the original DS legend and the quiet removal of the chevron badge, Citroen calculates that it can charge more money for cars that have, basically, been through an episode of Pimp My Ride.

Similarly, mention a Ford Fiesta or Vauxhall Astra to anyone born in the UK in the last 50 years, and they’ll have a good idea what you mean: smallish-to-medium-sized car; runs well; someone at work had one. (Actually there’s a strong statistical chance that someone in your family owned one as Fiestas and Astras have sold 4.5 million and 3 million respectively since they hit British roads in 1976 and 1979.)

The Land Rover Defender, which finally went to the great rutted track in the sky in 2013, was in some ways the same car that was launched as the Land Rover 90 in 1948. Certainly its interior didn’t seem to change much over those 65 years. And my trusty Honda Accord has been represented on British roads since before my birth.

If a car has a poor reputation, you’re not going to hold onto the name so, to some degree, you can gauge the esteem in which a car is held by its longevity.

The Ford Mondeo is now in its fifth iteration and is still one of the finest pound-for-pound cars on the road, more than 20 years since it replaced the Sierra.

Years after it was launched, I once drove the Sierra, a car that revolutionised volume car design, at a Ford car launch and was taken aback by the things we take for granted these days, and how our expectations change imperceptibly over time.

The lack of insulation in the car meant it was noisy and cold, the lack of safety and handling engineering meant the car seemed both flimsy and heavy, while the switchgear seemed painfully basic. Because I love cars, I loved that Sierra – for about 20 minutes anyway. Then I wanted DAB radio, cruise control, heated seats and lots of airbags.

In automotive, changing demands and trends are ruthless masters. Just as the Defender was recently put out to pasture, Honda has confirmed that the Accord will not be replaced. The Astra and Fiesta are still among the top ten best-selling cars on the market, but crossover SUVs are replacing Mondeos and Accords as the large cars of choice.

Either brands die or they become something very different. Brands that refuse to do either are consigned to oblivion.

I expect the all-new Top Gear to be a delicate balance of old and new. The name endures, in theory, as a guarantee of quality, but consumers won’t tolerate products – cars or television shows – that rest on their laurels.

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Record sales but Brexit worries car industry

5 trends and outliers in the latest SMMT car sales figures

• 2015 was a record year for car sales, and March 2016 was the best single month since the bi-annual plate change in 1999.

• Fleet sales were up in the first quarter of 2016, driven by a desire for the higher residual values that a plate change brings.

• Demand for alternatively-fuelled vehicles, including electric vehicle and hybrids, grew sharply – up more than 1000% compared to 2006 – as buyers seek cheaper running costs.

• The popularity of cars with ultra-low emissions continues unabated: CO2 emissions of cars sold in March were around 20% lower than the average car on the road.

• But… SMMT boss Mike Hawes warned that consumer confidence could be ‘undermined by political or economic uncertainty’ surrounding Brexit. Toyota, Ford and BMW – all of which build engines or vehicles in the UK – urged Britain to remain in the EU. They believe that without access to the common market or the raft of trade deals that could be jeopardised by Brexit, selling cars to the continent will be more difficult. Standardisation, access to research funding and the free movement of labour are among the benefits they cited.