Nissan at the Brexit Poker Table

Should Nissan, owner of the largest auto-making plant in the UK, be concerned about Brexit? The post discusses the implications of isolationism and invites debate over Nissan's actions.

In the five minutes it takes you to read this essay, the Nissan Sunderland plant in the UK – regularly praised as one of the world’s best – can produce ten new vehicles [1]. Eighty percent of its production goes overseas, and although most exports go to Europe, on a given day, Sunderland may be producing Qashqai model SUVs for a market like Costa Rica, one of its 100 export destinations [2]. In Costa Rica, the Qashqai’s extraordinary quality and competitive cost, both directly attributable to Sunderland, helped make it the #1 imported vehicle by volume in 2016, dwarfing figures for models produced in Korea, Japan, and elsewhere [3].

That is the power of global trade. It is precisely what isolationism – Brexit – threatens to destroy, and in this case, it is a key competitive edge for Nissan that may just go ‘poof’ in a few years’ time.

Brexit: Not Just a Europe Problem

New tariffs for EU-bound vehicles usually take the spotlight of Brexit concerns; however, the fact is that British government must negotiate trade agreements for all new trade partners, not just the EU. Maintaining equally favorable conditions as those enjoyed being a member state seems unlikely, and the key question for Nissan is whether autos will enjoy free trade from the UK into Europe and other key markets.

But new importing costs are not the only concern; production costs are also certain to rise. Equally hurtful, if not more, than new vehicle duties are tariffs on the plethora of imported parts that go into a UK produced car. Across the English car-manufacturing industry, only 41% of the vehicle parts are produced domestically [4]. Material costs are bound to increase, and the effect could even be compounded in some cases of EU sourced parts that travel back and forth across the Channel, worked on alternatingly in the UK and EU.

Lastly, seceding from the Customs Union, a highly likely Brexit implication, will directly affect Sunderland’s just-in-time operations. New customs controls and border inspections will delay and disrupt the free flow of parts sourced from Europe. Sunderland consumes up to 5M parts per day [5]. It’s high output level means the slightest increase in days (hours) of raw materials stock would produce noticeable cost increases.

Nissan Reacts (a Little)

Despite the huge implications of Brexit on the competitiveness of the Sunderland plant, Nissan’s top management has remained incredibly calm and has adopted a ‘wait-and-see’ approach. In a WSJ interview, Carlos Ghosn, chairman of Nissan, states:

“What is Brexit? What does it mean? We are business people, we can’t assume… [6]”

Perhaps the reason for Ghosn’s tranquility is the outcome of a closed-door meeting held with Theresa May in October 2016, from which Ghosn emerged with “an agreement … that the competitiveness of [Sunderland] would be preserved [7].” Neither parties disclosed how, but Ghosn mentioned as an example that tariffs may hurt Sunderland, but other factors like a weaker currency would work in their favor. Government would help ensure that these factors at least net out.

Even with these assurances and Brexit’s uncertainness, Nissan has not been entirely cross-armed. The company has been lobbying for vehicle free trade on both sides of the Channel, has asked the British government to remain in the Customs Union, and has started discussions about how to create a supplier base of high-tech auto parts from which to source domestically.

Age of Isolationism

Though Ghosn remains “reasonably optimistic that common senses will prevail on both sides” of the new UK and EU negotiations [8], Nissan should be doing much more contingency planning around Brexit and other isolationist threats. Brexit will eventually happen and it will hurt Sunderland’s competitiveness.

In the short term, Nissan should evaluate alternative plants from which to source production for the European market. This search for Sunderland alternatives should be made public to keep shareholders at ease, to incentivize bidding from the plants and their cities, and to add pressure on the British government to secure favorable Brexit terms for Nissan.

For the medium and long term, R&D investments on how to make production lines more versatile in terms of the models they produce is also something Nissan should consider. When analyzing alternatives for Sunderland, an unexpected candidate is the production plant of sister company Renault in Flins, France, where this January the Nissan Micra became the first Nissan passenger car to be produced in a European Renault plant. This cross-production capability may become a huge advantage for the Renault-Nissan-Mitsubishi Alliance in the new age of isolationism, enabling it to leverage the network of production facilities of all three companies to produce vehicles in locations where it is most trade efficient.

