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06. February 2019

IN - Why UK’s auto sector fears no-deal Brexit

Britain’s car makers are dependent on mainland Europe for auto parts and emerging technologies. High tariffs can be a disaster.


In November last year, Britain’s automotive industry was among those to give a cautious welcome to Theresa May’s controversial Withdrawal Agreement that set out the way in which Britain would extricate itself from the EU.

The deal was far from the frictionless scenario that the industry had hoped for in the aftermath of the referendum. After the referendum, industry body, the Society of Motor Manufacturers and Traders, which had ahead of the referendum, made clear that it believed remaining in the EU was critical to the UK automotive industry’s future, said that securing tariff-free access to the EU as well as ensuring they could continue to recruit talent from the EU would be key for the industry going forward.

Nevertheless, the industry was among those to give its backing to the deal, fearful that the alternative was a cliff-edge no-deal Brexit that would bring down borders and leave the industry and economies in entirely new territory. No-deal remains a possibility: while MPs voted this week to rule out no-deal it is non-binding on the government, which has now insisted on attempting to re-open negotiations with the EU over the withdrawal agreement.

The withdrawal deal would have also provided a degree of certainty about the future for industry. That has been lacking, and had led to companies – in the automotive sector and beyond – putting investment plans on hold.

Industry’s fears
Britain and continental Europe’s auto industry have been among the most vocal in expressing concerns over the direction of Brexit and in particular — with a failure by MPs to agree on a route ahead — the increased risk of the default scenario: crashing out without a deal reached, and without an extension sought.

In July last year, Tata-Motors-owned Jaguar Land Rover issued a stark warning that a bad Brexit deal could cost the company more than £1.2 profit each year, putting £80 billion of further investment and jobs at risk.

“If the UK automotive industry is to remain globally competitive and protect 300,000 jobs in Jaguar Land Rover and our supply chain, we must retain tariff and customs-free access to trade and talent with no change to current EU regulations,” said CEO Ralf Speth at the time.

Other auto giants sent out a similar message: Japanese car maker Nissan highlighted its UK plants’ dependence on just-in-time supply chains that brought in components from the EU mainland and depended heavily on swift, delay free passage.

In evidence to a parliamentary select committee in 2017, Colin Lawther, a senior Nissan executive set out some of these. The costs of a Nissan car, manufactured in the UK was typically around 70 per cent bought-out parts, with the actual manufacturing cost in the UK Sunderland plant comprising just around 7 per cent of the total cost.

With much of this 70 per cent coming from Europe, and Britain’s supply place not being “competitive globally” from a cost and technology point of view, the relationship with Europe was essential. This was all the more the case going forward, as the industry shifted to electronic vehicles, autonomous driving and high-technology manufacturing.

“If you look at the technology that goes into those cars — high definition cameras, high capacity processes, electric motors, batters — all of that does not exist in the UK at the moment,” he told MPs.

What is more, many of the cars produced in the UK were for a European market (60 per cent of Nissan’s popular Qashquai produced in the UK went to Europe). A bad exit deal or crash out — with tariffs of around 10 per cent — would therefore mean massive cost increases.

Moreover, the industry has been heavily dependent on its ability to rely on global talent, including from the EU.

Why India?
And while non-EU markets could in the future contribute to the export of Sunderland-produced cars the option had to be put in context. While the US market was an option because of the focus on premium cars, cars to other markets such as India simply weren’t an option, as was highlighted by the decision to move manufacturing of the Nissan Micra to India.

“We moved Micra from the UK to India, because, frankly, the UK should be building large, high spec, high technology, high-value cars.. So we moved the Micra to India…The market in India is very small, cheap cars. Not many people have cars. It is a market that is growing rapidly. I do not see personally any huge business advantage from the Sunderland plant exporting to countries like India, because they are developing countries where you should be building cars inside the country, for the country, appropriate to the country.”

The picture he built up of the speed and functioning of the just-in-time supply chain also highlighted the complexities involved. Sunderland, which used around 5 million parts a day, kept half-a-day’s stock inside the plant itself, which was continually replenished, and fitted to the right car, with two cars built every minute.

“Those two cars every minute have to go on to a transporter and disappear. So you have 5 million parts coming in every day and you have half a day’s worth of stock. Any disruption to that supply chain is a complete disaster.” With the company needing to be 97 per cent efficient with a downtime of two to six minutes a day, anything more than that was a disaster. “If you start talking about interruption of supply of parts for hours, that is completely off the scale,” he warned.

While Britain and EU ports such as Calais have indicated their preparedness for a no-deal scenario, (Britain for one has set aside some £4 billion for its Brexit preparedness strategy while also seconding many civil servants to work on it), there is little doubt that crashing out would cause substantial disruption.

However, even beyond the short-term, the industry’s intricate interdependency with Europe has served as an example of the kind of dilemmas facing Britain. Britain’s ability to rely on an EU supply chain has contributed to the limited domestic supply chain base, particularly in the high-tech arena, but what are the opportunities for this to be developed in the long term? And can it do so without access to the free movement of people it currently has access to through the EU?

The government’s immigration white paper has indicated plans to overhaul Britain’s immigration system, through a focus on skills rather than geographic location of those being sought, but can it develop a system robust and efficient enough to meet the changing demands of industries such as Britain’s auto sector?

Adding to its troubles, the uncertainty has come at a time when the global auto industry has other major challenges to confront — not least the regulatory push against the conventional combustion engine, and the shift away from diesel vehicles (a category that once was championed by authorities across Europe). And will car sharing and cheap-ride firms push more and more young people away from buying cars? Nor is China proving to be quite as lucrative as it once was.

Certainly, Europe’s auto industry’s problems don’t end with Brexit, but it is adding a level of complexity and uncertainty that could prove particularly injurious at a critical time.

By: Vidya Ram

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