APPENDIX 2
Memorandum submitted by the Society of
Motor Manufacturers and Traders Ltd
EXECUTIVE SUMMARY
The motor industry in the UK is facing very
serious challenges. The high value of Sterling has undermined
competitiveness and a range of Government actions are likely to
push the costs of operating in the UK higher. There is concern
that the combination of these factors is undermining confidence
in the UK and making it more difficult to secure new investment.
The Trade and Industry Committee inquiry is
focused on vehicle manufacturing in the UK. The SMMT's submission
has, however, sought to represent the broader range of issues
being faced throughout the automotive supply chain.
The UK automotive industry is a very successful,
key sector of the UK economy that operates within a highly competitive
global market. The industry has a turnover of approximately £46
billion, which is equivalent to 5.5 per cent of Gross Domestic
Product. Some 800,000 jobs were dependent on the industry in 1999
with 300,000 employees directly employed in the vehicle and component
manufacturing and the aftermarket. UK motor industry exports totalled
£20 billion in 1999, exceeding the export value of any other
manufacturing sector in the UK.
The UK has had an enviable record of attracting
inward investment from major global companies in the automotive
sector. In 1999, more than 60 projects in the UK motor industry
were funded by inward investment. These investments created around
7,000 new jobs and safeguarded a further 12,000.
The UK provides a strong operating base for
vehicle and component manufacturers. It has a strong domestic
market with 2.5 million new vehicle registrations per annum and
provides a strategic entry point to the European Single Market.
The UK has a long tradition of engineering excellence and innovation.
These qualities allied to a flexible labour market and economic
stability have made the UK an attractive base for the automotive
sector.
The UK motor industry recognises the need for
further improvements in productivity to ensure that it remains
internationally competitive. Industry has developed a number of
initiatives through partnerships and industry-led programmes.
The SMMT Industry Forum facilitates a world-unique collaboration
between manufacturers and suppliers to improve competitiveness
in the UK automotive supply chain. The success of Industry Forum
has led to sustainable shop-floor improvements in participating
companies and Government considers it a blueprint for industry
as a whole.
The appreciation of Sterling by 17 per cent
against the Euro since its launch has undermined the competitiveness
of the UK-based automotive industry. The high pound is forcing
vehicle manufacturers to seek significant cost reductions from
UK based suppliers or undertake significant shifts in sourcing
strategies. A continuation of these trends will result in severe
damage to employment in the UK supply chain.
The SMMT believes that the Bank of England has
overestimated the inflationary pressures in the economy. This
has resulted in higher than necessary interest rates. It would
like to see Government undertake more research into the impact
of regulatory and technological change on the economy in order
to gain more accurate forecasts of inflation guiding monetary
policy in the UK.
The climate change levy on the business use
of energy will increase net energy costs in the automotive industry
by 10 to 15 per cent without realising its maximum environmental
impact. These cost increases will impact most heavily on SMEs
in the supply chain already struggling to maintain competitiveness.
The SMMT calls upon Government to broaden the qualifying criteria
for eligibility for a negotiated agreement. This would encourage
the greatest possible number of companies within the motor industry
to commit themselves to challenging energy-saving targets.
The SMMT is concerned that the environmental
and economic impact of major changes to vehicle taxation in the
UK has not been fully assessed by Government. The diesel penalty
in both the new VED scheme and the company car tax regime is unfair
and does not take into account progress made in modern engine
technology. Arbitrary disruption to demand in key sectors of the
new car and commercial vehicle markets can undermine confidence
in the Government's approach to environmental objectives.
The SMMT sees no clear economic and environmental
rationale for the introduction of workplace parking levies. The
levies are a tax on car ownership that will only increase the
cost for businesses and displace workplace parking to nearby streets
with no reduction in overall traffic and pollution levels. To
tackle the issue of traffic congestion, road user charges are
a more appropriate response.
The End-of-Life Vehicles (ELV) Directive will
have a significant effect on UK car manufacturers and importers.
It imposes a total financial liability of some £4 billion
on UK car producers by obliging them to take back and bear the
cost of treatment for ELVs. The SMMT calls upon Government to
co-operate closely with industry in devising an implementation
strategy for the ELV Directive that provides for equitable burden
sharing and does not put the UK automotive industry internationally
at a competitive disadvantage.
The lack of quality graduate engineers is a
structural problem for the UK motor industry, which could diminish
its competitiveness and attractiveness for foreign investment.
Engineering courses need to transfer a wider range of applicable
skills and integrate work experience modules into the curriculum
to meet the needs and standards of the industry. The success of
the SMMT Industry Forum is creating a stream of high quality engineers,
but maintaining and increasing the numbers that are required in
the manufacturing sector remains a challenge.
INTRODUCTION
1. The Society of Motor Manufacturers and
Traders (SMMT) is the main trade association for the motor industry.
It represents 880 member companies in the motor vehicle and component
manufacturing industry in the UK. The industry has a turnover
of approximately £46 billion, which is equivalent to 5.5
per cent of Gross Domestic Product. Some 800,000 jobs were dependent
on the industry in 1999, with 300,000 engaged directly in vehicle
and manufacturing activities. In 1999 UK motor industry exports
totalled £20 billion, greater than any other manufacturing
sector and more than oil and aerospace.
2. The SMMT welcomes the Trade and Industry
Committee's inquiry into vehicle manufacturing. The motor industry
in the UK is facing very serious challenges. The high value of
Sterling has undermined competitiveness and a range of Government
actions are likely to push the costs of operating in the UK higher.
There is concern that the combination of these is undermining
confidence in the UK and making it more difficult to secure new
investment.
3. The motor industry in the UK comprises
a wide range of companies involved in a diverse range of activities.
These include global vehicle and component manufacturers supported
by a very large number of small and medium sized enterprises.
4. The automotive sector is exposed to intense
global competition. There is increasing pressure on the industry
to deliver ever more sophisticated products at lower prices. The
vehicle manufacturers and many of the major component suppliers
are large multi-national businesses operating production facilities
across the world. They are continually seeking to improve their
own productivity and reduce costs throughout the supply chain.
5. In its submission to the Trade and Industry
Committee the SMMT has sought to highlight a range of specific
concerns that are affecting the industry. It also demonstrates
the actions being taken by the industry to improve productivity
and compete more effectively in global markets. The SMMT is convinced
that the UK continues to be an attractive base for the automotive
industry, but that Government must do more to signal its support
for the manufacturing sector.
COMPETITIVENESS IN
THE AUTOMOTIVE
SECTOR
6. In the fiercely competitive global automotive
industry UK firms have taken a number of important steps to enhance
productivity and ensure that they remain competitive. UK firms
recognise the need to benchmark themselves against the best in
the world and adopt principles of best practice and as a result,
a number of initiatives have been developed through partnerships
and industry led programmes, collaborative projects and further
development in workforce practices.
SMMT Industry Forum
7. The SMMT Industry Forum was established
to drive for and support the achievement of sustainable world
leading competitiveness in the UK based vehicle and components
industry. It was developed by SMMT jointly with the Department
of Trade and Industry and launched in 1994 by Michael Heseltine
(then President of the Board of Trade). The Forum is industry
led, but works closely with the DTI, providing the basis for a
long term strategy for sustainable competitiveness focused on
high quality practical improvement activity. Vehicle manufacturers
and component suppliers at different levels in the supply chain
work together through Industry Forum to agree improvement activity
for the UK automotive supplier base. In this respect, Industry
Forum is a world unique collaboration amongst competitors.
