The consequences of “No Deal” for UK business Contents

3Automotive sector

Introduction

49.The automotive industry accounts for 13% of total UK exports of goods and employs 186,000 people directly.81 The industry is characterised by highly integrated international supply chains. Industry analysts predicted in 2017 that global vehicle sales would slow through to 2020, amidst widespread concerns that automobile demand in many developed economies has peaked and new vehicle sales in China are declining faster than had been expected.82 The industry was also facing falling sales of diesel cars.83

50.A number of announcements have been made concerning the UK automotive sector in the last six months including:

51.Mr Sydney Nash, Senior Policy Manager, Society of Motor Manufacturers and Traders believed that “the fundamentals for UK automotive remain strong” but that, given global challenges, the decisions regarding the UK’s relations with the EU would “determine whether or not the sector continues to grow or we see more negative outcomes for UK automotive”. He added that:

fundamental to ensuring we can still grow as a sector here in the UK is getting our relationship with the EU right, first and foremost, and about guaranteeing that frictionless trade. That is absolutely critical to our competitiveness, but it is also about maintaining the preferential access we have to global markets through EU FTAs,86

He concluded that “for the automotive sector, no deal is simply not an option”.87

Tariffs and Rules of Origin

52.In the event of a “no deal” exit from the EU, under “WTO terms” UK cars exported to the EU would be subject to the EU’s Common External Tariff. The standard tariffs on cars are 10% and, on average, 4.5% for vehicle components. In September 2018, the Society of Motor Manufacturers and Traders (SMMT) estimated that the cost of UK-built cars sold in the EU would rise, due to tariff costs by an average of £2,700, and light commercial vehicles by £2,000.88 Around 56% of UK vehicle exports currently go to the EU. Adding such significant costs to UK cars exported into the EU would make them substantially less competitive within the EU.

53.Exiting the EU Customs Union will also require the introduction of new customs checks, including on rules of origin. These rules require that the originating status of goods must be proved in order for them to comply with either preferential rules of origin (where a free trade agreement with zero or reduced tariffs apply) or non-preferential rules. In a no deal scenario, UK trade with the EU and with Turkey, a major supplier of components for the UK automotive sector, would be subject to increased checks.

54.Preferential rules of origin, a standard element of Free Trade Agreements (FTAs), involve requirements specifying a minimum percentage of domestic content. They can be broadened by provisions for “cumulation”—so that components from outside a country can be treated as originating there for the purposes of applying the rules. The SMMT have said that new free trade agreements with third countries will require negotiation of new rules of origin provisions. It has recommended that, where the UK is negotiating new trade arrangements with third countries with which the EU has an FTA, it should look to include provisions for “diagonal cumulation” which would allow for both UK and EU content to be counted as “originating content”. The SMMT have noted that:

Existing EU FTAs require approximately 55% EU content if a finished vehicle is to benefit from the preferential terms of trade with a third country. Were new trade deals signed by the UK to require 55% UK content in a finished vehicle, a significant change in the supply chain would be needed. Vehicles produced in the UK currently contain approximately 44% UK content. This represents a growth in UK content in recent years but is still a long way from the 55% that would be required to enjoy preferential treatment under future trade deals.89

55.Mr Nash explained that standard provisions in Free Trade Agreements around minimum domestic content meant that, for the automotive industry, clarity on trading terms with the EU was essential:

For us, when it comes to UK future trade policy, the EU is by far the most important deal to do, first and foremost. It also then has knock-on implications for any further deal, particularly because of rules of origin and cumulation. As things currently stand, if you take the trade deal with South Korea, for example, we unlock the benefits of that trade deal because our originating content level meets the requirements to get the zero tariffs, but that is based on UK-EU content.90

Supply chains

56.We were told that there are 1,100 trucks coming into the UK from the EU every day, delivering components to engine and car plants. Mr Nash told us that, in a no deal scenario, there would be disruption to supply chains in the automotive sector caused by any friction at the UK’s borders:

Looking at what happens at the border, we rely on frictionless trade, so the free movement of goods across the border. That cannot be guaranteed under a no-deal scenario and that will fundamentally undermine our competitiveness and our ability to manufacture at a competitive level with the rest of the EU.91

57.Supply chains in the automotive sector are highly integrated across the EU and are based on “just in time” delivery with minimal warehousing. Mr Nash told us that concerns around ability to move cars and components across the border was a concern around a no deal exit, adding that:

You cannot have a warehouse big enough to deal with two weeks, three weeks, four weeks, maybe several months indeed, of disruption and delay at the border. The reason that is so challenging is because it is a just-in-time industry, at least for the volume manufacturers. The way they operate is not to have a warehouse. It is to have the trucks as their warehouse. The component arrives just in time and just in sequence. If they are unable to do that, it will have an impact on production92

58.We were told that the risk of disruption of supply chains was already having an impact on decisions made by businesses throughout those supply chains. Production on a just in time model required components to arrive within approximately five minutes of going into a vehicle. For manufacturers in the EU27 relying on components produced in the UK, disruption at the border also amounted to a risk, albeit one that could be mitigated by moving its supply chain outside the UK. Mr Nash told us that the SMMT had:

surveyed our members, which are largely suppliers, and a number of them have come back and said they have had to move operations because of the uncertainty and because of the risk of a no-deal Brexit. In some parts of the supply chain, we are seeing pressure from their customers to, essentially, be no-deal-Brexit-proof, for want of a better phrase. One of the ways to achieve that is to move your operations out of the UK and into the EU 27.93

