Recently, the United Kingdom voted on a referendum which resulted in the declaration of splitting from the European Union. Panic has been coming in from all sides but this article will discuss the potential ramifications it can have on your next car purchase here in the United States.
To understand the issue, we have to look at the overall global picture as the vast majority of car companies have global interests. Just about any car brand you can think of is going to be affected by the U.K.’s exit from the E.U. as it will drag down revenue in an already struggling market. The E.U. went from being one of the most profitable regions in 2007 to one of the least today. The British market is a considerable chunk of the E.U.’s auto sector and by breaking off there is strong potential for it to weaken both of them. Many manufacturers, from BMW to Toyota, Kia to Volkswagen, Ford to GM, have factory operations in the U.K. and depending on how labor regulations fall it may force these companies to pull out and move their facilities elsewhere which only increases costs, importation fees, and destroys the jobs in the affected area. Another major area of concern for these companies is the rapid depreciation of the British pound, with some estimates reporting a 1% drop could cost a company like Ford $48 million. Japanese companies such as Toyota and Honda are struggling against the spike in value to the Yen in light of the Brexit on top of pound’s drop, doubling the impact and potential cost to revenue. JPL, Jaguar Land Rover, is facing a unique concern as the lenient emissions deal that was struck for them with the E.U. is now off the table. While that may sound good at first glance, JPL mostly sells SUVs and large sedans, they don’t have compact hybrids and electric cars because they’re such a small company so to hold them to the same strict goals of getting their fleet to an average similar to an economy car could have devastating consequences. All these issues will be exacerbated if the resulting dropout will lead to an eventual breakup of the E.U. "If the E.U. breaks up, the whole automotive supply chain would be in disarray”, investment bank RBC Capital Markets wrote in a note. "It could take years and a lot of capital to get supply chains back to more cost efficient levels."
So how might this affect you in the next couple of years purchasing a new car here in the U.S.? Almost all manufacturers are giving conservative comments about how they are making the proper preparations to ensure there isn’t a shockwave that will reach other markets and at this time only PSA Peugeot Citroen has said with certainty that this means an increase in prices. The problem is that we don’t currently know what the new British government will be able to hammer out in terms of trade deals or even if they’ll go through with the separation at all given the strong backlash post-vote.
What we can predict is that the separation will have dramatic effects on the auto industry’s profit margin. While here in the U.S. the auto industry has been strong performing in the past decade, cutting into already razor-thin profits in Europe could mean changes in cost efficiency here in the States. As companies will have to face new tariffs and increased costs of operations it means that we could see prices begin to rise faster than normal growth so if you’re considering a new vehicle the next few years would be the best time. The one area no one is commenting on is whether the market can be positively affected by the Brexit. The silence there may be the most damning bit of all.