Essay title - The UK Automotive Industry: Domestic Decline? An Assessment and Future Prospects.

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Abstract

There has been a vast amount of literature and news coverage of the perceived decline of the Automotive Industry within the UK, and equally supporting the advantages that the introduction of foreign investment has contributed to the country, as a result of this domestic decline. One of the main problems that has caused this divide of opinion is that there is no definition of what the UK Automotive Industry actually is. Does it refer to cars produced by UK Manufacturers, or all cars produced in the UK? All manufacturers, regardless of country of origin, that operate within the UK contribute to the UK economy and so this author believes the definition of the UK Automotive Industry is:

‘The Production of vehicles, regardless of marque or owner, that are produced in the UK that contribute positively to the UK Economy.’

I believe that the Country is better off now that we have no domestic industry and that the industry should not be perceived to have declined, but that it is a dynamic industry that has changed because of the impact of unforeseen externalities.

The methodology of the paper is to follow a general timeline format. Analysing Literature on the History of the industry, with the recent case of the decline of the MG Rover Group. Followed by a statistical analysis of the current industry state and past trends. Porter’s Fiver Forces and PESTLE analysis are undertaken to investigate the reasons for the modern industry structure, and to form reasonable future strategies for the survival of the industry.

The study concludes that the industry should not have perceived to have declined, but rather that it has adapted to the dynamic externalities that have faced it. The future of the industry lies in foreign investment and one of the key findings and required strategies is that the UK Government will play an important role in the survival and prospects of the Industry in the Future.

Introduction

The modern UK Automotive industry is now very different to how it used to be in its perceived prime in the 1970s. The Closure of major manufacturing plants such as Longbridge and others in the recent past is testament to this fact. The reality is that the majority of ‘British’ Automotive brands are now owned by other non British motor groups or foreign investors. MG Rover, Jaguar and Rolls Royce are some of the more recent examples of foreign acquisitions. On the other hand, Aston Martin, more recently owned by Ford, and one of the ‘great’ British marques, has recently been sold back to British investors. However, the re-establishment of British ownership of one small scale manufacturer, no matter how prestigious, can hardly be seen as a rebirth of the domestic industry. The increase of foreign investment into the majority of the UK’s signature brands has resulted in the public, media and critics believing that the ‘British’ car industry has suffered an irreversible decline.

The reasons for this trend to foreign ownership are manifold, but essentially derive from the basic underperformance of the industry as a whole, an eventuality spreading from the domestic market after the Second World War. Too many outdated models, of poor product quality and design, and the lack of awareness and consequent success in penetrating the growing continental export market (Bhaskar, 1979) were all key factors.

From this viewpoint the industry can be seen to have declined almost into non existence, and it is true that the majority of the domestic industry has ceased to exist, save some small volume sports car manufacturers such as Lotus and Caterham. However, these vehicles can in no way be seen as mass produced and could never support domestic let alone export demand.

The essential issue is what now constitutes the British Automotive industry? Is it the remnant of a once great domestic industry which thrived in the 1970’s, or is it, as I contend that all vehicles manufactured in The UK should be considered British regardless of ownership. This redefinition means that, even though Jaguar today is not in British ownership, design and manufacturing operations are still undertaken in the UK and Jaguar is still regarded as a ‘British’ marque or brand. With this new understanding the British Automotive industry is thriving, is not in decline, and is prospering. This paper is intended to reinforce this contention.

Figure 1: Jaguar; one of The UK’s most famous brands

seriouswheels.com

Statement of the Problem

Whereas there is literature and accounts supporting the decline of the British motor industry and its detrimental effects on this country, there is strong statistical data and qualitative accounts that highlight the strength of the Automotive industry today, even though the majority of manufacturers are no longer British. An understanding of what constitutes the ‘British’ Automotive industry needs to be established as there seems to be no balanced argument to this effect. This forms the basis and rationale for this paper.

The British Car Industry constitutes all vehicles produced in the United Kingdom regardless of ownership. This is the belief of the author.

Aims and Objectives of the Study

This study has three main aims:

  • To ascertain whether the British Car Industry has declined, or whether this is a perception and not relevant to the modern car industry in The UK.
  • To understand why The UK has been the investment target of many motor manufacturers in recent years.
  • To identify future strategies for the industry in The UK to facilitate its survival and growth.

Methodology

This study is presented in a timeline format.

  • Literature written upon past events in the industry from immediately post the Second World War is reviewed in order to gain an understanding of why the domestic industry entered the 21st Century in a state of insolvency.
  • The Current industry structure is then analysed and the reasons for the current investment position modelled around a framework of Porter’s Five Forces.
  • Strategic options and recommendations are then derived from this data and presented through a PESTLE analysis of the industry in order to realise the best future for the now ‘changed’ British Car Industry’.

