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UK 2020 Auto Sales Derail on Coronavirus Mayhem, '21 Prospects Dim

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The U.K. automotive industry has been in murky waters since the pandemic hit economies hard last year. Thanks to the global health crisis and in the U.K.’s case, the Brexit, there has been catastrophic damage to the British auto sector in 2020, with car sales tanking to the lowest level since 1992. This resulted in the biggest annual slump in new car sales since World War II despite the surging sales of electric vehicles (EVs) in the country.

2020: A Look Back at British Auto Industry

The automotive industry is an integral part of the U.K. economy, with a turnover of more than £82 billion, and contributes £18.6 billion to the economy. Per the Society for 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.

The coronavirus mayhem wreaked havoc in the U.K. auto industry in the latter half of the first quarter and the second quarter of 2020, amid factory closures, low footfall at dealerships and supply-chain distortions.

Per SMMT, sales in the country plummeted to 1.63 million cars in 2020, marking a year-on-year decline of 29.4%. In fact, the nation’s car industry endured a total turnover loss of £20.4 billion with demand tumbling across all segments, other than specialist sports.

Notably, Britain’s supermini continued to be the favorite among people, maintaining a 31.2% market share, though its sales witnessed a 25.9% decline year on year.

Nonetheless, there was one uptrend in this otherwise gloomy year for Britain’s auto industry. Electric vehicles have been a bright spot within the nation’s malaise. Sales of electric cars jumped exorbitantly, with their market share increasing to 6.5% in 2020 from 1.5% in 2019. Sales of plug-in hybrids also spiked sharply. This implies EVs now account for more than one in 10 registrations compared to the mere one in 30 in 2019. This demand surge for EVs was triggered as the country is set to ban the sale of new diesel and petrol cars by 2030.

Brexit Boom: How the Trade Deal Affects the Auto Sector?

The U.K. left the EU on 31 Jan, 2020. There was a transition period to allow for negotiations on the future relations. Without a trade deal, one would have expected another dramatic collapse in the U.K. auto industry. Following intense negotiations, an agreement on future EU-U.K. relations was concluded by end of December 2020.

The new trade deal between the U.K. and the EU is a huge sigh of relief for the auto sector. It has confirmed that cars and car parts could continue to move between the two regions, without tariffs or quotas being imposed, subject to certain conditions.

Nevertheless, on the flip side, this is not a free trade deal. Manufacturers will face additional significant costs due to so-called non-tariff barriers, including border formalities, and the need to obtain extra regulatory approvals for new models.

Apart from this, the trade deal exposes the inefficiencies in the U.K. car industry. Britain will need to focus on battery production in the upcoming years or the nation shall fall behind in the race to EV supremacy. That's because in order to qualify for tariff-free access to the European market, the value of car components made outside the U.K. and the EU will have to be strictly limited.

Moreover, battery packs are heavy and would be costly to be shipped from plants in the EU, making it crucial to have battery manufacturing factories in the U.K. for feeding the local car assembly sites.

Automakers to Watch Out For

Britain’s auto sector is hugely dominated by foreign manufacturers. Toyota (TM - Free Report) , Nissan (NSANY - Free Report) and Honda (HMC - Free Report) are the biggest automakers in the U.K. Other manufacturers include Tata of India’s Jaguar Land Rover, BMW AG’s (BAMXF - Free Report) Mini, and Peugeot SA’s Vauxhall.

Nissan, which currently carries a Zacks Rank #3 (Hold), reported a 27.5% year-on-year drop in sales last year. The Japan-based automaker recently decided against making an electric model at its Northern England factory. It’s unclear whether Nissan’s all-electric Leaf hatchbacks built in Sunderland plant — the largest car factory in the U.K. — have enough local components to avoid additional taxes. While Nissan seems optimistic about the Brexit deal, it is yet to assess the detailed implications of the same for its operations. Similarly, BMW and PSA have embraced the trade deal, though the automakers still need to closely examine the agreement to assess the aftermath for their business.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Encouragingly, Toyota’s Corolla hybrid and combustion-engine compact cars built in Burnaston will qualify for tariff-free export to the EU.

Though the U.K. auto industry dodged disaster with the trade deal, it is yet to be ascertained what major implications and costs it will bear for the auto giants in the nation.

Outlook Remains Muted

The year 2020 will be etched as a doomed year in the history of U.K.’s automotive sector, with the pandemic-enforced shutdown and uncertainty over future trading conditions taking their toll.

Nonetheless, with the rollout of vaccines and clarity over relationship with the EU, there is a ray of hope for 2021.

Still, with the U.K. entering into another phase of lockdown this week, a speedy recovery for the car sector is not anticipated, setting back automotive hopes for a revival by few more months.

Thus, as we look through 2021, the U.K. auto sector remains cautiously hopeful, though what lies ahead remains mostly uncertain.

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