{"id":25113,"date":"2017-11-15T19:13:41","date_gmt":"2017-11-16T00:13:41","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/jaguar-land-rover-a-bumpy-ride-post-brexit\/"},"modified":"2017-11-15T19:13:41","modified_gmt":"2017-11-16T00:13:41","slug":"jaguar-land-rover-a-bumpy-ride-post-brexit","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/jaguar-land-rover-a-bumpy-ride-post-brexit\/","title":{"rendered":"Jaguar Land Rover: A Bumpy Ride post-Brexit"},"content":{"rendered":"

A Bumpy Ride: Brexit and the UK Auto Industry<\/strong><\/p>\n

The UK\u2019s historic Brexit vote on 23 June 2016 sent the domestic car industry reeling. Not only are 53% of cars produced in Britain sold in the EU [1], but on average 60% of the components of those cars are imported from the continent [2]. With such heavily integrated supply chains, is the industry headed for a car crash?<\/p>\n

Brexit threatens the comfortable zero-tariff, zero customs controls relationship between Britain and Europe which thus far has helped British automakers thrive. Firstly, it\u2019s as yet uncertain whether the UK and the European Union (EU) will agree on a new free trade agreement. Even if they do, strict \u201crules of origin\u201d regulations will likely require UK-produced vehicles to meet a threshold percentage of domestically-sourced component parts, to be eligible for tariff-free trade [3]. Failing to meet that threshold raises the spectre of World Trade Organisation tariffs \u2013 up to 10% on vehicles and 4.5% on component parts \u2013 plus the introduction of customs controls [4].<\/p>\n

 <\/p>\n

Jaguar Land Rover: Hitting the Brakes?<\/strong><\/p>\n

As the UK\u2019s biggest automotive company, Jaguar Land Rover (JLR) is greatly exposed to these risks. An internal memo written pre-Referendum estimated that Brexit could hit profits by over \u00a31bn by 2020 [5]. Much of that is due to the havoc such trade barriers might wreak on JLR\u2019s supply chain. Although JLR exports only 20% of its cars to the EU [6], the company imports 40% of its materials from the continent [7].<\/p>\n

 <\/p>\n

Figure 1: 18 of the 25 parts in Jaguar Land Rover\u2019s Land Rover Discovery<\/em> come from Europe [8]<\/strong><\/p>\n

\"\"<\/a><\/p>\n

Tariffs are only half of the story. With the UK out of the European customs union, new customs controls may hit the brakes on daily deliveries of millions of components to JLR\u2019s UK factories \u2013 disrupting and delaying JLR\u2019s finely-tuned \u2018just-in-time\u2019 production process [9]. While JLR could hold buffers to allow time for customs inspections, they would face increased inventory costs and further hurt profitability.<\/p>\n

The solution isn\u2019t as obvious as simply sourcing more components locally. According to CEO Ralf Speth, \u201cwe source a high degree of components in continental Europe, and at the very moment the technology is not in the UK \u2013 so there is not another choice\u201d [10]. That said, JLR has already started to take action to address this concern.<\/p>\n

\u00a0<\/strong><\/p>\n

In the Driving Seat<\/strong><\/p>\n

JLR\u2019s first action has been \u2018reshoring\u2019: bringing offshore operations back to home ground. JLR and its peers have been putting pressure on British industry to increase its component manufacturing capabilities. It seems to be working: in 2017, 44% of the parts used to build British cars were sourced domestically, up from 41% in 2015 [11]. Other successes include convincing a French bumper supplier to move its production to the UK in time for the recent launch of a new Range Rover model [12].<\/p>\n

On the other hand, if JLR cannot source enough of its component parts domestically, its alternative is to move car production to Europe. As part of a pre-Brexit strategy to expand its international footprint, JLR has been doing just that: production will soon begin at new sites in Slovakia and Austria. JLR senior management have described the new facility in Slovakia as \u201ca hedge by default\u201d against a deterioration in British trading conditions [13].<\/p>\n

 <\/p>\n

The Road Ahead<\/strong><\/p>\n

While it would not be prudent for JLR to undertake major strategic shifts without further certainty regarding Brexit negotiations, there is some further action its management could take.<\/p>\n

Currently, JLR plans to produce just one model in each of the Austrian and Slovakian plants, while 12 models are manufactured across the three UK sites [14]. The company may consider diversifying its production by reallocating further models to these new European facilities.<\/p>\n

JLR can also use its clout, as the UK\u2019s flagship auto producer, to tap in to the political sphere. To aid its reshoring efforts, the company could work with lobby groups to advocate for funding grants to help relocate component suppliers to the UK. In such discussions, the threat of shifting production outside Britain could be a powerful bargaining tool for JLR and its peers.<\/p>\n

 <\/p>\n

Driving Away<\/strong><\/p>\n

Some open questions remain. I\u2019m particularly concerned about JLR\u2019s (and the broader industry\u2019s potential reliance on a successful reshoring campaign. It is a tough sell. Realistically, how much opportunity is there for parts-makers to produce in the UK, compared with the much larger auto markets of France and Germany? If this is deemed to be limited, what is their incentive to invest in expensive new facilities in the UK?<\/p>\n

