UK carmakers walk the tightrope as Brexit realities sink in

Passenger car sales in the United Kingdom have been either flat or degrown over the last 10 years. The exception was in 2015 they were up eight per cent to 2.6 million units from 2.4 million in 2005.

It was in June when Britain opted out of the European Union in a decision that shocked the world. More recently, in October, Prime Minister Theresa May said Article 50 of the Lisbon Treaty would be set in motion by March 2017, a clear reflection of a ‘hard Brexit’ getting underway.

While the British pound has fallen sharply since the decision to stay out was made official, the latest announcement has seen it plunge to its lowest level in 30 years.

These developments have hardly helped Britain’s cause. It has already lost its top ‘AAA’ credit rating with Standard & Poor’s, which has cited increased economic, fiscal and constitutional risks. The future of the UK is uncertain too with Northern Ireland and Scotland keen on staying put in the EU.

In turn, EU officials have hinted at taking a hard stance and are not willing to conduct informal talks with the UK on a post-Brexit deal. An arrangement that allows Britain full access to the EU’s single market without the need to accept free movement of people seems increasingly unlikely.

From an Indian perspective, the Tata Motors-owned Jaguar Land Rover becomes relevant in this new geopolitical landscape. The British brands are the biggest players in the UK followed by Nissan and it will be interesting to see what is in store for the duo in the coming months. The JLR management has already made it clear that it needs to have a viable business model in place post-Brexit, which means its cost structure, right from exports of cars to the EU to importing components to the UK, cannot afford to spin out of control. Of course, there is some assurance to JLR from the recent Nissan move to continue its investments in the UK clearly reflecting that the Theresa May government may have given reassurances to the carmaker on its future prospects. Nonetheless, JLR will go ahead with its plant in Slovakia, Central Europe, which will be commissioned by 2018-19 and possibly insulate it from a more vulnerable Britain.

What could also alter the European landscape in 2017 is the emergence of new political realities in Germany, France and Austria. As much as nobody predicted a Brexit or, across the Atlantic a Trump triumph in the US, there is no telling if right-wing politics will be victorious in Europe next year. Should that happen, some countries may just want to emulate the British model and go solo too.

According to data from the Society of Motor Manufacturers and Traders, British new car sales totalled 2.15 million units between January and September this year, an increase of 2.6 per cent over 2015. In June, the UK’s impressive record of consecutive year-on-year increase of new car sales was interrupted for the second time after October 2015. Registrations fell by 0.8 per cent to 2.56 lakh but sales began to recover with September sales up 1.6 per cent to 4.7 lakh units.

Likewise, fleet sales increased in September by 7.3 per cent both in the private and business segments. Year-to-date fleet sales were up 5.4 per cent where private increased by 0.4 per cent, but business sales dropped by 5.8 per cent from 2015 levels.

Diesel engines, which account for almost half the market, continue to lose ground and were down 47.6 per cent in the first three quarters of 2016 against 47.9 per cent last year.

Interestingly, the shift from diesel has not helped gasoline (petrol) cars as in other European countries, but to alternatively-fuelled vehicles. While this is still a niche segment which takes up barely 3.3 per cent of the market, sales increased by 24.3 till September to nearly 70,000 units.

Sales of light commercial vehicles were up 2.7 per cent to 2.92 lakh units for January-September this year against 2.84 lakh units in the same period last year. This was due to demand from e-commerce businesses coupled with a robust UK economy in the first semester.

Over the past four years, the British new car market has seen impressive growth backed by a consumer-friendly environment, low inflation and interest rates, attractive finance deals and continued introduction of high tech and fuel-efficient cars. As a result, the British car parc is one of the youngest in Europe and definitely the youngest of the top five EU countries.

Concerns are mounting that the UK has reached its market peak and PwC Autofacts expects new car sales in the fourth quarter to remain stable. Till the Brexit deal closes sometime in 2019, uncertainty will continue to undermine consumer/business confidence and adversely affect the market.

Some companies have already announced postponement or freezing of investments until the post-Brexit picture becomes clearer. PwC Autofacts anticipates new car sales to result in a minor growth of 1.8 per cent to 2.7 million cars in 2016.

The writer is Partner, Price Waterhouse