British car production falls at quickest pace since recession 

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The Society of Motor Manufacturers and Traders (SMMT), the industry body of automotive manufacturers in United Kingdom, has stated that the production of cars in 2019 fell by 14.2 per cent compared to last year with only 1.3 million cars being produced. The fall is the fastest since the 2008-9 era financial crisis induced recession and is marred by slumping exports and some automakers closing factories for additional days in anticipation of Brexit-related disruption. The biggest threat that is faced by the industry right now is the fall in exports. The Industry which exported more than 75 per cent of its produce since 2006 has the European Union as its largest trading partner, buying fully manufactured cars from the United Kingdom and selling automobile components back. Post Brexit, when enhanced tariff structures will be in place, a significant export base for the industry will be lost.

The United Kingdom’s automotive manufacturing industry has been a major wealth creator for the country. During the year 2018 the industry was the largest exporting sector of the British economy, exporting its produce to 160 countries around the world worth £44.4 billion. Compared to the total exports of goods exported during the year its share was 14.4 per cent and compared to all exports from United Kingdom its share was 7 per cent. The industry has also been one of the largest employers in the country employing more than 166,000 people in 2018 which is 7 per cent of all manufacturing employees, and 1 per cent of all employees of the country.

Brexit has been the biggest challenge that is threatening the industry since 23 June 2016 when the country decided to part its ways with the European Union. During the Period that the country was a part of European Union, it became highly integrated with the car industry of rest of Europe. During the Year 2018 the industry exported 82.8 per cent of its produce, out of which 52.6 per cent was destined to other European Union member countries. The industry also sourced heavily from the member countries of the European Union. Taking advantage of the relaxed tariff structures, it started sourcing its critical components from cheaper, yet high quality manufacturers located in rest of Europe. This arrangement not only advantaged the British automobile industry by making its cost effective but also provided it with an expanded manufacturing base allowing it to expand production rapidly. However, with Brexit in place a lot of structural problems would surface in the industry. One of the key issues, that the industry would face would be that of tariffs, should a trade deal not be negotiated between the United Kingdom and the European Union. In the absence of a bilateral agreement trade between countries of the two economic blocs would revert to the regulations of the WTO tariff regime.  In the case of automobile industry, this will lead to 10 per cent enhancement in the cost of fully manufactured cars and 4.5 per cent enhancement in tariffs for automobile components. The Society of Motor Manufacturers and Traders (SMMT) opining on the WTO regime argue that the new tariffs would increase the cost of production, undermine competitiveness and potentially increase the cost of cars for consumers. The WTO tariffs would affect the industry’s ability to export and import car components, meaning that there could be considerable costs added to the operations of automotive supply chains. Other than the above tariff-based barriers there are other non-tariff-oriented bottlenecks that would surface post Brexit, which would adversely impact the industry’s fortunes. Under the European Union regime, the automobile industry faced lesser logistical bottlenecks; car manufacturers operated on a ‘just-in-time delivery’ basis, where they did not hold reserves of various components and parts in order to improve efficiency and this resulted in lower carrying costs. Post Brexit, regulatory scrutiny and scrutiny on tariffs on products entering the United Kingdom from the European Union would significantly increase, leading to considerable time lag in the delivery of critical components to the manufacturers thereby jeopardising the just-in-time practice.

The most unfavourable impact of Brexit that the British car industry would have to confront would be the shrinking of its manufacturing base. The industry would not only find it difficult to immediately figure out replacement manufacturing facilities but whatever facilities would come up after a delay would come with a higher price tag. Other that that there will also be the additional constraint of availability of adequately trained manpower. UK’s exit from European Union would lead to many of the highly skilled manpower in the industry returning to their home countries along with restricted sourcing of similarly qualified manpower from other European countries. This shortfall in critical resource would have to be met with locally sourced manpower, which in the short term is not available in adequate quantity. This will necessitate immediate training and retraining of people in order to fill the gap. Even when the manpower is available, the cost of hiring them would be much more than what it is currently. Quality in the industry would also take a beating because of Brexit, due to extinguishment of existing sources of supply of component manufacturers, who would either have develop their own products domestically or outsource from other low-cost geographies. While this is the most appropriate solution in the medium to long term, in the short term it will lead to low quality components resulting from increased quality control costs. Given the above-mentioned structural faults that would spring up post Brexit, it is critical that a suitable deal be worked out with the European Union ensuring a smoother transition post the event and with least impact on several industries.

Other than Brexit, the industry is also faced with some other external threats which are set to bring in structural changes to the automobile industry globally. The world is increasingly moving towards electrical vehicles. The threat of environmental pollution has prompted governments world over to encourage non-petroleum based automotive technology solutions. In this endeavour, electrical vehicle technology is increasingly gaining traction. Underpinned by the technological advantages offered by the lithium ion batteries, it is now possible to make electric vehicles that offer similar performance capabilities as internal combustion engine powered vehicles at competitive economies. Several manufacturers around the world have already started to offer vehicles that are based on electric battery technology and the market for these vehicles is rapidly increasing. British companies who have been battered due the Pre-Brexit jitters in the past couple of years are currently cash strapped and are hard pressed to incur expenditure on research and development geared towards the development of these vehicles. This temporary constraint threatens to make the British car industry less competitive, where it could lose its edge as a source of quality cars in the world.

The British government in its attempt to address these concerns of the industry has been striving to strike competitive trade deal with the United States, which could help it recoup from some of the lost advantages due to parting of ways with the European Union. The deal will, however, only benefit in the medium to long term, with the industry left to fend for itself in the short run.