A sector which has been hardest hit by the secession is the automotive despite being very important in the UK’s manufacturing industry. As per reports, the sector contributes close to one percent of the United Kingdom’s total output and about 9.4% of the manufacturing output (Moravcsik & Andrew, 2012). The sector employs close to 169,000 people as direct employees most of whom are situated in the West Midland’s manufacturing hub. When compared to the other sectors in the industry, the automotive sector has been the most productive in the UK. It contributed to 13% of all the goods which are exported by the United Kingdom, a second largest portion in the country. The sector, however one of the most closely integrated in the EU (Bailey & De Propris, 2017). It has numerous and complex supply chains stretching throughout the European continent. Due to the effectiveness of its connection, large multinational companies chose to manufacture their vehicles specifically for the EU market. An example of this is the Nissan Corporation which set up manufacturing plants in the UK in order to create the market specific products for the European Union. A large manufacturer such as Nissan can readily switch its production between plants in the different countries of the block, but the decision usually depends on numerous factors which will be highly applicable in the Brexit situation. In this study, we shall be exploring the impacts which the Brexit will have on the economy of the United Kingdom, and specifically the Nissan Company, one of the biggest players in the automotive industry of the United Kingdom.
The integration of the European Union brought together 28 countries of Europe but with possible extensions to other regional trade agreements (Van, Overtveldt, & Johan, 2011). The level of integration of the European Union has been analysed from numerous angles and perspectives since the early studies most of which focused on of the derivative issues such as the increased relevance of trade blocks. The process of the European Integration is based on a strategy which is time honoured of partially integrating policy functions and institutions in a number of areas. These areas initially included coal and steel, then trade and later on, a common currency among the states (Krugman, 2016). There were high expectations that more integration would follow in other areas over time. The strategy was a major approach to the Institutional integration of Europe in the 1950s. This was after the failure of a more ambitious community of defence and politics which was purposed to include a common armed force, common budget as well as a common legislative and executive institution. Hence, the path of gradual and partial integration was adopted, taking effect especially on the technical and economical areas with expectations of much deeper and more political integration (Pierson & Paul, 2010).
The gradualist strategy has been successful for the EU as it was applied with large economics of scale and low heterogeneity costs of the preference and traits across different populations. In an example, the EU created a common market for all the manufactured goods in the region. In addition, the addition also led to creation of dangerous and inefficient institutional settings (Spolaore & Enrico, 2013). Example of it is the euro which was brought about without the participation of the institutions which were historically associated with successful union of money. The imperfections and shortcomings of the European Institutions were widespread and institutionalized due to the expectation of the associated problems of the previous steps would be fixed in due time by further integration. The commercial integration and monetary integration would be followed by one which is more institutional and political. This was referred to as a “chain reaction” towards an “Ever Closer Union.” (Tel & Verdun, 2009)
Even though previously ignored, the “chain reaction” approach had one core problem which was its nature to underestimate constrains and costs which are associated with the trait and preference heterogeneity over the goods and policies created for populations with diverse societal structures, identities and cultures (Overtveldt & Johan, 2011). The brexit was born due to these challenges, a recession which is seen to bring about vast economic impacts on organization operating in the economic block (Spolaore et al. 2013).
This industry is largely export based with Europe as a primary market. According to statistical evidence, the UK exports about 80% of the cars produced, 56% of which go to the rest of the EU. In addition, 86% of the vehicles sold in the UK are imported and 70% of the vehicles come from the EU member states. In 2016, there was a total turnover of about 77.5 billion Euros in the UK automotive industry. The first quarter of 2017 saw a trade deficit balance of about 25 billion sterling pounds with the EU. According to the Society of Motor Manufactures and Traders (SMMT), the shared market with tariff free internal trade with a transport system which was seamless across Europe enabled the UK become competitive in an industry which was very competitive (Excell, 2016).
There has not been a significant departure in the value of exports from the seasonal patterns since the fall of the sterling. The value of the exports in the second half of 2016 and 2017 increased from 15.5 billion to 18.7 billion sterling pounds respectively. The impacts of tariffs which would possibly come up due to the brexit will be severe for both the importers and consumers. The SMMT describes the change as devastating as a vehicle which would on average cost about 15,000 sterling pounds would be priced at about 16, 500 sterling pounds, an effect which would make the vehicles uncompetitive (Leggett, 2016). If the costs were not to be transferred to the consumers, the average 450 sterling pounds profit margin of the 15,000 sterling pounds vehicle world be completely wiped out. Price has large impacts on sales and studies estimate that a 15% price impact would possibly result to about 550,000 reduction in sales number in the EU states each year. This close to 19% fall. In other studies, trade barriers would result to about 7.9 billion sterling pounds worth of export decline in the EU. Professor David Bailey, the Japanese ambassador to the UK noted that there were no guarantees for future production in the UK. According to him, there were no possible profits in continuation of operations in the UK. This was not specific to the Japanese firms alone but also to the rest of private companies (Research and Markets, 2018).
