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Select Committee on Trade and Industry Fourth Report

2 THE UK INDUSTRY IN ITS GLOBAL CONTEXT

The worldwide automotive industry

5. Our predecessors were told in 2004 that, even with the growth in demand from India and China, the automotive industry was facing overcapacity worldwide.[11] Most of our witnesses accepted this analysis: the T&G stated that the industry was able to produce about 60 million vehicles per year worldwide, whereas 40 million were sold.[12] Amicus demurred from the consensus, but only on the basis that, if people in developing countries were richer, there would be much higher demand[13]—which may be true but does not reduce the industry's difficulties. It was also broadly accepted that the rise of China and India as manufacturing bases and the expansion of the European Union to Central and Eastern Europe had fundamentally changed the economics of the automotive industry.[14]

6. While car manufacture is a global industry, automotive companies operate largely in terms of broad regions (such as 'Europe' or 'Asia-Pacific') regarding both production and markets.[15] The definition of regions may vary from company to company. For example, we have discovered during our inquiry into trade and investment opportunities with Mercosur that companies have different views of whether there is a 'Latin American' market and, if so, which countries comprise it. However, all of them plan their operations on a regional rather than national basis, which in some cases—as we shall see later—applies also to the supply chain for their assembly plants.[16]

7. Assessing capacity and potential within regions, all our witnesses agreed that Western Europe and North America[17] were mature, and therefore slow-growing or stagnant, markets, and had significant overcapacity.[18] GM estimated overcapacity in Western Europe at 20-25%,[19] and suggested that demand would have to increase by between 8% and 10% a year just to utilise existing manufacturing capacity.[20] Growth of 8-10% in such mature markets is unlikely, particularly bearing in mind increasing environmental concerns. In the meantime, GM's operations in Europe, for example, had lost $6 billion "over the last six years".[21] PSA noted that no new car assembly plant had been opened in Western Europe, including the UK, for some years—the last one being Toyota's factory in northern France which started production in 2001.[22] On the other hand, a significant percentage of automotive companies' sales were still in these mature markets—Western Europe accounted for 70% of PSA's sales, for example—and we were told that they needed to maintain their manufacturing base there to meet regional demands.[23]

8. PSA identified three major trends affecting car production in mature markets. The first was the 'fragmentation' of mature markets: customers were demanding more choice, but this made it difficult for manufacturers to obtain economies of scale, so costs had to be reduced. Second, in response to this and to general competitive pressures, companies were entering into agreements to share development and/or production costs: PSA said that it had seven such 'co-operation strategies' with different companies. Thirdly, the focus on cost reductions had led to a reliance on 'platforms', basic structures common to several models (for a single car producer or a number of companies) which could then be varied with different styling, engine capacities and types, and other features. The manufacturers were thus able to produce the variety demanded by customers while retaining economies of scale.[24]

9. We were told that these strategies were not sufficient: companies were considering closing plants and changing the number and pattern of shifts to try to match production to demand.[25] Volkswagen was significantly reducing its workforce in west Germany—its target being 20,000 jobs or about 12%—to increase its competitiveness.[26] GM had undertaken wide-ranging 'restructuring' since late 2004, which involved the loss of 12,000 jobs by 2007, mostly in Germany: the workforce had already been reduced by 10,000 but the process had not been completed, and GM could not assure us that there would not be more job losses after the current wave.[27] Even Nissan's Sunderland plant, which received investment of £586 million between 2001 and 2006, witnessed a reduction of 15% in the workforce over the last four of those years.[28] Moreover, both unions and companies agreed that the application of technology to the industry, and in particular IT, had increased and would continue to increase productivity significantly, with a resulting decline in the labour force.[29]

10. Our witnesses agreed that the regions with growth potential were Central and Eastern Europe, Latin America and parts of Asia (especially China)[30], where the majority of middle-class consumers still earned much lower salaries than in the developed nations and western-manufactured cars would be uncompetitively expensive[31] (though the richest segments of their populations were an expanding market for luxury cars[32]). Automotive companies were therefore manufacturing vehicles close to these markets, which enabled them to compete with local producers.[33]

11. The automotive companies were reluctant to give us comparative costs for production in the UK and Eastern Europe. The trade unions, however, suggested that labour costs in the Czech and Slovak Republics were about a third of those in Western Europe and they quoted labour costs of €6 per hour for Slovak workers as compared with €25-26 per hour for UK workers.[34] The trade unions argued that it was these costs, rather than the growth in the local market, that were encouraging some companies to close their factories in Western Europe and move production eastwards, and that it might be only a matter of time before other firms, such as the Japanese manufacturers, followed suit.[35] Indeed, Toyota is already manufacturing jointly with PSA in the Czech Republic.

