A race against time for the UK car sector

Whether it is a hard or soft Brexit, the UK’s exit from the EU is going to have a big impact on the automotive industry and companies need to be preparing their supply chains now. However, with rapid advances in vehicle technology, the political landscape is only part of the picture. Victoria Johns reports from the UK conference

 

The automotive industry is vital to the UK economy and one of the country’s biggest industrial sectors. It contributes £202 billion ($265 billion) to the country’s economy and, between parts and vehicles, accounts for more than 12% of total exports from the country. UK car exports rose to their highest level last year, with 1.67m made for export, almost 80% of all production. Around 54% of that went to the European Union. However, between the uncertainties created by the nation’s looming exit from the EU and the need to adapt to new energy vehicles, regulation, manufacturing and IT patterns, business models need to be flexible in order to meet future demands.

A satisfactory deal with Europe, including the maintenance of frictionless trade and the free movement of workers, were two key concerns for logistics and transport firms at this year’s Automotive Logistics UK summit. If the UK hammers out a trade deal with the EU, it will essentially be a free-trade agreement (FTA) for most industries and sectors but without the free movement of labour, which would probably take a transition period of several years to implement.

Martin Benecke, manager of light vehicle sales forecasting at analyst IHS Markit, had a generally positive message and said that regardless of his company’s positive and negative forecast scenarios, the hit on the UK car market would not be drastic. IHS Markit expects a deal to be hammered out but Benecke said that even if that failed and there were interruptions and problems for currency and labour, it would still not lead to a dramatic collapse of the UK market.

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The impact in Europe would also be fairly small, according to Benecke, and would not impact what is a gradual recovery throughout the region, helped by performance in southern countries, including Spain.

“We are looking at 2% growth in the Eurozone this year but next year, partly driven by developments in the UK, we will see a slowdown to 1.7%,” he said.

However, he did also say that in its more pessimistic outlook, vehicle prices in the UK could rise by 3.5% by 2023 as a consequence of import tariffs.

Martin Benecke, manager of light vehicle sales forecasting, IHS Markit

What had been more detrimental, he added, was the continued uncertainty in the UK since the decision to leave the EU was announced, something which had proved a drag on investment.

Planning for interference
The interruption to business was more of a concern for Peter Ward, chief executive of the UK Warehousing Association (UKWA), who said it was hard to prepare for the unknown.

Ward was not alone in foreseeing problems, either. All of the delegates responding to a poll at this year’s summit said a no-deal Brexit would cause either short-term or long-term problems for their business and the majority said they were working on a contingency plan, should there be no deal when the UK leaves. Only 22% of delegates said they already had a plan in place.

“It may be a hard or soft deal, or a cliff-edge, but Brexit will bring interruption,” warned Ward, adding that the UK’s departure from the EU would bring with it the need for customs declarations that were not there before, something which demanded extensive planning. “Goods will need to be invoice-compliant before being moved, and transit times and security checks will be an issue,” he warned.

There are currently 90m export and import declarations made on trade between the UK and the rest of the world, and HM Revenue and Customs estimates that will increase to 300m frontier declarations to include trade to and from EU. The cost of 210 additional frontier declarations therefore, needs to be considered, as does the effect of 8.4m disrupted shipments. Gaining AEO (authorised economic operator) accreditation will certainly ease the process, but it currently takes six months to achieve.

Peter Ward, chief executive of the UK Warehousing Association (UKWA)

Third-party Britain
Gefco’s customs and tax director, Olivier Thouard, said that regardless of whether there was a no-deal scenario or a jointly ratified deal with a two-year transition period, the UK was still going to become a third party in trade deals and companies had to prepare accordingly.

Duties on vehicles and parts will have to be paid in line with World Trade Organization (WTO) rules and there will be no preferential agreements. For parts, that means tariffs of around 4% while for finished vehicles, it’s 10%.

Transit times for goods moving between the EU and the UK (including Ireland) will have to factor in border controls for customs and security checks, too.

“Even if the customs and ports are ready before March 29, and there is still a lot of work to do, we can still face disruption at the border,” said Thouard.

Should no deal be struck, the UK will leave the EU on March 29 2019 with no international agreements (at the moment it participates in 750 with the rest of the world as part of the EU).

Thouard explained that automotive companies in the UK and Europe would have to apply the same customs rules they do for other international markets to goods moving between the EU and UK.

“Each time something crosses the border, you will have to pay customs clearance import/export charges,” he said – meaning that compliant documentation would be necessary.

“Companies will have to have a compliant invoice before the departure of goods,” confirmed Thouard. “That is not how the automotive industry works today, we are not issuing invoices before departure. A lot of companies are using self-invoicing at the destination or invoicing at the end of the month. But you would need a compliant invoice before departure to cross the border.”

Automotive companies will also have to look closely at VAT and incoterms (international commercial terms) – the rules that govern sellers and buyers for the delivery of goods under sales contracts.

