Right turn only? Car manufacturing in Brexit Britain

Nissan’s produces cars for the European market in the UK, importing many of the components used from suppliers on the continent. New terms of trade driven by Brexit threaten to significantly disrupt this model, increasing costs and operational risk.

In 2016 Nissan’s Sunderland car manufacturing plant was the largest in the UK and most productive in Europe, employing 7000 workers and producing 500,000 cars a year at a rate of 2 per minute, 76% of which were exported to EU countries.[1]  Early on the morning of 24th June 2016, Sunderland became the first UK city to vote to leave the European Union.[2]

As the British Pound’s value fell to a 31-year low and the UK’s trading relationship with Europe became clouded in uncertainty, Nissan’s managers faced a series of tough decisions.[3]

First, with over 60% of car components used by the UK plant imported (many from Europe), Nissan would need to offset the risk that increased barriers to trade could significantly increase cost in its supply chain.  Whereas currently, under the European Single Market, Nissan purchased components and sold cars within the EU with zero tariffs,  there was growing political pressure for trade to ‘default’ to World Trade Organisation (WTO) terms once the UK left the EU in 2019.  These terms would require a 3-4% tariff on all imported components and a 10% tariff on all exported cars – creating a potential £600m cost for Nissan and eliminating supplier margins.[4]

Second, significant uncertainty existed around what customs framework for imported components would exist in future.  With goods currently able to pass between EU countries freely, without border checks, Nissan’s UK plant operated ‘Just In Time’ production and typically held only half a day’s stock of inventory. The firm would need to mitigate the risk that new procedures might bring major delays and uncertainty – with some commentators predicting ‘catastrophic’ scenarios for UK businesses as backlogs developed at the border.[5]  Indeed Nissan’s Head of European Manufacturing warned that, “anything more than six minutes downtime on the line a day is a disaster”.[6] Evidencing this concern, on one occasion, when crucial supplies had been stuck at sea, Nissan had contacted Britain’s Royal Air Force to try to pay for an urgent training mission to retrieve them.[7]

Finally, Nissan needed to decide whether Brexit necessitated changes to the firm’s long run strategy for its UK plant and operations. Should Nissan continue to invest in the plant and begin production of new models, or seek to scale back its UK operations and increase production elsewhere, potentially within the EU?[8]

Nissan’s short-term response to these challenges has been twofold: i). Operational changes to the business and supply chain to provide better insulation from possible future tariffs and ii). Lobbying of the UK government to provide specific assurances and increased investment to support the automotive industry’s competitiveness post-Brexit.

From an operational perspective, to maintain competitiveness, Nissan has announced that it intends to nearly double the amount it procures from UK suppliers, from £2.5bn to £4bn. This will simultaneously reduce the cost of future import tariffs and the impact of any disruption to the border customs regime.[9]  Nissan has also recently announced that it will increase total UK production by 20% to 600,000 vehicles, in order, after accounting for fixed costs, to reduce to total unit cost of each.[10]

From a government relations perspective, Nissan played hardball – threatening to reduce investment and cut jobs unless it received specific assurances from the UK government. Carlos Ghosn, the firm’s CEO, publicly pressed for and secured a meeting with the UK Prime Minister Theresa May, during which she promised that Nissan would not be adversely affected by any new trade regime (although without providing public details as to how).[11]  In advance of this meeting it is alleged that Nissan officials told the government the alternative would be closure of the plant – with the loss of thousands of jobs.[12]

Building on these immediate actions, Nissan took steps to position for the longer term. Having secured a ‘no-detriment’ guarantee from the government, the company announced that the next generation of Qashqai SUV would be produced in Sunderland, securing thousands of jobs over the following decade. Together with the wider automotive industry, it also began lobbying the government to increase funding to attract new suppliers to the UK.[13]

Going further, Nissan’s management might wish to consider: i). Building up a greater stock of inventory to provide a buffer against customs-related supply chain ‘down-time’; ii). Shortening supply chains further by bringing the production of the components at most cost/delivery risk in house; iii). Considering what opportunities Brexit might create for exporting UK-produced cars to new countries to offset increased costs of exporting to Europe, e.g. as the UK looks to negotiate free-trade deals with India, China and the USA.

