No Deal Brexit Threat Shifts Priorities For Autos Investment


Friday, August 02, 2019 /02:40PM / Fitch Ratings / Header Image Credit: China Briefing


The increased threat of the UK leaving the EU without an agreement is causing a divergence in investment decisions among UK auto manufacturers, Fitch Ratings says. Some companies have announced a potential reduction in their investment, while others are boosting capacity.

A no-deal Brexit scenario could materially lengthen supply chains and jeopardise just-in-time deliveries that are key to automakers' profitability and working capital management.

Peugeot (PSA) has said its Ellesmere Port plant could be closed if current frictionless trade is threatened by a no-deal Brexit. The plant, which makes the Astra car, currently is competitive so the announcement of a possible closure shows that the uncertainty in trading arrangements is influencing production planning decisions. PSA is clear that the economics could be enough to justify building a completely new plant in Spain, with lower variable costs, rather than reconfiguring Ellesmere Port.

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PSA is in the throes of substantial product re-configuration following its acquisition of General Motors' European operations and brands. Its production decisions remain in the balance as the company seeks to optimise its operating costs at a time of weak demand.

In contrast, Jaguar Land Rover (JLR), with its lower EU exposure, has announced investments in a new battery plant in the UK in addition to electric drivetrain capacity. About 78% of JLR's production is sold to the UK, US, China and the rest of the world. Additional capacity built in Slovakia may help to offset JLR's exposure to currency fluctuation and delivery risks.

Manufacturers such as JLR and PSA are investing heavily in new chassis architecture in order to accommodate as many models as possible on common architecture, significantly reducing development costs and enabling multiple models to be built on the same production line. This maximises capacity utilisation through adjustment of product mix, and preserves margins, while reducing production complexity of multiple model lines.

A potential no-deal Brexit threatens to considerably lengthen supply chains, jeopardising just-in-time deliveries that are key to continued smooth production. Interruption automatically results in revenue loss for manufacturers unless capacity utilisation is already low. All light vehicles manufactured in the UK have up to half of their parts coming from the EU through Dover-Calais and Eurotunnel. These routes carry the most lorry-based trade on a roll-on roll-off basis, due to high available capacity, frequent departures and reliability. About 70% of all EU freight traffic was via roll-on, roll-off or trailer ships in 2015, according to the UK Department of Transport; Maritime and Shipping Statistics.

In the event of a no-deal Brexit, trade between the UK and the EU would be affected by both the imposition of tariffs on exports, which would add to the costs of finished goods (notwithstanding currency movements), and new customs arrangements where currently there are none. This would be likely to result in clearance delays on cross channel routes.

Customs clearance would be the largest threat to the competitiveness of UK manufacturing, in our view. If the UK is outside the EU Customs Union, then UK produced vehicles will suffer from rules of origin, which will determine the tariff classification of vehicles exported to the EU.

As the UK would no longer be a point of entry into the EU, all goods exported into the EU would require significant additional paperwork. This includes value declarations, bills of landing, proof of freight insurance, import declaration, packing lists and a customs import declaration. All lorries coming through Dover-Calais and Channel Tunnel routes would need to be customs cleared, compared to less than 1% currently. Delays in clearance, which would be likely as current clearance capacity is scaled to need, would add to working capital needs and require additional logistics and port capacity, potentially reducing margin for UK based auto manufacturers and their suppliers.

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