Nissan after Brexit: Driving Manufacturing out of the UK?

Could isolationist Brexit policy derail the automotive manufacturing industry in the UK? According to leadership at Nissan’s Sunderland plant in Northeast England, supply chain complications stemming from Brexit cast doubt on the future of Nissan’s UK manufacturing operations.


Context:

The Nissan automotive manufacturing plant in Sunderland, UK is uniquely vulnerable to supply chain disruption for several reasons. First, the plant imports nearly 60% of the parts required for manufacturing [1]. As a result, plant operations are especially vulnerable to the increase in tariffs which could result from Brexit. Colin Lawther, Senior VP of Manufacturing Supply Chain at Nissan, estimates that the increase in tariffs following Brexit could cost the company over £600m [2], rendering the operation unsustainable in the long-term.

Nissan VP Colin Lawther testifies before Parliament.

Moreover, logistical complications resulting from importation delays due to customs could impede Nissan’s manufacturing model, currently the fifth most efficient automotive manufacturing operation worldwide [3]. The plant relies on only 3% downtime (or 6 minutes per day) in manufacturing operations [4] and maintains only one-half day’s inventory in stock. Thus, small disruptions in the supply chain could render the plant unable to fulfill orders on time. Unfortunately, the global supply chain upon which the Sunderland plant relies is not easily replicable in the UK—according to Lawther’s testimony before a parliamentary committee, the “UK supply base is not competitive globally…” [5]. Finally, the additional tariffs would not only impact the supply of chain of parts imported by Nissan, but it would increase the cost to export finished cars; the Sunderland plant exports approximately 60% of its cars to the EU.

Work-in-progress at Nissan’s Sunderland plant.

Nissan’s response:

Nissan management has taken several immediate steps to preempt potential supply chain issues in the wake of the Brexit vote. First, Nissan officials have lobbied the UK government to bolster the supply base within the UK, requesting a £100m fund to attract suppliers in order to build this infrastructure. Before the UK International Trade Committee, Lawther lamented that “[i]f we don’t as a country really invest in the supply base, my fear is that it will be a house of cards effect” [6]. He further suggested that, absent assurances from the UK that the government would subsidize an expansion of the supply base internally, Nissan would have to consider other manufacturing options outside the UK.

In the long-term, Lawther also vowed to consistently reevaluate the UK government’s commitment to supporting Nissan’s supply chain: “As those circumstances change, and we wouldn’t wait until the end of the process, we will continually review the decisions that we take, based on anything that materially changes” [7]. Furthermore, Lawther suggested that Nissan could eventually divert resources from its Sunderland plant to its U.S. plant in Tennessee or one of its Japanese plants. Still, it is possible that such drastic measures would never be required, as the UK could negotiate favorable trade agreements with the EU in order to maintain low supply costs for Nissan and other automotive manufacturers.

Way ahead:

In evaluating the way ahead for Nissan’s Sunderland plant, the first step is to determine the tradeoff between additional costs resulting from tariffs imposed on UK imports and exports versus the higher cost of shipping cars manufactured at another plant already in operation (e.g., a Japanese or American plant). For example, even with a 10% tariff on parts imported into the UK, it might still be more cost-effective to manufacture automobiles in the Sunderland plant in order to reduce shipping costs to consumers in the UK and EU.

Next, supposing that manufacturing automobiles at another plant and shipping them to the UK and EU is not cost-effective, Nissan should consider vertical integration of its supply chain in the UK. Because the Sunderland plant maintains low inventory and relies on limited downtime, Nissan would benefit from plant workers maintaining more control over their suppliers, particularly as the automobile supply base in the UK would likely experience difficulties as it expands and matures. At the very least, the Sunderland plant could explore partnerships with it suppliers to help them streamline their processes.

Finally, Nissan could also consider relocating its Sunderland plant to another country in the EU. This new plant would have tariff-free access to the rest of the EU and would have the capacity to ship to the UK at a relatively low cost.

 

Questions for further consideration:

  1. Is reliance on the UK government to support expansion of the UK supply base a viable strategy?
  2. What are the obstacles to vertical integration of Nissan’s supply base in the UK?

