Nissan: Supply Chain Uncertainty in the Age of Brexit
How will the U.K.’s second-largest automaker remain competitive?
When the people of the U.K. voted on June 23, 2016 in favor of leaving the European Union, they set into motion a wave of uncertainty about the economic future of the nation. Due to the global supply chains that permeate the industry, Brexit immediately became a major concern to all automakers with ties to the U.K., including Nissan Motor Company.
Experts estimate that less than half of the approximately 5,000 components in a British-made car are manufactured domestically, and some of the individual parts cross U.K. borders dozens of times [1][2]. With the withdrawal of the U.K. from the EU customs union, these imported parts could be slapped with import tariffs at multiple steps along their journey, dramatically affecting the final costs to OEMs [1]. Nissan will also need to grapple with the possibility of further decreased vehicle profit margins due to increased tariffs on the 55% of U.K.-produced vehicles exported to Europe [3]. However, the potential impact of new tariffs will remain unclear until a post-Brexit trade deal is negotiated between the U.K. and the EU. This future uncertainty has led to somewhat more immediate financial implications for the company; Nissan shares fell more than 12% in the days following the Brexit referendum [4].
Another possible outcome of Brexit negotiations is the establishment of a tariffless free trade agreement between the U.K. and the EU [1]. While this would reduce the negative impact of import tariffs, free trade agreements commonly require that a majority of the components in the vehicle originate in the exporting country. In other words, more than 50% of a U.K.-built vehicle’s components will need to be manufactured in the U.K. in order to be eligible for tariff-free export to the EU under a hypothetical future free trade agreement [3]. For Nissan to meet this requirement, the company will need to reduce the foreign component makeup of its vehicles by almost half, from its current level of 85% [2]. If the company is not able to achieve this, it could face a 10% tariff on all vehicles imported into the EU [3].
To this end, Nissan management has been proactive in lobbying the British government for both a beneficial future trade agreement and financial support for industry-wide changes that will be required regardless of which deal is reached [2]. Colin Lawther, Nissan’s manufacturing and supply chain head for the European region, met with members of the U.K. parliament in February 2017 and issued a “strong request” that the nation remain in the EU customs union in order to avoid tariffs or free trade agreement restrictions [2].
Lawther also requested that the U.K. government set up a £100 million fund to help the automotive industry cope with the necessary supply chain changes [3]. In particular, Nissan has asked for government support in persuading component manufacturers to relocate to the U.K. While the government has yet to respond to this monetary request, Nissan partnered with a U.K. trade minister in convening group of key suppliers this year at the company’s British headquarters in order to make a pitch for relocation [3].
So far the results of Nissan’s efforts have been mixed, and the company’s more medium-term strategy has shifted to waiting until a formal Brexit deal has been reached. In the initial months post-referendum, the automaker committed to building two new vehicle programs at its U.K. plant after receiving assurances from the government that the company would be protected from negative trade implications stemming from Brexit [5][6]. However, more recent statements by Nissan’s CEO suggest that the company will reevaluate that pledge once the final details of the Brexit deal are known [7].
Moving forward, Nissan should continue to reassess its post-Brexit strategy as more information becomes available. However, since the company has long-term investment decisions that will need to be made soon, management should continue to work with the U.K. government and encourage a speedy resolution of Brexit negotiations. A positive outcome for the company would be a post-Brexit trade deal that establishes tariffless free trade with the EU, but one that differs from most free trade agreements in that it counts European and British components as interchangeable for origin purposes. Through a close relationship with the British government, Nissan can attempt to influence trade agreements in a way that enables the nation’s automotive industry to stay competitive.
What will be the final terms of a Brexit agreement between the U.K. and the EU? Will they include trade terms, or will no trade deal be reached? How will these potential trade terms treat the import and export of automotive components and finished vehicles? And, perhaps most importantly, will Nissan be able to hold off on any significant U.K. investment until a Brexit deal is reached?
