By Dr Laszlo Czaban, The University of Manchester, UK firstname.lastname@example.org
Since the triggering of Article 50 (Brexit), a number of international manufacturing companies announced that they would relocate production, component manufacturing or assembly from the UK. Some stated that it has nothing to do with Brexit, some that Brexit affected their decision, and some that it was due to Brexit.
Obviously, tons of evidence could be piled up for any of these narratives – the data are infinite, so there would be some supporting the argument (and if there are contradictory data, we could always resort to probabilities, relative weights, and so on). These pieces of data in combination with the narrative become stylised facts – it is partly a theoretical necessity, partly a practical solution.
Just consider the following: the manufacturing of the components starts in Britain, then makes its way to Northern France, then to Germany, finally back to Britain for assembly the Mini (which is owned by BMW and only really sells in the UK). Obviously, Brexit would affect this. And Brexit would affect the sandwich company whose many components are transported from the EU, assembled in the UK, and sold in France, or those destined to the UK market whose ingredients, apart from the bread derive from a rather long supply chain, and only assembled here. On the other hand, Brexit would not affect the fish caught just off the coast of the UK, transported to China (more recently to Vietnam) where it is filleted, returned to the UK, and sold in chip shops. Yet, there are ups and downs in this trade, and not quite dissimilar to the one Brexit may cause, just triggered by prices, costs and alike.
Let’s leave the fish filleting industry, and sandwich making for the rest of this post, and let’s turn to manufacturing (actually both fish fillets and sandwiches are manufacturing sectors, just we not associate them with the sector). While this Brexit upheaval has been going on supposedly causing the relocation of manufacturers (oddly the Japanese ones didn’t move to Continental Europe, but back to Japan), or the denial of it (blaming on the falling demand for, let’s say, diesel cars), or exploiting short-term government subsidies to produce something or other in Singapore, German car manufacturers simply couldn’t satisfy the domestic demand for their personal vehicles. While this Brexit upheaval has been going on, and German car manufacturers cannot meet the demand mainly because their sluggish response to the new emission standards, and while there is demand for their cars, Audi is considering the cutting out of one shift a day (which will also have a major effect on the supply chain).
So, supply chain. It sounds boring in an academic article, but it is much more interesting seeing it. Just try to visualise it: one of the Audi assembly factories is in Iglostadt, and the engine factory supplying it is in Hungary, so about 650 km away. That’s about 7-8 hours’ drive or 11 hours on the train. Inputs to the engine factory comes from many places, mainly (but not exclusively) on road. The engines leave the factory mainly (two thirds) by train. That’s 60 wagons a day at normal times. There must be an economic reason behind it.
It was Peter Dicken who summarised the regionalisation of the automotive industry (and manufacturing in general) in the most convincing way that became a paradigm. It was based on evidence, and a clear logic (economies of scale and value/weight ratio in combination with Dunning’s eclectic theory). By the time it gained sufficient attention, it became undermined by the findings of global commodity chain (now GVC) approach – economies of scale (for example, in assembly (Volkswagen), or in cutting (US garment industry) regionalised, production as a whole globalised utilising the relatively low transportation cost (still value/weight ratio), and global efficiencies in low value added parts (that is adjusting the value/weight ratio with accounting for margins). And there was something else: China
All these, the regionalisation of production, the long supply chains chosen on the grounds of various considerations in combination with lean production, and other kinds of modern in-factory management techniques make completely common sense. There is economies of scale in assembly, in components, in transportation, there is low inventory, the globalisation opened trading routes, companies are able to optimise the location of various aspects of the production (be it via subsidiaries or outsourcing) by production factors or total production factor. And it offers the basis for Industry 4.0.
Yet, these stylised facts cannot explain why German car manufacturing couldn’t comply with the new emission requirements in terms of output, why Japanese car manufacturers (among them the most productive in Europe) withdraw, and seem to choose centralised manufacturing and distribution – the Brexit argument is not a sufficient explanation, the drop in demand for diesel engine cars is not a sufficient explanation because we are supposedly talking about those wonderfully modern, advanced, intelligent, technology focused, whatever companies, so such a simple Fordist, because this is what they are, answer does not seem to match those stylised facts.
Not only that – it seems that we are within a year from the next recession, which will probably be led by manufacturing, and for the first time it may take China to recession.
So, what’s going on?
It would be nice if economics could get a kind of working partnership with management studies (and vice versa) at a theoretical level, and then for the practical level we would also need psychology, sociology and so on to give an explanation.
I will try to keep it simple. I will talk about cars, but the points are valid for most manufacturing sectors.
