Description
As the world economy is heading towards a major contraction that had its roots in the
collapse of the financial system in 2007, fuelled by cheap credit and ruthless speculation,
demand for motor vehicles had virtually halved in late 2008 and early 2009. Government
bailouts and emergency loans were soon needed across countries and regions for the car
manufacturers and suppliers to stay in business, and many asked whether the end of the
motor industry was indeed near.
Undoubtedly the present crisis will hurt vehicle manufacturers, suppliers and service
providers alike, and some of the weaker firms might well cease to exist in their current form,
or even vanish altogether as the market contraction forces the weaker players into
bankruptcy. However, one should not forget that global demand for personal transportation
is still on a growth trend, and has been growing at a remarkably constant rate since World
War II. The right question is therefore not to ask whether we will build motor vehicles, but
where. In addition, the growing pressures on reducing carbon emissions and the
dependency on fossil fuels will not abate global demand for personal mobility. Thus, the
second question that one might rightfully ask is what kind of vehicles we will be driving in
the future? These are the questions that this report will comment on.
The competitive status of the
UK automotive industry
Matthias Holweg
with
Philip Davies & Dmitry Podpolny
Foreword by Richard Parry?Jones
The Competitive Status of the
UK Automotive Industry
Dr Matthias Holweg
Judge Business School
University of Cambridge
with
Philip Davies
Department for
Business Enterprise and Regulatory Reform
Dmitry Podpolny
Judge Business School
University of Cambridge
Foreword by
Professor Richard Parry?Jones CBE
Chairman,
New Automotive Innovation and Growth Team
Published by:
PICSIE Books
Box 622
Buckingham, MK18 7YE
United Kingdom
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Copyright © PICSIE Books, 2009
ISBN 978?0?95441244?6?5
British Library Cataloguing?in?Publication Data
A catalogue record for this book is available from the British Library
Cover photograph courtesy of BMW Group UK.
About this report
This report was compiled in collaboration with Philip Davies (Automotive Analyst,
Department for Business Enterprise and Regulatory Reform), Dmitry Podpolny (then with
Judge Business School and now with McKinsey) and the Key Performance Indicator (KPI)
Subgroup of the New Automotive Innovation and Growth Team
i
(NAIGT).
The report was commissioned by the NAIGT Steering Group to provide an empirical basis of
the UK’s competitive status and the key challenges the industry faces. More specifically, the
remit of this report was to inform the work of the NAIGT with regards to (a), the
contribution of the UK automotive industry to the national economy, (b), the industry’s
competitiveness on several key indicators in relation to other countries in Western Europe,
CEE and BRIC
ii
countries, in order to, (c), identify the key strengths and weaknesses of the
UK motor industry.
Furthermore, the report summarises the work of the Key Performance Indicator (KPI)
subgroup of the NAIGT. The subgroup members are:
Robert Baker: Chief Economist, Society of Motor Manufacturers and Traders
Phil Davies: Automotive Analyst, Department for Business Enterprise and Regulatory
Reform
Fernando Galindo?Rueda: Economist, Department for Business Enterprise and
Regulatory Reform
Colin Herron: Manufacturing and Productivity Advisor, One North East
John Hollis: Head of Government and Industrial Affairs, BMW Group UK
Matthias Holweg (Chair of the KPI subgroup): Director, Centre for Process Excellence
and Innovation, Judge Business School, University of Cambridge
Tim Leverton: Group Engineering Director, JC Bamford Excavators Ltd
Rob Oliver: CEO, The Construction Equipment Association
David Smith: Chief Executive Officer, Jaguar Land Rover
Jim Sumner: Managing Director, Leyland Trucks
Earlier versions of this report have been discussed at the various NAIGT meetings, and the
comments and suggestions made by the NAIGT Steering Group members were instrumental
in setting our findings into the context of current business practice.
The NAIGT Steering Group members are:
Simon Edmonds: Head of Business Relations 1, Department for Business Enterprise
Regulation and Reform (BERR official)
Paul Everitt: Chief Executive, The Society of Motor Manufacturers & Traders
Bob Gibbon: Managing Director, National Skills Academy for Manufacturing
Jerry Hardcastle: Vice President – Vehicle Design and Development, Nissan Europe
Matthias Holweg: Director, Centre for Process Excellence and Innovation, Judge
Business School, University of Cambridge
Hermann Kaess: Managing Director, Original Equipment, Bosch
Richard Parry?Jones: RPJ Consulting Services Ltd, formerly Chief Technology Officer,
Ford Motor Company (Chair of the NAIGT)
Roger Putnam: Chair, Retail Motor Strategy Group
Dave Shemmans: Chief Executive Officer, Ricardo
David Smith: Chief Executive Officer, Jaguar and Land Rover
Nigel Stein: Chief Executive, Automotive, GKN plc
Matthew Taylor: Managing Director, J C Bamford Excavators Ltd
Oliver Zipse: Managing Director, BMW (UK) Manufacturing Ltd, MINI Plant, Oxford
We are furthermore grateful to OICA, VDA, ANFAVEA, CATARC and the SMMT for their
assistance in assembling the international dataset underlying this study. We would also like
to express our sincere gratitude to the many industry leaders who so generously gave their
time to support our survey efforts that underpin Part III of this report. Last but not least we
thank Jane Whewell and her team at the Automotive Unit at BERR for her support
throughout the work of the NAIGT.
All errors that remain are solely mine.
Dr Matthias Holweg
Centre for Process Excellence and Innovation
Judge Business School
University of Cambridge
(For feedback and comments please email [email protected]).
Foreword
The UK auto industry has transformed itself in the last decade from a sector with turbulent labour
relations and a poor reputation for quality and productivity to one that is fully competitive.
Independent external reliability surveys put UK built cars at the top of the rankings, and productivity
and labour relations are among the best in the world. Until the impact of the global financial crisis,
the industry was profitable and self?sustaining in Europe and in the UK. Technology and modern
management practices have transformed the shop floor environment, and product technology
embraces lightweight materials, cutting edge design analysis and visualisation tools and the extensive
use of integrated electronic systems to extend digital control to most functions of the car. But all is
not as rosy as this picture paints, and the UK industry has fragilities and faces significant challenges.
Where do we go next?
This is a crucial question for the UK, since the industry is such a huge proportion of our manufacturing
base, still the sixth largest in the world.
The industry has developed a highly integrated industrial system that offers unprecedented value and
accessibility to consumers worldwide through efficient logistics, massive scale, global trade, and
sophisticated systems integration skills. Technological progress has seen dramatic improvements in
vehicle safety, environmental impact, fuel economy, performance and comfort and versatility, while
offering an ever increasing choice through model variety expansion
It is a huge source of technological, industrial and commercial innovation. Many of these innovations
have been adopted by sectors outside the industry, following the example of the moving production
line, just?in?time inventory control, total preventative maintenance and lean flexible production
methods,
The climate change agenda is accelerating technological change at an unprecedented rate, and the
industry in Europe and the UK has embraced the CO
2
challenge and is investing heavily in people and
technology to provide innovative solutions while continuing to offer exciting, safe and satisfying
products that people want to buy.
I believe that the fundamental starting point for developing policy recommendations for any industry
is a fearless and rigorous research and analysis of the key data that helps describe the state of the
industry, the underlying dynamics, and the diagnostics that help shape thinking about where we
should be trying to go next, and how we are going to get there.
This report is the essential complementary document to the report published by the NAIGT on the
future of the automotive sector in the UK, and its contents profoundly shaped the recommendations.
My sincere thanks to Dr Mathias Holweg and his team at the University of Cambridge for helping give
us the insights and test the hypotheses in such a clear?sighted way.
Professor Richard Parry?Jones CBE
Chairman, New Automotive Innovation and Growth Team
Index
On the brink of a global recession... ......................................................................................... 1
PART I: THE UK AUTOMOTIVE INDUSTRY IN PERSPECTIVE ...............................................................4
1.1 Scope ......................................................................................................................... 5
1.2 Method ..................................................................................................................... 6
1.3 Three macro trends that affect the automotive industry ......................................... 7
1.4 The UK automotive industry: a sector overview ..................................................... 22
PART II: THE COMPETIVENESS OF THE UK AUTOMOTIVE INDUSTRY: AN INTERNATIONAL COMPARISON .. 27
2.1 The UK economy ..................................................................................................... 27
2.2 Contribution of the automotive industry to the national economy ........................ 28
2.3 Growth performance of the automotive industry .................................................. 31
2.4 Employment in the automotive industry ................................................................ 33
2.5 Productivity ............................................................................................................. 41
2.6 R&D expenditure and capital investment ............................................................... 43
2.7 Summary ................................................................................................................. 47
PART III: INDUSTRY LEADERS’ ASSESSMENT OF THE COMPETITIVENESS OF THE UK AUTO INDUSTRY ....... 48
3.1 Perceptions of the competitiveness of the UK automotive industry ...................... 48
3.2 Sourcing patterns .................................................................................................... 48
3.3 Industry leaders’ perception: UK strengths and weaknesses ................................. 50
3.4 Industry leader survey: summary of findings .......................................................... 60
PART IV: CONCLUSIONS ........................................................................................................ 62
4.1 The need for evidence?based policy making ........................................................... 62
4.2 Summary of key findings ......................................................................................... 64
4.3 What policy levers does Government have at hand? ............................................. 67
4.4 How can we ensure policy is effective? Key performance indicators ..................... 71
PART V: OUTLOOK: THE NEED FOR A ‘CAR 2.0’ ......................................................................... 74
5.1 Preparing for a fundamental shift in powertrains and fuels ................................... 74
5.2 The mandate for change ......................................................................................... 75
5.3 Disruptive innovation or gradual change? .............................................................. 79
5.4 What are the options? A primer on alternative fuels and powertrains .................. 80
5.5 How to support the transition towards low?carbon transportation ....................... 85
BIBLIOGRAPHY .................................................................................................................... 91
APPENDICES ....................................................................................................................... 94
Appendix A: High?level data on the UK automotive industry ............................................................ 95
Appendix B: The contribution of the UK automotive industry's GVA to the national economy ....... 99
Appendix C: A comparison of the value?added in DM34, selected countries ................................... 99
Appendix D: Number of passenger cars and commercial vehicles produced, selected countries .. 101
Appendix E: Employment in the automotive industry ..................................................................... 102
Appendix F: Employment in DM34, selected countries ................................................................... 102
Appendix G: Labour costs in DM34, selected countries .................................................................. 103
Appendix H: National?level productivity, selected countries (GVA/Employees) ............................. 104
Appendix I: Firm?level productivity (vehicles per employee per annum) ........................................ 105
Appendix J: R&D expenditures in UK motor?vehicle, engine and component manufacturing ........ 106
Appendix K: R&D expenditures in DM34, selected countries ......................................................... 106
Appendix L: Investment in DM34 as part of overall investments, selected countries .................... 107
Appendix M: Graduates' favourite employers, selected countries ................................................. 108
Appendix N: Comparison of key industry indicators, selected countries ........................................ 109
Appendix O: Average wages in DM34, selected countries .............................................................. 113
Appendix P: Questionnaire used in survey ...................................................................................... 114
Page | 1
On the brink of a global recession
As the world economy is heading towards a major contraction that had its roots in the
collapse of the financial system in 2007, fuelled by cheap credit and ruthless speculation,
demand for motor vehicles had virtually halved in late 2008 and early 2009. Government
bailouts and emergency loans were soon needed across countries and regions for the car
manufacturers and suppliers to stay in business, and many asked whether the end of the
motor industry was indeed near.
Undoubtedly the present crisis will hurt vehicle manufacturers, suppliers and service
providers alike, and some of the weaker firms might well cease to exist in their current form,
or even vanish altogether as the market contraction forces the weaker players into
bankruptcy. However, one should not forget that global demand for personal transportation
is still on a growth trend, and has been growing at a remarkably constant rate since World
War II. The right question is therefore not to ask whether we will build motor vehicles, but
where. In addition, the growing pressures on reducing carbon emissions and the
dependency on fossil fuels will not abate global demand for personal mobility. Thus, the
second question that one might rightfully ask is what kind of vehicles we will be driving in
the future? These are the questions that this report will comment on.
It is not a question of whether we will build cars in the future, but where these
vehicles will be built, and what kind of vehicles these will be.
Having a domestic automotive industry is attractive to governments primarily because of
the large direct employment and job multiplier in the supply chain, as well as the industry’s
economic contribution to exports and technology development in general. Thus, developing
and developed nations alike will continue to compete for their share of this global industry.
In this report we will focus on the competitive status of the UK’s automotive industry, as
well as on the competitiveness of the UK as a location for investment and automotive
manufacture in general. We deliberately restrict our analysis to exclude the motor retail and
service sectors, as these sectors are not under threat of offshoring. Their prosperity largely
depends on the household disposable income, interest (and thus mortgage) rates, and the
cost of energy in the UK.
It is virtually impossible to make predictions at the point of start of a recession, a point in
time where the slope of change is the greatest. Doing so bears the great danger of feeding
Page | 2
off a growing lack of consumer confidence and thus amplifying the trend, thereby overall
distorting the long?term trajectories. Figure 1 illustrates the most recent decline of
manufacturing and automotive production in 2007 and 2008.
Figure 1
In fact, from past recessions it is widely known that the automotive industry tends to react
both faster to recession than other sectors, and it tends to experience deeper troughs. The
reason is simply that durable goods purchases can be postponed, and thus – as consumer
confidence wanes – replacement purchases are simply delayed until confidence is restored.
We hence largely focus on extrapolating the existing trends prior to the recession. We argue
that the UK market is as badly affected as any other market, and assume that post?recession
the UK‘s competitive position will be the same in relation to other countries. The recession
might accelerate certain trends, but overall – given that it affects all countries globally –
there will not be a major shift in the UK’s position in the global context.
Forecasting major industry trends at times of a recession is likely to amplify
the trends of ‘doom and gloom’. One hence needs to consider the pre?existing
long?term trends to assess future scenarios.
50
60
70
80
90
100
110
120
2007 Apr Jul Oct 2008 Apr Jul Oct
UK automotive industry output, 2007 and 2008
(Index, moving 3?month average)
Vehicles
Parts
Manufacturing
Page | 3
We nonetheless fully acknowledge that the auto industry in the UK, as in virtually any other
country, has immediate needs for short?term support in terms of credit lines and guarantees
to sustain operations, as well as support for credit?based demand for its products. The
debate how to support an industry sector at times of economic hardship however extends
beyond the scope of this report.
Page | 4
PART I: THE UK AUTOMOTIVE INDUSTRY IN PERSPECTIVE
It is common to start reports like this with statements about ‘increasingly competitive
markets’ and the ‘impacts of globalisation’. While we cannot ignore the wider global trends
that shape all industry sectors in the UK, all too often these terms are being used to suggest
that the industrial decline in the Western World is merely an inevitable consequence of a
trend at global level. This sentiment is generally amplified at times of economic contraction,
when proponents of protectionism find an increasing audience.
Yet the above statements are only partially true – while competition in a mature industry,
such as automotive, is bound to be dominated by unit cost (putting developed countries at a
disadvantage), it is also driven by incremental innovations (putting emerging countries at a
disadvantage). Furthermore, the global shift in manufacturing footprint (often called ‘off?
shoring’ or ‘East?shoring’) has not had an equal impact on all countries alike. We hence
argue that policy decisions taken in support of the automotive and manufacturing industries
in the Western World can make that vital difference, and it is in this spirit that we have
compiled this study. Our objective is not to promote the industry as a whole, nor to highlight
its many achievements, but on the contrary to provide a ‘no?nonsense’ analysis of where
the UK industry stands, where it is headed and what its likely future challenges will be.
The decline of the manufacturing sectors in the Western world is not an
inevitable consequence of globalisation.
In this study we follow on from the last AIGT in 2001/2002 that argued that the UK might no
longer be a viable base for volume manufacture for motor vehicles if the volume sector was
lost, as the economies of scale in the supply chain might no longer be given. This scenario
has now largely come true: since 2002, the UK motor industry has seen a series of further
plant closures, as well as the failure of the last British?owned volume car manufacturer, MG
Rover
iii
. This decline is not a transient economic misfortune, but forms part of a long?term
trend that has been widely observed and discussed
iv
: ever since the UK lost its prevalent
position as the world’s largest vehicle exporting nation in the early 1950’s, the importance
of its motor industry has been declining both in national, as well as, global terms. The loss of
its national champion, MG Rover, in 2005, aggravates this problem.
This decline is not entirely unexpected in a mature industry, where the dominant design has
been set early in the twentieth century, and where countries since have been competing
Page | 5
largely on a basis of unit cost and incremental innovation. The industry has further changed
considerably over the past decade due to the reduction in trade barriers and growth in
developing markets such as China and India, which have led to drastic changes in
manufacturing footprint. Existing overcapacity is exacerbating the problem and will continue
to do so, as developed countries strive to sustain their national industries, while other
countries are encouraging the growth of their national industries, often with generous
subsidies.
Looming over the entire industry is a general uncertainty over the future supply (and thus
cost) of fuel, the ever more pressing need to reduce the environmental impact of the
transportation sector in terms of emissions. While the need to replace fossil fuel?based
internal combustions engines (ICEs) as the main powertrain architecture is as widely
accepted, so far we lack any clear alternative as to what the dominant design of such next
generation powertrains will be. Conjointly, these factors add greatly to the uncertainty felt
in the industry at this point, with a conclusive answer to what the post?petrol? and diesel?
fuelled internal combustion engine powertrains still amiss.
It is against this picture that we are assessing the competitiveness of the UK automotive
industry, drawing upon both past quantitative data as well as present qualitative
assessments, in order to identify the strengths and weaknesses of the UK motor industry, in
relation to its competition.
This paper is part of a review of the UK’s automotive industry by the New Automotive
Innovation and Growth Team (NAIGT), and this paper was specifically commissioned to:
i. assess the economic contribution of the UK’s automotive industry,
ii. determine its competitiveness against its peers groups in Western Europe, CEE and
BRIC countries, and
iii. identify the key strengths and weaknesses of the automotive industry in the UK.
1.1 Scope
In this report we largely focus on the passenger car industry, which we define as a proxy for
the industry as a whole that includes the manufacture of commercial vehicles, truck, busses,
and specialist sectors, such as construction equipment, design engineering and motor
sports. The main reason for this simplifying assumption is to achieve consistency of data in
order to provide for valid and rigorous international comparisons.
Page | 6
We hence use ‘DM34’ as our reference, which in statistical terms includes all economic
activities related to the vehicle manufacture, the manufacture of components, engine parts
and accessories
v
. We acknowledge that although the economic activities captured in DM34
will cover most of the direct automotive assembly operations and component suppliers, it is
also likely to underestimate the employment in the 2
nd
and 3
rd
tiers of the supply chain –
economic activities which are often not classified as ‘automotive’, but according to their
products (e.g. plastics parts, cables), processes (e.g. forging, pressings) or services (e.g.
finance, transport, security). However, we are confident that for the purpose of
international comparisons use of DM34 is consistent, and that we capture the large majority
of economic activity related to the motor industry. We will return to the issue of
employment in more detail in section 2.4.
While we acknowledge that the UK is home to some of the most productive car and truck
plants in Europe, we are interested in national trends only and thus will not comment on
individual firms and their performance in this report. We focus on manufacturing of
components and assembly of motor vehicles only, as the threat of offshoring does not apply
to the retail sector
vi
. In fact, the UK motor retail and service sector would look exactly the
same if not a single car was made in the UK any more. By definition this sector is not in
danger of being offshored, and its prospects are largely determined by macroeconomic
factors, such as household disposable income, oil price, interest and mortgage costs. Retail
and service are however very important, accounting for 25?30% of the automotive value.
1.2 Method
In terms of method, we rely on two main sources of data. We use past data to extrapolate
and examine current trends in the macroeconomic data at the national level. Secondly, we
use survey data from a selected range of senior decision makers in the UK auto industry to
assess their perceptions, as a means of identifying likely patterns in their firms’ future
behaviour. The data from both sources was triangulated and then put forward at the NAIGT
Steering Group meetings for discussion; in this sense our analysis is conceptually a hybrid
between a macro?economic analysis, a survey and a Delphi study.
More specifically, in the first part, a quantitative analysis of the UK automotive industry over
time and in relation to other countries was conducted. The industry’s performance was
evaluated and factors assessing growth, productivity, cost and innovation were identified
and compared across countries. In the second part, a qualitative analysis of the industry was
conducted, using in?depth interviews and/or on?line surveys with 17 industry leaders. In this
Page | 7
part of the study industry leaders were asked to estimate trends in sourcing from the UK,
rank various factors defining competitiveness in four different geographies, with the UK as
the main point of reference,
i. the immediate peer group in Western Europe, namely France, Germany, Italy and
Spain, henceforth ‘FGIS’; as these are most similar to the UK in several ways – their
level and history of industrialisation is fairly similar, all have relatively large and
functioning automotive industries, and they are the largest countries and
economies in Western Europe.
ii. Central and Eastern European countries, or ‘CEE’, such as the Czech Republic,
Slovakia, Hungary, Poland, and Romania that have seen a great level of influx of
offshored manufacturing operations, which often export back into Western
European markets. Here, it was decided to focus on the Czech Republic as a
representative.
iii. Brazil, Russia, India, and China or ‘BRIC’, as the main growing markets, which have
seen the largest growth levels on a world scale. It was decided to compare these
countries to the UK because of the growing importance of these regions in the
automotive industry (between 1995 and 2008, 48 new assembly plants were
opened in this cluster). The decision to adhere to a common convention of grouping
these countries together despite the considerable difference between them was
made because of the relatively large size of the labour market in these countries
(especially in China and India), the size of their territory and the relatively similar
level of industrial development (though Russia is somewhat an outlier in this
respect).
The findings from the above analyses were discussed at length at the NAIGT Steering Group
meetings, which marked a vital ‘sense check’ of our research findings, enabling us to ground
these in current practice and perceptions in the industry.
1.3 Three macro trends that affect the automotive industry
At the start of its second century, the automotive industry is undergoing a period of drastic
change: over the past decade we have seen both record profits and bankruptcy of global
suppliers and manufacturers, some of the largest industry mergers and de?mergers, and –
largely thanks to emerging new markets – an ever increasing global demand for passenger
cars that saw global production rise by a CAGR of 2.44% since 1970. Figures 2 and 3 show
Page | 8
global production and vehicles in use from 1900?2007, respectively, while Table 1 gives a
more detailed overview of the growth rates in both global production and vehicles in use.
Figure 2
Figure 3
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Total Passenger Cars Commerical Vehicles
Global Productionof Passenger Cars and Commercial Vehicles, 1900?2007
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
700,000,000
800,000,000
900,000,000
1,000,000,000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Total Passenger Cars Commercial Vehicles
Worldwide Vehicles in Operations, Passenger Cars and Commercial Vehicles, 1900?2007
(data missing pre 1919, and from 1940?1944)
Page | 9
Table 1: Compound annual growth rates for global passenger car and commercial vehicle production,
and global vehicles in operation.
Vehicle Production Vehicles in Operation
Time CAGR Time CAGR
Total 1900?2007 8.71%
Total 1945?2007 6.95% Total 1945?2007 5.25%
Total 1970?2007 2.44%
Passenger Cars only 1964?2007 2.50% Passenger Cars only 1977?2007 2.77%
CVs only 1964?2007 3.61% CVs only 1977?2007 4.25%
Despite this apparent stable growth in demand, the industry is undergoing structural
changes that have seen many of the established players close to bankruptcy. In Europe, the
exit of MG Rover as the last British?owned volume manufacturer and the recent years of
crisis at Fiat mark a case in point, so do the large financial losses incurred by the Big Three
(GM, Ford, Chrysler) while trying to restructure and survive in a contracting market at the
same time. Further exits of established players remain highly likely, a market space that will
happily be filled with a third wave of low?cost imports, from China, India and others
vii
.
The automotive industry is not a ‘sunset industry’: global demand will rise
again post?recession, as more and more societies rely on motor vehicles for
both economic activity and personal mobility.
There are three trends that drive these competitive dynamics: regionalisation,
fragmentation and saturation.
Regionalisation
With a reduction in trade barriers and more porous borders, we have observed several
distinct shifts in the manufacturing footprint that shaped the industry’s structure as it is
today. As demand in the established regions has been stagnating, we have seen several
major waves of investment in emerging markets. In the early 1970s, the vehicle production
of the US, Western Europe and Japan combined accounted for 91% of the world’s 22.5m
passenger car production. Back then, the US and Western Europe in particular were large
Page | 10
net exporters, while Japan was still on a steep curve of increasing both domestic production
and export volumes. By 2004, the picture had changed considerably. Of the 42.8m units that
were built, only 70% came from the three established regions, USA, Europe and Japan. The
number of assembly plants had grown from 197 to 460, of which only 44% were located in
North America, Western Europe and Japan. In 2007, this trend had continued, with only 54%
of the global car production originating in the USA, Japan and Western Europe.
What had happened was the industry had distributed its manufacturing base: whereas
previously largely ‘knock?down’ operations (CKD or SKD
viii
) were used in emerging markets,
the growth of their respective domestic demand now justified full?scale assembly plants.
The increase in demand in Latin America in the 1990s for example sparked a wave of
investment in the local motor industry in Latin America. From 1980 to 2000, the combined
vehicle production in Argentina, Brazil and Mexico nearly doubled to just under 4 million
units. Yet the experiences in Latin America also serve as a warning signal, as the demand in
Brazil and Argentina collapsed sharply after the respective currency devaluations. Exchange
rate uncertainty remains an issue, today more than ever, with respect to the most recent
wave of expansion in China, and the artificially pegged Yuan, and a weakening US dollar.
Recent growth in the automotive sector has largely been confined to emerging
markets. The beneficiaries of this growth have been the multi?national car
manufacturers that have diversified their footprint to serve this demand.
The opening of the Chinese domestic market, in conjunction with a strict growth policy, has
seen the dramatic rise of the Chinese automotive industry. With virtually no passenger car
production before 1980, China produced 5.39m cars in 2007. Of these, 90% are made by the
joint venture companies of the large foreign manufacturers, and virtually all of these are (so
far) sold domestically. China thus does not yet pose an import threat of the kind that Japan
and South Korea did, yet may well do so in the near future. See section on ‘waves of
imports’ below.
What one can observe here is not what is commonly referred to as globalisation, but is
much better described as a regionalisation of the industry. The net export balance that
fostered the growth of the automotive industry in the industrialised world over much of the
last century is gradually being replaced with an infrastructure that builds vehicles locally,
close to the customer (see Table 2). The immediate result for the established regions has
been a necessary yet painful capacity adjustment, and the recent plant closure in the UK are
Page | 11
likely to be followed by others across Western Europe
ix
. In the USA, the overcapacity
situation is even more pronounced, and further Big Three plant closures in addition to those
already announced are to be expected.
Table 2: Share of world car production by region, selected years 1971?2007. Source: Ward's Automotive
This trend can be illustrated even more drastically if one considers the world's production
and sales by region, in 1980, 1990, and 2000 compared with 2006. As can be seen in Figure
4, as late as 2000 there were essentially only three car producing regions in the world:
Western Europe, Japan, and the US/Canada. By 2006 this picture had changed drastically,
with the largest growth in China, India, CEE and Latin America.
1971 1980 1990 1995 1997 2000 2002 2004 2007
World Car
Production
[in million
units]
26.45 28.61 36.27 36.07 38.45 41.23 41.22 43.20 52.19
Industrialised
Countries [USA,
Japan, W Europe]
% of World
Passenger
Car Production
90.9% 89.9% 87.8% 82.0% 73.4% 74.9% 72.3% 67.8% 54.1%
Newly
Industrialised
Countries
% of World
Pass. Car Production
5.1% 7.7% 8.7% 15.1% 17.3% 17.2% 21.4% 31.4% 35.7%
Page | 12
Figure 4
1980: Total production of passenger cars: 28.609m (#241)
#83 (60)
Domestic sales (2m units)
Car production (2m units)
#10 (8)
#10 (10)
#6 (5)
#32 (34)
#21 (13)
#6 (5)
#49 (40)
#5 (4)
#6 (4)
#11 (6)
#30 (26)*
* Rest of Asia
#9 (8)
1990: Total production of passenger cars: 36.273m (#317)
#95 (68)
Domestic sales (2m units)
Car production (2m units)
#15 (13)
#10 (10)
#9 (8)
#36 (34)
#28 (20)
#11 (10)
#65 (54)
#9 (7)
#6 (4)
#16 (10)
#47 (39)*
* Rest of Asia
#9 (8)
Page | 13
Figure 4 (ctd)
2000: Total Production of Passenger Cars: 41.229m (#419)
#122 (86)
Domestic Sales (2m units)
Car Production (2m units)
#30 (25)
#23 (17)
#14 (12)
#42 (34)
#49 (31)
#14 (11)
#73 (59)
#16 (11)
#7 (4)
#26 (13)
#75 (62)*
* Rest of Asia
#10 (9)
2006: Total Production of Passenger Cars: 46.464m (#456)
#143 (97)
Domestic Sales (2m units)
Car Production (2m units)
#69 (47)
#28 (21)
#16 (12)
#43 (35)
#49 (32)
#17 (12)
#74 (54)
#18 (11)
#8 (4)
#34 (17)
#84 (69)*
* Rest of Asia
#12 (7)
Page | 14
Waves of imports
Underlying this trend are three distinct waves of imports from an emerging economy, into
the Western markets of Europe and North America. The first wave of imports was from
Japan, from 1975 onwards. Fuelled by the oil crises of 1973 and 1979, the comparatively
smaller (and thus more fuel?efficient) Japanese cars were capturing a large fraction of the
US market, while the market share in Europe has remained relatively low to this day (the
Japanese market share in the UK and Germany in 2007 was 17% and 12%, respectively,
compared with 45% in the USA). Although hard to quantify, we argue that this is due to the
fact that continental European customers express much stronger preference for their
national brands. From the mid?1980s, the export surplus of Japan subsided, not because the
Japanese lost ground in their export markets, but because they established transplant
operations overseas, in particular in the US market (see the footnote for a table of North
American transplant operations)
x
.
The second wave emanated from South Korea, with its indigenous vehicle manufacturers,
Daewoo (under GM control since 2001), Hyundai and Kia (Kia was bought by Hyundai during
the Asian financial crisis in 1997), and later also Samsung (which was established in 1994,
and was bought by Renault in 2000). The South Korean approach almost perfectly replicated
the Japanese model, of entering the lower market segments with very competitively priced
models – a segment that was opening as the Japanese were moving upmarket, to compete
full?on with the US and European vehicle manufacturers.
The most recent emerging automotive nation is China, which has seen a phenomenal
growth in its domestic car industry. So far this growth has been to satisfy domestic demand,
but there is little doubt that the recent SAIC?NAC merger
xi
is developing the capability to
serve Western markets with a competitive product. Previous attempts such as exporting the
Landwind SUV, which showed a disastrous crash test performance, have demonstrated the
need to develop competitive products before attempting to develop export markets. China
certainly is developing the potential of leading the next wave of cheap imports into the
Western world, without any question. The IPR from the Rover acquisition, as well as the
collaboration with Ricardo in the UK, have certainly accelerated the development of the
Roewe 750 (based on the Rover 75), and the new Roewe 550.
In contrast with Japan and South Korea though, one might ask to what extent the Chinese
industry needs the scale improvement through exports, as their domestic car market is
already the largest market in the world (as of January 2009), and still the fastest growing in
overall volume, while the Western markets are relatively mature with little further prospect
for significant growth.
Page | 15
One might argue that India has an equal potential of leading an import wave. While this is
certainly true in terms of labour cost and increase in assembly capacity, in our view India is
about 5?10 years behind the development level of China, and thus unlikely to achieve a
similar level of prominence compared to China in the short or medium term. That said, the
purchase of Jaguar Land Rover by Tata may accelerate India’s progress, in the same way as
the Rover assets and IPR have helped China to push the Roewe brand.
There have been several distinct waves of imports from Japan, South Korea
and Eastern Europe over time, and there is little reason to doubt that the next
wave will come from China in the near future.
Figure 5 shows the ratio of production to domestic sales for Japan, South Korea, China,
India, Brazil and the Czech Republic; several distinct ‘waves of imports’ can be seen. As one
would expect, Japan developed into a very large net exporter in the 1970s (and has
remained one ever since), while South Korea started becoming a large net exporter only in
1990. The Czech Republic, amongst other countries, led a third wave of imports from CEE in
the mid?1990s, while (so far) neither China, India nor Brazil have become primarily exporting
car producers.
Figure 5
0.1
1
10
1970 1980 1990 2000
Japan China South Korea
Brazil India Czech Rep.
Ratio of productionto sales, selected countries, 1970?2007
(logarithmic scale)
Page | 16
Labour cost
Lower labour cost are generally stated as the main reason for the increase in decentralising
global production into low?labour cost countries, and comparing the nominal hourly
compensation there are indeed stark differences (see Table 3).
Table 3: Labour cost per hour in automotive manufacturing, US$. Source: ILO
Germany $29.91 Korea $10.28
US $21.97 Czech Republic $ 4.71
UK $20.37 Brazil $ 2.67
Japan $20.09 Mexico $ 2.48
Spain $14.96 China $ 1.30
But how significant are labour costs? First of all, in the overall cost structure, the production
of a vehicle roughly from the customer’s point of view approximately breaks down into: 31%
of the list price are accounted for by distribution and marketing cost, as well as dealer and
manufacturer margins. The 69% ex?factory cost split into 48% for procured parts and
materials, 9% overhead, and only 13% are related to the vehicle production operation. Here,
labour represents the largest component, alongside capital investment depreciation for the
production assets.
There still are significant labour cost differences across countries, however,
direct labour only accounts for about 4% of total value in a vehicle. Also, the
higher the vehicle segment, the less important labour cost become.
When one compares the above to the hourly rates a worker earns then it is obvious that
labour cost is indeed a significant competitive factor in the lower segments of the market,
yet does play an decreasing role in the higher market segment, where firms do not compete
on cost alone, but on technological innovation, design, and brand image.
Page | 17
Figure 6: Typical automotive cost structure, C?segment vehicle. Source: Holweg and Pil (2004)
As Figure 6 shows, vehicle assembly accounts for only a small fraction of the total value of a
vehicle, while two thirds of the vehicle value (66%?75% of manufacturing cost, or 50% of the
retail price) is being bought in from component suppliers.
The majority of value in the motor industry is generated in the component
supply chain, while manufacturing plays only a minor part.
Fragmentation of markets
The second key trend is one that is relatively easy to observe, namely the implosion of
traditional vehicle segments, in favour of ‘cross?over’ and niche segment vehicles. The
traditional segments of small cars (B?segment, e.g. Polo or Fiesta), compact cars (C?segment,
e.g. Golf and Focus), family cars (D?segment, e.g. Passat and Mondeo), and executive class
(E?segment, such as E?class and 5?series) have been joined by SUVs, MPVs, UAVs, and the
like. In quantitative terms, this trend can be easily seen: across Europe, in 1990 a total of
187 models were offered, which increased to a total of 315 models in 2003. This increase is
MSRP
€17,000
Raw materials: 6.9%
Dealer margin 8?12%
Inbound Logistics 1%
Source: Holweg and Pil (2004) “The Second Century”
Internally produced parts 13.2%
Procured parts: 27.6%
Manufacturing 12.5%
Product development and
overhead 8.5%
OEM margin 7%
Outbound Logistics 1.2%
Direct marketing, dealer
support 10%
Page | 18
both due to the new segments, such as MPVs and SUVs, but also model line expansions in
existing segments. The B?segment of the Corsa and Fiesta, for example, saw an increase
from 16 to 31 models over that time period.
The increase in model range is accompanied by a general shortening of product life cycles.
While the average time a product stayed in the market was around 7 years in 1970, this
average has been reduced to 5 years – a trend consistent across the US and Western
Europe. In Japan, life cycles have traditionally been much shorter already, and some
companies like Toyota have coped by building two generations on one platform, before
changing both design and platform with the third generation.
Together, the increase in model range and the reduction in life cycles have a drastic impact
on the economies of scale that can be achieved. The volume sold per model has been
significantly reduced over time, which gives the manufacturers less and less opportunity to
recover their considerable development cost. As a reaction, manufacturers are trying to
increase the component sharing and platform usage across as many models as possible.
Table 4 illustrates the overall shifts in volume per model, and the use of platforms in Europe
between 1990 and 2002:
Table 4: Platform Usage in the European Automotive Industry. Source Pil and Holweg (2004).
1990 1995 1996 1997 1998 1999 2000 2001 2002
No. of Platforms in use (all
Europe) 60 60 57 56 53 51 45 45 48
No. of Bodytypes offered (all
Europe) 88 137 139 148 157 162 170 178 182
Av. No. of Bodytypes per
Platform 1.5 2.3 2.4 2.6 3.0 3.2 3.8 4.0 3.8
Av. Production Volume by
Platform (in '000s) 190 171 185 194 199 215 249 272 258
Av. Production Volume by
Bodytype (in '000s) 129 75 76 73 67 68 66 69 68
This development marks a major shift in the fundamental economies of the automotive
industry: whereas previously a volume of c.250,000 units annually was sufficient for a
vehicle model to break even, the present economies of scale are no longer based on
individual models, but on platforms and shared modules and components. This essentially
creates a market that is divided into two viable spaces: those manufacturers that are able to
leverage their brand portfolio and achieve these economies of scale by sharing platforms
across models and brands (see for example Volkswagen’s Golf platform PQ35 that is shared
Page | 19
across the VW, Audi, Seat and Skoda brands). The second viable space is at the low?volume
premium end of the market, where brand strength and technological or performance
leadership mean that manufacturers can command a high premium (and thus margin) for
their products (see for example Porsche).
In between these two viable spaces there will be increasing pressure on manufacturers that
are too small to leverage their platforms across many models and brands, and do not
command the premium margin on their vehicles, to fund a sustainable pipeline of new
products.
We have seen a fundamental shift in the economies of scale in the industry,
which now segregates competition into a high?volume and low margin, and
low?volume high?margin segment.
While the large players are currently working on leveraging their resources across their
brands, for smaller companies this is not so easy. One reason why MG Rover failed was the
need to cover the growing new market segments, while volumes were shrinking in the
traditional segments it was offering products in. Ultimately, its volumes were too small to
finance the required product development programmes, and with an ageing line?up in
limited segments, sales continued to fall.
Saturation and overcapacity
The third key trend is a malaise that is entirely self?inflicted: as a result of the failure to
adjust capacity to demand, the auto industry suffers from a global overcapacity that at this
point is estimated at 20 million units – equivalent to the combined installed capacity in
Western Europe! The basic reason for the overcapacity is an asymmetry: it is much easier to
add capacity, than it is to reduce it. With an average employment of 5,000 workers per
assembly plant and an additional job multiplier of at least five jobs in the supply chain,
governments encourage, and most often also subsidise, the building of new vehicle
assembly plants. For the same reason, closing a plant when demand drops is difficult and
quickly becomes a political issue. As a result, there is a perennial asymmetry in capacity
adjustment: it is considerably easier to add capacity than it is to close capacity down.
Page | 20
The main consequence from the overcapacity is that manufacturers ? in their quest to keep
capacity utilisation high ? produce into the growing inventories of unsold cars (around 1.5 –
2 months in most markets), and then employ sales incentives, such as discounts, high trade?
in prices, free upgrades, and the like, to maintain their market share. Initially, the problem
was confined to the North American market, which after the recession of 2001 has seen an
increasing ‘war of attrition’ between the manufacturers. Average incentives then and today
range between $2,000 and $6,000 per vehicle. That way, the Big Three managed to maintain
their market share until recent times, yet this position is not sustainable, as the massive
recent losses graphically illustrate.
An asymmetry in capacity adjustment has resulted in a global overcapacity
that is causing the poor profitability of the sector.
The root cause here is a chronic inability to adjust output to demand and link the production
schedule to actual customer orders. While Henry Ford founded the industry on the premise
of making vehicles as efficiently and inexpensively as possible, this mass production
‘volume?push’ approach is no longer viable in current settings of saturated markets, where
one has to deal with increasingly demanding customers. At times when Dell illustrates that
one can order a customised product that is built to order within a few days only, the
established automotive business model seems obsolete. Several manufacturers have
understood the need of linking production to customer demand, and have successfully
initiated ‘build?to?order’ (BTO) programmes, such as Renault, Nissan, BMW, and Volvo. Their
success has illustrated that one can indeed build a car to customer order within 3 weeks or
less, and operate without the costly finished vehicle inventories and the incentives needed
to clear the overproduced cars from dealer stock. Most other manufacturers recognise the
need of getting closer to their customers, but the implementation is often lagging behind
what the press releases state. One could argue that while there is widespread intellectual
acceptance, there is an equally widespread institutional apathy.
Page | 21
Dynamics of competition
Over the years, the claims that ‘competition in the motor industry is increasing’ have been
omnipresent. While there undoubtedly is some element of ‘propaganda’ involved,
empirically this claim can indeed be verified. As Figure 7 shows, if one corrects the cost of a
modern passenger car for safety and emissions content, as well as for inflation, the cost of a
vehicle has indeed been stagnant and even slightly declining over the past two decades.
In fact, the motor vehicle is actually one of the lowest of all consumer products, in
comparison: a laptop for example will cost around £600, and weigh about 3 kg, giving it a
value of £200/kg. A motor vehicle will cost £12,000 and weigh 1,800 kg, giving it about
£6.7/kg in terms of cost per weight.
Overall, the motor industry is indeed providing an increasingly better value proposition to its
customer – a factor largely enabled by large?scale and globally connected operations that
allow for the increasing development costs to be netted off against large, global sales.
Figure 7: The evolution of the cost of a passenger car
$0
$5,000
$10,000
$15,000
$20,000
$25,000
1
9
6
7
1
9
7
1
1
9
7
5
1
9
7
9
1
9
8
3
1
9
8
7
1
9
9
1
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
1
2
0
0
3
2
0
0
5
Average expenditure per new car
(import and domestic) in US$
Estimated Average New Car Price
for a 1967 "comparable car" ? with
emissions and safety features
(inflated to 2007 US$)
Estimated Average New Car Price
for a 1967 "comparable car" ?
without emissions and safety
features (inflated to 2007 US$)
Page | 22
1.4 The UK automotive industry: a sector overview
Overall, the UK produced 1,649,515 vehicles in 2008, placing it 12
th
in the global output
league
xii
. This represents 2.4% of global output in terms of numbers of vehicles
xiii
. Within
Europe, UK has remained in 4
th
position throughout since 2000, achieving 8.8% of European
output in 2007, down from 9.6% in 2000. Only Germany, France and Italy have indigenous
volume vehicle makers, with all other nations reliant on inward investment for their volume
vehicle plants, supplemented in some cases by niche products for local markets.
Vehicle and engine manufacturing
In total, official statistics record 753
companies in the vehicles and engine
sector
xiv
. Of this total, 20 companies
account for 90% of sector sales and
84% of sector employment
xv
. The
data is not entirely consistent, as
some companies split up their
operations in separate reports, whilst
others put everything together. Ford
figures include the Southampton van
plant, engine plants at Dagenham
and Bridgend, and the Dunton research & development facility. Meanwhile Vauxhall’s
accounts include Ellesmere Port, and their UK sales operation, but their van manufacturing
plant (IBC) is reported separately. Comparisons are thus not perfect but the chart gives a
good indication of the relative values of the businesses.
The chart shows size in terms of vehicle output. Note that company sales by value do not
correlate exactly with unit output, due to differences in the scope of the operations as well
as differences in value of the product.
In terms of vehicle output over time, the following chart shows the UK passenger car output
since 1940. The decline in the 1970s follows the bankruptcy and subsequent nationalisation
of British Leyland, while the increase in the 1980s and 1990s is largely due to the arrival of
the Japanese transplants. The decline since 2000 is related to the demise of MG Rover, and
the effects of the plant closures by GM Luton and Ford.
UK vehicle makers Pareto chart (2007 Vehicle output)
0
200
400
Nissan Toyota Honda BMW Land
Rover
Vauxhall IBC Ford
O
u
t
p
u
t
(
0
0
0
)
0%
50%
100%
Page | 23
Figure 8: UK vehicle output over time
The UK has seen a great deal of volatility in its automotive production over
time, with foreign manufacturers largely replacing the failing domestic
producers’ volume by the mid?1990s.
Thus, the frequent claims that the UK automotive industry is providing a stable output of 1.6
million units are misplaced: the UK has in fact seen a great deal of volatility of outputs, and
is in fact producing at a level considerably below its peak in the 1960s and 1970s.
Commercial vehicle
manufacturing
The data for the commercial sector
is commonly included in the motor
vehicles industry; the chart opposite
sets out the industry in terms of
output, as distinct from the
UK CV makers Pareto chart (2007 Vehicle output)
0
50
100
I
B
C
F
o
r
d
L
e
y
la
n
d
T
r
u
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0%
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0.0
0.5
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1.5
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2.5
1940 1950 1960 1970 1980 1990 2000
M
i
l
l
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t
s
UK vehicle output 1940?2008
CV's
Cars
Page | 24
passenger car sector
xvi
. In volume terms, the panel vans made by Ford and IBC dominate,
but Leyland Trucks are about half the size of the IBC operation in terms of sales and
employment. Unit output is less than 20% of IBC’s, but value per unit is much higher.
Component supply
Nearly 2,600 business units
xvii
are
directly active in this sector,
according to ONS data. Of these,
around 80 companies have been
identified, using knowledge
gained from BERR relationship
management, a recent study of
Japanese autoparts makers, and
local RDA knowledge. Three
companies in particular have
been identified as being based in
UK but having a global reach.
These are GKN, Tomkins and TI.
For Tomkins and TI it has proved difficult to identify the UK automotive element of their
operation so they have been excluded from the Pareto analysis.
The companies identified represent some 74% of sector sales, and 96% of employment.
This suggests a degree of error in the figures, but that overall coverage is probably fairly
comprehensive. Setting aside Tomkins and TI, the leading company is Robert Bosch (though
whether these figures include domestic appliances needs further investigation).
Construction equipment
This sector is separately identified in
the statistics
xviii
. The dominant player
is JCB: UK based and one of the top
three global players in the sector.
The figures quoted here are for the
global operation: work continues to
collate all the separate UK accounts:
UK auto parts makers Pareto chart
£0
£1
R
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£
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0%
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UK CE makers Pareto chart (Sales)
£0
£1
£2
J CB
(global)
Caterpillar
(UK)
Komatsu
(UK)
Terex Thwaites Neuson
(UK)
S
a
l
e
s
£
b
n
0%
100%
Page | 25
each facility appears to be reported separately, and the holding company is registered in
Netherlands. Caterpillar also has a very strong presence in UK. Thwaites and Neuson
specialise in dumper trucks.
Research and development, and design engineering
Data has been extracted
from the DTI R&D
scoreboard. Note at least
one aerospace company is
recorded in the auto sector
and several auto companies
are found elsewhere in the
document. With these
amendments, it is believed
that at least 30 auto?
related companies are in
UK top 850 companies as
defined in the Scoreboard. UK automotive R&D is dominated by Ford (Dunton) and Land
Rover (figures include Jaguar). In this chart, the figure for GKN probably includes some
aerospace R&D.
The data presented here has
been extracted from
company accounts, using the
company list identified in the
recently published Design
Engineering SCE. The largest
player is Ricardo. Lotus
figures include the car
business and figures don’t
enable the DE contribution
to be separated out from car
manufacturing.
UK Auto R&D Pareto chart
0
500
F
o
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a
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(
£
M
)
0%
100%
c
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m
%
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f
U
K
A
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R
&
D
Design Engineering pareto chart
£0
£200
Ricardo Lotus Prodrive Mahle TWI MIRA PI Zytek
S
a
l
e
s
(
£
M
)
0%
100%
c
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m
%
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f
U
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Page | 26
Motorsport
Motorsport is an ill?defined sector in statistical terms, and for this analysis the ‘Motorsport
100’ survey has been used. This is a sampling exercise, and of the companies in the survey,
around one third have published annual reports. It will be noted that there are several
‘repeats’ from other sectors: Lotus, Ricardo and Prodrive appear elsewhere, and their
accounts do not allow separate identification of the motorsport?related activities in the
organisation. However, their repeat appearances indicate their importance across the
industry.
Amongst the uniquely motorsport
companies in the list, the F1 teams
head the list, and specialist
lubricants appears also to be a high
value sector. Amongst the other
companies included here are
makers of racing cars, racing
engines, high technology
components and infrastructure
operations such as circuits and
publicity.
UK Motorsport Pareto chart
0
100
200
P
e
t
r
o
c
h
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m
C
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(
U
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)
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(
£
M
)
0%
50%
100%
Page | 27
PART II: THE COMPETIVENESS OF THE UK AUTOMOTIVE INDUSTRY:
AN INTERNATIONAL COMPARISON
In this part we review the current trends of the UK automotive industry since 1995 on a
range of selected indicators, and set its performance into relation to other countries,
especially France, Germany, Italy and Spain. The data regarding the Czech Republic will be
used as representing the CEE (excluding Russia), due to limited reliable data on other CEE
countries.
2.1 The UK economy
At the highest level, the UK trade balance over time shows the degree to which the UK came
to rely on services as the main contributor to the overall trade balance. The manufacturing
sector is showing an increasing trade deficit (meaning that the manufactured products
demanded by the UK are increasingly imported), and the automotive sector is following this
trend also. Both were often seen as ‘sunset industries’, and the trade balance very clearly
reflects the effects of a policy that has promoted (financial) service as the main driver of a
‘post?industrial’ economy.
Figure 9: Trade balance of the UK economy, by sector, over time
?100,000
?80,000
?60,000
?40,000
?20,000
0
20,000
40,000
60,000
1990 1995 2000 2005
UK trade by sector, in £ million
Services
Pharma
Aero
Oil
Auto
UK Trade balance
All mfr
Page | 28
2.2. Contribution of the automotive industry to the national economy
There are many ways in which to assess the economic contribution of an industry sector to
the wider economy, such as employment or contribution to GDP
xix
. We have chosen to
estimate economic contribution using value added data in the manufacturing of vehicles
and components because it is a direct method of understanding the true value to the
national economy of what is potentially offshorable. The following data hence are reflecting
only the value?added in manufacturing, and do not take into account sales and services nor
do they reflect supporting industries.
By the standard HMG definition
xx
, the UK auto industry thus employs 194,000 people in
3,300 businesses, generating some £10.2bn value added in 2007. The auto industry directly
accounts for 5.9% of UK manufacturing employment, 6.4% of gross value added, and
accounts for around 12% of UK manufactured exports, and 13% of manufactured imports.
2008 vehicle production was just under 1.65 million units, down 5.8% as the industry started
to respond to a sharp downturn in vehicle markets worldwide. This included 1,446,619 cars
(down 5.7%) and 202,896 commercial vehicles (down 5.9%). 77% of the cars, and 61% of the
commercial vehicles, were exported.
Manufacturing generates around 14% of the total UK GVA and provides around 10% of total
UK employment
xxi
. It follows that the automotive manufacturing sector directly represents
around 0.8% of the UK economy in terms of value added, and directly provides around 0.6%
of total UK employment. This excludes goods and services bought in: the true contribution
to the economy is probably in the order or two to three times these figures, and some
analysis on this is offered below.
Inputs and outputs
Data exists to analyse where the auto sector buys its inputs, and where the products are
sold. Latest available data comes from the 2006 Input & Output publication, which has data
up to 2004
xxii
. The input data shows that the single largest source of supply is other
companies within the sector: in total, 31.5% of the inputs are from within the sector.
Meanwhile 68.5% of the inputs come from elsewhere in the economy: principally from
industries that are categorised by process rather than end?user. The output data indicates
that the sector is its own largest customer, with 47% of all output recycling within the
industry. Of the output going into the wider economy, just under half goes to the motor
trades, 6% to other land transport, and 5% to public administration & defence.
Page | 29
International trade
2007 trade data shows a widening of the auto sector trade deficit. Exports were £25.3bn, up
9.6% and totalling 12.8% of UK manufactured exports. However, imports were up 12.6% to
£42bn, totalling 15.3% of UK manufactured imports. This yielded an automotive sector trade
deficit of £16.75bn. Analysis of UK trade in goods shows that the automotive sector is the
single largest exporter, but by a rather larger amount the single largest importer, and as
such has the largest trade deficit of any sector.
Figure 10: UK automotive industry’s trade balance, 1990?2007. Source: ONS
The UK is a net importer of motor vehicles, despite the fact that it is exporting
the majority of its products.
Value?added
In the case of the UK data regarding the value added in manufacturing of motor?vehicles,
engines and other components was available. This data shows that the relative contribution
to GVA
xxiii
in 2006 was actually smaller than the GVA in 1996, reflecting the fact that over a
10?year period the industry has not expanded in any meaningful way. Taken in the context
of GDP these data show an even bleaker picture – the GVA as a percentage of GDP has
declined by nearly 40%, from 1.16% in 1995 to 0.73% in 2006. The compound annual growth
rate (CAGR) of the GVA was 1.12%, while the GDP was growing by 5.51% during that time.
