Effects and the ramifications of Brexit -Globalization of the UK automotive industry

The manufacturing sector includes the automotive industry, which deals primarily with the integration of tens of thousands of components made by various manufacturers into the finished goods of automobiles of various calibers (Soejachmoen, 2011). The recent tendency has been toward globalization. It is defined as the rise in connectedness between nations so that the world is condensed into a small sphere as a result of technology and innovation in the transportation and communication sectors (Singh & Gupta, 2012; Soejachmoen, 2011). The automobile sector has also been affected by this connectedness and intrusion of the foreign community into internal affairs of a nation. This sector is important globally as it employs over four million people who are involved in the direct manufacture of vehicles and a further forty million whose employment relies indirectly on this industry.
Globalization in the automotive industry has propelled the defragmentation of the automobile production process. This breakdown has further enabled the distribution of components of production into different locations such that a global network of automobile production is achieved (Soejachmoen, 2011). Sturgeon & Florida (2000) adds that although the production process is dispersed, globalization still retains central and coordinated corporate governance, component sourcing and vehicle production. In simple terms globalization has enabled cars to be designed in one country and then assembled in a second country using components that are manufactured from several other countries. The assembling nation imports the components and then exports the complete vehicles (Hammonds, 2009). Though globalization has been present in the automotive industry since its inception (Commonwealth of Australia (2012) states that, the pace at which different markets adopt it is not uniform.
The automotive industry is quite significant in the UK as it involves 2350 companies, contributes 4% of the GDP and is an employer of 700000 people. It earns close to £10 billion in revenue annually (Birrell, 2015). In 2013, UK produced 1.6 and 2.6 million cars and engines respectively ranking it at the fourth position among the EU car manufacturers and second largest market in Europe after Germany. This industry also serves as a large contributor of exports as 77% of its cars are exported amounting to £20300. This is compared to the £13000 worth of car imports demonstrating a favorable balance of trade (KPMG, 2014; PA Research, 2016).
Globalization runs deep in the UK automotive industry. Aside from being integrated with the EU, the production firms are developed such that their research and manufacturing activities have a presence in the USA, Japan and also China. Despite having tier 1 suppliers and their tier 2 counterparts in the region, local supplies (from EU) account for only 40% depicting the importance of foreign trade in the form of imports to acquire the remaining 60% (KPMG, 2014; PA Research, 2016).
Critical Analysis
Mintchell (2011) commenting on the landmark IDC report on the future assembly industry affirms that until recently automobile industry has remained the same ever since Ford invented the moving assembly line. However, globalization has brought great impacts that are forcing the industry to restructure. The focus now is turned towards incorporating IT and adoption of the economy of scope strategy rather than the traditional economy of scale. The new strategy will allow design, manufacture and sale of automobiles to be done anywhere, globalizing the entire process.
Writing for the Guardian, Birrell (2015) explores how globalization has influenced the British motor industry. He says this industry owes its recovery from the 1970's crisis that threatened its survival to globalization. Foreign capital was accepted from Germany, India, the USA and Japan who came in as buyers of the British car brands to revive the industry and also to explore the UK market (Ballaban, 2016). Their attraction to Britain was its membership to the EU. Today, the industry has expanded both in size and innovation as it is home to seven car manufacturers, nine bus builders, eight premium producers, eight formula one teams and other car accessory manufacturers. The government also supports the industry by funding research and development (Birrell, 2015; Holweg, Davies, & Podpolny, 2009).
The contrast with France is that while the French government retained a lot of stakes in its automotive industry, controlling it and practicing protectionism, UK allowed foreign investors. These investors work with the local flexible workforce where the management imported its style of practice and integrated it into the local system such that there was no need to bring in foreign workforce. They thus embraced globalization and its effects are seen in the increased investments in new production lines, employment opportunities and improved sales with massive profits. This allowed the UK to surpass France's car industry in terms of production volume where the government continued meddling has had a negative effect. Control by the French government was exhibited when Renault entered Turkey and CEO was conditioned to give the French nationals the first priority in the job offerings. With the continued meddling, the French government has to incur costs of increased labor and as it becomes unsustainable, many employees are leaving the industry (Birrell, 2015).
