The 2016 Brexit vote opened the possibility of increased tariffs and restricted immigration between the United Kingdom and European Union. However, as Brexit negotiations won’t be completed until 2019, there is great uncertainty around what Brexit will look like; possibilities range from a “soft Brexit” that results in minimal policy changes, to a “hard Brexit” that results in high tariffs and severe immigration restrictions . In light of this uncertainty, supply chains have to be ready for multiple Brexit scenarios.
Car manufacturing could be significantly impacted by Brexit. There are several ways a hard Brexit would hurt the profitability of manufacturing cars in the UK. Increased tariffs on car components would increase the cost of buying parts from the EU, while increased tariffs on finished automobiles would force companies to either reduce profitability or increase prices. Potential tariff scenarios are shown in Exhibit 1:
Finally, restricted immigration could limit the labor supply for certain jobs and thus increase labor costs . Overall, it’s estimated these impacts could hurt the UK car industry profitability by as much as £2B .
However, there are potential positive impacts of Brexit as well. Brexit resulted in a decrease in the value of the pound; this currency adjustment makes labor and other costs relatively cheaper in the UK than other countries . The British government has also alluded to potential tax cuts and regulatory changes that would make it more attractive to do business in the UK in light of Brexit . Thus, auto manufacturers must consider the positive and negative impacts of Brexit in planning their supply chains.
In analyzing the situation, at least one car company decided to double down on manufacturing in the UK: luxury manufacturer McLaren. In the short term, McLaren is taking advantage of the weak pound by shifting more manufacturing to the UK, including investing £50M in a new chassis facility. McLaren is also focused on increasing the share of components manufactured in the UK, in anticipation of potential tariffs on components from the EU . This mirrors a trend in the UK car industry overall, which has increased its share of locally made parts from 36% to 44% since 2011 .
McLaren’s actions are relatively low risk given their business mix. 80% of McLaren’s cars are sold to non-EU countries, meaning that in the event of a hard Brexit, only a small share of their cars would be subject to potential finished goods tariffs . Thus the company would be able to benefit from lower costs without incurring significant tariffs. On the other hand, in the event of a soft Brexit, McLaren would be able to continue their operations much as before. Thus, McLaren has positioned themselves well for any Brexit scenario.
The company is also taking and planning actions to ensure long-term success post-Brexit. While most of their sales wouldn’t be impacted, tariffs would still negatively impact some of their sales; McLaren has thus been lobbying the government for a tariff-free Brexit deal . McLaren is also planning to take advantage of additional government assistance; for example, McLaren is hoping to leverage government assistance on battery development to make half of their cars hybrid by 2022. Finally, McLaren has plans for minimizing any potential tariff burden, including taking advantage of the Inward Processing Relief tariff exemption scheme .
Looking ahead, McLaren should take several other actions to prepare themselves for Brexit. The first involves capacity planning. While the economics enable McLaren to continue manufacturing in the UK under a hard Brexit, the same may not be true for other car manufacturers that sell more cars to the EU. McLaren should be prepared to benefit if any of these car companies leave, by hiring their best workers and potentially buying their manufacturing facility at a discount. On a similar note, a hard Brexit could significantly hinder McLaren’s ability to hire foreign engineers and other workers; as a result, they should seek to make any needed foreign hires now, before laws change.
McLaren should also recognize the power they currently have in negotiating with the UK government, which is very afraid of losing car manufacturers. McLaren must take advantage of this by demanding significant tax breaks or other concessions as they increase their UK manufacturing. They should also continue their lobbying to try to secure the best Brexit terms and post-Brexit regulatory environment possible.
While McLaren has worked hard to be prepared for Brexit, their future economics are still very uncertain. Could a particularly harsh Brexit deal make their decision to commit to the UK look like a mistake? Should they consider leaving in this event? Do they even have the option to leave, or is being British too central to their brand? McLaren’s management must be prepared to answer these questions in the years ahead.
 Chris Giles and Alex Barker, “Hard or Soft Brexit? The Six Scenarios for Britain,” Financial Times, https://www.ft.com/content/52fb4998-573f-11e7-9fed-c19e2700005f, Published June 2017.
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 Thomas Kwasniok et al., “Is Your Supply Chain Ready for Brexit?” Bain & Company, http://www.bain.com/publications/articles/is-your-supply-chain-ready-for-brexit.aspx, Published February 2017.
 “Supply Chain: Your Brexit Competitive Advantage,” pwc, https://www.pwc.com/gx/en/issues/assets/brexit-supply-chain-paper.pdf, Published February 2017.
 Philip Oltermann, “Hammond threatens EU with aggressive tax changes after Brexit,” The Guardian, https://www.theguardian.com/politics/2017/jan/15/philip-hammond-suggests-uk-outside-single-market-could-become-tax-haven, Published January 2017.
 Jonathan Ford, “Profiting from Brexit: McLaren Shifts Supply Chain Back to the UK,” Financial Times, https://www.ft.com/content/b3d67800-9475-11e7-bdfa-eda243196c2c, Published September 2017.
 “Automotive Council News Release,” Automotive Council UK, https://www.automotivecouncil.co.uk/wp-content/uploads/sites/13/2017/06/170620-Auto-Council-release_Rise-in-British-parts-used-in-British-car-pr….pdf, Published June 2017.
 Costas Pitas, “McLaren Sees Brexit Vote Benefit from Weaker Pound,” Automotive News Europe, http://europe.autonews.com/article/20160722/ANE/160729932/mclaren-sees-brexit-vote-benefit-from-weaker-pound, Published July 2016.
 Martin Saarinen, “McLaren and Aston Martin Voice Concern over Brexit Uncertainty,” Auto Express, http://www.autoexpress.co.uk/car-news/consumer-news/101370/specialist-car-brands-like-mclaren-and-aston-martin-voice-concern-over, Published October 2017.