The rationale behind this methodology is that to truly understand the current market the past traits and trends must first be analysed to understand why the industry has apparently declined and why it was not suitable for the UK. Only then can current trends be truly understood and future recommendations that promote a viable Automotive Industry, and are in the best interests of this country can be made.

Porter’s Five Forces model is the preferred tool to use in order to understand the factors affecting a company’s competitiveness in the marketplace and I have chosen this to better understand the current market position. The PESTLE Analysis allows the user to analyse all the external factors that affect an industry and allows future strategies to become apparent.

Rationale for the Study

There is a lot of literature written upon the subject of the British Motor Industry’s decline. The majority of which is presented in a negative light, or suggests that this domestic decline has affected the UK in a negative manner. Current news coverage of factory closure and company insolvency seems to back these pessimistic claims and critics believe the UK is still suffering from the lack of a domestic motor industry. This author believes however that reviewing the past and the present quantitative data will allow a different and opposing view to be formed if the British Car Industry is taken as ‘Car production in the UK’ rather than domestic supply. This author would like to use this data as an ‘Automotive case study’ in order to formulate future objectives that will insure the success of the British Automotive industry, in whatever capacity that may be.

History of the Industry

At the end of WWII the UK car industry still had its capacity intact, and in fact although there was a large domestic demand for vehicles at this time, the government restricted home sales in order to stimulate the export market. They set quotas that motor manufacturers had to comply with which started out at 50% of annual production but quickly reached 80% by 1950 (Owen, 1999).

Most manufacturers met these export quotas by exporting their current UK vehicles, regardless of how suitable they were for foreign markets. This gave rise to British cars to gaining a reputation for unreliability, which has been difficult for the manufacturers to remedy (Rhys, 1972 p.379). In the short term the UK Automotive exports were very successful, with a 52% share of world car exports in 1950. This was mainly due to European competitors’ slow recovery from the war and the American government concentrating on their own domestic market. In fact, when the export quotas were lifted in 1953 by the Churchill Government the world share only fell by 7%, and remained at this level until the end of the decade (Owen, 1999 p.218). However, by this time competition had recovered from the war and most British companies decided to concentrate efforts upon the commonwealth markets. This followed the belief that going head to head with German, Italian and French car manufacturers in their home countries was unlikely to reap any great reward. European car sales in America sold well until the domestic firms started to produce more ‘compact’ direct competition and at this point European imports almost disappeared completely.

Following the war one of the most successful companies was Ford of America, using a true mass market low cost strategy at its advanced Dagenham Plant (Now home to Jaguar). Ford was able to increase its UK market share from 14 per cent in 1946 to 27 per cent in 1953 (Owen, 1999 p. 219). The UK automotive industry did not adopt this strategy and tended to be more focused on quality and variety rather than the mass market that was needed (Zeitlin, 2000). This increased competition from Ford and was one of the driving factors for the 1952 merger of Austin and Morris to form the British Motor Corporation (BMC) (Owen, 1999 p. 219).

Shares of the British car market held by principal manufacturers in 1955 & 1964

1955 (%)

1964 (%)

BMC

39.0

37.0

Ford

26.5

28.5

Vauxhall

8.5

13.0

Rootes

11.5

12.0

Standard

9.5

6.5

Others

5.0

3.0

Table 1: Market Share of British Car Market 1955 -1964

(Silberston, 1965)

Table 1 shows how market share in the UK of BMC had fallen at the hands of Ford between 1955 and 1964. However, in Europe two companies, Volkswagen and Renault, were paving the way for mass production to boost their own country’s economies. Volkswagen a new company to the scene, as they had not produced passenger vehicles before the War (Owen, 1999 p. 222), began producing the Beetle (Figure 2) a car ideally suited to the German market, performing a similar role to that of the Model T Ford in America, and by only producing one model in mass, quickly became the market leader.

Figure 2: 1964 Volkswagen Beetlehttp://www.channel4.com/4car/gl/gallery/gallery/24/4

Renault, in France, achieved similar results when the new chief Pierre Lefaucheux launched the 4CV in 1947, creating a small car niche and instantly giving Renault leading market share above Citroen. British industries did not pursue this strategy, and while it wasn’t apparent that there was potential for decline especially with the success of the Jaguar and Land Rover brands, no steps were taken to mitigate this development (Owen 1999).

Maxcy and Silberston (1959, p. 187) examined the UK industry and found it to be not inferior to competitors as such but that, despite the BMC merger, the industry was still too fragmented to be really successful. Volkswagen in Germany was producing 400,000 vehicles a year and Renault 200,000, whereas in the UK no manufacturer was achieving 100,000 units (Owen, 1999 p. 224).

