Why is the car industry is braced for a bumpy Brexit ride?

Why is the car industry is braced for a bumpy Brexit ride?

Faisal Islam, Political Editor

Sticking a camera at a car production line cannot do justice to the sheer magic of the making of a modern motor vehicle.

The right front-end module of the right Mini joins the assembly line at precisely the right time for the body of the car. Four hours previously it did not exist.

The module - the front bumper, lights, and famous grille - is a complicated bit of engineering in its own right, made by a supplier half an hour away, which in turn necessitated the right parts at the right time from dozens of suppliers from Austria to Poland to Hungary to the UK.

It is just one example.


Inside the main body is the engine. It contains a crankshaft, a £400 precision-sculpted metal part that transfers under several tonnes of pressure the motion of the pistons into the rotational motion of the flywheel, which will turn the wheels of the car.

Brexit Forensics: Govt faces revolt from carmakers

The crankshaft is made in France, drilled and milled in Warwickshire, and integrated into an engine in Bavaria.

It then arrives at the Oxford plant in an engine, and within five-and-a-half hours turned into one of the 1,000 finished Minis produced per day.

:: Government faces Brexit revolt from unhappy carmakers

The cars are then tested thoroughly before being driven in convoy up and down the ramps of the plant rail station on to a double-decker train heading for Purfleet or Southampton docks, and exported back to Europe or beyond.

It is impossible not to imagine the music to the Italian Job, but a spot of Stravinsky would not shame the timing, precision and sheer choreography required to make this work.

This is just-in-time manufacturing across a pan-European integrated supply chain, and its constant refinement over years is responsible for the raging recent success of UK car production, under mainly foreign ownership, from Sunderland to Swindon.

It is a product of design, technology, politics, diplomacy, marketing and constant refinement.

Imagine what happens when engineers responsible for this type of meticulous system attend a meeting with the Government about its Brexit plans and strategy.

The chance to communicate with finance directors about the legal and trading environment that needs to be in place may well produce an initial rush of relief.

Image: A Mini in the early stages of production receives its final inspection before being painted

Brexit Day is in the next financial year, for which investment plans are being signed off at board meetings.

As one would expect, detailed contingency and scenario planning has occurred.

At this stage, the shock is significant at hearing from Government that not only does it not know exactly where the UK is going to land, but further that it does not know how these systems work, and that the meeting is in fact about attempting to find out how the car companies' logistics and customs systems function.

An internal industry memo circulating at the Frankfurt Motor Show, revealed to Sky News, described a recent "disillusioning" meeting with the Government on Brexit customs arrangements and "a lack of detailed information and blocking of our questions" which attendees concluded was a "desperate attempt" to get the industry to solve the customs conundrum posed by the Government's approach to Brexit.

That was just one behind-the-scenes meeting.

The car companies have been generally appreciative of the work of the Business Department in trying to square circles, but have become increasingly alarmed by the direction of travel in rhetoric.

They have noticed, for example, that the Prime Minister at the Conservative conference promised that UK firms would continue to trade freely and "operate within" Europe's single market.

This then changed to a promise of "frictionless" trade. And it is now "as frictionless as possible".

There is method in seemingly innocuous semantics and signals have been received.

Image: German Chancellor Angela Merkel visits the Volkswagen booth at the Frankfurt Motor Show

At a Number 10 meeting in July, Jaguar Land Rover boss Ralph Speth is understood to have directed a "heated" monologue on the impact of no deal and no transition on the car industry towards the PM.

Top JLR boss Andy Goss told Sky News that its investment in a car plant in Slovakia should now be seen as a "hedge" against uncertainty around the post-Brexit trading environment.

"It's become a hedge by default - we will assess everything in the cold light of day - we don't expect to do it, but if we have to we will," he told me.

Does he know what the regulatory and trading arrangement will be after Brexit day? "As of today nobody knows," says JLR's Goss.

At the Frankfurt Motor Show, a Toyota boss expressed concern that assurances from Government on a tariff-free outcome to negotiations had been made at the time of a £240m investment in its Burnaston plant in Derbyshire, but "not any more".

What exactly is the problem?

Back at the Mini plant, the finance chief Jeremy Stoyle shows me the assembly line.

Ninety-five percent of the parts currently require no tariffs, no checks, no customs, and flow entirely freely.

"As frictionless as possible" is a pretty meaningless phrase in a place like this. It exists or it doesn't.