Not only did globalization revive the automotive industry but it propelled innovation which led to products that appealed to different segments of the global market. It also championed the reduction of CO2 emissions, setting a trend for the manufacturers (Birrell, 2015; Holweg et al., 2009).
Contradicting UK's experience with globalization, Wood (2014) of Market Watch brings forward the disheartening experience of the Australian automotive industry. Globalization in Australia meant that there was unrestricted importation of cars, a move that went ahead to hurt the local manufacturers and also jeopardized the employment of close to 50,000 workers. The reduced profits against an increasing cost of production have caused the local manufacturers of famous car brands to close and exit the Australian market. Nissan was the first to close down in 1992 followed by Mitsubishi in 2008 and now Ford after a market presence of 92 years and its CEO cited high production costs as compared to its European and Asian production lines and also because it had lost close to $600 million since 2011. General Motors and Toyota will also quit this year (Commonwealth of Australia, 2012).
All these tribulations came about when the Australian government abandoned the import substitution model that used to protect local manufacturers through custom duties (tariffs and quotas) that were imposed on the imports. To embrace the open market system, these tariffs were lowered sequentially to reach 5% and the government instead subsidized the cost of local production to cushion local manufacturers (Commonwealth of Australia, 2012). With the low tariffs, low cost imported products including vehicles flooded the local market while domestic producers felt the heat as subsidies were phased out sequentially. This led to a 50% fall in production since the turn of the millennium. In 2013, only 210,000 cars were locally produced and they constitute only 18% of the cars used in the country. Even with the dismal sales, the workers are still entitled to high pays as the government set $15 per hour as the minimum pay. Workers in the automotive industry receive well beyond $20 an hour (Commonwealth of Australia, 2012).
Robinet, (2013) looking at the effects of globalization concurs with Wood (2014) on the state of Australia. He adds Italy, Belgium, Sweden, France, Canada, Taiwan and even Japan to the list of countries that have been negatively affected by globalization. In his opinion, the economies of scale, elevated costs of production, consensus in global regulations, risk reduction, shifting market preferences, and changing trade regimes. He adds that globalization has redefined production from regional to global targeting. The difficulty is that the regional markets are unique and specific and initial production tuned vehicles to these characteristics. At a global level, there are few uniting characteristics making it harder to satisfy the global demands. This is further complicated by consensus on global emissions, safety standards and the fuel economy, conditions that weigh heavily on the named countries resulting to a reduction in vehicle production and the eventual pull-out. The GM Holden are losing out both at home and in the middle east where they were the preferred export cars. With the increase in options, the Middle East market is now turning to other brands (Robinet, 2013).
Away from the experiences of manufacturing nations, the government of Australia notes that globalization has increased the economic status of the emerging economies and as a result, the demand for cars has also increased tremendously. Countries such as China, Brazil, Thailand, India and Indonesia report an increase in car ownership. This translates to the increase in the car production and consequently employment rates to meet these demands. It has also caused pollution, congestion and high consumption of fuel which is fast depleting the oil's reserves and the same scenario apply for the availability of steel. Given these negative effects, globalization has also opened up new avenues for research to find interventions and alternatives (Commonwealth of Australia, 2012).
