Blog : Brexit and the UK’s Automotive Industry…

Carole Nash Classic Insurance Specialists

Dave Leggett

MINI production at Cowley

The subject of Brexit – the UK’s decision to leave the EU, following a referendum – is already proving somewhat tortuous for the UK Government. The basic problem is that no-one actually knows what Brexit looks like or even what the UK’s negotiating position with the EU – when it eventually decides to start formal exit negotiations (sometime next year, the betting rapidly moving towards the second half) will be.

The Government is quietly consulting as widely as possible to work out where the dangers and risks, as well as potential benefits, are for the UK economy. And it is rapidly realising that formally disentangling the UK from the EU trade bloc will be extremely complex. To deliver that formal exit, while not damaging trade flows with our biggest trading partner, maintaining inward investment flows to Britain and yet, somehow, ‘controlling immigration’ will be something of a challenge. After the lull of the summer holidays, the political wrangling in Britain has barely begun.

The two main pinch points or areas of major concern for the UK economy are automotive manufacturing and financial services (essentially, the operation of London-based banks and financial institutions who can currently operate freely in euros across the whole EU territory). The debate is moving from In or Out to ‘soft exit’ versus a ‘hard exit’. The ‘soft exit’ camp wants to keep the economic relationship between Britain and the EU as much like it is today as possible. Broadly speaking, that’s what the auto sector wants – the UK staying in the EU Single Market, able to trade freely in vehicles and parts with the continent. Potentially, that also protects the UK’s very valuable financial services sector.

However, the EU Single Market comes with free movement of people in the EU (a core principle that Germany’s leader Angela Merkel has not budged on) and that’s something that the UK Government seems committed to end following the referendum result. Nigel Lawson, a former UK Chancellor of the Exchequer, encapsulated the hard exit viewpoint when he said that the Single Market cannot be maintained for Britain while still delivering on immigration policy, so it’s best to accept that and have a full divorce from the EU. And that, he maintains, can be done quickly. Others will argue that course is reckless and would do considerable harm to the UK economy as tariffs and other additional costs become imposed on UK-EU trade.

I suspect, as the UK Prime Minister has implied, that Britain will want as much access to the Single Market as possible while also being able to say to voters that immigration has been addressed. ‘Free trade plus’ is perhaps a way to look at it, with assurances for different sectors of the economy – including automotive – sought. The uncomfortable thought though, is that Brussels will likely want to impose additional costs for Britain somewhere down the line. The political reality is that the UK won’t get all that it wants. And there will likely be more arguing in the UK over whether the UK should pay into the EU’s budget in return for Single Market access (a potential negotiating lever for Britain, as the EU looks at the emerging hole in its finances).

It’s the continued uncertainty that will eventually start to weigh down on the UK economy, deter inward investment. A note from the Japanese Government at the weekend expressed the concerns in very direct fashion. As Nissan’s CEO Carlos Ghosn has explained many times, its manufacturing plant in the UK is a European facility located in the UK. Trading relations between the UK and the EU are very important. Will anything change in the short-term? No. Automotive companies like Nissan, which have invested hugely in manufacturing facilities, do not walk away from those investments. Investments in new models are pretty fixed 5-6 years out.

Beyond that though, investment strategies are evaluated on a variety of competitive criteria, including any changes to shipping costs. And it’s not just the existing companies to consider, there are decisions being made on long-term criteria by new investors. A Chinese OEM, for example, might now consider that locating a plant in the UK is less preferable than, say, Poland, because of Brexit risks attached to UK-EU trade costs. Of course, there are plenty of factors that go into a decision like that, but anything that impacts the competitive position of the UK in the long-term is potentially significant. International investment flows can and do change.

The economic impact of the Brexit decision in the UK thus far has been pretty muted. Sterling took an immediate tumble – actually, good news for UK exports – and the Bank of England has taken measures to shore up confidence. The Government is taking a more relaxed view on public finances. There has even been talk of Corporation Tax cuts, if necessary (no doubt designed for ears in Brussels and Berlin).

It is early days, but recent UK economic data has looked surprisingly good. The dire short-term predictions of the consequences of a Leave vote have not come to pass. However, the longer-term uncertainties and problems for Britain remain and they are deadly serious. The Japanese plea for Brexit transparency and a soft exit is understandable; large investments were attracted to the UK as a ‘gateway’ to Europe. The UK Government will want to reassure where it can. It is simply not in a position to, though, and won’t be for some time yet.

The headache won’t go away, even if there has been some short-term relief.

