Now that the kaleidoscope has been shaken, what lies ahead for the UK automotive sector as it calculates the cost of Brexit.
In the months leading up to the EU referendum the likely fallout of leaving the European Union was known and quantifiable. Every respected financial and business body urged remain, citing economic turmoil should the nuclear option be taken. So while major multinationals probably had every permutation of Brexit modelled and case-studied, according to figures from the BBC, less than 50% of UK businesses developed a contingency for an exit vote. Now, just over a month since Brexit day-zero, only one thing is certain – we face a wholly new idea of North.
Since this is an auto-specific site, I’ll sidestep overt forays into politics, even if it seems ridiculous to divorce the political from a matter as all-encompassing and potentially calamitous as this. What we’re left with of course is a giant 1200-piece puzzle of unknowns. It remains to be seen what level of access the UK will ultimately negotiate with the EU, and what (if any) tariffs UK-automotive will face. This lack of clarity fuels uncertainty, and when uncertainty reigns, as it did in the aftermath of the 2008 financial crash, firms delay or cancel investment plans, rein in spending and hire less.
All of which is logical and perhaps prudent business practice – after all, risk is something that businesses grapple with constantly while avoiding like the plague. Those who haven’t modelled for this are not the only ones frantically devising coping strategies, because the threats to UK-based auto businesses are real. According to figures from the SMMT, 1.6 million new cars were made in the UK last year – 80% of which were exported. Of these, more than 900,000 UK were sold in the EU. Research analysts, Evercore ISI, quoted in Automotive News, suggest the UK’s exit could potentially cut carmaker earnings by more than €8bn by 2020, with all that entails for inward investment.
Who will be affected if things go as badly as some analysts predict? Well in truth, just about everyone. The motor industry is global and interconnected, but there are a few early signals of those most at risk. Over the past couple of years, Ford and Opel/Vauxhall European operations have been clawing their way back to solvency, an outcome Brexit appears likely to reverse, owing to the UK market’s significance to both. Already industry watchers are suggesting GM’s Ellesmere Port assembly plant could be the first of the dominoes to fall. But it may not be the only UK manufacturing site to come under threat. Honda’s Swindon plant has had its up’s and downs too, particularly during the depths of the financial crisis in 2009, when production was significantly scaled back. While Honda has posted modest sales gains across Europe this year, their overall EU market share remains notably weaker than rivals and having pitched overtly towards the US market, speculation continues about their long-term plans. However with minuscule European sales and a level of visibility that could be described as amoebic, MG’s future in the UK looks shakier still. Who’d bet against their Nanjing Auto parents pulling the whole venture back to China?
JLR too face uncertainty. Currently subject to leniency from EU emissions-based penalties against their predominantly high-consumption vehicles, Brexit could remove such exemptions, making their big selling SUVs a far less tempting proposition for European customers. Of course, a good 80% of JLR’s sales lie further afield in China, the US and the Middle East, but with Brexit likely to have a regressive global effect, there is little comfort in the belief that these territories can take up the slack. Prior to the vote JLR stated an exit result could wipe £1 bn off their earnings by the decade’s end.
Believing super-luxury carmakers can ride out any potential storm is perhaps naïve as well, with a UK slowdown quickly becoming contagious. This year already, both Rolls Royce and Bentley posted notable European sales falls – figures incidentally, compiled before the referendum took place. But both firms are protected to some extent by well-financed parents. But what of smaller firms like Aston Martin, Lotus, or indeed minnows like Morgan, to say nothing of newly re-emergent Bristol?
But manufacturing forms only part of the overall picture. UK-based manufacturers are served by a large network of component suppliers, all of whom rely on mostly EU-sourced contracts and will feel the pinch of any reversal. As manufacturers begin re-examining product cycles and possibly review new model introductions, Brexit could hit the supply chain hard. Furthermore, the West Midlands is home to a cluster of research and development consultancies with specialist manufacturing and motorsport links providing technology and design expertise to all major European OEM manufacturers. This nucleus of engineering businesses punch well above their weight in terms of talent and innovation, while offering the sort of good jobs for motivated young engineering graduates government ministers like to harp on about. But any potential fallout could not only affect job prospects, but their options to work or study within the EU.
Non-UK based motor businesses are unlikely to be immune either. If sales fall in the uncertainty that prevails, everybody’s projections will go out the window. Analysts predict PSA, Ford and VW are likely to be hardest hit by a slowdown in the UK. Already PSA has said it will temporarily suspend production at their Poissy plant outside Paris as a precautionary measure. FCA too could suffer. Hopes of reviving Alfa Romeo will have been at least partially based on robust projections from the UK market and furthermore, FCA are now based in London. Back in the depths of 2009, Sergio Marchionne prophesied the demise of several well known marques. This didn’t really come to pass, but in this post-Brexit landscape, anything could happen. At the very least, it could conceivably provide useful cover for any politically sensitive decisions around capacity, location or product.
All major car companies utilise a policy of forward-buying currency against fluctuations and changes in wind direction. Given this, it will be some time yet before analysts get a true picture of how they are riding the waves. Companies like McLaren are actually experiencing a benefit from Sterling’s current weakness. Smaller players however will have no such buffer. They are most likely being affected now. So as the mood darkens across all corners of the UK motor industry, forward trajectory remains the only option, but the direction it takes from here looks increasingly in the lap of the (political) Gods.