Brexit Impact on Automotive sector

<strong>Brexit</strong>
<strong>Impact</strong> on Automotive Industry

BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
Table of Contents
Automotive: <strong>Brexit</strong> is a Concern for Vehicle Manufacturers
Tariff-free Access to the EU Single Market
Production Outlook Scenarios: Hard <strong>Brexit</strong> vs. Soft <strong>Brexit</strong>
Vehicle Registration Outlook: Hard <strong>Brexit</strong> vs. Soft <strong>Brexit</strong>
Access to EU Talent Essential to the Success of the Sector
Cross-sectoral Regulatory Issues
01
02
04
07
11
12

BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
AUTOMOTIVE: BREXIT IS A CONCERN
FOR VEHICLE MANUFACTURERS
In February 1984, when Nissan and
the U.K. government signed an
agreement to build a car plant in
the U.K., it had been a part of the
EU for a decade. The 799-acre
greenfield site in Sunderland,
Tyne and Wear is now home to one
of the biggest manufacturing
plants in the U.K., with over half a
1
million unit sales in the EU. Will the
result of the U.K. referendum
thwart the growth of thriving
companies like Nissan?
This section will analyze the impact
of <strong>Brexit</strong> on the U.K. automotive
industry and try to answer some of
the pressing questions arising from
the U.K. referendum.
The result of the referendum on
U.K.'s membership can be assessed
through the following Issues:
EU tariffs on U.K. exports
Cross-sectoral regulatory issues
Access to EU talent
1. The Society of Motor Manufacturers and Traders (SMMT).
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
TARIFF-FREE
ACCESS TO THE EU
SINGLE MARKET
Goods currently traded between
the U.K. and the EU 27 enjoy a
tariff-free movement. Access to the
EU's single market has made the
U.K. a formidable competitor as its
supply chain companies can do
business with other EU automotive
companies and the OEMs
(Original Equipment
Manufacturers) can tap into a
lucrative market of over 500 million
2
consumers . If the U.K. leaves the
single market without a proper
replacement for the current system,
it could result in the introduction of
automotive tariffs of 10 percent on
passenger cars, 10-22 percent
on commercial vehicles, and
3-4 percent on average for
3
automotive components.
The U.K. produced a total of 1.8
million motor vehicles in 2016, of
which more than 900,000 were
exported to the EU. The EU
represents 81 percent of the U.K.
vehicle import volumes ( 44.7
billion euros) and 52.8 percent of
U.K. vehicle export volumes (EUR
4
14.6 Billion). Many OEMs sell 75
percent of their production within
the EU. For engines, this figure
stands at 55 percent.
The chart below outlines the sales
of the biggest car manufacturers in
the U.K. According to these figures
published by the Society of Motor
Manufacturers and Traders, U.K.,
the EU unit sales of Nissan and
Toyota, the largest vehicle
manufacturers in the U.K., was
double the number of their non-EU
unit sales. Between them, Nissan,
Toyota and Honda made half of the
1.7 million cars built in the U.K. in
5
2016 and employed 16,000 people.
2. Ibid.
3. European Automobile Manufacturers Association, Position Paper <strong>Brexit</strong>.
4. SMMT.
5. Article by Financial Times, Toyota and Nissan take different roads to <strong>Brexit</strong>, March 2017.
2
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
Exhibit 1
Sales of U.K. Built Cars
EU unit sales
Non-EU unit sales
Honda
50,000
80,000
Mini
Vauxhall
JLR
Toyota
Nissan
80,000
130,000
90,000
20,000
100,000
120,000
40,000
120,000
400,000
380,000
0 100000 200000 300000 400000 500000
Source: Society of Motor Manufacturers and Traders (SMMT)
Exhibit 2
U.K. Export Share by Region
EU US China Turkey Australia Japan
Canada South Korea Israel Russia
Russia
Israel
South Korea
Japan
Canada
Australia
Turkey
China
US
EU
Source: SMMT
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
PRODUCTION
OUTLOOK
SCENARIOS:
HARD BREXIT VS.
