Is Brexit to blame for the automotive industry’s woes?

Plants are being shut and jobs are being lost, but how much of the automotive industry’s problems are down to Brexit?

The UK automotive industry has been a rare success story for the country’s manufacturing sector, having attracted swathes of carmakers around the world who set-up shop to benefit from the UK’s reputation as a gateway to Europe for foreign companies.

It is a key pillar of the economy. There are over 30 car manufacturers building over 70 different types of cars in the UK. Eight in every ten cars produced are exported to other countries, making cars the UK’s single largest export accounting for 12% of the annual total last year. Alongside the 2,500 suppliers providing carmakers with the vital components they need, the UK automotive sector employs a staggering 856,000 people and generates annual revenue worth over £80 billion, with over £20 billion being paid to the Treasury each year.

Key car manufacturing sites in the UK

Carmaker Factory site Models built
Aston Martin Gaydon Vanquish, DB11, Rapide S, V12 Vantage S and VB Vantage
Bentley (Volkswagen) Crewe Bentayga, Continental Flying Spur, Mulsanne
Caterham Dartford Seven
Honda Swindon Civic, Civic Type R
Infiniti Sunderland Infiniti Q30
Jaguar Land Rover (Tata Motors) Castle Bromwich and Wolverhampton F-Type, XE, XJ, XF
Jaguar Land Rover Solihull and Halewood Land Rover Discovery, Discovery Sport, Range Rover, Sport, Velar and Evoque
Lotus (Geely) Norwich Elise, Evora and Exige
McLaren Woking 540, 570, 650, 675 and P1
MINI (BMW) Oxford MINI-3-Door, 5-Door, Convertible, Clubman, Countryman, and MINI Electric
Morgan Malvern 3 Wheeler, 4/4, Plus 4, V6 Roadster
Nissan Sunderland Juke, LEAF and Qashqai
Rolls Royce (BMW) Goodwood Cullinan, Dawn, Ghost, Phantom and Wraith
Toyota Burnaston Auris and Avensis
Vauxhall (PSA Group) Ellesmere Port Astra

Key engine manufacturing sites in the UK

Bentley Crewe
BMW Hams Hall
Cummins Darlington
Ford Bridgend and Dagenham
Honda Swindon
Jaguar Land Rover Castle Bromwich and Wolverhampton
Toyota Burnaston

It is a troublesome time for the industry. The flow of bad news has only accelerated as the Brexit deadline draws closer as carmakers fear losing tariff-free access to the European market and disruption to their ‘Just-in-Time’ supply chain: thousands of job losses have already been announced with tens of thousands more still at risk, several plants will be temporarily or even permanently shut down, and overall investment has plummeted.

However, while Brexit is being cited as the cause of this drastic downturn it is in fact only one factor, albeit a major one, driving jobs and investment out of the country. Demand for diesel cars has dwindled following the Dieselgate emissions scandal and manufacturers have struggled to get their new models to meet stringent new limitations, US trade policy toward China and the EU is throwing up barriers to markets and pushing up costs through tariffs, and consumer sentiment and economic growth has slowed significantly in key automotive markets such as China.

While some of these developments are to be expected in an industry that is cyclical by nature, many of the vast changes are unique to the time. For example, traditional carmakers have the added burden of investing billions into new technology such as electric vehicles or self-driving cars to ensure they don’t get left behind the new breed of competition represented by tech companies, like Google’s Waymo, at a time when margins are being squeezed and confidence is low.

How has the value of the pound changed since the Brexit vote?

How is the UK automotive industry performing?

Against this backdrop, UK car production declined over 9% in 2018 to 1.5 million cars to hit its lowest level in five years, according to industry body the Society of Motor Manufacturers and Traders (SMMT).

