The automotive industry in Asia is busy weighing up the implications of last month’s decision by the UK to leave the EU – whether the outcome of the referendum represents an opportunity for their businesses or in fact a threat. The impact so far in terms of currency fluctuations has been significant.

The first question asked is whether there will be a significant fall in vehicle demand in the UK and Europe in the coming months and years as a result of “Brexit”. Political leaders worldwide, international institutions and global companies in the months leading up to the referendum were quick to warn of the hugely adverse economic implications a Brexit vote would have on the UK and EU economies, and even beyond.

Economic growth in the region no doubt will be affected by the uncertainty surrounding future UK trade relationship with the EU, particularly if it takes between 5-10 years to reach the necessary trade agreements as feared.

Domestic and foreign direct investment (FDI) in particular will likely slow during this period of uncertainty, with inevitable implications on corporate spending, employment, consumer confidence and ultimately consumer spending.

To better analyse what’s at stake for the Asian automotive industry, it is necessary to dive into some essential stats. Last year a total of 15.8 million new motor vehicles were sold across the 28 EU states, according to data collected by the association of European automobile manufacturers (Acea).

The UK market alone accounted for almost 3.1 million units, or close to 20% of the EU total, and was second in size only to Germany – where some 3.5 million vehicles were sold last year.

Almost 2 million Japanese branded vehicles were sold in the EU last year. South Korean companies sold a further 374,000 vehicles, while sales of other Asian brands, including Chinese, were negligible.

Vehicle manufacturers such as Toyota, Nissan, Honda and Hyundai-Kia have already invested in significant production capacity in the EU. But overall, Asian manufacturers still depend heavily on exports from Asia.

A total of 1,292,000 vehicles where imported into the EU from Asia last year, including 480,000 from Japan; 376,000 from South Korea; 242,000 from China; 99,000 from India; and 95,000 from Thailand. A large part of exports from Thailand were also Japanese brands, while exports from India were largely Japanese and Korean brands.

This dependence on exports leaves the Asian automotive industry highly susceptible to swings in currency valuations, with consequences for revenues, local competitiveness and earnings. Long-term investment planning and purchasing strategies are important parts of currency hedging.

Japanese vehicle manufacturers have been caught out by the rising value of the yen. The yen has appreciated by over 20% against the British pound since the beginning of the year, including a 14% jump immediately after the Brexit result was announced. Against the euro, the yen is up just 10% year-to-date.

Exports from Japan account for around 25% of Japanese brand sales in the EU. This is down from around 32% just five years ago, but still significant nevertheless. Some Japanese manufacturers are more exposed than others to the strong yen and will be under significant pressure to localize production in the EU.

For other major vehicle exporting economies, currency fluctuations have been more muted. The Chinese yuan, Korean won, Indian rupee and Thai baht are up by around 10% on average against the British pound year-to-date, but are largely flat against the euro.

On the recent currency valuation alone, the UK has become a more attractive investment location for Asian vehicle manufacturers since the beginning of the year. If most of the doomsayers are correct, and the pound continues to slide, the UK will become even competitive in the coming years.

Access to the EU’s markets remains a key factor affecting decisions, however. Potentially, the EU could impose a post-Brexit 10% duty on imports from the UK, the current tariff applied to non-EU countries, which would no doubt be reciprocated.

Europe automakers have the most to lose if tariffs are applied, particularly if the pound depreciates further against the euro. Last year, more than 2.1 million EU-made vehicles were sold in the UK, according to the UK’s Society of Motor Manufacturers and Traders (SMMT), including 962,069 vehicles from Germany alone.

On the other hand, the UK exported a total of 747,000 vehicles to the EU last year, or around 60% of its total exports. A further 480,000 were exported to markets outside the EU. The weak pound has made UK products more competitive globally – in the UK, in the EU and further afield in markets such as China and the USA.

If import tariffs are applied between the UK and the EU, Asian automakers may see this as an opportunity to gain some useful market share both in the UK and in the EU. Given the size of the UK vehicle market within the EU, the likes of Hyundai-Kia and some of the smaller Japanese brands, for example, along with their suppliers may find it necessary to hedge their European operations with production facilities in the UK.

Local content of UK vehicles already has increased significantly in the last five years, according to some reports, which means more component production in the UK. This trend will no doubt continue if the pound continues to slide.

On the flip side, currency swings are unpredictable and if the UK does well out of Brexit the British pound could well appreciate against the euro in the medium and long term. Hence the need for an effective hedged production strategy.