It’s becoming clear that Brexit doesn’t just mean the UK is breaking away from the European Union. It comes with far greater consequences than voters previously anticipated. Analysts predict that it will progressively affect various manufacturing sectors, including the automobile industry. Sadly, it is not just limited to the UK but will also affect global markets.
How Much Could Brexit Cost Vehicle Manufacturers?
According to a study conducted by IHS Automotive, the move by the UK to break away from the EU could ultimately cost vehicle manufacturers more than 2.8 million sales in the next two years. The report, which was presented by Autonews, predicts a drop of more than 200,000 in worldwide vehicle deliveries this year alone, a phenomenon purely triggered by Brexit. Over the next year, the drop is projected to increase to 1.25 million, and 1.38 million in 2018.
Although other markets will feel this impact, according to IHS Automotive analyst Ian Fletcher, the UK is expected to bear the brunt of it. At the beginning of 2016, the automobile industry in the UK was predicted to grow by 3.2 percent. However, due to Brexit, the growth could wane down to 1 percent by the end of the year and possibly drop even further in the next couple of years.
Brexit’s Effects On UK-Based Companies
The biggest losers, of course, are companies based in the UK, including foreign automakers with vehicle manufacturing plants within the country. Before Brexit, UK was widely perceived as a strategic location to penetrate the rest of the European markets. Therefore, a bulk of companies, including the world’s largest motor vehicle manufacturer, Toyota, had already established themselves with Avensis and Auris manufacturing plants. Sadly, they now have to part with levies as high as 10 percent on these two models- something that could subsequently force them to increase prices or drastically cut production costs.
According to the statement released by Ian Fletcher, Ford and General Motors also share the same fate as Toyota, Nissan, PSA, Peugeot, Citroen and Honda. The two biggest importers of vehicles, Ford and Volkswagen, also face a significant risk from the fall of the pound against the euro. This alone could cause them to reduce the number of vehicles directed to the UK market, and instead focus on making up for lost sales by capitalizing on other European markets.
Another company that could be substantially affected is BMW, which according to the Wall Street Journal, sells more than 11 percent of their vehicles in the UK. The progressive pound value loss could force them to increase their sale prices, consequently locking out some of their prospective buyers.
This unexpected turn of events, especially in regards to UK and U.S. based companies, arguably prove London-based Evercore ISI analyst Arndt Ellinghorst right. According to him, “Brexit adds further ballast to an already struggling ship.” True to his words, automakers could have an even harder time when the EU begins imposing new tariffs on UK manufactured vehicles. To cushion themselves against the consequent losses, they could begin shifting their plants to other countries within the EU. General Motors’ plant at Ellesmere, for instance, could possibly be one of the first companies to shift, considering the high number of Astras produced in the UK.
Supply Chain Complications
Breaking away from the EU is also expected to introduce new complications in the automotive supply chain. If border crossings are restored, it could take a lot of time, possibly years, to reinstate the respective supply chains back to their current cost-effective standards.
Investment bank RBC Capital Markets further introduced a new twist to this, by weighing in on the odds of a subsequent EU disintegration. If that occurred, countries would ultimately go back to their national currencies, including the strong Deutsche Mark, which would undoubtedly make Germany’s exports uncompetitive — an impact that would consequently be felt by U.S. suppliers.
Currently these effects are yet to be felt. They are only predictions, which could potentially change, as vehicle manufacturers employ new strategies to cushion themselves.
The UK, with the help of its allies, is also working to maintain a stable market that’s attractive to not only automakers but also other manufacturing companies.
Only time will tell if they will ultimately be successful.