Just over a year on from our last look at the possible impact of Brexit on the automotive industry and with almost 7 months to go until the UK formally withdraws from the EU, we revisit the potential implications for the sector that employs nearly 1 million people in the UK and accounts for almost 10 per cent of national manufacturing output.
The motor industry still appears to be in good health according to data for 2017, the most recent period available. Automotive production turnover was up 5.3% on the previous year to £82 billion, although vehicle production was down by 3.7% or 1.75 million vehicles. There was also a 5.4% decrease in new vehicle registrations in the period, with a significant move from diesel to hybrid and electronic vehicles.
In this article, we review the key legal and political developments in the UK since June 2017 and consider whether any of these developments have mitigated the threats to the automotive industry that we identified last year.
The legal landscape
The most significant change in the last year has been the approval of the EU (Withdrawal) Act (the "Act"), which entered into law on 26 June 2018. The Act: (i) will retain all existing EU legislation as part of UK domestic law; and (ii) grants the UK Government limited powers to make secondary legislation to adapt or remove laws that no longer work or are considered irrelevant (for example, if they refer to specific EU institutions). The Act aims to ensure a smooth transition and prevent the occurrence of any legal 'black holes' when the UK formally exits the EU on 29 March 2019. The position therefore remains that, from a legal perspective, there will be little change in the short term.
In July this year, the Government published its White Paper entitled "The Future Relationship between the United Kingdom and the European Union", as authored by the new Secretary of State for Exiting the EU, Dominic Raab. This White Paper set out at a high level the Government's approach to Brexit in which they promised "flexibility … to strike new trade deals around the world" and "frictionless trade in goods between the UK and EU through a new free trade area responding to the needs of business". The White Paper recognises the importance of the manufacturing sector and in particular the automotive industry, including the need to protect integrated supply chains that exist in those sectors.
The following points made in the White Paper are especially noteworthy:
- It proposes a free trade area for goods moving between the UK and EU, to be underpinned by an agreement not to impose tariffs, quotas or requirements for rules of origin in any UK-EU trade in goods, the latter point being of particular importance for the car manufacturing industry where many of its component parts are imported from non-EU jurisdictions such as China. It also proposes a "common rule book" for manufactured goods passing between the UK and the EU so that consistent customs and regulatory approvals apply in a frictionless way.This is an attempt to address one of the main concerns of the industry, being the potential impact that delays to the delivery of component parts due to prolonged customs clearance would have on its manufacturing models.
- It specifically addresses the Whole Vehicle Type Approval process under which a single approved body (in the UK's case, the Vehicle Certification Authority) can test a vehicle's compliance with international standards and approve it for sale in the whole of the EU. Under the common rule book it is envisaged that: (i) the UK and EU would continue to recognise each other's type approval authorities (including whole type approval certificates and assessments of conformity of production processes); and (ii) UK agencies could be designated by EU approval authorities to authorise UK service providers to enable them to carry out EU wide approvals.
- In addition to ensuring that the UK and EU continue to trade freely with one another, the Government is also looking to boost trade relationships with "old friends and new allies" through an independent trade policy.The Government considers that in seeking to negotiate new trade deals with countries such as the US, Australia and New Zealand, the UK will be better placed to take advantage of opportunities presented by global mega-trends – including the rise of new and disruptive technologies such as autonomous (and near-autonomous) vehicles and internet of things.
Of course, the White Paper merely represents a high level outline of the arrangements that the UK will wish to have in place when leaving the EU. Whether it can negotiate this, and whether it will be willing to meet any conditions that the EU will demand for agreement to such arrangements, remains unclear.
We therefore re-consider below the next steps and the implications of a "no deal" scenario.
A 'no deal' scenario
The next step in the Brexit process is the conclusion of a withdrawal agreement that will set out, amongst other issues, details of the proposed transition period to run until 31 December 2020, during which time EU rules would continue to apply to the UK (although the UK would not participate in the governance or decision-making of EU institutions). In order to take effect, the withdrawal agreement must be finalised and ratified before the UK leaves the EU in March 2019, with negotiations set to conclude in October 2018.
Given the realistic prospect of a withdrawal deal not being concluded in the next 3 months, both the EU and UK Government have undertaken contingency planning for the possibility of a 'no deal' scenario. If no agreement is reached, a 'hard' Brexit would be the automatic position and, critically, there would be no transition period. In this instance, the UK's relationship with the EU would instead be governed by general international public law, including the basic rules of the WTO – an arrangement that would be unprecedented for a major trading partner of the EU.
