The road ahead for UK car makers

Making cars in the UK is much more expensive than in eastern Europe

The automotive industry is a key sector in the UK economy, generating around £46bn or 5.5% of the country's GDP last year and employing 800,000 people. But after a difficult year, BBC News Online's Briony Hale examines its long-term future.

The plight of the UK car industry has been and will continue to be dependent on the decisions of multinational car firms.

There is no long-term future for a volume manufacturer in the UK

Steve Young
AT Kearney

And the biggest challenge facing these companies is that there is about 25% more installed capacity to make cars than there is demand to buy them worldwide.

Axing production in the UK to produce cars in Eastern Europe - where labour is about one eighth of the cost - is one logical solution to building cars on scale.

Given that many car makers have already shaken up their UK operations - the biggest changes to come are in the components industry.

"There is no long-term future for a volume manufacturer in the UK," Steve Young at management consultants AT Kearney's told BBC News Online.

But in comparison to Western Europe, the UK is still an attractive platform for Japanese manufacturers who have decided to keep - and even expand - their existing plants.

Shedding jobs

This year has seen Ford and Vauxhall both fight bitter political battles in order to close UK plants, together shedding a total of 3,900 jobs.

And while Rover has saved the Longbridge plant, there are doubts as to whether it will be profitable in the long term.

Car production in the UK centres on the more profitable area of the luxury car sector - vehicles such as Land Rover, Jaguar, Bentley and Rolls Royce.

Rover falls somewhere between the luxury models and the mass production plants.

Closing factories has led to protests and strikes

But it has not all been bad news for the UK car industry this year.

Toyota is to increase its UK production by a third, while Nissan chose to build its new Micra model at Sunderland.

This means that UK vehicle production is most likely to stay on an even keel over the next few years.

Accident of history

As such, some UK volume car plants will continue to exist, but that is much more of an accident of history rather than any decision which would be made with a clean sheet of paper, says Mr Young.

Excess capacity

Europe - +33%

Japan +50%

North America +21%

Global +25%

Nissan's choice to build the Micra at Sunderland came down to a particular set of circumstances and the fact that the plant in France was not ready on time.

The decision is not all good news for the UK car industry in any case.

The new Micra will have a far smaller British content than its predecessor and British component manufacturers could lose out to the tune of £100m a year.

Importing components

Components make up about 25% of the cost of making any one car.

Production will end at Ford's Dagenham plant at the end of 2002

With the strong pound, British part makers are struggling to compete with European manufacturers.

And one way for companies to get round the high cost of producing cars in their existing UK factories is to import more parts from abroad.

With most of the shake-ups at key vehicle assembly plants already over, it is now the components sector which is facing the greatest shake-up over the next few years, according to PricewaterhouseCooper's Phillip Wylie.

UK car production

UK production 1.6m

UK exports 1.1m

UK imports 1.6m

UK cars sold locally 0.6m

Although firms such as TI and Smiths are not as well known as Ford and Vauxhall, there is much at stake for British industry.

The automotive industry is a key sector in the UK economy. It makes up £46bn or 5.5% of the country's GDP last year and employing 800,000 people.

Of this, the component sector is worth about £12bn.

And it is highly concentrated in certain regions, especially the West Midlands.

Demanding customers

And to add to the woes of car manufacturers, UK customers are becoming ever more demanding and cost-wise, according to Professor Peter Cooke of Nottingham Business School.

The biggest challenge facing the car industry today is still the huge excess in manufacturing capacity.

Professor Peter Cooke

Profits are being squeezed out of every element, but car manufacturers are trying to introduce as many different elements as possible in order to make profit "little but often".

Ford now defines itself as a "total person mobility provider," seeking to add extra services such as insurance, fuel cards, financing and maintenance in order to help the cash-rich but time-poor customer.

Peter Cooke compares the UK car industry to a Rivita biscuit - you only eat it because of the nice things that go on top.

In the same way, the car is the bland carrier that relies on the extras to entice the customer.