Jaguar Land Rover’s Billion-Pound Brexit Problem
UK’s largest automaker could see profits halved by import and export tariffs in post-Brexit Europe.
Jaguar Land Rover (JLR) faces a billion-pound Brexit problem. It manufactures more cars in the United Kingdom (UK) than any other company and exports a plurality of its cars to the Eurozone . The specific trade policies of the post-Brexit world are yet unknown, but JLR’s worst-case scenario accounts for a new 4% import tariff on supplies from the European Union (EU) to the UK and a new 10% export tariff on finished cars shipped from the UK to buyers in the EU . Approximately 40% of JLR’s supply chain spend is devoted to sourcing components from the EU, so it is particularly exposed to any new import tariff . In June 2016 JLR’s chief economist estimated that such import and export tariffs would erase one billion pounds of pre-tax profit in the year 2020, more than half of JLR’s total pre-tax profit of 1.6 billion pounds in 2016 .
Brexit’s effects on JLR’s supply chain costs could not only jeopardize the company’s short-term profitability but also its long-term growth. CEO Ralf Speth claimed in September 2017 that “inward investment [now] takes longer or is reduced, so the number of suppliers that we can convince to come to the UK is really more or less limited” in the wake of the Brexit referendum . Not only is JLR’s UK manufacturing already constrained by Brexit: its supply chain expansions overseas are also taking a hit. The company paused construction of a billion-pound plant in Slovakia until it better understands how Brexit will affect future profitability . Prior to the referendum JLR committed to broadening its product lines and thus is especially vulnerable to Brexit-related supply chain costs that could limit the growth of manufacturing operations .
In the short-term JLR’s management is lobbying the UK’s government to protect it from the supply chain costs of new tariffs . Results of JLR’s efforts are unknown, but industry insiders have reported that Nissan already received assurances that the government will subsidize some Brexit-related costs to its UK manufacturing operations . Based on this precedent and the UK government’s stated desire to “effectively pursue and protect our interests abroad” while negotiating post-Brexit trade policy, such lobbying could offset some of JLR’s Brexit burden . However as tariffs are negotiated over the next two years, it will likely prove more difficult for JLR and its peers to obtain concessions from the EU, which is less incentivized than the UK is to protect these manufacturers.
Over the long-term JLR is poised to defray some Brexit costs by expanding its overseas manufacturing, thus avoiding new tariffs imposed on UK operations. For example, it partners with Chery Automobile to produce some vehicles in China and last year opened its first company-owned overseas plant in Brazil . But with a majority of its vehicles still being made in the UK, JLR would need to accelerate this trend to more fully counteract the consequences of Brexit .
Although JLR has appealed to the UK government to support its short-term profitability, it should do more to entice EU members to negotiate trade deals favorable to the company. Some increased supply chain costs would likely be passed on to Europeans purchasing JLR’s cars. By demonstrating this cost to Eurozone consumers, JLR could incentivize the EU to support lower export tariffs on UK-made vehicles. That said certain member-states, like Germany, may seek to advantage their domestic automakers (which of course compete with JLR) by favoring higher tariffs on UK exports . JLR would need the UK government to threaten counter-tariffs on EU exports to the UK in the event of such a threat in order to dissuade protectionist policies. Demonstrating that all parties benefit from lower (or no) tariffs will help JLR obtain favorable outcomes in the ongoing Brexit negotations over the next two years.
To further offset long-term costs of Brexit, JLR should shift its UK operations toward supporting innovative product lines (assuming these have better profit margins than do traditional vehicles). JLR announced in June 2017 that it will hire 5,000 new, mostly UK-based, engineering and manufacturing personnel to support its autonomous and electric vehicle development . Aside from this, JLR should also partner with UK-based suppliers to ensure that as many new vehicle parts as possible can be made in the UK and not the EU. While supply chains for traditional vehicles are well-established, JLR has the opportunity to invest early on in UK suppliers of innovative parts to minimize import tariffs on parts. But given the unpredictable and potentially dire effects of Brexit on JLR’s supply chain costs, does it still make sense for the company to adhere to its identity as “a British company [whose] headquarters will remain in the UK” or should it relocate and divest from its UK operations as quickly as possible ?
- Peter Campbell, “Hard Brexit Will Leave Us Uncompetitive, Says Jaguar Land Rover,” Financial Times (September 28, 2016).
- Costas Pitas, “Jaguar Land Rover Could Face 1-Billion-Pound Brexit Hit,” Reuters (June 21, 2016).
- Costas Pitas, “Jaguar Land Rover Warns Brexit Deterring Suppliers, EU Workers,” Reuters (September 7, 2017).
- Ed Wiseman, “What Does Brexit Mean for Drivers, the ‘Booze Cruise’ and the UK Car Industry?” The Telegraph (June 2, 2017).
- Costas Pitas, “UK Says Brexit Talks with Bentley Motors Must Remain Confidential,” Reuters (May 15, 2017).
- Trefis Team, “Brexit Could Be Good or Bad News for Jaguar Land Rover,” Forbes (July 25, 2016).
- Costas Pitas, “In Brexit Boost, Jaguar Land Rover To Hire 5,000 Staff,” Reuters (June 18, 2017).
Student comments on Jaguar Land Rover’s Billion-Pound Brexit Problem
Interesting article, and I do not envy being JLR in their current political climate. I think JLR will find it quite hard to negotiate trade deals favorable to their company. Many EU countries feel spurned by the leaving the EU, and would like nothing more than to see them suffer a bit for it. Furthermore, I believe JLR is still a fairly small company relative to some of the European behemoths that caters mostly to the wealthy; I have a hard time believing politicians will score many points by giving luxury car makers a break in their country.