SOFT BREXIT
Reassuring Nissan, Toyota and the
other leading auto manufacturers
has been a priority for the U.K.
government after the June 2016
referendum to leave the EU. Eight
months after the referendum,
Nissan and Toyota have signaled
their commitment, with Nissan
announcing in October 2016 that
new versions of its Qashqai and
X-Trail would be made in the northeast
of England, thereby turning its
Sunderland plant into a 600,000
6
plus production plant. In March
2017, Toyota announced GBP 240
Million worth of investment into its
Burnaston site in Derbyshire, with
an additional investment of up to
GBP 21.3 Million from the
government, thereby underlining
the company's resolve to continue
to manufacture in Britain even if
7
trading conditions were to change.
However, whether the big auto
manufacturers continue with their
commitment to treat U.K. as a
major manufacturing hub depends
on how well the U.K. is able to
negotiate the terms of <strong>Brexit</strong> and is
able to retain the current structure
of its access to the single market.
Recent falls in the value of sterling
have made U.K. exports cheaper,
while the value of sterling against
the euro and the dollar is
approximately 15 percent below the
long-run average. While the lower
value of sterling will improve the
competitiveness of U.K. exports in
the long term, it will also increase
the costs of imported components
from the EU, which account for
nearly 60 percent of components
8
used in U.K. built cars.
The latest figures published by the
SMMT on car and commercial
vehicle production for the first five
months of 2017 suggest that
production has slowed down
across the U.K. following the
referendum and the resulting
uncertainty it brought with regard
to the U.K.'s position as a strategic
manufacturing hub in the EU.
British car production fell by 9.7
percent in May 2017 in the wake of
a slowing auto market across
Europe. Cars produced in the U.K.
for export fell by 9 percent to
109,591, while those made for the
home market fell by 12.8 percent
to 26,528. Production of
commercial vehicles also slowed
down to hit an all-time low of
6,875 in May 2017, declining by
28.3 percent from May 2016.
6. Article by Guardian, Nissan to review Sunderland plant's competitiveness after <strong>Brexit</strong>, January 2017.
7. Article by Financial Times, Toyota and Nissan take different roads to <strong>Brexit</strong>, March 2017.
8. SMMT.
4
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
Exhibit 3
Car Manufacturing
May-16 May-17 % Change YTD-16 YTD-17
% Change
Total
150,802
136,119 -9.7 738,516 729,755
-1.2
Home
30,431
26,528 -12.8 166,766 153,199
-8.1
Export
120,371
109,591 -9.0 571,750 576,556
0.8
% Export
79.8
80.5 - 77.4 79.0
-
Source: SMMT, May 2017 Release
Exhibit 4
Commercial Vehicle Manufacturing
May-16
May-17
% Change
YTD-16
YTD-17
% Change
Total
7,748
6,875
-11.3
39,935
36,458
-8.7
Home
3,826
2,503
-34.6
19,062
12,999
-31.8
Export
3,922
4,372
11.5
20,873
23,459
12.4
% Export
50.6
63.6
- 52.3
64.3
-
Source: SMMT, May 2017 Release
Cars produced in the
U.K. for export fell by
9 percent to 109,591,
while those made for
the home market fell by
12.8 percent to 26,528
Despite the recent slowdown in
auto production, British auto
manufacturing industry remains in
good health with several new
models to go into production over
2017 to 2021 and expansion in
investments by leading auto
manufacturers. WNS
TM
DecisionPoint projects an upward
trend in auto production over the
forecast period. However, this
forecast is contingent upon U.K.'s
continued access to the EU single
market with minimal disruptions to
the current trade structure. A hard
<strong>Brexit</strong> scenario without any access
to the single market will result in a
slowdown in vehicle production
from 2018-19, when <strong>Brexit</strong>
negotiations will be underway.
But it is expected that 2019-2021
will see some improvement in
production, albeit a slow one,
owing to finalization of the
<strong>Brexit</strong> agreement.
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
6
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
Exhibit 5
Vehicle Production Forecast
Soft <strong>Brexit</strong>
Hard <strong>Brexit</strong>
2021
1,905,371
2,087,168
2020
2,044,239
1,875,365
2019
1,847,650
2,004,156
2018
1,964,858
1,829,357
2017
1,889,287
1,820,255
0
500000 1000000 1500000 2000000 2500000
TM
Source: OICA, WNS DecisionPoint Analysis
VEHICLE
REGISTRATION
OUTLOOK: HARD
BREXIT VS. SOFT
BREXIT
Although the U.K. is a significant
consumer market, it is not large
enough to support the size of the
British auto manufacturing sector.
