OEM, aftermarket executives contemplate Brexit challenges, options

Aug. 10, 2016
Global automotive executives are proceeding cautiously while pondering the ramifications of a pending UK/EU breakup – a puzzling scenario that has the distinct possibility of creating major supply chain, manufacturing and marketing difficulties.

A sense of voter’s remorse seems to growing in the United Kingdom over the anticipated consequences of Great Britain’s  exit (Brexit) from the European Union, but thus far a widespread political movement to place a repeat referendum on the ballot has yet to pick up speed.

Global automotive executives are proceeding cautiously as if motoring through a roundabout while they ponder the ramifications of a pending UK/EU breakup – a puzzling scenario that has the distinct possibility of creating major supply chain, manufacturing and marketing difficulties as the UK and EU negotiate their breakup.

The vehicle industry annually contributes $22.6 billion to the UK’s economy, accounting for 800,000 jobs. Last year a record-setting 77.3 percent of the 1.5 million cars manufactured in the UK – the most produced since 2005 – were destined for export; 57.5 percent of them were purchased by EU drivers, besting the U.S. (10.9 percent) and China (7 percent) as the UK’s top vehicle market, a status now in jeopardy as Brexit takes hold amid considerable economic, governmental and societal turmoil.

“The British public has chosen a new future out of Europe. Government must now maintain economic stability and secure a deal with the EU which safeguards UK automotive interests,” asserts Mike Hawes, chief executive of the UK’s Society of Motor Manufacturers and Traders (SMMT). “This includes securing tariff-free access to European and other global markets, ensuring we can recruit talent from the EU and the rest of the world, and making the UK the most competitive place in Europe for automotive investment.”

“As recent surveys showed, the automotive industry is anticipated to be one of the sectors most impacted by the vote to leave the EU,” says chief automotive analyst John Leech at KPMG UK.

“While it will take years for the UK’s future relationship with the EU and other countries to become clear, there are steps that the automotive industry should take now,” Leech suggests. “The fall in Sterling and commodity prices will prompt vehicle production plans, sales incentives, financing arrangements and purchasing plans to be adjusted. Information about employees, procurement and distribution needs to be gathered and reassessed such that quick action can be taken once the anticipated changes to VAT (value-added taxes), customs and migration rules are enacted.”

In advance of the vote Leech expressed concern that “UK automotive sector would likely lose sales, face slower supply chains and higher costs in the event of a Brexit. Given the low levels of profitability that accrue to mass market vehicle manufacture this would likely, over time, lead to the loss of jobs overall. Even for the UK’s successful premium car manufacturers the loss of influence over EU regulation would come to damage their businesses over time.”

Leech further points out that “the automotive businesses we spoke to believe that the EU is an important bargaining force in global trade negotiations. Moreover, research and development, which is vital to the UK’s ability to be at the forefront of innovation in car manufacturing, is both heavily funded by the EU and requires access to the expertise and free movement of skilled engineers within the EU.”

Supply chain intelligence

“Brexit has created many risks to global supply chains, particularly those touching the UK and Europe. However, companies armed with information about their supply chain dependencies will be able to exploit the opportunities that open up quickly during this period of turbulence and uncertainty” says Bindiya Vakil, CEO of Resilinc, a logistics consultancy that has General Motors as a client.

“Supply chain practitioners who have made the investment to map their supply chain and proactively identify who their key sub-tier suppliers are will be able to begin the process of predicting potential problems immediately,” according to Vakil, referring to a Brexit-solutions whitepaper that Resilinc has prepared.

“Often operational performance problems can be early indicators of financial stress. Many companies in the UK face an extended period of uncertainty where some key projects may go on hold, access to investments gets jeopardized and currency fluctuations make imports of critical raw materials more expensive and squeeze margins and cash from operations,” she says.

“The turbulence in currency markets also opens up opportunities for cost savings for companies importing from the UK,” says Vakil. “Additionally, cash-rich companies in emerging countries, as well as the U.S. and EU, can use the period of currency turbulence to identify key M&A opportunities for robust UK brands or snap up UK’s existing supply chain operations and access to markets in the U.S. and EU.”

Vakil goes on to say that “these moves can protect long term supply assurance of critical components, but also be used to disrupt the supply chain for key competitors. Deep multi-tier supply chain intelligence can provide tremendous opportunities for arbitrage and be a tremendous source of competitive advantage.”

