One of the target industries of UK-based plastic injection moulder Polymermedics is the automotive industry, for which it produces complex optical components. How will Brexit affect its partners? The company decided to find out and launched a study. Here of some of its findings.
The effect of Brexit on the automotive industry
Brexit will potentially cause damage to the UK's industries, with one of the most affected being the automotive industry, especially considering that the majority of British-manufactured vehicles are made for export, of which more than half are to be exported to the EU.
Discussions on postponing the date of Brexit are being held at this time, but this does not change the fact that three distinct outcomes for Brexit still remain: soft Brexit, hard Brexit and no-deal. According to Polymermedics, the most suitable would be “to leave everything as it is right now - but the repercussions could be minimized. We will get back to it later, but at this point let's go through the threats that we could expect.”
Budding tariffs to the automotive industry
The WTO tariffs facing British-made cars in case of a hard Brexit, no-deal or a similar sub-optimal agreement, would be a staggering 10% and 4.5% on average for vehicle components.
Considering that the average profit margin is 3.5-4%, these numbers are worryingly high. According to a report prepared by the House of Commons' Committee, 60% of parts of many models are imported parts. Tier 1 suppliers import even more - around 70%. In addition, approximately 56% of UK vehicles are produced for export to Europe.
Polymermedics: “We should remember that a part, more often than not, requires multiple border crossings before it reaches the destination of final assembly. Therefore, a complex system of repayment of multiple payments should be implemented for re-exported goods.”
Tariffs in and of themselves could add an annual £2.7 billion to imports and £1.8 billion to exports, SMMT analysis shows. The numbers skyrocket if we take into account all costs that could be dragged by non-tariff barriers too. For example, for Jaguar Land Rover Brexit could cost up to £1.2 billion each year.
Non-tariff barriers in wait for the automotive industry
The most disturbing non-tariff barriers for the automotive sector are border delays, restricted access to the skilled EU staff and compliance with rules of origin.
Due to the robust transportation of goods from Europe, manufacturers have had no need to keep stock for more than a day. This means that there is presently no logistics system in place that can handle delays. Honda claims that even delays as short as 15 minutes each could potentially cost them £850,000 a year.
Not only would delays in themselves increase costs, the paperwork relating to border crossings would be increased substantially. According to Ford's calculations, the company will have to provide 115,000 declarations for its import alone.
Access to a skilled workforce is another point to discuss. SMMT's statement says that around 10% of all employees in Britain's automotive manufacturing are EU citizens and furthermore, that there are approximately 5,000 open vacancies in the sector, that are highly unlikely to be filled with local staff.
The third major issue relates to the “rules of origin” - a specific regulatory mechanism designed to determine the originating country of goods.
“And it's not quite simple as it seems. For example, if the final product consists of numerous components, most likely, at least a part of those components are imported. So, if the amount of imported parts exceeds a certain percentage, the final product cannot be considered a product originating from the country of final assembly,” the company found.
This means that any car that is manufactured in the UK should contain at least 55% of locally produced parts to be able to cross the border without duties, even under the free trade agreement. The rules are designed this way to prevent benefiting any third-party country that doesn't have a free trade agreement with the final importer.
The problem is that, right now, each vehicle made in Britain contains approximately 44% local components. But, for example, Honda uses only 25% of UK parts. Therefore, the only option to comply with the rules of origin in their case is to set up new supply chains from the ground up, which sources more parts from the UK.
Ways for automotive manufacturers to avoid disruptive Brexit consequences
Should the deal prove not to have been carefully thought through, two available options would remain - to leave the market, or to move the supply chain to the UK.
We should not forget that each case is very specific, and different manufacturers will have to solve different problems. As an example: Honda and Nissan started production in Britain to have access to the single market in which the UK was. Bentley won't be able to just leave the UK and start the production elsewhere, because Bentley's brand is founded on the idea of “Great Britain origin”. Manufacturers from different price segments will also have different issues to deal with. What the majority of manufacturers have in common is that they will have to build and maintain a local supply chain.
A UK-based supply chain for automotive manufacturers
A local supply chain could eliminate a set of complications, from rules of origin to tariffs or border delays. Polymermedics has therefore decided to move production partially from our Germany based sister-company Polyoptics to Britain.
Neil Skyba, Polymermedics' Operation Director says: “Our focus on the medical and pharmaceutical markets brought us to the unique combination of medical cleanness, precision and extremely high-quality standards for the automotive industry. It gave us the freedom to move Polyoptics' expertise in optics manufacturing for the automotive market to the UK. I'm sure that it is possible to build a strong domestic supply chain. There is definitely an opportunity for local manufacturers.”
The government's policy supports this view, by aiming to increase the UK-sourced content in British-made vehicles to 50% by 2022.
Neil continues: “As any investment, the decision to move the production will increase costs in a short term, but in a long term it will bring obvious advantages: the UK components will become more competitive compared with imported ones”.
Roadmap for the future
The European automotive industry is being bombarded with influences that are shaping how the industry will look tomorrow. The demand for autonomous-driving and electric cars is on the rise; safety, software implementation and emissions reduction are the clear top priorities. Consequently, the costs are constantly rising, but without actual price increases.
According to the latest McKinsey report on the automotive industry, EU prices on vehicles were almost constant for a decade: price growth was wiped out by a reciprocal level of inflation. Average margins in this sector are very low, and potential tariffs and non-tariff barriers could dramatically decrease profitability. Therefore, the safe long-term decision is to build a strong and robust local supply chain and we at Polymermedics are ready to be a part of it.