Brexit sticking point underlines the need for the UK's automotive supply chain to keep innovating

There is no denying that this is bad news. The expected refusal to include parts supplied from Japan and Turkey to UK auto makers’ factories under cumulation rules seems now to be inevitable. For many, especially the UK’s Japanese transplant factories, this is a big blow.

The practice of suppliers producing parts in Japan and/or in Turkey (where there are other car plants) has, so far, reduced capital needs, increased other economies of scale and taken advantage of wage arbitrage. As these new rules take hold it will drive some profound changes to the UK’s car industry.

It would be easy to only look at the negatives, and there are plenty of them including whether it is economical to make cars in the UK at all. However, there may be some opportunities too. The rules of origin relate to where value is added to the components, meaning that some of the value that is currently added in Japan or Turkey would need to transfer to the UK. The crucial question is how much value needs to be added in the UK for it to be determined to be local. And this depends on the value chain of each component.

The UK supplier landscape has structural over-capacity and a skilled workforce which means that for a select few there will be ways to benefit from this change. The car makers themselves will be deciding how much can be moved in-house. Increasing local value-added content will enable them to avoid the duties and so now the race begins to develop the most elegant solution to the problem – and there isn’t much time.