Image: The 2017 Land Rover Discovery at a motor show in LA

The entire rationale for just-in-time manufacturing is minimal levels of stock. The small proportion of parts imported from outside the EU requires multiple levels of stock.

Their initial contingency planning for a worst-case scenario points to an increase in stock levels from two to three days, to a three to four days in order to account for a likely daily 12-24 hour delays at docks.

Is that really so bad? Apparently so.

"We don't want to end up with an army of customs people in our plant," says Mr Stoyle.

The process is already refined and optimised - with a 50% increase in levels for most imported parts, he ponders whether it can work at all.

Certainly it is now standard process for all car companies to get their plants across the Continent to compete against each other aggressively for new production work.

Customs checks alone are a distinct disadvantage, the mere possibility of tariffs, in or out, could be disastrous.

The preferred solution to all of this among Cabinet Brexiteers is a massive expansion by the Government of what is known as Authorised Economic Operator (AEO) status, and this was mentioned in the Department for Exiting the EU's customs paper.

This is a European Union scheme for manufacturers to handle customs arrangements for non-EU parts internally, subject to certification and checks.

Image: The assembly line at the Toyota factory at Burnaston in Derby

Essentially it outsources customs to authorised manufacturers inside their plant.

Privately the industry is scathing about the idea, gaining AEO status is "the devil's work" and there is "no chance" for the entire supply chain to do that.

BMW's Ian Robertson says it is a "proposition" but one he "can't quite understand".

If this was a serious proposition, the manufacturers would have to be building office blocks for internal customs facilities right now. Small manufacturers in the supply chain would have to spend months becoming accredited.

The Government points out that the gloom and doom is undermined by a series of high-profile plant investments over the past 12 months, from Nissan, to Toyota, to the Mini plant itself.

Niche players such as McLaren are doing well out of the competitiveness of a cheap currency.

The industry plays down the Nissan announcement saying "the decision was already made". Toyota has expressed concerns since their investment.

BMW play down the "early stage" investment in the electric Mini.

The new part of it - the electric powertrain - will be manufactured in Bavaria, unlike most of the existing engines currently made in Warwickshire.

Image: Mini's parent firm began researching an all-electric Mini E back in 2008. Pic: BMW

It is equipping other continental factories with the systems to produce the car.

The head of the German Automotive Association, the VDA, Matthias Wissmann, argued: "At the moment we still have internal market and the Government is promising to these companies that they will keep the market open. We ask: 'Do they put the same proposal on the table in Brussels?' There are still doubts."

Overall investment figures in UK automotive were sharply down, according to the SMMT, to the lowest on record last year of £1.66bn, and has halved again so far in the first half of this year to just £322m, as companies await certainty around trading conditions.

Some in the industry are a little tired of the Government trumpeting small investments as endorsements of its Brexit strategy, with one refusing to allow a Cabinet minister to conduct celebratory interviews from its premises.

They claim there was "zero chance" of executives from major car manufacturers signing up to the Government's aborted attempt to get a public letter of endorsement from businesses.

At precisely this moment, the Foreign Secretary Boris Johnson's response to the car industry conundrum was to say that "traditional carmakers will vanish" within 20 years, to be replaced by automated cars. Brexit would allow new innovative regulations to replace entirely existing supply chains, he suggests.

There certainly is a revolution occurring in the automotive sector, and judging by the Frankfurt Motor show, the industry is well aware, with never-ending displays of autonomous driving and electrification technologies.

That means a land grab on standards and regulations. The industry dismisses the idea of a separate set of UK automotive standards.

BMW's Mr Robertson says: "What we don't want is another set of rules. For the UK - a small manufacturer producing one million cars per year - to break out on a global scale with a new set of rules just complicates things even more and would be very unfortunate."

Some in the industry are a little tired of the Government trumpeting small investments as endorsements of its Brexit strategy, with one refusing to allow a Cabinet minister to conduct celebratory interviews from its premises.

Jaguar Land Rover goes further, saying the Government already accepts that there will be no deviation from European standards at all.

"We made it quite clear that there is only one set of compliance in Europe - (there are) no noises from the Government that they (expect) any different from that," says Mr Goss.

There is a tremendous irony in all of this, of course.

The car industry was the prototype for the single market. Margaret Thatcher's promotion of foreign and particularly Japanese investment into the UK went hand in glove with the creation of the single market with one set of rules, and an arbiter, the European Court of Justice.

