JLR is growing its sales around the world, but is potentially relatively exposed by Brexit because of its UK production base allied to a high proportion of sales and parts sourcing in Europe

JLR is growing its sales around the world, but is potentially relatively exposed by Brexit because of its UK production base allied to a high proportion of sales and parts sourcing in Europe

The Fitch ratings agency says that Tata-owned Jaguar Land Rover (JLR) is the automotive group most at risk of revenue and earnings pressure due to the so-called Brexit referendum result for the UK to leave the EU.

Fitch points out that JLR has over 20% of unit sales in the UK - higher than other groups - and substantial local production is exported to the EU.

The ratings agency also says that the UK's vote to leave the EU will create uncertainty for several automotive manufacturers and is likely to weigh moderately on revenue and earnings in the next couple of years. "But we do not expect any near-term ratings impact," Fitch said.

The Fitsch report said one of the main effects will probably be a decline in UK new vehicle sales due to slower economic growth and weaker consumer confidence. However, it was also noted that new vehicle sales in the UK have rebounded sharply since 2012 to a record high and that a cyclical downturn was "likely in the foreseeable future even without Brexit". The referendum result, Fitch said, could also affect vehicles sales in the rest of Europe, curbing the recovery that began in late 2013.

Another major impact on manufacturers will be the period of uncertainty until the final terms of any trade deal are decided, Fitch said, noting that it is "impossible to predict if tariffs will be introduced and to what extent they could penalise exports from, and imports to, the UK". However, it said that a levy on exports to the EU could create a cost disadvantage for UK plants, raising the likelihood of automakers shifting some production elsewhere in Europe over the medium to long term and causing them to reassess future investments. It added that the whole supply chain could be affected as auto manufacturers and suppliers have plants located across the UK and the rest of Europe.

Fitch also pointed out that only a few manufacturers have significant production in the UK, including Jaguar Land Rover, with almost all its production in the UK, Nissan, with around 10%, and BMW at just less than 10%.

The vast majority of UK automotive production is exported and the industry represents a significant proportion of total British exports. The UK is also an important market for several global manufacturers. This, Fitch said, could lead to "intense campaigning in the UK and the rest of Europe to obtain favourable trade conditions for the sector".

Increased currency volatility could also weigh further on manufacturers' earnings once financial hedges covering the next 12-18 months expire. Local production acts as a natural hedge but about 60% of car parts used in UK production are imported from the EU, limiting the benefit. JLR, for example, imports substantial volumes of parts from Europe, such as transmissions from ZF plants in Germany

However, Fitch also noted that automotive manufacturers are used to managing downturns and generally have a solid track record of adapting to challenging conditions. In particular, pricing can be adjusted to limit sales declines and could protect revenue and mitigate earnings deterioration.

According to Fitch, the group most at risk of revenue and earnings pressure is JLR, with over 20% of unit sales in the UK and substantial local production exported to the EU. But Fitch also believes JLR has "sufficient headroom within its ratings, including robust credit metrics and ample liquidity, to weather some decline in earnings".  

The Fitch analysis says that others at risk include BMW, Peugeot, Volkswagen and Daimler, which all generate 5%-10% of unit sales and revenue in the UK. Peugeot and Daimler have substantial ratings headroom, Fitch says.

The UK market constitutes a small proportion of revenues and earnings for the big three Japanese automakers, Toyota, Honda and Nissan. A potential UK slowdown will have little impact on their credit profiles the ratings agency said. However, as noted yesterday on just-auto, indirect impacts – a rising yen – will impact the outlook for Japanese companies.