If it allowed them to reduce their tariffs, I would not be shocked to see JLR pursue some type of tax inversion strategy with their HQ. They could keep much of their design and operations in the UK, but be domiciled in an EU country. If it’s the actual shipping of the car to a new country that creates the tariff, I don’t think JLR will have any choice but to shift much of their EU-destined production to the EU itself (but keep much of UK-destined production in the UK).
Adding to the analysis, it is not only the possibility of tariffs which is threatening the supply chain of Jaguar and Land Rover. To my mind, a big worry of Brexit to JLR’s supply chain is the possibility of hold-ups at the customs inspection of parts from the EU. As Peter Campbell notes, JLR only holds inventory for 2 hours of production in some of its plants . These just-in-time supply-chains rely heavily on the fast delivery of parts and additional controls or uncertainty at the border could severely impact JLR’s operations.
I disagree with the author’s idea that JLR could try to influence the Brexit negotiations to achieve a somewhat favorable deal. The political situation is so unclear and fragmented right now, that it seems that the UK is going to sleepwalk into a “hard Brexit”, i.e., exiting the EU without a new trade deal. Migration and billion-pound settlements are on top of the agenda of the negotiating parties. It is hard to see how one company could try to gain an edge in these talks.
 Campbell, Peter. Financial Times. October 16, 2016. https://www.ft.com/content/c397f174-9205-11e6-a72e-b428cb934b78 (accessed 11 27, 2017).
Interesting piece, although I think I would come out somewhat more positively on JLRs prospects in the future than Peter Campbell’s $1bn estimate of profit downside.
I think Jaguar will actually benefit from the dependence that the European car industry has on the UK. The German automotive industry specifically is extremely reliant on the UK (86% of UK cars come from abroad, one in three from Germany). The German government are unlikely to harm their automotive manufacturers (see VW emissions scandal for more evidence of this)
As you point out, Long term within Europe tariffs will impact demand (through increased pricing) or profits (through tariffs on parts or margin reduction to remain price competitive). However, we are currently seeing short term currency effects which should boost European sales at least until the UK actually exits. The £ has weakened on the news of Brexit which makes British cars effectively cheaper. (for now at least)
Furthermore, given JLR is actually more exposed to consumers in the “Rest of the World” than Europe, there is an argument to suggest that the rest of the business could benefit from Brexit (JLR is one of the UK’s largest exporters, ~80% of the revenues of JLR come from outside of the UK, with ~25% of sales from inside Europe) leaving ~65% of sales from rest of world (with China, US and India being specifically important growth markets).  A weaker £ helps trade with these markets (with a weaker £, your local currency gets you more car for your buck (or yen), reducing effective export prices)
You referenced some of the lobbying efforts that JLR can engage in, which makes sense – in theory, given the impact Brexit is likely to have on both the production and sale of JLR’s goods, they should focus their efforts on ensuring the UK government can get them the best deal possible for carmakers.
Having said that, the vast majority of UK businesses (including JLR), would almost certainly prefer it if the UK stayed in the single market. However, the issue with this is that the UK would need to also continue to accept freedom of movement, which could be seen as a cardinal sin by many of the Conservative government’s core voters (and by much of its own backbench) who supported Brexit. The EU is sticking in its heels, insistent that a ‘divorce settlement’ needs to be agreed and paid first before the specifics of a trade deal can be discussed (the EU has asked for £53 billion to cover Britain’s financial obligations; Theresa May has since countered with £40 billion).
Appealing to the EU for low or no tariffs would almost certainly be a lost cause, not just because of influential German carmakers, but a whole swathe across the continent (e.g. Renault in France; Fiat in Italy, production facilities in central & eastern Europe, etc.). It is possible that they will not be amenable to making concessions, pushing for tariffs on UK produced vehicles, leaving JLR over the barrel.
It’s likely that your suggestion (for JLR to relocate and divest from its UK operations) is its best solution. (well, except for selling to people in Britain!)
Given the unpredictability of the outcome of Brexit negotiations, it would be difficult for JLR to justify new manufacturing investment in the UK. It appears to me that the only logical strategy is to focus on the shift to overseas manufacturing that you mention, even for electric and self-driving technology. Although this may be unfortunate for the UK, it is the inevitable result of the Brexit vote. Furthermore, I wonder if the actions by JLR to lobby the UK government are too little too late. It almost certainly would have been more effective to focus their efforts fighting Brexit instead of trying to manage the fallout.
Interesting piece and insightful comments. A few reactions to both the original article and comments so far:
While the short-term FX benefits may be a boon, I don’t think it should factor in much to their long-term decision making on where to locate elements of their supply chain. FX can be very hard to predict in the long term and medium term and they shouldn’t try.
While JLR lobbying the UK government alone on Brexit response likely wouldn’t do much, they should band together with companies in similar decisions. Together they can likely have an impact. What Brexit will mean is certainly still undetermined and with the election of Macron and continued power of Merkel, there is hope that counterparties across Europe will be continued to have interest in a softer Brexit.
JLR should not count on the EU for any relief to make the cost of JLR automobiles cheaper to the European consumer. Given the luxury positioning of JLR cars, the EU power will not care about those prices for their consumers. More broadly, while the EU may not want to lose factories of foreign companies, there is a strong portfolio of EU-made car brands that will provide plenty of cars at a range of price options and the EU will likely be happy at the advantages those brands will face.
The ultimate headquarters of JLR is probably not that relevant. It is different for companies like financial institutions who don’t have a supply chain or a lot of hard assets. For companies like JLR, what’s most relevant is where its supply chain and consumers are.