This article is being updated regularly.

The UK general election on June 8th, in which the governing Conservative party lost its parliamentary majority, has cast uncertainty over investment and policy in terms of the country’s automotive industry and supply chain – most notably over pending negotiations to leave the European Union.

There is now a real risk that an unstable UK government may be unable to come to agreement over Brexit, increasing the potential of leaving the EU without an agreement in place, which could do real damage to the UK economy and its automotive sector.

However, doubts following the election also augur some hope, at least for some. While business associations and manufacturers have expressed concerns over how a weak, potentially unstable government might impact the economy – which has already shows signs of slowing, including lower vehicle sales – a number of analysts and business leaders have suggested the result could encourage a ‘softer’ Brexit, in which the UK might remain in or closely linked to the European single market and customs union, which allow for tariff-free, frictionless trade between members.[in_this_story align="right" border="yes"]

A number of major business associations for manufacturing and logistics have called on the government to 'rethink' its Brexit strategy. The Freight Transport Association (FTA), which represents the British logistics sector, has called for the government to reconsider its plan to leave the customs union, something the association said would have negative impacts for trade and logistics between the UK and the EU, its biggest trade partner.[sta_anchor id="1"].

Meanwhile, the EEF, a major manufacturers' organisation in Britain, also called on the government to put access to the single market at the centre of its strategy, and to ensure transitional arrangement are in place for when the UK is scheduled to leave the EU in March 2019.

Up to now, May has herself indicated that there will be no change in direction from the government's original plans, which include quitting both the single market and customs union. The question is whether divisions in her own party, and across parliament, may force a change or compromise.

Coming out weaker: a parliamentary recapThe election saw the Conservatives, or Tory party, led by Theresa May, the prime minister, lose 13 seats in the House of Commons. That still leaves it as the largest party in parliament but it is around eight seats short of the number required to give it an outright majority, resulting in what is termed a ‘hung parliament’. The Labour party, led by Jeremy Corbyn, gained 32 seats but has about 50 seats fewer than the Tories.

The Conservatives appear to be close to an agreement with the Democratic Unionist Party (DUP) of Northern Ireland, which won 10 seats, that would allow the Tories to remain in power either as a minority government or in a formal coalition.


Theresa May is expected to remain as UK prime minister for now... but her vision of Brexit may have to change

When May called the early election back in early April, her party was ahead of Labour by 20 percentage points in the polls and was expected to win a comfortable, if not substantial, majority. At the time, she said she was going to the ballots because having a bigger majority in parliament would strengthen her hand in negotiations with the EU.

The prime minister now appears to have a weaker position in her government and her own party, and faced calls after the election both from opposition leaders and even some members of her own party to resign.

While it looks as though she will stay in power, it is unclear for how long and whether she will be able to carry out the version of Brexit she has advocated up to now. Official negotiations were set to begin with the EU on June 19th, a timetable that top officials in Brussels, as well the German chancellor Angela Merkel, have said should go ahead as planned. So far, the British government has also said they would.

The UK officially triggered Article 50 at the end of March, beginning a two-year countdown for negotiations to leave the EU.

The situation is made particularly shaky because either a coalition with a small majority or a minority government could struggle to pass legislation. Although the Conservatives led a coalition with the centrist Liberal Democratic party from 2010-2015, together they were able to command a much higher majority than a pact with the DUP would achieve today. Tensions could arise over differences of opinion between some in the Conservative party and the DUP on social and economic issues, as well as Brexit, over which the Tories and parliament are deeply divided. For example, May's government may now be just as dependent on backbench members of parliament who support a hard Brexit, as it is those who support more compromise.

OEMs: tell us what we need to hearFor the automotive sector and the wider UK economy, this uncertainty raises many questions. The economy may already be slowing down following weak GDP output in the first quarter of this year, rising inflation and some deterioration in business confidence. The automotive sector, which saw record sales levels alongside the highest production and export output this century in 2016, has experienced declines in light vehicle sales in recent months, including a 20% drop in April (which followed a tax increase for vehicles) and an 8% drop in May, compared to the same months last year. Light vehicle assembly also declined in April, though it remains at a similar level to last year’s high through the first four months of the year.

