Taking Leave (of Our Senses?)

Now that the kaleidoscope has been shaken, what lies ahead for the UK automotive sector as it calculates the cost of Brexit.

Image: davidsonmorris
Turn right. Turn right. Turn right… Image: davidsonmorris

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.

Author: Eóin Doyle

Founding Editor. Content Provider.

5 thoughts on “Taking Leave (of Our Senses?)”

  1. I cannot see Brexit actually happening in the manner the Leave campaign and its supporters envisaged. Oh, the Tories will claim that “out means out” and they have won concessions from the EU with any new treatise, but in reality the UK will remain in the same sphere, just without their feet physically under the EU table. (I can also envisage the possibility that the referendum could be held again; perhaps not under a Tory majority government but certainly in the event of an unlikely swing to Labour or a left leaning coalition.) Whatever its stripe, for HM Government to do anything other than foster ties with the EU would be grossly negligent. In the meantime the uncertainty will cause untold damage to UK manufacturing and banking as multinationals move their business to safe havens. It is a sorry mess that could have been entirely avoided by strong governance, something the UK has been sorely lacking for a long time.

  2. My company which trades in Europe and has a workforce from 12 different countries (I just counted) will certainly be affected by Brexit though, honestly, that wasn’t my main reason for being against it. I feel that the EU’s break-up, whether in part or, conceivably in the future, total, will be hugely retrograde and damaging. Saying ‘I’m a European’ may seem a comfy, middle-class thing, uttered by people who have villas in Tuscany but the intimacy of today’s world, for good and bad, means you can’t really turn things back. Living in isolation would more likely be squalid than glorious and, as Chris suggests, the end result of the Referendum vote will probably please no-one, with much remaining the same and much not quite as good.

    I have a fair amount of contempt for those who are at least vaguely well-off, especially of my generation, who voted out, but will certainly moan if import tarifs end up being stuck on their next new Audi. I understand why people who have felt their livelihoods greatly affected by the EU might have voted out, but that’s just because they were informed by the bunch of chancers and media barons who fronted and supported the campaign in such a cavalier way. My company did not consider a contingency strategy beforehand, partly because we thought sense would prevail but, partly, because until terms have been decided, it’s wasted effort.

    As for the UK motor industry, which has been very healthy in recent years but is, unfortunately, for the most part not owned by UK companies, I imagine that in time we will see quite how much ‘they need us’, to quote a Brexiteer chant. You can take a brand anywhere.

    A small, though futile, pleasure was seeing the humiliation of Gove and Johnson. Of course, Gove will likely slither back at some time in the future and, after a paltry few days in the widerness, our new Foreign Secretary is now busy cementing our image as world-class clowns. The only petty revenge I can consider is to write something about his ghastly, vanity project Routemaster bus which, I read, with inadequate air-conditiong and fixed windows, left Londoners sweltering in recent weather.

  3. One thing that I have come to realise is that both HM Government and the EU have done little to help themselves. You cannot neglect manufacturing whilst simultaneously flooding the job market with casual or semi-skilled labour. You cannot enact austerity policies and expect public services to handle increased demand. You cannot impose a neoliberal policy of economic migration on an island state and not expect the ladder to be pulled up.

    1. The only thing that seemed to unite many pro and anti Brexit people is the skewed idea that the UK is in some way innately blessed. The people in my workplace, who come from both inside and outside the UK are there through qualification, not because they are cheap. They actually produce something other than paper, a concept that Mrs Thatcher’s government felt was rather unnecessary, and no subsequent government has felt that different about. We can’t all be in service industries, servicing each other but, ineffectual though the EU has been in many ways, they can’t be blamed for our own various government’s wilful short-termism.

  4. It might very well be that Brexit ends up changing very little. That’s not an argumemt for Brexit, but an argument for the pointlessness of trying to legislate against circumstances: Britain is always going to be near Europe and will
    always be a trading nation. Thus the trade will come with conditions as it always did. If the Tory Brexiteers had been conservative and not libertarian they’d have not bothered with spending three months on tour busses demanding revolution. Every conservative knows revolutions are always violent failures.
    Getting back to cars: this means one outcome is that the UK car industry continues as before. And it won’t mean the sudden resurgence of automotive production and innovation, probably the continued incorporation of British manufacturing into the global market (without an EU lifebelt).

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