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Monday, 14 August, 2000, 11:32 GMT 12:32 UK
Q&A: Honda's UK commitment
Japan's third-largest car maker, Honda, is switching its entire production of the Civic range from Japan to Swindon, throwing a lifeline to the beleaguered UK car industry.

The decision will fan the debate on whether UK industry can thrive without adopting the single currency, the euro. The BBC's industry correspondent Stephen Evans explains the reasons for Honda's decision.

Honda wants to build more cars in the United Kingdom - does that mean more jobs for the UK?

It does mean more jobs for the UK - or rather it safeguards the 3,000 already at the plant. The plant at Swindon currently makes 100,000 cars a year but the plan is to expand that to 250,000 cars.

More than doubling the output, with the construction of a new assembly plant at a cost of $600m (400m) has secured existing jobs and led the company to take on more people.

Exporting Japanese cars from Britain back to Japan sounds daft. How can they make money with it?

They can do it by being a state-of-the art car plant with very competitive rates of pay.

The plant in Swindon is new so it doesn't have to make do with old configurations (as say the Rover plant in Longbridge has to).

It's also got state-of-the-art machinery so that the whole operation can switch very quickly between different models.

The trick for car companies is to be able to adapt to market changes quickly. Honda does this by flexibility of worker and machine on a basic design which can be adapted easily.

On top of that, the exchange rate between the pound and the yen has moved in favour of British production (just as the pound/Euro rate has moved against British production.

In the past two years, the pound has gained 15% against the Euro but devalued by about 10% against the yen.

But just a few days ago Toyota and Nissan threatened to pull out of the UK because the country is outside the eurozone. So why is Honda staying put?

Honda sees decisions about siting car plants as very long term (as do the other car companies) and the pound may well weaken against the euro. Toyota and Nissan both have plants on the Continent so it would be easier for them to switch production in that direction.

Toyota and Nissan aren't saying they'll pull out of Britain if Britain doesn't adopt the euro - though Honda has said it would prefer Britain to be in the single currency so the uncertainties of exchange rate movements can be eliminated.

What all the big car companies are complaining about is the level of the exchange rate. The pound has moved the wrong way for them against the euro. If it moves the same way in the future, their calculations of profitability in Britain will also change.

Does Honda's decision prove the point for the eurosceptics?

No it doesn't. There's no doubt that foreign companies will keep coming to Britain if Britain remains outside the euro.

The question is whether they would keep coming in the same numbers.

Britain offers advantages in terms of flexibility of workforce, nearness to ports, the English language - and those would continue outside the euro.

The pro-euro people say that staying outside the single currency would take some of the shine off those advantages - and they cite Ireland where inward investment is rising as an example of how being in the euro is an attraction for foreign firms that trade internationally, particularly in the eurozone.

So, to recap. Honda's decision only shows that there is life outside the euro. It doesn't show that life is better outside the euro.

But will Honda buy parts in the UK or follow Toyota's example and buy in Euroland?

Honda has already indicated that it will be increasing the proportion of parts it takes from the eurozone. The unfavourable exchange rate is putting a squeeze on British suppliers across the car industry.

Honda once provided the technology for Rover cars, and there has been speculation Rover is looking for a partner again. With Honda expanding, could Rover be a partner?

Rover is certainly looking for a partner. The salvation of Longbridge in Birmingham depends on them finding a partner in three or four years time. It can't have a long term future as a mass car brand.

Will it be Honda? It's too early to say but Rover and Honda remain amicable.

The big problem is that there are already too many car plants across Europe. It's hard to see why Honda would want to acquire a new one, particularly with its site in Swindon expanding in such a spectacular, successful fashion.

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See also:

14 Aug 00 | Business
Japan's other carmaker
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Honda boost for UK car industry
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