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Britain’s Auto Business Fears Brexit Plan Defeat Spells Doom

Britain’s Auto Business Fears Brexit Plan Defeat Spells Doom.

‘No deal’ must be avoided at all costs-SMMT.

“However, the longer term picture is by no means so bleak. Over half of UK new car exports are to markets outside the EU, a share that has been steadily increasing over recent years”

Parliament’s rejection of Prime Minister Theresa May’s Brexit plan increased the chances of a so-called no-deal exit from the European Union (EU) and spurred a chorus of doom from business in general and automotive leaders in particular.

But not everybody believes that if Britain does leave the EU on March 30 without a deal the consequences will be horrendous. Because of modern technology, if Britain is forced to undertake its foreign trade by reverting to World Trade Organization terms, this is unlikely to cause a long-term problem. After all, just over 50% of its foreign trade is already currently conducted under WTO rules.

Prime Minister May’s proposed deal was rejected by Parliament Tuesday by an unexpectedly large 432 to 202 majority. British political experts were left stunned by the scale of the defeat, and were floundering to figure out the consequences. The auto industry liked the plan because it retained much of the free access to European markets after Brexit, and meant its just-in-time supply chain remained intact. But politicians disliked the fact that the plan left the EU with much unaccountable power over Britain after Brexit.

Big business was unanimous in expressing its horror. Britain’s leading industrial organization, the CBI, said if Britain leaves the EU it will have huge negative implications for the economy.

Britain’s biggest automotive interest group, the Society of Motor Manufacturers and Traders, was typical in its reaction.

Close to catastrophe
“The vote against the Brexit deal on the table brings us closer to the ‘no deal’ cliff edge that would be catastrophic for the automotive industry. All sides in parliament must work together to find a way forward and put the necessary mechanisms in place to prevent this happening and explore alternatives that protect our future,” SMMT chief executive Mike Hawes said in a statement Wednesday.

“Leaving the EU, our biggest and most important trading partner, without a deal and without a transition period to cushion the blow would put this sector and jobs at immediate risk. ‘No deal’ must be avoided at all costs. Business needs certainty so we now need politicians to do everything to prevent irreversible damage to this vital sector,” Hawes said.

Britain’s big business and the City banking sector have been a long-term opponents of leaving the EU, mainly on the grounds of increased uncertainty. Business involvement in big political issues hasn’t been impressive. Before the birth of the euro, the EU’s single currency in 1999, big business and the City were adamant that if Britain failed to join, it would spell long-term doom for the economy. But Britain prospered while many other members of the Eurozone floundered.

Britain’s automotive manufacturers have consistently warned that leaving the EU would be a disaster for them. Prime Minister May’s deal was seen as a life-saver. Honda, Nissan, Toyota and Jaguar Land Rover have been increasingly vocal saying they would be hit hard by a “no-deal” outcome and might have to take drastic action, according to Professor David Bailey, Professor of Industrial Strategy at Aston Business School

Frustration growing
“The warning reflects growing frustration in U.K. automotive and manufacturing over the inability of a fractured government and Parliament to spell out what it wants in terms of a post Brexit trade deal  – hence increasing the risk of ‘no deal’. None of this should be a surprise. A hard Brexit would be nothing short of catastrophic for the UK car industry as the SMMT itself recognizes. Output will fall, jobs will be lost and – in my opinion – plants will close,” Bailey said.

“UK auto needs a Brexit deal that secures free and frictionless trade with Europe, unrestricted access to the single market and the ability to hire skilled employees from overseas,” Bailey said.

“Brexit uncertainty combined with a confused government stance over diesels has already seen investment, output and sales in the industry fall in 2018. The government needs to come up with a plan for post-Brexit trade that the U.K. auto industry can actually work with, and fast,” Bailey said.

Professor Peter Wells, Professor of Business and Sustainability at Cardiff Business School, agrees that uncertainty over Britain’s post-Brexit arrangements is bad for Britain’s automotive business. The British car market is sliding and is preparing for hard times, but he is more optimistic for the future.

“However, the longer term picture is by no means so bleak. In the automotive industry, and especially in vehicle assembly plants, the investments are very durable. It is expensive to close an assembly plant, in fact almost as expensive as to build a new one. As a result, it is likely that vehicle manufacturers will have to ride out the storm until a clear view of the trading arrangements can be determined,” Wells said. 

“Moreover, over half of UK new car exports are to markets outside the EU, a share that has been steadily increasing over recent years,” according to Wells.

Sterling fall helps
Wells points out that the UK auto industry has also benefitted from the steady decline in the value of sterling on foreign exchange markets, allowing it be more competitive.

The view from Germany is negative though.

Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen expects the British auto sector to be hit hard, not least because of expected economic problems in Europe. Jobs will go and factories moved out of the country.

“I guess companies will decide to reduce their workforce and activities in Britain in the near future. We see economic problems in China, the U.S. and the EU. Thus it makes sense to adapt capacity. At biggest risk is the U.K. and it makes sense to cut capacity there. For the Japanese (in Britain) it makes sense to shift activities to Eastern Europe and JLR and BMW’s Mini have also to think about the size of factories in Britain,” Dudenhoeffer said.

The defeat of Prime Minister May’s plan has left Britain’s politicians and media puzzled about what happens next. The most likely outcome is that Britain will leave the EU on March 30 without a deal, because Parliament has already approved a law doing just that. For Brexit to be thwarted would require a majority in Parliament to pass a new law, and that looks difficult.


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