Monday, October 3, 2016

Brexit and the car industry

If you follow the news you'll have noticed that Nissan, the Japanese car maker, has told the government that in order to continue investing in the UK in the short term it needs to government to be prepared to compensate it if the government then decides on a "Hard Brexit". The new story from the Guardian is here.

What most of the news coverage on this story seems to be failing to mention (particularly in those papers that were rabidly in favour of Brexit) is why this should be a concern.

Basically it comes down to this; car manufacturers source components from across Europe and *assemble* them in the UK. Sure some items are manufactured here, but some are not. When we leave the EU the portion that are not will need to be imported into the UK.

Assuming that there is a 5% tariff and that 5% of a £10,000 car's parts are being imported then this will mean a cost increase of £25. On a £10,000 car you could argue that that's not a significant cost but if you make 5,000 cars then the cost is £125,000. Still, looking at the big picture, a pretty small amount.

So what's the issue?

Well the WTO tariff for Car Parts for import into the UK from outside the European Union is 3.7% (found here) and the EU tariff for importing cars is 10% (found here) so your £10,000 car (for which 5% of parts are sourced from the EU) would cost you £18.50 as you import the parts, and £1,000 as you export the completed car. Assuming you make 5,000 again that's £5,092,500 in taxation charges that only apply post-Brexit.

Now let's assume that you're a global manufacturer so you have a plant in the UK but also a plant in Europe. Let's assume the same formula, that 5% of the parts cross the new UK/EU border so that charge, £18.50, remains the same.

The difference, of course, is the size of the market. Looking at the new car registration statistics (see here) the number of new registrations in 2015 for the EU block as a whole was 14,300,044 of which the UK was responsible for 2,633,503 (2nd biggest share after Germany). Put another way; 1 in about 4 new cars went to the UK. If we assume sales are evenly spread and that we are still making 5,000 cars when we make those 5,000 in Europe the 10% tax will be payable on 1,250 of the cars whereas the other way round the tax would be payable on 3,750 cars. That's £1,406,250 if we export from Europe to the UK, whereas if we export from the UK to Europe the tax jumps to £3,750,000.

So looking at that tax *alone* it's better to move your manufacturing centres to Europe rather than keep them in the UK.

Let's also consider the parts manufacturers themselves. Europe, as a much larger market and with a might greater population, is more likely to be able to replace existing UK part manufacturers than the UK would be able to setup and duplicate European manufacturers.

If you were in charge of running a global manufacturing business based on these figures alone why would you *not* manufacture in Europe?

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