12. At present the automotive industry still seems to be wedded to a regional approach to its markets, expanding or contracting capacity to meet regional demand. Logistical costs and the need to reflect local tastes are important factors in limiting the scope for supplying customers from plants outside the region. While we do not believe that a shift in production from Western Europe to the cheaper Asian economies is imminent, like our predecessors we believe that the closure of car plants in Western Europe and the opening of up-to-date facilities in Eastern Europe, using cheaper labour, will continue.

UK automotive industry

13. The Department of Trade and Industry ('DTI') and Society of Motor Manufacturers and Traders ('SMMT') seemed fairly optimistic about the state of the UK automotive industry. The DTI summarised the situation as follows: "The diversity of the UK auto industry is such that some companies have grown, some have failed, and many have continued to do well. … the total number of companies has remained stable over the last 10 years…. Headline vehicle production is also relatively stable."[36] The SMMT commented: "The UK automotive industry remains wide and diverse in nature with a larger number of global brands located here than in any other European country."[37] The DTI also noted that in 2004 the UK attracted more inward investment projects by car manufacturers (15% of the European total) than any other European country[38]—though it must be said that Korean car manufacturers seem to be locating their European plants in Slovakia, in the same way as Japanese car companies used the UK as their base for Europe 20 years ago.[39]

14. Our trade union witnesses painted a fairly gloomy view of the general state of the UK car industry: with total car production having decreased by 3.6% in the previous three years; car production in the first four months of 2006 being at its lowest rate since 2001 and more than 10% lower than the average for the previous five years; and with—according to the T&G—further falls predicted for 2007 and 2008.[40] However, the UK was not alone in experiencing problems: as shown in the table below, almost all of the EU15, including France, Spain and Italy, saw a decline in total motor vehicle production in 2005 as compared with 2004; Germany was the only big Western European car-making country to experience a rise in production.[41] Moreover, a breakdown of these figures reveals the fact that, across Europe, passenger car production declined more sharply than that of other vehicles, with growth in light commercial vehicles and heavy lorries and a slight decline in bus and coach production.[42] Even the 'new' EU Member States were not completely immune from the malaise affecting passenger car production: while Poland, Hungary and—especially—the Czech Republic bucked the trend, the Slovak Republic saw car production slump from 281,160 vehicles in 2003 to 218,173 in 2005.[43]

Table 1: European Motor Vehicle Production

Selected countries, ordered according to 2005 figures

	2003	2004	2005	Change 2004/05
Germany	5,506,629	5,569,954	5,757,710	3.40%
France	3,620,053	3,665,990	3,549,003	-3.20%
Spain	3,029,826	3,011,776	2,752,500	-8.60%
UK	1,846,429	1,851,589	1,803,049	-2.60%
Italy	1,321,631	1,142,105	1,038,352	-9.10%
Czech Republic	441,717	448,106	604,930	35.00%
Poland	n/a	522,900	540,200	3.30%
Slovak Republic	281,165	223,542	218,173	-2.40%
Netherlands	192,634	247,503	180,568	-27.00%
Hungary	126,296	122,661	138,918	13.30%
Finland	19,658	10,510	21,644	105.90%
EU 15 Total	16,798,345	16,892,611	16,492,796	-2.4%

Table derived from statistics on Total Motor Vehicle Production in the EU by country 2003-05 produced by the European Automobile Manufacturers' Association[44]

Table 2: European Production of Passenger Cars Only

Selected countries, ordered according to 2005 figures

	2003	2004	2005	Change 2004/05
Germany	5,145,403	5,192,101	5,350,187	3.0%
France	3,220,328	3,227,416	3,112,956	-3.5%
Spain	2,399,374	2,402,103	2,098,168	-12.7%
UK	1,657,558	1,647,246	1,596,296	-3.1%
Belgium	791,703	857,119	895,788	4.5%
Italy	1,026,454	833,578	725,528	-13.0%
Czech Republic	436,297	442,812	599,472	35.4%
Poland	*	522,900	540,200	3.3%
Sweden	280,394	290,383	288,659	-0.6%
Austria	118,650	227,244	230,505	1.4%
Slovak Republic	281,160	223,542	218,173	-2.4%
EU 15 Total	14,694,868	14,748,189	14,272,045	-3.2%

