QUESTIONS DEALERS SHOULD BE ASKING OF MANUFACTURERS – AND THEMSELVES – ABOUT PREPARATIONS FOR ‘NO-DEAL’ BREXIT
No-Deal Brexit raises a whole host of difficult questions for UK automotive distribution, and no easy answers. Dealers should be assessing the risks to their business, which includes seeking assurance and guidance from their franchise OEMs.
Key Risk Areas
Given that default to WTO rules would be the most likely outcome, and in that scenario the UK shifts to 'third country' status, tariffs of 10% would then be automatically imposed on the wholesale price of cars entering the EU from the UK; therefore, the UK is almost certain to place similar tariffs on cars entering the UK from the EU. It is unclear what tariffs would be applied on non-EU sourced imports, but existing EU trade agreements with third party countries, whether specific agreed tariffs are implemented or due to be implemented, will become invalid for UK trade and so tariffs for these countries now and in the future will all default to the same decided rate (i.e. 10%) until a new bilateral UK trade deal is agreed with each country. In all cases it is reasonable to expect that prices will go up by the level of change in tariff (i.e. 10%).
The UK government stated in March 2019 that their plan is that no tariffs will be levied on car parts in the event of a no deal, for a limited period that remains unspecified. This 0% tariff will apply to aftermarket parts as well as parts destined for new vehicle assembly, and, as for cars, the same tariffs would have to be applied to all imports so that, for example, a 0% tariff would apply on car parts from the EU and China alike. See here for more details: https://www.bbc.co.uk/news/bus... and here: https://assets.publishing.serv...
Despite these Government announcements (prior to the change in PM) regarding special concessions for imported car parts, there is a risk related to the parts content of cars. There is no guarantee that the Government measure, if implemented, will be mirrored by the EU. In the worst case, any manufacturer who is producing in the UK, but using components sourced from the EU (e.g. Vauxhall Astra and Vivano, Mini), or producing in the EU, but using components sourced from the UK (e.g. Toyota using engines from Deeside, or BMW using engines from Hams Hall), there would be a delayed effect of vehicles using parts imported/exported after October 31st, having a higher parts cost which would presumably be passed onto consumers in due course.
The disruption of “no deal” is already reflected in a weakened exchange rate for Sterling vs Euro, and although both would be affected by a “no deal”, Sterling is likely to be more affected. This will therefore create price inflation for any imported product, or product with imported content, quite separate from any tariffs. It will also increase the real cost of incentives in the UK market for manufacturers reporting in other currencies and reduce the profits. It will therefore be less attractive for manufacturers to support marketing programmes
in the UK, with for example, subvented finance.
In addition, logistical delays are a real risk, on cars and parts, including the impacts of handling of import licences. Therefore, Dealers should be asking manufacturers as to what they intend to do to manage the changes. There are other, less obvious uncertainties including possible impacts on manufacturer's financial businesses.
Questions for OEMs
• Will there be any changes to wholesale and advertised list prices on new cars? If so, what and when?
• Will wholesale and retail prices on new cars on order now for delivery after October 31st be honoured at the prices offered at the time of ordering?
• Will there be any lengthening of lead times on new cars? If so, what lead time impacts are expected on each model? Note that this question remains highly relevant to UK built product, as disruption to production schedules are a real possibility.
• Will OEMS offer support to new car customers caught by extended lead times?
• Will additional stock of commonly sold model derivatives be landed in the UK ahead of October 31st to mitigate as much as possible against disruption to supply, as occurred in Q1 and 2, 2019? If so, how much supply in months, and on which models and derivatives?
• Will there be any changes to the range of models and derivatives offered to UK customers?
• Will there be any changes to financing and dealer invoice points for new cars?
• Will there be any other changes to financial services?
• Will there be any changes to parts prices, whether wholesale, trade, fleet or retail?
• Are there any anticipated impacts on parts availability? If so, which categories of parts are expected to be impacted the most?
• Are any precautions being taken to hold increased spare parts buffer stocks in the UK to avoid increased levels of VOR?
• Will manufacturers provide any financial support to customers or dealers where a car is off road for an extended period due to stock availability impacts, requiring courtesy cars for longer?
Changes in trading rules
• Has the manufacturer put the arrangements in place for handling changes in import rules, and will dealers be expected to do anything differently? For example, will the manufacturer and/or importer handle all aspects of new administrative tasks set out for managing trading terms?
More details: https://www.gov.uk/government/publications/partnership-pack-preparing-for-a-no-deal-eu-exit/preparing-for-a-no-deal-eu-exit-step-by-step-guide-to-importing
• Are any special measures expected to be put in place for dealers in Northern Ireland?
What should Dealers be doing to prepare their own business?
• Weakening of sterling against the Euro may deepen, meaning that currency risks should be managed as best as they can.
• Staff who are EU nationals living and working in the UK should apply for settled status if they have not done so already. See here for details: https://www.gov.uk/staying-uk-...
Permanent residence can be applied for if staff have lived in the UK for five years, otherwise they should apply to the EU settlement scheme to be able to remain in the UK. See here for details: https://www.gov.uk/settled-sta... Current UK government advice is that the deadline for applying if there is exit with a deal is 30/06/21, but no deal would mean applying by 31/12/20, but this advice may change and should be checked.
• Equally, dealers should be thinking ahead about how they will change their approach to recruitment and training of new staff should the supply of labour supply become more restricted, particularly relevant to workshop technicians.
• Dealers should be prepared to start advising customers on possible impact to supply and lead times for new cars, and possible delays on parts supply for aftersales. A strong September will be desirable given the supply and price uncertainty after that, and so even though customers may have become very cautious, dealers would be justified in encouraging customers to buy sooner rather than later if they plan to buy in the next six months.
• Although manufacturers should have put in place additional UK stocking of fast-moving aftermarket parts lines, some Dealers may want to consider building their own buffer of the fastest moving parts lines, for example, those that are typically consumed and sold on a weekly basis.
As of writing we think this a fair assessment, but we cannot guarantee any of this will be pertinent as of October 31st, as obviously the situation remains very uncertain and unpredictable.
19th August 2019.