Whether they like it or not, it seems likely that manufacturers across the UK are heading for a future without zero-tariff trading. Although for many cost increases are inevitable, action can be taken to mitigate this while also bolstering supply chain relationships.
For automotive manufacturers the removal of free access to the single market would be more severe than for many other sectors of the economy. Key components used in the manufacture of transmissions and drive trains for example frequently pass to and fro between the UK and other parts of the EU and manufacturers are concerned that this could rack up significant cost once tariffs are introduced.
In a zero-tariff world, there would still be an opportunity for manufacturers to claim duty drawback and this would go some way to softening the impact of the changes. Under the current rules, manufacturers would be able to claim back any duty paid on goods imported from Europe at the point that the end product is shipped there for sale. While there would be some administrative burden involved in keeping track of the movements of individual components and some impact on cash-flow, the fact that the scheme already exists would make it relatively easy to deal with.
Despite the availability of duty drawback, manufacturers are expecting the cost of imported goods to increase significantly post-Brexit and this could be particularly painful as many are operating at relatively low margins. Recent downward shifts in the value of the pound mean the net cost of imported goods has already risen by around 10% and once fixed, long-term contracts and hedges come to an end, the full effect of these increases will be felt.
To mitigate the impact of these pending cost increases, automotive manufacturers should consider securing prior agreements to share their impact with key suppliers. Based on similar agreements struck by retailers, many of which have been forced to respond to the cost increases already, some manufacturers are proposing that the cost increases are split three ways - one third to be absorbed by the manufacturer, one third by the supplier and the final third added to the price of the end product.
Preparing for a zero-tariff trading environment, will require careful management and strategic aforethought. Instead of forcing suppliers to absorb cost increases, which could damage established relationships and introduce vulnerability, manufacturers should consider whether supplier protection might be required.
The prospect of customs delays could also present serious issues for automotive manufacturers. While the UK government might be hoping to negotiate a reciprocal zero-tariff agreement, the EU may well take a different view. If customs clearances take longer post-Brexit, this could cause production line downtime. To avoid this, manufacturers may decide to place more inventory into the system but this would bring more cost and potentially slow down the identification of issues such as product faults. Many manufacturers have invested heavily in the introduction of lean management processes and the thought of stepping back from these is bound to be unpopular. There could also be issues for line-side sequencing, which typically focuses on parts specific to a particular vehicle and manufacturers may even need to create more warehouse space to store the various parts.
Instead of waiting to hear which route the Brexit negotiations are taking, UK-based automotive manufacturers need to plan ahead; putting in place contingency plans based on a variety of Brexit scenarios.
Richard Gane is director and automotive sector specialist at supply chain firm, Vendigital.