Also reporting for BBC News, Schifferes (2007) explains that globalization has opened up more market for vehicles.US is no longer the major market and the demand for cars is rising fast in other economies. Mexico and the BRICs Brazil, Russia, India and China are the most promising markets (London Translations, 2014). Shepardson, (2017) posits that major car brands are setting shop in Mexico. This has also put out US-based Ford and GM as the dominant car manufacturers across the world since other regions are also competing for the market share. In China, GM is finding it hard to make profits (IHS, 2015). Consumer preference between the US and other markets are also diverging with the big cars, SUVs known to be fuel guzzlers remaining popular only in the US while smaller cars are preferred elsewhere. This is because US fuel prices have remained low compared to the rest of the world where taxes on petrol are so high. Recent regulations on pollution and efficient fuel use have also prompted car manufacturers to look for alternatives to fuel such as developing cars. The CEO of GM Rick Wagoner and his counterparts of Ford and Toyota have already embarked on designing cars that run on biofuel such ethanol hybrids or even hydrogen (Schifferes, 2007).
Due to globalization, manufacturing bases are also identical but the cars produced in each region have been customized to suit the local needs. Countries also retain the brands even though they are produced by foreigners (Hammonds, 2009; Shepardson, 2017). Small companies have been compromised by globalization as the spreading big companies invade their market share rendering them uncompetitive.
From the above insights, the profound impacts of globalization are evident. Some regions have benefited from it yet others have been destroyed by it. The pace at which manufacturers are dealing with its impact is also varying with Toyota leading and others following(Editorial Staff, 2010). This arouses curiosity as to how the British automobile industry has been affected. This proposal will thus answer the question,' What are the effects of globalization on the automobile industry of UK. The sub-questions under it will be:
What benefits/challenges is the UK automobile industry dealing with, following globalization?
How will Brexit affect the globalized UK automobile industry following?
Practical rationale
The research questions raised here are quite important and relevant in these times. Initial reports as seen in the analysis section have shown that the British motor world was on the verge of extinction sometime back but thanks to the foreign investors it was awakened. This was only the first step towards globalization and sure enough, so many things have changed with globalization, allowing the automotive industry in the UK to mature, revolutionize and even spill over to new markets. Insiders in the automobile industry of UK state that the geographical position of the UK in Europe and its membership to the EU were the major attractions for foreign investments. EU negotiates deals on behalf of its member states, a move that is profitable as when compared to when a country is doing it independently. The convenience of EU has enabled more investors to enter the British market, use it as a manufacturing and distribution hub to other parts of Europe. Imports are also subsidized which lowers the cost of production within the UK market as most car components are outsourced. Its membership to the EU also enables its ventures in overseas markets to be successful (Ballaban, 2016).
Having seen how belonging to EU has enabled the British automobile industry to globalize, one would wish to understand the repercussions of globalization. They say that each venture has its strengths and pitfalls and the same applies to this case and therefore highlighting the benefits and challenges would guide the manufacturers on strategizing on future ventures. London Translations, (2014) quote the EU Commissioner of Employment, inclusion and social affairs, Laszlo Andor who states that globalization and the opening up of boundaries to conduct business at an international level has forced UK's auto world to restructure. Editorial Staff, (2010) highlights that a single strategy will not meet all the needs of the evolving industry and therefore a series of interventions will have to be combined then implemented sequentially if a manufacturer intends on staying afloat. Deciding on the most appropriate strategies will rely heavily on the current information.
The UK government would also be keen on these answers seeing as they are in the middle of negotiating a partnership model after the outcome of the Brexit referendum in which the Britons opted to exit from EU (Ballaban, 2016; PA Research, 2016). The answers will inform the terms that will be tabled during the negotiations to secure the interests of this industry even as the rest of other Brexit priorities are voiced. Players in this industry are hoping changes to be minimal so that disruptions, delays and possible losses are put at bay. Renown personalities from this industry have come out saying that with all the uncertainty at the moment, the industry is hurting since production is maintained at the bare minimum and there are no plans of expansion until certainty is regained. PA Research, (2016) projects a10% drop in car sales during these uncertain times. Ballaban (2016) explains that the foreign-owned British brands like Land Rover, Mini and Jaguar, foreign manufacturers like Ford Nissan and Honda who are substantially established in UK and export to the rest of Europe are now unsettled, due to the possible impacts of Brexit. Reaching an agreement could take long and this spells a period of stagnation (Jamaica Observer, 2016; Kirka, 2017).