8. The DTI White Paper on Competitiveness,
published in 1998, highlights the SMMT Industry Forum as an example
of a successful industry led partnership, which has raised the
productivity of the sector through a series of shop floor improvements.
Following its outstanding success, the DTI is currently using
the SMMT Industry Forum as a role model for 10 new sectoral initiatives
to transform manufacturing quality and productivity.
Manufacturing Process Improvement
9. The Forum's current main activity is
the Process Improvement Master Class project, which was launched
in 1997. This is targeted at improving single companies within
the supply chain using expert engineers skilled in shop floor
improvement activities. SMMT Industry Forum has developed a "common
approach" to shop floor process improvement activities. SMMT
Industry Forum is currently training 30 young British engineers
recruited by the SMMT, together with secondees from the industry,
in these techniques. An important feature of the project is the
use of hard quantitative measures to assess the existing performance
of a company's manufacturing processes. The measures have been
distilled by Industry Forum from those used by the vehicle manufacturers
and have been agreed for use in their own supply chains. Such
measures help to target activity where it is most needed, provide
a basis for monitoring improvements and over the longer term,
ensure that improvements are sustained and developed further.
10. In addition to the Master Class, Industry
Forum organises improvement activity in the supply chain. The
aim is to eliminate "interface waste" between the companies
by improving communication and working relationships along a supply
chain. This is a shop floor activity in which different companies
in a supply chain provide members of the work shop team. The teamwork
is designed to improve working relationships and communication,
and give companies an insight into the shop floor operations of
suppliers and customers. The results are measured using the same
hard quantitative manufacturing process measures of quality, cost
and delivery performance as for the Master Class, together with
a more subjective set of measures of partnership.
RESULTS ACHIEVED BY COMPANIES UNDERTAKING
MASTER CLASS ACTIVITIES (MANUFACTURING CELL OR LINE IMPROVEMENTS
ACHIEVED)
| |
Average %
Improvement
| Best %
Improvement
|
| None right first time | 25
| 65 |
| Delivery schedule achievement | 40
| 75 |
| Overall equipment effectiveness | 20
| 40 |
| Value added per person | 40
| 100 |
| Space utilisation | 40
| 90 |
| People productivity | 30
| 65 |
| Stock turns | 135
| 260 |
These results show the typical manufacturing cell or line
improvements achieved by those companies participating in Master
Class activities. In addition to the achievements of initiatives
such as SMMT Industry Forum, SMMT is also working to promote and
support the adoption of global quality management standards and
the achievement of Business Excellence throughout the industry.
Industry Measures to Improve Quality Standards
11. The rapid movement of the UK automotive industry
towards globalisation has presented the industry with a number
of challenges. In order to meet those challenges and remain competitive
in the global market place, the industry has developed a series
of measures aimed at raising product and process quality throughout
the supply chain. The SMMT Quality Panel was established by the
SMMT to promote, achieve and safeguard business excellence throughout
the UK automotive industry. Having provided the basis for the
original development of British Standard BS 5750, which subsequently
became ISO 9001, the Quality Panel has a long history of leading
in Quality Management Systems in the industry. Certification to
ISO 9001/2, however, is only a first step on the ladder to Business
Excellence required throughout the global industry.
12. The next step from ISO 9001/2 is the new global automotive
specification ISO/TS 16949. It was published by the International
Organisation for Standardisation (ISO) and the International Automotive
Task Force (IATF) in March 1999. The IAFT is an ad hoc group of
automotive manufacturers and their respective trade associations.
It was formed to achieve harmonisation of supplier quality system
requirements for the benefit of the automotive industry. SMMT
is the UK representative to this group.
13. All original equipment manufacturers are encouraged
to promote ISO/TS 16949 as a step beyond ISO 9001/2. Initial signs
are that it will become a requirement for any company involved
in supplying the automotive industry. SMMT aims to set up an Automotive
Business Excellence Centre to assist the promotion and implementation
of the quality standards. It will also co-ordinate and monitor
the assessments and improvement support being provided.
14. The introduction of a global quality standard has
introduced a common language for systems and achieved a reduction
in multiple third party assessments. This in turn has freed up
suppliers' resources for other activities. The global quality
standard will contribute to an improvement in industry competitiveness
as a result of improvements in product and process quality and
the establishment of a common quality system throughout the supply
chain. Success in implementation in the UK will also contribute
to increased confidence for global sourcing from the UK industry.
15. Overall, the standard has also provided a benchmark
for UK automotive suppliers, enabling them to better compete in
the global marketplace. It must be recognised, however, that substantial
efforts are needed for the whole UK supply base to achieve compliance
with a standard which has detailed requirements, not only for
manufacturing and product excellence, but also in areas such as
continuous improvement, employee training and qualification and
strategic business planning. The SMMT intends to lead in setting
and achieving these required global standards.
Industry Improvements in Workforce practices
16. In order to remain globally competitive and safeguard
jobs, UK based vehicle manufacturers and their workforces have
worked together to introduce a number of flexible working practices
and re-education schemes aimed at improving productivity and quality
output. Some companies, for example, have avoided redundancies
among the workforce by introducing flexible shift patterns which
can cover production shortfall by allowing shorter hours when
work is slack and longer hours when demand picks up. Other measures
to meet the challenges faced by this highly competitive sector,
currently operating under very difficult circumstances, have included
changes in shift patterns and the introduction of a banked hours
system. These are intended to reduce costs, increase flexibility
and increase line up time.
17. The automotive industry has also taken a number of
steps to improve the quality of education, training and development
of the workforce. One such initiative is a new MSc in Sustainable
Competitiveness which is to be launched at Liverpool John Moores
University in September 2000. The taught Masters degree is aimed
at companies in the automotive industry that are employing recent
graduates and have middle and senior managers who would benefit
from the learning and assist their company meet its aim to achieve
sustainable competitiveness.
18. The Leeds Manufacturing Initiative is a public-private
organisation set up to support the manufacturing sector in the
city. Members of the Leeds Manufacturing Initiative include vehicle
and component manufacturers and a significant number of second
and third-tier suppliers. They collaborate inter alia in
the areas of education, training and development. The Initiative
is aimed at creating business opportunities and networks and attempts
to promote a positive image of the manufacturing sector as it
plays an important role for employment and wealth in Leeds and
the surrounding region.
Foresight Vehicle and IMI Road Transport Sector R&D link
programmes
19. Over the last five years, the Foresight Vehicle and
Innovative Manufacturing Initiative (IMI) programmes have attracted
the joint support of academic researchers and engineers in the
industry to develop automotive product technology and manufacturing
process know-how. A substantial R&D programme has been developed
to address issues of congestion, pollution, energy use and road
safety as well as UK competitiveness in design, manufacturing
and market support.
20. The Foresight Vehicle programme was created to develop
technology for road vehicles and promote Quality of Life and Wealth
Creation in the UK. From this brief, a Steering Group created
a programme to develop lighter and more fuel efficient vehicle
bodies, new sources of motive power to reduce emissions and CO2,
and telematics and communications technologies to combat congestion
and increase safety. The Innovative Manufacturing Initiative is
an EPSRC programme to develop and deploy new understanding of
the business process. The Road Transport sector was launched in
1995 and has sponsored collaborative work in design, manufacturing
and marketing operations.
