Automotive Industry: A Hard Brexit’s Gonna Fall

Originally written for the Q1 2017 edition of Professional Manager

Brexit automotive

Theresa May’s government, trapped between a rock and a hard place, seems likely to plump for a ‘hard’ Brexit, meaning Britain is likely to leave the single market in order to guarantee more controls over immigration. Conversely it’s the soft option, at least as far as a test of the government’s mettle is concerned. It knows that the single market is invaluable to the UK, but at the Tory Party conference in October the government signalled that it is not prepared to make the argument for staying in it.

Business is virtually united in opposing a hard Brexit, because they know it will make trading with Europe – far and away the largest economic partner GB has – much more costly and expensive. Unfortunately it’s a double-edged sword too. In making it harder for Europeans to live and work in Britain, the government seems set on depriving British businesses of both unskilled and highly-skilled workers alike. The vast sums in R&D funding that have flowed from the EU into Britain will also be lost. No wonder just 3% of SMMT members, the automotive industry’s UK trade body, were in favour of leaving the EU when surveyed in 2014.

The automotive industry has already signalled its intent. Jaguar Land Rover, Britain’s biggest exporter of any kind to China (our great saviour, according to Brexiteers) has made its feelings clear already: the tariffs that would hit British exports without single market access would directly ‘damage business and British jobs’ and be ‘frankly disastrous’. Nissan’s declaration that it will suspend investment in its massive and highly productive Sunderland plant is a similar warning shot warning shot. And no empty threat.

The automotive industry is hardly socialist, but it is internationalist. Without access to the single market and facing the prospect of more costly, time-consuming and inefficient factories and working processes, it will simply leave for the continent without huge public subsidies.

Quite how the Prime Minister would present the flow of billions to foreign-owned companies remains to be seen, but the alternative is a sector that accounts for 4% of GDP, 10% of the UK’s trade in goods, providing around £5bn in added value to the economy and supporting around 800,000 jobs simply leaving the UK.

As far as bewildered foreign car companies are concerned, the UK has voted to saw its own legs off. Much like the European Union itself, the automotive sector will drive a hard bargain with the government in exchange for a hard Brexit.

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Brexit and Automotive: The Morning After

My Q4 2016 column for Professional Manager

Boris Johnson car

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.