“For now, tariffs, quotas and rules governing trademarks and patents with the UK will remain unchanged,” says Sean Windle in an IBISWorld analysis. “However, these trade mechanics may change with whatever new agreement emerges from future negotiations. IBISWorld suggests that buyers looking to maintain continuity in their supply chains consider alternative sources for any British products. By diversifying their supply chains, buyers are less likely to experience supply disruptions or price volatility associated with Brexit.”

Trade relations between the UK and the U.S. will have to be renegotiated when Britain completes its EU separation, according to Windle, noting that President Barack Obama has cautioned that the process could take up to a decade to finalize.

“Given political gridlock in Congress and the often lengthy nature of trade negotiations, it could be many years before a new bilateral agreement between the two countries is hashed out,” says Windle, adding that in the meantime the UK is likely to face higher trade barriers with the U.S.

Emerging details

“Full unhindered access to the European single market is essential for Magal Engineering’s UK operations,” says Gamil Magal, CEO of the medium-sized Tier 1 components supplier. “Our companies are based throughout the EU and the free movement of labor and materials across the continent is an essential part of our day-to-day operations and growth.”

Prior to the June election, Toyota Motor Europe President and CEO Johan van Zyl noted that “we have carefully considered the implications for our manufacturing operations, should the UK leave the European Union. We are committed to our people and investments, so we are concerned that leaving would create additional business challenges. As a result, we believe continued British membership of the EU is best for our operations and their long-term competitiveness.”

According to the company’s updated outlook after the votes were tallied, “Going forward we will closely monitor and analyze the impact on our business operations in the UK, and how we can maintain competitiveness and secure sustainable growth together with the UK automotive industry and other stakeholders.”

In 2015 Jaguar Land Rover produced 500,000 vehicles in the UK with 80 percent of the output shipped to more than 180 countries. “Europe is a key strategic market for our business, comprising 20 percent of global sales, and we remain absolutely committed to our customers in the EU,” says a spokesman for the automaker, remaining anonymous as per a common overseas media custom.

Taking a “business as usual” stance as news of the voting results broke, “we are a British business with a strong manufacturing base in this country; we call Britain home and we remain committed to all our manufacturing sites and investment decisions. We respect the decision of the British people and in common with all other businesses Jaguar Land Rover will analyze the issues arising from it. As of today, nothing has changed for us or the rest of the British automotive industry,” he says.

“There will be a significant negotiating period, and we need to understand more about that as details emerge,” the spokesman points out. “We will work hard with all parties to ensure that the importance of the British automotive industry is fully understood at every level of the negotiation process.”

“As a major employer, exporter and investor, the BMW Group is committed to the UK, which is home to two of our brands, Mini and Rolls-Royce Motor Cars. Our experience shows that the free movement of components, finished products and skilled workers within the EU is extremely beneficial to British-based business,” advised BMW board member Dr. Ian Robertson as voters were preparing to go to the polls. “We firmly believe Britain would be better off if it remained an active and influential member of the EU, shaping European regulations which will continue to impact the UK whatever the decision in June.”

“While it is clear there will now be a period of uncertainty, there will be no immediate change to our operations in the UK,” says a BMW spokesman, speaking post-election. “We know that many of the relevant conditions for supplying the European market will have to be re-negotiated, but of course we cannot say what this means for our UK operations until those future regulatory and legislative arrangements are agreed. We will not speculate about the outcome of these negotiations, nor about any possible effects that might have on our production operations in the UK.”

“At this moment, it is not clear what conditions and rules will ultimately replace the UK’s membership of the EU,” a spokesman for Honda observes. “We will therefore carefully monitor developments. We continue to prepare for the production launch of the 10th generation Civic from our Swindon plant.” Last year the EU received 40 percent of the firm’s UK production of some 130,000 cars, and “Honda remains committed to its business in Europe.”

“The UK is the fourth-largest global market for Vauxhall’s parent company GM and the largest EU market,” reports Vauxhall Chairman and Managing Director Rory Harvey. “We are part of a fully integrated European company where we benefit from the free movement of goods and people, and we believe not to be part of the EU would be undesirable for our business and the sector as a whole.”

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