What Will Brexit Mean For the Auto Industry?

Britain's Brexit vote immediately hammers global auto industry.

Global automotive stocks took a sharp fall on Friday, hammered by Britain’s vote to walk away from the European Union and fears that this could push the industry into a worldwide slump.

Considered too close to call before British voters went to the polls on Thursday, the “Leave” vote wound up garnering a solid 52 percent majority—the first step in what could be a long and unclear exit process. Any number of trade treaties and other laws will now need to be renegotiated, and that could impact everything from cross-border car sales to labor contracts, auto industry observers said.

Some automakers tried to put a positive, or at least neutral, spin on the Brexit vote; see a BMW Group statement asserting “there will be no immediate changes to our operations in the UK.” But the sentiment of the broader community is reflected in comments by Joseph Spak, an automotive analyst for RBC Capital Markets, who declared the outcome a “negative for the automotive sector,” while Joe Eberhardt, the CEO of Jaguar Land Rover North America, warned that “all hell will break loose.”

A number of major automakers decided to cast their lots with those who wanted to stay within the EU. This included not just Britain’s own JLR, but General Motors, Toyota, and Nissan. Despite the fact that the two Japanese makers operate some of the latest automotive manufacturing operations in the UK, some of the most lopsided “Leave” results in the Brexit vote came from Sunderland, the Northern England community where Nissan operates.

In the wake of the “Leave” vote, the British pound also tumbled—something that could actually work in favor of British-based automakers. Nonetheless, JLR warned ahead of the vote that it foresaw a $1.47 billion drop in earnings by the end of the decade. The company has already put on hold some of its global expansion plans, including starting construction on a new assembly plant in Slovakia.

A weaker pound sterling could make British manufactured goods, including automobiles, more cost-competitive abroad. About 78 percent of the 1.7 million vehicles that the country assembled last year were exported, 58 percent of those to Europe. But whether those cars will still find a ready market in the EU and elsewhere now depends on negotiating new trade agreements, which remains a significant uncertainty.

Meanwhile, it will become more expensive for Britons to purchase imported goods, and 90 percent of the cars sold in the country come from abroad, 80 percent of those from other parts of the EU.

Various analysts are predicting that the British auto industry will see a rapid dip of at least 10 percent in its car market. LMC Automotive, for one, has reduced its previous forecast for British sales by 410,000 vehicles in 2018. That could create a real problem in other parts of the world, especially the EU; LMC predicted Germany will quickly see a reduction of about 130,000 annual sales to the UK.

Any setback is potentially significant for the European auto industry, which only last year clawed its way out of a decade-long recession widely considered its worst since World War II. Even so, many automakers, such as General Motors’ Opel subsidiary, have continued to operate in the red—or, at best, just barely back in the black.

A senior representative for the Korean auto industry also expressed concern. Kim Tae-nyen, vice president at the Korea Automobile Manufacturers Association, warned that “this could inevitably undermine the price competitiveness of South Korean automakers in UK.”

Adding further confusion, leaders in Scotland quickly responded to the Brexit vote by reviving their own plans to split from England. For their part, Scottish voters decided to stay in the UK in 2014—but that decision was linked to staying in the EU.

With uncertainty the dominant mood, automakers and industry representatives responded Friday by calling for cooler heads and a slow and careful follow-up to the Brexit vote.

“The British public has chosen a new future out of Europe,” said Mike Hawes, chief executive of the UK’s automotive trade group, the Society of Motor Manufacturers and Traders. “Government must now maintain economic stability and secure a deal with the EU which safeguards UK automotive interests.”

For its part, Ford issued a statement declaring “the need to maintain a stable trading environment so that we can continue building a strong and sustainably profitable business in the UK and Europe.”

Clearly, many in the auto industry are hoping that the results of the vote will echo the words of British bard William Shakespeare: all “sound and fury, signifying nothing.”

But despite suggesting it will be business as usual for now, the statement from BMW made it clear that really isn’t likely. “Today, we know that many of the relevant conditions for supplying the European market will have to be re-negotiated, but of course we cannot say what this means for our UK operations until those future regulatory and legislative arrangements are agreed.”

How long it will take for the Brexit vote to lead to Britain’s actual exit is anything but clear, and for the auto industry, that translates into a potentially lengthy period of uncertainty.