UK Automoti ve trade
-20
-10
0
10
20
30
40
50
1990 1995 2000 2005
£
b
n
imports
exports
balance
Page | 30
Thus, over the past decade the industry’s contribution to the UK economy has been
declining, pointing to the fact that the industry has not been expanding as fast as the overall
economy (for more information see appendix B).
In order to compare the UK to other countries, we use the value?added in DM34, without
taking into account components. In comparing the trends of the GVA it is clear that the UK is
faring worse than FGIS and the Czech Republic. In fact, only in the UK and Italy the GVA in
DM34 is decreasing, and in the UK it is doing so slightly faster than in Italy (see figure 2.2).
The CAGR of the GVA in DM34 in the UK was actually negative between 1997 and 2005
(?1.92%), with only Italy’s CAGR lower, at (?2.57%).
When comparing the impact motor?vehicle manufacturing has on the GDP, the situation is
slightly more complex. A positive trend – pointing to the fact that the automotive industry is
having an increasing affect on the national economy – is only apparent in Germany and in
the Czech Republic. In these two countries the automotive industry has been having an
increasing effect on the GDP. While France, Italy and Spain all have a negative trend, the
only one where the automotive industry’s part in the economy is decreasing faster than it
does in the UK is Italy. Overall, the data in Figure 11 show that the UK automotive industry is
doing worse than the national industries in comparable European countries (for more
information see Appendix C).
Figure 11: Contribution of value?added in the automotive sector as fraction of national GDP
[UK]
y = ?0.0006x + 1.2109
R² = 0.7095
[Germany]
y = 0.0006x ? 1.14
R² = 0.5263
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
1996 1998 2000 2002 2004 2006
Growth
Time
(Years)
GVA in DM34 as part of GDP by country
UK France Germany
Italy Spain Czech Republic
Linear (UK) Linear (France) Linear (Germany)
Linear (Italy) Linear (Spain) Linear (Czech Republic)
Source: Eurostat, Euromonitor
Page | 31
2.3 Growth performance of the automotive industry
When assessing the relative performance of a national industry, growth is a key measure.
The assumption is that any growth at a rate above the growth of the overall national
economy is a sign of success of a given industry. Secondly, one can compare the growth
rates of national industry sectors across countries, in order to assess whether or not growth
occurs above the competitors’ rates.
We begin this section with a discussion of the trends in overall numbers of passenger and
commercial vehicles production is presented and conclude with data regarding openings
and closures of plants which might account for the trends in the production numbers.
Figure 12: Vehicle production trends, by country
Between 1995 and 2007 the number of passenger and commercial vehicles produced in the
UK had a CAGR of ?0.09%. This figure puts the UK below the EU average (0.63%), but above
France and Italy, where the CAGR of vehicle produced was ?0.11% and ?4.56%, respectively.
In comparison, Brazil’s, India’s and China’s CAGR of vehicle production between 1995 and
2007 was 4.38%, 8.72% and 13.84%, respectively. At the same time, the global CAGR of
vehicle production was 2.60%. In addition, on average, the trend exhibited by the pace of
UK trend:
y = ?11080x + 2E+07
R² = 0.2276
Germany, trend:
y = 82586x ? 2E+08
R² = 0.6503
?
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
1994 1996 1998 2000 2002 2004 2006 2008
Vehicles produced
Time
(Years)
Passenger cars and commercial vehicle production by country
UK France Germany Italy
Spain Linear (UK) Linear (UK) Linear (France)
Linear (Germany) Linear (Germany) Linear (Italy) Linear (Spain)
Source: Euromonitor
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Page | 33
The UK has seen a disproportionately high level of assembly plant closures over
the past decade. The reason is a perception in the industry that it is cheaper
and less damaging to reduce capacity in the UK, than elsewhere.
The data shows that the UK has seen a disproportionate level of plant closures. From 1997
six volume plants were closed in the UK, while two have opened
xxvi
. During the same period
throughout all of Western Europe (excluding the UK) only seven plants were closed and 5
new plants were opened. A further look at the capacity loss and gain in the UK reveals an
even direr reality – the two new plants added an annual capacity of circa 10,000 units, while
just two of those that closed (Ryton and car production at Dagenham) decreased production
by nearly 400,000 units annually. While this was happening in Western Europe, 57 new
plants were built (or announced to be built) in the BRIC countries and only 4 plants were
closed in these regions.
Thus, the recent trends in plant openings and closures in the UK have led to a shift away
from volume car production, towards niche and luxury products, alongside a set of three
inward investors from Japan and one from USA (GM Ellesmere Port).
2.4 Employment in the automotive industry
xxvii
One of the main contribution mechanisms of any industry to a national economy is through
employment, and the compensation that is paid to the workers the industry employs. When
one considers the number of persons directly employed in the UK automotive industry has
shrunk by more than 90,000, with a CAGR of ?3.89% between 1996 and 2006. At the same
time, the percentage of persons employed in the automotive industry as part of
employment in manufacturing and overall labour market has shrunk, from 6.56% to 6.18%
and from 1.11% to 0.67%, respectively. Though the overall percentage of persons employed
in manufacturing as part of the overall labour market has declined during this time as well
(from 16.91% to 10.86%), the data show that the decline in the automotive sector was more
pronounced than in manufacturing as a whole. While the CAGR of employment in the
automotive industry is (?3.89%), the CAGR of employment in manufacturing is slightly lower
at (?3.32%). Put in absolute terms, the UK automotive industry appears to be losing
approximately 10,050 employees every year (also see partial explanation below). As a
Page | 34
reference projection, if this apparent trend were to continue, by 2027 the UK automotive
industry would cease to employ anyone (for further details see appendices F,G).
At the present rate, the UK is losing an approximate 10,000 automotive jobs
every year. This downward trend affects both automotive, and manufacturing
in general.
Figure 14: Employment trends in the UK automotive and manufacturing industries
Please note that the trend lines added to the chart above are not forecasts, but reference
projections. A reference projection is an extrapolation from the past into the future
assuming that the system involved and its environment will develop without intervention,
that is, with no change of the trends experienced over the relevant past. Thus, such a
projection is not a forecast of what will happen but of what would happen if there were no
y = ?10050x + 2E+07
R² = 0.965
?
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
1994 2004 2014 2024 2034
Employeees
Employment in the UK automotive industry and in UK manufacturing,
including reference projections
Employment in Automotive Industry in the UK Employment in Manufacturing in the UK
Linear (Employment in Automotive Industry in the UK) Linear (Employment in Manufacturing in the UK)
Source: SMMT, BERR/ONS, Euromonitor
Page | 35
interventions. The purpose of a reference projection is to identify when and how a system
will break down if there are no interventions, so that planned interventions are more likely
to be creative and effective (Ackoff 1978: 128). We use the reference projection here to
highlight the urgency in the current trend in employment in the motor industry, which at
the current rate appears to be around 10,500 employees per year.
The decline in direct employment in DM34 marks a surprisingly strong trend, and one that
stands against the growth in vehicle output. This poses a dichotomy that is not easily
explained. While explanations will include the outsourcing of non?core operations to service
providers, the employment of agency and temporary workers, as well as gains in
productivity, we argue the above cannot account for all of this reduction in direct
employment. This is for three reasons:
i. Outsourcing of component operations (such as module assembly), business
processes (such as HR or payroll), and non?core services (such as catering) is
anything but a new strategy. In fact at the height of the modularity/outsourcing
debate in the mid?1990s, both Ford and GM span out their internal component
operations, Visteon and Delphi, respectively. So did many of the other OEMs.
Empirical proof of the impact of outsourcing was given in the 2003/4 update of the
1998 study by CAR (2005), which showed that the job multiplier (of an assembly job
in the US motor industry) has increased from 7.6 in 1998, to 10.4 in 2003. As a
result, we argue that these gains have largely been accounted for already, and
hence cannot be the continued main driver for the decline in direct employment (is
this backed up by the evidence?).
ii. Productivity gains will be an important factor. If one takes the number of vehicle
units produced by UK workers in 1996 (as a base), and adjusts it according to the
growth in output, as well as the increase in productivity (as defined by change in
GVA/employee), we can explain 32% of the actual reduction in employment level
seen between 1996 and 2006.
iii. The use of agency workers. It has become an increasing practice to employ a large
number of temporary and agency workers and fixed term contract workers (mostly
as means of labour flexibility, less so as a means of cost reduction) in the industry.
The proportion of temporary workers generally ranges between 20% and 30% of the
overall workforce of an assembly plant, in some cases such as BMW Group’s Cowley
plant up to 50%. As agency work will not be accounted for as ‘automotive’ in the
national employment statistics, this factor might account for part of the decline in
employment. On the other, the use of agency work is well established, and thus – in
Page | 36
our view – unlikely to be a major driving force behind the recent decline in
employment.
We consider that a combination of the above three issues may well account for a large
fraction of the decline in DM34 employment, however, would also like to offer an additional
explanation also. DM34 captures both the employment in the OEMs, as well as the
component suppliers. While it is unlikely that the decline in employment will be driven by
job losses at the OEMs (given that overall output is increasing), we consider that these jobs
might well be continuing to be lost in the component supply chain. If true, such drastic job
losses would provide further strong evidence of the ‘hollowing out’ of the UK auto supply
chain. To test this hypothesis, we consider the employment in sectors that are typically not
first, but second and third?tier suppliers to the motor industry: pressings, forgings, plastics,
cables, and tool makers. The Figure 15 below shows the development of employment in the
plastics, fabricated materials, electrical and optical, basic metal and machine tools sectors,
shown in comparison with the employment in the vehicle and auto parts sectors.
Figure 15: Employment trends in the UK automotive and manufacturing industries
Based on this chart, we can only partially confirm our hypothesis that the job losses in the
automotive industry have primarily been affecting the component supply sector.
Overall we thus conclude that:
25
50
75
100
1998 1999 2000 2001 2002 2003 2004 2005 2006
I
n
d
e
x
.
1
9
9
8
=
1
0
0
UK employment trends by manufacturing sector, 1998?2006.
Source: ONS
plastics
fabricated metals
auto parts
vehicles
electrical and optical
basic metals
machine tools
Page | 37
i. Direct employment in the auto sector has been declining at a rate of 10,000
employees per annum. This trend has been almost linear in nature.
ii. This decline can be explained to 32% by productivity gains made over the past
decade.
iii. This decline is not homogenous across sub?sectors within the automotive (supply)
industry, and is affecting vehicle and component manufacture as well as related
sectors to varying degrees, without however showing a consistent trend.
iv. A combination of productivity gains, outsourcing, agency work contribute to the
direct job losses (though offset to a degree by an unquantifiable increase in service
sector employment), while several component sectors have seen decreases in
employment that by far outpace the decrease in vehicle manufacturing
employment.
Comparison of the UK against its peers (FGIS)
Another perspective on the drastic decline in the UK employment figures is to consider the
relative developments in the UK, in comparison to its direct peer group, France, Germany,
Spain, Italy as well as the Czech Republic and Poland. As can be seen in Figure 16, the UK has
disproportionately lost employment in its automotive industry.
Figure 16: Relative employment trends across countries
?30%
?20%
?10%
0%
10%
20%
30%
40%
50%
2000 2001 2002 2003 2004 2005 2006
Auto sector employment trends (2000 baseline)
Czech
Poland
Sweden
EU
Germany
France
Spain
Italy
UK
Page | 38
All developed economies have suffered from a shifting manufacturing footprint, where
manufacturers decided to offshore their operations to low?cost locations. The European
automotive industry has seen a particular trend towards ‘East?shoring’, whereby capacity
moved from Western Europe into Central and Eastern Europe.
All countries in Western Europe have suffered from the trend of ‘East?shoring’.
In relative terms, however, the UK has lost the most jobs, while employment in
France, Germany, Italy and Spain has remained fairly stable
The decline in UK employment overall can be explained by this trend. However, we found
that the UK has lost out disproportionately against its peer group. All Western regions have
suffered from a shift in manufacturing footprint, the UK however has seen significantly more
plant closures than other European countries. The reason for this relative decline is twofold:
first and foremost, flexibility cuts both ways. It is attractive to invest in the UK, but in times
of crisis, the downside is a higher propensity to use that flexibility by closing plants in the
UK. Secondly, this is amplified by the Government’s non?interventionist approach which has
meant that it is simply easier and less costly (politically) to close plants in the UK, rather
than elsewhere.
Estimating the ‘job multiplier’
A key measure of employment is the number of persons directly employed by the industry
in its manufacturing and assembly operations. In the most direct form, this relates to the
workers and staff employed in the manufacturing operations (manufacturing jobs), and of
course, the staff employed by the dealerships and sales organisations (service jobs). In
addition, these manufacturing and service jobs create further indirect jobs: most
prominently, in the various tiers of the component supply chain, and as well as at service
providers that support both manufacture and retail operations. The ratio of these indirect
jobs, in relation to the direct jobs, is called a ‘job multiplier’. For example, if the job
multiplier is 5, then every job in vehicle assembly supports 4 jobs elsewhere in the economy,
at component suppliers, at retail operations, and at various service suppliers.
While it was beyond the remits of this study to do an empirical investigation into the job
multiplier in the UK automotive industry, it is nonetheless important to estimate this factor,
in order to assess the full economic contribution of the motor industry. We thus employ a
Page | 39
meta?analysis of previous studies, in order to estimate a confidence interval for the job
multiplier in the UK auto industry. To this effect we analyse the studies conducted in the US
of the years 1998, 2003 and 2004, as well as the study of 2004 of the BMW operations in the
UK (OEF, 2006).
The most important studies in this area have been conducted by the University of
Michigan's Institute for Labor and Industrial Relations jointly with the Center for Automotive
Research. The first study of the economic contribution of the motor industry to the US
economy found an overall multiplier of k=10.4 in 2003 (considering dependent employment
in component manufacture, retail, and other service sectors). This is an increase from k=7.6
in 1998, which is largely driven by the outsourcing of internal component operations. An
interesting fact to note is the retail job multiplier of k=2.7, which means that every job at a
car dealership supports a further 1.7 jobs in other service sectors. (Note that sales and retail
operations are included in the overall job multiplier estimation, so these are not in addition
to the above.)
OEF (2006) estimate BMW's contribution to employment in three stages: direct employees
in manufacturing (8,700), employment in motor retail (10,900), indirect employment in the
supply chain (25,600), and finally, ‘induced’ employment through increases in the disposable
income of the wider economy (11,300). While we consider the ‘induced’ element to be
conceptually problematic (it is easy to get into a circular argument here about the
relationship between employment, wealth creation, and demand), we would also argue that
OEF's estimate of 19,400 indirect jobs in the supply chain (equiv. to a multiplier of k=2.2) is
rather low. Thus, overall we consider OEF’s firm?specific multiplier of k=6.5 to be the
conservative side by the standards of the other studies mentioned above.
Every job in a UK car factory supports an estimated 7.5 jobs elsewhere in the
economy, bringing the estimated direct employment in the sector to 384,000.
Of these, we estimate that 330,000 are under threat of being offshored.
Overall we thus estimate the job multiplier in the UK to be between in the range of
k=?[6.5,10.4], with a median of k=8.5, which means that in addition to the 45,220 direct
employees
xxviii
in vehicle manufacturing, an estimated total of 384,000 UK jobs are
supported by the automotive industry in the component supply chain, motor retail and
general service sectors. It is this figure that more accurately illustrates the true economic
Page | 40
importance of the automotive sector to the UK economy, not the direct employment in
DM34.
Of the total employment of 384,000, we estimate that c.330,000 are under threat of being
offshored, while c.55,000 jobs in motor retail and service are not likely to be under this
threat.
Labour cost comparison
The Figure 17 below compares labour costs across countries; the data is based on the
average yearly costs of an employee for an employer in motor?vehicle manufacturing
(DM34) for the years 1997?2005. The data show that labour costs in Western Europe are
rising dramatically faster than in Eastern Europe (though Italy is an outlier, with a relatively
slow labour cost increase). The UK is situated after Germany and France but before Spain
and Italy, showing that the labour costs in the UK are increasing faster than in the latter two
countries and slower than in the former two. Since 2002 the absolute labour costs in the UK
followed a similar trend – lower than in France and Germany but higher than in Spain and
Italy. Thus, labour costs in the UK are similar to that in Western Europe, but lower than in
Germany and France (for more information see appendix O).
Figure 17: Labour cost in automotive, across countries
[UK]
y = 1155.6x ? 2E+06
R² = 0.6677
[Germany]
y = 3672.4x ? 7E+06
R² = 0.7218
?
20,000
40,000
60,000
80,000
100,000
1996 1998 2000 2002 2004 2006
Average
personnel cost
Time
(Years)
Labour cost in DM34 across countries
UK France Germany Italy
Spain Czech Republic Linear (UK) Linear (France)
Linear (Germany) Linear (Italy) Linear (Spain) Linear (Czech Republic)
Source: Eurostat
Page | 41
Relative skill levels of the UK workforce
The availability and skill level of the UK workforce has been a frequent issue of concern to
both the manufacturing sector in general, and the automotive industry in particular. Skills of
the UK workforce have been subject to previous studies commissioned by BERR (and the DTI
previously), in conjunction with the Department for Education and Skills. We refer to these
studies for more detail (see Steadman et al 2004; the Leitch Review of 2006, and the most
recent comparative data published by the OECD in 2008).
2.5 Productivity
There are numerous ways to assess productivity, with most commonly value added per
employee at national level, and labour hours per vehicle at firm level (used for example in
the Harbour reports). Each has its advantages and disadvantages: the former does not take
into account the difference between manufacturing and assembly operations (showing
inherently lower levels of productivity for the less automated assembly), the latter distorts
the data according to vehicle segments (as higher vehicles require more labour input) and
does not take into account the levels of vertical integration (the more value is bought in
from suppliers, the less labour is required in assembly). In this section we will assess
productivity in the UK auto industry using both methods.
Productivity at national level
At national level, we derive our first measure by dividing the value added of DM34 by the
number of employees in the sector. The analysis shows that all the countries in the sample
are experiencing a rise in productivity, except Italy (with a CAGR of ?0.88%). In terms of
comparative productivity, the UK has made significant progress and does not lag behind its
peer group in terms of productivity in terms of €/head. In fact, as Figure 18 shows, the UK is
only second to Germany, and considerably ahead of the EU average.
Page | 42
Figure 18: Labour productivity, across countries
Source: EuroSTAT
Thus, the often held image of poor quality and productivity, as well as poor industrial
relations that have marked several decades of UK automotive manufacturing, has to be
revised. The UK automotive industry has undergone a major transformation since, and is
now able to compete on par with its European and international competitors.
Productivity at firm level
At firm level, we use the labour hours per vehicle measure. Figure 1.8 shows productivity by
number of vehicles produced in a selection of the largest plants in Europe between 2001
and 2003
xxix
. Unlike the data in figure 2.9, these data show that the UK is the most
productive. The reason for this discrepancy most likely rests with the fact that out of the
seven plants observed in the UK, three are very efficient Japanese inward investors (Nissan’s
Sunderland, Toyota’s Burnaston and Honda’s Swindon plants).
0
10
20
30
40
50
60
70
80
90
2000 2001 2002 2003 2004 2005 2006
Automotive labour productivity €K/head
Germany
UK
Sweden
EU
France
Spain
Italy
Czech
Page | 43
Figure 19: Productivity at firm level
The UK is competitive in comparison to its direct peers, both in terms of labour
cost and productivity.
Overall we can confirm the frequent claim that the UK is home to some of the most
productive plants in Europe, largely thanks to the Japanese transplants, and also in terms of
value?added per employee lies on par with its European peers, largely due to the strong
upmarket brands of British heritage.
2.6 R&D expenditure and capital investment
Investments and R&D expenditures are two of the major determinants of an industry’s
sustainability, that is, a determinant for its ability to innovate and compete in the future.
The data in this section show the amounts invested in the industry and the amounts spent
on R&D in the years 1999?2006, as well as the capital investment made in the automotive
industry over the same period. The data clearly point to the fact that both these
expenditures in the UK auto industry have shrunk considerably over this time horizon (for
0
20
40
60
80
Czech
Republic
Germany France Italy Spain UK
51
54.95
54.96
63.61 64.29 68.10
Average number of
vehicles produced per
employee
Productivity, vehicles produced per employee
(average across selected plants)
Source: World Markets Research Centre ? European Automotive Productivity
Index 2001, 2002, 2003
Page | 44
more information see appendix J). Overall, Europe is still in a strong position with regards to
R&D, and vehicle design. Overall, a recent study showed that – by origin of OEM – 28% of
vehicles were developed by European manufacturers, 48% by Japanese, and 23% by US
firms. With the downturn in the US this is likely to reduce to 15% overall, with the
remainder increasing
xxx
.
We compare R&D expenditures in DM34 across countries between 1995 and 2004: absolute
R&D expenditures in the UK have experienced the slowest growth among the chosen peer
group (CAGR of 0.96%), with the exception of Italy (CAGR of 0.45%). Moreover, in the ten
years considered overall growth of R&D expenditure in the UK was only higher than that in
Italy – while R&D in Spain and Germany nearly tripled, it doubled in the Czech Republic and
in France it still grew by more than 50%, the UK only showed a growth of 9%. In relative
terms, considering the percentage of R&D expenditure in DM34 in relation to R&D
expenditures in the total economy reflect the fact that it has declined over the years only in
the UK and in Italy. This shows that while overall R&D expenditure in the UK economy was
growing, the R&D expenditures in the automotive industry were not keeping up (for more
information see appendix J).
Figure 20 examines the levels of R&D expenditure as a fraction of value?added in the sector,
and Figure 21 shows the level of capital investment in DM34 in relation to investments in
the total economy.
Capital investments and R&D expenditures are two of the major determinants of an
industry’s sustainability, that is, a determinant for its ability to innovate and compete in the
future. Our data clearly points to the fact that both these expenditures in the UK
automotive industry have shrunk considerably over this time horizon. Overall, Europe is still
in a strong position with regards to R&D, and vehicle design. Overall, a recent OEM study
showed that ? by origin of OEM – 28% of vehicles are developed by European
manufacturers, 48% by Japanese, and 23% by US firms. With the downturn in the US this is
likely to reduce to 15% overall, shifting further towards Japan and Europe. Thus, Europe is
still in a very strong position overall. In the UK, Ford, Jaguar and Land Rover together spend
close to £1bn annually on R&D in the UK, which accounts for over 80% of the entire annual
sector spend.
In our analysis we consider the R&D expenditure as a percentage of gross value added by
the automotive sector, or in simpler words, we ask what percentage of the money in
automotive earned is reinvested into the sector. Figure XX shows the comparative
performance of the UK over time against its peer group.
Page | 45
Figure 20: Level of re?investment in R&D
Source: EuroSTAT. Missing data points not available.
As can be seen, the R&D intensity in the UK has been decreasing sharply since 2003. One
main reason has to be seen in the fact that R&D tends to be conducted in the home market
of the OEM, and here the UK suffers from a lack of indigenous producers. In absolute terms,
we see a decline in both R&D expenditure and capital investment that puts the UK in a weak
position with regards to playing a major role in the development of new energy?efficient
and low?carbon power trains. Given its low R&D intensity, the UK is essentially competing as
an assembly location, with any other nation in the world. This is a fundamentally different
from Germany and France, where the R&D intensity is considerably higher.
Both R&D intensity and capital expenditure are both showing clear downward
trends, which will place the UK in a weak position to meet the challenges of
taking part in the development of low?carbon powertrains.
0
5
10
15
20
25
30
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Czech Republic
Germany
Spain
France
Italy
United Kingdom
%
R&D expenditure in DM34 as % of GVA in DM34
Page | 46
This picture is little different on the capital investment side: our analysis clearly shows that
the abovementioned ratio was growing between 1995 and 2002 in Germany and France,
showing that, assuming a growth in investment in total economy, these countries increased
significantly increased the levels of investment in the automotive industry. In both Italy and
the UK this ratio was decreasing, but in the UK this decrease was far more pronounced.
Overall, the ratio decreased from 2.1% in 1995 to 1% in 2002 and 0.9% in 2003. In Italy, for
example, it decreased from 1.5% in 1995 to 0.9% in 2002 (for more information see
appendices K,L,M).
Figure 21: Capital expenditure in the automotive sector, by country
[UK]
y = ?0.0016x + 3.1151
R² = 0.7208
[Germany]
y = 0.0015x ? 2.9478
R² = 0.7958
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
1994 1996 1998 2000 2002 2004
Share of investment in
DM34 relative to
investment in total
economy
Time
(Years)
Capital investment in DM34 as
part of overall investment in the economy
UK France Germany Italy
Linear (UK) Linear (France) Linear (Germany) Linear (Italy)
Source: OECD Statistaical Database, http://stats.oecd.org/
Page | 47
2.7 Summary
In this section we have reviewed the macro development of the UK automotive industry, on
a range of selected indicators on economic contribution, growth, productivity, and
investment. We have also set the UK into the context of its peer group, in order to highlight
both its absolute and relative development. In conclusion, virtually all indicators point to an
above?average decline of the automotive industry in the UK (with the possible exception of
Italy in some cases). The UK is increasingly losing its R&D intensity, while experiencing a shift
towards the niche and luxury segments. Despite this fact, the industry remains an important
contributor to the UK economy, especially when taking into account the job multiplier.
Contribution to GDP – Between 1995 and 2006 the UK automotive industry’s value added
contribution to GDP has fallen from 1.16% in 1995 to 0.8% in 2007, while the number of
people it directly employs has dropped by 90,000 at the same time. We estimated a job
multiplier of 8.5 (that is, every job in vehicle assembly supports 7.5 elsewhere in the
economy), which means that overall 384,000 jobs are supported by the automotive industry
in the UK. Of these, 330,000 are under the threat of being offshored. The value added in the
auto industry has been decreasing over this time period only in the UK and in Italy, while all
other countries considered show a positive growth in contribution to the GDP.
Growth of the automotive industry – The growth of output in the UK lags behind both the
developments at European and global level in the industry, a fact largely driven by the
disproportionate amounts of plant closures that have hit the UK over the past decade.
Productivity – Productivity in the UK automotive industry is on par with the EU average, and
in fact outperforms any country considered in our analysis apart from Germany.
R&D and investment – investment in the UK automotive industry have dropped by a third
between 1999 and 2006. While between 1995 and 2004 capital expenditure has tripled in
Germany and Spain, they only grew by 9% in the UK. Most worryingly, the UK also shows
both a very pronounced trend of a falling level of investment in automotive R&D, as well as
one of the lowest R&D levels across our sample.
Page | 48
PART III: INDUSTRY LEADERS’ ASSESSMENT OF THE COMPETITIVENESS OF
THE UK AUTOMOTIVE INDUSTRY
In this third part, we present the findings of a survey of selected industry leaders with
regards to their perceptions of the UK automotive industry, and its strengths and
weaknesses in relation to its peer group
xxxi
(see footnote and appendix O for more details
and the questionnaire used, respectively).
3.1 Perceptions of the competitiveness of the UK automotive industry
In this section an analysis of the views expressed by industry leaders regarding the
competitive nature of the UK automotive industry will be conducted. The section will first
discuss the sourcing patterns, notion of ‘hollowing out’, then on to the analysis of the
strengths and weaknesses of the UK automotive industry, and present the UK in relation to
its international competitors. We use a 5?point Likert scale in our analysis, with 1 being the
weakest, and 5 the strongest. When comparing, 1 represents a strong disadvantage, 3 is
neutral, while 5 represents a strong relative advantage.
3.2 Sourcing patterns
Shift in sourcing away from the UK
The component supplier base is a vital element in the value chain to understand the overall
trends in the automotive industry as an average two thirds of value in a vehicle is created in
the component supply chain. Unfortunately statistical data on the component supply sector
is limited, or conceptually problematic, as many firms are classified by process, not by
industry.
xxxii
Instead, we focus on a quantitative analysis of trends in sourcing, as well as a
qualitative analysis of industry leaders’ views in order to assess the UK component supply
sector. Interviewees were asked to provide details regarding several aspects of their
sourcing operation in the UK. The average percentage sourced from the UK in the
operations of the interviewees was 33.85 (with a standard deviation of 24.65). 12 out of the
15 interviewees have stated that this percentage has decreased in the past 5 years (4 said
that the decrease was significant). None stated that the sourcing from the UK had increased
over the last 5 years. This pessimistic sentiment was confirmed regarding the future, where
11 out of the 15 interviewees stated that sourcing from the UK is likely to decline further (5
Page | 49
claimed that the expected decline will be significant). Only one interviewee replied that the
future holds a moderate potential increase in sourcing from the UK.
In?depth interviews revealed that many industry leaders believe that reality is worse than
the numbers they provided for two main reasons. First, though OEMs’ spending in the UK is
declining, it is accompanied by a similar – if not much more significant – decline in sourcing
by Tier 1 suppliers, further decreasing the value added by the UK automotive industry as
such. Several industry leaders had specific data to support this argument. Secondly, in some
cases while the overall spending in the UK remained relatively the same over the years, its
structure has changed significantly. One OEM, for example, seeing many of its Tier 1
suppliers leave the UK, in?sourced production of a major component of its final product,
leaving the overall spending in the UK relatively constant, but hiding a significant decline in
the number of UK suppliers working with it.
Some interviewees expressed a view that the decrease being witnessed now is a result of
developments dated decades ago. According to them, in the 1980s and 1990s, as the British
car industry was in decline, with it declined R&D and investment (partly because these
activities were and are often closely linked to the companies’ headquarters, which moved
outside the UK at that time). Thus, 20 years later, the UK automotive industry lost its
competitive edge in R&D, which has led to the closure of many SMEs and driven other
suppliers away.
Sourcing from UK suppliers is set to decline further, with the availability of
local suppliers being one of the key concerns of industry leaders.
All interviewees agreed that a major reason for the decrease in sourcing from the UK was
the cost factor. The advantages of CEE and BRIC countries in relation to the UK were
mentioned, mainly the low labour costs and abundant labour supply. It was also claimed
that the main disadvantages of these countries – e.g., infrastructure, limited and unqualified
supplier base – are slowly fading away.
This study tends to accept the argument that the sourcing from the UK is decreasing. This
decrease is most likely accompanied by a decrease in the number of suppliers and the value
of components produced in the UK. Hence, the argument of this study is that the
component suppliers are experiencing a decline similar to that of the OEMs. Even if the
trends experienced by suppliers are not as negative as those experienced by OEMs, they are
still not enough to offset the overall decline of the industry.
Page | 50
3.3 Industry leaders’ perception: UK strengths and weaknesses
Strengths of the UK
The perception analysis (see Table 5) shows that the most prominent strengths of the UK
automotive industry are labour flexibility (13 out of 16 stated that it has a positive impact on
the industry’s level of competitiveness) and quality of R&D resources. To a lesser extent,
interviewees noted the following as additional strengths: governmental subsidies, barriers
to exit and taxes and tariffs.
In?depth interviews revealed that interviewees value UK labour flexibility most, mainly
because of the flexible working hours they are allowed to employ, but also because of the
relatively lower level of unionisation
xxxiii
. They stated that this competitive advantage was
mostly relevant in relation to Western Europe and less so to Eastern Europe or the BRIC
countries. Interviewees also favourably noted the quality of R&D resources in the UK, but
claimed that these could be coordinated better on a national level. Some interviewees
specifically mentioned the R&D tax benefits as a major competitive advantage of the UK.
Interviewees also commented on the strengths ranked somewhat lower. They pointed out
that though the UK government does not generally provide more subsidies than other
European governments, it does provide them sufficiently, mostly directly (in the form of
grants) but also indirectly. They also claimed that the UK was especially strong because of
the ease to close down operations, especially in relation to Western Europe (according to
them, this was difficult to assess in CEE and BRIC because few have actually tried to leave up
to now)
xxxiv
. As for taxes and tariffs, interviewees mentioned that the UK was on par with its
European counterparts overall, and slightly better because of the relatively lower personal
taxes. Some interviewees also noted that the customs service was especially effective in the
UK, in relation to Western European countries as well as BRIC countries.
Page | 51
Table 5: Perceived strengths and weaknesses of the UK
Weaknesses of the UK
The analysis showed that the most salient weaknesses of the automotive industry in the UK
are relative labour costs, availability of skilled labour and environmental regulation. Though
many did agree that there is a deficit of skilled labour in the UK, they had varying opinions as
to the nature of unavailable skills: several interviewees claimed that the deficit was most
pronounced in skilled mid?level management, while a few others stated that they had most
difficulty in finding enough engineers. One interviewee even asserted that the deficit was
most prevalent among skilled blue?collar workers. Most of the interviewees agreed on the
fact that one of the main reasons they are finding it difficult to recruit skilled labour is that
the most accomplished high?school students and graduates do not opt for engineering, and
even those who do prefer to accept offers from the financial sector rather than from the
manufacturing one. (To underline this point, see Appendix L, which shows the favourite
employers by recent graduates, by country).
While most interviewees did indeed agree that skilled labour was in short supply, one
interviewee’s contrarian views were potentially illuminating. He claimed that there is no real
Average score No of answers
Labour flexibility 3.94 16
Quality of R&D resources 3.71 17
Governmental subsidies 3.31 13
Barriers to exit 3.29 14
Taxes & Tariffs 3.27 15
Interaction with government 3.18 17
Labour productivity 3.06 17
Quality of local suppliers 3.00 16
Logistics & infrastructure 2.88 17
Skill level of workforce 2.76 17
Availability of local suppliers 2.53 15
Environmental regulation 2.44 16
Availability of skilled labour 2.41 17
Labour cost 1.94 17
Page | 52
shortage of skilled labour in the UK and that the main difficulty lies with companies’ inability
to attract qualified individuals. In his view, this difficulty is a result of companies’ inability to
offer competitive wages and interesting career paths
xxxv
. Quantitative data seems to offer
some support for this argument, as it shows that salaries in the UK industry are indeed
lower on average than in Germany and France (we hence did confirm this statistically).
The final main weakness identified was environmental regulation. While agreeing that from
a sustainability perspective environmental regulation in the UK was highly positive, many
interviewees claimed that it also eroded the UK’s competitive advantage in relation to other
countries in the world, and even in Western Europe. These interviewees argued that the UK
tends to adopt EU?level regulation in a stricter way than do most of its counterparts in the
union, possibly, in order to set an example for others to follow. However, as long as other
countries do not adopt similar policies, industry finds it more costly to implement
environmental regulation in the UK, relative to other countries. A few industry leaders
plainly said that the environmental burden is getting ‘too heavy to bear’.
Besides these two weaknesses interviewees also expressed – to a lesser extent – their
concern regarding the availability of local suppliers, the skill level of the workforce, and the
infrastructure. In addition, there are some points raised by interviewees during the in?depth
interviews that are worth mentioning despite their not being salient in the perception
analysis. Many interviewees – despite not reflecting it in their questionnaires – noted the
difficulties in interacting with the government, mainly pointing to the fact that the relatively
low place of the automotive industry on the agenda leads to a lack of communication flow
between the industry and the government
xxxvi
. Some also mentioned that they found it
difficult to communicate with the government because of the multitude of governmental
organisations and entities they had to deal with.
The UK’s main strengths are its labour flexibility and the low barriers to exit –
the weaknesses remain the lack of skilled labour and local suppliers.
Additionally, a number of interviewees claimed that the productivity of the workforce in the
UK is relatively low (especially in relation to BRIC and CEE) because of the prevailing
importance of ‘work?life balance’, which leads to British workers having lower work ethics;
several interviewees raised the issue of the relatively inferior level of the infrastructure in
the UK; some interviewees claimed that it is too difficult to communicate with the
Page | 53
government because of the multitude of organisations they have to work with; and a few
pointed to the high tax on fuel and energy in the UK as being counter?competitive.
The UK’s relative international competitiveness
The following analysis will provide a comparison between the UK and three groups of
countries – France, Germany, Italy and Spain (FGIS); Central and Eastern Europe (CEE),
focusing mainly on the accession countries; and Brazil, Russia, India and China (BRIC). In
each case results of the perception analysis in the surveys taken will be presented first, the
points raised by interviewees during their in?depth interviews (if any) second, and a
comparison between the interviewees answers regarding the UK and the relevant group of
countries as third point.
The UK versus France, Germany, Italy and Spain (FGIS)
Interviewees were asked to
rank the developments in
sourcing from the UK
relative to FGIS. The results
are inconclusive and mainly
point to the fact that
developments in the
competitive nature of the
UK automotive industry
were accompanied by
similar developments in
Europe. All interviewees
agreed that in recent years
the main development
influencing the issue was
the appreciation of the
Pound in relation to the
Euro. Several interviewees
pointed out that it is indeed one of the main reasons for their staying in the UK, and voiced
their concern regarding the future if the Euro devalues
xxxvii
.
Table 6: Perception analysis of FGIS automotive industries’
competitiveness
Average score No of answers
Quality of R&D resources 4.43 14
Availability of local suppliers 4.00 15
Quality of local suppliers 4.00 15
Governmental subsidies 3.92 12
Skill level of workforce 3.88 16
Availability of skilled labour 3.50 16
Logistics & infrastructure 3.47 15
Interaction with government 3.44 9
Taxes & Tariffs 3.23 15
Labour productivity 3.19 16
Environmental regulation 3.14 14
Labour cost 2.38 16
Labour flexibility 2.13 15
Barriers to exit 1.92 12
Page | 54
Some interviewees claimed that the UK government and public opinion seem to value
industry less than in other European countries, which often leads the government to be less
encouraging and protective of the national industry in relation to its counterparts from the
mainland
xxxviii
. Other interviewees mentioned that UK suppliers and manufacturers began
employing innovative manufacturing techniques ahead of their mainland competition, thus
improving the overall competitiveness of the national industry.
The perception analysis (see Table 6) shows that industry leaders view the following as the
main strengths of FGIS (in order of importance): quality of R&D resources, availability and
quality of local suppliers, governmental subsidies, skill level of workforce and availability of
skilled labour. To a lesser extent, interviewees valued the interaction with government, and
logistics and infrastructure as sources of competitive advantage of FGIS.
At the same time the perception analysis showed that the following were identified as the
main weaknesses: barriers to exit, labour flexibility and labour cost. Interviewees mentioned
that they believed it to be much more difficult to close down operations in FGIS than in the
UK because of both tougher labour laws and governmental support of the industry and
opposition to closures. They also claimed that labour is far less flexible in FGIS than in the UK
because of less stringent labour laws in the latter and the ability to work more shifts and
extra hours. Labour cost in the EU was perceived to be lower than that in the UK, though
Table 7: Comparison between FGIS and UK competitiveness
FGIS UK Difference
Labour flexibility 2.13 3.94 ?1.81 Relative
advantage for
the UK
Barriers to exit 1.92 3.29 ?1.37
Taxes & Tariffs 3.23 3.27 ?0.04
Labour productivity 3.19 3.06 0.13
Relative
disadvantage
for the UK
Interaction with government 3.44 3.18 0.26
Labour cost 2.38 1.94 0.44
Logistics & infrastructure 3.47 2.88 0.59
Governmental subsidies 3.92 3.31 0.61
Environmental regulation 3.14 2.44 0.70
Quality of R&D resources 4.43 3.71 0.72
Quality of local suppliers 4.00 3.00 1.00
Availability of skilled labour 3.50 2.41 1.09
Skill level of workforce 3.88 2.76 1.12
Availability of local suppliers 4.00 2.53 1.47
Page | 55
quantitative data shows that personnel costs in the UK are indeed higher than those in
Spain and Italy, but lower than those in France and significantly lower than those in
Germany.
A comparison between interviewees’ answers regarding the UK and FGIS shows quite a few
prominent differences (see Table 7). In the data, the lower the score the better the UK does
in relation to its peers. Thus, the UK is perceived to be more competitive than FGIS in labour
flexibility and barriers to exit, while FGIS are clearly more competitive than the UK in the
availability of local suppliers, the skill level workforce, the availability of skilled labour and
the quality of local suppliers.
The UK versus CEE countries
Perception analysis (see
Table 8) shows that the
main strengths of CEE are
the low labour costs,
labour flexibility,
governmental subsidies
and barriers to exit. Many
interviewees pointed out
that the labour cost
advantage is slowly
disappearing, but
estimated that the
‘evening?out process’
would take between five
and ten years. To a lesser
extent, interviewees
identified taxes and tariffs
and environmental
regulation as additional
strengths. During in?depth interviews, a few interviewees claimed that despite relatively low
taxes, the import and export duties from CEE were perceived to be relatively high.
There were no prominent weaknesses identified, though interviewees did identify some
minor ones: logistics and infrastructure, quality of local suppliers and quality of R&D
Table 8: Perception analysis of CEE automotive industries’
competitiveness
Average
score
No of
answers
Labour cost 4.67 15
Labour flexibility 4.14 14
Governmental subsidies 4.08 12
Barriers to exit 4.00 6
Taxes & Tariffs 3.40 10
Environmental regulation 3.38 13
Availability of skilled labour 3.27 15
Labour productivity 3.20 15
Skill level of workforce 3.07 15
Availability of local suppliers 2.79 14
Interaction with government 2.78 9
Quality of R&D resources 2.73 11
Quality of local suppliers 2.64 14
Logistics & infrastructure 2.57 14
Page | 56
resources. Interviewees mentioned that in many countries in CEE the infrastructure dates
back to Soviet times, but is quickly improving. They also argued that despite the low quality
of local suppliers, the increasing number of OEMs and international component
manufacturers entering the region is helping the local industry to make fast progress. As for
quality of R&D resources, interviewees mentioned that there was potential there, but at the
moment these countries were mainly used for manufacturing and assembly.
In?depth interviews revealed two additional interesting points. The first was that the
educational systems in CEE were relatively weak and unprepared for providing the
automotive industry with skilled labour. However, it was mentioned that this will probably
change as time goes by and relationships emerge between the industry and the educational
system there. The second point was that the labour in these countries was relatively less
productive because of the lack of experience in working in a western manufacturing
environment.
Comparison between the interviewees’ answers for CEE and the UK reveals a few
differences (see Table 9). The UK is clearly more competitive in its quality of R&D resources,
but CEE was much more competitive on labour costs and slightly more competitive in its
environmental regulation policies.
Table 9: Comparison between CEE and UK competitiveness
CEE UK Difference
Quality of R&D resources 2.73 3.71 ?0.98 Relative
advantage for
the UK
Interaction with government 2.78 3.18 ?0.40
Quality of local suppliers 2.64 3.00 ?0.36
Logistics & infrastructure 2.57 2.88 ?0.31
Taxes & Tariffs 3.40 3.27 0.13
Relative
disadvantage
for the UK
Labour productivity 3.20 3.06 0.14
Labour flexibility 4.14 3.94 0.20
Availability of local suppliers 2.79 2.53 0.26
Skill level of workforce 3.07 2.76 0.31
Barriers to exit 4.00 3.29 0.71
Governmental subsidies 4.08 3.31 0.77
Availability of skilled labour 3.27 2.41 0.86
Environmental regulation 3.38 2.44 0.94
Labour cost 4.67 1.94 2.73
Page | 57
The UK versus BRIC countries
Many interviewees pointed to
the fact that it was very
difficult to assess these four
countries as a homogenous
group. Many emphasised that
they had little or no
information regarding Brazil,
and others revealed that their
answers are clearly the average
between what they think about
China (and India) and what
they think about Russia. Thus,
it seems that though the
answers in this part are fairly
representative of BRIC they
tend to be lower than answers
given separately to China and
India and higher than answers
given separately to Russia.
The analysis (see Table 10) shows that the BRIC automotive industry is more competitive in
its labour costs, labour flexibility, governmental subsidies and environmental regulation. To
a lesser extent, the interviewees pointed to labour productivity, availability of skilled labour,
barriers to exit and availability of local suppliers as strengths.
The weaknesses identified were mainly logistics and infrastructure, because of both the
relatively bad shape of roads and railways and the distance components and products have
to travel in order to get to their destination. To a lesser extent, interviewees identified the
quality of local suppliers as a weakness, though they argued that the situation was quickly
improving.
In?depth interviews revealed a few additional weaknesses. Many interviewees mentioned
that a significant disadvantage of BRIC countries (especially China and Russia) is the lack of
adherence to IP law. Interviewees mentioned that despite the high quality of the workforce
and the new facilities, R&D in these countries was difficult to conduct because of the
inherent lack of respect towards intellectual property, and the high turnover rates that lead
to engineers moving frequently from one company to the next, taking trade secrets with
Table 10: Perception analysis of BRIC automotive industries’
competitiveness
Average score No of answers
Labour cost 4.79 16
Labour flexibility 4.57 15
Governmental subsidies 4.25 12
Environmental regulation 3.77 14
Labour productivity 3.46 16
Availability of skilled labour 3.43 16
Barriers to exit 3.33 12
Availability of local suppliers 3.25 15
Interaction with government 3.20 9
Skill level of workforce 3.07 16
Quality of R&D resources 3.00 14
Taxes & Tariffs 2.92 15
Quality of local suppliers 2.71 15
Logistics & infrastructure 2.08 15
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them. An additional important disadvantage is the high import tariffs and, especially in
China, their complex structure. Some interviewees went as far as to mention the highly
inadequate quality level of suppliers in Russia.
During many of the interviews a discussion arose regarding the costs and benefits of
sourcing or working in BRIC. It was argued that BRIC are inherently more competitive
because of the low labour costs, though the rising energy prices have eroded that advantage
somewhat. Several interviewees also mentioned the relatively low quality of products as an
additional eroding factor. However, all agreed that given the current circumstances, despite
the various eroding factors, the final cost of products produced in BRIC countries is far lower
than those produced in the West.
A comparison with the UK (see Table 11) reveals that there is no one single factor that the
UK is perceived to be significantly more competitive than BRIC. However, it also shows that
BRIC are extremely more competitive than the UK on labour costs, and more competitive in
environmental regulation and the availability of skilled labour.
Table 11: Comparison between BRIC and UK competitiveness
BRIC UK Difference
Logistics & infrastructure 2.08 2.88 ?0.80 Relative
advantage for
the UK
Quality of R&D resources 3.00 3.71 ?0.71
Taxes & Tariffs 2.92 3.27 ?0.35
Quality of local suppliers 2.71 3.00 ?0.29
Interaction with government 3.20 3.18 0.02
Relative
disadvantage
for the UK
Barriers to exit 3.33 3.29 0.04
Skill level of workforce 3.07 2.76 0.31
Labour productivity 3.46 3.06 0.40
Labour flexibility 4.57 3.94 0.63
Availability of local suppliers 3.25 2.53 0.72
Governmental subsidies 4.25 3.31 0.94
Availability of skilled labour 3.43 2.41 1.02
Environmental regulation 3.77 2.44 1.33
Labour cost 4.79 1.94 2.85
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Industry leaders’ suggestions
This section will follow the order the industry leaders set when identifying the weaknesses
of the UK automotive industry. Three suggestions emerged as consensus, while several
other suggestions were also made by individuals. These suggestions/recommendations
were:
Suggestion 1: Increase availability of skilled labour
Most interviewees emphasised the importance of improving the image of manufacturing in
the UK in order to attract accomplished young people to the sector. They suggested that this
should start at a very early stage (kindergarten, primary school) and offered to be involved
at every level.
Several interviewees attested that initiatives such as these were already in place, but
lamented the fact that they were badly coordinated. A few went as far as to mention that
the issue should be identified by government as important, and put ‘on the public agenda’.
They argued that a clear strategy is needed that would convey order and continuity.
Some admitted that in order for the reputation of manufacturing to improve the industry
would have to find a way (preferably with the help of the government) of paying engineers
higher wages. Others mentioned that the government should also think about subsidising
engineering studies and provide industry with easier ways to retain foreign students
studying engineering in the UK, to fill the skills gap.
In addition to supporting the public image of manufacturing, some interviewees focused on
the low skill level of vocational labour and suggested that the government should initiate
and coordinate vocational training programmes, similarly to what the German government
is doing for the ‘Meister’ level.
Suggestion 2: Collaborate with industry on environmental regulation
The main suggestion in this context was to create a forum for discussion between the
government and the industry that would enable the latter to point out the repercussions of
various environmental policies.
A few interviewees suggested that the UK government should either slacken the regulation,
provide the industry with grants to help it implement the regulation, or pressure other
countries to adopt similar environmental policies in order to eliminate the competitive
advantage they enjoy.
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Suggestion 3: Provide a single point of contact in (or with) the government
Many industry leaders stressed the importance of communication between the government
and industry, especially in issues relation to regulation, education and low carbon initiatives.
They claimed that currently they find it very difficult to communicate with the government
because of the various entities they have to speak to when trying to promote something.
Besides these main three issues many interviewees suggested changes in the government’s
policy towards the UK automotive industry. Many interviewees suggested that the
government recognise the difficult situation the industry is in and adopt, after discussing it
with the industry, a comprehensive strategy to deal with the imminent problems
xxxix
.
A few interviewees further expressed their desire to see a long?term sustainable energy
strategy from the government. According to them, such a policy would not only be
necessary to allow the industry to survive in the future, but it would also attract new
companies and investors who would want to benefit from the progress made in the UK in
this field.
Many interviewees thought that the UK automotive industry has already significantly
deteriorated. They suggested that the government accept what has already happened and
try to focus on the industry’s strengths, maintaining them and allowing them to anchor the
industry that is left.
3.4 Industry leader survey: summary of findings
The qualitative part of the analysis reinforces the findings of the prior quantitative analysis
by underlining the structural weaknesses that have contributed to the decline of the UK
automotive industry. Industry leaders have identified strengths and weaknesses in the UK
automotive industry, with the two main strengths identified as labour flexibility and the
quality of R&D resources. Though labour is considered to be much more flexible in the UK
than in FGIS countries, it is considered to be slightly less flexible than in CEE and moderately
less flexible than in BRIC. Equally, although the quality of R&D resources in the UK is
considered to be much better than in CEE and moderately better than in BRIC, it is,
nevertheless, moderately worse than in FGIS.
Even worse, the competitive disadvantages identified seem to be here to stay: whilst labour
cost in the UK is by no means the highest in the EU, it is significantly higher than in CEE and
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BRIC. Finally, the strict enforcement of environmental regulation renders the UK moderately
less competitive in relation to FGIS, and highly uncompetitive in relation to CEE and BRIC
countries.
Industry leaders specifically emphasised Germany as having significant competitive
advantages over the UK, France, Italy and Spain, especially with regard to R&D resources,
quality and availability of skilled labour and suppliers. The German government was also
identified as extremely supportive of the industry.
CEE countries are perceived to be a significant threat to the industry in Western Europe,
especially because of the relatively low costs, which will continue to be a significant
advantage, according to the interviewees, over the next 5?10 years. Industry leaders
estimated that the weaknesses in the CEE will gradually disappear, as the shift in
manufacturing footprint is set to continue as the countries in the region get accustomed to
catering to the automotive industry (especially with regard to the educational system).
BRIC countries were mentioned especially for their significant cost advantages, which,
according to the interviewees, outweighed the shipping costs
xl
and the relatively low quality
standards. Industry leaders also mentioned that these countries have been improving their
infrastructure for the automotive industry, though many expressed significant apprehension
about conducting R&D in such an environment.
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PART IV: CONCLUSIONS
‘I knew six honest serving men, they taught me all I knew;
their names are what and why and when, and where and how and who’.
Rudyard Kipling’s ‘Six Honest Serving Men’
4.1 The need for evidence?based policy making
Previous reviews of the competitive status of the UK auto industry have commonly pointed
to the stable overall production volume (in terms of units produced in the UK), as well as
excellence in certain subsectors, such as motor sports, as signs of strengths. In the light of
the evidence presented in this report, such assessments seem romantic at best. The UK
automotive industry is in decline, and this decline is not due to a temporary economic
misfortune. It is the effect of the UK having to compete in a mature industry, which has seen
dramatic shifts in its global footprint over the past decade. It is thus important to view the
developments in the UK not in isolation, but against those at its peer group, namely the
other car producing nations in Western Europe that have been exposed to the same global
trends. Frequent comments that argue the UK would be able to ‘leapfrog’ its competitors
hence are naïve at best. In the work of the NAIGT it was made very clear from the start that
an in?depth empirical analysis would define the current state of the UK industry within the
global automotive industry, and lead the recommendations that were to be developed. We
continue to argue that understanding the underlying trends and trajectories is vital in
predicting the near?term future of the industry. Breaking or even reversing trends is only
possible once one knows about these trends.
Trends and trajectories need to be well understood for policy measures to be
effective in halting or even reversing them.
It is also very instructive to put the NAIGT’s findings into context of the previous studies that
have been commissioned by successive UK governments since 1975, and many key issues
that are seen to affect the competitiveness of the UK automotive industry have remained
remarkably constant from previous reviews over the past three decades. These include
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currency fluctuations and exchange rates, the need for better skills and training, as well as
the perception within the industry that the government does not support it, or at least does
not publicly recognise it as a strong contributor to the national economy
xli
.
So in this sense history does repeat itself: the very first observation that we have made is
that the issues mentioned by industry leaders in this study provide a near perfect
congruence to the last AIGT’s findings, as well as previous studies of the UK (see CPRS 1975).
