Risk & Economy » Brexit » Brexit and the UK motor industry – almost Carmmegedon

The UK motor industry has and is being badly hit by the uncertainty surrounding Brexit and uncertainty that is now prolonged possibly until October.

The sector’s success over the past 50 years has been based around Britain’s involvement and membership of the  European Union and stands to lose more than most from its exit. Looking at Brexit from car industry perspective there appears to be no positives. no neutrals, only negatives.

The relationship between the car industry and the then Common Market started back in 1971 when prime minister Ted Heath wanted to take Britain into Europe on the back of a demand led reflation.

Up until that time the UK had a policy of ‘Competition and Credit Control’ which meant in the terminology of the day that the UK had hire purchase restrictions which stopped products being bought on credit.

To boost the economy Heath pulled back on the policy and unleashed a pent up demand that had built up from the end of the Second World War.  One of the unintended consequences was that the British public rushed out a bought three things, furniture, carpets and cars.

The problem was that there wasn’t IKEA or even DFS around and the UK carpet industry was in a poor state. The UK car industry at that time was in no better condition. It was the era of Derek Robinson (‘Red Robbo’) and militant union power at British Leyland at Longbridge.

The industry was characterised by poor manufacturing quality with a built in obsolescence in some car parts of nine months.  The Government had got fed up with these poor standards and had introduced the MoT test in 1968 as a countermeasure to stop dangerous cars being allowed on the road.

The result was that the UK based car manufacturing plants were unable to respond to this sudden rise in demand.  As a result, cars from overseas particularly Japanese vehicles were ‘sucked’ into the UK by this customer-led demand.

Significantly it brought into the UK large numbers of Datsuns (Nissan) which had much better build quality than those produced domestically and developed a reputation for reliability and comfort by comparison to the British vehicles.  This established an appetite for foreign cars with UK consumers.

What followed in the 1980s was the then prime minister Margaret Thatcher promoting the UK as being the gateway to Europe, as a result Honda opened their plant in Swindon with Nissan building their Sunderland facility both with the intention of avoiding the 10% tariff on cars imported from outside the single market.

This was subsequently followed by investment from Toyota at Burniston in Derby. From this time onwards UK car brands were seen as attractive to foreign investors as witnessed by BMW’s involvement with Rolls- Royce and Mini and VW Group’s ownership of Bentley.

It is ironic that Margaret Thatcher who had a track record of being patriotic saw the commercial benefit of being part of Europe while today’s Brexiteers seem to view the single market as a problem.

Moment of despair

It is not therefore a surprise that when the Brexit Referendum result was announced it was met by the industry with a universal sense of despair. It is rumoured that the senior management of one Japanese manufacturer where forced by their directors in Japan to apologise for not doing more to promote the advantages of the remain case.

The last two years has seen a barrage of bad news coming from the car industry. It can be argued that some of it stems from a global slow down in car demand particularly from China. This was coupled with the VW ‘Dieselgate Affair’ where the company admitted to putting ‘defeat software’ into the management systems of some of their diesel cars so that false readings on emissions and fuel efficiency were produced under the testing regime.

This has led to court cases and penalties but more significantly a move away from diesel fuelled power trains. The combination of the uncertainty coupled with the quite dramatic market shift away from diesel has impacted the car manufacturers in different ways.

The impact of the slump in the demand for diesel cars has been particularly felt by Jaguar Land Rover who have up 90% of their range powered by the fuel, this coupled with the slow down in sales in China lead to them making an announcement in January 2019 of 4,500 job losses.

Their sales in the UK in the last year up to March 2019 are up by 8.4% but this does not mask the underlying problem with the export market.  Jaguar Land Rover announced that they would be implementing a protracted manufacturing plant shut down to cover the then date for leaving the EU (April 12th) as well as the Easter holidays.

The situation with Nissan is more straightforward. The management announced that they would not be investing in any new models at their highly efficient Sunderland plant. The debate started as to whether this was to do with Brexit or the fact that the new Nissan X-Trail was a diesel vehicle that would have limited appeal in the market.

When this decision is looked at logically one is left with the overriding view that Brexit triggered both the decision and the timing.  For years the Sunderland plant has been held up as an example of world class engineering. If that was the case why not continue to invest.

The shadow of Brexit inevitably hangs over this especially as Renault owns 43.4% of Nissan. With uncertainty and no real advantage in producing in the UK it doesn’t take much to suspect that the balance of the argument to move future production east if not to Japan but at least into Europe could undoubtedly gain support. The Nissan situation puts at risk 7,000 jobs with a further 24,000 in the supply chain and related industries.

Another disturbing case was the announcement that Honda was going to close its highly efficient Swindon plant in 2022 with the loss of 3,500 jobs. The company claimed at a press announcement that this had nothing to do with Brexit. Although there are undoubtedly other factors involved, there is a certain irony that in May 2018 David Hodgetts the MD of Honda UK is quoted as saying that the Swindon plant remained central to their manufacturing plans and that “I kind of think of (the Brexit vote) in a slightly insular way – it’s not that bad for Honda UK. We have some major advantages now that we didn’t have before.”

Obviously, those advantages seem to have evaporated within a year. Possibly Ian Howells, a senior vice president speaking in June 2017 was correct when he warned of the possible harm of leaving the European Customs Union. The strange situation is that Honda is looking at alternative high- tech options in their future development, yet Swindon is based in the UK’s M4 ‘Silicon Valley’ and ideal area for this type of development.

Both BMW and Toyota have wanted of the consequences of an unfavourable exit with BMW suggesting that it would consider moving Mini production out of the UK. Toyota are the only company so far that it is not planning cutbacks in the short run but this would depend on barriers that they foresee happening being able to be overcome.

The current announcement of a six month extension has been greeted as being ‘utterly unacceptable’ by Mike Hawes of the Society of Motor Manufacturers and Traders. The problem is that it leads to continued uncertainty potentially leading to another cliff edge moment later in the year.

A recent survey suggested that Brexit and confusion over diesel had meant that 2.4 mill consumers had delayed buying new vehicles. The time delay also puts pressure on manufacturers who are questioning the resilience of their supply chains with so many companies being under pressure. From a motor industry perspective, it is difficult to see why anyone would want to vote for Brexit. Even more bizarre was the fact that both Sunderland and Swindon voted to leave when their major employer was a Japanese company.