Uncertainty over Brexit and the UK’s future trading relationship with the EU have also contributed to a drop in investment in the automotive sector since last year, according to the Society of Motor Manufacturers and Traders (SMMT), although the lower levels have also been partly cyclical following record investments in prior years.

For the SMMT and other business lobby groups, the primary concern following the election has been to see a government formed as soon as possible to ease business and investor concerns, and to avoid further delays to Brexit negotiations. For the car industry, in which long-term investments in model locations and plants are made in 5-7 year cycles, any sustained period of uncertainty on the part of a government can be highly damaging.

“UK automotive is vitally important to the UK economy and jobs across the country, and now more than ever we need strong engagement by government with the industry – both on the domestic agenda and in European negotiations – to secure future growth and investment in our sector,” said Mike Hawes, SMMT chief executive. “Collaboration with our industry is the key to securing a globally competitive business environment, an ambitious industrial strategy and a strong relationship with Europe and our trading partners across the world.”

Andy Palmer, chief executive at British premium carmaker Aston Martin, also urged a fast resolution. "We cannot stress strongly enough the need for rapid and decisive policy direction to ensure that business can continue to invest for long-term growth and ensure the global competitiveness of the British economy," said Palmer in a statement after the election.

"Clarity over our relationship with Europe must be established quickly together with the wider reassurance to our key trading partners that Britain remains a dynamic and thriving business environment," he added.[sta_anchor id="2"]

Voices from the automotive sector are echoed elsewhere in the wider British business community. According to a survey after the [related_topics align="right" border="yes"] election by the Institute of Directors, a 30,000-member business association across sectors in the country, 65% of respondents said the uncertainty in the government was a significant concern; the election also led to a huge loss in confidence, with 57% of respondents either quite or very pessimistic, compared to 37% in May. A large majority of respondents also put agreeing trade arrangement with the EU as a top priority.

A walk on the softer sideWhile carmakers and businesses want clarity above all over Brexit, the government’s direction appears to be in doubt. Up to now, Theresa May has pledged to leave the single market and customs union in favour of having more control over immigration, regulations and forming separate global trade deals (which membership of the customs union excludes). In doing so, she aimed to achieve ‘maximum access’ to the single market, including special status for industries like automotive, while ending free labour movement between the UK and EU.

Agreeing anywhere near the type of seamless trade that the UK has today as a member of the EU was always going to be difficult to agree in Brussels and European capitals, for which freedom of movement is a core EU principle. The recent election of a highly pro-EU president in France, Emmanuel Macron, along with the strong parliamentary majority that he now appears on course to win following the first round of French legislative elections, seems only to strengthen unity on the EU side.

Now, without a majority in parliament, and with her position less secure as leader of the party, it is unclear if Theresa May would even have the authority in her own government to push through the legislation required for such changes. Political analysts have noted that the Conservative party was already divided on the issue of leaving the single market, given the risks it poses to the economy, including to the manufacturing, technology and financial sectors. While there were many factors in the election result, at least some rejection of a ‘hard Brexit’ may have been involved.

For example, many of the seats the Tories lost in England were in constituencies that voted to remain in the EU and would be likely to support a softer Brexit, especially in cities like London and Manchester. In Scotland, where the Conservatives gained 12 seats, the party’s members of parliament tend to favour a softer Brexit, given Scotland’s overwhelming vote to remain in the EU. A significantly high turnaround among younger voters, who mostly favoured remain in the referendum and appear to have largely voted Labour on June 8th, could also put pressure on the government looking ahead to future elections.