Partially due to this report, the companies in the British automotive industry started to merge. Jaguar and Rover were both sold to the BMC to make British Motor Holdings (BMH) and this new group was merged with the second largest British enterprise Leyland. This posed immediate problems as the group was internally fragmented and none of the management really knew how to run such a large scale organisation. As a result of this change to mass production without either a suitable management model or the intimate market knowledge needed to succeed, quality and labour relations fell causing many of the new vehicles, such as the Rover Saloon, to badly miss their sales targets. Unfortunately for the industry this happened at a time when foreign imports were starting to build up again after the war (Owen, 1999 p.230).

Figure 3

While tariffs still stood in 1968, imports amounted to only 8% of British car sales. However, as soon as the UK entered into the Common Market in 1972 import penetration increased dramatically, and unfortunately British Leyland had nothing to offer to the mass produced market in Europe. Only the Mini succeeded as it had a market due to its ‘small car’ niche (Owen, 1999).

In 1974 the market collapsed (Figure 4) due to a rise in oil prices and banks turned their back on British industry and British Leyland had no choice but to ask for backing from the government, Labour at the time, which was successfully granted by Harold Wilson.

Figure 4

The Ryder report commissioned in 1975 concluded that Leyland’s problems were not irreversible (HMSO, 1975); but that it was to be understood that Leyland could not be both a mass market producer and a specialist upmarket producer at the same time. Trying to compete in both, could see the failure of the company in both of these competitive markets (HCEC, 1975). Unfortunately the government ignored these warnings and invested £900 Million into the firm and British Leyland became state owned (Owen 1999). Even with this large investment Leyland’s market share continued to fall as did its exports (Figure 5).

Figure 5

This failure would not have had such a profound impact on the industry if it had not been for the fact that many of the US owned manufacturers in the UK were performing badly as well. Ford and Vauxhall (a subsidiary of General Motors) formed common markets effectively combining British and continental operations. This gave rise to the inefficiencies of the British industry coming under close scrutiny, especially in regards to labour relations. The UK had more unofficial strikes than anywhere on the continent, and due to low morale in the workforce, productivity was low and quality dropped. This caused many manufacturers to start importing. In fact over half of Vauxhalls and Fords sold in the UK in the 1990’s came from the continent (Owen, 1999). Chrysler was by far the worst hit US firm by the oil crisis and threatened to withdraw European operations completely, however the UK government decided to support Chrysler in the UK until 1978, even with strong political advice not to (Young and Hood, 1977). The outcome of this was the sale of the whole of Chrysler UK to Peugeot of France. (Dell, 1992).

An interesting debate in the literature here is the fact that there was no world car industry decline but just one in the UK. The Continental and American firms had to deal with moving from closed domestic markets to open continental markets, and all had to go through periods of recession and the rise in oil prices in 1973, so why was the British market the only one in serious trouble (Owen, 1999)? Current Literature has put this down to three main factors.

Firstly, the majority of European firms were inside the European Common Market by 1958, much earlier than the British firms, and so had established models and a strong customer base. Secondly, the UK’s main goal seemed to be to have one powerful national car firm, which is why all of the UK mergers were set up. European firms did merge to a certain extent but there was more collaboration than anything else, resulting in not just one, but a number of healthy competing groups. Thirdly, labour relations in the UK were poor, with constant strikes and poor productivity and quality. (Owen, 1999) All of these factors demonstrate why the British car industry came off much worse when the external eventualities occurred.

The following section reviews the decline of the last real producer in the UK, the MG Rover Group, an event which really did signal the end of the ‘domestic’ automotive industry in the UK.

The Case of MG Rover – 2000 to the Present Day

Mergers and Acquisitions (M&A) are strategic strategies that are developed by taking ownership of another organisation (Johnson et al, 2006) and have been evident throughout the life cycle of the UK car industry, and are occurring still on a regular basis in the world industry. The result of which can be seen by the current motor ‘groups’ rather than sole firm operations. Acquisitions refer to the purchase of one company by another (For example NAC purchasing MG Rover) and mergers occur when ‘two or more businesses join forces to become one organisation’ and in doing so form a new legal entity (learnmanagement2.com). So in other words, Ford ‘acquired’ Aston Martin (i.e. the Aston Martin name remained), but the 1952 combining of Austin and Morris to create the British Motor Corporation is a merger as a new entity is formed (BBC News Archive).

The last real mass producer as highlighted earlier was the newly formed MG Rover Group. However, this Group is now also in foreign hands. The lifecycle of the British Automotive Industry up until today is illustrated in the following tree diagram. A short summary follows, explaining the events from the year 2000 to the present day.

