UK_EU_webFor the automotive logistics sector, there was a cruel but telling irony in where the strength of the British vote to leave the EU on June 23rd first emerged. Around midnight, in one of the first areas to announce its results, the north-east city of Sunderland revealed that 61% of its voters had chosen to leave, far higher than expected.

Sunderland is home to Nissan’s assembly plant, the largest in the UK with capacity for more than 500,000 units per year. More than 80% of production here is exported, with the majority, like other British plants, bound for the EU. The plant and its nearly 7,000 workers, along with tens of thousands more in the supply chain, benefit from open access to the European single market.

But risks to this arrangement were not enough to sway the voters of Sunderland, nor in many other industrial areas of England – including the Midlands, the country’s traditional home of car making – where the leave vote was particularly strong.

The automotive industry had figured prominently in the referendum campaign. David Cameron, the prime minister (who has already announced he will resign by autumn), and other ministers frequently gave speeches from car plants, warning about the risk to trade and supply chains in the event of ‘Brexit’.

Executives from the like of Jaguar Land Rover, Toyota, BMW, Ford and Nissan, meanwhile, had all warned that their businesses were highly integrated with the EU and that a vote to leave would be risky. According to the country’s automotive association, SMMT, 77% of its members thought remaining in the EU would be better for the UK industry, with only 9% saying Brexit would be better.

Logistics firms and associations, such as the Freight Transport Association (FTA), also supported a remain vote, warning that leaving the EU could lead to supply chain disruptions and more bureaucracy.

However, voters’ worries about immigration and resentment towards the establishment seem to have won out over factors as esoteric as trade barriers. The UK now faces political, economic and constitutional uncertainty. The vote has already cost the prime minister his job, and it may lead to the end of the UK as it currently stands, should Scotland seek secession. As we write, the pound was in freefall, dropping the most in any single day since the 1930s, with global stock markets falling too.

The country’s automotive manufacturing and supply chain remained on the front line. The Brexit result had, at least initially, battered the share prices of carmakers with plants in the UK, including Toyota, BMW, Nissan and Honda. The fall in the pound, while likely to recover somewhat, will probably lead to an increase in the price of imports. Considering that around 85% of new vehicle sales in the UK are imported, that could hit sales. Vehicle exports, which have been at record levels, should get a boost, however with 50-60% of car components typically imported, supply chain costs could rise sharply.

Prior to the result, forecasters had predicted a grim medium-term outlook for the UK market in the event of a Brexit vote. Outfits including LMC Automotive and the Economist Intelligence Unit (EIU) have suggested that sales could decline by nearly 500,000 units by 2017-2018, or 15% from current levels. Justin Cox, head of European production forecasting, predicted the largest share of that loss would likely come from German plants.

The biggest questions, however, revolve around whatever the UK’s eventual settlement with the EU may be. At the time of writing, David Cameron has said that he will not trigger Article 50 of the Lisbon Treaty – the official process that signals the UK’s intention to leave the bloc – before he stepped down. From whenever that process does begin, the UK and EU have two years to negotiate terms of exit, extendable only with unanimous agreement from all member states. If an agreement were not reached, the UK would revert to WTO rules, which would include a 10% tariff on vehicle exports to the EU.

A Norway-style arrangement that granted the UK access to the single market would cause the least disruption, say analysts. That would also allow the continued free movement of labour, goods and capital, all of which the SMMT and carmaker executives cite as critical. However, with the electorate’s ire directed so strongly against immigration, such a deal seems unlikely. Indeed, the Leave campaign had said prior to the referendum that the UK would have to leave the single market in the event of Brexit.

That could have particularly negative impacts for the UK automotive sector, for which even the imposition of minor tariffs and trade barriers would damage its competitiveness. So far, comments from the SMMT, as well as logistics associations such as the FTA have called on the government to secure tariff-free access to the European market. Others, including Mark Perrin at accountancy firm Menzies, have pointed that restrictions to labour could result in driver and other labour shortages.

In the long run, there are those who would argue that there could be benefits to the UK leaving the EU. The EIU points out that EU-negotiated trade deals often take very long since they require agreement from all member states; a potential deal with India, for example, has been negotiated since 2007. The UK could potentially negotiate such deals faster.

However, the country also stands to lose access to markets via existing existing EU trade agreements. And the UK may find itself in a less powerful negotiating position compared to having the heft of a 500m trading bloc. So much was in evidence earlier this year when the American president, Barack Obama, said that the UK would "go to the back of the queue" in negotiating any trade deal with the US.

For now, at least, nothing actually changes to UK rules and procedures. However, it could be years before a clear picture of the future emerges. The EIU predicts the UK will outline its proposed EU trade deal by the end of this year. That may bring some stability, however analysts expect a pullback in foreign investment and potential job cuts at OEMs. UK carmakers, their suppliers, logistics providers and indeed much of the world, will be watching closely.

The consequences for the UK car sector and its relationship with Europe and the wider industry will be discussed at the inaugural Automotive Logistics UK Summit to be held on October 5th-6th this year.