Carmakers fear rising trade barriers after Brexit

A storm is brewing as clouds gather over Bristol Port, with the rain set to fall on tens of thousands of vehicles parked in the port’s car compounds, ready for export by ship, or destined for UK dealerships.

It is an apt backdrop for the UK automotive sector’s current predicament.

“Brexit has derailed the industry,” says Sarwant Singh, senior partner and global head of automotive and transportation at consultants Frost & Sullivan.

“The uncertainty causes people not to buy cars.”

The number of cars sold in the UK dropped 5.7% in 2017, according to industry body the Society of Motor Manufacturers & Traders, and ratings agency Moody’s predicts a further 5.5% fall this year.

There has been little respite from foreign markets, with exports slipping 1% last year.

Each year, about 80% of the vehicles built in the UK are exported, so smooth international trade relations are vital for the automotive sector’s continued prosperity.

But these days, the relations are as choppy as the sea in the Bristol Channel.

Industry executives’ main fear is that Brexit will result in heightened barriers to trade, not only with the European Union, but with the rest of the world too, once the transition period ends on 31 December 2020.

The prospect of an escalating trade dispute between the US and its main trading partners, the EU and China, also looms large, after US President Donald Trump’s recent threat to tax cars imported into the world’s largest market.

“All of Europe is exposed,” says Justin Cox, director of global production at consultants LMC Automotive, “but some plants are more exposed than others, and it so happens that several of those are in the UK.”

Then there’s China, the world’s second-largest car market. Trading relations with China are already complicated, and may well be subject to even greater complexity in future.

“A UK-China free trade agreement will be neither easy nor clearly advantageous for the UK,” says Bruegel, a European think tank that specialises in economics.

Part of the issue, it says, is that the UK would like to land better trade deals with China when it leaves the bloc than the ones the EU already has in place. But being smaller, the UK will be in a weaker position during trade talks, so there are no guarantees China will be prepared to offer better terms.

On top of this, UK automotive trade with China – and other fast-growing markets such as India, Brazil and Russia – could suffer, depending on the terms of a post-Brexit trade deal with the EU, Mr Singh says.

That’s because the UK might not be able to piggyback on the EU’s existing bilateral trade agreements with third countries, including those entered into since the Brexit vote with Canada and Japan. Instead, it would face years of protracted trade talks with dozens of countries.

Getting a good Brexit deal is also important because of the interdependence of European automotive companies.

“The motor industry has taken advantage of the EU’s single market as much as, perhaps more than, any other industry,” says Mike Hawes, chief executive of SMMT.

As a result, EU customers buy about €15bn ($18.5bn; £13bn) worth of British-made cars per year, accounting for some 53% of the UK’s vehicle exports, according to the European Automobile Manufacturers Association (ACEA).

Conversely, EU manufacturers deliver 81% of the cars imported by the UK, to the tune of about €45bn, a trade imbalance that Brexit supporters hope will give the UK leverage during trade talks.

At the same time, about 80% of the parts and components used to build cars in the UK are also imported from the EU, while 70% of the parts and components made in the UK are exported to EU countries.

“Any changes to the deep economic and regulatory integration between the EU and the UK will have an adverse impact on automobile manufacturers with operations in the EU and/or the UK, as well as on the European economy in general,” the ACEA says.

Hence, both the UK and the European car industries are keen to see a final UK-EU deal that retains frictionless trade in the long-term.

“Anything short of single market membership could be a problem for the UK,” says Simon Dorris, managing partner at Lansdowne Consulting.

Free trade is indeed key to future prosperity, not just within Europe but beyond, according to Prof Patrick Minford of Cardiff University, who chairs Economists for Free Trade, a group of pro-Brexit economists.

Its much debated paper, From Project Fear to Project Prosperity, suggests fears of rising trade barriers for carmakers after Brexit are misplaced.

Prime Minister Theresa May has said that Brexit presents an “opportunity to strike free trade deals around the world“.

“Auto manufacturers will improve profitability post-Brexit,” Prof Minford predicts.


Motor vehicle production, 2017

  • UK production: 1.75 million motor vehicles. Exports to the EU: 800,000
  • EU 27 production: 19.69 million motor vehicles. Exports to the UK: 2.3 million

    Source: ACEA


    Despite the uncertainty about a future trade deal, a number of big carmakers have committed to building more cars in the UK since the Brexit vote, including Nissan, BMW, Toyota, and last week Vauxhall, which is owned by French group PSA.

