The U.K. automotive industry is facing the biggest challenge right now. As Brexit talks enter the final leg, the U.K. has only a few weeks left to secure an ambitious trade deal with the European Union (EU).

Brexit happened on Jan 31, 2020, when the U.K. exited the EU. Nonetheless, the two sides agreed to negotiate their future relationship, during an 11-month transition ending Dec 31, 2020.

British Auto Sector in Murky Waters

The automotive industry is an integral part of the U.K. economy, with more than £82 billion turnover, and contributes £18.6 billion to the economy. Per Society of Motor Manufacturers and Traders (SMMT), it accounts for 14.4% of the total U.K. export of goods, worth £44 billion, and invests £3.75 billion each year in automotive R&D.

However, the U.K. auto sector is in murky waters, with the coronavirus pandemic hitting the economy hard and the Brexit transition period nearing conclusion.

Per the SMMT, the pandemic has rattled the British auto sector, with only 381,357 cars being built in the first half of this year, marking a plunge of 42.8% in manufacturing and a loss of 285,164 units for the U.K. auto sector.

With the economy gradually recovering from the wreckage caused by the coronavirus mayhem, factories in the U.K. are gradually re-opening and resuming production. Nevertheless, the sluggish demand underlines the crippling impact of the pandemic. Per the SMMT, U.K. car production slid 18.2% year on year this October.

Amid this gloomy scenario, the nearing deadline of the Brexit transition period has only aggravated the headwinds for the British auto sector.

No-Deal Brexit Consequences

The EU is considered as a single market in which imports and exports between member states are exempt from tariffs and other barriers. Services, including financial services, can also be offered without restrictions across the continent. As part of the EU, Britain took advantage from trade deals between the EU and other world powers. However, outside the EU, the U.K. would lose the benefits of free trade with neighbors as well as reduce its negotiating power with the rest of the world. The consequences of Brexit for businesses that took leverage of these freedoms have always been a topic of dispute.

Hence, the U.K. is in talks with the EU to conclude a free trade deal, so that companies based in the country are able to buy and sell goods across the EU's borders without paying taxes. The idea is to encourage business between countries by making the process convenient and cheaper.

According to the SMMT, which had always opposed Brexit, if the deal is not concluded, British car production would tank to less than 1 million cars a year compared with more than 1.3 million in 2019, because tariffs would render major parts of the U.K. business unviable. It would also result in a 10% duty to be applied to new cars, hiking the average cost of a car imported from the EU by 2,800 pounds. This would also add an average 2,000 pounds to the cost of British-built electric cars sold in the EU, making the U.K. manufacturing sites considerably less competitive and affecting Britain's appeal as a stop for inward investment.

Further, it is imperative for the U.K. to strike a trade deal with the EU to avoid paying $74 billion (55.4 billion pounds) in tariffs by 2025 to the World Trade Organization (WTO) on parts, and vehicles imported and exported into and out of Britain. Moreover, a no-deal Brexit would cut the U.K. vehicle production by two million units over the next five years. In fact, the SMMT predicts that even a “bare-bones” basic trade deal could cost the British industry 14.1 billion pounds.

The plea for a deal on Brexit by the SMMT comes in just after the U.K. government decided to discontinue the sale of new petrol and diesel cars and vans from 2030, five years earlier than the 2035 pledge made by Prime Minister Boris Johnson in February. This announcement came in as part of the country’s green revolution to reach a zero emission goal by 2050.

UK Auto Industry’s Destiny Lies in Hands of Brexit Deal 

Britain’s auto sector is hugely dominated by foreign manufacturers. Toyota (TM Quick QuoteTM - Free Report) , Nissan (NSANY Quick QuoteNSANY - Free Report) and Honda (HMC Quick QuoteHMC - Free Report) are the biggest automakers in the U.K. Other manufacturers include Tata of India’s Jaguar Land Rover, BMW AG’s (BAMXF Quick QuoteBAMXF - Free Report) Mini, and Peugeot SA’s Vauxhall. The auto biggies have been quite vocal in their opposition to a no-deal Brexit, who have already been bearing Brexit’s severe blow and are also reducing investments in Britain.

In fact, PSA Group has said it will only build its new Vauxhall Astra in the U.K. if there is a trade deal, while Nissan, which currently carries a Zacks Rank #2 (Buy), noted that the business model of its Sunderland plant — the largest car factory in the country — would be destroyed. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

For the deal to be favorable for the U.K., it should contain the right terms and conditions which allow for present and future U.K. exports to be zero tariff and zero quota trade. A deal that fails to achieve this would be as good as a no deal, tapping brakes on the country’s desire to be a world leading manufacturer and provider for e-mobility solutions and battery technologies. If the deal does not materialize, it would be a devastating blow to the U.K. economy, damaging it more than the pandemic and resulting in the loss of thousands of jobs.

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