Investment In Automotive Industry Declines Amid Brexit Uncertainty

Investment In Automotive Industry Declines Amid Brexit Uncertainty

Automotive manufacturing is one of the most important economic assets and also one of the most productive sectors in the United Kingdom, with its contribution to the local economy remaining unparalleled. The automotive output per job is now worth some GBP 100,900, and its average salary is around 40 per cent higher than the national average. Accounting for more than 14 per cent of total exports and trading with some 160 countries worldwide, it remains the single biggest exporter of goods in the country.

The car industry in the United Kingdom has been one of the most vocal sectors in the country to oppose a no-deal Brexit or any deal that would impose constraining tariffs or trade barriers. Worried about the impact of a no-deal Brexit could have in disrupting the supply chains of an industry that currently employs hundreds of thousands of personnel and contributes GBP 18.6bn to the British economy, car manufacturers remain particularly vociferous against a hard-Brexit. Their concern has been backed by data which has over the months showed the impact on the industry, leaving experts worried about the potential of the Brexit to further disrupt an important industry.

According to figures published by the Society of Motor Manufacturers and Traders (SMMT), the trade association for the United Kingdom motor industry, British car manufacturing output fell by 15.2 per cent in June marking the 13th consecutive month of negative growth, while the output declined by more than a fifth in the first half of 2019. As manufacturing plants were shut down in anticipation of the March Brexit deadline and due to falling demand in key markets, including the UK, the number of cars manufactured in the first six months of the year reported a year-on-year loss of 168,052 units to 666,521 cars, representing a decline of 20.1 per cent. Only 128,799 cars rolled off production lines in June, down from 109,226 units last year.

Following an unusual decline of 47.2 per cent in output for the UK in June last year, this year output for the country rose by 2,791 units, or 17.8 per cent to 15,647. Last year, volume had been impacted by preparations by the companies for the new WLTP emissions test. While output for domestic consumption recorded a rise in June, mainly due to a sharp decline last year, year-to-date production for the domestic market was down -16.4 per cent, indicating that the underlying trend remained downward. Given global trade tensions and softening of key overseas markets, just 533,318 unitAutomotive Industrys were shipped overseas, indicating that the number of cars built for export fell by 21.0 per cent in the first half of the year and by 19.8 per cent in June to less than a hundred thousand units. Exports to Turkey was down by 93 per cent, Japan by 10.5 per cent, China by 53.1 per cent and the US by 12.9 per cent, showing that exports to the top global markets of the sector dropped by double digits. In the first half, 57 per cent of all UK car exports went the European Union, reporting the highest first-half dependence since 2016, but exports to the bloc were down by 15.6 per cent over the year.

According to a research conducted by SMMT in the first half, no less than GBP 330 million has already been spent by the companies on contingency plans, revealing the substantial cost the industry has had to bear to prepare for a no-deal Brexit. This underscores the need for a business-friendly deal which would give the industry a much-needed relief. Preparations for the worst-case scenario has resulted in the blocking of working capital and includes additional insurance and training in new customs procedures, investing in new logistics solutions, securing warehousing capacity, and stockpiling materials and components. During the proposed October departure date, the companies cannot repeat the shutdown of plants as they had earlier moved annual plant shutdowns from the summer to April.

According to figures released by the Society of Motor Manufacturers and Traders, UK commercial vehicle, which includes vans, trucks and buses, production fell by 57.2 per cent in June to just 3,345 units, while output declined by 15.8 per cent in the first six months. Following a strong start to the year, three months of significant decline drove the overall decline. During the months, output from both home and overseas markets fell by 44.7 per cent and 65.4 per cent respectively, while production for home market rose by 11.1 per cent and for export declined by 29.2 per cent during the first half of the year. The majority of exports was destined for the European Union, with exports still account for more than half of all UK commercial vehicle manufacturing. Mike Hawes, Chief Executive of Society of Motor Manufacturers and Traders, said that the data highlighted the importance of exports to UK commercial vehicle production, though fluctuating fleet buying cycles and model changes are behind the recent decline.

According to the calculations by the trade body based on new, publicly announced investment decisions in the first half of 2019, inward investment into the industry effectively stopped during the period. Compared to the average yearly investment figure of GBP 2.7 billion over the previous seven years, newly pledged investment declined by more than 70 per cent to GBP 90 million in the period January-June from GBP 347m last year, even as the government says it is in contact with companies to help them prepare. Moreover, UK engine production fell by 9.5 per cent in June to mark its tenth consecutive month of decline. In the first half, engine manufacturing declined by 10.8 per cent to 1.3 million units, showing the impact that uncertainty surrounding Brexit is having on the supply chain of the industry and reflected the drop in output at the car and commercial vehicle plants.

Investments and expenditure that should have been better spent in tackling technological and environmental challenges are now diverted to prepare for a hard-Brexit, causing important investment to ensure competitiveness to stall. The latest figures show the ongoing fear in the industry of no deal, which is further exacerbated by global economic and political instability. The fear in the country is not limited to the automotive sector only, optimism among smaller British companies tumbled to a three-year low in July, a survey from the Confederation of British Industry revealed on 31 July, indicating worsening sentiments in the wider manufacturing segment.

Recently, the Chief Executive Officer of PSA Group, which owns the Vauxhall brand, warned that if Brexit makes car manufacturing unprofitable in the UK, the company will not hesitate in switching to a plant in mainland Europe and stop all production from the Ellesmere Port, as the bureaucracies of the supply chain would be disruptive in case of a no-deal Brexit. Warnings about the impact of a no-deal Brexit have been sounded by big carmakers such as Jaguar Land Rover, Ford, Toyota, Nissan and BMW, even as manufacturers including Jaguar Land Rover and Nissan have chosen to build some models overseas, while several plants have announced the closure.

Steve Turner, assistant general secretary of the Unite, the union representing car workers, accused Prime Minister Boris Johnson of playing a no-deal roulette with the livelihoods of thousands of workers and urged the government to take a no-deal Brexit off the table. Earlier, Mike Hawes had warned that the car companies are in limbo as the Brexit process remains as uncertain as ever and the reputation of the country of offering a stable and attractive business environment has been undermined. Recently, in a letter to the prime minister, Mr Hawes urged the PM to make the country the most attractive destination for automotive investor and warned that a no-deal Brexit would be an existential threat to their industry.

The foundations of the industry remain strong, but to encourage more investment, innovation and growth, the sector needs an internationally competitive business environment, which will not be possible under a no-deal Brexit. Supporters of a decisive Brexit say that in the long term the country would thrive if it left the European Union and the disruption of a no-deal Brexit has been overplayed, though there could be some short-term difficulties. However, industry experts reckon that the competitiveness of the sector would be undermined as any potential disruption at the border would throw Just-in-Time manufacturing into chaos as it means the immediate imposition of tariffs.

Profitability and jobs would come under threat as a tariff would lead to an end to the seamless movement of goods and cost the manufacturers around GBP 4.5 billion a year. Every extra minute of delay of parts at the border would cost the car companies GBP 50,000, and as the industry is highly competitive and has fine margins, frictionless and tariff-free trade is required for the sustained growth of the industry. Of the total cars manufactured in the country, around 80% are exported, with around 66% being sold in countries with which the European Union has a trade deal, and an agreement that imposes barriers and tariffs or a no-deal Brexit would lead to difficulties in exporting manufactured cars for sale and importing parts into the country needed to build cars.

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