Select Committee on Trade and Industry Third Report


The Industry

67. The UK automotive industry constitutes a major part of the UK manufacturing base, and a significant part of European manufacturing.

  • the industry has an annual turnover of over £40 billion, equivalent to around 5.3% of GDP;

  • UK motor industry exports in 1999 totalled £20 billion;

  • The industry has changed from being regarded as representing much that was bad in British manufacturing to being in some respects the benchmark for other industrial sectors, in areas such as new technology, industrial relations, industrial design and production engineering.

  • The UK is unique in having three major Japanese car manufacturers, as well as two of the global manufacturing companies (Ford and General Motors): Peugeot, part of the Peugeot-Citroen Group, which took over Chrysler's European plants in 1979: BMW, a medium-sized German company, which disposed of Rover in 2000 but retained the Cowley plant: and the remaining UK-owned volume manufacturer, MG Rover. There is also a significant commercial vehicle industry making trucks, buses and vans: a vibrant small company sector; and a highly successful motorsport sector.

Cycle of models

68. The car industry has a standard cycle of introduction of a new model; a production life of 6 or 7 years; and its replacement by a new model or relaunched version of the old one. Planning begins for the replacement of a model around halfway through its life, even at the height of its commercial success. A year or so later, the process gets under way of taking decisions as to where to assemble its successor and where to source key sub-assemblies and major components. The number of vehicle manufacturers in the UK and the number of models being made means that every year the future of one or two UK-manufactured models, and by extension that of the manufacturing plants where they are assembled, is called into question.

69. In 2000 attention was focussed first on the successors to the Ford Fiesta at Dagenham and the Nissan Micra at Washington, and then at the end of the year on the successor to the Vauxhall Vectra now made at Luton. In the next 18 months decisions may loom on the replacement for the Vauxhall Astra at Ellesmere Port, the Peugeot 206 at Ryton and possibly the Toyota Avensis at Burnaston. That is not scaremongering, but the simple facts well known to those who work in the industry. The outcome of this cycle of decision-making is of course of crucial importance to the whole industry and to those working in it. While the individual decisions are indeed affected by the prevailing economic and fiscal climate, including exchange rates, the regular cycle of decisions on the place of assembly of new models is the normal practice in the industry. We trust that the significance of this cycle is fully appreciated by all concerned, including those responsible for these issues within Government.


  70. Vehicle manufacturers are either losing money on their European and UK operations or are making a very small return on their investments.[95] Ford recorded a loss on their European business of $33 million in 2000, with a large restructuring charge to cover the Dagenham decision. They returned an overall pre-tax profit of over $6 billion. General Motors recorded a loss in Europe of $676 million in 2000, including $419 million to cover restructuring costs, but returned an overall pre-tax profit of around $5 billion. The Chief Executive of Opel resigned. The Japanese companies manufacturing in the UK are also recording disappointing results, which inevitably lead their main boards in Japan to ask questions about the direction of future investment. This does not of course necessarily imply a reduction in UK production, as demonstrated by Toyota's recent decision to transfer production of the 3-door Corolla from Japan to Burnaston as a means of using underused assembly capacity more prudently. The recently merged Chrysler-Mercedes group experiences the opposite of this pattern, with European operations supporting substantially less profitable US operations. Most car manufacturers are feeling the cold winds of low or negative returns on assets and are under pressure from unhappy shareholders.


71. There is generally said to be substantial overcapacity in global, European and UK vehicle manufacturing plants. The capacity of the sum of vehicle manufacturing plants exceeds current and projected demand by some margin. All the major manufacturers experience this. The market shares of some of the longer established companies have also fallen in the face of competition from new entrants.[96] Ford told us that it had in Europe a capacity of around 2.3 million vehicles a year, and demand for roughly 1.7 million vehicles.[97] This meant that they had one plant too many. The Chairman of Vauxhall suggested to us in June 2000 that overcapacity in Europe was somewhere around 20 per cent, and that General Motors could close a significant car-sized plant and get by with the remaining capacity.[98] The suggestion in a memorandum in June 2000 from Professor Rhys that by 2005 there would be capacity for 2.6-2.7 million cars in the UK and that it was likely that output would "develop to a level that will use most of this"[99] looks optimistic.

