A short-term deterioration to UK and European automotive sales was always anticipated under Brexit.
No-Brexit Deal Looms
While the UK government has a draft Brexit deal on the table and likely to be approved by the other 27 EU member states, it still must be approved by the UK parliament, and this currently looks to be fraught with difficulty. In that case the most likely outcome would be a Brexit on March 29th, 2019 without a trade deal with the EU in place. While some form of transition agreement would likely be established, the UK could be isolated and, by default, have to fall-back on World Trade Organization (WTO) terms.
While even the proposed Brexit deal will cause problems for the automotive sector that relies heavily on parts and sub-assemblies being moved seamlessly around between EU nations, a no-deal Brexit would have a far more severe and far-reaching impacts on the automotive and broader business sectors.
Serious Outcomes Ahead
As a first outcome post Brexit, the no-deal impasse will result in people and goods being in a state of legal limbo, with no provisions for entering or leaving the UK. It will also affect UK’s terms with countries outside Europe, with most of its trade based around EU treaties. With WTO rules as the basis, a 10% tariff will be applied to all cars and parts traded between the UK and EU. Automakers now need to consider either passing on the extra costs to consumer or otherwise completely/partially absorbing within their businesses. With profit margins in the industry already considerably lower than 10%, it will be a tough choice – choosing between sustaining volumes or profitability. Import tariff rates of goods from other countries into the UK will also need to be urgently firmed-up and will be expected to be based on most-favoured-nation terms, each coming with their own set of diplomatic complexities.
Based on various estimates, and depending on the quantum of vehicle price increases, an overall sales drop of as much as 20% (over 500,000 vehicles) in the UK can be anticipated in 2019 – the first year of exit. With 85% of cars sold in Britain being imported, the highly integrated interdependency of the UK’s industry with the European auto industry, will likely set-off a chain reaction. As an example, the UK accounts for some 250,000 German vehicle exports alone. This shortfall can impact some 18,000 jobs in the German automotive industry.
Mitigating the Impact
Automakers and suppliers, both in UK and Europe, are looking to maximise their production and sales opportunity within the current short window until March 2019. They are rushing to grab all available strategic warehousing and parking spaces to stockpile parts and vehicles, mostly at exorbitant costs given the sudden spike in demand for such storage facilities. Some suppliers are also preparing for temporary production shutdowns post-Brexit, in order to balance future production schedules.
The anticipated customs processing and administrative delays on account of such post Brexit ambiguities are also causing further anxiety among automotive manufacturers, as they will adversely affect their just-in-time production schedules and supply chain reliability, adding further costs and inefficiencies to their time-sensitive operations. There is also a growing concern with the realisation that current port capacity and infrastructures in the UK may be insufficient to handle the impending onslaught of imports in the coming months; not just automobiles, but also a host of other manufactured and retail products.
Time Running Out
Evidently, no amount of contingency planning can realistically anticipate all the possible collateral impacts of UK’s withdrawal from the European Union under a no-deal outcome. Time is clearly running out for auto manufacturers and suppliers to hope for an agreement to come through. They will need to, and it looks like most already have, kick-off their contingency plan B, or even C.
