Hard Brexit and the car industry

Hard Brexit, take your bets : 7 weeks to go...

The weekly column of Bernard Jullien , former director of Gerpisa, lecturer in economics (University of Bordeaux) and scientific advisor to the Essca Group's Chair of Network Management.

No one had wanted to believe in Brexit and it came. No one wanted to believe in a "no deal" and this is the scenario that is now emerging.
It was clear that it was politically important for Brussels to flex muscles and to indicate that opting out would have a cost. 
It was clear that Brexit supporters, on the other hand, were keen on showing that they did not intend to let themselves be reimposed on Brussels standards as part of a deal.
However, it was thought on both sides that reason would eventually prevail and that well-understood interests on both sides of the Channel would lead to a Norwegian-style free-trade agreement. 
The anti-Theresa May vote on 15 January shattered these hopes, which were a reason not to be very actively preparing for a "no-deal". In the automotive industry, as elsewhere, we must take up our calculatoragain and try to understand very quickly what is likely to happen.
To this end, a number of statistical realities should be recalled with respect to British motor vehicle foreign trade. 
First, vehicles assembled in the United Kingdom are massively exported: according to the Society of Motor Manufacturers & Traders (SMMT), out of 1.67 million VPs produced in 2017, 336,000 were destined to the domestic market and 1.334 million (79.9%) were exported. 
Conversely, since the domecstic market amounted to 2.54 million vehicles sold in 2017, it is understandable that 2.21 million (87%) had been imported. 
For LCVs, exports are of lesser importance since, of the 78,000 assembled in 2017, 29,000 were destined to the domestic market and 49,000 (62.8%) for exportation.Since the English LCV market is 360,000 vehicles big, it can be deduced that 331,000 (92%) were imported. 
This implies that the United Kingdom imports more than it exports: in 2017, 1.383 million passenger cars and light commercial vehicles were exported while 2.54 were imported. 
The high unit values of exports on the one hand correct this impression somewhat and limit the size of the trade deficit on vehicles, but the relative weakness of the British suppliers base has led to the fact that the growth in production recorded over the period 2009-2016 is accompanied by a tripling of the British deficit on assembly parts. 
The SMMT states that - like the vehicles bought by the British - these parts that are assembled in British plants come from the EU for 79%. Conversely, when considering exports of assembled vehicles to the United Kingdom, it appears that the EU accounted for only 54% of total exports in 2017 (compared to 62% in 2009).
As Tommaso Pardi, Director of Gerpisa, pointed out at FEAL colloquiumin June 2018 in Lille, 75% of the growth in British production between 2009 and 2016 corresponded to Jaguar Land-Rover's expansion, which supplies overseas markets from its British sites, including the United States (15.7% of British exports in 2017) and China (7.5% of exports in the same year). 
According to Tommaso Pardi's calculations, the average unit value of vehicles exported by English industry from the EU in 2016 was £33,000 while the average unit value of vehicles sold in the EU was £19,000.
Several clear lessons can be drawn from these statistical findings.
The first is that, for the European industry, a major problem will be to supply the British market under the new conditions, which will probably be those that meet WTO standards, that impose 10% customs duties on assembled vehicles
From this point of view, German manufacturers are potentially the most affected: in 2018, the VW group sold 483,000 passenger cars and 42,000 light commercial vehicles in the United Kingdom where it has no assembly lines; Mercedes sold 172,000 passenger cars and 32,000 light commercial vehicles and does not produce locally either; BMW (and Mini) sold 239,000 vehicles while its Oxford plant produces around 200,000 Mini. Ford is the leading brand in the United Kingdom and no longer runs manufacturing operations there... 
It is therefore understandable why Euler-Hermes, which has tried to quantify the export losses linked to a no deal for the different sectors of different countries, puts the German car industry at the top of the list of losers with a loss of around €1.6 billion. 
With sales of Renault / Dacia of around 100,000 passenger cars and light commercial vehicles and sales of 188,000 Peugeot / Citroën units, the French carmakers are much less exposed but the loss could still, according to the same study, amount to around 300 million. It should be noted that these figures include a strong depreciation of  the British pound linked to the no deal, which would obviously strengthen the customs duty effect by raising the price of imports even higher.
Under these assumptions, and this is the second lesson, there could be a reward for manufacturers with assembly lines in the United Kingdom. 
Still according to T. Pardi, the British industry is now characterised by the weakness of the domestic outlets for its factories: the proportion of passenger car registrations covered by domestic production is less than 15%, while in France and Germany this figure ranges between 35 and 40%. 
This is partly due to the decline of "domestic or semi-domestic producers": not only did Margaret Thatcherkill British Leyland, but Ford and Vauxhall largely exited the United Kingdom. The market is now very fragmented and the two leading brands, Ford (10.73% in 2018) and VW (8.58%), do not produce locally. 
Vauxhall, Toyota and Nissan could be candidates for the role of new national champions to correct this anomaly, which appears particularly problematic in the post-Brexit era.
The third lesson is about the British industry, which is wondering whether - as it has been since 2016 - it will not see its take-off broken by Brexit
In fact, for the assembly plants of non-specialist carmakers, who were clearly part of a regional industrial system, life can become difficult. We know that they are very dependent on elements that travel throughout Europeand will ultimately have to pass through English customs and suffer customs duties and a probable depreciation of the pound that will harm their economic competitiveness and most likely pose logistical problems that are incompatible with the requirements of just-in-time. 
On the other hand, if it is confirmed that the "no deal" goes together with a weak pound, this could save sites such as Toyota's and Nissan's, which are the continental platforms to produce models such as Auris, Aventis, Qashqai, Juke and Leaf for the entire EU.
In short, the disaster announced is not certain and if it would have been more comfortable for everyone to see a Norwegian-style solution emerge, the future is not written and will depend a lot in the weeks and months to come on the GBP/EUR exchange rate.
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Translated with www.DeepL.com/Translator, corrections by Géry Deffontaines 


La chronique de Bernard Jullien est aussi sur www.autoactu.com.


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Concéption Tommaso Pardi
Administration Géry Deffontaines

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