21 January 2019

A possible but unlikely silver lining to the Brexit cloud

I have steadfastly avoided writing about the biggest news story in the UK - Brexit - until now but I cannot ignore it any longer. With the government suffering the worst defeat in history in a vote, and various seemingly insoluble issues remaining, I feel it is time to think about the implications for the automotive supply chain of the country’s exit from Europe be it a ‘hard’ Brexit, or a more favourable negotiated deal. With just 10 weeks to go until the projected exit date, not one deal is ready to replace existing arrangements that the EU has with some of the world's biggest economies.

The UK’s International Trade Secretary, Liam Fox has said that the government is dependent on other countries in the EU “putting in the work” to ensure the UK’s free trade agreements continue to apply after Brexit. This is in stark contradiction to what he said immediately after the referendum when he confidently predicted that the country would have “up to 40 free trade deals” ready for “one second” after midnight on the day of the exit. Of course a politician being unable to fulfil his promises is not exactly novel but this is just another example of why the rest of Europe, and indeed the world, could be forgiven for thinking that our politicians are not being realistic, to be generous about it.

For foreign-owned automotive businesses in the UK, such as Nissan, this kind of uncertainty is intolerable. Daimler have recently cancelled plans to bring production of a new model to the Japanese carmaker’s Sunderland plant under its ongoing joint venture, not only because of the short-term confusion of the UK government but because vehicle programmes are planned six to seven years in advance and the Brexit waters are presently so muddy that the German OEM cannot count on any particular outcome.

It is not all doom and gloom though, according to the Japanese ambassador to the UK, the just-in-time delivery advantage of having seamless borders with Europe can be overcome. He pointed out that in the event of a ‘no deal’ Brexit, WTO rules will be in place instead of the frictionless flow of goods and services to and from the EU but that this is the case for Japan trading with many of its partner countries. WTO rules require more regulation between trading areas and thus borders cannot be made ‘smoother’ and faster beyond a certain point.

This does not have to mean the death of just-in-time manufacturing for Nissan, Toyota and Honda in the UK. It could result in greater stockpiling of the components coming from the EU but could also herald some great opportunities for UK-owned and global suppliers to benefit from what made the ‘trans-plant’ come here in the first place - the craftsmanship, work ethic and sheer determination of the British workforce. This perhaps rather hopeful sentiment will require considerable investment, some of it from the UK government but if we cannot shorten the supply chain to alleviate border delays and rising tariffs on parts imported to build cars here, we may indeed have, to use the idiomatic expression, thrown the baby out with the bathwater.

Simon Duval Smith

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