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Looming Brexit Deadline: Automakers Devise Emergency Plans

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With the final bell of Brexit drawing close, a slow pace of negotiations between Britain and European Union (EU) has raised concerns for auto manufacturers. This also puts strain on Britain’s auto industry that employs roughly 850,000 people and exports about 45% to EU nations.

Lack of clarity in trade, customs and other major issues has increasingly placed the carmakers in a tight spot pertaining to Britain’s separation from the EU. Further, the country leaving the bloc with no deal would be compelled to abide by the World Trade Organization (WTO) rules. Per the WTO regulations, car exporters in the country will face a EU import tariff of approximately 10%. Further, Society of Motor Manufacturers and Traders (SMMT) believe that a no-deal will hamper the industry not only within the country but also across the larger European continent.

Apart from the cloud of ambiguity looming over production facilities in Britain, automakers who don’t manufacture vehicles in the country will also have to opt for other feasible ways to access Europe’s second-largest auto market.  Currently, almost 85% of the total cars sold in Britain is imported.

In order to avoid tariffs and trade barriers, both parties have decided to strike a deal by the end of 2018. However, the British government has to find a middle path that will be acceptable to both sides and aid the EU as well as Britain.

Carmakers Delving Into Other Possible Options

Nevertheless, an air of uncertainty over cross-border tariffs and high chances of free trade loss have prompted the automakers to look for emergency plans if a no-deal exit takes place. Companies that rely on prompt delivery for vehicle manufacturing are planning to stockpile auto parts and components. This will allow the makers to maintain their production targets post Brexit. However, the plan will bump up costs and escalate bureaucracy, thereby affecting the industry players’ long-term feasibility. The other plans contain certifying vehicle models in the EU and changing production schedules.

Last week, BMW AG (BAMXF - Free Report) announced its decision to shut down its Mini plant in England for a month. At present, the Mini plant situated in Oxford employs 4,200 workers. After Britain’s severance on Mar 29, the factory’s shutdown will begin on Apr 1. Besides this, the company is looking for warehouses and lorry parking areas on both sides of the route.

Further, the company expects an increase in documentations if tariffs and customs are imposed, which impelled BMW to invest in IT systems. A source known to Reuters stated that the Brexit related plans adopted by the carmaker are costing a huge sum of money.

Per the company, it is dedicated to the United Kingdom but fears that Brexit might induce higher expenses and disruption of supply chains that support the country’s auto market.

Japan-based Honda Motor Co., Ltd. (HMC - Free Report) manufactures almost 10% of Britain’s 1.67 million vehicles at its Swindon plant situated in southern England. Also, the company’s Civic model for the global market is manufactured in Britain.

Almost at the same time, Honda announced that a no-deal exit would be very expensive for the company. The company’s management further added that it is preparing itself for a no-deal outcome but did not talk about shifting its Swindon factory. Similar to BMW, the company also assumes that a no-deal would lead to costly trade rules and dislocate its supply chain.

Unlike Honda and BMW, there are a few automakers who have not yet decided on plans they would follow in case of a no-deal exit by Britain.

Britain’s biggest carmaker, Jaguar Land Rover Automotive PLC owned by Tata Motors Ltd. (TTM - Free Report) reported that it is considering various options. Jaguar Land Rover is already on its way to recovery, which aims at boosting production in the U.K. to simplify its supply chains and opting for economies of scale. However, a looming split is making it difficult for the company to move on with its expansion schemes.

Apart from BMW, Honda and Jaguar Land Rover, Toyota Motor Company (TM - Free Report) and Nissan Motor Company (NSANY - Free Report) also have big production plants in the country. Ford Motor Company (F - Free Report) also has two plants, which manufactures engines for its wide range of vehicle models.

Both Ford and Tata Motors currently carry a Zacks Rank #4 (Sell) while BMW and Toyota have a Zacks Rank #3 (Hold). Meanwhile, Nissan holds a Zacks Rank #2 (Buy) while Honda sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term growth rate for Tata Motors, Ford, BMW, Nissan, Toyota and Honda is 12.8%, 5.3%, 4.5%, 4.3%, 6% and 3%, respectively.

In Conclusion

Of late, a sluggish pace in Brexit bargains has raised worries among automakers. Even if a deal is finalized, the terms and conditions to export products from Britain to EU nations might remain uncertain way past the Brexit deadline. Additionally, carmakers will inevitably experience a major disruption in their supply chain. Moreover, increased tariffs could result in loss of competition. The risk is quite high for the British automotive industry, which is already combating a sharp decline in diesel vehicle sales in the country.

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