Brexit - what does it mean for the Automotive Sector?

13 minute read
06 July 2016

Now that the UK has voted to leave the European Union (EU), what are the possible ramifications for the Automotive sector?

Q - What is the immediate impact of Brexit?

In legal terms, nothing has changed. The UK remains today in the European Union and all EU law continues to apply within the UK (either directly in the form of EU regulations or indirectly through incorporation of EU Directives in UK law).

However, with exchange rates fluctuating daily, checking how cross-border contracts deal with the exchange rate risk is important, as is putting in place appropriate hedging arrangements. However, this is likely to be more difficult for smaller businesses and hedging costs will probably increase.

Almost all contracts will not be impacted legally by the referendum result.

Any material transactions which have not been completed will need to be reviewed.

Q - What should I do next?

There is a risk that the UK and the EU may slide into recession due to the uncertainty undermining confidence and freezing investment decisions. Indeed, the impact on the economy is perhaps the most significant concern.

Much of the investment into the UK's resurgent auto industry by global manufacturers is based on the UK's open and free access to all European markets and to the UK being an active and influential member of the EU.

Nobody can predict what will happen in the long term, but in the short term a downturn, if one materialises, and a loss of consumer confidence, is bound to feed into new car sales figures and consequently into finance. We may see an increase in insolvencies and a rise in litigation.

Much will depend on the politicians and how much calm they can bring as the next few months play out. It is the author's personal view that politics is the art of fudge and I expect there to be a few twists and turns in the Brexit story yet. I would still not rule out us staying in the EU in some way, shape or form, or ending up with something that feels very similar. Therefore I would advocate caution in making any hasty decisions on what to do now.

It is to be hoped that the sector is generally well-prepared for a downturn. After all, it does not feel as if it's that long since we left the last recession.

Therefore, the usual recession agenda may need to be considered. We should not talk ourselves into a recession, though, and be savvy enough to recognise the passing birds and interesting opportunities which may present themselves:

  • Focusing on decreasing costs. That will mean reviewing workforces, capital investment, and procurement arrangements. This will be challenging given that, with a weak pound, imports are more expensive which will drive up raw material, components and energy costs.
  • Reviewing solvency risk in supply chains and customers. This means considering contingency plans. After all, becoming insolvent is awful, but that is closely followed by having to deal with a key supplier or customer's insolvency. You should ensure that your contracts have clauses allowing you to terminate on insolvency (permitted under English law) to ensure you have some options.
  • Credit might well tighten given increased risks. Check your funding arrangements - is it secure, what happens if the base rate increases? Additionally, a big issue in the 08/09 recession was withdrawal or tightening of credit insurance leading to cash flow getting harder - so consider your exposure.
  • Sales. Consumer caution and higher import costs may slow down new car sales. This may lead to benefits for the aftermarket, maintenance markets and second hand.
  • Interest rates. If interest rates fall, will this wash through to pricing? Will it make finance more attractive or will it erode the profit margin even further?
  • Opportunity. Be prepared to move quickly and perhaps assemble a team in readiness. Some overseas investors are already accelerating investments while sterling is lower. What assets will become cheap? Is there a great opportunity to renegotiate? And good businesses may be available for acquisition cheaply while competitors may be distracted.
  • Exports. The weak pound will benefit exporters. Where are your sales efforts focussed? Brexit may be an opportunity to increase the sale of cars, built in the UK, into other countries that UK-based manufacturers have struggled to sell into in the past. China, India, US, and Australia all present possible opportunities for the UK outside the EU subject to trade negotiations.
  • Local sourcing/sales. UK suppliers sourcing in the UK will, with the weak pound, have an advantage over importers. Original equipment manufacturers (OEMs) may look to use 'onshore' UK component suppliers where possible.
  • For better or for worse. Prices will alter in a range of ways to reflect market shifts and currency fluctuations. If you are in fixed cost contracts is there now room to renegotiate? Even if you are content with your arrangements, you need to be more circumspect on price shifts happening around you to avoid sudden surprises when contracts are renewed.
  • Skills. There is already a skill shortage in this sector. Even if residency rules do not change for those currently working in the UK is now the time to do a talent and risk audit? If we do leave and free movement is constrained, what is your plan?
  • Data and technology. A lot may happen in this space. Access to talent and cost may become problematic - American vendors will still want to enjoy the same margins. Also, in the future what will happen to Data Protection Laws? Even if they are unchanged, will your data centre location requirements remain the same? Will you need to relocate data to the UK rather than, say, Germany, and what will you want from your cloud computing suppliers?
  • Intragroup arrangements. It is too early to call what changes will be necessary, but perhaps this is a good time to collate and review what you currently have in place.
  • Exclusivity. Will "Made in the UK" be a possible logo and become a badge of pride? A sign of exclusivity and desirability? Do we need to take action to refine what we stand for as individual businesses and a country as a whole? A global centre of excellence for automotive innovation, engineering and manufacturing? Will British products become more desirable and sought after on the world stage? As a country we can perhaps become more nimble and free in how we innovate.

Q - I have dealt with the immediate issues, what happens next?

