Frankfurt Auto Show: Brexit Might Lead To Big U.K. Pullout.
“If you have a “hard” Brexit, it will mean a kind of de-industrialization, as the car industry leaves the island”
A major talking point at the Frankfurt car show will be Brexit, which should have been settled by now, but is still a running sore for European carmakers because of the uncertainty it whips up.
Big carmakers based in Britain like Toyota, Nissan, PSA Group’s Vauxhall, BMW Mini and Jaguar Land Rover, and smaller luxury and niche brands like Bentley, Rolls Royce, Aston Martin and McLaren are being driven to distraction by the lack of clarity concerning the details of Britain’s exit from the European Union (EU), or if it will actually leave at all. They need to find out and soon, just what the details are so they can continue investing, or decide to cut back their presence, or perhaps eventually pull out.
Manufacturers like mainland Europe based Volkswagen, BMW, Mercedes, and PSA Group of France, make big money selling into Britain, and they need some clarity. The Germans especially are in a quandary because as huge profits from sales in China have been slashed, lucrative sales in Britain are becoming ever more important to profitable survival.
Britain was supposed to have left the EU on March 31, again in April, and now departure is scheduled for October 31. After shenanigans in Britain’s Parliament on Wednesday though, that date might now be January 31, 2020. Nobody knows what kind of deal will be agreed.
The best case scenario for the industry would be a free trade deal under which nothing really changes from the current setup. The worst case would be a “hard” Brexit with no formal deal, and Britain reverting to World Trade Organisation (WTO) terms. That would restore a tariff regime, but given around half of Britain’s foreign trade is conducted under WTO rules now, that shouldn’t cause many problems. But manufacturing industry fears that any change to its current free access to imports and exports might disrupt the smooth flow of its just-in-time supply chains.
Production capacity halved?
Experts from Germany believe the disruption to Britain’s auto manufacturing may mean its capacity of about 1.8 million a year, could soon be halved. Others see a lesser crisis, but all say the indecision has gone on too long, and clarity is required, even if it presents new hurdles to jump.
Professor Stefan Bratzel of the Center of Automotive Management in Bergisch Gladbach, Germany believes that a so-called “hard” Brexit could slash British output by 50% in 5 years. This scenario also assumes these arrangements won’t be compatible with a smooth just-in-time supply chain, although other experts point out that integrated supply chains work perfectly well across the world, in and out of free trade and into WTO zones.
“If you have a “hard” Brexit, it will mean a kind of de-industrialization, as the car industry leaves the island (Britain) because it makes no sense to manufacture there. That holds true for Nissan and Toyota, but is better for a classic player like (British domiciled and Tata Motors of India owned) Jaguar Land Rover. They (excluding JLR) will have to think about different locations and in 5 years there will be a noticeable change in making cars in the U.K., with only half the production capacity that we have today,” Bratzel said.
It’s no surprise that Toyota and Nissan might be thinking about ending manufacturing in Britain because earlier this year Japan and the EU agreed a deal which will phase out the 10% import tariff over 10 years.
Professor Ferdinand Dudenhoeffer from the Center for Automotive Research at the University of Duisburg-Essen is almost as pessimistic.
“A hard Brexit is more probable now and car manufacturers with big factories on the island will be in trouble and I’m pretty sure most of them, like BMW Mini and Nissan and of course PSA (PSA’s Vauxhall factory) will rearrange capacity and relocate a bit more to continental Europe. They will leave some capacity on the island but not that much. I can’t imagine more than 1 million (a year) after a hard Brexit,” Dudenhoeffer said.
Depends on Brexit form
David Bailey, Professor of Business Economics at the Birmingham Business School was a little more optimistic, but not much.
“It depends on the form of Brexit. The industry could live inside a customs union but “no deal” would be very damaging,” Bailey said.
Britain’s ruling Conservative party wouldn’t survive in office for long if it agreed a customs union with the EU, because this would remove one of the core reasons for leaving, the ability to agree free-trade deals with the rest of the world, which individual EU members aren’t allowed to do.
“Manufacturers might not replace models made now in the U.K, and would lead to a reduction in volume of about 500,000 later in the 2020s,” Bailey said.
Dr Dan Coffey, industrial strategy and world car industry expert from Leeds University Business School, said if Britain left the EU without a deal, the impact would be wide-ranging and exacerbate the impact of wider economic downturn in Europe, but German car-making would be hit too.
Coffey said the British car industry is already suffering a crisis of investment because of Brexit uncertainty.
“A deal allowing a controlled Brexit without tariff barriers would help enormously – but like everyone else, I have absolutely no idea what is going to happen, although we might find out quite soon. But I think with Europe, German car-making is especially vulnerable to a no-deal Brexit,” Coffey said.
Coffey, quoting Britain’s auto industry mouthpiece, the SMMT, said in 2018 Britain exported 1.2 million cars, and imported 2.1 million, and Germany is the biggest car importer in the U.K.
“With German industry on the edge anyway, Germany needs this like a hole in the head,” Coffey said.
The SMMT has said a “no-deal” Brexit would be an existential threat to the British auto industry. U.K. car production fell by a fifth in the first half of 2019 to 666,000 compared with the same period the previous year.
Felipe Munoz, global automotive analyst at JATO Dynamics, sounds unruffled about the impact of Brexit.
“The main problem of Brexit is the uncertainty it creates among people. When there is uncertainty, there are fears and this hurts any industry. The U.K. car market has been already absorbing the Brexit impact during the last 24 months,” Munoz said.
Britain has been gearing up for, or dithering, depending on your point of view, for more than three years since the referendum was won by the Leave voters.
“Therefore I don’t see an abrupt drop after Britain leaves the EU. The industry knows this is going to happen and have had enough time to get prepared. However, in addition to the devaluation of the pound, consumers are likely to find cars more expensive if new tariffs come into effect,” Munoz said.
Britain’s car workers might find consolation from the fact that it is very expensive to close an assembly plant, probably just as expensive as building a new one. So carmakers will probably ride out any storm before taking such an expensive decision. Britain’s car exports outside of EU markets are growing quickly, and don’t seem to suffer from having to do business under WTO rules, and are also benefitting from lower prices for their products because of the big fall in the value of sterling induced by the Brexit crisis.