There are two VAT rules in Europe that apply to the automotive industry – Directives 8 and 13. The UK is currently using 8 but will have to move to 13, which is used by third countries. That directive covers VAT registration, management and refunds, in turn affecting the management of parts or vehicle flows. This is something companies will have to look at closely to judge what impacts the change in directive will mean for their individual operations, Thouard said.

Olivier Thouard, customs and tax director, Gefco

Similar attention was needed for incoterms, he continued, because the UK’s exit from the EU will mean customs and tax are organised in the country of origin. Incoterms such as Ex-Works, which is favourable to the seller, will still apply but should be used with caution, said Thouard. The same goes for Delivery Duty Paid incoterms for purchases.

“In both of those cases, you will not be managing VAT yourself or customs duties, and those duties could be performed on your behalf – but you won’t know it,” he said.

For European customs, origin rules will also have an impact on production origin. Thouard posed the question of whether a vehicle made in Europe with parts from the UK would be deemed of European origin or not.

“It could change a lot of things for my customers,” said Thouard. “I cannot issue a certificate of origin any more saying it is European; a lot of origin issues need to be analysed.”

Analysis is a problem for a lot of companies, however, at time of critical importance for the management of inventory – not only because of the unpredictable situation of Brexit at the moment, but also, according to Ward, because a lot of people are bogged down in supply chain silos.

Ward also pointed to the scarcity of talent and capacity in the sector.

“Net migration is falling as EU citizens leave the country and we’re losing eastern European labour, which the warehousing and logistics sector is critically dependent on,” he said.

That is leading to wage inflation where businesses seek to hold on to staff, resulting in a 15-20% increase in labour costs, he said – something Ward warned would have a huge knock-on effect on logistics costs.

While more stock and inventory-holding could be good news for the warehouse industry, questions remain over the availability of space and people to manage that increased stock. As well as the issue of labour, there is an all-time low vacancy rate on warehousing, not to mention the planning approval required for brownfield warehousing developments.

Aftermarket needs
That shortage of available storage capacity was also a question for the automotive aftermarket – an issue that could be compounded by growth in the take-up of electric vehicles (EVs).

“We need to get more stock and capacity and prepare our dealers,” said Juan Manuel Santiago Mendez, CEO Mercdes-Benz Parts Logistics UK. “Next year, when electric vehicles hit in a massive way, we’ll have more spare parts, more new models, launching new orders every year, which have to be available. “

Juan Manuel Santiago Mendez, CEO Mercdes-Benz Parts Logistics UK

Santiago asked whether it was better to hold stock at origin or destination in a situation based on the global supply of parts on different modes of transport but potentially upset in the UK by border problems.

“We will end up with overspill if we don’t have the capacity,” he said, adding that it was important to involve dealers in the evolution of the vehicle that is currently underway.

“More and more products will be more personalised,” he told delegates. “We need to combine the standard of personalisation of vehicles with standards in the supply chain, always keeping the customer in mind.”

Maintaining those standards meant training in the supply chain was vitally important, said Santiago, pointing to bodies such as the International Transport Workers Federation (ITF) and the information source, National Manufacturing Competitive Levels (NMCL), which was developed by the Society of Motor Manufacturers and Traders (SMMT) and is supported by OEMs and industry leaders.

Global outlook
Despite the changing landscape, Benecke revealed there was real GDP growth in many major economies, with the global economy growing 3.2% this year. Vehicle production growth in Europe was primarily driven by strong performance in central and eastern Europe, which was up 9% to 1.3m units, as well as the aforementioned gains in countries such as Spain, up 2% to 1.3m. Italy is also up 2% to 1.7m but remains a fragile economy. Overall, this led to 2% growth across the EU in the first half of the year. Significantly the only country to show a decline (of 5%) was the UK.

Delegates heard that the EU is facing challenges in the second half of this year because of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) for vehicle emissions

However, the EU does face challenges in second half of this year, not least because of the impact of the new the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) for vehicle emissions. Since the beginning of September this year, all new vehicle registrations have to meet stricter emissions checks. The introduction of this new regulation has made for a volatile market and led to a 30% spike in sales ahead of the deadline for compliance.

That was followed by a sharp drop in September and this has had consequences for transport providers in Europe who have been struggling to find sufficient capacity even without the recent surge. Those capacity problems are expected to continue into 2019 but what is more long-term is that WLTP could lead to an increase in CO2 taxation throughout Europe, with markets such as the UK and France particularly hard-hit, according to Benecke. The volatility in the market is not being helped by a lack of government clarity on vehicle approval, which is irritating consumers who are unsure whether they might need a Euro 6-temp vehicle to drive in the city soon.

“It is clear that there needs to be a plan for the next couple of years about which car to buy, otherwise it will be an own-goal for the carmakers because people will wait and see if there are new laws or rules before they buy a car that can go into the city,” commented Benecke.

