UK investment tumbles post-Brexit as carmakers fear ‘death by 1000 cuts’

January 27, 2017

Although UK car production reached a 17-year high last year, the industry’s future looks uncertain after investment in the sector dropped more than a third.  

While Britain built 1.72 million cars in 2016, an 8.5% rise year on year and its highest output since 1999, according to the UK’s Society of Motor Manufacturers and traders (SMMT), this success was on the back of investment decisions made ‘before the referendum was even mooted,’ according to SMMT boss Mike Hawes.  

Investment across the sector fell from £2.5 billion to £1.66 billion, as carmakers and suppliers delayed investment decisions that were not essential, until the Brexit terms become clearer.  

Hawes said that any imposition of tariffs for UK trade with the EU is ‘an absolute red line for the industry’ that would put the future of some plants into doubt. Failure to secure a preferential deal with the EU would see the UK revert to World Trade Organisation rules, which stipulate a tariff of 2.5-4.5% on parts and 10% on a whole vehicle. Hawes said it would be ‘very hard to overcome that level of additional cost’ because plants ‘operate on wafer-thin margins,’ with generally a 2-4% return on investment.  

He added that factories would not close overnight, but the potential is for death by a thousand cuts as production of new models was moved abroad. An additional issue is that many free trade deals between countries and blocs require more than 50% of components in a car to be made locally. In the UK, this currently averages 41%. UK plants are also heavily reliant on the EU for both exports and components, with more than half of exported cars going to the EU. EU sales rose 7.5% to 758,680 units in 2016.  

Meanwhile, international sales – inherently a cornerstone to Prime Minister Theresa May’s ambitions for a ‘Global Britain’ – were mixed. US exports skyrocketed 47% to account for 14.5% of exports overall, but in the major growth market of China, sales grew by just 3%, after falling 37.5% the previous year.  

However, while worrying, much of this investment may simply come once the terms of Brexit are on clearer ground – although the industry may suffer in the meantime, especially if the two-year process drags out. Decisions about future production in the sector tend to be made two to three years before a model rolls off the production line. Britain’s biggest plant, Nissan’s in Sunderland, also appears to be safe after Nissan committed to building the new Qashqai and X-Trail crossover there after UK government pledges for additional support to counter any loss of competitiveness caused by Brexit.  

Furthermore, Britain remains on track to make its largest number of cars ever by the end of the decade, surpassing the record 1.92 million cars produced in 1972, on the back of investments made two to three years ago. 

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