Interestingly, these issues also feature strongly in the report on the US auto industry in
1982, at a time of crisis (see Abernathy et al. 1982). These issues are:
Public support by HM Government for the industry
The availability and skill levels of the UK workforce
The competitiveness (and scale) of the UK supply base
The inherent risk of currency fluctuations
On a positive note one could argue that it is good for this report to show continuity in the
key policy areas that the government should focus on. While this undoubtedly is true, one
also has to see this as a failure to address sufficiently these issues in the past, given that
they repeatedly are mentioned by industry leaders as factors negatively affecting the
competitiveness of the UK automotive industry.
Many of the issues highlighted by industry leaders as areas of concern, such as
a lack of public support by the government or the availability of suppliers and
qualified labour, have remained the same for over three decades.
In this respect we welcome the ‘Manufacturing Strategy 2008’ document, which despite its
rather selective reporting of KPIs, is providing the ‘manufacturing matters’ message that
industry has long wanted the government to give. This document also identifies R&D as the
most the important USP of UK manufacturing firms, which in automotive terms has to be
seen in context of the sharp decline in both capital investment and R&D the UK has seen,
which will place the UK in a very weak competitive position in the long run.
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4.2 Summary of key findings
The automotive industry is not a ‘sunset industry’: both the developed and developing
worlds are heavily relying on automobiles for economic activity and personal mobility. To
this effect the automotive industry has been growing at a steady rate, and there is no
reason to believe that this long term trend will abate in the near future. Most of the
recent growth has occurred in the emerging markets, and post?recession this trend is
likely to resume. In that sense the automotive industry, in global terms, is still a growth
sector. In the UK, on the other hand, we have seen a steady decline of automotive
activity. This reduction is not due to temporary economic misfortune, but a long?term
trend and the consequence of competing in a mature industry, which has seen a drastic
shift in manufacturing footprint over the past decade towards sourcing from low?cost
countries. The UK’s global production share has fallen by 25% since 1995, to 2.43%, and
is falling faster than in Germany or France, but less so than Italy. The employment in
both the manufacturing sector in general, and the automotive industry in particular,
show a clear downward trend that can only partially be explained by productivity gains,
outsourcing or the use of agency labour.
The UK still has a competitive, yet fragile, automotive industry: adopting a general picture
of doom is misleading, as the UK automotive industry is still producing c.1.7 million
passenger cars and commercial vehicles per annum, placing it 12
th
in the global output
league
xlii
. Within Europe, UK has remained in 4
th
position throughout since 2000. The
industry is directly employing an estimated 384,000 people. Further, our survey results
show that the key industry leaders consider labour flexibility and the quality of R&D
resources as the two main strengths of the UK automotive industry. We also find that
the UK is a competitive location for automotive manufacture in terms of productivity and
labour cost. The UK is still home to some of the most productive passenger car and
commercial vehicle plants in Europe. Thus, despite the perennial bad press coverage,
there clearly is a viable automotive industry left in the UK.
The UK is losing out disproportionately: over the past decade, the UK has seen a
disproportionate degree of plant closures, which, unsurprisingly, has resulted in a steady
decline in automotive employment. The main reasons for this decline are first and
foremost the lack of a national car maker ‘champion’ (due to the failure of MG Rover in
2005), which means that the UK now relies mainly on attracting foreign direct
investment. When it comes to investment decisions, the UK is therefore competing with
any other country in the world, as there is no natural choice to do the work in the UK.
Furthermore, due to political pressures, vehicle manufacturers tend to avoid plant
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closures in the home market. Germany is a good example, which despite high labour cost
has been able to maintain and grow its volume car industry. Strong public support and
links to the German federal and regional governments, a high skill base, as well as the
possibility of flexible labour arrangements (see for example the bid by Leipzig for the
BMW plant, which was won due to labour flexibility over the product life cycle, which
outweighed the benefits from east?shoring the plant). Location decisions are only
partially made on economic terms, political and strategic considerations play a large role.
A general shift towards niche and engine manufacture: The plant closures in the UK since
the last AIGT have shifted the landscape in the UK further towards luxury and niche
vehicles, Japanese inward investors, and engine manufacture. This is not necessarily a
disadvantage, and most likely driven by economic factors, that will see the offshoring of
entry?level or basic products to low?cost countries, while it retains the high?value
products (where the fraction of labour cost is comparatively lower, and often non?
financial product characteristics are important, such as brand or manufacturing location).
However, it does expose the UK to economic swings, as an over?reliance on luxury
vehicles increases exposure to economic downward shifts. Thus, any punitive regulation
against luxury vehicles is going to disproportionately hurt the UK car industry. One might
conclude that the UK has developed an area of expertise in engine manufacture. While
this is undoubtedly true in volume terms, one also needs to understand that these
engine plants are not embedded, but (apart from Ford Bridgend and Dagenham, and
partially BMW Hams Hall
xliii
) are all serving existing vehicle manufacturing operations in
the UK. Many UK engine plants are not embedded into local R&D and supply chain
operations, and thus not self?sustaining in the absence of the UK car plant they serve. In
that sense we would argue that one cannot assume that the fate of these engine
facilities is independent of that of the vehicle assembly operations they are serving.
The UK’s greatest advantage is turning into its worst enemy at times of crisis. The analysis
of industry leaders’ perception shows that the most prominent strengths of the UK
automotive industry are labour flexibility, and the quality of R&D resources. To a lesser
extent, interviewees noted the following as additional strengths: governmental
subsidies, barriers to exit and taxes and tariffs. In?depth interviews revealed that
interviewees value UK labour flexibility most, mainly because of the flexible working
hours they are allowed to employ, but also because of the relatively lower level of
unionisation. The flexibility to adjust capacity however is a double?edged sword: it makes
it attractive for OEMs to produce in the UK, but it also helps in downturns when firms
need to reduce capacity. Thus, it is our view that it is comparatively cheaper to reduce
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capacity in the UK, and hence the UK has seen a relatively higher proportion of plant
closures than other countries in Europe.
The UK’s main disadvantages remain skilled labour and the local supplier base: The
analysis showed that the most salient weaknesses of the automotive industry in the UK
are the availability of skilled labour and local suppliers. Though many did agree that
there is a deficit of skilled labour in the UK, they had varying opinions as to the nature of
unavailable skills: several interviewees claimed that the deficit was most pronounced in
skilled mid?level management, while a few others stated that they had most difficulty in
finding enough engineers. One interviewee even asserted that the deficit was most
prevalent among skilled blue?collar workers. Most of the interviewees agreed on the fact
that one of the main reasons they are finding it difficult to recruit skilled labour is that
the most accomplished high?school students and graduates do not opt for engineering,
and even those who do prefer to accept offers from the financial sector rather than from
the manufacturing one. In terms of suppliers, there is a general consensus that the UK is
losing its first?tier supplier base to continental Europe (France and Germany), which in
turn has led to a reduction in second and third tier suppliers in the UK. This is leading to a
‘hollowing out’ of the supply chain.
Supply chain hollowing?out: the loss of volume manufacture exacerbates supply chain
hollowing out. A further concern is to what degree the volumes at the remaining vehicle
manufacturers can support the economies of scale needed for the component supply
chain to remain competitive. While it has been very difficult to quantify, the ‘hollowing?
out’ of the UK component supply chain remains a clear risk in the mind of many industry
leaders, and the reduction in sourcing from the UK has been confirmed unanimously by
the industry leaders surveyed. Our survey clearly shows that the decline in the level of
sourcing from the UK has continued for all firms surveyed, and is very likely to decline
further over the coming five years. The great danger in this development is that with a
decrease in local sourcing, the UK component supply chain (across all tiers) may lose its
economies of scale, and hence will find it harder to compete with materials and
component imports. In the long run, without being able to call upon a competitive
component supply chain, the manufacturing base will be forced to relocate abroad as
well. We thus share the concern of the last AIGT report in 2002 that the loss of
economies of scale in the component supply chain is detrimental to the future of the UK
automotive industry.
The UK is in a comparatively weak position to meet low?carbon challenge: an area of great
concern is the drastic decline in R&D activity in the UK. As the automotive industry is
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bracing for the necessary shift from fossil fuel?powered ICEs to alternative fuels and
powertrains, the UK is an increasingly weak position to capture a share of this growing
market segment – most notably because of a lack of indigenous car makers. The UK
shows the lowest relative spend on automotive R&D across our sample, and also has
seen strong linear decline capital investment in the motor industry. At present,
alternative powertrain (such as hybrid, hydrogen, fuel cell and electric) vehicles make up
a small proportion of the market only. However, as their importance will grow, so will
the relative weakness of the UK to maintain its position in the global automotive
industry. The main developments in this space are currently being done in Japan,
Germany, France and the USA. We have little evidence that a growing ‘low carbon
vehicle’ competence is developing in the UK.
4.3 What policy levers does Government have at hand?
(This list was kindly compiled by Rob Smith of BERR, upon our request)
The common perception of instruments in industrial policy is that ‘it is all about money’,
whereby subsidies, tax breaks and grants provide the strongest levers. This notion is
distorted: governments in fact command an array of both financial and non?financial policy
instruments.
These non?financial instruments include first and foremost the proactive management of
the relationship with industry. This, in our view, is a key distinction between the UK and its
peer group in continental Europe. The issue why countries like Germany have been able to
retain their national industries is that they provide direct and frequent contact to top
(Secretary?level, at both state and federal level) government officials. This interaction is not
needs? or project?driven, but ongoing. The UK needs to be ‘first choice after the home
market’
xliv
for foreign vehicle manufacturers. The natural choice will always be the home
market, but UK can still aim to be first choice for overseas investment.
In addition to the relationship management, there are direct and indirect levers the
government can use, with different time intervals. The following list is not comprehensive,
but a first summary of the main instruments
xlv
:
Tax (and the wider economy): Taxation has been, and remains, the is a varied range of fiscal
levers operate on consumers, business/fleet purchasers, business, manufacturing industry,
supply chains, logistics providers; examples include: Company Car Benefit in Kind Tax,
Vehicle Excise Duty, Fuel Duty, Value Added Tax, Capital Allowances, Corporation Tax,
Business Rates and reliefs, Employee Car ownership schemes, Personal Taxation, and
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Interest Rates. All can be an incentive or disincentive, and can be major market drivers.
Fiscal push vs pull a key consideration. ‘Carrot and stick’ for consumers and business; is a
framework all have to work within.
Regulation/Legislation: The second main lever is regulation and legislation in the wider
sense; regulation can broadly be split between Environmental and Safety regulation. While
sometimes seen as a burden, it can also be essential to set a level playing field and/or
present opportunities (technology, innovation, single market, etc). Further,
compliance/delivery regimes can be as important as shaping the regulations: key examples
include CO
2
, Vehicle Type Approval, Safety, Fuel Quality. In terms of legislation, generic
aspects such as Company Law, Working Time Directive are possible levers.
Regional Development/Investment Incentives: There are Regional Development Agencies
(RDAs) in each of the 9 English regions. Similar functions are part of the wider remit of the
Devolved Administrations (DAs) in the case of Northern Ireland, Scotland and Wales. Key
functions include: Strategic drivers of regional economic development. Future remit will be
to bring together economic development with planning, housing and transport into a single
integrated regional strategy. Regeneration, regional competitiveness, fostering enterprise
and innovation, the regional lead on inward investment, and with regional partners,
ensuring the development of a skills action plan to ensure that skills training matches the
needs of the labour market. Overall responsibility for business support rests with the
regions, managing the Business Link and Manufacturing Advisory Service. They also support
cluster strategies for key sectors in their regions, for example Advantage West Midlands has
an Automotive Cluster Plan for 2008?11. The majority of BERR funding for business support
is delegated to the RDAs.
The Automotive Unit chairs a National Automotive Group, which brings together the
automotive leads in the RDAs/DAs, to discuss issues of common interest and to improve
coordination and joint working.
Selective Finance for Investment in England (SFIE): SFIE is designed for businesses that are
looking at the possibility of investing in an Assisted Area, but need financial help to go
ahead. Delivery of the scheme in England is primarily through the RDAs, although large
projects will be managed by BERR HQ. SFIE is discretionary and normally takes the form of a
grant or occasionally a loan. All projects must meet the scheme criteria and in each case the
amount and terms of assistance will be negotiated as the minimum necessary for the
proposed project to go ahead.
National Supply Chain Group (SCG) programme a 5 year £9m programme (jointly funded by
DTI and the RDAs). Closed to new applications October 2006. 64 projects in total, of which
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46 were in the automotive sector. Currently in development pilot supplier development
programmes which BERR, SMMT Industry Forum and the NSA?M are developing with the 3
Japanese VMs and nominated Tier 1s, in response to an action point in the Report on the
Business Environment for Japanese Automotive Supply Companies in the UK. A number of
regional supply chain programmes including the Accelerate and PARD programmes (the
latter being a programme focused on collaborative R&D) in the West Midlands, and
Productivity Alliances in the North East and West Midlands.
The Manufacturing Advisory Service (MAS), a national brand but delivered regionally. This
largely provides individual company support (as do some of the other schemes to varying
degrees), but also supports some supply chain group projects.
Education, Training and Skills – Role of Learning and Skills Councils (LSCs), National Skills
Academy for Manufacturing (NSA?M), Education Policy. Examples of current activity
include: LSCs, which currently working with NSA?M to develop workplace skills. Examples
include various courses, the promotion of apprenticeships and Train to Gain. Also,
SEMTA/NSA?M (incl. Sector Skills Council) agrees standards with industry and promotes
Auto?specific qualifications. Strong employer?led SSCs and Regional Skill Partnerships (RSPs).
25 SSCS are up and running across a range of sectors covering 89% of workforce. 17 SSCS
have launched Sector Skills Agreements. RSPs are operational in all 9 English regions.
Technology/R&D Support: TSB/Technology Platform/support exists for development of low
carbon technologies following the recommendations of the last AIGT. Current and planned
activities/initiatives include the Technology Strategy Board/Technology Programme which
offers support for innovative often high risk ideas. The scope of each competition is broader
than individual sectors and therefore auto is in competition with other sectors (e.g.
Aerospace). There have however, been a number of notable successes for Automotive.
The Technology Strategy Board Innovation Platforms (IPs) is focussed on societal challenges
(from auto perspective ITSS, LowC with a lesser link to built environment and network
security). IPs combine Departmental policy objectives. The IPs look for ‘big hit, big win’
activity. It is ‘early days’ but the LCV IP Integrated Delivery Programme is looking very good.
Early successes include the ITSS IP FITS call (with DfT and EPSRC).
R&D Tax Credits are relative to R&D activity (credit based on tax paid so no actual payment
to companies). Comes with strict eligibility criteria.
CENEX/InnovITS offer a rapid, flexible response which is not constrained by Departmental
policy (other than LowC and ITSS). Funding is limited and the focus is relatively narrow.
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Recent examples of success include electrification of Smart For2 project and InnovITS
Advance test and demo facility and SENTIENCE project.
RDAs/DAs offer a High level of funding but this comes with a regional requirement.
Emphasis is on capital projects (not cash). InnovITS ADVANCE is co?funded in this way.
Inward Investment/Trade Policy aims to attract mobile investment in key strategic areas.
UK Trade & Investment (UKTI), a joint agency of BERR and FCO, has the lead national role in
attracting inward investment to the UK, and in helping UK based companies trade and invest
overseas. Key inward investment targets are the attraction of new high value added,
knowledge?based activities, and securing the expansion of existing overseas owned
investors already here. The main focus of programmes on the trade side is helping SMEs and
middle market companies through specialist advice, subsidised information/research
services, overseas missions and seminars, etc. However, larger companies can benefit, for
example where Governmental policy and contacts play a role in business negotiations.
R&D programme, which was announced in autumn of 2006, and has the aim to increase
R&D investment as a proportion of national income from 1.9% to 2.5% over a 10 year period
to 2014. It is seeking to build relationships to this end with about 80 targeted companies,
and is supported by 17 R&D specialists in key technologies.
The Emerging Markets programme has a similar group of specialists with direct commercial
experience of these markets, who are particularly focused on helping middle market
companies access the opportunities in the key emerging markets of eg. China, India, Russia,
Brazil, Mexico, South Africa.
Transport Infrastructure/Intelligent Transport Systems – Investment in road infrastructure,
congestion and technology opportunities. Congestion charging/TDP RUC is a national
solution to a global problem and world?leading if successful. Has an impact on all levels of
society and industry. London Congestion Zone and Zero Emission Zones current examples
(ZEZs deal with air quality issues rather than low C). Freight Consolidation Hubs which could
promote the use of zero emission delivery vehicles. Potential to change final delivery to ‘out
of hours’ using near?silent EVs. Infrastructure costs/land use requires private partnership.
May need shared capital costs for EV fleet. Foresight Vehicle project e?FLEX developed as
e?Stop in Manchester.
Government Procurement Policy/Public Procurement could be a tool to bring new
products and technologies to market. Potentially large scale provides market pull. Certainly
high profile, but budgets lie in many Departments’ hands and numerous different
organisations are seeking to use procurement for different purposes. Also need to abide by
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public procurement rules (national and EU). Cenex manage DfT public procurement
programme for vans. London 2012 and other major UK events offer opportunities.
Direct subsidies, which would be the most direct form of government action, yet are also
regulated by the Subsidies Act. There is widespread anecdotal evidence that is common
practice in continental Europe, where subsidies for new plants are provided: not at national,
but at regional level in the form of transportation infrastructure, favourable tax regimes or
breaks, support of local training and skills and language training activities, subsidised
housing for workers and executives.
4.4 How can we ensure policy is effective? Key performance indicators
In order to devise effective policies, it is vital to be able to monitor the impact of any policy
made. Therefore, we have devised a set of Key Performance Indicators (KPIs) that in our
view should be monitored to track the performance of the industry in terms of
Competitiveness, Growth, and Innovation.
The following brief was set by the NAIGT for the Key Performance Indicator (KPI) Subgroup:
‘The NAIGT needs to find ways of measuring the success of the UK automotive
industry, so as to establish a baseline against which to measure future industry
performance improvement through to 2025 and beyond. This relates to the first of
the ‘terms of reference’ of the NAIGT, namely to identify key performance
indicators and success factors in support of the NAIGT.’
The KPI subgroup
xlvi
was assembled to provide the broadest possible field of industrial
representation from the passenger car, commercial vehicle and construction equipment
sectors, as well as representatives from the regional development agencies, BERR and
academia.
The KPI subgroup first of all recognised the conceptual difficulties in developing a set of key
performance indicators capable of representing the diversity of the automotive industry,
from large multinational enterprises to SME?sized second and third tier suppliers, working
across a range of products from passenger cars to construction equipment. Thus the
subgroup acknowledged that some measures are more applicable to certain sub?sectors of
the industry, while overall the aim was to cover all economic activity in the sector in the UK.
Secondly, it was recognised that any measure proposed will be imperfect, as in most cases
either the input data is unavailable or incomplete, or the effort in collecting the required
data is economically unviable, or both. Typical problems include the inconsistent
interpretation of industry classifications, levels of aggregation that are too high, lack of
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availability of international comparative data, and measurement cycles that are too long
and thus do not permit for a continuous and up?to?date measurement. Specific emphasis
was placed on devising a balance of retrospective or output?based measures and forward
looking measures, although it was recognised that common indicators, such as investment,
were far from perfect in this regard. Finally, the objective was to use as few measures as
possible, that is to focus ‘on the vital few’, in order to provide the best possible set of
measures while requiring a reasonable amount of effort in compiling and tracking data.
The matrix provides the set of ‘NAIGT recommended measures’ in the categories of
competitiveness, innovation and growth. We suggest that these measures are applied
consistently, and longitudinally, in order to monitor the performance of the UK automotive
industry, and to inform future policy decisions.
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Table 12: NAIGT Matrix of Key Performance Indicators
Retrospective or output?based KPIs Forward?looking KPIs
Competitiveness 1. The UK’s relative global share of
vehicle production, by segment
2. Value?added per employee, which
allows for international
comparisons at SIC classification
level 34 and 34.1, 34.2
3. Skill levels, in terms of % of
workforce with NVQ, HNDs,
degrees, or other.
Growth 4. Vehicle production output, in
terms cars and commercial
vehicles, in units per month
5. Export –import balance in terms of
value and units of production.
Note: if available this should be
done for passenger cars and
commercial vehicles.
6. Ratio of capital investment (in
terms of total value) and total
turnover per sector, on a rolling 5?
year horizon. Note: we consider a
relative rather than absolute
measure more appropriate here.
Innovation 7. Fleet CO
2
emissions, measured
across all vehicles produced by the
firm in the UK.
Note: this measure can be applied
at firm level, as well as at segment
level (to compare a firm’s
performance in relation to its peer
group).
8. CO
2
emissions to produce one unit
(including emissions, landfill), by
vehicle category (passenger cars
and commercial vehicles).
9. R&D expenditure in SIC/DM 34, as
a % of Gross Value Added in
SIC/DM 34, as a measure of the
extent to which the sector
reinvests in R&D in the UK.
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PART V: OUTLOOK: THE NEED FOR A ‘CAR 2.0’
‘The Stone Age did not end for a lack of stone, and the Oil Era will also end before the World
runs out of oil.’
(Quote attributed to former Saudi oil minister Sheikh Zaki Yamani)
5.1 Preparing for a fundamental shift in powertrains and fuels
In this report we have focused on the current state of the UK automotive industry, and
outlined the trajectories and trends that will shape its near future. In addition however we
fully acknowledge that the automotive industry is facing its second major shift in
powertrains and fuels, and the final part of this report will be devoted to what undoubtedly
will shape the long?term future of this industry – in the UK, as well as in any other country of
the world.
This trend will increasingly affect the industry, although industry leaders agree that – due to
the long product life cycles, path dependency and sunk cost – the traditional ICE will remain
the most common powertrain for the coming decade, accounting for at least 80% of all
automotive powertrains produced. Nonetheless, virtually all vehicle manufacturers are
working on alternative powertrains at this point in time, yet it is important to note that:
i. most manufacturers are concentrating their efforts on a single technology only, as
the high cost do not permit for exploring several competing technologies at this
point in time.
ii. there are regional clusters and international collaborations on new powertrains in
place already, whereby Japan is leading the efforts on hybrid vehicles, Europe is
largely focussing on downsizing and improving existing ICEs, while the USA is
focusing mostly on fuel cell and electric vehicles.
In the long run, as the fraction of hybrid, electric, fuel?cell, hydrogen, and flex?fuel vehicles
will increase, so will the importance of local R&D resources to capture a share in this
growing trend. Thus, recognising the UK’s weak position here and developing the
automotive R&D sector in this area will become a vital component in the UK’s quest to
capture its share of this growing market segment, and sustain its operations in the UK in the
long term (see also the ‘NAIGT Technology Roadmap’ for more detail on technologies, and
likely timeframes).
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5.2 The mandate for change
The mandate for change is driven by two factors: the depletion of fossil fuels, and the need
to avert further damage to the Earth’s climate through carbon dioxide emissions. We will
discuss each in turn.
‘Peak Oil’ and the inevitability of further oil price increases
A timeline of industrial development that stretches back to the Middle Ages, the oil?based
economy is a relatively recent phenomenon ? the first commercial oil well came on?stream
in Titusville, Pennsylvania, USA, only 150 years ago. Since then oil has taken up a pivotal
role in every aspect of our lives ? not only as a fuel and energy source for transportation, but
also as a raw material of virtually any plastic as well as many pharmaceutical products and a
whole range of petro?chemicals. The reason for the rapid rise of the use of oil as a source of
energy is simple: as the demand for energy grew during industrialisation, oil (and its
derivatives, gasoline/petrol and diesel fuels) were easy to process (by essentially ‘cracking’
the crude oil carbon chains into smaller chunks), these fuels were easy to transport as they
were liquid over a wide range of temperatures, had low ignition points so were safe to
handle, and most importantly, had a high energy density. So, with the invention of the
internal combustion engine by Nicolaus Otto, and the self?igniting derivative of Rudolf Diesel
at the end of the 19
th
century, respectively, the dominant design for the powertrain of our
current mobility system was formed, and has remained largely unchanged for over a
century.
The depletion of fossil fuels and the environmental impact of transportation
emissions create a strong mandate for change.
The rise in crude oil prices that is fuelling this rise in transportation, and ultimately supply
chain cost, is not unexpected. It has always been recognised that the reserves of fossil fuels
are finite. With the drastic oil price increase in 2008, this growing gap between supply and
demand, for oil has now become significant. The unforeseen rise in demand in emerging
markets means that the gap is growing wider. The effect of this gap between supply and
demand has been manifested in the dramatic increase in the price of oil.
It was a senior geologist and analyst at Shell, named M.K. Hubbert, who in 1956 embarked
on a simple quest, namely to calculate the remaining world oil reserves. His assumptions
Page | 76
were simple: he argued that at some point in time the production of oil would reach its
peak, and from then on would steadily decline, at the same time as the cost of exploration
and production would rise. He assumed that the production pattern of crude oil would
essentially resemble a bell?shaped curve, and labelled the turning point of maximum
exploration ‘peak oil’. Hubbert predicted peak oil for the period of 2010?2015, see Figure
22.
Figure 22: Hubbert’s original ‘Peak Oil’ chart. Source: Hubbert 1956.
Since, many predictions have been made that refine Hubbert’s curve, see Figure 23. While
some predictions are far more optimistic, the majority of studies place the peak at 80?85
million barrels per day (which is the equivalent to the level reached during the oil price rise
in 2008), in the year 2010 or 2011.
Due to the limited information available about the status of many oil fields in the Middle
East it is impossible to determine exactly when ‘peak oil’ will be reached, yet it is also
irrelevant. Whether or not peak oil has been reached does not change the fact that –
logically – it will be reached in the near future. Thus, assuming that the oil price hike was
merely an unfortunate result of speculation in the stock market is naïve: there are growing
concerns over the accuracy of Saudi?Arabia’s oil reserve claims, and the large remainder of
the World’s oil reserves lies in politically unstable or uncontrollable regions, namely Iran,
Iraq, Venezuela, Nigeria, and Russia. Hence, even if reserves are verified, the mere fact that
these lie in volatile or potentially hostile regions will further fuel the perception of
uncertainty, and hence increase the price for crude.
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Figure 23: Recent ‘Peak Oil’ Predictions. Source: www.theoildrum.com
At the same time that the supply of oil is reducing, the demand for it continues to increase,
largely driven by the economic growth in emerging markets. In fact, most projections of
future world demand for oil show it continuing its rapid growth post recession. The result of
these two forces ? reducing supply and increasing demand ? is to create a widening gap
which in the absence of fuel substitutes can only be closed by significant price increases.
Thus, for the medium and long term (post recession) we will need to both plan for increased
volatility in the oil price, as well as for a general increase in crude oil prices.
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Climate Change and Vehicle Emissions
The second mandate for change is the environmental impact of transportation: motor
vehicles cause 14% of all greenhouse gas (GHG) emissions, and thus are a major contributor
to climate change, and global warming. And here a lot remains to be done: while the
automotive industry has presented many innovations with regards to emissions (such as the
catalytic converter), the overall fuel consumption has remained fairly stagnant for the past
twenty years, see Figure 24. Key drivers for this lack of improvement have surely been the
increase in vehicle size and weight, driven by an increase in option and equipment content.
In order to reduce the emissions of our transportation system, we need to either replace the
fuel or reduce the energy consumption, or both. The options at hand, and how this change
can be achieved, will be discussed next.
Figure 24: Fuel consumption by vehicle type over time (US Data).
0
10
20
30
40
50
60
1960 1970 1980 1985 1990 1994 1996 1998 2000 2001 2002 2003 2004 2005
Cars Light trucks (incl. SUVs) Medium duty trucks
Heavy duty trucks All vehicles
Source: U.S. Department of Transportation, Federal Highway Administration
Average fuel consumption by vehicle type in litres per 100 km, USA
Page | 79
5.3 Disruptive innovation or gradual change?
With regards to how this change will occur, all too often there is a perception in the public
mind that a ‘disruptive innovation’ will lead to a large?scale change in the industry over a
short period of time. This notion is unfortunately unrealistic, for three reasons:
First and foremost, modern vehicles are optimised to meet multiple objectives: passenger
and pedestrian safety, comfort, ease of operation, fuel consumption and affordability. Even
if a new technology provides better energy efficiency, it would still have to meet the safety
and affordability criteria in order to succeed in the marketplace.
Secondly, the industry clockspeed is very slow. Vehicles are in operation for an average 12
years, while product development life cycles are about 24?36 months. Thus, it would take at
least ten years for 75% of all vehicles to be replaced with the new technology. And of
course, in addition to replacing the actual vehicles, the fuel distribution infrastructure might
have to change as well, which is likely to introduce further delays in the adoption.
Thirdly, the industry is strongly bound by scale economies. Present development costs for
new models are in the order of $1bn, and need to be offset against high volumes in order to
ensure competitive prices. One of the key driving factors is the sunk costs that have been
invested in current technologies (most notably steel forming and welding which requires
very expensive pressing dies), as well petrol/diesel?based internal combustion engines. The
industry is characterised by its heavy, encumbered investments, which result in high barriers
to entry for new entrants.
Any radical change in automotive fuel and powertrain technology will be
inhibited by current industry structure, vehicle architecture, as well as the way
vehicles are used. Any change will phase in incrementally.
Thus, even if a radical technology were to be invented, it would have to deal with the strong
path dependency present in the automotive industry that results both from the sunk costs
for current technologies used to produce a vehicle, as well as the long cycle of usage for this
durable good. Any new technology will have to compete with the mature existing dominant
design on cost, safety, and reliability, which makes the rapid adoption of any new disruptive
technology unlikely. This marks a structural difference between the automotive and other
sectors that feature a higher clockspeed, where large?scale adoption can happen in the
short term.
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5.4 What are the options? A primer on alternative fuels and powertrains
In order to outline the different options at hand, it is first of all important to understand that
automotive powertrains are embedded in (a) the vehicle architecture they propel, (b) the
transportation system they are used in, and (c) the fuel sources and infrastructures that
provide the energy. In order to understand the issues associated with a major change in
automotive powertrains, all three aspects need to be considered.
Also, it is important to recognise that transportation and energy systems are largely
developed, manufactured and operated by private industry. This means that all stages in the
value chain – development, manufacture and operation – need to be profitable. In short, if
this transition is to happen, everyone involved ‘needs to make a buck along the way’. Even
where governments are taking an active role in managing the transition, commercial
realities cannot be ignored. As the World Business Council for Sustainable Development
(WBCSD) wrote in its ‘Mobility 2030’ report:
‘Governments may sometimes take a longer term view than companies. But there
are limits. A society that bankrupts itself trying to force the premature adoption, or
inappropriate use, of novel but economic technologies is not sustainable. Neither is a
society that in order to conserve financial resources hamstrings industry with
regulations to make it operate in an economically unsustainable manner.’
xlvii
In terms of optional powertrains, the main pathways are shown in Figure 25:
Figure 25: Automotive powertrain pathways. Adopted from WBCSD.
Coal
Crude Oil
Natural Gas
Primary Energy Source Energy Carriers Infrastructure Powertrains
Coal
Crude Oil
Natural Gas
Biomass
Natural Gas
Nuclear
Gasoline
FT Gasoline
Diesel
FT Diesel
Biodiesel
Ethanol
Methanol
DME
CNG
LPG
Hydrogen
Electricity
ICE
Electric
Fuel Cell
Hybrid
Fuel Cell
(FC)
ICE Hybrid
Liquid Fuel
Infrastructure
Gaseous Fuel
Infrastructure
Electric
Infrastructure
‘Plug?in’
FC or ICE
Hybrid
Butanol
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As can be seen, a wide range of potential options are at hand how the existing and
renewable energy sources can be coupled with existing and new fuels, and infrastructures.
The fundamental problem is that none of these alternative pathways provides a clear
alternative to petrol/diesel as main transportation fuel. In other words, the main reason
why we find it so hard to replace petrol/diesel as our main fuel type is that it combines a set
of key advantages:
1. Oil?based fuels are affordable
2. Oil?based fuels have a high energy density, yet are safe to distribute and store as
they are liquid at ambient temperatures
3. The internal combustion engine is a mature and reliable technology
Neither hydrogen nor electricity – that are commonly proposed as main competitors – have
properties that are even close to the performance of petrol, see Table 13:
Table 13: Energy Density by Weight and Volume for different Fuel Types.
Energy Carrier Form of Storage Energy Density by
Weight [kWh/kg]
Energy Density by
Volume [kWh/l]
Hydrogen Gas (20 MPa) 33.3 0.53
Gas (24,8 MPa) 33.3 0.64
Gas (30 MPa) 33.3 0.75
Liquid (?253°C) 33.3 2.36
Metal hydride 0.58 3.18
Natural Gas Gas (20 MPa) 13.9 2.58
Gas (24,8 MPa) 13.9 3.01
Gas (30 MPa) 13.9 3.38
Liquid (?162°C) 13.9 5.8
LPG (Propane) Liquid 12.9 7.5
Methanol Liquid 5.6 4.42
Gasoline Liquid 12.7 8.76
Diesel Liquid 11.6 9.7
Electricity Pb Battery (chemical) 0.03 0.09
The main impediments to hydrogen are storage and distribution infrastructures, as we will
discuss below, but this most likely can be solved through technological innovation.
Electricity seems to be the second possible choice, using hybrids to convert our current
vehicles into all?electric cars. The one problem that affects both hydrogen and electricity,
albeit it to different degrees, is whether we can produce it cheaply and cleanly: while it
would of course be theoretically possible (and very desirable indeed) to use renewable
energy (wind, solar or tidal power) to produce either electricity directly, or use that
electricity to produce hydrogen through electrolysis of water, the reality is that these
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options are far from today’s capabilities. So far, most of the hydrogen produced is by steam
reforming fossil fuels, which generates almost as many CO
2
emissions as burning it in the
first place, and of course large amounts of our electricity are produced by burning coals and
through nuclear energy, each polluting the environment in different ways.
A wide range of alternative fuels and powertrains are already available, but so
far none has emerged as a clear alternative to the internal combustion of fossil
fuels. The reason is that any powertrain/fuel technology has to meet the
multiple objectives of availability, affordability, safety and sustainability.
One key trend that is already underway is an electrification of the vehicle architecture. This
has several advantages: firstly, any powertrain that uses electric energy has zero tailpipe
emissions and can thus be used in areas that are sensitive to emissions (such as inner cities).
Secondly, internal combustion engines are not well suited (that is, inefficient) to operate in
stop?start traffic patterns. Most importantly however, bringing in an electric powertrain
allows for the merger of vehicle systems: where mechanical systems and electrical systems
have to be combined in a traditional vehicle architecture (for braking, steering etc), these
can be combined if they are electrical. Hub motors, for example, could provide propulsion,
braking, ABS, and ESP functionality – all in one system. This allows for content and weight
reduction of the vehicle, which results in considerable increases in fuel efficiency.
Overall, the pressure is mounting: more stringent emissions guidelines, spearheaded by
markets such as California, have already fostered a range of hybrid vehicles, which use both
an internal combustion engine (ICE), and an electric powertrain that permits ‘zero
emissions’ in city traffic. Vehicles such as the Toyota Prius and Honda Insight have been
successfully launched, and the market for these vehicles is growing. In the long run
however, these hybrid vehicles will not solve the problems arising from decreasing fossil fuel
resources and increasing pollution through vehicle emission. In fact, the average fuel
consumption of hybrid?electric vehicles (HEV) is still worse than that of modern diesel
engines, and only provides economic and environmental advantages in short?distance city
traffic cycles. Here, the prospects of the fuel cell (that uses hydrogen and oxygen gases in a
chemical reaction to generate electricity, without generating any emissions other than
water) are far more promising. These advanced fuel cell powertrains offer much higher
efficiency than both conventional and hybrid vehicles when assessed on a ‘well?to?wheel’
basis (see Table 14).
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Table 11: Overall Energy Efficiencies of Different Powertrain Options. Source: Toyota Motor Corporation.
Well?to?Tank Tank?to?Wheel
Well?to?Wheel
(Overall)
Gasoline Vehicle (ICE) 88% 16% 14%
Electric Vehicle (EV) 26% 80% 21%
Gasoline Hybrid Electric Vehicle (HEV) 88% 30% 26%
Fuel Cell Vehicle – present (FCV) 58% 50% 29%
Fuel Cell Vehicle – target (FCV) 70% 60% 42%
While a certain consensus seems to have been reached that fuel cells will spark the gradual
change from CO
2
?emitting to CO
2
?free traffic (transportation accounts for c.26% of global
CO
2
emissions caused by combustion), while retaining existing technologies of the car itself,
a range of key problems have not yet been addressed. These problems are the generation of
hydrogen, its storage, and the infrastructure needed to support a large fleet of fuel cell
vehicles.
First of all there is a serious environmental concern with generation of hydrogen. Currently,
the majority of hydrogen gas is reformed from fossil resources. During this process, CO
2
is
generated, so that an overall reduction of greenhouse gas (GHG) emissions is achieved only
if the hydrogen is used in fuel cell vehicles (rather than internal combustion engines, which
can also run on hydrogen) (European Commission, 2004). Assuming that sufficient hydrogen
is generated centrally, it could then be distributed through ‘petrol stations’, given that the
infrastructure was in place. This brings the second problem. Currently, there are c.22,000
petrol stations in the US alone, all of which would have to be converted to supply hydrogen.
GM estimated that it would take $11 billion in investment alone to support 1,000,000 fuel
cell vehicles in the US. On the other hand, it takes c.11,000 stations in 100 main cities in the
US to reach 70% of the US population, so a certain incremental path for migration from
densely populated to less populated areas seems feasible.
The main problem is hydrogen storage in the vehicle. There are essentially three options:
liquid hydrogen in a tank, as a compressed gas, or the storage in metal hydride form. The
first option means that the tank can be small as the liquid gas is very dense, but constantly
‘breathes off’ some gas to cool the tank. So, if a car was left at the airport for a week, the
tank would be empty upon return. The second option seems the most promising, and is
already being practised with the Compressed Natural Gas (CNG) vehicles, which operate in
large fleets in countries such as Holland, for example. Here, the consumer acceptance of
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having a compressed gas tank in the vehicle is dependent on the safety of such installations.
Finally, experiments with metal hydride storage systems have been undertaken by
companies such as Daimler?Benz, BMW, and Mitsubishi as early as 1985, and test vehicles
have been on the road for more than 15 years by now. Here, the hydrogen is absorbed by a
metal ‘sponge’, and only released once the metal hydride is reheated. The storage is the
safest option, yet bears the problem that considerable energy is needed to re?release the
hydrogen by heating the metal storage, as currently temperatures of 80°C are required for
this process. So far, the energy balance for metal storage systems is negative.
In conclusion, it is fairly certain that alternative fuels will gradually replace petrol and diesel
fuels, while none so far has emerged as the next dominant source of energy. The question
which fuels and powertrain technologies will drive this transition however is far from
certain, as a range of fuel, storage and conversion possibilities are at hand. Studies by the
European Commission and the vehicle manufacturers’ association EUCAR concluded that ‘no
single fuel pathway offers a short term route to high volumes of low carbon fuels’. The study
instead expects strong contributions from a wide range of technologies, such as CNG and
bio fuels, and expects a wider variety of fuels in the market within two decades (European
Commission, 2004, 2007). Thus, despite all the hype about hydrogen and electrification, the
question of the fuel of the future is far from resolved, and so manufacturers all lobby hard
for their respective concepts, most of which currently centre around hydrogen and methane
as fuels. Currently, the question of future propulsion introduces considerable uncertainty
into the competitive realm in the automotive industry, which is likely to sustain until one or
several new powertrains have found general acceptance with customers, regulators and
policy makers, and surpass the critical volume to form a new standard.
These factors, combined, will drive the shift in automotive powertrains. Due to the industry
structure and clockspeed this shift will be gradual, and for the foreseeable future we will see
an increasingly diverse mix of fuels and powertrains in personal mobility. The NAIGT
Consensus Roadmap reflects these factors (see Figure 26, and NAIGT main report).
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Figure 26: NAIGT Consensus Roadmap.
5.5 How to support the transition towards energy?efficient, low?carbon
transportation systems
The UK government has set ambitious target for a reduction in carbon emissions by 2050.
Considering the lead?times to develop, launch, and replace motor vehicles, immediate
radical action would be needed to achieve such reductions in emissions caused by
transportation. Here, three main aspects will be critical in determining how the transition
towards alternative fuels and powertrains will take place:
(a) how the government measures the environmental impact of motor vehicles,
(b) whether demand?side or supply side interventions will be used, and
(c) what policy levers will be used to incentivise the adoption of such vehicles.
We will discuss each aspect in turn.
The Consensus roadmap defines future direction but we need a focused res
agenda to deliver products that will benefit UK plc
Ni che EVs
2020
2000 2010
2030
Full Hybrid
Micro/Mild Hybrid
130 100
EU Fleet Average
CO
2
Targets (g/km)
2040
Plug-In Hybrid
Mass Market EV Technology
IC Engine and Transmission innovations (gasoline/diesel/ hydrogen /renewables)
Demonstrator s Fuel Cell Vehicle
Demonstrator s
Charging Infrastructure
H
2
Infrastructure
Energy Storage Breakthrough
Energy Storage Breakthrough
Fuel Cell Stack & H
2
storage Breakt
Vehicle Weight and Drag Reduction
??
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Beyond tailpipe CO
2
: the need for new measures
Performance measure drive behaviour: in this respect the decision which performance
metrics will be used by the government(s) will drive the decision by the vehicle
manufacturers which technologies to adopt, and which ones to phase out.
First of all, one needs to understand what drives the environmental impact of motor vehicle;
there are three main factors that matter:
1. Vehicle design: the weight, aerodynamic drag (cw) and roll resistance determine the
fuel consumption of the vehicle. For example, every additional 100kg of weight
result in an approximate increase of 1 l/100km fuel consumption.
2. Powertrain design: the design of the powertrain largely determines the fuel
efficiency of the vehicle, in other words, how much energy is used to propel the
vehicle. This energy efficiency can be differentiated into:
a. Fuel efficiency of the infrastructure or ‘well?to?tank’ (WTT) efficiency, or in
other words, how much energy is lost/needed to bring the fuel into the
tank.
b. Fuel efficiency within the vehicle or ‘tank?to?wheel’ (TTW) efficiency, or in
other words, how efficient is the powertrain in converting the energy from
the fuel into motion. Combined, WTT and TTW efficiencies give the ‘well?to?
wheel’ (WTW) energy efficiency of a fuel?powertrain combination.
c. Carbon emissions in g C0
2
/100km; for example, a litre of petrol burnt in a
petrol engine produces 2.32kg of carbon dioxide, a diesel engine produces
2.66 kg/l diesel burnt
xlviii
.
3. Utilisation: the cycle of utilisation of the vehicle has a strong impact on the fuel
consumption, and energy efficiency. Diesel powertrains for example are the most
energy?efficient option with regards to long?distance travel at constant speed, while
electric and hybrid?electric powertrain work best in city cycles.
Combined, these factors determine the environmental impact of a vehicle. To give an
example: if an electric vehicle is powered by coal?generated electricity, its greenhouse gas
emissions (on a WTW basis) will be slightly higher than for a petrol?powered vehicle
xlix
. The
magnitude of any advantage these vehicles provide thus strongly depends on the source of
electricity, and the degree to which carbon emissions are generated and captured.
Similarly, the Tesla sports car (one of the very first desirable electrical vehicles) has zero
tailpipe emissions, and a TTW efficiency that is very high. But considering that it takes about
500g of CO
2
emissions in the UK to produce a kWh of electric energy, and the Tesla’s
Page | 87
consumption of 430 Wh/mile travelled, it effectively ‘emits’ 133g/km of CO
2
. This figure of
course relates to WTW and thus is not comparable to ICE vehicles, where the figures relates
to TTW emissions only. On an on?par comparison, the Tesla burns an equivalent of about
1.28% of one gallon of gasoline, which equates to about 3.6 l/100km fuel consumption. In
relation to performance, the Tesla is nearly three time more energy efficient than its Lotus
Elise sibling
l
.
Measuring tailpipe CO
2
emissions is largely meaningless – what matters are
well?to?wheel emissions, and well?to?wheel energy efficiency.
In order to account for the true environmental impact of transportation, it would be more
accurate to use WTW or ‘end?to?end’ measures for both energy efficiency and emissions:
1. Well?to?wheel energy efficiency, stating how much energy is lost in the conversion
from generation through distribution, storage to utilisation. This measure should be
given as a ratio of energy generated to energy used for propulsion: a ratio of 14%
(typically for an ICE vehicle) would mean that 14% of the energy in the fuel is
actually used to propel the vehicle, with the remainder being lost in heat, friction
and conversion from to heat to motion.
2. Well?to?wheel CO
2
emissions, showing the total emissions caused in generation,
distribution, storage and utilisation of the energy needed to propel the vehicle. This
encompassing measure would thus provide an holistic and more balanced view of
the environmental impact of a given fuel?powertrain design.
Demand?side versus supply?side interventions
Any government aiming to support the shift to low?carbon transportation could adopt two
basic approaches: first of all, it could give grants and subsidies to individual firms (so called
‘supply side interventions’). The main concern with this approach is that it distorts
competition, often by supporting the weakened national champion. The nationalisation of
British Leyland in 1975 marks a good case here. Even worse, supply?side interventions will
also hurt competitive firms that are not being supported, which now have to compete on
unequal terms with the firm being subsidised.
The other approach is to provide support by increasing the demand for the products the
industry produces (so called ‘demand?side interventions’). Car scrappage schemes are a
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good example. The problem with such schemes is the lack of a direct measurable effect on
the national industry it aims to support. In a globally connected industry, it is virtually
impossible to ensure that subsidies given in the UK market benefit exclusively the UK
industry. If consumers decide to buy a Korean car using a UK government incentive, then
this cannot be prevented.
Past experience shows that supply?side intervention (subsidies for individual
firms) distorts competition, and often inhibits radical reforms needed to regain
competitiveness. Demand?side interventions are much more effective, but
show a weak cause?effect relationship in support of a national industry.
Overall, neither approach is perfect, however past experience has shown the long?term
detrimental effect of shielding nationalised firms from market competition, while the recent
scrappage schemes have indeed been very effective at restoring market demand – albeit
not exclusively for the domestic players.
Carbon tax and trading, or fuel price increase: how to incentivise consumers?
An obvious question is ‘why is the industry so slow in adapting these new powertrains?’ First
and foremost, because of a lack of consumer demand: over the past decades, vehicle
manufacturers had offered several alternative powertrains and efficient vehicles, most of
which had a disastrous market reception. To list a few: The ‘3?litre Lupo’ of Volkswagen,
which was capable of 94 miles per Imperial gallon, but had very poor sales; the first start?
stop automatic was available in VW Golf Mark III, but it was a commercial flop. The GM EV 1
electric vehicle was available in 1996, but received little interest then. The main reason for
the commercial failure of such pioneering vehicles was that they were too expensive for the
fuel savings they offered (at times of an overall low and stable cost of oil), so consumers
were not interested.
More recently, most manufacturers have launched ‘eco models’ of existing vehicles. For
example, the Smart Fortwo CDI achieves 3.4 l/100 km, the current Ford Fiesta Econonetic
achieves 3.7 l/100 km or 77 mpg US), which are comparable to modern hybrid vehicles such
as the Prius II at 65.7 mpg or 4.3l l/100 km, or the Honda Insight II at 64.2 mpg or 4.4 l/100
km. The Lexus RX 400h hybrid SUV, on the other hand, achieves only 34.9mpg or 6.7
Page | 89
l/100km – as stated above, vehicle weight has a drastic impact on fuel consumption, which
this comparison illustrates.
A wide range of policy measures have and are being debated how to make these vehicles
more attractive to consumers: carbon trading, carbon taxes and increased standards for
emissions are all being debated at present. Here, it is obvious that carbon trading is already
being undermined by firms lobbying for exceptions; the main question is: why is the market
mechanism not correcting our car buying behaviour? Because the relative wealth of most
car buyers, the undervaluation of fuel economy savings when purchasing a car, and the non?
consideration of climate change cost mean that the market mechanism fails in this case. In
short, the consumers do neither feel the ‘economic pain’ of driving fuel?inefficient cars, nor
do they feel any repercussions from the emissions they are causing.
First and foremost, we need to reduce uncertainty for anyone wishing to invest in new fuels
and powertrain technology by removing the price volatility currently experienced, as this is
inhibiting investment in novel powertrains. Many experts agree that raising the cost of fuel
to a reliably high?level will send the right signal to the market.
One obvious approach would be to increase the cost of petrol to include the cost that the
CO
2
emissions will cause: according to the IPCC and Stern Review
li
, there is a remarkable
congruence between the models as to the mean cost per tonne C0
2
emissions, namely $120?
130. If one were to convert this to cost of fuel, this would add an estimated 16p to a litre of
fuel that retails at £0.90.
While logically very compelling, such a 16p increase in fuel price might not even be
sufficient: the price elasticities are low, and decreasing: strong change needed to alter
behaviour. Secondly, there is volatility in the fuel price. This means that people will hold off
buying cars when the fuel price increases, and then will resume their normal buying
behaviour. To give an example: the recent fuel price hikes were not sufficient to persuade
buyers to change behaviour. According to academic studies, the short?term price elasticity
of demand for gasoline in the United States has historically been around ?0.3. This means
that with a 10% increase in fuel prices at the pump, the demand for fuel should drop by 3%.
This data is based on the reaction of consumers to the increases of fuel prices in the 1970s
and 1980s during the oil crises. As Sperling and Gordon note in their 2009 book, more
recently this price elasticity has dropped in recent times, with some studies claiming as little
as ?0.04
lii
.
Page | 90
Uncertainty in the cost of fuel prevents manufacturers from developing new
technologies, and consumers from demanding these products. What is needed
is a clear signal that the cost of fuel will rise and remain at a high level, which
will give both industry and consumers confidence to switch to low?carbon
alternatives.
Instead, we need to eliminate the downwards uncertainty by providing the clear policy that
the ‘times of cheap fuel’ are over. High fuel prices will send the clear signal needed that is is
worth investing as well as worth buying these cars with new powertrains, because there will
be significant savings to be realised over the course of their usage. Price floors have been
proposed (e.g. by Sperling and Gordon), yet these would allow OPEC to simply raise the cost
of crude oil up to the floor price. Instead we need to increase the tax on fuel significantly,
even higher than the Stern Review suggests, and employ these extra revenues to proactively
support the shift towards a low?carbon, energy?efficient transportation system.
As unpalatable as it might be at times of economic crisis: if we want our transportation
systems to shift towards greater energy efficiency and lower carbon emissions, the fuel
prices at the pump will have to increase: it is the end of cheap oil which will be the
beginning of the low carbon era.
