Newly manufactured Nissan cars at the company’s factory in Sunderland, UK
Photographer: Ian Forsyth / Bloomberg
Photographer: Ian Forsyth / Bloomberg
The auto industry dodged the disaster when the United Kingdom and the European Union sealed a deal. post-Brexit trade agreement, but not before automakers announced the closure of factories and canceled plans to make several new vehicles in the country.
Even more damage could be done, even with last week’s agreement. Automakers, including Nissan Motor Co. may struggle to qualify some models assembled in the UK for tariff-free export to the EU while assessing whether they supply sufficient local components. The costs associated with switching suppliers and loads of customs declarations, certifications and audits can still make automakers convinced that it is better to invest elsewhere.
“This is still a tenuous business, with major implications and costs for the automotive sector,” said David Bailey, professor of business economics at Birmingham Business School, England. “A lot will depend on the degree of flexibility allowed and the degree of gradual introduction.”
Industry under threat
Number of cars produced annually
Source: SMMT 2019 data
The stakes for the UK economy are huge. The country’s auto industry it employs more than 860,000 people, more than a fifth of whom work in vehicle and parts factories. The sector sent 42.4 billion pounds (US $ 57 billion) in automobiles and components abroad last year, 13% of the country’s total exports. The Brexit deal eliminates the risk of a widespread exodus, but it may still fall short for automakers with very little room for maneuver to assume more expenses.
Ones to watch
Nissan and its Japanese counterparts are the companies to watch after the deal. The outlook was already bleak before the Brexit deal was closed.
The company recently decided not to make an electric model at its factory in northern England and almost two years ago gave up plans to build another sport utility vehicle on the same site. Honda Motor Co. is closing its only car plant in the UK next year.
Nissan and Hybrid and electric models from Toyota Motor Corp. manufactured in England have some slack in the Brexit trade deal, with the deal allowing a larger proportion of the vehicle’s content to come from outside the UK or the EU. Still, the so-called initial rules of origin require 10 percentage points more local content than the UK was looking for.
| Rules of Origin |
|---|
|
It is unclear whether Nissan’s all-electric Leaf hatchbacks built in Sunderland have enough local content to avoid taxes. Although Nissan welcomes the commercial agreement, it will now “assess the detailed implications for our operations and products,” said Azusa Momose, a spokeswoman for the company in Yokohama, by email.
Toyota’s compact Corolla hybrid cars made in Burnaston, as well as non-electrified vehicles assembled on site, qualify for export without tariffs to the EU, said Sonomi Aikawa, a company spokesman in Tokyo. The company benefits from its engine factory in Wales, she said.
The Nissan Leaf electric vehicle.
Photographer: Ian Forsyth / Bloomberg
Carmakers’ tariff requirements going forward may be affected by their plans to bring more battery supply chains to the region. Electric vehicles will have another six years to bring their amount of foreign content below 45%, the limit for gasoline and diesel cars will be maintained immediately.
“The schedules underscore the urgent need for the government to create the conditions that will attract large-scale battery manufacturing to the UK and transform our supply chains,” said Mike Hawes, chief executive of the Society of Engine Manufacturers and Dealers, the UK auto industry trading group. “Improving the UK’s competitiveness will be essential to help mitigate the additional costs and burdens arising from our new business relationship.”
‘Green light’
Other automakers are postponing investments in factories in the UK, pending the outcome of trade negotiations.
BMW AG has delayed work on a next generation Mini platform due to uncertainties about UK trade relations with the EU. Chief Financial Officer Nicolas Peter said this month, BMW would consider making Mini cars in Germany or China if the tariffs hurt the business case of producing them in the UK
PSA Group CEO Carlos Tavares said in March, car maker Vauxhall would determine whether there was a business case for its factory in Ellesmere Port and whether the company could ask the British government for compensation for any trade barriers that arose.
BMW and PSA welcomed the trade agreement, while warning that they would need to examine the agreement closely to assess the implications for their operations.
“The business is now expected to give the green light to major investments in the UK that have stalled amid Brexit uncertainty,” said Bailey, a professor at the Birmingham School of Business. “There will be extra costs for the industry in terms of non-tariff barriers, but things could have been much worse.”
– With the help of Stefan Nicola, Christoph Rauwald, William Wilkes, Shiho Takezawa and Tsuyoshi Inajima