UK car production fell by -13.7 per cent in June according to SMMT figures. This is the third consecutive month of decline resulted in a -2.9% year-to-date dip in output. While this is still the second highest for 12 years, it is clear to most industry observers that the graph showing growth has reached the summit and the decline has begun. At the heart of this is the Brexit negotiations and the uncertainty arising from them, because the European Union is by far their biggest customer and supplier.
Production for export continued to underpin volumes in 2017 with overseas demand for British-built cars falling by nearly 1 per cent in the first six months, with 683,826 cars shipped overseas. The percentage of cars for export now stands at 78.9 per cent – the highest for five years.
Meanwhile, demand from their home market new car sales declined -9.5 per cent to 182,830 units, as the UK new car market is definitely cooling in line with forecasts following a long period of record growth. If this decline continues as forecast, it will influence used car availability and prices for Irish buyers regardless of tariffs or currency exchange rates in two to four years.
Although there is much uncertainty, production is forecast to rally in the second half of 2017, according to the latest independent forecast. However, I believe this projection is optimistically based on some new models and updates planned for production later this year, many from premium brands, helping cement the UK as the world’s second biggest producer of premium cars after Germany. The new introductions mentioned are for the record are the: Range Rover Velar; Nissan Qashqai (facelift); Aston Martin Vantage; Jaguar XF Sportbrake; Aston Martin V8 Vantage; and Lotus Evora 400 Roadster.
In addition, market softness both in the UK and certain key export markets may see the 2017 forecast revised. Looking further ahead, the base outlook (which assumes some sort of Brexit deal in place) has been revised such that, by 2020, the analysis forecasts the sector just missing the ambition of two million cars by 2020. I fear more optimism at play here, where the forecast is to grow output from a forecast of 1.92m units this year to 1.99m by 2020. For that to be achieved it would require very successful Brexit negotiations and a much more conciliatory approach by negotiators on the British side.
As concerns mount over Brexit and the effect of the ongoing uncertainty on investment, the analysis also suggests that failure to secure a deal, or at the very least, an interim arrangement maintaining current trading conditions, will cause output to fall in 2019. Supply chain disruption caused by ‘hard’ border controls as the UK leaves the customs union and price increases driven by WTO tariffs, could result in a 10 per cent hit to production, taking volumes back to 2016 levels.
There are three possible options being talked about in this regard. The cliff-edge scenario where there is no Brexit agreement or interim deal from April 2019 and the UK immediately reverts to WTO tariff arrangements and there are ‘hard border’ customs check. That would reduce forecast for UK car production in 2019 to: 1,72m units.
The second is A ‘midway’ agreementis reached between the EU and UK whereby vehicles are subject ao a 5 per cent tariff with light touch customs checks for the automotive sector. The forecast would then rise to 1,89m units.
The third would be the British auto industry’s preferred, and a transitional agreement is reached whereby there is no material change to current arrangements until 2021, at which point a 3.5 per cent tariff on vehicles is applied and an electronic customs system is introduced. That would see a forecast for 2019 car production of 1,92m units.
Mike Hawes, SMMT Chief Executive, tells us, “World-class engineering, productivity, strong government collaboration and massive investment in the past few years have helped UK Automotive become a global success story. At the heart of this has been the free and frictionless trade we’ve enjoyed with the EU – by far our biggest customer and supplier. But Brexit uncertainty is not helping investment and growth is stalling. The government has been in “listening” mode but now it must put on the table the concrete plans that will assure the future competitiveness of the sector. Investors need certainty so, at the very least, the UK must seek an interim deal which maintains single market and customs union membership until we have in place the complex new agreement sought with the EU.”