Given the UK’s vote to leave the European Union in June this year, discussions of ‘Brexit’ were bound to recur at the inaugural Automotive Logistics UK summit, which took place last week at Mercedes-Benz World at Brooklands, just outside London, where Marcus Williams reports
Carmakers need to recoup the costs incurred by the recent fall in the British pound and prepare for a potential increase in import tariffs, given the UK’s vote back in June to leave the European Union – but there is little left to squeeze out of the supply chain, delegates at last week’s Automotive Logistics UK summit heard.
However, the UK remains part of a growing global automotive industry and the complexity of the supply chains supporting this growth requires better use of the latest digital technology and a greater understanding of where the proliferation of data now available can be most usefully applied, as carmakers look at more automation of physical logistics processes.
The move from mass production to mass customisation, as consumers demand more from carmakers using their own access to the latest technology, is also now a major consideration for all involved in the supply chain.
Trade crucial to growth
The UK is a growing market with 3m annual light vehicle sales. It is also on target to produce 1.7m vehicles this year, according to figures from the Society of Motor Manufacturers and Traders (SMMT) of which the majority – 1.2m – will be exported. The country also imports 2.5m vehicles. It makes 2.36m engines a year, with 65% of that being exported, and boasts a £21 billion ($23 billion) service and repair aftermarket.
According to figures from analyst PwC Autofacts, its contribution to growth in the combined European Union and European Free Trade Association (which includes Iceland, Lichtenstein, Norway and Switzerland) areas, which are expected to see 17.1m in light vehicle sales this year, is around 10%.
What all this means is that trade in and out of the country is crucial to the continued growth of the sector. The UK’s automotive plants are highly integrated with mainland Europe, with up to 50% of components for some models assembled in the UK coming from Europe. However, as has been well documented, there are strong concerns in the automotive industry about the UK’s vote in June to exit the EU.
Earlier this year, when the SMMT polled its members, which include leading carmakers and suppliers, 77% wanted to remain part of the EU. They cited access to the markets in Europe and its skilled workforce as important factors. Those concerns were central to discussions at the Automotive Logistics UK summit.
How the UK will end its membership of the EU and the rules under which it will continue to trade once it is finally outside – something estimated to take two years to bring to fruition – are difficult to predict at the moment. The formal legal process for exiting the EU, called Article 50, will be triggered in March 2017 according to the prime minister, Theresa May.
Her government is calling for a bespoke relationship with maximum single market access but with a control on immigration and regulations that could throw up some contradictions. The free movement of goods, capital, services and people are closely tied together and represent a line the EU will not cross. The UK’s call for greater control on the movement of people could put negotiations around the UK’s access to the European single market at risk.
If a so-called ‘hard Brexit’ direction is taken, which seems likely given the government’s rhetoric at the Conservative Party conference last week, the car industry in the UK could be looking at World Trade Organisation (WTO) tariffs of 9.7% for vehicles and 3.8% for parts.
Levent Yuksel, Jaguar Land Rover’s plant group manager for global material planning and logistics (MP&L), said the importance of a tariff-free relationship between Europe and the UK was immense, given the importance of the European market to UK vehicle production.
“We are engaged with the government and EU parliament to identify the importance of tariff-free trade between UK and Europe. We want to protect the existing situation,” he said.
JLR is the biggest premium car producer in the UK and has already said it would ‘realign’ investment thinking following Brexit. Almost 80% of its production is exported from the UK.
While trade under WTO rules would allow greater flexibility in global trade agreements and free the UK from the need to follow EU rules and regulations, it could also see the introduction of non-tariff trade barriers and a divergence of regulations. That could make the logistics underpinning the movement of cars and parts more costly and problematic. What is more, negotiations on free trade agreements with Europe and the wider world could take a long time to complete.
In short, WTO rules or some other form of free trade agreement are unlikely to match the efficiency of current trade and customs rules within a single market.
Furthermore, French and German elections could hamper the progress of negotiations next year. At the same time, international pressure is building on the government to end the uncertainty, with the Japanese government, for one, pressing the UK to protect corporate interests and investments.
As with JLR, most of the major OEMs in the UK have already expressed their concerns. Nissan has put investment in its Sunderland plant on hold until the situation becomes clearer and has indicated it will seek government compensation if import and export tariffs are introduced.