Questions for discussion

  • Under what conditions is it possible for companies with complex supply chains to increase competitiveness, even as trade barriers are increased?
  • To what extend does increased protectionism favour ‘sweetheart deals’ between government and companies? What are the long-term consequences of these deals?

 

 

Word count: 799

 

[1] Peter Campbell and Kana Inagaki, ‘Toytota and Nissan take different routes to Brexit’, The Financial Times, 16 March 2017, [URL], accessed 12 November 2017.

[2] Reuters Staff, ‘Sunderland votes more strongly than expected to leave the EU, Reuters, 23 June 2016, [URL], accessed 12 November 2017.

[3] Anirban Nag and Sudip Kar-Gupta, ‘Pound hits 31 year low on ‘hard’ Brexit fears’, Reuters Business News, 4 October 2016, [URL], accessed 12 November 2017.

[4] Peter Campbell, ‘ Toyota invests £240m to upgrade car plant in boost for Brexit Britain’, The Financial Times, 16 March 2017, [URL], accessed 12 November 2017.

[5] Anon, ‘The customs crunch: to see how trade may work after Brexit, visit Dover’s docks’, The Economist, 6 April 2017, [URL], accessed 12 November 2017.

[6] Peter Cambell, ‘Nissan asks for £100m supplier fund to safeguard UK car industry’, The Financial Times, 28 February 2017, [URL], accessed 12 November 2017.

[7] Peter Campbell, ‘UK car industry fears effects of tariffs on supply chain’, The Financial Times, 16 October 2016, [URL], accessed 12 November 2017.

[8] Chris Tighe, ‘After a resounding Brexit vote, Sunderland fears for Nissan plant’, The Financial Times, 28 June 2016, [URL], accessed 12 November 2017.

[9] Anon, ‘Nissan bolstering UK production as split with EU looms’, Nikkei Asian Review, 28 August 2017, [URL], accessed 12 November 2016.

[10] Ibid.

[11] Peter Campbell and Kana Inagaki, ‘Toytota and Nissan take different routes to Brexit’, Financial Times, 16 March 2017, [URL], accessed 12 November 2016.

[12] Timothy Ross, ‘Nissan said to have informed UK that car plant would be closed’, Bloomberg Business News, 28 October 2016, [URL] , accessed 12 November 2016.

[13] Peter Cambell, ‘Nissan asks for £100m supplier fund to safeguard UK car industry’, The Financial Times, 28 February 2017, [URL], accessed 12 November 2017.

Cover image: Chronicle Live, 27 October 2017, [URL], accessed 12 November 2017.

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7 thoughts on “Right turn only? Car manufacturing in Brexit Britain

  1. Rob – a very interesting read (and not a word to spare). While I usually think about “isolationism” from the lens of American capitalism, the term certainly can be applied to any nation, especially one that votes to secede from the strongest trade cooperative in the history of capitalism. Well done.

    I thought your questions were thought-provoking, but I’m also curious how you see the decision to leave the EU affecting the British economy. Your essay starts by identifying several challenges, but ultimately, Nissan decide to source more products from Great Britain and is increasing its vehicle production by 20%. That seems like a huge win for the British economy. Surprisingly, it appears that Brexit and its isolationist policies will have a positive impact for domestic firms. But what are the downsides? Will vehicle purchase prices go up? Will Nissan run more narrow margins? Are other vehicle manufacturers protesting?

    Next on my to-do list: figure out what a Qashqai SUV looks like.

  2. Rob, I found your article very interesting and thought-provoking. The topic of Brexit and its impact on car manufacturers is a complicated one and I sought to explore it myself through the lens of Jaguar Land Rover.

    I would like to address your question on the conditions under which it is possible for car manufacturers with complex supply chains to increase their competitiveness in this era of isolationism. As you suggested, companies like Nissan should increase their investment in local parts procurement and more local production to offset the increases in import costs that Brexit will entail. In parallel, I think it is important that car manufacturers also invest in automation technologies and increased manufacturing capacity. Automation in Nissan’s factories will allow it to offset some of the high labor costs associated with increasing UK production. In a similar vein, Nissan should expand its UK manufacturing capacity. By doing so, it will achieve economies of scale and consequently will maximize its potential to remain globally competitive.

