The UK Brexit vote on 23rd June 2016 came as shock to the entire UK car manufacturing industry which hitherto had been on the way to a 17-year production high of 1.7m units, 50% of which destined for continental Europe.
Although this mark was eventually surpassed, helped by the Pound trading at a 30-year low post-vote and fuelling export activity, discomfort of the UK’s largest car manufacturer Nissan and its CEO Carlos Ghosn grew quickly in light of the looming political uncertainty around the UK’s future access to the EU single market. For Nissan, Brexit uncertainty represents a key issue as the company operates the UK’s largest and heavily export-focused automotive plant in Sunderland, recognized for its efficiency (#5 worldwide) and delivering 30% of the UK’s annual car output while employing 35,000 people directly and indirectly.  55% of the plant’s annual production is exported to Europe while 50% of the plant’s assembly parts are sourced from abroad through complex multi-national (largely Pan-European) supply chains, making the plant particularly susceptible to potential Brexit restrictions on free trade and access to the EU single market. 
With Brexit negotiations currently in full swing, it is largely impossible to predict the final shape of a `Brexit trade deal´. However, considering a worst-case scenario in which the UK would lose free EU single market access and hence would be forced to trade under WTO rules, Nissan’s management faces three key supply chain challenges:
Under WTO trade rules, tariffs of 10%/4.5% would be imposed on exported cars and components respectively. As a result, profit margins on exported cars would be squeezed or even eliminated, assuming only limited pass-through due to price competition. Similarly, tariffs would increase Nissan’s imported assembly parts cost base as components typically travel multiple times between UK and Europe before being finally assembled in the UK. In total, Nissan management estimates total additional cost of £600m related to WTO tariffs. In addition to tariffs, required border customs would lead to unavoidable supply delays, disrupting the Sunderland plant’s production flow and just in time supply chain (5m parts per day with only ½ day of safety inventory). According to Sunderland’s head of manufacturing, even a delivery delay of 2 min would represent “logistical nightmare”. WTO trading rules would also hinder the establishment of free trade agreements (FTAs) due to local content regulations, requiring Nissan to meet a minimum share (set by WTO) of domestically sourced components before being allowed to export under FTAs.
To proactively encounter a worst-case scenario, Nissan CEO Carlos Ghosn, has initiated a set of short-/mid-term operational and political measures to facilitate the `re-shoring´ of its supply chain, mitigating the potential impact of WTO regulations. In this context, Nissan is leading an initiative to re-build its UK automotive supplier base by inviting suppliers to its UK operations and advertising its long-term commitment to its Sunderland plant as shown by the company’s decision to build the next generation Qashqai and X-Trail SUV at the facility. Nissan also publicly communicated its plan to spend an additional £2bn with UK suppliers, almost doubling the £2.5bn of current spend on domestic parts and re-assuring potential new suppliers of its re-shoring ambitions. Internally, Nissan will invest an additional £670m (on top of £3.7bn invested to date) into its Sunderland plant to reduce its dependency on external suppliers. To support his plan, CEO Carlos Ghosn is taking a hard stand on UK premier minister Theresa May who granted £100m support funding to rebuild the broader UK supplier base, while guaranteeing Nissan insulation from potentially negative Brexit fallout. In the medium term, Nissan aims to significantly influence the `fine print´ of Brexit negotiations around local content requirements and hold the UK government accountable for its promises made under the £100m support fund. 
In addition to the already initiated measures, Nissan could, in the short-term, engage, with other UK-based OEMs (e.g. Toyota, Jaguar, Range Rover) to form procurement collectives, providing the production volume and scale required by new domestic automotive suppliers to run their high fixed cost operations profitably. If it becomes evident that suppliers are not re-shoring operations for key technologies, Nissan should consider establishing in-house operations or JVs with other OEMs to produce key supplier parts internally. On a more tactical level, to mitigate the impact of delayed deliveries due to border customs processes under WTO trade regulations, Nissan could increase its current safety stock (currently ½ day) reducing overall supply variability. In the mid-term and with more clarity on the final Brexit deal, Carlos Ghosn, should also consider a re-allocation of its European manufacturing capacity, potentially leveraging the manufacturing footprint of its alliance partner Renault in other continental European countries.
Questions for further consideration:
- How realistic is the ambition to `re-shore´ the UK domestic automotive supplier industry within 2-4 years?
- Have there been precedents were companies successfully enforced government `insulation guarantees´ in the case of adversarial outcomes?
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