British and European aftermarket firms ponder ramifications of stalled Brexit talks

Aug. 10, 2019
The possibility of a "no deal Brexit" could have major implications on the automotive industry — see what could be ahead.

Savoring a Brexit of champions appears to be an elusive outcome at this point as automotive executives are expressing little confidence that Britain and the European Union can arrange a suitable separation agreement by the established Oct. 31 dissolution deadline.

The possibility of a “no deal Brexit” under subsequently harsh circumstances is a key concern.

Negotiations between the governmental parties appear to have stalled, resulting in near-universal dismay among business leaders on both sides of the English Channel. Although 51.9 percent of England’s electorate opted to break ties with the EU in June 2016, the prospect of a do-over vote has yet to gain suitable traction despite widespread regret over a decision made amid nationalistic fervor and the belief that the EU was holding too much sway over Britain’s economic affairs.

“It is utterly unacceptable that, more than two years since negotiations started, industry still does not know what the UK’s relationship with the EU will be in the coming weeks and months,” says Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders (SMMT), which represents more than 800 British OEMs and aftermarket enterprises. “Uncertainty has already caused serious damage – car plants are on enforced shutdown, investment has been cut and jobs lost.”

Hawes has been calling for all the involved officials “to take ‘no deal’ off the table for good, and guarantee a positive long-term resolution that delivers frictionless trade. If they fail, we face yet another devastating ‘no deal’ precipice” at the end of October.

“Brexit is a very real challenge facing every UK industry. The automotive aftermarket, however, is facing a particularly volatile” situation if negotiations are inconclusive or unsuccessful, according to Natalie Davies, a marketing executive at sales-I, a supplier of software products with offices in England, Australia and Chicago. (**sales-i is written all lowercase, my spellcheck insists on capitalizing the “i”**

“This uncertainty is piling the pressure on businesses up and down the UK. How Brexit will impact the British automotive aftermarket is not an exact science and relies heavily on the deal struck between the UK and Brussels,” she adds, referring to the EU’s headquarters in Belgium.

“The automotive industry has been consistent and united – a ‘no deal’ Brexit would have a devastating impact on the sector and the hundreds of thousands of jobs it supports. It would end frictionless trade, add billions to the cost of importing and exporting and put jobs at risk,” says Hawes. “We believe that a ‘no-deal’ should be taken off the table for good to end damaging uncertainty that has undermined investor confidence and forced companies to spend millions on ‘no deal’ contingency planning.”

He further insists that “government must secure a future deal with the EU which guarantees frictionless trade and the free movement of goods between the UK and the EU; retains the UK’s preferential trading relationships with third countries such as Japan, Canada, South Korea and Turkey; and maintains the sector’s ability to access EU talent and move employees freely across sites in the UK and EU.”

A high-ranking British automotive executive, insisting on anonymity because “we don’t comment on political matters,” points out that “our concern in relation to Brexit is to prepare for whatever scenario ensues. At the moment, we’re just waiting to see what happens, so preparations/initiatives have been more or less paused for now.”

The executive observes that “we can’t really comment on supply chain challenges when all bets are off, which they seem to be at the moment. We don’t know about the Brexit deal – or if there will even be a Brexit yet. We don’t know what kind of deal will eventually be approved – or if there will be another vote on Brexit.”

Devastating impacts
As described by Hawes, the SMMT has compiled a listing of five Brexit areas of focus:

Single Market – To achieve automotive priorities on tariff-free trade and avoiding non-tariff barriers, government must demonstrate how it intends to secure a future trade agreement with the EU that affords the automotive industry the benefits currently enjoyed as members of the Single Market.

Customs – Under a new customs agreement with the EU, government should prioritize the free-flow of automotive goods at the border to avoid costs, maintain competitiveness and support the just-in-time manufacturing process. Key issues include continued application of common customs rules and procedures without burdensome checks or reporting.

Talent – Government must address the needs of the automotive industry in its ability to recruit and access talent when assessing how the UK ends freedom of movement and implements new immigration controls. Key issues include access to labor to fill skills gaps and the current ability for automotive companies to quickly and easily move employees to address operational issues or support project teams.

Regulation – Government should demonstrate how existing automotive regulation fits within plans for the “Repeal Bill” and work through options for how future EU regulation affecting the UK automotive industry can be effectively implemented. Key issues include future influence on regulations affecting the UK automotive industry, the potential to create non-tariff barriers through regulatory divergence and the ability for the UK to type approve vehicles for the European market.

