What would a no-deal Brexit mean for cars?

The Economist is running a series of articles on the potential impact of a no-deal Brexit on everything from trade to the economy, immigration to universities, the island of Ireland to retailing. This piece looks at the automotive industry.

Carmakers based in Britain compete fiercely to sell their products to motorists. But competition gives way to total agreement when it comes to Brexit. Any deal that changes arrangements at Britain’s borders—across which millions of parts and completed cars flow in both directions every year—or introduces tariffs on an industry that customarily operates on slender margins, would be damaging. Worst of all is the prospect of a no-deal Brexit. That would bring immediate uncertainty to the operation of supply chains and impose World Trade Organisation (WTO) rules, slapping large tariffs on cars and parts.

To be sure, other problems loom over the global car market, from slowing sales in China to tougher emissions rules. Honda, a Japanese carmaker which announced on February 18th that it would be closing its only European manufacturing facility, in Swindon, in 2021, blamed an industry-wide move to electrification for its decision. But worries over Brexit are undoubtedly a significant factor in Honda’s decision.

Uncertainty over Britain’s departure from the European Union has already hurt the industry. Figures from the Society of Motor Manufacturers and Traders, an industry body, show a steep decline in investment, from £2.5bn ($3.8 bn) in 2015 to £589m in the first half of 2018.

Brexit has been cited as a factor by Nissan, another Japanese firm, for the reversal of its decision to make the latest model of its X-Trail SUV in Sunderland, and by Jaguar Land Rover (JLR) for its recent lay-offs. A no-deal Brexit would prompt further restructuring. Ford summed up the attitude of the industry on February 13th, saying that such an outcome would be “catastrophic”. The American carmaker, which only makes engines in Britain these days, also suggested that it would almost certainly move production abroad.

Carmakers have two fears about no deal. The first concerns the imposition of tariffs under WTO rules—an average of 10% on cars and 4.5% on parts. That would raise the cost of imports and exports, and hit demand. (The bureaucracy required would raise costs, too: Honda has said in the past that it would have to deal with an additional 60,000 pieces of paperwork a year.)

The second, more immediate, fear is that no deal would mean chaos at ports, as lorries are stopped for new customs checks and traffic jams build up on either side of the Channel. Over half of the 1.5m cars made in Britain in 2018 were exported to the EU; a large proportion of the parts that made them were imported from the bloc. The techniques of lean manufacturing, first brought to Britain by Toyota, Nissan and Honda, have led to supply chains that criss-cross a free-trading EU. This interdependence would create severe problems from day one.

Just-in-time deliveries mean that planning for “no deal” and the non-arrival of essential parts is close to impossible. Car factories are conceived, designed and built to use parts that flow in regularly on lorries. If one lorry fails to arrive and a car cannot be completed the line grinds to a halt; there is no space to leave half-assembled cars hanging around the factory until vital parts appear.

Consider the plant in Oxford where BMW churns out 1,000 Minis a day. Each is made up of 4,000-5,000 parts. Bringing 4m parts to the factory on 200 lorries every day is a “significant logistical challenge”, says Graham Biggs, the firm’s communications director. Three-fifth of them come through Dover or the Channel Tunnel; their contents are unloaded directly onto the appropriate part of the production line. The consignments are not all the same parts but ones for the cars that will be made that day or hour. The lorries are even packed in sequence so that the right part comes out in the right order.

All carmakers have similar processes. Nissan needs 5m parts each day, of which 85% are imported. Honda takes delivery of 2m parts a day at its Swindon works. JLR uses 25m separate parts per day. Toyota makes 600 cars a day and requires 2m parts in 34,000 boxes, many of which arrive on 50 lorries; the continuous flow of parts means that the firm has inventory on site for four hours of production. In all these cases, many or most of the parts come from across the Channel.

Some carmakers have already made plans to shut up shop around Brexit day, in anticipation of likely disruption. Temporary suspensions are one thing. But if a no-deal Brexit were to add permanent costs to carmakers, firms would have to reconsider their positions. Reconfiguring supply chains to circumvent hold-ups and tariffs would take years, if it is possible at all. Many suppliers simply do not have operations in Britain; persuading them to set up there would also depend on persuading them that the car industry in Britain is likely to thrive over the long term. And a no-deal Brexit would make the opposite outcome more likely.

See more Brexit briefings:
What would a no-deal Brexit mean for trade?
What would a no-deal Brexit mean for the island of Ireland?
What would a no-deal Brexit mean for immigration?
What would a no-deal Brexit mean for retailing?
What would a no-deal Brexit mean for the economy?