APPENDIX 1
Memorandum submitted by Professor Garel
Rhys, Director of the Centre for Automotive Industry Research,
Cardiff Business School
THE PERFORMANCE AND ECONOMIC IMPACT OF THE
UK AUTOMOTIVE SECTOR
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
UK CAR MARKET STATISTICS, 1996, 1998 AND
2001 (M)
| |
1996 | 1998
| 1999 | 2001
|
| Registrations | 2.00
| 2.2 | 2.2
| 2.3 |
| Imports | 1.25
| 1.5 | 1.57
| 1.6 |
| Exports | 0.9
| 1.0 | 1.14
| 1.2 |
| Production | 1.7
| 1.75 | 1.78
| 1.9 |
| Capacity | 2.2
| 2.20 | 2.2
| 2.3 |
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
JAPANESE VEHICLE PRODUCTION IN THE UK (000s)
| | 1994
| 1998 | 2001
(forecast)
|
| Nissan | 215
| 289 | 350
|
| Toyota | 43
| 172 | 250
|
| Honda | 89
| 112 | 200
|
| TOTAL | 347
| 573 | 800
|
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
OTHER UK PRODUCTION OF PASSENGER CARS (000s)
| | 1994
| 1998 | 2003
(potential)
|
| BMW (Mini) | —
| — | 250
|
| Rover | 480
| 466 | 350
|
| Jaguar/Land Rover | 303
| 349 | 550
|
| Vauxhall | 245
| 277 | 400
|
| Peugeot | 75
| 71 | 180
|
| Others | 6
| 12 | 20
|
| TOTAL | 1,109
| 1,175 | 1,750
|
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.
SUMMARY
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.
CONCLUSION
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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