Fear of trade wars?
This is how the UK car industry is coping with it
Edoardo Pisciotta London - 10/05/2018
Car manufacturing is one of the key industries of the UK manufacturing sector. This industry has been growing constantly, and as of 2016 it accounts for 9.6% of UK manufacturing, up from 4.8% in 1990. The sector is very export oriented, with more than 70% of the production being sold oversea, with almost 53% going to continental Europe. This combination of factors, puts car manufacturing on top of the list of the UK government's concerns.
The outcome of the Brexit referendum brought mixed consequences for the industry. Being an export-oriented field, car manufacturers and their supply chain could suffer from tariffs being placed on their products and face limitations on trade. A recent example of such an occurrence is the decision of the Trump administration to apply tariffs on Chinese imports.
At the same time however, companies can take advantage of the weak pound and hedge against risks by bringing back production into the UK. Shifting production back is hardly a new trend, with the percentage of UK-made components in British cars raising from 36% to 44% since 2011. This trend however has now acquired a more strategic direction, being one of the solutions that manufacturers and suppliers use to reduce their exposure to currency fluctuations and trade risks.
One key example of this strategy is the supercar- manufacturer McLaren which has opened a £ 50 million chassis factory in Sheffield. The Woking-based company has decided to transfer production from Austria back to the UK, in a move that will allow cost saving of £ 10 million in the long term and more technological freedom. In addition, the move will allow for a logistical concentration of suppliers, reducing shipping times between the chassis manufacturing centre and the main factory in Woking. McLaren is hoping that, by raising the percentage of UK-made components, its cars will have a (somehow) lower price that can balance potential tariffs.
While raising UK production of components is a good idea, it is not entirely risk free. Car-manufacturers and suppliers must notice that the sector has reached its limit. Factories in the UK are operating at full capacity, or almost, with no space to take additional orders. Expanding capacity in the current scenario will surely be challenging, until at least the early 2020s. Car manufacturers and suppliers need to evaluate their strategies and be ready to diversify their risk allowing for flexibility, leaving multiple options open.
Could this be an opportunity for the UK car manufacturing industry to expand production in the UK? Please let us know your thoughts.