BRA0011 - Evidence on Leaving the EU: implications for the automotive industry

Written evidence from Ford Motor Company (BRA0011)

Ford Motor Company’s European business is responsible for producing, selling and servicing Ford brand vehicles in 50 individual markets and employs approximately 52,000 employees at its wholly owned facilities and approximately 66,000 people when joint ventures and unconsolidated businesses are included. In addition to Ford Motor Credit Company, Ford Europe operations include Ford Customer Service Division and 24 manufacturing facilities (16 wholly owned or consolidated joint venture facilities and eight unconsolidated joint venture facilities). The first Ford cars were shipped to Europe in 1903 – the same year Ford Motor Company was founded. European production started in 1911.

Ford welcomes the opportunity to respond to this important inquiry and to describe, as a compliment to the submission from the SMMT, the implications of leaving the European Union on the automotive sector.

Market access: how important is free access to the Single Market? What would be the impact of trading with the EU under WTO rules and tariffs? How significant are tariffs compared to other costs?

Retaining tariff-free trade between the UK and EU is Ford’s number one priority. At the moment, the UK enjoys tariff free trade within the single market and as part of the EU’s Customs Union with Turkey, while benefitting from preferential trading terms with third countries under EU Free Trade Agreements (FTAs). As a result, Ford’s sales, manufacturing and R&D operations in the UK are built upon access to this single European market and our ability to move goods freely across Europe.
Leaving the European Union single market and Customs Union, and reversion to World Trade Organisation (WTO) Most Favoured Nation (MFN) tariffs would place a very significant cost on Ford in Britain and across Europe.
Loss of the UK’s duty-free access to the European market would negatively impact Ford’s trade in three ways:

import of engine components and vehicle repair parts: Ford’s imports of components for engine production in the UK are mostly sourced in the EU
export of engines: 84% of UK-produced Ford engines are for export, and the EU and Turkey are the primary export markets
import of cars and vans: the bulk of Ford vehicles sold in the UK are imported from the EU and Turkey

The impact of tariffs on our business would be considerable: Society of Motor Manufacturers and Traders (SMMT) calculated in November 2016 that the cost to the UK automotive industry would be £4.5 billion tariff cost for cars alone. The SMMT calculates that this would equate to an average of £1,500 of duty cost to the list price of every car imported. Ford considers that this cost would either increase the cost of a vehicle, or reduce the choice available to the consumer- or possibly both.
A loss of access to the Single Market would also affect our UK-headquartered captive finance arm, Ford Credit Europe. This currently operates a branch network across the single market on the basis of an EU Capital Requirements Directive passport for the provision of banking services. Outside the EU and the EEA, FCE as a UK-regulated bank will lose access to the passporting regime as currently designed.
FCE’s sole purpose is to finance the sale of Ford motor vehicles and Ford cannot afford any kind of disruption to FCE’s continuity of financing. It finances almost four in ten of Ford vehicles sold in the UK and recently opened a new headquarters in Manchester, serving eleven markets across Europe.

Non-tariff barriers: how significant are non-tariff barriers potentially arising from leaving the Single Market and Customs Union? What are the most significant ones? How best could impacts be mitigated?

While the tariff costs to Ford would be significant, the business is also concerned about the non-tariff barriers we could face, such as additional costs through customs and excise duties and procedures which would be introduced. These could potentially negatively impact operational timings and logistics and, through delayed VAT payments, have a serious and negative impact on cash-flow. The last item, though an unwelcome burden for companies of the scale of Ford, could be a cost that smaller suppliers find challenging to bear.
The re-introduction of a customs border between the UK and the rest of Europe would result in a number of costs due to Customs Friction:

The Rules of Origin issue is a key one for the industry. If, following the UK’s exit from the European Union, UK manufactured engines are no longer considered as EU-originating materials, Ford in Europe would find that some EU built vehicles lose EU originating status under certain free-trade agreements (South Africa, Switzerland, Morocco, Serbia). This would add significant cost to our European business, and potentially negatively impact UK powertrain manufacturing.
Additional costs arising from the need to invest in new IT systems to cope with new and more complex customs processes and systems, increased inventory and a greater number of racks and trailers to cope with increased delays at borders because of new customs checks, and incremental broker fees are the most obvious.
A significant increase in post-Brexit customs documentation, for example:

