Transportation is particularly vulnerable to volatility in global trade and economic growth, as it is heavily reliant on exports. At the same time that it is grappling with these downside risks, the automotive and transport sector is facing major structural challenges, specifically emission curbing, changing consumer habits and the heavy cost of R&D for new technology. For instance, in France, automotive suppliers which have been impacted by a decrease in production of diesel vehicles have recently launched new innovation measures to provide components for environmentally friendly engines and electrical vehicles. Oxford Economics identifies the pursuit of R&D as a risk to the automotive sector, particularly as major intra-European production shifts as firms shed capacity to free up money to pursue emerging technologies.
All these challenges weigh particularly heavy on small and medium suppliers delivering less valuable car components and parts. According to Oxford Economics’ Q1 report on motor vehicles and parts, output growth in 2019 will be hurt by slowing domestic demand for new vehicles and weak external demand from major markets, such as the United Kingdom. For all these reasons, strained liquidity and an increase in payment delays and business failures may become more common for the industry over the next few years.
Brexit Casts a Shadow
The UK’s final decision regarding Brexit is weighing heavily on the transportation and automotive sector in Western Europe. If the UK leaves the EU under a hard Brexit, both producers and suppliers would feel negative effects.
The uncertainty surrounding the final outcome is already causing havoc in the UK automobile and transport sector, which has one of the poorest outlooks among Western European countries. Last year’s auto sales were down and business insolvencies in general were up, largely due to Brexit uncertainty.
What’s more, UK manufacturers require free and easy trade with the EU. Exports account for about 80 percent of production in the UK, with the EU being the biggest export market, accounting for more than half of the country’s auto exports. Manufacturers are already investing less in the British automotive sector in anticipation of a hard exit from the EU. The looming Brexit decision has led to the shutdown of production plants, nearly halving UK car production. There is concern that manufacturers could continue this trend, diverting further investments outside the UK.
The current Brexit deadline is the end of October. While we’re in a wait-and-see mode until then, a hard Brexit is looking like a real possibility. If this does occur, producing cars in the UK would become more expensive, as the UK would face a 10 percent tariff on vehicles and a 4.5 percent tariff on vehicle components under World Trade Organization rules. In this scenario, the UK would also lose EU funds for manufacturing research and development.
The UK sector won’t be the only one to suffer under a hard Brexit. Other Western European countries are closely connected with the UK automotive sector, so much so that 60 percent of automotive components used in production in the UK are imported from other EU countries – close trading partners include Belgium, Spain and the Netherlands. Sectors in each of these countries would likely take a hit were a hard Brexit come to pass.
U.S. Trade Policy Up in the Air
While the imposition of U.S. punitive tariffs on vehicles and vehicle parts has been suspended for the time being, the issue remains a dark cloud, with potentially severe repercussions for an industry reliant upon cross-border supply chains.
The ties between the U.S. and EU automotive and transport sectors are significant. The total value of automobile trade between the EU and U.S. is $48.5 billion, with EU automobile manufacturers contributing 1 in 6 cars produced in the U.S. Further, the U.S. is the most important export market for EU cars, accounting for 29 percent of the value of all exported cars from the EU. EU car markets contributed 27 percent to total US auto output. In other words, automotive and transport sectors would suffer in both the EU and the U.S. should the U.S. impose tariffs.
Although a rebound is anticipated in German sectors in 2020, that won’t be the case if the U.S. imposes tariffs – Germany is responsible for more than half of all EU auto exports to the U.S. German OEMs and suppliers without production plants in the U.S. would be especially hurt. In this scenario, German suppliers could very well face liquidity and payment issues. On top of its vulnerability to U.S. trade policy, German sectors are also vulnerable to Brexit-related risks.
Italy’s sector, likewise, would be harmed by the imposition of U.S. tariffs. The outlook for Italy’s automotive and transport sector is one of the poorest in Western Europe (alongside the UK). Growth has already stalled and will likely slow further should additional trade policy changes occur. Automotive and transport companies there are export-oriented, with more than half of cars sent elsewhere. France, Germany and the U.S. are its major markets.
U.S. tariffs wouldn’t be negative across the board for Western European countries, however. France and Spain, for instance, would be fairly insulated from harm, as those countries export very little automobiles or components to the U.S.
More than halfway through 2019, and the fate of Western European automotive and transport companies remains a mystery. While the outlook is already less-than stellar, we won’t know the full extent of the damage until major trade policy decisions are made by the end of this year. Until then, uncertainty will continue to depress growth.
Editor's Note: Theo Smid is an economist at Atradius Trade Credit Insurance, Inc. specializing in risk analysis for Western Europe.
