Brexit could cut UK car production in half

UK auto production is already plummeting and Brexit could make things even worse, limiting annual output to just 1 million cars, about half what the industry was planning to make in 2020 just a few years ago.

The number of vehicles produced in Britain slumped 4% in October, according to data published Thursday by the UK Society of Motor Manufacturers and Traders. Car production has now declined for 16 of the past 17 months.

“Yet another month of falling car production makes these extremely worrying times for the sector,” SMMT chief executive Mike Hawes said in a statement. “Our global competitiveness is under threat.”

US President Donald Trump and British Prime Minister Boris Johnson hold a meeting at UN Headquarters in New York, September 24, 2019, on the sidelines of the United Nations General Assembly.

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Global car sales are falling this year. But the slump in UK production is much more severe and that’s because of nearly three and a half years of uncertainty over Brexit, and the continued risk that leaving the European Union will make it much harder to trade with a market that takes 57% of the country’s car exports.

According to the SMMT, leaving the European Union without a trade deal in place would mean new tariffs and an even more dramatic decline in production. The group said earlier this week that such a scenario would cause carmakers to shift production to other countries, reducing UK production to 1 million vehicles a year by 2024.

“Rather than producing 2 million cars a year by 2020, a … worst case scenario could see us making just a million,” Hawes said in a statement.

UK auto production has already dropped over 14% so far this year compared to 2018, with annual production on track to hit roughly 1.3 million cars. Global sales are expected to dip by about 4% in 2019, according to Fitch, a credit ratings agency.

The global automakers who have built factories in Britain fear it could leave the European Union without securing a trade deal. That would snarl their supply chains, disrupt production and erode profit margins that are already razor thin. The outcome of a general election on December 12 could help break a domestic political stalemate over Brexit. But it won’t eliminate risks for the car industry.

Assuming Britain exits by the end of January, as Prime Minister Boris Johnson has promised, it will have less than 11 months to negotiate a new EU trade deal.

“We need to work closely with the next government to ensure frictionless trade, free of tariffs, with regulatory alignment and continued access to talent in the future,” said Hawes, who added that continued preferential trade with the European Union and other markets “will be essential to keep automotive in Britain.”

Much damage has already been done.

Honda (HMC) has announced plans to shut down a major factory in England that employs 3,500 people and makes up to 150,000 Civics a year. Nissan (NSANF) scrapped plans to build its new X-Trail SUV at its factory in Sunderland. It said uncertainty over Brexit was partly to blame.

Nissan cars parked in Sunderland.

French carmaker PSA (PUGOY), which is planning to merge with Fiat Chrysler (FCAU), has warned that continued production of the Vauxhall and Opel Astra in the United Kingdom depends on the country’s terms of trade following Brexit. It’s the only model currently produced at the group’s factory near Liverpool. Ford (F) will close an engine plant in Wales by 2020.

Asked earlier this month why he chose to locate Tesla’s (TSLA) first European factory in Germany and not the United Kingdom, Elon Musk did not mince words. “Brexit [uncertainty] made it too risky to put a Gigafactory in the UK,” Tesla’s (TSLA) CEO told Auto Express.

TOPSHOT - Anti-Brexit activists, and demonstrators opposing the British government's actions in relation to the handling of Brexit, protest outside the Houses of Parliament in central London on September 3, 2019. - The fate of Brexit hung in the balance on Tuesday as parliament prepared for an explosive showdown with Prime Minister Boris Johnson's that could end in a snap election. Members of Johnson's own Conservative party, including Philip Hammond, are preparing to join opposition lawmakers in a vote to try to force a delay to Britain's exit from the European Union if he cannot secure a divorce deal with Brussels in the next few weeks. (Photo by ISABEL INFANTES / AFP) (Photo credit should read ISABEL INFANTES/AFP/Getty Images)

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The car sector is one of the most productive industries in Britain, and the single biggest exporter of UK goods, accounting for 14% of total exports. But the cumulative effect of the uncertainty has reduced investment, undermined production expectations and raised concerns about job losses.

It’s a major reversal of fortunes for the industry. In late 2015, the SMMT predicted that annual car production in the United Kingdom would reach 2 million by 2020.

“The UK automotive industry is in the midst of a period of strong growth, with potential for further expansion,” the industry group said in the 2015 report, which predicted over 30,000 jobs would be created as a result of new investment.

The prospects for the sector would remain positive, the group said, assuming two conditions were met: That the world avoided an economic crisis, and the United Kingdom remained within the European Union.

The vote to leave in June 2016 was enough to derail the industry’s momentum. Annual UK car production was 1.72 million in 2016, and 1.67 million the following year. That declined to 1.51 million in 2018. Should the current trend hold, production would drop to roughly 1.3 million this year.