Brexit and the UK automotive industry – How can Jaguar Land Rover remain competitive?

Brexit threatens to disrupt Jaguar Land Rover's cross-border and interconnected supply chain. How can Jaguar Land Rover remain globally competitive in an ambiguous international trade environment?

If you drive one of the 600,000 JLR vehicles that were built in the UK last year, it is probable the steering wheel was manufactured in Germany, the electronic control system came from Romania, and the airbags arrived via Poland[1]. Indeed, more than half of the 30,000 components in an average British-made car are sourced from abroad[2]. Until June 23, 2016 that exemplified a feat of modern supply chain logistics. Now, with the impending departure of the UK from the EU, it is less of a wonder and more of an issue. The project of European integration has fostered the development of supply chains that are highly optimized, multi-tiered, and dependent on the smooth flow of goods, services, and labor across borders[3]. Increasing protectionism and the risk of Brexit, however, are threatening to disrupt the interconnectedness of global supply chains.

Jaguar Land Rover (JLR) currently buys 40% of its materials from Europe and generates 80% of its sales abroad[4]. The UK’s departure from the EU, would entail issues such as rules of origin, customs delays, tariffs and regulatory diversion[5], all of which have the potential to harm the production of JLR. Under trade rules that the UK is likely to face after Brexit, the carmaker could attract tariffs as high as 10% on vehicle movements between the UK and EU and 4.5% on imported component parts[6]. Consequently, an additional cost of up to £2,372 may affect JLR’s profitability per car, eliminating its profit margins[7].

How will JLR fight the threat of rising costs and who will bear the burden, its customers, or its supply chain?

Responding to the risk of Brexit, JLR has sought to attract international component manufacturers and suppliers to move their production to the UK[8]. In theory, Brexit offers an opportunity to stimulate local production of components, enhancing the industrial base and the broader economy. Indicatively, for the recent launch of the Range Rover Velar, JLR convinced the French bumper company, Plastic Omnium, to set up operations in the UK[9]. The carmaker has even promised Plastic Omnium more work supplying other models in the JLR range[10].

However, in an indication of the wider dilemma for the automotive industry, JLR has also sought to ramp up international expansion and minimize exposure to the risks of Brexit by opening its first engine plant outside the UK, in China[11]. JLR already has a joint venture in China and by building an engine facility on the same site, it aims to cut shipping costs from the UK to Asia[12]. By manufacturing engines closer to the point of sale, JLR achieves quicker turnaround times from factory to shelf[13]. Also, it reduces the reliance of its Chinese business on British parts at a time when Britain’s trading relationship with the rest of the world is unknown.

But attracting more suppliers to produce in the UK and diversifying its production base are not the only steps that JLR must take in order to address the threat of Brexit.

JLR’s decision to invest in local parts procurement and production to offset potential increases in import costs, should be accompanied by investments in automation technologies and increased manufacturing capacity[14]. Automation in its factories and processes will allow JLR offset some of the high labor costs associated with producing in the UK[15]. Similarly, expanding manufacturing capacity is a key way to achieve economies of scale in undertaking operations that were originally outsourced to other European countries.

Another necessary step that JLR management should take, is to reconsider its talent strategy[16]. The single European market allowed the free movement of labor. This, however, can no longer be taken for granted, and JLR could find itself at a disadvantage. In light of the rapid technological advancements in the automotive industry, technical staff and skilled engineers will be required to ramp up the development of self-driving and electric cars[17]. It is therefore imperative that JLR addresses the potential gap in key roles as that can result from restricted access to a skilled workforce from the EU.

To conclude, JLR’s interconnected supply chain, which is based on cross-European manufacturing, faces some serious challenges in light of Brexit. The carmaker will need to decide whether to invest in local parts procurement and production, re-shore manufacturing operations, or diversify its manufacturing locations in order to offset exposure to the risks of Brexit. In light of all of this, JLR will also need to consider how it can automate more of its manufacturing processes and what its supporting talent strategy should be. A key question remains open, however: How should JLR balance its response to the ambiguous external trade environment with the requirement to increase investment in new technologies, such as e-mobility and driverless cars?