21. Public funding for these programmes has been provided
by DTI, EPSRC, DETR and the Highways Agency. The total value of
the research projects supported by these programmes now stands
at some £80 million, of which Industry has contributed some
56 per cent. Three hundred and ninety four separate organisations
are involved in the programme, and the industrial and academic
partners involved see the benefits of the programme, and are keen
that it should continue. The initial tranche of public funding
available for investment in these programmes is now almost exhausted.
Inward Investment in the UK Automotive Industry
22. In 1999, there were more than 60 inward investment
projects into the UK automotive sector. These resulted in the
creation of some 7,000 new jobs and safeguarded a further 12,000.
The UK motor industry continues to attract major international
manufacturers and suppliers as it is considered to be the most
attractive country among all European locations for the production
of cars. The UK automotive industry provides a strong operating
base for vehicle and component manufacturers wanting to locate
in Europe as the UK domestic market for new vehicles is large
enough to provide a working foundation upon which to build export
volume. The UK also offers the most effective way to gain entry
to the European Single Market with efficient distribution from
UK plants to Europe.
23. In addition, the UK offers component manufacturers
the opportunity to serve a fast growing and particularly diverse
vehicle manufacturing sector with luxury automobiles and a larger
number of specialised small volume manufacturers than in any other
European country. Many European companies have invested in the
UK in order to supply components and services to the country's
growing volume of vehicle production. Moreover, the UK has one
of the longest traditions of engineering innovation and is home
to a world leading technical support sector including internationally
recognised laboratories, dedicated proving grounds, specialist
consultancies and design engineering companies. The world's largest
dedicated motor sport car design, development and manufacturing
sector is also located in the UK.
24. Investment into the UK automotive industry is encouraged
by the UK's pro business economy with low taxation and economic
and political stability. The low inflation rate in the UK, relatively
low labour costs and an accommodating industrial relations environment,
a well-developed skills base and flexible labour markets also
contribute to making the UK an attractive location for inward
investment. In addition, Britain has a high quality and inexpensive
utilities and telecommunications sector and Europe's largest financial
services sector.
25. It is clear then, that in addition to measures to
improve and sustain sector competitiveness, the long-term success
of the UK automotive industry is dependent upon the continued
economic stability of the UK and its position as the leading location
for inward investment in Europe. The series of investments highlighted
below demonstrate that the automotive industry has had the confidence
to invest in the UK. This past record of success should not lead
Government to underestimate the difficulties currently being faced
by the automotive sector, nor the difficulty in securing new investment
for the UK.
— General Motors has announced plans to invest around
US$302 million in its UK manufacturing facilities. US$51 million
will be spent at the Vauxhall Vectra car plant in Luton, for efficiency
and productivity gains, while US$208 million will be invested
in its sister plant, IBC Vehicles, turning it into a dedicated
commercial vehicle plant to produce medium vans for Vauxhall,
Opel and Renault.
— Honda announced plans in April this year to build
the CR-V four wheel-drive model at its plant in Swindon. Production
will start in June and is expected to reach 20,000 units by the
end of the year. The plant is undergoing a US$200 million plus
modernisation programme that will enable the plant to produce
a wide range of models at very short notice.
— Ford's premier Automotive Group is investing in
a new F-Type sports car to be manufactured by its UK subsidiary,
Jaguar, based in the West Midlands.
— Ogihara Europe Ltd, the European arm of the Japanese
Ogihara Corporation, has invested approximately US$16 million
in the UK automotive industry with the opening of a new engineering
centre, toolroom and production facility within its existing site
at Telford. The new facility will create 50 skilled positions
by the end of the year, rising to 100 within three years.
— TAG McLaren are to build the Mercedes-Benz Vision
SLR at a £200 million headquarters being built for McLaren
in Surrey. More than 250 jobs will be created.
POLICY CONCERNS
AND RECOMMENDATIONS
The Impact of the Sterling Exchange Rate
26. In increasingly competitive global markets currency fluctuations
have a significant impact on the competitiveness of goods supplied
from particular countries. The value of Sterling has risen by
6.5 per cent against the Euro since November 1999 and by 17 per
cent since the Euro was launched in January 1999.
The competitiveness of UK based automotive component suppliers
has been undermined by the continued rise in the value of Sterling.
27. The industry has been under pressure for some time,
with Sterling appreciating by more than 35 per cent since 1996,
but it is only as supply contracts are renewed that the full impact
becomes clear. In order to maintain competitiveness UK based vehicle
manufacturers are carefully reviewing all their costs. They are
seeking to secure cost reductions from their suppliers and/or
looking to source more components from outside the UK.
28. Vehicle manufacturers have made long term commitments
to production in the UK, but a significant shift in sourcing strategy
will result in severe damage to employment in the UK supply chain.
29. The motor industry recognises that the Government
has very limited scope for influencing exchange rates. The Bank
of England's independence to set interest rates has been widely
supported and the motor industry acknowledges the benefits of
a stable, low inflation economy. There is, however, concern that
the Bank's Monetary Policy Committee (MPC) may be overestimating
the potential for inflation resulting in higher than necessary
interest rates.
30. When the Government established the MPC and gave
it the power to set interest rates, it set a target for underlining
price inflation of 2.5 per cent. The target indicator is measured
by retail price inflation minus mortgage interest repayments (RPIX).
In may 2000 the RPIX fell to the lowest level since 1975 at 1.9
per cent and despite a small rise to 2 per cent in June, it has
now been below the target rate for 14 successive months.
31. It is recognised that the relative strength of Sterling
is a factor in subduing domestic inflation, but it is not the
only one. It is the Government's policy to stimulate greater competition
in the economy and encourage e-commerce. There should be little
surprise then that competition in the retail sector and the rapid
development of e-commerce is adding to the downward pressure on
prices. This pattern is being repeated in the service sector where
the privatised utilities are becoming subject to tighter regulation
and more competition.
32. In recent reports the MPC concluded that retail price
increases were subdued because of intense competition, productivity
improvements and manufacturers operating on reduced margins. If
these factors were reflective of structural changes in the economy
it could reduce the MPC's forecast of inflation by up to 0.4 per
cent. This would be sufficient to ensure that the inflation rate
continued to significantly undershoot the target for the next
two years.
33. Growth in productivity increases the supply potential
of the economy allowing higher and faster rates of economic growth
without adding to inflation. Productivity improvements are difficult
to measure and the MPC prefers to take a cautious approach when
forecasting future levels of inflation. They rely on the long
run average increase in productivity of 2 per cent per annum.
34. In a recent speech the Secretary of State for Trade
and Industry stated that productivity had improved by 5 per cent.
This suggests that forecasts for the next two years based on long
run productivity improvements might significantly underestimate
the potential for non-inflationary growth, leading to unnecessarily
high interest rates and the consequent artificial strengthening
of the Sterling/Euro exchange rate.
35. The SMMT would like to see the Treasury and the Bank
of England undertaking more research into the impact of regulatory
and technological change on the economy. It is essential that
forecasts of inflation more accurately reflect the changes affecting
the economy.
THE CLIMATE
CHANGE LEVY
36. In the 2000 Budget, the Chancellor restated Government
plans to introduce a Climate Change Levy on the business use of
energy from April 2001 as part of the UK's Climate Change Programme.
