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Monday, 10 April, 2000, 16:01 GMT 17:01 UK
Car firms under pressure
Rover cars leaving longbridge factory
High prices and the strong pound hit Rover hard
The UK car industry is in deep trouble. Rover is being broken up, Ford is pondering whether to close its Dagenham plant, others are moaning about over-capacity.

At the same time car makers stand accused of ripping off the country's consumers.

Trade and Industry Secretary Stephen Byers has released a report by the Competition Commission that found UK prices for new cars between 10% and 12% higher than in other European countries.

So how do the figures add up?

Captive customers

Car manufacturers have had a big advantage when setting prices for the UK market - captive consumers.
W-Reg cars
New car sales are sluggish as consumers wait for prices to come down
With the country's motorists driving on the left side of the road, and the steering wheel firmly installed on the right, hopping across the Channel to buy a cheaper 'continental' car has never been the easy option.

Buying in the Republic of Ireland was a potential alternative, but many buyers were deterred by threats from manufacturers that cars sold there were not compliant to UK spec and might not carry a valid warranty.

Car dealers on the continent, meanwhile, were actively dissuaded from selling cars with right-hand steering into the UK.

With a closed market and a system of exclusive dealerships, which ruled out competition, suppliers found it easy to sustain high car prices.

Forcing change

Government orders
Dealers can buy cars on the same terms as fleet buyers
Car makers must tell dealers current fleet buyer prices
Dealers can advertise price discounts
Manufacturers must supply cars to discounters
Suppliers cannot set sales targets for dealers
Following a nine-month investigation, the Competition Commission has now released a 1,200 page report into the industry.

Its recommendations - most of them taken up by Mr Byers - are all designed to make the market for new cars more competitive.

Its main aim is to address a distortion that is unique to the UK market, its domination by "fleet" or company cars.

Fleet buyers, who order in bulk, receive huge discounts. Car makers like them because their orders push up registrations, which in turn gives a car the aura of popularity.

Private car buyers are paying the price, effectively subsidising UK company cars on top of generating healthy profits for manufacturers.

Some industry analysts suggest that UK consumers contribute up to 20% of the profits made by European car makers.

The measures recommended by the Competition Commission could make a difference - by either driving up the price of company cars or bringing down the cost for consumers.

More competitive pressure is being applied by the European Commission, which has outlawed exclusive dealerships from 2003.

Pound pressure

But if manufacturers are raking in the profits, why are UK-based car factories in trouble?

The reasons are complex and among them are decades of under-investment and low productivity.

The biggest problem, though, is the persistent strength of the pound, especially against the euro.

A strong pound is making it expensive to export UK-built cars to the vast market of the eurozone.

To compete with continental rivals counting their costs in euros, BMW's British subsidiary Rover had to cut prices in the eurozone to the point where it hurt.

And several Japanese car makers have hinted that they may shift future investments to the continent if the pound fails to weaken or the UK does not join the single currency.

Pound profits

However, if UK car makers are finding it difficult to compete on price on the continent, cars produced in France, Italy or Germany should surely be cheaper in the UK?
Traffic jam on M4
Too many cars - and too expensive as well1
It has not happened, even though more than 70% of all cars sold in the UK are manufactured abroad.

Rather than making cars cheaper, the strong pound has created a nice windfall profit for an industry that is plagued by over-capacity and fierce competition, especially in the eurozone where the single currency has highlighted price differences between markets.

Reluctant consumers

The report by the Competition Commission and the emergence of online car retailers, who undercut the UK price of some car models by up to 50%, should drive down prices.

Several firms, among them Mitsubishi, Kia, Vauxhall, Rover and Ford, have already slashed list prices.

But in the short run the market will undoubtedly be thrown into confusion.

Most car buyers will wait and ponder their options until prices have come down. Manufacturers, meanwhile, have two months to register their objections to the report and are expected to mount a robust defence.

Until then, there will be two losers: UK consumers, who will have to pay more than their European counterparts, and UK car workers, who could see their jobs vanish as the pound makes their products less competitive.

See also:

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