Monthly Archives: December 2016

How will the Irish motor industry be affected

When we listen to the emotional and sometimes inflammatory debate taking place in the UK in relation to Brexit, it’s hard to have any certainty or even confidence in how the decision might go. Because it is all so unclear, confusing and increasingly theatrical, it would appear that many people in Ireland are just ignoring the potential impact of the UK Referendum, and perhaps hoping that it will somehow fizzle-out like the Y2K Millennium Bug that never happened. However, should it come to pass, Brexit would have far-reaching implications for the motor industry in Ireland, writes Alan Nolan from The Society of the Irish Motor Industry (SIMI).

From vehicle distribution, parts and equipment to professional services, the Irish motor industry is entwined with the UK, with a considerable number of businesses trading in the sector in Ireland, either as subsidiaries of a UK parent company or else supplied through the UK. There are also significant volumes of cars and commercial vehicles in Ireland, as well as vehicle parts and accessories, which are actually manufactured in the UK. A substantial trade in cars and commercial vehicles, mostly used, is sourced by dealers from dealers or auctions in the UK, and vehicle parts are often sourced from sellers in the UK. Used car imports total around 50,000 per year. So, if the UK votes to leave the EU, how will the Irish motor industry be affected?

Medium- and Long-term Concerns

In the medium- or long-term there may well be concerns regarding the potential for tariffs and quotas to be imposed on vehicles or parts manufactured in the UK, as a non-EU country. However, given the value of trade between the UK and EU, this may be more likely a consideration in the setting of negotiating positions rather than in reality. Another consideration relates to vehicles or parts, manufactured in another EU member state, but distributed into Ireland through the UK. Although many of these goods are produced in the Eurozone, they are often charged into Ireland in Sterling. Again, given a two-year transition, there is little doubt that such logistical challenges can be resolved satisfactorily from an Irish Motor Industry viewpoint.

Challenging Short-term Issues

From our industry’s perspective, it is the short-term that is likely to provide the biggest and most worrying challenges, especially in relation to currency fluctuations.  According to Swiss global financial services company UBS AG, the value of Sterling could fall by as much as 20% to virtual parity with the Euro, if the UK votes in favour of exiting the EU.  Although Sterling may well rally in due course this may take some time, particularly as the negotiation process – with a UK government damaged by the loss of the referendum – will not be easy and may well move close to collapse before real progress is eventually made. The reality of the UK facing similar terms to Norway for free access to the EU market place could also impact as this may well involve having to contribute to the EU Budget and to adhere to EU Directives and Court rulings, the very issues on which many will have voted to leave.

All of this suggests that Sterling may well remain at a very low exchange rate for some time, with all that this means for our sector during that period. A UK used car priced at £10,000 Sterling last July, would have cost €14,400 whereas it might currently stand at around €12,900 but at parity it would equate to €10,000. And the key issue here is not the potential for higher volumes of imports so much as the potential impact that it might have on used car values in Ireland, and this could very well slow down new vehicle sales, if the cost for a consumer to change their car increases as a result. But this may not only impact on used, or even new, cars as the same price adjustment will be happening in relation to parts and accessories as well.

These would be hugely serious challenges for the sector and for the State’s tax revenues, although the likelihood is that this should at least be short-lived. Sterling may indeed recover somewhat by itself but the EU zone will also have to move to protect trade and current taxation arrangements such as harmonised VAT rules and zero rating for exports. Even allowing EU citizens credit for VAT paid on goods purchased in a non-EU state would suggest that additional barriers may well be moved into place. In addition, the reality of Sterling remaining at such a reduced value for any significant period of time is likely to result in upward pressure on new car prices in the UK, which would in due course push up used car values in that market. Similarly mutual recognition between Ireland and the UK on vehicle approvals and acceptance of Mileage-based Odometers may need to be resolved in a changed context.

Profound implications for the sector in Ireland

  • It is expected that Sterling will depreciate in value by 15%-25%. We have already seen an 8% reduction since the beginning of the year, which will dramatically affect the volume of exports from Ireland to the UK, our largest export partner. This will create an imbalance in load volume, further reducing the viability of UK work, which is already marginal due to competition from UK hauliers.
  • Customs procedures will become more onerous. Since we are the only EU country with a land border to the UK, Irish hauliers transiting through Northern Ireland to the North East will be severely hampered.