The UK automotive industry fully recognises the importance of
the climate change issue and has an on-going commitment to improve
the environmental performance of its products and production processes.
SMMT members are signatories to the voluntary agreement that the
European automotive industry has entered into with the European
Commission to reduce average new car CO2 emissions by 25 per cent
between 1995 and 2008. This agreement provides for the largest
single reduction of greenhouse gases in meeting Europe's Kyoto
target.
37. SMMT shares the CBI's concern that the levy in its
current design is a blunt instrument that is unlikely to realise
its maximum environmental effectiveness and penalises UK manufacturing
industry at a particularly challenging time of intense cost pressures
and unfavourable exchange rates. The introduction of the climate
change levy will result in substantial increases in production
costs for the UK motor industry. Net energy costs are estimated
to increase by 10 to 15 per cent for vehicle and component manufacturers
as a result of the levy. For some SMMT member companies the levy
would increase overall manufacturing costs by approximately 3
per cent. Larger manufacturing members could face net bills of
up to £6 million from the levy, and most volume manufacturers
will see net cost increases of £1 million unless they are
able to obtain discounts under negotiated agreements with Government.
Additional costs of this scale will be very difficult to accommodate,
especially for small and medium-sized manufacturing companies
and they are likely to seriously damage the competitiveness of
the UK automotive sector.
38. Whilst the levy will be revenue neutral across the
UK economy as a whole, the compensatory 0.3 per cent cut in employer's
National Insurance Contributions (NICs) will be insufficient to
offset the increased energy costs that the UK motor industry will
face. The envisaged levy effectively offers a discount to labour
intensive business activities at the expense of technology-intensive
manufacturing industries. Many of our members have invested significantly
in updating their production facilities by introducing highly
efficient machinery to increase their competitiveness. The levy
will unfairly penalise such moves and reduce their benefits.
39. Energy intensive industries in UK can obtain an 80
per cent discount on levy rates if a negotiated agreement can
be reached with Government. The Chancellor has stated that only
sites covered by the EU's Integrated Pollution Prevention and
Control (IPPC) Directive, defined in England and Wales as sites
with processes listed in Parts A1 and A2 of the Pollution Prevention
and Control (PPC) Regulations, can enter a negotiated agreement.
The SMMT along with many other sectors has repeatedly argued the
economic and environmental case for broadening the qualifying
criteria for climate change levy discounts. SMMT believes that
the Government should be encouraging and enabling as many firms
as possible to reduce their energy use and CO2 emissions.
40. The automobile industry is keen to enter such a negotiated
agreement. Some member companies have sites with IPPC processes
such as painting, bumper painting, dye casting, boilers and effluent
treatment that qualify for a discount on the climate change levy.
SMMT members estimate that these processes represent approximately
50 per cent of their total energy costs. However, a far greater
number of our members have already voluntarily invested in cleaner
systems and production processes that do not fall under the IPPC
directive but have led to substantial increases in their energy
efficiency. Many SMMT members also have environmental management
systems like ISO 14001 which have energy efficiency targets in
them. Despite their environmental benefits and international recognition
none of these efforts are taken into account by the provision
that only IPPC sites qualify for levy discounts. SMMT feels that
this provision sends out contradicting signals and limits the
environmental effectiveness of the levy as a whole.
Recommendations
41. If the climate change levy is to maximise its environmental
impact, the Government has to broaden the qualifying criteria
for eligibility for levy discounts. This step would encourage
the greatest possible number of companies to commit themselves
to challenging energy saving targets. The SMMT calls for an acknowledgement
in the levy scheme of the cost-effective energy saving measures
that its members have already put in place at non-IPPC sites.
On behalf of member companies with IPPC processes, the SMMT is
currently working to establish a negotiated agreement with Government
to allow companies that can offer suitable energy reductions to
obtain an 80 per cent discount when the levy comes into force.
Companies interested in an SMMT led negotiated agreement include
major manufacturers like Toyota, Nissan, Honda, BMW, Rover, Ford,
Peugeot, Rolls Royce and Vauxhall. To prepare these negotiations,
the SMMT is compiling historical and future energy consumption
data from interested members.
VEHICLE TAXATION
42. In March, the Budget 2000 introduced significant
changes in the taxation regime governing motor vehicles in the
UK. The UK car industry welcomes some of the changes made by the
Chancellor compared to Budget 1999, including the reduced VED
rates for new cars and heavy trucks. However, the SMMT has reason
to be concerned about a number of issues and unresolved aspects
of the new vehicle taxation system.
Vehicle Excise Duty (VED)
43. The Chancellor announced the introduction of a revised
VED system for new cars from 1 March 2001. The new VED regime
establishes a system of graduated VED for new cars that places
newly-registered cars in one of four bands according to the CO2
rating and fuel type of the vehicle. Existing cars will be taxed
at a flat rate of £105 or £160 depending on their engine
size. The reduced rate will apply to all existing cars with engines
up to 1,200 cc, the higher rate to cars with engines above 1,200
cc.
44. The SMMT is not convinced that VED is an effective
economic instrument for tackling environmental problems. It is
a tax on the ownership and not the use of a vehicle. SMMT has
consistently argued for a more simplified VED on a continuous
rather than a banded scale. This would increase the transparency
and effectiveness of the taxation system in guiding the purchasing
behaviour of the customer.
45. The inclusion of a penalty of £10 on diesel
fuel in the revised VED system will have an overall negative effect
on the competitiveness of the UK industry and impede the development
of a market for low emission diesel technologies. It fails to
recognise the motor industry's investment in environmental R&D
and the rapid pace at which diesel technology is developing. Cleanest
diesel fuel/technology should therefore be exempt from the diesel
supplement and benefit from a VED discount. In order to promote
alternatively powered vehicles, the new VED regime needs to be
based on a definition of clean fuel cars/technologies that can
be adapted to technological progress. To ease the impact of higher
prices for these alternatively powered cars, the SMMT would like
to see increased discounts for alternative fuels/technology like
gas only cars, hybrids (petrol/electric) And fuel call/hydrogen
cars.
Company Car Tax
46. Company cars are an important market for SMMT members.
Under the new regime announced in the Budget 2000 the tax charged
on company cars will be based on a percentage of the car price
graduated according to its carbon dioxide emissions from 6 April
2002. Employees who drive a company car will have to pay an income
tax charge that builds up from 15 per cent of the car price for
cars emitting 165 grams per kilometre (g/km) CO2. The charge increases
in one per cent steps for every additional 5 g/km to a maximum
charge of 35 per cent of the car price.
47. SMMT is disappointed that the Inland Revenue has
failed to provide an economic and environmental assessment of
the planned charges which could have a very significant impact
on the market. With the start of the new system, the existing
business mileage discounts will be abolished. Employees who have
to use their company car intensively as part of their job will
face substantial tax increases for no published reason. Perverse
incentives at the upper end of the tax band will effectively encourage
business drivers of so-called "status" cars that have
a taxable value above the 35 per cent maximum charge to choose
a model that emits even more.
