Making the case for UK automotive staying inside the EUs single market - SMMTs Mike Hawes

Making the case for UK automotive staying inside the EU's single market - SMMT's Mike Hawes

Speaking exclusively to just-auto, SMMT chief executive Mike Hawes says the UK auto industry's interests would be best served by continued membership of the European Union's single market following the UK's planned exit from the trade bloc in 2019.

The UK's Chancellor of the Exchequer, Philip Hammond, recently warned of turbulence and a 'bit of a rollercoaster ride' for business confidence ahead, as negotiations start on the terms of the UK's post-referendum exit from the EU. Uncertainty over future trade arrangements between the UK and the EU has caused the pound to lose value in international currency markets (a drop of around 17% on the US dollar since the referendum result on June 24). Sterling had appeared to stabilise after an initial fall, but a recently resumed downward trend suggested that traders are taking the view that amid the uncertainties ahead for Brexit, a so-called 'hard' Brexit – with the UK outside of the EU's customs union – has just become more likely.

While the post-Brexit vote path for the UK economy has been smoother than many expected, concerns and uncertainties over future trade arrangements between the UK and the EU are well and truly in the news again. The main sectors of the UK economy at the heart of the debate are financial services (and continued 'passporting rights' for financial institutions based in the City of London) and automotive manufacturing.

The UK prime minister Theresa May recently said that the 'Article 50' trigger for time limited two-year negotiations on the formal terms of the UK's exit from the EU will be pulled by the end of March 2017 at the latest. That implies the UK will be out of the EU by the middle of 2019. Parallel talks on future trade arrangements between the UK and the EU are also expected to take place, although they could be concluded after the UK's formal exit from the EU.

Currently, as an EU member, automotive vehicle and component manufacturers enjoy the benefits of the EU customs union and 'single market' on trade between the UK and other EU member states. As well as zero tariffs, movement of goods is subject to minimal cross-border controls to encourage intra-EU trade. When the UK leaves the EU, it could potentially remain in the single market (one precedent for this non-EU Norway), but would potentially have to pay into the EU Budget for the privilege and also accept freedom of movement of people with the EU. The latter, in particular, looks problematic given the anti-immigration driver in the UK's national referendum result to leave the EU (51.8% voted leave and 48.2% were for staying in).

If, however, the UK is left outside of the single market, increased costs for businesses on trade with the EU could result. No rational government wants to do anything that harms the economy, but the political line delivered by the government has been that the voters have spoken: the UK will leave the EU and 'take control of its borders' (which translates to no complete 'freedom of movement' – a key requirement to be in the single market - with EU any longer). EU leaders have argued that being in the single market means accepting freedom of movement for EU citizens and is non-negotiable. It's a political puzzle that will take some solving.

The UK automotive sector, represented by the SMMT, was clear in the run-up to the referendum; its interests would be best served by remaining inside the EU and that was an emphatic message from most of its members when surveyed. The game has changed now: It's about the terms of the exit. SMMT CEO Mike Hawes stresses the importance of staying inside the EU single market for the UK's automotive sector, which counts the EU as its largest export market. It is also a sector with long supply chains, highly integrated with the wider European automotive sector. There are large flows of trade in automotive components - as well as in finished vehicles - imports and exports. 

"Speaking to our members, they would prefer that we remain within the single market," he says. "We are not ignoring the difficulties associated with immigration, but from a business perspective we are very clear that the best option for the UK automotive industry is to remain within the single market."

The UK's biggest trading partner is the EU and 57.3% of UK-produced cars this year (in the first 8 months) have been exported to the rest of the EU so far this year, followed by 12.1% to the US and 7.1% to China. While the US topped the list of individual countries buying British cars, EU Member States took six of the top 10 places: Germany, Belgium, Italy, France, Portugal and Spain.

"When you have such a massive market on your doorstep, you don't want to ignore it or make it more costly to do business with," Hawes notes.

He appreciates the acute political difficulties faced by the UK government, but believes the UK auto sector is effectively making its voice heard in the UK government ahead of the complex and lengthy negotiations with Brussels that lie ahead.

"Ministers understand the UK automotive position and the strategic importance to the UK economy. The challenge is to reconcile that with what drove the summer's referendum result," he points out.

The auto industry in Britain has been a thriving in recent decades, output rising. It's a success story based on global markets, but vehicle manufacturers such as Nissan and Toyota have been attracted to the UK primarily as a manufacturing base for sales in Europe as a whole. Nissan's Carlos Ghosn has pointed out many times that its Sunderland plant is a European plant based in the UK – some 85% of the company's UK car output is destined for the rest of Europe. His recent comments on future investment have raised the temperature of the debate on the economic choices ahead that Brexit presents.

