Automakers brace for Brexit impact

As the United Kingdom voted in favour of 'Brexit', the decision is likely to see repercussions across industries. Before the referendum, several automakers were in favour of the UK to remain a part of the European Union (EU).

This decision to bid adieu to the EU could prove to be the biggest blow to UK’s automobile industry since the financial crisis of 2008. Almost 80% of the automobiles manufactured in the UK are exported to other countries of which the EU has the largest share of the pie (of almost 57.5%).

This decision may definitely have a major impact on this statistic as remaining a part of the European Union would have meant free trade for the UK with other EU countries without the imposition of trade restrictions and duties, the ability to shape technical regulations and gaining unrestricted access to one of the world’s largest single market.

The Society of Motor Manufacturers and Traders (SMMT), which represents the UK automotive industry, had warned that remaining in Europe was vital to the industry. Commenting on the verdict to quit the EU today, Mike Hawes, SMMT’s chief executive, said, “The British public has chosen a new future out of Europe. The government must now maintain economic stability and secure a deal with the EU which safeguards UK automotive interests. This includes securing tariff-free access to European and other global markets, ensuring we can recruit talent from the EU and the rest of the world and making the UK the most competitive place in Europe for automotive investment.”

However, with the German automotive body, VDA having warned the UK of a potential trade dispute, it remains to be seen whether the British government can get tariff-free access to European markets.

The German auto industry, including suppliers, has around 100 production sites in Britain. German automotive groups such as BMW, owner of Mini and Rolls-Royce; and Volkswagen, which owns Bentley, all have manufacturing sites in the UK.

German automotive technology supplier Bosch has seven manufacturing sites in the UK, employing some 5,300 people. Dr Volkmar Denner, chairman, Board of Management, Robert Bosch highlighted the long-term economic effects of Brexit: “The EU is a successful project. We very much regret the decision to take the UK out of the world’s largest single market, and this not only for economic reasons. The long-term economic consequences will only become apparent gradually. We are currently examining the effects Brexit will have on our business. At present, it is still too early to say anything concrete. Clearly, this also depends on the exit terms that are negotiated. As we are traditionally well-represented in many European markets, we will likely be less severely affected than companies that use the UK as an EU bridgehead. In addition, we have already put precautionary measures in place. For example, we have significantly raised our hedging ratios in order to counteract a possible depreciation of the British pound. We currently do not have any plans to scale back our capital expenditure in the United Kingdom.” 

Moreover, several other automakers and suppliers such as Jaguar Land Rover, Toyota, Vauxhall, Nissan, Daimler, Ford and GKN and Magan have openly sided with the UK remaining a part of the EU.

JLR statement on Brexit

Meanwhile, in an official statement, Jaguar Land Rover said: "Today is just business as usual. We are a British business with a strong manufacturing base in this country. We call Britain home and we remain committed to all our manufacturing sites and investment decisions.

We respect the views of the British people and in line with all other businesses, Jaguar Land Rover will manage the long-term impact and implications of this decision: nothing will change for us, or the automotive industry, overnight.

Europe is a key strategic market for our business, comprising 20% of global sales, and we remain absolutely committed to our customers in the EU.

There will be a significant negotiating period, and we look forward to understanding more about that as details emerge. We look forward to working with the British Government and the automotive sector to ensure that the UK’s automotive industry remains as competitive as ever, and that negotiations between the UK government and the EU will continue to recognise the importance of car manufacturing to the UK and European economies."

Brexit: Risks and uncertainties

A number of SMMT members are of the view that since they extensively trade with the EU, any barrier to this would be bad for their business. They believe that leaving the EU would weaken their position for international trade negotiations and isolate them from winning contracts abroad. Another member said, “UK access to the EU is one significant reason for our location in the UK. As an engineering services company, unrestricted recruitment of skilled EU labour is an important strength.”

Some others cited fears that leaving the EU only puts trade barriers in place, making growth harder and providing opportunities for EU-based competitors. They also fear that they would not be eligible for EU research grants and collaborative projects while their competitors would be. Another risk of exiting the EU is that “Global OEMs will not invest in new models, while the UK’s involvement in a European supply chain will become harder.”

Why auto matters for the UK

The automotive industry is a vital part of the UK economy accounting for more than £69.5 billion (Rs 684,088 crore) turnover and £15.5 billion (Rs 152,566 crore) value added. The UK is not only the second largest car market in Europe but an important place for the manufacturing of several brands and models. It is the home for brands like Aston Martin, Bentley, Rolls-Royce, Jaguar and Land Rover, but also where other big car makers like Toyota, Honda and Nissan run some of their factories.

With some 160,000 people employed directly in manufacturing and in excess of 799,000 across the wider automotive industry, it accounts for 11.8%of total UK export of goods and invests £2.4 billion (Rs 23,623 crore) each year in automotive R&D. More than 30 manufacturers build in excess of 70 models of vehicle in the UK supported by over 2,000 component providers and some of the world's most skilled engineers.

The UK and Europe’s Automotive Industry: facts

In 2015, there were 754,000 UK-built cars sold in Europe-19, while 1.7 million EU-19-built cars sold in the UK. Even if last year results were considerably better for the EU cars sold in the UK, the sales of UK-built cars in Europe posted a higher increase during the last year, more than doubling the increase recorded by the EU-built cars sales in the UK.

Last year, this market counted for around 18% of EU + EFTA new car registrations, posting a big market share increase comparing to 2008 and 2009 when the UK’s volume represented around 14% of the total. Unlike its partners from the mainland, British car market has posted significant increases over the last years due to better economic conditions. While Germany’s car market recorded an average annual growth of 0% during the last 10 years, and France and Italy posted negative averages (-1% and -3% respectively), the UK passenger car industry was able to grow an annual average of 1% over the same period. In fact last year this market registered a record of 2.63 million units, while Germany, France and Italy were all far away from their respective historical records.

How Brexit affects India

For India, it might not have a direct effect as is in the case of other countries but multinational corporations having businesses in the UK might take a hard hit as a result of Brexit. For Tata Motors-owned Jaguar Land Rover, this can turn out to be a major issue as 27.3% of JLR’s sales were recorded from Europe for Q4 FY16.

The recent slowdown in the Chinese economy along with the chemical explosion at Tianjin port has been a major factor in slowing down profits for the carmaker. JLR posted a pre-tax profit of £88 million for the three months to the end of September 2015 but the £245 million charge it took for the 5,800 cars destroyed or damaged in the chemical blast in China in August drove it to a £157 million quarterly loss once the exceptional charge is counted.

In the same period last year, JLR reported a pre-tax profit of £609 million. However in spite of this, its performance back home was impressive with 9% growth in sales in the UK and that in Europe up by 34%. The decision to leave the EU will have a damaging effect on the relationship between JLR and its EU markets with the European Union declaring that once the UK is ‘Out’, there would be no turning back. Ken Gregor, chief financial officer of Jaguar Land Rover, had said that remaining in the EU would have increased Jaguar Land Rover’s chances to grow, create jobs and attract investment in future technologies. With the exit from the EU, this has taken a major hit now. JLR had also demonstrated the use of its autonomous vehicles to EU transport ministries in April 2016 which is also likely to be affected by this decision. 

While the India operations of JLR might not be affected as much but the exports of automotive components from the Indian manufacturers might be impacted due to the referendum. But only time will tell what the actual outcome would be as experts say that the UK government would be pushing forward the talks for engaging with the EU without trade restrictions as it did before.

Also read: 

- What do UK-based carmakers think of Brexit?

- UK sells 203,600 vehicles in May, up 2%

- UK car sales to fall by 15% post Brexit