72. The thesis of general overcapacity cannot be accepted at face value.

  • Measurement of capacity is not an exact science, and usually depends on estimates of the effect of technical constraints on output such as paintshop facilities or other production bottlenecks, or the layout of a site.

  • Output can be radically reduced or increased when required, particularly by changes in shift working patterns or by retooling. Mr Tod Evans, Managing Director of Peugeot UK, cited the plant at Ryton, where annual output had doubled in a short time. He suggested that plants could operate at anything from 65 to 120 per cent of installed capacity.[100] The practice of "sweating" a plant by driving it harder and longer is growing, as a means of improving the return on capital assets.

  • New vehicle manufacturing facilities are still being constructed in western Europe, including in the UK. We were briefed by Honda in the course of our visit to Swindon in July on their plans (subsequently scaled down) for new manufacturing capacity. Toyota recently opened their new plant at Valenciennes in France to produce the Yaris.

In the past, overcapacity as a result of excessively optimistic sales forecasts could be tolerated. Rightly or wrongly, however, the universal perception of overcapacity combined with the disappointing financial returns of many companies in the recent past, reflected in their share value, is now producing a worldwide pattern of plant closure, reduction in the number of models produced and reductions in the number of employees.

Globalisation and concentration

73. In recent years, the trend towards the concentration of vehicle manufacturing in a small number of global companies has continued apace. Chrysler and Mercedes have merged and are now closely linked with Mitsubishi. General Motors has a close relationship with Fiat, and controls Saab.[101] Ford now owns a stable of once independent British companies with distinct brands, notably Jaguar, Land Rover and Aston Martin. Renault has in effect taken control of Nissan. VW runs Seat, Skoda and Bentley. BMW will soon take over the Rolls-Royce brand. The three principal UK commercial vehicle manufacturers are owned by MAN of Germany, Paccar of the US, and Iveco, a pan-European company. The two principal UK bus and coach manufacturers have merged so as to be able to face the competition from the four major European manufacturers who dominate the market.[102] Professor Rhys has noted that there is a motor industry in Britain, rather than a British motor industry.[103] UK vehicle manufacturing is indeed merely one part of a European industry, which is in turn part of a global industry. Most cars produced in the UK are exported, primarily but not exclusively to the continent of Europe. The UK vehicle industry is no more than a branch of a European industry. The vital decisions affecting the future of UK vehicle manufacturing and vehicle component plants are taken at a European or global level, and generally not in the UK. As the European vehicle industry is increasingly centred elsewhere in Europe, the UK is likely to suffer from decisions taken there, sometimes on other than purely economic grounds.

74. Global companies have choices which purely national companies do not. If a global manufacturer such as Ford or General Motors find vehicle manufacture unprofitable in the UK, they have little difficulty in switching operations elsewhere. GM told us that they have "an integrated network of 14 vehicle plants and seven engine transmission plants located in 10 European countries".[104] Ford can produce Jaguars or Volvos anywhere. It is even possible that the new F type Jaguar could be assembled outside the UK. Conversely, an attempt was made to save car assembly at Dagenham by bringing in Volvo assembly. BMW need not produce the new Mini at Cowley or anywhere else in the UK; the relative ease with which that production line can be transferred from one plant to another has already been demonstrated. Ryton is potentially in competition with Mulhouse in producing the Peugeot 206 and will have to compete against other Peugeot Citroen plants for its successor model.[105] Toyota have two large European plants — at Burnaston near Derby and Valenciennes in northern France — and may in future be able to contemplate moving production between the two plants. Production of models can be and has been transferred between Europe and Japan.

