Impact of Brexit on automotive industries in the UK

Subject: Technology
Type: Descriptive Essay
Pages: 20
Word count: 5031
Topics: Automotive, Brexit, Innovation, Macroeconomics, Political Science
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Introduction

The success of any business organisation is dependent on both internal and external factors. Both factors have significant impacts on how business will be conducted and the ultimate bottom line of the organisation (Ayris, 2017). Moreover, the ability of an organisation to meet its set goals and objectives will be based on its ability to adapt to changes in the market and the business environments. Today most of businesses are faced with a huge task of adjusting to the changes in the business environment; the political environment and consumer needs are constantly changing resulting to significant disruption of strategies, plan and mode of operation of businesses (Ferdinand, 2017). The United Kingdom exit vote from the European Union has resulted to a heated debate on the immediate and long term impacts to businesses in the United Kingdom. In the Brexit referendum most of the debate was centred on the economic impacts of exiting the European Union. Economic experts and firms predicted that businesses based in the United Kingdom will be hit hardest by the Brexit (Ayris, 2017).

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Currently, businesses are enjoying the free market access offered to member states to the EU. The EU single market has offered free movement of goods and services and less restrictions in conduction of trade and business across Europe. Business people in the EU have been exempted from paying tariffs which has increased the amount of trade in Europe. Full divorce of the UK from the EU will mean end of the single market membership where economic experts have pointed that proposed new trading deals will not make up for the financial losses to be faced.  The Institute for Fiscal Studies reported that the UK will suffer reduced economic growth representing an estimated loss of over £70 billion in case the nation losses the single market membership (Ferdinand, 2017). Such economic predictions mean bad to multinational business organisations based in the United Kingdom. Most automotive industries based in the UK get over 65 percent of their inputs from outside (Ayris, 2017). The Brexit have serious implications on survival of the automotive dealers in the UK. This study is aimed at identifying key factors that have direct impact on automotive supply chain business, evaluate new market possibilities for sourcing components and supply of finished motors and determine the viability of keeping the business in the United Kingdom given the consumer reliance on the JIT methodology or relocating the factory and splitting the operations in consideration to logistic challenges. In doing so, a cost-benefit analysis will be conducted on international logistics network.

Key Factors that have a Direct Impact on Business due to Lack of Free Access to the EU Markets

There are several significant factors that have direct negative impacts on business both upstream and downstream in supply chain logistics (Fischer, 2016). Free markets offer better working environments for companies dealing with logistics operations. It is much easier to ensure convenient and effective logistics operations in free markets as they allow for free movement of people, goods and services. Some of the key factors that have direct impact on the supply chain business in the United Kingdom in the case where they are denied free market in Europe. Some of for key factors include:

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  1. Globalisation of business operations where most organisations seek for exploitation of emerging markets especially in the developing economies of the world and sourcing for raw materials at low costs and seeking global coverage (Fischer, 2016).
  2. Complexity of the supply chain business where it has become complicated to cross international borders to conduct business with different countries having different custom procedures and tariffs in conducting trade. Moreover, there are local restrictions to comply with different duty rates and long distances covered in supply and delivery of goods to consumers (Fischer, 2016).
  3. Increased competition among organizations conducting the similar businesses has been putting pressure on companies to adapt to new strategies that have directly impacted the supply chain and logistics. Competition among companies has led to leverage to reduce costs and driving at leaner and integrated supply chains and focussing on logistics costs (Fischer, 2016).
  4. Merger and acquisition of organisations have had a significant impact on business operations among companies not only in the United Kingdom but globally. Organisation and companies have been entering in mergers and acquisitions in gaining access to new markets which have been proved effective in exploration and capturing of new markets. Merger and acquisitions of companies have been found to have a direct impact on the operation of supply chain companies especially when the United Kingdom will have no access to the European single market (Fischer, 2016).

Other significant factors that will have direct impact on UK based companies such as the increased demand for door to door solutions where most clients are now looking for one point solutions where a single company or organisation will handle every aspect from supply, transportation, clearance, and installation and servicing. In addition the frequent and escalated use and advancement in technology has made companies to adopt strategies that will provide for real time information in the supply delivery and storage of products. Reverse logistical operations will also have a direct influence on operation of companies in the United Kingdom after the termination of the European free market access. Reverse logistics where faulty and unwarranted goods are returned to the supplier for modification and correction. Reverse logistics will create complexity in logistical operations where companies will have difficulty in verifying the authenticity of returned goods especially when there will be no free access to the European market.