48. Traffic related to "perk" cars is unlikely
to decrease as companies are already adapting their benefit packages
to the fiscal pressures on company car drivers. Recent years have
seen an increase in flexible benefit schemes in which employers
pay cash contributions towards sponsored employee car purchase
schemes. The new company car tax regime also introduces a 3 per
cent supplement for diesel cars. As in the reformed VED system
for new cars, such a supplement constitutes an unjustifiable penalty
for a rapidly evolving technology with great environmental potential.
The SMMT would welcome the recognition of progress made in cleanest
diesel technology in the fiscal measures taken by Government.
Commercial Vehicles (CVs)
49. SMMT welcomes the Chancellor's initiative to freeze
and lower VED rates for commercial vehicles (CVs), after the significant
rises in truck VED announced in last year's Budget. Despite these
changes, British CVs continue to pay by far the highest VED rates
in Europe. For example, a French 40 tonnes five-axle vehicle pays
just £450 road tax, compared to £3,950 that the same
vehicle incurs in the UK—a difference of £3,500. SMMT
shares the concern of the Freight Transport Association that the
legacy of ultra-high taxes on Vehicle Excise Duty and fuel duty
in the UK has increased the competitive advantage of foreign lorries
operating in the UK. It allowed foreign operators to make further
inroads in the UK domestic market in 1999 to the detriment of
UK based companies, since they could operate at far cheaper fuel
duty and VED levels. In the second quarter of 1999, there was
a 25 per cent increase in numbers of foreign trucks visiting the
UK against the same quarter in 1998. At the same time the number
of UK trucks operating on international business increased by
just 6 per cent. The unfavourable tax climate for commercial vehicles
in the UK increases the threat of relocation by UK based operators.
The SMMT advises the Government to further remove distortions
in the UK tax system for CVs that impede the international competitiveness
of the UK haulage industry.
Recommendations
50. The UK motor industry remains concerned that the
environmental and economic impact of major changes to vehicle
taxation has not been fully assessed by government. The new VED
and company car regime should not be used to merely increase the
tax take from motorists. Revenues need to be fully hypothecated
to transport improvements and the schemes closely monitored and
assessed. The criteria for any such assessment still need to be
clarified. The SMMT would like to see a correction of the remaining
distortions in the UK system of vehicle taxation like the diesel
penalty and high levies for heavy commercial vehicles. They impede
the development of cleanest diesel technology in the UK and reduce
the international competitiveness of the UK haulage industry.
WORKPLACE PARKING
CHARGES
51. The UK motor industry is committed to its efforts
to make a positive and constructive contribution to the long-term
transport and environmental objectives of the Government. The
SMMT however, alongside the CBI, the EEF and others, opposes the
introduction of a workplace parking levy which it regards as too
punitive a measure when suitable alternative forms of transport
are not in place. The policy is also misdirected as its taxes
parking space rather than addressing the environmental impact
of congestion through road use. It is doubtful whether the charges
will have any impact on the behaviour of car users and their decision
on how to travel to work. If levied at an annual rate, the incentive
not to use the car is gone once the levy is paid. If applied on
a daily basis, the levy would only displace workplace parking
into commercial car parks and nearby streets with negative consequences
for local communities and no demonstrable reduction in overall
traffic and pollution levels. The workplace parking charges will
only increase business costs for many companies at a time when
manufacturing firms are already experiencing significant cost
pressures.
52. The UK motor industry has approximately 3,500 UK
sites, rising to 7,000 for the whole supply chain. A majority
of these sites provide parking facilities for their employees
and would be adversely affected if the charge were levied on individual
businesses. Many of the larger sites operate rotating shift systems
whereby a proportion of workers travel during off-peak hours and
do not contribute to peak-time congestion. Moreover, levies on
workplace parking space are highly inappropriate if no viable
alternative, ie public transport facilities, is available or car
usage constitutes a necessary part of an employee's job. The proposed
workplace parking levy does not take these factors into account
and penalises manufacturing companies that run shift systems.
53. In addition, the policy fails to acknowledge efforts
by employers who set up other facilities such as park and ride
schemes or charge for work space parking, but will face the same
levy penalty regardless. A case study published by the EEF illustrates
the extra cost that a company with 1,880 parking spaces would
incur despite its extensive co-operation with the city council
to develop a park and ride scheme and implement car sharing schemes.
The workplace parking charge would make no account of these efforts
to reduce work-related traffic. If the levy was charged at £250
per space, it would cost the company nearly £500,000. In
London, businesses could face workplace charges of £3,000
and more per space in 2005, if the recommendations of a report
by the London Planning and Advisory Committee, formerly chaired
by Nicky Gavron, the new Deputy Mayor of London, were followed.
For a company in London with 300 parking spaces or more this could
mean an extra bill of nearly £1 million per year.
Recommendations
54. The SMMT sees no clear economic and environmental
rationale for the introduction of workplace parking levies to
tackle the issue of traffic congestion. Before introducing charges
on workplace parking, integrated transport systems have to be
put in place as a viable alternative for commuters. Flexibility
at local level and full hypothecation of the revenue have to be
complemented with national guidelines that establish key principles
and maximum limits on the amount that local authorities can charge.
The impact of the levy on small businesses is of particular concern
to the SMMT. Small firms with only a handful of parking spaces
do not add significantly to congestion and should therefore be
exempt from the levy. As the provision of parking places is a
pre-requisite for obtaining a planning permission for the workplace,
the levy should only apply to spaces that exceed the minimum number
required to obtain this planning permission.
THE END
OF LIFE
VEHICLE DIRECTIVE
55. Following its recent conciliation procedure, the
End of Life Vehicle Directive is expected to be adopted by the
EU by 25 July 2000 and pass into UK law by the end of 2001. It
sets new, stringent and increasing targets for recycling and recovery
of materials form End of Life Vehicles (ELVs) and prescribes specific
depollution and dismantling operations to support them. At the
same time, it requires that last owners of vehicles may dispose
of them free of charge, from 2001 for new vehicles, and from 2007
for all vehicles, irrespective of their age. Under the principle
of "Producer Responsibility", it requires that Vehicle
Producers (manufacturers of professional importers) will bear
"all or a significant part" of the cost of setting up
such a system. It also requires the elimination in production
of the heavy metals lead, mercury, cadmium and hexavalent chromium,
except for certain exempted applications, and a number of other
actions such as material labelling and provision of information.
56. There are nearly two million vehicles scrapped every
year in the UK. The depollution and dismantling operations prescribed
by the ELV Directive for these vehicles and the achievement of
recycling targets for materials which are not economic to process
are likely to result in a substantial increase in processing costs
which exceed the value of the saleable parts or scrap metal. Due
to oversupply of recycled material the scrap value of recycled
cars has fallen dramatically over the last couple of years. Under
the Directive the car industry will also be incurring considerable
costs for replacing prohibited materials, the provision of component
labelling and dismantling information and the need to enhance
the recyclability of their products to meet type approval requirements
after 2005. As a result of this, the DTI estimates that under
the new ELV Directive the processing of two million end-of-life
vehicles per annum in the UK would cost the industry £300
million.
57. The Directive's requirement that producers have to
bear the costs for treatment of vehicles, irrespective of their
age, from 2007, represents a major retroactive financial burden
and risk to the profitability and viability of UK car producers.
