Why the UK auto industry is standing over Brexit risks?

Mini automobiles, produced by Bayerische Motoren Werke AG (BMW), reach the end of the production line inside the final assembly plant in Oxford, U.K., on Tuesday, Sept. 20, 2016. The U.K. should maintain European Union regulations covering everything from working hours to chemicals until after the government sets out its plans for Brexit, said British manufacturers anxious to avoid a policy vacuum and safeguard access to their biggest export market. Photographer: Chris Ratcliffe/Bloomberg

Today, the British auto industry is going through a bad period ever as a result of decreasing car sales and the uncertainty over Brexit. Global automakers have stopped investing newly and invested in cheaper locations like Slovakia, and at the same time shutdowns or transfers of active plants are going to happen, as per the experts.

Industries have started layoffs, for example, the UK’s biggest automaker, Jaguar Land Rover, has announced 4,500 layoffs, or more than a tenth of its 40,000-strong workforce. The country’s auto industry at last calculate employed 860,000 people and in it supporting sectors like repairs and financing, made 82 billion pounds ($108 billion) in annual revenues and had an economic impact of $266 billion, according to figures from the Society of Motor Manufacturers and Traders (SMMT), the trade body of the U.K. automotive industry.

“Car company executives are literally pulling their hair out, and in the state of disbelief that we are in, such political chaos in the UK has not been seen,” said David Bailey, professor of industrial strategy at Aston University’s business school in Birmingham, UK Bailey is also author of the new bookkeeping the Wheels on the Road: U.K. Auto Post Brexit.

Bailey gave an example of how the automakers are getting affected by the uncertainty over Brexit. Imagine cars made in the UK and loaded onto ships headed for Japan or Korea. “The car companies don’t even know when they arrive whether or not they’ll face tariff barriers. At the moment, the UK benefits from an EU trade deal with Japan and Korea or other countries. If we fall out, we’ll no longer benefit from that.”

Automakers would like to shift permanently from their production facilities to other cheaper countries for more stable business environments. “Auto companies are very global in their orientation — they have to be,” said John Paul MacDuffie, Wharton management professor and director of the Program on Vehicle and Mobility Innovation at Wharton’s Mack Institute of Innovation Management. “Free movement across borders of products, of components, of people is just hugely important to them. They’re well familiar with making investment decisions in different parts of the world and sometimes backing away from one or deciding to grow faster or some other place.”

MacDuffie said if the business environment seems unfavourable in the UK, automakers will simply shift somewhere else. “It will not in the end have that big an impact on their overall global strategy, [although] they won’t necessarily be happy about having to do it,” he added. “But there will be results for the UK economy, for the people having very good jobs, and other multiplier effects that go out from the assembly plants into R&D and into suppliers. That’s the real potential loss here, and it’s huge.”

“Car company executives are literally pulling their hair out and in a state of disbelief that we are in such political chaos in the UK”–David Bailey

Bailey and MacDuffie discussed the implications of Brexit-related issues and other dampeners for the UK auto industry on the Knowledge@Wharton radio show on SiriusXM.

 

Impacts of a No-deal Brexit

In case British premier Theresa May gets Parliament approval for a plan to continue in the EU customs union and common market, the exit date would be shifted to May 22.

A no-deal Brexit would indicate the UK would leave the EU on April 12, sinking its auto industry into a jumbled mess of unexpected tariff walls and customs checks. “That would make a mess of very integrated just-in-time arrangements and supply chains across borders,” said Bailey. According to him, the auto industry could see a drop of around 175,000 units a year immediate after Brexit   and if companies do not change car models at the end of their life cycles that number could swell by another half -million units by 2025.

 

Planning Around Brexit

The auto industry usually plans years in advance, and in the case of Brexit, its unease set in with the June 2016 referendum that came “without a plan and high uncertainty,” MacDuffie said. “The auto industry has a relatively slow clock speed. Think of a four-year product replacement cycle unlike what we’re used to with electronics and in IT.”

