Brexit

On October 17, 2018, politicians expected to finalize Brexit terms at a 24-hour summit of European Union leaders in Brussels.  Had things gone to plan, a special one-off meeting in November was all that remained to sign the final Brexit deal between the European Union and the United Kingdom.  But the October summit fell apart.  Seemingly unresolvable issues, over what would happen with the border between Ireland and Northern Ireland, could not be overcome. European Union leaders, saying not enough progress had been made, also cancelled the planned November meeting.  This leaves a possible mid-December European Union summit as the last and only chance to reach a deal before March 29, 2019 (Brexit day).

Last month’s events mean it is increasingly unlikely a Brexit agreement will be reached with the European Union.  Even if the European Union and the United Kingdom do manage to cobble together a last-minute deal in December, there is also the very real possibility the deal may not be ratified by the United Kingdom parliament.  With so much uncertainty in the outcome, automakers are making dire warnings for the industry, begging negotiators to reach a deal, and preparing strategies for a no-deal Brexit crash exit from the European Union.

Under Brexit, a decline of European automotive sales was always inevitable.  However, economist now warn if Brexit arrives with no deal with the European Union, the United Kingdom will have no free trade agreements at all in place and will have only the World Trade Organization Terms under which to trade.  Moreover, the steady and measured transition plan everyone had hoped for will not happen.  Massive trade changes will literally occur overnight.

While the United Kingdom auto industry will be more directly impacted than the European Union auto industry, the two are closely linked.  Deloitte estimates in 2019, the year of exiting the European Union, price increases to vehicles sold in the United Kingdom would lead to an overall sales decrease of approximately 550,000 vehicles (a 19% drop).  This translates to a decline of 255,000 units of German vehicle exports alone and endangering 18,000 jobs in the German automotive industry.

European Automobile Manufacturers’ Association (ACEA), which represents the 15 major Europe-based car, van, truck and bus manufacturers, are also sounding the alarm. Secretary General of ACEA, Erik Jonnaert, issued a letter on October 25, 2018, expressing the “catastrophic impact” of a no-deal Brexit outcome.  He states, “I think we can safely claim that there is no other industry that is more tightly integrated than the European automotive industry.”  He went on to explain automotive supply chains span all of Europe and the ‘just-in-time’ and ‘just-in-sequence’ business models automakers use, put the whole of the European auto industry at risk when there are even small disruptions.  Jonnaert paints a bleak picture of critical car parts and components stuck in long customs lines at the border while whole factories are at a stand-still.

Sigrid de Vries, secretary general of the European Association of Automotive Suppliers (CLEPA) echoed the sentiment.  “Smaller companies in particular, that constitute important building blocks of the supply chain, do not have the internal systems, IT platforms or staff in place to deal with customs declarations, tariff classification, customs valuation, or calculations based on content origin.”  She went on to state, “automotive components often cross borders several times before the final product reaches the customer, and that includes Channel crossings….Any change in the level of integration of the value chain will have an adverse effect on the competitiveness of individual companies and the sector as a whole.”

“Our members are already making contingency plans and are looking for warehouse spaces to stockpile parts,” said Erik Jonnaert. “However, the space required to stockpile for more than a short time would be absolutely huge – and expensive.  “Some of our members are also planning a temporary post-Brexit production shutdown,” he added.  In addition to the costs of delays at border crossings, there are additional bureaucracy costs associated with the end of free trade deals.  World Trade Organization Trade Term rules require a 10% tariff (essentially a 10% devaluation of the pound) on all passenger cars traded between the European Union and the United Kingdom, costs that will have to be passed on to the consumers or absorbed by the manufacturers.

Jonnaert ends his letter with a plea to the European Union and United Kingdom negotiators to find a way for the United Kingdom to withdraw with reasonable harmony. “I’m sure it is now clear that the absence of a phased implementation of Brexit will have severe consequences for our sector, negatively impacting the profitability of automobile manufacturers, car prices and possibly even employment.”   Clearly, time is of the essence, and the clock is ticking…