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[Editor’s Note: Dave Leggett is the Editor of leading, UK-based Automotive Industry website, just-auto.com]

42 Comments

  1. Some interesting comments from the Japanese on Brexit, highlighting the supply chains issue…

    “Tight and integrated value chains have been established between the UK and the EU; with the imposition of duties, manufacturers, especially of automobiles, could have such levies imposed twice, once for auto parts imported from the EU and again for the final products assembled in the UK to be exported to the EU, which would have significant impact on their businesses.”

    “For products such as automobiles, the division of production of materials and parts is in place between the UK and the EU. BREXIT would make such products unable to meet the rules of origin as EU products, which means that Japanese companies operating in the EU would not be able to enjoy the benefit ofthe FTAs concluded by the EU.”

    • Andrew,

      Thank you for originally including the link to the Japanese Government’s Message to the United Kingdom and the European Union in your above post – we have now included a link to the whole document in the article.

    • Duty will not be imposed twice. If components are imported from the EU and duty is chargeable, this can be either suspended or clawed back under the Inward Processing Relief rules for any vehicles exported from the UK to the EU which contain components that are subject to duty.

      Although the cost of vehicles exported to the EU from the UK will rise by about 10% due to the imposition of duty charges, the exchange rate needs to be taken into account. The Euro was worth about £0.70 at the beginning of 2016 and is now worth £0.87. Thus, a car exported in January 2016 for £20,000 would cost Euro 28,571 in Jan 2016. The same car would be Euro25,287 now even with 10% duty added. It is cheaper due to the exchange rate movement.

      Conversely a European car exported to the UK costing Euro 28,000 in January 2016 would have cost £19,600 in the UK. Now with the exchange rate movement and the addition of duty this would cost £26,796. Thus, the EU and EU manufacturers also have a concern to ensure duty rates are not high. The impact of exchange rates are also very important. Often exchange rate movements are more important than duty rates.

  2. The “longer-term uncertainties” were there prior to any mention of the Referendum and will be there whatever the future holds. That is simply the way things work.

    However, one thing where UK EU membership is a certainty longer term is that continued membership would see the need for ever-larger NET contributions from EU Member States accused of being successful. All indicators in recent years show unsuccessful EU Member States hugely outnumber so called “successful” ones.

    The EU model is failing and will continue to do so. That, above all other things, was my main reason for wanting out. That and being taken for milch-cow mugs by our so-called friends on the mainland and in Brussels. Speaking to other folks, many felt the same and voted accordingly. Those who told me they would vote to remain did so mainly based on current personal reasons as they were doing alright so any change would maybe rock their boat… They are alright now but, what of their future? So, let the future take care of itself.

    Unfortunately, it doesn’t work like that. All people must be proactive and, by voting out on 23rd June, those that did so did so realising that it is merely the first small step to a longer term well-being of this nation. It will require many many more steps. That is another certainty.

    There are never any effective quick-fix answers where the longer term well being of a nation is involved. Thatcher and her team of worse forms of Tories clearly demonstrated that during the 1980s.

    I’m confident that this Nation does have sufficient quantities of the “Right Stuff” to not only survive outside the ever-more parasitical womb of the EU, but to thrive too. After all, we are assured that immigration has enhanced UK’s quota of the “Right Stuff” which is surely a bonus.

    It will not happen overnight.

    • “The ‘longer-term uncertainties’ were there prior to any mention of the Referendum and will be there whatever the future holds.” No. Leaving the EU brings very specific long-term uncertainties, well described in this article, which would not have been there otherwise.

      “EU Member States accused of being successful.” The use of the word accused is very emotive. It suggests that this is more just a faith in the untrustworthiness of those who don’t live in the UK.

      “The EU model is failing and will continue to do so” An unsubstantiated statement.

      “Those who told me they would vote to remain did so mainly based on current personal reasons as they were doing alright so any change would maybe rock their boat… They are alright now but, what of their future? So, let the future take care of itself.” You must know different people to me. The future is much more uncertain now.

      Clearly, no car maker is going to invest in the UK if they have to pay to get components in and pay to get them out again.

      The people I spoke to, for example Swiss people, said that we must be crazy to leave. We had all the advantages of being in and had successfully opted out of what we didn’t want.

      In the end it was a vote against globalisation. The EU is, if anything, a bulwark against globalisation.

  3. I’m currently listening to Theresa May on Radio 5 Live as I trawl the web. Based on her current and past form, that woman is in serious danger of being accused of being our best PM since Thatcher – with the passing of more time, maybe even better.