Figure 6, Source: www.xpower-mg.com

The Rover Group was sold to BMW in 1994 (BBC News Archive). However, by May 2000 BMW, determined to cut its losses on the business acquisition, segmented the business for sale. Phoenix Venture holdings bought out the MG Rover Group (as it was now known) and Jaguar and Land Rover became separate entities again. Land Rover was sold to Ford and all BMW retained from the Group was the Mini brand, which evidently was the most successful component. Unfortunately for Phoenix Venture Holdings losses still mounted and the group recorded losses of £254 million during the first eight months of trade. Over the next few years Longbridge and the MG Rover group declined rapidly, and finally in July 2005 the group went into administration and was sold to Nanjing Automotive (NAC), who pledged to retain “some” vehicle production in the UK (BBC News Archive).

Six thousand people lost their jobs at Longbridge and when NAC started to strip the plant people became worried that they were going to move all production abroad (BBC News Archive). However, in 2006, Nanjing backed up their promise by taking out a 33 year lease on the remains of the Longbridge site and currently around 250 people have been re-employed. The fact still remains that even though MG Rover has not disappeared, it is no longer in British ownership, and so this really did signify the end of the domestic British automotive industry.

The industry has declined as a result of poor governmental policy and stubbornness, poorly researched mergers and the consolidation and domestication of the industry. As mentioned in the Introduction the majority of British Firms now are owned by foreign investors and in the bulk of cases by the big automotive groups such as Ford or Volkswagen. Therefore, technically the UK has no domestic motor industry. However, foreign manufacturers have always been accounted for economically in the automotive industry. This reinforces the view that the domestic industry should include all vehicles manufactured in the country and not just those that are produced by British owned companies.

Porters 5 Forces Industry Analysis

The historical perspective shows why we are left with little domestic industry and charts the rise in foreign motor manufacturers.

I have applied Porter’s Five Forces analytical framework in order to understand the structure and characteristics of the Industry today, before analysing the change statistics.

Michael Porter’s work, ‘The Competitive Advantage of Nations’ (Johnson et al 2006) suggested that there were 5 forces that affect industry attractiveness and profitability (tutor2u.net). These include the threat of new entrants, the bargaining power of suppliers, and the bargaining power of buyers, the threat of product or service substitutes and industry competition (tutor2u.net).

Threat of New Entrants

The event of new entrants increases the level of competition within a market and thus reducing that market’s operational attractiveness. The threat of this entrance relies heavily upon the height of the barriers to entry within an industry (Tutor2u.net). The most significant barrier to entry in the UK automotive industry is economies of scale, or in other words a new entrant must have the financial capital to produce at a minimum level, to be able to achieve national competitiveness (McEachern, 2006). A small factory hypothetically producing one thousand cars a year could not be competitive against for example Nissan who produced 301,000 cars in the UK in 2006 (autoindustry.co.uk). This obviously links to lack of capital and investment, and highlights the potential distribution link problems, the majority of large firms preferring to lock in suppliers to facilitate their needs (see buyer/ supplier power balance).

Bargaining Power of Suppliers / Buyers

Suppliers are companies that provide materials and other products to an industry (tutor2u.net). The relative cost of these materials and components can have a sufficient effect on industry profits. Therefore a market where the power balance is in favour of the buyer is the preference for automotive companies. There are four main types of relationships between automotive firms and their suppliers which are summarised in the model below, these are:

  • Captive Buyer
  • Captive Supplier
  • Strategic Partnership
  • Market Exchange(Bensaou, 1999)

Figure 7

Generally the higher the specific investment of one party the less power over the other that party holds. From the above table it could be said that power is mutual. However, in reality suppliers in the British automotive industry tend to dependent on the automotive manufacturers, and even with specific investments by the firm (for example interior trims), the suppliers have little power. This tends to be because the automotive manufacture industry evolves so quickly and buyers have no problem switching suppliers as technology changes (Pérez and Sánchez, 2001). Suppliers tend to vertical integrate in a forward manner, investing into the activities of their buyers (the car manufacturers) (Johnson et al, 2006), whereas there is very little backward integration on behalf of the automotive companies.

In regards to the Buyer-Consumer relationship the power of the end consumer is higher due to zero switching costs, a longer thought process (high value, luxury good) and high price competition. Although, due to the sheer volume of consumers and the supply cost implications, the Buyer-Consumer relationship is of less importance to the firms than the Buyer-Suppler relationship.

Industry Rivalry

There are many key players in the British car market; GM Motors, Ford, Daimler Chrysler, Toyota, VW, Honda and BMW to name the largest. All have operations within the UK whether that be technical, research or manufacturing. There is however, a very large differentiation between the nature of products that are offered, for example, BMW’s are considered of higher value and quality than say a Vauxhall. This demonstrates that branding is a key determinant for success in the motor industry, as is a population that is brand conscious and that can differentiate between brands, as otherwise the market would become extremely price elastic.