Majority of UK carmakers report steep declines in production in 2018

Manufacturer 2017 2018 % change
Jaguar Land Rover 532,107 449,304 -15.6%
Nissan 495,206 442,254 -10.7%
MINI 218,885 234,183 7%
Toyota 144,077 129,070 -10.4%
Honda 164,160 160,676 -2.1%
Vauxhall 92,164 77,481 -15.9%
Others 24,567 26,472 7.8%
Total 1,671,166 1,519,440 -9.1%

Read more on Volkswagen retaining crown over Toyota in global car sales in 2018

The decline in output was largely driven by the export market, which declined 7.3% last year. Notably, the situation deteriorated as the year went on with exports down over 25% year-on-year (YoY) in December 2018. Demand from the EU last year fell 9.6% as many expected, but that slide was mild compared to the 25% decline in exports to China. There were bright spots, however, with exports to the US up 5% in 2018 while shipments to Japan and South Korea rose 26% and 24%, respectively, which will give some comfort over future UK trade once it leaves the EU.

Learn more on how the British car output falls to five-year low in early 2019

A significant drop in domestic demand also played its role, with registrations of British-built cars plunging 21% in 2018. Overall new car registrations in the UK in January 2019 were down 1.6% from the year before to come in at its lowest level since 2014.

UK new car registrations fall to five-year low in January 2019

January car sales
2008 162097
2009 112087
2010 145479
2011 128811
2012 128853
2013 143643
2014 154562
2015 164856
2016 169678
2017 174564
2018 163615
2019 161013

The SMMT forecasts overall car production will fall by about 3% in 2019.

What is the threat of Brexit to the UK automotive industry?

The success of the UK’s automotive industry over recent decades has been predicated on the country’s access to the EU single market and the customs union that allows both cars and components to cross borders quickly without incurring tariff charges. Virtually all the major carmakers manufacturing in the UK sell their cars to other countries, mainly to the EU, and therefore the threat of losing access has thrown the industry’s viability into doubt. The growing likelihood that the UK will leave the EU with no-deal with no transition period is only increasing chances that the industry’s worst-case scenario will come true.

The SMMT has warned that a no-deal Brexit, whereby the UK would fall back on World Trade Organisation (WTO) rules, would result in a 10% tariff being slapped on cars that are imported and exported out of the UK – adding a whopping £4.5 billion in costs (£1.8 billion on exports and £2.7 billion on imports). The industry body has said import tariffs could lift the cost of an imported car into the UK by an average of £1,500.

Brexit has been blamed for the flurry of bad news that has come out since the EU referendum result in 2016. Reports that overall investment in the UK automotive industry almost collapsed in half in 2018 to £588 million was widely put down to the uncertainty of Brexit prompting companies to delay spending and long-term investment. But, while this is partly true, Brexit is only one headwind that has caused this.

How important is the EU to the UK automotive industry?

Still, the importance of the EU to the UK automotive sector is undeniable: one in every four cars produced last year was shipped to the continent. The UK exports to over 160 countries around the world but only a handful of trading partners make-up the bulk of sales:

Top export destinations for UK cars (share of total exports)

EU 52.6%
US 17.9%
China 6.1%
Japan 3.3%
Turkey 2.3%
Australia 2.1%
South Korea 2.1%
Canada 2%
Russia 1.4%
Switzerland 0.8%

Germany is the UK’s biggest European customer accounting for 8.6% of total cars, followed by Italy (7.2%), France (6.7%), Belgium (6.2%) and Spain (3.4%). That means the US is the UK’s single biggest customer, which many Brexiteers hope can provide a foundation for post-Brexit trade with non-EU countries.

Over 1,100 trucks enjoy frictionless access to the UK from the EU every day to deliver £35 million worth of components to plants up and down the country. Almost 80% of all components that are imported to the UK come from other EU countries while 65% of British-built parts (worth around £3.4 billion annually) are sent the other way, demonstrating how entangled supply chains are across the Channel. Of the average car built in the UK, just 44% of its parts are sourced from other UK companies and although this has risen from 36% back in 2011 the figure remains below that boasted by European counterparts like France and Germany which are reported to source up to 60% of parts locally.

