LONDON (Bloomberg) -- Automakers with production in the UK are increasingly worried about the prospects of the the country leaving the European Union.
On election-season trips to British car factories, Prime Minister David Cameron likes to boast that the industry is enjoying a renaissance. What he doesn't say is how it will survive if the country leaves the EU. As he seeks re-election in May, Cameron is campaigning on his record of steering the economy to recovery, and the promise of an in-out referendum on European Union membership.
The U.K. car industry, which, as Cameron told Rolls-Royce workers last week, has overtaken that of France to become the third-largest in Europe, is among those with most to lose if Brits vote to leave the bloc.
Rolls-Royce, along with another iconic UK automaker, Mini, is owned by BMW, based in Munich, Germany. Another German mpany, Volkswagen, owns the Bentley ultraluxury brand while Jaguar Land Rover is owned by India's Tata Motors. Japanese automakers Nissan, Toyota and Honda, have factories in the UK,
"There's no doubt that the auto manufacturers think the U.K. should stay in the EU," said John Leech, an analyst at KPMG who wrote a report on the impact of a U.K. exit on the industry. "The longer we are outside the EU our industry will increasingly degrade and become less relevant."
At current growth rates, Leech estimates automakers could reach record production by 2017, the year Cameron has pledged a referendum as part of his efforts to see off rivals in the anti-EU U.K. Independence Party.
Threatening that goal, carmakers face at least two years of uncertainty, negotiations that could alter the status of immigrant workers, and the risk of an eventual exit from their biggest market.
While the U.K. isn't in the single currency, EU membership brings tariff-free access to a market of 500 million people, free movement of workers across the continent and a seat at the table when rules that affect the industry are hashed out.
Labor costs that are about half those in the German car industry, and similar to those in Spain, add to the appeal of the U.K. for carmakers wanting to produce inside the bloc.
"Access to the market, free movement of goods and people, the ability to influence regulation which allows you to sell in Europe -- these are fundamentally important issues for the industry," Mike Hawes, chief executive of the Society of Motor Manufacturers & Traders, said in an interview.
Carmakers are not alone in that view: others to have spoken out about the perils of an EU exit range from HSBC Holdings to Compass Group, the world's biggest caterer. While polls suggest Brits would opt to stay if a vote were held now, those in favor of leaving were in the majority as recently as 2012, and 17 percent remain undecided.
The U.K. produced 1.53 million cars last year, with 41 percent going to EU markets. The total, which puts the U.K. behind Germany and Spain, has risen 53 percent from 2009 and is approaching the national record of 1.92 million set in 1972.
Cameron, who pledged after coming to power five years ago to rebalance the economy toward manufacturing and away from the financial industry that prompted the crisis, visited three auto- industry plants last week, including Rolls-Royce, as he warms up for the election on May 7.
Manufacturing overall hasn't increased its share of the economy since Cameron came to power, even as car production has surged.
"We are seeing I think a great renaissance," Cameron told workers gathered at Rolls-Royce's Goodwood, West Sussex, plant. "We now make more cars in Britain than they make in France. We've overtaken Italy some time ago, we've now got Spain and Germany in our sights."
In a Nissan factory near Sunderland, two assembly lines are each churning out a car a minute. That's about half a million per year, or a third of the U.K. total, as the plant is the Yokohama, Japan-based company's largest European factory by volume.
About seven years ago, the plant was unsustainable, Colin Lawther, senior vice president for manufacturing, supply-chain management and purchasing in Europe, said in an interview late last year at the factory's brown-carpeted and brown-walled offices. "Volumes were quite depressed. We thought, 'What can we do as a breakthrough?' And the European team got their heads together and said, 'I'll tell you what, let's design, style, think about, conceive a car for Europe," he said.
They ended up creating the Qashqai, a model that other carmakers then raced to match. The plant has since been tasked to build the Juke, Leaf, and an Infiniti luxury model to be introduced at the end of the year. More than 70 percent of the plant's output is sent to Europe, with about a fifth sold at home.
As the U.K. plant prospers, technicians and engineers from Nissan's Spanish unit have been brought over to make up for a shortage of skilled workers in the U.K., Lawther said. When the workload changes, they take U.K. engineers to Spain. That kind of flexibility would be threatened not only if the U.K. left the EU but also if it sought to change freedom-of-movement rules, as Cameron has said he will try to do to curb immigration.
Cameron says he will renegotiate the terms of the U.K.'s EU membership, and present the result of those efforts to voters, even as he faces pressure from UKIP to hold the referendum as soon as possible. The latest YouGov poll this week showed 45 percent would vote to stay compared with 35 percent wanting to leave.
Labour, which is marginally ahead in most polls, says it won't hold a plebiscite and is using that stance to burnish its pro-business credentials amid broader criticism from leaders of finance and industry. While polls show Labour ahead, betting odds point to a Tory-Liberal Democrat coalition as the most likely outcome.
Foreign investment in the auto industry rose 78 percent last year and amounted to 7.5 billion pounds for the past two years combined. That included 480 million pounds in Ford Motor Co.'s Dagenham plant and 800 million pounds for Volkswagen's Bentley to build a SUV in Crewe rather than Bratislava.
Jaguar Land Rover attracted 3.7 billion pounds for the Land Rover Discovery Sport model. Some of that might not have made it to Britain if it wasn't an EU member, with a place at the negotiating table on regulations and trade deals.
"The reality is even a manufacturer as big as BMW Group in totality clearly doesn't have the negotiating power, or the knowledge, or the influence that the EU has," Graeme Grieve, chief executive of BMW's U.K. unit, said in an interview in December.
Smaller, premium brands, such as Bentley, Aston Martin and Jaguar Land Rover would suffer from not being represented when policies in the sector's biggest market are set, Hawes said.
The industry has already benefited from its EU role by managing to soften carbon dioxide regulations for small manufacturers. Those concessions can mean the difference between profit and loss, according to KPMG's Leech. "Being able to shape regulation so that you can protect and enhance the prospects of the U.K. automotive sector will only happen if you're at the table," Hawes said.