    Good for her and, just possibly, all of us…

    • Not quite my opinion of Mrs May from what I’ve seen so far – at the G20 Summit she looked like somebody who’d turned up at a poker game with just one white chip. Moreover, Thatcher, who enjoyed in 1979 a 40+ plus majority in the Commons plus the bonus of the oil revenues from the North Sea and also had the most sycophantic press since the regime in Germany under Adolf Hitler, but still managed to be (prior to the Falklands campaign) the most unpopular PM since records began.

      Anyway, to return to Mrs May, she was elected to the leadership of the Conservative Party against less than Premier League opposition, her opponents consisted of a has-been, a no-hoper plus two wannabes the last of which quit the race after her CV started to be more closely examined. So, what has Mrs May done to deserve this? she’s sitting on a majority of twelve, a split party plus a massive trade deficit as well. There won’t be any meaningful negotiations with the EU, the terms will be dictated by the EU and UK will be told that, if it doesn’t like it, shut the door on the way out.

      Yes, the Japanese manufacturers will leave. Honda’s halfway there as the Swindon factory isn’t working at anywhere its full capacity – the CR-V and Jazz are no longer built here either. Nissan is pretty likely to leave due to its alliance with Renault – the facilities at Sunderland, however efficient they may be, will be moved to Renault or Nissan plants in France or Spain. Toyota faces a similar future – it’s unlikely that the Avensis will be replaced and the Auris could be relocated to be built alongside the Aygo in the Czech Republic or the Yaris in France.

      Mrs May might not therefore be remembered as the “best PM since Thatcher” but as the woman who left the EU, split up the UK and decimated the car industry in the UK as well.

      • And while all that’s going on, let’s re-introduce Grammar Schools. I’m not particularly for or against them – I went to one myself – but it just seems a bit of an irrelevance at this particular juncture in our country’s history.

        • I’m not sure whether the powers that be are trying to return us to the 1970s, 1930s or 19th century…

          FWIW, I would have preferred Remain, keep out of the Euro and stop net payments until the EU starts producing annual accounts that independent auditors will sign off.

          • Exactly, the Alan Sugar “cat among the pigeons of Brussels” solution. We vote to remain, we introduce and set controls on EU immigration into Britain, we cease paying benefits to migrants and disregard the aspects of the Maastricht Treaty we no longer see as fit, at which point we stand back and see the reaction of Brussels. Based upon the inability of the EU to bring the Greek economy to heel, we would have nothing to fear.

        • Like most of Government’s policies grammar schools are a distraction far from being an agent of social change – grammar schools are yet another sop to the middle class.

          Already children in British schools are probably the most tested in Europe plus their schools are ranked in league tables. This has led to the rise of Ofsted and the establishment of an education inspection industry leeching funds from spending on education.

          If Mrs May is serious about digging out ideas from our educational past, maybe she could start by recreating technical colleges and bringing back polytechnics to attempt to give this country the technical skills it so desperately needs.

          • Grammar schools were the greatest agent for social mobility there has ever been. Their demise at the hands of Anthony Crossland is the root cause of the lack of state educated MPs that the Lefties keep whinging about

          • @ Stewart says

            Hmm. Two assertions that you have not supported. Is there any evidence to support what you say?

            I doubt that you are correct. From what I’ve read it appears that middle class parents have always used their wealth to fill the catchment areas of grammar schools and crowd out poorer parents and the children the schools are supposed to help. The same happens with well performing comprehensives or academies now. Whether that was the case 40, 50 and 60 years ago, I don’t know. But it pretty much has been the last 30 years so I doubt there would have been many disadvantaged (entitled to free school meals) kids getting into grammar schools even had they carried on nationwide.

            There was a study recently that showed only 2.5% of pupils come from disadvantaged backgrounds. So not exactly encouraging a lot of social mobility there. Plus, although the study shows high levels of attainment at grammar schools, that is higher than average state schools, most of this is because of prior attainment and demographics, which means a more affluent background (a definite advantage) and middle class parents prepping their kids. Nothing wrong with that. but disadvantaged parents cannot compete so that will always be the case.

            Other findings are not generally supportive of the value of grammar schools. See: http://epi.org.uk/report/grammar-schools-social-mobility/

            I would suggest that grammar schools don’t enhance social mobility and they might actually stifle it. Other good state schools seem to do just as well or better than many grammar schools.

            Besides, given that nowadays nearly 50% of young people go to university and get a degree, and given that most of them will have gone to a comprehensive or academy, there is a much bigger cadre of well educated state educated kids than in the 50s and 60s. More than there are jobs for graduates so has their social mobility been stalled by the state of the economy?

            As for the lack of state educated MPs, I think that is down to different causes. The pathway into politics over the past couple of decades seems to have been something like internship (unpaid), researcher, SPAD and then run for MP.