Finally, the DUP, while in favour of Brexit, has stressed the importance of avoiding a hard border or customs checks between Northern Ireland and the Republic of Ireland, which leaving the customs union may require. The DUP would also reject any arrangement that would create any kind of border or bureaucracy between Northern Ireland and the UK mainland, such as an arrangement where Northern Ireland remained in the customs union and the rest of the UK did not.

May’s oft-repeated mantra during the election campaign that “no deal [with the EU] would be better than a bad deal” – a situation that could have led to significant disruption to business on both sides of the English Channel – would not seem to square with many of these factions.

The government could therefore struggle to pass key pieces of law around its promised version of Brexit, particularly when it comes to changes in regulation, stricter controls on immigration, new trade policies and the crucial parliamentary vote that will follow the end of negotiations with the EU. Indeed, on election night, following exit polls showing the Tories would lose seats, the minister responsible for Brexit, David Davis, suggested a loss of its parliamentary majority in the vote would mean the government had also lost its mandate to leave the single market, as laid out in its campaign manifesto.

Following the election, the Financial Times reported that business secretary, Greg Clark, had held a meeting with a number of major business associations, including the EEF and employers’ lobby the CMI. According to those present, Clark was trying to guide consensus towards a softer Brexit.[sta_anchor id="3"]

Time for a rethink?A move by the new government towards a Brexit that may include full or partial membership of the single market would be welcome news to many in the automotive and logistics industries. Major carmakers in the UK including Nissan, Toyota and Ford have expressed worries that the trade and logistics barriers that would result from leaving the single market and customs unions would damage their businesses and disrupt supply chains.

Worries among manufacturers include seeing the imposition of tariffs for parts and vehicles, customs checks that would delay the flow of goods to the UK, and divergences in policy over vehicles, components or rules of origin for parts. Any or all such barriers could hurt the competitiveness of the UK automotive supply chain, which is highly connected to the EU. According to the most recent SMMT figures, only 41% of components in UK-built vehicles are sourced domestically; while this share has increased since 2011, two-thirds of the remaining share come from the EU, worth about £8 billion ($10.1 billion) per year, according to IHS Markit.

Meanwhile, the UK shipped 56% of its 1.35m vehicle exports last year to the EU; more than 1.5m of the 2.2m vehicles that it imports each year are from the EU.

brexitinfographic-1024x707. Click to enlarge

Manufacturers, including BMW, which builds the Mini brand in the UK, have largely encouraged the government to remain in the single market. The SMMT has also supported continued membership of the single market, and failing that wants to see as few barriers as possible. The organisation estimates that the EU’s 10% tariff on vehicles stipulated by the WTO would add £1.8 billion to the cost of assembled cars exported from the UK and £2.7 billion for those imported from the EU – raising prices by £1,500 per car.

PA Consulting has also warned that time delays at borders could impact the sector’s supply chains. “Both the EU and the UK would benefit from keeping free trade and supply chain unaffected because any tariffs would be damaging for both sides, based on today’s complex supply chain arrangement,” said Tim Lawrence, global head of manufacturing at PA Consulting Group.

IHS Markit estimates that the extra logistics and tariff costs that such a scenario for a UK-built Nissan Quashqai would add up to around £600 per vehicle.

In April, Jaguar Land Rover’s chief executive, Ralf Speth, also warned that more control on immigration could limits the carmaker’s access to highly skilled engineers in Europe, where JLR has also started production in Austria and is building a new plant in Slovakia.

The FTA, meanwhile, had warned that leaving the customs union would put the UK logistics sector and trade at risk. It estimates that 44% of the UK’s total exports in goods and services – valued at £240 billion out of £550 billion in total – were transported to the EU in 2016. The association has also pointed to the sector’s strong dependence on labour availability from the EU.

Following the election, the FTA said the government now lacked the mandate to leave the customs union and that it should rethink its plans.

