You can’t blame Brexit for the British car industry’s woes

Quizzed by Nick Hewer on Honda’s decision to close its Swindon plant earlier this month on BBC radio, I suggested that blaming Brexit for the demise of the Japanese auto makers factory with the loss of 3,500 jobs was not the whole story.

Certainly, Brexit plays havoc with the vehicle industry’s sophisticated just-in-time supply chain. Furthermore, tariff barriers of 9.8 per cent on UK exports into the EU will also hit car sales. But sterling’s depreciation against the euro more than outweighs this potential levy. After all, the pound was trading at 74 pence to the euro in January 2016, yet following the Brexit ballot in June 2016, it was trading at 90 pence three months later, more than double the impact of any EU tariff. This month, sterling is still worth 86 pence to the euro, making sterling-priced cars highly attractive to buyers in the Eurozone.

Despite the pound’s improved competitiveness car exports have not grown – they remain stubbornly steady. UK car manufacturers’ most promising markets turn out to be China, the Middle East and the US. In contrast, Britain’s annual deficit in vehicles amounted to £28bn in 2017, whereas in 1998 it was only £8.1bn. No less than 83 per cent of all new cars registered in Britain are now imported.

In order to explain the demise of Honda’s factory in Swindon we need to dig deeper.

Demand for cars is stalling worldwide. It’s down by an alarming four percent in the world’s biggest car market, China. It’s also down in the EU by one percent as well as in the US this year. Why is this the case?

Higher taxes on diesel cars, stricter emission standards and the introduction of congestion charging in cities combine to deter people using cars in urban centres. We are also seeing a major shift away from the combustion engine in favour of electric cars. This is seen above all in China where the number of public charging points in Beijing is higher than the whole of Germany.

Also, let’s not forget that public transport has got a lot better. Today’s tube service in the capital is streets ahead of what passengers endured a generation ago and more and more of us are using ride-hailing apps such as Uber or cycling around town. I am one of them. My Brompton bike is by far the quickest and easiest way to get across London.

In practice, we are witnessing a fundamental transformation in personal mobility. The attractions of car ownership are dwindling, underpinned by the greater popularity of home working reliant on fast broadband. Why drive to the office when you can stay at home?

Honda’s Swindon plant never fulfilled its original promise. To be competitive one needs to manufacture 260,000 vehicles a year; Swindon peaked at 230,000, but last year it only managed 161,000. With operating margins dangerously slim – Renault only managed 4.3 per cent last year – any disruption to manufacturers’ supply chains can play havoc with profitability.

No wonder then that car manufacturers are opting to cooperate on joint ventures, as with Volkswagen’s tie-up with Ford, or indeed merge, as is likely to be the case with Nissan Renault.

On a positive note, British car manufacturers’ fortunes appear to reside with prestige brands. Bentley’s Crewe factory is struggling to keep pace with demand while Jaguar, Range Rover and Rolls Royce have enjoyed a surge in demand in markets outside the EU.

Even specialist manufactures such as Morgan, makers of classic sports car featuring traditional running boards, are benefiting from higher sales. Investindustrial, the Italian private equity firm that is the largest shareholder in Aston Martin, understands the allure of British marques and opted to buy a majority stake in the Malvern-based manufacturer earlier this year.

So the future of British car manufacturing may well hinge on prestige brands and specialist producers in a global market reshaped by limits on car use, better public transport and greater use of ride-hailing apps. Looking ahead the message appears to be quality counts more than quantity.