Page | 91
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Page | 94
Appendices
Page | 95
Appendix A: High?level data on the UK automotive industry
Annual passenger car production. Source: SMMT
2006 2007 2008 Growth 07/06 Growth 08/07
Nissan 301,211 353,700 386,555 17% 9%
BMW 184,687 237,709 234,461 29% -1%
Honda 184,351 237,772 230,423 29% -3%
Toyota 282,214 277,825 213,329 -2% -23%
Land Rover 175,714 232,548 184,831 32% -21%
Vauxhall 143,654 115,476 102,481 -20% -11%
J aguar 69,852 54,030 72,876 -23% 35%
Bentley 10,034 9,973 7,675 -1% -23%
Aston Martin 7,052 7,393 6,487 5% -12%
Lotus 3,062 2,630 2,106 -14% -20%
LTI 2,484 3,129 2,095 26% -33%
Rolls Royce 831 1,009 1,388 21% 38%
Morgan 600 632 625 5% -1%
MG 468
Caterham 329 433 437 32% 1%
Mercedes Maclaren 261 283 382 8% 35%
Peugeot 75,401
TVR 306
Others 42 12
Total 1,442,085 1,534,554 1,446,619 6% -6%
Page | 96
Annual commercial vehicle production. Source: SMMT
2006 2007 2008 Growth 07/06 Growth 08/07
IBC 89,068 94,968 87,248 7% -8%
Ford 70,890 75,662 66,215 7% -12%
Leyland 16,954 17,478 24,662 3% 41%
LDV 6,990 10,418 9,308 49% -11%
Vauxhall 3,928 12,748 9,250 225% -27%
Land Rover 13,663 2,099 3,536 -85% 68%
Alexander Dennis 867 889 1,262 3% 42%
Dennis Eagle 852 952 903 12% -5%
Optare 425 472 512 11% 8%
Foden 264
Peugeot 3,803
Total 207,704 215,686 202,896 4% -6%
UK vehicle production. Source: ONS/SMMT
Cars Export % Commercials Export % Total Export %
2000 1,641,452 65 172,442 44 1,813,894 63
2001 1,492,365 60 192,873 50 1,685,238 59
2002 1,629,744 64 191,267 60 1,821,011 64
2003 1,657,558 69 188,871 55 1,846,429 68
2004 1,646,750 72 209,293 61 1,856,043 71
2005 1,595,697 74 206,753 63 1,802,450 73
2006 1,442,085 77 207,704 66 1,649,789 75
2007 1,534,567 77 215,692 62 1,750,259 75
2008 1,446,619 78 202,896 62 1,649,515 76
Page | 97
UK vehicle registrations. Source: SMMT
Cars Imports
%
Commercials Imports % Total Imports %
2000 2,200,813 74 298,043 68 2,498,856 73
2001 2,224,538 73 313,411 69 2,537,949 73
2002 2,544,924 77 322,258 76 2,867,182 77
2003 2,589,872 80 363,687 77 2,953,559 80
2004 2,567,271 82 389,923 79 2,957,194 82
2005 2,439,717 83 387,427 80 2,827,144 83
2006 2,344,864 86 386,968 82 2,731,832 85
2007 2,404,007 86 395,271 79 2,799,278 84
2008 2,131,795 85 352,823 78 2,484,618 84
UK automotive manufacturing industry statistics. Source: ONS
Employment GVA Employee
cost
GVA as % Capital
Expenditure
Trade
balance
(thousands) £M £M of employee
cost
£M £M
2000 263 8,089 6,383 127 1,990 -7,167
2001 246 9,138 6,382 143 2,118 -12,293
2002 243 9,126 6,498 140 1,259 -12,161
2003 234 8,915 6,502 137 1,173 -12,522
2004 221 9,150 6,611 138 1,367 -12,749
2005 210 9,079 6,608 137 1,297 12,875
2006 194 9,582 6,692 143 1,379 -14,258
2007 180 10,153 6,208 164 919 -16,752
Page | 98
UK automotive trade statistics. Source: ONS
Employment GVA Employee cost GVA as % Capital Expenditure
(thousands) £M £M of employee cost £M
2000 553 16,807 7,703 218 1,112
2001 552 18,911 8,520 222 1,163
2002 544 20,313 8,814 230 1,166
2003 558 22,049 9,114 242 1,371
2004 552 20,755 9,628 216 1,289
2005 571 21,171 10,088 210 1,343
2006 554 21,983 10,411 211 1,040
2007 552 24,151 11,396 212 1,118
Page | 99
Appendix B: The contribution of the UK automotive industry's GVA to the
national economy
in Millions£ 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
CAGR
1
Gross Value Added
(automotive)
8,416 9,591 10,811 10,694 9,355 8,089 9,138 9,126 8,915 9,150 9,122 9,518 1.12%
GVA yoy % change
13.96% 12.72% ?1.08% ?12.52% ?13.53% 12.97% ?0.13% ?2.31% 2.64% ?0.31% 4.34%
GDP 723,080 768,905 815,710 865,710 911,945 958,931 1,003,300 1,055,790 1,118,240 1,184,300 1,233,980 1,303,910 5.51%
GVA as a % of GDP 1.16% 1.25% 1.33% 1.24% 1.03% 0.84% 0.91% 0.86% 0.80% 0.77% 0.74% 0.73%
Source: ONS UK, Euromonitor
Appendix C: A comparison of the value?added in DM34, selected countries
GVA at factor cost
(Million EURO) in
DM34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 13,969.70 13,708.00 12,373.60 11,841.70 13,087.10 12,021.00 11,370.50 12,989.10 11,965.00
France 14,228.20 16,431.70 17,525.20 17,692.60 17,465.50 18,471.10 17,957.80 19,283.50 18,481.80
Germany 50,285.20 48,549.30 57,328.50 55,015.80 61,655.00 61,403.20 60,953.10
Italy 9,221.90 8,022.40 7,237.20 7,872.80 7,057.50 6,178.40 6,906.90 7,147.60 7,488.40
Spain 7,596.00 7,895.20 8,048.50 8,298.90 7,578.30 7,949.90 8,867.70 9,110.60 8,693.70
Czech Republic 1,290.90 1,620.70 1,972.50 2,109.50 2,401.40
GVA at factor cost, %
Change 1998 1999 2000 2001 2002 2003 2004 2005 CAGR
2
UK ?1.87% ?9.73% ?4.30% 10.52% ?8.15% ?5.41% 14.24% ?7.88% ?1.92%
France 15.49% 6.65% 0.96% ?1.28% 5.76% ?2.78% 7.38% ?4.16% 3.32%
Germany ?3.45% 18.08% ?4.03% 12.07% ?0.41% ?0.73% 3.26%
Italy ?13.01% ?9.79% 8.78% ?10.36% ?12.46% 11.79% 3.48% 4.77% ?2.57%
Spain 3.94% 1.94% 3.11% ?8.68% 4.90% 11.54% 2.74% ?4.58% 1.70%
Czech Republic 25.55% 21.71% 6.95% 13.84% 16.79%
(Ctd)
1
CAGR was calculated for 11 growth periods (1995?2006).
2
CAGR for Germany was calculated on the basis of 6 growth periods and for the Czech Republic on the basis of 3 growth periods. CAGR
for all other countries was calculated on the basis of 8 growth periods.
Page | 100
GDP (Million EURO) 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 1,127,005.00 1,223,751.20 1,384,782.70 1,573,782.70 1,573,061.90 1,612,104.60 1,679,197.50 1,616,457.50 1,745,170.70
France 1,267,261.00 1,324,142.00 1,367,226.00 1,442,794.00 1,497,544.00 1,549,787.00 1,595,817.00 1,657,791.00 1,715,797.00
Germany 2,012,000.00 2,062,500.00 2,113,160.00 2,143,180.00 2,163,800.00 2,211,200.00 2,244,600.00
Italy 1,048,767.00 1,091,362.00 1,127,091.00 1,191,057.00 1,248,648.00 1,295,226.00 1,335,354.00 1,391,539.00 1,428,375.00
Spain 503,921.00 539,493.00 579,942.00 630,263.00 680,678.00 729,206.00 782,929.00 841,042.00 908,450.00
Czech Republic 61, 492. 90 69, 027. 30 79, 882. 70 80, 883. 70 88, 150. 30 100,280.60
GVA as part of GDP 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 1.24% 1.12% 0.89% 0.75% 0.83% 0.75% 0.68% 0.80% 0.69%
France 1.12% 1.24% 1.28% 1.23% 1.17% 1.19% 1.13% 1.16% 1.08%
Germany 2.50% 2.35% 2.71% 2.57% 2.85% 2.78% 2.72%
Italy 0.88% 0.74% 0.64% 0.66% 0.57% 0.48% 0.52% 0.51% 0.52%
Spain 1.51% 1.46% 1.39% 1.32% 1.11% 1.09% 1.13% 1.08% 0.96%
Czech Republic 2.10% 2.35% 2.47% 2.61% 2.72%
Source: Eurostat, Euromonitor
VA in DM34 as part of
the Total Economy VA 1995 1996 1997 1998 1999 2000 2001 2002 2003
UK 1.30% 1.30% 1.30% 1.20% 1.10% 1.00% 0.90% 0.90% 0.80%
France 1.30% 1.20% 1.40% 1.50% 1.50% 1.60% 1.70% 1.70% 1.60%
Germany 2.60% 2.60% 2.70% 2.90% 2.80% 2.60% 3.10% 2.90%
Italy 0.80% 0.80% 0.90% 0.80% 0.90% 0.80% 0.70% 0.70% 0.60%
Source: OECD
Page | 101
Appendix D: Number of passenger cars and commercial vehicles produced,
selected countries
Total
production
[‘000s
units] 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
UK 1,765 1,924 1,935 1,975 1,972 1,813 1,685 1,821 1,846 1,856 1,803 1,769 1,746
World 52,851 53,357 56,561 55,236 58,185 60,069 57,854 60,499 62,130 65,551 68,712 70,670 71,939
EU15 15,818 15,121 16,022 17,320 17,550 17,483 17,586 17,293 17,166 17,203 16,827 16,935 17,058
France 3,474 2,390 2,571 2,954 3,180 3,348 3,628 3,692 3,620 3,666 3,549 3,478 3,428
Germany 4,667 4,842 5,022 5,726 5,687 5,526 5,691 5,469 5,506 5,570 5,757 5,876 5,969
Italy 1,667 1,545 1,827 1,692 1,701 1,738 1,579 1,427 1,321 1,142 1,038 978 952
Spain 2,333 2,412 2,562 2,826 2,852 3,032 2,849 2,855 3,029 3,012 2,752 2,898 3,027
Czech
Republic ? 307 413 412 375 458 465 448 443 450 604 638 661
Brazil 1,629 1,804 2,069 1,573 1,345 1,671 1,812 1,791 1,827 2,210 2,528 2,622 2,725
Russia 1,108 1,062 1,194 1,065 1,191 1,213 1,257 1,222 1,282 1,388 1,353 1,370 1,410
India 636 762 736 627 815 801 827 892 1,162 1,511 1,642 1,701 1,734
China 1,435 1,456 1,577 1,627 1,830 2,069 2,334 3,251 4,443 5,070 6,540 6,779 6,795
Growth
over prev.
year (%) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 CAGR
UK 4.16% 9.02% 0.59% 2.06% ?0.15% ?8.05% ?7.09% 8.06% 1.39% 0.54% ?2.87% ?1.86% ?1.29%
EU15 4.69% ?4.41% 5.96% 8.11% 1.32% ?0.38% 0.59% ?1.66% ?0.74% 0.22% ?2.19% 0.64% 0.72%
World 1.31% 0.96% 6.00% ?2.34% 5.34% 3.24% ?3.69% 4.57% 2.70% 5.51% 4.82% 2.85% 1.80%
Italy 8.65% ?7.31% 18.3% ?7.37% 0.50% 2.17% ?9.12% ?9.66% ?7.39% ?13.6% ?9.08% ?5.78% ?2.64%
France ?2.35% ?31.2% 7.55% 14.9% 7.65% 5.29% 8.37% 1.75% ?1.95% 1.27% ?3.19% ?1.99% ?1.43%
Germany 7.14% 3.76% 3.72% 14.1% ?0.68% ?2.83% 2.99% ?3.91% 0.68% 1.15% 3.37% 2.06% 1.59%
Spain 9.40% 3.36% 6.21% 10.3% 0.93% 6.33% ?6.03% 0.19% 6.12% ?0.58% ?8.62% 5.29% 4.48%
Czech
Republic ? ? 34.3% ?0.17% ?8.94% 21.8% 1.53% ?3.55% ?1.18% 1.53% 34.4% 5.52% 3.70%
Brazil 3.01% 10.8% 14.7% ?24.0% ?14.5% 24.2% 8.44% ?1.14% 1.98% 20.9% 14.4% 3.73% 3.90%
Russia 3.42% ?4.13% 12.4% ?10.9% 11.9% 1.84% 3.58% ?2.74% 4.84% 8.30% ?2.53% 1.23% 2.93%
India 30.7% 19.8% ?3.42% ?14.7% 29.9% ?1.73% 3.31% 7.78% 30.2% 30.0% 8.66% 3.61% 1.96%
China 7.17% 1.47% 8.36% 3.16% 12.5% 13.0% 12.8% 39.2% 36.7% 14.1% 28.9% 3.67% 0.23%
Source: Euromonitor
Page | 102
Appendix E: Employment in the automotive industry
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
CAGR
Employment in
Automotive
Industry in the
UK
288,430 289,336 293,000 274,000 263,000 246,000 243,000 234,000 221,000 210,000 194,000 ?3.89%
yoy % change
1% 0% ?7% ?1% ?3% ?3% ?3% ?8% ?6% ?7%
Employment in
Manufacturing
in the UK
(‘000s)
4,397 4,410 4,416 4,269 4,143 3,969 3,762 3,533 3,409 3,246 3,137 ?3.32%
Employed in
UK (‘000s)
26,000 26,447 26,714 27,052 27,434 27,692 27,866 28,166 28,411 28,674 28,895 1.06%
Employed in
the
Automotive
Industry as a %
of Employed in
Manufacturing
6.56% 6.56% 6.63% 6.42% 6.35% 6.20% 6.46% 6.62% 6.48% 6.47% 6.18%
Employed in
the
Automotive
Industry as a %
of overall
employment
1.11% 1.09% 1.10% 1.01% 0.96% 0.89% 0.87% 0.83% 0.78% 0.73% 0.67%
Employed in
the
Manufacturing
as a % of
overall
employment
16.91% 16.67% 16.53% 15.78% 15.10% 14.33% 13.50% 12.54% 12.00% 11.32% 10.86%
Source: SMMT, BERR/ONS, Euromonitor
Appendix F: Employment in DM34, selected countries
1997 1998 1999 2000 2001 2002 2003 2004 2005 CAGR
UK 250,653 251,888 224,749 231,265 220,111 221,529 217,282 203,974 192,708 ?3.23%
France 276,382 269,389 273,903 277,256 286,049 283,409 287,750 279,428 275,564 ?0.04%
Germany 835,523 855,570 863,207 874,014 867,601 873,785 866,569 0.61%
Italy 190,941 190,230 181,012 178,816 174,442 170,087 163,738 166,867 166,554 ?1.69%
Spain 150,064 154,844 159,493 165,606 161,881 162,511 164,325 162,713 159,913 0.80%
Czech Republic 62,209 67,227 69,365 84,862 89,953 89,188 95,833 6.37%
Source: Eurostat
Page | 103
Appendix G: Labour costs in DM34, selected countries
Average Personnel
Costs (Million EURO)
in dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 8,236.9 9,310.2 9,390.7 9,639.8 8,967.5 9,420.2 8,584.4 8,924.3 8,870.5
France 9,953.8 10,122.4 10,879.1 11,153.6 11,564.7 12,211.9 12,617.1 13,046.2 13,305.2
Germany 43,675.0 44,851.7 46,260.1 49,651.7 50,712.9 53,775.3 68,327.4
Italy 5,873.4 5,834.1 5,317.1 5,698.3 5,551.9 5,581.9 5,485.1 5,853.6 6,045.8
Spain 4,053.6 4,235.9 4,802.4 5,216.3 5,158.9 5,384.4 5,528.2 5,653.6 5,793.1
Czech Republic 353.7 419.7 476.7 N/A 699.2 867.4 881.8 1,007.8
Average Personnel
Costs per employee
in dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 32,861.8 36,961.7 41,783.1 41,682.9 40,740.8 42,523.6 39,508.1 43,752.1 46,030.8
France 36,014.6 37,575.4 39,718.8 40,228.5 40,429.1 43,089.3 43,847.4 46,689.0 48,283.5
Germany 52,272.6 52,423.2 53,591.0 56,808.8 58,451.9 61,542.9 78,848.2
Italy 30,760.3 30,668.7 29,374.3 31,866.8 31,826.6 32,817.9 33,499.2 35,079.4 36,299.3
Spain 27,012.5 27,355.9 30,110.4 31,498.3 31,868.5 33,132.5 33,641.9 34,745.8 36,226.6
Czech Republic 5,685.7 6,243.0 6,872.3 N/A 8,239.3 9,642.8 9,887.0 10,516.2
Number of
employees in dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 250,653 251,888 224,749 231,265 220,111 221,529 217,282 203,974 192,708
France 276,382 269,389 273,903 277,256 286,049 283,409 287,750 279,428 275,564
Germany 835,523 855,570 863,207 874,014 867,601 873,785 866,569
Italy 190,941 190,230 181,012 178,816 174,442 170,087 163,738 166,867 166,554
Spain 150,064 154,844 159,493 165,606 161,881 162,511 164,325 162,713 159,913
Czech Republic 62,209 67,227 69,365 N/A 84,862 89,953 89,188 95,833
Source: Eurostat
(ctd)
Page | 104
Unit Labour Cost
(annual growth
rate) in dm34
3
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
UK 3.60% 0.60% 2.40% 6.50% 1.00% ?0.70% 1.00% 2.90% 0.20% ?0.80% 0.20% 2.00% 1.00%
France ?1.00% 1.50% ?2.80% ?3.80% ?1.10% ?2.10% 0.60% 1.40% ?2.30% ?0.20% ?0.40%
Germany 3.70% 1.90% ?3.70% 1.00% ?0.10% ?1.70% 0.50% 1.50% ?1.30% ?3.10% ?2.50% ?2.80% ?2.90%
Italy 0.90% 5.70% 2.50% 0.10% 1.90% ?1.30% 3.10% 4.10% 6.00% 2.00% 1.90% 2.40% 2.60%
Spain 0.90% 3.60% 1.40% ?0.70% ?1.40% 1.20% 2.10% 2.90% 2.60% 1.60% 1.90% 0.40%
Czech Republic 3.30% 11.3% 4.60% 15.6% ?7.30% ?3.30% 10.3% 0.60% 5.60% ?5.30% ?5.30% ?5.50%
Source: OECD
Appendix H: National?level productivity, selected countries (GVA/Employees)
Productivity in
DM34 (GVA per
person employed) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
France 51.50 61.00 64.00 63.80 61.10 65.20 62.40 69.00 67.10 N/A
Germany 60.20 56.70 66.40 62.90 71.10 70.30 70.30 N/A
Italy 48.30 42.20 40.00 44.00 40.50 36.30 42.20 42.80 45.00 N/A
Spain 50.00 51.00 50.50 50.10 46.80 48.90 54.00 56.00 54.40 N/A
UK 55.70 54.40 55.10 51.20 59.50 54.30 52.30 63.70 62.10 N/A
Czech Republic N/A N/A N/A N/A 19.10 21.90 23.70 25.10 N/A N/A
Change of
Productivity in
DM34 1997 1998 1999 2000 2001 2002 2003 2004 2005 CAGR
4
France 18% 5% 0% ?4% 7% ?4% 11% ?3% 3.36%
Germany ?6% 17% ?5% 13% ?1% 0% 2.62%
Italy ?13% ?5% 10% ?8% ?10% 16% 1% 5% ?0.88%
Spain 2% ?1% ?1% ?7% 4% 10% 4% ?3% 1.06%
UK ?2% 1% ?7% 16% ?9% ?4% 22%
5
?3% 1.37%
Czech Republic 15% 8% 6% N/A 9.53%
Source: Eurostat
3
The data presented here calculates year on year change in labour costs as overall cost of labour D, divided by the number of
employees in D. D, according to ISIC, Rev 3, is classified as all manufacturing activities.
4
CAGR for Germany was calculated on the basis of 6 growth periods and for the Czech Republic on the basis of 3 growth periods. CAGR
for all other countries was calculated on the basis of 8 growth periods.
5
No obvious explanation for this increase could be identified in the Eurostat data.
Page | 105
Appendix I: Firm?level productivity (vehicles per employee per annum)
Country Manufacturer Plant 2000 2001 2002 Average
UK Nissan Sunderland 101 95 99 98
France Toyota Valenciennes ? ? 88 88
Germany Ford Saarlouis 81 87 87 85
UK Toyota Burnaston 86 87 81 85
Spain Renault Valladolid 77 77 89 81
Belgium GM Antwerp 77 76 83 79
Italy Fiat Melfi 76 82 77 78
Germany GM Eisenach 77 77 80 78
Spain GM Zaragoza 76 75 80 77
Slovenia Renault Novo Mesto 73 69 82 75
France Renault Flins 70 73 76 73
Spain Ford Valencia 77 70 72 73
France Renault Maubeuge 67 70 73 70
UK Honda Swindon 57 67 82 69
France PSA Aulnay 64 59 78 67
France Renault Douai 67 66 65 66
Spain Renault Palencia 71 66 61 66
Spain VW (Seat) Martorell 66 64 58 63
Germany GM Bochum 62 56 69 62
Italy Fiat Termini Imerese 61 63 63 62
Sweden GM (Saab) Trollhattan ? ? 62 62
Poland Fiat Tychy 59 58 66 61
UK PSA Ryton 55 58 63 59
Spain PSA Vigo 56 59 60 58
France PSA Mulhouse 60 47 66 58
Spain VW Pampalona 61 50 56 56
Italy Fiat Cassino ? ? 53 53
Italy Fiat Mirafiori 57 52 49 53
UK GM Ellesmere Port 60 55 41 52
Czech Republic VW (Skoda) Mlada Boleslav, Vrchlabi, Kvasiny 51 55 48 51
UK GM Luton 48 59 47 51
UK MG Rover Longbridge 51 50 ? 51
Belgium Ford (Volvo) Ghent 45 54 52 50
Germany DaimerChrysler Rastatt 55 52 44 50
France PSA Poissy 44 48 56 49
Germany VW Wolfsburg 46 48 42 45
Turkey Renault Bursa 51 39 42 44
Portugal PSA Mangaulde 40 42 45 42
Spain PSA Madrid 40 43 39 41
Sweden Ford (Volvo) Torslanda 40 40 36 39
Netherlands Ford (Volvo) Born 40 36 ? 38
France PSA Sochaux 34 36 43 38
France Renault Sandouville 32 40 41 38
France PSA Rennes 33 38 38 36
Germany GM Russelheim 34 36 35 35
Germany VW Emden 27 32 27 29
Page | 106
(continued)
2001 2002 2003 Average Productivity
Czech Republic 51 55 48 51
Germany 64.86 64.00 69.43 66.10
France 76.56 76.22 80.00 77.59
Italy 58.33 59.67 63.50 60.50
Spain 51.38 53.13 48.14 50.88
UK 35.00 37.63 37.00 36.54
Source: World Markets Research Centre ? European Automotive Productivity Index 2001, 2002, 2003
6
Appendix J: R&D expenditures in UK motor?vehicle, engine and component
manufacturing
in Millions£ 1999 2000 2001 2002 2003 2004 2005 2006
R&D Expenditures 1,200 1,000 1,000 1,000 1,000 900 800 800
% Change ?17% 0% 0% 0% ?10% ?11% 0%
Investment 2,100 2,000 2,100 1,300 1,200 1,400 1,300 1,400
% Change ?5% 5% ?38% ?8% 17% ?7% 8%
Source: SMMT, ONS UK
Appendix K: R&D expenditures in DM34, selected countries
R&D
Expenditures
(Millions US$
PPP) in dm34 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 CAGR
UK 1,275 1,476 1,481 1,440 1,646 1,364 1,439 1,522 1,870 1,390 0.96%
France 2,241 2,139 2,193 2,260 2,685 2,917 3,406 3,543 3,531 5.85%
Germany 5,579 6,225 6,946 7,925 9,385 11,130 10,922 11,476 12,726 13,421 10.25%
Italy 929 968 923 897 936 969 985 834 857 967 0.45%
Spain 240 255 236 255 333 364 467 510 546 640 11.52%
Czech Republic 205 170 231 295 283 327 406 378 371 402 7.77%
(continued)
6
The choice to use data from the world market research centre rather than Harbour was made because the latter only partially
available for the UK plants under consideration.
Page | 107
R&D Expenditures
(Millions US$ PPP)
in Total Economy 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
UK 14,623 14,818 15,317 15,980 17,549 18,183 19,773 21,488 21,822 21,384
France 17,367 18,044 18,613 18,977 20,105 21,127 23,091 24,262 23,945
Germany 26,137 26,968 28,720 30,139 33,502 36,249 37,225 38,550 40,064 41,626
Italy 6,355 6,662 6,658 6,894 7,024 7,717 8,133 8,554 8,272 8,712
Spain 2,418 2,595 2,697 3,343 3,543 4,132 4,347 5,286 5,933 6,418
Czech Republic 826 832 969 1,057 1,042 1,105 1,168 1,265 1,357 1,536
R&D
Expenditures in
DM34 / R&D of
Total Economy 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
UK 8.72% 9.96% 9.67% 9.01% 9.38% 7.50% 7.28% 7.08% 8.57% 6.50%
France 12.90% 11.85% 11.78% 11.91% 13.35% 13.81% 14.75% 14.60% 14.75%
Germany 21.35% 23.08% 24.19% 26.29% 28.01% 30.70% 29.34% 29.77% 31.76% 32.24%
Italy 14.62% 14.53% 13.86% 13.01% 13.33% 12.56% 12.11% 9.75% 10.36% 11.10%
Spain 9.93% 9.83% 8.75% 7.63% 9.40% 8.81% 10.74% 9.65% 9.20% 9.97%
Czech Republic 24.82% 20.43% 23.84% 27.91% 27.16% 29.59% 34.76% 29.88% 27.34% 26.17%
Source: http://www.oecd.com
Appendix L: Investment in DM34 as part of overall investments, selected
countries
Share of
investment
in DM34
relative to
investment
in Total
Economy 1995 1996 1997 1998 1999 2000 2001 2002 2003
UK 2.10% 1.90% 2.50% 1.70% 1.70% 1.50% 1.70% 1.00% 0.90%
France 1.60% 1.50% 1.50% 1.10% 1.10% 1.30% 1.10% 2.40%
Germany 2.00% 2.50% 2.50% 2.40% 2.50% 2.60% 3.10% 3.30%
Italy 1.50% 0.90% 1.00% 1.00% 0.90% 1.00% 0.90% 0.90%
Source: http://www.oecd.com
Page | 108
Appendix M: Graduates' favourite employers, selected countries
UK France Germany Europe
Across
Disciplines Business Grads
Engineering
Grads
Business
Grads
Engineering
Grads
Business
Grads
Engineeri
ng Grads
1
BBC (10,0%)
BNP Paribas,
L'Oréal (11,3%)
EADS
(11,7%)
BMW
(11,4%)
BMW
(18,8%)
L'Oréal
(15,4%)
IBM
(19,3%)
2
Apple (7,1%) LVMH (9,5%)
Thales
(9,3%)
Porsche
(10,0%)
Audi
(17,1%)
Pricewaterho
useCoopers
(13,8%)
Microsoft
(17,5%)
3
NHS, MI5 (6,7%)
Ernst & Young,
Société Générale
(9,0%)
Veolia
Environnem
ent (8,5%)
Pricewaterho
useCoopers
(7,8%)
Porsche
(16,9%)
Coca?Cola
(13,5%)
BMW
Group
(15,1%)
4
Microsoft (5,6%)
Groupe Danone
(8,2%)
PSA
Peugeot
Citroën
(7,8%)
KPMG (7,7%)
Siemens
(13,9%)
Ernst & Young
(13,4%)
Apple
(14,1%)
5
Google (5,5%)
Pricewaterhouse
Coopers (7,7%)
Dassault
Aviation
(7,7%)
Ernst &
Young (7,4%)
Daimler?
Chrysler
(10,3%)
Adidas
(12,1%)
Intel
(12,9%)
6
Pricewaterhouse
Coopers (5,4%)
Air
France (7,2%)
EDF (7,2%)
Deutsche
Lufthansa
(7,3%)
EADS (7,2%) Apple (12,1%)
Sony
(12,9%)
7
Deloitte (4,3%) HSBC (6,5%)
Renault
(6,8%)
Adidas (7,0%)
Lufthansa
Technik
(6,3%)
Nokia (12,0%)
Porsche
(12,7%)
8
GoldmanSachs,
Accenture,
GlaxoSmithKline
(4,2%)
KPMG (6,2%)
Areva
(6,7%)
Audi (6,8%)
Fraunhofer
Gesellschaft
(6,1%)
BMW Group
(11,7%)
Nokia
(12,6%)
9
Groupe
VINCI (6,5%)
Deutsche
Bank (6,0%)
Robert
Bosch (6,1%)
Deloitte
(11,2%)
Siemens
(12,3%)
10
L'Oréal,
Total (5,7%)
DaimlerChrys
ler (5,7%)
Bosch
Rexroth
(5,8%)
Microsoft
(10,9%)
AMD
(11,3%)
Source: ‘Trendemployer 2008: Deutschlands Top?Arbeitgeber zeigen Profil’ by Anja Möbius,
http://www.trendemployer.de/
Page | 109
Appendix N: Comparison of key industry indicators, selected countries
Source: OICA, SMMT, VDA, ANFAVEA, CATARC
United Kingdom:
United Kingdom
Automotive industry* Components
Cars and commercial
vehicles
Number of
employees
Turnover
(£bn)
Investment
s (£bn)
R&D
expendit
ure
(£bn)
Export
(£000)
Import
(£000)
Export
(£000)
Import
(£000)
1991 4,765,627 5,191,714 4,700,191 6,047,559
1992 4,978,627 6,023,141 4,962,825 7,317,306
1993 4,790,001 6,610,600 5,033,905 8,903,525
1994 5,715,388 7,265,815 5,614,618 10,530,725
1995 6,182,963 8,539,089 7,407,387 11,413,742
1996 7,075,211 9,599,024 9,458,599 12,478,010
1997 7,448,447 8,155,356 9,652,635 15,277,055
1998 7,242,325 8,055,745 9,459,336 16,168,824
1999 279 44.1 2.1 1.2 7,082,182 8,929,768 10,150,101 16,970,159
2000 267 42.2 2.0 1.0 8,045,348 8,753,046 9,899,594 16,368,474
2001 253 42.6 2.1 1.0 7,395,687 8,775,267 8,859,697 19,562,370
2002 248 44.7 1.3 1.0 7,637,998 9,894,120 11,537,778 20,904,926
2003 236 46.3 1.2 1.0 7,806,950 10,558,998 12,253,800 21,908,796
2004 224 46.9 1.4 0.9 7,525,835 11,102,177 13,032,996 22,351,498
2005 213 48.2 1.3 0.8 7,428,576 11,413,627 14,131,658 22,643,793
2006 195 49.3 1.4 0.8 7,887,325 12,617,712 13,837,146 23,324,129
2007 NA NA NA NA NA NA NA NA
*Automotive Manufacturing Sector
Page | 110
Germany:
in million Euro
German automotive industry Components
Cars and
commercial vehicles
Employees Turnover Investments R&D Export Import Export Import
1991 802,703 111,891 8,740 5,305 22,005 11,034 36,303 24,316
1992 757,871 117,942 8,130 6,263 22,766 12,145 40,124 22,739
1993 684,787 97,881 5,850 6,210 19,651 9,912 34,445 16,658
1994 641,685 105,373 5,580 6,289 21,627 12,498 40,799 17,853
1995 661,006 114,829 5,920 6,757 22,349 13,221 43,300 20,633
1996 659,015 124,016 7,340 7,248 24,546 14,747 47,666 22,712
1997 672,281 137,064 8,690 8,758 28,342 17,364 55,667 24,564
1998 710,481 159,469 8,120 10,891 31,879 19,616 63,624 26,259
1999 727,529 172,798 8,980 12,382 32,959 20,454 67,450 28,303
2000 746,020 188,733 9,100 13,467 37,473 23,247 77,176 28,706
2001 770,293 202,231 10,780 14,363 39,599 25,200 86,266 30,807
2002 763,522 204,043 11,652 14,790 42,744 26,966 90,882 31,306
2003 773,217 208,612 13,085 16,332 45,221 27,904 93,271 33,486
2004 773,217 227,666 12,206 15,738 49,386 29,747 94,280 34,410
2005 766,076 236,328 9,800 15,752 51,617 32,610 101,542 32,717
2006 750,206 270,506 8,800 16,799 57,394 35,294 110,357 37,391
2007 744,558 290,700 10,100 18,013 61,860 40,005 120,395 38,577
Page | 111
Brazil:
in million US$
Automotive industry Components
Cars and commercial
vehicles
Number of
employees
Turnover
(€m)
Investments
(US$m)
R&D
expenditure
(€m)
Export
(US$m)
Import
(US$m)
Export
(US$m)
Import
(US$m)
1991
109,428
880
1992
105,664
908
1993
106,738
886
1994
107,134
1,195
1995
104,614
1,694
1996
101,857
2,359
1997
104,941
2,092
1998
83,049
2,335
1999
85,100
1,791
3,969.50 4,034.00 1,961.00 1,819.70
2000
89,134
1,651
4,121.60 4,459.10 2,671.60 1,906.50
2001
84,834
1,750
3,910.70 4,416.50 2,640.10 2,017.00
2002
81,737
976
4,163.00 4,147.30 2,633.40 1,093.50
2003
79,047
673
5,137.30 4,503.90 3,566.50 828
2004
88,783
739
6,431.50 5,824.80 4,950.70 880.4
2005
94,206
1,050
7,855.00 7,070.20 7,076.80 1,350.60
2006
93,243
1,451
9,314.60 7,236.80 7,320.70 2,633.60
2007
104,274
1,965
9,118.00 9,140.30 7,800.30 4,083.50
Page | 112
PR China:
Chinese Automotive industry Components
Cars and commercial
vehicles
Number of
employees
Turnover in
10,000 RMB
Investment
in 10,000
RMB
R&D
expen
diture
in
RMB
bn
Export
(US$)
Import
(thousand
US$)
Export
(thousand
US$)
Import
(Thousand
US$)
1991 1,703,850 7,268,122 589,294 n.a.
1992 1,848,652 11,788,948 1,027,520 n.a.
1993 1,932,575 18,343,000 1,642,657 n.a. 585,345 1,792,178 148,385 3,615,470
1994 1,968,831 18,534,805 1,987,655 n.a. 830,198 1,296,233 109,448 2,329,027
1995 1,952,542 21,751,374 2,313,418 n.a. 1,291,776 1,436,456 156,459 1,550,515
1996 1,950,627 23,325,455 1,949,043 n.a. 1,466,618 1,737,467 148,324 854,610
1997 1,978,091 25,920,569 2,039,577 4 1,650,587 1,432,393 193,236 706,430
1998 1,962,837 27,574,343 1,961,231 4 1,848,835 1,460,267 158,281 858,747
1999 1,806,815 30,898,409 1,939,887 7 2,322,120 2,230,090 103,709 827,888
2000 1,571,664 35,746,697 1,787,479 7 3,316,562 3,219,973 195,330 1,212,082
2001 1,505,507 43,389,889 1,942,774 6 3,944,376 3,856,980 205,638 1,766,343
2002 1,570,540 60,821,956 2,831,570 9 4,726,877 4,665,361 248,606 3,226,836
2003 1,604,558 82,048,162 4,985,767 11 6,316,876 9,300,155 371,907 5,275,917
2004 1,693,126 93,061,416 6,413,104 13 10,670,480 11,287,580 612,020 5,416,174
2005 1,668,541 102,411,213 7,342,463 17 15,842,354 10,405,831 1,581,582 5,171,010
2006 1,855,096 137,469,137 7,808,921 24 21,071,684 12,458,740 3,134,647 7,561,274
2007 2,040,619 170,655,239 8,679,551 31 28,512,174 14,213,334 7,305,678 11,003,700
Page | 113
Appendix O: Average wages in DM34, selected countries
Aggregated
wages (Million
EURO) in
dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 7,316.7 8,202.7 8,304.1 8,528.9 7,773.2 8,253.1 7,312.5 7,478.6 7,331.7
France 6,968.0 7,120.8 7,610.0 7,890.8 8,272.3 8,713.1 8,983.7 9,256.1 9,416.5
Germany 34,574.2 35,735.4 36,921.2 38,825.5 39,897.4 41,356.3 42,006.3
Italy 4,312.5 3,945.6 3,649.5 3,915.3 3,823.0 3,866.8 3,790.7 4,059.8 4,170.8
Spain 3,118.5 3,258.9 3,607.9 3,928.9 3,845.8 4,076.7 4,155.4 4,246.1 4,355.8
Czech
Republic 255.7 305.0 343.6 430.2 510.6 631.5 647.9 735.6
Average
Yearly Wage
per employee
in dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 29,190.6 32,564.9 36,948.3 36,879.3 35,314.9 37,255.2 33,654.4 36,664.5 38,045.6
France 25,211.5 26,433.2 27,783.6 28,460.3 28,919.2 30,743.9 31,220.5 33,125.2 34,171.7
Germany 41,380.3 41,767.9 42,772.1 44,422.1 45,985.9 47,330.1 48,474.3
Italy 22,585.5 20,741.2 20,161.6 21,895.7 21,915.6 22,734.2 23,151.0 24,329.6 25,041.7
Spain 20,781.1 21,046.3 22,621.1 23,724.4 23,757.0 25,085.7 25,287.7 26,095.6 27,238.6
Czech
Republic 4,110.3 4,536.9 4,953.5 6,016.8 7,020.3 7,264.4 7,675.9
Number of
employees in
dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 250,653.0 251,888.0 224,749.0 231,265.0 220,111.0 221,529.0 217,282.0 203,974.0 192,708.0
France 276,382.0 269,389.0 273,903.0 277,256.0 286,049.0 283,409.0 287,750.0 279,428.0 275,564.0
Germany 835,523.0 855,570.0 863,207.0 874,014.0 867,601.0 873,785.0 866,569.0
Italy 190,941.0 190,230.0 181,012.0 178,816.0 174,442.0 170,087.0 163,738.0 166,867.0 166,554.0
Spain 150,064.0 154,844.0 159,493.0 165,606.0 161,881.0 162,511.0 164,325.0 162,713.0 159,913.0
Czech
Republic 62,209.0 67,227.0 69,365.0 84,862.0 89,953.0 89,188.0 95,833.0
Source:
Eurostat
Appendix P: Questionnaire used in survey
Following is the questionnaire used in the online survey/telephone survey.
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ENDOTES
i
The terms of reference of the NAIGT are given at
http://www.berr.gov.uk/whatwedo/sectors/automotive/naigt/tor/page45613.html
The New Automotive Innovation and Growth Team (NAIGT) will be established as a high level stakeholder group
to develop strategies for the future competitiveness of the automotive industry in the UK over the next 15 years.
It will take account of outcomes from the original AIGT, as well as looking at ongoing developments in the
automotive industry nationally and globally. It will aim to identify new measures for industry and/or government
to safeguard and promote continuing high added value investments and improved productivity and
competitiveness in the UK.
The NAIGT’s remit will cover the UK automotive manufacturing sector in its fullest sense, from research and
development, to design engineering, to components, systems, niche and volume vehicle manufacture, including
construction equipment. It will additionally consider the challenges and opportunities presented by development
of transport and other areas affected by Government policies and the impacts positively and negatively which
they can have on the competitiveness of the automotive sector, and identify areas for improved and informed
decision making.
It will include consideration of developments in both the motor sport and automotive retail sectors and seek to
maximise synergies, though it is not intended that the Group’s eventual recommendations should specifically
target those sectors. In addition the Review will consider the scope for technology transfer between the
automotive and other sectors.
The NAIGT will report to the Secretary of State for the Department of Business, Enterprise and Regulatory
Reform.
ii
CEE: Central and Eastern Europe, which includes Czech Republic, Poland, Hungary, Slovakia, Romania. BRIC
countries are Brazil, Russia, India and China.
iii
For an analysis on the demise of MG Rover see: Oliver, N., Holweg, M. and Carver, M. (2008) ‘A systems
perspective on the death of a car company.’ International Journal of Operations and Production Management,
28(6): 562?583
iv
See CPRS (1975), Church (1994), Whisler (1999), and Dunnett (1982).
v
DM34 contains manufacturing of vehicle, trailers and semi?trailers, but also car and engine parts, and
accessories. See the description on the ONS website:
http://www.statistics.gov.uk/methods_quality/sic/structure_sectiondm_dn.asp#sectiondm
Page | 123
Eurostat is using Nace Rev. 1.1 (but will be gradually moving to Nace rev. 2). The data used in this study is still
according to Nace Rev 1.1 (since there is no DM34 in Rev 2). The definition used for DM34 (or just 34) is the
same as the one used by the ONS. Please see:
http://epp.eurostat.ec.europa.eu/portal/page?_pageid=3233,73049386&_dad=portal&_schema=PORTAL.
The OECD use ISIC rev 3 (http://www.ilo.org/public/english/bureau/stat/class/isic.htm). As far as we know these
are almost identical (NACE is industrial classification while ISIC is a statistical measure). To see the corresponding
values please use:
http://ec.europa.eu/eurostat/ramon/relations/index.cfm?TargetUrl=LST_LINK&StrNomRelCode=ISIC%20REV.%2
03%20?%20NACE%20REV.%201&StrLanguageCode=EN.
Here, ‘DM34’ is listed as ‘34’ and has the same definition, while in many cases the data is not listed below the
level of D (which is overall manufacturing, of which DM34 is a part of); when used it in the report it is explicitly
stated so. In other places they do break it down and call it C34 (see for example:
http://www.oecd.org/dataoecd/3/33/40230754.pdf.) All in all, these are the same measures used across the
ONS, EuroSTAT and OECD.
vi
We follow the arguments by Blinder’s (2005; 2007) as a basis for addressing some of the questions presented
earlier. Blinder assumes that all industries are essentially offshorable, and argues that they differ in their level of
offshorability based on the degree of localisation needed for a given service or product. By this method, research
and development activities are the most ‘mobile’, while also all manufacturing activities could potentially be
offshored. As a result, and based on the assumption that offshoring is indeed one of the major threats the
industry is facing, it was chosen to narrowly define the automotive industry in this study as only manufacturing
operations.
vii
The first two import waves were by the Japanese and Korean vehicle manufacturers from the 1970s and 1980s
onwards, respectively.
viii
CKD: compete knock?down, SKD: semi?knock down; both describing various degrees of completeness of the
vehicle kits sent to the respective markets.
ix
The plants closed were MG Rover Longbridge (2005), Peugeot Ryton (2006), GM Luton (2002), Ford Dagenham
(2001), Jaguar Brown’s Lane (2005), Aston Martin Newport Pagnell (2007). The plant openings were Rolls?Royce
Goodwood (2003), Aston Martin Gaydon (2003).
Page | 124
x
The transplant operations of foreign vehicle manufacturers in North America (as of 2006):
Manufacturer Location Start of
Operations
Products Manufactured
(Past and Present)
Volkswagen Puebla, Mexico 1962 Beetle, New Beetle, Golf, Jetta, T2
Volkswagen Westmoreland, PA 1978
(closed 1988)
Rabbit and Jetta (Golf)
Nissan Aguascalientes and
Cuernavaca, Mexico
1966 Nissan Tsuru, Sentra, Tsubame, Pickups, Lucino,
Platina
Renault Scenic, Clio
Honda Marysville, OH 1982 Accord, Acura TL, CL
Nissan (NMMC) Smyrna, TN
1983 Quest, Altima, Maxima, Sentra, Frontier, Xterra
NUMMI
(Toyota/GM joint
venture)
Freemont, CA 1984 Chevrolet Nova, Prizm,
Pontiac Vibe
Toyota: Coralla, Hilux, Tacoma, Voltz
Honda Alliston, Ontario,
Canada
1986 Odyssey, Civic, Acura EL, Acura MDX, Pilot
Mazda (Auto?
Alliance
International,
owned by Ford)
Flat Rocks, MI 1987 Mazda 626 MX?6
Mercury Cougar, Probe
Ford Mustang
Mitsubishi
(formerly
Diamond Star
Motors, a joint
venture with
Chrysler)
Bloomington?Normal, IL 1988 Mitsubishi Eclipse, Galant, Mirage
Plymouth Laser, Chrysler Sebring, Dodge
Avenger, Stratus, Eagle Talon, Eagle Summit
Toyota (TMMK) Georgetown, KY 1988 Camry, Avalon, Solara, Sienna, Pronard
Toyota (TMMC) Cambridge, Ontario,
Canada
1988 Camry, Corolla, Matrix, RX330, Solara
Honda East Liberty, OH 1989 Accord, Civic, Element
Subaru?Isuzu
Automotive Inc.
(joint venture)
Lafayette, IN 1989 Isuzu Rodeo, Axiom
Subaru Legacy, Baja, Outback
Honda Passport
CAMI
(Suzuki/GM joint
venture)
Ingersoll, Ontario,
Canada
1989 Chevrolet (Geo): Metro, Tracker, Equinox
Pontiac Firefly
Suzuki: Swift, Sidekick, Vitara
Avon Lake,
(Ford?Nissan joint
venture)
Avon Lake, OH (prev.
Ford plant)
1993
Lincoln/Mercury Villager
Nissan Quest
BMW Greenville
(Spartanburg), SC
1994 Z3, Z4, X5
BMW Toluca, Mexico 1995 3 series
Honda El Salto, Mexcio 1995 Accord
Mercedes?Benz Vance (Tuscaloosa), AL 1997 M?class
Toyota (TMMI) Princeton, IN 1999 Tundra, Sequoia, Sienna
Honda Lincoln, AL 2001 Odyssey
Nissan Canton, MS 2003 Quest, Titan, Pathfinder, Armada, QX56
Hyundai (HMMA) Montgomery, AL 2005 Sonata
Page | 125
xi
The government?enforced merger of SAIC and NAC effectively merges the IPR acquired from Rover in 2004,
and the production assets for the Rover 75, acquired by NAC in 2005, under the umbrella of a single firm. This
merger supports the vision of the central government of creating a single ‘national champion’ (as opposed to a
joint venture with a foreign firm), that is able to compete internationally.
xii
Source: OICA
xiii
There is no known objective source of data to determine share by value, to our knowledge
xiv
Source: ONS ABI data for 2006, released November 2007
xv
Source: Hemscott summary of UK 2006 annual reports
xvi
Sales and employment for Ford, Vauxhall and Land Rover CV businesses are not separately available
xvii
Each business unit is surveyed separately, so the total number of companies will be less as many have more
than one location.
xviii
Part of SIC Class 29.52 plus Class 51.62.
xix
GDP (Gross Domestic Product) is real and measured in US Dollars. For further information on its definition
please see http://www.euromonitor.com.
xx
SIC34, plus 25.11 and 31.61
xxi
BERR analysis of ONS ABI and ‘Blue book’ data.
xxii
Source www.statistics.gov.uk/inputoutput/ : auto sector defined as SIC34 (excludes tyres and auto electrical
parts)
xxiii
GVA (Gross Value Added) is an estimation of GDP minus taxes on products plus subsidies on products. For
further information on GVA please visit http://www.statistics.gov.uk/CCI/nugget.asp?ID=254.
xxiv
The CAGR of vehicle production in France is negative, but it seems that this is mainly the result of a significant
but isolated drop in production between 1995 and 1996. Afterwards, the French automotive industry exhibits
growth of production.
xxv
Thus, it does not include workshops that produce or assemble vehicles, i.e., it excludes the likes of AC Cars
(UK), Bertone (Italy), Heuliez (France), Karmann (Germany), Magna Steyr (Austria), Matra (France), Pagani (Italy),
Piaggio (Italy), Pininfarina (Italy), Valmet (Netherlands), Westfalia Werke (Germany).
xxvi
In 2007 NAC reopened the MG Rover plant in Longbridge. However, as no significant number of cars has been
produced there yet, this operation has not been included in this analysis.
xxvii
The data in this part is taken from the ONS and Eurostat. Data from the ILO has not been used because of lack
of consistency in data availability across countries and the difficulty to translate some historical data in local
currencies to a comparable base?currency.
xxviii
Note that this is not the entire employment in DM34 as this already considers component manufacture
xxix
The data does not take into account small plants and workshops (usually for niche and luxury vehicles), where
there is a relatively low level of automation, and, hence, lower levels of productivity in terms of vehicles per
employee. More recent data was not available.
xxx
According to a study commissioned by the Ford Motor Company in 2008.
xxxi
The survey was conducted both via an on?line survey (n=9) and a structured phone interview (n=8). It
included three parts: the first gathered information regarding the company’s sourcing the UK and the general
Page | 126
perceptions of the interviewees regarding the competitiveness of the UK automotive industry over time and in
relation to France, Germany, Italy and Spain (as a group). The second part is comprised of four sections (UK,
FGIS, CEE and BRIC). In each section the interviewee was asked to evaluate – using a Likert scale of 1 to 5 – the
impact a factor has on the competitive nature of the country or countries he was answering for, where 1 is a
strong negative impact and 5 – a strong positive one. Interviewees were asked to evaluate fourteen factors:
availability of local suppliers, availability of skilled labour, barriers to exit, environmental regulation,
governmental subsidies, interaction with government, labour cost, labour productivity, logistics & infrastructure,
quality of local suppliers, quality of R&D resources, skill level of workforce, and taxes & tariffs. Interviewees were
also allowed to add two additional factors. In the third and final part interviewees were asked to write down
their suggestions regarding the measures the UK government can adopt to improve the status of the national
automotive industry. Interview and survey invitations were sent to 33 industry leaders in the UK. Positive replies
were received from most and those who replies were also asked to forward the questionnaires to their
colleagues. Among the interviewees were 5 CEOs of UK?based companies or subsidiaries, 3 plant managers, 3
purchasing/sourcing directors, 1 engineering director, 1 director of government affairs, 1 director of sales and
marketing, 1 VP of a global company’s European subsidiary, and 1 executive responsible for R&D.
xxxii
A key problem hereby lies in the reporting, as suppliers can classify themselves according to the materials
used, the main processes involved, or the industry they are supplying. Furthermore, automotive may only be one
of the industries they are supplying. As a result, we consider any statistical data on the component supply as
problematic and have not included it.
xxxiii
One interviewee, however, mentioned that in his operation legacy labour agreements made it extremely
difficult to operate on a competitive level comparable to that of similar operations in Western and Eastern
Europe.
xxxiv
Some, however, noted that this was a major disadvantage of the UK automotive industry, since the
government made less effort than other European countries to retain automotive manufacturing.
xxxv
For example, the interviewee argued that engineers are attracted to cutting edge research but most of the
OEMs in the UK do not conduct R&D in the country.
xxxvi
Several interviewees explicitly mentioned that the government seldom discusses the repercussions of its
policy in education, welfare or environment on the industry with the latter.
xxxvii
One interviewee, for example, went as far as to mention that if the EURO/Pound exchange rate shifts back
adding a relative 20% to the company’s cost?base, it would be forced to leave as soon as possible.
xxxviii
One interviewee, for example, mentioned that over the last couple of years PSA was thinking about closing
some of its underperforming plants it decided to close down Ryton and another plant in France. While the
French government acted in order to stop the closure, the British one did little (in fact, UK offered PSA an RSA
grant for the Peugeot 207, which PSA declined to take up: the interviewee’s comment is not accurate on this
point). Eventually, Ryton was shut down, while the French plant is still operating.
xxxix
The 2008 Manufacturing Strategy that was launched in September 2008 by the Prime Minister needs to be
seen in this context: a public statement by the Government that ‘manufacturing matters’.
xl
This can be a misconception as any increase in the cost of fuel could render this cost advantage obsolete. Thus,
one needs to consider the viability of offshoring and global sourcing setups in relation to the dynamic cost of
transportation.
xli
See for example the reports by the Central Policy Review Staff (1975) ‘The Future of the British Car Industry’,
HMSO, or the report of the 2001 Automotive Innovation and Growth Team. Both are available from HM
Government institutions.
Page | 127
xlii
Source: OICA
xliii
Due to historical circumstances dating back to 2000, when BMW demerged MG Rover, the Hams Hall engine
facility was producing engines entirely for export until the launch of the New Mini II.
xliv
This notion was introduced by Paul Everitt of the SMMT at the NAIGT meetings, and was heavily debated.
xlv
This list was kindly assembled by the BERR Automotive Unit for consideration by the NAIGT.
xlvi
The following subgroup members were present at the meeting:
Robert Baker, Chief Economist, Society of Motor Manufacturers and Traders
Phil Davies, Automotive Analyst, Department for Business Enterprise and Regulatory Reform
Dr Fernando Galindo?Rueda, Economist, Department for Business Enterprise and Regulatory Reform
Dr Chris Herron, Manufacturing and Productivity Advisor, One North East
John Hollis, Head of Government and Industrial Affairs, BMW Group UK
Dr Matthias Holweg, (Chair of the KPI subgroup), Judge Business School, University of Cambridge
Dr Tim Leverton, Group Engineering Director, JC Bamford Excavators Ltd
Rob Oliver, CEO, The Construction Equipment Association
Further views (submitted in writing) have been considered by:
Dr Mike Kitson, Director of the National Competitiveness Network and Co?Director of the Programme
on Regional Innovation, Cambridge?MIT Institute, University of Cambridge
Dr Christos Pitelis, Director of the Centre for International Business and Management, Judge Business
School, University of Cambridge
David Smith, Chief Executive Officer, Jaguar?Land Rover
Jim Sumner, Managing Director, Leyland Trucks
In addition, the BERR Automotive Unit had submitted a ‘straw man’ of potential KPIs, which had been requested
at the first NAIGT meeting. This proposal was also considered.
xlvii
World Business Council for Sustainable Development (WBCSD), ‘Mobility 2030 Report: Overview’, p. 10. 2004.
xlviii
Figures from www.epa.gov?OTAQ/climate/420f05001.htm. Retrieved February 19, 2009.
xlix
Q. Wang, M Delucchi, and D Sperling (1990) ‘Emission Impacts of Electric Vehicles’, Journal of the Air and
Water Management Association, Vol. 40, p.1275?1284. See also Well?to?wheel studies by EUCAR, ECJRC and
CONCAWE.
l
This comparison is based on the Tesla road test in Autocar of February 19 2009.
li
The Stern Review was announced by the Chancellor of the Exchequer in July 2005. The Review set out to
provide a report to the Prime Minister and Chancellor by Autumn 2006 assessing the nature of the economic
challenges of climate change and how they can be met, both in the UK and globally.
lii
See: Dahl, C. and Sterner, T. (1991) ‘Analysing gasoline demand elasticities: a survey’, Energy Economics 3:203?
