The SMMT’s announcement that UK car production has declined for a third month in a row came as no surprise, with a perfect storm of political and technological factors affecting this critical UK industry. Julie Palmer, partner at Begbies Traynor, gives her thoughts.
The SMMT has been vocal about the impact of a no-deal Brexit scenario, and it is clear that manufacturers are deeply worried about a potential cliffedge from next March.
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This, allied with the drive away from diesel and the mayhem caused by the rapidly rolledout WLTP tests, are all taking their toll on the UK motor industry.
Although manufacturers have been preparing for life after the EU, without details of a deal only limited preparations can be made, leaving businesses uncertain of the future.
The recovery and success that the industry has achieved since the 2008 financial crisis, with around 50% of UK-built cars exported to the EU, could now be at risk.
MEMBERSHIP PIVOTAL
The SMMT believes that the UK’s membership of the single market and customs union is pivotal, stating that exports continue to be the main driver of demand for UK-built cars.
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By GlobalDataIf a free-trade agreement is not secured, then tariffs will be introduced on UK imports and exports, increasing the cost of products and leading to a reduction in profitability, which in turn will impact prices, investment and jobs.
Leading UK manufacturers – including Jaguar Land Rover (JLR), Toyota and Honda – have all voiced their concerns about a potential no-deal situation.
JLR has called for more certainty on Brexit, announcing that a “bad Brexit” could cost the company more than £1.2bn in profit each year, while Honda has said a no-deal Brexit would cost it tens of millions of pounds.
Yet this is not the only hurdle they need to overcome. The government has taken a hard-line approach to demonising diesel, and this has hit manufacturers as consumers have voted with their feet.
DEMONISED DIESEL
For those that have previously focused much of their European production on diesel engines, the growth in negative public sentiment towards derv has caught them on the hop.
This has been exacerbated by the government making changes to car tax rates, creating low-emission zones and introducing new emission-testing standards within the space of a few years, forcing the industry to recertify entire model ranges to meet these changes.
If manufacturers had been consulted from the start, then this negative impact could have been minimised.
Instead, car sales figures fell by more than a fifth in September. The resulting combination of export uncertainty due to Brexit and the drive away from diesel has led to manufacturers facing greater pressure.
JLR has cut workers’ shifts and axed jobs from its Castle Bromwich and Solihull plants this year, with the latter being forced to shut down for two weeks in October 2018.
It has also opted to move production of its Discovery model from the UK to Slovakia in 2019.
Additionally, Toyota – one of the world’s largest motor manufacturers – announced it will no longer sell diesel passenger vehicles in the UK.
In fact, our Red Flag Alert data suggests that the uncertainty has already had an impact, with more than 14,000 automotive sector businesses in the UK in significant financial distress at the end of the second quarter, increasing by 1% since the same time last year.
However, the luxury end of the market is currently being propped up by major demand from non-European markets, which is why Aston Martin was able to get the wheels in motion for an IPO in the summer.
If greater demand can be generated from outside the EU for other brands, then manufacturers may be able to navigate these choppy waters.
That said, the pain in this sector could get worse before it gets better if fundamental issues are not addressed sooner rather than later.
If no progress is made before the next number plate change – in March, when the UK is due to leave the EU – the UK car industry could suffer irreparable damage with production moving to low-cost locations.