            Young people from working class backgrounds couldn’t afford an unpaid internship even if they wanted one and as much as anything getting to those first stages might be more about who you know, rather than what you know. In other words, the middle class chumocracy helping their kids into positions through their contacts and friends. Nothing changes there and I think that has probably been true of the Labour Party as well as the Conservatives.

            I don’t know, but I would guess that another reason has been the decline of the Trade Unions. They have been hammered for nearly forty years, are smaller and have fewer activists, so there aren’t as many state educated people becoming activists who might have been incentivised to become an MP through that route. Only a guess though – no evidence for that.

      • Why would Mrs. May be remembered that way? If that scenario comes to pass (and I’m not saying it will) the people who deserve the blame will be the people who led us on to that road to nowhere by voting Leave.

        May was on the Remain side during the referendum and it is now her job to make the best of the path she has been forced by the people to take. It won’t be her fault if that path proves to be the wrong one.

        • Speak for yourself… I voted to Leave and, if it wasn’t for morons like you clinging to the corrupt bullying failing EU, Britain could do very well on its own.

          It’s run by the Germans, French and the Italians in that order – they are the one that dont live by the many, many, many, many rules and regulations and they are the ones that get away with it – if they don’t want to trade with us, we can and will trade with everyone else and the sooner the Remainers stop crying about it the better.

          • Britain already does very well – the 5th (6th?) biggest economy yet less than 1% of the world’s population isn’t very well? Yes, there’s a chance we’ll do better out of the EU but abruptly leaving an established structure such as the EU with no plan opens the scope for a correspondingly abrupt fall. When you’re already this close to the top there’s a lot further to fall than climb.

            Oh, and quit with the name calling. We Remainers are expected to contribute to a successful Brexit. Clearly we’re likely to have a different view on how to achieve that than many Leave voters but, now that the first step to Brexit has been voted for, the ball is in your court to listen to our concerns and views on proceeding and making Brexit a success.

            Just because we view it as damage limitation makes our views no less valid. We keep being told we need to work together, well name calling won’t achieve that. Us Remain voters have proven we’re open to working collaboratively given we voted in favour of close collaboration with our European neighbours. Leave voters have everything to prove in this respect.

      • Oh no, please don’t get the UK into another unnecessary war to bolster her popularity!

        Actually, I think she is more pragmatic than that. The full impact of BREXIT hasn’t hit yet because we are still in the EU. Time will tell what the fallout will be. We can be certain that multi-national companies are already making plans…

        Personally, I believe that very bad things will start to happen within a couple of years.

  4. If everything goes pear-shaped the British people will only have themselves to blame and blaming the PM for the consequences of a referendum would be grossly unfair. I hope and pray the UK gets access to the Single Market, but I suspect there will be some price to be paid for an emotional rather than rational decision in the EU Referendum.

    • I do wonder if the “quick fix/sell your soul for a supposed few pounds better off a week” brigade will cope with a near generation of austerity – I bet they will be blaming anyone but themselves.

    • The balance of the referendum was only 52% to 48%. I spent a few days in the North the week before referendum day. It was quite clear to me, from conversations I had, that the “have-nots” of the North had given up hope of a fair share of the prosperity of the South.

      Like a gambler throwing his last pocket change onto a final desperate bet, the “have-nots” were prepared and ready for a change into the risky unknown of Brexit. The true culprits are not the voters, but the politicians, who ignored the one-nation principle and stood back while allowing the North to fail economically.

  5. Well, there has already been some good news for local component suppliers – see this recent Belfast Telegraph article: Belfast firm Montupet £7m Jaguar deal may open floodgates for more

    Montupet is based at the old DeLorean plant (with the test track in its back yard) and note this quote: “Alan Malcomson, engineering manager at Montupet – which employs around 600 staff here – says Brexit isn’t slowing the burgeoning business down, and it doesn’t have ‘any immediate concerns.'” from the article.

    • I wonder at what tarrif level Montupet’s cylinder heads lose their competitive edge for Ford, Peugeot, Citroen, Volvo, Fiat and Mazda (firms they presently supply – I know engines for some of these manufacturers are presently made in the UK but none of these firms make cars in the UK).

  6. Ultimately, both sides have much to lose in the negotiations. The consequences for Britain are well documented but we are also one of the largest contributors to the EU pot and also a key export market for many European businesses and suppliers.

    Will we get everything we want? Absolutely not. However, it’s in nobody’s interests to completely screw Britain over. Already Opel factories in Germany are reducing shifts due to the fact Britain is the biggest market for the Corsa and Insignia – see this Automotive News Europe article: Opel cuts working hours at two German plants following Brexit vote

    The ultimate question is whether those who have lead us down the path will be happy with whatever form of Brexit is the ultimate compromise.