The Industry has very high exit barriers, as it does those to entry. This is due to very high fixed costs in training, acquiring and retaining personnel and plants, manufacturing machinery and research and development, and thus exceptionally high disinvestment costs. To disestablish a business and move to another country, especially manufacturing operations, can be very costly for a firm, particularly in the European Union, which is why operations tend not to move that often.

Threat of Substitutes

The British Automotive Industry, whilst now predominantly foreign owned businesses, is still a very competitive trade. On product to product substitution there is always the risk of public transport, trains and buses for example, bikes and motorcycles (not taken into account in this research) and not to mention vehicles from other manufacturers. There are also fuel substitutes to consider, diesel or petrol and increasingly electric, hybrid, E85 bio-fuel and hydrogen powered vehicles. It is certainly not an overstatement to say that consumers today in the UK have an almost overwhelming amount of choice when it comes to choosing their next vehicle.

As cars are quite often seen as a luxury good, replacement is not always necessary and so substitutes also covers the fight for consumer disposable income as well as actual product substitutions.

This high product and service substitution abundance should make the industry in the UK less attractive as there are not only specific market niche competitors to consider, but also competitors in the nature of transportation taken as a whole, which should in theory drive down prices (tutor2u). However, as has been reported in the earlier Industry Rivalry Section the automotive industry is brand loyal, especially in the UK where the term ‘badge snobs’ is widely used.

The automotive industry therefore has relatively high competition, in general terms, but due to branding and market niches this competitive effect is mitigated. There tends to be a relatively high number of substitutes for any one manufacturer’s products, although many people in the UK use cars as a personal asset of success. Taken together with the fact that the majority of the British population still see the public transport infrastructure as inadequate and the use of cars considered a necessity. The fact that the industry problems are mitigated in this way coupled with high barriers to entry, low threat of new entrants and high buyer power in the market if the capital requirements are there, the automotive industry remains attractive and lucrative.

This explains why the UK is an attractive place for manufacturers to gain a competitive advantage. The following Section investigates the statistical data of the industry to help understand why the above industry characteristics have caused the industry structure we have today.

The Industry Today, a Statistical Approach

This Section of the Research Project considers the representative statistics for the British Automotive Industry, commenting upon levels of production and more importantly the change in scene of a truly domestic market to a market full of foreign investment (see history).

Firstly, there is the issue that whether the industry did really decline or not (Owen, 1999). The question has two possible and both equally viable answers. If considering from the perspective of the British Automotive Industry consisting of just domestic producers, then one could argue that the industry has indeed declined, the lack of any real domestic producers today confirms this. However, as the following statistics show the number of vehicles actually produced in the UK has, in reality raised since 1980.

Figure 8: Vehicle production since 1980 (autoindusry.co.uk)

Therefore, the issue lies in the actual number of cars produced by British firms and how this statistical representation has changed. MG Rover has been the last mass producer to be fully British. Unfortunately after the previously described influx of foreign imports and the unsuitability of MG Rover vehicles for the rapidly expanding continental market, sales and market share receded greatly. (Bhaskar, 1979) The following graph shows MG Rover sales from 1996-2006 compared with those of Nissan UK who indecently is now the manufacture with the highest levels of production in the UK.

Figure 9 (autoindusry.co.uk)

The industry has changed. No more is it a domestic manufacturing industry, but with obvious increased sales from foreign manufacturers the British Automotive Industry as a whole remains viable.

Turnover produced by the industry is a key success factor. Therefore, it would be predicted that the industry turnover will have fallen as there are now no mainstream British manufacturers, and consequently no automotive manufacturing industry. The following figures contradict this showing that from 1995 to 2004 the turnover of the industry actually rose from around £33 Billion to a much more impressive £49 Billion even allowing for inflation (Figure 9).

Figure 10 (autoindusry.co.uk)

This increased turnover must have come from the increased investment from foreign firms, as the domestic industry basically ceased in the year 2000 (note the slight dip in the table above). The next data investigated is the number of vehicles produced by the major manufacturers with operations based within the UK’s (Figure 10).

Figure 11 (autoindusry.co.uk)

Although the totals show an overall decline this is due mainly to the insolvency of MG Rover, in fact if the data for that one company was not included, the total production would be up. All of the other major manufacturers in the industry have increased production greatly since 1996, and in fact as the following chart shows the companies that have declined represent a relatively small proportion of the industry. The chart also shows Nissan, Toyota, BMW, Honda and Land Rover to be the biggest UK based companies.