210; Espey, M. (1998) ‘Gasoline demand revisited: an international meta?analysis of elasticities’, Energy
Economics 20:273?295; Hughes, J., Knittel, C., and Sperling, D. (2008) ‘Evidence of a shift in the short?run price
elasticity of gasoline demand.’ Energy Journal 29:1, p113?134.
Published by:
PICSIE Books, Box 622
Buckingham MK18 1AH, UK
Tel and Fax: +44 (0)1280 815 023
WWW: www.picsie.co.uk
Email: [email protected]
Copyright © PICSIE Books 2009.
All rights reserved.
doc_448795179.pdf
As the world economy is heading towards a major contraction that had its roots in the
collapse of the financial system in 2007, fuelled by cheap credit and ruthless speculation,
demand for motor vehicles had virtually halved in late 2008 and early 2009. Government
bailouts and emergency loans were soon needed across countries and regions for the car
manufacturers and suppliers to stay in business, and many asked whether the end of the
motor industry was indeed near.
Undoubtedly the present crisis will hurt vehicle manufacturers, suppliers and service
providers alike, and some of the weaker firms might well cease to exist in their current form,
or even vanish altogether as the market contraction forces the weaker players into
bankruptcy. However, one should not forget that global demand for personal transportation
is still on a growth trend, and has been growing at a remarkably constant rate since World
War II. The right question is therefore not to ask whether we will build motor vehicles, but
where. In addition, the growing pressures on reducing carbon emissions and the
dependency on fossil fuels will not abate global demand for personal mobility. Thus, the
second question that one might rightfully ask is what kind of vehicles we will be driving in
the future? These are the questions that this report will comment on.
The competitive status of the
UK automotive industry
Matthias Holweg
with
Philip Davies & Dmitry Podpolny
Foreword by Richard Parry?Jones
The Competitive Status of the
UK Automotive Industry
Dr Matthias Holweg
Judge Business School
University of Cambridge
with
Philip Davies
Department for
Business Enterprise and Regulatory Reform
Dmitry Podpolny
Judge Business School
University of Cambridge
Foreword by
Professor Richard Parry?Jones CBE
Chairman,
New Automotive Innovation and Growth Team
Published by:
PICSIE Books
Box 622
Buckingham, MK18 7YE
United Kingdom
How to order:
PICSIE Books
Telephone & Fax: +44 (0) 1280 815 023
Web site: www.picsie.co.uk
E?mail: [email protected]
Copyright © PICSIE Books, 2009
ISBN 978?0?95441244?6?5
British Library Cataloguing?in?Publication Data
A catalogue record for this book is available from the British Library
Cover photograph courtesy of BMW Group UK.
About this report
This report was compiled in collaboration with Philip Davies (Automotive Analyst,
Department for Business Enterprise and Regulatory Reform), Dmitry Podpolny (then with
Judge Business School and now with McKinsey) and the Key Performance Indicator (KPI)
Subgroup of the New Automotive Innovation and Growth Team
i
(NAIGT).
The report was commissioned by the NAIGT Steering Group to provide an empirical basis of
the UK’s competitive status and the key challenges the industry faces. More specifically, the
remit of this report was to inform the work of the NAIGT with regards to (a), the
contribution of the UK automotive industry to the national economy, (b), the industry’s
competitiveness on several key indicators in relation to other countries in Western Europe,
CEE and BRIC
ii
countries, in order to, (c), identify the key strengths and weaknesses of the
UK motor industry.
Furthermore, the report summarises the work of the Key Performance Indicator (KPI)
subgroup of the NAIGT. The subgroup members are:
Robert Baker: Chief Economist, Society of Motor Manufacturers and Traders
Phil Davies: Automotive Analyst, Department for Business Enterprise and Regulatory
Reform
Fernando Galindo?Rueda: Economist, Department for Business Enterprise and
Regulatory Reform
Colin Herron: Manufacturing and Productivity Advisor, One North East
John Hollis: Head of Government and Industrial Affairs, BMW Group UK
Matthias Holweg (Chair of the KPI subgroup): Director, Centre for Process Excellence
and Innovation, Judge Business School, University of Cambridge
Tim Leverton: Group Engineering Director, JC Bamford Excavators Ltd
Rob Oliver: CEO, The Construction Equipment Association
David Smith: Chief Executive Officer, Jaguar Land Rover
Jim Sumner: Managing Director, Leyland Trucks
Earlier versions of this report have been discussed at the various NAIGT meetings, and the
comments and suggestions made by the NAIGT Steering Group members were instrumental
in setting our findings into the context of current business practice.
The NAIGT Steering Group members are:
Simon Edmonds: Head of Business Relations 1, Department for Business Enterprise
Regulation and Reform (BERR official)
Paul Everitt: Chief Executive, The Society of Motor Manufacturers & Traders
Bob Gibbon: Managing Director, National Skills Academy for Manufacturing
Jerry Hardcastle: Vice President – Vehicle Design and Development, Nissan Europe
Matthias Holweg: Director, Centre for Process Excellence and Innovation, Judge
Business School, University of Cambridge
Hermann Kaess: Managing Director, Original Equipment, Bosch
Richard Parry?Jones: RPJ Consulting Services Ltd, formerly Chief Technology Officer,
Ford Motor Company (Chair of the NAIGT)
Roger Putnam: Chair, Retail Motor Strategy Group
Dave Shemmans: Chief Executive Officer, Ricardo
David Smith: Chief Executive Officer, Jaguar and Land Rover
Nigel Stein: Chief Executive, Automotive, GKN plc
Matthew Taylor: Managing Director, J C Bamford Excavators Ltd
Oliver Zipse: Managing Director, BMW (UK) Manufacturing Ltd, MINI Plant, Oxford
We are furthermore grateful to OICA, VDA, ANFAVEA, CATARC and the SMMT for their
assistance in assembling the international dataset underlying this study. We would also like
to express our sincere gratitude to the many industry leaders who so generously gave their
time to support our survey efforts that underpin Part III of this report. Last but not least we
thank Jane Whewell and her team at the Automotive Unit at BERR for her support
throughout the work of the NAIGT.
All errors that remain are solely mine.
Dr Matthias Holweg
Centre for Process Excellence and Innovation
Judge Business School
University of Cambridge
(For feedback and comments please email [email protected]).
Foreword
The UK auto industry has transformed itself in the last decade from a sector with turbulent labour
relations and a poor reputation for quality and productivity to one that is fully competitive.
Independent external reliability surveys put UK built cars at the top of the rankings, and productivity
and labour relations are among the best in the world. Until the impact of the global financial crisis,
the industry was profitable and self?sustaining in Europe and in the UK. Technology and modern
management practices have transformed the shop floor environment, and product technology
embraces lightweight materials, cutting edge design analysis and visualisation tools and the extensive
use of integrated electronic systems to extend digital control to most functions of the car. But all is
not as rosy as this picture paints, and the UK industry has fragilities and faces significant challenges.
Where do we go next?
This is a crucial question for the UK, since the industry is such a huge proportion of our manufacturing
base, still the sixth largest in the world.
The industry has developed a highly integrated industrial system that offers unprecedented value and
accessibility to consumers worldwide through efficient logistics, massive scale, global trade, and
sophisticated systems integration skills. Technological progress has seen dramatic improvements in
vehicle safety, environmental impact, fuel economy, performance and comfort and versatility, while
offering an ever increasing choice through model variety expansion
It is a huge source of technological, industrial and commercial innovation. Many of these innovations
have been adopted by sectors outside the industry, following the example of the moving production
line, just?in?time inventory control, total preventative maintenance and lean flexible production
methods,
The climate change agenda is accelerating technological change at an unprecedented rate, and the
industry in Europe and the UK has embraced the CO
2
challenge and is investing heavily in people and
technology to provide innovative solutions while continuing to offer exciting, safe and satisfying
products that people want to buy.
I believe that the fundamental starting point for developing policy recommendations for any industry
is a fearless and rigorous research and analysis of the key data that helps describe the state of the
industry, the underlying dynamics, and the diagnostics that help shape thinking about where we
should be trying to go next, and how we are going to get there.
This report is the essential complementary document to the report published by the NAIGT on the
future of the automotive sector in the UK, and its contents profoundly shaped the recommendations.
My sincere thanks to Dr Mathias Holweg and his team at the University of Cambridge for helping give
us the insights and test the hypotheses in such a clear?sighted way.
Professor Richard Parry?Jones CBE
Chairman, New Automotive Innovation and Growth Team
Index
On the brink of a global recession... ......................................................................................... 1
PART I: THE UK AUTOMOTIVE INDUSTRY IN PERSPECTIVE ...............................................................4
1.1 Scope ......................................................................................................................... 5
1.2 Method ..................................................................................................................... 6
1.3 Three macro trends that affect the automotive industry ......................................... 7
1.4 The UK automotive industry: a sector overview ..................................................... 22
PART II: THE COMPETIVENESS OF THE UK AUTOMOTIVE INDUSTRY: AN INTERNATIONAL COMPARISON .. 27
2.1 The UK economy ..................................................................................................... 27
2.2 Contribution of the automotive industry to the national economy ........................ 28
2.3 Growth performance of the automotive industry .................................................. 31
2.4 Employment in the automotive industry ................................................................ 33
2.5 Productivity ............................................................................................................. 41
2.6 R&D expenditure and capital investment ............................................................... 43
2.7 Summary ................................................................................................................. 47
PART III: INDUSTRY LEADERS’ ASSESSMENT OF THE COMPETITIVENESS OF THE UK AUTO INDUSTRY ....... 48
3.1 Perceptions of the competitiveness of the UK automotive industry ...................... 48
3.2 Sourcing patterns .................................................................................................... 48
3.3 Industry leaders’ perception: UK strengths and weaknesses ................................. 50
3.4 Industry leader survey: summary of findings .......................................................... 60
PART IV: CONCLUSIONS ........................................................................................................ 62
4.1 The need for evidence?based policy making ........................................................... 62
4.2 Summary of key findings ......................................................................................... 64
4.3 What policy levers does Government have at hand? ............................................. 67
4.4 How can we ensure policy is effective? Key performance indicators ..................... 71
PART V: OUTLOOK: THE NEED FOR A ‘CAR 2.0’ ......................................................................... 74
5.1 Preparing for a fundamental shift in powertrains and fuels ................................... 74
5.2 The mandate for change ......................................................................................... 75
5.3 Disruptive innovation or gradual change? .............................................................. 79
5.4 What are the options? A primer on alternative fuels and powertrains .................. 80
5.5 How to support the transition towards low?carbon transportation ....................... 85
BIBLIOGRAPHY .................................................................................................................... 91
APPENDICES ....................................................................................................................... 94
Appendix A: High?level data on the UK automotive industry ............................................................ 95
Appendix B: The contribution of the UK automotive industry's GVA to the national economy ....... 99
Appendix C: A comparison of the value?added in DM34, selected countries ................................... 99
Appendix D: Number of passenger cars and commercial vehicles produced, selected countries .. 101
Appendix E: Employment in the automotive industry ..................................................................... 102
Appendix F: Employment in DM34, selected countries ................................................................... 102
Appendix G: Labour costs in DM34, selected countries .................................................................. 103
Appendix H: National?level productivity, selected countries (GVA/Employees) ............................. 104
Appendix I: Firm?level productivity (vehicles per employee per annum) ........................................ 105
Appendix J: R&D expenditures in UK motor?vehicle, engine and component manufacturing ........ 106
Appendix K: R&D expenditures in DM34, selected countries ......................................................... 106
Appendix L: Investment in DM34 as part of overall investments, selected countries .................... 107
Appendix M: Graduates' favourite employers, selected countries ................................................. 108
Appendix N: Comparison of key industry indicators, selected countries ........................................ 109
Appendix O: Average wages in DM34, selected countries .............................................................. 113
Appendix P: Questionnaire used in survey ...................................................................................... 114
Page | 1
On the brink of a global recession
As the world economy is heading towards a major contraction that had its roots in the
collapse of the financial system in 2007, fuelled by cheap credit and ruthless speculation,
demand for motor vehicles had virtually halved in late 2008 and early 2009. Government
bailouts and emergency loans were soon needed across countries and regions for the car
manufacturers and suppliers to stay in business, and many asked whether the end of the
motor industry was indeed near.
Undoubtedly the present crisis will hurt vehicle manufacturers, suppliers and service
providers alike, and some of the weaker firms might well cease to exist in their current form,
or even vanish altogether as the market contraction forces the weaker players into
bankruptcy. However, one should not forget that global demand for personal transportation
is still on a growth trend, and has been growing at a remarkably constant rate since World
War II. The right question is therefore not to ask whether we will build motor vehicles, but
where. In addition, the growing pressures on reducing carbon emissions and the
dependency on fossil fuels will not abate global demand for personal mobility. Thus, the
second question that one might rightfully ask is what kind of vehicles we will be driving in
the future? These are the questions that this report will comment on.
It is not a question of whether we will build cars in the future, but where these
vehicles will be built, and what kind of vehicles these will be.
Having a domestic automotive industry is attractive to governments primarily because of
the large direct employment and job multiplier in the supply chain, as well as the industry’s
economic contribution to exports and technology development in general. Thus, developing
and developed nations alike will continue to compete for their share of this global industry.
In this report we will focus on the competitive status of the UK’s automotive industry, as
well as on the competitiveness of the UK as a location for investment and automotive
manufacture in general. We deliberately restrict our analysis to exclude the motor retail and
service sectors, as these sectors are not under threat of offshoring. Their prosperity largely
depends on the household disposable income, interest (and thus mortgage) rates, and the
cost of energy in the UK.
It is virtually impossible to make predictions at the point of start of a recession, a point in
time where the slope of change is the greatest. Doing so bears the great danger of feeding
Page | 2
off a growing lack of consumer confidence and thus amplifying the trend, thereby overall
distorting the long?term trajectories. Figure 1 illustrates the most recent decline of
manufacturing and automotive production in 2007 and 2008.
Figure 1
In fact, from past recessions it is widely known that the automotive industry tends to react
both faster to recession than other sectors, and it tends to experience deeper troughs. The
reason is simply that durable goods purchases can be postponed, and thus – as consumer
confidence wanes – replacement purchases are simply delayed until confidence is restored.
We hence largely focus on extrapolating the existing trends prior to the recession. We argue
that the UK market is as badly affected as any other market, and assume that post?recession
the UK‘s competitive position will be the same in relation to other countries. The recession
might accelerate certain trends, but overall – given that it affects all countries globally –
there will not be a major shift in the UK’s position in the global context.
Forecasting major industry trends at times of a recession is likely to amplify
the trends of ‘doom and gloom’. One hence needs to consider the pre?existing
long?term trends to assess future scenarios.
50
60
70
80
90
100
110
120
2007 Apr Jul Oct 2008 Apr Jul Oct
UK automotive industry output, 2007 and 2008
(Index, moving 3?month average)
Vehicles
Parts
Manufacturing
Page | 3
We nonetheless fully acknowledge that the auto industry in the UK, as in virtually any other
country, has immediate needs for short?term support in terms of credit lines and guarantees
to sustain operations, as well as support for credit?based demand for its products. The
debate how to support an industry sector at times of economic hardship however extends
beyond the scope of this report.
Page | 4
PART I: THE UK AUTOMOTIVE INDUSTRY IN PERSPECTIVE
It is common to start reports like this with statements about ‘increasingly competitive
markets’ and the ‘impacts of globalisation’. While we cannot ignore the wider global trends
that shape all industry sectors in the UK, all too often these terms are being used to suggest
that the industrial decline in the Western World is merely an inevitable consequence of a
trend at global level. This sentiment is generally amplified at times of economic contraction,
when proponents of protectionism find an increasing audience.
Yet the above statements are only partially true – while competition in a mature industry,
such as automotive, is bound to be dominated by unit cost (putting developed countries at a
disadvantage), it is also driven by incremental innovations (putting emerging countries at a
disadvantage). Furthermore, the global shift in manufacturing footprint (often called ‘off?
shoring’ or ‘East?shoring’) has not had an equal impact on all countries alike. We hence
argue that policy decisions taken in support of the automotive and manufacturing industries
in the Western World can make that vital difference, and it is in this spirit that we have
compiled this study. Our objective is not to promote the industry as a whole, nor to highlight
its many achievements, but on the contrary to provide a ‘no?nonsense’ analysis of where
the UK industry stands, where it is headed and what its likely future challenges will be.
The decline of the manufacturing sectors in the Western world is not an
inevitable consequence of globalisation.
In this study we follow on from the last AIGT in 2001/2002 that argued that the UK might no
longer be a viable base for volume manufacture for motor vehicles if the volume sector was
lost, as the economies of scale in the supply chain might no longer be given. This scenario
has now largely come true: since 2002, the UK motor industry has seen a series of further
plant closures, as well as the failure of the last British?owned volume car manufacturer, MG
Rover
iii
. This decline is not a transient economic misfortune, but forms part of a long?term
trend that has been widely observed and discussed
iv
: ever since the UK lost its prevalent
position as the world’s largest vehicle exporting nation in the early 1950’s, the importance
of its motor industry has been declining both in national, as well as, global terms. The loss of
its national champion, MG Rover, in 2005, aggravates this problem.
This decline is not entirely unexpected in a mature industry, where the dominant design has
been set early in the twentieth century, and where countries since have been competing
Page | 5
largely on a basis of unit cost and incremental innovation. The industry has further changed
considerably over the past decade due to the reduction in trade barriers and growth in
developing markets such as China and India, which have led to drastic changes in
manufacturing footprint. Existing overcapacity is exacerbating the problem and will continue
to do so, as developed countries strive to sustain their national industries, while other
countries are encouraging the growth of their national industries, often with generous
subsidies.
Looming over the entire industry is a general uncertainty over the future supply (and thus
cost) of fuel, the ever more pressing need to reduce the environmental impact of the
transportation sector in terms of emissions. While the need to replace fossil fuel?based
internal combustions engines (ICEs) as the main powertrain architecture is as widely
accepted, so far we lack any clear alternative as to what the dominant design of such next
generation powertrains will be. Conjointly, these factors add greatly to the uncertainty felt
in the industry at this point, with a conclusive answer to what the post?petrol? and diesel?
fuelled internal combustion engine powertrains still amiss.
It is against this picture that we are assessing the competitiveness of the UK automotive
industry, drawing upon both past quantitative data as well as present qualitative
assessments, in order to identify the strengths and weaknesses of the UK motor industry, in
relation to its competition.
This paper is part of a review of the UK’s automotive industry by the New Automotive
Innovation and Growth Team (NAIGT), and this paper was specifically commissioned to:
i. assess the economic contribution of the UK’s automotive industry,
ii. determine its competitiveness against its peers groups in Western Europe, CEE and
BRIC countries, and
iii. identify the key strengths and weaknesses of the automotive industry in the UK.
1.1 Scope
In this report we largely focus on the passenger car industry, which we define as a proxy for
the industry as a whole that includes the manufacture of commercial vehicles, truck, busses,
and specialist sectors, such as construction equipment, design engineering and motor
sports. The main reason for this simplifying assumption is to achieve consistency of data in
order to provide for valid and rigorous international comparisons.
Page | 6
We hence use ‘DM34’ as our reference, which in statistical terms includes all economic
activities related to the vehicle manufacture, the manufacture of components, engine parts
and accessories
v
. We acknowledge that although the economic activities captured in DM34
will cover most of the direct automotive assembly operations and component suppliers, it is
also likely to underestimate the employment in the 2
nd
and 3
rd
tiers of the supply chain –
economic activities which are often not classified as ‘automotive’, but according to their
products (e.g. plastics parts, cables), processes (e.g. forging, pressings) or services (e.g.
finance, transport, security). However, we are confident that for the purpose of
international comparisons use of DM34 is consistent, and that we capture the large majority
of economic activity related to the motor industry. We will return to the issue of
employment in more detail in section 2.4.
While we acknowledge that the UK is home to some of the most productive car and truck
plants in Europe, we are interested in national trends only and thus will not comment on
individual firms and their performance in this report. We focus on manufacturing of
components and assembly of motor vehicles only, as the threat of offshoring does not apply
to the retail sector
vi
. In fact, the UK motor retail and service sector would look exactly the
same if not a single car was made in the UK any more. By definition this sector is not in
danger of being offshored, and its prospects are largely determined by macroeconomic
factors, such as household disposable income, oil price, interest and mortgage costs. Retail
and service are however very important, accounting for 25?30% of the automotive value.
1.2 Method
In terms of method, we rely on two main sources of data. We use past data to extrapolate
and examine current trends in the macroeconomic data at the national level. Secondly, we
use survey data from a selected range of senior decision makers in the UK auto industry to
assess their perceptions, as a means of identifying likely patterns in their firms’ future
behaviour. The data from both sources was triangulated and then put forward at the NAIGT
Steering Group meetings for discussion; in this sense our analysis is conceptually a hybrid
between a macro?economic analysis, a survey and a Delphi study.
More specifically, in the first part, a quantitative analysis of the UK automotive industry over
time and in relation to other countries was conducted. The industry’s performance was
evaluated and factors assessing growth, productivity, cost and innovation were identified
and compared across countries. In the second part, a qualitative analysis of the industry was
conducted, using in?depth interviews and/or on?line surveys with 17 industry leaders. In this
Page | 7
part of the study industry leaders were asked to estimate trends in sourcing from the UK,
rank various factors defining competitiveness in four different geographies, with the UK as
the main point of reference,
i. the immediate peer group in Western Europe, namely France, Germany, Italy and
Spain, henceforth ‘FGIS’; as these are most similar to the UK in several ways – their
level and history of industrialisation is fairly similar, all have relatively large and
functioning automotive industries, and they are the largest countries and
economies in Western Europe.
ii. Central and Eastern European countries, or ‘CEE’, such as the Czech Republic,
Slovakia, Hungary, Poland, and Romania that have seen a great level of influx of
offshored manufacturing operations, which often export back into Western
European markets. Here, it was decided to focus on the Czech Republic as a
representative.
iii. Brazil, Russia, India, and China or ‘BRIC’, as the main growing markets, which have
seen the largest growth levels on a world scale. It was decided to compare these
countries to the UK because of the growing importance of these regions in the
automotive industry (between 1995 and 2008, 48 new assembly plants were
opened in this cluster). The decision to adhere to a common convention of grouping
these countries together despite the considerable difference between them was
made because of the relatively large size of the labour market in these countries
(especially in China and India), the size of their territory and the relatively similar
level of industrial development (though Russia is somewhat an outlier in this
respect).
The findings from the above analyses were discussed at length at the NAIGT Steering Group
meetings, which marked a vital ‘sense check’ of our research findings, enabling us to ground
these in current practice and perceptions in the industry.
1.3 Three macro trends that affect the automotive industry
At the start of its second century, the automotive industry is undergoing a period of drastic
change: over the past decade we have seen both record profits and bankruptcy of global
suppliers and manufacturers, some of the largest industry mergers and de?mergers, and –
largely thanks to emerging new markets – an ever increasing global demand for passenger
cars that saw global production rise by a CAGR of 2.44% since 1970. Figures 2 and 3 show
Page | 8
global production and vehicles in use from 1900?2007, respectively, while Table 1 gives a
more detailed overview of the growth rates in both global production and vehicles in use.
Figure 2
Figure 3
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Total Passenger Cars Commerical Vehicles
Global Productionof Passenger Cars and Commercial Vehicles, 1900?2007
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
700,000,000
800,000,000
900,000,000
1,000,000,000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Total Passenger Cars Commercial Vehicles
Worldwide Vehicles in Operations, Passenger Cars and Commercial Vehicles, 1900?2007
(data missing pre 1919, and from 1940?1944)
Page | 9
Table 1: Compound annual growth rates for global passenger car and commercial vehicle production,
and global vehicles in operation.
Vehicle Production Vehicles in Operation
Time CAGR Time CAGR
Total 1900?2007 8.71%
Total 1945?2007 6.95% Total 1945?2007 5.25%
Total 1970?2007 2.44%
Passenger Cars only 1964?2007 2.50% Passenger Cars only 1977?2007 2.77%
CVs only 1964?2007 3.61% CVs only 1977?2007 4.25%
Despite this apparent stable growth in demand, the industry is undergoing structural
changes that have seen many of the established players close to bankruptcy. In Europe, the
exit of MG Rover as the last British?owned volume manufacturer and the recent years of
crisis at Fiat mark a case in point, so do the large financial losses incurred by the Big Three
(GM, Ford, Chrysler) while trying to restructure and survive in a contracting market at the
same time. Further exits of established players remain highly likely, a market space that will
happily be filled with a third wave of low?cost imports, from China, India and others
vii
.
The automotive industry is not a ‘sunset industry’: global demand will rise
again post?recession, as more and more societies rely on motor vehicles for
both economic activity and personal mobility.
There are three trends that drive these competitive dynamics: regionalisation,
fragmentation and saturation.
Regionalisation
With a reduction in trade barriers and more porous borders, we have observed several
distinct shifts in the manufacturing footprint that shaped the industry’s structure as it is
today. As demand in the established regions has been stagnating, we have seen several
major waves of investment in emerging markets. In the early 1970s, the vehicle production
of the US, Western Europe and Japan combined accounted for 91% of the world’s 22.5m
passenger car production. Back then, the US and Western Europe in particular were large
Page | 10
net exporters, while Japan was still on a steep curve of increasing both domestic production
and export volumes. By 2004, the picture had changed considerably. Of the 42.8m units that
were built, only 70% came from the three established regions, USA, Europe and Japan. The
number of assembly plants had grown from 197 to 460, of which only 44% were located in
North America, Western Europe and Japan. In 2007, this trend had continued, with only 54%
of the global car production originating in the USA, Japan and Western Europe.
What had happened was the industry had distributed its manufacturing base: whereas
previously largely ‘knock?down’ operations (CKD or SKD
viii
) were used in emerging markets,
the growth of their respective domestic demand now justified full?scale assembly plants.
The increase in demand in Latin America in the 1990s for example sparked a wave of
investment in the local motor industry in Latin America. From 1980 to 2000, the combined
vehicle production in Argentina, Brazil and Mexico nearly doubled to just under 4 million
units. Yet the experiences in Latin America also serve as a warning signal, as the demand in
Brazil and Argentina collapsed sharply after the respective currency devaluations. Exchange
rate uncertainty remains an issue, today more than ever, with respect to the most recent
wave of expansion in China, and the artificially pegged Yuan, and a weakening US dollar.
Recent growth in the automotive sector has largely been confined to emerging
markets. The beneficiaries of this growth have been the multi?national car
manufacturers that have diversified their footprint to serve this demand.
The opening of the Chinese domestic market, in conjunction with a strict growth policy, has
seen the dramatic rise of the Chinese automotive industry. With virtually no passenger car
production before 1980, China produced 5.39m cars in 2007. Of these, 90% are made by the
joint venture companies of the large foreign manufacturers, and virtually all of these are (so
far) sold domestically. China thus does not yet pose an import threat of the kind that Japan
and South Korea did, yet may well do so in the near future. See section on ‘waves of
imports’ below.
What one can observe here is not what is commonly referred to as globalisation, but is
much better described as a regionalisation of the industry. The net export balance that
fostered the growth of the automotive industry in the industrialised world over much of the
last century is gradually being replaced with an infrastructure that builds vehicles locally,
close to the customer (see Table 2). The immediate result for the established regions has
been a necessary yet painful capacity adjustment, and the recent plant closure in the UK are
Page | 11
likely to be followed by others across Western Europe
ix
. In the USA, the overcapacity
situation is even more pronounced, and further Big Three plant closures in addition to those
already announced are to be expected.
Table 2: Share of world car production by region, selected years 1971?2007. Source: Ward's Automotive
This trend can be illustrated even more drastically if one considers the world's production
and sales by region, in 1980, 1990, and 2000 compared with 2006. As can be seen in Figure
4, as late as 2000 there were essentially only three car producing regions in the world:
Western Europe, Japan, and the US/Canada. By 2006 this picture had changed drastically,
with the largest growth in China, India, CEE and Latin America.
1971 1980 1990 1995 1997 2000 2002 2004 2007
World Car
Production
[in million
units]
26.45 28.61 36.27 36.07 38.45 41.23 41.22 43.20 52.19
Industrialised
Countries [USA,
Japan, W Europe]
% of World
Passenger
Car Production
90.9% 89.9% 87.8% 82.0% 73.4% 74.9% 72.3% 67.8% 54.1%
Newly
Industrialised
Countries
% of World
Pass. Car Production
5.1% 7.7% 8.7% 15.1% 17.3% 17.2% 21.4% 31.4% 35.7%
Page | 12
Figure 4
1980: Total production of passenger cars: 28.609m (#241)
#83 (60)
Domestic sales (2m units)
Car production (2m units)
#10 (8)
#10 (10)
#6 (5)
#32 (34)
#21 (13)
#6 (5)
#49 (40)
#5 (4)
#6 (4)
#11 (6)
#30 (26)*
* Rest of Asia
#9 (8)
1990: Total production of passenger cars: 36.273m (#317)
#95 (68)
Domestic sales (2m units)
Car production (2m units)
#15 (13)
#10 (10)
#9 (8)
#36 (34)
#28 (20)
#11 (10)
#65 (54)
#9 (7)
#6 (4)
#16 (10)
#47 (39)*
* Rest of Asia
#9 (8)
Page | 13
Figure 4 (ctd)
2000: Total Production of Passenger Cars: 41.229m (#419)
#122 (86)
Domestic Sales (2m units)
Car Production (2m units)
#30 (25)
#23 (17)
#14 (12)
#42 (34)
#49 (31)
#14 (11)
#73 (59)
#16 (11)
#7 (4)
#26 (13)
#75 (62)*
* Rest of Asia
#10 (9)
2006: Total Production of Passenger Cars: 46.464m (#456)
#143 (97)
Domestic Sales (2m units)
Car Production (2m units)
#69 (47)
#28 (21)
#16 (12)
#43 (35)
#49 (32)
#17 (12)
#74 (54)
#18 (11)
#8 (4)
#34 (17)
#84 (69)*
* Rest of Asia
#12 (7)
Page | 14
Waves of imports
Underlying this trend are three distinct waves of imports from an emerging economy, into
the Western markets of Europe and North America. The first wave of imports was from
Japan, from 1975 onwards. Fuelled by the oil crises of 1973 and 1979, the comparatively
smaller (and thus more fuel?efficient) Japanese cars were capturing a large fraction of the
US market, while the market share in Europe has remained relatively low to this day (the
Japanese market share in the UK and Germany in 2007 was 17% and 12%, respectively,
compared with 45% in the USA). Although hard to quantify, we argue that this is due to the
fact that continental European customers express much stronger preference for their
national brands. From the mid?1980s, the export surplus of Japan subsided, not because the
Japanese lost ground in their export markets, but because they established transplant
operations overseas, in particular in the US market (see the footnote for a table of North
American transplant operations)
x
.
The second wave emanated from South Korea, with its indigenous vehicle manufacturers,
Daewoo (under GM control since 2001), Hyundai and Kia (Kia was bought by Hyundai during
the Asian financial crisis in 1997), and later also Samsung (which was established in 1994,
and was bought by Renault in 2000). The South Korean approach almost perfectly replicated
the Japanese model, of entering the lower market segments with very competitively priced
models – a segment that was opening as the Japanese were moving upmarket, to compete
full?on with the US and European vehicle manufacturers.
The most recent emerging automotive nation is China, which has seen a phenomenal
growth in its domestic car industry. So far this growth has been to satisfy domestic demand,
but there is little doubt that the recent SAIC?NAC merger
xi
is developing the capability to
serve Western markets with a competitive product. Previous attempts such as exporting the
Landwind SUV, which showed a disastrous crash test performance, have demonstrated the
need to develop competitive products before attempting to develop export markets. China
certainly is developing the potential of leading the next wave of cheap imports into the
Western world, without any question. The IPR from the Rover acquisition, as well as the
collaboration with Ricardo in the UK, have certainly accelerated the development of the
Roewe 750 (based on the Rover 75), and the new Roewe 550.
In contrast with Japan and South Korea though, one might ask to what extent the Chinese
industry needs the scale improvement through exports, as their domestic car market is
already the largest market in the world (as of January 2009), and still the fastest growing in
overall volume, while the Western markets are relatively mature with little further prospect
for significant growth.
Page | 15
One might argue that India has an equal potential of leading an import wave. While this is
certainly true in terms of labour cost and increase in assembly capacity, in our view India is
about 5?10 years behind the development level of China, and thus unlikely to achieve a
similar level of prominence compared to China in the short or medium term. That said, the
purchase of Jaguar Land Rover by Tata may accelerate India’s progress, in the same way as
the Rover assets and IPR have helped China to push the Roewe brand.
There have been several distinct waves of imports from Japan, South Korea
and Eastern Europe over time, and there is little reason to doubt that the next
wave will come from China in the near future.
Figure 5 shows the ratio of production to domestic sales for Japan, South Korea, China,
India, Brazil and the Czech Republic; several distinct ‘waves of imports’ can be seen. As one
would expect, Japan developed into a very large net exporter in the 1970s (and has
remained one ever since), while South Korea started becoming a large net exporter only in
1990. The Czech Republic, amongst other countries, led a third wave of imports from CEE in
the mid?1990s, while (so far) neither China, India nor Brazil have become primarily exporting
car producers.
Figure 5
0.1
1
10
1970 1980 1990 2000
Japan China South Korea
Brazil India Czech Rep.
Ratio of productionto sales, selected countries, 1970?2007
(logarithmic scale)
Page | 16
Labour cost
Lower labour cost are generally stated as the main reason for the increase in decentralising
global production into low?labour cost countries, and comparing the nominal hourly
compensation there are indeed stark differences (see Table 3).
Table 3: Labour cost per hour in automotive manufacturing, US$. Source: ILO
Germany $29.91 Korea $10.28
US $21.97 Czech Republic $ 4.71
UK $20.37 Brazil $ 2.67
Japan $20.09 Mexico $ 2.48
Spain $14.96 China $ 1.30
But how significant are labour costs? First of all, in the overall cost structure, the production
of a vehicle roughly from the customer’s point of view approximately breaks down into: 31%
of the list price are accounted for by distribution and marketing cost, as well as dealer and
manufacturer margins. The 69% ex?factory cost split into 48% for procured parts and
materials, 9% overhead, and only 13% are related to the vehicle production operation. Here,
labour represents the largest component, alongside capital investment depreciation for the
production assets.
There still are significant labour cost differences across countries, however,
direct labour only accounts for about 4% of total value in a vehicle. Also, the
higher the vehicle segment, the less important labour cost become.
When one compares the above to the hourly rates a worker earns then it is obvious that
labour cost is indeed a significant competitive factor in the lower segments of the market,
yet does play an decreasing role in the higher market segment, where firms do not compete
on cost alone, but on technological innovation, design, and brand image.
Page | 17
Figure 6: Typical automotive cost structure, C?segment vehicle. Source: Holweg and Pil (2004)
As Figure 6 shows, vehicle assembly accounts for only a small fraction of the total value of a
vehicle, while two thirds of the vehicle value (66%?75% of manufacturing cost, or 50% of the
retail price) is being bought in from component suppliers.
The majority of value in the motor industry is generated in the component
supply chain, while manufacturing plays only a minor part.
Fragmentation of markets
The second key trend is one that is relatively easy to observe, namely the implosion of
traditional vehicle segments, in favour of ‘cross?over’ and niche segment vehicles. The
traditional segments of small cars (B?segment, e.g. Polo or Fiesta), compact cars (C?segment,
e.g. Golf and Focus), family cars (D?segment, e.g. Passat and Mondeo), and executive class
(E?segment, such as E?class and 5?series) have been joined by SUVs, MPVs, UAVs, and the
like. In quantitative terms, this trend can be easily seen: across Europe, in 1990 a total of
187 models were offered, which increased to a total of 315 models in 2003. This increase is
MSRP
€17,000
Raw materials: 6.9%
Dealer margin 8?12%
Inbound Logistics 1%
Source: Holweg and Pil (2004) “The Second Century”
Internally produced parts 13.2%
Procured parts: 27.6%
Manufacturing 12.5%
Product development and
overhead 8.5%
OEM margin 7%
Outbound Logistics 1.2%
Direct marketing, dealer
support 10%
Page | 18
both due to the new segments, such as MPVs and SUVs, but also model line expansions in
existing segments. The B?segment of the Corsa and Fiesta, for example, saw an increase
from 16 to 31 models over that time period.
The increase in model range is accompanied by a general shortening of product life cycles.
While the average time a product stayed in the market was around 7 years in 1970, this
average has been reduced to 5 years – a trend consistent across the US and Western
Europe. In Japan, life cycles have traditionally been much shorter already, and some
companies like Toyota have coped by building two generations on one platform, before
changing both design and platform with the third generation.
Together, the increase in model range and the reduction in life cycles have a drastic impact
on the economies of scale that can be achieved. The volume sold per model has been
significantly reduced over time, which gives the manufacturers less and less opportunity to
recover their considerable development cost. As a reaction, manufacturers are trying to
increase the component sharing and platform usage across as many models as possible.
Table 4 illustrates the overall shifts in volume per model, and the use of platforms in Europe
between 1990 and 2002:
Table 4: Platform Usage in the European Automotive Industry. Source Pil and Holweg (2004).
1990 1995 1996 1997 1998 1999 2000 2001 2002
No. of Platforms in use (all
Europe) 60 60 57 56 53 51 45 45 48
No. of Bodytypes offered (all
Europe) 88 137 139 148 157 162 170 178 182
Av. No. of Bodytypes per
Platform 1.5 2.3 2.4 2.6 3.0 3.2 3.8 4.0 3.8
Av. Production Volume by
Platform (in '000s) 190 171 185 194 199 215 249 272 258
Av. Production Volume by
Bodytype (in '000s) 129 75 76 73 67 68 66 69 68
This development marks a major shift in the fundamental economies of the automotive
industry: whereas previously a volume of c.250,000 units annually was sufficient for a
vehicle model to break even, the present economies of scale are no longer based on
individual models, but on platforms and shared modules and components. This essentially
creates a market that is divided into two viable spaces: those manufacturers that are able to
leverage their brand portfolio and achieve these economies of scale by sharing platforms
across models and brands (see for example Volkswagen’s Golf platform PQ35 that is shared
Page | 19
across the VW, Audi, Seat and Skoda brands). The second viable space is at the low?volume
premium end of the market, where brand strength and technological or performance
leadership mean that manufacturers can command a high premium (and thus margin) for
their products (see for example Porsche).
In between these two viable spaces there will be increasing pressure on manufacturers that
are too small to leverage their platforms across many models and brands, and do not
command the premium margin on their vehicles, to fund a sustainable pipeline of new
products.
We have seen a fundamental shift in the economies of scale in the industry,
which now segregates competition into a high?volume and low margin, and
low?volume high?margin segment.
While the large players are currently working on leveraging their resources across their
brands, for smaller companies this is not so easy. One reason why MG Rover failed was the
need to cover the growing new market segments, while volumes were shrinking in the
traditional segments it was offering products in. Ultimately, its volumes were too small to
finance the required product development programmes, and with an ageing line?up in
limited segments, sales continued to fall.
Saturation and overcapacity
The third key trend is a malaise that is entirely self?inflicted: as a result of the failure to
adjust capacity to demand, the auto industry suffers from a global overcapacity that at this
point is estimated at 20 million units – equivalent to the combined installed capacity in
Western Europe! The basic reason for the overcapacity is an asymmetry: it is much easier to
add capacity, than it is to reduce it. With an average employment of 5,000 workers per
assembly plant and an additional job multiplier of at least five jobs in the supply chain,
governments encourage, and most often also subsidise, the building of new vehicle
assembly plants. For the same reason, closing a plant when demand drops is difficult and
quickly becomes a political issue. As a result, there is a perennial asymmetry in capacity
adjustment: it is considerably easier to add capacity than it is to close capacity down.
Page | 20
The main consequence from the overcapacity is that manufacturers ? in their quest to keep
capacity utilisation high ? produce into the growing inventories of unsold cars (around 1.5 –
2 months in most markets), and then employ sales incentives, such as discounts, high trade?
in prices, free upgrades, and the like, to maintain their market share. Initially, the problem
was confined to the North American market, which after the recession of 2001 has seen an
increasing ‘war of attrition’ between the manufacturers. Average incentives then and today
range between $2,000 and $6,000 per vehicle. That way, the Big Three managed to maintain
their market share until recent times, yet this position is not sustainable, as the massive
recent losses graphically illustrate.
An asymmetry in capacity adjustment has resulted in a global overcapacity
that is causing the poor profitability of the sector.
The root cause here is a chronic inability to adjust output to demand and link the production
schedule to actual customer orders. While Henry Ford founded the industry on the premise
of making vehicles as efficiently and inexpensively as possible, this mass production
‘volume?push’ approach is no longer viable in current settings of saturated markets, where
one has to deal with increasingly demanding customers. At times when Dell illustrates that
one can order a customised product that is built to order within a few days only, the
established automotive business model seems obsolete. Several manufacturers have
understood the need of linking production to customer demand, and have successfully
initiated ‘build?to?order’ (BTO) programmes, such as Renault, Nissan, BMW, and Volvo. Their
success has illustrated that one can indeed build a car to customer order within 3 weeks or
less, and operate without the costly finished vehicle inventories and the incentives needed
to clear the overproduced cars from dealer stock. Most other manufacturers recognise the
need of getting closer to their customers, but the implementation is often lagging behind
what the press releases state. One could argue that while there is widespread intellectual
acceptance, there is an equally widespread institutional apathy.
Page | 21
Dynamics of competition
Over the years, the claims that ‘competition in the motor industry is increasing’ have been
omnipresent. While there undoubtedly is some element of ‘propaganda’ involved,
empirically this claim can indeed be verified. As Figure 7 shows, if one corrects the cost of a
modern passenger car for safety and emissions content, as well as for inflation, the cost of a
vehicle has indeed been stagnant and even slightly declining over the past two decades.
In fact, the motor vehicle is actually one of the lowest of all consumer products, in
comparison: a laptop for example will cost around £600, and weigh about 3 kg, giving it a
value of £200/kg. A motor vehicle will cost £12,000 and weigh 1,800 kg, giving it about
£6.7/kg in terms of cost per weight.
Overall, the motor industry is indeed providing an increasingly better value proposition to its
customer – a factor largely enabled by large?scale and globally connected operations that
allow for the increasing development costs to be netted off against large, global sales.
Figure 7: The evolution of the cost of a passenger car
$0
$5,000
$10,000
$15,000
$20,000
$25,000
1
9
6
7
1
9
7
1
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2
0
0
1
2
0
0
3
2
0
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5
Average expenditure per new car
(import and domestic) in US$
Estimated Average New Car Price
for a 1967 "comparable car" ? with
emissions and safety features
(inflated to 2007 US$)
Estimated Average New Car Price
for a 1967 "comparable car" ?
without emissions and safety
features (inflated to 2007 US$)
Page | 22
1.4 The UK automotive industry: a sector overview
Overall, the UK produced 1,649,515 vehicles in 2008, placing it 12
th
in the global output
league
xii
. This represents 2.4% of global output in terms of numbers of vehicles
xiii
. Within
Europe, UK has remained in 4
th
position throughout since 2000, achieving 8.8% of European
output in 2007, down from 9.6% in 2000. Only Germany, France and Italy have indigenous
volume vehicle makers, with all other nations reliant on inward investment for their volume
vehicle plants, supplemented in some cases by niche products for local markets.
Vehicle and engine manufacturing
In total, official statistics record 753
companies in the vehicles and engine
sector
xiv
. Of this total, 20 companies
account for 90% of sector sales and
84% of sector employment
xv
. The
data is not entirely consistent, as
some companies split up their
operations in separate reports, whilst
others put everything together. Ford
figures include the Southampton van
plant, engine plants at Dagenham
and Bridgend, and the Dunton research & development facility. Meanwhile Vauxhall’s
accounts include Ellesmere Port, and their UK sales operation, but their van manufacturing
plant (IBC) is reported separately. Comparisons are thus not perfect but the chart gives a
good indication of the relative values of the businesses.
The chart shows size in terms of vehicle output. Note that company sales by value do not
correlate exactly with unit output, due to differences in the scope of the operations as well
as differences in value of the product.
In terms of vehicle output over time, the following chart shows the UK passenger car output
since 1940. The decline in the 1970s follows the bankruptcy and subsequent nationalisation
of British Leyland, while the increase in the 1980s and 1990s is largely due to the arrival of
the Japanese transplants. The decline since 2000 is related to the demise of MG Rover, and
the effects of the plant closures by GM Luton and Ford.
UK vehicle makers Pareto chart (2007 Vehicle output)
0
200
400
Nissan Toyota Honda BMW Land
Rover
Vauxhall IBC Ford
O
u
t
p
u
t
(
0
0
0
)
0%
50%
100%
Page | 23
Figure 8: UK vehicle output over time
The UK has seen a great deal of volatility in its automotive production over
time, with foreign manufacturers largely replacing the failing domestic
producers’ volume by the mid?1990s.
Thus, the frequent claims that the UK automotive industry is providing a stable output of 1.6
million units are misplaced: the UK has in fact seen a great deal of volatility of outputs, and
is in fact producing at a level considerably below its peak in the 1960s and 1970s.
Commercial vehicle
manufacturing
The data for the commercial sector
is commonly included in the motor
vehicles industry; the chart opposite
sets out the industry in terms of
output, as distinct from the
UK CV makers Pareto chart (2007 Vehicle output)
0
50
100
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UK vehicle output 1940?2008
CV's
Cars
Page | 24
passenger car sector
xvi
. In volume terms, the panel vans made by Ford and IBC dominate,
but Leyland Trucks are about half the size of the IBC operation in terms of sales and
employment. Unit output is less than 20% of IBC’s, but value per unit is much higher.
Component supply
Nearly 2,600 business units
xvii
are
directly active in this sector,
according to ONS data. Of these,
around 80 companies have been
identified, using knowledge
gained from BERR relationship
management, a recent study of
Japanese autoparts makers, and
local RDA knowledge. Three
companies in particular have
been identified as being based in
UK but having a global reach.
These are GKN, Tomkins and TI.
For Tomkins and TI it has proved difficult to identify the UK automotive element of their
operation so they have been excluded from the Pareto analysis.
The companies identified represent some 74% of sector sales, and 96% of employment.
This suggests a degree of error in the figures, but that overall coverage is probably fairly
comprehensive. Setting aside Tomkins and TI, the leading company is Robert Bosch (though
whether these figures include domestic appliances needs further investigation).
Construction equipment
This sector is separately identified in
the statistics
xviii
. The dominant player
is JCB: UK based and one of the top
three global players in the sector.
The figures quoted here are for the
global operation: work continues to
collate all the separate UK accounts:
UK auto parts makers Pareto chart
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UK CE makers Pareto chart (Sales)
£0
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(global)
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(UK)
Komatsu
(UK)
Terex Thwaites Neuson
(UK)
S
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Page | 25
each facility appears to be reported separately, and the holding company is registered in
Netherlands. Caterpillar also has a very strong presence in UK. Thwaites and Neuson
specialise in dumper trucks.
Research and development, and design engineering
Data has been extracted
from the DTI R&D
scoreboard. Note at least
one aerospace company is
recorded in the auto sector
and several auto companies
are found elsewhere in the
document. With these
amendments, it is believed
that at least 30 auto?
related companies are in
UK top 850 companies as
defined in the Scoreboard. UK automotive R&D is dominated by Ford (Dunton) and Land
Rover (figures include Jaguar). In this chart, the figure for GKN probably includes some
aerospace R&D.
The data presented here has
been extracted from
company accounts, using the
company list identified in the
recently published Design
Engineering SCE. The largest
player is Ricardo. Lotus
figures include the car
business and figures don’t
enable the DE contribution
to be separated out from car
manufacturing.
UK Auto R&D Pareto chart
0
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Page | 26
Motorsport
Motorsport is an ill?defined sector in statistical terms, and for this analysis the ‘Motorsport
100’ survey has been used. This is a sampling exercise, and of the companies in the survey,
around one third have published annual reports. It will be noted that there are several
‘repeats’ from other sectors: Lotus, Ricardo and Prodrive appear elsewhere, and their
accounts do not allow separate identification of the motorsport?related activities in the
organisation. However, their repeat appearances indicate their importance across the
industry.
Amongst the uniquely motorsport
companies in the list, the F1 teams
head the list, and specialist
lubricants appears also to be a high
value sector. Amongst the other
companies included here are
makers of racing cars, racing
engines, high technology
components and infrastructure
operations such as circuits and
publicity.
UK Motorsport Pareto chart
0
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200
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Page | 27
PART II: THE COMPETIVENESS OF THE UK AUTOMOTIVE INDUSTRY:
AN INTERNATIONAL COMPARISON
In this part we review the current trends of the UK automotive industry since 1995 on a
range of selected indicators, and set its performance into relation to other countries,
especially France, Germany, Italy and Spain. The data regarding the Czech Republic will be
used as representing the CEE (excluding Russia), due to limited reliable data on other CEE
countries.
2.1 The UK economy
At the highest level, the UK trade balance over time shows the degree to which the UK came
to rely on services as the main contributor to the overall trade balance. The manufacturing
sector is showing an increasing trade deficit (meaning that the manufactured products
demanded by the UK are increasingly imported), and the automotive sector is following this
trend also. Both were often seen as ‘sunset industries’, and the trade balance very clearly
reflects the effects of a policy that has promoted (financial) service as the main driver of a
‘post?industrial’ economy.
Figure 9: Trade balance of the UK economy, by sector, over time
?100,000
?80,000
?60,000
?40,000
?20,000
0
20,000
40,000
60,000
1990 1995 2000 2005
UK trade by sector, in £ million
Services
Pharma
Aero
Oil
Auto
UK Trade balance
All mfr
Page | 28
2.2. Contribution of the automotive industry to the national economy
There are many ways in which to assess the economic contribution of an industry sector to
the wider economy, such as employment or contribution to GDP
xix
. We have chosen to
estimate economic contribution using value added data in the manufacturing of vehicles
and components because it is a direct method of understanding the true value to the
national economy of what is potentially offshorable. The following data hence are reflecting
only the value?added in manufacturing, and do not take into account sales and services nor
do they reflect supporting industries.
By the standard HMG definition
xx
, the UK auto industry thus employs 194,000 people in
3,300 businesses, generating some £10.2bn value added in 2007. The auto industry directly
accounts for 5.9% of UK manufacturing employment, 6.4% of gross value added, and
accounts for around 12% of UK manufactured exports, and 13% of manufactured imports.
2008 vehicle production was just under 1.65 million units, down 5.8% as the industry started
to respond to a sharp downturn in vehicle markets worldwide. This included 1,446,619 cars
(down 5.7%) and 202,896 commercial vehicles (down 5.9%). 77% of the cars, and 61% of the
commercial vehicles, were exported.
Manufacturing generates around 14% of the total UK GVA and provides around 10% of total
UK employment
xxi
. It follows that the automotive manufacturing sector directly represents
around 0.8% of the UK economy in terms of value added, and directly provides around 0.6%
of total UK employment. This excludes goods and services bought in: the true contribution
to the economy is probably in the order or two to three times these figures, and some
analysis on this is offered below.
Inputs and outputs
Data exists to analyse where the auto sector buys its inputs, and where the products are
sold. Latest available data comes from the 2006 Input & Output publication, which has data
up to 2004
xxii
. The input data shows that the single largest source of supply is other
companies within the sector: in total, 31.5% of the inputs are from within the sector.
Meanwhile 68.5% of the inputs come from elsewhere in the economy: principally from
industries that are categorised by process rather than end?user. The output data indicates
that the sector is its own largest customer, with 47% of all output recycling within the
industry. Of the output going into the wider economy, just under half goes to the motor
trades, 6% to other land transport, and 5% to public administration & defence.
Page | 29
International trade
2007 trade data shows a widening of the auto sector trade deficit. Exports were £25.3bn, up
9.6% and totalling 12.8% of UK manufactured exports. However, imports were up 12.6% to
£42bn, totalling 15.3% of UK manufactured imports. This yielded an automotive sector trade
deficit of £16.75bn. Analysis of UK trade in goods shows that the automotive sector is the
single largest exporter, but by a rather larger amount the single largest importer, and as
such has the largest trade deficit of any sector.
Figure 10: UK automotive industry’s trade balance, 1990?2007. Source: ONS
The UK is a net importer of motor vehicles, despite the fact that it is exporting
the majority of its products.
Value?added
In the case of the UK data regarding the value added in manufacturing of motor?vehicles,
engines and other components was available. This data shows that the relative contribution
to GVA
xxiii
in 2006 was actually smaller than the GVA in 1996, reflecting the fact that over a
10?year period the industry has not expanded in any meaningful way. Taken in the context
of GDP these data show an even bleaker picture – the GVA as a percentage of GDP has
declined by nearly 40%, from 1.16% in 1995 to 0.73% in 2006. The compound annual growth
rate (CAGR) of the GVA was 1.12%, while the GDP was growing by 5.51% during that time.
UK Automoti ve trade
-20
-10
0
10
20
30
40
50
1990 1995 2000 2005
£
b
n
imports
exports
balance
Page | 30
Thus, over the past decade the industry’s contribution to the UK economy has been
declining, pointing to the fact that the industry has not been expanding as fast as the overall
economy (for more information see appendix B).
