LONDON – Economic uncertainty brought on by the U.K.’s Brexit vote to leave the European Union is the single biggest challenge facing the automotive industry.

That’s the opinion of Mike Hawes, CEO of the U.K.’s Society of Motor Manufacturers & Traders group that represents automakers in the country.

The biggest hurdle for individual automakers is in making investment decisions needed to keep pace with 4- and 8-year product cycles.

“We’re in the position that manufacturers are having to make investment decisions when the future of our trading relationship with Europe is still not clear,” Hawes tells WardsAuto at a Fleet Street Motoring Group luncheon in London.

“Naturally, for most U.K. carmakers the biggest market is the rest of Europe. Of that 80% we export, some 55% goes to Europe and the next biggest market is the U.S. currently just under 10% of production volume. The key immediate challenge is what happens next in terms of our relationship with Europe?”

Hawes says his group would prefer Britain stay as part of the EU.

“We’re not saying this is easy or that it’s even potentially deliverable, but if you ask the industry what they want, as we did before and after the referendum, they wanted to remain inside the single market.”

The biggest threat to automaker profitability is the possibility of the U.K. being bumped down to World Trade Organization status where its dealings with the EU are concerned.

“On one extreme we could revert to WTO with some 10% tariffs on vehicles and about 2.5% on parts, and that would become a significant challenge for many of our manufacturers,” Hawes says. “The industry operates on wafer-thin margins depending on volume, and putting 10% on the price of vehicles coming out of the factories affects the ability of an individual factory to influence that final cost.

“With something of 25% to play with, against the majority of 75% as input costs, the ability for them to absorb that extra cost is somewhat limited,” he adds. “Also the potential for us to be outside the customs union, on an industry that builds its reputation on just-in-time delivery, lean manufacturing and taking out waste, would pose another challenge, and extra costs have been estimated as being in the magnitude of about 6%.”

The U.K.’s stumbling block of having to accept free movement of labor to remain in the European single market also poses a threat to car manufacturing in the country.

“We do need a skilled workforce in the industry, and about 10% across the industry are non-U.K. nationals and we are dependant on accessing that talent,” Hawes says. “Europe, itself, has a shortage of skilled engineers, especially production and design engineers. All this is the most important issue we currently face.”

That said, Hawes is confident the U.K.’s auto industry is well placed to cope with these challenges compared with previous decades.

“We go into this period of uncertainty in as good a shape as we can be if you look at car market itself, which has enjoyed a record year last year with 2.6 million vehicles,” he says. “And we’re heading probably towards being at least on par with that and possibly even exceed those sales.

“If you look at manufacturing, again the numbers are up at around 9% year-on-year and we’re still heading towards our all-time record volume that dates back to 1972. We hope to reach that target by 2020.”

The SMMT official says the U.K. auto industry is in a position of strength due to its productivity, good labor relations and flexible workforce.

“Also the level of investment that has taken place in the automotive sector has enabled the major OEMs to be very competitive and has allowed the supply chain to re-establish itself after being decimated over the last 20-30 years,” Hawes says.

“It is coming back, and we are now up to about 41% average locally produced content in U.K. cars. It may not be where we want it to be but it is growing and by contrast in Germany that figure is around 66-67%.

“Obviously, there is a lot of confidence and pride in what the automotive industry is doing, exporting to 100 different markets, and the industry wants to continue that global growth.”

Meanwhile, Hawes says the government’s commitment to electrification of powertrains is a welcome boost for the industry.

“We are moving towards increased diversity in powertrain development, we’re accelerating the take-up of electrification, whether plug-ins, full electric or alternative energy sources like hydrogen fuel-cell, there is now a good range of government support in these.”

Government backing on charging infrastructure projects also pleases Hawes.

“The political pressure on air quality, too, will not go away, and the challenge for the industry is that we will have the products that will meet ever tighter emission requirements in the major cities across Europe,” he says. “I believe the industry will achieve this.”