How could Brexit impact the UK automotive industry?

The UK and the European Union (EU) automotive markets are heavily intertwined, and Brexit poses a serious threat to the sector. Let’s have a look at how important the industry is to the UK economy and what could happen to it post-Brexit?

BMW
Source: Bloomberg

‘In the next ten years, the sector will see more change than in the previous hundred,’ – UK Business and Energy Secretary Greg Clark, January 2018.

The automotive industry is key to the UK economy. It is one of the country’s biggest sectors and one of the largest contributors to UK gross domestic product (GDP), while accounting for about 12% of total exports each year.

Automotive industry is key for UK economy

  • The UK automotive industry generates around £80 billion in revenue each year
  • Over 800,000 people are employed in the sector, with 170,000 of them employed directly in manufacturing
  • There are over 30 manufacturers operating in the UK, producing everything from sports cars, buses, commercial vehicles, and mainstream models
  • There are a further nine engine manufacturers in the country
  • There is over 2500 suppliers in the UK providing component parts
  • The automotive industry in the UK is entwined with the EU, which is the biggest customer for UK cars and parts, and the biggest source for imported cars and parts for the UK

The UK government has been particularly attentive to the automotive industry amid Brexit negotiations, with the industry’s supply chains and sales channels tangled with international markets - especially with the EU. 

The UK automotive industry and Brexit: a tale of two halves 

‘We compete in a global race to produce the best cars and must continue to attract investment to remain competitive. Whilst such investment is often cyclical, the evidence is that it is now stalling so we need rapid progress on trade discussions to safeguard jobs and stimulate future growth,’ – Society of Motor Manufacturers & Traders (SMMT) chief executive Mike Hawes.

There are few sectors more under threat from Brexit than the UK automotive market. There is heavy trade in parts going both in and out of the UK and in turn, the vast majority of cars finished off in the UK are then exported to be sold in other markets. Unsurprisingly, the EU is by far the UK’s biggest customer and the main source for parts – with 79% of all components imported from the EU into the UK.

Export destinations chart

The top models manufactured in the UK and sold around the world are: 

  1. Nissan Qashqai
  2. MINI
  3. Honda Civic
  4. Toyota Auris
  5. Vauxhall Astra
  6. Nissan Juke
  7. Range Rover Sport
  8. Jaguar F Pace
  9. Range Rover Evoque
  10. Land Rover Discovery Sport

The threat posed by Brexit is also larger than it appears. Direct exports to the EU already account for over half of all UK exports, but a further 10% of all car exports are delivered to countries under free trade agreements they signed with the EU, with the UK benefiting as a member. These include exports made to South Korea, Canada, and Turkey. In theory, up to 64% of UK exports are at risk from Brexit.

Learn more: how has the UK car market performed in early 2018?

The proportion of UK cars produced being exported rose to its highest ever level last year, and helped offset the declining domestic demand which caused UK car production to fall for the first time in eight years in 2017. With the UK government emitting confusing messages on diesel and a wobble in confidence during lengthy Brexit negotiations, output for the UK market fell 9.8% last year, compared to the 1.1% decline in production for export markets.

On a brighter note, demand for UK parts remains high, particularly for engines. UK engine production reached an all-time high in 2017, rising 6.9% to over 2.7 million. Over half went overseas, mostly to the EU.

Based on 2016 figures from SMMT, Ford produced 56.6% of all engines made in the UK from its two plants in Dagenham and Bridgend, with Nissan close behind at 10.4%. Other major contributors were BMW at 10.1%, Toyota at 9.4%, Jaguar Land Rover at 7.9%, Honda at 5.2%, and Bentley at only 0.5%.

The SMMT has been quite clear that the UK automotive industry wants a Brexit deal that is as close to the existing arrangement between the UK and the EU, and has called for maintaining membership of both the single market and the customs union – which might be better described a wish list.

Read more about London-listed UK car dealerships and what their share price outlook is

Although the impact of Brexit is already being felt, with investment in the UK automotive industry dropping by more than one-third in 2017 to £1.1 billion, the outlook will remain bleak until post-Brexit conditions are truly known. Having said that, it is not all doom and gloom. Most of the UK’s popular brands may have fallen into foreign ownership over time, but there is plenty of evidence that manufacturers are backing the UK post-Brexit.

