Near Swindon in the south-west of England, on a site where Spitfires were made in wartime, Honda operates two cavernous warehouses that Brexit could overwhelm.
Although the combined buildings dwarf the assembly plant next door, they still only store enough kit to keep production of the Honda Civic rolling for 36 hours. This is the Japanese carmaker’s breathing space, and after a hard Brexit it might need to be bigger — much, much bigger.
Proud managers describe 2m components “flowing like water” to the factory line every working day. Some orders from EU suppliers arrive within five to 24 hours; others, such as customised car seats, are summoned from local suppliers just 75 minutes before use. Not a minute is wasted.
Honda now fears that the border checks that could be introduced as a result of Brexit will clog up the process. If Britain were to leave the customs union, Honda estimates European parts will take a minimum of two to three days to reach the plant, and possibly as long as nine days. Delivery times of finished cars may be just as unpredictable.
To a car industry famed for its clockwork tempo, the potential delays pose an existential challenge. A warehouse capable of holding nine days’ worth of Honda stock would need to be roughly 300,000 sq m — one of the largest buildings on earth. Its floorspace would be equivalent to 42 football pitches, almost three times Amazon’s main US distribution centre. And its cost to operate would be as eye-catching as its proportions.
___________________________________________________________________________________________
Car companies in the UK
BMW
UK plants: Mini, Oxford (4,000 staff); Rolls-Royce, Goodwood (1,700); engines, Hams Hall, Birmingham (800); bodywork, Swindon (850)
Makes: Minis, all Rolls-Royce model
HONDA
UK plants: Cars and engines, Swindon (4,000 staff)
Makes: Civic
NISSAN
UK plant: Cars and engines, Sunderland (7,000 employees)
Makes: Qashqai, Leaf, Juke
___________________________________________________________________________________________
Such are the surreal options facing Honda — and manufacturers across a number of industries — which want to continue production in Brexit Britain.
Honda has had to deal with earthquakes in Japan and floods in Thailand. Adverse swings in currency markets have walloped profit margins. But these are nothing compared to what a clean break with the EU may bring. “The breadth of what we are dealing with is unprecedented in terms of its total impact,” says Ian Howells, senior vice-president of Honda Europe.
“Even though there is huge uncertainty around foreign exchange, our Japanese colleagues know how to manage that,” he added. “At the moment they don’t understand how to manage Brexit. It is a whole load of moving parts and nobody’s ever sure exactly how those parts are going to reconnect, disconnect or whatever.”
Other carmakers, such as BMW, are facing similarly unforgiving choices. Almost 90 per cent of the parts assembled in the German group’s four British factories come from mainland Europe.
“We do our best to maintain business continuity. We don’t want to give up our UK plants,” says Stephan Freismuth, a former customs officer who is now a director of BMW’s customs operations. “We always said we can do our best and prepare everything, but if in the end the supply chain will have a stop at the border, then we cannot produce our products in the UK.”
With nine months left before Britain’s exit and Westminster still undecided on the direction Brexit should take, the warnings are becoming increasingly blunt, and despairing. Airbus, BMW, Honda — blue-chip manufacturers in Britain are raising the alarm. The uncertainty has already hit spending in the industry, with investment in the first six months year of £347m, roughly half the amount spent in the same six months a year earlier, according to figures published on Tuesday by the Society of Motor Manufacturers are Traders.
Voicing the frustration of some in government, Jeremy Hunt, UK health secretary, complained that companies such as Airbus were making “totally inappropriate” threats that “weaken our negotiating position”.
Jacob Rees-Mogg, the pro-Brexit Conservative MP, says BMW is probably afraid of facing tariffs on its profitable exports to the UK. “You have to see what they are saying is driven by fear of losing access to our market, not the other way around,” he says. “The real issue is whether the UK remains an efficient base to manufacture — cost-competitive and value for money for customers.”
The warnings are not only over the implications of a no-deal exit in 2019, the most severe Brexit scenario. Manufacturers wonder whether their businesses will remain viable if the UK government achieves what it wants: an orderly withdrawal from the customs union, sometime in the 2020s. Investment decisions are looming.
