Brexit deal may be too little, too late for UK auto industry

The auto industry dodged disaster when the UK and the European Union sealed a post-Brexit trade accord, but not before automakers announced factory closures and called off plans to make several new vehicles in the country.

More damage may still be done even with last week’s deal. Automakers including Nissan might struggle to qualify some UK-assembled models for tariff-free export to the EU as they evaluate whether they source enough of their components locally.

Costs associated with having to switch suppliers and the burdens of customs declarations, certifications and audits could still leave car companies convinced that they are better off investing elsewhere.

“This is still a thin deal with major implications and costs for automotive,” said David Bailey, a business economics professor at Birmingham Business School. “Much will depend on the degree of flexibility allowed and the degree of phasing in.”

The stakes for the UK economy are huge. The country’s auto industry employs more than 860,000 people, over a fifth of whom work at vehicle and parts factories. The sector sent 42.4 billion pounds ($57 billion) worth of cars and components overseas last year, 13 percent of the nation’s total exports.

The domestic market is unlikely to compensate for any lost overseas sales. Registrations already dropped for three consecutive years before being decimated by the pandemic, falling 31 percent through November.

The Brexit deal eliminates the risk of widespread exodus but still could fall short for automakers with too little leeway to take on more expenses.

Nissan and its Japanese peers are the companies to watch in the wake of the deal. The outlook already was bleak before the Brexit accord was clinched.

The company recently decided against making an electric model at its factory in Sunderland, northern England, and almost two years ago scrapped plans to build another sport utility vehicle at the same site. Honda is closing its only UK assembly plant next year.

Nissan and Toyota hybrid and electric models built in England are cut some slack in the Brexit trade deal, with the accord allowing a greater proportion of vehicle content to come from outside the UK or the EU. Still, the initial so-called rules of origin require 10 percentage points more local content than what the UK sought.

These are the rules of origin, according to the trade deal: 

• Gasoline and diesel cars need to be made with at least 55 percent local content to avoid tariffs -- five percentage points more than what automakers and the UK wanted
• Electric vehicles and hybrids will need 40 percent local content, 10 percentage points more than what the UK sought
• Until 2023, batteries can have as much as 70 percent overseas content, and EVs and hybrids can have as much as 60 percent foreign content
• From 2024 to 2026 -- when European battery production is expected to be further along -- batteries can have 50 percent overseas content, and EVs and hybrids 55 percent foreign content

It’s unclear whether Nissan’s all-electric Leaf hatchbacks built in Sunderland have enough local content to avoid levies. While Nissan welcomes the trade agreement, it will now “assess the detailed implications for our operations and products,” Azusa Momose, a company spokeswoman in Yokohama, said by email.

Toyota’s Corolla hybrid compact cars built in Burnaston as well as the non-electrified vehicles assembled at the site qualify for tariff-free export to the EU, said Sonomi Aikawa, a company spokeswoman in Tokyo. The company benefits from its engine plant in Wales, she said.

The automakers’ tariff requirements going forward may be affected by their plans to bring more of their battery supply chains to the region. Electric vehicles will be given another six years to bring their amount of foreign content below 45 percent, the threshold gasoline and diesel cars will be held to immediately.

"The timings underscore the urgent need for government to create the conditions that will attract large-scale battery manufacturing to the UK and transform our supply chains,” said Mike Hawes, CEO of the industry trade group SMMT. “Improving the competitiveness of the UK will be essential to help mitigate the additional costs and burdens brought about by our new trading relationship.”

Other automakers have been putting off investments in UK plants as they awaited the result of trade talks.

BMW delayed work on a next-generation Mini platform because to uncertainties over the UK’s trade relations with the EU. Chief Financial Officer Nicolas Peter said this month that BMW would consider making Mini cars in Germany or China if tariffs undermine the business case of producing them in the UK.

PSA Group CEO Carlos Tavares said in March that the maker of Vauxhall cars would determine whether there was a business case for its factory in Ellesmere Port, and that the company could ask the British government to compensate for any trade barriers that may arise.

BMW and PSA welcomed the trade deal, while cautioning that they would need to closely examine the agreement to assess the implications for their operations.

“It’s hoped that the deal now gives a green light to major investments in the UK that had been stalled amid Brexit uncertainty,” said Bailey, the Birmingham Business School professor. “There will be extra costs for the industry in terms of nontariff barriers, but things could have been much worse.”