Is Brexit Restructuring the World’s Largest Specialist Car Sector for the Better? The Case of McLaren Automotive
McLaren Automative is one of the UK’s specialist car manufacturers. Its supply chain will have to be altered in order to adjust to a post-Brexit environment.
In June 2016, the United Kingdom voted to enact Article 50 of the Lisbon Treaty and initiate its removal from the European Union, a transition known as Brexit. The invocation of Brexit will have tremendous supply chain implications for companies operating in the UK. Although trade agreements remain to be finalized prior to the departure in 2019, thirty-two percent of the UK’s businesses have already begun to relocate their supply chains domestically. Despite the challenges that Brexit presents to an industry that relies heavily on international trade, British specialist car manufacturer McLaren Automotive has began to make changes to its supply chain that may ultimately allow it to benefit from Brexit.
McLaren should be concerned with Brexit because it has the potential to increase the company’s costs to source and manufacture cars. Currently, the company manufactures all of its products in the UK although various parts are sourced throughout Europe. If a “soft” Brexit is negotiated, whereby the UK maintains a trade agreement with the EU, not much would change for McLaren’s supply chain. If a “hard” Brexit is negotiated, whereby new restrictions impose tariffs on goods leaving and entering the UK, McLaren could see a surge in its operational costs as well as it in production times, for tariffs are often accompanied by procedures and inspections that take time. For example, 10,000 trucks cross England’s Port of Dover daily, and the average administrative time is two minutes per truck. Given that each of McLaren’s products requires many smaller parts and about fifty percent of such parts are imported from Europe, the related import expenses and delays could severely impact its cost structure and business.
In addition to increased supply chain costs on incoming car parts, McLaren may also face increased costs on finished cars exported to other countries. As the UK is no longer a member of the EU, McLaren will be subject to the result of the UK’s trade agreements with not only the EU but also with other non-European states. It currently sells twenty percent of its cars to customers in Europe and the remaining eighty percent of its inventory is sold to the U.S., the Gulf States and Asia. These sets of negotiations may result in higher tariffs for McLaren if the UK does not secure favorable trade plans with countries such as China, for example.
McLaren has attempted to address the challenges posed by Brexit by minimizing the physical distance of its supply chain. It recently invested £50 million in a British carbon-fiber chassis supplier facility with plans to replace its current Austrian supplier by 2020. The carbon-fiber chassis is McLaren’s new lightweight design for the frame and body of its cars that sell for £1.4 million each. By consolidating the supply-chain distance between parts, this relocation serves both vertical and domestic integration. It will save the company £10 million in costs and decrease the lead time for each cars’ production. These savings will occur even if a “soft” Brexit ensues.
The company’s attempts to consolidate its supply chain address the concern of post-Brexit import tariffs on parts entering the UK, however, it does not solve the problem of expenses incurred on the export of finished goods. While much of McLaren’s fate resides in the UK’s ultimate trade negotiations, it should begin preparations for the increased costs it may face on the delivery of the product. If the UK is unable to negotiate low tariffs with the U.S., China or the Gulf States, McLaren will either absorb those import costs itself or pass them on to the customer. In order to cushion the increase in costs, it should prepare arrangements for cheaper transportation routes on which to deliver finished cars.
Additionally, McLaren should consider the effects Brexit negotiations might have on its access to human capital. McLaren currently employs approximately 1,400 high-skilled workers, many of whom are not British nationals. As human capital is instrumental to its supply chain and Brexit may also result in a shortage of skilled labor, the company should also plan to recruit and adequately compensate the top international talent, if it intends to continue manufacturing high quality cars. McLaren’s current intention to introduce twenty-two new models to the market by 2022 may also need to be revised given the unpredictability of Brexit’s outcomes.
As various UK industries reconfigure their supply chains in light of Brexit, McLaren is strategically positioning itself to benefit from the transition. While it recognizes the need to consolidate its supply chain due to possible import tariffs, it has failed to take action in regards to delivering its finished products overseas. The UK automotive parts business has an estimated £4 billion worth of untapped potential. Perhaps, Brexit presents McLaren with other advantageous domestic synergies it had not previously explored.
 Chartered Institute of Procurement and Supply, “Businesses Preparing to Sever Supply Chain Ties Between the UK and the EU to Avoid Brexit Tariffs,” May 15, 2017, https://www.cips.org/en-gb/news/news/businesses-preparing-to-sever-supply-chain-ties-between-the-uk-and-the-eu-to-avoid-brexit-tariffs/, accessed November 2018.
 Impact of Brexit on Automotive OEMs in the United Kingdom, Frost & Sullivan, Frost Perspectives; accessed November 2018.
 Motis Freight Services Limited, “Operation Stack TAP and Dover Parking,” Government of Dover (Dover, United Kingdom), accessed November 2018.
 Benjamin Katz, “ McLaren Moves Chassis Production to UK to Avoid Brexit Taxes,” Bloomberg, https://www.bloomberg.com/news/articles/2017-02-09/mclaren-moves-chassis-production-to-u-k-as-brexit-taxes-loom, accessed November 2018.
 Financial Times, “Profitting from Brexit: McLaren Shifts Supply Chain Back to the UK,” https://www.ft.com/content/b3d67800-9475-11e7-bdfa-eda243196c2c, accessed November 2018.
 Society of Motor Manufacturers and Traders Limited, “UK Specialist Car Manufacturers Report 2017,” https://www.smmt.co.uk/wp-content/uploads/sites/2/SMMT-Specialist-Car-Manufacturers-Report-2017.pdf, accessed November 2018.
