Changing regulations, evolving powertrain technologies, shifts in consumer attitudes toward car ownership, and emerging business models, have created unprecedented challenges as well as opportunities for automakers and their suppliers.
Worldwide demand for automobiles is slowing after several years of growth. Automakers operating in the UK also face another problem: the disruption of supply chains and access to EU markets that could come with Brexit.
Car production stalls as Brexit risks accelerate
Data from the UK industry group the Society of Motor Manufacturers and Traders (SMMT) found that the number of vehicles produced in May dropped by 45% due to Brexit supply chain concerns. The resulting increase in customs costs and logjams at key points of entry stemming from Brexit could jeopardise UK car manufacturers’ just-in-time parts delivery strategies, which are designed to minimise inventory costs and keep factories humming efficiently.
Manufacturers rely more than ever on cross-border supply chains, as decades of auto industry consolidation have resulted in the UK no longer being home to any major indigenous auto brands. Storied British nameplates are now controlled by companies headquartered outside the UK, including JaguarLandRover (controlled by India’s Tata Motors), Mini and Rolls-Royce (BMW), and Bentley (Volkswagen). The UK car industry also includes manufacturers from Japan, the US, and other countries that have long operated plants in the UK, attracted in large part by access to European markets.
Japan’s ambassador to the UK recently warned that if Japanese firms begin to lose profits due to an unfavorable Brexit outcome, they may be compelled to leave the UK. When capital requirements are high and product cycles are measured in years, predictability is golden, and the uncertainty around Brexit has already had a chilling effect on investment. In 2018 investment in British auto manufacturing declined to just over £588 million, or about half the level seen in 2017, according to the Society of Motor Manufacturers and Traders. Production by UK car plants fell more than 9% during the same period.
The UK’s exit from the EU has already been blamed for the planned closure of Honda’s plant in Swindon, a location that is estimated to build 160,000 cars per year and is the company’s only factory in the EU; Ford also announced the closure of its engine plant in Bridgend with an expected 1,700 jobs to be lost. While Honda cited global shifts in the industry and investment in electric vehicles as the reasons – Ford blamed changing customer demand and cost – it’s widely speculated that Brexit uncertainty is the true culprit.
The announcement made by Honda earlier this year may be followed by bigger rivals including GM and Ford. After two decades of losses, GM exited the European market in 2017 through a sale to France’s PSA Groupe. The company said it would instead focus on key growth markets – the US and China – as well as electric drivetrains, driverless technologies, and mobility services. Amid its own mounting losses, early in 2019 Ford announced a major reshuffling of its European operations that will result in thousands of job losses and possibly plant closures. The UK is Ford’s largest European market.
In February 2019, Nissanannounced it was cancelling plans to build its X-Trail SUV in Sunderland, England. While plummeting European demand for diesel-powered vehicles played a role in its decision, regarding the move Nissan’s Europe Chairman Gianluca de Ficchy commented, “…the continued uncertainty around the UK’s future relationship with the EU is not helping companies like ours to plan for the future.” A new trade deal struck between Japan and the EU could further undercut the UK’s competitiveness. Over time, tariffs on exports of Japanese cars to the EU will fall to zero. If the UK leaves the EU, Japanese companies may have more to gain by building cars bound for the EU at home in Japan than building them in the UK where they could be subject to import tariffs.
Most global car companies are forming contingency plans to lessen the blow in the event of a no-deal Brexit. Many companies, including JaguarLandRover, Vauxhall (owned by France’s PSA Group), BMW, and Bentley are hoarding parts, but due to the nature of just-in-time supply chains, such parts stockpiles are expected to be measured in days, not weeks. Toyota has said stockpiling parts would keep its operations running for a few extra hours at most, and in the event of a no-deal Brexit will have to operate its two UK plants on a stop-start basis. Ford’s leader in Europe suggested a no-deal Brexit could lead to further job losses in the UK and would not rule out closing Ford’s UK plants if a favorable agreement isn’t reached.
According to D&B data, the UK is home to more than 3,500 auto industry-related establishments. In 2017, the UK automotive industry had £82 billion in turnover, employed more than 850,000 workers, and exported products with a value of £44 billion – accounting for nearly 13% of the UK’s total export goods, according to the 2017 UK Automotive Sustainability Report.
A no-deal Brexit – or an exit scheme that otherwise causes the UK to negotiate separate trade deals with the EU, Japan, and the US – would almost certainly cause global automakers and suppliers to second-guess their investments. A recently leaked impact study prepared by the UK government reportedly revealed a no-deal scenario would be hardest-felt in North East England, home to Nissan and numerous auto suppliers. The forecast projected that a no-deal exit would reduce economic growth in the North East region by 16%. Under a renegotiated free trade agreement with the EU, growth would decline 11%. Remaining in the EU customs region would still reduce growth by 3%.
Negotiations over the UK’s departure from the EU continue, but no agreement has been reached and with the deal extended to the 31st of October we are no closer to leaving than we were at the beginning of 2019.
Compared to decisions about balancing investments in electric drivetrains, shared mobility business models, and autonomous driving technology, the automotive industry’s choices about investments in the UK may be relatively simple. Eight out of 10 cars made in the UK are exported, according to the Society of Motor Manufacturers and Traders. Barring a favorable Brexit deal, it might be more cost-effective for the non-British car factory owners to build those eight export cars (as well as the two sold in Britain) elsewhere.
The UK evolved as a European automotive manufacturing hub because it offered perks such as an educated workforce, a strong track record of engineering and innovation, and economic and political stability. However, despite these significant advantages, if the costs of staying in the UK begin to outweigh the benefits, global automakers and their suppliers may vote to leave.