From zero to 20,000 declarations for Dagenham engines for Fiesta production alone.
From zero to 115,000 export declarations (one per vehicle) for Fiesta imports to the UK.
Further 250 import declarations with a risk that this could increase significantly as vessels are typically mixed loads

Ford is also concerned that the new UK customs system (Customs Declaration Service) which is due to replace the current system CHIEF from January 2019 faces a significant challenge in being delivered on time and may not be able to handle the expected surge in demand for the service from April 2019 if a status quo transition period is not achieved.
Import VAT is currently a cash payment, which the importer then reclaims up to three months later through their VAT return.
Post-Brexit Ford calculates that the cash flow impact based on 12 months of acquisition VAT would be considerable. The impact of this on Ford is unwelcome; the impact on SMEs could be even greater.
Other countries have pioneered a different approach and Ford recommends that the UK should follow the lead of Norway, France, Netherlands and Portugal. These are European countries that have introduced accounting for VAT through the importers’ VAT return.

It is imperative that a data protection mechanism is prioritised so that we can have certainty about our ability to process the data of EU citizens in the UK post Brexit – and vice versa. Although there are mechanisms that allow the transfer of personal data between the EU and the rest of the world, and some of these may be adapted to apply to the UK, we need to establish how this will work, or our ability to carry out many of the operations that we currently do in the UK may be impeded.

Regulation: what are the opportunities and potential disadvantages of seeking regulatory divergence from EU product, safety and other standards? To what extent should the UK seek to retain influence on these standards? Is it preferable for the UK to: establish an EU association agreement (or equivalent); replicate EU regulation; diverge from EU rules and standards? What dispute resolution processes would be most desirable? Should the UK seek to align professional qualifications with those in the EU?

When the UK formally exits the EU, the UK car industry will be removed from its regulatory framework. This has two core implications: firstly, a possible divergence of standards between the UK and EU, and secondly, additional vehicle testing to sell vehicles across the two markets. This scenario produces new frictional costs for Ford exports to the UK and Ford engines exported from the UK to the EU.
On the first issue, the industry sees no advantage in divergence from the EU’s product, safety, environment or any other standards. Any divergence from the EU’s regulatory framework post-Brexit would act as a non-tariff trade barrier, restricting the competitiveness of the UK’s manufacturing base, and reducing the ability to sell vehicles into the European market. It is crucial that the UK Government acts to avoid any divergence from EU regulations around automotive post-Brexit.
A mechanism will be needed so that UK Government can precisely mirror all new EU automotive product regulation as soon as it is implemented in the single market. Any delay in applying this would increase costs and act as a non-tariff barrier for the UK industry.
The UNECE, through its 1958 and 1998 agreements, seeks to establish harmonised requirements globally to ensure high standards of safety, environmental protection, energy efficiency and theft protection. The UK is a contracting party- separate from its membership of the EU- to the UNECE, and the UK must continue to engage actively with this body post-Brexit, to retain influence over these globally influential UNECE regulations. Furthermore, the UK should continue to play a role in the development of EU regulations, either as an observer or as part of a new relationship or mechanism to be negotiated through the withdrawal negotiations.
The second issue around regulation for Ford concerns type approval. The VCA is the approval body in the UK authorised by the EU to carry out test at a designated testing facility to ensure that vehicles placed for sale on the European market meet the required safety and environmental standards. Currently only EU Member States are allowed to issue European approvals, and the required European Community Whole Vehicle Type Approval Certificate. Once the UK leaves the EU, it is unclear whether the VCA will be allowed to continue to operate, or even if the approvals it has already issued will still be valid.
Establishing certainty over the UK’s status as an authority that can issue European approvals is important to avoid weakening the competitiveness for the UK as a destination for product development and R&D.