Trade – Clarity is needed on how the UK will treat both existing EU Free Trade Agreements and those currently under negotiation. Key issues include establishing solutions to issues around Rules of Origin, understanding how existing preferential access to markets can be secured as well as benefits from regulatory discussions between the EU and other key markets.

“The automotive industry needs the UK and EU to agree urgently the terms of the Brexit transitional period,” Hawes continues. “Should no transitional arrangements be agreed to it would cause considerable disruption to the automotive industry’s integrated supply chains; limit access to the sector’s biggest market -- the EU; bring an end to the sector’s preferential access to markets right across the globe; disrupt the manufacture, sale and registration of vehicles that have been type approved in the UK; and undermine the sector’s competitiveness right across Europe.”

“’No-deal’ is not an option,” declares Tony Walker, a London-based Toyota executive who additionally holds an SMMT leadership position.

“In the short term, crashing out of the EU would have immediate and devastating impacts, with border chaos disrupting the just-in-time basis on which our business depends,” he explains.

“Disruption could last for weeks – even months. It is unimaginable that we could implement full WTO (World Trade Organization) import and export procedures overnight. For the longer term, a ‘no-deal’ Brexit would harm our competitiveness, undermine sales and cost jobs,” says Walker.

“We need the certainty of a deal, not more uncertainty, and we need the smooth transition period based on current trading conditions,” he asserts. “It is vital we have free and frictionless trade with common technical standards. Without these, we risk losing all we have achieved in building a world-class automotive sector.”

Making contingency plans
As an EU member state, Britain currently continues to enjoy tariff-free trade with 70-plus countries as part of 40 free trade agreements. To put this into perspective, more than $43 million in components are delivered daily to British automotive and aftermarket businesses from the EU – all of them free from tariffs or quota limits.

“Europe’s auto manufacturers and suppliers have come together to issue a stark warning on the potentially far-reaching impacts of a ‘no-deal’ scenario on their sector, which would threaten their very business model,” cautions Erik Jonnaert, secretary general of the European Automobile Manufacturers’ Association (ACEA), which represents the 15 major Europe-based car, van, truck and bus manufacturers.

“Automobile production plants – be they in the EU27 or the UK – receive and fit millions of parts into vehicles every day,” he explains. “All manufacturers rely on ‘just-in-time’ and ‘just-in-sequence’ delivery and production, without any delays or obstacles. These parts are in constant transit in trucks, arriving as and when they are needed.”

Each day some 1,100 delivery trucks from Europe cross the English Channel laden with parts destined for UK engine plants and completed-car manufacturers. “After Brexit, even short hold-ups at customs will cause massive logistical problems, disrupting the production process and generating significant costs,” says Jonnaert.

“Our members are already making contingency plans and are looking for warehouse spaces to stockpile parts. However, the space required to stockpile for more than a short time would be absolutely huge – and expensive,” he points out.

“Some of our members are also planning a temporary post-Brexit production shutdown,” Jonnaert reports. “But the harsh fact is that no amount of contingency planning can realistically cover all the gaps left by the UK’s withdrawal from the EU on WTO terms.”

Under existing WTO rules, a 10 percent tariff would be applied to all cars traded between the EU and the UK. “We cannot forget that profit margins in our industry are significantly lower than 10 percent,” he notes. “At the end of the day, these extra costs will either be passed on to the consumer or will have to be absorbed by the manufacturers.”

Jonnaert underscores how “the clock is ticking, but it is not yet too late. That is why we are urging the negotiating teams on both sides to redouble their efforts to successfully conclude a withdrawal deal.”

“Everything possible must be done to secure a future exchange of goods, services and people that is frictionless. 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,” says Sigrid de Vries, secretary general of the European Association of Automotive Suppliers (CLEPA).

“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 adds, citing key concerns expressed by a CLEPA membership roster that exceeds 3,000 industry firms.

“SMEs (small to medium enterprises) will be forced to deal with at least some of these issues if they want to continue to trade and serve their customers, facing additional financial and logistical risks,” according to De Vries.

“It remains crucially important to provide clarity on the future relation with the UK as quickly as possible, starting with a withdrawal agreement so that a cliff-edge scenario can be avoided.”

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