  3. I think Nissan also needs to consider that Teresa May might not be able to guarantee “no-detriment” to their operations. Ramping production to reduce per-unit fixed costs will only work if there is a long term sustained demand increase to support this increased manufacturing. If Brexit does increase their costs, Nissan will need to shut this plant down. Since they just announced that the Qashqai SUV will be manufactured there, it seems like management is currently investing in plant expansion. Is it wise to ramp investment when the impact of Brexit on their operating profit is so uncertain? Can a politician’s “promise” be trusted?

  4. Rob, this is a great article about a very interesting and controversial topic – Brexit and its impact on manufacturers’ supply chain.
    First, I think Nissan did an impeccable job handling the issue so far, mostly by its decision to go strong against the government, threatening with reduced investments or even plant closure. I imagine it must be very difficult for companies to plan what steps to take in this situation given the level of uncertainty on how things will evolve – if Brexit will happen at all, which tax would be applied for each industry, etc.
    Second, on your question on to what extent increased protectionism favors ‘sweetheart deals’, I worry about how many concessions like this one with Nissan the UK can actually make. It begs the question on whether the government has factored all these issues when deciding Brexit and what was their long-term perspective. Frankly, from the information I have, I do not see how the benefits of Brexit will offset the costs either for the UK or for the manufacturing companies.

  5. Great read, Rob. In response to your question regarding ‘sweetheart deals’, to echo Reed’s point above, Teresa May’s “no detriment” guarantee is vague and not enforceable by Nissan particularly after it commits high capex investments. While Nissan played “hardball” with the UK government to obtain this concession, Nissan has no clarity on what this concession will look like or how competitors will respond.

    Like Nissan, Toyota has signaled its commitment to remaining in the UK for now with a £240m investment in one of its UK sites in March 2017 that Toyota stated was focused on upgrades needed to stay in the UK market. Toyota signaled that it also negotiated with the UK government regarding this investment, though Toyota qualified that there is no guarantee that it will make future cars in its UK plant. Unlike Nissan’s investment, Toyota’s investment did not involve new jobs or increased vehicle production, signaling that has not yet committed to operating in the UK market longer-term.

    This makes me more concerned about Nissan’s no-detriment guarantee from Theresa May. I wonder whether Toyota was offered comparable terms during its negotiations and decided that this amorphous promise was too risky to rely on. I do not think the UK government should be in the business of negotiating behind-the-scenes guarantees with firms. I question the government’s ability to deliver on these guarantees, and the government’s ability to successfully manage individual private-sector negotiations to help businesses adapt to Brexit.

    Source: https://www.ft.com/content/fe6e3660-0a68-11e7-ac5a-903b21361b43

  6. Very interesting read. I did some further research on the topic and found that Toyota took a very different approach to Brexit versus Nissan. While Nissan met with Theresa May, ultimately leading to the “no-detriment” guarantee mentioned, Toyota was very private in its negotiations with UK government officials. [1] And, while this alternative approach did not ultimately garner a similar “no-detriment” guarantee, Toyota did receive a commitment from the government to invest up to £21.3mm in Toyota’s larger £240mm investment in its Burnaston site in Derbyshire. [1]

    In my mind, this begs the question of which approach was better in terms of interacting with the government? Was now the appropriate time to play a more aggressive hand when there is little detail on how the exit will play out? To Reed’s point, what value does the “no-detriment” guarantee ultimately have and is this preferred to actual side-by-side investment on behalf of the UK government?

    [1] Peter Campbell and Kana Inagaki, “Toyota and Nissan take different roads to Brexit,” https://www.ft.com/content/fe6e3660-0a68-11e7-ac5a-903b21361b43, accessed December 2017.

  7. Thank you Rob, it is a very interesting article. As I thought about trade isolationism, I always took a view on how import tariff affects on company’s competitive advantage in a host who imposed such barriers. Brexit is such a unique situation and posed very challenging questions to the economy and companies operating in the UK and Europe. In addition to raw material sourcing and supplier location, I wonder the implication on labor sources as well? Are there EU nationality workers in the Sunderland plant? If so, Nissan has benefited from the free flow of labor but with Brexit, it may face a new challenge of finding and training new employees.

    Moreover, I do not agree to the increase in plant capacity in an attempt to reduce per unit cost. If there is not sufficient demand within the UK or if the cost after tariffs is too high to remain competitive, Nissan could end up with significant inventory holding cost or potential write-off from obsolete car models.

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