Brexit failure a graver threat to UK carmakers than Covid, Moody’s warns

A no-deal Brexit will have a longer negative impact on carmakers than the coronavirus pandemic, according to a report by credit rating agency Moody’s.

The agency said the auto sector remained highly exposed to the risks of a no-deal Brexit, which has grown after the prime minister broke off trade talks with Brussels last week. In 2019, the UK car industry exported four-fifths of vehicles — and more than half went to the EU.

Moody’s said a no-deal Brexit was not the baseline forecast but it was more likely than at the start of the year, and would have a long-term negative effect on carmakers with significant UK production capacity and a large share of exports to the EU.

The rating agency said permanent tariffs and other trade barriers would erode UK carmakers’ profitability. Those most exposed include Jaguar Land Rover, Aston Martin Lagonda and McLaren. 

“Tariffs would make it more difficult for these companies to restore credit ratios and credit quality after a very weak 2020,” it said, pointing to potential trade tariffs of 10 per cent on UK car exports to the EU in the event of a no-deal Brexit.

“Lower profit would mean UK-based manufacturers have less capacity to invest if the difference is high and sustained.

“UK auto manufacturers would then face the dilemma of whether to pass on the extra costs of tariffs to customers or try to offset the impact with cost savings and efficiency improvements.”

International carmakers also face disruption. Japanese groups Nissan, Toyota and Honda all have significant production in the UK and substantial exports and imports.

Of the European manufacturers, Germany’s BMW, which exports UK-made Rolls-Royce and Mini cars and imports BMW cars, is the most exposed carmaker.

Moody’s added that domestic sales were unlikely to balance the hit to profit from tariffs, even if reciprocal tariffs for car imports might mean market share gains for local manufacturers. 

“The UK economy is already weak and a no-deal Brexit would exacerbate this.”

However, Moody’s said in the short term the potential disruption at the border, at least, has been dwarfed by the pandemic’s financial hit, and supply and demand implications. 

“We expect some immediate disruption and extra costs for UK auto manufacturers from the execution of no-deal Brexit contingency plans,” said the report.

“However, the impact of subdued demand as a result of the pandemic will have a much greater effect on their financial performance in the next 12-18 months.”

As they struggle to survive the economic impact from the pandemic, many bosses of smaller companies say they have had little time to think or prepare for the end of the Brexit transition period this year.

However, Moody’s said carmakers such as JLR, Aston Martin and McLaren have prepared for a no-deal Brexit by exploring alternative supply routes, putting paperwork in place and stockpiling supplies.

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