BREXIT AND SUPPLY CHAIN MANAGEMENT
Introduction
In recent years the UK automotive industry has performed relatively well with output increasing by around 60% in the last ten years. Similarly, the industry has also received over £8bn worth of investment and employing around 800,000 jobs (Bailey and De Propris 2017). Also, at least 54% of UK manufactured vehicles are sold in the EU market; the UK motor vehicle industry has clearly benefited from EU membership. Areas such as the Midlands that were highly affected by the global financial crisis have experienced an up turn in fortunes (Bailey and Berkley 2014). The recent is attributed to several factors but UK access to the EU Single Market remains a central reason to this success. Also, the EU enabled the industry to access skilled workers and European networks and research funding (KPMG, 2014). In the light of Brexit it is vital to consider how Brexit will impact on the UK automotive industry supply chain and reverse logistic processes. Currently automotive supply chains are optimized based on open borders, potential issues that will arise Post- Brexit include a more complicated and time consuming customs process, new tariffs and tax regimes (import and excise duty as well as VAT). Brexit may have a negative impact on the UK industry due to tariffs with reverse logistics impacted by a potential increase in the cost of parts and subsequently car maintenance.
Discussion
Auto manufacturing in UK
Before the new Bentley SUV leaves the show room its bumper will have already crossed the English Channel three times covering a distance of around 2200 miles (). Although the luxury car maker is owned by a German company (Volkswagen), its manufacturing plant is based in Crewe (northern England), where VW heavily invested in an old factory dating from the World War 2 period. Despite the assembly being done in Britain, the Bentley parts are sourced from across the globe, and travel among factories in UK before finally landing at the Crewe plant (). The Bentley manufacturing process is symbolic of the car manufacturing process in Britain, with automakers supply chain at risk of being affected by tariffs once Britain exits the European single market. For instance, bumpers for some Bentley models like Bentaygas are produced in Europe, sent to Crewe for quality checks, and back to Germany for specialized painting, and back to UK for final assembly . Don't use plagiarised sources.Get your custom essay just from $11/page
According to the trade body SMMT, the UK auto industry supports 169,000 manufacturing jobs with 46% of those positions directly in the supply chain (SMMT 2019). 18 of the world’s top manufacturers of parts have operations in the UK, with at least 66% (£4bn worth) of parts exported directly into the EU (ACEA 2019). Similarly, majority of components used in British built cars are imported (ACEA 2019). In case tariffs come into play the supply chain would have to be shortened, integrated or relocated in or out of UK (Frost and Sullivan 2019). In terms of engines Ford and BMW makes engines in UK with parts imported from Europe; the engines are then assembled in cars in other countries that are then sold in the UK.
Impacts associated with reverse logistics on the UK automotive supply chain
Economic
The most significant impact of Brexit on reverse logistics will be felt in the parts market. UK car exports will attract hefty tariffs if manufacturers are unable to source a bigger proportion of parts from the UK (Baileys and De Propris 2017). According to the WTO the UK car exports would attract a tariff on 10% of vehicles and 4.5% on parts; the cost of production would be significantly and this would reflect on the consumer price of UK produced cars (BIES 2018). Although the supplier base is steadily growing UK cases are still heavily dependent on parts sourced from Europe . Brexit is creating a new urgency to create free trade agreements that minimize the impacts of costly tariffs (Frost and Sullivan 2019). Rules of origin regulations may mean that UK cars may fail to meet the components regulation (at least half from source country); and that the manufacturing gap to be bridged is even wider.
The Brexit process has created significant uncertainty in the UK automotive reverse logistics process. Of concern is how rising prices related to the falling sterling value could result in reduced consumer spending on car maintenance (Di Li et al. 2019). Tariffs on automotive parts could also potentially cost UK suppliers up to £3 billion in lost revenue (Capprielo 2017; Centre for Brexit Studies 2017). In a no-deal scenario the UK may lose tariff free access to the EU market resulting in up to 4.5% additional tariff on parts according to WTO regulations (Hartzsche et al. 2019). The tariffs would cost vehicle owners an additional £21 for parts annually with the cost rising up to £70 due to customs changes.UK’s departure from a custom’s union could also result in shortages of time-critical service and repair parts (Humphreys and Munro 2019; Sampson 2017). Distributors would have to invest additional working capital in the areas of additional warehousing and contingency stock to alleviate the impact of potential port delays.
