Brexit and the auto industry: the clock is ticking, but it is not yet too late to avoid the worst-case scenario!
October 29, 2018
As everyone is all too aware, the date for Brexit is just around the corner and a withdrawal agreement is yet to be concluded. Without an agreement on the withdrawal of the United Kingdom from the European Union, there simply can be no negotiations on the nature of the future trading relationship. Nor will there be a transitional period during which the UK could remain within the single market for a limited period of time. In that case, the EU and the UK will begin to trade under WTO rules.
Such a no-deal Brexit could have a catastrophic impact on the European automobile industry. I think we can safely claim that there is no other industry that is more tightly integrated than the European automotive industry. This is due to two key factors. First of all, there are the highly complex automotive supply chains that stretch across Europe. Secondly, the business model of automakers is totally reliant on ‘just-in-time’ and ‘just-in-sequence’ delivery and production.
The production plants of all our members – be they in the EU or the UK – receive and fit millions and millions of parts into vehicles every single day. Their operations rely on these parts being delivered on time, on a daily basis, without any delays or obstacles. Not everybody fully realises this, but automobile manufacturers do not stock up their needed parts and components in their plants.
Manufacturers generally don’t have warehouses. Instead, the parts they require to assemble a car are in constant transit. They are in trucks making their way to their destination, arriving as and when they are needed. To give you an idea of the magnitude of this situation, every day 1,100 EU trucks cross the Channel to deliver to car and engine plants in the United Kingdom alone. This is our industry’s business model; it works and is cost-efficient. So, if Britain comes crashing out of the EU without a deal in March next year, what will happen in the hours and days that follow?
The introduction of customs procedures where there were none before is obviously going to cause delays at ports. It is estimated that just two extra minutes of checks could triple queues at ports. The vision of containers with vital parts and components for automobile assembly, stuck in long tailbacks outside ports on both sides of the Channel, is therefore both realistic and very worrisome. Even short hold-ups at customs borders will cause massive logistical problems for manufacturers, generating significant costs. If even just one single part is missing, a car simply cannot roll off the assembly line. It won’t take long for production to suffer.
Our members are already making contingency plans and are looking for warehouses to stockpile parts. But the space required to stockpile for more than a short time of production would be absolutely huge and expensive. Some ACEA members are even planning a temporary post-Brexit production shutdown. 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.
As well as causing disruption to the manufacturing process, a no-deal outcome would of course result in very burdensome customs procedures – entailing vast amount of red tape with thousands of new documents to fill in. Again, all this will cost time and money.
No deal would also mean the end of duty-free trading. Under WTO rules, a 10% tariff would be applied to all passenger cars traded between the EU and the UK. And do bear in mind that profit margins in our industry are significantly lower than 10%. At the end of the day, these extra costs will have to be passed on to consumers or absorbed by the manufacturers. Either way, the competitiveness of European automakers will be compromised in an already very difficult market.
Moreover, EU law requires that cars are tested by a national technical service to verify compliance with environmental, safety and security standards, before they can be put on the market anywhere in the European Union – the so-called ‘type approval’ system. It is essential that automobile manufacturers can maintain valid type approvals in both the EU and the UK as of 30 March 2019, no matter where the approval was issued.
The European Commission has prepared a draft proposal for a regulation that would allow a type approval authority of an EU member state to re-issue an approval originally issued by the United Kingdom. We support this initiative; it is now a matter of making sure that the new regulation gets adopted and published before the end of the year. Likewise, we also welcome the UK government’s recent pledge to allow for a streamlined registration process for approvals currently held under EU authorities with the UK Department of Transport.
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. The clock is ticking, but it is not yet too late. That is why we are urging the UK and EU negotiating teams to redouble their efforts to successfully conclude a withdrawal deal.
The responsibility to deliver a successful agreement lies with the negotiators. Their burden is a heavy one, but a political deal that reflects the business realities of decades of European economic integration is the only way in which we can minimise the impact on all aspects of our economy.
Secretary General of ACEA