As 2016 drew to a close, British car manufacturing achieved a 17 year high point, as almost 1.7 million cars rolled off production lines1. Approximately 1.35 million of these vehicles were destined for more than 100 overseas markets, with one in two cars headed for EU countries.

Such increased production output was no doubt the result of investment decisions made over a number of previous years, influenced by tariff-free access to the single market, efficient productivity from a highly-skilled mobile workforce and (relative) economic stability. There has in this respect been a mutual dependency between the UK and the EU for the automotive sector.

However, the vote by the UK to leave the EU in June last year has meant that the current model on which the UK automotive industry operates cannot be certain to continue. The response by the sector has been generally pessimistic. Following the Brexit vote, a survey conducted by the Society of Motor Manufacturers and Traders ("SMMT") showed that 57% of its members – including OEMs and component/ part suppliers – believed Brexit would have a negative impact on their businesses (while just 8% saw it as positive and 28% were uncertain). However, is this pessimistic outlook justified and what are the actual implications likely to be in practice?

The immediate impacts

Legally, there should be no change in the short term. The UK remains a member of the EU and EU law continues to apply, whether directly through Regulations or by Directives incorporated into UK law. Although the UK Government has now formally notified the European Council of its intention to withdraw pursuant to Article 50, it is likely that the full two year period will be required for negotiations. This means that actual withdrawal is unlikely to take place before 2019.

On 30 March 2017, the UK Government also issued its proposal for the Great Repeal Bill. One of the main effects of this proposed legislation is for EU laws and regulations to be placed into the UK statute books in order to avoid the creation of any legal 'black hole' after the UK leaves the EU. The Bill also proposes a power for the UK Government to make secondary legislation to implement changes as are considered necessary.

From a wider perspective, any impact is likely to depend on how the exit negotiations develop and – in particular – the type of 'model' the UK wishes to adopt. In broad terms, the alternate models being considered are:

  1. joining the European Economic Area (the 'Norwegian' model), where EU legislation will continue to be applied and implemented although the UK will have no say in the legislative process;
  2. operating under bilateral agreements (the 'Swiss' or 'Canadian' model); and
  3. negotiations through World Trade Organisation membership.

Option three above is being described as a 'hard' Brexit, and would likely see the UK relinquish full access to the single market and the customs union. In comparison, models under one and two above would leave the UK’s trade relationship with the EU as similar to the current arrangements as possible, often described as a 'soft' or 'softer' Brexit.

Notwithstanding this future uncertainty, certain economic effects have already been felt. The depreciation in the value of Sterling has made certain imports more expensive, especially for OEMs who import component parts from outside the UK. Many automotive-focussed businesses have anticipated increased costs going forward and have accordingly put in place contingency planning measures – including cutting costs, re-negotiating or terminating commercial contracts and revisiting funding arrangements. However, in the short term, OEMs may benefit from the weakness of Sterling against other currencies so that vehicles may become more affordable for purchasers in other export markets of vehicles manufactured in the UK.

What are the longer term implications and challenges?

Looking forward in the long-term and – subject to the outcome of the negotiations – the key concerns are as follows:

  • Any uncertainty that continues during the two year negotiation period would be damaging for an industry in which major commercial decisions are often taken several years in advance.
  • If the UK no longer has access to the single market on a tariff-free basis (i.e. under a 'hard' Brexit), it is likely to be more expensive for vehicles, components and parts manufactured in the UK to be exported to the EU, due to increased tariffs and custom charges. In particular, if WTO rules were to apply, there would be a 3% tariff on parts and up to a 10% tariff on vehicles. In total, the SMMT believes the cost consequences for the sector could be up to £4.5 billion (with the 10% tariff adding £1.8 billion to the cost of fully assembled cars and £2.7 billion to those exported to the EU2).
  • This could even result in UK-based manufacturers and suppliers moving their principal operations to the Continent although the costs and time implications of doing so will be significant. Recent events have demonstrated that manufacturers may take a different approach. Nissan sought guarantees from the UK Government that it will not be prejudiced by Brexit. The Government has given assurances which have satisfied Nissan and has indicated that it will provide similar assurances to other car manufacturers. However, the scope of these assurances is unclear.
  • If a trade agreement can be agreed with the EU this will typically set parameters for determining whether a product such as a car originates in the UK so is able to benefit from low or nil import duty. In situations where it is often vehicle assembly which is left to domestic work in the automotive industry, there is a risk that these "rules of origin" are not met so that full WTO tariffs kick in.
  • UK manufacturers and suppliers who want to continue selling their products and goods into the EU will need to adhere to EU automotive regulatory standards, including on safety, type approval and emissions. This could lead to duplicate certification procedures and increased compliance costs although we consider that similar regulation is likely to be retained or replicated in the UK even after Brexit as the UK Government has been heavily involved in the negotiation of those regulations. The possibility does however exist of future divergence between EU and UK regulatory requirements.
  • The UK may have a reduced ability to influence future regulation in its (current) biggest export market. This is important given that new regulations will be developed to address autonomous driving technologies and connected vehicles.
  • The EU has negotiated free trade deals with other countries such as Canada, which the UK may lose the benefit of. Unless replacement free trade deals between the UK and those other countries can be agreed on similarly-advantageous terms, increased trade costs could occur. It is in any event likely that these trade deals will take several years to negotiate so that there is likely to be a period of increased costs and tariffs post-Brexit.
  • A crucial negotiation point will be free movement of people. If this freedom is not retained, challenges could be faced: (i) for the UK in attracting necessary labour, including skilled workers, from the EU; and (ii) so as to enable OEM personnel involved in the start-up and manufacturing of particular vehicles to move between the UK and the EU.
  • There is likely to be reduced EU funding to the UK, which may impact research and development projects in the sector.

The broader issue is that these concerns – if realised – may mean that the UK will become a less attractive home for automotive businesses, resulting in lower investment in the long term. This is a concern not only for those traditional automotive players but also those emerging technology-based enterprises seeking to enter the sector at a time when autonomous systems are being developed, an area in which UK businesses are at the cutting edge.

Therefore, it is clear that Brexit poses a number of material threats to the UK automotive industry and that automotive interests will need to work hard to ensure that a Brexit deal is reached that protects their position within the EU market. That said, Brexit does represent an opportunity for UK exports of automotive products to strengthen and develop relationships with other non-EU markets especially those with growing automotive markets.