Similarly, Brexit casts uncertainity on UK’s automotive aftermarket that has been under EU regulations for at least 20 years. Issues arising include whether car owners will be able to continue to use independent workshops when vehicles are still covered by the new car warranty without previous EU applicable regulations (Julio 2017).Also, there is concern about the EU Type Approval Framework and whether UK auto industry players can sell their products in the EU market (Karlsson et al. 2018). Although, the Vehicle Certification Agency (VCA) in UK provides the necessary certification for UK made parts sold in Europe it is uncertain what the new regulatory framework post Brexit will look like.
Social
The reverse logistics sector will also have to address the access or in access to skills as a result of Brexit. Currently, the UK automotive sector has a 5000 people skill gap specifically in design and product engineering (Broughton et al. 2016). Prior to Brexit the industry was characterized by high labor flexibility that allowed manufacturers to easily train employees in various EU locations as well as quick manufacturing scalability (Portes and Forter 2017). Brexit may limit the movement of skilled employees between UK and Europe and transfer of valuable reverse logistics knowledge into UK (CIPD 2018). Also, the automotive industry may face challenges in recruiting an adequate number of qualified employees from the EU as well as developing home grown UK talent.
Figure 1: Impact of Brexit: Automotive Trade, UK and EU, 2017
Source: SMMT, Frost & Sullivan
Reverse logistics
In the automotive sector production parts fall under the Original Equipment (OE) and Aftermarket categories (Golinska and Dawson 2011). OE parts form the initial product, while the same part can be sold again in the Aftermarket (Chan et al., 2012). Aftermarket parts are part of the service market and have gained more prominence in recent times accounting for up to 40 to 50% of a company’s revenue. Reverse logistics then become important in customer management, revenue management and also as an element of legal and environmental issues (Chan et al., 2012).
Measures undertaken to mitigate Brexit impact on reverse logistics
Up scaling production of parts in UK factories
In response to the uncertainty associated with Brexit there has been concerted effort to Britishise the supply chain for vehicles manufactured in the UK (SMMT 2019). In the past two years the percentage of UK parts in British manufactured cars has grown from 41% to 44% (initially it was at 36%) (SMMT 2019);therefore even as British car manufacturing is soaring it becomes vital to use locally sourced parts. Parts that have seen growth include exhausts, large pressings, small pressings and plastics, to the tune of 60% (SMMT 2019). UK parts suppliers are able to create a healthy supply chain based on the just in time concept (SMMT 2019); by increasing the British supply base UK auto manufacturers will mitigate the impact of Brexit by minimizing the time and costs associated with supply chains and minimize delays that can halt production. Similarly, global automakers that may want to invest in UK will be attracted by the healthy local supply chain, rather than being put off by the threat of new tarrifs that may arise from Brexit (SMMT 2019). Also, enhancing local production of parts will enable the industry to be able to negotiate beneficial trading terms as they will be able to meet the minimum requirements of origin thresholds.
Support for small businesses
In response to the Brexit uncertainty The Society of Motor Manufacturers and Traders has set up a programme to support small and medium-sized firms who are the majority in UK’s automotive supply chain (SMMT 2016). In light of Brexit the UK automotive industry will have to deal with changes in regulations, customs processes, tariffs and potential restricted movement of staff (Tetlor and Stojavonic 2018). Also, the firms will have to deal with new business requirements, delays in movement of parts in and out of the UK, changes in raw material stocks and warehousing programs (The Economist 2019). Similarly, Post-Brexit automotive industry will bring complex custom changes such as increased paperwork, detailed customs declaration, customs guidance and cash flow implications related to tariffs and taxes (The Economist 2019). Through SMMT SME’s will be provided with legal advice from five large consulting firms to navigate the business challenges posed by Brexit.
Contingency Budget
Similarly, the SMMT members (industry players) have spent at least £330m on risk mitigation plans including new IT systems, new regulatory framework on storage of chemicals, warehousing, extra stock insurance, logistics management like seeking alternative ports, training in new customs policies, recruitment of new staff and stockpiling of specialized pallets for parts (SMMT 2019).
Conclusion
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