Instead, Nissan has recently commenced production of two new models in Sunderland [9]. Like others, is Nissan calling the UK’s Brexit bluff? Or is there simply not much else it can do?

(Word Count: 799)

Sources

  1. Graham Ruddick and Phillip Oltermann, “A Mini part’s incredible journey shows how Brexit will hit the UK car industry” The Guardian, March 3, 2017, https://www.theguardian.com/business/2017/mar/03/brexit-uk-car-industry-mini-britain-eu, accessed November 2017.
  2. “Nissan Announces 2016 UK Production Statistics,” press release, January 26, 2017, on Nissan Newsroom Europe Website, https://newsroom.nissan-europe.com/eu/en-gb/media/pressreleases/426175387/nissan-announces-2016-uk-production-statistics, accessed November 2017.
  3. Source: Database of Costa Rica New Vehicle Imports, AIVEMA, accessed November 2017.
  4. Graham Ruddick and Phillip Oltermann, “A Mini part’s incredible journey shows how Brexit will hit the UK car industry” The Guardian, March 3, 2017, https://www.theguardian.com/business/2017/mar/03/brexit-uk-car-industry-mini-britain-eu, accessed November 2017.
  5. Lisa O’Carroll, “Brexit means taxpayers need to support supply chain, says Nissan,” The Guardian, February 28, 2017, https://www.theguardian.com/business/2017/feb/28/brexit-taxpayers-support-supply-chain-nissan-sunderland-car-auto, accessed November 2017.
  6. “Carlos Ghosn Talks Globalization, Brexit and the Benefits of Japan,” interview by Peter Landers, Wall Street Journal, May 16, 2017, https://www.youtube.com/watch?v=RK6QQgPeQ_E
  7. “Renault Nissan CEO Ghosn on Brexit, UK Facilities,” interview by Francine Lacqua and Erik Schatzker, Bloomberg, January 18, 2017, https://www.bloomberg.com/news/videos/2017-01-18/renault-nissan-ceo-ghosn-on-brexit-u-k-facilities
  8. “Renault-Nissan ‘reasonably optimistic’ over Brexit,” interview by Daniel Gallas, BBC News, August 5, 2016, http://www.bbc.com/news/business-36981182
  9. Sam Dean, “Nissan to increase production in Sunderland by a fifth,” The Telegraph, August 28, 2017, http://www.telegraph.co.uk/business/2017/08/28/nissan-increase-production-sunderland-plant-fifth/, accessed November 2017.

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18 thoughts on “Nissan at the Brexit Poker Table

  1. If I were in Ghosn’s shoes, I would be worried. As you point out, there are numerous potential negative consequences of Brexit on Nissan and it seems fairly likely that Nissan’s cost structure will be impacted significantly.

    The good news with Brexit is that it did not happen immediately – companies have a few years to plan before it goes into effect. That being said, Ghosn should keep lead times into account. In order to stand up a new factory (or find enough existing facilities with excess capacity), Nissan will need a significant amount of time. As a result, I think Nissan should be even more aggressive than it has been so far and explore options in Asia too, where there is likely a lower cost structure.

    I really like the idea to explore alternatives publicly. This will ensure that Nissan is prepared if things go awry and it will force the British government to take action to stop Nissan from leaving the country. After all, this factory likely employs many people and if jobs start disappearing, British politicians will find themselves in big trouble.

  2. I believe you raised valid points for Nissan to worry and it’s way forward. If I were Ghosn, I would restructure the Nissan UK supply chain by utilizing Sunderland factory for UK (and non-EU) markets while shifting production for EU markets to another factory inside EU, perhaps the Renault factory in France. Three reasons to support this decision. Firstly, the UK government should be serious to support Nissan running the factory for UK domestic market, considering the fact that Nissan, Toyota, and Honda produces half the consumer demand of UK. Secondly, we learnt from Toyota USA case about the challenges to educate workers mindset takes significant time. Believing this was true to Nissan Sunderland factory, it will not easy to replicate a state of art factory with Kaizen culture in another country entirely. Thirdly, other UK companies such as EasyJet relocated their company HQ to Austria, however, the relocation cost them significant financial implications (https://www.theguardian.com/business/2017/jul/14/easyjet-austria-eu-flights-brexit). That said, balancing factory in different location could turn out to be a competitive edge for Nissan.

