Britain’s Auto Industry Could Face Existential Hit.
“even before the exit decision it was clear the U.K. was becoming too expensive to compete”
If Britain can do a sweetheart free trade deal with the European Union, its auto industry will still face existential problems that would have hit even if it had stayed inside the EU.
In the long run up to Britain finally leaving the European Union – the referendum approving departure was held in mid-2016, and political indecision led to a 3-1/2 year hiatus – auto manufacturers and their representatives did everything in their power to try and stop it, with predictions of doom and disaster.
The industry’s case that business outside the EU would be crippled didn’t stand up to scrutiny because official data showed that over a 20-year period Britain’s trade outside the EU grew at a much healthier rate than inside, while economies like the U.S., trading through a tariff wall into the EU, performed better than Britain inside the EU. But the industry also worried that its complex supply lines across Europe might be jeopardized, and didn’t like the fact that even across World Trade Organisation tariffs, supply lines could be just as smooth.
A year ago, the outlook for the British auto industry looked bleak and uncertain as Brexit talks stumbled. Investment was on hold because the future of Britain’s trade with the EU was impossible to predict. Sales of cars and SUVs slipped, as worries about the future restrained private buyers.
According to the Society of Motor Manufacturers and Traders (SMMT), which speaks for British producers and foreign importers, British car and SUV output in 2019 dropped 14.2% to 1.3 million, a 3rd straight year of decline, and was the lowest since 2010. About 80% is exported. The latest forecast for 2020 points to a slight decline to 1.27, the SMMT said.
Britain finally got its act together and left the EU on January 31, and over the next 11 months they will seek a free trade agreement (FTA). If that fails, WTO terms will kick in.
During the 3-1/2 year hiatus, one problem loomed large for the U.K. industry. Would big manufacturers like Nissan, Toyota and Honda (which later decided to end European production anyway) which moved to Britain to be gain tariff free trade with the EU, get a deal that would allow them to continue this, and guarantee smooth running of its complicated supply lines across Europe. Now that seems close to becoming reality, the point has become moot. Early last year Japan and the EU finally signed a free trade agreement which could well make their British factories redundant in the long-term.
So what fate awaits the British auto industry?
The global industry faces a decade of disruption as electric cars and computer-driven ones gradually replace conventional vehicles. The whole idea of individual car ownership is being questioned. And it’s not clear who the winners may be – perhaps cash-rich high-tech interlopers – or where they will be located.
Peter Wells, Professor of Business and Sustainability at Cardiff Business School, said Britain’s mass-market auto industry has been weakening for some time.
“The future of the U.K. automotive industry is particularly bleak because the decision to leave the EU, with all the economic uncertainty and probable added cost entailed, comes at a time of massive and rapid technological and business convulsions sweeping through the industry,” Wells said.
Wells said even before the exit decision it was clear the U.K. was becoming too expensive to compete in the lower margin segments despite good quality and productivity. Britain’s auto industry may return to pre-EU conditions where, as imports become more expensive and exports more difficult, U.K. output may focus on the home market. Wells said the long-term future for the industry is more likely to be a smaller domestic industry producing high-margin vehicles.
Other experts say there will be big challenges for the auto industry outside of the EU, but it should thrive nonetheless. Any free trade deal with the EU will be relatively easy because it really amounts to simply consolidating what already exists. The industry will have to raise productivity because it will no longer be able to hide behind the 10% tariff barrier provided by the EU. The industry won’t welcome having to improve efficiency but the likes of Jaguar Land Rover (JLR) already manage to do this very successfully. Now they will be able to source components not just from the EU but also the rest of the world.
The FTA with Japan raises the question about whether Toyota and Nissan would want to remain in the U.K. even if it were firmly in the EU for the long-term. It’s unlikely in the short term that these companies would want to shut down very efficient factories because big global manufacturers need to insure themselves against things like exchange rate fluctuations and perhaps tariff wars too. Having a paid-for alternative makes good business sense.
An intriguing variation on that theme emerged Monday with a report in the Financial Times that Nissan, far from deciding to leave Britain, had drawn up a contingency plan to withdraw production from Europe and concentrate it all at its U.K. Sunderland plant if Britain failed to agree an FTA. Nissan would seek to raise its current 4% market share in Britain to up to 20% by exploiting the 10% tariff wall a WTO agreement would imply to hobble foreign competition.
Nissan denied the existence of this contingency plan.
“We deny such a contingency plan exists. We’ve modelled every possible ramification of Brexit and the fact remains that our entire business both in the U.K. and in Europe is not sustainable in the event of WTO tariffs. We want our U.K. team of more than 7,000 people to have the best possible chance of future success, which is why we continue to urge U.K. and EU negotiators to work collaboratively towards an orderly balanced Brexit that will continue to encourage mutually beneficial trade,” Nissan said in a statement.
Japanese may withdraw anyway
Phil Radford, trade analyst and author of nothingtofear.co.uk, said if a free trade deal is agreed, exports to the EU will stagnate, as they have over the last 20 years. Japanese manufacturers will eventually withdraw because there won’t be a competitive advantage from staying.
Nobody, at least in the short-term, now seems to expect the talks to fail, but if they did, Radford initially expects the British government to mirror the EU 10% tariff. This would save the mass market industry in the short term, but the likes of Nissan and Toyota would have to radically sharpen their business model, or leave.
“The key thing with the Japanese manufacturers is that they have signally failed to create the sort of vast market in the EU that would justify the U.K needing an FTA that covered autos post-Brexit,” Radford said.
From 2000 to 2018, Nissan raised its market share in Europe from 2.9 to 3.2%, Toyota from 3.6 to 4.5%, and Honda’s fell from 1.3 to 0.9%, according to carsalesbase.com. In contrast in the U.S., Nissan’s market share rose from 3.9 to 7.8%, Toyota advanced from 8 to 12.3% while Honda spurted from 5.9 to 8.3%.
Fitch Solutions Macro Research welcomed the fact a clear path was being mapped to finally leave the EU. It pointed out that the long impasse over the Brexit issue had led to many manufacturers postponing or cancelling investment, and that this wouldn’t be reignited until the long-term direction of the industry in Britain had been re-established.
“There are carmakers waiting for concrete details on future trade to make decisions over their U.K. operations, such as Groupe PSA, which has said the future of its Vauxhall plant in the U.K. depends on favorable Brexit conditions. With this in mind, any delays to a long-term trade deal would pose considerable risk to the production side of the industry,” Fitch Solutions said in a report.
Currently, Britain hosts big car factories from Toyota and Nissan, while Honda has announced it was pulling out next year. There is Jaguar Land Rover and BMW’s Mini and Rolls Royce. Vauxhall, now a part of PSA, operates a big plant at Ellesmere Port, near Liverpool. There are also specialist vehicle makers like VW’s Bentley, McLaren, Lotus, and Aston Martin.