Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum submitted by Professor Garel Rhys, Director of the Centre for Automotive Industry Research, Cardiff Business School


In the early 1980s the UK motor industry was being written off as a major force. By whatever criterion used, be it output, employment, investment or its contribution to the balance of payments, the industry was in decline and but a pale shadow of its former status. For example, car production in 1982 was 868,000 compared with 1,921,000 in 1972, while an industry that could be relied on to earn a balance of payments surplus slipped into a deficit of almost £1 billion in 1982. By 1989, the deficit had worsened to £6.5 billion.

  Now the position is changing as a major recovery occurs in the industry. This is in no small part due to the huge investment being made in the UK by Japanese vehicle motor companies, but also to the improvement in the affairs of the traditional car manufacturers. However, one can no longer talk about a British motor industry, but rather a motor industry in Britain.

  The UK is the first major vehicle manufacturing country to relinquish domestic control of its motor industry. Unlike in 1972, the ownership and control of large and small car companies and commercial vehicle makers is now largely located abroad, a process still continuing in 2000. Companies such as Morgan or TVR cars are among the few small-scale exceptions that prove this rule.

  This change is due to traditional companies such as Land Rover and Jaguar being bought by larger companies, and Japanese investment reinforced this. As a result, the motor industry in the UK has become truly part of a global industry. In future, this could be a source of strength that not all other European motor industries may share.

  So, the rise and decline of the UK-owned motor industry is being replaced by the emergence of a motor industry in the UK, stronger and more efficient than anything that went before. Although it is sad that the UK has lost most of its domestically owned motor industry, nevertheless it is returning to the forefront of the European motor industry. If this can be consolidated, then the UK will re-emerge as a major force in the world industry.

  The magnitude of the improvement is already considerable. Exports recovered from 186,000 cars in 1984 to almost 620,000 in 1994. By 1998, exports exceeded one million units for the first time and could reach 1.2 million in 2001.

  Exports are driving the recovery in UK car production. In 1982, UK car factories struggled to make 868,000 cars, a level of output that reflected the disaster facing the UK industry. In 1998, output was the best since 1972 (see Table 1), and grew again in 1999. The difficulties at Rover and Ford may see output fall for the first time since 1991.

Table 1



  Source: Derived from SMMT Yearbook, various years; CAIR.

  Much was achieved in 1998. Exports exceed one million cars a year for the first time. Imports were a record. The car market was the second largest on record. Production was the best since 1972. Capacity utilisation improved. The UK industry was doing well, but in the way of competitive markets, some companies or plants did less well or downright badly. This was the position facing the BMW subsidiary, Rover, in 1998-2000, and Ford's Dagenham plant. A crisis within an overall industrial recovery.

  These cold figures (Table 2) reflect exciting developments in the UK motor industry. The three Japanese car companies—Nissan, Toyota and Honda—are in the midst of continuing investment which will have injected more than £3.5 billion of capital investment in the UK between 1984-2001. However, this is put in context by Ford's £1.9 billion investment programme for 2000-05.

  By the end of the decade, the Japanese factories in the UK will be spending £2.8 billion on buying supplies in Europe—hopefully more than 65 per cent of this will be in the UK but the value of sterling may provoke a reappraisal. These purchases will be used in manufacturing 900,000 cars (Table 2). (The figure can go beyond this as Toyota may have capacity to make 400,000 cars.) This suggests that some criticism of the underlying performance of the UK component sector is overdone.

Table 2



  Source: Derived from SMMT Yearbook, various years; CAIR.

  The Japanese manufacturers say that many UK suppliers are up to the mark, with quality standards approaching those in Japan. As a result, by 2001 the Japanese owned and linked manufacturing plants will employ 12,500 people, together with another 16,500 in UK component plants, and 4,500 in other European factories. Another 16,000 jobs will be created in the European economy generally, giving 50,000 in all. Most will be in the UK. However, even here matters do not stand still.

  The effective purchase of Nissan by Renault means that the future development of Nissan's UK operation will depend on how it fits in with the Renault-Nissan global strategy, and the continuing appeal of a UK production base. (Similarly for ERF within MAN, and if the latter is bought by Iveco which already has a UK subsidiary in Seddon Atkinson further changes will occur.)

