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30 May 2016

How Brexit Could Affect the Irish Motor Industry

Posted By: AIB Business

When we listen to the emotional and sometimes inflammatory debate taking place in the UK in relation to Brexit, it’s hard to have any certainty or even confidence in how the decision might go. Because it is all so unclear, confusing and increasingly theatrical, it would appear that many people in Ireland are just ignoring the potential impact of the UK Referendum, and perhaps hoping that it will somehow fizzle-out like the Y2K Millennium Bug that never happened. However, should it come to pass, Brexit would have far-reaching implications for the motor industry in Ireland, writes Alan Nolan from The Society of the Irish Motor Industry (SIMI).

From vehicle distribution, parts and equipment to professional services, the Irish motor industry is entwined with the UK, with a considerable number of businesses trading in the sector in Ireland, either as subsidiaries of a UK parent company or else supplied through the UK. There are also significant volumes of cars and commercial vehicles in Ireland, as well as vehicle parts and accessories, which are actually manufactured in the UK. A substantial trade in cars and commercial vehicles, mostly used, is sourced by dealers from dealers or auctions in the UK, and vehicle parts are often sourced from sellers in the UK. Used car imports total around 50,000 per year. So, if the UK votes to leave the EU, how will the Irish motor industry be affected?

Medium- and Long-term Concerns

In the medium- or long-term there may well be concerns regarding the potential for tariffs and quotas to be imposed on vehicles or parts manufactured in the UK, as a non-EU country. However, given the value of trade between the UK and EU, this may be more likely a consideration in the setting of negotiating positions rather than in reality. Another consideration relates to vehicles or parts, manufactured in another EU member state, but distributed into Ireland through the UK. Although many of these goods are produced in the Eurozone, they are often charged into Ireland in Sterling. Again, given a two-year transition, there is little doubt that such logistical challenges can be resolved satisfactorily from an Irish Motor Industry viewpoint. 

Challenging Short-term Issues

From our industry’s perspective, it is the short-term that is likely to provide the biggest and most worrying challenges, especially in relation to currency fluctuations.  According to Swiss global financial services company UBS AG, 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.  Although Sterling may well rally in due course this may take some time, particularly as the negotiation process – with a UK government damaged by the loss of the referendum – will not be easy and may well move close to collapse before real progress is eventually made. The reality of the UK facing similar terms to Norway for free access to the EU market place could also impact as this may well involve having to contribute to the EU Budget and to adhere to EU Directives and Court rulings, the very issues on which many will have voted to leave.

All of this suggests that Sterling may well remain at a very low exchange rate for some time, with all that this means for our sector during that period. 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. But this may not only impact on used, or even new, cars as the same price adjustment will be happening in relation to parts and accessories as well.

These would be hugely serious challenges for the sector and for the State’s tax revenues, although the likelihood is that this should at least be short-lived. Sterling may indeed recover somewhat by itself but the EU zone will also have to move to protect trade and current taxation arrangements such as harmonised VAT rules and zero rating for exports. Even allowing EU citizens credit for VAT paid on goods purchased in a non-EU state would suggest that additional barriers may well be moved into place. In addition, the reality of Sterling remaining at such a reduced value for any significant period of time is likely to result in upward pressure on new car prices in the UK, which would in due course push up used car values in that market. Similarly mutual recognition between Ireland and the UK on vehicle approvals and acceptance of Mileage-based Odometers may need to be resolved in a changed context.

For companies currently trading into Ireland from the UK, there may have to be some adjustment or modification in relation to the most beneficial way to structure for the future, but again there will be time to find the best solutions. In addition, there is also the spectre of the return of a border, with controls, between the Republic and Northern Ireland, bringing with it the potential for increased black market activity as well as the more worrying political impact that it might entail.

In the medium-term, most of the economic and trade issues will resolve and the marketplace in Ireland will settle again to a level of equilibrium during or following the suggested negotiation period. So, for me, the major issue is the short-term – the immediate aftermath of a decision to exit and, critically, uncertainty and destabilisation in the marketplace at a time when we need stability and increased confidence. The potential risks in relation to used vehicle values, although likely to be a relatively short-term phenomenon, nevertheless would be at a time when dealers can least afford such additional risk factors, and the recovering market could do without such additional complications. 

Y2K Revisited or a Major Cause for Concern?  

There has, to some degree, been a detached – almost disinterested – approach to the UK Brexit campaigns, here in Ireland, but the potential consequences are far too high for us to remain indifferent, particularly as we get closer to decision date. I for one will be glued to the count results on 24th June and hoping that it does turn out to be Y2K revisited.        


Written by: Alan Nolan, Director General, The Society of the Irish Motor Industry (SIMI) – representing the views of the industry by campaigning to the Government, state bodies, the media and the motoring public


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