Does Britain still need a car industry?

Posted on 11 May 2009 by The Manufacturer

Dr Matthias Holweg from BERR's New Automotive Innovation and Growth Team discusses the fragile UK auto sector

The findings presented on Thursday by the New Automotive Innovation and Growth Team (NAIGT), a government-initiated review of the British motor industry, makes it very clear: The automotive industry in Britain is fragile, and is declining on virtually every indicator.

Over the past decade, more assembly plants have closed in Britain than elsewhere in Europe, and at this point readers may well argue that we have been here many times before. And the truth of the matter is, yes we have.

Yet the motor industry in Britain today is fundamentally different from the British motor industry of the 1970s and 1980s that received press coverage more for its poor industrial relations, poor quality and low productivity, than its achievements. Today’s industry is almost entirely owned by foreign firms, and its plants are competitive both in terms of productivity and labour cost. What brings these manufacturers to the UK is its labour flexibility that makes capacity adjustments in a dynamic market easier, which has given the UK a distinctive advantage over its European peers.

This key advantage however turns out to be a double-edged sword: in times of global overcapacity and competition from low-cost countries, the UK has seen a disproportionate decline in employment, and is currently losing employment at an alarming rate. We estimate that out of a total of 384,000 directly employed by the industry, 330,000 jobs are under the threat of being offshored.

At this point many will argue that this is yet another chapter in an eternal saga of industrial decline, and might ask whether the UK actually still needs a motor industry?

The answer is simple: it depends entirely on what one considers to be a healthy UK economy. On the one hand, British-based car manufacturers export two out of every three cars they make – contributing £25bn to the trade balance. The industry also provides many of the basic skills and processes needed by the wider manufacturing base. On the other hand, the growth in financial services has meant that “sunset industries” such as automotive were often seen as out of fashion and redundant in a post-industrial “service economy”. Recent events support the call for a balanced economy that creates value through both manufactured goods, and services.

This view was certainly shared in the past, when successive governments of both parties actively did try to sustain the automotive sector in the UK, albeit largely for pragmatic (read: employment) rather than ideological reasons. More recently though, the government’s stance has been rather ambivalent towards the sector – a point that featured most prominently in our survey of automotive industry leaders’ perceptions of the UK. However, is it really important, or even healthy, for a government to develop close ties with its automotive industry?

Well, it certainly does makes a difference: a key reason why Germany and France are not suffering in the same fashion as the UK is that their governments care, and proactively manage the relationship with their respective automotive industries. As a result, industry leaders argue that it is ‘easier’ (that is, less costly and politically less damaging) to close plants in the UK, rather than on the continent.

Establishing an Automotive Council in the UK is thus is one of the key recommendations the NAIGT is putting forward, alongside measures to establish the UK as a key market for low-carbon vehicles, and more. We have outlined what it takes, from our point of view, to retain the automotive industry as a national capability in the UK.

It would be easy to stave these recommendations off by paying lip-service and continuing the ambivalent approach the UK government has shown in the past. But one should also be clear about the consequences: at the current rate of decline, the UK automotive industry will disappear altogether in less than twenty years. And once these jobs are gone, they are gone forever.

By Dr Matthias Holweg

Judge Business School, University of Cambridge

Dr Holweg is a member of the New Automotive Innovation and Growth Team and lead author of the NAIGT research report “The competitive status of the UK automotive industry”.