  The hoped-for effect of Japanese car companies on UK vehicle suppliers shows that the recovery of British car production cannot just be measured in terms of the numbers of cars made and sold at home and abroad, but is also a matter of the British content by value of those vehicles.

  In 1972 when the record UK car production was achieved, the local content of those vehicles was almost 100 per cent, by value. Now the situation is different and demonstrates the international nature of car production.

  In the UK the British content of a Ford or Rover normally exceeds 70 per cent whilst that of Peugeot and Vauxhall is around 60 per cent. The Japanese makers responded to British requests with a gentleman's agreement to aim for at 80 per cent "local" (ie EU) content, but with an understanding that the UK value would be around 70 per cent of the ex-works costs.

  The impact of the exchange rate on the competitiveness of a car firm is influenced by the local content. So firms may try to counter the "overvaluation" of a currency by reducing the domestic content and buy components abroad to benefit from the exchange rate. To this extent Peugeot and Vauxhall have a considerable built-in hedge against a high pound. However, it would be ironic if at the very time the Japanese car manufacture was building up to levels that really benefited UK suppliers, the UK content was cut to compensate for the exchange rate effect on profitability.

  In the main investment in the motor industry is affected by long term issues and not short term exchange rate movements. However, if the pound's long term appreciation since 1996 was forecast as lasting as long again, then this could affect not only company's sourcing strategy but also investment in plant and products: cars, commercial vehicles and tractors. The fact that the Japanese car makers with amongst the most productive plants in Europe are making losses demonstrates that the problem is not one that can be easily dismissed as the result of low productivity, poor quality and defective products. However, it is true that the cars made in these British plants are not as competitive as anticipated with the usual implications for pricing. What can be achieved in the UK without adverse exchange rates and weak products is demonstrated by Jaguar with growing sales to markets like the USA where currency has kept in step with sterling.

  Before the major appreciation of sterling in 1997, the efficiency of car plants in unit cost terms was often the best or equal to anything else in Europe. Therefore, GM expanded its UK car manufacturing facilities at the end of the 1990s for the first time since the 1960s, and prepared to introduce new and extra car models. Net of the exchange rate effect, Ford's UK cost base was among the best in Europe. However, notwithstanding the exchange rate many firms are finding the UK to be a good base. This was confirmed by Vauxhall when announcing in 2000 its £189 million investment in UK manufacturing resources. This is a measure of the impact and role of the UK motor industry.

  Rover's potential capacity was impressive. Before its dismemberment in 2000, the company could make 600,000 cars and 200,000 Land Rovers a year with minimal investment to take out bottlenecks. This was appreciated by BMW, which needed Rover's volume to secure its own future in a motor industry inhabited by corporate giants. Now, however, Land Rover's 250,000 units have been bought by Ford, BMW will retain 250,000 units of capacity at Cowley and hopefully Rover at Longbridge will find the ways and means to unlock its 350,000 units plus of capacity.

  At the top end of the market, Jaguar has rationalised its Coventry factory to enable it to make 50,000 units a year with ease and has built a new assembly plant capable of making 120,000 cars a year. From 2002, it will run Halewood to make 150,000 compact Jaguars.

  In this way, Ford will be confident that its Jaguar subsidiary can achieve sufficient economies of scale to obtain a competitive cost structure. In addition, VW will take Bentley's capacity up to 8,000 a year—adding to the contribution of "Others" to the recovery of UK car manufacturing. Rolls Royce will site a new plant on the south coast to assemble 1,000 Rolls Royce cars a year.

  Also in Coventry, Peugeot is increasing capacity from 120,000 to 180,000 units a year with extra models, new investment in equipment, more flexible work practices and extra shifts. This restores the position to what it was before the state rescue of Chrysler in 1976.