The average tariff on components imported to the UK from countries outside the EU is 4.5%, according to the SMMT, and this would apply to the vast amount of parts shipped in from the EU if the UK leaves without a deal. Ultimately, any tariffs on parts or finished cars undermines the viability of the UK’s position in Europe and stains the attractiveness of the country over both European and non-EU nations.

The importance of the customs union for UK car manufacturers is clear but the industry also relies on the freedom of movement enjoyed by EU states, with over 10% of the industry’s workforce from other European nations. Some reports have already suggested the UK is already struggling to secure the talent it needs, with some citing there are over 5,000 vacant roles available at present, so Brexit is likely to exacerbate the situation further.

Brexit and EU-Japan trade deal pave way for Honda to head home

Honda is the latest carmaker to take drastic action by announcing plans to close its Swindon plant by 2021, when production of its Civic model will end, costing 3,500 jobs and thousands more across the wider supply chain.

The Japanese carmaker has said the decision is not solely down to Brexit. Production at its UK plant has been in decline, falling to just over 160,000 in 2018 compared to a peak of almost 250,000 cars as the financial crisis hit in 2008, and more attention is being paid to larger and faster-growing markets in Asia, predominantly China, rather than Europe. The transition to electric cars was also a factor, with Honda believing its progress will advance faster in Asia.

These are all valid reasons to shift production out of the UK and, since the EU and Japan have recently agreed to eradicate all tariffs on imported Japanese cars from 10% to 0% by 2027, the justification behind the decision has been cemented: why produce abroad and incur tariffs when you can manufacture back at home and enjoy tariff-free trade?

So, shipping from Japan will be a cheaper route to the EU market, even if it is a longer journey, and the environment offers much more certainty than the UK at present – a vital ingredient for the long-term plans that the industry follows. However, there is a fair argument that Honda wouldn’t have taken the decision without Brexit. It is notable that the plant would close just weeks before the UK would leave the EU if the 2-year transition period was implemented. About 40% of Honda’s UK-produced cars are exported to the EU and while it can prepare to enjoy tariff-free access to the EU from its home market over the coming years, the UK’s decision to leave the EU wouldn’t have necessarily prompted the company to make the costly move from the UK to Japan only to lengthen the delivery journey and increase costs for no difference in tariffs. It is the combination of the UK losing access while Japan is gaining access to the EU single market that has led Honda to make the decision, and the opportunity to move production home and closer to key Asian markets. While an unwelcome move to the UK economy, can anyone be surprised a Japanese company aims to manufacture in Japan to improve its own business, especially when every strand of logic tells it to do so?

Nissan makes U-turn amid Brexit uncertainty and falling diesel demand

Nissan was the first carmaker to install some much-needed confidence into the UK car industry following the Brexit referendum in the middle of 2016. Just months after the vote the Japanese carmaker unveiled plans to build its new sport-utility vehicle at its plant in Sunderland which was viewed as a long-term commitment to the country and a boon for Brexiteers eager to prove the UK’s departure from the EU wouldn’t be bad for business. However, Nissan has now reversed that decision and said it will build the new model at its Kyushu plant back home.

Although welcome, the original commitment was controversial at the time as the government pledged to contribute toward investment in Nissan’s supply chain and workforce, and award tax breaks for electric vehicle technology, in order to convince the firm to produce the X-Trail in the UK. This has made Nissan’s decision particularly embarrassing for the government.

It is a blow for the industry but, amid more drastic action taken by its peers, Nissan should be credited for its intention to build new models of the Qashqai and Juke at the Sunderland plant. That protects the 7,000-strong workforce for now – but nobody is entirely convinced that Nissan won’t make a U-turn on this too if the situation after March 29 is as dire as many predict. Business Secretary Greg Clark, who criticised the move, has previously said Nissan’s pledge to maintain the Sunderland plant was on the basis the UK will keep frictionless trade with the EU, which is becoming virtually impossible as the UK steamrolls toward no-deal. Either way, it is hard to see the bright side when the best-case scenario is Nissan not hiring any further staff or even contemplating expansion in the UK.