  3. As you mention well, there are implications for Nissan both in the increased production costs but also in the increased tariffs on the final product. If I were Gosh I would take additional actions in those 2 dimensions to ensure that the Sunderland plant remains competitive.

    Production costs: Nissan should try to increase the amount of domestic inputs. This way it would avoid additional taxes or tariffs on those products. In order to do this, Nissan should do a deep review of the current UK industry to see if the current 40% domestic input can be increased to 60-80%. I see 2 ways of doing this: 1- Find current suppliers in the UK (maybe less cost effective) and work with these suppliers in long term contracts based on volume to achieve efficiencies. Nissan would need to share best practices with these new suppliers to ensure quality and efficiency. 2) Establish JV for domestic production in the UK of parts that are not currently produced. With additional investment in the UK, Nissan could negotiate with the government to reduce the current tax rates or get another type of subsidy that in overall would benefit the company.

    Increased tariffs on final product: If increased tariffs are a fact, I believe the best plan of action, as you mention, is to partner with other car manufactures that don’t have plants in the UK but that have plants in the rest of Europe. The deal would then be shifting Nissan’s European production to the other manufactures and vice versa, and use the Sunderland plant only for domestic demand and international non-EU demand (countries such as Costa Rica that the Brexit won’t have any impact).

  4. Your article is well appointed with issues that transcend not just the auto industry, but manufacturing’s relationship with cross-border conflicts, fluid trade agreements and a shifting global political footprint. I couldn’t help but consider our recent cases, particularly “Sustainability at Ikea” and consider what a vertically integrated supply chain might do to Nissan’s operations.

    As it relates to production costs, the integration of raw materials in a more efficient manner would help drive down fluctuations or risks in supply that result from isolationist policies. While increasesd stocks of raw materials have a large effect on costs in an isolationaist setting, vertically integrating the supply chain in Sunderland would remove the tarrifs and barriers to receiving raw materials on time, a cost-offset that would alleviate the effects Bexit might have. This would encapsulate an effective long-term strategy post-Brexit. In the near-term, this would require a tremendous investment by Nissan which is a cost seemingly too high for Goshen to reconcile at this time.

    Even if the costs of vertically integrating were amicable to Nissan’s management – global consultancy’s have assessed the implications of inclusive growth strategies and cited the slim margins for asset heavy manufacturing industries [1]. Why has Nissan taken a stance that seeminly doubles down on a strategy that may be obsolete following Brexit negotiations? Goshen and his team need to maximize revenues and production efficiencies already present in their supply chain before they are forced or incentivized to invest in new supply chain practices.

    [1]James Manyika, “The US Economy: An Agenda for Inclusive Growth,” McKinsey Global Institute, November 2016.

  5. Quite a well-written article raising important points for any company producing cars in the UK. Ghosn and other company executives should be very concerned, as neither new plants nor new supply chains can be made overnight (and both would cost fortunes). They may be facing certain losses regardless of their mitigation efforts.

    But they will not be the only ones. The far more UK dependent Jaguar Land Rover is highly outwardly concerned. The now-Indian-owned but primarily UK-based and operated firm estimates they could lose $1 billion pounds in profit over the next 10 years. https://www.theguardian.com/business/2016/jun/21/brexit-could-cause-1bn-drop-jaguar-land-rover-profit-sources-say

    This discussion also begs the question as to the impact any change to NAFTA will have on the US, Canada, and Mexico auto industries should the Trump Administration follow through with proposals set forth in their campaign. It is important to consider the follow-on impacts from isolationism in addition to any perceived short-term gain.