    • What?! Corsas and Insignias not made by the good folks in Luton? How about that? 🙂

      Whatever next, new MGs NOT made in Longbridge?

      Nobody’s interest to screw us over? Hmmm… whilst that is obviously true following on from 23rd June, I and 17.4 million other Brits believe those in Brussels have been screwing us Brits over for far too long.

      • “Those in Brussels…” You fell for that one did you? Blaming foreigners for the country’s ills always works. Adolf was especially good at that.

    • Insignia and Corsa sales are down, I read that in the press.

      But then the Insignia is near end of life, and spy shots of the replacement are already in the motoring press. The only ones interested in this will be fleets getting a hefty discount, and buyers looking for any runout specials.

      And I don’t think anyone has been fooled by the ‘new’ Corsa, which is a ’90s Fiesta-style rehash of the previous generation model in a hugely competitive new car market – it’s even up against its own stablemate in the new Viva.

  7. Until we actually leave the EU, be it a soft or hard exit, we cannot really give an opinion on how it is going to work out.

    However, Brexit has already shown many issues raised by Remain being reiterated by foreign diplomats. Obama has already said that the EU will come ahead of Britain in trade talks and, if Trump comes in trade with the US will probably become even worse as he is likely to entrench the US economy with protectionism. Japan and China have also made clear that they have serious concerns especially with their business and have threaten the withdrawal of their business.

    That said, we have seen Australia show interest in improving trade links, while there has been rumours that India are keen, too. However, without negotiating new trade deals elsewhere before leaving the EU, we could put ourselves in jeapody, which is why May won’t announce a date.

    The likelihood is that we will see a very soft option which many MPs would vote through. The UK still retain membership of the European Trade Federation, which is how Norway accesses the EU markets. A fee would have to be paid and immigration will still be open, but the government will have removed us from the Union! It is a fudge but then it could be a quick fix until deals could be negotiated.

    In addition, this Government is already showing they are trying to be different with Grammar Schools instead of academies coming to the fore. However, this will not improve education in this country, as Grammar Schools may have good grades but they do get the brightest kids. What the Government should be doing is testing certain skills for these kids when they join each school and then see how the have progressed at the end of their time. This is the best way to show how good a school is, as schools that take on a dummy who can’t read and isunlikely to achieve a grade, and then gets an E shows progression, not an A student who gets an A at the end of 5 years.

    • Irrespective of any Referendum decisions, all three Japanese Manufacturers with factories here have threatened to leave in both the recent and distant past if it suits them. That’s the way international business works. They, along with Indian TATA, will always put their interests ahead of ours.

      That’s the way it works and will continue to do so – if and when it suits, they will be gone. They will still want to sell their stuff here though to take advantage of wider UK trading margins.

      Is the UK still BMW’s largest by profit of all the European Markets bar their own?

      By the way, I saw my first 66 Plate car today when out and about – a mustard yellow MINI Countryman.

      • Yes, businesses weigh up the pros and cons of investing in a country, and we just voted to make it look a lot less attractive.

        • Speak for yourself. John and his cronies voted for a return to 1974. Hope he’ll still be around in 10 years time to see the consequences.

    • The Government is using the grammar school proposals as a smokescreen to hide the reality of the BREXIT negotiations. Grammar schools are highly controversial and will take attention away from the EU situation. It is an old tactic for burying bad news.

  8. International companies will pick and choose the best locations to manufacture and assemble.

    That being the case, it is suicidal to throw brickbats, such as Brexit, in their path.

  9. I think there’ll be a compromise as the result of the referendum was close. Britain, whose economy is one of the biggest and strongest in Europe, will retain access to the Single Market, but will still be expected to allow some kind of free movement of labour and EU regulations on trade.

    OTOH, the Brexiteers will probably be happy as Britain no longer has to contribute to the EU, agricultural policy will be decided in Britain not Brussels and shops will be able to sell meat in pounds and ounces again.

    Should we stay in the Single Market, I doubt Nissan and the like will leave as there would be no reason for them to abandon what are modern and very productive factories.

  10. Where I live, which is a working class, if not particularly deprived, area, 60 per cent voted Leave. It was like a protest vote against Westminster and the EU for many people here. Also the strongest supporters of Brexit were working class Labour voters, or ex-Labour voters, who felt their party was being run by out of touch middle class left wingers who cared more about immigrants than working people.

  11. I wonder if they will be feeling the same way when their costs of living go up, standards of living go down, jobs get exported and they are made to do entry-level jobs just to get benefits?

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