Figure 12 (autoindusry.co.uk)

The statistical data presented shows that the motor industry is still active and it could be argued to be more economically beneficial to this nation than when it was a solely domestic market. The chief executive of Rolls-Royce Ian Robertson was quoted as saying:

“The motor industry in this country is probably stronger than it has been for decades”

(bbc.news.co.uk)

Some critics may state that the country is not seeing any of this foreign investment. However, it is obvious that the differences with employment at the numerous plants around the country and indirectly through suppliers to the automotive industry, and through direct contribution from the firms operating within our nation. Oxford Economic Forecasting was commissioned to write a report for BMW on the state of the UK industry. The Findings (OEF) of which were as follows:

  • The activities of the BMW Group in the UK contributed £1 billion directly to GDP in 2004.
  • The BMW Group in the UK employs directly nearly 20,000 people and supports nearly 55,000 jobs in the UK indirectly.
  • The Group created £1 billion worth of business for UK automotive suppliers.
  • The group has spent around £900 million upgrading facilities, showing it has no intent of leaving the UK
  • The Group exported almost £1.7 billion worth of automotive related products in 2004, accounting for 0.9% of the UK’s total exports.

In fact Adrian Cooper Managing Director of OEF is quoted as saying:

“Taking the combined impact of BMW's activities, both directly, through its suppliers and the wider economic activity that this spending supports, we estimate that in total, BMW Group contributed over £2.5 billion to UK GDP in 2004. And BMW Group supports a total of over 55,000 jobs in the UK”

(indiacar.net)

This impact that BMW is making as only the UK’s 3rd biggest manufacturer shows the industry still has real benefits to the UK economy, and if the following statement made by Jim O’Donnell the managing director of BMW UK is anything to go by then the potential for the industry’s future can only be described as optimistic:

"Our MINI production triangle in the UK will strengthen the links between our plants at Oxford, Hams Hall and Swindon. Over time we see this leading to more business for UK suppliers and further increasing BMW Group’s contribution to UK plc."

(indiacar.net)

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The data shows that, in conjunction with the five forces analysis, that the UK is a very attractive place for automotive companies to settle and those companies have and are increasingly establishing operations here. The following section investigates the factors that have caused the increase of foreign investment.

Why has the industry had continued investment in the past?

Firstly, on the topic of generalised foreign investment into the UK. Ernst & Young, a global leader in assurance, tax, transaction and advisory services (ey.com), released figures in 2001 showing that the UK is the favourite place for foreign investment within Europe, Stephen Byers the Trade and Industry Secretary hailing these results as “ringing endorsement” for the UK (Invest UK, 2001). The UK at this time held 26% of the investment market share with France holding a not so close second of 15% (Invest UK, 2001). Stephen Buyers attributed this investment rate as a result of the high economic stability within the country, a growing recognition as a centre of excellence for engineering and research development and strong economic policies. One reason why new technology sites are appearing all the time such as the new Chinese technology hub recently announced in Kent in collaboration between Commercial Group Properties (CGP) and Beijing Association of SMEs, a Chinese trade body for small and medium-sized companies (Kleinman, 2007).

In regards to the automotive industry the above is true. However, there are some distinct factors which especially influence the automotive industry. The fact remains that the automotive industry is a £47 billion industry employs over 800,000 people and takes around ten percent of the UK’s total manufacturing (Jessop, 2006), even though output has dropped slightly since 2003 it is still rivalling the output in the much acclaimed 1970’s (Jessop, 2006). The combination of high levels of engineering excellence, advanced plants (Nissan etc.), a comparatively stable economy coupled with the presence of 17 of Europe’s 20 top component manufacturers, a large customer base and easy access to Europe has meant the UK has been a prime location for all types of industry and more notably the automotive industry (Invest UK, 2001).

These factors coupled with the relatively attractive industry (for those with the capital requirements, and already in the industry) at least partially ensures that the motor industry has a future in the UK. The managers of any national automotive industry cannot be complacent even if in the past that country has been a good location to build cars, something that contributed to the British domestic decline of course. The industry is becoming more cut throat by the day and so industries must stay competitive to survive (Jessop, 2006). The problem now is that the UK’s domestic industry attractiveness could be declining. The subsequent section addresses this.

Is the UK’s Attractiveness Declining?

The basic problem is that now foreign countries are developing many of the same core competences as the UK and it is increasingly becoming obvious that the UK can no longer compete on a cost base. Figure 12 shows how large the gap is between the labour rates in the UK and those in emerging markets (Parker and McGinity, 2006).