Cars are not produced faster today than towards the end of the 1970s. Workers cannot jump in the skeleton cars quicker to fasten the screws, human biology hasn’t changed to accommodate the higher speed of the conveyor belt. Yet, the HPV (hours per vehicle) has come down. Why?
Well, firstly, there is less waste (quality problem), which obviously reduces the useful hour per vehicle. However, even if all problems are addressed in the free time of the workers, it is now at a level that cannot really be further reduced.
Secondly, workers (teams really) operate at the highest possible speed, so it cannot be further increased. Replacing them with robots means being exposed to capacity utilisation, so there are limits to that too. In financial terms it would expose companies to market changes more.
Third, a lot of back office staff and supervisors have been fired, replaced by teamwork and by versions of artificial intelligence, thus their hours are now taken out of the calculations. Not many more people could be fired.
Fourth, the combination of platform and model numbers are at a technological crunch. Every new model increases the HPV, less so on the same platform, but platforms can accommodate only a limited number of models (and the same applies for the shared components), thus new platforms are needed, increasing the HPV. However, the decisions on the models and platforms are not driven by HPV (unlike the poor factory manager’s KPI), but by market segmentation and competition, thus it is largely beyond the control of the modern optimising managers, and it is unlikely to provide more productivity gains.
Now we get to the supply chains. Supply chains don’t only reduce the cost (through location and negotiating position between the assemblers and the component manufacturers, or through shared R&D), but they also increase responsiveness and variety. Indeed, as it is written in the textbooks. This, in combination with lean management techniques, has been the main life support of the current structure of manufacturing.
Automobile companies have been squeezing drips from the five points above, here a percent, there two, and this with the growing and more segmented market provided further impetus to maintain and perfect the existing production system.
To put it simple: the current system has no ability to deal with any larger impediment than a few drops of rain on the road. Fluctuation at any point of the system creates an increasing wave of diversions from the expected norm, and the effects are enduring as the production system has limited capacity to catch up with itself.
A week-long strike somewhere would stop the output for 3 days somewhere else, and then extra resources needed to catch up – all these have to be financed from the limited margins. Now, match this with such a shock as Brexit or new emission criteria. The point is – the unsustainability of the production system. Not only in environmental terms, not only in terms of global politics, not only in terms of international trade rules, but also in terms of management. We know companies where suppliers suddenly gained an upper hand. We know companies where quality checks are a problem. We know companies where the opportunity cost between flexibility and margins tilted, and cannot be balanced.
All these are happening when in some sectors (the most observed is automotive) a major technological upheaval is imminent (alternative energy, autonomous cars, etc.) but without much knowledge about the winner – which one would become the dominant technology, the “dominant design”.
So now back to the theory. We have had the valid theoretical argument when Fordism in some sectors and in some parts of the world got into crisis. We have had a valid theoretical argument when regionalised production emerged. We have had a valid theoretical argument when regionalised production with global supply chains emerged. There has always been a problem when applying these models to concrete cases (it’s an epistemological problem that cannot be resolved at the level of the theory or at the level of the concrete case – inductive and deductive inferential reasoning really).
It is too easy to get distracted right now with the turmoil caused by Brexit, regulatory changes, trade wars and so on. The point is: these are triggers and not causes.
What all these suggest, when accounting for the key characteristics of the business models, of international business, of management of processes of the concrete firms: the current model of international manufacturing reached its limits – the cause of its crisis is internal, and the solution is unlikely be anything but managerial.
Thus the theoretical analysis, be it from the firm to the theory of international business or from the theory of international business to the firm, it should treat the consequential point as a frame, and hence recognise the crisis.
 Dicken, P. (1986): Global Shift: Industrial Change in a Turbulent World, Harpercollins College.
It was effectively the first edition of the Global Shift (now in the 7th edition.
 Of course, the global commodity chain concept did not come from nothing. There have been articles about outsourcing by Swedish companies or by the US apparel industry as far back as the 1970s.
 The Chinese domestic market has been a conceptual problem to both the Global Shift and to GVC. It has become more and more localised (regionalised), but because of the conceptual problem, it was worth leaving it to those who were writing about China rather than those who were writing about international business, thus avoiding uncomfortable questions about the boundaries of these theories (The Chinese domestic economy is international business through and through – just a different kind, and not “just” – it is one of the main components of the outward FDI from China: the outward FDI supports the localisation/regionalisation of manufacturing production and assembly in China).
 China has been buying time via soft loans and quasi-quantitative easing. It can maintain it for a long time.
 I’m not going into the replacement of professionals with AI. It is happening and it will continue to happen, but the research is quite weak (in terms of evidence).