75. If Renault had not taken effective control of Nissan, there would have been no question of the new Micra being produced at Renault's Flins plant in France, although logically Nissan could have sought some contract production arrangement. The Government's submission to the European Commission in support of the proposed RSA grant to Nissan explicitly treats Renault and Nissan as effectively one organisation. The new Micra will in effect be a version of the existing Renault Clio, a small car produced in greater volumes and sold cheaper. Other Nissan products will in due course also now have to fit in with the existing Renault range.

76. The emergence of global producers has extended the possibility of production of vehicles and components outside the traditional markets for cars, particularly in the new economies of central and eastern Europe, in Turkey and in the Far East.[106] We heard something of this on our November 2000 visit to Turkey, where Ford is opening a light van plant and where there is a thriving business in components. Honda referred to its car manufacturing operation in Turkey becoming a source of supply to Eastern Europe.[107] In our discussions we have heard of the move by first line suppliers to sourcing in Hungary, the Czech Republic and further afield, including India and China, for materials such as wiring assemblies and seating material. Mr Woodley of the TGWU referred to a recent case of a major supplier, Johnson Controls, moving production of seat trim for cars from Mansfield in Nottinghamshire to a joint venture in the Czech Republic.[108]

Technological Change

77. The pace of change in technologies and the cost of introduction of new technology has had and is having a huge impact on the automotive industry worldwide. Vehicles have in recent years been placed under increasingly onerous environmental restraints, on engine emissions in particular, but also on noise. The public and the public authorities demand cleaner and safer vehicles. A challenging new regime has been introduced for disposing of old vehicles. New technologies and designs associated with luxury or sporting vehicles now rapidly becomes the industry standard, putting a premium on flexibility in manufacturing techniques. New technology also increases the pressure on component suppliers to stay up with the game so as to be able to respond to the manufacturer' demand for the latest technology at an affordable price. Manufacturers find themselves obliged to contain the costs by closer co-operation both with component manufacturers and with one another. The prospect of radical changes in the way in which vehicles are powered is also driving the major engine manufacturers to cooperate in the development of new engines and powertrain technology.

78. Consumers are becoming more demanding. They increasingly seek a degree of individualisation of their vehicles, going beyond the practice of sticking on some stripes and inventing a sub-brand name. It is anticipated that manufacturers will have to be able to offer dozens of models, based on no more basic platforms than at present, but with a range of engines and stylings to suit particular requirements.

79. We detect in the industry a fundamental uncertainty as to the medium term future of its technology. The next decade may see a radical shake-up in the way vehicles are assembled and powered. The UK will need to maintain its technological edge, but without a very clear idea as to where this might be, or of how to do it, especially with the current haemorrhaging of vehicle assembly operation. There has been for several years the admirable DTI-sponsored Foresight Vehicle and Innovative Manufacturing Initiative programmes, with significant public funding support.[109] The DTI told us that " the focus of the Government's R&D support... will need to shift to issues of exploitation...".[110] There would in our view be benefit in Government and industry exploring ways of ensuring that the UK vehicle manufacturing industry is in the best possible position to benefit from the exploitation of new automotive technologies.

Core business

80. Vehicle manufacturers are increasingly concentrating on the core business of assembly. Parts of their existing manufacturing business are either sold to more specialist component manufacturers, floated off as independent concerns or placed into joint ventures.[111] This applies to most components, including transmission and powertrain, as well as spare parts manufacture and supply. They are also co-operating more in development of those parts of the business they retain.

  • Ford have formed a joint venture with Getrag to make transmissions, affecting three of their European plants, including Halewood. They floated off their Visteon parts operations; and have separated from their other operations a number of UK plants engaged in parts manufacture.

