Tim O'Brien | Jun 28, 2016

Leaving aside the politics of the issue and the breathtaking miscalculation by the ruling Cameron Tory government in calling a referendum that need not have been called, and also leaving aside the consequences for the social and political unity of the UK, the Brexit now underway – the severing of the UK from the European Union – will have an impact on Australian importers and exporters, and, certainly, on the automotive sector here.

While British vehicle brands were once a dominant force in the Australian new car market – Austin, Morris and Hillman once rivalled Holden, Ford and Chrysler here – some of ‘the old country’ nameplates, like Jaguar, Land Rover, and MINI, still hold a reasonable slice of some key market sectors.

And others – Aston Martin, Rolls Royce, McLaren and Bentley – retain a special place among uber-premium buyers. These, and other British brands (though now mostly owned by transnational car companies), supply the Australian market from their UK factories.

The Nissan Qashqai - Built In The UK
The Nissan Qashqai - Built In The UK

Also, Nissan and Honda, to name two, import some of their model line-up from UK factories.

In total, between 2500 and 3000 cars a month are imported from the UK into the Australian market – in excess of 30,000 cars annually.

So, not large, but significant. And perhaps made more significant by the simple fact that many of these imports are of very high value vehicles (Rolls, Aston, etc.), and premium brands such as Jaguar and Range Rover.

And, given the uncertainty now hanging over the UK economy (from both real and imagined fears), and the resulting impact on the value of the pound sterling as a major international currency of trade, there will likely be benefits to Australian buyers flowing from the unexpected Brexit.

First, a look at the automotive manufacturing sector in the UK

Britain has a large, and mostly profitable, automotive manufacturing industry and is also a key engineering hub for many of the transnational giants.

It may surprise some (even, as this vote would suggest, some in the UK) that there is more than 30 manufacturers operating there – Aston Martin, MINI, Honda, Nissan, Ford, Toyota, Vauxhall, Daimler, Jaguar, Rolls Royce, McLaren, Lotus, Land Rover, etc. – as well as myriad small-volume manufacturers of bespoke sports and race cars, like Morgan, Noble, Ariel, and Caterham.

There is also a thriving motorcycle manufacturing sector (Triumph, AJS and Norton among them), as well as commercial vehicle manufacturing.

The sector now produces in excess of 1.7million cars annually, and is (was) expected to top 2.0 million by 2018.

Honda's Civic Hatchback is another UK-built Japanese car
Honda's Civic Hatchback is another UK-built Japanese car

So little wonder – given the importance of unfettered access to the European market that membership of the EU allowed – this sector eyed the ‘Leave’ campaign with growing alarm.

In fact, Nissan, which has around 8000 people employed in its UK operations, is pursuing the Leave campaign with legal action after its logo was used, without permission, on a Leave flyer.

While it’s anyone’s guess when the trigger will be pulled on ‘Article 50’ – the EU wants the UK out as soon as possible; the UK, from the top, entirely ill-prepared for the outcome of the vote, is ducking for cover and in a political mess.

Who, or what, will lead them through the tricky negotiations to come is entirely uncertain.

Whatever the outcome of negotiations, there will of course be consequences for UK vehicle exports into the EU.

As sure as eggs, the EU is not going to make it easy; the UK will not be given a soft run, there will be a price to pay – “we’ll let you go but you can keep the free market access and all the benefits of membership”, no, that won’t happen.

There will likely be a return to World Trade Organisation rules of tariffs and trade barriers and negotiated access, just as there is for any country outside the EU that wishes to trade within that market – such as Australia (the EU is Australia’s second-largest trading partner after China), and the USA.

So, ipso facto, UK sales into the EU will suffer.

And what’s at stake here? The EU currently accounts for nearly one-third of all UK exports across all industry sectors.

More to the point, UK vehicle manufacturers currently export around four out of every five cars they produce, the EU accounting for no less than 57.5 percent of all British vehicle exports in 2015. (Does “dumb and dumber” suddenly come to mind?)

So, how might all this affect the Australian vehicle market?

Firstly, while the hard work might just be beginning for the UK in its negotiations to exit the EU, there will be more hard work on the other side of the curtain in negotiating new trade relationships with trading partners outside the EU.

Australia will certainly be among them.

Perhaps we may see another FTA (free trade agreement) on the table, but one that hearkens back to the old notion of “the British Commonwealth of Nations”, and the favoured trading relationships that Commonwealth countries like Canada, Australia, India, New Zealand and South Africa (among others) once enjoyed with the UK.

BMW-owned MINI is managed from Germany, but built in the UK
BMW-owned MINI is managed from Germany, but built in the UK

(It was a bitter blow to Australian and New Zealand primary producers (of wool, dairy, steel etc.) when the UK joined the ‘European Common Market’ nearly 50 years ago.)

Should this happen, then the current customs duty of five percent on imported new vehicles would likely be abolished (as with other FTA signatories with Australia); other ad valorem excises, non-tariff barriers and charges would also likely be dropped.

Importantly, the timing of this (given the UK has just two year’s maximum to pull the trigger on its exit from the EU) will likely coincide with changes to Australia’s Motor Vehicles Standards Act, due to come into effect in 2018, which will allow the import of new vehicles by private individuals.

In this, the planets may have just aligned.

Under these changes, consumers will be able to import a new car or motorcycle from countries with comparable Australian standards… like the UK. And that prospect, for cars manufactured in the UK, perhaps just became a little more appealing.

Collapse in the pound = cheaper imports

Also making the prospect of imported vehicles from the UK more appealing is the collapse in the pound. It fell against the US dollar another 3.3 percent yesterday; it is now at a 31-year low against the ‘greenback’, it also fell against the Aussie dollar.

The pound has lost, in total, more than 10 percent of its value since Friday. And it will likely keep falling while the ruling Tory Government, who manufactured the mess, keeps giving every impression that it doesn’t have the faintest idea of what to do next.

In fact, the pound will likely continue to fall for as long as the uncertainty as to the timing and circumstances of the negotiated ‘Brexit’ continues.

If it goes on for too long, and currency markets abandon hope in the short and medium term, it may irreparably damage the pound as an international trade currency.

But, whatever the broader consequences, a depreciated pound makes vehicles sourced from the UK cheaper for Australian importers. To that might be added any reduction in excise that may result from a negotiated trade agreement, and the net affect will be cheaper Jaguars, Range Rovers, MINIs and Aston Martins.

It will also mean that we will likely see more cars sourced from UK factories for the Australian market.

Not only Nissan and Honda, but Toyota, GM (Vauxhall), Ford, Toyota, et al, have large modern operations there which may be left with excess capacity should sales into the EU slow.

And, given that the EU currently absorbs nearly 60 percent of UK vehicle production, slow it will.

So, while the astonishing rush of blood to the head of British voters, and their equally astonishing willingness to follow into the unknown the likes of Alexander Boris Johnson and the tissue-thin Nigel Farage, has yet to play out, there may be some benefits to Australian car buyers – and Australian importers and exporters generally – in the British referendum result.

Somehow, however, it’s hard not to agree with US satirist Andy Borowitz and his observation that "the British just lost the right to claim that Americans are dumber”.

Tim O'Brien
TMR Managing Editor