 Sorry for bringing in Porter’s Five Forces.
 I chose this example because according to textbooks it wasn’t supposed to happen: https://www.bbc.co.uk/news/business-43298649
 The entire retail sector really.
By Professor Pervez Ghauri, University of Birmingham, UK (email@example.com) and
Professor Ursula Ott, Nottingham Trent University, UK (Ursula.firstname.lastname@example.org)
After more than forty years of UK membership in the EU, the UK and the EU have been negotiating the exit of the UK from the EU for two years. We analyse possible outcomes of these negotiations. There are examples of countries that are not members but have a close relationship with the EU. These examples provide possible outcome of Brexit negotiations.
The Brexit-Negotiations could have been conducted amicably with offers and counter offers. However, while the EU have been trying to be rational, the UK has been negotiating with a somewhat emotional approach. In most negotiations, parties do not get what they wish, they must give and take to come closer to reach a compromise. In a so called White Paper, UK announced twelve objectives that it wanted to achieve. We analyse some examples that can help the UK achieve these objectives:
Norway Model. This model allows an access to the single market by paying a membership fee and allowing free movement of people which was clearly rejected by British referendum and the White Paper. Therefore, this model needs to be negotiated, which might be difficult.
Canada Model. This agreement was achieved after several years of negotiations and includes free trade in many products/services and no free movement of people. This needs a long period of negotiations and would mean uncertain and difficult time for UK residents.
Ukraine plus agreement. This model is rarely discussed by British politicians or by the media. However, it seems to be the closest to objectives listed in the White paper. In addition to free trade in most products/services and no free movement of people, this agreement includes security collaborations that is desired both by UK and EU.
No deal = WTO rules. In case no deal is agreed by 29th March 2019, all present arrangements will cease to exist, and several agreements will have to be negotiated following WTO rules for trade. This might lead to similar arrangement as US-EU trade relationship and may take several years to negotiate.
UK model on the table: Single market access (through tariffs, quota, agreements and payments) and special agreements to be negotiated for financial services, security issues, Northern Ireland border and no free movement of people. The negotiations will proceed following offers and counter-offers depending upon the bargaining power of parties.
While remaining in EU is the best option for the UK, at present this seems not to be achievable unless there is a second referendum and majority of people vote to remain. Considering the present deadlock in the UK parliament, a second referendum is a real possibility. Keeping the second referendum aside, our analysis reveals that the Ukraine plus model is the most suitable for the UK. The next best option is the Canada model. The Norway model is not a very viable option as the UK will have to pay a membership fee and it will have to accept some level of free movement of people.
To read the full academic article click here
Ott, U. F. and P. N. Ghauri (2019). "Brexit negotiations: From negotiation space to agreement zones." Journal of International Business Studies 50(1): 137-149.
Will the GDPR change the approach to scientific
By Dr Agnieszka Chidlow, Birmingham Business School, The University of Birmingham
Since 25 May 2018, the European Union (EU) Parliament and Council enforced the General Data Protection Regulation (GDPR) as the primary law regulating how companies protect EU citizen’s personal data. Any organisations that are not compliant will face heavy fines. But what does the GDPR mean for scientific and statistical research?
It is worth noting that, the Regulation treats the processing of personal data for scientific and statistical research separately, for example:
1) For scientific research it points out that “the processing of personal data for scientific research purposes should be interpreted in a broad manner including for example technological development and demonstration, fundamental research, applied research and privately funded research (...) To meet the specificities of processing personal data for scientific research purposes, specific conditions should apply in particular as regards the publication or otherwise disclosure of personal data in the context of scientific research purposes (Recital 159, p.30)”. Even though not explicitly stated, these “specific conditions” may refer to ethical standards for scientific research (Recital 33) as well as all listed safeguards.
2) For statistical research it indicates that “where personal data are processed for statistical purposes the Union or Member State law should, within the limits of the Regulation, determine statistical content, control of access, specifications for the processing of personal data for statistical purposes and appropriate measures to safeguard the rights and freedoms of the data subject and for ensuring statistical confidentiality. Statistical purposes mean any operation of collection and the processing of personal data necessary for statistical surveys or for the production of statistical results. Those statistical results may further be used for different purposes, including a scientific research purpose. The statistical purpose implies that the result of processing for statistical purposes is not personal data, but aggregate data, and that this result or the personal data are not used in support of measures or decisions regarding any particular natural person (Recital 162, p.30)”.