At the same time, “there is no upside from Brexit for the UK car industry,” said Bailey. Its worries are all over the extra costs and trade barriers that Brexit will mean. “Regardless of what happens, it will make making cars in the U.K. more difficult. For much of UK manufacturing, it’s about damage limitation.” The UK economy would take a sizable hit as auto exports account for nearly 13% of its total exports.

Honda’s decision to close its Swindon plant is essentially a verdict that the UK will not be “an attractive place” to make electric cars in the early 2020s, Bailey suggested. “That’s quite a big criticism of the British government’s industrial policy, which is all about making electric cars,” he said. Further, the new EU-Japan free trade agreement will help companies like Honda to make cars in Japan and export them to the EU increasingly without tariff barriers, he noted.

Bailey also pointed out that Jaguar Land Rover, owned by the Tata group of India, recently invested in a plant in Slovakia. “That investment was partly because they wanted to access lower labour costs in Slovakia, but it was also a hedge against Brexit. “We might see Jaguar Land Rover shifting more production to Slovakia to produce inside the Eurozone for that market.”

In April, many UK automakers are for the interim closing their plants. Jaguar Land Rover, BMW, Peugeot and Opel Vauxhall are in this list. In February, Honda said it would close its Swindon plant in 2021, but it featured that move to reorganization of its global businesses, and not Brexit. That shutdown risks 3,500 jobs at the plant.

As per Bailey, many car makers are storing components, as they have no idea whether the UK will still be in the EU customs union. “In the extreme case, you’ve got niche producers like Aston Martin prepared to fly in high-end components to keep their production lines going,” he said. “But it’s difficult for the companies to be doing the things that they need to do, which is transforming their business models towards electrified and connected vehicles, when they don’t know whether they’ll be able to make the cars in the UK and export them to Europe without tariffs and non-tariff barriers.”

 

How U.K. Auto failed in Europe

The Society of Motor Manufacturers & Traders (SMMT)  said that in 2018, the British auto industry shut as the fresh car registrations reduced 6.8% to 2.37 million units and out of these diesel vehicles saw a nearly 30% drop. Continuous production loss of nine straight months worsened in the first two months of 2019. Bailey published in a recent article that investment in the UK auto industry has fallen 80% in the last three years, and it has lost 10,000 jobs in the last two years.

Bailey reported that UK auto industry has lost out on the growth accomplished since the 1980s, when British Prime Minister Margaret Thatcher attracted Japanese car companies to invest in the country. Then Honda and Nissan invested in the UK so as to export to Europe and over time has this reached for more than half of British car exports. MacDuffie agreed with Bailey and said that “the success back in the 1980s of attracting the Japanese companies to make the UK their beachhead or production base for all of Europe was a huge achievement.”

But, over time the EU market also has contracted, and UK car exports to Europe reduced 15% in the first two months of this year. “The likes of Honda that came here are scratching their heads, thinking ‘what on earth is the UK doing?’ ” Bailey said, indicating to the Brexit uncertainty.

 

Bigger Changes

Brexit, of course, is not alone responsible for all those despairs. Bailey noted two other factors, “a huge shift” away from diesel cars and the impact of an economic recession in China.

MacDuffie said that diesel vehicles have lost market share as they are being remarked “as not being green and clean, but being dirty and having major net negative health consequences.” European companies are now encouraging to produce electric vehicles, but consumers are not responding in a faster speed to pick up that trend, he said. He told that China is going to be the biggest market for electric vehicles, but consumers do not need as well.

The bigger changes in consumer preferences also pressurise British car exports. “The industry is about to transform itself, particularly in Europe, where a big shift towards electric cars is coming and autonomous cars in the future,” said Bailey.

Bailey and MacDuffie mentioned the refuse of auto manufacturing in Australia as an example of how global automakers leave unhelpful markets. “[The Australian experience] has to scare anyone in the UK who understands how important the auto industry has been to the manufacturing sector and the overall economy since the 1980s,” MacDuffie said.