59.Across the manufacturing sector, Seamus Nevin, Chief Economist, Make UK, told us that there was evidence of some manufacturers shortening their supply chains, to reduce their dependence on imported components with some onshoring. However, this was not possible for all firms and the availability of the relevant skills was an obstacle to firms hoping to source more components locally. Mr Nevin noted that “88% of non-graduate employees working in the manufacturing sector would not qualify to meet the Home Office’s visa entry requirements under the proposals in the Immigration White Paper”.94

Cost of preparation for no deal

60.We were told that the cost of the stockpiling exercise undertaken by the automotive sector to prepare for a possible no deal exit on 29 March was in the “tens of millions, in terms of the cost for just an individual company to prepare for no deal”, and that this covered costs including storage of stockpiles but also:

increased insurance costs. If a company is stockpiling chemicals it is increasing insurance and compliance costs as well. There are new IT systems, new staff, consultancy fees, legal fees; there is very long list of expenses related to no deal. Some of them are issues the companies themselves had not quite anticipated would be costs.95

61.For example, we were told of the need to stockpile pallets which are specifically designed for moving specific components, another additional cost which we were told ran into the millions of pounds for the sector.

62.Mr Nash also set out what he described as “the cost of just the threat of no deal”. He explained that businesses had spent tens of millions of pounds on no-deal contingency planning, and invested thousands of hours of work. “Even with the best will in the world, no company can fully mitigate against all the risks of a no-deal Brexit. [ … ] It does not fill international investors with confidence either”.96 Mr Nevin said that Make UK members had made clear for the manufacturing sector as a whole “that there is a direct link between politicians talking up the prospect of no deal and British firms losing customers overseas and British people losing jobs in British firms”.97

63.In January, the SMMT reported that inward investment in the automotive sector fell by 46.5% in 2018 compared to 2017 citing “fears over the UK’s future trading prospects with the EU and other key global markets”.98

Type approvals

64.When EU law ceases to apply in the UK, the UK’s Vehicle Certification Agency (VCA) will cease to be an EU type approval authority (TAA). EU approvals issued by the VCA will no longer be recognised in the EU27, and UK produced vehicles will not be able to be placed on the EU market without an approval from a TAA in the EU27. The Government’s Chequers proposals in July 2018 envisaged vehicle regulations and the EU type approval system forming part of the “Common Rulebook”, with the UK committing to ongoing regulatory alignment and earning recognition of VCA approvals. Mr Nash confirmed that a UK approval would not be valid in the EU under a no-deal scenario.99 A majority of UK car producers are understood to have obtained approvals from a TAA in the EU27 prior to the end of March 2019 in anticipation of a no deal exit.

Conclusions

65.Leaving the EU without a deal would mean that the UK automotive sector would be subject to the EU’s Common External Tariff on its exports to the EU27, its largest market, adding costs estimated at around £2,700 for UK cars. These costs would undermine the competitiveness of UK exported cars compared to cars manufactured and traded within the EU and cars manufactured in countries, including South Korea and Japan, with free trade agreements with the EU.

66.Without any agreement on cumulation with the EU, it would be difficult for UK-manufactured cars to benefit from any trade deals reached with third countries as, for most lines, the proportion of UK-produced content is currently below 50%. There may be potential for some onshoring of supply chains in the automotive sector, and in manufacturing more generally, but there is also evidence of jobs being lost in the supply chain as manufacturers in the EU27 reduce their own exposure to the disruption of a no deal exit.

67.Turkey is currently a major supplier of components to the UK’s automotive sector. As a member of a customs union with the EU, a no deal exit would also require Turkey to erect new barriers and checks in its bilateral trade with the UK, placing further costs on the UK automotive sector. The Committee notes that trucks attempting to enter the EU via the border between Turkey and Bulgaria can be subject to tailbacks of up to 17km and delays of up to 30 hours.100

68.The UK automotive sector relies on highly integrated supply chains. Delays at the border will create disruption and inefficiency for businesses relying on components arriving “just in time” and in the correct sequence. Failure to maintain these processes risks putting the UK automotive sector at a competitive disadvantage in a highly competitive industry. Planning for a no deal has also already placed a substantial cost on the UK automotive sector and has had a chilling effect on investment in the sector.

69.It is clear that a no deal exit would result in the UK automotive sector - a great British success story - being put at a competitive disadvantage.


81 SMMT: Driving the Motor Industry, Automotive Brexit myths–busted

82 Global Automotive Industry report, Riedel Equity Research 2017

85 The Financial Times reported that Ralf Speth, Chief Executive of JLR, had said that securing a UK centre for battery production, around 40% of the cost of an electric car, was key to the future of UK carmaking; he said “Affordability will only be achieved if we make batteries here in the UK, close to vehicle production, to avoid the cost and safety risk of importing from abroad”. It also reported that several European countries were trying to attract “gigafactories” to make electric car batteries. “Jaguar Land Rover to invest £1bn to build electric cars in Britain”, 5 July 2019

89 SMMT Issue Paper July 2019 - Rules of Origin

100 The Financial Times, “Turkey border gridlock hints at pain to come for Brexit Britain”, 16 February 2017




Published: 19 July 2019