Even though the GDPR creates very strict obligations for processing and collecting personal data for scientific and statistical research, it offers some exemptions as part of its mandate to enable a Digital Single Market across the EU. More specifically, by allowing researchers to process data beyond the purpose for which it was first collected, the Regulation exempts research from the principle of storage and purpose limitation. What is more, in limited circumstances, it also allows researchers to process sensitive data without a consent as well as to transfer personal data to third countries that do not provide an adequate level of protection.
However, it is rather unclear as to how exactly such exemptions will extend. But what is clear is the fact that the GDPR aims to encourage innovation as long as researchers implement the appropriate safeguards, as stated in Article 89 (page 84) of the Data Protection Act.
By Prof. Rajneesh Narula OBE, Henley Business School
The run-up to Brexit Day has been a windfall for the chattering classes. We have known since June that this day must come, and thousands of commentators – perhaps millions, if you include the discussions in living rooms and pubs across Europe – have visualised and considered the various possible shapes Brexit might finally take; what would be gained and what might be lost, and how the future of Britain in the 21st century might unfold after B-Day.
Non-Europeans are quite bewildered by the number of column inches and minutes devoted to Brexit in our newspapers, online fora and broadcast news. B-Day is still a subject for fantasy: there is even less clarity as to the UK government’s position. In short, uncertainty still abounds, and this reflects itself in the value of the Pound against most currencies. That there is so much difficulty agreeing on a withdrawal agreement does not bode well for the actual negotiations, because almost every aspect of life is shaped by the intensity of the embrace from which the UK wishes to extricate itself. Converting hundreds of years of formal and informal treaties and institutional arrangements into new law is mind-bogglingly difficult. Article 50 is a harbinger of mirthless days for all, with the possible exception of lawyers and consultants.
It is a matter of incredulity to the rest of Europe that Brexit is not some practical joke, and I say the ‘rest of Europe’ because these islands will remain part of Europe, and two millennia of interaction will not suddenly stop on ‘moving-out’ Wednesday. Indeed, there is no moving-out: The UK, like some petulant teenager, is simply giving formal notice of relocation two years hence (but like all teenagers he feels he can demand things without considering the quid pro quo).
But here lies the rub: this is not a petulant teenager leaving home, but the legal divorce of long-married couple who have a wide variety of common property, offspring, shared interests and responsibility, and a lot of history.
To the outside observer, the UK has painted itself as the much-wronged and misunderstood teenager, while the EU has portrayed itself as the unappreciated and long-suffering spouse who is being dumped in an acrimonious and public breakup. These two contrasting views that continue to be propagated by either side assure us of a convoluted and discordant two-year negotiation. The teenager feels confident that its (estranged) extended family in the form of the commonwealth will clutch the prodigal cousin tightly to their bosom. Alas, it is already clear that Empire 2.0 is fantasy. On the other hand, the EU knows where it stands: its position is clear. The deck, to use another tired metaphor, is stacked firmly in their favour, and they know it. That they offered a Soft Brexit shortly after the referendum was a kindness, but in its spurning, little has been gained except Trump-like hubris and ill-will.
B- Day brings to mind that other famous British folly, The Charge of the Light Brigade.
I hope 29 March 2019 proves me wrong.
By Prof. Nigel Driffield, Warwick Business School
Inward investment is of vital importance to the UK economy. Compared to other G7 countries, the UK has had the highest percentage of inward FDI as a percentage of GDP, at 64 per cent of GDP in 2014 (ONS 2016). Much of this investment is from other EU member states, as Figure1 shows.
How is inward investment likely to be affected by the UK leaving the European Union?
Investors in the UK will face a number of challenges as a result of Brexit if they seek to sell into the EU and operate supply chains that cross between the UK and the UK. The devaluation in sterling will also have an impact on inward investment decisions.
There will be challenges for investors if they seek to operate supply chains that cross (sometimes several times) between the UK and EU. When the single market was created in 1993, many commentators speculated that intra-EU FDI would plummet. This turned out to be far from the case as firms took advantage of the opportunities to coordinate resources across countries. The single market connects innovative firms to the richest market in the world and, through EU regional policy and structural funds, allows firms to take full advantage of location economies where labour is available in low-cost locations. Most recently, Honda has warned MPs of the consequences of leaving the customs union.
From an inward investment perspective the essential problem is that the ‘middle region’ of activities of the value chain, characterised by lower value added and higher volume of employment, are often carried out outside the UK. Developed countries attempt to “plug the gap in the middle” by seeking inward investment that will generate employment for the squeezed middle. This can be achieved by identifying key sectors that hit the ‘sweet spot’ of high productivity but also employment generation. However, these sectors, such as advanced manufacturing, food technology and financial services, are the ones most vulnerable to frictions in value chains which drive away investment, due to the way they are organised in the single market.