Globalisation and Complexity of Supply Chain Business

Although not proved, globalisation of trade operations and complexity of immigration procedures were the major motivating that pushed the Britons into exiting the European Union. Globalisation of business operations led to the influx of foreign labour force into the UK which increased the volume of trade in the nation. Companies had an easy access to competitive talent across member states of the European Union. This increased the success of business organisations in the UK. Empirical evidence suggests that manufacturing and supply chain organisations contribute over 10 percent of the nation real capita income (Fischer, 2016). Given that the UK will lose its free market access to the United Kingdom mean that companies based in the UK will face difficulties in acquiring top labour talent across the continent. Brexit will force foreigners working in companies based in the United Kingdom to go back to their home countries or relocate due to uncertainties and predicted difficulties in working in the nation. In this case foreign companies will have an added advantage when competing for common markets in Europe (Howarth and Quaglia, 2017). The cost of labour in the UK will increase and UK based companies will be forced to lower their product costs in the European market. Workers from foreign nations will be opting against working in the UK due to the increased restrictions and costs of working in the nation. Brexit will definitely have a negative impact on the benefits of globalisation of business operations due the reduced openness, pulling back of labour movements and difficulties in accessing the free European markets due to application of tariffs and custom duties. While companies are seeking growing new markets for their goods, globalisation offers opportunities for organizations to get low cost materials (Fischer, 2016). Specifically, manufacturing companies in the United Kingdom are seeking to increase their global logistical operations. For a long time the European single market has enable them to have increased access and ease in transporting their products across the continent. Free borders, lack of tariffs and free movement of goods reduced the cost of logistical operations and reduced time in supplying and delivering products to clients. In improving the services to new markets in Europe, the companies invested in recruiting and relocating staff to other European nations benefiting from the single market and free movement of goods.

With the full implementation of the Brexit, UK manufacturing companies will no longer have free access of the European single market. The benefits of globalisation will be pulled back and businesses in the UK will be negatively impacted. Analysis of the possible impacts of Brexit on the benefits of globalisation on UK companies point that production and landed cost will increase, increased restriction in accessing the European market will increase delivery time and costs to clients in foreign nations which will trigger breach of contracts and possible increase in costs of operation (Fischer, 2016).

Considering the production and landed costs, lack of access to the free European market will have direct negative impacts on running of supply chain and logistical operations of the company. Given that the company outsources over 68 percent of its material from outside the nation, the lack of free market access will increase the cost of acquiring automotive components due to application of border custom duties and trade tariffs (Ellison, 2016). Lack of globalisation benefits will result in increased production costs reducing the bottom line of the organisation. After expiry of the current contract, suppliers and clients will possible decline to enter into new contracts with the company due to increased costs of operations. This will force the company to seek for new markets to source out for components and modify their marketing strategies to remain competitive against other multinational companies in Europe accessing the single market. Increased landed and production costs will result in increased cost of products. This will make it difficult for the UK based company to effectively compete with foreign based organisation in terms of cost. The company will possibly lose its long term clients and partners which can result in severe consequences including closure of the business. In addition, the staff of the company will be adversely affected with the new developments. Due to increased restrictions in movement of people and complexity of the immigration laws, some of the workers would opt to relocate and seek employment in other countries. This will deprive the company with the top European talent in the logistics sectors. This will make it more difficult for the company to ensure effective logistical operations resulting in low productivity.

However, the local economy will be boosted as more UK citizens will have increased job opportunities. Suppliers in the nation will have to increase their productivity to ensure the UK based companies are adequately supplied. When more natives are employed locally, national resources allocated to providing for the jobless will be reduced and channelled to activities that will increase the productivity of UK based companies (Ellison, 2016). Furthermore, local suppliers will face reduced competition in supplying local companies with components thereby promoting their growth. Curbing the negative effects of globalisation will promote the growth of local companies as they will face reduced competition and less restriction in conducting local business. Despite the promotion of local business, there will be a high risk of losing international clients and customers especially in Europe (Ellison, 2016).

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On the other hand companies in the UK will be able to negotiate freely with suppliers and clients from different countries without limitations of EU trade terms. They will only be required to meet the threshold of the World Trade Organisation which provides an opportunity to expand their global operations. By exploring new markets outside the European Union, UK based companies will have an opportunity to independently negotiate trade terms which could possibly increase their operations at friendlier terms than those offered in the free market. Moreover, the company can enter into merger and acquisition agreements with other companies in different companies. Merger and acquisitions will help better explore new markets and have reduced operation costs in both acquiring components and supply of finished products to clients and consumers. When approached carefully, the Brexit could be a masterstroke in enhancing the performance of UK based companies in the local and international markets.