The EU-Japan trade deal applies the same to Nissan as it does Honda, and the fact it has excess capacity at its plant back home whilst output in Sunderland has fallen (down 10% last year) only makes the option of moving back home more enticing. However, the reasons behind the fall in UK production highlight the other forces at play. Since German carmaker Volkswagen was found to be cheating emissions tests, consumers have become more environmentally-aware and ditched diesel while the EU has imposed strict emission limitations that, although justified, are proving too tough for carmakers to meet. New registrations of diesel cars in the UK in January 2019 were down 20% from the year before to account for 29% of total registrations that month, down from 36% in January 2018. Nissan’s original decision to build the X-Trail in Sunderland was based on the idea of producing diesel versions, so the decision to produce models in Japan is justified, particularly if it can gain tariff-free access to Europe anyway.

There is another angle to the decision. Nissan is in a long-term partnership with French firm Renault and under former chief executive Charles Ghosn the Japanese firm has favoured regions like Europe over markets closer to home. However, since Ghosn was ousted after being arrested, a power struggle over the next chairman of Nissan has erupted, with Renault reportedly hoping its new chairman can take on the same role at the Japanese carmaker. Some regard Nissan’s decision to move more of its operations to Japan as a warning shot to its European partner.

Toyota provides much-needed optimism, but patience is being tested

In February 2018, Toyota announced a surprise investment in its UK operations as it pledged to invest £240 million into its Burnaston facility so it can produce the next version of the Auris. The commitment, safeguarding its 3,000-strong workforce, is significant considering its Japanese peers are heading home but the company has outlined the reasons why it was willing to back Britain regardless of growing uncertainty over its role in Europe, where Toyota exports about 80% of its UK-made vehicles.

Investment is relatively low because the plant already produces the existing Auris, and the company plans to use more of its engines built in Deeside in UK-built cars, which should help mitigate the threats to the supply chain.

Toyota has previously said it only stocks around four hours' worth of parts, meaning any disruption to the 50 lorries arriving to deliver parts from the EU each day will cause havoc for output. It is a case of moving as fast as the slowest-moving part – with executive vice president Shigeki Tomoyama warning: 'If one of these components did not arrive, we will have to halt the plant'.

Jaguar Land Rover cuts thousands of jobs after disastrous year

Having acquired the company for $2.3 billion in 2008, Indian firm Tata Motors had long relied on the earnings of Jaguar Land Rover to absorb the cost of failures elsewhere in the business. But Jaguar Land Rover, which has historically produced its cars exclusively in the UK, has had a tough few years. Tata announced it booked a staggering £3.1 billion write-down on its investment in the carmaker last year after the slump in diesel sales, a slowdown in China and Brexit costs all weighed on its performance.

The 4,500 job cuts recently announced by Jaguar Land Rover will be predominantly made in the UK, following the 1,000 jobs it cut in 2017, as part of a wider restructuring aimed at saving the company £2.5 billion in annual costs. The latest job cuts follow on from the carmaker’s earlier warning that it would temporarily close all its plants in April 'due to potential Brexit disruption'. It has also moved one of its plants to a three-day week.

Read about how Jaguar Land Rover will slash thousands of jobs to offset losses

Jaguar Land Rover is the epitome of a British brand but that is under threat. The company opened a new £1 billion manufacturing plant in Slovakia in October 2018, having started construction in 2016, which will initially be able to produce 150,000 cars per year before gradually expanding to 300,000 later on. It is a significant decision from a company that has exclusively built its cars in the UK. Upon opening, CEO Ralf Speth said although the company’s 'heart and soul remain firmly anchored in the UK, expanding internationally only enriches and strengthens our UK business'.

There is reason to fear for the future of Jaguar Land Rover’s UK operations but there is also optimism. The company has said it will open a new battery assembly plant at Hams Hall in North Warwickshire and start creating components for electric vehicles at its existing Wolverhampton plant in the hope of repurposing the facility and ensuring it is fit for the future. The company’s lone electric model, the Jaguar I-Pace, is currently manufactured by a third-party in Austria.

