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Will the Brexit deal kill the UK’s automotive industry?

Automotive is a key manufacturing sector for FDI and the UK economy. Following the Brexit trade deal, Investment Monitor assesses the impact on the sector.

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The likes of Jaguar Land Rover, owned by India’s Tata Motors, have been badly affected by the Covid-19 pandemic and Brexit. (Photo by Ben Stansall/AFP via Getty Images)

Although the UK prides itself on being an automotive manufacturing hub, the country’s vote to leave the EU in 2016 left many wondering what impact this would have on the sector. In the aftermath of the vote being announced, automotive companies were reported to be considering leaving the UK, but four-and-a-half years later, has there been any impact?

The automotive industry in the UK: key facts

Foreign investment in the UK’s automotive sector

Automotive investors accounted for 4.9% of foreign direct investment (FDI) projects in the UK between the three financial years 2017–18, 2018–19 and 2019–20, according to figures from the Department for International Trade.

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Between 2017–18 and 2018–19, automotive FDI projects accounted for 5.2% of all FDI in the UK. However, this figure fell to to 4.3% in 2019–20.

The number of FDI projects in the UK’s automotive sector declined by 13.9% in 2017–18 and 14% in 2018–19, reaching 80 projects in 2019–20. This was a 59% decline on 2016–17 figures, when the UK recorded 127 automotive FDI projects.

Despite declining project numbers, in 2019–20 the UK’s automotive sector saw employment growth of 18.4%, to 3,212 new jobs. In contrast, total new jobs from FDI declined 2.6% to 56,117. This was despite a series of investments coming into the country, including Luxembourg-based IAC Group, a supplier of components and interior trim to Land Rover and Range Rover models, which plans to create 400 jobs at its plant in Elmdon in the West Midlands.

Which automotive companies are present in the UK?

The UK has an abundance of global automotive manufacturers with operations in the country. Japan-based Nissan has operations in Sunderland, while Toyota has operations in Derbyshire and Wales. India-based Tata Motors subsidiary Jaguar Land Rover has a facility in Wolverhampton, and Vauxhall, a subsidiary of Netherlands-based Stellantis, is located in Luton and Cheshire.

The reason for this is that the country boasts a range of strengths important to automotive manufacturing, including supply chains, facilities, infrastructure, incentives and a talented workforce. The European Automobile Manufacturers Association (ACEA) estimates that just over 10% of Europe’s automotive plants are in the UK.

The UK’s supply chain strengths

The Brexit trade deal allows for tariff and quota-free trade between the UK and the EU, which will have appeased automotive investors. However, the addition of extra procedures and paperwork will affect trade and supply chains.

The impact of Brexit on supply chains could be seen almost immediately, with Honda closing its UK plant twice in January 2021, following delays in receiving parts.

The ACEA estimates that 30,000 parts are used in the construction of a single car, highlighting the importance of a seamless supply chain.

Reasons for optimism over Brexit

Following the referendum result in 2016, many automotive investors voiced their concerns. US car company Ford stated a no-deal Brexit would be catastrophic for its UK business and would put jobs at risk at its Bridgend, Dagenham and Halewood manufacturing plants, while Bentley CEO Adrian Hallmark stated that a no-deal Brexit would have a significant impact on the company’s profits.

It initially appeared that some car manufacturers were considering leaving the UK, but this does not appear to have occurred despite the many concerns voiced in the industry.

Investment Monitor chief economist Glenn Barklie says: “Existing large-scale manufacturing plants are typically more ‘sticky’ than other forms of operations given the amount already invested in establishing the facility. Moving an existing UK operation, while still possible, will be less likely in the short term, especially given the non-tariff Brexit deal. Where we may see more impact is in new operations where the location is yet undecided – such as Ineos’s decision to produce a new range in France rather than the UK. Shortenings of supply chains will also impact new FDI; however, not necessarily in a strictly negative manner – as seen by Nissan’s recent decision to relocate its electric vehicle [EV] battery production to the UK.”

In early 2020, Nissan stated a no-deal Brexit would have detrimental effects on its UK operations. However, just after the trade deal was secured the company announced its commitment to its Sunderland plant. Nissan plans to relocate production of EV batteries from the US to the UK to avoid tariffs when exporting to the EU.

The reason for this move appears to be because of the rules of origin set out in the Brexit trade deal. The deal allows UK manufacturers to use parts that have been made in the UK or the EU and not pay tariffs when they export the finished product to an EU country.

Nissan also believes it has an advantage when selling to UK customers, as cars from rivals are likely to become less competitive because of non-tariff barriers leading to price rises.

How Covid-19 affected the UK automotive industry

In June 2020, the UK Society of Motor Manufacturers and Traders announced that one in six automotive jobs was under threat in the UK due to the Covid-19 lockdowns, with one-third of employees in the industry furloughed in June 2020. The pandemic has hit the sector hard, with new car sales plummeting by almost one-third in 2020. Recovery from Covid-19 combined with Brexit will continue to impact the sector, but the total cost remains to be seen.

What lies in the future for the UK?

The decision to end sales of new petrol and diesel vehicles in UK by 2030 will add increasing pressures to the UK automotive sector. To remain competitive, the UK needs to attract EV and component manufacturing operations. Battery technology company Britishvolt announced plans in December 2020 to build its electric car battery factory in Blyth, Northumberland, creating 3,000 jobs. This was an encouraging end to a tough year for the sector and provides a boost to any hopes of maintaining the UK’s status as a global automotive hub.

Christine Patton

Christine Patton

Senior economist

Christine Patton is senior economist at Investment Monitor and a global expert on cross-border investment.