Figure 13

It’s not just this cost base that is going to threaten the future of British industry either. Previous research has highlighted that one of the key reasons for companies remaining in the UK is due to the engineering excellence to be found in the country. However, the educational system and government are not promoting careers in engineering, especially in the automotive sector (Parker and McGinity, 2006). In fact between 1995 and 2001 there was a 6.9 per cent drop in newly qualified engineers (jobsite.co.uk). This is even more of an issue as India and China are producing an ever increasing level of engineers for their rapidly expanding technology and industrial infrastructure (Parker and McGinity, 2006).

Before any future strategies are formulated, it is important to understand the challenges affecting the industry, in a macro-environmental context as a whole. Porter’s Five Forces Model has been conducted to measure industry attractiveness, and so to measure potential issues and threats within an industry the PESTLE Analysis Model will be used. Kotler (1998) claims this model to be a useful strategic preparation tool that can be used to understand the market, business positioning and potential of future operations. This Framework categorises influences on an industry or market into the following headings; Political, Economic, Social, Technological, Legal and Environmental. The interpretation of this framework can be used to make plans for potential threats and/or strategies for future opportunities (Byars, 1991; Cooper, 2000).

Porter’s Five Forces analysis shows that the industry in the UK has the potential to be even more attractive, but that also the UK is in grave danger of losing out to foreign counterparts if too complacent.

To further understand these macro-environmental issues the following PESTEL Analysis has been conducted.

PESTLE Industry Analysis

Political
  • Political unrest and tension over oil supply and prices
  • Congestion charges
  • Environmental Taxes
Economic
  • Industry depression – less disposable income, demand for luxury items declines (Scandinavia and UK less affected)
  • Weakening of the Dollar, Strength of the Euro
  • Rising Interest Rates, Currency Fluctuations
  • Rising Price of Oil and thus Petrol
  • Excess Capacity of plants
  • Transport and logistical costs of components and products
  • Lower foreign wages
  • Lower foreign production costs
Social
  • Fashion, brand image and taste
  • Demographics, driving population – ageing
  • Income distribution
  • More women driving
  • ‘Car Culture’
  • Ethical Images (Hybrid cars etc…)
Technological
  • Quality and quality control
  • E-commerce and the internet
  • New production methods (JIT)
  • More advanced plants (Nissan, Sunderland)
Legal
  • EU4 Legislation, reduction of particle emissions
  • EC cars block exemption
  • Legal Driving age under review
  • Safety standards
Environmental
  • Being more of an issue
  • Green movement and global warming
  • EU end of life vehicle directive
  • Increased tax and charges on polluting vehicles

The PESTLE analysis shows that there are significant challenges affecting the future of the automotive industry. New legislation such as the EU4 directive, which stipulates that all new vehicles must be sold to a fully informed consumer who knows for example the vehicle’s CO2 emissions before purchase (DIRECTIVE 1999/94/EC) and more stringent congestion charging in London and other cities (to follow) not to mention new EU end of life vehicle directives, which place the responsibility of car disposal with the manufacturer not the consumer, means that car manufacturers must invest heavily in order to survive. So increasing environmental and legal pressures are becoming an issue for the automotive industry, but it is important to understand that also economic factors are becoming more and more apparent and strategies need to be put into place to ensure the automotive industry in the UK has a future.

Future Strategy, Research and Recommendations

After a thorough analysis of the industry I am now in a position to research and review the future possibilities for the UK Automotive Industry. The final section recommends future strategies to ensure the survival of the industry, and hopefully it’s increasing economic value to the UK economy.

The key issues for the industry found in the analysis are as follows.

  • Increased competition from emerging markets both in terms of production and labor costs and increasingly in academic circles and engineering excellence.
  • Increased taxes and legislation on certain fuels and emissions, plus the rising price of oil.
  • Increased transportation costs and country infrastructure problems.
  • Taxes and government intervention in regards to foreign companies
  • Manufacturing plants not all up to standards, especially for future production and research and development.

It has already been mentioned that the UK cannot realistically combat lower wage costs in foreign markets, as the difference is just too much to be feasibly economical. Therefore it is important to provide other added values to manufacturers. One of the key threats is the reduction in engineering excellence within the UK, something which has previously sustained the industry within recent years. The following Strategies are intended to contest this.

The government needs to start promoting engineering and more importantly engineering in the automotive industry in this regard (McGinity and Parker, 2006). One approach would be to promote this through the increasing involvement of the UK in Formula 1 research, design and development, for example. However, the Government does need to be proactive in addressing the issue and once again establishing the UK as a hub for engineering excellence, and should not be put off by the lack of a domestic industry.

In regards to Government engagement there also needs to be a proactive effort to make it even more financially beneficial for the foreign manufacturers to continue operations here. McGinity and Parker (2006) mention that corporate taxes of 30% are some of the lowest in Europe, but that they should be lowered and simplified to encourage even more foreign investment. Things such as the proposed increased congestion charge need to also be reviewed as this could have a detrimental effect upon car sales and so indirectly foreign investment. Countries like India and China are providing financial incentives for many firms and the UK government needs to realise this before industry moves abroad (McGinity and Parker, 2006).

