Economics

Nissan – why the UK is less attractive for manufacturing investment than it was

BY Steve Davies   /  5 February 2019

There are many reasons why Nissan pulled the plug on the new X-Trail being built in the UK. The decision is not all because of Brexit.

Nissan’s decision several years ago to create another production line at its Sunderland plant was influenced by incentives promised by the UK government, promises which are looking rather hollow now as we near a no deal Brexit with no clear plan B in sight. So, Nissan is merely reverting back to its original plan which was to build the car in Japan, as the car maker does with the current model.

With the EU’s latest trade agreement with Japan completed, and the UK unable to confirm or deny what arrangements it will l trade under, Nissan has to plan on what it knows now. Car companies need certainty because their margins are comparatively low, especially for mass produced vehicles such as the X-Trail.

That’s why a 10% tariff – which would apply when the UK leaves the EU without any sort of deal – could wipe out Nissan’s margins especially when combined with supply-chain delays and the need for additional warehousing to compensate for the increased ordering latency. It would also put pressure on its ability to respond to changes in demand.

Most car companies like Nissan stockpile huge amounts of finished stock at ports and depots around the world, because customers expect very short order-delivery times of up to one to two weeks. This makes Nissan’s forecasting accuracy absolutely key.

The structure of Nissan’s supply chain is a calculated bet on the pattern of future demand and with the current Brexit uncertainty the UK becomes a poor market to invest in, especially when offset against the set-up time/costs of a new production line and the three to five year payback period for such a large investment.

With diesel sales down more than 30% in the past year (due to a combination of the VW dieselgate scandal and the government’s miss-communication about its future emission plans) and with diesel sales banned from 2040 or sooner, the UK is proving a challenging market for selling cars such as the X-Trail. The car is currently fitted almost exclusively with diesel engines (in five of the six variants).

This will change in the future, with petrol hybrids being offered for the first time, but it is a slow transition and Nissan still expects diesel to play a major part in their product range, especially in the next product life cycle. Thus, with sales in the UK falling and the rest of the world making up a greater proportion of demand, Nissan’s decision to invest deeper in the UK was bound to take a knock.

In essence, Nissan’s decision to de-invest in the UK is a combination of the EU-Japan trade deal, which now makes it potentially cheaper to produce in Japan and export to the EU tariff free, rather than make the X-trail in the UK and face parts and finished goods tariffs when supplying to the EU. Then you have the sharp decline in demand for diesel-powered cars which further erodes the value of the UK as a supply hub because a greater proportion will be exported. And none of us know what tariffs will apply, and when. Uncertainty over Brexit makes it safer for a company such as Nissan to stick to their original plans rather than placing a bet on Britain’s future.

Unless you are the pub company Wetherspoons, whose owner is a prominent advocate of Brexit, and can flog any beer from wherever you choose to source it, the UK as a manufacturing destination is less attractive now than it was before the 2016 referendum, especially for cars.

Steve Davies, investor in automotive industry