According to the figures published
by the Association Auxiliaire de
l'Automobile, 2.7 million new
passenger cars were registered in
the U.K. in 2016, 18.5 percent of the
14.2 million that were registered
across the EU and the European
Economic Area (EEA) as a whole.
The export market will always be
vital if the U.K. plans to sustain
and expand the existing auto
manufacturing sector. The regional
nature of the automotive sector is
such that that the EU will remain
U.K.'s single largest export
market, which makes export
tariffs critical to the existence
of the current sector.
The final sale price of a vehicle is
determined by factors other than
the costs of manufacturing the
vehicle; however, even a 10 percent
tariff on automotive components
imported from the EU will raise the
9
manufacturing costs significantly.
This will be passed on to
consumers by manufacturers,
thereby curbing the demand for
cars and commercial vehicles.
According to the figures published
by the SMMT, the year-to-date new
passenger cars registered from
2016-17 declined by 0.6 percent to
1,158,357. This slowdown can be
attributed to the uncertainty
caused by the surprise
announcement of a June 2017
election, with buyers holding back
until the election outcome.
Demand was driven by business
purchases, to offset declines from
private and fleet buyers.
9. SMMT.
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
Exhibit 6
U.K. Passenger Car Registrations Overview
Year-to-date
Total Diesel Petrol AFV Private
Fleet
Business
2017
1,158,357
509,817
600,604
47,936
522,877
589,161
46,319
2016
1,164,870
559,269
567,907
37,694
545,674
575,169
44,000
% change
-0.6
-8.8
5.8
27.2
-4.2
2.4
5.3
Source: SMMT, May 2017
Exhibit 7
Commercial Vehicle Registrations
2016 2017
May
Apr
32,989
32,127
32,494
27,637
Mar
70,669
69,726
Feb
16,631
16,206
Jan
24,621
25,215
0 10000 20000 30000 40000 50000 60000 70000 80000
Source: European Automobile Manufacturers Association, June 2017
8
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
A comparison between the
commercial vehicle registration
figures for the first five months of
2016 and 2017 shows a slight
decline of 862 units in the
registration figures for the month
of May, which is lower in
comparison to the relatively larger
decline of 4857 units for April. The
British referendum in June 2016
and the snap election called in the
first quarter of 2017 are primary
factors leading to the decline,
coupled with an ongoing
inflationary squeeze on consumer
and investment spending brought
on by a depreciating sterling.
We expect car and commercial
vehicle registrations to grow at a
stable rate for the remainder of
2017. This will continue into the first
half of 2018, supported by
declining oil prices and a
depreciating pound which will add
to the competitiveness of U.K. auto
exports. Our outlook for the period
2019-2021 remains stable, with
both car and commercial vehicle
registrations forecasted to grow at
a steady rate, provided that the
U.K. is able to retain its current
trade agreement with the EU. A
hard <strong>Brexit</strong>, which implies a shift
away from the current system of a
single market, will lead to a slide in
vehicle registrations in the forecast
period, exacerbated by new trade
tariffs, thereby aggravating costs of
production and final sale prices. A
soft <strong>Brexit</strong> with access to a single
market will ensure a rapid increase
in registrations from 2019-2021
when the <strong>Brexit</strong> framework for the
British auto industry is finalized.
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
Exhibit 8
Forecast for Passenger Car Registrations
Soft <strong>Brexit</strong>
Hard <strong>Brexit</strong>
2021
2,689,887
2,870,286
2020
2,662,489
2,841,052
2019
2,599,870
2,787,844
2018
2,581,579
2,688,154
2017
2,572,919
2,626,776
0 2400000 2500000 2600000 2700000 2800000 2900000
TM
Source: European Automobile Manufacturers' Association (ACEA), WNS DecisionPoint Forecast
Exhibit 9
Forecast for Commercial Vehicle Registrations
Soft <strong>Brexit</strong>
Hard <strong>Brexit</strong>
2021
2020
2019
2018
2017
513,448
480,027
492,904
464,387
478,656
450,964
456,211
437,320
423,340
419,030
0 200000 400000 600000
TM
Source: International Organization of Motor Vehicle Manufacturers (OICA), WNS DecisionPoint Forecast
10
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
ACCESS TO EU
TALENT ESSENTIAL
TO THE SUCCESS
OF THE SECTOR
The U.K. automotive industry
benefits from access to the skills
and experience of the EU and
global employees. EU skills and
talent are utilized in all aspects of
businesses in the U.K. There are
three principal reasons for the use
of EU migrant labor in U.K. plants.
