Unscheduled braking: how Brexit can affect the UK automotive sector

Uncertainty with brexitis is not in favor of the UK economy. According to the Department of National Statistics, the country's GDP in the second quarter fell by 0.2%. According to the British National Institute for Economic and Social Research, the kingdom’s economy has been in recession since April.

Prime Minister Boris Johnson said Brexit will take place on October 31, even without a deal. In this case, analysts expect a painful economic downturn in the third quarter.

The fact is that Brexit without a deal can hit hard on auto production - one of the key sectors of the British economy, which accounts for 14% of the country's exports. According to the British Society of Automobile Manufacturers and Sellers, 80% of the state’s auto products are exported and only 20% is used internally. Importers of British cars today are more than 160 countries. The vast majority of deliveries (57%) are directed to EU countries.

Market drop

In the United Kingdom, about 667 thousand cars were produced in the first half of 2019, which is 20.1% less than in the same period last year. The decline in production has been recorded for the thirteenth month in a row. Moreover, the decline is observed in the segment of key automotive parts. For example, in the first half of 2019, 10% fewer engines were produced than in the first half of 2018. Such data are cited by the British Society of Automobile Manufacturers and Dealers (SMMT).

The indicator of the automobile market also decreased. In July, 157 thousand cars were registered, which is 4.1% more than in July 2018, and the lowest July indicator since 2012. As for the first six months of 2019, 1 million 426 thousand cars were registered during this time, which is 3.5% less than in the first half of 2018. The indicator has been falling for the fifth month in a row. The SMMT report emphasizes that business and consumer confidence is undermined by economic and political uncertainty.

At the same time, demand for cars with low emissions is growing. In July 2019, demand for hybrid cars increased by 34.2% compared to July 2018. For electric vehicles with rechargeable power supplies - by 158.1%.

Mike Hawes, executive director of the British Society of Automobile Manufacturers and Sellers, noted the impact of the new WLTP standard for determining exhaust emissions and the associated diesel scandal, when large automakers had to recall their cars and pay fines for hiding pollution data.

The growing demand for electric cars requires manufacturers to increase investment in the development of new technologies. However, experts note the negative impact of the current uncertain situation on Brexit on the possibility of such investments. In a conversation with RT, BKS Broker stock market expert Albert Koroev noted that investment in the automotive industry has already declined significantly.

“Companies are forced to spend money preparing for the force majeure consequences instead of developing production,” Koroev emphasized.

According to SMMT, about 330 million pounds have already been spent on mitigating the possible effects of Brexit, and investment in the development of new automotive technology has fallen by 70%.

Hope for a deal

Mike Hawes pointed to the strong connection of the UK with the EU market. The destruction of established supply chains and high tariffs will cause severe damage to one of the key industries of the kingdom.

Albert Koroev considers the trade agreements of Great Britain as a member of the EU with other countries an important factor in influencing the supply of British cars abroad.

“Brexit will lead to an increase in customs costs - not only cost but also time, which ultimately leads to violations in the supply chain and a decrease in market share,” the expert explained.

One of the most important partners in the UK in the automotive industry - Japanese automakers. In 1986, Nissan was the first company to open a factory in England. Next came other major manufacturers - Honda and Toyota. Great Britain has become for them the “gateway” to the EU market.

However, now the Japanese plan to leave Britain. According to the European Commission, the country has already signed a free trade agreement with the EU, and since 2019, Japanese automakers have become easier to export their cars to Europe.

According to the Guardian newspaper, Nissan now plans to abandon the production of the X-Trail SUV model at its factory in England. The French Peugeot also announced the possibility of curtailing the production of Opel and Vauxhall cars in the case of hard brexitis.

Mike Hawes hopes for the development of English electric cars. For example, Jaguar Land Rover announced the start of production of a new line of electric cars. However, this may not be enough to avoid losses from brexitis. Howes asked Boris Johnson to take measures to protect the auto sector per transaction and special conditions for British automakers.

Experts interviewed by RT also linked the future fate of machine manufacturing in the UK with government support for the industry.

“There is less and less time for decision-making, and few constructive steps have been taken so far. After Brexit, it will be possible to negotiate that EU duties do not apply to English cars. However, Britain needs to start acting today, since Brexit without a deal threatens manufacturers with new difficulties, for example, drawing up new production chains, establishing supply lines without supporting the EU open market, ”said Artyom Deev, head of the AMarkets analytical department, in an interview with RT.