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Student comments on Is Brexit Restructuring the World’s Largest Specialist Car Sector for the Better? The Case of McLaren Automotive
Interesting article! One other additional cost and complexity could be the cost of the instability in the supply chain/demand as regulators get their bearings in a post-Brexit world. I would imagine that McLaren does not like to hold inventory given its high price point and warehousing costs, and this could pose a problem as shipments get held at customs whereas they could easily get to Europe/other countries before Brexit. This is especially challenging given how many of the cars are sold outside of the UK.
Great article! I’m terrified to hear that McLaren’s current intention is to introduce 22 new models to the market by 2022 — as you rightly pointed out, this is a decisions better made when McLaren actually understands the business landscape it exists in.
One additional thought on this – an argument of isolationism is always the protection and the ‘pushing up’ of one country’s own brands. Back in the day, the UK had McLaren, Jaguar and a few more brands that were iconically ‘British’. 1. Can McLaren benefit from the high tariffs of bringing in other luxury automobiles (i.e. Mercedes, BMW) and successfully supply a larger subset of the UK market with a range of models, not just the highest end of sports cars? and 2. Can McLaren use Brexit and the increase in price due to tariffs, to make itself more desirable to the outside luxury world?
Tabatha, thanks for putting together this article. It was interesting to see how McLaren may benefit from Brexit.
McLaren is reducing its physical distance supply chain costs, so the company can potentially afford to absorb some of the increased finished goods export tariff. That said, McLaren vehicles are very expensive such that their purchasers could be relatively price inelastic and more willing to have the tariff passed on via higher pricing. Les Edgar, the chairman of TVR (another UK-based sports car manufacturer) echoed this point, “we work in the luxury goods market, so if prices rise in the event of tariffs, well it’s not desirable but it is by no means the end of the world.”
However, if the high-end vehicle purchasers are indeed more elastic and less willing to pay for the tariff, McLaren could benefit from the non-UK luxury car providers being “priced out.” According to Research and Markets report, “A Study of the Global Luxury Car Market 2017,” the three German players, Audi, BMW and Mercedes-Benz, represent ~80% of the global luxury market. With those market leaders potentially facing higher tariffs, I appreciate DPI’s suggestion that McLaren could expand its range of models to compete in the broader luxury market, rather than just the highest end. In this scenario though, McLaren would need to be careful to not diminish its brand by producing and marketing more affordable vehicles.
Very interesting article!
You mentioned the potential impacts of Brexit on importing human capital and car parts as well as the export of finished cars. Do you think that political backlash could also reduce customer demand for McLaren vehicles in the EU? Especially in the case that EU residents feel slighted by UK actions. At the same time would local UK demand increase or are the supporters of Brexit the wrong customer demographic?
Also, rather than just consolidate to local UK suppliers and find cheaper transportation routes could McLaren consider using plants in the US and China to build finished goods and minimize tariff impacts? Are the tariffs based on the sales price or COGS? Is there another country that represents a large portion of the potentially displaced human capital that they could relocate to? This may be difficult since there is often heritage and tradition associated with luxury goods like cars.
Thanks for a very thoughtful article. Your point on the impact of Brexit on human capital in this supply chain is particularly interesting to me. Brexit has already seen a major shift in skilled labor in the EU, with skilled employees from a variety of industries leaving the UK for seemingly “greener” pastures . Given the current state of affairs, it is likely very tempting for McLaren to focus on the short term implications of Brexit through the increased costs to source and manufacture cars. However, I would caution McLaren to also focus on the longer-term cost implications, particularly in both hiring skilled labor in the UK and in customer demand. With skilled laborers leaving, cost of labor is only going to increase for these jobs. Additionally, as McLaren (as I understand it) is a manufacturer of luxury jobs, high-earners leaving the region has the potential to significantly disrupt demand. 
1. Rovnick, N. Cocco, F. Brexit prompts skilled European workers to leave the UK. Financial Times. https://www.ft.com/content/a37c2aee-565f-11e7-80b6-9bfa4c1f83d2
2. Helm, T. The Guardian. The Guardian. Aug. 26, 2017. https://www.ft.com/content/a37c2aee-565f-11e7-80b6-9bfa4c1f83d2
Thank you for sharing your thoughts! Regarding Brexit, I agree that McLaren needs to take action in delivering its products overseas as its export tariff goes up. However, I believe that reducing its shipping cost is not the only option for McLaren to cope with Brexit. As customers of McLaren are unlikely to be as price sensitive as those of the other auto manufacturers serving for middle-income households, such as Toyota Motors, McLaren should utilize Brexit to rebrand its products as a more high-end luxury item affiliated to the UK to pass on the cost to end users. Otherwise, McLaren needs to build production facilities outside the UK and establish a new supply chain based on the new location. However, building a new supply chain is difficult and takes time, McLaren should at least seek ways to enhance its product value, differentiating itself with its product identity. This might work well for foreign customers as they recognize that the products come not from local countries but from the U.K.
Thank you for the article, Tabatha. I agree with the comments from protagonist and others above. I am a bit skeptical about increased tariffs being a true threat to McLaren’s business. Fred mentioned Mercedes and B&W as comparisons; while I agree these are all luxury vehicles, I view McLaren as an even more luxury offering. The buyers of McLarens are likely to almost be price agnostic, as they are likely attracted to the vehicle because of its brand or performance attributes. While consumers definitely react negatively to price increases, I doubt there are many customers of McLaren who exist on the fringes in terms of willingness to pay and are deterred by new tariffs. As we saw with the Marriott case in regards to Ritz Carlton properties, regardless of price increases, there will always be consumers who value luxury goods are are far less price sensitive. I do agree with your assessment that McLaren should explore domestic synergies that have arisen to further improve its supply chain, however.