The impact of prolonged Brexit negotiations is taking its toll upon the UK automotive sector, warns trade credit insurer Atradius.
A new economic report by Atradius highlights that economic uncertainty has led to a 6% drop in new car registrations in the first half the year and a significant decline in investment; from £1.7bn in 2016 to just £347m in H1 of 2018. Atradius’ Automotive Market Monitor goes on to predict a rise in non-payments and insolvencies across the sector this year alongside the potential for future disruption.
Tom Danson, Head of Commercial for the Atradius Midlands region said “Uncertainty isn’t just a frustration to business, it is a potential catalyst for failure as it diminishes confidence and undermines the foundation for future growth. The industry has not only been impacted by uncertainty caused by the government’s plans to cut emission targets but also by the limbo of the ongoing Brexit negotiations, which keep continue to fuel concerns in the sector.”
“UK automotive manufacturers are reliant on access to free and frictionless trade with the EU, and there is therefore concern that manufacturers could decide to divert further investment outside the UK. A hard Brexit outcome ending access to the single market and customs union without any interim arrangement would severely hurt both producers and suppliers.”
The Atradius report considers the potential impact of a no-deal Brexit, which could see UK car production becoming more expensive should tariffs rise. Under World Trade Organisation (WTO) rules, there would be a tariff of 10% on vehicles and 4.5% on components. The introduction of stricter customs controls would hamper the just-in-time delivery of parts from EU suppliers and lead to higher stocks, which would increase costs; on average, cars made in the UK contain in the region of 60% EU-imported components. Further, overseas car producers with operations in the UK could suffer from a deterioration in profits and an impairment in assets, while the sector would also lose benefits from EU funds for manufacturing research and development.
On a more positive note, the weaker pound has been helping exporters to sustain automotive production growth, with exports accounting for around 80% of vehicle production. The EU remains the biggest export market for automotive sales, accounting for 54% of exports last year. However, conversely, currency volatility has also pushed up the cost of importing both vehicles and components. This is significant for the sector with around 82% of domestic-sold vehicles and 60% of automotive components imported from the EU. The recent decrease in new car registrations compels dealers and manufacturers to consider absorbing a share of these increased costs, negatively impacting their margins. Meanwhile, lower production will impact suppliers, particularly those who had invested in expanding their facilities expecting robust growth to continue. Car dealerships are also being squeezed by the drop in domestic car sales with some having to restructure and downsize.
Danson continued: “Risk has always been an inherent part of trade but in today’s more uncertain economic climate, the focus on risk is becoming more acute. Non-payments and business failures are unfortunately all too common and are becoming increasingly difficult for businesses to predict. What’s more, the current economic challenges come at a time when there are significant sector-related issues on the horizon such as emission curbing, new technologies and changing consumer habits. The concern is that even without trade tariffs, the sector could face a challenging period ahead over the next five years.”
“However, for Atradius, as a trade credit insurer, the changing pattern of risk is something we are very used to, indeed it is pretty much business as usual. As a trade partner, we work with customers to identify the risks that are important for them and provide expert advice in order to facilitate trade while providing protection should anything go wrong. Above and beyond this, we help customers to identify new opportunities and equip them with the real-time insights and analysis to successfully and safely navigate the path of global trade.”