Auto workers across the United Kingdom have been reeling from a series of cascading announcements regarding global auto maker’s cutbacks of capacity and production. While many have been quick to cite root cause to the threats of Brexit, Supply Chain Matters points to broader industry developments and unfolding moves as the catalyst. Brexit

The latest shock came this week with the announcement from Honda Motor that the company will close its Swindon Honda Civic assembly facility in 2021 and transfer production to Japan. The plant which produces up to 150,000 vehicles annually employs upwards of 3000 workers. According to business media reporting, over half of the Swindon plant output of Civics is exported to North America.

Earlier in the month, Nissan Motor indicated that its next-generation X-Tail crossover SUV originally planned for its Sunderland UK production facility will instead be produced in Japan.

In January, Jaguar Land Rover, the subsidiary of global conglomerate Tata Motors, announced plans to cut 4500 jobs from its global workforce, a reported large majority of which is based in the UK. Also, in January, Ford Motor announced up to 400 voluntary layoffs at its engine production plant in Bridgend, in an initial phase of upwards of 1000 job losses.

Many in the UK are making a direct root cause connection to Brexit being the catalyst for such cascading actions across the country’s automobile sector. That is understandable.

Supply Chain Matters is of the viewpoint that the catalyst is broader than Brexit.

Here is why.

The global automotive industry is being challenged by the complex and difficult transition toward producing more electrical and hybrid powered vehicles. Parallel to this transition are realities that the major markets across Europe, China and now the United States are weakening which is fueling a growing supply and demand imbalance across these global regions. The imposition of steel and aluminum tariffs by the United States, along with continued threats to impose added or corresponding retaliatory import tariffs on foreign produced automobiles and trucks have global automakers more sensitized to higher costs and inherent supply network risk factors.

A further consideration is that automotive supply networks run on the DNA of just-in-time, uninterrupted component material flows across mostly lower-cost to higher-cost regions.

Honda, Nissan and other manufacturers sourced auto assembly facilities in the UK in order to serve both domestic and European Union export needs under the umbrella of uninterrupted EU tariff-free movements.  In the case of Honda and Nissan, the 2020-21 time period coincides with the need to introduce and manufacture electric or hybrid powered vehicles for various markets.

Honda’s CEO has indicated that the timing of the Swindon announcement actually coincides to a global strategy as to where to produce the next-generation Civic. That strategy was articulated as producing and/or exporting electric vehicles from either Japan, China or the U.S..

Jaguar Land Rover reportedly had to incur a $4 billion write-down of capitalized investments primarily because of demand erosion across China as well as a weighted reliance on diesel-powered vehicles which European consumers are now shunning in greater numbers.

Similarly, global manufacturers have sourced auto and parts production Canada, Mexico and the United States under the former NAFTA tariff-free umbrella. All of that is changed with the combination of dramatically newer vehicle development strategies that now de-emphasize sedans and the Trump Administration’s aggressive stance on perceived trade imbalances and the reconstituted USMCA trade agreement.

General Motors recently pointed to higher commodity costs in 2018, including the effects of steel and aluminum tariffs that impacted its bottom-line in excess of $1 billon. The November 2018 announcement to shutter five North American production assembly plants and trim its overall workforce by 15 percent was predicated on the needs to invest in new model and services development related to electrically powered and autonomous driving vehicles in the coming decade. Another not stated implication was considerations for investing where global market growth is most promising and in buffering the effects of ongoing geo-political tensions including tariffs. U.S. politicians were also not at all pleased with the announcement and the significance.

Ford Motor’s bottom line is also under pressure amid reported worsening loses in China and Europe. The company’s initial moves are part of a yet to be announced global restructuring expected to be in the range of $11 billion. The risk of the UK leaving the EU without a trade deal certainly has the attention of Ford, but there are broader challenges to tackle and shoes to fall.

With growing geo-political tensions and a groundswell of nationalism, global based auto manufacturers are now much more attuned to exercising risk mitigation from a number of dimensions that reflect on overall cost and distribution. The recent tariff-free deal between the EU and Japan, along with declining demand across EU markets likely motivated decisions from Honda and Nissan to export vehicles directly from Japan.

 

Reader Takeaway

While Brexit is one factor, the broader implication points to a tide of inter-related product demand erosion and escalating geo-political forces that are motivating many manufacturers to adjust or supplement production sourcing strategies with risk-and cost mitigation and in some cases more flexible options to counter increased export costs.

Our UK readers can context Brexit as one of many interrelated global geo-political and industry specific developments that are now motivating auto manufacturers to collectively take more aggressive actions related to strategic product development and their associated supporting supply networks.

Other industries will likely follow, which makes a no agreement Brexit scenario all the more an anathema for global manufacturers assessing the broader global product demand and supply network landscape for the next decade.

Bob Ferrari

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