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Planning for Brexit: the automotive sector

12 December 2017

As Brexit negotiators get ready to talk trade, the UK's automotive sector highlights just why a transition deal is needed

With talks in Brussels finally moving on to what our future trading relationship will look like with the European Union, businesses can now have greater confidence that the UK can get a good deal. But there are no guarantees – and the devil is in the detail.

Brexit uncertainty has already caused 40 per cent of firms to delay or cancel new investments, according to the Bank of England. The same percentage has told the CBI that Brexit has already made it more difficult to recruit and retain staff. So companies are now watching closely for a transition deal, promised early next year, to stave off acting on contingency plans that could do further damage to the economy.

Businesses still need to prepare for Brexit Day 1.

The automotive industry is just one sector where companies are speaking out about the consequences should agreement fail to materialise. As one of the most prepared, it’s also a good example to highlight what the issues are when trading relationships change – and, whether you’re talking about the smallest part or the UK’s global standing, it shows how widely the impact could be felt.

Just-in-time delays

Automotive supply chains are particularly exposed. 60 per cent of parts supplied for cars built in the UK are imported. The Society of Motor Manufacturers and Traders (SMMT) equates that to 1,100 trucks crossing into the UK from the continent every day.

The weaker pound and the possibility of having to pay tariffs has price implications for those parts, which could be problematic when the industry typically operates on small margins – but the bigger issue is what delays would mean for the industry’s just-in-time delivery models if customs barriers are put in place.

Your supply chain is only as good as your weakest link

Honda in the UK, for example, oversees 2 million component movements each day and only keeps a couple of hours’ worth of parts on the production line. Speaking to the parliamentary BEIS Select Committee in November, the company’s government affairs director Patrick Keating said it would take 18 months to set up the necessary procedures and warehouses if Britain left the customs union, but even those measures wouldn’t fully protect the business from even minor delays on imports.

“Your supply chain is only as good as your weakest link,” says senior vice president Ian Howells. Lower down the supply chain, his concern is for the SMEs who have never had to deal with customs, tariffs, VAT or duty guarantees on imports as they have never had to trade outside the EU – or have simply not realised the supply chain implications for their own parts.

“They need to be as ready for this as we are,” he says. Honda has ramped up its communications with them to that effect and Howells argues there is also a role for Government in supporting SMEs. 

Supply chain choices

Although the industry’s ambition is to invest more in the UK supply chain regardless of Brexit, it is a solution for the long term, which requires the government’s continued support and commitment to its industrial strategy.

“The SMMT and the Automotive Council have been working on this for years,” says Howells. “The dial has moved but there is still a lot of work to be done as the sector deal acknowledges”. 

And currently, even if a car manufacturer wanted to build a car solely from UK parts, it would only officially manage 40 per cent – and many manufacturers believe the real figure is closer to 25 per cent.

That brings another difficulty into the spotlight: under ‘rules of origin’, current free trade agreements stipulate that local content must reach 60 per cent. If UK car manufacturers aren’t allowed to include EU parts in their figures, exports would likely fall automatically under the higher tariffs prescribed by the World Trade Organisation – adding significant costs to an industry that exports upwards of 75 per cent of its cars.

And in this respect, businesses don’t just need clarity on the trading relationship with Europe. Honda, for example, regularly ships parts between the UK and its “daughter plant” in Turkey, under the country’s free trade agreement with the EU. This could become more problematic after Brexit unless the UK negotiates a similar deal.

Investment risk

From a supplier point of view, nerves around the uncertainty and the effect it could have on their customers are already a factor in investment decisions.

Unipart chief executive John Neill, for example, says that Brexit and the ongoing threat that the government might fail to achieve frictionless trade “piles a load more risk on top” of investment decisions that are deemed high risk anyway.

Operating under WTO rules or conditions of high friction risks making the industry un-investible

Highly automated equipment has a multimillion pound price tag, he explains, and typically takes 18 months from decision, through build and then commissioning for volume production, with the payback coming over many years. If it goes wrong, you not only have to write off the equipment but face significant exit costs.

“Those who naïvely say we can operate under WTO terms simply don’t understand that it will massively damage the competitiveness of the industry, just as these investments are going to come on stream,” he says.

He too argues that it is not simply tariffs he is worried about, but the disruption caused by customs barriers. “If we have gridlocked supply chains and we can't predict them, the cost of inventory and stop/start on production lines will increasingly make the industry uncompetitive,” he says.

“Operating under WTO rules or conditions of high friction risks making the industry un-investible.”

Competitiveness takes a hit

And it is the UK’s competitiveness in a global context that worries Ford’s vice-president for Europe, Middle East and Africa, Steven Armstrong. He has suggested the car giant might have to move parts of the business out of the UK if its facilities here can no longer compete with their counterparts around the world.

“We're in one of the most competitive industries in the world, in one of the most competitive markets in the world,” he told Business Voice in November. “When you add indecision and uncertainty to that, it makes it very difficult for us to plan our business appropriately.” 

“Ford doesn’t want to exit the UK,” he told delegates at the CBI Annual Conference. “But we might if the UK is not competitive. It’s why we need a clear view of what the final agreement will be.”

For him, though, it’s not just about getting parts to a production line. He depends on free movement of people for the research and development that Ford invests in in the UK.

Regulation outsiders

Aston Martin has a slightly different perspective on the issues at stake. For the luxury car manufacturer, pressure on margins and just-in-time delivery are less pronounced. But as a small business it faces the tricky prospect of having “an awful lot of money tied up” if its cars stay sat at ports awaiting customs clearance, says chief executive Andy Palmer.

Post Brexit our influence will undoubtedly wane

But the biggest issue he foresees is around regulation. Type approval can take up to 30 months to process – and car manufacturers such as Aston Martin don’t know if the current regime, through the government’s Vehicle Certification Agency (VCA), will be accepted on exports to the EU in the case of a hard Brexit. It can use alternative bodies in Europe to cover its new models after 2019, which will include the next iteration of the Vanquish and the DBX SUV, but “we need to decide which to use by the end of the year”, says Palmer, “especially as the European agencies have limited capacity.”

Outside the EU, and with no footprint in Europe, he worries Aston Martin will lose any influence over future European regulations too – which could have bigger ramifications for a small luxury car manufacturer, than it would for some of the larger multinationals.

“We’ve worked hard as an industry to see small volume manufacturers such as Aston Martin and the specific issues we face recognised by the EU. Post Brexit our influence will undoubtedly wane,” he adds.

Knock-on effect

These are only a glimpse of the issues that one of the UK’s strongest manufacturing sectors is facing as it braces for a hard Brexit. There are plenty of other businesses, ports and communities that will feel a knock-on effect.

But there is also plenty of opportunity in the car industry as it adopts new technology, and with moves to electric and automated vehicles. A comprehensive modern industrial strategy will support those advances and improve the supply chain in the UK – but without a good Brexit, the country’s world leading status is under threat.

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