    Over 80% of our road freight to mainland Europe transits through the UK mainland and, if customs restrictions are put in place that increase cost or time, this will result in added costs that have to be passed on to customers. Some freight will become economically unviable to transport by road to, or from, mainland Europe, resulting in lost revenue to Irish hauliers and a reduction in trade as import/export volume decreases and transfers to containers.

  • The UK’s current cabotage regulations may alter, with a knock-on effect on the current work practices of Irish hauliers in the UK. The current derogation on car transporter firms using Irish registered units in the UK during peak periods may also be lost.
  • Less than 15% of current commercial vehicle volume in right-hand drive form will remain under EU legislation, meaning a massive increase in cost to service a limited market. This will result in less brands and higher cost. Currently, we have differences in weight and height legislation between Ireland and the UK, which will become more pronounced if the UK leaves the EU.

The international logistics industry

Given its position as Ireland’s most important trading partner, if the UK was to exit the EU the very strong likelihood is that there will be a very negative impact on trade flows between the two countries. The ESRI has estimated that the negative impact on trade between the two countries could be as high as 20%, which would have a significant impact on both economies – most especially on the Irish economy. How this would, in turn, affect individual companies would of course vary. It is reasonable to suggest that small and medium sized enterprises (SMEs) with a higher proportion of their trade with the UK would be more severely impacted than larger companies that tend to have a more diverse range of export markets and are therefore less dependent on the UK as a destination.

Certain Sectors Susceptible to Brexit

The severity of the consequences of Brexit is also likely to differ by industry sector. For example, the pharmaceutical and medical devices sectors, which historically have a significant FDI investment, have a wide range of both EU and non-EU export markets. In contrast, the agriculture and food & drink sectors are more dependent on the UK as a market, so the impact of a Brexit on these sectors would be much more significant. According to a study by IBEC, the UK accounts for over half of all meat exports, valued at close to €2 billion and 30% of Irish dairy exports, valued at close to €1 billion. The UK is also an important market for ingredients and prepared consumer foods, accounting for 70% of exports in this area. However, even if the UK decides to leave the EU, it’s still likely to be an important market as businesses tend to sell perishable goods to nearby markets. Irish firms will still have to apply EU regulations but may also have to shoulder the cost of applying separate UK regulations as well. Regardless of the type of new arrangement it reaches with the EU, if the UK votes to leave the EU, customs and other procedures are likely to become more onerous for exporters to the UK in comparison to the current trade agreements.

 

Some Silver Linings Amongst the Clouds?

It could be argued that British exports to the EU would decline in light of a Brexit and this represents an opportunity for Irish companies to provide similar, substitute products. A recent article in The Guardian in the UK suggests that trade concerns are minimal due to the fact that, should Brexit actually proceed, the most likely outcome would be that the UK would negotiate a free trade agreement. It points out that the UK is the largest export market for the EU and, in that context, it has a strong negotiating position. However, many British business leaders are sceptical about their negotiating power and they point out that while the UK may have 65 million or so consumers, the EU represents 500 million and therefore has significantly more clout.

For Irish businesses that are currently relying heavily on the UK as a market, it may be an opportunity to delve into other international markets. If the UK exits the EU, then the likelihood is that the value of Sterling will decline against the Euro. This will have some implications for Irish exporters to the UK, potentially making their prices less competitive to UK consumers or retailers. A drop in the value of Sterling, along with some potential additional trade barriers, could put some Irish businesses at risk. To mitigate this risk, Irish companies (in particular SMEs that have less product market diversity) should really look to expand their market base to destinations further afield.

For exporters trading exclusively with the UK, the EU is a logical next step in terms of expansion. Operating as a single market, the 28 countries that make up the EU represent a major world trading power. With just 7% of the world’s population, the EU nonetheless accounts for 20% of global exports and imports. Furthermore, 18 of the 28 countries operate within the Eurozone, so there’s no exchange rate risk to these countries. And remember the EU operates as a single market so, for the vast majority of goods and services, there are no customs or regulatory restrictions. That means Irish exporters have unfettered access to the 500 million consumers that make up the EU.