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. Early on the morning of 24th June 2016, Sunderland became the first UK city to vote to leave the European Union.
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.
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.
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. Indeed Nissan’s Head of European Manufacturing warned that, “anything more than six minutes downtime on the line a day is a disaster”. 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.
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?
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. 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.
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). 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.
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.
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?
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Cover image: Chronicle Live, 27 October 2017, [URL], accessed 12 November 2017.