Detroit's auto presence in UK could be reduced after Brexit deal reached
The United Kingdom could be facing a reduced role in the global auto industry and a hastening of the Detroit automakers' shrinking presence there even after the country reached a last-minute agreement with the European Union that concludes the years-long Brexit saga.
Britain's exit from the EU happened last January, but the jurisdictions had until Thursday to sort out a new trade agreement. The deal reached on Christmas Eve — which would largely maintain free trade — prompted relief from automakers who operate there. It avoids the abrupt implementation of tariffs that would have followed a no-deal Brexit. But hurdles remain, experts say, as businesses adapt to and work through the complex new rules.
Over the next five years, auto production in the United Kingdom could plummet, believes one European industry expert.
“The British car industry will be reduced in half,” predicts Ferdinand Dudenhöffer, professor of automotive economics at the Center for Automotive Research at the University of Duisburg-Essen in Germany. “I don’t see a strong reason for international carmakers to have a big location in the U.K.”
Still, the European Automobile Manufacturers' Association (ACEA), noting the "complex supply chains" that traverse the region, called the deal "a great relief for European automobile manufacturers, allowing the sector to avoid the catastrophic effect of a no-deal Brexit."
The EU and U.K. trade nearly 3 million vehicles worth nearly $66 billion each year, according to ACEA.
But the association said it awaits the release of the deal's technical details, and noted "major challenges still lie ahead" as the industry braces for new customs procedures and "much more red tape and regulatory burden."
Declining presence
The Detroit Three's presence in the region has been on the downswing in recent years. General Motors Co. exited the European market in 2017 after selling off its struggling Opel and Vauxhall brands to French automaker Groupe PSA.
Ford, amid an ongoing restructuring in which it has whittled down European operations, now has just two manufacturing sites in the U.K. since closing its Bridgend Engine Plant earlier this year. It builds on average about 660,000 diesel engines per year at its Dagenham Engine Plant outside of London, and produces transmissions via a joint venture at a facility in Liverpool.
Of the engines it makes at Dagenham, about 85% are exported to the EU and to the plant in Turkey where Ford builds its Transit commercial van.
Even without Brexit, those types of facilities are facing the end of their lifetimes over the next 10-15 years as Britain bans the sale of gas- and diesel-powered new vehicles starting in 2030, said Dudenhöffer, the German economist.
In a statement, Ford of Europe President Stuart Rowley said the agreement "will help sustain the vital role of the automotive industry in European economies today, while also providing stability as the industry transitions to new technologies and opportunities for the future."
"It is now important to understand the detailed rules of origin which will apply and to create as smooth a transition as possible by maximizing flexibility as businesses adjust to the new trading environment," he said.
Fiat Chrysler Automobiles NV has no manufacturing plants in the U.K., but the company is headquartered in London. The automaker is waiting for terms to be finalized, a company spokeswoman said.
FCA, however, expects to merge with PSA before the end of the first quarter of 2021. The combined company Stellantis NV will be based in the Netherlands and have control of PSA's two production plants in England.
In Ellesmere Port, PSA makes the Vauxhall and Opel Astra cars, and in Luton, it makes vans. Carlos Tavares — the CEO of the maker of Peugeot, Citroën, Opel and Vauxhall — said earlier this year that investment into Ellesmere Port, which exports most of the vehicles it makes, has paused, and the automaker would reevaluate the business case for the factory once the trade terms were negotiated.
“We welcome the conclusion of the Free Trade Agreement between the U.K. and EU which, after a long period of time, provides us with some certainty on the future trading relationship,” PSA said in a statement.
“However, many important points remain unclear, and we need to urgently understand the detail within the agreement to assess the full impacts on our operations in the U.K."
Likewise, Japanese automaker Nissan welcomed the deal. It had questioned the future of its massive Sunderland plant without a new trade agreement. Nissan executives had previously said that a no-deal scenario would render its operations there unsustainable.
UK downturn
The U.K.'s unprecedented retreat from the EU comes amid a downturn of its auto industry.
