What Brexit Means to Automakers

Thursday’s U.K. vote to leave the European Union has one certain effect: trade among the nations of Europe will be more complicated. Automakers face some significant issues whether they build cars in Britain for export to the rest of Europe or whether they build cars in other EU countries for export to the United Kingdom.

Trade among EU nations is tariff-free. Now that Britain is out the country must negotiate trade treaties on its own. Toyota Motor Corp. (NYSE: TM), Nissan, and Honda Motor Co. Ltd. (NYSE: HMC) all have plants in Britain, building cars mostly for export to Europe. General Motors Co.’s (NYSE: GM) Vauxhall division also builds cars in the United Kingdom and Ford Motor Co. (NYSE: F) has a number of parts-making facilities throughout the country.

The impact of the Brexit vote could be mitigated if the United Kingdom remains part of the European Economic Area, an organization that includes all EU members plus Iceland, Norway, Liechtenstein, and Switzerland which, like the other three, is a member of the European Free Trade Association, but not of the EEA. Membership in the EEA could maintain Britain’s tariff- and duty-free trade with the rest of the continent.

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Exports from the United Kingdom to EU nations were both tariff- and duty-free. U.K.-built cars exported to Europe could now be obliged to pay a levy of as much as 10%. According to Automotive News, Toyota built 190,000 vehicles in Britain last year of which 75% were exported to other EU countries. Just 10% of Toyota’s production was sold within the United Kingdom last year. Nissan built 475,000 vehicles in its British plants last year with most of those also going into EU member nations.

Germany-based makers BMW, Volkswagen, and Daimler currently sell half the new cars sold in Britain every year, or about 810,000 units. Including suppliers, German carmakers have 100 production sites in the United Kingdom.

Automotive News cited analysts at Evercore ISI who said they expect U.K. car sales to drop 4.5% this year due to economic uncertainty. The drop in sales is forecast to rise to 10% next year as U.K. production drops by 2.5%. The total impact on automakers earnings could rise to around $9 billion.