    But Parliament’s cross-party Business, Energy and Industrial Strategy Committee is pessimistic, recently warning that “there are no advantages to be gained from Brexit for the automotive industry for the foreseeable future”.

    The UK prime minister’s desire for free trade is shared by the global motor industry more generally.

    Executives are nevertheless pragmatic, and accept that although international trade is governed by rules policed by the World Trade Organization, free trade is rarely a reality.

    Trade-distorting subsidies and a variety of measures, such as regulatory barriers, internal tax measures, and intellectual property rights, still impede the free flow of goods, even when trade agreements are in place, according to the European Commission.

    The EU, for instance, will not import cars unless they meet EU safety and emissions requirements.

    Moreover, trade agreements are generally conditional. For instance, cars exported from the EU must be predominantly made within the EU to be allowed free entry into other markets.

    Such “Rules of Origin” could complicate exports for UK carmakers after Brexit, as an estimated 55%-75% of the parts and components that make up a car built in Britain are imported, according to Mr Hawes of SMMT.


    Global Trade

    More from the BBC’s series taking an international perspective on trade:

Volkswagen puts Herbert Diess in the driving seat

Volkswagen has replaced its chief executive with Herbert Diess, who takes on responsibility for the entire company after overseeing the VW brand.

He takes over from Matthias Mueller, who was appointed in 2015 at the height of the diesel emissions scandal.

Mr Diess has clashed with unions and is known for his cost-cutting measures.

The move is part of sweeping changes announced by the German company, which also owns several other brands including Audi and Porsche.

The carmaker said it will reorganise its 12 brands by creating six new vehicle divisions and a special arm devoted to China, its largest market.

More details about the restructuring are expected to be revealed at a press conference at VW’s Wolfsburg headquarters on Friday morning.

The management shake-up signals VW’s desire to move forward from the emissions scandal and press on with its “Strategy 2025” plan to build greener vehicles.

Mr Mueller had been running Porsche before being elevated to replace Martin Winterkorn as VW chief.

He has presided over a wide ranging restructuring of the company and its other brands.

However, in May 2017 prosecutors in Stuttgart said they were investigating Mr Mueller over suspicions he may have known about the diesel cheating before it became public.

The scandal, in which VW installed emissions-cheating software in 11 million vehicles worldwide, has cost the firm at least $30bn (£22.4bn) in fines and other costs.

As well as cars, the VW empire spans motorbikes, bus, and truck operations. Its brands also include Bentley, Scania, Skoda and Ducati.

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      • VW takes blame for exhaust tests

        VW chairman Hans Dieter Poetsch said in a statement that Mr Mueller had done “outstanding work” for the company.

        The statement continued: “He assumed the chairmanship of the board of management in the fall of 2015 when the company faced the greatest challenge in its history.

        “Not only did he safely navigate Volkswagen through that time, together with his team, he also fundamentally realigned the group’s strategy.”

        ‘Man of action’

        However, Mr Mueller was seen by critics as having failed to refocus the group’s portfolio of brands, a key pillar of “Strategy 2025” to transform the company into a leader in cleaner cars after the diesel scandal.

        Some analysts cheered the appointment of Mr Diess.

        “Diess is a man of action, he is the most plausible choice at VW to lead the group into the next phase of its transformation,” said Nord LB analyst Frank Schwope.

        VW also announced that works council executive Gunnar Kilian would replace Karlheinz Blessing as human resources chief.

        And the chief executive of Porsche, Oliver Blume, will join the main VW board.

Jaguar Land Rover to shed 1,000 contract staff

Jaguar Land Rover says it will not be renewing the contracts of 1,000 temporary workers at two factories.

The UK’s biggest carmaker, owned by India’s Tata Motors, blamed “continuing headwinds” affecting the car industry.

It said it was continuing to recruit large numbers of engineers and apprentices and it remained committed to its UK plants.

Earlier this year, it said it would cut production amid uncertainty over Brexit and changes to taxes on diesel cars.

Those cuts were made at its Halewood plant in Merseyside. These jobs will go at the Solihull.

  • Simon Jack: Jaguar Land Rover’s diesel dependency
  • Diesel cars: Your questions answered
  • What’s gone wrong in the UK car market?
  • UK car registrations plunge in March

    JLR was expected to announce the cuts on Monday, with Brexit and confusion over diesel cars again being cited as the chief reasons for the changes.

    JLR employs 40,000 people in the UK, 10,000 at Solihull.

