Don’t believe all the car industry’s prophecies of Brexit doom

Don’t believe all the car industry’s prophecies of Brexit doom

The Society of Motor Manufacturers and Traders (SMMT) has swung into full ‘Project Fear’ mode with its latest claims that ‘UK Automotive (is) on red alert as ‘no deal’ threat sees manufacturing and investment plummet’ and ‘Brexit uncertainty has already done enormous damage to output, investment and jobs’. Not for the first time, the SMMT has gone completely OTT.

Let’s deal first with the actual data. UK car sales and production did fall sharply in 2018. But it is misleading, to say the least, to attribute to this to the ‘no deal’ threat. As the SMMT itself acknowledges, the global auto sector is reeling from multiple shocks, including the diesel scandals and a sharp decline in demand from China. Indeed, when commenting earlier on the UK sales figures, the SMMT barely mentioned Brexit at all.

Some further context: 2016 marked a cyclical peak for the UK car industry, with sales flattered by cheap finance deals, the launch of new models and the last of the pent-up demand from the recession. A correction was overdue, regardless of Brexit. And while the UK was the weakest of the major European markets in 2018, sales data from the European trade association ACEA show that the decline of 6.8% here was matched in both Norway and Sweden.

What about the reported collapse in ‘investment’, down almost half on 2017 to ‘just £588.6 million’? To be fair, there is plenty of evidence from other sectors of the economy that Brexit uncertainty has made companies more cautious, and it would be no surprise if this has impacted the auto sector too. But these statistics still need a major health warning. They are not hard numbers for actual spending.

Instead, they are ‘SMMT calculations based on new, publicly announced investment decisions in 2018 covering genuine commitments to fresh spend on new product, tooling, equipment or facilities’. Even taken at face value, these numbers are likely to be highly volatile from year to year.

A lot has also been made of the shutdowns planned for April as a precaution against ‘no deal disruption. Again, a sense of perspective is badly needed. Jaguar Land Rover (JLR), for example, is planning to extend its usual seasonal shutdown by just one week. To put this in context, JLR closed its main Solihull plant for two weeks in October last year, due largely to the slump in demand from China. It also extended the usual break over the Christmas and New Year holiday period by one week.

Nonetheless, all of this has been used as evidence that a ‘no deal’ Brexit in particular represents an existential threat to the UK automotive industry. Unfortunately, the sector has form here. The car makers warned in 2000 that they would leave the UK if we did not adopt the euro. Indeed, Nissan was still threatening to do so in 2004.

Of course, leaving the EU is potentially a bigger shock than remaining outside the single currency. Nonetheless, the comparison is valid. Membership of the euro would also reduce barriers to trade with the EU (by reducing currency risk and transactions costs, and increasing price transparency). However, it would only do so at the cost of losing control over key aspects of the economy (independence on interest rates and exchange rate flexibility) and potentially being on the hook for large budget payments to other members (the Greek bailouts). Car makers might only care about the former, but politicians also need to think about the latter. At the very least, the fact that the auto industry has cried wolf before makes it perfectly reasonable to ask whether it is doing so again.

To be clear, I understand why many businesses, including car makers, are worried about Brexit and especially the extreme ‘no deal’ scenarios: the potential for new tariff and non-tariff barriers, including border delays that might disrupt complex just-in-time supply chains. They could do without the hassle and additional costs. But there are two key points here.

First, there are still many ways in which these new barriers could be minimised. Both sides would have a strong vested interest in keeping border delays to a minimum, and tariffs may not be as big an issue as many assume either.

For example, the worst case assumes that, outside the EU’s Customs Union, manufacturers would have to pay the (actually quite low) tariffs on components every time these cross the new UK-EU border. As it happens, the number of times that this happens is usually exaggerated. But in any event, this ignores the many trade facilitation arrangements that already apply to parts imported from outside the EU, such as inward processing relief, which should also protect UK-EU supply chains from cumulative duties.

Tariffs on the finished cars themselves could be more of a problem, though this may also depend on the proportion of inputs coming from the EU. But if we are talking about worst case scenarios, these usually include another large fall in the value of sterling which could maintain the competitiveness of UK exports. Indeed, research by Deloitte has suggested that a ‘hard Brexit’ could do far more damage to the German car industry than our own.

The second key point is that even if there is some additional disruption in the short term, a ‘no deal’ Brexit could simply be an alternative stepping stone to a free trade agreement that addresses all the auto sector’s concerns. In other words, even a disorderly exit, while clearly far from ideal, need not have any lasting impact on investment or jobs.

To sum up, I’m not going to tell the SMMT how to make a car. But I do think it’s right to question what the industry is assuming about how Brexit might play out, and to view their darkest warnings with a healthy dose of scepticism.