However, the company will have to increase their logistical operations in terms of increasing their production facilities, devise ways of providing customers with immediate services and advancing the insurance schemes, storage and handling costs and strategies to increase and securing additional space for accommodating increased business volumes (Ferdinand, 2017).

Increased Competition among Supply Chain and Logistics Companies

Economic experts point out that UK based companies will be adversely affected by the increased competition in reaching new markets especially in the European Union member states. Lack of free European market access will lead to reduced costs of exports from the UK which will have a negative impact on local companies. High reliance of automotive companies on components from abroad will increase the margin pressure and leaner integrated supply chains that will reduce the purchasing power for UK local companies (Mearson, 2016). Increased cost of obtaining raw materials and components from outside and reduced costs in selling of their finished goods to consumers will resulted in a reduced bottom line for the organisation. The organisation will be forced to increase their focus on logistical costs due to sudden drop in cost of products (Ellison, 2016). Higher portion of income will be channelled in sorting out the increased logistical operations required in supplying and delivering finished goods to clients across Europe.

Brexit move will directly influence the emigration and immigration patterns negatively affecting the movement of workers into the nation (Mearson, 2016). The move will result to increased restrictions and custom duties in obtaining work permits and residency status in the country. It would more difficult for companies to obtain top talent from Europe as they will opt to work in other nations allowing for free movement of people and goods. In addition company staff working in other nations will find it more difficult to move across countries when conducting their duties and responsibilities. This will mean increased logistical operation cost for the organisation. Given the lack of free market access, export from the UK will be cheaper and it would be difficult for organisations to recover the production costs (Ellison, 2016). Foreign companies will have an upper hand in exploitation of the European market compared to UK based companies. Therefore, UK based companies will have to devise a way remaining competitive in both the local market and the European market (Mearson, 2016).

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To offset the impacts the company will be forced explore new markets especially in the developing economies where there is high availability of low cost components and wide market for finished products. The companies in the UK will have an advantage of entering into new deals with other nations without the restrictions of the EU trade regulations. By being aggressive in the market, UK based companies will have an upper hand in gaining new markets in Brazil, India, Asia and South Africa which represent new markets for finished automotive products (Ferdinand, 2017).

Changes in Operation Planning and Scheduling of Logistical Operation to manage negative Brexit Impacts

Success and sustainability of any business depends on its ability to adapt to new changes in the business environment (Wang and Macaulay, 2017). Change in the business environment can have both positive and negative impact. In order to remain competitive in the market and increasing the bottom line of the company, business managers need to develop new strategies that will keep the business relevant. Brexit and imminent lack of access to the European free market have and will negatively impact on UK businesses especially in the manufacturing sector. UK based automotive companies need to develop and implement strategies that will help increase business operations and offset the negative impacts that will come with Brexit (Mearson, 2016). Moreover, business community in the UK which is the most hit sector by Brexit should convert the crisis into new opportunities that will ensure growth of the organisations and ultimately the UK economy. Some of the strategies that can be used to retain customers and enhance the production levels and delivery schedules include:

Merging of the company’s’ operations with other organisation having similar business operations in Europe will help in curbing the negative impacts of Brexit. By merging the operations of the company, it would be easier to outsource components for the company while at the same time maintain the workforce of the company. In addition, merging will open up new opportunities for the company and reduced logistical operations cost (Borgström and Hertz, 2013). Improved logistical operations will help create and build confidence with clients who will be willing to engage into new long term contracts with the company. Through merging operations with other multinational companies enjoying the free European market access will help maintain customers without having a negative impact on logistical operations (Mearson, 2016).

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To prevent the negative impacts of restricted access of the European market, the company will have to devise new operation planning and scheduling systems to improve supply and delivery of services to consumers. For instance with the application of new trade tariffs, the company will need to plan and change the mode of transportation of acquiring components and delivery of products to meet the time frames in time introduced by new regulations (Mearson, 2016). Efficient planning procedures will be developed to accommodate all changes brought about by new trading regulations in such a manner normal business operations will not be affected. The new logistical operations should be able to incorporate new scheduling systems to ensure delivery of finished products to clients without violation of trading terms stated in contracts. By doing so the company will be able to ensure smooth transition into post-Brexit era (Mearson, 2016).

Evaluation of New Markets for Sourcing of Components and Supply of Finished Motors

With the exclusion of United Kingdom from the free European market, the automotive organisation in the UK will have to seek for new markets for sourcing manufacturing components and supplying of finished motors (Wang and Macaulay, 2017). Naturally, EU member states will make it difficult for the UK to conduct business by introducing punitive trade tariffs for non-member states. However, with globalisation of business operations, the UK based companies can source out component from other nations and find new markets for supplying finished motors. Developing economies in Asia, Brazil, South Africa and Malaysia represent areas where the company can find new markets for its products and also form a source for low cost automotive manufacturing components. By striking new trade deals with component suppliers from these nations, the UK based company can form strong partnership business that will surpass the benefits of signing a single market agreement with the European Union (Wang and Macaulay, 2017).