 

Word Count: (766)

 

Works Cited

[1] Auto Express. (2017). Nissan asks for £100million boost to UK supply industry. [online] Available at: http://www.autoexpress.co.uk/nissan/97259/nissan-asks-for-100million-boost-to-uk-supply-industry [Accessed 15 Nov. 2017].

[2] ibid.

[3] Ft.com. (2017). Nissan asks for £100m supplier fund to safeguard UK car industry. [online] Available at: https://www.ft.com/content/9bd3e876-fddc-11e6-96f8-3700c5664d30 [Accessed 15 Nov. 2017].

[4] Automotive Logistics. (2017). Nissan outlines UK supply chain and Brexit concerns – Automotive Logistics. [online] Available at: https://automotivelogistics.media/news/nissans-lawther-warns-parliamentary-committee-supply-chain-concerns [Accessed 15 Nov. 2017].

[5] ibid.

[6] ibid.

[7] Carroll, L. (2017). Brexit means taxpayers need to support supply chain, says Nissan. [online] the Guardian. Available at: https://www.theguardian.com/business/2017/feb/28/brexit-taxpayers-support-supply-chain-nissan-sunderland-car-auto [Accessed 15 Nov. 2017].

 

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10 thoughts on “Nissan after Brexit: Driving Manufacturing out of the UK?

  1. Interesting reading!

    This case is especially relevant from a strategic business perspective as we are not only talking about a company leader in the industry overall, but within the company the Sunderland plant present a major productivity and cost advantage.

    I would like to dig deeper in a point that you have presented regarding the convenience or not of a local vertical integration of Nissan in the UK due the Brexit consequences for importing materials from other countries. From a pure strategic perceptive the decision of vertical integration depends of basically two elements: i) how competitive is the market upstream in the supply chain and ii) what is the relative power of Nissan over the suppliers upstream in the supply chain. The greater the competitive of the market upstream and the relative purchasing power of Nissan, indicate that more than a vertical integration, Nissan should seek to transfer it’s request and demands to the suppliers or to explore partnership alternatives, as you mentioned in your essay. Even in the case there is a lack of local suppliers in the UK, one alternative for Nissan is to start developing them based on a relevant volume that the car company can guarantee to these new suppliers.

    From my perspective in these kind of tradeoffs we never have to forget what are the core competitive advantages of a company, and always looks askance when companies make jumps to business where is not clear that they have an advantage over the others players in the market

  2. Very interesting read! I think Nissan should also join together with other automobile makers (who I would assume are facing similar issues) to step up the pressure on the UK government. Together, they will hopefully be able to use their collective influence to either lobby for funds to attract/develop suppliers or to lobby for favorable trade agreements. Or, perhaps, Nissan can use this as an opportunity to make a strategic entrance into a different EU market/country and set themselves up for future, long-term growth.

  3. Vertical integration is a viable option if manufacturing and shipping automobiles is not cost effective. I would also look at other factors other than cost like: speed to market, and experience and expertise in manufacturing automobiles. There are many obstacles to vertical integration, which would need to be a longer-term solution. Building a new plant would be time intensive and expensive-Nissan would need to provide a large capital investment, hire a large employee base at all levels (operators, engineers and management), and manage an effective supply chain for not only Nissan but also its other customers in order to keeps costs and inventory levels down.

  4. The essay reminds me of a discussion I had recently with some bankers. We raised the question “who really benefited from Brexit”. One interesting perspective is that at least for banking, New York i/o Dublin or Frankfurt is the final beneficiary. Because in the short run, neither Dublin nor Frankfurt has the infrastructure such as housing, hospitals, educational institutions to satisfy the need of employees in finance. Consequently, financial institutions will rather choose to move their services back to America.
    What I want to point out is that although Brexit is an act of isolation, the impact is an example of globalization. Isn’t that ironic?

