How Much Are The Luxury Automakers Exposed To The U.K.?
Growing uncertainty after the U.K. voted to exit the European Union weighed on consumer and business confidence in June, negatively impacting vehicle sales in the month. Premium vehicle manufacturers such as the German trio of Mercedes-Benz, Audi, and BMW, and Jaguar Land Rover, have performed better than the overall passenger vehicle market in the region through the first half of the year, as the demand for higher-end vehicles remains strong. However, the impending exit of the U.K. could alter the situation for the automakers in this region.
It might be too early to relate the fall in vehicle sales in the U.K. to the June 23 vote, as car deliveries typically occur several weeks after purchase decisions, and most of the month’s sales happened prior to the vote. However, manufacturers push to boost figures as much as possible at the end of the month, meaning the June 23 vote could have had an impact on the June results.
The U.K. is an important market for the German big 3 and even more so for the British marquee brand Jaguar Land Rover, as can be seen from the volume-sales proportion of this region. The full impact will be seen during 2017 and 2018, when registrations are expected to reflect customers’ decisions taken following the Brexit vote, however, even if Britain exits the European Union and inks a free trade agreement, the uncertainty in the intervening two years is expected to hurt vehicle deliveries.
The biggest issue for the German automakers, who are widely exposed to the U.K., is the depreciating pound. The pound sterling is down ~10% against the euro and ~12% against the dollar since right before the announcement of the Brexit vote on June 23. Concerns over the U.K.’s current account, interest rate cuts by the Bank of England, and the U.S.’s prospective monetary tightening could lead to a further depreciation of the pound. The German carmakers (including non-premium brands such as Volkswagen) exported more than one million cars to the U.K. last year, and the declining pound is expected to dent earnings from the country, when converted back to the euro.
According to Audi Chief Executive Rupert Stadler, Audi is solidly hedged against the pound sterling, so the brand hasn’t been forced to raise vehicle prices exported to the U.K. following the Brexit-induced decline in the pound against the euro. [1] However, the continual weakening of the pound against the euro could catch up to Audi and its counterparts, prompting a rise in model prices, and hence, giving price advantage to local manufacturers such as Jaguar Land Rover, BMW’s Mini (manufactured in the U.K.), and Aston Martin. Tariff barriers could also raise prices of cars exported to and from the U.K., hurting these luxury automakers.
The luxury automakers have performed well in the U.K. so far this year, beating the growth in the overall industry. However, growing uncertainty after the Brexit vote could deter customers from purchasing luxury automobiles at least for a period of one to two years. Analysts expect sales growth in the European Union to slow down in the second half of the year, to around 3%. The declining vehicle demand in the U.K. could mean a further dip in the sales forecast for Europe, and also that for the luxury automakers.
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