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Final Exam

Introduction

The British car manufacturing has experienced revitalization in the past four years after a decade-long slump. In the first half of 2016, the car manufacturing sector hit a record in vehicle production and sales. It is not surprising, therefore, that Britain has of late progressively established itself as the center for automotive industry in Europe. Currently, Britain headquarters seven mainstream automobile manufacturers and eight premium manufacturers. It further plays host to seven Formula 1 teams, multiple automobile design studios, and a dozen automobile research and development centers (Gosney, 2016). This paper explores the reasons that have made Britain a compelling destination for vehicle manufacturers such as Toyota, Nissan, and Mini among others. It will also interrogate the prospective effects of Brexit and their impact on the automotive industry in Britain, with a particular focus on manufacturing and exporting. The analysis indicates that Brexit will adversely affect the automobile manufacturing in Britain as it will increase the production costs, restrict the manufacturers’ access to their single largest market, and even chase away the existent foreign manufacturers.

Reasons Manufacturers Choose Britain

There are several compelling reasons why the world’s leading automobile manufacturers such as Toyota, Nissan, and Mini have chosen Britain as their preferred manufacturing location in Europe. The primary reason is that Britain’s economy is vibrant and has continually grown, recovering from the unprecedented adverse effects of the global financial crisis between 2007 and 2009. The British economy has grown by an average of 2% since then (MacShane, 2016). The data from the Office for National Statistics indicate that for the first quarter of 2016, the British economy has registered 0.7% growth (Ruddick, 2016). The fact that testifies to Britain's being a vibrant economy is that it affords manufacturers such as Nissan and Toyota economies of scale and other location economies, which reduce their production costs.

The development of Britain’s car manufacturing industry complements the general economic growth in the country. During the first quarter of 2016, the car manufacturing industry has grown by 0.9%, further attesting to the British automobile industry’s resurgence, which is a huge vote of confidence for Britain (Monaghan, 2016). In 2015, the industry churned out 1,587,677 vehicles, representing a 3.9% rise as compared to the production volumes recorded in 2014 (Monaghan, 2016). During the same period, the car manufacturing industry has had a turnover of more than £55 billion, generating upwards of £12 billion as net value to the British economy (Campbell & Inagaki, 2016). To underscore the vibrancy of the automobile industry in Britain, the volume of vehicles manufactured by a single Nissan plant in Sunderland was more than that produced by the whole of Italy in 2015. Even more impressive is the fact that the vibrant automobile industry is fast outperforming the other sectors of the economy, gradually establishing itself as the main exporter of goods made in Britain. In 2013, for instance, the British car manufacturing industry was the largest exporter by value generating upwards of £27 billion in revenues, accounting for more than 11% of the total exports (Boyce, 2014). The vast opportunities the market offers make Britain an enticing location for automobile manufacturers.

A further compelling reason, at least before Brexit, was Britain’s unlimited access to the open and free European market as Britain’s main market. According to the statistics released by the Society of Motor Manufacturers Traders (SMMT), almost 76% of the vehicles manufactured in Britain were exported to EU countries (Campbell & Inagaki, 2016). The proximity of the vehicles market to the manufacturing sites made Britain a viable location for the automobile firms. However, now that Britain has voted for Brexit, its extent of access to the single market is doubtful.

Furthermore, Britain has a sizeable skilled workforce, which ensures that the firms have ready access to labor. There are more than 30 million Britons aged above 16 years who comprise a prospective workforce for the firms (Price, 2016). About 2% of this workforce is already working under the umbrella of motor industry (Price, 2016). The Society of Motor Manufacturers Traders estimates that there are almost 18,000 apprentices working in the car manufacturing industry (Monaghan, 2016). Furthermore, there is a large pool of workers who have particular strengths in engineering and are driving innovation in the industry. To further promote the availability of highly-skilled personnel, the government has also initiated the adoption of flexible working practices. As such, the UK workforce is not encumbered by dogmatic unions, which highly suits the automobile manufacturers as employers.

An additional reason for the firms’ investing in Britain is the great enthusiasm and support shown by the British government. The latter has progressively liberalized the market making it easier for foreign companies to set up manufacturing in the UK (Coffey, 2006). The British market is one of the freest in the world and, as such, has been able to encourage substantial foreign direct investment. The supportive, positive attitude towards inward investment shown by both the local and the national government has played a major role in convincing automobile firms to situate their businesses in the UK.