Further afield, global production and sales are being driven by the ASEAN countries, including China, which has invested $9 billion into its Belt and Road trade initiative and is the main contributor to global growth. China is forecast to increase vehicle sales to 29.9m units in 2019, up 27% from 23.5m in 2014, according to figures from IHS Markit.

In the US meanwhile, Trump has nailed his colours to the mast since his inauguration two years ago. Within a week, he had ripped up the Trans Pacific Trade agreement, threatening Mexico with a wall, Nafta revisions, protectionist measures and tariffs in the steel industry.

“China is spreading its wings while America is entrenching into America first,” said Benecke.

All hands on tech 
From the adoption of EVs and artificial intelligence (AI) to new mobility models, the automotive industry is simultaneously undergoing a global technological transformation and its logistics is becoming more digital. More than 40% of delegates taking part in the poll at the conference said that in-car technology was having a significant impact on their business.

“Our business is not like five years ago and in five years’ time won’t be like today,” said Martin Corner, vice-president supply chain management at Renault-Nissan-Mitsubishi Alliance (RNMA). “There is a new consumer driven by technology and their habits are filtering through into the B2B environment. The buyers we’re dealing with expect the same speed they have in their domestic lives. These are the key drivers in the world of logistics; it is no longer linear.”

Martin Corner, vice-president supply chain management at Renault-Nissan-Mitsubishi Alliance (RNMA)

There is also the impact of new technology on the vehicle itself, with the driveline technology of almost all manufacturers set to change in the next five years by 30-70%, according to Transport Intelligence analyst, Thomas Cullen. He asked whether carmakers had a logistics plan to cope with the impact on the supply chain.

Talking about RNMA’s position on electric vehicles and battery sourcing, Corner said it was currently hard to tell how much the move to an EV-centric supply chain was going to change its business and factory processes.

“We have a steam train coming towards us in terms of technological change and we are still ignorant of where this is coming from, what the R&D footprint is and how we will ship [the products],” he said.

The battery supply chain is a specialist and complex one, with lithium-ion batteries designated as hazardous cargo. Nissan has a lithium battery plant next to its Sunderland assembly plant but Corner said he expected that with volume increases and the type of electrification coming down the line, it would also be sourcing batteries from China.

He went on to suggest, however, that battery transport was a great opportunity for logistics companies.

“Anyone who buys into expertise on transporting batteries or electrification parts to support that powertrain will be getting a lot of business,” said Corner. “It will be more costly on insurance and there are safety issues related to the batteries, but it is a massive opportunity for logistics companies.”

Corner said RNMA was using technology to analyse customer behaviour, including using AI to forecast what inventory it needed around and how to implement technology at low cost.

John Buchanan, manager of powertrain programming at Ford

John Buchanan, manager of powertrain programming at Ford, noted that new sourcing strategies would be needed for the new components in autonomous cars and said the supply of transistor chips had been a challenge in the recent past, with a number of global shortages at the tier three/four level. The automotive industry is in competition with other industries, notably consumer electronics, for these chips and Buchanan said it was shock to many in the automotive industry to find that their voice at the table wasn’t as loud as they expected.

“Part and parcel of this digital revolution in the car industry is new types of suppliers and we need to work out how to secure the supply of parts that are going to be needed,” said Buchanan.

One thing of advantage to parts and vehicle-makers in the west was the opening up of the railway from China to Europe, as part of China’s Belt and Road trade initiative, he said.

“It is reliable and predictable and, in comparison to ocean freight, not that much more expensive. That will change the way we operate in bringing parts in,” he predicted.

Corner added that developments in software meant manufacturing would change significantly but at the same time, carmakers and their suppliers would be handling fewer parts.

“Processes will be simplified in one way regarding car configurations but the making of it will be more complex,” he said. “The big change in the vehicle launch is that there are more software problems and [the question is] can we pull the right talent into our industry to deal with this.”

Corner said that by 2022, RNMA would have 40 autonomous drive vehicles on the market and its cars would be connected 90% to the Internet of Things.

Many businesses have successfully contained supply chain costs to unlock huge savings, reducing waste and improving efficiency. A significant investment in technology has resulted in visibility and transparency, awarding the companies the ability to track components and automobiles as they pass through various supply chain touch points, dealer outlets and service points.

Mercedes-Benz’s Santiago summed things up on a positive note, suggesting that the best way to navigate the changes that were happening so fast was to enjoy the ride.

“These are exciting times and we have not seen anything like it for the last 100 years,” he said. “Daimler has produced cars for 132 years now and the core business is still there, but behaviour is changing and it is changing so quickly that we have to think about how we will adapt our business to a mobility set up for the future.”

What was crucial for Santiago, when it came to the logistics supporting this, was a change in mindset and a more open approach to change among the OEMs. “We have to ensure we are aware of what is going on out there and we are able to react quickly,” he concluded.

 Additional reporting by Marcus Williams

 

Automotive Logistics Global is part of the global Automotive Logistics series of conferences. The next event is the inaugural Automotive Logistics  Central and Eastern Europe summit, which takes place between 13-14 November this year

 

 

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