Table derived from statistics on Passenger Car Production in the EU by country 2003-05 produced by the European Automobile Manufacturers' Association[45]

15. Even within the UK, fortunes vary widely. The T&G agreed that the commercial vehicle sector was doing fairly well;[46] according to the SMMT, it was thriving, as was the taxi manufacturer LTI Ltd, while the bus and coach sector was stable.[47] Most of our witnesses also commented on the differences between passenger car companies. Although, according to the T&G, six of the last eight car assembly plants in Europe to shut down or announce their closure were in the UK,[48] we noted that the Japanese manufacturers were thriving, with Nissan in September 2006 launching its first ever car designed, engineered and built in the UK (the Qashqai),[49] Honda employing another 700 staff at Swindon to support an increase in output from 190,000 to 250,00 vehicles a year, and Toyota heading towards production of 300,000 cars a year at Burnaston in Derbyshire.[50] These three plants are within the top ten most productive car plants in Europe: Sunderland is the most productive.[51] Other car companies were also showing confidence in the UK industry: BMW announced its intention to invest £200 million at its Cowley plant to build a new generation Mini and to expand production from 200,000 to nearly 250,000 a year; Rolls-Royce has said that it is planning a new, smaller and somewhat cheaper series of models at Goodwood in Sussex for sale in 2010; and Ricardo has signed an agreement with Lifan, a Chinese motor manufacturer, to develop a new family of car engines and transmissions.[52] BMW, Land Rover, Toyota and Vauxhall all achieved record car production in the UK in 2005, and the Halewood plant was Ford's best performing plant in the world in 2004.[53] Engine production in the UK increased by 22.6% between 1999 and 2004 and, as the SMMT pointed out, since engines represent 17% of the total value of a passenger car, they are "a lucrative form of automotive manufacturing".[54] The niche manufacturers are still important, too: Morgan and Bristol are introducing new products, and Aston Martin—which also achieved record production in 2005—is the exception to Ford's Premier Automotive Group's falling sales.[55] Even some of the companies that have closed or reduced car assembly capacity are still investing in some areas of the UK industry, with the most visible example being Ford's development of its engine plant at Dagenham (including a move into the design of advanced diesel engines);[56] also PSA has embarked on joint research with Ricardo Associates (an automotive research and design firm, based in the UK) into improving diesel technology.[57]

16. When we asked how, in particular the Japanese-owned, companies were managing to thrive in the UK despite the difficult trading conditions, we were given several answers. Amicus emphasised these companies' commitment to investment in new models and plant, in contrast, they alleged, to the "more traditional" British car industry.[58] The T&G gave two principal reasons. It said that Toyota's strategy was to grow organically rather than through mergers and acquisitions (unlike Ford and GM), and it highlighted the importance of the company's careful nurturing of its supply chain, both of which, it implied, increased the company's commitment to, and its ability to withstand pressure in, the mature European car market.[59] PSA and GM suggested that it was the companies longer-established in the UK that were experiencing problems: the Japanese companies had started manufacturing in the UK comparatively late, and were able to build modern plants and incorporate the latest lean manufacturing techniques from the start.[60] Amicus contrasted the situation in the UK with that in Germany, and attributed the increase in car production in Germany to investment by the industry, and government support and training.[61] We examine all these elements in more detail in the next chapter.

11 Eighth Report, paragraphs 1 and 10 Back

12 Q 74 Back

13 Q 13 Back

14 See, for example, Q 76 (T&G) Back

15 For example, the SMMT told us: "It is Europe, not just the UK, that now provides the 'home market' for vehicle producers": Appendix 18, para 2.12 Back

16 Paragraph 23 below Back

17 Including Canada and Mexico Back

18 Qq 107-109 (GM) and 136 (PSA) See also Q8 (Amicus)and Appendix 18, para 2.12 (SMMT) GM mentioned projections that the UK market is set to contract by 5% between 2005 and 2011: Appendix 12 Back

19 According to GM, roughly equivalent to an excess of 20 assembly plants Back

20 Q 107 and Appendix 12 Back

21 Q 109 Back

22 Q 259 Back