The last compelling reason is the UK’s excellent reputation in manufacturing. Britain has a set of the most stringent manufacturing regulations in Europe (Coffey, 2006). In fact, as a member of the EU, it was constantly lobbying for stricter regulations. As a result of this enhanced focus on quality, the British-made products are normally held in high regard across the world. The perceived quality and craftsmanship of the British-made products will serve to market the vehicles made by the firms situated in the UK. Consequently, the firms can benefit from the excellent reputation and high esteem Britain enjoys.

Implications for Leaving the EU

There are several concerns over Britain’s decision to leave the EU. The Brexit decision is sure to affect Britain’s car manufacturing and export. The most prominent concern is that Britain will have to forfeit the benefits of the free trade agreements it enjoyed as a member of the EU (Beck, 2016). As a non-member, Britain will not have ready access to the single market. Currently, the EU is the primary market for British automobile exports, accounting for 78% of the total automobile exports (Campbell & Inagaki, 2016). Losing access to this market is a legitimate concern of the automobile firms manufacturing in Britain whose Britain-produced vehicles will be subjected to tariffs, trade bans, and other forms of regulations, which, ultimately, will escalate the price of their exports. If the product prices increase, the consumers will opt for cheaper vehicles from competitors manufacturing elsewhere.

A further Brexit-induced concern relates to manufacturing. Leaving the EU will gravely disadvantage Britain-based automobile manufacturers, as they will have reduced efficiency in sourcing for vehicle components. Manufacturing in Britain will become more expensive, which will inevitably influence the pricing, with the firms trying to shift the costs to the consumer (Stephens, 2016). Currently, almost 60% of the essential parts and components used in the vehicle manufacturing processes in Britain are imported from Germany, France, Spain, and Slovakia among other EU countries (Ruddick, 2016). Leaving the EU means that Britain will have to pay more for these components as a non-EU state. The higher production costs translate into pricier products not only for its international market but also for its domestic market. If these costs keep on spiraling upwards, the market will shift elsewhere.

The last major concern is that the overseas cars manufacturers, disillusioned by the incremental costs, may disinvest from Britain. One of the reasons why the manufacturing industry in the UK is booming is because many manufacturers are enjoying location economies and economies of scale. If these benefits are not afforded anymore, then, some manufacturers may deem it imprudent to continue manufacturing in Britain (Ruddick, 2016). Some automobile firms have already indicated that they are likely to cut back on their production in the foreseeable future. Hyundai and Ford have already stated that they are going to scale back their operations (Stephens, 2016). Nissan and Toyota warned before the referendum that they might have to disinvest if the country left the EU because this move would reduce their competitiveness in the market and create an uncertain future. Having voted to leave the EU, Britain runs the risk of having the foreign manufacturers scale back their operations.

Recommendation

Given the uncertainty surrounding the post-Brexit era, I strongly recommend that the client should not invest in Britain, at least not at the moment. As has been detailed, leaving the EU will adversely affect the automobile industry in Britain. The manufacturers will have limited access to the single market and will have their products subjected to tariffs and other regulations. Furthermore, they will acquire their input, most of which is imported from the EU region at higher prices, thus raising the costs of production. The Korean car manufacturer should not invest in Britain yet. It should wait until the cost-effectiveness of manufacturing vehicles in Britain becomes apparent. Only then should it consider investing in Britain, if it still makes sense economically.

In conclusion, it is evident that Britain is one of the most popular locations for automobile manufacturing firms. All the world’s leading automobile companies have significant operations in Britain including Nissan, Toyota, Jaguar, Honda, Hyundai, and Ford. Some of the reasons that have compelled these firms to situate their manufacturing plants in the UK include its current doubtful access to the EU single market, its sizeable skilled workforce, and Britain’s excellent reputation in manufacturing. The other reasons include Britain’s ever-growing economy, an equally resurgent automobile industry, and supportive trade policies. However, the decision to leave the EU threatens to limit the market for its exports, increase the manufacturing costs, and, in case of the worst scenario, chase away foreign automobile investors operating in the UK. Thus, the definite implications of Brexit for the British automobile industry will become clear with time.

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