Page last updated at 23:02 GMT, Monday, 8 June 2009 00:02 UK

Carmakers in crisis

By Tristan Marshall
BBC Money Programme

Citroen gets its number plate fitted
New registrations are down sharply this year.

A collapse in sales, mass layoffs, factory shutdowns and even bankruptcy. Why is the British car industry in so much trouble, and what if anything, can car makers do to save themselves?

The recession began with a banking crisis, but in the UK it is manufacturing that has taken the biggest hit and no part of manufacturing is suffering more than the car industry.

Sales of new cars are down 28% this year in the UK and in much of Europe, where many of the cars we make are sold, sales have fallen by more than 40%.

A collapse in sales of this magnitude is a big challenge for any business, but for the car industry, where the profit margin is typically less than 5%, it's a disaster.

"Margins are pretty low at the best of times, and with the recession it's virtually impossible for anybody to make a profit," says Professor David Bailey of Coventry University.

Even Toyota, the world's number one carmaker, is not immune and last month posted a$7.1bn (£4.4bn) loss, the first loss in its 71-year history.

Loss of confidence

So why has demand fallen so much? One issue is credit. Few of us can afford to buy a new car outright, so credit has always been important to the car trade and the credit crunch has made it harder to get loans.

General Motors car factory
The scrappage scheme is in effect the British tax payer subsidising foreign car factories, which would be in most people's opinion a bit of a no-brainer
Professor Garel Rhys, Cardiff Business School

But because many car firms have their own finance arms - in effect mini-banks - credit is generally still available to customers with good credit history.

The real issue, according to Nigel Gray of Vauxhall dealership Motorbodies in Luton, is a fear of redundancy. "People don't have the confidence that they are going to have a job or that their future is secure," he says.

But confidence will only return when the economy improves and few are expecting that to happen any time soon.

To stimulate sales in the short term, last month the UK government launched a car scrappage scheme, offering £2000 to owners of cars 10 years old or more willing to trade them in for a new model.

According to the government 35,000 buyers took advantage of the scheme in the first month of operation, representing one in five of all new car sales.

'No-brainer'

So far there's no sign of a scrappage subsidy boost in the number of new car registrations, the industry standard measure. In May registrations were 25% down, barely any better than the previous month.

But the Society of Motor Manufacturers and Traders says it may take some time for the impact of the scrappage subsidy to filter through to registrations.

While the scrappage subsidy might be benefitting retailers, it's unlikely to provide much comfort for British manufacturers because six out of every seven new cars we buy are imported.

"The scrappage scheme is in effect the British tax payer subsidising foreign car factories, which would be in most people's opinion a bit of a no-brainer," says Professor Garel Rhys of Cardiff Business School.

A changed industry

Over the last 25 years, the UK car industry has changed enormously. In the mid-1980s the giant British Leyland dominated the UK industry, along with US-owned brands Vauxhall and Ford.

Gordon Brown and Vauxhall car
Our determination is to save Vauxhall jobs in this country and make sure people have a secure future,"
Prime Minister Gordon Brown

Today, Vauxhall's future is uncertain, Ford no longer assembles cars in the UK and the former British Leyland disappeared with the collapse of the Rover Group in 2005.

Jaguar Land Rover and Mini are the only parts of British Leyland that remain, and both are now under foreign ownership.

But while existing mass-market manufacturers have struggled in the UK, three Japanese manufacturers, Nissan, Honda and Toyota have set up their own factories here, and now form a huge part of our industry. Nissan's plant in Sunderland has become the most productive car factory in the whole of Europe.

Garel Rhys believes that we're very lucky to still have a motor industry. "It really is based upon the back of the Japanese, either the Japanese themselves or the Japanese having an influence on other companies operating in Britain," he says.

Jobs under threat

Britain has been able to attract foreign companies to set up here in part because of its flexible labour markets. But in a recession, flexibility becomes a problem for employees. "Flexible markets are good at creating jobs. They're also very good at destroying them," says David Bailey.

Car being scrapped
One in five of all new car sales were scrappage-scheme related

Mr Bailey believes the government should be doing more to protect jobs, such as introducing a part time wage subsidy to help employers keep skilled staff on their books.

But what about the government's £2.3 billion Automotive Assistance Programme to guarantee loans to car manufacturers and suppliers?

Mr Bailey isn't impressed: "It's been far too slow, and it isn't enough money," he says.

But Lord Mandelson defends the government's cautious approach.

"It would be a problem if the government were to move so quickly as to give the impression that we were some sort of cash machine that people could come to at will and draw out the taxpayers' money whenever they wish," he says.

Factory closures

Foreign ownership is also a problem when it comes to factory closures. Nowhere is this more obvious than in the case of Vauxhall, the British division of General Motors Europe.

As General Motors Europe is sold off by its bankrupt US parent, it's widely accepted that it will need to close up to three of its ten European factories. But which ones?

Vauxhall's plants at Ellesmere Port and Luton are among the most productive that General Motors has in Europe, so they ought to be safe.

But the fear is that the German government, facing an autumn election, will do everything possible to avoid Germany's own less productive factories being earmarked for closure. "I think it's fanciful to believe that economics alone will determine which plants remain open and which shut," warns Garel Rhys.

The UK Government is aware of the danger.

"Our determination is to save Vauxhall jobs in this country and make sure people have a secure future," Prime Minister Gordon Brown told the House of Commons last week. But the future for Vauxhall is far from certain.

Reducing emissions

A longer term issue facing the industry is to reduce vehicle emissions. Up to now the car industry as a whole has resisted attempts by the European Commission to introduce tough emissions targets and then failed to meet the targets that it has agreed to.

Mike Reid as wheeler-dealer Frank Butcher, BBC Television
Selling cars has become more difficult than it used to be.

Ultimately this is bad for business, according to Jos Dings of European campaign group Transport and Environment.

"The American car industry has completely ignored the issue of fuel consumption and climate change. And they are in a shambles right now," he says.

Emissions are a particular challenge for manufacturers specialising in luxury vehicles and SUVs, as David Smith, chief executive of Jaguar Land Rover, admits.

"I think in the future things that are important to customers today like performance, desirability and comfort, but we've got to have this much stronger emphasis on fuel economy and reducing emissions as well," says Mr Smith.

The way forward

Business trouble-shooter Sir Gerry Robinson, who investigated the British car industry for the Money Programme, thinks it does have a future if it gets its priorities straight.

He identifies three key areas that car manufacturers needs to focus on for the long term: developing much greener cars, focusing on the higher end of the car market and investing in training the next generation of designers and engineers.

"But in the short term, the reality is that car makers just have to hang in there until demand recovers," he says.

Money Programme: Gerry Robinson's Car Crash. Broadcast 2200, BBC2, Tuesday 9 June 2009.



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