By Costas Pitas
LONDON (Reuters) - British car production reached a 17-year high last year, but the country's vote to leave the European Union contributed to a roughly 33 percent drop in investment in the sector, a car industry body said on Thursday.
Carmakers had lobbied hard against Brexit, saying that it could result in the imposition of export tariffs that would make UK plants uncompetitive.
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Britain built 1.72 million vehicles in 2016, the Society of Motor Manufacturers and Traders (SMMT) said, adding that the annual increase of 8.5 percent lifted output to its highest since 1999 and the third-highest since the 1970s.
However, the SMMT said that investment in the sector, which tends to make decisions about future production two to three years before a model rolls off the production line, fell by a third to 1.66 billion pounds ($2.1 billion).
"We do see companies at least delaying decisions until there is greater certainty," SMMT Chief Executive Mike Hawes told reporters.
Among the British car industry's concerns is the requirement of many free-trade deals between countries and blocs for more than 50 percent of components in a car to be made locally. Britain currently averages 41 percent.
If Britain fails to secure a preferential deal with the European Union during the two-year divorce talks due to begin by the end of March, cars made in Britain could become subject to a 10 percent World Trade Organization tariff on exports.
"It would be very hard to overcome that level of additional cost, given that plants operate on wafer-thin margins," Hawes said, adding that carmakers generally make only a 2-4 percent return on investment.
"We want trade deals, but they must be the right deals, not rushed deals. Failure to do so could damage UK automotive manufacturing beyond repair."
Prime Minister Theresa May said last week Britain would leave the EU single market, which guarantees unfettered trade on the continent, but suggested that the car industry may be able to retain elements of free trade under a bespoke Brexit deal.
Japanese carmaker Nissan <7201.T> said in October that it would build two new models at its Sunderland plant in North East England.
A source told Reuters that the decision had been made after a government pledge for extra support to counter any loss of competitiveness caused by Britain leaving the EU, though a spokesman for the Prime Minister said that no explicit promises had been made on compensation for tariffs.
(Editing by David Goodman)