The Nissan Company became the first company to show the willingness to invest in the United Kingdom despite the Brexit threats. For this reason, the government of the UK provided assurances that the carmaker, alongside others who will be willing to stick around that they would not see the expected impact on trade after the UK leaves the EU. In order to promote the assurance, Toyota invested close to 240 million sterling pounds in its Derby plant last year. The UK government offered an aid grant of about 21 million sterling pounds to the company. Additionally, the government of UK guaranteed close to 9 million sterling pounds to PSAs plant in Luton to enhance their competitiveness even after the Brexit.
The UK government also proposed a possible deal of the automotive sector which would include a sector deal of about 32 million sterling pounds in joint funding in order to develop a supply chain which is industry led as a competitive program. 26.4 million Sterling pounds would also be invested to the low carbon vehicle projects with Ford, GKN and Jaguar Land Rover. This will also be matched by a further 52.8 million sterling pounds worth of industry funding. An additional model of this deal is a 500 million sterling pounds of government investment over 10 years in order to develop the low carbon technologies of the automotive industry. Funding to support the research and development in the sector would also be important. This need has further motivated the UK government to make additional 225 million sterling pounds from 2023 to 2026. 246 million sterling pounds I also pledged in order to make the UK a world leader in the design and development as well as the manufacture of electric vehicle batteries. Autonomous vehicles are also to receive an investment boost of close to 250 million sterling pounds
All this is motivated by the fact that the UK government has the responsibility to support the important industries which will be negatively impacted by the Brexit event. These efforts are however only directed to those who show promise for a future in the market. The automotive market of the UK has bright prospects. The government is likely to offer guarantees to the industry’s largest employers. A deal has to be delivered in order to satisfy the industry and an event of failure will need a ready purse to ease the loss of trade projected and expected by the manufactures (Lopez, 2018).
Negotiations to secure partial customs union for specific products such as the vehicles should also be employed in order to mitigate the impacts. Other options of mitigating the impacts of additional costs brought about by the brexit would include the expansion of the Authorised Operator Regime in the UK. An example of a likely agreement is like one between the US-Canada border which allows vehicle components to cross under the provision of the CETA and other bilateral agreements. The taxes can be administered away from the boarder in order to prevent the challenging restrictions which are likely to come up. This however would require further explorations whose outcomes are likely to be affected by agreements reached in relation to the external borders.
The Japanese carmaker is a major player in the automotive industry of the UK. The company employs close to 7,000 people in the Sunderland plant alone and supports more than 300000 other posts in the supply chain. The company is a major taxpayer in the UK but the Brexit has brought up speculations of failure of its operations in the country. There are a number of threats which have led to this but also, there are opportunities which can be exploited
A major threat is a no deal scenario of whether the EU rules would continue to apply. For this to happen, it would be needed for the UK to ratify the withdrawal agreement before the country leaves the EU in March 2019. Negotiations are set to conclude in October 2018. A no deal scenario is of concern to Nissan since it would increase restrictions on the movement of goods by the formalities of imports and exports. Introduction of the export taxes would also have severe cost implications. According to the House of Commons report, a no deal scenario would result to the introduction of a 10% tariff on cars and 4.5% tariff on car components. In addition, Nissan faces a threat of the subject of goods to conformity assessment procedures, re-certification and possible suspension of their manufacturing activities until the relevant approvals are obtained (Roberts, 2016).
Despite these, there are also a number of opportunities, first, it is possible for the carmaker to make adjustments on its supply chain and source components locally for the UK assembled cars. Currently, only about 40% of the parts used in building cars in the UK are sourced locally as opposed to the available 60%. This would help avoid the import tariffs. In addition, the scepticism on the ability of trade with non-EU states after Brexit are simply speculations. It has been estimated by the Department of International Trade that 90% of economic growth on a global level to 2040 would come from outside the European Continent (Leggett, 2017). For this reason, it will be possible for a company such as Nissan to cultivate and exploit the trade patterns likely to come up from the Brexit in order to generate sufficient make up on trade loss from the EU market. In addition to this, it has remained a primary focus for the UK government to encourage the design and development of autonomous vehicle technology. This presents the opportunity for Nissan to make moves to manufacture autonomous vehicles in order to benefit from the vast funding proposed by the government as a way to mitigate the impacts of the Brexit on the automotive industry (Moore, 2016).
Strategy to exploit opportunities and avert threats
The lack of clarity in almost all the aspects of manufacturing and supply chain, selling, and servicing means that the manufacturers of cars such as Nissan create strategies to lessen the possible impacts on their operations. Nissan can do this using the following strategy.