“It is the end of the business model,” says one senior EU diplomat handling Brexit who has met car executives laying out the dire consequences for their industry. “It is nuts.”
Swindon’s site has long been a test bed for manufacturing experiments. At a secret Vickers factory during the second world war, “lean” methods were used to maximise Spitfire production at a time of scarcity: it was one of the oldest of the “just-in-time” systems that now dominate modern manufacturing.
In the late 1970s, Swindon witnessed the first partnership between eastern and western automakers. Workers at the ailing British Leyland were astounded to find Honda Ballade assembly packages arrive from Japan that had no missing parts, and could actually fit together. The spirit of “kanban” — Japanese lean manufacturing — had arrived on British shores.
Years later, Japanese cars were some of the first made in Britain to use a truly pan-European supplier base. Former prime minister Margaret Thatcher wooed Japanese carmakers to a Britain that “provides access to the whole European Community”. Honda Accords first rolled off the Swindon assembly line in 1992, just as the single market was about to be launched.
Honda exports about half its Swindon-made cars to the US — giving it just the kind of global outlook championed by Brexiters. “There is some opportunity,” says Justin Benson, head of UK automotive at KPMG. A weaker pound, he adds, could improve competitiveness and “see an upside for exports”. However, Brexit has shaken the foundations of this partnership. Through unusually frank public interventions, Japanese diplomats have made their concern plain. The reality for Honda is that just 25 per cent of the Civic model is now “true UK content”. Nissan is in a similar position: only 15 per cent of its components are paid for in sterling. Put simply, the carmakers would never have developed these plant networks if they knew Britain planned to leave the EU’s customs union or single market.
“I don’t think it’s feasible for the carmakers to carry on running the supply chains they currently do if that happens,” says Tim Lawrence, global head of manufacturing at the PA Consulting group. “It’s just not going to work.”
Honda is one of the first carmakers to explain, in detail, the delays it expects for importing parts and exporting cars if the UK leaves the customs union. Based on experience of trading with the US, it estimates UK export clearance will take an extra 24 hours on top of the five to 24-hour order-to-destination journey within the EU today.
In addition, entry clearance into the EU may take a further 24-36 hours if current US arrangements are any guide. It has little hope that technological fixes will make a big difference.
The biggest delay of all would come from being forced on to the seas. At present about 75 per cent of Honda parts and cars move through the Channel tunnel rail link, which is likely to become a bottleneck in a world of border checks. The Eurotunnel has room for only 200 trucks at the UK side, and 900 on the continent. The sheer volume of small consignments makes handling paperwork or checks hard. Stoppages make for large queues and there is little chance to make up for delays.
Honda thinks congestion may force it to use sea routes, which are more intermittent, require bigger deliveries and add three to six days of delay — if ports have the infrastructure and space to cope with the extra demand.
“Shipping takes a long time,” says Mr.Howells. “That’s what we are facing.” Mr.Freismuth of BMW also highlighted the “massive problem” physical checks would cause at Eurotunnel. “Without having a frictionless border, it will be a problem and there will be production stops at UK plants,” he said.
Mr.Rees-Mogg plays down the impact of more trade having to travel by sea. “Just look at what goes through Southampton regularly. Most goods are cleared within seconds, only 6 per cent of goods take more than a minute to clear,” he says. “Once we have left the EU we will not be obliged to follow the EU bureaucracy. We can make it more streamlined.”
Theresa May’s stated plan is to leave the single market and customs union. But the prime minister’s team seem to have devoted a lot more energy into finding ways to soften the exit.
This includes pushing for a standstill transition to 2021, and potentially a “temporary customs partnership” lasting for at least a year longer. In Whitehall, senior officials imagine those transitional measures in practice turning into a final arrangement, where Britain would in effect remain in a customs and goods area with the EU. “Isn’t it obvious?” asks one British official.
Yet for business, such hints about minimal actual changes are not enough to work with given all the uncertainties.