Despite the promising nature of exploring new markets especially in developing economies, the company should be ready to invest huge amount of resources in developing effective logistics operation plans and schedules, financial projections and risk management models to ensure feasibility of the new idea. In addition the company will carry out key performance indicators that will guarantee success in maintaining productivity of the organisation (Wang and Macaulay, 2017).

Analysis of critical performance indicators for a supply chain company will involve identification of key indicators known as KPIs which are developed by organisational managers with variables reflecting operational productivity. Identifying and developing key performance indicators will involve setting targets and validating key areas that are critical to the performance of the organisation (Borgström and Hertz, 2013). For instance, in Warehouse operations one need to determine the time taken between the receipt of goods and the time they are put away, time for picking and placing orders for shipment and preparation of dispatch documents. The process will involve assessment of the present state of the business and prescribing the steps that will be taken to improve or maintain good performance of the organisation amid the emerging market challenges (Fernandes, 2016).

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For example, the organisation has a centralised regional motor distribution centre used for storing and dispatch of products to consumers in the region, inbound documentation accuracy including indication of clearance time, arrival time, recording of damaged goods, amount of space occupied receipt of orders and shortages need to be available in order to prepare efficient logistical schedules. There will a need to identify causes of low organisational performance and their likely consequences to the organisation. Some of the reason for delay product clearance could be due to lack of knowledge and familiarity of document requirement, description of wrong products portraying different qualities and quantities (Fantazy, Mukerji and Kumar, 2012).

In analysis methods of improving logistical operation in exploration of new markets for sourcing components and supply of finished motors, it is important for the company to maintain customer service levels that would help in safeguarding the organisation against losses and extreme financial spending (Fernandes, 2016). Analysis of the supply chain and logistics will include detailed assessment of amount of space utilised to ensure clear record of the amount of space occupied during a given period and the total number of storage locations that are available in the warehouse. To accurately determine the performance of the supply chain both inbound and out bound performance indicators need to be analysed. The inbound performance indicators include documentation of accuracy of records, the arrival time of goods, clearance time, damaged products cleared products(containers), amount of space occupied, details of picked and ordered products, receipt of orders and assembly durations. Outbound performance evaluation techniques will involve analysis of the amount of time for preparation of export documents, time taken in dispatch of products, record of the amount of goods delivered to clients on time and the shortages and, possible damage of the supplied goods on arrival both at the warehouse and the client (Fernandes, 2016).

Considering that the new markets will form crossing of the international waters, new modes of transport for sourcing of components and delivery of finished goods need to be determined (Bailey and De Propris, 2017). Only two forms of transport are for the company to ensure effective acquisition and delivery. Air and water transportation have been determined to be the most effective modes of transport for sourcing components and delivery of finished motors in the overseas markets. In conducting international trade, sea transport is the most convenient and significant mode of transportation that has been proved to deliver products in good condition. Over long distances, sea transport offers the cheapest means to carry heavy loads (Bailey and De Propris, 2017). However, sea transport require high investment in shipping lines with organisation developing strategies to establish faster and ships and efficient port warehouses. In reaching to the overseas new markets, the company need to develop container carriers and bulk carrier to ensure effective servicing of customers. A cost benefit analysis of the two show that use of water transport will be the most effective in ensuring safe delivery of products to clients in the oversee market (Fantazy, Mukerji and Kumar, 2012). However, it will take considerable amount of time to deliver bulk amount of finished motors to clients in the new markets. This will call for increased costs of logistical operations due to the resources and security required in making shipments to clients in the new markets (Bailey and De Propris, 2017). The initial investment cost for setting up shipping lines and bulk carriers will involve huge investment of financial resources. However with the availability of ready market for finished goods in the overseas market forms a good investment following lack of free market access in Europe. The developing economies in the third world countries represent valuable new markets which the company can dominate. In addition, the new markets offer effective sources of components for automotive factories which are cheaper compared to those found in the European free market (Bailey and De Propris, 2017). This provides the Cardiff based company to expand its operations and global coverage. A good example of an established internal shipping line is the Emma Maersk which represents the largest container carrier in the world.