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[1] Peter Campbell and Michael Pooler, “Brexit triggers a great car parts rate for UK auto industry”, Financial Times, July 30, 2017, [https://www.ft.com/content/b56d0936-6ae0-11e7-bfeb-33fe0c5b7eaa], accessed November 2017

[2] Automotive Council News Release, “Rise in amount of British parts used in British car production as manufacturers boost UK automotive supply chain investment, finds new research”, June 20, 2017 [https://www.automotivecouncil.co.uk/wp-content/uploads/sites/13/2017/06/170620-Auto-Council-release_Rise-in-British-parts-used-in-British-car-pr….pdf], accessed on November 2017

[3] Carlos Mena, Andrew Humphries, Thomas Y. Choi, “Toward a theory of multi-tier supply chain management”, Journal of Supply Chain Management 49, 2 (April 16, 2013): p.2-3

[4] Peter Campbell and Michael Pooler, “Brexit triggers a great car parts rate for UK auto industry”, Financial Times, July 30, 2017

[5] OECD, “Protectionism? Tariffs and Other Barriers to Trade”, International Trade: Free, Fair and Open?, (Paris: OECD Publishing, 2009), p. 54-75

[6] SSMT, SSMT Motor Industry Facts 2017, [https://www.smmt.co.uk/wp-content/uploads/sites/2/SMMT-Motor-Industry-Facts-2017_2-online.pdf], accessed on November 2017

[7] Ibid

[8] Peter Campbell and Michael Pooler, “Brexit triggers a great car parts rate for UK auto industry”, Financial Times, July 30, 2017

[9] Ibid

[10] Ibid

[11] Peter Campbell, “Jaguar Land Rover opens first engine plant outside UK in China”, Financial Times, July 20, 2017, [https://www.ft.com/content/2bfdae04-6d5f-11e7-bfeb-33fe0c5b7eaa], accessed on November 2017

[12] Ibid

[13] “Brexit triggers a round of reshoring”, The Economist, October 19, 2017, [https://www.economist.com/news/britain/21730479-firms-shorten-their-supply-chains-divorce-europe-nears-brexit-triggers-round], accessed on November 2017

[14] Thomas Seal, Jill Ward, “Cars made in UK may struggle to be British enough post-Brexit”, Bloomberg, August 21, 2017, [https://www.bloomberg.com/news/articles/2017-08-21/cars-made-in-u-k-may-struggle-to-be-british-enough-post-brexit], accessed on November 2017

[15] Christoph Knoess, Ron Harbour, Steve Scemama, “Prepare your workforce for the automation age”, Harvard Business Review, November 23, 2016

[16] Ibid

[17] Ibid

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7 thoughts on “Brexit and the UK automotive industry – How can Jaguar Land Rover remain competitive?

  1. This article quantifies how severe the threat of Brexit is on JLR’s bottom line. At an expected increase of cost of goods sold of GBP 2,372 per vehicle in a highly price competitive industry I think JLR needs to prioritise minimising the impact of Brexit over any other project. Given that Brexit will begin in Spring 2019, JLR has a very short time to alter its supply chain especially if this means getting its partner suppliers to build new manufacturing facilities in the UK or changing suppliers to be less heavily dependent on the EU.

    The article also raises the potential of forming joint ventures with suppliers in China which could be a potential advantage to gain increase market share of sales in Asia. Previously under the EU there was high incentives / political pressure to keep as much manufacturing in the EU in order to create jobs even if this wasn’t necessarily the most cost-efficient mechanism to produce cars. In return, European companies would benefit from not having to pay taxes to move cars across borders. However, for cars sold in Asia JLR can potentially gain a competitive edge on European suppliers by not being bound to manufacture in Europe as they already have to pay taxes anyway after Brexit. The joint venture would allow them to closely control design and quality while gaining a cost advantage of cheaper labour costs and lower logistics costs as the cars are being produced closer to the end user. This can be a very interesting approach to actually turning Brexit to a potential cost advantage in markets outside Europe.

  2. Elli, you make an excellent illustration of the impact of Brexit on JLC’s supply chain. It is quite clear that, in an effort to protect domestic jobs, British authorities are negatively impacting JLC’s supply chain, undermining the company’s global competitiveness. In addition to increased tariffs from parts imports from the EU and finished goods exports to the EU, JLC will also face increased costs because of more cumbersome customs processes. According to the Economist, the free flow of auto parts across British borders enables manufacturers to maintain razor-thin inventories, keeping costs down. If border controls increase the variability of customs process times, then manufacturers will have to maintain higher inventories, reducing margins.

    With regard to your strategic recommendations, the Economist article also mentions that recent heavy investments have already made British auto manufacturers highly efficient, so the benefits of investing in automation are likely marginal and the company will be forced to launch operations abroad. An additional open question is how JLC can balance domestic vs. foreign production to minimize the new investments required. The Economist article suggests that JLC and its peers are likely to offshore the production of new models while maintaining local production of existing ones.