Toyota UK, which exports 85% of its production from the UK, has said that UK production would be “very, very difficult” if tariffs and barriers were applied. Opel/Vauxhall has also said it would review all its options, predicting a $400m loss this year because of the decision to leave.
Ford wants a zero tariff regime for trade or compensation if tariffs were introduced, according to its European purchasing boss, Alan Draper. That is important for moves between the UK and Turkey, from where it imports the popular Transit van made at its joint venture, Ford Otosan, in Koecaeli. It is also important for engines being moved out of its plants in Dagenham and Bridgend.
Ford does not want a hard Brexit, something that it expects to hit exchange rates further. The multi-decade low affecting sterling at the moment is increasing the cost of imports. Ford imports 440,000 vehicles to the UK each year as well as parts for engine production.
Some at the UK conference wondered where the OEMs would look to recoup their losses from this drop in the value of the pound.
Jan-Willem Adrian, vice-president of strategy and supply chain at business analytics provider ActiveViam, pointed to carmaker comments from the recent Paris Motor Show.
“One of the key things mentioned there was that the fall of the British pound after Brexit has led to problems for the car manufacturers in the sense that they want to recoup some of their losses because of that fall,” he noted.
Carmakers including Renault, Nissan and Peugeot have increased vehicle prices by 1-2% already but said at the Paris show that that increase would not be sufficient to recoup the losses from the drop in the pound.
“This means that somewhere down the line, somebody has to make up for the difference lost,” said Adrian, who asked whether this was likely to put greater pressure on logistics providers to find cost savings.
According to Gefco’s board chairman Luc Nadal, it could not change the level of pressure logistics providers were already under in terms of cost and reliability, however.
“The consequences will be on the OEM to try and recover that [difference] but it will not change the behaviour of logistics providers and the supply chain because everyone is under pressure: tier one and two, and logistics providers,” said Nadal. He illustrated the savings the industry had already achieved by comparing the price of cars at the Paris Motor Show to those of 30 years ago. “Thirty years ago it was the same and you have better cars today for the same price,” he said. “All of us, we have erased more than inflation.”
Draper looked on the bright side and said there was some hope in terms of the impact of tariffs because even though the Conservative government appeared to have no clear vision on what the UK’s relationship with Europe or the rest of the world would be like in three years, the feedback it had been given was positive on that subject at least.
“Automotive is very important to the UK economy and the government is listening to the concerns,” said Draper, adding that he expected the government to work with the UK’s carmakers. Ford so far has had a strong relationship with it on innovation. “They will continue to listen and we will work through the process,” he said.
Draper also said it was not the first time the company had faced challenges from economic shifts. South America was one example.
“We have always found a way through the costs involved and we will try to find a sensible way through it now to help the customer,” he said.
Supporting global growth
Regardless of its current woes, the UK is also part of a growing global automotive industry and hard Brexit or not, that global growth is going to continue.
As PwC Autofacts’ EU lead analyst, Philippe Funda, made clear, global light vehicle assembly is forecast to grow by more than 25% to 2022. While emerging markets will account for the vast majority of that growth (almost 94%) location factors and free trade agreements are important factors in the mature economies.
Draper noted that its business and logistics more generally were global. Given the scale, operations there would always be a positive angle and he said Ford would be looking for opportunities from the change in the UK’s trading strategy.
While he had expressed his concerns about the importance of tariff-free trade between the UK and the EU, JLR’s Yuksel was also keen to highlight the company’s global standing at the same time.
“At heart we are a British company but we compete globally,” he said.
In the UK the carmaker has three assembly plants – Castle Bromwich, Halewood and Solihull – but it is also opening a plant in Slovakia in 2018 and has joint ventures in China and with contract manufacturer Magna Steyr in Austria. It also has 1,000 supplier locations worldwide. On the outbound side it distributes 550,000 vehicles a year to 189 countries.
Yuksel said that JLR was looking globally at meeting customer needs and expanding its base. Regardless of Brexit, the company was on a good path to growth, he added.
Yuksel’s colleague Richard Marlow, planning and strategy manager in the UK plant group for material planning and logistics, talked more about how the company was developing the logistics supporting this global growth. That included more consistent labelling standards on the inbound side using new technology by working closely with vendors and suppliers to drive conformity into the inbound process.
Marlow said there needed to be more automation of physical logistics processes and that the company needed to have greater consolidation in its logistics networks, with one logistics centre per plant and an optimised freight network. JLR was also working on better integrated crossdock operations and yard management at its older sites in the UK, as well as putting an emphasis on guaranteeing future capacity for production growth.
