SMMT news conference January 2019Vehicle exports from the UK accounted for 81.5% of production last year, the highest proportion since 2012, allowing the country to maintain its position as the second strongest new car market in Europe after Germany.

According to data presented last week by the Society of Motor Manufacturers and Traders (SMMT), the UK exported over 1.2m vehicles last year, the third highest volume on record (though 7% down on last year). Exports to Japan, South Korea, Russia and the US were all up and the EU remained the UK’s biggest trading partner, with a 52.6% share of all exports.

However, continued uncertainty amongst automotive manufacturers with regard to trading conditions after the Brexit deadline at the end of March contributed to a halving of investment in the sector last year. Investment fell by 46.5% to £588.6m ($770.5m) during the period.

Nissan’s latest decision to cancel its plans to build the X-Trail in the UK indicates the extent of the problem. Decisions like this threaten the UK’s long-term competitiveness as an automotive manufacturing base.

The decline is more dramatic if one compares the figure for last year with the average annual investment made over the last five years, equal to around £2.5 billion, according to the SMMT.

While major investments in vehicle-making are cyclical over five-year periods, Mike Hawes, chief executive of the SMMT, said last year’s investment drop was a clear indication that investors were pausing on facility and equipment upgrades until they had clarity on how the UK would continue to trade with the EU.

“We always expected production to be relatively flat at the moment and investment to come down, but the severity of the drop in production and investment is much worse than we had anticipated,” he said.

It is not just Brexit uncertainty that is disrupting the normal round of UK automotive investment; there are also concerns over diesel policy, changes to emissions regulations, including the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP), along with declining business and consumer confidence (also factors in Nissan’s decision to cancel plans for the X-Trail at Sunderland).

[mpu_ad]Those contributory factors meant that last year in the UK, car production fell by 9.1% to 1.52m, with domestic demand down more than 16% to just under 282,000 vehicles. Despite buoyant exports, there was also a decline of more than 7% to overseas markets, mainly because of drops in demand in China and the EU. Added to this, there is expected to be a further fall in production of 40,000 this year, according to the SMMT.

Urgent need for dealThe UK’s competitiveness as a leading new car market is now under pressure and what is of immediate concern to the companies invested in production is the prospect of the UK leaving the EU without some sort of a deal, come March 29. Along with the 650,000 vehicles exported to Europe from the UK last year, a further 15% of overall production (around 228,000) goes to markets with which the EU has a preferential trading arrangement.

“About two-thirds of our exports go to countries where we have preferential trading arrangements,” said Hawes. “Those preferential trading arrangements will be lost if we exit Europe without a deal and that could be less than two months away.”

This situation is compounded by the fact that the EU-Japan trade deal was finalised at the beginning of February with a seven-year timeline on the reduction of tariffs. The UK’s exports to Japan were up 26% last year to around 36,500, and it is now the UK’s fourth largest export market. Leaving the EU without a tertiary agreement could damage that trade.

The UK also imports a lot of vehicles from global markets. Around 86% of the vehicles sold in the UK are imported, with the majority coming from European factories, according to Hawes. It is also heavily reliant on parts trade for its own production, with 1,100 trucks coming into the UK from the EU every day carrying components for OEM assembly facilities.

The UK government is negotiating with the EU up to the last minute on the details of withdrawal, while fighting its own battles at home – all at the cost of business confidence.

“Whatever the arrangements that will be agreed for the long term (which are still unclear), what we need most urgently is a deal,” said Hawes. “The prospect of no deal would be incredibly damaging for this sector. Not only is it our major market, it is a major source of imports, of components.”

Modern automotive production relied on just-in-time (JIT) delivery and that worked on the basis of barrier-free trade, he stressed. “Anything that puts up a barrier between [the UK] and the rest of Europe will undermine our competitiveness,” said Hawes.

Brexit Any prospect of resorting to trade with Europe along WTO rules would also be costly, according to the SMMT. Hawes said it would add around £5 billion to the cost of trade between the UK and the EU, and was nowhere near the preferential trading arrangement UK manufacturers currently have or need to remain successful.

“It would add to the average cost of a car sold in the UK, just on tariffs alone, £1,500 per car, if those costs were passed onto the consumer,” he said. “Inevitably, that would affect demand, profitability and jobs.”

As an EU member, the UK is part of a customs union and single market. Replacing this arrangement with separate free trade agreements would bring up questions of tariffs and regulations, both of which could cause trade friction, he continued.

“We have regulatory alignment with the rest of Europe, which means you can make a vehicle in the UK and sell it anywhere else in Europe and it can pass the borders seamlessly,” said Hawes, underlining that this could change if the UK government fails to settle with Europe on a common regulatory set-up without tariffs.

While negotiations between the UK government and the EU have frustratingly failed to resolve the uncertainty plaguing business between the UK and Europe, Hawes said the government did have the best interests of the automotive industry at heart, pointing to the Chequers plan drawn up by the government last July, which proposed a free trade area with a facilitated customs arrangement, by way of example.

“The Chequers proposal has parts written explicitly for the automotive sector,” said Hawes. “Whenever the prime minister or business secretary have got up to talk about the importance of trade and manufactured goods, invariably they cite automotive, just-in-time, exports around the world and doing all of this competitively, so they do understand what needs to be done.”

As Theresa May returns to Brussels to reopen talks and seek a “pragmatic solution” to the impasse, knowing what needs to be done and actually doing it seem as far away now as when the referendum result was announced in 2016.