Wafer-thin margins

Hawes stresses the highly competitive nature of the automotive sector and the constant need to raise productivity. Not being in the EU single market would potentially increase costs and bring new productivity challenges. "We are a highly competitive industry operating on wafer-thin margins. The best outcome for the industry in the UK would be to remain within the single market. I'm not saying that's easy, or even potentially deliverable – given the primary political driver of controlling immigration – but that is, as far as the UK auto industry is concerned, the ideal outcome. If we don't get that we are going to be challenged to try and contain additional costs. There would have to be further productivity improvements to maintain competitiveness and that isn't easy."

There are multiple possibilities and scenarios being suggested for the UK's future trading relationship with the EU, including the idea that the UK may have to leave the single market to deliver on immigration control, but could do a free trade deal to allow tariff-free trade to continue. Being outside of the EU single market and customs union would also mean that the UK could do free trade deals with other countries around the world, such as the US. 

However, a free trade deal could come with additional costs, at least when compared to the free and unfettered trading conditions between UK and other EU member states today. For example, there are 'rules of origin' for goods assigned for free trade that require compliance - and there are bound to be some compliance costs. Automotive industry supply chains mean that system modules and parts have content from multiple supply tiers. Local content for automotive parts circulating in the EU single market is measured at the first tier level only. There could be purchasing department and export goods compliance headaches ahead if the UK's single market status alters.  

"Not being in the single market but having a tariff-free trade deal means that you are not in the single market and that means additional costs in terms of the trade process and administration," Hawes points out. "In terms of moving cars or parts across borders, you need the appropriate authorisations which imply more time taken to trade. Logistics costs go up because goods are sitting at ports for longer, maybe having to go into warehouses before shipping to the factory as well. There are a series of non-tariff barriers which mitigate against competitiveness and the UK industry would have to overcome that."

Hawes and the SMMT are making the case with government ministers and officials for the best possible outcomes for the UK's automotive industry as the UK negotiates the potentially turbulent and politically volatile waters of the UK's Brexit. The UK automotive sector has been a notable success story for the UK economy over the past two decades, with rising output, employment and exports that have greatly helped the UK's trade balance.

While the relationship with the EU is an uncertainty that will persist for some years yet, Hawes is well aware of the bigger picture and the complexities of the ever changing political dimension – in Europe as well as in the UK. While the terms of the UK's exit from the EU will be a focus of the Brexit negotiations to 2019, a parallel trade deal could take even longer to negotiate and conclude. There are multiple scenarios for a possible interim period, the UK being outside of the EU but trading with the EU and conditions needing to be set – WTO (with tariffs) or something else, such as continued membership of the single market. There is much speculation and more is to come, the negotiations unlikely to come with a running commentary. "We simply don't know, at this stage, how it will play out, what the politically feasible options will be," says Hawes and no-one will argue with that. "We are putting the case on behalf of the UK automotive sector to get the best outcomes we can, to continue to deliver a thriving, growing and dynamic part of the UK's manufacturing economy."

Complex political process

It's going to be a complex process of broad dialogue allied to detailed negotiations, subject to the shifting sands of political priorities in the UK and in Europe. Economic and political circumstances tend not to be static (financial instability in the shape of a crisis at Deutsche Bank has been in the news again, and the eurozone currency area is hardly fixed for good). Elections in France and Germany are coming next year; key political figures and new priorities may yet emerge; agendas are subject to changed priorities – in London, Brussels, Paris or Berlin. And there's the vital point that a final trade deal between the EU and UK will – as things stand - potentially need to be ratified by all 27 remaining EU member states (there could even be some new ones by then). A general observation is that Brussels politics has never been particularly straightforward. Hawes agrees. "The trade deal may take some time to deliver," he acknowledges. "Besides the detail, there is multi-lateral politics and some countries may have other agendas that come into play or cause mischief." 

Slovakia's Prime Minister, Robert Fico, recently said in an interview with the Financial Times that the EU will make sure leaving the EU is 'very painful' for the UK. The political temperature of the Brexit dialogue, the wider debate over the level of Europe's political and economic integration, as well as the status (and possible reform) of the EU itself, is sure to swing and fluctuate. The media will have a field day and we can expect much speculation of what can or cannot feasibly be agreed for an 'orderly' Brexit. If it hasn't been already, the very word 'Brexit' is sure to be welcomed into the Oxford English dictionary on the grounds of its common usage. 

The whole UK economy will be impacted by Brexit. While the UK's automotive sector has a significant degree of integration to the wider European automotive sector, there is also a global stage to consider. UK automotive exports go around the world, of course. There are potential upsides. "The possibility of additional free trade deals is potentially a huge positive and it would be fantastic if that can be delivered," says Hawes. "There really is a lot that is yet to be decided. The negotiations haven't even started yet."

If it's to be a rollercoaster ride ahead, it's good to have representation and leadership that is capable, calm and level headed. The SMMT, it seems, is providing that through its chief executive. 

See also: Ghosn raises Nissan Qashqai question-mark for UK