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[1] Michael Pooler, “Brexit adds to challenges facing car parts suppliers,” Financial Times, September 14, 2017, ABI/INFORM via ProQuest, accessed November 2017.
[2] Lisa O’Carroll, “Brexit means taxpayers need to support supply chain, says Nissan,” Guardian, February 28, 2017, [https://www.theguardian.com/business/2017/feb/28/brexit-taxpayers-support-supply-chain-nissan-sunderland-car-auto], accessed November 2017.
[3] Peter Campbell and Michael Pooler, “Brexit triggers a great car parts race for UK auto industry,” July 30, 2017, ABI/INFORM via ProQuest, accessed November 2017.
[4] Megumi Fujikawa, “Brexit Vote Rattles Japanese Auto Makers; Nissan, Toyota and Honda produce about half of all vehicles made in the U.K. each year,” Wall Street Journal, June 27, 2016, ABI/INFORM via ProQuest, accessed November 2017.
[5] Peter Campbell, “Vauxhaull decision looms as key moment for Brexit,” Financial Times, August 27, 2017, ABI/INFORM via ProQuest, accessed November 2017.
[6] Natalia Drozdiak, “EU Examines U.K.’s Brexit Assurances to Nissan; Nissan’s decision has ensured the jobs of 7,000 people in the north of England,” Wall Street Journal, November 7, 2016, ABI/INFORM via ProQuest, accessed November 2017.
[7] Joshua Posaner, “Nissan to review UK investment decision based on Brexit deal: CEO,” Politico, January 20, 2017, [https://www.politico.eu/article/nissan-to-review-uk-investment-decision-based-on-brexit-deal-ceo/], accessed November 2017.
Although a speedy resolution and favorable outcome for Brexit is possible, it is far from likely. In order to de-incentivize other countries from leaving the EU, it is difficult to imagine European countries setting friendly trade deals (https://www.economist.com/news/britain/21695544-it-would-be-hard-britain-negotiate-good-trade-deals-post-brexit-unfavourable-trade-winds): waiting for the Brexit resolution is risky. Thus, Nissan should be proactively re-designing its supply chain in the short term to accommodate realistic (and perhaps worst case) scenarios, in addition to lobbying governments and hoping for the best. How can they do so? Nissan leaders should focus on creating agility within their supply chain, and prioritizing cost efficiencies to protect margins from future potential tariffs, and avoid passing them to the customers. In gaining in agility, Nissan will shield itself from future geopolitical instabilities (https://blogs.wsj.com/experts/2017/04/17/how-companies-should-prepare-for-brexit/).
Japan-based Nissan has manufacturing centers in 20 countries across the globe. According to the company website, they have design and production facilities in the UK but European regional headquarters are in Switzerland. I would argue that the likelihood of some import and export tariffs from a UK-based production plant are not worth the cost or trouble. I think Nissan should move the UK plants to continental Europe. UK automotive laborers would suffer but the potential marginal increase in production and selling costs do not justify keeping a manufacturing presence in the UK.
I think Nissan and other UK automakers really have three options to address this Brexit problem.
(1) Accept the tariff on cars exported from the UK to Europe which is expected to be at least £1,500 (https://www.politico.eu/article/interview-uk-car-industry-will-stall-if-theresa-may-walks-away-from-deal/)
(2) Move the plant to mainland Europe as Colton suggests which would have a very high capital cost associated with it. Although this solves the tariff problem for cars to mainland Europe, it will have an offsetting cost as cars being made for the UK would then be struck with the tariff unless Nisan would decide to operate both facilities.
(3) Adapt their supply chain to meet expected or worst case trade rules. This is the option I would take as long as Nissan believes they can make these changes under £1,500 per vehicle. In order to be efficient in this process Nissan will need to search to find what production capabilities already exist within the UK and which components are priced most similarly to products made outside the UK. I would focus on parts that are a large quantity per vehicle as this should reduce the number of suppliers they need to add to their supply chain in order to meet their local content requirements.
