Exact Systems experts on Brexit's influence on the automotive industry in the EU

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Today we'd like to invite you to the article published by money.pl, one of the biggest business web portal in Poland, on Brexit and its consequences on the automotive industry. Our experts Jacek Opala and Dan Clues share their predictions and thoughts. 

The automotive in Poland will lose out the most on the hard Brexit out of all countries in Central and Eastern Europe

Poland is the fifth most important partner of the automotive trade exchange for Great Britain. In terms of the trade balance only Germany, Belgium, Spain and France leave us behind. In 2017 an export of the Polish automobile goods to the United Kingdom amounted to 1.5 milliard and constituted approx. 6% of the whole foreign automobile sales. According to the experts from the Exact Systems company, the potential hard Brexit will have an impact on the British, the European Union and the Polish automotive industry. The British will lose the trusted and price competitive part suppliers (78% of the parts is from the EU import), and the manufacturing plants in Poland will be affected by the largest turnover downturn out of all countries in Central and Eastern Europe.

The automobile manufacturing is export-oriented what refers both to the passenger cars, and the parts for them. 80% from 1.67 million vehicles manufactured in 2017 in Great Britain found their purchasers abroad, and more than a half of this group (i.e. 719 K) got to the European Union. In the segment of the automotive parts this percent is even higher – 60% of the British manufacturing was sold to the EU (in terms of its value). A heavily dependence on the European market is also noticeable in an import. Last year almost 2 million cars and automobile components were imported to the United Kingdom. In total it amounted to circa 46 milliard EUR, what constitutes even 85% of the total import of the cars (in terms of the quantity) and 78% of the total import of the parts to the United Kingdom (in terms of their value), respectively.

The member states of the European Union provided 34% of the total car export (in terms of its quantity) and 15.5% of the total part export (in terms of their value) to Great Britain. Poland is one of five the most important EU partners of Great Britain in respect of the trade in cars and components. In 2017 we noted a positive trade balance at the level of 0.7 milliard EUR – we exported to the United Kingdom the automobile goods amounting to 1.5 milliard EUR and we imported the automobile commodities worth 0.8 milliard EUR.

- A result of the Brexit negotiations may turn out to be very important for the future of the automobile industry in our country. We will be affected by the possible hard Brexit twofold. Firstly, we should take into consideration the potential loses in respect of the direct export; the highest ones in Central and Eastern Europe. Among all countries in the region, to Great Britain gets the most of our automotive goods. Secondly, we will also note the indirect loses, because the hindered access to the British market also means a decreased sales volume of the cars from the EU in the UK, that is a declined demand, for instance for the Polish parts in the manufacturing plants located in the area of the European Union. Great Britain is the second largest automobile market in Europe after Germany, in terms of a number of the registered vehicles (more than 2.5 million in 2017, where in the entire European Union was of 15 million). It is also more than 30 automobile manufacturing plants and 850 thousand employees. Whereas let us remember that the most of the automobile goods is exported to Great Britain by Germany – our primary trade partner – ascertains Jacek Opala, member of the management board of Exact Systems S.A.

The soft Brexit the last hope for the automotive industry?
By the soft Brexit we denominate a situation, in which Great Britain will departure from the European Union structures, but it remains on the common market, what guarantees a free movement of goods, services, people and capital. Then it will have a status similar to Norway or Switzerland. It is an optimal solution for the automotive industry, because the mutual trade exchange will not suffer. It will not be needed to reorganise the efficiently functioning business model based on the integrated supply chain while holding no stocks. This model, named as just-in-time, may function only in the in the conditions of the common market and open borders.

Unfortunately, the soft Brexit fails to coincide with the expectations of a part of the British society and politics of the ruling Conservative Party. While looking for a consensus, Prime Minister Theresa May prepared a so-called Chequers plan.

- It assumed that Great Britain remains on the common market, but on its own terms, i.e. without a free movement of people and capital, which are to be regulated by the separate agreements. The European Union rejected this precedent, because these freedoms constitute an integral part of the common market. Making concessions in this respect would weaken a position of the EU, which wants to overcome this crisis while saving face and not allowing for the subsequent split inside the European Community. A new version of the Brexit agreement, published in mid-November, is much more in line with expectations of the European Union that the Chequers plan. Is it sufficient to obtain a consent from Brussels? It seems that it will be much harder to convince the British Parliament for the new agreement – says Dan Clues, General Manager of the British Exact Systems company. So, what will happen if both parties fail to reach an agreement?

