The uk and the global car industry

5. Foreign transnationals exporting cars to developed countries in significant volumes.

The car industry is also expanding fast in Eastern Europe, particularly in some countries that joined the EU in May 2004. Slovakia, with a population of just over five million, has been dubbed ‘the Detroit of Europe’ by at least one writer. Prior to EU membership, Slovakia already boasted a Volkswagen plant with an output of 250,000 cars a year. The Bratislava plant is one of the top three Volkswagen factories in the world, producing the Polo, the Touareg and the SEAT Ibiza. The Touareg is almost totally produced in Slovakia. In 2004, Volkswagen produced almost a quarter of all Slovakia’s exports. Although Volkswagen did not receive a subsidy from the Slovak government, the company is benefiting from a ten-year tax concession. A VW spokesperson has been quoted as saying ‘Volkswagen voted for Bratislava because of the good infrastructure of this region – highway, railway, airport and river transport’. Slovakia enjoys a strategic location on the border with Austria.

In late 2004, Slovakia fended off fierce competition from Poland and Hungary to seal a deal with the Korean company, Hyundai, to build its first European car factory in the country. The factory, which should open in 2006, will produce up to 200,000 vehicles a year under Hyundai’s Kia brand. The location of the factory is near Zilina, 200 kilometres northeast of Bratislava. Some of Slovakia’s East European competitors have criticised the amount of the Slovak subsidy to Kia – 228 million euros. In addition, the state is paying 1,750 euros for each of the 3,000 workers. The total cost of Kia’s investment will be $870 million. As with other large car plants, Kia is attracting some of its main suppliers to locate nearby. With its seven suppliers, the total investment is estimated to be $1.4 billion.

In January 2006, Peugeot will open a large new car plant in Trnava, 50 kilometres from Bratislava. When it reaches maximum production, this state-of-the-art plant will export 300,000 cars a year to Western Europe and to other parts of the world. This greenfield investment will cost around 700 million euros. Apart from low wage costs, a major attraction of this location to Peugeot was the promise of free land. The new Peugeot factory is attracting many of its suppliers to the same location. In total, it is estimated that 10,000 new jobs will be created. The Slovak Investment and Trade Development Agency (SARIO), established in 2001, played an important role in attracting Peugeot Citroen to the country. SARIO offered a range of potential sites for the new factory.

The large car manufacturers are looking more closely into sourcing parts from countries such as India and China, which could reduce autoparts bills by 25 per cent. Traditionally most parts have been supplied from the same or neighbouring countries. Very often, parts suppliers have clustered around large assembly plants. However, this geographical bond is weakening.

There are some difficulties with sourcing parts from further away, such as the need to enter into long-term relationships with new suppliers, as well as changing factors such as exchange rates and wage levels. This prospective change in the car industry will not occur overnight, but the potential cost savings make it likely.

The UK car industry

While the record of British manufacturers in the UK has been a tale of woe, foreign car producers have been doing well in Britain. As a result of high foreign direct investment, Britain has a wider range of car manufacturers than anywhere else in Europe. Eight volume brands are made in Britain along with Rolls-Royce, Bentley and niche producers such as Morgan and Lotus. Figure 9 shows production figures for major manufacturers in the UK between 1995 and 2004. In 2003, the motor vehicle industry (vehicles and parts) accounted for just over ten per cent by value of all UK manufacturing, up from 7.8 per cent in 1995. As large employers, the big car companies are of great economic importance in the regions in which they are located.

In 2004, Toyota reported its first back-to-back annual profit in the UK for eight years. Toyota’s car plant is at Burnaston in Derbyshire and it manufactures engines in Deeside, North Wales. Its 2004 profits of more than £30 million are expected to rise to £50 million in 2005. However, the picture has not always been as good. Since both factories opened in 1992, Toyota has lost £780 million over the thirteen-year period.

A recent £50 million investment completed in April 2005 allows the Burnaston plant to produce cars at the rate of one every 45 seconds, compared with 57 seconds previously. Toyota can now also move from ‘raw steel to completed car’ in just 19.5 hours. Eighty per cent of production is exported. One factor that can affect profits is the level of the euro against the pound. If the euro strengthens against the pound, it makes British-made cars cheaper for people in other countries to buy, leading to an increase in exports. However, because the two currencies can fluctuate considerably over time, Toyota has reduced the impact of the pound/euro relationship by cutting the ‘UK content’ of each car from 67 per cent to 47 per cent since 1992. Production at Toyota topped 200,000 in 2004. Toyota claims it is on course to sell 1.2 million cars in Europe by 2010. A quarter of these cars will be made in the UK.

Nissan’s Sunderland factory remains the most efficient in Europe. It is the largest plant in the UK. The production of two new models in the next couple of years will increase production to 300,000 cars a year.

Figure 10.

The considerable level of foreign direct investment in car manufacturing in the UK means that Britain has a wider range of car manufacturers than anywhere else in Europe. As a result, Britain remains one of the world’s biggest car exporters and is poised to overtake Germany as Europe’s biggest car exporter.

The collapse of Birmingham car manufacturer MG Rover in April 2005 has had indirect as well as direct consequences. When the Longbridge car plant collapsed, its 6,100 workers were making 150,000 cars a year. There is now no British-owned mass manufacturer left in the UK. Previous to this, BMW had bought Rover from British Aerospace in 1994. However, six years later, after encountering serious difficulties, it gave the company away to a consortium of businessmen and employees. BMW retained the successful Mini brand manufactured in Oxford. One significant concern is the long-term effect on the UK supply base. Once suppliers are forced to close because of a lack of current demand, it is very difficult to get them back.

Industry experts estimate that by the end of this decade the UK will be making more cars than at any time since the 1970s, when a record 1.9 million cars a year were produced. This is good for Britain’s balance of payments because the car industry is currently a net exporter. About 70 per cent of the 1.7 million cars made in the UK are exported. There was concern that being outside the ‘Eurozone’ might weaken the UK’s position in the global car industry. However, these worries seem to have receded. Nissan, a major initial critic of Britain’s decision to keep the pound, now says that the issue is no longer important to its strategic planning.

Although the position with regard to car production is healthy in the UK, the same is not true for car components, with a significant number of closures over the last decade. It is the most labour-intensive component manufacturers that have been worst hit. For example, for Nissan’s new Micra, 80 per cent of the components come from elsewhere in the EU, with only twenty per cent from the UK. For the previous version of the Micra, 80 per cent of parts came from Britain. The reasons for this trend are:

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  Increasing competition from lower-cost producers abroad.
  
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  The strength of the pound.
  
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  Lack of investment in research and development.
  

The car industry is a classic example of mass production and mass consumption. It has responded to the emergence of new markets by major changes in location. In terms of production techniques, the huge success of Japanese manufacturers has led to other major car companies adopting similar methods. However, further changes will undoubtedly occur in the future. According to a recent article in The Economist (2/9/04), these are likely to be:

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  Fragmentation of the market leading to lower production runs.
  
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  Building cars to order rather than for stock.
  
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  Innovative modular construction in which more of the car is put together by parts suppliers.
  
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  A switch to electric cars with electronic and electrical rather than mechanical controls.