In a move that could be followed by other UK manufactures McLaren shifts supply chain back to the UK. The luxury car company is boosted by the weak pound and focuses on domestic components.
When I started my business career on the Birmingham Stock Exchange in the mid-sixties there were many motor component companies in the West Midlands. Most of them were public companies and we traded the shares on the Birmingham Stock Exchange. The industry was largely destroyed in the seventies but has been rebuilding since the nineties.
Car making is pretty much at the top of the list of industries that the UK government worries about after Brexit. It is a sector that the UK has painstakingly rebuilt as other industries have shrunk, rising from a 4.8% share of UK manufacturing in 1990 to 9.4% in 2016, according to the Office for National Statistics.
It is also one that the EU has historically sheltered behind high tariff walls, with an average of 4.5 per cent on components and 10 per cent for complete cars. After Brexit, these could be raised against the departing UK, affecting the 53 per cent of production that is shipped to the continent and disrupting supply chains.
McLaren Automotive is admittedly not a mass market manufacturer nor a grand old marque like Jaguar. But it sells £649m of these luxury motors each year, and the weakness of sterling since the Brexit vote should boost that number.
Tariffs are nothing new to the business. Its customers in China, where it sells 7% of its output, pay roughly 100 per cent duties on foreign supercars. But it has relatively limited exposure to the EU. Of the nine out of 10 cars that it sells overseas, only two go to Europe, The US is a much more important market for them and tariffs on imported cars there are just 2.5%.
Confidence in its business plan has encouraged McLaren to press ahead with investments that should help it profit from Brexit. It has already been moving more of its supply chain back to the UK, announcing a £50m investment in a new carbon-fibre chassis facility in Sheffield last year to replace an Austrian supplier. McLaren said that distance is an important criterion when you are building a high-tech car and to have engineers flying off all around the world to go and meet your suppliers isn’t efficient. They looked at their Austrian partner and other engineers, and different business cases, and the UK option was about £10m cheaper on a full lifecycle basis.
McLaren will also have more control over its technology, shortening the lead time for new chassis designs. The Sheffield project will increase the share of McLaren parts being made in the UK from 50 per cent to 58 per cent and replacing euro with sterling costs will help it benefit from the pound’s weakness, with many of its overseas sales denominated in US dollars.
More widely, the UK government has pushed the industry, and offered incentives and funding, to increase the proportion of domestic components in its cars. Local content has risen from 36 per cent in 2011 to 44 per cent last year.
The Spanish body parts manufacturer Gastamp announced a £70m investment in its plant in Cannock in Staffordshire last September, while Jaguar Land Rover supplier Magna is pushing ahead with plans announced in May to build an aluminium casting facility in Telford.
For McLaren, the biggest positive effect of Brexit is that it has focused the government on supporting the industry. One area the government is working very hard with McLaren on is batteries, for example the Faraday Challenge, a £246m government-sponsored competition to support the development of a domestic battery supply industry.
McLaren is aiming for half of its cars to be hybrids by 2022 and welcomes any government support for new technology. Meanwhile, its proposed Sheffield plant will be given an undisclosed amount of financial support by the local council and the regional local enterprise partnership.
EU trade policies are already dismantling some of the tariff barriers, with a free-trade agreement with South Korea removing tariffs and negotiations under way with Japan. Perhaps an EU-UK pact could offer the same.
The company is now looking at ways to suppress the possible additional expense of tariffs on components, such as ‘Inward Processing Relief’, a scheme that exempts from duties and tariffs imported components that you process and then re-export.
McLaren said it would continue to search for more domestic parts and if there is a UK supplier who met their criteria they would look at it very favourably.”
McLaren’s change in business strategy is a very good example of the way to go for manufacturing industry after Brexit. It’s the kind of business transformation and change management scenario that we at Amelia Bishop Consulting are trying to emphasise in the Brexit work we are doing for clients.