9/4/2019 | 4 MINUTE READ

Auto in the U.K.

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Things are not good across the ocean

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The Society of Motor Manufacturers and Traders (SMMT) is a trade association that represents the U.K.’s auto industry, and the impending Brexit is truly roiling that industry. Even though the global auto industry is undergoing economic discomfort at the moment—to put it politely—the consequences of a completely changed trade regime (realize that the U.K. joined the European Union in 1973), Brexit is, for the U.K. auto industry, analogous to either pouring gasoline on a fire or, perhaps more aptly, putting out a flickering candle that is the only source of illumination.

Consider this SMMT statement reflecting the first half of the year—and things probably aren’t going to get any better between now and the impending deadline to leave the EU at the end of October:

“The automotive sector is on the cusp of transformation; we believe there will be more change in the next ten years than there has been in the last 50.  . . .

“However, in order for us to maximise the opportunity we need the right policy, business and trading environment. The economic and political uncertainty of the past three years is putting the future of our industry at risk.

“Annual R&D investment has reduced from £2.5 bn to just £90 m, car production has fallen 20% and commercial vehicle production is down almost 16%, with most of the decline in exports.

“Although model changes and fluctuating fleet buying cycles explain some of this, these half-year results once again demonstrate the importance of exports to the UK. Exports to the EU account for a substantial part of CV output, therefore a Brexit deal that maintains frictionless trade and secures our competitiveness will be key to the future viability of this valuable UK sector.”

Or said another way: this is a time when companies need to be investing in advanced technology, but conditions on the ground are making that investment difficult at best because the only way you make money is through selling things, and sales are being truncated.

June marked the 13th month in a row that car manufacturing fell in the U.K. During that month sales were off 15.2 percent compared to June 2018. But car makers had it good in June compared to producers of commercial vehicles: commercial vehicle production in the U.K. fell 57.2 percent compared with the year earlier. For the U.K. market production was off 44.7 percent. It was down 65.4 percent for export.

Things were better for engine manufacturing in the U.K. but still not good. That is, June was the 10th month in a row there was a decline in engine production, with a year-to-date decline of 10.8 percent.

The SMMT points out that—presumably under ordinary conditions—automotive manufacturing delivers £18.6 billion to the economy and provides good jobs to 168,000 people. It is the U.K.’s single biggest exporter, something that seems to be coming to a rapid end. What had been a free trade agreement between the U.K. and the other EU companies may come to an end, and the SMMT reckons that a “no deal” Brexit, which as of early August still seems to be what’s likely to occur, “would mean the immediate imposition of tariffs costing some £4.5 billion a year and an end to the seamless movement of goods.” Because there would have to be inspections at the borders in order to calculate these tariffs, just-in-time manufacturing, a mainstay of modern manufacturing practices is all competitive industries would come to an end—another mainstay of modern manufacturing is that there is global sourcing and when what was once seamless suddenly has barriers, well, that simply won’t work in the near term.

What is making vehicle manufacturing even more challenging is that the SMMT says that “at least” £330 million has already been spent automotive companies on “contingency plans,” including stockpiling parts and materials, which means acquiring additional warehouses, and developing new logistics approaches. None of which is value-added. None of which is a productive use of money. None of which is going to put U.K. automotive companies in a better competitive position.

And look at that reduction in the investment in R&D. Of course, these companies aren’t investing when it seems as though there is going to be nothing but contraction, when they look at an uncertain economic future predicated on politics.

All countries like inward investment. This is hobbled in the U.K., as well, as for the past seven years the average annual investment figure into automotive was £2.7 billion—and that’s gone down more than 70 percent, to £90 million.

Mike Hawes, SMMT chief executive, said—and this is an example of the proverbial “stiff upper lip”--“We need an internationally competitive business environment to encourage more investment, more innovation and more growth. That starts with an ambitious Brexit deal that maintains frictionless trade and we look to the new administration to get a deal done quickly so manufacturers can get back to the business of building cars and helping deliver a brighter future for Britain.”

Unless something radically changes, automotive manufacturing in the U.K. is going to be irrevocably injured.