With the ELV Directive in force, the UK motor industry would face
a total liability of some £4 billion, rising to £30
billion on a European basis. These enormous additional costs ultimately
will have to be borne by the 800,000 employees working in the
UK automotive industry. Companies could find themselves technically
bankrupt and forced to contract their UK operations which are,
at best, only marginally profitable. This would result in significant
job losses in the UK and lead to further job losses in the manufacturing/supply
side of the industry. Even if they survive, the UK companies'
global competitiveness would be impaired by the drain on their
resources, affecting production and engineering efficiency and
future product offerings.
Recommendations
58. SMMT calls upon the Government to use the flexibility
granted to Member States and co-operate with industry in devising
an implementation strategy for the ELV Directive that does not
put the UK automotive industry at a competitive disadvantage.
UK car manufacturers are already making a significant contribution
to the solution of the problem of end of life vehicles. In the
1997 ACORD voluntary agreement between the trade associations
of the motor industry and other sectors involved in the disposal
process for ELVs, SMMT members have committed themselves to a
challenging recovery target for material of 85 per cent by 2002,
and 95 per cent by 2015. Other industry initiatives include the
CARE research activities which are wholly funded by the manufacturers,
improvements in car design to aid recycling and to the use of
recycled materials to stimulate market development.
59. To maintain their competitiveness it is essential
to achieve an equitable split of the enormous costs that will
result from the ELV Directive in terms of processing and retroactive
liability. Any funding mechanism for the treatment of ELVs has
to incorporate a substantial sharing of the costs with either
the Government or the present car-owning population. This could
be by means of a registration tax, an annual tax, or an insurance
premium supplement, all or any of which would be hypothecated
into a central fund for treatment of ELVs of any make or age.
This would also take care of grey, parallel and personal imports
and dead brands for which there is no longer a producer to contributed
(eg FSO, Lada).
AVAILABILITY OF
QUALITY ENGINEERS
60. According to a recent CBI industry survey on employment
trends, 52 per cent of responding companies said that their performance
had been negatively affected by problems in recruiting skilled
labour, reflecting shortages of specialist staff such as highly
skilled IT and engineering staff. These trends strongly affect
the UK car industry. SMMT members have found it increasingly difficult
in recent years to fill vacancies for professional engineers.
Due to the lack of quality engineers at graduate level, they reported
that they had lost out on business opportunities to foreign competitors.
61. DfEE research shows that the reason for the grave
mismatch between the supply and demand for technical graduates
lies primarily in the quality of graduate engineers and not their
quantity. SMMT member companies complain about the lack of basic
numeracy skills in graduate applicants. Most graduates have no
relevant work experience, poor commercial understanding and weak
communication and presentation skills when they leave university.
Increased market competition and changes in working organisation
and logistics put pressure on the UK car industry to recruit graduates
who will not require a long "learning curve" and can
perform technical tasks as well as managerial roles and communication
functions when interacting with suppliers and customers.
Recommendations
62. Despite initiatives led by the UK motor industry
in collaboration with British universities, the insufficient supply
of quality graduate engineers continues to be a structural problem.
The negative effects of the lack of a highly skilled labour force
on the competitiveness of the UK car industry will increase with
time and diminish the attractiveness of the UK for foreign investment.
To increase the quality of graduate engineers, engineering courses
in the UK have to transfer a wider range of applicable skills
and integrate work experience modules in the curriculum. If bright
graduates are to be attracted into the industry, a positive image
of car manufacturing in the UK is needed. Public endorsement and
support of the industry would help to convey an image that reflects
the importance of the car industry for the UK economy. The SMMT
Industry Forum has a role to play to address the problem of skill
shortage. It has already gained industry-wide recognition for
its achievements in the field. Increased Government support would
allow the Forum to build upon its success in increasing workforce
skills at engineer level and broaden its capacity.
SECTOR INFORMATION
CAR PRODUCTION AND REGISTRATIONS
New Car Registrations
63. The economic boom of the late 1980s led to an all time
peak in car registrations with 2.3 million new cars registered
in 1989. The subsequent recession however resulted in the reduction
of new car registrations to a low of 1.6 million in 1991. Following
the recession, the car market began to recover in 1993 with 2.2
million new car registrations recorded in 1997. This recovery
has been sustained and the car market has remained at this level.
Furthermore, forecasters predict that the market will hold fast
at this level for the next two years. The decade between 1985
and 1995 saw the registrations of imported cars move in line with
the market average with the share of imported cars ranging between
55 and 60 per cent of the total. Since 1996 however, the share
of imports has risen rapidly, and it currently stands at 72 per
cent of the total. As over 80 per cent of cars imported into the
UK market are from Europe, this increase can be generally seen
as a result of the appreciation of Sterling against the Euro which
has made imports more competitive in the UK.
Production
64. From a peak of over 1.9 million units in 1972, car
production output fell to below one million units by 1980. It
remained around the one million mark until 1986 when it increased
to 1.3 million, where it stayed until 1992. Since 1992 output
has steadily risen, reaching 1.8 million units in 1999. The increase
in production has been largely the result of improvements in productivity
and increases in exports. These improvements resulted from new
inward investment from Japanese manufacturers and the renewal
of facilities by more traditional producers.
65. Exports have increased almost six fold since 1985,
reaching 1.4 million in 1999, and now account for almost 64 per
cent of total output, compared with less than 20 per cent in 1989.
Although UK manufacturers have succeeded in maintaining their
level of exports, many have been forced to sell at considerably
reduced margins as the strength of Sterling has undermined the
competitiveness of UK manufactured models. As some UK manufacturing
plants however are the sole producer of certain models in Europe,
manufacturers are required to continue to sell at reduced prices
in order to meet European demand and maintain export markets which
are extremely difficult to rebuild once they are lost.
COMMERCIAL VEHICLE (CV) REGISTRATIONS AND PRODUCTION
Registrations
66. As a result of the growth in the economy as a whole during
the second half of the 1980s, commercial vehicle registrations
grew strongly in this period, increasing by 29.4 per cent between
1985 and 1989. Demand for commercial vehicles however fell heavily
as the economy started to weaken in 1990 with the result that
CV registrations fell by 43.7 per cent between 1990 and 1991.
Registrations of commercial vehicles continued to fall throughout
1992 and 1993 as there was a reluctance in the market to invest
in new vehicles whilst economic uncertainty prevailed. CV registrations
however began to increase significantly from 1993 as confidence
in the economy grew, rising by 49.4 per cent from 1993 to 1998.
Registrations fell in 1999, despite overall economic growth of
2 per cent. This was partly due to economic uncertainty in the
first half of the year and the very strong growth in demand in
the previous four years, which had satisfied a large proportion
of replacement demand.
67. Although demand for commercial vehicles and particularly
heavy goods vehicles (HGVs) has traditionally tended to reflect
the overall economic situation, this has been less so since 1995
as most vehicles are now leased, thereby encouraging and enabling
more frequent changes of vehicle. Import penetration in the commercial
vehicle market has increased dramatically since 1997, rising from
50.7 per cent in 1997 to 59.9 per cent in 1999. This has been
largely due to both the strength of Sterling, which has enabled
importers to offer highly competitive deals, and the closure of
a number of UK production operations.
Production
68. Whilst CV registrations fell heavily in the early
1990s, production decreased less strongly. This was largely due
to very strong demand in Germany following the post reunification
economic boom. As a result, 52.5 per cent of the 248,452 commercial
vehicles produced in the UK in 1992 were exported. Weak UK demand
however, combined with a decline in the German and most other
European markets resulted in a 22 per cent fall in output in 1993.