In order to compare the UK to other countries, we use the value?added in DM34, without
taking into account components. In comparing the trends of the GVA it is clear that the UK is
faring worse than FGIS and the Czech Republic. In fact, only in the UK and Italy the GVA in
DM34 is decreasing, and in the UK it is doing so slightly faster than in Italy (see figure 2.2).
The CAGR of the GVA in DM34 in the UK was actually negative between 1997 and 2005
(?1.92%), with only Italy’s CAGR lower, at (?2.57%).
When comparing the impact motor?vehicle manufacturing has on the GDP, the situation is
slightly more complex. A positive trend – pointing to the fact that the automotive industry is
having an increasing affect on the national economy – is only apparent in Germany and in
the Czech Republic. In these two countries the automotive industry has been having an
increasing effect on the GDP. While France, Italy and Spain all have a negative trend, the
only one where the automotive industry’s part in the economy is decreasing faster than it
does in the UK is Italy. Overall, the data in Figure 11 show that the UK automotive industry is
doing worse than the national industries in comparable European countries (for more
information see Appendix C).
Figure 11: Contribution of value?added in the automotive sector as fraction of national GDP
[UK]
y = ?0.0006x + 1.2109
R² = 0.7095
[Germany]
y = 0.0006x ? 1.14
R² = 0.5263
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
1996 1998 2000 2002 2004 2006
Growth
Time
(Years)
GVA in DM34 as part of GDP by country
UK France Germany
Italy Spain Czech Republic
Linear (UK) Linear (France) Linear (Germany)
Linear (Italy) Linear (Spain) Linear (Czech Republic)
Source: Eurostat, Euromonitor
Page | 31
2.3 Growth performance of the automotive industry
When assessing the relative performance of a national industry, growth is a key measure.
The assumption is that any growth at a rate above the growth of the overall national
economy is a sign of success of a given industry. Secondly, one can compare the growth
rates of national industry sectors across countries, in order to assess whether or not growth
occurs above the competitors’ rates.
We begin this section with a discussion of the trends in overall numbers of passenger and
commercial vehicles production is presented and conclude with data regarding openings
and closures of plants which might account for the trends in the production numbers.
Figure 12: Vehicle production trends, by country
Between 1995 and 2007 the number of passenger and commercial vehicles produced in the
UK had a CAGR of ?0.09%. This figure puts the UK below the EU average (0.63%), but above
France and Italy, where the CAGR of vehicle produced was ?0.11% and ?4.56%, respectively.
In comparison, Brazil’s, India’s and China’s CAGR of vehicle production between 1995 and
2007 was 4.38%, 8.72% and 13.84%, respectively. At the same time, the global CAGR of
vehicle production was 2.60%. In addition, on average, the trend exhibited by the pace of
UK trend:
y = ?11080x + 2E+07
R² = 0.2276
Germany, trend:
y = 82586x ? 2E+08
R² = 0.6503
?
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
1994 1996 1998 2000 2002 2004 2006 2008
Vehicles produced
Time
(Years)
Passenger cars and commercial vehicle production by country
UK France Germany Italy
Spain Linear (UK) Linear (UK) Linear (France)
Linear (Germany) Linear (Germany) Linear (Italy) Linear (Spain)
Source: Euromonitor
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Page | 33
The UK has seen a disproportionately high level of assembly plant closures over
the past decade. The reason is a perception in the industry that it is cheaper
and less damaging to reduce capacity in the UK, than elsewhere.
The data shows that the UK has seen a disproportionate level of plant closures. From 1997
six volume plants were closed in the UK, while two have opened
xxvi
. During the same period
throughout all of Western Europe (excluding the UK) only seven plants were closed and 5
new plants were opened. A further look at the capacity loss and gain in the UK reveals an
even direr reality – the two new plants added an annual capacity of circa 10,000 units, while
just two of those that closed (Ryton and car production at Dagenham) decreased production
by nearly 400,000 units annually. While this was happening in Western Europe, 57 new
plants were built (or announced to be built) in the BRIC countries and only 4 plants were
closed in these regions.
Thus, the recent trends in plant openings and closures in the UK have led to a shift away
from volume car production, towards niche and luxury products, alongside a set of three
inward investors from Japan and one from USA (GM Ellesmere Port).
2.4 Employment in the automotive industry
xxvii
One of the main contribution mechanisms of any industry to a national economy is through
employment, and the compensation that is paid to the workers the industry employs. When
one considers the number of persons directly employed in the UK automotive industry has
shrunk by more than 90,000, with a CAGR of ?3.89% between 1996 and 2006. At the same
time, the percentage of persons employed in the automotive industry as part of
employment in manufacturing and overall labour market has shrunk, from 6.56% to 6.18%
and from 1.11% to 0.67%, respectively. Though the overall percentage of persons employed
in manufacturing as part of the overall labour market has declined during this time as well
(from 16.91% to 10.86%), the data show that the decline in the automotive sector was more
pronounced than in manufacturing as a whole. While the CAGR of employment in the
automotive industry is (?3.89%), the CAGR of employment in manufacturing is slightly lower
at (?3.32%). Put in absolute terms, the UK automotive industry appears to be losing
approximately 10,050 employees every year (also see partial explanation below). As a
Page | 34
reference projection, if this apparent trend were to continue, by 2027 the UK automotive
industry would cease to employ anyone (for further details see appendices F,G).
At the present rate, the UK is losing an approximate 10,000 automotive jobs
every year. This downward trend affects both automotive, and manufacturing
in general.
Figure 14: Employment trends in the UK automotive and manufacturing industries
Please note that the trend lines added to the chart above are not forecasts, but reference
projections. A reference projection is an extrapolation from the past into the future
assuming that the system involved and its environment will develop without intervention,
that is, with no change of the trends experienced over the relevant past. Thus, such a
projection is not a forecast of what will happen but of what would happen if there were no
y = ?10050x + 2E+07
R² = 0.965
?
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
1994 2004 2014 2024 2034
Employeees
Employment in the UK automotive industry and in UK manufacturing,
including reference projections
Employment in Automotive Industry in the UK Employment in Manufacturing in the UK
Linear (Employment in Automotive Industry in the UK) Linear (Employment in Manufacturing in the UK)
Source: SMMT, BERR/ONS, Euromonitor
Page | 35
interventions. The purpose of a reference projection is to identify when and how a system
will break down if there are no interventions, so that planned interventions are more likely
to be creative and effective (Ackoff 1978: 128). We use the reference projection here to
highlight the urgency in the current trend in employment in the motor industry, which at
the current rate appears to be around 10,500 employees per year.
The decline in direct employment in DM34 marks a surprisingly strong trend, and one that
stands against the growth in vehicle output. This poses a dichotomy that is not easily
explained. While explanations will include the outsourcing of non?core operations to service
providers, the employment of agency and temporary workers, as well as gains in
productivity, we argue the above cannot account for all of this reduction in direct
employment. This is for three reasons:
i. Outsourcing of component operations (such as module assembly), business
processes (such as HR or payroll), and non?core services (such as catering) is
anything but a new strategy. In fact at the height of the modularity/outsourcing
debate in the mid?1990s, both Ford and GM span out their internal component
operations, Visteon and Delphi, respectively. So did many of the other OEMs.
Empirical proof of the impact of outsourcing was given in the 2003/4 update of the
1998 study by CAR (2005), which showed that the job multiplier (of an assembly job
in the US motor industry) has increased from 7.6 in 1998, to 10.4 in 2003. As a
result, we argue that these gains have largely been accounted for already, and
hence cannot be the continued main driver for the decline in direct employment (is
this backed up by the evidence?).
ii. Productivity gains will be an important factor. If one takes the number of vehicle
units produced by UK workers in 1996 (as a base), and adjusts it according to the
growth in output, as well as the increase in productivity (as defined by change in
GVA/employee), we can explain 32% of the actual reduction in employment level
seen between 1996 and 2006.
iii. The use of agency workers. It has become an increasing practice to employ a large
number of temporary and agency workers and fixed term contract workers (mostly
as means of labour flexibility, less so as a means of cost reduction) in the industry.
The proportion of temporary workers generally ranges between 20% and 30% of the
overall workforce of an assembly plant, in some cases such as BMW Group’s Cowley
plant up to 50%. As agency work will not be accounted for as ‘automotive’ in the
national employment statistics, this factor might account for part of the decline in
employment. On the other, the use of agency work is well established, and thus – in
Page | 36
our view – unlikely to be a major driving force behind the recent decline in
employment.
We consider that a combination of the above three issues may well account for a large
fraction of the decline in DM34 employment, however, would also like to offer an additional
explanation also. DM34 captures both the employment in the OEMs, as well as the
component suppliers. While it is unlikely that the decline in employment will be driven by
job losses at the OEMs (given that overall output is increasing), we consider that these jobs
might well be continuing to be lost in the component supply chain. If true, such drastic job
losses would provide further strong evidence of the ‘hollowing out’ of the UK auto supply
chain. To test this hypothesis, we consider the employment in sectors that are typically not
first, but second and third?tier suppliers to the motor industry: pressings, forgings, plastics,
cables, and tool makers. The Figure 15 below shows the development of employment in the
plastics, fabricated materials, electrical and optical, basic metal and machine tools sectors,
shown in comparison with the employment in the vehicle and auto parts sectors.
Figure 15: Employment trends in the UK automotive and manufacturing industries
Based on this chart, we can only partially confirm our hypothesis that the job losses in the
automotive industry have primarily been affecting the component supply sector.
Overall we thus conclude that:
25
50
75
100
1998 1999 2000 2001 2002 2003 2004 2005 2006
I
n
d
e
x
.
1
9
9
8
=
1
0
0
UK employment trends by manufacturing sector, 1998?2006.
Source: ONS
plastics
fabricated metals
auto parts
vehicles
electrical and optical
basic metals
machine tools
Page | 37
i. Direct employment in the auto sector has been declining at a rate of 10,000
employees per annum. This trend has been almost linear in nature.
ii. This decline can be explained to 32% by productivity gains made over the past
decade.
iii. This decline is not homogenous across sub?sectors within the automotive (supply)
industry, and is affecting vehicle and component manufacture as well as related
sectors to varying degrees, without however showing a consistent trend.
iv. A combination of productivity gains, outsourcing, agency work contribute to the
direct job losses (though offset to a degree by an unquantifiable increase in service
sector employment), while several component sectors have seen decreases in
employment that by far outpace the decrease in vehicle manufacturing
employment.
Comparison of the UK against its peers (FGIS)
Another perspective on the drastic decline in the UK employment figures is to consider the
relative developments in the UK, in comparison to its direct peer group, France, Germany,
Spain, Italy as well as the Czech Republic and Poland. As can be seen in Figure 16, the UK has
disproportionately lost employment in its automotive industry.
Figure 16: Relative employment trends across countries
?30%
?20%
?10%
0%
10%
20%
30%
40%
50%
2000 2001 2002 2003 2004 2005 2006
Auto sector employment trends (2000 baseline)
Czech
Poland
Sweden
EU
Germany
France
Spain
Italy
UK
Page | 38
All developed economies have suffered from a shifting manufacturing footprint, where
manufacturers decided to offshore their operations to low?cost locations. The European
automotive industry has seen a particular trend towards ‘East?shoring’, whereby capacity
moved from Western Europe into Central and Eastern Europe.
All countries in Western Europe have suffered from the trend of ‘East?shoring’.
In relative terms, however, the UK has lost the most jobs, while employment in
France, Germany, Italy and Spain has remained fairly stable
The decline in UK employment overall can be explained by this trend. However, we found
that the UK has lost out disproportionately against its peer group. All Western regions have
suffered from a shift in manufacturing footprint, the UK however has seen significantly more
plant closures than other European countries. The reason for this relative decline is twofold:
first and foremost, flexibility cuts both ways. It is attractive to invest in the UK, but in times
of crisis, the downside is a higher propensity to use that flexibility by closing plants in the
UK. Secondly, this is amplified by the Government’s non?interventionist approach which has
meant that it is simply easier and less costly (politically) to close plants in the UK, rather
than elsewhere.
Estimating the ‘job multiplier’
A key measure of employment is the number of persons directly employed by the industry
in its manufacturing and assembly operations. In the most direct form, this relates to the
workers and staff employed in the manufacturing operations (manufacturing jobs), and of
course, the staff employed by the dealerships and sales organisations (service jobs). In
addition, these manufacturing and service jobs create further indirect jobs: most
prominently, in the various tiers of the component supply chain, and as well as at service
providers that support both manufacture and retail operations. The ratio of these indirect
jobs, in relation to the direct jobs, is called a ‘job multiplier’. For example, if the job
multiplier is 5, then every job in vehicle assembly supports 4 jobs elsewhere in the economy,
at component suppliers, at retail operations, and at various service suppliers.
While it was beyond the remits of this study to do an empirical investigation into the job
multiplier in the UK automotive industry, it is nonetheless important to estimate this factor,
in order to assess the full economic contribution of the motor industry. We thus employ a
Page | 39
meta?analysis of previous studies, in order to estimate a confidence interval for the job
multiplier in the UK auto industry. To this effect we analyse the studies conducted in the US
of the years 1998, 2003 and 2004, as well as the study of 2004 of the BMW operations in the
UK (OEF, 2006).
The most important studies in this area have been conducted by the University of
Michigan's Institute for Labor and Industrial Relations jointly with the Center for Automotive
Research. The first study of the economic contribution of the motor industry to the US
economy found an overall multiplier of k=10.4 in 2003 (considering dependent employment
in component manufacture, retail, and other service sectors). This is an increase from k=7.6
in 1998, which is largely driven by the outsourcing of internal component operations. An
interesting fact to note is the retail job multiplier of k=2.7, which means that every job at a
car dealership supports a further 1.7 jobs in other service sectors. (Note that sales and retail
operations are included in the overall job multiplier estimation, so these are not in addition
to the above.)
OEF (2006) estimate BMW's contribution to employment in three stages: direct employees
in manufacturing (8,700), employment in motor retail (10,900), indirect employment in the
supply chain (25,600), and finally, ‘induced’ employment through increases in the disposable
income of the wider economy (11,300). While we consider the ‘induced’ element to be
conceptually problematic (it is easy to get into a circular argument here about the
relationship between employment, wealth creation, and demand), we would also argue that
OEF's estimate of 19,400 indirect jobs in the supply chain (equiv. to a multiplier of k=2.2) is
rather low. Thus, overall we consider OEF’s firm?specific multiplier of k=6.5 to be the
conservative side by the standards of the other studies mentioned above.
Every job in a UK car factory supports an estimated 7.5 jobs elsewhere in the
economy, bringing the estimated direct employment in the sector to 384,000.
Of these, we estimate that 330,000 are under threat of being offshored.
Overall we thus estimate the job multiplier in the UK to be between in the range of
k=?[6.5,10.4], with a median of k=8.5, which means that in addition to the 45,220 direct
employees
xxviii
in vehicle manufacturing, an estimated total of 384,000 UK jobs are
supported by the automotive industry in the component supply chain, motor retail and
general service sectors. It is this figure that more accurately illustrates the true economic
Page | 40
importance of the automotive sector to the UK economy, not the direct employment in
DM34.
Of the total employment of 384,000, we estimate that c.330,000 are under threat of being
offshored, while c.55,000 jobs in motor retail and service are not likely to be under this
threat.
Labour cost comparison
The Figure 17 below compares labour costs across countries; the data is based on the
average yearly costs of an employee for an employer in motor?vehicle manufacturing
(DM34) for the years 1997?2005. The data show that labour costs in Western Europe are
rising dramatically faster than in Eastern Europe (though Italy is an outlier, with a relatively
slow labour cost increase). The UK is situated after Germany and France but before Spain
and Italy, showing that the labour costs in the UK are increasing faster than in the latter two
countries and slower than in the former two. Since 2002 the absolute labour costs in the UK
followed a similar trend – lower than in France and Germany but higher than in Spain and
Italy. Thus, labour costs in the UK are similar to that in Western Europe, but lower than in
Germany and France (for more information see appendix O).
Figure 17: Labour cost in automotive, across countries
[UK]
y = 1155.6x ? 2E+06
R² = 0.6677
[Germany]
y = 3672.4x ? 7E+06
R² = 0.7218
?
20,000
40,000
60,000
80,000
100,000
1996 1998 2000 2002 2004 2006
Average
personnel cost
Time
(Years)
Labour cost in DM34 across countries
UK France Germany Italy
Spain Czech Republic Linear (UK) Linear (France)
Linear (Germany) Linear (Italy) Linear (Spain) Linear (Czech Republic)
Source: Eurostat
Page | 41
Relative skill levels of the UK workforce
The availability and skill level of the UK workforce has been a frequent issue of concern to
both the manufacturing sector in general, and the automotive industry in particular. Skills of
the UK workforce have been subject to previous studies commissioned by BERR (and the DTI
previously), in conjunction with the Department for Education and Skills. We refer to these
studies for more detail (see Steadman et al 2004; the Leitch Review of 2006, and the most
recent comparative data published by the OECD in 2008).
2.5 Productivity
There are numerous ways to assess productivity, with most commonly value added per
employee at national level, and labour hours per vehicle at firm level (used for example in
the Harbour reports). Each has its advantages and disadvantages: the former does not take
into account the difference between manufacturing and assembly operations (showing
inherently lower levels of productivity for the less automated assembly), the latter distorts
the data according to vehicle segments (as higher vehicles require more labour input) and
does not take into account the levels of vertical integration (the more value is bought in
from suppliers, the less labour is required in assembly). In this section we will assess
productivity in the UK auto industry using both methods.
Productivity at national level
At national level, we derive our first measure by dividing the value added of DM34 by the
number of employees in the sector. The analysis shows that all the countries in the sample
are experiencing a rise in productivity, except Italy (with a CAGR of ?0.88%). In terms of
comparative productivity, the UK has made significant progress and does not lag behind its
peer group in terms of productivity in terms of €/head. In fact, as Figure 18 shows, the UK is
only second to Germany, and considerably ahead of the EU average.
Page | 42
Figure 18: Labour productivity, across countries
Source: EuroSTAT
Thus, the often held image of poor quality and productivity, as well as poor industrial
relations that have marked several decades of UK automotive manufacturing, has to be
revised. The UK automotive industry has undergone a major transformation since, and is
now able to compete on par with its European and international competitors.
Productivity at firm level
At firm level, we use the labour hours per vehicle measure. Figure 1.8 shows productivity by
number of vehicles produced in a selection of the largest plants in Europe between 2001
and 2003
xxix
. Unlike the data in figure 2.9, these data show that the UK is the most
productive. The reason for this discrepancy most likely rests with the fact that out of the
seven plants observed in the UK, three are very efficient Japanese inward investors (Nissan’s
Sunderland, Toyota’s Burnaston and Honda’s Swindon plants).
0
10
20
30
40
50
60
70
80
90
2000 2001 2002 2003 2004 2005 2006
Automotive labour productivity €K/head
Germany
UK
Sweden
EU
France
Spain
Italy
Czech
Page | 43
Figure 19: Productivity at firm level
The UK is competitive in comparison to its direct peers, both in terms of labour
cost and productivity.
Overall we can confirm the frequent claim that the UK is home to some of the most
productive plants in Europe, largely thanks to the Japanese transplants, and also in terms of
value?added per employee lies on par with its European peers, largely due to the strong
upmarket brands of British heritage.
2.6 R&D expenditure and capital investment
Investments and R&D expenditures are two of the major determinants of an industry’s
sustainability, that is, a determinant for its ability to innovate and compete in the future.
The data in this section show the amounts invested in the industry and the amounts spent
on R&D in the years 1999?2006, as well as the capital investment made in the automotive
industry over the same period. The data clearly point to the fact that both these
expenditures in the UK auto industry have shrunk considerably over this time horizon (for
0
20
40
60
80
Czech
Republic
Germany France Italy Spain UK
51
54.95
54.96
63.61 64.29 68.10
Average number of
vehicles produced per
employee
Productivity, vehicles produced per employee
(average across selected plants)
Source: World Markets Research Centre ? European Automotive Productivity
Index 2001, 2002, 2003
Page | 44
more information see appendix J). Overall, Europe is still in a strong position with regards to
R&D, and vehicle design. Overall, a recent study showed that – by origin of OEM – 28% of
vehicles were developed by European manufacturers, 48% by Japanese, and 23% by US
firms. With the downturn in the US this is likely to reduce to 15% overall, with the
remainder increasing
xxx
.
We compare R&D expenditures in DM34 across countries between 1995 and 2004: absolute
R&D expenditures in the UK have experienced the slowest growth among the chosen peer
group (CAGR of 0.96%), with the exception of Italy (CAGR of 0.45%). Moreover, in the ten
years considered overall growth of R&D expenditure in the UK was only higher than that in
Italy – while R&D in Spain and Germany nearly tripled, it doubled in the Czech Republic and
in France it still grew by more than 50%, the UK only showed a growth of 9%. In relative
terms, considering the percentage of R&D expenditure in DM34 in relation to R&D
expenditures in the total economy reflect the fact that it has declined over the years only in
the UK and in Italy. This shows that while overall R&D expenditure in the UK economy was
growing, the R&D expenditures in the automotive industry were not keeping up (for more
information see appendix J).
Figure 20 examines the levels of R&D expenditure as a fraction of value?added in the sector,
and Figure 21 shows the level of capital investment in DM34 in relation to investments in
the total economy.
Capital investments and R&D expenditures are two of the major determinants of an
industry’s sustainability, that is, a determinant for its ability to innovate and compete in the
future. Our data clearly points to the fact that both these expenditures in the UK
automotive industry have shrunk considerably over this time horizon. Overall, Europe is still
in a strong position with regards to R&D, and vehicle design. Overall, a recent OEM study
showed that ? by origin of OEM – 28% of vehicles are developed by European
manufacturers, 48% by Japanese, and 23% by US firms. With the downturn in the US this is
likely to reduce to 15% overall, shifting further towards Japan and Europe. Thus, Europe is
still in a very strong position overall. In the UK, Ford, Jaguar and Land Rover together spend
close to £1bn annually on R&D in the UK, which accounts for over 80% of the entire annual
sector spend.
In our analysis we consider the R&D expenditure as a percentage of gross value added by
the automotive sector, or in simpler words, we ask what percentage of the money in
automotive earned is reinvested into the sector. Figure XX shows the comparative
performance of the UK over time against its peer group.
Page | 45
Figure 20: Level of re?investment in R&D
Source: EuroSTAT. Missing data points not available.
As can be seen, the R&D intensity in the UK has been decreasing sharply since 2003. One
main reason has to be seen in the fact that R&D tends to be conducted in the home market
of the OEM, and here the UK suffers from a lack of indigenous producers. In absolute terms,
we see a decline in both R&D expenditure and capital investment that puts the UK in a weak
position with regards to playing a major role in the development of new energy?efficient
and low?carbon power trains. Given its low R&D intensity, the UK is essentially competing as
an assembly location, with any other nation in the world. This is a fundamentally different
from Germany and France, where the R&D intensity is considerably higher.
Both R&D intensity and capital expenditure are both showing clear downward
trends, which will place the UK in a weak position to meet the challenges of
taking part in the development of low?carbon powertrains.
0
5
10
15
20
25
30
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Czech Republic
Germany
Spain
France
Italy
United Kingdom
%
R&D expenditure in DM34 as % of GVA in DM34
Page | 46
This picture is little different on the capital investment side: our analysis clearly shows that
the abovementioned ratio was growing between 1995 and 2002 in Germany and France,
showing that, assuming a growth in investment in total economy, these countries increased
significantly increased the levels of investment in the automotive industry. In both Italy and
the UK this ratio was decreasing, but in the UK this decrease was far more pronounced.
Overall, the ratio decreased from 2.1% in 1995 to 1% in 2002 and 0.9% in 2003. In Italy, for
example, it decreased from 1.5% in 1995 to 0.9% in 2002 (for more information see
appendices K,L,M).
Figure 21: Capital expenditure in the automotive sector, by country
[UK]
y = ?0.0016x + 3.1151
R² = 0.7208
[Germany]
y = 0.0015x ? 2.9478
R² = 0.7958
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
1994 1996 1998 2000 2002 2004
Share of investment in
DM34 relative to
investment in total
economy
Time
(Years)
Capital investment in DM34 as
part of overall investment in the economy
UK France Germany Italy
Linear (UK) Linear (France) Linear (Germany) Linear (Italy)
Source: OECD Statistaical Database, http://stats.oecd.org/
Page | 47
2.7 Summary
In this section we have reviewed the macro development of the UK automotive industry, on
a range of selected indicators on economic contribution, growth, productivity, and
investment. We have also set the UK into the context of its peer group, in order to highlight
both its absolute and relative development. In conclusion, virtually all indicators point to an
above?average decline of the automotive industry in the UK (with the possible exception of
Italy in some cases). The UK is increasingly losing its R&D intensity, while experiencing a shift
towards the niche and luxury segments. Despite this fact, the industry remains an important
contributor to the UK economy, especially when taking into account the job multiplier.
Contribution to GDP – Between 1995 and 2006 the UK automotive industry’s value added
contribution to GDP has fallen from 1.16% in 1995 to 0.8% in 2007, while the number of
people it directly employs has dropped by 90,000 at the same time. We estimated a job
multiplier of 8.5 (that is, every job in vehicle assembly supports 7.5 elsewhere in the
economy), which means that overall 384,000 jobs are supported by the automotive industry
in the UK. Of these, 330,000 are under the threat of being offshored. The value added in the
auto industry has been decreasing over this time period only in the UK and in Italy, while all
other countries considered show a positive growth in contribution to the GDP.
Growth of the automotive industry – The growth of output in the UK lags behind both the
developments at European and global level in the industry, a fact largely driven by the
disproportionate amounts of plant closures that have hit the UK over the past decade.
Productivity – Productivity in the UK automotive industry is on par with the EU average, and
in fact outperforms any country considered in our analysis apart from Germany.
R&D and investment – investment in the UK automotive industry have dropped by a third
between 1999 and 2006. While between 1995 and 2004 capital expenditure has tripled in
Germany and Spain, they only grew by 9% in the UK. Most worryingly, the UK also shows
both a very pronounced trend of a falling level of investment in automotive R&D, as well as
one of the lowest R&D levels across our sample.
Page | 48
PART III: INDUSTRY LEADERS’ ASSESSMENT OF THE COMPETITIVENESS OF
THE UK AUTOMOTIVE INDUSTRY
In this third part, we present the findings of a survey of selected industry leaders with
regards to their perceptions of the UK automotive industry, and its strengths and
weaknesses in relation to its peer group
xxxi
(see footnote and appendix O for more details
and the questionnaire used, respectively).
3.1 Perceptions of the competitiveness of the UK automotive industry
In this section an analysis of the views expressed by industry leaders regarding the
competitive nature of the UK automotive industry will be conducted. The section will first
discuss the sourcing patterns, notion of ‘hollowing out’, then on to the analysis of the
strengths and weaknesses of the UK automotive industry, and present the UK in relation to
its international competitors. We use a 5?point Likert scale in our analysis, with 1 being the
weakest, and 5 the strongest. When comparing, 1 represents a strong disadvantage, 3 is
neutral, while 5 represents a strong relative advantage.
3.2 Sourcing patterns
Shift in sourcing away from the UK
The component supplier base is a vital element in the value chain to understand the overall
trends in the automotive industry as an average two thirds of value in a vehicle is created in
the component supply chain. Unfortunately statistical data on the component supply sector
is limited, or conceptually problematic, as many firms are classified by process, not by
industry.
xxxii
Instead, we focus on a quantitative analysis of trends in sourcing, as well as a
qualitative analysis of industry leaders’ views in order to assess the UK component supply
sector. Interviewees were asked to provide details regarding several aspects of their
sourcing operation in the UK. The average percentage sourced from the UK in the
operations of the interviewees was 33.85 (with a standard deviation of 24.65). 12 out of the
15 interviewees have stated that this percentage has decreased in the past 5 years (4 said
that the decrease was significant). None stated that the sourcing from the UK had increased
over the last 5 years. This pessimistic sentiment was confirmed regarding the future, where
11 out of the 15 interviewees stated that sourcing from the UK is likely to decline further (5
Page | 49
claimed that the expected decline will be significant). Only one interviewee replied that the
future holds a moderate potential increase in sourcing from the UK.
In?depth interviews revealed that many industry leaders believe that reality is worse than
the numbers they provided for two main reasons. First, though OEMs’ spending in the UK is
declining, it is accompanied by a similar – if not much more significant – decline in sourcing
by Tier 1 suppliers, further decreasing the value added by the UK automotive industry as
such. Several industry leaders had specific data to support this argument. Secondly, in some
cases while the overall spending in the UK remained relatively the same over the years, its
structure has changed significantly. One OEM, for example, seeing many of its Tier 1
suppliers leave the UK, in?sourced production of a major component of its final product,
leaving the overall spending in the UK relatively constant, but hiding a significant decline in
the number of UK suppliers working with it.
Some interviewees expressed a view that the decrease being witnessed now is a result of
developments dated decades ago. According to them, in the 1980s and 1990s, as the British
car industry was in decline, with it declined R&D and investment (partly because these
activities were and are often closely linked to the companies’ headquarters, which moved
outside the UK at that time). Thus, 20 years later, the UK automotive industry lost its
competitive edge in R&D, which has led to the closure of many SMEs and driven other
suppliers away.
Sourcing from UK suppliers is set to decline further, with the availability of
local suppliers being one of the key concerns of industry leaders.
All interviewees agreed that a major reason for the decrease in sourcing from the UK was
the cost factor. The advantages of CEE and BRIC countries in relation to the UK were
mentioned, mainly the low labour costs and abundant labour supply. It was also claimed
that the main disadvantages of these countries – e.g., infrastructure, limited and unqualified
supplier base – are slowly fading away.
This study tends to accept the argument that the sourcing from the UK is decreasing. This
decrease is most likely accompanied by a decrease in the number of suppliers and the value
of components produced in the UK. Hence, the argument of this study is that the
component suppliers are experiencing a decline similar to that of the OEMs. Even if the
trends experienced by suppliers are not as negative as those experienced by OEMs, they are
still not enough to offset the overall decline of the industry.
Page | 50
3.3 Industry leaders’ perception: UK strengths and weaknesses
Strengths of the UK
The perception analysis (see Table 5) shows that the most prominent strengths of the UK
automotive industry are labour flexibility (13 out of 16 stated that it has a positive impact on
the industry’s level of competitiveness) and quality of R&D resources. To a lesser extent,
interviewees noted the following as additional strengths: governmental subsidies, barriers
to exit and taxes and tariffs.
In?depth interviews revealed that interviewees value UK labour flexibility most, mainly
because of the flexible working hours they are allowed to employ, but also because of the
relatively lower level of unionisation
xxxiii
. They stated that this competitive advantage was
mostly relevant in relation to Western Europe and less so to Eastern Europe or the BRIC
countries. Interviewees also favourably noted the quality of R&D resources in the UK, but
claimed that these could be coordinated better on a national level. Some interviewees
specifically mentioned the R&D tax benefits as a major competitive advantage of the UK.
Interviewees also commented on the strengths ranked somewhat lower. They pointed out
that though the UK government does not generally provide more subsidies than other
European governments, it does provide them sufficiently, mostly directly (in the form of
grants) but also indirectly. They also claimed that the UK was especially strong because of
the ease to close down operations, especially in relation to Western Europe (according to
them, this was difficult to assess in CEE and BRIC because few have actually tried to leave up
to now)
xxxiv
. As for taxes and tariffs, interviewees mentioned that the UK was on par with its
European counterparts overall, and slightly better because of the relatively lower personal
taxes. Some interviewees also noted that the customs service was especially effective in the
UK, in relation to Western European countries as well as BRIC countries.
Page | 51
Table 5: Perceived strengths and weaknesses of the UK
Weaknesses of the UK
The analysis showed that the most salient weaknesses of the automotive industry in the UK
are relative labour costs, availability of skilled labour and environmental regulation. Though
many did agree that there is a deficit of skilled labour in the UK, they had varying opinions as
to the nature of unavailable skills: several interviewees claimed that the deficit was most
pronounced in skilled mid?level management, while a few others stated that they had most
difficulty in finding enough engineers. One interviewee even asserted that the deficit was
most prevalent among skilled blue?collar workers. Most of the interviewees agreed on the
fact that one of the main reasons they are finding it difficult to recruit skilled labour is that
the most accomplished high?school students and graduates do not opt for engineering, and
even those who do prefer to accept offers from the financial sector rather than from the
manufacturing one. (To underline this point, see Appendix L, which shows the favourite
employers by recent graduates, by country).
While most interviewees did indeed agree that skilled labour was in short supply, one
interviewee’s contrarian views were potentially illuminating. He claimed that there is no real
Average score No of answers
Labour flexibility 3.94 16
Quality of R&D resources 3.71 17
Governmental subsidies 3.31 13
Barriers to exit 3.29 14
Taxes & Tariffs 3.27 15
Interaction with government 3.18 17
Labour productivity 3.06 17
Quality of local suppliers 3.00 16
Logistics & infrastructure 2.88 17
Skill level of workforce 2.76 17
Availability of local suppliers 2.53 15
Environmental regulation 2.44 16
Availability of skilled labour 2.41 17
Labour cost 1.94 17
Page | 52
shortage of skilled labour in the UK and that the main difficulty lies with companies’ inability
to attract qualified individuals. In his view, this difficulty is a result of companies’ inability to
offer competitive wages and interesting career paths
xxxv
. Quantitative data seems to offer
some support for this argument, as it shows that salaries in the UK industry are indeed
lower on average than in Germany and France (we hence did confirm this statistically).
The final main weakness identified was environmental regulation. While agreeing that from
a sustainability perspective environmental regulation in the UK was highly positive, many
interviewees claimed that it also eroded the UK’s competitive advantage in relation to other
countries in the world, and even in Western Europe. These interviewees argued that the UK
tends to adopt EU?level regulation in a stricter way than do most of its counterparts in the
union, possibly, in order to set an example for others to follow. However, as long as other
countries do not adopt similar policies, industry finds it more costly to implement
environmental regulation in the UK, relative to other countries. A few industry leaders
plainly said that the environmental burden is getting ‘too heavy to bear’.
Besides these two weaknesses interviewees also expressed – to a lesser extent – their
concern regarding the availability of local suppliers, the skill level of the workforce, and the
infrastructure. In addition, there are some points raised by interviewees during the in?depth
interviews that are worth mentioning despite their not being salient in the perception
analysis. Many interviewees – despite not reflecting it in their questionnaires – noted the
difficulties in interacting with the government, mainly pointing to the fact that the relatively
low place of the automotive industry on the agenda leads to a lack of communication flow
between the industry and the government
xxxvi
. Some also mentioned that they found it
difficult to communicate with the government because of the multitude of governmental
organisations and entities they had to deal with.
The UK’s main strengths are its labour flexibility and the low barriers to exit –
the weaknesses remain the lack of skilled labour and local suppliers.
Additionally, a number of interviewees claimed that the productivity of the workforce in the
UK is relatively low (especially in relation to BRIC and CEE) because of the prevailing
importance of ‘work?life balance’, which leads to British workers having lower work ethics;
several interviewees raised the issue of the relatively inferior level of the infrastructure in
the UK; some interviewees claimed that it is too difficult to communicate with the
Page | 53
government because of the multitude of organisations they have to work with; and a few
pointed to the high tax on fuel and energy in the UK as being counter?competitive.
The UK’s relative international competitiveness
The following analysis will provide a comparison between the UK and three groups of
countries – France, Germany, Italy and Spain (FGIS); Central and Eastern Europe (CEE),
focusing mainly on the accession countries; and Brazil, Russia, India and China (BRIC). In
each case results of the perception analysis in the surveys taken will be presented first, the
points raised by interviewees during their in?depth interviews (if any) second, and a
comparison between the interviewees answers regarding the UK and the relevant group of
countries as third point.
The UK versus France, Germany, Italy and Spain (FGIS)
Interviewees were asked to
rank the developments in
sourcing from the UK
relative to FGIS. The results
are inconclusive and mainly
point to the fact that
developments in the
competitive nature of the
UK automotive industry
were accompanied by
similar developments in
Europe. All interviewees
agreed that in recent years
the main development
influencing the issue was
the appreciation of the
Pound in relation to the
Euro. Several interviewees
pointed out that it is indeed one of the main reasons for their staying in the UK, and voiced
their concern regarding the future if the Euro devalues
xxxvii
.
Table 6: Perception analysis of FGIS automotive industries’
competitiveness
Average score No of answers
Quality of R&D resources 4.43 14
Availability of local suppliers 4.00 15
Quality of local suppliers 4.00 15
Governmental subsidies 3.92 12
Skill level of workforce 3.88 16
Availability of skilled labour 3.50 16
Logistics & infrastructure 3.47 15
Interaction with government 3.44 9
Taxes & Tariffs 3.23 15
Labour productivity 3.19 16
Environmental regulation 3.14 14
Labour cost 2.38 16
Labour flexibility 2.13 15
Barriers to exit 1.92 12
Page | 54
Some interviewees claimed that the UK government and public opinion seem to value
industry less than in other European countries, which often leads the government to be less
encouraging and protective of the national industry in relation to its counterparts from the
mainland
xxxviii
. Other interviewees mentioned that UK suppliers and manufacturers began
employing innovative manufacturing techniques ahead of their mainland competition, thus
improving the overall competitiveness of the national industry.
The perception analysis (see Table 6) shows that industry leaders view the following as the
main strengths of FGIS (in order of importance): quality of R&D resources, availability and
quality of local suppliers, governmental subsidies, skill level of workforce and availability of
skilled labour. To a lesser extent, interviewees valued the interaction with government, and
logistics and infrastructure as sources of competitive advantage of FGIS.
At the same time the perception analysis showed that the following were identified as the
main weaknesses: barriers to exit, labour flexibility and labour cost. Interviewees mentioned
that they believed it to be much more difficult to close down operations in FGIS than in the
UK because of both tougher labour laws and governmental support of the industry and
opposition to closures. They also claimed that labour is far less flexible in FGIS than in the UK
because of less stringent labour laws in the latter and the ability to work more shifts and
extra hours. Labour cost in the EU was perceived to be lower than that in the UK, though
Table 7: Comparison between FGIS and UK competitiveness
FGIS UK Difference
Labour flexibility 2.13 3.94 ?1.81 Relative
advantage for
the UK
Barriers to exit 1.92 3.29 ?1.37
Taxes & Tariffs 3.23 3.27 ?0.04
Labour productivity 3.19 3.06 0.13
Relative
disadvantage
for the UK
Interaction with government 3.44 3.18 0.26
Labour cost 2.38 1.94 0.44
Logistics & infrastructure 3.47 2.88 0.59
Governmental subsidies 3.92 3.31 0.61
Environmental regulation 3.14 2.44 0.70
Quality of R&D resources 4.43 3.71 0.72
Quality of local suppliers 4.00 3.00 1.00
Availability of skilled labour 3.50 2.41 1.09
Skill level of workforce 3.88 2.76 1.12
Availability of local suppliers 4.00 2.53 1.47
Page | 55
quantitative data shows that personnel costs in the UK are indeed higher than those in
Spain and Italy, but lower than those in France and significantly lower than those in
Germany.
A comparison between interviewees’ answers regarding the UK and FGIS shows quite a few
prominent differences (see Table 7). In the data, the lower the score the better the UK does
in relation to its peers. Thus, the UK is perceived to be more competitive than FGIS in labour
flexibility and barriers to exit, while FGIS are clearly more competitive than the UK in the
availability of local suppliers, the skill level workforce, the availability of skilled labour and
the quality of local suppliers.
The UK versus CEE countries
Perception analysis (see
Table 8) shows that the
main strengths of CEE are
the low labour costs,
labour flexibility,
governmental subsidies
and barriers to exit. Many
interviewees pointed out
that the labour cost
advantage is slowly
disappearing, but
estimated that the
‘evening?out process’
would take between five
and ten years. To a lesser
extent, interviewees
identified taxes and tariffs
and environmental
regulation as additional
strengths. During in?depth interviews, a few interviewees claimed that despite relatively low
taxes, the import and export duties from CEE were perceived to be relatively high.
There were no prominent weaknesses identified, though interviewees did identify some
minor ones: logistics and infrastructure, quality of local suppliers and quality of R&D
Table 8: Perception analysis of CEE automotive industries’
competitiveness
Average
score
No of
answers
Labour cost 4.67 15
Labour flexibility 4.14 14
Governmental subsidies 4.08 12
Barriers to exit 4.00 6
Taxes & Tariffs 3.40 10
Environmental regulation 3.38 13
Availability of skilled labour 3.27 15
Labour productivity 3.20 15
Skill level of workforce 3.07 15
Availability of local suppliers 2.79 14
Interaction with government 2.78 9
Quality of R&D resources 2.73 11
Quality of local suppliers 2.64 14
Logistics & infrastructure 2.57 14
Page | 56
resources. Interviewees mentioned that in many countries in CEE the infrastructure dates
back to Soviet times, but is quickly improving. They also argued that despite the low quality
of local suppliers, the increasing number of OEMs and international component
manufacturers entering the region is helping the local industry to make fast progress. As for
quality of R&D resources, interviewees mentioned that there was potential there, but at the
moment these countries were mainly used for manufacturing and assembly.
In?depth interviews revealed two additional interesting points. The first was that the
educational systems in CEE were relatively weak and unprepared for providing the
automotive industry with skilled labour. However, it was mentioned that this will probably
change as time goes by and relationships emerge between the industry and the educational
system there. The second point was that the labour in these countries was relatively less
productive because of the lack of experience in working in a western manufacturing
environment.
Comparison between the interviewees’ answers for CEE and the UK reveals a few
differences (see Table 9). The UK is clearly more competitive in its quality of R&D resources,
but CEE was much more competitive on labour costs and slightly more competitive in its
environmental regulation policies.
Table 9: Comparison between CEE and UK competitiveness
CEE UK Difference
Quality of R&D resources 2.73 3.71 ?0.98 Relative
advantage for
the UK
Interaction with government 2.78 3.18 ?0.40
Quality of local suppliers 2.64 3.00 ?0.36
Logistics & infrastructure 2.57 2.88 ?0.31
Taxes & Tariffs 3.40 3.27 0.13
Relative
disadvantage
for the UK
Labour productivity 3.20 3.06 0.14
Labour flexibility 4.14 3.94 0.20
Availability of local suppliers 2.79 2.53 0.26
Skill level of workforce 3.07 2.76 0.31
Barriers to exit 4.00 3.29 0.71
Governmental subsidies 4.08 3.31 0.77
Availability of skilled labour 3.27 2.41 0.86
Environmental regulation 3.38 2.44 0.94
Labour cost 4.67 1.94 2.73
Page | 57
The UK versus BRIC countries
Many interviewees pointed to
the fact that it was very
difficult to assess these four
countries as a homogenous
group. Many emphasised that
they had little or no
information regarding Brazil,
and others revealed that their
answers are clearly the average
between what they think about
China (and India) and what
they think about Russia. Thus,
it seems that though the
answers in this part are fairly
representative of BRIC they
tend to be lower than answers
given separately to China and
India and higher than answers
given separately to Russia.
The analysis (see Table 10) shows that the BRIC automotive industry is more competitive in
its labour costs, labour flexibility, governmental subsidies and environmental regulation. To
a lesser extent, the interviewees pointed to labour productivity, availability of skilled labour,
barriers to exit and availability of local suppliers as strengths.
The weaknesses identified were mainly logistics and infrastructure, because of both the
relatively bad shape of roads and railways and the distance components and products have
to travel in order to get to their destination. To a lesser extent, interviewees identified the
quality of local suppliers as a weakness, though they argued that the situation was quickly
improving.
In?depth interviews revealed a few additional weaknesses. Many interviewees mentioned
that a significant disadvantage of BRIC countries (especially China and Russia) is the lack of
adherence to IP law. Interviewees mentioned that despite the high quality of the workforce
and the new facilities, R&D in these countries was difficult to conduct because of the
inherent lack of respect towards intellectual property, and the high turnover rates that lead
to engineers moving frequently from one company to the next, taking trade secrets with
Table 10: Perception analysis of BRIC automotive industries’
competitiveness
Average score No of answers
Labour cost 4.79 16
Labour flexibility 4.57 15
Governmental subsidies 4.25 12
Environmental regulation 3.77 14
Labour productivity 3.46 16
Availability of skilled labour 3.43 16
Barriers to exit 3.33 12
Availability of local suppliers 3.25 15
Interaction with government 3.20 9
Skill level of workforce 3.07 16
Quality of R&D resources 3.00 14
Taxes & Tariffs 2.92 15
Quality of local suppliers 2.71 15
Logistics & infrastructure 2.08 15
Page | 58
them. An additional important disadvantage is the high import tariffs and, especially in
China, their complex structure. Some interviewees went as far as to mention the highly
inadequate quality level of suppliers in Russia.
During many of the interviews a discussion arose regarding the costs and benefits of
sourcing or working in BRIC. It was argued that BRIC are inherently more competitive
because of the low labour costs, though the rising energy prices have eroded that advantage
somewhat. Several interviewees also mentioned the relatively low quality of products as an
additional eroding factor. However, all agreed that given the current circumstances, despite
the various eroding factors, the final cost of products produced in BRIC countries is far lower
than those produced in the West.
A comparison with the UK (see Table 11) reveals that there is no one single factor that the
UK is perceived to be significantly more competitive than BRIC. However, it also shows that
BRIC are extremely more competitive than the UK on labour costs, and more competitive in
environmental regulation and the availability of skilled labour.
Table 11: Comparison between BRIC and UK competitiveness
BRIC UK Difference
Logistics & infrastructure 2.08 2.88 ?0.80 Relative
advantage for
the UK
Quality of R&D resources 3.00 3.71 ?0.71
Taxes & Tariffs 2.92 3.27 ?0.35
Quality of local suppliers 2.71 3.00 ?0.29
Interaction with government 3.20 3.18 0.02
Relative
disadvantage
for the UK
Barriers to exit 3.33 3.29 0.04
Skill level of workforce 3.07 2.76 0.31
Labour productivity 3.46 3.06 0.40
Labour flexibility 4.57 3.94 0.63
Availability of local suppliers 3.25 2.53 0.72
Governmental subsidies 4.25 3.31 0.94
Availability of skilled labour 3.43 2.41 1.02
Environmental regulation 3.77 2.44 1.33
Labour cost 4.79 1.94 2.85
Page | 59
Industry leaders’ suggestions
This section will follow the order the industry leaders set when identifying the weaknesses
of the UK automotive industry. Three suggestions emerged as consensus, while several
other suggestions were also made by individuals. These suggestions/recommendations
were:
Suggestion 1: Increase availability of skilled labour
Most interviewees emphasised the importance of improving the image of manufacturing in
the UK in order to attract accomplished young people to the sector. They suggested that this
should start at a very early stage (kindergarten, primary school) and offered to be involved
at every level.
Several interviewees attested that initiatives such as these were already in place, but
lamented the fact that they were badly coordinated. A few went as far as to mention that
the issue should be identified by government as important, and put ‘on the public agenda’.
They argued that a clear strategy is needed that would convey order and continuity.
Some admitted that in order for the reputation of manufacturing to improve the industry
would have to find a way (preferably with the help of the government) of paying engineers
higher wages. Others mentioned that the government should also think about subsidising
engineering studies and provide industry with easier ways to retain foreign students
studying engineering in the UK, to fill the skills gap.
In addition to supporting the public image of manufacturing, some interviewees focused on
the low skill level of vocational labour and suggested that the government should initiate
and coordinate vocational training programmes, similarly to what the German government
is doing for the ‘Meister’ level.
Suggestion 2: Collaborate with industry on environmental regulation
The main suggestion in this context was to create a forum for discussion between the
government and the industry that would enable the latter to point out the repercussions of
various environmental policies.
A few interviewees suggested that the UK government should either slacken the regulation,
provide the industry with grants to help it implement the regulation, or pressure other
countries to adopt similar environmental policies in order to eliminate the competitive
advantage they enjoy.
Page | 60
Suggestion 3: Provide a single point of contact in (or with) the government
Many industry leaders stressed the importance of communication between the government
and industry, especially in issues relation to regulation, education and low carbon initiatives.
They claimed that currently they find it very difficult to communicate with the government
because of the various entities they have to speak to when trying to promote something.
Besides these main three issues many interviewees suggested changes in the government’s
policy towards the UK automotive industry. Many interviewees suggested that the
government recognise the difficult situation the industry is in and adopt, after discussing it
with the industry, a comprehensive strategy to deal with the imminent problems
xxxix
.
A few interviewees further expressed their desire to see a long?term sustainable energy
strategy from the government. According to them, such a policy would not only be
necessary to allow the industry to survive in the future, but it would also attract new
companies and investors who would want to benefit from the progress made in the UK in
this field.
Many interviewees thought that the UK automotive industry has already significantly
deteriorated. They suggested that the government accept what has already happened and
try to focus on the industry’s strengths, maintaining them and allowing them to anchor the
industry that is left.
3.4 Industry leader survey: summary of findings
The qualitative part of the analysis reinforces the findings of the prior quantitative analysis
by underlining the structural weaknesses that have contributed to the decline of the UK
automotive industry. Industry leaders have identified strengths and weaknesses in the UK
automotive industry, with the two main strengths identified as labour flexibility and the
quality of R&D resources. Though labour is considered to be much more flexible in the UK
than in FGIS countries, it is considered to be slightly less flexible than in CEE and moderately
less flexible than in BRIC. Equally, although the quality of R&D resources in the UK is
considered to be much better than in CEE and moderately better than in BRIC, it is,
nevertheless, moderately worse than in FGIS.
Even worse, the competitive disadvantages identified seem to be here to stay: whilst labour
cost in the UK is by no means the highest in the EU, it is significantly higher than in CEE and
Page | 61
BRIC. Finally, the strict enforcement of environmental regulation renders the UK moderately
less competitive in relation to FGIS, and highly uncompetitive in relation to CEE and BRIC
countries.
Industry leaders specifically emphasised Germany as having significant competitive
advantages over the UK, France, Italy and Spain, especially with regard to R&D resources,
quality and availability of skilled labour and suppliers. The German government was also
identified as extremely supportive of the industry.
CEE countries are perceived to be a significant threat to the industry in Western Europe,
especially because of the relatively low costs, which will continue to be a significant
advantage, according to the interviewees, over the next 5?10 years. Industry leaders
estimated that the weaknesses in the CEE will gradually disappear, as the shift in
manufacturing footprint is set to continue as the countries in the region get accustomed to
catering to the automotive industry (especially with regard to the educational system).
BRIC countries were mentioned especially for their significant cost advantages, which,
according to the interviewees, outweighed the shipping costs
xl
and the relatively low quality
standards. Industry leaders also mentioned that these countries have been improving their
infrastructure for the automotive industry, though many expressed significant apprehension
about conducting R&D in such an environment.
Page | 62
PART IV: CONCLUSIONS
‘I knew six honest serving men, they taught me all I knew;
their names are what and why and when, and where and how and who’.
Rudyard Kipling’s ‘Six Honest Serving Men’
4.1 The need for evidence?based policy making
Previous reviews of the competitive status of the UK auto industry have commonly pointed
to the stable overall production volume (in terms of units produced in the UK), as well as
excellence in certain subsectors, such as motor sports, as signs of strengths. In the light of
the evidence presented in this report, such assessments seem romantic at best. The UK
automotive industry is in decline, and this decline is not due to a temporary economic
misfortune. It is the effect of the UK having to compete in a mature industry, which has seen
dramatic shifts in its global footprint over the past decade. It is thus important to view the
developments in the UK not in isolation, but against those at its peer group, namely the
other car producing nations in Western Europe that have been exposed to the same global
trends. Frequent comments that argue the UK would be able to ‘leapfrog’ its competitors
hence are naïve at best. In the work of the NAIGT it was made very clear from the start that
an in?depth empirical analysis would define the current state of the UK industry within the
global automotive industry, and lead the recommendations that were to be developed. We
continue to argue that understanding the underlying trends and trajectories is vital in
predicting the near?term future of the industry. Breaking or even reversing trends is only
possible once one knows about these trends.
Trends and trajectories need to be well understood for policy measures to be
effective in halting or even reversing them.
It is also very instructive to put the NAIGT’s findings into context of the previous studies that
have been commissioned by successive UK governments since 1975, and many key issues
that are seen to affect the competitiveness of the UK automotive industry have remained
remarkably constant from previous reviews over the past three decades. These include
Page | 63
currency fluctuations and exchange rates, the need for better skills and training, as well as
the perception within the industry that the government does not support it, or at least does
not publicly recognise it as a strong contributor to the national economy
xli
.
So in this sense history does repeat itself: the very first observation that we have made is
that the issues mentioned by industry leaders in this study provide a near perfect
congruence to the last AIGT’s findings, as well as previous studies of the UK (see CPRS 1975).