UK car manufacturers invest in the UK amid Brexit

PSA Group, having bought the loss-making Opel-Vauxhall business from General Motors last year, has become the latest manufacturer to invest in its UK operations amid Brexit to join the likes of Nissan, Toyota and BMW in what has to be seen as a voice of confidence behind the UK market – regardless of what Brexit can throw at it.

PSA has committed to building new Vauxhall and Opel Vivaro vans at its existing plant, partly thanks to an existing paint facility it has there. This will involve an investment of about £100 million and output will rise to 100,000 when new Peugeot and Citroen models are added from about 59,000 vans in 2017. However, PSA has said it needs to begin sourcing more parts from the UK than abroad, and has a long way to go to turn the business round.

Toyota said earlier this year it is to build the next generation of the Auris Hatchback in Derbyshire, after producing cars in the UK over the past quarter-of-a-century, and has in turn called for trade post-Brexit to be as ‘frictionless as possible’.

BMW said it would continue to back the Britishness of the MINI by building its electric version in Oxford, after previously stating it was looking to shift manufacturing outside of the UK.

Nissan, which produces the most in-demand car for overseas markets, was the first big manufacturer to back its UK plants after the referendum vote. The company in 2016 committed to making the next generation Qashqai and X-Trail SUVs at its Sunderland plant.

The UK government’s helping hand to the automotive industry

When Nissan became the first to signal its willingness to invest in the UK despite Brexit, the UK government provided assurances that the Japanese carmaker would not see an impact on trade after the UK left the EU. When Toyota invested around £240 million in its Derby plant last year it was aided by a UK government grant worth over £21 million.

The UK is contributing £9 million as a guarantee PSA’s plant in Luton will remain competitive after Brexit, but the firm’s Ellesmere Port plant is still in jeopardy, and competing with one other plant in the EU to produce the next version of the Vauxhall Astra. The government may well have to get its purse out again. 

UK Automotive Sector Deal

In January this year, the UK government confirmed the Automotive Sector Deal which includes:

  1. A sector deal with £32 million of joint funding to develop ‘industry-led supply chain competiveness programme’
  2. A £26.4 million government investment in low-carbon vehicle projects with Ford, GKN and Jaguar Land Rover, which will be matched by a further £52.8 million of industry funding
  3. A £500 million government investment over ten years to 2023 to develop new low carbon automotive technologies, matched by £500 million of industry funding
  4. Government funding of £225 million from 2023 to 2026 to support research and development in the sector, with industry matching that investment
  5. Government investment of £246 million to make the UK a ‘world leader’ in design, development and manufacture of batteries for the electrification of vehicles
  6. A £250 million government investment in connected and autonomous vehicles

The government does have a responsibility to help ailing important industries (those with strategic importance or employing large numbers of staff) get back on their feet when times get tough, but only those that it believes has a future. The UK government offered a plaster to what remains of the steel industry but refused to provide any further treatment because, ultimately, it doesn’t see a future for UK steel beyond a small group of niche producers.

The UK automotive market, however, has bright prospects and the government is not plumping up major sums to rescue a struggling industry, it is more offering guarantees to some of the country’s biggest employers. As far as the UK government is concerned, it will deliver a deal that will satisfy the industry and, if it doesn’t pay off, then it has the purse ready to ease the projected loss of trade that manufacturers would expect. 

As the UK government has conceded, the UK automotive industry ‘has benefited from the European market’ and a ‘new relationship that is free from tariffs and without friction to trade’ are ‘factors fundamental to the competiveness of the UK automotive sector’.

What could happen to the UK’s automotive industry without a Brexit deal?

If a no trade deal is agreed between the UK and EU for the automotive industry, then the sector will fall under World Trade Organisation (WTO) rules, which would slap a 10% tariff on all cars imported to the EU from the UK. Over half of all UK-made cars are sent to the EU, and the SMMT has estimated this could add £1.8 billion in costs. With the UK importing 69% of all cars from the EU, that tariff on cars imported to the UK from the EU would add £2.8 billion in costs.

There is also employment concerns as ‘at least’ 10% of the manufacturing workforce in the UK come from elsewhere in the EU, according to the SMMT.

Learn more: what is the potential economic impact of Brexit?

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.

Find articles by analysts

This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa 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. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.