In recent years, the UK has benefited from a resurgent automotive industry, both in relation to traditional British luxury brands along with very high levels of investment by a number of global manufacturers of volume vehicles. This, in turn, has resulted in further significant investment in the component industry and the UK has been at the forefront of many revolutionary developments in automotive technology.
The EU referendum vote now places a significant cloud over the ability of the UK’s automotive industry to be able to continue to grow at recent rates.
Despite the Brexit vote, the United Kingdom will retain many of the advantages which have attracted the automotive industry to the UK – such as highly efficient production facilities, flexible labour and high quality production.
However, leaving the EU creates some significant and unwelcome challenges for the automotive industry in the UK. The reasons are as follows:
- A good deal of the investment into the UK’s automotive industry by global manufacturers has been based on the UK’s open and free access to all European markets and to the UK being an active and influential member of the EU. For these reasons, the UK has been chosen as a key manufacturing base by many of the large car manufacturers. If the UK is to lose the benefits of access to the single market on a tariff free basis, every vehicle that is produced in the UK and exported to the EU will be more expensive. If we end up defaulting to the World Trade Organisation, this will add 10% to the price of every vehicle which is exported from the UK to the EU. This, in turn, will place UK manufacturing plants at a considerable disadvantage when compared to a manufacturer’s other plants in the EU as regards the production of vehicles for sale in the EU.
- The UK will also lose its free trade status with all other countries with which the EU has negotiated free trade deals unless replacement free trade deals can be agreed over the next 2 years.
- Any restriction to the free movement of people with the EU will create further challenges to an industry which is already suffering from a labour and skills shortage.
- Those companies who benefit from European funding for research projects may suffer if this funding is cut or disrupted. Also, going forward, the participation of the UK in new EU research programmes must now be in doubt.
- There will be general market disruption related to any slow-down in economic activity which arises in the UK and across the EU as a result of Brexit. This could well soften the demand for new cars and commercial vehicles.
- If volatility continues in exchange rate markets, significant financial implications will arise. Whilst it is true that the UK’s exports will become cheaper, many of the components which are required to produce a vehicle are imported and will therefore become more expensive.
All of these factors will affect the profitability margins for both OEMs and component suppliers.
For these reasons, it is generally expected that Brexit will have a negative impact on the automotive industry, at least for the volume manufacturers unless a new free trade arrangement can be agreed quickly. On the other hand, the manufacturers of luxury brands may see a boost as the demand for their vehicles increases as they become cheaper as a result of any lasting fall in the value of sterling.
In addition, all automotive companies now need to start thinking about the potential impact of exiting will have on their contractual commitments and, in particular, to any pricing commitments which have been given in contracts. In addition, further consideration will need to be given to Brexit when negotiating new contracts. However, with all of the detail currently uncertain, it will be very difficult to predict the potential impact of Brexit on any particular contract. This may well result in a trend to dealing with Brexit as a future change in law, the impact of which may have to be agreed when it becomes clear. Of course, a lot depends on timing. As far as the UK automotive sector is concerned, the issues need to be resolved quickly if investment decisions which need to be taken over the next 2 years and beyond are to be made in favour of continued research, development and production in the UK automotive sector. However, from the time that the UK triggers Article 50, it will have 2 years to negotiate its access to the single market. Here, if the UK will not accept free movement of people and the payment of a contribution to the EU budget, it is difficult to see how the EU can agree to granting tariff free access to the single market.
However, given the significant investments which have already been made into the UK automotive industry, manufacturers are unlikely to move operations from the UK quickly. The UK is still the world’s 5th largest economy and, geographically, it will still be at the edge of Europe and will still benefit from its own currency which could still provide advantages. That said, the bigger questions will relate to where global manufacturers decide to produce their next models for sale in the EU. These decisions will be being made over the next 2 years and beyond. However, every decision that is taken to shift the production of a new model to a factory in the EU will have a negative impact on the UK’s automotive industry. Here, manufacturers cannot wait to make these decisions if it is to remain competitive in the market. Hence, unless some quick decisions are taken as to fundamental basis of the UK’s post Brexit relationship with the EU, the attractiveness of the UK as a place to manufacture vehicles for sale in the EU will be seriously challenged.
Simon Jones, Partner and Head of Automotive, Eversheds LLP