In this instance, I think it’s key to consider Nissan’s exposure relative to their competitors. This relative exposure will dictate whether the tariff is a competitive advantage or disadvantage, which influences the course of action they should take:
1) Underexposed: other players may source more parts outside the UK, or manufacture entirely outside the UK for cars sold in the UK. If this is the case, they’ll be hit with a larger tariff than Nissan for cars sold in the UK, which could give Nissan a competitive advantage. They may have the opportunity to increase prices less and make a share play or increase prices in line with competition and gain margin
2) Parity: in this case, I’d imagine all tariffs would be passed on to the consumer and the competitive landscape would be largely unchanged, unless the car category as a whole is more elastic than I think. I imagine a 10% penalty on even the majority parts isn’t enough to move the needle here if the whole category is affected
3) Overexposed: if Nissan imports significantly more than it’s competitors for cars sold in the UK, then it’s in trouble. This is the only scenario for which they need to consider immediate action. In addition to lobbying, it should look to make its supply chain as efficient as possible (e.g., reduce unnecessary movements across borders, evaluate any competitive domestic suppliers vs international alternatives) to best position it to avoid painful losses if penalties occur
Nice work with this post! I tend to agree with SAM – I think the incremental, relative impacts are where the crux of the issue is, but I am wondering about these impacts not only in terms of tariff costs, but also in terms of physical flow of the parts. Will there be significant variability or delays due to increased scrutiny at the border (to determine country of origin and or percentage of the item that was made in each country)? Could a cottage industry pop up so that you can digitize the process – tracking chips and barcodes and RFIDs so you can, with a single scan, see that 50.1% of the vehicle was made in the UK?
Based on the reaction of the EU nations to Brexit, it seems unlikely that an agreement with no tariffs on automotive vehicles will be reached. Even if a free trade agreement is passed on the completed vehicle, it is unlikely that all the components which Nissan currently imports into the U.K. will also be under the same trade agreement terms. This would lead Nissan to experience higher input costs which it will either need to absorb or pass on to the customer, likely negatively affecting demand.
It is even more unlikely that the U.K. will be able to negotiate an agreement which allows for free trade and amends the majority origination component role. In this case, Nissan will need to find alternative component manufacturers in the U.K.
Given the two alternatives, it appears that Nissan might be forced, or might be incentivized economically, due to tariffs, to source its components from inside the U.K. Understanding this, and given the long lead time to source new component manufacturers or relocate them inside the U.K., Nissan needs to begin its component rationalization immediately to ensure a smooth transition no matter what agreement is reached between the U.K. and the EU.
Great article showing how a politically motivated decision can have far-reaching impacts on a supply chain. To maintain a competitive edge, Nissan needs to have a plan of action in place to act quickly as soon as the Brexit trade agreements are finalized. I tend to agree with my classmates that a trade agreement with no tariffs or no restriction on component origin is unlikely, so they should urgently consider how to adjust the supply chain to address the potential tariffs.
Colton’s point is very important to consider – will the U.K. plant still be worth operating after the tariffs are imposed? If Nissan decides it is more profitable (or perhaps, less costly) to move production to the Switzerland headquarters to avoid tariffs between the U.K. and EU, the U.K. labor force will suffer significantly. Nissan should use this point as a bargaining tool when trying to convince the British government to consider its interests while negotiating a trade agreement with the EU. The British government is incentivized to avoid mass layoffs at all costs, so they could be incentivized to lobby in the favor of keeping Nissan’s U.K. plants in operation.
While it is unlikely that Nissan could transfer 35% of its components to a U.K.-based supplier (to meet the 50% restriction), Nissan could consider a few options to “bend the rule”. Nissan could consider working with its suppliers to specify that the component raw materials be purchased in the U.K. to meet the requirement that the component must originate in the U.K. Nissan could also consider acquiring some of its component suppliers. Would a component produced by a Nissan-owned supplier be subject to the same domestic origin requirements?