  The "Other" category hides the small company sector, which remains a vibrant part of the UK motor industry. While the likes of Aston Martin, Lotus, Bentley and Rolls-Royce are part of large combines, stand-alone enterprises are still able to survive, and some flourish. There will always be a UK-owned sector of the motor industry as long as companies like Morgan, TVR, Caterham, Bristol and others are able to make a profit and finance new products. This entrepreneurial part of the industry attracts changes of ownership, new entrants and liquidation. The "creative destruction" within the sector ensures the survival of the fittest and a continuing role for the UK-owned car manufacturer in an industry dominated by corporate giants. This output from individualism and old-fashioned entrepreneurship is at the heart of the UK's major position in the motor racing industry, and in vehicle design and development. Even where no UK companies are involved, UK-trained individuals are. It is no exaggeration to say that whereas in the nineteenth century the Scottish engineer was to be found everywhere, now it is the UK-trained designer and stylist that holds a key position throughout the world motor industry.

Table 3


BMW (Mini)
Jaguar/Land Rover

  Source: CAIR.

  So, the position of the UK in the global motor industry is a significant one. As a case in point, by 2005 the car industry will have the capability to make between 2.6 million and 2.7 million cars and light vans. It is likely that output will develop to a level that will use most of this.

  Unfortunately, it is difficult to see a similar revival of heavy truck making as so much capacity has closed in the past decade. However, the emergence of Paccar as a major force in the UK could create good possibilities, and Seddon-Atkinson has a strong niche within the Fiat Iveco empire. In addition, Dennis has become a real force in the bus industry.


  In the early 1980s, it appeared as if nothing could stop the process of decline in the UK motor industry. Through inward investment by new entrants and improved performance by the existing suppliers, decline has been turned into growth.

  The motor industry in the UK is re-establishing itself as a major force in the car market. It is up to the UK component sector to show that it can benefit from this, and despite the plethora of adverse comments in sundry reports, many UK component companies are showing that they can. The main short term challenge they face is the possibility of UK based car makers switching suppliers abroad as an exchange rate hedge.

  As the economic effects of the motor industry are so large, the 300,000 people in the UK directly and indirectly employed by this sector of manufacturing, a motor industry is a useful thing to have. One thing is sure. Given the dynamic nature of the global motor industry, of which the UK is very much a part, there is never a "final form" for the industry in the UK. Change is always on the agenda. Therefore the industry is a force for change in the British economy.

  In addition, governments do well by taxing vehicle purchase and usage and in the UK's case government policy can take some credit for attracting major inward investment in the motor sector in the past decade

  This success needs to be repeated in other parts of the economy if the revival of UK manufacturing is to be meaningful, and ancillary service jobs created. The nature of the motor sector's performance is impressive.

  The economic impact and significance of the automotive manufacturing industry in the UK, vehicles, parts and components is considerable. This is measured in terms of the employment, trade, investment and wealth creation of the industry on the one hand and the impact on qualitative factors such as skills and technology on the other.

  During the 1980s and 1990s the industry has experienced major restructuring. In the 1980s the trend of activity and employment was downwards with the reduction being over 50 per cent in each case. In the 1990s there was a substantial recovery in car output and a small recovery in employment. The former almost doubled but the latter increased by 25 per cent. In all productivity increased by almost 300 per cent.

  The industry is now much more efficient and can be described as a major element in the European motor industry where cars and many components are concerned. Even in the case of commercial vehicles where no recovery in output has occurred there are significant players contributing to the economic significance of the UK.

  The industry contributes massively to the UK's export drive and import saving despite an overall trade deficit. Without the contribution of the UK based automotive sector, and everything else being equal, the automotive trade deficit would be eight times worse than it is.

  The impact of the industry stems not only from the major component and vehicle firms but also from an array of specialist makers where the UK is a world leader. This is especially so in the high performance car sector and in support facilities and research and development in the independent design houses and contract engineers. The latter employs 5,000 people using the most sophisticated technology. They turn over in excess of £600 million and export 80 per cent of their output.

  The improved performance of the industry is manifested in a number of ways such as reduced costs, increased productivity and are driven by the industry's widespread realisation of the need to improve itself. In addition this has created a remarkable series of partnerships within the industry and with outside agencies including government. This introduces world class performance to the UK economy as a whole.

  The industry has favourably altered fundamental elements in the field of new technology, organisation, training and skills, industrial relations and employee involvement.

