Last June, voters in the United Kingdom faced a very serious question: should the UK remain a member of the European Union as it had been since 1973, or should it back out of the political and economic alliance, going it alone? When all the votes had been counted, 51.9 percent had chosen the latter path.
As we discussed at the time, the vote sent shockwaves across the UK and around the world. Anxieties have continued to rise, especially in the nation's auto industry, which could be facing big problems in a couple of years.
A coming storm
The UK's formal exit from the EU doesn't occur until March 29, 2019, but the implications of the move are already being negotiated. Apart from a great deal of talk about political treaties, economics, free movement of people (both EU citizens living in the UK and UK citizens living in the EU), and immigration, there's also been plenty of discussion about what kind of access the UK will have to the European market post-Brexit.
Obviously, the UK wants to maintain its current level of access--not only for its own domestic companies, but also for Toyota, Honda, and other international firms headquartered in the UK so they can have easy access to EU consumers. Unfortunately, the UK may not get exactly what it wants.
Like their peers in other industries, UK automakers could be looking at much slower sales in Europe following Brexit. That's because few vehicles manufactured in the UK meet the EU's current "country of origin" standards, which require companies to prove that 50 to 60 percent of the components in their vehicles were made domestically. If they can't do that, the cars could be slapped with sizable tariffs, which would make them more expensive to European shoppers and thus, less attractive.
At the moment, 44 percent of components in the average vehicle built in the UK were sourced domestically. However, automakers with plants in the UK also acquire parts from suppliers in the EU, and because the UK is currently an EU member state, it's allowed to count EU parts as "domestic."
If that loophole closes following Brexit, automakers will be faced with some tough choices. Among them:
- Keep sourcing components as they currently do and incur tariffs on vehicles shipped to the EU.
- Source more materials from UK suppliers, which could increase costs by as much as 15 percent.
- Establish new bases of operations on the Continent to reach EU consumers.
If the business community had any idea which way the winds of change were blowing, it might be easier for them to prepare for the post-Brexit future. As it is, though, negotiations are tense and often contentious, causing everyone to fear the worst.