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Brexit Will Create Uncertainty, Weaken Sales, Outcome Unclear

Brexit Will Create Uncertainty, Weaken Sales, Outcome Unclear.

“The E.U should not treat Britain as an escapee from prison, but as a potential compatriot” – Kissinger

    Truth be told, nobody has any idea how Britain’s Brexit decision will hit the economy in general or the automotive industry in particular, but that hasn’t stopped forecasters weighing in with their theories.

    Fitch Ratings, in a report published Tuesday, is the latest to take a stab at predicting the outcome and it doesn’t expect the sky to fall. Fitch said Brexit will create uncertainty for several big manufacturers and have a moderate impact on sales and profits in the next couple of years.

    The trouble for forecasters is that nobody yet knows even how long it will take for Britain to negotiate its exit from the European Union (E.U.), or what terms it might win. Britain is currently politically rudderless, with the ruling Conservative Party in the middle of a leadership campaign after Prime Minister David Cameron resigned the day after the referendum. This campaign is likely to produce a new PM early in September. Nothing will happen at least until then.

    Arguments rage in Britain about when talks with the E.U. will start. When Britain formally asks to leave, Article 50 of the Lisbon Treaty will be invoked which gives the parties 2 years to agree Brexit. Until these talks start, Britain remains a full member of the E.U. and its single market.

    Fitch Ratings’ two main worries were uncertainty about trading conditions and currency volatility. Britain hopes to negotiate a free trade deal, but if that fails the worst case scenario would mean tariffs on imports and exports.

    Cost disadvantage
    “A levy on exports to the E.U. could create cost disadvantage for U.K. plants, raising the likelihood of automakers shifting some production elsewhere in Europe over the medium to long term and causing them to reassess future investments,” Fitch Ratings said.

    Nissan, Honda, and Toyota have big factories in the U.K., but they represent a small proportion of their total global production. Most of Jaguar Land Rover’s production is U.K. based. GM’s Vauxhall has a large factory. BMW makes the Mini in Britain. Luxury manufacturers like VW’s Bentley and BMW’s Rolls Royce make cars just in Britain.

     In theory, the dramatic fall in sterling since Brexit will help these operations, to a degree.

    “Increased currency volatility could also weigh on manufacturers earnings once financial hedges covering the next 12-18 months expire. Local production acts as a natural hedge but about 60% of car parts used in U.K. production are imported from the E.U., limiting the benefit,” Fitch Ratings said.

    Other forecasters have offered their theories.    

    LMC Automotive, citing much uncertainty in the coming weeks and months as politicians negotiate the divorce, said Britain’s car sales will fall by 15% to 2.55 million in 2018 as the pound falls, GDP growth slows and consumer confidence is hit.

    IHS Automotive cut its GDP growth forecasts to 1.5% from 2.0% for 2016, to 0.2% from 2.4% for 2017 and 1.3% from 2.3% in 2018. Britain’s auto sales will fall between 220,000 and 260,000 in 2017.

    Morgan Stanley cut its forecast for British and West European car sales.

    Risk increased
    “We think the risk of a sharp European sales slowdown has increased as a result of the U.K. vote. We downgrade our European car sales forecasts from 5.0% in 2016 to 3.7% (minus 200,000 cars), 2017 from 0.2% growth to a 2.2% (minus 350,000 cars). Either way, we expect strong European production growth to slow in the second half of 2016,” Morgan Stanley said in a report.

    BMI Research, part of the Fitch Group, predicts British car sales will fall 1.5% in 2016 and 0.5% in 2017.

    “Sales will be damaged by falling consumer and business confidence, economic uncertainty and vehicle price inflation. The decline will also spark a period of consolidation in the U.K.’s automotive industry,” BMI said..

    BMI Research published another report later, saying there was also a more positive case.

    “Outside the E.U., the U.K. will have an opportunity to embrace more market-friendly policies, while increasing cooperation with more dynamic economies outside Europe. With the pound now trading at attractive valuations, this could be as major draw for (foreign direct investment),” the report said.

    JLR most at risk
    According to Fitch Ratings, JLR is most at risk with over 20% of its sales in the U.K. and substantial local production exported to the E.U., but it doesn’t export to much damage to be done.

    “Others at risk include BMW, Peugeot, Volkswagen and Daimler which all generate 5% to 10% of unit sales in the U.K.,” Fitch Ratings said.

    The arguments about the significance of Britain’s exit from the E.U, has generated much angst amongst European political leaders. Some E.U. leaders sound as though they want to punish Britain for daring to leave, and at the same time warn other nations which might be thinking along the same lines.

    U.S. elder statesman Henry Kissinger stepped into the fray last week in an article in the Wall Street Journal, and had this advice for Europe’s politicians. The E.U should not try to penalize the recalcitrant but negotiate in a manner that restores the prospects of unity.

    “The E.U should not treat Britain as an escapee from prison, but as a potential compatriot,” Kissinger said.           

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