Can the British car industry survive Brexit?

The first industry to start making deals with the government over Brexit was the finely tuned and globalised system of automotive manufacturing. David Bailey, Professor of Industry at Aston Business School, explains why these negotiations are crucial.

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Giving evidence to a Lords’ Committee late last year, Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders said that the UK auto industry faces “death by a thousand cuts” if the big car firms decide to invest in other countries, over the UK, in the wake of the Brexit vote. It’s a view I share.

The recent decision by Nissan to invest in building the next-generation Qashqai model – currently the most-produced car in the UK – at Sunderland, was a great piece of news that reflects the underlying competitiveness of the UK auto industry. But the big battles for UK auto are still ahead. Toyota committed £240m to its Burnaston plant last week, but did not make any specific commitment to building future models there. More seriously, Honda and Vauxhall are still  at risk of switching production from the UK to Europe if uncertainty over our trading relationship with Europe isn’t clarified sooner rather than later.

The takeover of GM Europe by Groupe PSA adds an extra dimension of uncertainty for the Vauxhall plant at Ellesmere Port, in that the firm will be looking to make significant cost savings. These could come from joint procurement and technology sharing across models and brands, but they could also come from plant closures and job cuts.

Sadly, UK plants look more vulnerable to such cost-cutting than European sites. That’s not because they are inefficient. Far from it – workers and management at both Ellesmere Port and Luton have pulled out all the stops in recent years to work flexibly, get costs down and win contracts to build new models, beating competition from across Europe.

Instead it’s a combination of the UK’s flexible labour markets (it’s easier to fire workers here), uncertainty over our trading position with Europe, and the post-referendum Sterling depreciation that leaves British plants exposed.

The currency point illustrates the significance of an international supply chain. Major components such as engines are imported to GM’s UK plants from the continent. The weaker pound makes components more expensive, pushing up assembly costs in the UK.

Groupe PSA has experience of closing UK operations, having shut its (profitable) Peugeot plant at Ryton, near Coventry, almost 10 years ago, when it shifted production of small cars over to Slovakia. Ellesmere Port, which employs 2,100 people, is arguably the most vulnerable in the context of uncertainty over the future of the UK’s trading relationship with Europe. The Astra model assembled there is due to be replaced in 2021, with a decision on where to base production to be made sometime in 2018 – slap bang in the middle of Article 50 negotiations. Key investment decisions will be made in what looks to be at least a two-year window of uncertainty. PSA/GM, like other car makers, will ask if the UK car industry has access to the single market, and if WTO tariffs will apply, before they decide if investing in UK production is worth the risk.

The risk is greatest for these ‘mass market’ producers, who operate on low margins, rely on exports and have new models (such as the next Astra) at the planning stage. There is a particular concern in the industry over tariff barriers. With margins in the mass volume sector already wafer thin, a ‘hard Brexit’ that falls back on World Trade Organisation (WTO) rules could see tariffs as high as ten per cent for cars and four per cent for components. While the Prime Minister states that “no deal is better than a bad deal”, no deal in this sector would constitute a bad deal by default, raising serious questions about the future viability of several more UK car plants.

Tariffs are not the only area in which agreement is required, either. Non-tariff barriers, such as regulatory differences, can also disrupt automotive value chains. Components can cross borders several times before final car assembly.

All of which brings us back to Nissan and the 'assurances' it received over the Qashqai from a government that knew that it couldn’t afford to lose the investment. We don’t know exactly what was offered, but it seems to around be support for building local supply chains, and on innovation and skills. Nissan has since called for a £100-£140m fund to help rebuild supply chains. Ford at Bridgend and Peugeot/GM at Ellesmere Port will no doubt be looking for similar support, as will other auto makers.

Yet reshoring supply chains didn’t get much mention in the recent industrial strategy green paper, and policies to support this would constitute a U-turn on the policies of the former Business Secretary, Sajid Javid, who axed key policy interventions such as the Manufacturing Advisory Service. These will need to be put back in place – maybe in a more regional approach – if the government is serious about rebuilding the UK’s fractured supply chains.

Greg Clark has repeatedly stressed that different sectors have unique needs, implying that the UK could seek sector-by-sector deals with the EU. This could mean, if certain sectors avoid non-tariff barriers, that parts of the economy will achieve de facto access to the single market.

But if the UK really does want to trade without tariffs and non-tariff barriers in sectors like auto, then the EU may well extract a ‘price’ in the form of a contribution to the EU budget, as it does from Norway and Switzerland.

And some form of ‘referee’ will be needed to determine whether the UK is playing by the rules of whatever trade deal is done with the EU, particularly regarding rules of origin. These require 55-60 per cent “local content” to qualify for tariff-free trade under a Free Trade Agreement. This would require regulatory oversight, perhaps by the European Court of Justice (provided this doesn’t cross a ‘red line’ of British autonomy).

As plant location decisions are made in the industry, the UK government will no doubt offer Nissan-style deals to auto makers, and unions and management will pull out all the stops to work flexibly and get costs down so as to make the UK an attractive place to invest. But if a hard Brexit forces the UK to fall back on WTO rules and tariff barriers, such efforts might not be enough.