Research and Development is now a key issue especially with more legislation regarding emissions and the increasing prices of oil (McGinity and Parker, 2006). This is an area where the UK has a real chance to become the world base on innovation. The government needs to take a proactive stance on this, increasing foreign research and development activities within the UK to compliment the already strong base of Formula 1 innovation. More investment into alternative fuels is needed and the government needs to encourage manufacturers inside the UK that the UK is the place to launch these new initiatives. Figure 14 from research by Parker and McGinity, shows the likely route of development and the areas in which the UK industry must investigate and invest in to keep competitive in the future. The key is to gain first mover advantage on new legislation to support and promote these new technologies.

Figure 14 (Parker and McGinity)

A survey in 2005 showed that over 75 percent of executives within the Automotive industry mentioned that the infrastructure of the UK is making it harder and harder for companies to remain competitive (Global Insight, 2005). This again is a government issue. A strategy needs to be put in place to enable even easier access to Europe for manufacturers within the UK not to mention logistical issues between suppliers and the manufacturers within our infrastructure (McGinity and Parker, 2006).

If the industry was still domestic then these issues would not be the responsibility of the government so much as the manufacturers would be pushing for exports and higher sales themselves. However, the fact remains that without a domestic industry the government must make the UK as attractive as possible through research and innovation plus a base of engineering excellence. Current manufacturers need to be retained and encouraged to be innovative within the UK and others who do not hold operations here need to be enticed into doing so.

Aim’s realised?

There were three main aims, which were as follows:

  • To ascertain whether the British Car Industry has declined, or whether this is a perception and not relevant to the modern car industry in The UK.
  • To understand why The UK has been the investment target of many motor manufacturers in recent years.
  • To identify future strategies for the industry in The UK to facilitate its survival and growth.

Aim 1

The History Section of this Paper demonstrated the ‘domestic’ decline of the British Motor Industry. However, this author believes that the British Motor Industry is not defined by ‘British’ Automotive Producers, rather cars that are manufactured in the UK. In other words ‘while the cars on our roads may not be produced by British owned manufacturers many will be British built (Jessop, 2006). The first aim has been realised, the industry has domestically declined, but the British Motor Industry is very much still alive and should not perceived to have declined. Strong economic and statistical data supports this view with companies such as Nissan, Toyota and BMW continuing to invest in this country’s Industry. The country does still have a form of domestic industry, although in more of a research and development role, something which the government needs to encourage and expand for the industry’s future.

Aim 2

The UK has been seen as an engineering and academic ‘tour de force’ for many years, and this coupled with a stable economy close proximity to Europe and a keen domestic consumer base, has ensured manufacturers have located and retained their operations within the UK. This research has highlighted that foreign industries are rapidly gaining on the UK and developing many of the core competences which enable the UK to remain competitive. Formula 1 is firmly establishing a base here through research and development, but complacency by the government could cause manufacturers to move abroad, even with the high levels of capital investment.

Aim 3

Porter’s and PESTLE analyses have been carried out and future strategies have been suggested. It has become apparent through this research that the Government will play a key role in the future success of the automotive industry in the UK. The Government must make it as economically viable for foreign manufacturers to remain here by increasing the UK’s academic and engineering excellence, reducing taxes and increasing incentives, increasing infrastructure attractiveness and investing heavily in research and innovation into alternative fuels, thus rendering the UK as the world’s technological and automotive engineering hub. Doing so will not only benefit the automotive manufacturers that are based in the UK and accordingly retain their custom, but will also help to continue to boost the British economy especially in the manufacturing industries, many of which have already declined due to increased foreign competitive advantage (textiles for example).

Final Conclusions

I have set out in this Paper to review the historic events and past and current statistical trends and sought to demonstrate that the British Automotive Industry is still extant, but structured in a different way with emphasis on British ‘Built’ rather than British ‘owned’ and built.

The current industry analysis and subsequent potential future recommendations have shown that there is a very healthy future for an industry that we can still be proud of, even if not in the same patriotic sense. It has also been highlighted that the UK Government now and in the future, holds responsibility in the industry’s future development and profitability.

In summary, it should be recognised that there still exists a ‘British’ Automotive Industry that makes a major contribution to GDP and the success of the UK, and the industry can be even more successful in the future with the appropriate investment, strategy and support.

Finally, It is important to remember that even though the manufacturers’ badges on the bonnets of many cars may no longer be British owned, they were still put there by British hands in UK based manufacturing operations.

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