Marlow said JLR was looking at its in-plant logistics as well. It was bringing its storage and retrieval system at Halewood up to scratch and would roll that upgrade out in Solihull next month followed by Castle Bromwich, something that its logistics provider Gefco was helping with.
Gefco’s Nadal clarified that the logistics provider was investing in an 11,600 sq.m facility to support JLR’s logistics at Halewood. However, he did warn that if the UK did not provide greater clarity on the its future relationship with Europe there would be a limit on an investment across the industry over the next two years and there could be greater change in the long term.
Marlow said it was important to make logistics as risk-free as possible and introduce a ‘one touch logistics’ priority, reducing as much as possible the number of times a part was handled by a human in the inbound process.
Behind this global transformation of processes it was key to have accurate data, he added.
“Jaguar Land Rover’s logistics is transforming and its network will meet the challenges of this ambitious growth,” said Marlow. “Globalisation requires integrated logistics networks and data flow for operations – that is absolutely critical. Information is very critical in terms of getting to market and making sure we provide a service to our customers more effectively.”
Technology to tackle complexity
Tomasz Spluszka, EDI consulting manager at Comarch EDI, which makes and integrates IT systems for global customers, had some advice on what IT could do for the increased flow of information through the global logistics networks that Marlow was talking about.
Spluszka identified the main areas of difficulty associated with this supply chain complexity that companies were now facing. They included maintaining end-to-end visibility, dealing with a global economy, communication with suppliers based around the globe, and knowing when their goods would arrive in the warehouse.
“The supply chain is getting more and more complex, with more companies involved in the process, and more suppliers and LSPs,” said Spluszka. “There is a lot of attention to cost and how to reduce it in the whole logistics process.”
At the same time, logistics processes need to be more ecologically sustainable now and supplier performance on delivery is being more closely scrutinised. Natural disasters and cyber-crime are also factors that companies need to address with their IT solutions.
The answer is better data pooling and the establishment of strong business-to-business (B2B) collaboration platforms. According to Spluszka, data pooling provides better management of information because it sets up a central directory that streamlines product data, providing greater accuracy and less delay.
Spluszka said everyone involved in the process of getting a part inbound needed the same understanding of that part.
In terms of B2B collaboration, platforms now exist that allow business data to be shared by all partners in the process, including the supplier, logistics providers and the OEMs.
“You are exchanging information automatically without the need for human intervention,” he said, and pointed to the different electronic data interchange (EDI) options out there including direct EDI messaging and VAN EDI, where messages are exchanged via value added networks. E-invoicing also allows for the faster and cheaper (paperless) exchange of documents between suppliers and buyers, something being led by companies in northern Europe where around 40% of invoices are now exchanged electronically on a B2B basis.
That sort of technology-led advance in collaboration between automotive parties is going to be crucial as customers get more sophisticated with their choice of vehicle and less patient with order-to-delivery times. There has been an explosion in technological innovation affecting how cars are made and how they are bought now, with ever more sophisticated mobile device apps allowing customers to choose and change vehicle options.
According to Awais Ajmal, general manager of supply chain for Kia Motors, mass customisation will add something to lead times but will not affect the delivery process fundamentally. PSA Group’s director of programming, logistics and distribution, David Higgins, agreed that it would not have a major impact on the delivery process given that the customisation was done further back along the line and that lead times could be altered.
Barinder Lalria, managing consultant at PA Consulting Services, highlighted the shift in the industry from mass production to mass customisation in some more detail. He looked at Industry 4.0, which covers developments in cyber-physical systems, the Internet of Things and cloud computing, and how this would have a dramatic impact on the supply chain. Lalria pointed to advances in new product development and how rapidly cars were now being launched. He also pointed to the emergence of the ‘smart factory’, which is based on modular structure where cyber-physical systems monitor the physical processes throughout and create a virtual copy of the physical world, facilitating decentralised decisions. This meant that there was now more cooperation between supplier and customer with reduced time to market and faster delivery times. The digital supply chain is connecting the industry and using autonomous techniques to provide real-time integrated planning.
Lalria said it was imperative the UK had the capability to deal with this trend in customer demand and the technology underpinning it, if it was to remain a production centre.
“Industry 4.0 is the biggest step since electronics and IT-enabled mass automation,” said Lalria.