___________________________________________________________________________________________
In numbers
75%
Percentage of Honda components which arrive via the Channel tunnel. If there is disruption the tunnel cannot recover quickly
60,000
Estimated number of extra customs declarations that would be needed in the event of a hard Brexit
£2.1m
Extra costs for new IT systems and staffing to cope with Honda’s additional customs declarations, according to a Customs and Excise estimate
___________________________________________________________________________________________
As a result, manufacturers are adjusting where they can. BMW is beginning to unpick supply chains, shifting production of engines destined for Germany from its plant at Hams Hall near Birmingham. Mr.Freismuth says it is “preparing for a cliff-edge scenario in March 2019 based on the information we have”. Additional distribution centres are also planned to house more parts, but it “just won’t be possible to store everything”, he says. “You just couldn’t build enough warehouses.”
Honda has fewer options. Swindon is its global production centre for five-door Civics — and Honda’s only car factory in Europe. Mr.Howells says Honda’s operations “are predicated on the customs union”, but says it could adapt to a “more inefficient model” outside.
But again the expectation gap between politics and business seems considerable. Honda expects it would need to handle 60,000 additional customs declarations, requiring a new IT system and additional staff. HM Revenue & Customs says this would cost Honda £2.1m a year in form-filling alone — a cost that does not include the hit to productivity from a more unwieldy supply chain.
Crucially it also assumes Honda has enough time to adjust. Mr.Howells says he needs at least 18 months to adapt his systems to “the brave new world” outside a customs union.
Yet this uncertainty over regulations could last for years after Brexit negotiations end. Even with the conclusion of a UK-EU trade deal, which EU officials say will be signed in 2021 at the very earliest, many questions will remain outstanding. No trade agreement would include the kind of detail Honda needs on database fields, IT systems, form requirements or the application of measures to facilitate trade.
Honda could only begin to fully adapt to the new reality when the UK details its implementation plans, with legislation and technical standards. The process, in other words, stretches into the late 2020s. “We can only go as fast as [government] can go,” said Mr.Howells.
Lower down the supply chain, the adaptation challenge will be even greater. When BMW talked to its network of 1,600 suppliers in Europe that sell into its UK plants, it found only half were prepared for customs checks.
Among its UK suppliers that are exporters, the situation was even worse — only a third had customs procedures in place, and many of those were using customs brokers that charge £40 per consignment. “We had to invite all our suppliers who are not well prepared for Brexit, and teach them the basics of customs,” says Mr.Freismuth.
These are wrenching changes that no company would embark on unless absolutely necessary — the kind of certainty that Britain’s Brexit debate has yet to deliver. “What is it that I am dealing with? We have very regular meetings internally on Brexit and I don’t think we’ve given the same reports twice,” says Mr.Howells.
“With foreign currency you can react, you can see what the problem is and you can react to it. With Brexit we just can’t react. We can scenario, we can contingently plan, but we can’t then react because we don’t know.”
___________________________________________________________________________________________
In numbers
2m
Number of components coming into the factory production line in Swindon every day
10,000
Number of containers handled by Honda’s logistics and materials division per shift
25%
Percentage of a Honda Civic’s components which come solely from the UK
___________________________________________________________________________________________
This uncertainty has carried a price in investment. Honda will soon be reviewing the plans for its next Civic model, which is due around 2021. In theory, it would be glad to source more parts from within the UK and Brexit provides an opportunity to do just that. But it would take years — perhaps even a decade — to shift more supply to the UK, even if the parts companies were willing. Mr.Howells warns the UK supply base is “shallow” and more orders from Britain alone may not be a big enough incentive to deepen it.
Other UK suppliers are already feeling the pinch. Andrew Varga, who runs specialist valves maker Seetru, noticed a 5-10 per cent drop in orders from the EU recently, even as other business grew. Longstanding EU customers sought to protect their supply chains against a Brexit shock, or a change in origin requirements.
“They’ve said they don’t want to talk to us any more, no new products, nothing,” Mr.Varga says, staring out of a window. “These manufacturers tend to have long product life-cycles, so once you’re in a product, it’s difficult for them to engineer you out, but then, as the next model comes in, you don’t go into the next model,” he adds. “So, it’s a slow death process. That’s what it is.”
More from the Financial Times:
Brexit triggers a great car parts race for UK auto industry
EU reprimands UK over pace of Brexit talks beset by ‘huge differences’
UK consumer confidence improvement snaps as pessimism builds