Firstly, U.K. automotive
manufacturing has a skill gap of
around 5000 people, which is
projected to increase. Secondly,
with many companies having
multiple plants across the EU,
employees are moved from one
plant to the other for specific
engineering or manufacturing
needs. Thirdly, many companies
choose to move their employees
for professional training and
development, in order to improve
the quality and competitiveness
10
of their business.
According to a survey conducted
by the U.K. Automotive Council and
the Automotive Industrial
Partnership, majority of vacancies
in the top 10 current and future
priority jobs are engineering
positions, with a particular
concentration around design and
production engineering,
accounting for 40 percent of
immediate vacancies. However, the
potential loss of access to the EU
workforce and uncertainty over the
status of current EU workers is a
challenge for the U.K. automotive
industry's plans from a perspective
of continued innovation,
productivity and output as well as
future growth potential.
One of U.K.'s many advantages as a
member of the EU is labor market
flexibility, which is essential for
ensuring that workers are allocated
to their most effective use in the
economy. High labor flexibility
allows easy shifting of workers
from one economic activity to
another, rapidly and at low cost
and allows for wage fluctuations
while minimizing social disruption.
It gives companies the confidence
to rapidly take on employees to
meet market demand. Additional
administrative and cost burdens for
moving skills, and a reduction in
the ease of access to skills will
reduce U.K. industry
competitiveness and risks creating
the perception that the U.K. is not
an easy place to do business.
10. SMMT Issue Paper, November 2016.
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
CROSS-SECTORAL
REGULATORY
ISSUES
The EU allows financial institutions
established within the region to
operate a branch network across
Member States by virtue of the EU
Capital Requirements Directive
passport for the provision of
banking services, which is crucial to
the automotive industry. Motor
vehicles are expensive, and hence,
dealers need assistance in order to
make their purchases. Likewise,
motor vehicles are expensive to
manufacture, and therefore
manufacturers need to be paid
quickly for the vehicles that they
sell in order to have enough
liquidity to fund the manufacture
of more vehicles.
To alleviate the cash-flow concerns
of both sides to the transaction, a
third- party financial institution will
finance the sale of the vehicle from
the manufacturer to the dealer. In
this way, the manufacturer gets
paid quickly for the vehicle that has
been sold and the dealer is
afforded a period of credit for
making the payment. Most
automotive manufacturers operate
in this manner, as this is essential to
the maintenance of healthy dealer
networks. Many automotive
manufacturers set up their own
financial institutions created
specifically for the purpose of
providing wholesale dealer finance,
known as 'captives'.
Captive finance companies based
in one EU Member State will often
operate a branch network to other
Member States within the single
market. The ability of those
companies based in the U.K. to
continue to support a branch
network once the U.K. leaves the
EU may be severely impeded if
there is no future provision made
for the continuation of the
passporting regime. If the U.K.
leaves the single market (and sits
outside the EEA) and the EU single
rulebook on financial services,
captive finance firms based in the
U.K. would be required to take
mitigating action to ensure
continuity of service, including
relocating their headquarters
from the U.K. to another EU
11
Member State.
Uncertainty regarding the
application of cross-sectoral
regulations following the U.K.'s
withdrawal from the EU will
negatively impact business
operations. The Great Repeal Bill,
a new legislation put into place by
the U.K. government to ensure an
orderly transition from the EU
membership and that same rules
and laws apply after the U.K. leaves
the EU, should provide some
certainty. However, clarity is
needed regarding the maintenance
of regulatory equivalence in areas
that are critical to ensuring that the
automotive sector can continue to
access the single market without
any barriers.
11. Ibid.
12
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BREXIT
IMPACT ON AUTOMOTIVE INDUSTRY
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