A month on from the UKs referendum vote to leave the EU and
the focus has quickly shifted onto how the relationship between the EU and the
UK will be managed in the future, and indeed whether the UK may benefit or
suffer from its decision to leave the EU.
One industry that has a particular interest in this changing
landscape is the UKs automotive industry. With around 80% of its output
heading for international markets (more than 50% alone heads to other EU countries),
and with the majority of components used by the industry imported, the UKs
automotive industry will be a keen observer of how the UKs international trading
relations develop over the coming years.
The UKs steel industry will also be watching with interest.
While not the UKs largest-consuming sector of steel the
automotive industry accounts for some 15-20% of UK steel consumption it has
been a strong growth area in recent years, with car output up by some 4% last
year and on course to rise at an even quicker pace this year.
The industry itself certainly appeared to be firmly in
favour of remaining in the EU prior to the referendum vote.
Executives from some of the UKs leading car manufacturers,
as well as the industrys trade association, the Society of Motor Manufacturers
and Traders (SMMT), both issued pro-EU statements prior to the referendum vote.
A poll carried out by SMMT found that 77% of their members were in favour of
staying in the EU.
So what now?
In the immediate future the outlook remains mostly positive.
The only thing that has fundamentally changed since the referendum vote is the
value of the pound, which has weakened by almost 10% against the euro since the
referendum vote, and by slightly more against the US dollar.
With UK exports therefore priced more competitively in
overseas markets, and vice-versa with regard imports into the UK market, the
UKs automotive industry should be well placed to benefit.
On a similarly positive note, fears about UK-based
manufacturers such as Nissan, Jaguar Land Rover and MINI deciding to leave their
UK facilities behind are probably overdone at this point. Hasty decisions about
existing investments are very unlikely.
But beyond the immediate short term and also with regard to
future investments, the picture becomes more complicated and uncertain.
Given the nature of the automotive industry, large changes
tend to come when new models arrive or existing models are updated. With life
cycles on car models generally varying from 7-10 years, decisions on where to
produce new models are likely to have an impact on the UKs automotive industry
in around 2-3 years given the life cycles of the cars currently being
manufactured there.
In particular to the UK, decisions being made by Jaguar Land
Rover and Nissan will carry the most weight, given that each company accounted
for about 30% of UK car output last year.
And with both companies there are causes for concern as far
as UK steelmakers are concerned.
Jaguar Land Rover (JLR) for its part has begun construction
on a new £1bn facility in Slovakia this year initially capable of producing
150,000 cars per year from 2018 but with scope to double output.
On a note unrelated to the referendum vote, the company is
also increasingly committed to producing cars with aluminium bodies in place of
steel as it looks to deliver more lightweight vehicles, much to the dismay of
steelmakers (JLR is ironically part of the Tata Group, owner of Tata Steel).
But at the same time, Jaguar Land Rover is very unlikely to
relocate entirely to the EU given the relatively small share of its sales that
head to other EU markets when compared to other carmakers.
The company also operates as a manufacturer of premium cars
and so competes less on price when compared to the likes of Nissan, Honda, and
Toyota. The relatively high margins enjoyed by the company, as well as the fact
that it has increasingly sought to increase the percentage of components
sourced in the UK, should protect it to some degree from changes in trading
conditions.
The future of Nissans UK operations is more uncertain in
our opinion.
Perhaps the biggest decision to be taken by the company
revolves around where to produce the next generation of its Qashqai cars, likely
to enter production around 2020.
Currently produced at the companys plant in Sunderland, the
Qashqai alone accounts for about 20% of all cars made in the UK and has been
hugely successful for Nissan.
But as a producer more focused on price and operating at
lower margins than JLR (see above chart), as well as depending on sales to EU
markets to a much greater degree, it is likely to be more susceptible to any adverse
changes in trading conditions.
Certainly a 10% import duty on UK cars entering the EU for
example (the standard EU duty on car imports from those external countries
without trade agreements, as per WTO-based rules) would cause the company to
look into alternative options. Likewise various import duties on automotive
components entering the UK (they typically stand at around 3-5% for external
countries without trade agreements) would act against the Sunderland plant.
It should be pointed out, however, that we view the prospect
of trade between the EU and the UK reverting to the above WTO-based rules very
unlikely. Germany in particular would look to avoid such a fate given the large
volume of automotive exports it sends to the UK.
But while a lot will clearly depend on the future trading
arrangement reached between the EU and the UK, a lot too will depend on how the
value of the pound fluctuates over the coming years, particularly against the
euro.
Indeed, as mentioned toward the beginning of this piece, the
relative weakness of the pound against the euro at present should in fact act
as a short-term boost for the UKs automotive industry. Were it to remain
relatively weak, one could understandably conclude that the UK would remain a
good base from which to export cars, to both other European countries and
farther afield, even under applicable third-country tariffs.
Certainly we are a long way from the strength of the pound
seen at the turn of the century, when £1 was equivalent to around 1.65 and
executives from Honda, Nissan, and Toyota were all openly questioning the
future of their respective UK operations.
Clearly there are both potential positives and negatives for
the UKs automotive industry as a result of the UKs decision to leave the EU.
In the short term, the degree to which UK-based carmakers
will benefit from currency weakness depends on company-specific dynamics i.e.
what percentage of sales head to export markets and what percentage of
components are sourced from within the UK.
In the longer term, meanwhile, the trade agreement
eventually reached between the EU and the UK is of fundamental importance.
Should an agreement close to existing arrangements be reached then there is little
reason to think that the UK facilities would be impacted much. Moves toward
more protectionism, however, would be likely to see carmakers such as Nissan
reconsider their operations given their low margins and dependence on sales to
EU markets.
Robert Cartman
rcartman@metalbulletinresearch.com