KGP

KGP’s Briefing Series #6 – CV NRMM Briefing 6 – Brexit – The Issue of Regulatory Alignment

Tuesday, January 09, 2018

One of the most pressing issues of Brexit for both the NRMM and CV market in the UK is the ability to sell vehicles and machinery into the EU market. One of the problems that could occur post Brexit is the issue of regulatory alignment. Currently when an engine is manufactured in the UK, the majority are certified by the Vehicle Certification Agency (VCA). However, post-Brexit will the EU still accept the VCA as a body to certify products to meet EU regulations? This could become an issue if a hard deal is established along with many other negative impacts associated such as boarder delays and import/export tariffs which would could encourage OEMs to shift UK production to within the EU.

Commercial Vehicles Market

The UK produced just under 20,000 commercial vehicles (CV) in 2016 which includes around 10,000 units for heavy-duty trucks and the remainder made up of medium-duty trucks and bus (>6t). Sales of heavy-duty trucks amounted to 36,000 units in comparison to only 9,000 for medium-duty trucks.  Hence, the majority of heavy-duty truck sales are made up of imports with very little exported. These exported trucks are predominately right hand driven which are exported to countries in Africa.

Figure 1 2016 Heavy-duty Truck Unit Sales (Sources: LMC, SMMT)

Figure 2  2017H1 UK exports of built CV (Units)       (Source: SMMT)

Taking a closer look into the exports of CVs, roughly 70% of medium-duty trucks and only 20% of heavy-duty trucks are exported to the EU.

Therefore, the UK CV market is highly dependent on imports and the resulting impacts of Brexit could increase the costs of CVs for UK operators with the pound depreciating making imports relatively more expensive as well as the inclusion of any tariffs that are implemented and boarder delays post-Brexit.

Non-Road Mobile Machinery Market

The UK is the leading producer of construction equipment (CE) in Europe producing over 25,000 units a year. Interestingly, for the CE market, over the last few years the UK has experienced increasing relative share of exports to the EU from 27% in 2013 to 41% in 2016. This has risen to 44% in the first half of 2017 equalling roughly £2.8Bn.

Figure 3 2017H1 UK CE Exports and Imports £m (Sources: HRMC, CEA)

Exports significantly exceed that of imports with many CE OEMs manufacturing in the UK. However, the relative share of EU is much larger with 63% of CE imported from the EU in comparison to 44% exported.

The agricultural equipment (AG) market in the UK has significantly less UK-based production than the CE market. There are only two OEMs manufacturing in the UK, CNH’s plant in Basildon manufacturing over 20,000 tractors while JCB produce under 1000 units for niche agriculture applications. Roughly 40% of CNH production in the UK remains in Europe. Therefore, imports are relatively more important for the AG market than CE in the UK.

Overall, Brexit will negatively impact all markets due to the current free and ease of trade being reduced once the UK has left the EU.

Mutual Product Recognition for OEMs

Many OEMs and component suppliers currently manufacture in the UK with the main players in the NRMM and CV market accounting for roughly 20 manufacturing facilities generating £7.5 billion and just under 20,000 employees.

Figure 4 Major OEM Revenues from UK Plants (£)(Sources: Companies House, KGP Analysis)

 

If a no deal, hence, a hard Brexit occurs, then UK and EU regulation could diverge, and products may not be accepted into EU markets unless a mutual recognition of products is met. This in fact is very difficult with the only evidence of a mutual recognition of products worldwide being Australia and New Zealand with highway cars. This could lead to major OEMs with a large share of European sales shifting production from the UK into the EU. For example, Caterpillar NRMM revenues for the UK account for 0.4% whilst their European sales generate 46%. Although this is an extreme case among the OEMs’ revenues produced in the UK, generally a large share is generated by Europe. With these machines or components not being able to be certified or sold in the EU, this share of revenue will be eliminated, with revenues falling, jobs losses are likely and even the shutting down of some plants would be expected. Therefore, it is vital that the UK provide some agreement with regards to the mutual recognition of products.

Possible Brexit Deals

Fortunately, a complete break away from EU without any relationship seems unlikely, although so does a soft Brexit after completion of the first phase. A soft Brexit can have many different outcomes with no off the shelf solution available for the UK. Norway and Switzerland are examples of close relationships with the EU. However these countries and deals have a lot of differences in comparison to the UK and any future UK-EU deal:

  • Population is much smaller
  • UK has a much larger economy and larger influence on the EU
  • Both countries generally accept EU regulations in order to have the single market and trade freely with the EU
  • Both countries have free movement of people

Another trade deal which has been mentioned recently is the CETA deal between Europe and Canada, with David Davis’ stating the UK want a Canada plus plus kind of deal. CETA took 7 years to finalise with Canada remaining outside the single market and customs union. This kind of deal would satisfy those who voted to leave the EU as EU migration can be restricted and would allow the UK to be independent in developing trade deals with other economies. However, a lot would needed to be added to the deal as the UK economy is 80% services and CETA does not cover full market access in this type. Services has become very important to OEMS in the last few years generating a high share of revenue, therefore is a crucial negotiation that needs to made between the UK and EU along with regulatory alignment to be able to sell machinery into the EU.

Figure 5 Summary of current EU relationships (Source:HSBC)

Whatever the deal come 2019, the UK will suffer negative short-term effects but with the hope this is offset by a  long-term gain.

Download this article in PDF format here: Briefing Paper No 6 CV NRMM Brexit Briefing 09 01 18

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