As Opposition leader she visited Japan in 1977 to meet with Nissan's then boss - Katsuji Kawamata - and badgered the Japanese PM at G7 meetings.

In 1982 she persuaded Nissan to invest in Sunderland partly by telling Mr Kawamata that "dependence of Britain on exports to Europe meant no realistic prospect of leaving the European Economic Community".

And ultimately in 1989, when exports of Nissan's UK-made Bluebird faced being shut out by the French, who saw the Sunderland plant as a Trojan Horse, she forced President Mitterrand to back down.

German car boss: EU27 'more important' than Britain

How? By threatening to take Paris to the European Court of Justice for a case they would surely lose. The French backed down, and Nissan's success was born, followed by Toyota and Honda.

That is one of the reasons the Japanese government published an extraordinary memo last year stressing for Britain to "consider seriously" that its businesses had invested heavily in the UK after being "invited by the Government" to use the country as "a gateway to Europe".

Long-term promises matter. It is why there has been non-stop visits of Cabinet ministers trying to reassure and get reassurances from Tokyo.

Japanese officials stressed that decisions on investments are in the hands of its private companies, not Government.

It is perhaps of little surprise that in seeking reassurance on Japanese trade, Tokyo extracted a surprising concession from the PM on her recent visit.

In a little-noticed signed joint 'Prosperity Cooperation' declaration with the Japanese PM Shinzo Abe, Theresa May promised to "support the lifting of EU import restrictions on food and feed from Japan, including those from Fukushima where they have been scientifically verified as safe".

Chlorinated chickens could yet be accompanied by Fukushima fish on the post-Brexit dining table.

Chlorinated chickens could yet be accompanied by Fukushima fish on the post-Brexit dining table.

The PM also agreed that any UK-Japan trade deal would have to follow the conclusion of the EU-Japan deal, and would be based on it.

This rather suggests that for the world's number three economy, in the car industry at least, the UK will not be in a position to trade independently of the EU.

A rule-taker on standards, and a negotiation-accepter on trade. Is that a price worth paying for keeping the decade-long boom in British car assembly?

All this could come to a head quite quickly at the Ellesmere Port Vauxhall plant, which exports 80% to Europe, with a decision over the Astra.

Now under the French ownership of Peugeot, and running under capacity, with spare capacity at European plants.

Image: Ellesmere Port Vauxhall plant in Cheshire

The business is undergoing a global post-merger cost-cutting review. And Carlos Tavares ­- chairman of Peugeot's managing board - told German journalists: "We don't know how Brexit is going to unfold... all this completely changes the business model for Vauxhall and Peugeot and Citroen." Peugeot is 14% owned by the French government.

But Jaguar Land Rover is perhaps the most important, as it is a great success story, less connected to Europe.

In theory it should be delighted by the opportunities of a cheap pound and trade deals with the US and China - big consumers of their high-end cars.

And yet it is deeply concerned by what it hears from both sides.

Trade deals with the US and China? "If only life were that simple," says Mr Goss, pointing out that 40-50% of its parts including expensive German gear boxes are imported from EU suppliers.

Cheap pound outweighs tariffs? "That's absolutely not our perspective. We want today's arrangements and access to the best people."

JLR's British success, under Indian ownership, has been built on attracting 10,000 of the best engineers.

Image: The Landrover and Jaguar Halewood plant in Merseyside

It wants to continue poaching German executives from their big car companies. The atmosphere around post-Brexit migration policy is not helping.

Ultimately there are some opportunities to increase local sourcing of parts.

In fact, in order to qualify in new trade deals there will have to be a massive increase in locally sourced components. So big, as to raise doubts as to its viability in the industry as a whole, though some individual plants might be able to get there.

The car industry has always intertwined the state, diplomacy, buccaneering enterprise, high design and cutting-edge technology.

The German carmakers, who we were told would dictate a great cake-and-eat-it trade deal with the UK to Chancellor Merkel, are not doing that, preferring to value the single market upon which their businesses are built.

In any event the German carmakers are in no position to dictate anything to politicians, licking their paws after the diesel scandal.

The car industry tail may well be wagging the Brexit dog already.

Transition, implementation or a standstill looks likely to be the aim of the PM's speech in Florence - her Italian job.

Unlike their crankshafts, however, this is a high-profile, totemic industry that does not expect solutions to complex problems to be foisted upon them "just-in-time".