Secondly, Brexit won\u2019t just impact the UK-EU supply chain. 56% of JLR\u2019s sales are to the rest of the world [15]. Post-Brexit, as the UK renegotiates terms with all its trading partners, what further ramifications will this have for JLR?<\/p>\n

 <\/p>\n

Word Count: 800.<\/p>\n

 <\/p>\n

References<\/strong><\/p>\n

[1] Ford, Jonathan. \u201cProfiting From Brexit: McLaren shifts supply chain back to the UK.\u201d The Financial Times, 9 September, 2017. https:\/\/www.ft.com\/content\/b3d67800-9475-11e7-bdfa-eda243196c2c<\/a>, accessed November 2017.<\/p>\n

[2] The Economist. \u201cBritain\u2019s car industry gets a Mini boost but faces major problems.\u201d 27 July, 2017. https:\/\/www-economist-com.ezp-prod1.hul.harvard.edu\/news\/britain\/21725584-bmw-announces-welcome-investment-road-ahead-looks-bumpy-britains-car-industry-gets<\/a>, accessed November 2017.<\/p>\n

[3] Seal, Thomas and Ward, Jill. \u201cCars Made in U.K. May Struggle to Be British Enough Post-Brexit.\u201d Bloomberg , 21 August, 2017. https:\/\/www.bloomberg.com\/news\/articles\/2017-08-21\/cars-made-in-u-k-may-struggle-to-be-british-enough-post-brexit<\/a>, accessed November 2017<\/p>\n

[4] The Economist. \u201cBritain\u2019s car industry gets a Mini boost but faces major problems.\u201d 27 July, 2017. https:\/\/www-economist-com.ezp-prod1.hul.harvard.edu\/news\/britain\/21725584-bmw-announces-welcome-investment-road-ahead-looks-bumpy-britains-car-industry-gets<\/a>, accessed November 2017.<\/p>\n

[5] The Guardian. \u201cBrexit could cause \u00a31bn drop in Jaguar Land Rover profit by 2020.\u201d 21 June, 2016. https:\/\/www.theguardian.com\/business\/2016\/jun\/21\/brexit-could-cause-1bn-drop-jaguar-land-rover-profit-sources-say<\/a>, accessed November 2017.<\/p>\n

[6] The Economist. \u201cBritain\u2019s car industry gets a Mini boost but faces major problems.\u201d 27 July, 2017. https:\/\/www-economist-com.ezp-prod1.hul.harvard.edu\/news\/britain\/21725584-bmw-announces-welcome-investment-road-ahead-looks-bumpy-britains-car-industry-gets<\/a>, accessed November 2017.<\/p>\n

[7] Campbell, Peter and Pooler, Michael. \u201cBrexit triggers a great car parts race for UK auto industry.\u201d The Financial Times, 30 July, 2017. https:\/\/www.ft.com\/content\/b56d0936-6ae0-11e7-bfeb-33fe0c5b7eaa<\/a>, accessed November 2017.<\/p>\n

[8] ibid.<\/p>\n

[9] Seal, Thomas and Ward, Jill. \u201cCars Made in U.K. May Struggle to Be British Enough Post-Brexit.\u201d Bloomberg , 21 August, 2017. https:\/\/www.bloomberg.com\/news\/articles\/2017-08-21\/cars-made-in-u-k-may-struggle-to-be-british-enough-post-brexit<\/a>, accessed November 2017<\/p>\n

[10] Speth, Ralph. \u201cJaguar CEO Says Future of Automobile Industry is Electric.\u201d Interview on Bloomberg Daybreak: Europe, 7 September, 2017. https:\/\/www.bloomberg.com\/news\/videos\/2017-09-07\/jlr-ceo-future-of-automobile-industry-is-electric-video<\/a><\/p>\n

[11] The Economist. \u201cBrexit triggers a round of reshoring.\u201d 19 October, 2017. https:\/\/www-economist-com.ezp-prod1.hul.harvard.edu\/news\/britain\/21730479-firms-shorten-their-supply-chains-divorce-europe-nears-brexit-triggers-round<\/a>, accessed November 2017.<\/p>\n

[12] Campbell, Peter and Pooler, Michael. \u201cBrexit triggers a great car parts race for UK auto industry.\u201d The Financial Times, 30 July, 2017. https:\/\/www.ft.com\/content\/b56d0936-6ae0-11e7-bfeb-33fe0c5b7eaa<\/a>, accessed November 2017.<\/p>\n

[13] Islam, Faisal. \u201cGovernment faces Brexit revolt from unhappy carmakers over customs.\u201d Sky News, 18 September, 2017. https:\/\/news.sky.com\/story\/government-faces-brexit-revolt-from-unhappy-car-makers-over-customs-11041724<\/a>, accessed November 2017.<\/p>\n

[14] Jaguar Land Rover. 2017 Annual Report. http:\/\/annualreport2017.jaguarlandrover.com\/assets\/files\/jlr_ar16_17.pdf<\/a>, accessed November 2017.<\/p>\n

 <\/p>\n

[15] ibid.<\/p>\n","protected":false},"excerpt":{"rendered":"

Is Jaguar Land Rover, the UK’s largest auto manufacturer, heading for a car crash? 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