Although production grew between 1993 and 1996, production has
fallen in each of the past three years. In 1999 it stood at 185,923
units, which was the lowest level since 1948. Such a fall in production
is mostly due to the increase in imports and a decline in exports.
By 1999, import penetration had risen to 59.9 per cent while export
production had fallen from 47.2 per cent of production in 1996
to just 40.3 per cent.
69. The commercial vehicle sector has been through a
period of significant rationalisation and consolidation over the
past few decades to the extent that there are now only four light
commercial vehicle producers and six heavy commercial vehicle
producers, with Paccar owning two of them. Only two of these,
LDV and Dennis are UK owned producers. Despite this overall reduction
in the number of players and of CV output over the past few decades,
those left are fighting to remain competitive with LDV, ERF and
Leyland making significant investments in new product and production
facilities. ERF has just started work on its new £25 million
factory site at Mid-Point 18, Middlewich, Cheshire. It will bring
together ERF's manufacturing, warehouse and office facilities
in order to improve the company's production efficiency.
THE UK AUTOMOTIVE
COMPONENT INDUSTRY
Overview of the sector
70. The UK automotive component industry experienced a strong
revival in the mid-1990s as a result of the relative weakness
of Sterling, strong growth in UK car production and cost advantages
in the UK compared to other European locations. However, overall
cost competitiveness and quality in the sector remain relatively
poor. Official data confirms a trend towards less employment in
fewer firms and plants as a result of restructuring and rationalisation
in the UK components industry.
71. The component sector is highly fragmented with companies
ranging from major international players to small and medium-sized
enterprises. The sector spans many products and process specialisms.
Original equipment manufacturers (OEMs) supply directly to vehicle
manufacturers for line-fit and others supply replacement parts
and accessories to the "Aftermarket". Many component
suppliers and distributors are active in both markets.
72. It is difficult to establish definite figures for
company numbers, turnover and employment in the automotive component
industry. Official classifications of the industry do not account
for many companies that supply the automotive sector as part of
their broader business activities in areas like metals, other
engineering, rubber and plastics, textiles or electrical and electronics.
Estimates based on the official classification of the sector in
1998 see around 3,500 companies generating a sales value of about
£9 billion. Adding estimates of turnover from the related
part of the supply base gives total gross sales as high as £13
billion with companies employing about 150,000 people in the UK.
These figures are consistent with an employment total of about
280,000 in the whole automotive manufacturing supply chain and
a sales turnover value of over £45 billion.
Structural changes during the 1980s and 1990s
73. The UK automotive component industry has undergone
a profound transformation in terms of structure, ownership and
working practices during the 1980s and 1990s. This is mainly due
to substantial foreign inward investment as well as merger and
acquisitions. These trends reflect the significant shake up in
the sector on a European and global basis. The arrival of Japanese
car manufacturers in the UK in the early 1980s gave the UK component
industry a critical push as Japanese manufacturers needed to source
locally. They encouraged UK suppliers to adopt Japanese production
methods and demands in terms of product quality, efficiency and
logistics. This helped to achieve considerable productivity gains,
especially in the UK first tier supply base.
74. During the 1990s "foreign" ownership in
the UK component industry has grown through acquisitions and greenfield
plant investment. US owned suppliers have traditional roots in
Britain and they have maintained and in some cases strengthened
these. Japanese and European suppliers (Germany, France and Italy)
have established sizeable manufacturing operations in the UK whereas
the activities of smaller, UK-owned component supplier were more
focused and concentrated on UK OEMs and other UK markets. The
traditional concentration of the component industry in the West
Midlands still remained strong, but much new foreign investment
was channelled into areas like South Wales, the South East, East
Midlands and North East. Key factors in these investment decisions
were high production costs in their "home" markets and
a recognition of the strong car production build-up in the UK.
75. However, many of these companies' business strategies
have been keenly tested and are being re-evaluated in the period
since 1998. Sterling has appreciated to an unexpected level and
concerns raised about the sustained growth of UK car output. Car
manufacturers have reduced the number of suppliers they deal with
directly, from up to 3,000 suppliers for a major manufacturer
in the early 1980s to only hundreds in the late 1990s. In parallel,
challenging demands on suppliers in terms of manufacturing practices,
product quality, cost competitiveness and research and development
(R&D) investment have changed the nature of the UK components
industry. The trend is towards first tier suppliers that provide
complete sub-assemblies of parts sourced from a variety of second
and third tier component manufacturers. Newly identified as tier
0.5 suppliers, these companies are gaining greater competence
in modules, systems and even vehicle manufacture and have to meet
the highest quality standards to be able to compete in the global
market.
The Challenges Ahead
76. Despite these changes and many plant or company specific
productivity gains during the 1980s and 1990s, the UK automotive
component industry as a whole has not significantly improved its
overall comparative international competitive position during
the 1990s. The greatest challenge facing companies in the UK supply
chain at present is the need to catch up and increase their international
competitiveness in terms of cost and quality at a time of a very
unfavourable Sterling exchange rate.
77. The presence of some of the world's leading vehicle
assemblers in the UK is crucial for a strong UK component industry.
To benefit from this presence and secure business opportunities
in the future, UK suppliers must be able to succeed in the highly
cost competitive European market. SMEs within the components sector
are finding themselves under particularly increasing pressure
to meet the demands of automotive supply chain management as practised
by the major car manufacturers. The outsourcing of tasks and responsibilities
by the manufacturers coupled with tougher quality control creates
new demands on the skills base, flexibility and cost structure
of UK component suppliers.
THE UK AUTOMOTIVE
DESIGN ENGINEERING
SECTOR
78. The UK automotive design engineering industry is
widely acknowledged as being among the world leaders in providing
innovative product development combined with excellence and confidentiality
to the car industry. There are about 20 independent automotive
design engineering businesses in the UK, each specialised in a
specific area and providing an exceptional range of services.
The annual turnover of the sector is estimated approaching £1
billion, three quarters of which is generated through mainly "invisible"
exports, ie services or intellectual property, highlighting the
importance of British automotive design in the global market.
Sales have doubled over the last five years and demand for UK
design products and services has continued to grow strongly.
79. The UK has a substantive network of vehicle makers,
component suppliers, specialist R&D providers and academic
institutions and many manufacturers have taken advantage of these
facilities. Car manufacturers are facing an ever-increasing demand
for new models and niche vehicles and have to comply with complex
legislative demands, ranging from safety issues to chassis systems
requirements. Automotive design engineering companies in Britain
have the expertise and experience to help manufacturers meet these
demands and create innovative solutions to future challenges.
80. Through their long experience, British design engineering
companies know how to work effectively with OEMs and suppliers
while guaranteeing absolute confidentiality about their involvement.
Confidentiality is a critical requirement for the success and
credibility of a company working with many clients. As a consequence
the input of design engineering companies into major automotive
programmes, models and production facilities very often receives
no public acknowledgement. Confidentiality agreements therefore
make it difficult to give a complete account of the success of
automotive design engineering in the UK.
Partnerships and R&D
81. Recent investment decisions like Jaguar's opening
of a new design studio near Coventry reflect the growing success
of and confidence in UK automotive design engineering. Independent
design companies are very successful in using their specialisation
to build partnerships with rival businesses and co-operate on
a project base for major car manufacturers. The rising demand
for automotive design engineering and the opening of new markets
in the Far East offer good prospects for continuing growth in
the sector.