“Exiting the customs union threatens the imposition of tariffs, border checks, customs declarations and huge amounts of bureaucracy for the significant number of UK businesses that trade in the EU, and the logistics organisations that deliver it for them,” said James Hookham, FTA’s deputy chief executive. “Negotiating a replacement trade deal that avoids these would require a strong and convincing mandate, which the election has now put into doubt. The importance of frictionless arrangements for UK trade with the EU, particularly with Ireland, means that the decision to leave the customs union should be reviewed as a matter of urgency, and other ways of achieving a positive outcome for Brexit should now be considered.

“Our members agree that the government’s aim of delivering a frictionless trade deal for British business outside of the customs union has now become much more difficult than before the election,” he went on. “We are therefore calling for a rethink of that decision, and for other options to be considered in which Brexit can be delivered whilst reducing the impact on British exporters and importers and the international logistics businesses that deliver the UK economy.”[sta_anchor id="4"]

On June 13th, the EEF also called on the government to revise its strategy and take a more "pro-business" stance. The EEF warned that companies in the UK were already considering their business plans in the UK, including moving operations out of the country. Terry Scuoler, chief executive of EEF, called on the country to build more consensus on Brexit.

“The new Government’s priorities must radically re-focus Brexit negotiations around trade and close cooperation ensuring a smooth exit from the EU. There are numerous ways of establishing a new relationship with the EU and, given we’ve just wasted a year, the Government needs to move away from its previous rhetoric and start repairing relations with EU partners," said Scuoler.

“This means putting access to the single market and a form of customs union at the heart of a revised strategy, and removing the shibboleths created around a hard Brexit, which businesses know would be highly damaging for Britain. The UK can surely manage who is and who is not in the country by introducing a more effective and robust form of immigration control which maintains the rights of EU citizens and UK citizens’ across Europe.

“With less than two years to negotiate a meaningful deal, the Government should commit to a significant period of transition to manage uncertainty for businesses and bolster confidence," he added. "Business groups can help with the negotiations over trade, which is the model every other government involved in trade negotiations operates, and we need to be brought in quickly to do this. We need to build a political consensus based on our collective national interest.”

Uncertainty goes both waysWhile the election may open up the potential for a softer Brexit, such an outcome is far from definite. Theresa May has so far maintained that there will be no change in plans. A cabinet reshuffle since the election has included appointments of both Brexit-supporting and remain-leaning ministers.

Furthermore, the opposition Labour party's position is far from clear on Brexit. Its own manifesto said that that it would end freedom of movement, something that would imply leaving the single market as well. Since the election, Corbyn and his shadow ministers have made somewhat contradicting statements about how certain they would be to leave the single market. In general, Labour appears to be more open to a softer Brexit, with a pledge to 'put the economy first'. However, the Labour party is faced with some of the similar divisions as the Tories are over Brexit. The degree to which the party would support Conservative legislation in these areas is unclear.

In either case, the weakness of the UK position may now also increase the risk of a more dangerous exit from the EU. If the UK government is unable to overcome its own divisions over its Brexit aims, it may struggle to achieve any agreement with Brussels. Even if negotiations were postponed from June 19th, delaying the UK’s exit under Article 50 would require agreement from all 27 other member states. Leaving without any agreement would likely do the most damage to the automotive sector.

The danger of that uncertainty to the automotive supply chain was put into stark perspective at the recent Automotive Logistics Europe conference, where Christophe Stürmer, an analyst for PwC Autofacts, suggested that in the worst-case scenario carmakers could abandon much of their UK production capacity relatively quickly. He estimated that up to 17% of UK vehicle assembly could be moved to the EU virtually immediately, while another nearly 50% of vehicles, which shared a platform at another plant in the EU, could potentially be moved within a year.

Speaking on the eve of the election, he warned that political leaders in the UK and EU had little time to lose in assuring stability for manufacturers, investors and consumers. “The situation could be very dramatic, but I am quite sure politicians, especially in the UK, understand that it is not good to keep the automotive manufacturers in an unsure state for very long, because decisions need to be taken and they need to be taken fast for the next product generation,” he said.