  Despite the traumas of the 1980s the automotive sector is still a major force in the economy, which allows it to create or support jobs and income elsewhere:

    (i)  In 1999 some 110,000 people were employed in vehicle manufacture and 150,000 in component and parts manufacture. Another 30,000 were employed in a wider definition of both activities. This represented 1.5 per cent of the UK's total employed labour force and 8 per cent of all manufacturing jobs. The traumas at Longbridge and Dagenham and the knock-on effects will reduce the total by about 8,000 although employment will increase eventually at Bentley, Rolls Royce and Cowley.

    (ii)  The industry generated a turnover of £30 billion directly plus £10 billion indirectly.

    (iii)  The automotive sector contributed some £30 billion to GDP, or 4.1 per cent of the total. That is, the industry is a major contributor to national income.

    (iv)  The investment by the industry on products and facilities exceeds £2.5 billion per year. The industry in the 1990s has been in the midst of its largest post-war investment boom. In plant renewal and expansion alone this amounts to over £7.5 billion. The investment in the regions has been important. The employment impact on the West Midlands, South East, Wales, North West and North East is central to the economic wellbeing of those areas. The industry has played a major role in regenerating the old industrial areas of the UK.

    (v)  The total number of jobs in the automotive sector of 290,000 is enhanced by the 40,000 employed in backward linkages into sectors such as steel. The job total of 558,000 in forward linkages into vehicle retail are not included, as most of these jobs would exist whether or not there was a UK based automotive sector. Even so they are part of the effect of vehicle manufacture and use on the economy and their role must be remembered. The official measure of the motor industry is an underestimate by at least 30,000 jobs. The figures above also reinstates jobs defined away by changes in the official basis of the headcount in the industry.

  These 330,000 jobs in the automotive sector create jobs throughout the UK economy via the multiplier effect. This is conservatively estimated as 100,000 but could be as high as 330,000.

  The total job dependence on the UK automotive sector throughout the UK economy is 430,000 or 1.7 per cent of the UK's employed workforce. That is for every one person employed in vehicle making alone, an additional three people in the UK owed their jobs to the activities of these car and CV firms and ultimately to the demand for British-made vehicles. The impact of the industry depends in the final analysis on the competitiveness of the industry: the ability to produce products acceptable to the customer in efficient and profitable operations.

  If "other" vehicle manufacture (such as tractors), employment of 10,000 is added, and assuming no extra employment in the component sector, the backward linkage and multiplier total would increase and there would be some forward linkage into products like tractor cabs. This would increase the total job impact of the UK automotive sector to about 450,000. (If a one-for-one multiplier was used then the total would be 700,000.) If the forward linkages were also added then a figure of 1,258,000 emerges. This may not be the impact of the UK automotive sector, but it gives the job importance of the industry within the UK. It amounts to over 6 per cent of all UK jobs.

  The job and wealth impact of 430,000 identified is the impact of the automotive sector. That is, the impact of vehicle and components and parts production. It is not the impact of the vehicle firms alone. This allows us to include the export and after-market business of the parts, materials and components suppliers.

  The automotive sector has had a qualitative effect on the UK economy. The productivity improvements alone have set the standards for the rest of the engineering sector.

  The qualitative impact has come about as a result of the restructuring of capacity and the introduction of new technologies leading to new models and products. The changes have involved: increased labour utilisation through workforce improvements; better organisation leading to improved working within and between companies. In turn this has produced improvements in human capital and greatly improved industrial relations and human resource management.


  The UK automotive sector is no longer synonymous with all that is bad in the UK economy but on the contrary it is the benchmark for all that is good. The re-emergence of the UK as a competitive manufacturing and service economy had its beginnings in the automotive sector, and it is that sector that continues to drive the process forward.

  The UK motor industry through its production activities and the products it makes is a major force in the economy that not only increases national prosperity but also improves the quality of life for so many. Whatever the "costs" of vehicle manufacture and usage the "benefits" greatly exceeds them. The industry has a well advanced philosophy of social and community responsibility. Its enduring success is based upon this and its ability to give customers and society what they want at the right price and quality. The impact of the automotive industry is what it is: being in all respects a value-for-money industry.

June 2000

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