  5. Really well written and sound logic! I find this topic extremely interesting because this Nissan plant is the poster child for why free trade and specifically within the Schengen Area is so attractive. With Brexit, this throw the entire supply chain and viability of the factory into question. A couple of points to consider:
    1) With the massive devaluation of the British Pound, Britain’s labor and supply market has become cheaper. As a result, selling cars in Europe for Euros while costs are in British Pounds would be a potentially positive outcome from Brexit. Do you think this currency arbitrage would continue to exist in the future?
    2) You really have the British government in a bad spot. Nissan leaving Great Britain would be such a PR disaster for the country in the wake of Brexit that they will likely give massive concessions to keep you in country. I would question the author on the potential asks of the British government for help in a post-Brexit world.

  6. I am skeptical that vertical integration in the UK will be cost effective without the help of the UK government to bolster the supply base, and would urge Nissan to evaluate other EU markets. I am also curious what factors could be evaluated to assess the likelihood the UK government will come through with subsidization? Such as past investments and how many other companies/industries are currently lobbying for similar infrastructure investment?

  7. Great article! I’d be interested to know if other car manufacturers will be affected by Brexit to this extent. To the extent there are several, they could form a consortium to have increased leverage against the UK government for subsidization. However, this is not a short-term solution. The benefits of investing in the local supply base are probably reaped over the long-term. How does Nissan continue to compete on price in the short- to medium-term?

  8. Very interesting article. While tempting to assume that the UK government will take the necessary steps to ensure that Nissan keeps its manufacturing operations in the country, due to the importance of the UK automotive industry and the negative publicity that would ensue from a departure, Nissan would do well to be cautious and maintain its optionality [1]. In addition to continuing to make its case that the government provide adequate relief and support local parts suppliers, Nissan in the near term should be cautious about making high-value, long-term domestic capital investments until it has more clarity on the direction of public policy [2].

    The UK automotive industry more broadly has reined in domestic capital investments to reduce downside exposure to a hard Brexit. The aggregate £1.66 billion invested in the sector last year represented a 30 percent reduction relative to 2015, reflecting deferral of non-essential capital expenditures following the June 2016 referendum [3]. In light of the magnitude of the fixed, upfront investments that Nissan requires to build out manufacturing operations, planning for the future means taking definitive actions to adjust its spending today.

    —–

    1. Fraser D. EU Trade “Linked to 134,000 Scots Jobs.” BBC News. http://www.bbc.com/news/uk-scotland-scotland-business-42159320. Published November 29, 2017.
    2. Campbell P. Investment in UK Car Industry Plummets amid Brexit Uncertainty. Financial Times. https://www.ft.com/content/0c3427b2-5ce1-11e7-9bc8-8055f264aa8b. Published July 2, 2017.
    3. Campbell P. Car Industry Faces £4.5Bn Bill without Brexit Deal. Financial Times. https://www.ft.com/content/e00fbc9e-d438-11e7-a303-9060cb1e5f44. Published November 28, 2017.

  9. This is a really interesting read Brad. To your question on the viability of relying on the UK government to support expansion of the UK supply base – this feels to be a reasonable assessment. There is a significant incentive for the UK to preserve manufacturing jobs in the UK to mitigate the controversy and public concerns over Brexit. However, their ability to control factors such as trade agreements with Europe, mitgration laws and import duties will be limited by the ability of Brexit negotiators to persuade the EU that it is mutually beneficial. The benefits to the EU are not as clear and therefore it will be interesting to see how Nissan’s response evolves over the course of the next year as the reality of the implications of Brexit emerge.

  10. As owner of Brad’s Bags I am proud to have you write this essay. Very interesting perspectives on the challenges for Nissan in regards to the challenges with Brexit. The question is how accurately Nissan can determine its shipping costs. Given your analysis, I would estimate that Nissan could fair better at closing the UK plant and shipping its vehitcles abroad especially from another EU nation. Regardless, Brexit poises significant risks to many aspects of the British economy and Britain’s leaders should advises of these implication especially in regard to the international corporations that operate within its borders. Nissan certainly faces myriad challenges regarding the longevity of its supply chain given the looming policies of Brexit.

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