    Professor of industry, David Bailey, from Aston University, said: “With the big turn against diesel engines, Jaguar Land Rover is particularly exposed as more than 90% of its UK sales are diesels.

    “JLR has just revealed its full-electric i-Pace model and have indicated offering all-electric or hybrid variants of all their models by around 2021, but they have been far too slow compared with Tesla and BMW.”

    He said the problems caused by Brexit were also unlikely to be solved in a timely manner: “It’s hard to say how long this production uncertainty will continue around Brexit negotiations, because it’s still unclear what the trading relationship will be between the UK and EU with regards to tariffs.”

    Analysis: Simon Jack, business editor

    JLR was very exposed to the demise of diesel. Recent figures from the trade body showed sales of diesels fell a whopping 37% in March compared with the previous year.

    Unhappily for JLR, 90% of its vehicles are powered by diesel engines and there are critical industry voices that say they have been slower than their rivals to embrace hybrids and electric.

    JLR Plants in China and Slovakia are increasing production, but company insiders were keen to stress that it would continue to invest in its UK plants and recently launched a drive to recruit another 5,000 engineers.

    Jaguar sales are down 26% so far this year, compared with last year, while demand for Land Rovers in the UK is down 20%.

    Last year, global sales hit a record, but the company acknowledged that the UK market was “tough”.

    Diesel registrations overall in the UK industry have plunged, down a third compared with January to March 2017

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Jaguar Land Rover’s diesel dependency

JLR was very exposed to the demise of diesel. Recent figures from the trade body showed sales of diesels fell a whopping 37% in March compared with the previous year.

Unhappily for JLR, 90% of its vehicles are powered by diesel engines and there are critical industry voices that say they have been slower than their rivals to embrace hybrids and electric.

JLR Plants in China and Slovakia are increasing production, but company insiders were keen to stress that it would continue to invest in its UK plants and recently launched a drive to recruit another 5,000 engineers.

All cylinders

The use of agency staff is fairly common in the automotive sector to cover periods of peak production and, until the diesel crisis hit, JLR had been firing on all cylinders with strong global demand for its vehicles.

The company said Brexit uncertainty had dented consumer confidence, but insiders conceded that the confusion over diesel was the most acute problem facing the company.

The automotive industry continues to insist that new, cleaner diesel cars are part of the pollution solution and critical to keeping CO2 emissions reduction targets within reach.

Lobbying groups are desperate for government ministers to deliver that message. However, central government has largely devolved responsibility on diesel policy to local authorities, saying they know best how to regulate their own pollution hotspots.

Confused

In London, for example, the Mayor, Sadiq Khan, has proposed that diesel cars over four years old by April 2019 will then incur a charge of £12.50 a day for driving into the centre of the city – 24 hours a day, seven days a week.

Motorists who have been regularly hit with new regulations and tax changes are understandably nervous that the goalposts may be moved again in the future – on a city by city basis.

It’s little wonder they are confused and putting off purchases.

While this confusion reigns, diesel sales plummet, production falls with them and -inevitably – jobs are lost.

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UK car registrations plunge in March

Car registrations plunged in March, according to figures from industry body the Society of Motor Manufacturers and Traders (SMMT).

Preliminary data shows the UK new car market shrank by 15.7% last month compared with 2017.

Demand for diesel vehicles fell 37%, but demand for petrol was flat and that for alternative fuel models rose 5.7%.

March 2017 was a record month as customers bought new vehicles ahead of a change in Vehicle Excise Duty.

New car sales fell for the first time in six years in 2017, with a 5.7% decrease to about 2.5 million vehicles.

Demand for diesel cars plunged by 17% last year, meaning the pace of decline for such vehicles in March has more than doubled.


Analysis: Theo Leggett, BBC business correspondent

At first glance, this looks like deeply worrying news for the automotive industry. But it it’s worth remembering that in March 2017, new car registrations hit a record high. Buyers were rushing to get hold of new vehicles ahead of big changes to the vehicle excise duty regime, which sharply increased the rates payable on some cars.

But we can say with certainty that registrations have now been falling steadily for a whole calendar year. The SMMT has consistently blamed economic uncertainty, which it links to Brexit and the collapse in diesel sales.

The latest figures show that the move away from diesel seems to have accelerated. That suggests that the industry’s attempts to convince consumers and politicians that modern diesels are clean and have a future are failing badly.

By historical standards, new car registrations are still at pretty high levels. The steep fall in March might be a glitch. However, the overall trend cannot be ignored – and that is what the industry will be worried about.