Jaguar Land Rover (JLR) faces a billion-pound Brexit problem. It manufactures more cars in the United Kingdom (UK) than any other company and exports a plurality of its cars to the Eurozone . The specific trade policies of the post-Brexit world are yet unknown, but JLR’s worst-case scenario accounts for a new 4% import tariff on supplies from the European Union (EU) to the UK and a new 10% export tariff on finished cars shipped from the UK to buyers in the EU . Approximately 40% of JLR’s supply chain spend is devoted to sourcing components from the EU, so it is particularly exposed to any new import tariff . In June 2016 JLR’s chief economist estimated that such import and export tariffs would erase one billion pounds of pre-tax profit in the year 2020, more than half of JLR’s total pre-tax profit of 1.6 billion pounds in 2016 .
Brexit’s effects on JLR’s supply chain costs could not only jeopardize the company’s short-term profitability but also its long-term growth. CEO Ralf Speth claimed in September 2017 that “inward investment [now] takes longer or is reduced, so the number of suppliers that we can convince to come to the UK is really more or less limited” in the wake of the Brexit referendum . Not only is JLR’s UK manufacturing already constrained by Brexit: its supply chain expansions overseas are also taking a hit. The company paused construction of a billion-pound plant in Slovakia until it better understands how Brexit will affect future profitability . Prior to the referendum JLR committed to broadening its product lines and thus is especially vulnerable to Brexit-related supply chain costs that could limit the growth of manufacturing operations .
In the short-term JLR’s management is lobbying the UK’s government to protect it from the supply chain costs of new tariffs . Results of JLR’s efforts are unknown, but industry insiders have reported that Nissan already received assurances that the government will subsidize some Brexit-related costs to its UK manufacturing operations . Based on this precedent and the UK government’s stated desire to “effectively pursue and protect our interests abroad” while negotiating post-Brexit trade policy, such lobbying could offset some of JLR’s Brexit burden . However as tariffs are negotiated over the next two years, it will likely prove more difficult for JLR and its peers to obtain concessions from the EU, which is less incentivized than the UK is to protect these manufacturers.
Over the long-term JLR is poised to defray some Brexit costs by expanding its overseas manufacturing, thus avoiding new tariffs imposed on UK operations. For example, it partners with Chery Automobile to produce some vehicles in China and last year opened its first company-owned overseas plant in Brazil . But with a majority of its vehicles still being made in the UK, JLR would need to accelerate this trend to more fully counteract the consequences of Brexit .
Although JLR has appealed to the UK government to support its short-term profitability, it should do more to entice EU members to negotiate trade deals favorable to the company. Some increased supply chain costs would likely be passed on to Europeans purchasing JLR’s cars. By demonstrating this cost to Eurozone consumers, JLR could incentivize the EU to support lower export tariffs on UK-made vehicles. That said certain member-states, like Germany, may seek to advantage their domestic automakers (which of course compete with JLR) by favoring higher tariffs on UK exports . JLR would need the UK government to threaten counter-tariffs on EU exports to the UK in the event of such a threat in order to dissuade protectionist policies. Demonstrating that all parties benefit from lower (or no) tariffs will help JLR obtain favorable outcomes in the ongoing Brexit negotations over the next two years.
To further offset long-term costs of Brexit, JLR should shift its UK operations toward supporting innovative product lines (assuming these have better profit margins than do traditional vehicles). JLR announced in June 2017 that it will hire 5,000 new, mostly UK-based, engineering and manufacturing personnel to support its autonomous and electric vehicle development . Aside from this, JLR should also partner with UK-based suppliers to ensure that as many new vehicle parts as possible can be made in the UK and not the EU. While supply chains for traditional vehicles are well-established, JLR has the opportunity to invest early on in UK suppliers of innovative parts to minimize import tariffs on parts. But given the unpredictable and potentially dire effects of Brexit on JLR’s supply chain costs, does it still make sense for the company to adhere to its identity as “a British company [whose] headquarters will remain in the UK” or should it relocate and divest from its UK operations as quickly as possible ?
- Peter Campbell, “Hard Brexit Will Leave Us Uncompetitive, Says Jaguar Land Rover,” Financial Times (September 28, 2016).
- Costas Pitas, “Jaguar Land Rover Could Face 1-Billion-Pound Brexit Hit,” Reuters (June 21, 2016).
- Costas Pitas, “Jaguar Land Rover Warns Brexit Deterring Suppliers, EU Workers,” Reuters (September 7, 2017).
- Ed Wiseman, “What Does Brexit Mean for Drivers, the ‘Booze Cruise’ and the UK Car Industry?” The Telegraph (June 2, 2017).
- Costas Pitas, “UK Says Brexit Talks with Bentley Motors Must Remain Confidential,” Reuters (May 15, 2017).
- Trefis Team, “Brexit Could Be Good or Bad News for Jaguar Land Rover,” Forbes (July 25, 2016).
- Costas Pitas, “In Brexit Boost, Jaguar Land Rover To Hire 5,000 Staff,” Reuters (June 18, 2017).