Interestingly, these issues also feature strongly in the report on the US auto industry in
1982, at a time of crisis (see Abernathy et al. 1982). These issues are:
Public support by HM Government for the industry
The availability and skill levels of the UK workforce
The competitiveness (and scale) of the UK supply base
The inherent risk of currency fluctuations
On a positive note one could argue that it is good for this report to show continuity in the
key policy areas that the government should focus on. While this undoubtedly is true, one
also has to see this as a failure to address sufficiently these issues in the past, given that
they repeatedly are mentioned by industry leaders as factors negatively affecting the
competitiveness of the UK automotive industry.
Many of the issues highlighted by industry leaders as areas of concern, such as
a lack of public support by the government or the availability of suppliers and
qualified labour, have remained the same for over three decades.
In this respect we welcome the ‘Manufacturing Strategy 2008’ document, which despite its
rather selective reporting of KPIs, is providing the ‘manufacturing matters’ message that
industry has long wanted the government to give. This document also identifies R&D as the
most the important USP of UK manufacturing firms, which in automotive terms has to be
seen in context of the sharp decline in both capital investment and R&D the UK has seen,
which will place the UK in a very weak competitive position in the long run.
Page | 64
4.2 Summary of key findings
The automotive industry is not a ‘sunset industry’: both the developed and developing
worlds are heavily relying on automobiles for economic activity and personal mobility. To
this effect the automotive industry has been growing at a steady rate, and there is no
reason to believe that this long term trend will abate in the near future. Most of the
recent growth has occurred in the emerging markets, and post?recession this trend is
likely to resume. In that sense the automotive industry, in global terms, is still a growth
sector. In the UK, on the other hand, we have seen a steady decline of automotive
activity. This reduction is not due to temporary economic misfortune, but a long?term
trend and the consequence of competing in a mature industry, which has seen a drastic
shift in manufacturing footprint over the past decade towards sourcing from low?cost
countries. The UK’s global production share has fallen by 25% since 1995, to 2.43%, and
is falling faster than in Germany or France, but less so than Italy. The employment in
both the manufacturing sector in general, and the automotive industry in particular,
show a clear downward trend that can only partially be explained by productivity gains,
outsourcing or the use of agency labour.
The UK still has a competitive, yet fragile, automotive industry: adopting a general picture
of doom is misleading, as the UK automotive industry is still producing c.1.7 million
passenger cars and commercial vehicles per annum, placing it 12
th
in the global output
league
xlii
. Within Europe, UK has remained in 4
th
position throughout since 2000. The
industry is directly employing an estimated 384,000 people. Further, our survey results
show that the key industry leaders consider labour flexibility and the quality of R&D
resources as the two main strengths of the UK automotive industry. We also find that
the UK is a competitive location for automotive manufacture in terms of productivity and
labour cost. The UK is still home to some of the most productive passenger car and
commercial vehicle plants in Europe. Thus, despite the perennial bad press coverage,
there clearly is a viable automotive industry left in the UK.
The UK is losing out disproportionately: over the past decade, the UK has seen a
disproportionate degree of plant closures, which, unsurprisingly, has resulted in a steady
decline in automotive employment. The main reasons for this decline are first and
foremost the lack of a national car maker ‘champion’ (due to the failure of MG Rover in
2005), which means that the UK now relies mainly on attracting foreign direct
investment. When it comes to investment decisions, the UK is therefore competing with
any other country in the world, as there is no natural choice to do the work in the UK.
Furthermore, due to political pressures, vehicle manufacturers tend to avoid plant
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closures in the home market. Germany is a good example, which despite high labour cost
has been able to maintain and grow its volume car industry. Strong public support and
links to the German federal and regional governments, a high skill base, as well as the
possibility of flexible labour arrangements (see for example the bid by Leipzig for the
BMW plant, which was won due to labour flexibility over the product life cycle, which
outweighed the benefits from east?shoring the plant). Location decisions are only
partially made on economic terms, political and strategic considerations play a large role.
A general shift towards niche and engine manufacture: The plant closures in the UK since
the last AIGT have shifted the landscape in the UK further towards luxury and niche
vehicles, Japanese inward investors, and engine manufacture. This is not necessarily a
disadvantage, and most likely driven by economic factors, that will see the offshoring of
entry?level or basic products to low?cost countries, while it retains the high?value
products (where the fraction of labour cost is comparatively lower, and often non?
financial product characteristics are important, such as brand or manufacturing location).
However, it does expose the UK to economic swings, as an over?reliance on luxury
vehicles increases exposure to economic downward shifts. Thus, any punitive regulation
against luxury vehicles is going to disproportionately hurt the UK car industry. One might
conclude that the UK has developed an area of expertise in engine manufacture. While
this is undoubtedly true in volume terms, one also needs to understand that these
engine plants are not embedded, but (apart from Ford Bridgend and Dagenham, and
partially BMW Hams Hall
xliii
) are all serving existing vehicle manufacturing operations in
the UK. Many UK engine plants are not embedded into local R&D and supply chain
operations, and thus not self?sustaining in the absence of the UK car plant they serve. In
that sense we would argue that one cannot assume that the fate of these engine
facilities is independent of that of the vehicle assembly operations they are serving.
The UK’s greatest advantage is turning into its worst enemy at times of crisis. The analysis
of industry leaders’ perception shows that the most prominent strengths of the UK
automotive industry are labour flexibility, and the quality of R&D resources. To a lesser
extent, interviewees noted the following as additional strengths: governmental
subsidies, barriers to exit and taxes and tariffs. In?depth interviews revealed that
interviewees value UK labour flexibility most, mainly because of the flexible working
hours they are allowed to employ, but also because of the relatively lower level of
unionisation. The flexibility to adjust capacity however is a double?edged sword: it makes
it attractive for OEMs to produce in the UK, but it also helps in downturns when firms
need to reduce capacity. Thus, it is our view that it is comparatively cheaper to reduce
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capacity in the UK, and hence the UK has seen a relatively higher proportion of plant
closures than other countries in Europe.
The UK’s main disadvantages remain skilled labour and the local supplier base: The
analysis showed that the most salient weaknesses of the automotive industry in the UK
are the availability of skilled labour and local suppliers. Though many did agree that
there is a deficit of skilled labour in the UK, they had varying opinions as to the nature of
unavailable skills: several interviewees claimed that the deficit was most pronounced in
skilled mid?level management, while a few others stated that they had most difficulty in
finding enough engineers. One interviewee even asserted that the deficit was most
prevalent among skilled blue?collar workers. Most of the interviewees agreed on the fact
that one of the main reasons they are finding it difficult to recruit skilled labour is that
the most accomplished high?school students and graduates do not opt for engineering,
and even those who do prefer to accept offers from the financial sector rather than from
the manufacturing one. In terms of suppliers, there is a general consensus that the UK is
losing its first?tier supplier base to continental Europe (France and Germany), which in
turn has led to a reduction in second and third tier suppliers in the UK. This is leading to a
‘hollowing out’ of the supply chain.
Supply chain hollowing?out: the loss of volume manufacture exacerbates supply chain
hollowing out. A further concern is to what degree the volumes at the remaining vehicle
manufacturers can support the economies of scale needed for the component supply
chain to remain competitive. While it has been very difficult to quantify, the ‘hollowing?
out’ of the UK component supply chain remains a clear risk in the mind of many industry
leaders, and the reduction in sourcing from the UK has been confirmed unanimously by
the industry leaders surveyed. Our survey clearly shows that the decline in the level of
sourcing from the UK has continued for all firms surveyed, and is very likely to decline
further over the coming five years. The great danger in this development is that with a
decrease in local sourcing, the UK component supply chain (across all tiers) may lose its
economies of scale, and hence will find it harder to compete with materials and
component imports. In the long run, without being able to call upon a competitive
component supply chain, the manufacturing base will be forced to relocate abroad as
well. We thus share the concern of the last AIGT report in 2002 that the loss of
economies of scale in the component supply chain is detrimental to the future of the UK
automotive industry.
The UK is in a comparatively weak position to meet low?carbon challenge: an area of great
concern is the drastic decline in R&D activity in the UK. As the automotive industry is
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bracing for the necessary shift from fossil fuel?powered ICEs to alternative fuels and
powertrains, the UK is an increasingly weak position to capture a share of this growing
market segment – most notably because of a lack of indigenous car makers. The UK
shows the lowest relative spend on automotive R&D across our sample, and also has
seen strong linear decline capital investment in the motor industry. At present,
alternative powertrain (such as hybrid, hydrogen, fuel cell and electric) vehicles make up
a small proportion of the market only. However, as their importance will grow, so will
the relative weakness of the UK to maintain its position in the global automotive
industry. The main developments in this space are currently being done in Japan,
Germany, France and the USA. We have little evidence that a growing ‘low carbon
vehicle’ competence is developing in the UK.
4.3 What policy levers does Government have at hand?
(This list was kindly compiled by Rob Smith of BERR, upon our request)
The common perception of instruments in industrial policy is that ‘it is all about money’,
whereby subsidies, tax breaks and grants provide the strongest levers. This notion is
distorted: governments in fact command an array of both financial and non?financial policy
instruments.
These non?financial instruments include first and foremost the proactive management of
the relationship with industry. This, in our view, is a key distinction between the UK and its
peer group in continental Europe. The issue why countries like Germany have been able to
retain their national industries is that they provide direct and frequent contact to top
(Secretary?level, at both state and federal level) government officials. This interaction is not
needs? or project?driven, but ongoing. The UK needs to be ‘first choice after the home
market’
xliv
for foreign vehicle manufacturers. The natural choice will always be the home
market, but UK can still aim to be first choice for overseas investment.
In addition to the relationship management, there are direct and indirect levers the
government can use, with different time intervals. The following list is not comprehensive,
but a first summary of the main instruments
xlv
:
Tax (and the wider economy): Taxation has been, and remains, the is a varied range of fiscal
levers operate on consumers, business/fleet purchasers, business, manufacturing industry,
supply chains, logistics providers; examples include: Company Car Benefit in Kind Tax,
Vehicle Excise Duty, Fuel Duty, Value Added Tax, Capital Allowances, Corporation Tax,
Business Rates and reliefs, Employee Car ownership schemes, Personal Taxation, and
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Interest Rates. All can be an incentive or disincentive, and can be major market drivers.
Fiscal push vs pull a key consideration. ‘Carrot and stick’ for consumers and business; is a
framework all have to work within.
Regulation/Legislation: The second main lever is regulation and legislation in the wider
sense; regulation can broadly be split between Environmental and Safety regulation. While
sometimes seen as a burden, it can also be essential to set a level playing field and/or
present opportunities (technology, innovation, single market, etc). Further,
compliance/delivery regimes can be as important as shaping the regulations: key examples
include CO
2
, Vehicle Type Approval, Safety, Fuel Quality. In terms of legislation, generic
aspects such as Company Law, Working Time Directive are possible levers.
Regional Development/Investment Incentives: There are Regional Development Agencies
(RDAs) in each of the 9 English regions. Similar functions are part of the wider remit of the
Devolved Administrations (DAs) in the case of Northern Ireland, Scotland and Wales. Key
functions include: Strategic drivers of regional economic development. Future remit will be
to bring together economic development with planning, housing and transport into a single
integrated regional strategy. Regeneration, regional competitiveness, fostering enterprise
and innovation, the regional lead on inward investment, and with regional partners,
ensuring the development of a skills action plan to ensure that skills training matches the
needs of the labour market. Overall responsibility for business support rests with the
regions, managing the Business Link and Manufacturing Advisory Service. They also support
cluster strategies for key sectors in their regions, for example Advantage West Midlands has
an Automotive Cluster Plan for 2008?11. The majority of BERR funding for business support
is delegated to the RDAs.
The Automotive Unit chairs a National Automotive Group, which brings together the
automotive leads in the RDAs/DAs, to discuss issues of common interest and to improve
coordination and joint working.
Selective Finance for Investment in England (SFIE): SFIE is designed for businesses that are
looking at the possibility of investing in an Assisted Area, but need financial help to go
ahead. Delivery of the scheme in England is primarily through the RDAs, although large
projects will be managed by BERR HQ. SFIE is discretionary and normally takes the form of a
grant or occasionally a loan. All projects must meet the scheme criteria and in each case the
amount and terms of assistance will be negotiated as the minimum necessary for the
proposed project to go ahead.
National Supply Chain Group (SCG) programme a 5 year £9m programme (jointly funded by
DTI and the RDAs). Closed to new applications October 2006. 64 projects in total, of which
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46 were in the automotive sector. Currently in development pilot supplier development
programmes which BERR, SMMT Industry Forum and the NSA?M are developing with the 3
Japanese VMs and nominated Tier 1s, in response to an action point in the Report on the
Business Environment for Japanese Automotive Supply Companies in the UK. A number of
regional supply chain programmes including the Accelerate and PARD programmes (the
latter being a programme focused on collaborative R&D) in the West Midlands, and
Productivity Alliances in the North East and West Midlands.
The Manufacturing Advisory Service (MAS), a national brand but delivered regionally. This
largely provides individual company support (as do some of the other schemes to varying
degrees), but also supports some supply chain group projects.
Education, Training and Skills – Role of Learning and Skills Councils (LSCs), National Skills
Academy for Manufacturing (NSA?M), Education Policy. Examples of current activity
include: LSCs, which currently working with NSA?M to develop workplace skills. Examples
include various courses, the promotion of apprenticeships and Train to Gain. Also,
SEMTA/NSA?M (incl. Sector Skills Council) agrees standards with industry and promotes
Auto?specific qualifications. Strong employer?led SSCs and Regional Skill Partnerships (RSPs).
25 SSCS are up and running across a range of sectors covering 89% of workforce. 17 SSCS
have launched Sector Skills Agreements. RSPs are operational in all 9 English regions.
Technology/R&D Support: TSB/Technology Platform/support exists for development of low
carbon technologies following the recommendations of the last AIGT. Current and planned
activities/initiatives include the Technology Strategy Board/Technology Programme which
offers support for innovative often high risk ideas. The scope of each competition is broader
than individual sectors and therefore auto is in competition with other sectors (e.g.
Aerospace). There have however, been a number of notable successes for Automotive.
The Technology Strategy Board Innovation Platforms (IPs) is focussed on societal challenges
(from auto perspective ITSS, LowC with a lesser link to built environment and network
security). IPs combine Departmental policy objectives. The IPs look for ‘big hit, big win’
activity. It is ‘early days’ but the LCV IP Integrated Delivery Programme is looking very good.
Early successes include the ITSS IP FITS call (with DfT and EPSRC).
R&D Tax Credits are relative to R&D activity (credit based on tax paid so no actual payment
to companies). Comes with strict eligibility criteria.
CENEX/InnovITS offer a rapid, flexible response which is not constrained by Departmental
policy (other than LowC and ITSS). Funding is limited and the focus is relatively narrow.
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Recent examples of success include electrification of Smart For2 project and InnovITS
Advance test and demo facility and SENTIENCE project.
RDAs/DAs offer a High level of funding but this comes with a regional requirement.
Emphasis is on capital projects (not cash). InnovITS ADVANCE is co?funded in this way.
Inward Investment/Trade Policy aims to attract mobile investment in key strategic areas.
UK Trade & Investment (UKTI), a joint agency of BERR and FCO, has the lead national role in
attracting inward investment to the UK, and in helping UK based companies trade and invest
overseas. Key inward investment targets are the attraction of new high value added,
knowledge?based activities, and securing the expansion of existing overseas owned
investors already here. The main focus of programmes on the trade side is helping SMEs and
middle market companies through specialist advice, subsidised information/research
services, overseas missions and seminars, etc. However, larger companies can benefit, for
example where Governmental policy and contacts play a role in business negotiations.
R&D programme, which was announced in autumn of 2006, and has the aim to increase
R&D investment as a proportion of national income from 1.9% to 2.5% over a 10 year period
to 2014. It is seeking to build relationships to this end with about 80 targeted companies,
and is supported by 17 R&D specialists in key technologies.
The Emerging Markets programme has a similar group of specialists with direct commercial
experience of these markets, who are particularly focused on helping middle market
companies access the opportunities in the key emerging markets of eg. China, India, Russia,
Brazil, Mexico, South Africa.
Transport Infrastructure/Intelligent Transport Systems – Investment in road infrastructure,
congestion and technology opportunities. Congestion charging/TDP RUC is a national
solution to a global problem and world?leading if successful. Has an impact on all levels of
society and industry. London Congestion Zone and Zero Emission Zones current examples
(ZEZs deal with air quality issues rather than low C). Freight Consolidation Hubs which could
promote the use of zero emission delivery vehicles. Potential to change final delivery to ‘out
of hours’ using near?silent EVs. Infrastructure costs/land use requires private partnership.
May need shared capital costs for EV fleet. Foresight Vehicle project e?FLEX developed as
e?Stop in Manchester.
Government Procurement Policy/Public Procurement could be a tool to bring new
products and technologies to market. Potentially large scale provides market pull. Certainly
high profile, but budgets lie in many Departments’ hands and numerous different
organisations are seeking to use procurement for different purposes. Also need to abide by
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public procurement rules (national and EU). Cenex manage DfT public procurement
programme for vans. London 2012 and other major UK events offer opportunities.
Direct subsidies, which would be the most direct form of government action, yet are also
regulated by the Subsidies Act. There is widespread anecdotal evidence that is common
practice in continental Europe, where subsidies for new plants are provided: not at national,
but at regional level in the form of transportation infrastructure, favourable tax regimes or
breaks, support of local training and skills and language training activities, subsidised
housing for workers and executives.
4.4 How can we ensure policy is effective? Key performance indicators
In order to devise effective policies, it is vital to be able to monitor the impact of any policy
made. Therefore, we have devised a set of Key Performance Indicators (KPIs) that in our
view should be monitored to track the performance of the industry in terms of
Competitiveness, Growth, and Innovation.
The following brief was set by the NAIGT for the Key Performance Indicator (KPI) Subgroup:
‘The NAIGT needs to find ways of measuring the success of the UK automotive
industry, so as to establish a baseline against which to measure future industry
performance improvement through to 2025 and beyond. This relates to the first of
the ‘terms of reference’ of the NAIGT, namely to identify key performance
indicators and success factors in support of the NAIGT.’
The KPI subgroup
xlvi
was assembled to provide the broadest possible field of industrial
representation from the passenger car, commercial vehicle and construction equipment
sectors, as well as representatives from the regional development agencies, BERR and
academia.
The KPI subgroup first of all recognised the conceptual difficulties in developing a set of key
performance indicators capable of representing the diversity of the automotive industry,
from large multinational enterprises to SME?sized second and third tier suppliers, working
across a range of products from passenger cars to construction equipment. Thus the
subgroup acknowledged that some measures are more applicable to certain sub?sectors of
the industry, while overall the aim was to cover all economic activity in the sector in the UK.
Secondly, it was recognised that any measure proposed will be imperfect, as in most cases
either the input data is unavailable or incomplete, or the effort in collecting the required
data is economically unviable, or both. Typical problems include the inconsistent
interpretation of industry classifications, levels of aggregation that are too high, lack of
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availability of international comparative data, and measurement cycles that are too long
and thus do not permit for a continuous and up?to?date measurement. Specific emphasis
was placed on devising a balance of retrospective or output?based measures and forward
looking measures, although it was recognised that common indicators, such as investment,
were far from perfect in this regard. Finally, the objective was to use as few measures as
possible, that is to focus ‘on the vital few’, in order to provide the best possible set of
measures while requiring a reasonable amount of effort in compiling and tracking data.
The matrix provides the set of ‘NAIGT recommended measures’ in the categories of
competitiveness, innovation and growth. We suggest that these measures are applied
consistently, and longitudinally, in order to monitor the performance of the UK automotive
industry, and to inform future policy decisions.
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Table 12: NAIGT Matrix of Key Performance Indicators
Retrospective or output?based KPIs Forward?looking KPIs
Competitiveness 1. The UK’s relative global share of
vehicle production, by segment
2. Value?added per employee, which
allows for international
comparisons at SIC classification
level 34 and 34.1, 34.2
3. Skill levels, in terms of % of
workforce with NVQ, HNDs,
degrees, or other.
Growth 4. Vehicle production output, in
terms cars and commercial
vehicles, in units per month
5. Export –import balance in terms of
value and units of production.
Note: if available this should be
done for passenger cars and
commercial vehicles.
6. Ratio of capital investment (in
terms of total value) and total
turnover per sector, on a rolling 5?
year horizon. Note: we consider a
relative rather than absolute
measure more appropriate here.
Innovation 7. Fleet CO
2
emissions, measured
across all vehicles produced by the
firm in the UK.
Note: this measure can be applied
at firm level, as well as at segment
level (to compare a firm’s
performance in relation to its peer
group).
8. CO
2
emissions to produce one unit
(including emissions, landfill), by
vehicle category (passenger cars
and commercial vehicles).
9. R&D expenditure in SIC/DM 34, as
a % of Gross Value Added in
SIC/DM 34, as a measure of the
extent to which the sector
reinvests in R&D in the UK.
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PART V: OUTLOOK: THE NEED FOR A ‘CAR 2.0’
‘The Stone Age did not end for a lack of stone, and the Oil Era will also end before the World
runs out of oil.’
(Quote attributed to former Saudi oil minister Sheikh Zaki Yamani)
5.1 Preparing for a fundamental shift in powertrains and fuels
In this report we have focused on the current state of the UK automotive industry, and
outlined the trajectories and trends that will shape its near future. In addition however we
fully acknowledge that the automotive industry is facing its second major shift in
powertrains and fuels, and the final part of this report will be devoted to what undoubtedly
will shape the long?term future of this industry – in the UK, as well as in any other country of
the world.
This trend will increasingly affect the industry, although industry leaders agree that – due to
the long product life cycles, path dependency and sunk cost – the traditional ICE will remain
the most common powertrain for the coming decade, accounting for at least 80% of all
automotive powertrains produced. Nonetheless, virtually all vehicle manufacturers are
working on alternative powertrains at this point in time, yet it is important to note that:
i. most manufacturers are concentrating their efforts on a single technology only, as
the high cost do not permit for exploring several competing technologies at this
point in time.
ii. there are regional clusters and international collaborations on new powertrains in
place already, whereby Japan is leading the efforts on hybrid vehicles, Europe is
largely focussing on downsizing and improving existing ICEs, while the USA is
focusing mostly on fuel cell and electric vehicles.
In the long run, as the fraction of hybrid, electric, fuel?cell, hydrogen, and flex?fuel vehicles
will increase, so will the importance of local R&D resources to capture a share in this
growing trend. Thus, recognising the UK’s weak position here and developing the
automotive R&D sector in this area will become a vital component in the UK’s quest to
capture its share of this growing market segment, and sustain its operations in the UK in the
long term (see also the ‘NAIGT Technology Roadmap’ for more detail on technologies, and
likely timeframes).
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5.2 The mandate for change
The mandate for change is driven by two factors: the depletion of fossil fuels, and the need
to avert further damage to the Earth’s climate through carbon dioxide emissions. We will
discuss each in turn.
‘Peak Oil’ and the inevitability of further oil price increases
A timeline of industrial development that stretches back to the Middle Ages, the oil?based
economy is a relatively recent phenomenon ? the first commercial oil well came on?stream
in Titusville, Pennsylvania, USA, only 150 years ago. Since then oil has taken up a pivotal
role in every aspect of our lives ? not only as a fuel and energy source for transportation, but
also as a raw material of virtually any plastic as well as many pharmaceutical products and a
whole range of petro?chemicals. The reason for the rapid rise of the use of oil as a source of
energy is simple: as the demand for energy grew during industrialisation, oil (and its
derivatives, gasoline/petrol and diesel fuels) were easy to process (by essentially ‘cracking’
the crude oil carbon chains into smaller chunks), these fuels were easy to transport as they
were liquid over a wide range of temperatures, had low ignition points so were safe to
handle, and most importantly, had a high energy density. So, with the invention of the
internal combustion engine by Nicolaus Otto, and the self?igniting derivative of Rudolf Diesel
at the end of the 19
th
century, respectively, the dominant design for the powertrain of our
current mobility system was formed, and has remained largely unchanged for over a
century.
The depletion of fossil fuels and the environmental impact of transportation
emissions create a strong mandate for change.
The rise in crude oil prices that is fuelling this rise in transportation, and ultimately supply
chain cost, is not unexpected. It has always been recognised that the reserves of fossil fuels
are finite. With the drastic oil price increase in 2008, this growing gap between supply and
demand, for oil has now become significant. The unforeseen rise in demand in emerging
markets means that the gap is growing wider. The effect of this gap between supply and
demand has been manifested in the dramatic increase in the price of oil.
It was a senior geologist and analyst at Shell, named M.K. Hubbert, who in 1956 embarked
on a simple quest, namely to calculate the remaining world oil reserves. His assumptions
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were simple: he argued that at some point in time the production of oil would reach its
peak, and from then on would steadily decline, at the same time as the cost of exploration
and production would rise. He assumed that the production pattern of crude oil would
essentially resemble a bell?shaped curve, and labelled the turning point of maximum
exploration ‘peak oil’. Hubbert predicted peak oil for the period of 2010?2015, see Figure
22.
Figure 22: Hubbert’s original ‘Peak Oil’ chart. Source: Hubbert 1956.
Since, many predictions have been made that refine Hubbert’s curve, see Figure 23. While
some predictions are far more optimistic, the majority of studies place the peak at 80?85
million barrels per day (which is the equivalent to the level reached during the oil price rise
in 2008), in the year 2010 or 2011.
Due to the limited information available about the status of many oil fields in the Middle
East it is impossible to determine exactly when ‘peak oil’ will be reached, yet it is also
irrelevant. Whether or not peak oil has been reached does not change the fact that –
logically – it will be reached in the near future. Thus, assuming that the oil price hike was
merely an unfortunate result of speculation in the stock market is naïve: there are growing
concerns over the accuracy of Saudi?Arabia’s oil reserve claims, and the large remainder of
the World’s oil reserves lies in politically unstable or uncontrollable regions, namely Iran,
Iraq, Venezuela, Nigeria, and Russia. Hence, even if reserves are verified, the mere fact that
these lie in volatile or potentially hostile regions will further fuel the perception of
uncertainty, and hence increase the price for crude.
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Figure 23: Recent ‘Peak Oil’ Predictions. Source: www.theoildrum.com
At the same time that the supply of oil is reducing, the demand for it continues to increase,
largely driven by the economic growth in emerging markets. In fact, most projections of
future world demand for oil show it continuing its rapid growth post recession. The result of
these two forces ? reducing supply and increasing demand ? is to create a widening gap
which in the absence of fuel substitutes can only be closed by significant price increases.
Thus, for the medium and long term (post recession) we will need to both plan for increased
volatility in the oil price, as well as for a general increase in crude oil prices.
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Climate Change and Vehicle Emissions
The second mandate for change is the environmental impact of transportation: motor
vehicles cause 14% of all greenhouse gas (GHG) emissions, and thus are a major contributor
to climate change, and global warming. And here a lot remains to be done: while the
automotive industry has presented many innovations with regards to emissions (such as the
catalytic converter), the overall fuel consumption has remained fairly stagnant for the past
twenty years, see Figure 24. Key drivers for this lack of improvement have surely been the
increase in vehicle size and weight, driven by an increase in option and equipment content.
In order to reduce the emissions of our transportation system, we need to either replace the
fuel or reduce the energy consumption, or both. The options at hand, and how this change
can be achieved, will be discussed next.
Figure 24: Fuel consumption by vehicle type over time (US Data).
0
10
20
30
40
50
60
1960 1970 1980 1985 1990 1994 1996 1998 2000 2001 2002 2003 2004 2005
Cars Light trucks (incl. SUVs) Medium duty trucks
Heavy duty trucks All vehicles
Source: U.S. Department of Transportation, Federal Highway Administration
Average fuel consumption by vehicle type in litres per 100 km, USA
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5.3 Disruptive innovation or gradual change?
With regards to how this change will occur, all too often there is a perception in the public
mind that a ‘disruptive innovation’ will lead to a large?scale change in the industry over a
short period of time. This notion is unfortunately unrealistic, for three reasons:
First and foremost, modern vehicles are optimised to meet multiple objectives: passenger
and pedestrian safety, comfort, ease of operation, fuel consumption and affordability. Even
if a new technology provides better energy efficiency, it would still have to meet the safety
and affordability criteria in order to succeed in the marketplace.
Secondly, the industry clockspeed is very slow. Vehicles are in operation for an average 12
years, while product development life cycles are about 24?36 months. Thus, it would take at
least ten years for 75% of all vehicles to be replaced with the new technology. And of
course, in addition to replacing the actual vehicles, the fuel distribution infrastructure might
have to change as well, which is likely to introduce further delays in the adoption.
Thirdly, the industry is strongly bound by scale economies. Present development costs for
new models are in the order of $1bn, and need to be offset against high volumes in order to
ensure competitive prices. One of the key driving factors is the sunk costs that have been
invested in current technologies (most notably steel forming and welding which requires
very expensive pressing dies), as well petrol/diesel?based internal combustion engines. The
industry is characterised by its heavy, encumbered investments, which result in high barriers
to entry for new entrants.
Any radical change in automotive fuel and powertrain technology will be
inhibited by current industry structure, vehicle architecture, as well as the way
vehicles are used. Any change will phase in incrementally.
Thus, even if a radical technology were to be invented, it would have to deal with the strong
path dependency present in the automotive industry that results both from the sunk costs
for current technologies used to produce a vehicle, as well as the long cycle of usage for this
durable good. Any new technology will have to compete with the mature existing dominant
design on cost, safety, and reliability, which makes the rapid adoption of any new disruptive
technology unlikely. This marks a structural difference between the automotive and other
sectors that feature a higher clockspeed, where large?scale adoption can happen in the
short term.
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5.4 What are the options? A primer on alternative fuels and powertrains
In order to outline the different options at hand, it is first of all important to understand that
automotive powertrains are embedded in (a) the vehicle architecture they propel, (b) the
transportation system they are used in, and (c) the fuel sources and infrastructures that
provide the energy. In order to understand the issues associated with a major change in
automotive powertrains, all three aspects need to be considered.
Also, it is important to recognise that transportation and energy systems are largely
developed, manufactured and operated by private industry. This means that all stages in the
value chain – development, manufacture and operation – need to be profitable. In short, if
this transition is to happen, everyone involved ‘needs to make a buck along the way’. Even
where governments are taking an active role in managing the transition, commercial
realities cannot be ignored. As the World Business Council for Sustainable Development
(WBCSD) wrote in its ‘Mobility 2030’ report:
‘Governments may sometimes take a longer term view than companies. But there
are limits. A society that bankrupts itself trying to force the premature adoption, or
inappropriate use, of novel but economic technologies is not sustainable. Neither is a
society that in order to conserve financial resources hamstrings industry with
regulations to make it operate in an economically unsustainable manner.’
xlvii
In terms of optional powertrains, the main pathways are shown in Figure 25:
Figure 25: Automotive powertrain pathways. Adopted from WBCSD.
Coal
Crude Oil
Natural Gas
Primary Energy Source Energy Carriers Infrastructure Powertrains
Coal
Crude Oil
Natural Gas
Biomass
Natural Gas
Nuclear
Gasoline
FT Gasoline
Diesel
FT Diesel
Biodiesel
Ethanol
Methanol
DME
CNG
LPG
Hydrogen
Electricity
ICE
Electric
Fuel Cell
Hybrid
Fuel Cell
(FC)
ICE Hybrid
Liquid Fuel
Infrastructure
Gaseous Fuel
Infrastructure
Electric
Infrastructure
‘Plug?in’
FC or ICE
Hybrid
Butanol
Page | 81
As can be seen, a wide range of potential options are at hand how the existing and
renewable energy sources can be coupled with existing and new fuels, and infrastructures.
The fundamental problem is that none of these alternative pathways provides a clear
alternative to petrol/diesel as main transportation fuel. In other words, the main reason
why we find it so hard to replace petrol/diesel as our main fuel type is that it combines a set
of key advantages:
1. Oil?based fuels are affordable
2. Oil?based fuels have a high energy density, yet are safe to distribute and store as
they are liquid at ambient temperatures
3. The internal combustion engine is a mature and reliable technology
Neither hydrogen nor electricity – that are commonly proposed as main competitors – have
properties that are even close to the performance of petrol, see Table 13:
Table 13: Energy Density by Weight and Volume for different Fuel Types.
Energy Carrier Form of Storage Energy Density by
Weight [kWh/kg]
Energy Density by
Volume [kWh/l]
Hydrogen Gas (20 MPa) 33.3 0.53
Gas (24,8 MPa) 33.3 0.64
Gas (30 MPa) 33.3 0.75
Liquid (?253°C) 33.3 2.36
Metal hydride 0.58 3.18
Natural Gas Gas (20 MPa) 13.9 2.58
Gas (24,8 MPa) 13.9 3.01
Gas (30 MPa) 13.9 3.38
Liquid (?162°C) 13.9 5.8
LPG (Propane) Liquid 12.9 7.5
Methanol Liquid 5.6 4.42
Gasoline Liquid 12.7 8.76
Diesel Liquid 11.6 9.7
Electricity Pb Battery (chemical) 0.03 0.09
The main impediments to hydrogen are storage and distribution infrastructures, as we will
discuss below, but this most likely can be solved through technological innovation.
Electricity seems to be the second possible choice, using hybrids to convert our current
vehicles into all?electric cars. The one problem that affects both hydrogen and electricity,
albeit it to different degrees, is whether we can produce it cheaply and cleanly: while it
would of course be theoretically possible (and very desirable indeed) to use renewable
energy (wind, solar or tidal power) to produce either electricity directly, or use that
electricity to produce hydrogen through electrolysis of water, the reality is that these
Page | 82
options are far from today’s capabilities. So far, most of the hydrogen produced is by steam
reforming fossil fuels, which generates almost as many CO
2
emissions as burning it in the
first place, and of course large amounts of our electricity are produced by burning coals and
through nuclear energy, each polluting the environment in different ways.
A wide range of alternative fuels and powertrains are already available, but so
far none has emerged as a clear alternative to the internal combustion of fossil
fuels. The reason is that any powertrain/fuel technology has to meet the
multiple objectives of availability, affordability, safety and sustainability.
One key trend that is already underway is an electrification of the vehicle architecture. This
has several advantages: firstly, any powertrain that uses electric energy has zero tailpipe
emissions and can thus be used in areas that are sensitive to emissions (such as inner cities).
Secondly, internal combustion engines are not well suited (that is, inefficient) to operate in
stop?start traffic patterns. Most importantly however, bringing in an electric powertrain
allows for the merger of vehicle systems: where mechanical systems and electrical systems
have to be combined in a traditional vehicle architecture (for braking, steering etc), these
can be combined if they are electrical. Hub motors, for example, could provide propulsion,
braking, ABS, and ESP functionality – all in one system. This allows for content and weight
reduction of the vehicle, which results in considerable increases in fuel efficiency.
Overall, the pressure is mounting: more stringent emissions guidelines, spearheaded by
markets such as California, have already fostered a range of hybrid vehicles, which use both
an internal combustion engine (ICE), and an electric powertrain that permits ‘zero
emissions’ in city traffic. Vehicles such as the Toyota Prius and Honda Insight have been
successfully launched, and the market for these vehicles is growing. In the long run
however, these hybrid vehicles will not solve the problems arising from decreasing fossil fuel
resources and increasing pollution through vehicle emission. In fact, the average fuel
consumption of hybrid?electric vehicles (HEV) is still worse than that of modern diesel
engines, and only provides economic and environmental advantages in short?distance city
traffic cycles. Here, the prospects of the fuel cell (that uses hydrogen and oxygen gases in a
chemical reaction to generate electricity, without generating any emissions other than
water) are far more promising. These advanced fuel cell powertrains offer much higher
efficiency than both conventional and hybrid vehicles when assessed on a ‘well?to?wheel’
basis (see Table 14).
Page | 83
Table 11: Overall Energy Efficiencies of Different Powertrain Options. Source: Toyota Motor Corporation.
Well?to?Tank Tank?to?Wheel
Well?to?Wheel
(Overall)
Gasoline Vehicle (ICE) 88% 16% 14%
Electric Vehicle (EV) 26% 80% 21%
Gasoline Hybrid Electric Vehicle (HEV) 88% 30% 26%
Fuel Cell Vehicle – present (FCV) 58% 50% 29%
Fuel Cell Vehicle – target (FCV) 70% 60% 42%
While a certain consensus seems to have been reached that fuel cells will spark the gradual
change from CO
2
?emitting to CO
2
?free traffic (transportation accounts for c.26% of global
CO
2
emissions caused by combustion), while retaining existing technologies of the car itself,
a range of key problems have not yet been addressed. These problems are the generation of
hydrogen, its storage, and the infrastructure needed to support a large fleet of fuel cell
vehicles.
First of all there is a serious environmental concern with generation of hydrogen. Currently,
the majority of hydrogen gas is reformed from fossil resources. During this process, CO
2
is
generated, so that an overall reduction of greenhouse gas (GHG) emissions is achieved only
if the hydrogen is used in fuel cell vehicles (rather than internal combustion engines, which
can also run on hydrogen) (European Commission, 2004). Assuming that sufficient hydrogen
is generated centrally, it could then be distributed through ‘petrol stations’, given that the
infrastructure was in place. This brings the second problem. Currently, there are c.22,000
petrol stations in the US alone, all of which would have to be converted to supply hydrogen.
GM estimated that it would take $11 billion in investment alone to support 1,000,000 fuel
cell vehicles in the US. On the other hand, it takes c.11,000 stations in 100 main cities in the
US to reach 70% of the US population, so a certain incremental path for migration from
densely populated to less populated areas seems feasible.
The main problem is hydrogen storage in the vehicle. There are essentially three options:
liquid hydrogen in a tank, as a compressed gas, or the storage in metal hydride form. The
first option means that the tank can be small as the liquid gas is very dense, but constantly
‘breathes off’ some gas to cool the tank. So, if a car was left at the airport for a week, the
tank would be empty upon return. The second option seems the most promising, and is
already being practised with the Compressed Natural Gas (CNG) vehicles, which operate in
large fleets in countries such as Holland, for example. Here, the consumer acceptance of
Page | 84
having a compressed gas tank in the vehicle is dependent on the safety of such installations.
Finally, experiments with metal hydride storage systems have been undertaken by
companies such as Daimler?Benz, BMW, and Mitsubishi as early as 1985, and test vehicles
have been on the road for more than 15 years by now. Here, the hydrogen is absorbed by a
metal ‘sponge’, and only released once the metal hydride is reheated. The storage is the
safest option, yet bears the problem that considerable energy is needed to re?release the
hydrogen by heating the metal storage, as currently temperatures of 80°C are required for
this process. So far, the energy balance for metal storage systems is negative.
In conclusion, it is fairly certain that alternative fuels will gradually replace petrol and diesel
fuels, while none so far has emerged as the next dominant source of energy. The question
which fuels and powertrain technologies will drive this transition however is far from
certain, as a range of fuel, storage and conversion possibilities are at hand. Studies by the
European Commission and the vehicle manufacturers’ association EUCAR concluded that ‘no
single fuel pathway offers a short term route to high volumes of low carbon fuels’. The study
instead expects strong contributions from a wide range of technologies, such as CNG and
bio fuels, and expects a wider variety of fuels in the market within two decades (European
Commission, 2004, 2007). Thus, despite all the hype about hydrogen and electrification, the
question of the fuel of the future is far from resolved, and so manufacturers all lobby hard
for their respective concepts, most of which currently centre around hydrogen and methane
as fuels. Currently, the question of future propulsion introduces considerable uncertainty
into the competitive realm in the automotive industry, which is likely to sustain until one or
several new powertrains have found general acceptance with customers, regulators and
policy makers, and surpass the critical volume to form a new standard.
These factors, combined, will drive the shift in automotive powertrains. Due to the industry
structure and clockspeed this shift will be gradual, and for the foreseeable future we will see
an increasingly diverse mix of fuels and powertrains in personal mobility. The NAIGT
Consensus Roadmap reflects these factors (see Figure 26, and NAIGT main report).
Page | 85
Figure 26: NAIGT Consensus Roadmap.
5.5 How to support the transition towards energy?efficient, low?carbon
transportation systems
The UK government has set ambitious target for a reduction in carbon emissions by 2050.
Considering the lead?times to develop, launch, and replace motor vehicles, immediate
radical action would be needed to achieve such reductions in emissions caused by
transportation. Here, three main aspects will be critical in determining how the transition
towards alternative fuels and powertrains will take place:
(a) how the government measures the environmental impact of motor vehicles,
(b) whether demand?side or supply side interventions will be used, and
(c) what policy levers will be used to incentivise the adoption of such vehicles.
We will discuss each aspect in turn.
The Consensus roadmap defines future direction but we need a focused res
agenda to deliver products that will benefit UK plc
Ni che EVs
2020
2000 2010
2030
Full Hybrid
Micro/Mild Hybrid
130 100
EU Fleet Average
CO
2
Targets (g/km)
2040
Plug-In Hybrid
Mass Market EV Technology
IC Engine and Transmission innovations (gasoline/diesel/ hydrogen /renewables)
Demonstrator s Fuel Cell Vehicle
Demonstrator s
Charging Infrastructure
H
2
Infrastructure
Energy Storage Breakthrough
Energy Storage Breakthrough
Fuel Cell Stack & H
2
storage Breakt
Vehicle Weight and Drag Reduction
??
Page | 86
Beyond tailpipe CO
2
: the need for new measures
Performance measure drive behaviour: in this respect the decision which performance
metrics will be used by the government(s) will drive the decision by the vehicle
manufacturers which technologies to adopt, and which ones to phase out.
First of all, one needs to understand what drives the environmental impact of motor vehicle;
there are three main factors that matter:
1. Vehicle design: the weight, aerodynamic drag (cw) and roll resistance determine the
fuel consumption of the vehicle. For example, every additional 100kg of weight
result in an approximate increase of 1 l/100km fuel consumption.
2. Powertrain design: the design of the powertrain largely determines the fuel
efficiency of the vehicle, in other words, how much energy is used to propel the
vehicle. This energy efficiency can be differentiated into:
a. Fuel efficiency of the infrastructure or ‘well?to?tank’ (WTT) efficiency, or in
other words, how much energy is lost/needed to bring the fuel into the
tank.
b. Fuel efficiency within the vehicle or ‘tank?to?wheel’ (TTW) efficiency, or in
other words, how efficient is the powertrain in converting the energy from
the fuel into motion. Combined, WTT and TTW efficiencies give the ‘well?to?
wheel’ (WTW) energy efficiency of a fuel?powertrain combination.
c. Carbon emissions in g C0
2
/100km; for example, a litre of petrol burnt in a
petrol engine produces 2.32kg of carbon dioxide, a diesel engine produces
2.66 kg/l diesel burnt
xlviii
.
3. Utilisation: the cycle of utilisation of the vehicle has a strong impact on the fuel
consumption, and energy efficiency. Diesel powertrains for example are the most
energy?efficient option with regards to long?distance travel at constant speed, while
electric and hybrid?electric powertrain work best in city cycles.
Combined, these factors determine the environmental impact of a vehicle. To give an
example: if an electric vehicle is powered by coal?generated electricity, its greenhouse gas
emissions (on a WTW basis) will be slightly higher than for a petrol?powered vehicle
xlix
. The
magnitude of any advantage these vehicles provide thus strongly depends on the source of
electricity, and the degree to which carbon emissions are generated and captured.
Similarly, the Tesla sports car (one of the very first desirable electrical vehicles) has zero
tailpipe emissions, and a TTW efficiency that is very high. But considering that it takes about
500g of CO
2
emissions in the UK to produce a kWh of electric energy, and the Tesla’s
Page | 87
consumption of 430 Wh/mile travelled, it effectively ‘emits’ 133g/km of CO
2
. This figure of
course relates to WTW and thus is not comparable to ICE vehicles, where the figures relates
to TTW emissions only. On an on?par comparison, the Tesla burns an equivalent of about
1.28% of one gallon of gasoline, which equates to about 3.6 l/100km fuel consumption. In
relation to performance, the Tesla is nearly three time more energy efficient than its Lotus
Elise sibling
l
.
Measuring tailpipe CO
2
emissions is largely meaningless – what matters are
well?to?wheel emissions, and well?to?wheel energy efficiency.
In order to account for the true environmental impact of transportation, it would be more
accurate to use WTW or ‘end?to?end’ measures for both energy efficiency and emissions:
1. Well?to?wheel energy efficiency, stating how much energy is lost in the conversion
from generation through distribution, storage to utilisation. This measure should be
given as a ratio of energy generated to energy used for propulsion: a ratio of 14%
(typically for an ICE vehicle) would mean that 14% of the energy in the fuel is
actually used to propel the vehicle, with the remainder being lost in heat, friction
and conversion from to heat to motion.
2. Well?to?wheel CO
2
emissions, showing the total emissions caused in generation,
distribution, storage and utilisation of the energy needed to propel the vehicle. This
encompassing measure would thus provide an holistic and more balanced view of
the environmental impact of a given fuel?powertrain design.
Demand?side versus supply?side interventions
Any government aiming to support the shift to low?carbon transportation could adopt two
basic approaches: first of all, it could give grants and subsidies to individual firms (so called
‘supply side interventions’). The main concern with this approach is that it distorts
competition, often by supporting the weakened national champion. The nationalisation of
British Leyland in 1975 marks a good case here. Even worse, supply?side interventions will
also hurt competitive firms that are not being supported, which now have to compete on
unequal terms with the firm being subsidised.
The other approach is to provide support by increasing the demand for the products the
industry produces (so called ‘demand?side interventions’). Car scrappage schemes are a
Page | 88
good example. The problem with such schemes is the lack of a direct measurable effect on
the national industry it aims to support. In a globally connected industry, it is virtually
impossible to ensure that subsidies given in the UK market benefit exclusively the UK
industry. If consumers decide to buy a Korean car using a UK government incentive, then
this cannot be prevented.
Past experience shows that supply?side intervention (subsidies for individual
firms) distorts competition, and often inhibits radical reforms needed to regain
competitiveness. Demand?side interventions are much more effective, but
show a weak cause?effect relationship in support of a national industry.
Overall, neither approach is perfect, however past experience has shown the long?term
detrimental effect of shielding nationalised firms from market competition, while the recent
scrappage schemes have indeed been very effective at restoring market demand – albeit
not exclusively for the domestic players.
Carbon tax and trading, or fuel price increase: how to incentivise consumers?
An obvious question is ‘why is the industry so slow in adapting these new powertrains?’ First
and foremost, because of a lack of consumer demand: over the past decades, vehicle
manufacturers had offered several alternative powertrains and efficient vehicles, most of
which had a disastrous market reception. To list a few: The ‘3?litre Lupo’ of Volkswagen,
which was capable of 94 miles per Imperial gallon, but had very poor sales; the first start?
stop automatic was available in VW Golf Mark III, but it was a commercial flop. The GM EV 1
electric vehicle was available in 1996, but received little interest then. The main reason for
the commercial failure of such pioneering vehicles was that they were too expensive for the
fuel savings they offered (at times of an overall low and stable cost of oil), so consumers
were not interested.
More recently, most manufacturers have launched ‘eco models’ of existing vehicles. For
example, the Smart Fortwo CDI achieves 3.4 l/100 km, the current Ford Fiesta Econonetic
achieves 3.7 l/100 km or 77 mpg US), which are comparable to modern hybrid vehicles such
as the Prius II at 65.7 mpg or 4.3l l/100 km, or the Honda Insight II at 64.2 mpg or 4.4 l/100
km. The Lexus RX 400h hybrid SUV, on the other hand, achieves only 34.9mpg or 6.7
Page | 89
l/100km – as stated above, vehicle weight has a drastic impact on fuel consumption, which
this comparison illustrates.
A wide range of policy measures have and are being debated how to make these vehicles
more attractive to consumers: carbon trading, carbon taxes and increased standards for
emissions are all being debated at present. Here, it is obvious that carbon trading is already
being undermined by firms lobbying for exceptions; the main question is: why is the market
mechanism not correcting our car buying behaviour? Because the relative wealth of most
car buyers, the undervaluation of fuel economy savings when purchasing a car, and the non?
consideration of climate change cost mean that the market mechanism fails in this case. In
short, the consumers do neither feel the ‘economic pain’ of driving fuel?inefficient cars, nor
do they feel any repercussions from the emissions they are causing.
First and foremost, we need to reduce uncertainty for anyone wishing to invest in new fuels
and powertrain technology by removing the price volatility currently experienced, as this is
inhibiting investment in novel powertrains. Many experts agree that raising the cost of fuel
to a reliably high?level will send the right signal to the market.
One obvious approach would be to increase the cost of petrol to include the cost that the
CO
2
emissions will cause: according to the IPCC and Stern Review
li
, there is a remarkable
congruence between the models as to the mean cost per tonne C0
2
emissions, namely $120?
130. If one were to convert this to cost of fuel, this would add an estimated 16p to a litre of
fuel that retails at £0.90.
While logically very compelling, such a 16p increase in fuel price might not even be
sufficient: the price elasticities are low, and decreasing: strong change needed to alter
behaviour. Secondly, there is volatility in the fuel price. This means that people will hold off
buying cars when the fuel price increases, and then will resume their normal buying
behaviour. To give an example: the recent fuel price hikes were not sufficient to persuade
buyers to change behaviour. According to academic studies, the short?term price elasticity
of demand for gasoline in the United States has historically been around ?0.3. This means
that with a 10% increase in fuel prices at the pump, the demand for fuel should drop by 3%.
This data is based on the reaction of consumers to the increases of fuel prices in the 1970s
and 1980s during the oil crises. As Sperling and Gordon note in their 2009 book, more
recently this price elasticity has dropped in recent times, with some studies claiming as little
as ?0.04
lii
.
Page | 90
Uncertainty in the cost of fuel prevents manufacturers from developing new
technologies, and consumers from demanding these products. What is needed
is a clear signal that the cost of fuel will rise and remain at a high level, which
will give both industry and consumers confidence to switch to low?carbon
alternatives.
Instead, we need to eliminate the downwards uncertainty by providing the clear policy that
the ‘times of cheap fuel’ are over. High fuel prices will send the clear signal needed that is is
worth investing as well as worth buying these cars with new powertrains, because there will
be significant savings to be realised over the course of their usage. Price floors have been
proposed (e.g. by Sperling and Gordon), yet these would allow OPEC to simply raise the cost
of crude oil up to the floor price. Instead we need to increase the tax on fuel significantly,
even higher than the Stern Review suggests, and employ these extra revenues to proactively
support the shift towards a low?carbon, energy?efficient transportation system.
As unpalatable as it might be at times of economic crisis: if we want our transportation
systems to shift towards greater energy efficiency and lower carbon emissions, the fuel
prices at the pump will have to increase: it is the end of cheap oil which will be the
beginning of the low carbon era.