In the same way car manufacturers are striving for localised production to get around the increasingly tough international trading environment, the industry is building new electric vehicle operations in way that will help future-proof operations even if the rise of trade protectionist policies persist over the long term. For example, Volkswagen is investing in a swathe of international plants to produce electric vehicles, opening new sites in the US, Germany and China over the next three years to ensure it has production in the world’s three key car markets.

Read about whether Daimler and others can stay ahead in electric vehicles and autonomous driving

US Trade policy poses an even bigger threat to carmakers

The other, arguably bigger elephant in the room is Trump’s trade policy. Although Trump has been primarily targeting China his attack has spilled-over to allies like Europe and Canada, which had to argue hard to escape US tariffs on steel and aluminium that were introduced on national security grounds. Trump is currently considering whether to impose a large 25% tariff on imported cars from the EU to address what he perceives as trade imbalances, but also as a bargaining chip over other issues such as the EU’s agricultural subsidies that make it hard for US firms to compete.

Trump’s attack on world trade is already taking its toll before any decision over EU imports has been made. US carmakers are already feeling the effects of tariff-trade with China and are now warning Trump’s metal tariffs come at a huge cost: Ford warned it cost the company an additional $1 billion in 2018 and General Motors has said it will experience a similar rise in costs this year.

Read about Ford's warning on the 7000 British jobs that are at risk under a no-deal Brexit

Tariffs and tougher international trade is regarded as a bigger threat by European carmakers than Brexit in 2019. Volkswagen CEO Herbert Diess recently agreed with independent estimates that US tariffs could cost the company £2.5 billion of earnings each year, equal to a 13% drop from current levels, and described Brexit as a concern 'but on a smaller scale'.

The retaliatory measures taken by China, which has introduced a 40% tariff on imported US cars, are equally damaging. For example, BMW’s plant in South Carolina currently sends about 70% of its production to China. This is why companies like electric carmaker Tesla and Volkswagen are building new facilities in the likes of China to ensure they have local production for local markets. General Motors has also said it expects sales in China, a major market for the company, to slow in 2019 to knock profit as a result of the tariffs.

Read about BMW raising stake in China car venture with $4.1 billion deal

While some carmakers have managed to get around the consequences of the US-China trade war, most would be unable to avoid the fallout from any disruption to trade policy between the US and Europe. For example, the Chinese owner of Swedish carmaker Volvo, Geely Group, began shipping cars to the US from its Swedish plant to avoid the tariffs it was incurring sending them from China, but Volvo CEO Hakan Samuelsson has said tariffs on trade between the US and Europe would be a 'totally different situation'. Volvo’s new plant in South Carolina was intending to ship cars out for export, including to China, but the firm has said it may repurpose the facility if the situation doesn’t change.

Geely is also the owner of British brand Lotus, which builds out of its site in Norfolk. Although the Chinese firm has said the site is safe the company intends to open a new 150,000 vehicles per year manufacturing plant in China by 2021 to serve the local market. The move is designed to allow Lotus to avoid the 35% tariff on all cars costing more than ¥1.3 million and produce the car at a lower cost to make it more affordable for Chinese consumers.

Read more on the possibility of British Lotus cars being soon labelled ‘Made in China’

Conclusion: Brexit just makes logical decisions easier to make

The automotive industry and its global supply chains are facing a number of threats that is forcing them to take drastic action. Brexit, protectionist trade policies and the urgent need for large investment in new technologies like electric vehicles and autonomous cars is placing a heavy cost-burden on the industry at a time when slower economic growth and the dumping of diesel is hurting sales and margins.

Although the challenges facing UK and European carmakers is easily blamed on Brexit the picture is far more complex, but it has certainly made decisions to cut investment and move production out of the UK a lot easier.

Many are forecasting the beginning of the end for UK car manufacturing. That would be a huge loss for economy in the short-term and, longer-term, threatens to erode the UK’s reputation as a technological hub by shifting future development of key breakthroughs like electric vehicles and self-driving cars elsewhere.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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