UK's globalized car industry wary of Brexit impact

AP News
Posted: Sep 28, 2016 10:29 AM
UK's globalized car industry wary of Brexit impact

PARIS (AP) — This should be a fine time for British carmakers, with sales on the rise, but for one major storm front — the impossible-to-predict ramifications of the country's vote to leave the European Union.

As British industry leaders showed off their wares Wednesday beneath the Eiffel Tower ahead of the Paris Motor Show, Britain's EU exit remains a vexing concern because it's not clear how the complex and highly globalized auto trade will be affected.

"Being part of the single market is fundamental to the current strength we're enjoying," Mark Hawes, head of Britain's Society of Motor Manufacturers & Traders. "Our biggest concern is about competitiveness of the sector."

The British automotive industry has attracted record investment in recent years, including more than 3 billion pounds in 2015, he said next to a stand of the latest models of Jaguar, Aston Martin and other U.K.-made cars. But the growth "could be jeopardized because of that uncertainty," and if Britain's departure from the EU single market results in high tariffs or too much new regulation.

Most expect "Brexit" to be disruptive, and to raise costs for companies, but the hard talk negotiations between Britain and the EU on the crucial issues of tariffs and the free movement of labor are still months away and will possibly take years to resolve.

That means years of uncertainty over the cost of building cars in Britain and the ease of exporting them to other EU countries. It will also create doubts about how difficult it will become to import vital car parts from other EU countries, to say nothing of the restrictions likely to be put in place on the free movement of skilled workers needed to assemble vehicles.

"You won't think at the moment of investing in Britain," said Stefan Bratzel, director of the Center of Automotive Management in Bergisch, Germany. "You need stability, you want to know you are investing in a stable environment, and you don't have it."

This comes just as the industry was enjoying a good run of health — production grew more than 12 percent in the first half of 2016 compared with the year before.

While the drop in the pound since the June vote to leave the EU has helped car exports from Britain, overall uncertainties are casting a shadow over the future.

"We had a short-term gain but we are very mindful of the long term," Simon Sproule, marketing director for Aston Martin, said in Paris.

In the meantime, the company is focusing on non-European markets, too. "The big picture is that we're a global growth business as well," he said.

Carmakers do not know how much production costs will rise, and whether the increases will end Britain's attractiveness as a platform for building cars and getting them into the European market. Several major British brands are owned by foreign companies — Vauxhall by U.S. giant General Motors Co., Jaguar Land Rover by India's Tata Motors and Mini by Germany's BMW.

"We have made no secret that we would have liked to remain in EU," said Hanno Kirner, executive director of Jaguar Land Rover.

Brexit is expected to hurt carmakers based in Europe, too. The immediate impact, Bratzel said, has been the reluctance of major companies like BMW to put more money into operations.

Cars are exceptionally complex in terms of the way tariffs are structured, and taking Britain out of the easy world of EU trade, with its ample single market, raises a host of issues.

Many British carmakers, for example, rely on parts imported from other EU countries. That is red-tape-free at the moment, because of EU easy access rules, but will become much more troublesome when new rules have to be negotiated and implemented, said Arndt Ellinghorst, an analyst with Evercore ISI in London.

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"It's not simple at all," he said. "The second you use a component from the EU in a U.K. car, you need a new trade agreement for that car when it leaves the country. So it's very complicated."

He said this will not only make it more difficult to export finished vehicles to EU countries but will also complicate sales to the United States and other parts of the world.

"Right now, most companies are maintaining their production footprint, but they are limiting expansion," he said. "For any major expansion, you need to know the legal framework, and that's currently unclear."

Hawes, of the motor manufacturer's lobby, said one possibility could be a tailored free-trade agreement between Britain and the EU. But he cautioned, "Even if we had tariff-free access to the European market, there would still be other costs involved, because you have to go through the processes of being a trade partner.

"Anything that adds complexity and administrative cost undermines your competitiveness," he said.

While international carmakers showcase a slew of new machines at the Paris show this week, Land Rover chose to stay on the other side of the English Channel to demonstrate its latest model Wednesday.

Company officials played down any political message behind the decision. But with the industry converging on Paris, whether to consider British manufacturers part of the European market is a question on many minds.


Katz reported from London.