Nissan, just like most other manufacturing plants in the UK depend on the just in time component delivery from the UK and EU. Hence, it will be important for Nissan to maximize its vehicle production and sales before the end of the transition period on 29th March. The company needs to also boost its vehicle production outside the boarders of the UK, mostly in the EU in order to trade freely with the remaining EU-27. Additionally, inventory can be held on in the UK in order to mitigate the possible impact of tariff increment to be put in place next year. Reduction in factory numbers will help to limit the disruption and gain more clarity before creating future production plans (Warburton, 2016).
The EU exiting plans by the UK will cause severe ripple effects across the entire automotive industry. This would require both the suppliers and manufactures to work on their schedules and volumes of production. Nissan can employ stockpiling in both the UK and the EU as a strategy to ensure preparedness and meeting the demands after the Brexit.
Autonomous Vehicle Production
It is evident that the UK government has shown great support for the production of environment friendly vehicles. Nissan is a large corporation with strong research and innovation activities. Hence, more resources, especially of the Nissan UK need to be directed towards this technology. This would mean that the organization will benefit from the numerous proposed funding and leverages proposed by the UK government on such types of vehicles as stipulated above in this study (Moore, 2016).
Despite these being favourable propositions to deal with the effects of the Brexit, Nissan alongside other manufactures will need to continue applying pressure to the government to evade a ‘no-deal brexit’ that would lead to the UK leaving without any Free Trade Agreement. This can be done through the Society of Motor Manufactures and Traders which in recent times has been quite vocal on the lack of uncertainty on the future of UK’s trading relationship to have caused a fall of about 50% of investments in the British Motor Industry (PR Newswire, 2018).
Conclusion
Despite the appearance of the government to have made progress in addressing the possible effects of the Brexit to the automotive sector, there still remains a significant uncertainty in regards to the outcome of the Brexit negotiations. The likeliness of a ‘no-deal’ brexit has become more evident than before. Companies such as Nissan in this case will have to employ contingency plans while hoping that the government will put in place or replicate regulations and rules which protect the sector (Bailey & De Propris, 2017).
References
Bailey, D., & De Propris, L. (2017). Brexit and the UK Automotive Industry. National Institute Economic Review, (242), R51–R59. https://doi.org/10.1177/002795011724200114
Excell, J. (2016). UK auto industry backs remain vote ahead of EU referendum. Engineer (Online Edition), 3. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=116303258&site=ehost-live
Krugman, P. R. (2018). International Trade: Theory and Policy, Global Edition (Vol. Eleventh edition). Harlow, England: Pearson. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1629189&site=ehost-live
Leggett, D. (2016). Auto business confidence hit but holding up, despite Brexit. Aroq – Just-Auto.Com (Global News), 1. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=120628058&site=ehost-live
Leggett, D. (2016). SMMT chief bangs EU single market drum – Interview. Aroq – Just-Auto.Com (Global News), 1. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=120627271&site=ehost-live
Lopez, J. (2018). Auto sector seeks revival in Europe. ICIS Chemical Business, 11. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=133057552&site=ehost-live
Moore, M. (2016). Brexit impact still uncertain. Rubber & Plastics News, 45(25), 0001. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=116824091&site=ehost-live
Moravcsik & Andrew (2012), “Europe After the Crisis,” Foreign Affairs, New Haven: Yale University Press.
Pierson & Paul (2010), “The Path to European Integration: a Historical Institutionalist Analysis,” Comparative Political Studies, 29: 123-63.
PR Newswire. (2018, November 12). Impact of Brexit on the UK Automotive Industry and Mitigation Strategies, Q4 2018: Insight into CETA/CETA Plus, No Deal (WTO) & Soft Brexit (Chequers) Scenarios. PR Newswire US. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=bwh&AN=201811121315PR.NEWS.USPR.IO69979&site=ehost-live
Research and Markets. (2018). Impact of Brexit on the UK Automotive Industry and Mitigation Strategies, Q4 2018 Report – ResearchAndMarkets.com. Business Wire (English). Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=bwh&AN=bizwire.c87031672&site=ehost-live
Roberts, G. (2016). Post-Brexit blues continue for the auto industry – survey. Aroq – Just-Auto.Com (Global News), 1. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=120609120&site=ehost-live
Spolaore, J. & Enrico, I. (2013), “What is European Integration Really About? A Political Guide for Economists,” Journal of Economic Perspectives, 27(3): 125-44
Tel & Verdun (2009), “Explaining Europe’s Monetary Union: A Survey of the Literature,” International Studies Review, 11: 277-301.
Van, K, Overtveldt, J, & Johan, Y. (2011), The End of the Euro, Chicago: Agate Publishing.
Warburton, S. (2016). VDA warns against post-Brexit customs barriers. Aroq – Just-Auto.Com (Global News), 1. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=120609977&site=ehost-live
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