Saturday, 9 July 2016

Macro-Level Trends – Beyond “Brexit” - Looking Back to Look Forward...A Paradoxical “Merci, Monsieur Hulot” (Part 1)

The Americans, Japanese and British have always been aghast at, and very envious about, lengthy European vacation times. France's entire August Summer “shut-down” long centre of its engrained attitude, yet previously seen as endemic to Europe's post-WW2 economic lag behind the overt 'Thrusting 3' nations.

Re-Balancing to the 'New Norm' -

Today, as the west endures the slow-growth 'new normal', deflation and limited personal income growth because of the ongoing reality of squeezed and cash-cautious firms, the very idea of a period of summer shut-down' within the once 'Thrusting 3' and so right across the Triad regions might itself pose not a problem, but a solution to present socio-economic woes.

Such a possibility part-answer to the re-balancing of both intrinsically aggrieved social troubles, created from financial stress and distress, and as importantly, a route to reduce cost pressures on corporate overhead expenditure.

But unlike cosseting European regulation – France itself now going through much resisted labour reforms - the concept is that of part-paid or even unpaid time-off during the 'shut-down'. The aim to better equate to the cold reality of a firm's true level of demand vs its costs of supply; and so better able to manage the marginal costs of its productivity – whether in goods production or services provision.

The always efficient German's and the automotive sector have set the example here in the UK some time ago, notably when BMW bought the Mini brand and invested heavily in the Oxford plant. The business case to do so was founded upon the need for far greater staff hours flexibility that would match the varying customer demand for its cars over the course of the year. Staff hours annually 'banked' so as to modulate labour availability relative to more efficient production rates.

'Brexit': a Basis for Re-Orientation -

That European-wide social anger has obviously been most recently illustrated by Britain's 'Referendum on Europe'...'Brexit'. Of those that voted the British population decided to extricate itself from the apparent shackles of EU regulations and their seemingly negative consequences.

[NB Although it was obvious that the 'leave' voters themselves were themselves primed for many years beforehand by the deluge of anti-immigration stories, so creating 'red-top' fuelled reactionary popularism.

It is also paradoxically noted that whilst Brits themselves drive some cars made in the UK (BMW Mini, Nissan Qashqai, Honda Civic) the majority of new cars bought are imported from Europe; whilst the “nation's favourite” comedian Peter Kay is depicted driving a FIAT 500L].

Now 100 years on from the trench warfare of the Somme, Britain could be said to stand in a 'no man's land' of its own doing, leading European politicians highlighting the apparent lack of a credible future-forward plan ex-EU.

This now being partly ideologically addressed via new party leadership manifestos.

The Brexit vote and its aftermath caused hedge-funds to profusely bleed, the capital markets to convulse, the GBP dramatically weaken to a 30 year low, the BoE to highlight possible recession (though with policy in hand) and the UK Treasury to state that national debt reduction targets inevitably post-poned because of the renewed bout of uncertainty and lost business confidence.

Hence it is no wonder that the very notion of a tenable alternative UK economic export model - with renegotiated EU relations  – is the hot topic.

Exactly how Britain resets its trade, commercial, industrial and overall economic agenda remains to be seen,such a broad reformation to both continue very valuable EU trade links and to also 'welcome the world' is obviously key.

The Economic Model Options -

To present and simplify the issue, the Financial Times via its 'FT Punk' video cartoon edition explains what alternative economic models might be seen as possible options; the cartoon using an automotive character theme to do so; whilst effectively inferring a negative outcome of a true split from Europe.

The themes illustrated for the UK are:

1. “Britain Alone” - whereby the UK looks to the Commonwealth, Rest of the World and EU via basic WTO rules, becoming far more marginalised from access to European trading.
2. The “Canada Model” - seeking to mimic this positively flexible EU arrangement whereby whilst noting that this applies to goods only (from Forestry to Fishing to Part Finished Vehicle Sub-Systems). Hence not services which are the bedrock of the UK export economy.
3. The “Norway Model” (EEA) – allows both goods and services into EU and a country by country basis for negotiation, but still requires free movement of people.
4. “The Lichetenstein Model” (EEA+) - effectively a highly tailored deal for a miniscule country of 36,000 people and simple economy, far from the 65,000,000 people of the UK and its highly diverse and complex economy.

It should be noted that George Osborne has been a long-time admirer of the Norwegian fiscal attitude of responsibility and propriety, and also envious of the enormous SWF created from North Sea oil income. Mimicking such a model as far as possible with an SWF would indeed be positive.

Much of any newly re-constructed relationship will of course rely upon the foundations of the 'two-way traffic' involved, critically the basis of provided and received funding from Brussels and the new circumstantial basis for trade.

Already we have witnessed the efforts of the Paris Bourse talk-up its capabilities regards the Euro-bond trade and other financial instruments, so as to undermine The City's future role.

Devaluation Sets the Ball Rolling -

Yet, critically here the dramatically lowered GBP could well serve not only Britain's international exports but also various European corporates.