  6. If I look at this through the lens of the British government, the stakes are even higher for the government and the people. Nissan’s successful operation in the UK is main source of jobs for its people and revenue for the state. Losing its competitive edge in the market will have major impact on the economy. I believe that this problem is not only isolated to one automaker or the auto industry. Brexit brings forth the same set of challenges you’ve mentioned across various sectors and it must find a way to work with the business representatives to find a way that can minimize the impact of Brexit.

    Forming strategic alliances and looking for alternative sourcing in Europe as you mentioned can be an effective way of gaining leverage with the government. It also will serve as an insurance policy if an agreement with the government cannot be reached.

  7. Great read! While I appreciate Ghosn’s desire to not jump to conclusions about the outcome of the Brexit negotiations, I would not place all my faith on a closed-door meeting with Ms. May. Nissan is just one of hundreds if not thousands of companies that the U.K. government will have to deal with, and the political situation can change with the wind.

    I support your arguments for finding alternative production facilities, and R&D in production line versatility is always a sound course of action (although not specific to the Brexit concerns).

  8. This article makes the very interesting point that the effects of Brexit will be felt not only in the UK and EU, but across the world. In fact, any country that receives imports from a UK-based company may see prices of their products rise. As the article points out, when Brexit comes into effect, the Sunderland plant will no longer be able to source materials for their production lines tarrif-free from other European countries. This will drive up costs that Nissan will ultimately have to pass along to the consumer. Nissan could reinvent its entire supply chain. But short of that, if they want to keep their current set of European suppliers, they should consider investing in a new manufacturing plant within the EU that can benefit from free cross-border trade.

  9. I really liked how you covered and described the concerns for Nissan with respect to Brexit. You raised very valid points and I agree with a lot of the above comments that if I were Ghoshn, I would be alarmed about the current situation. Given the uncertain state of Brexit, I am comfortable that they want to wait, but I would like them to have Plan-B solutions available.

    It is interesting to note how Nissan and Toyota are employing different techniques to deal with the UK Government to safeguard their production facilities in the UK [1]. While Nissan is negotiating with the Government that they enjoy the same trading conditions, Toyota has committed to invest 240 million pound and realign their management focus and supplement employee training. I believe that it would help Nissan if they come up with more contingency solutions, similar to what Toyota is doing, instead of the laid back approach they are currently taking.

    As you talked about the uncertainty with UK’s new trade deals with various countries, if I were Ghoshn, I would also consider the possibility of opening a site in a different location and start exploring this option financially, at least on paper to be better prepared to deal with the worst case scenario.

    [1] Campbell P., 2017, “Toyota and Nissan take different roads to Brexit” The Financial Times

  10. Very well written article, with key concerns explicitly highlighted. To answer your question, I’m not sure I would call Brexit a ‘bluff’ and actually think there is not much Nissan can do but work with what they have at the moment. I’m wondering whether Ghosn is keeping his cards close to his chest as Nissan figures out what to do next.
    I would be very worried if I were Ghosn. Nissan operates in the ‘economy’ tier of the market, and any disruption to its supply chain that may increase costs or reduce output could have damaging effects on the bottom line.
    I fully support your proposed set of solutions, both short term and long term. I found it very interesting that Nissan was able to produce vehicles from its Renault plant in France. I agree with Juan’s point on teaming up with other car manufacturers (non-Renault), unless I understood his point incorrectly.

    support your arguments for finding alternative production facilities, and R&D in production line versatility is always a sound course of action (although not specific to the Brexit concerns).

    1. ignore last two lines** 🙂

  11. Thank you very much for bringing a non-US-focused issue to the spotlight. I really enjoyed reading the paper.

    I agree with you that companies should prepare very actively to this significant change to come, and I think all your action items are great ideas. I am just wondering whether it is fair to expect companies to plan and act on something that is completely opaque. Coming from the consulting industry, I am part of the people whose work is strongly impacted by the fact that companies stopped investing, developing and are in a waiting mode. But putting myself into the shoes of these companies, I would also find it hard to put money in large supply chain disrupting projects when the future is less certain than ever.

