So we will soon be free of Brussels red tape, able to make our own decisions and in control of our borders. Instead of buying stuff from overseas, we can make it here. Made by Brits for Brits. It sounds good, in simple soundbites. But when we lift the lid of Pandora’s Brexit Box, what do we see?
I was recently asked to represent the automotive technology industry at a Westminster briefing for MPs. Held in one of the beautiful Westminster committee rooms, it brought together views from many industries, revealing the complexity of the Brexit jigsaw and the conflict between pieces fighting for the same space.
Take ‘why not make it here?’ as an example. While that’s possible for some products, for many it will just compound the problem. First, if you have a capital-intensive facility like high-precision heat treatment, it needs a constant flow of work to deliver a reasonable pay-back. That means customers in all the major European countries. So even if you did have a plan to close your expensive facility, sack your carefully trained workforce and build a shiny new one somewhere else, why would you locate it in the UK and introduce a border and customs red tape between your facility and the majority of your customers?
Maybe low capital manufacturing could come here to serve just the UK market? Currently these facilities tend to be in low cost countries such as Morocco that have free trade agreements with the EU. Their governments provide substantial incentives to locate your factory there, employing their affordable but relatively low skill workforce to make labour-intensive products such as wiring harnesses. Leave the EU and you leave Morocco’s FTA too, so suddenly you have a border, probably tariffs and certainly customs and tax administration that ads cost, complexity and risk.
Let’s say you do bring a downsized wiring plant to the UK and put an advertisement in the paper for energetic and committed employees. We learnt at the parliamentary meeting that there is already a shortage of people eager to work in largely manual production activities. The food industry representative told us about a factory where 70 percent of the employees are immigrants because they can’t recruit enough people in the UK. The farming representative told us of crops rotting in the fields, unpicked because of a shortage of labour. Introduce the immigration controls promised by the Brexiteers and you slash today’s already too-small workforce. Then re-shore low-skill manufacturing and you increase demand for that shrunk workforce. Who is going to make the wiring harnesses?
To bring the plants back here, we would also have to offer financial incentives comparable to the development areas in low cost countries. The government says its vision is to transform Britain into a world-leading centre of innovation and high-skill jobs, but the opportunity cost of tax breaks for low skill employment is less money for education and for delivering the high-skill vision.
So we leave the wiring plant in Morocco and the heat treatment plant in Germany and hope that there will be ‘frictionless trade’. That means a lot more than no tariffs. Do you remember when every company had an export department to sort out the paperwork for selling overseas? The cost of customs can be considerable, not to mention the risk and delays.
A digital border like Canada’s portal for road cargo into the US sounds like a perfect solution, but can you name a single large, complex, public IT project that has been brought in on time and to budget, working perfectly? The time window for delivering to a production line is typically two hours and stopping a line can cost around £300,000 per minute, while your customer’s purchasing team is keeping an eye on your delivery record, sharpening its weapons for the next price negotiation.
Red Tape? Yes, it can be very effective at holding down costs. In my time in this industry, one of the biggest areas of cost reduction has been the increasing volumes of each platform that have been achieved by globalisation. Today, European manufacturers sell similar vehicles in every major market. That’s partly enabled by increasing harmonisation of regulations, such as those for crash performance and emissions. If we decide that the UK can free itself from harmonisation with these standards, we have to be very careful not to throw away the cost advantage that harmonisation provides. Developing, validating and homologating separate components for the UK and for the rest of the world ads unwelcome cost that makes our exports less attractive. It wouldn’t take much divergence for some models built in the UK to not be available to British customers.
Technology suppliers typically create 70 percent of the value of a car. When discussing Brexit, we need to discuss that 70 percent too.
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