Presently in-situ local carmakers in Sunderland, Oxfordshire and Derbyshire are obviously set to enjoy the fruits of the declined GBP, and if this devalued situation remains could well see not only expansion, as with Aston Martin's new Welsh plant for DBX, but also the possible return of major European volume makers.

Remember it was primarily the strength of the GBP that forced Peugeot to close its factory at Ryton in the Midlands in the late 1990s, this also cited by BMW executives as the vital cause for failure of Rover Cars (and its EU export hopes) during the same era.

And even if the large auto-producers don't retake the plunge back into the UK (because of the need to provide their own national domestic employment and better plant opportunities in EM regions) there is an argument that even more may be gained by the less conspicuous within the auto-sector.


1. The Supplier Base
2. Vehicle Conversion Specialists
3. Advanced Engineering Services

The Supplier Base -

Tier 1 and 2 parts and sub-systems suppliers who are able to more rapidly relocate at lesser costs for an FX advantage.

Those firms in the supplier-base could re-view Britain as a useful production location, using both the FX tailwind to provide reduced capital costs, more flexible European customer pricing, better attune company budgeting via more finely honed flexible production output and critically interact with UK research and development agencies at lower cost and thus with potentially higher future brand value and profit margins on more advanced products.

Vehicle Conversion Specialists -

Newly revived business cases are likely created for a set of firms who historically have experienced 'feast or famine', those who seek to offer specialist 'added value' via vehicle re-specification activities by typically substantial modification of standard “off the shelf” vehicles.

These span a plethora of uses, and is the case for:

A. high-profile brand-centric operators like Land Rover's internal SVO Dept.
B. lesser publicly known firms such as Marshal AD, operating in the Defence sector.
C. the various 'body-builders' who enjoy contracts from the emergency services
D. the number of chassis-cab based motor-home (and caravan) producers
E. those firms adapting vehicles for the less physically able (cars to mini-buses)

For each of these the lower GBP means a boost to their business models, which invariably deploy a wide mix of labour types from within the skilled, semi-skilled and unskilled broad workforce by way of degree qualified engineers using CAD, experienced production technicians and new young apprentices.

Thus improved probability of either making the “business numbers stack-up” (no doubt so for most) or adding further to sizeable per unit margins (as per JLR's customised Defenders to Range Rovers).

Thus the GBP's fall helps to off-set the very unfortunate detrimental commercial impact of the recently introduced higher minimum wage, the cost of labour very critical to designed and manufactured products, even if seemingly more an issue related to the service sectors of retail or hospitality.

Furthermore and importantly, whilst it might be considered that UK based firms in question might be said to have a captive client-base with the emergency service type vehicles, 'blue-badge' vehicles, and the likes of extra-niche Land Rovers and Jaguars; in the past heir respective commercial efforts were often less secure than expected.

The emergency services themselves have been through tough budget cuts because of austerity measures which meant a harsh tender process for new procurement which in turn have had a direct impact on margins, cut-to-the-bone to obtain contracts.

Likewise what had been obtainable grants and loans for physical adaption of a vehicle, for owner-driver or charity organisation, saw funding cut so impacting upon the ability to order a specially adapted vehicle.

Whilst (in real terms) JLR SVO was (all too ironically) late to either recognise or reach into the 'hi-Performance', 'Premium Urban Warrior' and Hi-Luxury' markets, because of restricted CapEx and Research and Development monies for so long. Having seen other small ventures initiate the trend by mimicking what had happened with Hummer H2/H3, Mercedes Gelanderwagen and Jeep's auto-show concepts, via names like 'Twisted, 'Chelsea Truck' etc. (Even though Land Rover had itself shown many 'tailored-tough' concepts often drawn from its own product placement in movies (007, Lara Croft etc) it had been unable to truly exploit the trend beyond periodic special editions. Whilst it hesitated the market grew without its presence and became increasingly larger but also increasingly competitive.

As regards motorhomes and caravans, for decades the Germans, French and Italians have effectively owned this vehicle space, unsurprising given the size of the leisure and camping market across Europe thanks to a mix of product choice and good destination facilities. Though a few motorhome brands have gained traction (such as Swift) Britain never really had a comparable leisure-camping market because of the impact of package holidays from the mid 1970s onward.

However, typically in times of reduced economic circumstances, the UK does indeed see a return to such more affordable (often motor-based) leisure pursuits, noticeable off of a relatively small constant volume baseline.

And today's mix of constrained disposable incomes – especially for families, the much reduced buying power of the GBP in Europe, and rise in British patriotism (seen with 'Brexit') appears to indicate that the UK domestic motorhome, caravan and camping scene could well see a positive boost.

That boost domestically, plus the potential for export sales and ironically the possibility of lower-cost sub-contracted work for European counterparts, would undeniably assist the likes of Swift and its peers.

Advanced Engineering Services -

Given its automotive history and its precedence as a leading actor in future-forward engineering – presently illustrated by Britain as the construction heartland for Formula One – the country obviously seeks to re-bolster the national economic agenda with Advanced Engineering.

