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Brexit and tariff-free trade: What does it mean for British motor retailers?

Tariff-free trading promises for overseas car manufacturers has raised questions about the future of the UK's motor retailers
November 3, 2016

Speculation about the future of the UK's automotive industry reignited this week after revelations that business secretary Greg Clarke told Japanese carmaker Nissan that the British government wanted to negotiate tariff-free trading for the sector with the remaining 27 EU members.

A lack of clarity about trading conditions post-referendum is a concern for overseas carmakers which make cars here and export them to mainland Europe. A report from PA Consulting in July highlighted plants owned by Japanese operators as being at greatest risk of eventual closure if the terms of Brexit made them uneconomical.

The concern is that if the UK's access to the single market following Brexit is deemed to be inadequate by these and other such carmakers, their UK factories could face closure because they would be uncompetitive. This would lead to widespread job losses and a serious loss of export traffic for the UK.

This is worrying for London-listed car retailers, which have enjoyed something of a renaissance period in the past six years. In 2015, production increased by 5.2 per cent, while employment in the sector rose 3.15 per cent and total turnover was boosted more than 7 per cent. Most of that production was exported, with around 50 per cent heading for the EU market. At the same time, the PA Consulting report highlighted that the domestic market was still heavily reliant on imports.

But some experts have said much of the recent years' investment was thanks to the UK's membership of the EU. Under the single-market arrangements, overseas carmakers dispatch their UK-made vehicles for sale on the continent without incurring tariffs. However, this may now change following the UK's decision to leave the union.

This week it was widely reported that Nissan's chief executive, Carlos Ghosn, wanted a guarantee of compensation to offset any potential tariffs, before deciding whether to build new models at the Sunderland factory in north-east England. A subsequent announcement from Nissan that it would build the next generation of its Qashqai and X-Trail models at Sunderland (which employs around 7,000 people) suggested that promises for subsidies had been made. This was later denied.

 

 

But what about Britain's motor retailers? It has been well documented that industry forecasters predict an ongoing decline in new car sales, as well as slowing growth in used car sales. That could be a problem if, in the words of N+1 Singer analyst Matthew McEachran, "a business model existed that was entirely built on new car sales".

Most of the London-listed car retailers have substantial aftersales divisions, though, which are high-margin. And their market share gains should put the minds of the carmakers to rest.

Although the carmakers might not be negotiating such high prices with their distributors these days, the UK remains "a very important market", according to Mr McEachran. Around a fifth of all the cars made in Germany in 2015 were exported to the UK, while domestic producers such as Jaguar Land Rover still have market share to take.

In Mr McEachran's view, the manufacturers are still after volume and market share gains, but are likely to stick with high-quality retailers that can prove they are able to mitigate any consumer slowdown. Inevitably, that might take some capacity out of the market, says Mr McEachran, but that could actually provide larger motor retailers such as Lookers (LOOK) with further acquisition opportunities.

Mr McEachran also highlighted a 2009 free trade agreement between the EU and South Korea which, among other things, offers commitments against non-tariff obstacles for the automotive sector and thus preferential treatment. Such an agreement could therefore be replicated between the UK and the EU depending on Brexit negotiations.

More immediately, though, the upcoming Autumn Statement on 23 November might be of more concern for investors in this sector. A reduction in VAT could have a trickle-down effect on disposable incomes, while a decision on diesel surcharges for the sake of improving air quality could altar the shape of emissions testing for the motor industry.