If UK manufacturers do keep up with the latest technology, they can expect to boost revenue through the introduction of more innovative vehicles with better quality at a lower cost. They will have more direct access to customers, increased production flexibility and lower inventory costs, said Lalria.
Back to basics on data
The digital connections between the supply chain and the smart factory were certainly something that JLR was looking at, according to Richard Marlow. He said the carmaker was looking at Industry 4.0 and how it could benefit from data right back to the supply base and beyond. This could afford total visibility from the making of parts right up to delivery of the vehicle to the customer.
“The use of new technology and data transfer that is out there has been developing fast and we need to find where it can add value to our business,” said Marlow. “We are midway there but binding strongly into the technology.”
However, data is proliferating and Marlow said what was also important was to weed out the data that was relevant and feed that into the process.
“The question is how to integrate the data both within the company and between companies,” added Spluszka. “Systems need to be connected and simple. It is not about data collection; it is about how that data is used.”
This was something of a priority for Awais Ajmal, general manager of supply chain for Kia Motors.
Ajmal said there was a lot of information out there now and that it involved many systems. “We should go back to basics and ask what we are doing with that information,” he said. That was complicated by the different perspectives on the data required, depending on where you were in the supply chain, he observed.
The OEM wants information to give an accurate delivery date to the dealer, while outbound logistics providers want it to plan more efficient loads and get the cars to the dealer on time. The dealer needs ready information to give an accurate date to the end customer. Using a system designed with its logistics provider in the UK – Paragon – Ajmal said it could now use a simple algorithm to more accurately predict delivery time to the dealer – and had a 96% accuracy rate.
“[You have to ask], where is the information adding value?” said Ajmal. “Use that information to find out when it should be disseminated. The future is about understanding the data and disseminating it to the right people at the right time.”
Rather than using the barcodes it has used traditionally for vehicle tracking, it is now using passive RFID tags on each vehicle, a move Ajmal described as a ‘calculated risk’.
“Paragon gave us the confidence that it would work and it has,” said Ajmal “This is a record year for Kia but now Kia can track a car in real time to within 50cm by using this system.”
Once past the facility gate, Kia imports the data on each vehicle into its SAP system, which goes out to its network. Ajmal said there was also a good opportunity to expand the technology further along the supply chain.
“If the tags could be installed at the factory we could use this information through the different phase gates and that could be given to everyone involved,” he said.
Crucial to this, however, was trust amongst the parties involved about the sharing of confidential information. “Everyone could use the data then and make logistics more efficient,” he added. “But how do we start engaging? Investment will be required but getting that information is the ultimate goal.”
Potential to deal with peaks
Quality of information was also important to PSA Group’s activity in the UK. David Higgins said this was particularly the case in coping with peak volumes during the two registration periods the UK sees annually.
“Fundamentally, it is about the quality of information and that takes pressure off margins for all parties,” he said. “There is huge inefficiency in the supply chain but we can unlock the potential [to solve that].”
That also depended on better collaboration and greater consolidation of the players involved, especially those involved in outbound logistics, he suggested. “The problem now is that if you look at inbound compared to outbound, they are chalk and cheese,” he said. “We need to look at outbound the same way we look at inbound.”
According to Higgins, while its network as stable, customer demand is not. He said PSA had spent the last five years trying to streamline the supply chain but it needed to use its distribution centres more effectively and there needed to be more services taken care of at the ports to cut down on handling.
Higgins added that the sooner that was done, the better, because if pressure was coming to the UK sector as a consequence of the Brexit vote the industry would need to have the best tools on hand to address it.
What was worth noting is that those tools could be applied to move out of the UK altogether. In line with other companies with a presence in both the UK and Europe, PSA Group could concentrate on streamlining on the continent. PwC’s Phillipe Funda said a number of carmakers based in the UK were highly connected to Europe and already had or were working on capacity in Europe. Crunch time for stay or go was 2019 when Brexit should be concluded, though going would not be an easy decision.
“At plants in the EU there is a free capacity of around 500,000 units,” said Funda. “So [some] OEMs such as BMW, Nissan or GM Europe could shift from the UK to the EU without investing in completely new facilities. Connecting the dots and looking at 2019 when Brexit has happened, all the companies will have to take a decision.”
Based on those decisions UK light vehicle assembly could either see an increase to more than 2.1m by 2023 or drop back to below 1m.