UK builds its car business - but other exporters fear the logistics

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“The UK has become the investment destination of choice for OEMs.” This bold claim opened a recent report by KPMG, commissioned by the Society for Motor Manufacturers and Traders (SMMT).

The claim comes on the back of various announcements of new investment in the country by OEMs, which cumulatively amount to some £6 billion, including expansion plans from Nissan, General Motors, Jaguar Land Rover and BMW.

The SMMT further believes that these investments will create a gap in supplies to OEMs to the tune of about £3 billion – a vacuum that is waiting to be filled by UK engineering firms. This year, sales to OEMs in the UK are forecast to amount to £11 billion, almost doubling to £21 billion by 2016, by which time the country is also expected to be producing more cars annually – 2.2 million – than ever before.

A large majority of OEM procurement executives surveyed for the report said that labour costs, taxes and tariffs, and production quality had made the UK a favourable place to source components; but 100% of respondents said that the lower transport and logistics costs of having suppliers close to their production plants was also a decisive factor.

Andrew Austin, chief executive of expedited contingency logistics company Priority Freight, which counts automotive manufacturers among its client base, said there had been a “significant uplift” in the number of components sourced in the UK but warned that global sourcing is not going to be reversed.

“The events of the last five years have frightened OEMs. They had no idea what was happening to their tier two, three or four suppliers and the shocks to the system – be they financial, volcanoes or tsunamis – meant they needed to address the risks in their supply chains.

“They have wised up now, and the issues of old reliance on a limited supplier base and vulnerability in distances in the supply chain have been addressed.”

Additionally, while the appetite among automotive producers to locate plants in the UK is clear, how much of a tectonic shift does it actually represent, he asked.

“There is certainly a trend towards in-shoring to the UK in this industry. But does it represent a tidal wave? That question has yet to be answered by the government – it has to be prepared to support inward investment, and has to be prepared to support investment into areas where there is an educated and available workforce to respond to it.”

The purchasing director of Jaguar Land Rover told the KPMG researchers that the additional logistics costs of having to source a given component from outside the UK could add as much as 10% to the total cost of that component.

A key aspect of the UK’s automotive sector is its reliance on exports. When Britain last made more than 2 million cars per year, in the early 1970s, the vast majority were for the domestic market. Today, some 80% of what it produces is destined for abroad.

And crucially, only 45% of its exports are for the European market, with 30% heading to Asia and just over 10% to North America. In contrast, the automotive industries of Italy, France and Spain sell 70% to 90% of their cars within the EU – and as the downturn has intensified, revenues have been crippled.

The need for UK exporters of all types of goods to look beyond their traditional trading partners was further underlined by a survey undertaken by the Centre for Economics and Business Research on behalf of UPS, which discovered that of the top 15 nations that the UK exports to, only two – China and India – were emerging economies. Brazil and Russia, currently showing the strongest growth rates, do not figure at all.

The biggest obstacle identified by respondents was perceived logistical difficulties – which is ironic, given that the import supply chains that have defined the UK’s commercial activity for the past two decades have had little problem overcoming those distances, only in reverse. (For the full release, go here.)

Top 15 UK export destinations (2001 vs. 2011)

 Source: Centre for Economics and Business Research