Peugeot to open African bakkie plant
February 13, 2017
Looking to the future
February 13, 2017

The Brexit Effect

This post has already been read 468 times!

Developments generated by the UK’s severing of ties with the European Union’s single market have wide implications for South Africa’s automotive industry

The United Kingdom’s referendum vote to leave the European Union (EU) has led to concerns about the potential impact on the automotive industry – not only in Britain and the EU, but in South Africa, too.

One of the biggest direct concerns is how potential tariffs, custom charges and other barriers between the UK and its trading partners could change the dynamics for an industry that relies on an integrated global supply chain and cross-border trade in both components and final products.

Laying out her plans for Brexit last month in London, British Prime Minister, Theresa May, made it clear that the UK was committed to severing ties with the EU’s single market. In response, the Society of Motor Manufacturers and Traders in the UK warned that quitting abruptly and reverting to tariffs under World Trade Organisation rules would threaten the viability of the country’s automotive industry.

The point is of major concern for automotive manufacturers and suppliers in South Africa since the UK is a key external market for locally produced motor vehicles, parts and accessories, with exports in 2015 valued at R6,7-billion.

According to a recent study released by the Industrial Development Corporation, the UK is by far the largest export destination for South African made motor vehicles, accounting for 30,6% – or 101 704 units – of the total number of vehicle exports in 2015.

Catalytic converters, too, are the second highest revenue earner, the study warning that their value – which has already been adversely affected by the phasing down of incentives by the Department of Trade and Industry – could be further degraded by the imposition of new tariffs.

The balance of automotive industry exports to the UK comprises a wide variety of components and accessories, including stitched leather seat covers, automotive glass and engine parts which, though accounting for a smaller share of the total value, remain significant revenue generators.

The IDC warns that the uncertainty and adverse developments generated by Brexit are widely expected to weaken the UK’s growth performance at least over the medium-term, impacting negatively on its demand for motor vehicles and automotive components.

“Furthermore, the ripple effects on the European Union could further affect South Africa’s automotive export performance,” it says.

In the absence of a negotiated trade agreement with the EU, the IDC study says Britain could face high tariffs on items entering the European single market – undoubtedly affecting its exports negatively and, consequently, its production activity which would in turn affect input requirements from foreign suppliers of parts and accessories, such as South Africa.

“The UK could consider adopting a somewhat protectionist stance, but, considering the fact that its own car industry is heavily export-oriented – exports represent about 75% of production – it could face the threat of retaliation by trade partners,” the study says.

The IDC says other factors to consider include the disruption of automotive supply chains across Europe – which in turn will impact South African exporters – and the length of time it will take to set new trade agreements in place.

According to a study by Price Waterhouse Coopers, businesses involved in trade with Britain should be exploring all possible scenarios to develop strategies that will allow them to pursue their objectives whatever the outcome of the UK’s rapidly changing economic and political landscape.

“Some companies may want to review their OEM and supply chain investments in the UK in light of the changing economic and trade environment, including sterling’s depreciation and the prospect of increased trade costs.

“Brexit may provide an impulse to start or upgrade their globalisation efforts, especially in the direction of countries that are not in the EU but which entertain privileged (sectoral) trade relationships, like South Africa,” the study says.

May’s announcement that the UK would leave the single market was described as “expected” by Renault-Nissan-Mitsubishi CEO Carlos Ghosn. He said Nissan – which operates Britain’s biggest assembly plant at Sunderland – would remain committed to building cars in the UK.

Similarly, Toyota’s chairman, Takeshi Uchiyamada, said the company would keep its car and engine plants in the UK. However, both men said steps would be taken to increase the manufacturing competitiveness of the facilities if leaving the European Union raised costs.

Toyota and Nissan, along with Japanese rival Honda, have led a revival in UK car manufacturing, relying on EU membership to export cars to other countries in the bloc without tariffs.

 

Leave a Reply