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What could Brexit mean for the UK automotive industry?

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By Professor Lawrence Bellamy, Academic Dean, Faculty of Business, Law and Tourism 

The UK automotive industry is big business. The Society for Motor Manufacturers and Traders (SMMT) indicates that it has a collective annual turnover of £82 billion per year and in 2017 built nearly 1.7 million cars.

A row of new cars

The industry is made up of many types of companies: ‘mainstream’ producers who cater to the mass market, commercial vehicle manufacturers, specialist, premium and sports producers, research and development companies, design centres, sales, distribution and importantly an extensive supply chain. In total, it employs over 850,000 people (with around 186,000 in manufacturing). It is one of the most significant export sectors, making up 12% of UK exports, and sends vehicles to over 160 countries.

Some of the UK facilities are world leading for their productivity (Nissan at Sunderland) and technology (Formula One). For those companies involved in mass manufacturing and trading extensively with Europe (both import and export), their concerns are the most significant and the scale of their operations gives them a strong voice in trying to influence Brexit policy.

The automotive manufacturing industry operates a global strategy, where the location of activities takes place at the best point for it to do so. Design, manufacturing and group management can be in totally different locations and are carried out where the best expertise and facilities are located for quality and cost factors.

The manufacturing supply chain is often fragmented across countries and whole facilities may be dedicated, for example, to engine, chassis or gearbox manufacturing, where these are used across the automotive group (platform technology shares components across marques). Getting the supply chain configuration right is therefore critical. 

So what are the main issues which concern automotive manufacturing?

There are a number of areas of concern over the deal, or lack of a deal, for Brexit. These include primarily tariffs, logistics, standards, market access, skills and uncertainty. It’s complicated.

Tariffs are the duties or a tax on goods imported or exported. These would push up the effective price of a car when exporting to the EU, causing consumers to pay more for cars produced in the EU (and many of them use UK components) and so could make these items less price competitive. In addition, components may become more expensive too due to tariffs, pushing up the price of the vehicles and making them much less competitive. One current proposal is that the UK adopts World Trade Organisation (WTO) rules for Brexit. This would see a 10% tariff applied. 

Logistics are critical for the industry where getting thousands of component parts to the factories using ‘just-in-time’ approaches ensures that both stoppages due to supply delays are minimised and that costly stock-holding is minimised. The industry would like to see ‘frictionless trade’ with the EU, where goods can flow across the borders without being held up by lots of customs ‘red tape’. The risk is that hold-ups could stop production and cost thousands of pounds per minute in waiting time. The whole of the mass automotive industry is based upon this type of supply principle which has been proven to be highly effective over time.

Standards are critical in vehicle manufacturing. Another market may not accept vehicles for sale if they do not come with the correct certification relating to factors such as safety and associated legal compliance. A single market has single standards and so reciprocal recognition is straightforward. Move away from that and barriers can be put up to prevent vehicles and components being used by other markets. Testing is slow and costly, so overall alignment is the best place to be.

Market access is critical for the international firms which use the UK as a base. To avoid tariffs and issues of compliance, many non-UK owned firms, including Japanese and US firms from outside the EU, have established bases within the UK. This gives them a platform to sell not only into the UK car market, but also across the EU. This reduces logistics costs and avoids import barriers.

Skills across the range of functions within the sector are very varied. The UK currently has shortages in the areas of science, technology and engineering and so recruits skilled workers from across the EU to support the advanced manufacturing operations required within the industry. If there are restrictions on the movement of these EU workers (around 10% of the UK workforce in automotive manufacturing) then this could hamper operations.

Uncertainty is the big killer. Organisations, given time can plan to overcome many barriers. However, not knowing what the future holds makes planning very difficult. Contingency plans can be put in place but ultimately may involve significant cost and compromise. This uncertainty is holding up crucial investments as shareholders are worried about the outcome.

Is it all doom and gloom?

Overall there are a number of significant challenges for the automotive industry, particularly manufacturing in the UK in facing Brexit. The sooner that the parameters of the deal are known then the sooner plans can be put in place to respond. It could be that some of the EU operations could be located within the UK and long-term investment in UK education and training could meet the skills gaps here too. Additionally, the UK could refocus and reconfigure supply chains to access alternative markets, such as China and India. However, whichever way the outcome goes in terms of an agreement, some change will be required and that takes both time and money and a configuration may ultimately realise more activity overseas.

Learn more about Professor Lawrence Bellamy and the Faculty of Business, Law and Tourism.

Published: 12 October 2018