Brexit Effect on The Car Industry

By: Andy Enright

Date: 28.06.2016

Boris Johnson hanging on Victoria Park zipline

Boris Johnson hanging on Victoria Park zipline

By your leave: what does Brexit mean for the car industry?

Let's get one thing straight. Despite British car manufacturing doing its best to commit suicide in the Seventies, the UK builds more cars now than it ever did in the days of Red Robbo and riots at the gates of Halewood. The referendum to leave the EU raises many questions as to the ongoing viability of that industry as several large manufacturers rush to formulate contingency plans.

It’s trickier for brands such as Mini and Rolls-Royce - owned by BMW, Jaguar Land Rover where the purse strings are pulled by Tata Motors of India, and Bentley which is part of the Volkswagen Group. These brands have an emotional attachment to the mother country and the authenticity of these marques to a greater or lesser extent depends on their ties to the UK. Jaguar Land Rover now has a fabrication plant in Slovakia, which joined the EU in 2004, giving it a possible buffer there.

Tariffs could damage sales of these brands but the premium sector can weather a certain price elasticity. Add 10 percent to the price of a Nissan, Honda or Toyota and that could make their respective wares critically uncompetitive. Nissan, the country's second-largest car builder, manufactures 475,000 cars in the UK with the vast majority exported. Toyota built 190,000 cars last year in Britain, of which 75 percent went to the EU and just 10 percent were sold domestically. Its manufacturing facility in Turkey could take up slack if the country replaces Britain in the EU.

Investors have reacted nervously. Although the pound dropped off a cliff and is only now starting to bounce, key share prices have trended downwards. Shares at Tata Motors, for instance, took a 12 percent hit. Evercore Automotive Research estimates the potential damage to car makers at $9bn.

The longer term? It’s anybody’s guess. The two major political parties are in meltdown, the ruling Conservative party is leaderless and the Labour opposition has just had half of its cabinet resign at the perceived weakness of party leader Jeremy Corbyn over the Brexit vote. The third party, the Liberal Democrats, are making noises that they will ignore the Brexit referendum if a snap election is called. One thing’s for sure. Nobody wants to be the person to invoke Article 50, which will start the process of Britain withdrawing from the European Union.

Mike Hawes, SMMT chief executive, said, "The British public has chosen a new future out of Europe. Government must now maintain economic stability and secure a deal with the EU which safeguards UK automotive interests. This includes securing tariff-free access to European and other global markets, ensuring we can recruit talent from the EU and the rest of the world and making the UK the most competitive place in Europe for automotive investment."

The Financial Times has Ford quoted as saying it 'will take whatever action is needed' to keep its UK operations competitive; a hedge that suggests that cost cutting measures could be implemented. With 800,000 jobs in UK car manufacturing, this $70bn industry faces a huge headache, just one of many that Brexit has created.

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