These primarily spanning both 'Eco' and 'Performance' realms to befit the needs of the automotive and wider and transport sectors. (Yet also interestingly, with possible efforts directed toward the broader reaches of industrial design, architecture and elsewhere).

New and more apt engineering design solutions achieved via ever better computer modelling capabilities, the ongoing development of materials sciences, innovation in production techniques and the enormous influence of electronics, have over the last four decades allowed for a relatively rapid evolution of exacting answers.

Whilst the ideals of common platforms for vehicles to aid scale production efficiencies have morphed into common module sets and adaptable platforms, such seeming homogenisation has been off-set by the adoption of ever more sophisticated engineering, both as ambitious, progressive technical routes and often equally important as a powerful 'performance' and / or 'eco' marketing story for the brand.

Although comparatively much smaller in size and GDP percentage contribution than in its industrial heyday, much of heavy industry long since departed, the remainder of the UK's engineering sector can still count itself as at, or at least very near, the forefront of technical discovery, innovation and productionisation; albeit typically at the smaller end of the scale in mid-volume (JLR) and niche (McLaren) production quantities.

However, it cannot be overstated that others in automotive technologies, namely Germany, Japan, S. Korea and America have demonstrated themselves as leaders in their respective fields.

BMW regards the scaling-up of carbon-fibre structures, stressed panels and components, aswell as duty-specific “mix and match” of advanced lightweight metals. Toyota (via a heavy early phase investment by its government) in the proven mass-production and so cost-reduction of hybrid-drive powertrains. Hyundai-Kia (with its access to domestic electronics research, development and integration) in the mainstream adoption of increasingly intelligent electronic systems. Tesla Motors in the provision of hi-performance, mid-distance range, all-electric vehicles thanks to evolutionary improvement of lithium-ion battery technology and the real-world provision of part-time, restricted environment, autonomous driving (even with the tragedy of a recent single death due to the failure of 'visual recognition' aids).

To this end, though Britain illustrates itself with Formula One engineering (systems integration to aerodynamics to seemlessly merged propulsion), has a wide spectrum of specialist vehicle knowledge (from leisure sports-cars to military armoured cars), has renowned and historical Engineering Services companies (such as Ricardo plc), and has a wealth of more recent and start-up customisation and personalisation firms (such as Kahn), there is a danger that the very breadth of necessary deep engineering knowledge across all systems is being incrementally surpassed by foreign organisations.

As seen, Germany able to draw strong financial resources from its position as premium auto-makers to the world and now very low cost ECB generated lending, Japan from its leap-frog lead since the Kyoto Summit and its volume sales learning, S. Korea from a combination of electronics expertise since the 1980s aswell as the cross-learning from its conglomerate structure, America from a combination of IT-orientated 'disruptive technology' fever driven Silicon Valley venture funds thereafter re-supported by access to a massive national and international capital markets base via Wall Street.

Each of these progressive ambitions and nurturing financial environs has indubitably assisted marches forward in specific disciplines and fields.

To this end Britain does indeed still has relevance as an engineering tour de force, especially regards the arenas of lightweight structures (as seen at JLR) and in the assisting of other countries' own motor industries (from Turkey in the 1960s [the then Rootes Group] to China in the early 2000s [with Ricardo-SAIC]), but that once unassaled position of leadership has been arguably degraded over the last twenty years.

Beyond own UK brand domestic engineering for JLR, Aston Martin, McLaren etc in advanced structures ,on-road dynamics and bespoke engines , it is seems the case that the UK is viewed today by the rest of the world of conventional EM auto- companies as simply useful 'go-to' experts in very specific one-off topics. Akin to the manner in which Malaysia's Proton utilised its ownership of Lotus Engineering.

These ranging from aerodynamics improvement to NVH suppression to 'ride and handling', to hybrid systems, to engine testing to whole car performance modification, thanks to a marriage of ever more refined and comprehensive computational software programmes and hands-on human experience.

Proton's and other client uses done so in an ad-hoc, piece-meal manner, making use only as necessary.

This should be of concern to the UK as other advanced countries demonstrate the right to their monikers with various proven engineering progression, and as ambitious emerging nations absorb ever more learning from those incumbent major manufacturers operating plants locally, and those new disruptors who can lure EM nations with a 'spoil of the profits' and simultaneously enable  their own technical learning through good policy alignment of their national economic agenda and academic efforts to 'search, learn, adopt and adapt' internally transferred foreign technology.

To this end the British “Catapult” Scheme must itself deliver and be seen to deliver the automotive advancement necessary to maintain the UK as a multi-dimensional Advanced Engineering Hub to the world.


The following Part 2 of this weblog very pointedly, and intentionally paradoxically, uses the 1971 French film 'Trafic' as a guiding light for both Britain's need for much regenerated creativity and the manner by which it should engage with Europe from here onward.

The relatively unknown but cult figure of Monsiuer Hulot has much to teach, from his design-engineer character to the ability to engage and innocently charm European border officials.

Monsieur Hulot conveys the very meaning of “entente cordial” that underpins and bolsters international trade.