  12. Thanks for sharing this insightful analysis. One key concern that emerged after reading this article is the adverse, unfair impact of isolationist movements such as Brexit on small business owners. While Nissan is able to negotiate ‘deals’ with Theresa May and leverage its global network of production facilities to mitigate the effect of Brexit, small-business owners that rely on imports and exports will bear the brunt of Brexit. It is imperative that the governments and institutions think more closely about the impact of such policies on small business owners.

  13. Although I see the overall benefits of building more flexible production lines, I do not see it as a viable long-term solution to the impact of Brexit. If Nissan were to invest first in R&D and subsequently in redesigning its Sunderland factory, would it not be a more attractive option to move production to e.g. Eastern Europe? This way it can not only move production to a lower-cost country that is part of the EU, but also address the issues that arise from Brexit directly.

  14. Great read. I believe the primary reason Nissan has been cavalier about the implications of Brexit on its UK operations is because of one thing: leverage! It has the largest operating presence in the UK of all its Japanese competitors (~$4 billion investment and annual production of ~500k cars, and countless jobs at stake) and as such, wields tremendous bargaining chips when dealing with government officials. As you mentioned, the automaker was able to secure a sweetheart deal with Theresa Mays, essentially shielding itself from any potential adverse effect Brexit may present. While it is lobbying the government to remain in the Customs Union and seeking to source more components domestically, I do not envision a scenario in which that is critical for the automaker. It called the UK’s bluff and they folded like a cheap suit. Case closed.

  15. It seems undeniable that Brexit will have a substantial impact on this company. Nissan is a global organization moving goods all over the world. The supply chain for any of its plants is dispersed and far-reaching. Isolationist ramifications due to this political change will radically affect the economics for business units operating inside the UK.

    It is amazing that Sunderland consumes up to 5M parts per day. The downstream implications from any change in raw materials must be massive. It is also remarkable that only 41% of the vehicle parts are produced domestically.

    Running Nissan, it seems diligent to act conservatively and make plans to move more of its operations out of the nation. It is surprising that it has commenced production of two new models in Sunderland. This seems ill advised.

  16. I really enjoyed reading this article. It gives a vivid example of the implications of isolationism. I absolutely agree with the author that Nissan could be doing much more to address the risk that Brexit poses to its supply chain, and would like to propose an additional initiative to mitigate some of the risk in the front-end of the business (i.e. from the Sunderland Plant to the end consumers in the countries that it serves).

    In the light of the Brexit and isolationism in general, I believe that Nissan should revise and regionalize its go-to-market strategy. This means re-assessing – under the Brexit context – how effectively they could compete in price in each country, and shifting its go-to-market levers (pricing, discounts, advertising, sales force, etc.) accordingly. By shifting its go-to-market focus and resources towards countries in which they will be better positioned vs key competitors, and away from countries in which key competitors will be better positioned then Nissan, the company “sends a signal” to its competitors. Once the competitors “read this signal”, they will be incentivized to shift their go-to-market levers in Nissan’s opposite direction. By doing this, each competitor inevitably gains market share in the countries that they can serve more efficiently, and give up share in other countries. Once this occurs, both competitors would have increased their profits. This is a practice that is commonly used in other industries with high geographical barriers, such as the cement industry. I believe that, in light of isolationism, it can be adapted to and implemented in the auto industry.

    In regard to the back-end of the business (i.e. sourcing plus production), I really liked the idea mentioned by the author of finding and developing local suppliers in the UK, as well as the idea of partnering with other automakers to implement cross-production across the EU.

  17. Great read. While I take your point that the UK will have to renegotiate positions with all trade partners including the non-EU ones, I’m leaning towards a more positive view on that. The EU has an incentive to make an example out of the UK by giving them harsh terms, so as to deter other European countries with populist uprisings from gaining traction. The rest of the world has no such agenda. Beyond the administrative hassle involved in drafting up the contract, I would think the U.K.’s position with the rest of the world could actually be strengthened. In fact, if the negotiations with the EU begin to turn sour, the carrot of relocating production to strategic ‘rest of the world’ countries might actually prove useful in negotiations. Nevertheless, it is critical that Nissan thinks of contingencies in the short term as it may take a few years for the new equilibrium to be reached.

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