Production there between 2016 and 2020 is down 47%. That's largely attributable to pandemic-related shutdowns this year, according to the German Center for Automotive Research. Over the next five years, however, that could be the country’s new reality, Dudenhöffer said.
Honda Motor Co. Ltd. last year said it would close its plant in Swindon, England, which employs 3,500, in 2021.
It remains to be seen how those automakers who remain in the country will react, but experts say further withdrawal is a possibility as competitive advantages favor countries that remain in the EU.
Tavares, who will lead the combined company known as Stellantis NV, has said brands will remain based in their countries of heritage.
Although Vauxhall is a British brand, its vehicles are based on the German Opel brand. Many are manufactured in Germany, Spain and Poland. That would make it less of a challenge for PSA to move Vauxhall production completely outside the U.K., said Warren Browne, a former GM executive who consults automotive suppliers and is an adjunct professor at Lawrence Technological University.
“They can build Vauxhalls anywhere in the European Union. They do all the time,” he said. “Vauxhall is fundamentally different than a Mini or Land Rover or Jaguar. Those are iconic U.K. brands.”
Those brands may be willing to live with some of the additional administrative burdens, Browne said.
Big barriers
Tariffs are one thing, but they likely are to be “peanuts” compared to the non-tariff barriers companies doing business between the European Union and the United Kingdom could soon face. The balance of power favors the EU’s almost 16 million vehicle sales market compared to the U.K.’s less than 3 million in 2019.
“Rather than taking an engine out of France and moving into Germany without any hassle, the level of complexity to move the same powertrain or same component (to the U.K.) will be much more," Browne said. "Manufacturers don’t like that. That’s the whole reason (the EU) was formed.”
Among the new complexities businesses must navigate is the requirement — known as rules of origin — that the U.K. self-certify where a product's inputs originated. Certain exports to the EU with inputs sourced heavily from other places could face tariffs.
"If nothing else, it will slow down the trade," said Alan Deardorff, a professor of international economics and public policy at University of Michigan. "It's going to take longer for everything to move across the border."
Businesses will have to document the origins of products' parts, and goods will have to stop for inspection at borders. For an industry as globally intertwined as autos, that could be time-consuming, complex, and a challenge to the widely used system of sourcing vehicle components as they are needed.
Negotiators, however, did agree to one rules-of-origin ask from the auto industry.
Instead of the requirements applying immediately to electric vehicles, they will be phased in over a six-year period, Politico reported.
As for what the future holds for Ford's presence in the U.K., the automaker still has some 7,500 employees, as well as commercial vehicle and mobility centers there, said John Gardiner, executive director of communications and public affairs for Ford of Britain and Ireland: "I think we need to see what happens" in the longer term.
Ford, fearing the 10% duties on vehicle imports that would have gone into effect had a deal not been reached and warning of costs totaling hundreds of millions of dollars, had long sought a free trade agreement.
"We know it's not the same as being in the single market, but trying to maintain as close a proximity to what we've always experienced ... we always said, was the best solution both for the U.K. and for the EU," Gardiner said.
Though its manufacturing footprint there is relatively small, Great Britain remains an important market for Ford. With hundreds of thousands of annual sales, it's the automaker's third-largest market behind only the U.S. and China. It makes up about 30% of the automaker's total Europe sales, and is the largest market in Europe for the Transit, Gardiner said.
Still, Brexit could challenge Ford's strong U.K. demand, said Philippe Houchois, a London-based Jefferies Inc. analyst: “They are the ones potentially most at risk given that they have no manufacturing locally to protect the market share.”
Adding another twist to the saga is the automotive industry's transition of its own, away from gasoline- and diesel-powered vehicles and toward electric and autonomous ones. Detroit's automakers alone have committed to tens of billions of dollars in EV investments within the next few years.
"There’s a huge push on that front in terms of investment," Gardiner said. "So I think anything that makes (us) less competitive, it’s going to be a real cause for concern.”
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