  • GM floated off their Delphi parts division some years ago. They have recently formed a joint venture with Fiat for powertrain manufacture.[112] Mr Reilly told us "we realised we were both spending a lot of money developing engine lines to do virtually the same job in the same type of car and therefore we might be able to share those components and reduce the costs".[113]

   81. The principal manufacturers have thus far retained engine design and manufacture as a core competence. MG Rover are seeking to buy the Longbridge South Works engine and powertrain plant retained by BMW when they disposed of Rover.[114] The Managing Director of Peugeot UK told us that the Group was not enthusiastic for outsourcing, preferring ventures with other manufacturers.[115] Nissan has recently been reported as hesitating to dispose of their transmission operations. We noted that Ford has retained their wheel manufacturing and press plant at Dagenham, used for a number of their vehicles made in Europe, and are indeed investing in modernising both. Outsourcing is therefore by no means the invariable pattern.

82. The broad trend towards concentration on core competences is nonetheless unmistakeable. The enterprises which are thereby created have the chance to expand by selling their product to other vehicle assemblers. They also run the risk of losing to other independent suppliers their existing tied market to their original parent company. The trend towards concentration on core competences challenges the future of all non-assembly operations carried out by the manufacturers, and is likely to lead to difficulties for some of the UK plants thus cast adrift. It is important that the Department is not taken by surprise by such developments.


83. The perception of overcapacity and current low profitability have added to the pressure on management to make existing plants as profitable as possible. We were told by many manufacturers that flexibility was the key to this: the capacity of one plant to make a range of different models, to switch rapidly from one to another in response to market changes, and to assemble cars on more than one standard platform.[116] Companies do not want to have a plant tied up making cars that they cannot sell and unable to meet demand for cars which are selling well.

"If a plant can build more than one model, the exposure of any single plant to the effects of large demand swings is minimised."[117]

   84. The mobility of manufacture is striking. The BMW plant at Cowley and the MG Rover plant at Longbridge effectively exchanged the new Mini and the Rover 75 lines in a matter of months. Honda has recently been able to decide to use their new capacity at Swindon to build a smaller number of larger recreational vehicles rather than a large volume of new small cars. Toyota are able to switch a model from Japan to Burnaston without apparent difficulty. The line being prepared for the successor to the Vectra at Luton — although not a similar line in Germany — can apparently be moved elsewhere without difficulty.

85. The implications are grave for older plants, those with geographical constraints or limitations, and those whose internal configuration cannot readily be adapted to the need for flexible plants able to produce several models and switch quickly from one model to another. No matter how flexible and skilled a workforce, the inherited characteristics of a plant prove fatal to its long-term future. The implications can also be grave for a plant which fails to win a new or replacement model. It will face difficulties in demonstrating that it remains cost-effective in producing a reduced range of models, since fixed costs have to be spread over a lower volume of fewer models. Dagenham and Luton were single-model plants. It is a matter of some concern that a number of the remaining UK car assembly plants are also single-model plants, notably Ryton, Cowley and Ellesmere Port.

93  Ev, p 76 Back

94  Ev, pp 74-5 for detailed calculations Back

95  Qq 2, 26 (Ford) Back

96  Eg Q 4 Back

97  Qq 3, 24, 27 Back

98  Qq 82, 137; also Q 248 Back

99  Ev, p 73 Back

100  Q 141 Back

101  Q 112 Back

102  Ev, pp 112-5 Back

103  Ev, p 71 Back

104  Ev, p 17 Back

105  Q 141 Back

106  Ev, p101: Q 196 Back

107  Ev, p 109 Back

108  Q 191 Back

109  Ev, p 79, paras 19-21; p 98 (DTI) Back

110  Ibid, p 99, para 5 Back

111  See eg Qq 2, 21 (Visteon), 52 and 63: Q 112; Qq 191, 217, 232 Back

112  Q 112 Back

113  Q 285 Back

114  HC 383, para 45 Back

115  Q 167 Back

116  Eg Qq 24, 155 Back

117  Ev, p17 Back

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Prepared 8 February 2001