“No-deal” Brexit Would Decimate UK Auto Industry: Report.
“many see “no-deal” as a negotiating ploy which would quickly lead to a free-trade arrangement, given both sides have a huge amount of business which they would be reluctant to jeopardize”
Because of Brexit, investment in Britain’s auto industry has dropped by 80% over 3 years, production volume has fallen 9%, and production forecasts are 17% down, according to a report published Wednesday, and if there’s a “no-deal” scenario, Britain will lose 35% of its current volume over the next 10 years.
The report was published by the Said Business School at the University of Oxford and is entitled “Death by a thousand cuts: The strategic outlook for the U.K. automotive industry beyond Brexit”.
“The great and present danger is that the decisions on where to produce new models will continue to go against the U.K., until existing plants here become sub-scale and thus uncompetitive, and will close,” Said Business School’s Professor Matthias Holweg said.
“This would invariably lead to a hollowing-out of the U.K.’s component supply chain, effectively condemning the automotive industry to a slow “death by a thousand cuts” … Whichever way one looks, it is hard to underestimate the threat Brexit represents to the future of U.K. manufacturing,” Holweg said.
There’s no disputing the ongoing damage to Britain’s auto industry as uncertainty about the future forces companies to delay big investment decisions, but falls in sales aren’t necessarily linked to the Brexit negotiations as global car markets weaken. And many economists disagree that the outcome for Britain’s auto industry would be negative if it left the EU.
Negotiations about Britain’s exit from the European Union (EU) center Wednesday in talks in Brussels between leaders of the member states. Britain has asked for an extension of the deadline for the talks, currently April 12. The previous deadline was March 29.
There is still a possibility that Britain will leave without a deal on Friday, but a short extension maybe to June 30 is more likely.
Britain loses big
Holweg said if Britain left without a deal Britain would lose big.
“In case of a no-deal Brexit we estimate that the U.K. is likely to lose 35% of its current production volume over the coming decade, to a level below 1 million units per annum. This equates to 58% of its peak production volume in 2016,” Holweg said.
This assumes that “no deal” would be long lasting with Britain assuming World Trade Organisation tariffs, but many see “no-deal” as a negotiating ploy which would quickly lead to a free-trade arrangement, given both sides have a huge amount of business which they would be reluctant to jeopardize.
Holweg concedes that car sales are weakening as a result of the scandal which poisoned the market for diesels, while there is growing anxiety over the possibility of disruption from trade disputes and the slowdown in China. But he also cites Honda’s decision to close its plant in Britain, and Nissan announcing it will make its new X-Trail SUV in Japan, not Britain, as evidence of companies deserting the country because of Brexit.
Honda and Nissan couldn’t have been clearer in saying the decisions had nothing to do with Brexit.
Holweg said the assumption is false that WTO rules could be an acceptable long-term way of maintaining the auto business between Britain and the EU. The resulting increase in tariffs would wipe out the small profit margins earned on mass market cars.
UK Will Survive Nay Thrive
“Exporting volume cars to the EU under WTO rules is simply not a financially viable option, as vehicle import tariffs will render these unprofitable. Firms may instead choose to establish small-scale assembly operations in the U.K. for local sales to circumvent U.K. import duties on vehicles, yet this would mean that the most significant proportion of economic value is generated outside the U.K.,” Holweg said.
Many economists though believe Britain’s auto industry could survive and thrive outside the EU.
Roger Bootle, chairman of Capital Economics has said the industry had every right be alarmed about the short-term prospects of “no-deal” and the threat to the supply chain. But long-term the evidence from around the world showed that integrated supply chains exist all over the world across tariff barriers without problems.
Ruth Lea, economic advisor to the Arbuthnot Banking Group has said trading under WTO rules applies to more than half of Britain’s trade exports already and shouldn’t pose any problems. Modern technology has eased the threat of tariff barriers to free trade, she said.
Professor Peter Wells from the Cardiff Business School said short-term uncertainty is obviously bad, but the long-term future of the British auto industry is good, and points out that over half of new car exports are to markets outside the EU and this has been steadily increasing over recent years.
But Said Business schools Holweg is not convinced and sees disruption to the supply chain.
“Vehicle assembly plants take delivery of components several times per day, in a tightly orchestrated and synchronized manner. Delays at the borders, and more so the uncertainty surrounding the length of this delay, will mean car manufacturers will have to hold more costly inventory buffers in order to prevent disruptions to production. Additional requirements for licences, invoices, and transport permits further increase transaction costs,” Holweg said.
“Other sectors will be affected too, as there is a symbiotic relationship between automotive, defence and aerospace in terms of skills and supply base. Whichever way one looks, it is hard to underestimate the threat Brexit represents to the future of U.K. manufacturing,” Holweg said.