The path for the next few years for our relationship with the EU and the rest of the world is very unclear. The main political parties are in chaos as they appoint new leaders, the "leave" camp have not set out a proposed pathway, and the EU is currently pushing hard for us to do so. We may end up with a general election or even a second referendum to give a mandate for the specific proposals.

That might mean that nothing will change (we end up staying in the EU), or not too much change but a loss of influence (the Norway model), or significant changes in specific areas (the Swiss model), or all-encompassing changes (the Canadian model)!

Our current view is that it is likely that we will end up with at least some form of free movement of goods between the UK and EU with low or no tariffs as we will still have an economy and purchasing power which is too significant to ignore. UK consumers like their German cars and German manufacturers like selling them to us. That in turn is likely to mean that there will be some form of free movement of people (as the price for being able to access the EU market) although naturally automotive businesses will be concerned about possible skill shortages and potential 'brain drains'.

Depending on what is negotiated, there may be free movement of services in certain sectors. The UK is likely also to regain hegemony with respect to trade with third countries and so we must query whether will we see the resurrection of the Commonwealth Preference System.

So with that in mind:

Q - Will there be a bonfire of EU regulation?

That is unlikely in the short and medium term for the following reasons:

  • The UK participated in the crafting of much of this legislation and so may find that it is in fact fit for purpose!
  • Any exporter to the EU will need to comply with EU law in order to gain access to that market.
  • If we do have free movement of goods in the automotive sector within the EU, which is likely, then we will need to keep the relevant legislation.
  • And note that if we are not in the EU, but have to comply with EU law, there is a risk that without the UK's close involvement in creating it, EU law might become less suited to UK business operations.

Specifically in relation to automotive finance businesses and the consumer credit legislation, while the EU has imposed certain requirements such as the use of the Standard European Consumer Credit Information (SECCI), the majority of requirements are now imposed by our FCA Handbook. With the ongoing review of the Consumer Credit Act, it is likely we will see more consolidation in the Handbook and it is hard to see how Brexit will have any impact on this.

Indeed, the FCA has urged firms to continue to abide by their obligations under UK law, including those derived from EU law, and continue with implementation plans for legislation that is still to come into effect.

Consumers’ rights and protections, including any derived from EU legislation, are unaffected by the result of the referendum and will remain unchanged unless and until the Government changes the applicable legislation.

The longer term impacts of the decision to leave the EU on the overall regulatory framework for the UK will depend, in part, on the relationship that the UK seeks with the EU in the future. The FCA has said it will work closely with the government as it confirms the arrangements for the UK’s future relationship with the EU.

An interesting area to watch will be European-derived employment protection legislation e.g. Working Time (limiting the number of hours an employee can work), and temporary workers. Changing this presents significant opportunities for cost saving to businesses. Whether the UK will want to decrease protection in this area will depend very much on the bent of a future UK government.

The UK legal system is admired throughout the world and so there may be an opportunity to improve laws in other areas and to even set an example for Europe.

All businesses should be considering the impact of EU law on their businesses and identifying what EU laws restrict them or increase costs. Business should be channelling views via their trade associations to lobby government.

Q - What about migrant labour?

Immigration was a key theme to the referendum. There must then be a high chance that the UK will want to restrict immigration in some way.

That presents risks to the automotive sector, as it is a significant employer of skilled European labour.

However, the EU is currently making it clear that the price for low or zero tariff access to the EU markets is to accept free movement of people, as one of the fundamental four freedoms of the Single Market.

It is difficult to see how that conflict will be resolved, but delivering on the vote by the people of the UK appears to be the number one political challenge ahead for the new Prime Minister.

Q - Aside from cutting costs, what other opportunities does Brexit present?

The Leave camp talked of substantially increasing trade with non-EU countries. Assuming that is delivered, then combined with a weaker pound, it should create good opportunities for UK exporters (assuming they have a low reliance on imports in their own cost inputs). Non-EU markets looks like an area worth investing in.

Note, though, that liberalised trade with non-EU countries creates not just opportunities for exporters (who do not rely on imports) but also imports into the UK, where appropriate trade agreements are put into place.

Q - I own trademarks. What is the impact?

There is no immediate change. However, the future approach to trade marks in the EU is unclear. It is likely that we will end up with separate UK and EU trademark systems. If you have, or plan to register, trade marks, you should seek advice as the position gets clearer.

Q - I am a supplier investing heavily in product innovation. I have or may have patents and designs. What is the impact?

There is no immediate change. However, the UK will need to extricate itself from the existing EU system for designs. Patents depends whether the UK stays in the EEA, and with the approaching changes to European patent enforcement, the position is complex. If you have patents or designs, you should seek advice as the position becomes clearer.

Q - I am an indirect supplier of services - what is the impact?

For UK suppliers supplying services in the UK change will be limited except to the extent that any EU legislation gets repealed.

For UK suppliers of services into the EU, the position is uncertain. Most Brexit models suggest no or limited free movement of services with the EU. Given the importance of our financial and professional services market, this is likely to be an area where the UK does push for EU market access.

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