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For UK auto industry, Brexit 'damage already done'

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Nissan has warned that Brexit could put the future of its Sunderland plant, which employs about 7,000 people, in jeopardy.
Source: AP Photo

When Nissan Motor Co. Ltd. in the mid-1980s chose the U.K. to be the location of its first-ever foreign production plant, the prospect of borderless access to millions of customers nearby on the European continent through the soon-to-arrive European single market was a major part of the appeal.

Fast forward to the present and, as the U.K. edges nearer to its departure from the European Union, Nissan may be forced to contemplate a "Brexit" of its own. The company said Oct. 10 that the potential loss of free trade puts its European passenger car production, all of which takes place at its Sunderland plant in the north of England, in "jeopardy."

The idea that the U.K.'s second-biggest carmaker, after Tata Motors Ltd.-owned Jaguar Land Rover, could up and leave highlights the erosive effects of three years of political wrangling and uncertainty on an industry of juggernaut dimensions that relies on a sprawling, globalized supply chain.

"Damage has already been done," said Mike Hawes, chief executive of the U.K.'s Society of Motor Manufacturers and Traders, or SMMT. The organization represents the £82 billion automotive sector and, like others across the British industry, has been clamoring for the government to ensure arrangements for frictionless trade are in place before leaving the bloc.

The SMMT says members have "wasted" £500 million on measures to mitigate the impact of the potential return of customs checks on goods from the EU for the first time since the single market's creation in 1992, including on additional warehouse capacity and logistical preparations. Some of that was spent on building buffer stocks of imported materials and parts.

Investment in the U.K. automotive industry plunged to £90 million from January to June. Though Jaguar Land Rover's electrification plans are expected to boost levels in the second half of 2019, this would still be well below the average annual investment in the prior seven years of £2.7 billion. U.K. car production is now down about a fifth from 2017. A cyclical downturn in the car market must take a share of the blame, but the industry body says prolonged uncertainty over the U.K.'s future status has warded off a lot of new money.

An SMMT survey in October showed that a third of the sector's companies, many smaller parts-makers among them, are trimming their workforces, up from one in eight in the same poll in November 2018.

"Investment is hemorrhaging, competitiveness being undermined, U.K. jobs cut and vast sums wasted on the impossibility of preparing for no deal. Make no mistake, every day no deal remains a possibility is another day of lost investment, another day that makes it harder to recover investor confidence in the U.K.," Hawes said.

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PARTS IN PORTS

Britain's departure from the EU and its customs union under a scenario where no special trade arrangements are agreed beforehand would mean U.K.-made cars would be subject to a 10% import tariff on entry to the EU, while EU-sourced components would rise in price with a 3% tariff payable at the U.K.'s borders. As the U.K.'s biggest export industry, accounting for 14% of all shipments, that is no small concern.

The tariffs would bump up the sticker price of a U.K.-made car abroad by around £2,800 while imports to the U.K. would rise by around £1,700, the SMMT estimates. The U.K. exports eight out of every 10 cars it makes, and half of those to EU countries while about a fifth head to the U.S. The weakness of sterling, which remains near a 10-year low, could help dampen some of that tariff impact at least temporarily.

The likely return of customs inspections as part of this process, however, is the impact the British auto industry says it dreads most as it could see cause carefully planned, just-in-time production to grind to a halt if parts are not available when needed. Trade could be complicated further still if technical standards in the U.K. and EU were to diverge.

"The thing about Brexit is it could go anywhere," said Elena Eder, head of Project MINI Electric at Bayerische Motoren Werke AG-owned MINI, at the Frankfurt Motor Show in September. Eder said the company remained committed to building the forthcoming fully electrified MINI at its Oxford plant, though it was seeking to anticipate potential disruption.

"We have, let's say, action plans for the one-off disruption. ... Of course, we have a lot of just-in-time or sequenced suppliers based in the U.K., but we also have a lot of imported parts," Eder said.

AU REVOIR ASTRA?

French automaker Peugeot SA, owner of the U.K.-focused Vauxhall brand, has production sites spread across Europe. It has been quicker than its rivals to remind the U.K. that it has options. CEO Carlos Tavares says the company will move production of the Vauxhall Astra model from the Ellesmere Port site near Liverpool to continental Europe if the country leaves without negotiated terms of trade. Peugeot plants in Europe have already been making their pitches to take the model on, according to news reports.

In an interview with S&P Global Market Intelligence in September, Tavares, one of the more outspoken automotive industry leaders, went as far as to say Brexit would "ruin the lives" of the next generation in the U.K.

Brexit is just one of many challenges facing automakers in the U.K., a point Honda Motor Co. Ltd. stressed when it announced in February that it would end car production in the country. But with companies under intense pressure to reassess their business models and cut costs, the uncertainty of Brexit makes investing in the U.K. car industry that much harder to justify.

"There is no doubt that the Japanese came here because of unfettered access to the EU market but Brexit will cut away that assumption," said Ian Henry, director of AutoAnalysis and visiting professor at the Centre for Brexit Studies at Birmingham City University.

"I believe that were we not leaving the EU, they [Honda] would have found a reason to continue producing something in the U.K."