Of particular concern to the automotive industry is that movement of goods would be severely restricted by import and export formalities. The UK currently exports approximately 80% of all cars assembled here, with 50% going to Europe, so the introduction of export taxes would have significant cost implications. A House of Commons report published in March this year considers that a 'no deal' scenario would be '"hugely damning to the UK automotive sector", resulting in the introduction of a 10% tariff on cars and a 4.5% tariff on components, in accordance with the WTO's rules. Recent analysis by the SMMT indicates this would add at least £1.8 billion to exports and £2.7 billion to imports annually. If OEMs are unable to absorb such additional costs, the list price of cars imported to the UK from the EU could increase by an average of £1,500 which may wipe out the profit that is made on an average car (as estimated at just £450 on a £15,000 car).
Similarly, although UK manufacturers are already required to comply with the Whole Vehicle Type Approval System, goods would nonetheless become subject to conformity assessment procedures upon withdrawal in a 'no deal' scenario. The lengthy process of re-certification (possibly on a country by country basis) would likely result in the suspension of manufacturing activities until the requisite approvals were obtained, at a significant cost and to the great detriment of planning timetables.
The House of Commons predicts that the cumulative effect of these factors would be a decline in the competitiveness of the UK's automotive sector and ultimately a relocation of manufacturing to countries remaining within the EU. Refuting the Government's suggestion that withdrawal from the EU allows for trade opportunities with non-EU nations (as mentioned above), the House of Commons report states that it is "unrealistic to expect an expansion of trade overseas to outweigh the loss of trade to Europe arising from a hard Brexit. Furthermore, any new bilateral trade deals secured by the Government are unlikely to lead directly to a significant increase in investment and jobs in the UK automotive sector. Retaining good access to the single market is more important than securing the freedom to secure new trade deals with third countries."
Ongoing industry impact
In last year's overview, the automotive sector's view was generally pessimistic, with 57% of SMMT members believing that Brexit would have a negative commercial effect. The House of Commons report, which comprised of evidence from 18 businesses and other stakeholders, indicates there has been little shift in that outlook, although it should be noted that the report does address in part a worst case 'no deal' scenario. However, are there any opportunities for the UK automotive industry arising from Brexit?
First, the potential application of tariffs to components and supply-chain disruption may result in greater local sourcing of components for UK-assembled cars. Currently, only 40% of the components comprising a car built in the UK are sourced from UK manufacturers, as opposed to 60%. The component market may therefore see some growth if demand from UK-based OEMs increases as a means of avoiding costly import tariffs. However, this scenario would of itself require manufacturers to establish new domestic supply chains which would be a costly process. BMW was reported in June 2018 as saying that it could cease manufacturing Mini and Rolls- Royce cars in the UK if Brexit resulted in serious supply chain disruption although it confirmed that it had no current intention to do so.
Secondly, despite the House of Commons' scepticism as to the ability of trading with non-EU states to compensate for lost EU trade, it is significant that the Department for International Trade estimated that 90% of global economic growth up to 2040 will come from outside Europe. Of the 80% of UK-assembled cars that are exported, 6% currently go to China – yet this market is forecast to grow by 32% by 2023. In this respect, the changing trade patterns that will inevitably result from Brexit should be cultivated and exploited by the UK automotive sector, to generate sufficient trade to make up the shortfall from Brexit-related losses.
Thirdly, autonomous vehicles and related automated (and connected) technology remain a primary development focus for the UK Government. Research a work has so far benefitted from European funding through the Horizon 2020 project, which is likely to be lost upon EU withdrawal. This potentially presents an opportunity for the UK to partner with technologically-strong emergent economies such as China and India to become a market-leader in this breakthrough field, which is (at least, currently) less restricted by regulation than the traditional automotive sector.
In conclusion, whilst it appears that in the last year the Government has made some progress towards addressing the Brexit-related concerns of the automotive sector and its intentions are a little clearer than previously, there remains significant uncertainty as to the outcome of the Brexit negotiations. It could also be argued that due to the lack of progress in negotiations a "no-deal" Brexit is actually more likely than it was a year ago. It appears to be the consensus within the sector that "no- deal" will significantly harm the industry in the short to medium term and manufacturers of vehicles and component parts will of course be aware of these issues and have in place contingency plans already. The industry will hope that the Government prioritises the negotiation of a framework which best replicates the existing trading and regulatory rules to protect this vital commercial sector.