Not easy life upon the hard Brexit
A scenario of the hard Brexit is, first and foremost, connected with closing the borders and restoring a full control at them, what will cause a wide range of the logistic problems. The waiting time for the parts will be significantly extended, the plants will have delays in manufacturing and will fail to keep pace with the current order delivery. It will force a change in manufacturing from the just-in-time inventory strategy for holding the stocks, and a transfer from the global to local manufacturing. However, before a change in manufacturing model takes place, may happen the obstructions, a decrease in the manufacturing level or the redundancies. Some companies are already preparing for this scenario, e.g. upon the Brexit, Mini plans to shut down manufacturing temporarily in April. The manufacturer also searches for a location for warehousing the parts and invests in the IT systems for processing the new type of the documents, which will only be entered into the circulation. Whereas McLaren wants to gather the most important documents and in case of any problems to change the schedule of the consignments to Europe.

Changes on the manufacturing map of Europe
Some companies consider a closure of their manufacturing plants in Great Britain and a transfer of their manufacturing closer to the primary manufacturing plants. It is very probable that the same will work the other way around, too – an escape from the continent to the Islands in order to optimise financially the manufacturing processes.
- If the automotive industry in Great Britain begins to base to the greater extend on the suppliers located in your country, so not only the manufacturing plants from Poland, but also the Polish logistic companies will suffer. Annually 2 million heavy goods vehicles enter into the United Kingdom, in that more than 1/5 (450 K) belongs to the Polish carriers. It is more and more talked about transferring the road transport to the maritime transport, by what the Dutch and Belgian seaports will benefit – says Jacek Opala.

The expert from the Exact Systems company emphasises also that the escape of the part of the manufacturing plants from the UK to the EU will create a domino effect: - A move of Jaguar Land Rover (JLR) that shifts the burden of manufacturing to Slovakia will force the local branches of the international players, such as Lear or Brase, to transfer their manufacturing for JLR from the manufacturing plants in Great Britain to those located in Slovakia or in the vicinity, e.g. to Poland – adds Opala.

We will not allow to enter this good, that is the problems with a uniform approval
In case of the hard Brexit, the automobile parts will not fulfil the requirements of the European Union or Great Britain, because there will be no uniform certification process, therefore the problems with the type-approval, e.g. the diesel engines may appear. Already now, JLR introduced a 3-day working week in the manufacturing plant situated in Castle Bromwich, applicable from October until December. It results from entering into force the new exhaust emission tests and a necessity to obtain the new EU approval. The downtimes in manufacturing can encourage to decrease the exhaust emission standards in Great Britain.
In order to avoid in future, the problems with admitting its goods to the EU market, McLaren considers their certification also in Germany, whereas Honda obtains its licenses both in Great Britain and the EU.

Turkey instead of Great Britain?
The hard Brexit will force the manufacturing plants in Poland to search more intensively for the alternative ready markets. In 2017, 90% of the exported parts found their purchasers in the EU (increase 10.4% year by year), but the growth dynamics on the non-EU markets reached 29%. This trend will be continued in the coming years. From the Polish point of view particularly significant may turn out a political and economic situation in Turkey.
- Brexit approaches at a difficult time for the UK automotive market as UK manufacturers are also faced with diversifying their approach from diesel engines to hybrid and electric models. I predict there will be some decline in the automotive industry within the UK but the lesser will be with a soft Brexit. It will ensure an access to the single market for the British companies and will grant the British government a right to co-decide on the rules governing the European market - summarises Dan Clues.

Brexit is an informal term for the process of the Great Britain’s exit from the European Union, which has begun in June 2016. Then was held a referendum on leaving the structures of the European Union, where a majority (51.89%) voted in favour of leaving the EU. Apart from a non-binding nature of this referendum, prime minister Theresa May commenced the Brexit. Great Britain is to exit the Community by 29th March 2019. Until this date, the parties have time to agree the legal issues.

Data sources in the press release:
Brexit and the auto industry: facts and figures (ACEA)
Record-breaking export of automobile industry in 2017 (AutomotiveSuppliers.pl)