10th June, 2016

Brexit and the Irish Motor Industry

We pull together key opinions from some of the most influential commentators in the Irish automotive industry and ask, what impact if any, will Brexit have on our sector?
The threatened Brexit has caused a decline in the value of sterling and these currency fluctuations are already having an impact on the Irish used car market. With Ireland importing 50,000 used cars from Britain each year, what could a possible Brexit mean for the automotive sector here in the medium to long term?
BREXIT'S EFFECT ON THE IRISH ECONOMY
In a September 2015 report, Atradius Economic Research speculates that Britain will likely stay in the EU, but in the event that the Brexit occurs:

• The economic sectors most at risk would be minerals, financial services, and transportation (which includes the auto industry).
• The countries most at risk are Ireland and the Netherlands because of their deep investment and trade ties to the UK, as well as Germany because it depends on UK political support in the EU.
• Uncertainty will likely damage consumer and business spending as well as foreign direct investment (FDI) in the UK and the countries most affected by the Brexit.

In evaluating the countries most at risk from the Brexit, the study notes that:
"Ireland is a small, open economy that depends on the UK for 14% of its exports and 34% of its imports. Beyond trade disruptions, the re-introduction of the customs border would impose new costs and lost time to cross-border transactions. On the flipside, Ireland could possibly benefit from larger inflows of FDI as foreign investors seek other access points to the Single Market."
KEY CONCERNS FOR THE IRISH AUTO INDUSTRY
Cars make up 3.2% of Ireland's overall imports ($2.31B of $72.6B total imports).

Alan Nolan, Director General of the Society of the Irish Motor Industry (SIMI), believes that the main challenge to the Irish Motor Industry if the Brexit occurs will be in the short term due to currency fluctuations. Nolan notes that, "the value of Sterling could fall by as much as 20% to virtual parity with the Euro, if the UK votes in favour of exiting the EU," according to UBS AG, a Swiss global financial services company.

Nolan further notes, "A UK used car priced at £10,000 Sterling last July, would have cost €14,400 whereas it might currently stand at around €12,900 but at parity it would equate to €10,000. And the key issue here is not the potential for higher volumes of imports so much as the potential impact that it might have on used car values in Ireland, and this could very well slow down new vehicle sales, if the cost for a consumer to change their car increases as a result." He suggests that the medium and longer-term concerns may involve potential tariffs and quotas, but he believes that will get hashed out through EU negotiations.

One article in the Irish Times written by Neil Briscoe encourages car buyers who are interested in purchasing a British import to do so now, before the the June 23 referendum occurs, in case the changes that come with the Brexit make importing cars more difficult or costly. A decline in the sterling could be beneficial to buyers, unless the process of importing cars becomes more difficult or comes with fees.

In an article on LinkedIn about the Irish car dealership model, Blackwater Motors Managing Director Denis Murphy states that "the value of used cars in the Irish market is completely dependent on the value of sterling. We have to be currency traders as well as car dealers, a complex mix. We have benefited from the strength of sterling over the last two years and used car values have been strong. As sterling has weakened, we can expect the values of used cars to decline and expect a surge in the importation of used cars from the UK."

In another LinkedIn article, Murphy discusses the weakening of the sterling in relation to used car sales and the role the Brexit could play in lowering used car values. His commentary, in both articles, alludes to the flaws in Ireland's car dealership model and questions its dependency on UK imports.

In addition, the used car trade between Ireland and Northern Ireland could be affected because the Brexit could create border controls between the two regions, affecting both economies.

THE UK MARKET
The UK government has warned that the country is in for a decade of uncertainly if the unprecedented Brexit occurs. Negotiations with the EU would likely take longer than expected, and its commerce with other countries would be affected as well.

In an article about the attitude of the UK car industry toward the referendum, the author notes the following statistics:
• 77% of the UK motor industry wants the UK to stay in the EU.
• Reasons for staying were the positive impact on business that access to EU automotive markets provided (66%), access to a skilled workforce (55%) and the ability to influence industry standards and regulations (52%).

Concerns about the future of the economy are also affecting used car sales in the UK, as potential buyers wait to see what the referendum will mean for the British economy.

PURCHASING STRATEGIES
It's impossible to know how Irish car dealerships will approach their purchasing strategies should the Brexit occur, and that appears to be because no one has any idea what the Brexit will actually mean to the economies of the UK, Northern Ireland or Ireland (or anywhere else for that matter). An Irish Times article notes that "the car-makers and importers do not really seem to know quite what to do, and that is probably because no one does. Neither the leave nor stay camps in the UK seem quite certain what would happen were a leave vote to romp home on June 23rd."

It would seem that the auto industry is anxious about the possibility of the largely unprecedented Brexit, but it is waiting to see what happens before determining a change of course.

Many Irish car dealerships may shift their used car focus to home-grown used cars (which one or two of my sources would support anyway) if the Brexit occurs, at least until the sterling gains strength, or they will depend on imports from other countries. Ireland gets many of its car imports from Germany, France, and Belgium, as well as the UK. However, cross-border costs may be a deterrent to that path.

SUMMARY
In summary, the biggest threats to the Irish used car industry are the weakening of the sterling and uncertainty about the economy keeping potential car buyers out of the dealerships.

If the UK does leave the EU, the Irish used car market will likely take a hit in the short term, but it is likely to bounce back in the mid to long term.

Few plans appear to be in place in making changes to the way used car dealerships purchase their vehicles because everyone appears to be on pins and needles waiting to see what happens on June 23.

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