82. In order to exploit these opportunities, British
design engineering companies have to meet the challenge of their
competitors in the European market, particularly in terms of research
and development (R&D). German design engineering businesses,
for example, benefit from close links to universities and research
institutions. Owing to their small size and private ownership,
they are also able to re-invest higher levels of revenue into
R&D than their British counterparts.
83. Britain's innovative automotive design engineering
capability supports motor manufacturers around the world. Its
success—present and future—will play a key part in
attracting inward investment and improving the competitiveness
of the British automotive industry.
THE UK AUTOMOTIVE
AFTERMARKET SECTOR
84. The automotive aftermarket represents the industry
that maintains, repairs and adds accessories to vehicles after
they are sold to their owners by a car or truck dealer. In the
UK no central body is co-ordinating any form of data collection
on the diverse enterprises and business activities constituting
the aftermarket. Little accurate information is available to monitor
and assess trends in market share and size, thus making business
planning and performance monitoring difficult for those within
the industry.
85. The UK automotive aftermarket is estimated to comprise
about 6,750 franchised dealerships, 15,000 independent garage
outlets, 4,300 retailers and 2,400 motor factors. Its total value
(including all replacement parts) is widely acknowledged to have
reached £4.5 to 4.6 billion by the end of 1999. The total
crash repair work each year, including labour, is valued between
£4 and £4.5 billion.
Declining market with increasing competition
86. Competition within the aftermarket is stronger than
ever. Vehicle manufacturers are reducing costs, while attempting
to boost their share of higher margin aftermarket revenues. In
order to meet the increasing demands by consumers and legislators,
manufacturers and suppliers have employed new technology to offer
vehicles that are cleaner, cheaper, safer and more reliable than
ever before. These factors have resulted in greater quality and
durability of parts. In addition to falling replacement rates
and lengthening service intervals, there are other factors impacting
on cost. The growing range of models and options for brand extension
offered by manufacturers lead to increasing brand numbers and
greater complexity of components, raising both distribution and
production cost. As a consequence, the aftermarket experienced
no significant increase in revenue despite an increase in the
UK vehicle park at a rate of 2.5 to 3 per cent per year in the
1990s.
87. In order to survive in a declining market, many independent
aftermarket firms are trying to achieve economies of scale through
consolidation. Fierce competition in the car market increases
pressure on the price of components with motor manufacturers increasingly
regarding the aftermarket as an important source of growth. Parts
manufacturers, in turn, have also become increasingly rigorous
in the management of their business portfolios. They are disposing
of those operations which fail to hold a competitive advantage,
while strengthening their core business units through mergers
and acquisitions. Similarly, the tyre sector has witnessed a spate
of alliances as the industry leaders seek to reinforce their operations.
88. Further consolidation in the previously fragmented
aftermarket stems from growth in new niche areas such as fast
fit. Despite their reduced engagement in the production of vehicle
parts, car manufacturers are increasingly concentrating on the
provision of higher value-added services. For example, car manufacturers
increasing use fault diagnosis technology (on board diagnostics).
Without universal availability of the codes used in this technology,
independent garages could face a barrier to entry into the aftermarket
for newer cars and either way the cost implications might be prohibitive
for them. In 1999, a wave of consolidation activity in the fast
fit sector has increased the dominance of manufacturers on a European
scale, starting with Ford's acquisition of Kwik-Fit. Mercedes
Benz are showing growing interest in the aftermarket, Volkswagen
started from scratch with a new Stop & Go fast-fit business,
and Fiat acquired the Midas chain. This trend is likely to continue.
UK MOTOR SPORT
INDUSTRY
89. The UK Motor Sport Industry is estimated to have
an annual turnover of £1.3 billion and employs up to 150,000
people in full and part time jobs. Nearly 4,000 businesses throughout
Britain are involved in motor sport. In Formula One racing, the
pinnacle of the motor sport industry, Britain has won more World
Drivers Championships than any other nation and in the past decade
Ferrari has been the only non-British team to win a Formula One
Grand Prix. The UK is also home to many of the major World Championship
rallying teams including Mitsubishi, Ford and Subaru.
90. British pre-eminence in motor sport as a whole reflects
the country's strength in motor sport engineering. From the 1960s
there has been a strong and consistent British contribution to
Formula One engine and transmission design and there are currently
over 100 British companies involved in the building or preparation
of competition engines. Mercedes-Benz, for example, who supply
engines to Formula One and Indycar teams use engines designed
and built by the British based Ilmor Engineering. British built
cars have dominated US Indycar racing for the last two decades.
Altogether, Indycar racing provides Britain with annual export
earnings of more than £20 million, when the value of engines,
components an supporting services are taken into account.
91. Racing teams can also benefit from the expertise
of engineers and scientists who work in research establishments
such as the Motor Industry Research Association (MIRA) and in
the universities. More Formula One testing takes place at Britain's
premier Grand Prix circuit at Silverstone than at any other testing
facility in the world. Confidential testing may also be carried
out at the private proving grounds of the Motor Industry Research
Association near Nuneaton, which includes a full scale wind tunnel
and crash test facilities, and at the Millbrook Proving Ground
in Bedfordshire. Britain's technical research sector therefore
is able to provide excellent support for both Britain's own competition
vehicle manufacturers and component suppliers in addition to services
for overseas customers.
92. Motor sport plays an important role in the development
of the automotive industry as a whole both in terms of the improvements
it introduces to standard production car design and the media
coverage and raised profile it can provide for manufacturers.
Technological advances resulting from motor sport research and
development are often introduced to production cars. These have
contributed not only to enhanced performance but also to improved
reliability, safety, efficiency and aerodynamics. Participation
in motor sport can also enable a manufacturer to demonstrate the
strength, reliability and other positive qualities of their cars
to a large audience. In addition, hosting a motor sport event
can generate considerable income and publicity, both on a national
and regional level, as well as proving an international showcase
for British based manufacturing and engineering expertise.
UK SPECIALIST CAR
MANUFACTURERS
93. The UK automotive industry has the highest number
of specialist car manufacturers in the world. As low-volume producers,
most companies in the sector are small and medium-sized enterprises.
Over 3,000 specialist cars are manufactured in the UK each year,
with foreign demand for UK manufactured specialist cars remaining
strong.
94. The specialist car sector is highly innovative and
relies heavily on design flair in both engineering and aesthetics.
Despite pressures towards economies of scale in the globalised
motor industry, UK specialist car producers are successful in
maintaining their low volume production of unique and innovative
vehicles. TVR offer several unique model ranges and manufacture
a large part of their components themselves. New models are about
to be launched by Bristol and Morgan, demonstrating the sustained
strength of specialist car manufacturing in the UK.
95. Specialist car companies share the problems of SMEs
in the industry. Regulatory changes and environmental legislation
have a disproportionate financial impact on small businesses that
have less resources available to address the technical challenges
involved. Low volume output means that the costs incurred for
complying with new regulations can often not be recouped and production
of specialist models might even have to cease. The financial impact
of emissions legislation on vehicle costs has already led to the
cessation of several model lines. Derogations for low volume manufacturers
tend to be considered only at a late stage in the legislative
process, adding to the uncertainty in the sector.
June 2000
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