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28 Nov 2019


auto industry

The British auto industry has again offered up a stark warning on the impact of a no deal Brexit.

Speaking at the annual dinner of the Society of Motor Manufacturers and Traders, the chief executive Mike Hawes commented that “rather than producing 2m cars a year by 2020, a no deal worst case scenario could see us making just a million. That’s a loss to the economy of over £40bn.”

He added that this would see “cherished production lines mothballed, workforces cut, a haemorrhaging of skills, of investment. What a travesty.”

Some 1.5m fewer cars would be produced by British auto plants over the next five years, the SMMT warned, should the auto industry face World Trade Organisation (WTO) rules and 10% tariffs – whether in a direct no deal Brexit or at the end of the transition period.

The SMMT drew on new research which suggests that tariffs could add £3.2bn a year to costs in Britain, which is of the order of 90% of the industry’s research and development budget.

It stated that a combination of falling demand (linked to the imposition of tariffs) and multinational auto firms shifting production elsewhere could see UK factories’ annual output falling to 1m vehicles per year, from 1.3m now.

Back in 2016, before the EU referendum, output was rising, peaking that year at 1.7m, and at that point the auto industry was predicting that more than 2m cars would be rolling off UK production lines by 2020. That hope now seems pretty distant.

The SMMT warned that the cumulative cost of a no deal Brexit by 2024 would be £42.7bn and that thousands of jobs would be at a risk without a Brexit deal. It stressed that the sector directly employs 168,000 people in Britain, paying decent wages (the wider industry accounts for over 800,000 jobs in the UK it is thought).

Mike Hawes said that the “UK automotive’s needs are clear: frictionless trade free of tariffs, with regulatory alignment and continued access to talent. Detailed trade negotiations have yet to begin. They will be complex and they will take time. But a close trading relationship is essential to unlock investment.”

He went on to say that “the next government must deliver the ambition, the competitive business environment and the commitment needed to keep automotive in Britain.”

The SMMT president, George Gillespie, urged political leaders to work with the sector, saying: “Uncertainty over Brexit and future trade has cost us dearly. We have all spent millions on no deal preparation – not once, not twice, but three times. Wasted millions that could, should, have been spent on research, on development, on design.”

Gillespie stressed how Brexit uncertainty had choked off investment in the sector in the UK of late: “Look at what uncertainty is doing to investment. Before the referendum it averaged £2.5 billion per year. Until recent new announcements, that figure had fallen from £2.5 billion to a paltry £90 million in the first half of this year; £90 million across every UK manufacturer is barely enough to keep our existing plants operational. That could be a predictor of our manufacturing sector’s fate in three to five years.”

Several auto assemblers including Jaguar Land Rover, Toyota and BMW shut down assembly operations last month to avoid disruption around the time of the UK’s scheduled departure from the EU. It was the second time this year that car firms in the UK had to shut down because of Brexit uncertainty.

Back in April much of the UK car industry was idled in anticipation of the original end of March Brexit deadline. Firms brought forward planned maintenance shutdowns and took extended breaks in an effort to mitigate the cost of disruption caused by Brexit.

Output fell by 45% in April compared with a year earlier. So far this year output is down by 16%.

Jaguar Land Rover’s chief exec Ralf Speth said the firm had no choice but to stop production lines at its four UK plants (Solihull, Castle Bromwich, Wolverhampton and Halewood), stating that “we cannot think about it, we just have to do it. I need 20 million parts a day and that means I have to make commitments to my suppliers. I have to have every and each part available and I have to have it just in time.”

The latter point illustrates again the vulnerability of automotive and manufacturing that rely on a ‘Just in Time’ (JIT) supply chains to a no deal Brexit that could cause customs delays and supply chain disruption.

Essentially, customs delays under a no deal Brexit would throw a big spanner in the works of JIT systems commonly used across UK and EU manufacturing.

Another shutdown may take place in January, depending on the outcome of the election. Under the revised withdrawal agreement, which Boris Johnson expects to get through Parliament if he wins a majority next month, Britain would leave on 31 January and enter a transition period (on current trading terms) due to expire in December 2020.

That still leaves open the risk of a no deal exit at the end of 2020 if a trade deal has not been agreed, and this uncertainty weighs heavily on auto firm bosses in pondering where to invest.

More broadly, the direction of travel under the Johnson plan is towards a Canada-style Free Trade Agreement.

That might – if delivered by the end of 2020 – eliminate most tariffs but would leave the possibility of customs delays disrupting supply chains, and raise issues over whether there would be enough local content in UK assembled cars to qualify for Free Trade Area status.

The SMMT’s latest warnings are not out of line with other forecasts. In our recent book Keeping the Wheel on the Road: UK Auto post Brexit, Ian Henry forecasts a short-term production hit from a no deal of at least 175,000 cars a year (that’s not including the Honda closure), which is over 10% of UK car output.

Longer term, there is a significant risk that some firms would consider shifting production activities outside of the UK such that the loss of output could be much higher. Honda and Ford have already announced plants closures in the UK for a variety of reasons; Brexit uncertainty being seen by many as one factor.

Other assemblers may follow in the event of a no deal Brexit, especially when new model production is being planned. Peugeot has already stated bluntly that a no deal Brexit would mean no investment at Vauxhall at Ellesmere Port (the current Astra model is due to be replaced in 2021).

That’s before we get to Toyota, which began new Corolla production last year at its plant in Burnaston, Derbyshire (an investment decision which goes back before the 2016 Referendum).

Like Honda, the plant has been operating below capacity in recent years, and there is a big question mark over its future when production of the current Corolla ends in 2024.

It’s worth noting that there is plenty of spare capacity in the European auto industry. Other countries would jump at the chance to attract such assembly activity, hoping that that they could also pull in significant (especially higher value) parts of the value chain.

Exiting the EU in an orderly way with a deal, minimal trade friction and a transition period remains vital for the British auto industry. No deal – as the SMMT has highlighted – would be very damaging to output, jobs and investment.

By David Bailey, senior fellow at The UK in a Changing Europe and Professor of Business Economics at Birmingham Business School.


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