The shock waves from the U.K.’s historic vote to leave the EU are about to hit the global auto industry.
Analysts predict that falling sales and rising costs are the most likely outcomes for automakers as Europe’s second-largest car market begins severing long-standing ties with the region that buys the greatest proportion of the U.K.’s home-produced vehicles.
It comes at a bad time for the world’s automakers.
“Brexit adds further ballast to an already struggling ship,” said London-based Evercore ISI analyst Arndt Ellinghorst. He listed concerns over U.S. sales, industry disruption, regulatory headwinds and uncertainty over future mobility.
Brexit is bad news for Ford and General Motors, which are battling for profitability in a region already hard on the bottom line. “We’re taking a chunk out of the sales forecast so the two biggest sellers in the country, Ford and [GM’s] Vauxhall, will likely be affected the most,” said Ian Fletcher, principal analyst for IHS Automotive.
The two biggest importers into the country, Ford and Volkswagen Group, are most at risk from the pound’s fall in value against the euro, but PSA Peugeot Citroen will also be hit, analysts predict. Japanese automakers exporting from Japan are also suffering as the value of the yen strengthened on news of the British vote.
Automakers could move production elsewhere if the EU imposes tariffs on U.K.-made vehicles. GM’s plant in Ellesmere Port is considered most at risk because of the high imported content of the Astras made there.
Carmakers are pushing for a deal with the EU that retains access to the single market. “Leave” voters are likely to reject that. Until the decision is made, manufacturers are hastily making contingency plans for all outcomes.
“We hadn’t planned for Brexit. No one had,” said Tony Walker, deputy managing director of Toyota’s U.K. car-making operations. “We were all expecting a narrow vote for “Remain.’ Even the bookies said that, and they’re never wrong.”
Here are some of the key questions arising from Britain’s vote to withdraw from the EU.
• How will automakers’ and suppliers’ earnings be affected?
They’ll take a knock, analysts predict. Evercore ISI has cut its 2017 earnings-per-share predictions for German, French and U.S. manufacturers by 8.9 percent and for global suppliers by 3 percent.
Japanese automakers’ operating profit is likely to fall 15 percent as the value of the yen rose against European currencies and the dollar after the Brexit vote, according to JP Morgan. Of those importing into the U.K., the bank predicts Mitsubishi and Mazda will be hit hardest, followed by Toyota.
Automakers were already struggling to make money. “Europe has gone from the most profitable region in the world in 2007 to the least profitable,” said Erik Jonnaert, secretary general of ACEA, the European automakers association, citing the cost of meeting increasingly stringent regulations.
• What would a breakup of the EU look like for the auto industry?
Not good. “If the EU breaks up, the whole automotive supply chain would be in disarray” as border crossings are reinstated, investment bank RBC Capital Markets wrote in a note. “It could take years and a lot of capital to get supply chains back to more cost efficient levels.”
A return to national currencies would mean a return to Germany’s strong deutsche mark making its exports uncompetitive, which would affect U.S. suppliers.
“While we are not forecasting it, we have to believe that the odds of the disintegration of the EU have risen,” RBC wrote.
• How will U.S. dealership groups with U.K. operations, such as Penske Automotive Group and Group 1 Automotive, be affected?
“The main problem for dealers is the uncertainty,” said Sue Robinson, director of the U.K.’s National Franchised Dealers Association. Concerns include what happens to pan-European dealer contracts once the ties are severed. “We’ve taken quite a lot of legal advice on this but all the lawyers are saying is that everything is pure conjecture at the moment,” Robinson said. Broader worries include possible pricing increases and expected loss of sales. So far, no one is reporting a drop in demand.
• Are Ford’s and GM’s European recoveries at risk?
Almost certainly. The U.K is the biggest European market for both companies, with Ford heading GM’s Vauxhall as the country’s two most popular brands. The country is “fundamental” to Ford’s return to profitability in Europe, Ford of Europe’s CFO, Lyle Watters, told Automotive News last year. Ford of Europe reported healthy profits for the first quarter this year, but the weakening pound exposes the company to a currency hit because it imports all its U.K.-sold vehicles, mostly from Europe.
GM is better positioned because it makes cars and vans in two U.K. factories. Last week, GM’s chief economist, Mustafa Mohatarem, argued that that Brexit might have a positive effect on U.S. sales because it meant U.S interest rates would be less likely to rise, preserving low-interest auto financing.
• How will suppliers be affected?
Dan Sharkey, a suburban Detroit lawyer whose firm Brooks Wilkins Sharkey & Turco represents more than 150 suppliers, said Brexit will affect only a few of those clients.
“England is a pretty small market, nowhere near Mexico, nowhere near China. It’s not a huge issue. But for those who are there it’s huge. If they negotiate new trade deals that are very close to what they have now, the panic may be for naught. The question is: What’s going to replace this? The answer is: Nobody knows. Until we know what replaces it, we don’t know how scared we should be.”
• What is the future of U.K. auto manufacturing? Who is most likely to leave?
The U.K. plant most likely to shut is GM’s Ellesmere Port factory, which makes the Vauxhall Astra subcompact hatch and station wagon, argues Garel Rhys, emeritus professor of motor industry economics at the U.K.’s Cardiff Business School. “It’s the most vulnerable,” he said. His reckoning is that Ellesmere Port’s cars’ low 25 percent local content rate makes the plant less “anchored” compared with factories whose products have more parts sourced in the U.K. Offsetting that is the Ellesmere Port plant’s fresh trade-union agreement, a new model to build and improved productivity.
• Are U.K. car prices likely to rise?
So far only PSA Peugeot Citroen has said that Brexit likely will mean price increases in the U.K., but the fall in the pound’s value against the euro makes that inevitable. As of Thursday, June 30, the pound stood at 1.20 euros, down from 1.36 at the beginning of the year, hitting the big importers such as PSA Peugeot Citroen and VW Group.
• What about Jaguar Land Rover’s special agreement on carbon dioxide emissions?
The U.K. government helped Jaguar Land Rover reach a deal with the EU whereby its cars were handed a much less onerous fuel economy target come 2020-21. Without it, JLR would have to bring the average economy of its SUV-heavy lineup to roughly that of a subcompact. Will it still stand?
“It’s a fair question,” said ACEA’s Jonnaert. He believes that if the U.K. joins the wider European Economic Area trading bloc, the special deal will still apply. But if the country rejects that route, which looks likely because that option would come with all the same EU rules U.K voters rebelled against, then it will have to renegotiate. That could force JLR to accelerate its electric vehicle plan.
• Will the U.K. have the same fuel economy and emissions requirements?
Yes. 57 percent of the 1.6 million cars the U.K. built last year are sold into Europe and they will still need to conform to EU regulations. That means hitting stringent targets for gasoline and diesel emissions, as well meeting crash standards.
• Could the U.K.’s automakers weather a 10 percent tariff to sell into the EU?
Cardiff Business School’s Rhys said yes, thanks mainly to their productivity, led by Nissan’s Sunderland plant. “We are the most productive country in Western Europe, twice as productive as the French and Italians and ahead of the Germans too,” Rhys said. So far no U.K.-positioned automaker has said it will alter its investment plans.