News that Nissan is still investing at its Sunderland plant has come as a big boost for workers and has raised hopes that the plant can still build the next generation Qashqai from 2021.
Nissan recently unveiled a new 2000 tonne £52m production press, which has taken 18 months in install. It forms part of £400m investment in preparation for the next generation Qashqai model.
Back in late 2016, Nissan committed to building the new Qashqai and XTrail models in Sunderland in 2016 after ‘assurances’ from the May government that Brexit would not affect its competitiveness.
But it later reversed the decision to build the X-Trail SUV at the plant, shifting planned production back to Japan, and axed Infiniti model assembly in the UK.
That left the Juke, the electric Leaf and the Qashqai as models assembled at the plant, with the latter taking pride of place as the most produced car in the UK.
The significance of the Sunderland plant shouldn’t be underestimated.
Opened in the mid-1980s, it has assembled over 10m cars, and today provides jobs for over 6,000 UK workers directly and many more in the supply chain.
Until recently it accounted for 30% of UK auto output. Sunderland has been widely regarded as one of the most efficient plants in the world when operating flat-out.
But output has fallen from over 500,000 vehicles in 2016 to 350,000 last year, linked to a big shift away from diesels, and stalling markets in the EU and elsewhere.
Late last year the plant cut shifts from three to two a day and is now operating well below capacity.
This pushes up costs, which makes the plant more vulnerable to job cuts in a firm which has seen profits fall dramatically of late and which is looking to make thousands of job cuts globally.
An FT story last month claimed that Nissan had drawn up plans to pull out of mainland Europe if Brexit leads to tariffs on car exports and to “double down” on the UK, with the firm aiming to take 20% market share.
But Nissan flatly rejected the claim, and has given frequent warnings over the possible impacts of Brexit, and in particular how – in the event of a No Trade Deal scenario at the end of 2020, the EU’s 10% tariffs on UK exports would jeopardise its business model.
Some 70% of cars made in Sunderland are exported to mainland Europe.
In the event of no trade deal, Sunderland’s fate would depend on a range of factors including the exchange rate, the impact of customs delays to its supply chain, to what extent Nissan could sell more cars in the UK to offset export reductions (in the event of tariffs), as well as what options it has to switch production to other plants in the EU.
What that FT piece really suggests is that like other auto firms, Nissan has ‘war-gamed’ various Brexit scenarios.
Local newspaper reports suggest that Nissan is looking at a range of options for the plant beyond 2020.
One option in the event of a No Trade Deal scenario could be to engage in a ‘platform sharing’ approach at its UK plant in order to keep production viable.
That might see a range of models (Nissan, Renault and Mitsubishi) being built off one or two platforms (the underpinnings of the car) to serve the UK market and maybe some other right hand drive markets around the world – although capturing a 20% UK market share seems pretty far-fetched.
Doing this might keep the plant viable, even if operating well below its 2016 peak output.
Yet such an approach would require a degree of integration and platform sharing across the brands not yet achieved and which might be tricky given the current governance challenges at the Renault-Nissan-Mitsubishi Alliance.
Peugeot might feasibly take a similar approach at its Ellesmere Port plant in the event of a No Trade Deal, given its range of brands including Peugeot, Citroen, Vauxhall, and soon Fiat brands too.
But no deal is not the industry’s only concern. They are worried about the implications of the sort of deal Johnson envisages on the sustainability of their operations in the UK.
Boris Johnson is aiming for a much harder form of Brexit than Theresa May envisaged, with zero tariffs and quotas but nothing like the high degree of convergence on customs and regulations she wanted so as to remove friction from cross-border supply chains.
That is not possible outside the customs union and single market.
A Canada-style FTA would potentially avoid tariffs but would still disrupt ‘just in time’ supply chains.
With the majority of components going into cars assembled in the UK being imported (mostly from Europe) that means big issues for car firms in terms of customs delays of uncertain length.
Firms would need to stockpile parts to offset that, in turn pushing up costs (and firms may want compensation for such costs from the UK government).
To qualify for zero tariffs, UK produced cars would need to meet whatever the UK and EU agree on Rules of Origin (ROO), which need a certain percentage of ‘local content’ (likely to be in the 55-60% range).
As noted, a problem here is that UK assembled cars tend to have low local content on average in the range 20-25%, with most parts being imported form the EU. And this is something that the EU will be keen to check, as Michel Barnier has stressed.
Some sort of ‘cumulation agreement’ – which would allow EU content to count as local content” and conformity of assessment – to avoid duplicate approvals in the UK and the EU –will then be needed to avoid additional extra costs.
And simply ending complicated supply chains (as Andrew Neil appeared to suggest at the recent MAKEUK National Manufacturing Conference) and sourcing more components in the UK isn’t going to happen automatically, though, given the barriers to reshoring manufacturing, like access to finance, wage and energy costs, and availability of land we have identified in our own work.
That would require a much more supportive industrial policy; indeed whatever the form of Brexit, it seems that a better funded and more active industrial policy will be needed to boost competitiveness in the UK automotive sector and manufacturing more broadly.
By David Bailey, Senior Fellow at The UK in a Changing Europe and Professor of Business Economics at Birmingham Business School.