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Therefore the company will be required to establish new warehouses, in the new markets where goods will stored for a given period to ensure delivery of finished goods to customers on time (Howarth and Quaglia, 2017). The warehouses will also be used for storing components to prepare them for shipment to factory sites in bulk so as to improve on the economies of scale for manufacturing. Such warehouses can be established in Singapore, Hong Kong, Jeddah, Nava Sheva, Pretoria, Mombasa and Algeciras. However, the choice of port will be dependent on the geographical location, port charges, existing port infrastructure and the size of the new market. Other logistical issues to consider include disruptions due to loading and unloading problems, politics, congestion, re-positioning, port operations and charges. When the new markets have been found to contribute high on revenue, possibilities of expanding the manufacturing factories near the new markets will be considered. It would be much easier to adequately meet the demands and requirements of clients in time and when the goods are in good condition (Howarth and Quaglia, 2017).

Viability of Operating the Business from United Kingdom

The Just in Time methodology applied by the company ensures high efficiency in receiving and delivery of goods. The production process of the company work under the principle of manufacturing finished motors upon the availability of a demanding market. The European free market provide for fast acquisition of automotive components which would be quickly assembled and finished motors delivered to clients in time. The JIT methodology ensured reduced inventory costs for the company where the demand for finished goods was well predicted. The supply chain for the company ensured effective delivery of automotive components that made the company to adhere to the low inventory levels where finished motors were availed to clients just when they were needed. The JIT methodology for inventory control ensured that the company was flexible in shifting from one product to the other depending on consumer needs (Fantazy, Mukerji and Kumar, 2012). The Brexit move has however resulted to disruption of the supply chain as it has become more difficult for the company to sourer for its components in Europe. The move has brought up a situation where a single component supplier can cause massive disruption of the supply chain affecting the timely delivery of goods to clients. With full implementation of Brexit, the Europe free market will be shut for UK companies. Without effective plans to find new sources for components, the company will face severe penalties resulting from breach of contract with clients. Such a situation will result in huge financial losses that have the ability to down the operations of the company (Fantazy, Mukerji and Kumar, 2012).

If the company will proceed with the JIT methodology, it would be no longer viable to operate the business from Cardiff given the reduced market both locally and in Europe (Ayris, 2017). The cost of sourcing components from European free market countries would be high due to application of trade tariffs and high cost low export prices of finished goods from the UK. The emerging new markets in developing economies and cheap availability of component will force the company to relocate its operations to the new markets to cut off logistical operation and supply chain costs. Given that other European nations are still operating under the free single market, it would be viable to relocate or split the operation of the company to nations that contribute to revenue of the company and form major sources for the various automotive components (Ayris, 2017). In addition, over 60 percent of the company’s staff work outside the UK. It would be cost effective for the company to shift the few workers in Cardiff to work in other nations.

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Empirical evidence suggests that the developing nations are a major source of cheap factory components and at the same time they are offering ready markets for finished goods. By analysing key performance indicators for businesses investing and relocating automotive manufacturing business to these countries is viable but a risky business operation. Shifting of operations of the business from the UK to developing economies will involve huge amount of investments in shipping lines, containers and bulk carriers (Fantazy, Mukerji and Kumar, 2012). The company will have to build new warehouses and factories in order to maintain the JIT methodology in their production processes. However, once established, the company will have formed a major capture of the new markets that will ensure optimal financial performance of the company even after Brexit. Maintenance of the international logistics network will involve high cost of operations. The time frame for supply chain and logistic operations will increase thus affecting the period of arrival of goods to clients. Moreover, international sea transportation will require huge investment in goods insurance further raising the cost of operating international trade. However, by shifting the operations of the company to new markets, the ultimate logistics cost will be cheaper than retaining the operations of the company in Cardiff given the small domestic market for operating the business. Once the company has achieved stability and the UK have undergone the Brexit transition period, re-establishing the company back in the UK would be considered (Ayris, 2017).

Conclusion

United Kingdom exit from the European Union was highly contested with the ‘leave’ campaign emerging the winners. Economic analysis suggests sever economic impacts on UK based companies due to the end of the free European market access. Specifically, the automotive manufacturing sector will be hit hardest by the Brexit implications on business. Over 65 percent of revenue for automotive manufacturing companies comes from outside UK. These companies source for its component in the European market. In addition, two thirds of the staff is based in Europe. Lack of free market access will negatively impact the JIT methodology of inventory control of the Cardiff based company. In addition, the company will possibly be a victim of increased competition from foreign based companies enjoying the free market access. The automotive company will be forced to operate on limited domestic market resulting to reduced revenue. In order to remain completive the company will have to explore new markets in the developing economies. Though the move will increase the equity of the organisation, the company will, have to face high initial investment in ensuring efficient logistics and supply chain cost of international trade.

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