E.U. Deal Still Most Likely, So Auto Industry Can Relax.
“that puts us in a stark position: if they could not pass then we would be in the semi-catastrophic position of having to stop production”
The debate about the impact on the British auto industry of leaving the European Union (E.U.), otherwise known as Brexit, is gathering pace as the deadline looms larger, with luxury sports-car maker Aston Martin saying an exit without an agreement could be “semi-catastrophic”.
According to BMI Research, the most likely outcome of the talks between the E.U. and Britain is that a deal will be agreed by the deadline of March 2019. BMI Research reckons that this deal will include Britain leaving the E.U. single market after a two-year transition period. This would allow time for Britain and the E.U. to finalize details of the deal and allow business on both sides to adapt.
But this outcome isn’t guaranteed and it’s the alternative that is freaking-out Aston Martin, and British industry in general.
“There is a rising likelihood of the U.K. failing to establish any exit agreement with the EU and for the country to thus completely exit the E.U. and single market in March 2019. This is the so-called ‘cliff edge’ Brexit,” BMI Research said in a report.
Aston Martin’s chief financial officer Mark Wilson testified to a British Parliamentary committee Tuesday and worried that if Britain left without an agreement, important procedures for certifying vehicles for use in other countries would cripple its business.
Under current arrangements, cars certified by Britain can be sold in other E.U. states. But if Britain left without an official deal, there’s a chance this might kill the certification arrangements and bring British car exporting to a halt.
Wilson was worried this might happen.
“We need to make sure they (our cars) pass certification. That puts us in a stark position: if they could not pass then we would be in the semi-catastrophic position of having to stop production until we can get them recertified to a new approach,” Britain’s Daily Telegraph newspaper quoted him as saying.
Doubts over the possibility of a deal between Britain and the E.U. have persuaded the anti-Brexit media and some politicians to exploit the almost endless ugly possibilities of Brexit without a deal. Hysterical theories have included the grounding of all flights into and out of Britain, if the current arrangements aren’t renewed. Food shortages, massive job losses and the end of civilisation as we know it are on the cards. Meanwhile the Brexiteers cling to the notion that given both sides would be harmed if there was no agreement, reasonable people will come to an agreement. Dissenters point out E.U. politicians, rather than national ones, will make it hard for Britain to leave, as a warning to other countries which might decide on a similar path.
BMI Research has examined what might happen if this so-called ‘cliff-edge’ Brexit does happen, and put forward its predictions for the economy in general and the auto industry in particular.
- Weaker British economic growth – the economy would suffer at least one quarter of contraction in late 2018 to early 2019. This would be driven by a weak sterling-induced inflation shock eroding purchasing power and income growth. Exports would be disrupted.
- Significant sterling weakness – the pound would weaken, and might test parity with the U.S. dollar and fall through parity with the euro.
- New trading regime – Britain would revert to the WTO tariff regime which would mean higher tariffs on imports and exports to and from the E.U., and the rest of the world. E.U.-U.K. trade would become subject to customs inspections at U.K. and E.U. ports.
- Fiscal boost to the economy – fiscal and monetary policy would become more accommodative, but the potential magnitude would be limited by political constraints and rising inflation.
For the auto industry, this would mean weaker domestic demand, investment cutbacks, cost increases and weaker exports, BMI Research said. A proportion of domestic and foreign firms would move facilities out of the country, although auto manufacturers would be slow to do this because of the huge costs of relocation.
The British auto industry has annual sales of $105 billion and exports 80% of that.
Major manufacturers include Honda, Toyota, and Nissan of Japan, PSA Group of France’s Vauxhall, Tata of India’s Jaguar Land Rover and BMW’s Mini. Ford no longer makes cars in the U.K. but makes engines and does research and development. There are specialized luxury and sports car makers like BMW’s Rolls Royce, VW’s Bentley, McLaren, and Aston Martin.
In a report last year PA Consulting Group said Honda and Toyota were most likely to move out of Britain, although LMC Automotive said at the time that Vauxhall was the most vulnerable, and that was before its takeover by PSA.