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Brexit part three – how will automotive businesses be affected?

9 August 2016

Britain’s automotive sector is vital; encompassing manufacturing and retail to help keep the west Midlands economy purring along. In our third blog on what Brexit means for businesses in the region, we look at how the post-referendum climate could affect this industry.

According to a pre-referendum survey, 77 % of motor manufacturers and traders expressed their desire for the UK to remain within the EU; concerned that leaving would affect long-term business opportunities. However, now that the result is known, the variables affecting the British automotive industries in the wake of Brexit are as complex as Spaghetti Junction!

Changes are coming in the fast and slow lanes, some of which have overtaken us swiftly, such as currency movements. Other long-term effects could take years to appear in the rear view mirror.

As it stands there are no guarantees over economic and trade agreements. Industry trends which were building momentum before the referendum result may either continue, potentially be diverted or may stop altogether. Additionally, there’s a pervading uncertainty that acts like a fog, causing everyone to slow down and manoeuvre more cautiously.

So let’s take a snapshot of the issues affecting the three main areas of the automotive industry, focusing on the short and long-term effects:

  • Manufacturing
  • Dealerships
  • The used vehicle trade

But first: there is something worth mentioning on its own…

The drop in the value of the pound

The pound is still around 7.5% down against the Euro compared to the prevailing level in June:

XESource XE.com.

This currency movement gives us two forces to deal with in the short term:

  • A boost to manufacturing – we forecast that UK car production will grow by double digits in 2016 to 1.7 million cars, mainly because EU exports will be buoyed by a weak pound.
  • A barrier to sales – it will be harder for overseas businesses to make money on new vehicles in the UK market, given the unfavourable exchange rates, unless prices go up, which will slow down sales.

If this currency shift persists, it will have its own effects on the motor business, quite apart from anything else that changes.

Now let’s dive in and see what the effects of Brexit could be for each part of the market.

1. Manufacturing

Over 75 % of British vehicle production is destined for overseas, the majority of which is to EU countries.  Pre-referendum forces have already seen British built cars reach an 18-year high and the first six months of 2016 saw the best half-year production figures since 2000.

As mentioned, the likely increase to sales in 2017, if the pound stays low against the Euro, will boost our export potential. However, in the long-term, there have been two main factors underpinning the growth in UK vehicle manufacturing; both of which are now in question:

  1. tariff-free access to the single market; and
  2. economic stability.

It could take years for the UK’s future relationship with the EU and other countries to become clear, however, what we do anticipate are changes to VAT, customs and migration rules. Nevertheless, until details emerge, any of these could be potential setbacks to manufacturing businesses. These businesses must retain as much flexibility as possible for when the long-term changes become more apparent.

2. Dealerships

Neither the short nor long-term picture looks terribly encouraging for dealerships, although there is still a lack of detail and the outlook could improve.

Trevor Finn at dealership group Pendragon has identified the main risks to new sales as follows:

  • Vehicle prices going up thanks to the pound/Euro exchange rate; and
  • Consumer confidence falling, if the wider economy looks in trouble.

Meanwhile, there are other strains on the industry from European manufacturers, with UK dealerships being burdened with excess inventory. Our own research shows that UK dealers have been soaking up excess European car production, with 13% more cars on the books compared to 2015 (and 46% more than five years ago):

Value of UK car dealership inventory

press release motor

If new car sales slowdown, this weight of inventory could make it even harder for dealerships to turn a profit.

Uncertainty over the manufacturer–dealer relationship

One of the EU regulations that has protected dealers in their relationship with manufacturers over the years is the Block Exemption Regulation (BER).  Jim Saker, School of Business and Economics at Loughborough University, has raised the concern that manufacturer/dealer contracts could end up being rewritten once the UK leaves the EU. It is claimed that this could shift power back to the manufacturers, who could attempt to revert to the type of relationship before BER.

3. Used vehicle trade

Now for some good news! Unlike manufacturing and the trade in new cars, the market for used vehicles in the UK is largely self-contained. Furthermore, if currency movements affect new car pricing and demand as predicted, it could create a temporary boom for businesses dealing in used vehicles.

Paul Burgess of Startline believes that this could create trading conditions “similar to those seen after the economic crisis of 2007-08”.

For businesses with trading activities in used cars and new vehicles, we could see positive and negative forces balancing each other out for the time being, however, it will certainly require proactive planning and the ability to adapt the business model in preparation for a new set of circumstances. Glenn Thomas, can discuss with you how to restructure the areas in your business that could be strengthened in the event of variable changes. For further information, please contact Glenn via email at: glenn.thomas@uhybirmingham.co.uk.