The last few months has seen what will surely prove to be the beginnings of a seismic shift in the social and economic fabric of the UK; once Article 50 has been triggered, the country’s politicians will begin the task of unpicking our membership of the EU.
Far beyond the sensationalist media headlines, the business community is now left with a sobering set of complex and significant issues. This will cause businesses of all types and across many sectors significant pause for thought and chief amongst these will be the UK’s automotive manufacturing sector. This has and continues to divide opinion throughout the sector and beyond – so just what does BREXIT mean for UK automotive manufacturing?
Automotive manufacturing in the UK - both the car builders and the supply chain that it feeds – is almost as old as the motor car itself. The sector has for a very long time been an integral part of the UK’s industrial base, with a long tradition of providing jobs for millions. But only in more recent times has it become the success story that it is today.
To put this in some context…
The UK automotive sector has become synonymous with export led recovery in the UK. The Society of Motor Manufacturers and Traders (SMMT) found that nearly 80% of all vehicles produced here are in left-hand-drive specification – destined, in other words, for overseas markets. This reflects changing patterns of consumption – whilst in Europe, there is a tendency to down size to more fuel efficient cars, there remains a strong demand in emerging markets for status symbol SUVs. This also means that the one time fascination with the ‘all electric’ vehicle has faded a little – for the time being, at least – with the emphasis firmly on perfecting hybrid technologies, harnessing electrical propulsion with the familiar internal combustion engine.
So manufactured output of vehicles in the UK has in the last 18 months hit an all-time high – more than the high-water mark of the BL days of the 1970s, when an industry crippled with restrictive practices was entering terminal decline. Although this was to set the scene for the largely foreign-dominated ownership we see today, nonetheless it has had very positive effects on the UK economy – these companies pay UK corporation tax and provide substantial employment opportunities throughout the industry and beyond.
This success has created a large network of complex and high performing embedded supply chains, comprising highly skilled and specialised tier 1 and tier 2 organisations supplying the OEM builders. This includes a wide range of design-to-specification parts, from the simple to the sophisticated, including sundries and consumables, electronic and electro-mechanical sub-systems, transmissions, power units and complete sub-assemblies.
Accordingly, this means that the UK’s automotive supply chain operates a set of very complex procurement patterns, where the nature of supply agreements is long term and tied-in, typically over the life-cycle of a given platform. Of course, it is not impossible to disrupt these, but for all sorts of logistical and financial reasons, it is something that the OEMs tend to avoid.
And there is no reason to suggest this would happen – most OEMs have actually expressed a desire to buy more from the UK based supply chain, where possible. UK-based OEMs benefit from close proximity to market, which means lower logistics costs than might otherwise be the case. This also means speed and responsiveness to mid-lifecycle specification changes and the ability to offer more flexibility to volume and product mix fluctuations. Also – and by no means least – the UK is home to a wealth of unrivalled engineering and technical know-how. It’s no coincidence, for example, that Mercedes-Benz, one of the biggest names in world motorsport, does not build its world-beating F1 cars and power units in Germany, but in Northamptonshire.
It can therefore, be said with reasonable certainty that the UK automotive market is important to OEMs, as well as the mostly UK-based companies which supply them. But there’s a flip side to the coin, as the UK is also a mission critical market for non-UK based car builders selling their products here; despite more home-produced cars than at any time in our industrial history, there is no evidence that UK buyers are losing their appetite for the products of Mercedes-Benz, BMW or Audi, amongst others.
So what will Brexit mean?
In the short-term, very little – at the present time, politicians seem unable to agree on the timing of triggering Article 50, so at the moment, it’s essentially ‘talks about talks.’
But, without question, it was not the outcome the overwhelming majority of UK-based automotive manufacturers were hoping for. The attitude of the major manufacturers will be key in what happens next.
Jaguar Land Rover, whilst disappointed with the decision, is saying its business as usual, as has BMW, which also has significant investments in the UK. Ford, Vauxhall and Toyota are, on the other hand, being a little more circumspect and are adopting a ‘wait and see’ stance, though they are not blind to the implications of downward pressure on sterling and the increased competitiveness this will bring. Renault-owned Nissan have declined to make any comment, but having separately announced plans to sue the Vote Leave campaign, their views are probably clear enough!
In the supply chain, it is more of a split verdict, with around 57% of supplier’s executives viewing Brexit as not good for business.
However, taking on board the evidence and in particular, the highly developed UK supply chain, the sense of pessimism seems counter-intuitive.
What it will ultimately hinge on is negotiations on trading agreements and access to the single market and in this regard, the industry itself will have to go in to bat.
The reality is that significant investments and business plans have been committed to long before the referendum was even on the agenda. And with roll-out in many instances, well advanced, changing direction in this way would be rather like stopping a super tanker on a coin.
There is a substantial installed base of manufacturing capability built up around the OEMs needs. Relocating production to other countries does not just mean moving factories, but establishing a whole new supply chain, involving new quality standards, supply agreements, etc. and ramping up production once again. This, in an industry that likes it suppliers close at hand, will be a financial and logistical undertaking of military proportions.
Mutuality and vested interests will be key – one of the German car industry’s biggest export markets is the UK.
Nonetheless, the nervousness is understandable. For all this, though, the likely direction of travel is towards compromise and creating a tariff-free framework that will allow trade to continue. It is strongly rumoured that such as BMW, VW/Audi and Mercedes Benz are already lobbying their government for favourable conditions for the British car industry in return for favourable conditions for German cars in the UK, the French, Spanish and Italians will undoubtedly do similar.
It could almost be EU without the EU.
In the end, the parties involved have too much to lose. It not only requires the industry to stand up and be counted, but for calm and pragmatic heads to prevail in the forthcoming negotiations. Let us hope that is not too much to ask.
T: 0121 634 8804
E: [email protected]