Changing gear

    27 May 2017

    Factories in the north will be shuttered up. Ports will be clogged with lines of Land Rovers and Minis completing their customs checks. On the roads, we’ll be driving Morrises and Austins and perhaps even Humber Hawks — look it up on Wikipedia — as imports slow down. After financial services, the motor industry is the sector likely to be most affected by our decision to leave the European Union — and since the referendum there has been no shortage of dire warnings over the likely consequences for what in the past 20 years has arguably been the UK’s most successful manufacturing sector.

    Brexit will undoubtedly be a huge challenge for companies which, like many City firms, have remade their business as part of an integrated European industry. Yet it can be an opportunity as much as a threat.

    It remains to be seen whether EU tariffs or other barriers are imposed on British-made cars. But even if they are, there are still many ways in which the industry can play to its strengths. It can break free of Brussels regulation to take a lead in new technologies such as hydrogen, electric and driverless cars. And it can focus on selling upmarket vehicles to global rather than European customers.

    When the UK joined the EU back in 1973, the British car industry was a joke. Cars such as the Austin Allegro and Morris Marina, made by the ill-managed British Leyland group, have gone down in automotive history as some of the worst ever produced. Over-manned, strike-ridden, under-capitalised and with laughable quality control, the whole sector was dying on its feet by the end of the 1970s; its traditional export markets had been lost.

    It would be an exaggeration to say EU membership turned that around. The Thatcherite reforms of the 1980s and the first waves of Japanese and German investment were far more important. But the EU played a part. Companies such as Honda, Toyota and Nissan started manufacturing in this country because it was a way into Europe — so much so that Peugeot boss Jacques Calvet memorably accused Britain of being an ‘aircraft carrier for the Japanese’.

    Even if that were true, it led to a remarkable revival. We now produce almost 1.8 million cars a year in an industry that employs more than 800,000 people and generates £71 billion in sales. Some of that might have happened without ever joining the EU, but not all of it.

    Critically, however, the industry relies on exports. Of those cars, 1.2 million are not for the home market. The UK industry is part of an EU-wide supply chain and while making cars to sell abroad, we are also buying those assembled in Germany, Spain or Poland. Components may travel through several countries before finishing up in a Honda or a Ford.

    The trouble is that tariffs — even at the modest 4 per cent or so permitted by WTO rules — along with customs checks, could hugely disrupt that network. Indeed, these barriers might be worse than for the City. A fund manager may get away with opening a front office in Frankfurt or Paris while doing the real work in Canary Wharf. But that won’t be possible for a car factory. Either it’s inside the EU or it isn’t. In short, Brexit poses a huge threat — which is why the industry’s leaders were so vocal in the Remain campaign.

    Amid pre-negotiation mudslinging on both sides, we have no idea what kind of final deal will be struck with the EU. Will there be a special motor customs union, recognising, for example, that Britain is a huge market for German cars? Whatever the final outcome, the industry will have to make itself less reliant on the EU. How? There are two big things it could be doing to reinvent itself.

    First, access to the EU comes at the cost of compliance with rules set by Brussels. Even when it’s not actively hostile to radical ideas, as it is with the gig economy, the EU is slow to permit anything new. And yet, after a century in which the internal combustion engine has not fundamentally changed, a revolution looms. Electric and hydrogen power promise a complete step change; the driverless car will transform the way vehicles are used and owned. If the UK is flexible and fast to deregulate, it can steal a lead in those technologies.

    Next, we need to diversify away from stagnant EU markets. Greek car sales, not surprisingly, have fallen almost 90 per cent in the past decade. Italian sales are down by half. GM’s recent decision to pull out of Europe (by selling its Vauxhall and Opel marques and factories to Peugeot) implied that American bosses think Europe’s overcrowded market hardly worth bothering with any more.

    Instead, the manufacturers need to concentrate on countries that are growing. The Chinese market for vehicles is exploding; so is that in Vietnam, now the 35th biggest market in the world, and, closer to home, Poland, now the 25th.

    The motor industry faces a huge challenge — and as Robin Andrews explores on the right, so does the investor who believes Brexit is also an opportunity. For the global car giant, the specialist component maker or the humble stock-picker, boldness and lateral thinking will win the day.