PA Research, (2016) categorizes the UK based manufacturers into groups of three as a prediction of what might occur after Brexit. The leavers are the Japanese manufacturers as they export heavily to Europe hence will be most affected by Brexit. Vauxhall and Mini fall in the question mark category because they could leave or stay and further explore their EU options. Jaguar and Land Rover are expected to stay due to their global footprint. Owing to this, Tovey (2017) affirms that the innovativeness of the British automobile could be lost if the final Brexit deal is deemed unfavorable. This will occur if UK loses its position as an influencer of the EU regulations.
Still adding to the concerns of the automotive industry over Brexit, Holweg et al., (2009) point that the weaknesses in this industry are a shortage of skilled manpower, costs of labor and the tough environmental regulations. The solution to these issues so far has been outsourcing workers from the EU region which also solves the pay issues as most are willing to take up the offered salaries which native Britons consider poor pay. The question that now lingers is how these issues will be tackled in the event that the Brexit deal changes regulations on passporting. If the UK, relinquishes EU's control of regulations then how faithful and effective will the UK be at implementing them alone?
Exploring the topic further
It is not UK's automobile industry alone that is globalized. Other car manufacturing countries have also embraced globalization and thus the effects of globalization in these countries could help map the situation of UK. A lot of research has been conducted on the globalization of the automobile industries albeit in different countries and this will contribute to the literature review of the final work. The following seven articles present arguments and findings that are relevant to this research topic.
Reporting on the US, Miller & Sirgy, (2011) posit that with globalization, foreign companies, especially from Japan, entered the American market with new concepts and innovation which increased competition with the three US manufacturers Chrysler, Ford and GM. Their entry also expanded the car industry in terms of capacity and also regions that capitalized on automobile activities. Globalization also allowed the circulation of money within the economy and also the diffusion of technology to/from foreigners and also into other sectors. It also increased the volume of service and goods in foreign trading and created employment opportunities
Greenbaum (2002) follows the development of the Korean automobile industry. His climax is the contribution of the foreign community through globalization. He notes that it brought in foreign direct investment which aided in the expansion of the industry, it also allowed strategic alliances to be formed bringing about stability and innovation. It allowed Korea to import car parts from reknown manufacturers thus assembling high-quality vehicles and finally, it opened up the international market for the locally made cars and this increased export volumes, sales and profits
Reporting on the Chinese market, Gan (2001) appreciates that globalization has boosted international trade, has created employment and has contributed immensely to GDP growth. It has also prompted mergers with the famous American and European companies leading to innovation and product diversification. However, innovation has led to negative impacts of pollution, greenhouse gas emission and has also widened the social gap between the rich and the poor since only the former have the purchasing power for cars.

Similar effects are reported in the case of India by Singh & Gupta (2012). They expunge that the permission of foreigners led to increased foreign investment, production and cross-border trade. Workers have also been outsourced and local kills are being utilized abroad. Consumers enjoy a wide range of products to choose from, technology has also been introduced which has averted local brain drain. Access and exchange of information have been eased and finally, cultural interaction has been enabled. He, however, cautions against the domination of smaller nations by foreigners.
IHS (2015) includes the works of several writers who independently tackle the challenges that the automotive industry will have to deal with in the face of globalization. Among them is increasing competition, new regulations, evolution and conquering China.
Finally, Sturgeon & Florida, (2000) give an industrial level report that looks at the consequences of globalization in the automobiles. It is informed by theoretical voices of the pessimists and optimists of globalization and provides an insight on how jobs are affected in terms of quality, quantity and availability. While Sturgeon, Memedovic, Van Biesebroeck, & Gereffi (2009) describe the global automobile industry, bringing out the trends of globalization. They compare the developing and developed nations and also explore how regionalism has influenced global integration.


References
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