Skills: how dependent is the sector on workers from EU countries, at all skill levels? What is the potential impact of restrictions on freedom of movement? How far can gaps be filled by UK workers?

Ford relies on a constant flow of people between our various European locations, so ensuring sufficient free movement to maintain our operations is critical. Free movement should be replaced with a workable light-touch visa system, in order to ensure that Ford can continue to fill vital roles in the UK. There is a well-documented shortage of local engineering talent, specifically in relation to software engineers to support emerging areas of activity around electrification and mobility. Any reduction in our ability to attract and retain these skills would impact the competitiveness of our UK operations against other markets.
Maintaining ease of short term travel will be critical to Ford, particularly related to vehicle launch activity, where flexibility is needed in deploying teams of specialists quickly to fix potential issues. Any system which requires pre-clearance of travellers, even on short-term travel, adds delay and cost to our business.
It is likely that restrictions impacting hiring may be felt more acutely by our agency partners and purchased service providers, but Ford may also see some form of impact. For Ford recruitment we do not target hiring campaigns to the EU, rather we have a UK campaign and we find that EU nationals apply. It would be burdensome if we are expected to remove all EU nationals first and consider only UK nationals.
Government must be clear on what the requirements will be (both on the individual and the employer) to ensure that EU citizens can continue to work in the UK. It is likely that Ford will need to collect additional information, which may be complex therefore require sufficient lead time.
Future regime for EU citizens: the tier 2 process that is currently in place is rather cumbersome and we would need an easy to understand and implement visa style program going forward. It is crucial that this does not place a prohibitive cost for businesses like ours to access the skills we need as we develop our work in the areas of electrification and mobility.

R&D: How significant are EU-dependent R&D activities within the sector’s broader research landscape? What R&D collaboration, funding and access to facilities and resources is the UK in danger of losing as a result of Brexit? How can future collaboration, funding and resource/facility access with EU countries be best secured? How can the UK best retain influence in EU and international research programmes?

As the automotive industry is going through a period of unprecedented change as we move to electrified and alternatively powered vehicles, and connected and smart transport systems, we need more than ever to be able to attract talented and qualified individuals. While the automotive sector, like others, will need to do all it can to train UK staff in these new skills, we believe it is important to retain access to talent beyond the UK.
Ford’s R&D centre at Dunton relies on the free movement of prototype vehicles between the UK and its sister site in Cologne, Germany. Any significant imposition of customs barriers, especially delays in clearance/processing, would have the potential to impact the competitiveness of UK based R&D activity.

Trade opportunities: what opportunities are there for the UK to improve exports to countries outside the EU? Where should Government the Government seek to prioritise in terms of trade deals?

Ford does see potential opportunities in future UK trade deals and asks that Government works closely with the automotive sector to assess the pros and cons of specific trade deals, taking into account the growing importance of electro-mobility and data services.
Clearly, it will be critical to secure an ambitious free trade arrangement with the EU as a necessary platform on which to build other opportunities. Ford also believes that the UK should prioritise preserving free trade with those territories already covered by FTAS with the EU, such as Canada and South Africa.
In addition, Ford shares the view of other sectors in prioritising a comprehensive free trade deal with Turkey, especially important to support our engine exports and commercial vehicle business.

Transitional arrangements: what should the UK seek in transitional arrangements and for how long should they apply?

Ford believes that a transitional arrangement is critically important in order to avoid a cliff edge scenario in April 2019. Businesses are making investment decisions now for that timeframe so clarity is needed on this issue as soon as possible
In order to allow for frictionless trading throughout the transition period, business needs certainty that it will be a standstill agreement in which all current trading conditions and customs arrangements apply. We do not believe that the new customs, border and documentation arrangements necessitated by the UK leaving the EU and customs union could be put in place by April 2019.
We believe that this transition period should be time limited and of sufficient duration to ensure that a comprehensive trade and customs arrangement can be finalised with the EU.

20 October 2017