  3. Eli, raises a great question in the end by asking, “How should JLR balance its response to the ambiguous external trade environment with the requirement to increase investment in new technologies, such as e-mobility and driverless cars?”

    I believe that the post-Brexit world has indeed created sound conditions for JLR to focus on innovations such as driverless cars. It is a boon rather than a bane. Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders (SMMT), said that several factors meant that Brexit Britain could be better suited to support the development of the fledgling technology than a UK inside the EU. UK has a more liberal attitude than much of Europe to the internet communications used by technologies like driverless cars, meaning legal issues around testing the vehicles are likely to be less complicated. The opportunity to escape from European red tape could further make the UK a friendly location for testing. In addition, David Cameron’s government announced the Modern Transport Bill, which was intended to reduce restrictions on automated driving and update the legal system to reflect emergent technology [1].

    Endnotes
    [1] Campaignlive.co.uk. (2017). Brexit could be a boon for driverless cars, says auto industry body. [online] Available at: https://www.campaignlive.co.uk/article/brexit-boon-driverless-cars-says-auto-industry-body/1403950

  4. Elli, you bring up many interesting strategies that JLR is using to mitigate increasing costs due to Brexit, including moving component manufacturing and suppliers to the UK, hiring skilled workers from the EU while it still can, and partnering with Chinese manufacturing companies. I wonder is it possible to relocate JLR headquarters and incorporation to a different country and avoid the upcoming UK Brexit penalties you mentioned? I am not certain what the costs would be to reincorporate in a different country, but for 600,000 cars to lose £2,372 in margin would be a roughly £1.4 billion dollar loss every year. If the costs to reincorporate were less than say 10 years of losses, then it might be in the company’s best interest to relocate.

    In response to your thought “How should JLR balance its response to the ambiguous external trade environment with the requirement to increase investment in new technologies,” the big concern I see with JLR pursuing self-driving cars and automation of manufacturing plants as you mentioned is the timeline of Brexit. It is unlikely that self-driving cars will be ready in time to differentiate JLR, and I worry that automation of manufacturing plants (including delays, budget overruns, etc) will be completed in time. It appears that JLR will be hit hard regardless and that many of the strategies you outlined above are the best immediate steps they can take to reduce their exposure on supply chain costs.

  5. Elli, this is a very intriguing article.

    The outcomes of Brexit still remain in the grey area. The current estimate of tariffs up to 10% of its exports will be a game changer. Given that JLR is Britain’s largest carmaker, there is an incentive for the local government to represent their best interest throughout the negotiation process with Brussels. To that effect, JLR should try to actively influence the British Government’s positioning by being a thought partner to this process. Having low to no import-export tariffs for this industry will be the best outcome. Otherwise, JLR will have to figure out how to mange the costs in order to remain competitive.

    In terms of the restriction on talent movement that will be improsed by Brexit, I think that JLR will need to design an attractive program that will draw key talent. All major corporations in the UK will be facing a similar talent choke and the war to secure the best will be heated. Alternatively, JLR can consider relocating functions such as R&D outside of the UK / Europe, however I’m not sure what additional barriers they will face from this.

  6. Elli, I think your excellent article has highlighted the difficult position JLR currently holds. Similarly to some previous comments, I agree that between their two biggest risks of Brexit and technology changes in the industry, Brexit is the one to focus more resources on. Out of the subcomponents of Brexit that you discussed, the one that stands out most to me and seems to be of least concern among others is the risk to JLR’s global talent pool.

    Should JLR focus more of its energy on attracting and retaining highly skilled and educated talent to manage the business, or should they hedge this risk by investing in more automation and technology to reduce their overall dependence on human capital? The latter seems more straightforward and likely to yield measurable results, but I believe they should adopt the former; competition for global talent continues to increase and the only way they can prepare for future, currently unknown risks is to have the best people possible on their team.

  7. Elli, great article. It is interesting to see how the effects of isolationism here are somewhat different than for automakers in the US, which is a much larger market in its own right. Since JLR is exposed to such a high portion of international sales relative to its sales in the UK, I believe it is actually more likely that in the long run production shifts away from the UK. This shift would likely follow the model the company has established in China, whereby it might produce in conjunction with a Tier 1 supplier. Then the core competency of its business slowly becomes the design, aesthetics, and marketing of the luxury vehicles, rather than the production of them. I wouldn’t be surprised to see a large amount of production shift to China to capture not only the sales of the Chinese market, but on the production side to capture the benefits of labor arbitrage. That in conjunction with increased levels of automation could be a very powerful combination. On balance I would say that, given the Brexit environment, JLR stands to gain more by leaving the UK rather than doubling down on it.

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