In the event of a No Deal at the end of 2020, 10 per cent tariffs will be applied to UK car exports to the EU

It’s been a rocky road for UK auto (excuse the pun) over the last few years. Just five years ago, UK car production was growing and on target to hit 2 million units a year by 2020. Now output it is running at around 1.3 million units a year, and risks falling below 1 million a year.

By 2019 something of a ‘perfect storm’ had hit the auto industry. The industry faced a triple whammy of declining sales in China (as the world’s largest car market contracted after 20 years of breakneck growth), a massive shift away from diesels across Europe in the wake of the VW ‘dieselgate’ scandal, and Brexit uncertainty slowing the UK market and investment.

The industry took several hits last year. Jaguar Land Rover announced it would shed another 4500 workers on top of the 1400 lost in 2018. Honda confirmed that it was shutting its Swindon plant and Ford its Bridgend plant, while Nissan reversed its decision to build the XTrail model at Sunderland from 2020, with the latter citing Brexit as a complicating factor.

A few investments, by the likes of JLR in electric vehicle production and Aston Martin in its new DBX model stood out as positive stories, but investment in the auto industry in particular stalled amidst Brexit uncertainty over the nature of the future trading relationship with the EU.

Of course, the Conservatives’ overwhelming general election win means that the UK will leave the EU on 31 January 2020 and enter into a transition phase. That much we know.

But while Johnson campaigned on the slogan ‘Get Brexit Done’,  leaving the EU at the end of January doesn’t really ‘get it done.’ Rather, the UK will then enter negotiations on the form of the trade deal with the EU. And exactly what form of Brexit the UK is aiming at is still not clear.

The first deadline to note next year is the end of June: this is the deadline for requesting an extension to the transition period which otherwise runs only to the end of 2020.

The risk of a no-deal Brexit at the end of 2020 rises dramatically if no extension has been requested as many think it unlikely that a trade deal – even a ‘bare bones’ Canada style Free Trade Agreement – can be struck in a year.

In the event of a No Deal at the end of 2020, 10 per cent tariffs will be applied to UK car exports to the EU. This would hit EU demand for UK-made vehicles.

Ian Henry of Auto Analysis forecasts additional costs of £3bn just in tariffs to UK output and far more when non-tariff barriers are added in:

“We calculate that 1.5m vehicles would be lost from otherwise expected UK production from 2020 through to 2024; and, taking into account the different mix of vehicles involved, from Opel Astra’s through to Rolls Royce’s, the loss of economic value at the factory gate would be nearly £43bn, or more than £8bn a year on average

…between £3bn a year and £8bn a year in lost economic value creation are sums which any industry would struggle to bear unscathed. Given the global headwinds battering UK vehicle production, we can expect further major challenges for this once thriving, but now troubled, sector” he says.

Longer term, according to Justin Cox and David Oakley of LMC Automotive in the event of a No Deal at the end of 2020:

“the loss of models made in the UK could see output in the latter part of the next decade being 500,000 units lower per year than in a base-case scenario of a managed deal and an orderly Brexit”.

This would take output down to levels not seen since the 2008 global financial crisis with a big hit to jobs in assembly and the supply chain.

Peugeot, The French car manufacturer has already stated that a no Deal would see no new investment at the Ellesmere Port to make their new Astra Model in 2021, while Nissan has said that it can’t guarantee that the new Qashqai model will come to Sunderland.

But suppose a limited trade deal that simply eliminates most tariffs – of the sort envisaged in the latest political declaration – is achieved this year. This could still cause severe headaches for industry given issues of regulatory divergence and through the UK being outside the EU customs union, especially given Just-in-Time supply chain arrangements in the industry.

While ’taking back control’ means the ability for the UK to set new regulations and standards after Brexit, the knock-on effect will likely mean more checks and possible delays to manufacturing components moving across borders, bringing challenges for manufacturers.

In summary, even though the EU will be leaving the EU at the end of January, the stakes from on¬going Brexit uncertainty remain high for UK auto, just at a time when the sector industry is starting to transform itself towards an electric future. The UK could risk losing a wave of investment, and with it, a raft of new technologies.

‘Carmageddon? Brexit and Beyond for UK Auto’ has just been published by Bite-size books, edited by David Bailey, Alex de Ruyter, John Mair and Neil Fowler