Further written evidence submitted by the Society of Motor Manufacturers and Traders (FCR0043)

A numerical example illustrating the effect of (a) recent exchange rate movements; and (b) WTO MFN tariffs on the cost of finished vehicles [Q392]

a)      Automotive businesses are part of wholly integrated global supply-chains and do not operate in isolation in the UK in terms of sourcing and supply of vehicles and parts. Consequently, whist Sterling depreciation could be seen in part as a boost to the competitiveness of UK manufactured exports, that same depreciation and exchange rate fluctuations will impose a significant cost on businesses of all sizes and throughout the automotive supply-chain. In addition, for complex supply-chains, exchange rate volatility presents a cost and a risk. UK automotive operates a trade deficit for parts and vehicles. We have an ambition to grow our UK supply-chain but are at a position whereby, on average, 41% of the components of a UK produced vehicle are sourced from the UK and 59% from abroad, the majority from the EU. As a result, sterling depreciation is leading to higher production costs and lower export values.

In July 2016, SMMT surveyed its SMMT supply-chain members who provided a consistent commentary that one of the immediate impacts of Brexit was that the cost of exchange rate movements were affecting profits and their ability to invest.

In terms of the market, given 86% of vehicles sold in the UK are imported, it will be no surprise that a number of brands have raised car prices due to Sterling depreciation. For a company such as GM, this shift was estimate to have cost around $400 million in the second half of the year[1].

b)      SMMT has undertaken an analysis of WTO tariffs at MFN rates of 10% on finished cars. This shows that EU car imports would incur additional tariff costs of around £2.7 billion and exports to the EU would incur a £1.8 billion cost. Needless to say the import costs would most likely be passed onto consumers given the market’s dependence on imports whereas export costs would have to be borne by UK manufacturers if they were to compete in the EU market. The effect on UK car prices of these additional import tariffs would be in the order of £1,500 on the list price[2].

An estimate in (a) absolute terms and (b) tariff-equivalent terms of the cost of non-tariff barriers that would be faced by the automotive sector, post-Brexit. [Q476-7]

SMMT is unable to provide detailed estimates of the cost impacts of non-tariff barriers (NTBs) but has identified two of the key areas of costs additional to the risks of tariffs, these are the costs of customs checks and delays and regulatory divergence or uncertainty in the legal framework for the automotive industry.

A range of cost estimates exist, including €100-150 for customs checks, and a CEPR report of 2013 gives a conservative estimate of an additional 6% in cost for the administrative and compliance costs of trade with the EU under such arrangements[3].

It is essential, therefore, that there is certainty and continuity for the automotive sector through the harmonisation of EU and UK regulations to support both UK manufacturing and the UK vehicle market. Government should establish appropriate, clear and non-burdensome structures that enable the application and implementation of crucial EU legislation. Regulatory divergence or uncertainty in the legal framework for the automotive industry would amount to non-tariff trade barriers, increasing costs and reducing the competitiveness of both the manufacturing base and ability to sell vehicles.

Furthermore, the industry fears the loss influence in EU regulatory development could damage UK interests globally. The UK automotive industry is, in some ways, unique with its myriad premium and specialist vehicle manufacturers. Their requirements in legislative and regulatory terms do not always align to the interests of major OEMs and the UK Government has been very successful in safeguarding their interests at an EU level, boosting their competitiveness. With the decline of influence in EU policy fora, the industry fears a consequent risk of regulatory protection. This is critical not just for the EU market but global markets as EU standards are often adopted by non-EU countries, such as the growing Chinese market. The UK has an influential and respected voice and must remain part of all these vital discussions.

The UK should prioritise the following policy areas when seeking to secure regulatory harmonisation with the EU:

• Safety and type approval
• CO2
• Emissions / Euro standards
• End of Life Vehicles (ELV) and recycling
• Data protection regulation
• Intellectual property rights and patents

The proportion of the EU automotive financing market that is located in the UK [Q489-90]

The UK’s access to EU Capital Requirements Directive passport for the provision of banking services is of significant importance to the UK automotive industry.

Motor vehicles are expensive and the provision of finance, to dealer networks as well as to consumers is an important part of how most automotive manufacturers operate. Automotive manufacturers often set up their own financial institutions created specifically for the purpose of providing wholesale dealer and consumer finance.  Many automotive companies operate captive finance firms, which support the manufacturing company by providing finance to both the dealer network and the customer. Within the automotive industry, these entities are commonly referred to as “captives”.

Captive finance firms based in one EU member state will often operate a branch network to other member states within the single market.  The ability of those firms based in the UK to continue to support a branch network once the UK leaves the EU may be severely impeded if there is no future provision made for the continuation of the passporting regime.  Ford Credit Europe is headquartered in the UK, and other manufacturers captives also operate extensively here. In 2016, the FLA estimated almost 90% of private new car sales were bought on finance[4]. We seek the preservation of passporting rights to maintain cross-border lending rights for UK-based captive finance firms.

Further evidence

I note that you will provide us with the following request for further evidence to comment on once published.

Commentary on the Legatum Institute Special Trade Commission paper, and in particular the assertion that tariffs do not apply at intermediate stages of vehicle production, thereby mitigating the impact of “WTO rules” on supply chains [Q440-1]

February 2017