Global automotive supply chains set for significant upheaval

Honda’s announcement this week of its UK plant closure reflects a sector in crisis, with winners and losers among logistics suppliers, says Ti’s Thomas Cullen.

Global automotive supply chains are set for a period of significant upheaval, creating winners and losers among the sector’s logistics suppliers, with this week’s announcement about Honda’s UK plant closure just the latest in a series of developments reflecting a sector in crisis.

Thomas Cullen, senior analyst at Transport Intelligence (Ti), said the news that Honda will shut its Swindon assembly plant in the UK in 2021 “has little, if anything, to do with local politics and everything to do with the changing nature of the automotive supply chain”.

He added: “That Swindon was vulnerable to closure was something that those in the automotive sector were aware of for several years. The fundamental problem was that, despite its models’ excellent engineering, Honda did not sell enough cars in Europe and the UK.

“This meant smaller throughput volumes and lower profitability for the Swindon assembly plant. Recent trends reflected a vehicle manufacturer that had almost given up on the European market, with the Swindon plant having concentrated production on the 2016 Civic, a new design whose aesthetics reflected that its core market would be in the US, not Europe.”

Honda’s only other assembly plant in the region is the small facility at Gebze in Turkey, Cullen noted, adding: “This will remain open beyond the end of the present Civic model’s life, although Honda’s statement seems less than emphatic about its future.”

Opinion varies on whether or the extent to which the decision to close Swindon was linked to Brexit and the uncertainty surrounding it. Some believe that although the plant has been struggling for some time, Brexit caused the company to more seriously re-examine its future in the UK, while others point to the recent signing of the EU-Japan free trade agreement as a key factor – limiting the benefits of production in Europe because of the elimination of EU import tariffs on goods manufactured in Japan – along with profound changes taking place within automotive manufacturing more generally, such as the decline in diesel sales and growth in electric and hybrid vehicles. These were all reasons cited for the recent decision by Nissan to backtrack from its plans to base new production at the company’s plant in Sunderland in the northeast of England.

“There is some irony that the reduction in trade barriers resulting from treaties such as the Japan-EU Free trade agreement has made such plant closures more common,” noted Cullen. “In such a trading environment, the production logistics logic of centralising assembly at a global level is slightly stronger, leading to marginal models such as the Nissan X-Trail or Honda Civic being more attractive to make in a fewer, larger locations.

“This logic has limits due to the influence of currency uncertainty; nonetheless, an increase in the global movement of passenger cars is likely.”

Most importantly, Honda, like all vehicle manufacturers, is facing existential pressure from the shift in technology, Cullen noted, adding: “The demand to fund research into both electric vehicles and digital guidance systems is putting a huge strain on their balance sheets and forcing them to re-evaluate their corporate strategies. Every plant investment is being re-assessed and a new emphasis is being placed on returns on investment.”

In such an environment, all but the most profitable assembly plants are vulnerable, he said.

“GM has already announced the closure of a string of assembly plants. Ford is aggressively restructuring, and the likelihood is that both assembly-plants and engine-plants will shut across much of the world.

“The German vehicle manufacturers’ profits are suffering and they are likely to be next in attempting to rationalise their production in Europe. Indeed ‘Europe’ is generally vulnerable due to slow market growth in comparison to much of the rest of the world.”

He continued: “The automotive supply chain is changing; it is increasingly global, but the major transformation is driven by technology. More traditional assembly plants will shut, but new battery plants and technology facilities will open.

“It is worth noting that the Honda Swindon Assembly plant is just down the motorway from the new Dyson electric vehicle supply chain R&D centre that employs thousands of design engineers rather that assembly-line workers. This is probably an indication of what the future looks like.”

Cullen concluded: “The implications for logistics service providers are significant. Some, such deep-sea car carriers will benefit; others will suffer badly.”

 

Source: Lloyd’s