May 24, 2018

Why Brexit has the Automotive Industry in Tiers of Uncertainty

Simon Lucas

The Automotive Industry is in Tiers of Uncertainty over Brexit

 

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While it’s unlikely that the United Kingdom will fully extricate itself from the EU for a few more years yet, concrete effects are likely to start biting sometime after the spring of 2019. For automobile manufacturers in the UK and elsewhere in Europe, “bite” may well be the operative word.

Amid the uncertainty about tariffs, border-crossing procedures, and other impacts on OEMs and suppliers, is there anything these enterprises can do to save themselves from “tiers” of uncertainty and begin to shape their post-Brexit future proactively?

Actually, as this brief article will reveal, there is—but first, let’s review the main sources of sleepless nights for procurement leaders in the automotive industry.

The Trouble with Tariffs

Even this close to the true commencement of Brexit in early 2019, it is still unclear what, if any deals will be made between the UK and Europe to facilitate trade. The worst scenario for auto manufacturers would be a “hard” exit, with World Trade Organization (WTO) rules being applied to the setting of tariffs. The outcome would likely be a 4.5% tariff on component parts moving across UK/European borders.

Given that the profit made by auto manufacturers is between five and ten percent, the application of WTO tariffs would significantly erode OEM margins. This would force manufacturers to consider options such as…

  • Passing costs on to their customers;
  • Making drastic changes to Tier 1 sourcing arrangements;
  • Relocating factories to minimize the import and export of components.

While a hard exit may be the worst-case scenario, the introduction of tariffs at any level will be bad news. With some auto components traveling between the UK and Europe as many as two or three times before ending up in a finished vehicle, even tariffs at half the value of those set by the WTO will have a telling impact on margins.

Bureaucracy at the Border

Brexit uncertainty for OEMs and component-suppliers is not limited to the matter of tariffs. EU membership offers freedom not only from import and export duties but also from complexities in the flow of goods and materials across European borders.

Within the European Union, customs formalities are minimal and delays are rare. These conditions are essential to the integrity of the “just-in-time” supply chain strategy, which the automotive industry has honed to perfection over decades of trade-freedom between EU member-states

For example, one Japanese manufacturer that builds cars in the UK and imports components from the EU is currently able to maintain just one day's worth of stock in its UK warehouses. Longer cross-border transit times would result in the need to maintain higher inventory levels.

Survivability of Sub-tier Suppliers

The issues mentioned above are a concern for manufacturers and Tier 1 suppliers alike, but their concerns do not end there. It is difficult to envisage which sub-tier suppliers will be affected and in what way.

Many sub-tier suppliers are SMEs that have never traded outside of the EU. Post-Brexit changes may place some of these enterprises in unrecoverable financial difficulty—a serious threat to OEMs in an industry where customers and suppliers form long-term, strategic, and interdependent partnerships.

Nevertheless, the lack of clarity as to how Brexit will play out is debilitating, leaving many suppliers unable to move beyond speculation as to their options. While a sense of helplessness is understandable though, any steps to prepare and plan for mitigation are better than none.

Supply Chain Mapping as a Proactive Measure

At this stage, a practical and achievable step-one for any company is to execute a detailed, top-to-bottom supply chain mapping exercise. There is really no time like the present to identify sub-tier suppliers and evaluate their exposure to risks from Brexit—and of course, their potential opportunities.

After all, while tariffs cannot yet be assessed in terms of hard numbers, the best and worst-case scenarios are predictable. With a full understanding of the current sourcing landscape, OEMs and suppliers can begin to model for these two scenarios at least and use the results to start planning "no-regret" measures, hedging strategies, and even big-bet moves in readiness for the Brexit sequence of events.

Fortunately, multi-tier supply chain mapping and impact-assessment is a very realistic proposition today, thanks to advanced tools like RiskShield, the latest resiliency solution built on the Resilinc platform.

Why Take Step One with RiskShield?

Soon enough, the separation of Great Britain and the European Union will begin in earnest, so now is a good time to prepare Brexit strategies. RiskShield can give OEMs and their suppliers a kick-start, via comprehensive supply chain mapping and 24/7 event monitoring.

By providing detailed visibility down to partner, site, category or product level, RiskShield allows users to monitor risk-related signs and signals continuously.

Collaborative features enable suppliers and their customers to begin working together on scenario modeling and strategy formulation, and finally, a free 60-day trial and subscription pricing model make step-one achievable and affordable for any enterprise with interests in the automotive industry—and its own post-Brexit future.

Learn More

 

About Simon Lucas

Simon Lucas is a supply chain management professional with some 20-year’s practical experience in domestic and global logistics. Perplexed by a lack of quality content online, Simon began writing for the industry in 2012. This became his second career, and very soon, his first. Simon now writes full-time, crafting content to help businesses boost their supply chain management and logistics capabilities.

 

Topics: automotive industry, multi-tier mapping