Page | 91
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Appendices
Page | 95
Appendix A: High?level data on the UK automotive industry
Annual passenger car production. Source: SMMT
2006 2007 2008 Growth 07/06 Growth 08/07
Nissan 301,211 353,700 386,555 17% 9%
BMW 184,687 237,709 234,461 29% -1%
Honda 184,351 237,772 230,423 29% -3%
Toyota 282,214 277,825 213,329 -2% -23%
Land Rover 175,714 232,548 184,831 32% -21%
Vauxhall 143,654 115,476 102,481 -20% -11%
J aguar 69,852 54,030 72,876 -23% 35%
Bentley 10,034 9,973 7,675 -1% -23%
Aston Martin 7,052 7,393 6,487 5% -12%
Lotus 3,062 2,630 2,106 -14% -20%
LTI 2,484 3,129 2,095 26% -33%
Rolls Royce 831 1,009 1,388 21% 38%
Morgan 600 632 625 5% -1%
MG 468
Caterham 329 433 437 32% 1%
Mercedes Maclaren 261 283 382 8% 35%
Peugeot 75,401
TVR 306
Others 42 12
Total 1,442,085 1,534,554 1,446,619 6% -6%
Page | 96
Annual commercial vehicle production. Source: SMMT
2006 2007 2008 Growth 07/06 Growth 08/07
IBC 89,068 94,968 87,248 7% -8%
Ford 70,890 75,662 66,215 7% -12%
Leyland 16,954 17,478 24,662 3% 41%
LDV 6,990 10,418 9,308 49% -11%
Vauxhall 3,928 12,748 9,250 225% -27%
Land Rover 13,663 2,099 3,536 -85% 68%
Alexander Dennis 867 889 1,262 3% 42%
Dennis Eagle 852 952 903 12% -5%
Optare 425 472 512 11% 8%
Foden 264
Peugeot 3,803
Total 207,704 215,686 202,896 4% -6%
UK vehicle production. Source: ONS/SMMT
Cars Export % Commercials Export % Total Export %
2000 1,641,452 65 172,442 44 1,813,894 63
2001 1,492,365 60 192,873 50 1,685,238 59
2002 1,629,744 64 191,267 60 1,821,011 64
2003 1,657,558 69 188,871 55 1,846,429 68
2004 1,646,750 72 209,293 61 1,856,043 71
2005 1,595,697 74 206,753 63 1,802,450 73
2006 1,442,085 77 207,704 66 1,649,789 75
2007 1,534,567 77 215,692 62 1,750,259 75
2008 1,446,619 78 202,896 62 1,649,515 76
Page | 97
UK vehicle registrations. Source: SMMT
Cars Imports
%
Commercials Imports % Total Imports %
2000 2,200,813 74 298,043 68 2,498,856 73
2001 2,224,538 73 313,411 69 2,537,949 73
2002 2,544,924 77 322,258 76 2,867,182 77
2003 2,589,872 80 363,687 77 2,953,559 80
2004 2,567,271 82 389,923 79 2,957,194 82
2005 2,439,717 83 387,427 80 2,827,144 83
2006 2,344,864 86 386,968 82 2,731,832 85
2007 2,404,007 86 395,271 79 2,799,278 84
2008 2,131,795 85 352,823 78 2,484,618 84
UK automotive manufacturing industry statistics. Source: ONS
Employment GVA Employee
cost
GVA as % Capital
Expenditure
Trade
balance
(thousands) £M £M of employee
cost
£M £M
2000 263 8,089 6,383 127 1,990 -7,167
2001 246 9,138 6,382 143 2,118 -12,293
2002 243 9,126 6,498 140 1,259 -12,161
2003 234 8,915 6,502 137 1,173 -12,522
2004 221 9,150 6,611 138 1,367 -12,749
2005 210 9,079 6,608 137 1,297 12,875
2006 194 9,582 6,692 143 1,379 -14,258
2007 180 10,153 6,208 164 919 -16,752
Page | 98
UK automotive trade statistics. Source: ONS
Employment GVA Employee cost GVA as % Capital Expenditure
(thousands) £M £M of employee cost £M
2000 553 16,807 7,703 218 1,112
2001 552 18,911 8,520 222 1,163
2002 544 20,313 8,814 230 1,166
2003 558 22,049 9,114 242 1,371
2004 552 20,755 9,628 216 1,289
2005 571 21,171 10,088 210 1,343
2006 554 21,983 10,411 211 1,040
2007 552 24,151 11,396 212 1,118
Page | 99
Appendix B: The contribution of the UK automotive industry's GVA to the
national economy
in Millions£ 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
CAGR
1
Gross Value Added
(automotive)
8,416 9,591 10,811 10,694 9,355 8,089 9,138 9,126 8,915 9,150 9,122 9,518 1.12%
GVA yoy % change
13.96% 12.72% ?1.08% ?12.52% ?13.53% 12.97% ?0.13% ?2.31% 2.64% ?0.31% 4.34%
GDP 723,080 768,905 815,710 865,710 911,945 958,931 1,003,300 1,055,790 1,118,240 1,184,300 1,233,980 1,303,910 5.51%
GVA as a % of GDP 1.16% 1.25% 1.33% 1.24% 1.03% 0.84% 0.91% 0.86% 0.80% 0.77% 0.74% 0.73%
Source: ONS UK, Euromonitor
Appendix C: A comparison of the value?added in DM34, selected countries
GVA at factor cost
(Million EURO) in
DM34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 13,969.70 13,708.00 12,373.60 11,841.70 13,087.10 12,021.00 11,370.50 12,989.10 11,965.00
France 14,228.20 16,431.70 17,525.20 17,692.60 17,465.50 18,471.10 17,957.80 19,283.50 18,481.80
Germany 50,285.20 48,549.30 57,328.50 55,015.80 61,655.00 61,403.20 60,953.10
Italy 9,221.90 8,022.40 7,237.20 7,872.80 7,057.50 6,178.40 6,906.90 7,147.60 7,488.40
Spain 7,596.00 7,895.20 8,048.50 8,298.90 7,578.30 7,949.90 8,867.70 9,110.60 8,693.70
Czech Republic 1,290.90 1,620.70 1,972.50 2,109.50 2,401.40
GVA at factor cost, %
Change 1998 1999 2000 2001 2002 2003 2004 2005 CAGR
2
UK ?1.87% ?9.73% ?4.30% 10.52% ?8.15% ?5.41% 14.24% ?7.88% ?1.92%
France 15.49% 6.65% 0.96% ?1.28% 5.76% ?2.78% 7.38% ?4.16% 3.32%
Germany ?3.45% 18.08% ?4.03% 12.07% ?0.41% ?0.73% 3.26%
Italy ?13.01% ?9.79% 8.78% ?10.36% ?12.46% 11.79% 3.48% 4.77% ?2.57%
Spain 3.94% 1.94% 3.11% ?8.68% 4.90% 11.54% 2.74% ?4.58% 1.70%
Czech Republic 25.55% 21.71% 6.95% 13.84% 16.79%
(Ctd)
1
CAGR was calculated for 11 growth periods (1995?2006).
2
CAGR for Germany was calculated on the basis of 6 growth periods and for the Czech Republic on the basis of 3 growth periods. CAGR
for all other countries was calculated on the basis of 8 growth periods.
Page | 100
GDP (Million EURO) 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 1,127,005.00 1,223,751.20 1,384,782.70 1,573,782.70 1,573,061.90 1,612,104.60 1,679,197.50 1,616,457.50 1,745,170.70
France 1,267,261.00 1,324,142.00 1,367,226.00 1,442,794.00 1,497,544.00 1,549,787.00 1,595,817.00 1,657,791.00 1,715,797.00
Germany 2,012,000.00 2,062,500.00 2,113,160.00 2,143,180.00 2,163,800.00 2,211,200.00 2,244,600.00
Italy 1,048,767.00 1,091,362.00 1,127,091.00 1,191,057.00 1,248,648.00 1,295,226.00 1,335,354.00 1,391,539.00 1,428,375.00
Spain 503,921.00 539,493.00 579,942.00 630,263.00 680,678.00 729,206.00 782,929.00 841,042.00 908,450.00
Czech Republic 61, 492. 90 69, 027. 30 79, 882. 70 80, 883. 70 88, 150. 30 100,280.60
GVA as part of GDP 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 1.24% 1.12% 0.89% 0.75% 0.83% 0.75% 0.68% 0.80% 0.69%
France 1.12% 1.24% 1.28% 1.23% 1.17% 1.19% 1.13% 1.16% 1.08%
Germany 2.50% 2.35% 2.71% 2.57% 2.85% 2.78% 2.72%
Italy 0.88% 0.74% 0.64% 0.66% 0.57% 0.48% 0.52% 0.51% 0.52%
Spain 1.51% 1.46% 1.39% 1.32% 1.11% 1.09% 1.13% 1.08% 0.96%
Czech Republic 2.10% 2.35% 2.47% 2.61% 2.72%
Source: Eurostat, Euromonitor
VA in DM34 as part of
the Total Economy VA 1995 1996 1997 1998 1999 2000 2001 2002 2003
UK 1.30% 1.30% 1.30% 1.20% 1.10% 1.00% 0.90% 0.90% 0.80%
France 1.30% 1.20% 1.40% 1.50% 1.50% 1.60% 1.70% 1.70% 1.60%
Germany 2.60% 2.60% 2.70% 2.90% 2.80% 2.60% 3.10% 2.90%
Italy 0.80% 0.80% 0.90% 0.80% 0.90% 0.80% 0.70% 0.70% 0.60%
Source: OECD
Page | 101
Appendix D: Number of passenger cars and commercial vehicles produced,
selected countries
Total
production
[‘000s
units] 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
UK 1,765 1,924 1,935 1,975 1,972 1,813 1,685 1,821 1,846 1,856 1,803 1,769 1,746
World 52,851 53,357 56,561 55,236 58,185 60,069 57,854 60,499 62,130 65,551 68,712 70,670 71,939
EU15 15,818 15,121 16,022 17,320 17,550 17,483 17,586 17,293 17,166 17,203 16,827 16,935 17,058
France 3,474 2,390 2,571 2,954 3,180 3,348 3,628 3,692 3,620 3,666 3,549 3,478 3,428
Germany 4,667 4,842 5,022 5,726 5,687 5,526 5,691 5,469 5,506 5,570 5,757 5,876 5,969
Italy 1,667 1,545 1,827 1,692 1,701 1,738 1,579 1,427 1,321 1,142 1,038 978 952
Spain 2,333 2,412 2,562 2,826 2,852 3,032 2,849 2,855 3,029 3,012 2,752 2,898 3,027
Czech
Republic ? 307 413 412 375 458 465 448 443 450 604 638 661
Brazil 1,629 1,804 2,069 1,573 1,345 1,671 1,812 1,791 1,827 2,210 2,528 2,622 2,725
Russia 1,108 1,062 1,194 1,065 1,191 1,213 1,257 1,222 1,282 1,388 1,353 1,370 1,410
India 636 762 736 627 815 801 827 892 1,162 1,511 1,642 1,701 1,734
China 1,435 1,456 1,577 1,627 1,830 2,069 2,334 3,251 4,443 5,070 6,540 6,779 6,795
Growth
over prev.
year (%) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 CAGR
UK 4.16% 9.02% 0.59% 2.06% ?0.15% ?8.05% ?7.09% 8.06% 1.39% 0.54% ?2.87% ?1.86% ?1.29%
EU15 4.69% ?4.41% 5.96% 8.11% 1.32% ?0.38% 0.59% ?1.66% ?0.74% 0.22% ?2.19% 0.64% 0.72%
World 1.31% 0.96% 6.00% ?2.34% 5.34% 3.24% ?3.69% 4.57% 2.70% 5.51% 4.82% 2.85% 1.80%
Italy 8.65% ?7.31% 18.3% ?7.37% 0.50% 2.17% ?9.12% ?9.66% ?7.39% ?13.6% ?9.08% ?5.78% ?2.64%
France ?2.35% ?31.2% 7.55% 14.9% 7.65% 5.29% 8.37% 1.75% ?1.95% 1.27% ?3.19% ?1.99% ?1.43%
Germany 7.14% 3.76% 3.72% 14.1% ?0.68% ?2.83% 2.99% ?3.91% 0.68% 1.15% 3.37% 2.06% 1.59%
Spain 9.40% 3.36% 6.21% 10.3% 0.93% 6.33% ?6.03% 0.19% 6.12% ?0.58% ?8.62% 5.29% 4.48%
Czech
Republic ? ? 34.3% ?0.17% ?8.94% 21.8% 1.53% ?3.55% ?1.18% 1.53% 34.4% 5.52% 3.70%
Brazil 3.01% 10.8% 14.7% ?24.0% ?14.5% 24.2% 8.44% ?1.14% 1.98% 20.9% 14.4% 3.73% 3.90%
Russia 3.42% ?4.13% 12.4% ?10.9% 11.9% 1.84% 3.58% ?2.74% 4.84% 8.30% ?2.53% 1.23% 2.93%
India 30.7% 19.8% ?3.42% ?14.7% 29.9% ?1.73% 3.31% 7.78% 30.2% 30.0% 8.66% 3.61% 1.96%
China 7.17% 1.47% 8.36% 3.16% 12.5% 13.0% 12.8% 39.2% 36.7% 14.1% 28.9% 3.67% 0.23%
Source: Euromonitor
Page | 102
Appendix E: Employment in the automotive industry
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
CAGR
Employment in
Automotive
Industry in the
UK
288,430 289,336 293,000 274,000 263,000 246,000 243,000 234,000 221,000 210,000 194,000 ?3.89%
yoy % change
1% 0% ?7% ?1% ?3% ?3% ?3% ?8% ?6% ?7%
Employment in
Manufacturing
in the UK
(‘000s)
4,397 4,410 4,416 4,269 4,143 3,969 3,762 3,533 3,409 3,246 3,137 ?3.32%
Employed in
UK (‘000s)
26,000 26,447 26,714 27,052 27,434 27,692 27,866 28,166 28,411 28,674 28,895 1.06%
Employed in
the
Automotive
Industry as a %
of Employed in
Manufacturing
6.56% 6.56% 6.63% 6.42% 6.35% 6.20% 6.46% 6.62% 6.48% 6.47% 6.18%
Employed in
the
Automotive
Industry as a %
of overall
employment
1.11% 1.09% 1.10% 1.01% 0.96% 0.89% 0.87% 0.83% 0.78% 0.73% 0.67%
Employed in
the
Manufacturing
as a % of
overall
employment
16.91% 16.67% 16.53% 15.78% 15.10% 14.33% 13.50% 12.54% 12.00% 11.32% 10.86%
Source: SMMT, BERR/ONS, Euromonitor
Appendix F: Employment in DM34, selected countries
1997 1998 1999 2000 2001 2002 2003 2004 2005 CAGR
UK 250,653 251,888 224,749 231,265 220,111 221,529 217,282 203,974 192,708 ?3.23%
France 276,382 269,389 273,903 277,256 286,049 283,409 287,750 279,428 275,564 ?0.04%
Germany 835,523 855,570 863,207 874,014 867,601 873,785 866,569 0.61%
Italy 190,941 190,230 181,012 178,816 174,442 170,087 163,738 166,867 166,554 ?1.69%
Spain 150,064 154,844 159,493 165,606 161,881 162,511 164,325 162,713 159,913 0.80%
Czech Republic 62,209 67,227 69,365 84,862 89,953 89,188 95,833 6.37%
Source: Eurostat
Page | 103
Appendix G: Labour costs in DM34, selected countries
Average Personnel
Costs (Million EURO)
in dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 8,236.9 9,310.2 9,390.7 9,639.8 8,967.5 9,420.2 8,584.4 8,924.3 8,870.5
France 9,953.8 10,122.4 10,879.1 11,153.6 11,564.7 12,211.9 12,617.1 13,046.2 13,305.2
Germany 43,675.0 44,851.7 46,260.1 49,651.7 50,712.9 53,775.3 68,327.4
Italy 5,873.4 5,834.1 5,317.1 5,698.3 5,551.9 5,581.9 5,485.1 5,853.6 6,045.8
Spain 4,053.6 4,235.9 4,802.4 5,216.3 5,158.9 5,384.4 5,528.2 5,653.6 5,793.1
Czech Republic 353.7 419.7 476.7 N/A 699.2 867.4 881.8 1,007.8
Average Personnel
Costs per employee
in dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 32,861.8 36,961.7 41,783.1 41,682.9 40,740.8 42,523.6 39,508.1 43,752.1 46,030.8
France 36,014.6 37,575.4 39,718.8 40,228.5 40,429.1 43,089.3 43,847.4 46,689.0 48,283.5
Germany 52,272.6 52,423.2 53,591.0 56,808.8 58,451.9 61,542.9 78,848.2
Italy 30,760.3 30,668.7 29,374.3 31,866.8 31,826.6 32,817.9 33,499.2 35,079.4 36,299.3
Spain 27,012.5 27,355.9 30,110.4 31,498.3 31,868.5 33,132.5 33,641.9 34,745.8 36,226.6
Czech Republic 5,685.7 6,243.0 6,872.3 N/A 8,239.3 9,642.8 9,887.0 10,516.2
Number of
employees in dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 250,653 251,888 224,749 231,265 220,111 221,529 217,282 203,974 192,708
France 276,382 269,389 273,903 277,256 286,049 283,409 287,750 279,428 275,564
Germany 835,523 855,570 863,207 874,014 867,601 873,785 866,569
Italy 190,941 190,230 181,012 178,816 174,442 170,087 163,738 166,867 166,554
Spain 150,064 154,844 159,493 165,606 161,881 162,511 164,325 162,713 159,913
Czech Republic 62,209 67,227 69,365 N/A 84,862 89,953 89,188 95,833
Source: Eurostat
(ctd)
Page | 104
Unit Labour Cost
(annual growth
rate) in dm34
3
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
UK 3.60% 0.60% 2.40% 6.50% 1.00% ?0.70% 1.00% 2.90% 0.20% ?0.80% 0.20% 2.00% 1.00%
France ?1.00% 1.50% ?2.80% ?3.80% ?1.10% ?2.10% 0.60% 1.40% ?2.30% ?0.20% ?0.40%
Germany 3.70% 1.90% ?3.70% 1.00% ?0.10% ?1.70% 0.50% 1.50% ?1.30% ?3.10% ?2.50% ?2.80% ?2.90%
Italy 0.90% 5.70% 2.50% 0.10% 1.90% ?1.30% 3.10% 4.10% 6.00% 2.00% 1.90% 2.40% 2.60%
Spain 0.90% 3.60% 1.40% ?0.70% ?1.40% 1.20% 2.10% 2.90% 2.60% 1.60% 1.90% 0.40%
Czech Republic 3.30% 11.3% 4.60% 15.6% ?7.30% ?3.30% 10.3% 0.60% 5.60% ?5.30% ?5.30% ?5.50%
Source: OECD
Appendix H: National?level productivity, selected countries (GVA/Employees)
Productivity in
DM34 (GVA per
person employed) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
France 51.50 61.00 64.00 63.80 61.10 65.20 62.40 69.00 67.10 N/A
Germany 60.20 56.70 66.40 62.90 71.10 70.30 70.30 N/A
Italy 48.30 42.20 40.00 44.00 40.50 36.30 42.20 42.80 45.00 N/A
Spain 50.00 51.00 50.50 50.10 46.80 48.90 54.00 56.00 54.40 N/A
UK 55.70 54.40 55.10 51.20 59.50 54.30 52.30 63.70 62.10 N/A
Czech Republic N/A N/A N/A N/A 19.10 21.90 23.70 25.10 N/A N/A
Change of
Productivity in
DM34 1997 1998 1999 2000 2001 2002 2003 2004 2005 CAGR
4
France 18% 5% 0% ?4% 7% ?4% 11% ?3% 3.36%
Germany ?6% 17% ?5% 13% ?1% 0% 2.62%
Italy ?13% ?5% 10% ?8% ?10% 16% 1% 5% ?0.88%
Spain 2% ?1% ?1% ?7% 4% 10% 4% ?3% 1.06%
UK ?2% 1% ?7% 16% ?9% ?4% 22%
5
?3% 1.37%
Czech Republic 15% 8% 6% N/A 9.53%
Source: Eurostat
3
The data presented here calculates year on year change in labour costs as overall cost of labour D, divided by the number of
employees in D. D, according to ISIC, Rev 3, is classified as all manufacturing activities.
4
CAGR for Germany was calculated on the basis of 6 growth periods and for the Czech Republic on the basis of 3 growth periods. CAGR
for all other countries was calculated on the basis of 8 growth periods.
5
No obvious explanation for this increase could be identified in the Eurostat data.
Page | 105
Appendix I: Firm?level productivity (vehicles per employee per annum)
Country Manufacturer Plant 2000 2001 2002 Average
UK Nissan Sunderland 101 95 99 98
France Toyota Valenciennes ? ? 88 88
Germany Ford Saarlouis 81 87 87 85
UK Toyota Burnaston 86 87 81 85
Spain Renault Valladolid 77 77 89 81
Belgium GM Antwerp 77 76 83 79
Italy Fiat Melfi 76 82 77 78
Germany GM Eisenach 77 77 80 78
Spain GM Zaragoza 76 75 80 77
Slovenia Renault Novo Mesto 73 69 82 75
France Renault Flins 70 73 76 73
Spain Ford Valencia 77 70 72 73
France Renault Maubeuge 67 70 73 70
UK Honda Swindon 57 67 82 69
France PSA Aulnay 64 59 78 67
France Renault Douai 67 66 65 66
Spain Renault Palencia 71 66 61 66
Spain VW (Seat) Martorell 66 64 58 63
Germany GM Bochum 62 56 69 62
Italy Fiat Termini Imerese 61 63 63 62
Sweden GM (Saab) Trollhattan ? ? 62 62
Poland Fiat Tychy 59 58 66 61
UK PSA Ryton 55 58 63 59
Spain PSA Vigo 56 59 60 58
France PSA Mulhouse 60 47 66 58
Spain VW Pampalona 61 50 56 56
Italy Fiat Cassino ? ? 53 53
Italy Fiat Mirafiori 57 52 49 53
UK GM Ellesmere Port 60 55 41 52
Czech Republic VW (Skoda) Mlada Boleslav, Vrchlabi, Kvasiny 51 55 48 51
UK GM Luton 48 59 47 51
UK MG Rover Longbridge 51 50 ? 51
Belgium Ford (Volvo) Ghent 45 54 52 50
Germany DaimerChrysler Rastatt 55 52 44 50
France PSA Poissy 44 48 56 49
Germany VW Wolfsburg 46 48 42 45
Turkey Renault Bursa 51 39 42 44
Portugal PSA Mangaulde 40 42 45 42
Spain PSA Madrid 40 43 39 41
Sweden Ford (Volvo) Torslanda 40 40 36 39
Netherlands Ford (Volvo) Born 40 36 ? 38
France PSA Sochaux 34 36 43 38
France Renault Sandouville 32 40 41 38
France PSA Rennes 33 38 38 36
Germany GM Russelheim 34 36 35 35
Germany VW Emden 27 32 27 29
Page | 106
(continued)
2001 2002 2003 Average Productivity
Czech Republic 51 55 48 51
Germany 64.86 64.00 69.43 66.10
France 76.56 76.22 80.00 77.59
Italy 58.33 59.67 63.50 60.50
Spain 51.38 53.13 48.14 50.88
UK 35.00 37.63 37.00 36.54
Source: World Markets Research Centre ? European Automotive Productivity Index 2001, 2002, 2003
6
Appendix J: R&D expenditures in UK motor?vehicle, engine and component
manufacturing
in Millions£ 1999 2000 2001 2002 2003 2004 2005 2006
R&D Expenditures 1,200 1,000 1,000 1,000 1,000 900 800 800
% Change ?17% 0% 0% 0% ?10% ?11% 0%
Investment 2,100 2,000 2,100 1,300 1,200 1,400 1,300 1,400
% Change ?5% 5% ?38% ?8% 17% ?7% 8%
Source: SMMT, ONS UK
Appendix K: R&D expenditures in DM34, selected countries
R&D
Expenditures
(Millions US$
PPP) in dm34 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 CAGR
UK 1,275 1,476 1,481 1,440 1,646 1,364 1,439 1,522 1,870 1,390 0.96%
France 2,241 2,139 2,193 2,260 2,685 2,917 3,406 3,543 3,531 5.85%
Germany 5,579 6,225 6,946 7,925 9,385 11,130 10,922 11,476 12,726 13,421 10.25%
Italy 929 968 923 897 936 969 985 834 857 967 0.45%
Spain 240 255 236 255 333 364 467 510 546 640 11.52%
Czech Republic 205 170 231 295 283 327 406 378 371 402 7.77%
(continued)
6
The choice to use data from the world market research centre rather than Harbour was made because the latter only partially
available for the UK plants under consideration.
Page | 107
R&D Expenditures
(Millions US$ PPP)
in Total Economy 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
UK 14,623 14,818 15,317 15,980 17,549 18,183 19,773 21,488 21,822 21,384
France 17,367 18,044 18,613 18,977 20,105 21,127 23,091 24,262 23,945
Germany 26,137 26,968 28,720 30,139 33,502 36,249 37,225 38,550 40,064 41,626
Italy 6,355 6,662 6,658 6,894 7,024 7,717 8,133 8,554 8,272 8,712
Spain 2,418 2,595 2,697 3,343 3,543 4,132 4,347 5,286 5,933 6,418
Czech Republic 826 832 969 1,057 1,042 1,105 1,168 1,265 1,357 1,536
R&D
Expenditures in
DM34 / R&D of
Total Economy 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
UK 8.72% 9.96% 9.67% 9.01% 9.38% 7.50% 7.28% 7.08% 8.57% 6.50%
France 12.90% 11.85% 11.78% 11.91% 13.35% 13.81% 14.75% 14.60% 14.75%
Germany 21.35% 23.08% 24.19% 26.29% 28.01% 30.70% 29.34% 29.77% 31.76% 32.24%
Italy 14.62% 14.53% 13.86% 13.01% 13.33% 12.56% 12.11% 9.75% 10.36% 11.10%
Spain 9.93% 9.83% 8.75% 7.63% 9.40% 8.81% 10.74% 9.65% 9.20% 9.97%
Czech Republic 24.82% 20.43% 23.84% 27.91% 27.16% 29.59% 34.76% 29.88% 27.34% 26.17%
Source: http://www.oecd.com
Appendix L: Investment in DM34 as part of overall investments, selected
countries
Share of
investment
in DM34
relative to
investment
in Total
Economy 1995 1996 1997 1998 1999 2000 2001 2002 2003
UK 2.10% 1.90% 2.50% 1.70% 1.70% 1.50% 1.70% 1.00% 0.90%
France 1.60% 1.50% 1.50% 1.10% 1.10% 1.30% 1.10% 2.40%
Germany 2.00% 2.50% 2.50% 2.40% 2.50% 2.60% 3.10% 3.30%
Italy 1.50% 0.90% 1.00% 1.00% 0.90% 1.00% 0.90% 0.90%
Source: http://www.oecd.com
Page | 108
Appendix M: Graduates' favourite employers, selected countries
UK France Germany Europe
Across
Disciplines Business Grads
Engineering
Grads
Business
Grads
Engineering
Grads
Business
Grads
Engineeri
ng Grads
1
BBC (10,0%)
BNP Paribas,
L'Oréal (11,3%)
EADS
(11,7%)
BMW
(11,4%)
BMW
(18,8%)
L'Oréal
(15,4%)
IBM
(19,3%)
2
Apple (7,1%) LVMH (9,5%)
Thales
(9,3%)
Porsche
(10,0%)
Audi
(17,1%)
Pricewaterho
useCoopers
(13,8%)
Microsoft
(17,5%)
3
NHS, MI5 (6,7%)
Ernst & Young,
Société Générale
(9,0%)
Veolia
Environnem
ent (8,5%)
Pricewaterho
useCoopers
(7,8%)
Porsche
(16,9%)
Coca?Cola
(13,5%)
BMW
Group
(15,1%)
4
Microsoft (5,6%)
Groupe Danone
(8,2%)
PSA
Peugeot
Citroën
(7,8%)
KPMG (7,7%)
Siemens
(13,9%)
Ernst & Young
(13,4%)
Apple
(14,1%)
5
Google (5,5%)
Pricewaterhouse
Coopers (7,7%)
Dassault
Aviation
(7,7%)
Ernst &
Young (7,4%)
Daimler?
Chrysler
(10,3%)
Adidas
(12,1%)
Intel
(12,9%)
6
Pricewaterhouse
Coopers (5,4%)
Air
France (7,2%)
EDF (7,2%)
Deutsche
Lufthansa
(7,3%)
EADS (7,2%) Apple (12,1%)
Sony
(12,9%)
7
Deloitte (4,3%) HSBC (6,5%)
Renault
(6,8%)
Adidas (7,0%)
Lufthansa
Technik
(6,3%)
Nokia (12,0%)
Porsche
(12,7%)
8
GoldmanSachs,
Accenture,
GlaxoSmithKline
(4,2%)
KPMG (6,2%)
Areva
(6,7%)
Audi (6,8%)
Fraunhofer
Gesellschaft
(6,1%)
BMW Group
(11,7%)
Nokia
(12,6%)
9
Groupe
VINCI (6,5%)
Deutsche
Bank (6,0%)
Robert
Bosch (6,1%)
Deloitte
(11,2%)
Siemens
(12,3%)
10
L'Oréal,
Total (5,7%)
DaimlerChrys
ler (5,7%)
Bosch
Rexroth
(5,8%)
Microsoft
(10,9%)
AMD
(11,3%)
Source: ‘Trendemployer 2008: Deutschlands Top?Arbeitgeber zeigen Profil’ by Anja Möbius,
http://www.trendemployer.de/
Page | 109
Appendix N: Comparison of key industry indicators, selected countries
Source: OICA, SMMT, VDA, ANFAVEA, CATARC
United Kingdom:
United Kingdom
Automotive industry* Components
Cars and commercial
vehicles
Number of
employees
Turnover
(£bn)
Investment
s (£bn)
R&D
expendit
ure
(£bn)
Export
(£000)
Import
(£000)
Export
(£000)
Import
(£000)
1991 4,765,627 5,191,714 4,700,191 6,047,559
1992 4,978,627 6,023,141 4,962,825 7,317,306
1993 4,790,001 6,610,600 5,033,905 8,903,525
1994 5,715,388 7,265,815 5,614,618 10,530,725
1995 6,182,963 8,539,089 7,407,387 11,413,742
1996 7,075,211 9,599,024 9,458,599 12,478,010
1997 7,448,447 8,155,356 9,652,635 15,277,055
1998 7,242,325 8,055,745 9,459,336 16,168,824
1999 279 44.1 2.1 1.2 7,082,182 8,929,768 10,150,101 16,970,159
2000 267 42.2 2.0 1.0 8,045,348 8,753,046 9,899,594 16,368,474
2001 253 42.6 2.1 1.0 7,395,687 8,775,267 8,859,697 19,562,370
2002 248 44.7 1.3 1.0 7,637,998 9,894,120 11,537,778 20,904,926
2003 236 46.3 1.2 1.0 7,806,950 10,558,998 12,253,800 21,908,796
2004 224 46.9 1.4 0.9 7,525,835 11,102,177 13,032,996 22,351,498
2005 213 48.2 1.3 0.8 7,428,576 11,413,627 14,131,658 22,643,793
2006 195 49.3 1.4 0.8 7,887,325 12,617,712 13,837,146 23,324,129
2007 NA NA NA NA NA NA NA NA
*Automotive Manufacturing Sector
Page | 110
Germany:
in million Euro
German automotive industry Components
Cars and
commercial vehicles
Employees Turnover Investments R&D Export Import Export Import
1991 802,703 111,891 8,740 5,305 22,005 11,034 36,303 24,316
1992 757,871 117,942 8,130 6,263 22,766 12,145 40,124 22,739
1993 684,787 97,881 5,850 6,210 19,651 9,912 34,445 16,658
1994 641,685 105,373 5,580 6,289 21,627 12,498 40,799 17,853
1995 661,006 114,829 5,920 6,757 22,349 13,221 43,300 20,633
1996 659,015 124,016 7,340 7,248 24,546 14,747 47,666 22,712
1997 672,281 137,064 8,690 8,758 28,342 17,364 55,667 24,564
1998 710,481 159,469 8,120 10,891 31,879 19,616 63,624 26,259
1999 727,529 172,798 8,980 12,382 32,959 20,454 67,450 28,303
2000 746,020 188,733 9,100 13,467 37,473 23,247 77,176 28,706
2001 770,293 202,231 10,780 14,363 39,599 25,200 86,266 30,807
2002 763,522 204,043 11,652 14,790 42,744 26,966 90,882 31,306
2003 773,217 208,612 13,085 16,332 45,221 27,904 93,271 33,486
2004 773,217 227,666 12,206 15,738 49,386 29,747 94,280 34,410
2005 766,076 236,328 9,800 15,752 51,617 32,610 101,542 32,717
2006 750,206 270,506 8,800 16,799 57,394 35,294 110,357 37,391
2007 744,558 290,700 10,100 18,013 61,860 40,005 120,395 38,577
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Brazil:
in million US$
Automotive industry Components
Cars and commercial
vehicles
Number of
employees
Turnover
(€m)
Investments
(US$m)
R&D
expenditure
(€m)
Export
(US$m)
Import
(US$m)
Export
(US$m)
Import
(US$m)
1991
109,428
880
1992
105,664
908
1993
106,738
886
1994
107,134
1,195
1995
104,614
1,694
1996
101,857
2,359
1997
104,941
2,092
1998
83,049
2,335
1999
85,100
1,791
3,969.50 4,034.00 1,961.00 1,819.70
2000
89,134
1,651
4,121.60 4,459.10 2,671.60 1,906.50
2001
84,834
1,750
3,910.70 4,416.50 2,640.10 2,017.00
2002
81,737
976
4,163.00 4,147.30 2,633.40 1,093.50
2003
79,047
673
5,137.30 4,503.90 3,566.50 828
2004
88,783
739
6,431.50 5,824.80 4,950.70 880.4
2005
94,206
1,050
7,855.00 7,070.20 7,076.80 1,350.60
2006
93,243
1,451
9,314.60 7,236.80 7,320.70 2,633.60
2007
104,274
1,965
9,118.00 9,140.30 7,800.30 4,083.50
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PR China:
Chinese Automotive industry Components
Cars and commercial
vehicles
Number of
employees
Turnover in
10,000 RMB
Investment
in 10,000
RMB
R&D
expen
diture
in
RMB
bn
Export
(US$)
Import
(thousand
US$)
Export
(thousand
US$)
Import
(Thousand
US$)
1991 1,703,850 7,268,122 589,294 n.a.
1992 1,848,652 11,788,948 1,027,520 n.a.
1993 1,932,575 18,343,000 1,642,657 n.a. 585,345 1,792,178 148,385 3,615,470
1994 1,968,831 18,534,805 1,987,655 n.a. 830,198 1,296,233 109,448 2,329,027
1995 1,952,542 21,751,374 2,313,418 n.a. 1,291,776 1,436,456 156,459 1,550,515
1996 1,950,627 23,325,455 1,949,043 n.a. 1,466,618 1,737,467 148,324 854,610
1997 1,978,091 25,920,569 2,039,577 4 1,650,587 1,432,393 193,236 706,430
1998 1,962,837 27,574,343 1,961,231 4 1,848,835 1,460,267 158,281 858,747
1999 1,806,815 30,898,409 1,939,887 7 2,322,120 2,230,090 103,709 827,888
2000 1,571,664 35,746,697 1,787,479 7 3,316,562 3,219,973 195,330 1,212,082
2001 1,505,507 43,389,889 1,942,774 6 3,944,376 3,856,980 205,638 1,766,343
2002 1,570,540 60,821,956 2,831,570 9 4,726,877 4,665,361 248,606 3,226,836
2003 1,604,558 82,048,162 4,985,767 11 6,316,876 9,300,155 371,907 5,275,917
2004 1,693,126 93,061,416 6,413,104 13 10,670,480 11,287,580 612,020 5,416,174
2005 1,668,541 102,411,213 7,342,463 17 15,842,354 10,405,831 1,581,582 5,171,010
2006 1,855,096 137,469,137 7,808,921 24 21,071,684 12,458,740 3,134,647 7,561,274
2007 2,040,619 170,655,239 8,679,551 31 28,512,174 14,213,334 7,305,678 11,003,700
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Appendix O: Average wages in DM34, selected countries
Aggregated
wages (Million
EURO) in
dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 7,316.7 8,202.7 8,304.1 8,528.9 7,773.2 8,253.1 7,312.5 7,478.6 7,331.7
France 6,968.0 7,120.8 7,610.0 7,890.8 8,272.3 8,713.1 8,983.7 9,256.1 9,416.5
Germany 34,574.2 35,735.4 36,921.2 38,825.5 39,897.4 41,356.3 42,006.3
Italy 4,312.5 3,945.6 3,649.5 3,915.3 3,823.0 3,866.8 3,790.7 4,059.8 4,170.8
Spain 3,118.5 3,258.9 3,607.9 3,928.9 3,845.8 4,076.7 4,155.4 4,246.1 4,355.8
Czech
Republic 255.7 305.0 343.6 430.2 510.6 631.5 647.9 735.6
Average
Yearly Wage
per employee
in dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 29,190.6 32,564.9 36,948.3 36,879.3 35,314.9 37,255.2 33,654.4 36,664.5 38,045.6
France 25,211.5 26,433.2 27,783.6 28,460.3 28,919.2 30,743.9 31,220.5 33,125.2 34,171.7
Germany 41,380.3 41,767.9 42,772.1 44,422.1 45,985.9 47,330.1 48,474.3
Italy 22,585.5 20,741.2 20,161.6 21,895.7 21,915.6 22,734.2 23,151.0 24,329.6 25,041.7
Spain 20,781.1 21,046.3 22,621.1 23,724.4 23,757.0 25,085.7 25,287.7 26,095.6 27,238.6
Czech
Republic 4,110.3 4,536.9 4,953.5 6,016.8 7,020.3 7,264.4 7,675.9
Number of
employees in
dm34 1997 1998 1999 2000 2001 2002 2003 2004 2005
UK 250,653.0 251,888.0 224,749.0 231,265.0 220,111.0 221,529.0 217,282.0 203,974.0 192,708.0
France 276,382.0 269,389.0 273,903.0 277,256.0 286,049.0 283,409.0 287,750.0 279,428.0 275,564.0
Germany 835,523.0 855,570.0 863,207.0 874,014.0 867,601.0 873,785.0 866,569.0
Italy 190,941.0 190,230.0 181,012.0 178,816.0 174,442.0 170,087.0 163,738.0 166,867.0 166,554.0
Spain 150,064.0 154,844.0 159,493.0 165,606.0 161,881.0 162,511.0 164,325.0 162,713.0 159,913.0
Czech
Republic 62,209.0 67,227.0 69,365.0 84,862.0 89,953.0 89,188.0 95,833.0
Source:
Eurostat
Appendix P: Questionnaire used in survey
Following is the questionnaire used in the online survey/telephone survey.
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ENDOTES
i
The terms of reference of the NAIGT are given at
http://www.berr.gov.uk/whatwedo/sectors/automotive/naigt/tor/page45613.html
The New Automotive Innovation and Growth Team (NAIGT) will be established as a high level stakeholder group
to develop strategies for the future competitiveness of the automotive industry in the UK over the next 15 years.
It will take account of outcomes from the original AIGT, as well as looking at ongoing developments in the
automotive industry nationally and globally. It will aim to identify new measures for industry and/or government
to safeguard and promote continuing high added value investments and improved productivity and
competitiveness in the UK.
The NAIGT’s remit will cover the UK automotive manufacturing sector in its fullest sense, from research and
development, to design engineering, to components, systems, niche and volume vehicle manufacture, including
construction equipment. It will additionally consider the challenges and opportunities presented by development
of transport and other areas affected by Government policies and the impacts positively and negatively which
they can have on the competitiveness of the automotive sector, and identify areas for improved and informed
decision making.
It will include consideration of developments in both the motor sport and automotive retail sectors and seek to
maximise synergies, though it is not intended that the Group’s eventual recommendations should specifically
target those sectors. In addition the Review will consider the scope for technology transfer between the
automotive and other sectors.
The NAIGT will report to the Secretary of State for the Department of Business, Enterprise and Regulatory
Reform.
ii
CEE: Central and Eastern Europe, which includes Czech Republic, Poland, Hungary, Slovakia, Romania. BRIC
countries are Brazil, Russia, India and China.
iii
For an analysis on the demise of MG Rover see: Oliver, N., Holweg, M. and Carver, M. (2008) ‘A systems
perspective on the death of a car company.’ International Journal of Operations and Production Management,
28(6): 562?583
iv
See CPRS (1975), Church (1994), Whisler (1999), and Dunnett (1982).
v
DM34 contains manufacturing of vehicle, trailers and semi?trailers, but also car and engine parts, and
accessories. See the description on the ONS website:
http://www.statistics.gov.uk/methods_quality/sic/structure_sectiondm_dn.asp#sectiondm
Page | 123
Eurostat is using Nace Rev. 1.1 (but will be gradually moving to Nace rev. 2). The data used in this study is still
according to Nace Rev 1.1 (since there is no DM34 in Rev 2). The definition used for DM34 (or just 34) is the
same as the one used by the ONS. Please see:
http://epp.eurostat.ec.europa.eu/portal/page?_pageid=3233,73049386&_dad=portal&_schema=PORTAL.
The OECD use ISIC rev 3 (http://www.ilo.org/public/english/bureau/stat/class/isic.htm). As far as we know these
are almost identical (NACE is industrial classification while ISIC is a statistical measure). To see the corresponding
values please use:
http://ec.europa.eu/eurostat/ramon/relations/index.cfm?TargetUrl=LST_LINK&StrNomRelCode=ISIC%20REV.%2
03%20?%20NACE%20REV.%201&StrLanguageCode=EN.
Here, ‘DM34’ is listed as ‘34’ and has the same definition, while in many cases the data is not listed below the
level of D (which is overall manufacturing, of which DM34 is a part of); when used it in the report it is explicitly
stated so. In other places they do break it down and call it C34 (see for example:
http://www.oecd.org/dataoecd/3/33/40230754.pdf.) All in all, these are the same measures used across the
ONS, EuroSTAT and OECD.
vi
We follow the arguments by Blinder’s (2005; 2007) as a basis for addressing some of the questions presented
earlier. Blinder assumes that all industries are essentially offshorable, and argues that they differ in their level of
offshorability based on the degree of localisation needed for a given service or product. By this method, research
and development activities are the most ‘mobile’, while also all manufacturing activities could potentially be
offshored. As a result, and based on the assumption that offshoring is indeed one of the major threats the
industry is facing, it was chosen to narrowly define the automotive industry in this study as only manufacturing
operations.
vii
The first two import waves were by the Japanese and Korean vehicle manufacturers from the 1970s and 1980s
onwards, respectively.
viii
CKD: compete knock?down, SKD: semi?knock down; both describing various degrees of completeness of the
vehicle kits sent to the respective markets.
ix
The plants closed were MG Rover Longbridge (2005), Peugeot Ryton (2006), GM Luton (2002), Ford Dagenham
(2001), Jaguar Brown’s Lane (2005), Aston Martin Newport Pagnell (2007). The plant openings were Rolls?Royce
Goodwood (2003), Aston Martin Gaydon (2003).
Page | 124
x
The transplant operations of foreign vehicle manufacturers in North America (as of 2006):
Manufacturer Location Start of
Operations
Products Manufactured
(Past and Present)
Volkswagen Puebla, Mexico 1962 Beetle, New Beetle, Golf, Jetta, T2
Volkswagen Westmoreland, PA 1978
(closed 1988)
Rabbit and Jetta (Golf)
Nissan Aguascalientes and
Cuernavaca, Mexico
1966 Nissan Tsuru, Sentra, Tsubame, Pickups, Lucino,
Platina
Renault Scenic, Clio
Honda Marysville, OH 1982 Accord, Acura TL, CL
Nissan (NMMC) Smyrna, TN
1983 Quest, Altima, Maxima, Sentra, Frontier, Xterra
NUMMI
(Toyota/GM joint
venture)
Freemont, CA 1984 Chevrolet Nova, Prizm,
Pontiac Vibe
Toyota: Coralla, Hilux, Tacoma, Voltz
Honda Alliston, Ontario,
Canada
1986 Odyssey, Civic, Acura EL, Acura MDX, Pilot
Mazda (Auto?
Alliance
International,
owned by Ford)
Flat Rocks, MI 1987 Mazda 626 MX?6
Mercury Cougar, Probe
Ford Mustang
Mitsubishi
(formerly
Diamond Star
Motors, a joint
venture with
Chrysler)
Bloomington?Normal, IL 1988 Mitsubishi Eclipse, Galant, Mirage
Plymouth Laser, Chrysler Sebring, Dodge
Avenger, Stratus, Eagle Talon, Eagle Summit
Toyota (TMMK) Georgetown, KY 1988 Camry, Avalon, Solara, Sienna, Pronard
Toyota (TMMC) Cambridge, Ontario,
Canada
1988 Camry, Corolla, Matrix, RX330, Solara
Honda East Liberty, OH 1989 Accord, Civic, Element
Subaru?Isuzu
Automotive Inc.
(joint venture)
Lafayette, IN 1989 Isuzu Rodeo, Axiom
Subaru Legacy, Baja, Outback
Honda Passport
CAMI
(Suzuki/GM joint
venture)
Ingersoll, Ontario,
Canada
1989 Chevrolet (Geo): Metro, Tracker, Equinox
Pontiac Firefly
Suzuki: Swift, Sidekick, Vitara
Avon Lake,
(Ford?Nissan joint
venture)
Avon Lake, OH (prev.
Ford plant)
1993
Lincoln/Mercury Villager
Nissan Quest
BMW Greenville
(Spartanburg), SC
1994 Z3, Z4, X5
BMW Toluca, Mexico 1995 3 series
Honda El Salto, Mexcio 1995 Accord
Mercedes?Benz Vance (Tuscaloosa), AL 1997 M?class
Toyota (TMMI) Princeton, IN 1999 Tundra, Sequoia, Sienna
Honda Lincoln, AL 2001 Odyssey
Nissan Canton, MS 2003 Quest, Titan, Pathfinder, Armada, QX56
Hyundai (HMMA) Montgomery, AL 2005 Sonata
Page | 125
xi
The government?enforced merger of SAIC and NAC effectively merges the IPR acquired from Rover in 2004,
and the production assets for the Rover 75, acquired by NAC in 2005, under the umbrella of a single firm. This
merger supports the vision of the central government of creating a single ‘national champion’ (as opposed to a
joint venture with a foreign firm), that is able to compete internationally.
xii
Source: OICA
xiii
There is no known objective source of data to determine share by value, to our knowledge
xiv
Source: ONS ABI data for 2006, released November 2007
xv
Source: Hemscott summary of UK 2006 annual reports
xvi
Sales and employment for Ford, Vauxhall and Land Rover CV businesses are not separately available
xvii
Each business unit is surveyed separately, so the total number of companies will be less as many have more
than one location.
xviii
Part of SIC Class 29.52 plus Class 51.62.
xix
GDP (Gross Domestic Product) is real and measured in US Dollars. For further information on its definition
please see http://www.euromonitor.com.
xx
SIC34, plus 25.11 and 31.61
xxi
BERR analysis of ONS ABI and ‘Blue book’ data.
xxii
Source www.statistics.gov.uk/inputoutput/ : auto sector defined as SIC34 (excludes tyres and auto electrical
parts)
xxiii
GVA (Gross Value Added) is an estimation of GDP minus taxes on products plus subsidies on products. For
further information on GVA please visit http://www.statistics.gov.uk/CCI/nugget.asp?ID=254.
xxiv
The CAGR of vehicle production in France is negative, but it seems that this is mainly the result of a significant
but isolated drop in production between 1995 and 1996. Afterwards, the French automotive industry exhibits
growth of production.
xxv
Thus, it does not include workshops that produce or assemble vehicles, i.e., it excludes the likes of AC Cars
(UK), Bertone (Italy), Heuliez (France), Karmann (Germany), Magna Steyr (Austria), Matra (France), Pagani (Italy),
Piaggio (Italy), Pininfarina (Italy), Valmet (Netherlands), Westfalia Werke (Germany).
xxvi
In 2007 NAC reopened the MG Rover plant in Longbridge. However, as no significant number of cars has been
produced there yet, this operation has not been included in this analysis.
xxvii
The data in this part is taken from the ONS and Eurostat. Data from the ILO has not been used because of lack
of consistency in data availability across countries and the difficulty to translate some historical data in local
currencies to a comparable base?currency.
xxviii
Note that this is not the entire employment in DM34 as this already considers component manufacture
xxix
The data does not take into account small plants and workshops (usually for niche and luxury vehicles), where
there is a relatively low level of automation, and, hence, lower levels of productivity in terms of vehicles per
employee. More recent data was not available.
xxx
According to a study commissioned by the Ford Motor Company in 2008.
xxxi
The survey was conducted both via an on?line survey (n=9) and a structured phone interview (n=8). It
included three parts: the first gathered information regarding the company’s sourcing the UK and the general
Page | 126
perceptions of the interviewees regarding the competitiveness of the UK automotive industry over time and in
relation to France, Germany, Italy and Spain (as a group). The second part is comprised of four sections (UK,
FGIS, CEE and BRIC). In each section the interviewee was asked to evaluate – using a Likert scale of 1 to 5 – the
impact a factor has on the competitive nature of the country or countries he was answering for, where 1 is a
strong negative impact and 5 – a strong positive one. Interviewees were asked to evaluate fourteen factors:
availability of local suppliers, availability of skilled labour, barriers to exit, environmental regulation,
governmental subsidies, interaction with government, labour cost, labour productivity, logistics & infrastructure,
quality of local suppliers, quality of R&D resources, skill level of workforce, and taxes & tariffs. Interviewees were
also allowed to add two additional factors. In the third and final part interviewees were asked to write down
their suggestions regarding the measures the UK government can adopt to improve the status of the national
automotive industry. Interview and survey invitations were sent to 33 industry leaders in the UK. Positive replies
were received from most and those who replies were also asked to forward the questionnaires to their
colleagues. Among the interviewees were 5 CEOs of UK?based companies or subsidiaries, 3 plant managers, 3
purchasing/sourcing directors, 1 engineering director, 1 director of government affairs, 1 director of sales and
marketing, 1 VP of a global company’s European subsidiary, and 1 executive responsible for R&D.
xxxii
A key problem hereby lies in the reporting, as suppliers can classify themselves according to the materials
used, the main processes involved, or the industry they are supplying. Furthermore, automotive may only be one
of the industries they are supplying. As a result, we consider any statistical data on the component supply as
problematic and have not included it.
xxxiii
One interviewee, however, mentioned that in his operation legacy labour agreements made it extremely
difficult to operate on a competitive level comparable to that of similar operations in Western and Eastern
Europe.
xxxiv
Some, however, noted that this was a major disadvantage of the UK automotive industry, since the
government made less effort than other European countries to retain automotive manufacturing.
xxxv
For example, the interviewee argued that engineers are attracted to cutting edge research but most of the
OEMs in the UK do not conduct R&D in the country.
xxxvi
Several interviewees explicitly mentioned that the government seldom discusses the repercussions of its
policy in education, welfare or environment on the industry with the latter.
xxxvii
One interviewee, for example, went as far as to mention that if the EURO/Pound exchange rate shifts back
adding a relative 20% to the company’s cost?base, it would be forced to leave as soon as possible.
xxxviii
One interviewee, for example, mentioned that over the last couple of years PSA was thinking about closing
some of its underperforming plants it decided to close down Ryton and another plant in France. While the
French government acted in order to stop the closure, the British one did little (in fact, UK offered PSA an RSA
grant for the Peugeot 207, which PSA declined to take up: the interviewee’s comment is not accurate on this
point). Eventually, Ryton was shut down, while the French plant is still operating.
xxxix
The 2008 Manufacturing Strategy that was launched in September 2008 by the Prime Minister needs to be
seen in this context: a public statement by the Government that ‘manufacturing matters’.
xl
This can be a misconception as any increase in the cost of fuel could render this cost advantage obsolete. Thus,
one needs to consider the viability of offshoring and global sourcing setups in relation to the dynamic cost of
transportation.
xli
See for example the reports by the Central Policy Review Staff (1975) ‘The Future of the British Car Industry’,
HMSO, or the report of the 2001 Automotive Innovation and Growth Team. Both are available from HM
Government institutions.
Page | 127
xlii
Source: OICA
xliii
Due to historical circumstances dating back to 2000, when BMW demerged MG Rover, the Hams Hall engine
facility was producing engines entirely for export until the launch of the New Mini II.
xliv
This notion was introduced by Paul Everitt of the SMMT at the NAIGT meetings, and was heavily debated.
xlv
This list was kindly assembled by the BERR Automotive Unit for consideration by the NAIGT.
xlvi
The following subgroup members were present at the meeting:
Robert Baker, Chief Economist, Society of Motor Manufacturers and Traders
Phil Davies, Automotive Analyst, Department for Business Enterprise and Regulatory Reform
Dr Fernando Galindo?Rueda, Economist, Department for Business Enterprise and Regulatory Reform
Dr Chris Herron, Manufacturing and Productivity Advisor, One North East
John Hollis, Head of Government and Industrial Affairs, BMW Group UK
Dr Matthias Holweg, (Chair of the KPI subgroup), Judge Business School, University of Cambridge
Dr Tim Leverton, Group Engineering Director, JC Bamford Excavators Ltd
Rob Oliver, CEO, The Construction Equipment Association
Further views (submitted in writing) have been considered by:
Dr Mike Kitson, Director of the National Competitiveness Network and Co?Director of the Programme
on Regional Innovation, Cambridge?MIT Institute, University of Cambridge
Dr Christos Pitelis, Director of the Centre for International Business and Management, Judge Business
School, University of Cambridge
David Smith, Chief Executive Officer, Jaguar?Land Rover
Jim Sumner, Managing Director, Leyland Trucks
In addition, the BERR Automotive Unit had submitted a ‘straw man’ of potential KPIs, which had been requested
at the first NAIGT meeting. This proposal was also considered.
xlvii
World Business Council for Sustainable Development (WBCSD), ‘Mobility 2030 Report: Overview’, p. 10. 2004.
xlviii
Figures from www.epa.gov?OTAQ/climate/420f05001.htm. Retrieved February 19, 2009.
xlix
Q. Wang, M Delucchi, and D Sperling (1990) ‘Emission Impacts of Electric Vehicles’, Journal of the Air and
Water Management Association, Vol. 40, p.1275?1284. See also Well?to?wheel studies by EUCAR, ECJRC and
CONCAWE.
l
This comparison is based on the Tesla road test in Autocar of February 19 2009.
li
The Stern Review was announced by the Chancellor of the Exchequer in July 2005. The Review set out to
provide a report to the Prime Minister and Chancellor by Autumn 2006 assessing the nature of the economic
challenges of climate change and how they can be met, both in the UK and globally.
lii
See: Dahl, C. and Sterner, T. (1991) ‘Analysing gasoline demand elasticities: a survey’, Energy Economics 3:203?
210; Espey, M. (1998) ‘Gasoline demand revisited: an international meta?analysis of elasticities’, Energy
Economics 20:273?295; Hughes, J., Knittel, C., and Sperling, D. (2008) ‘Evidence of a shift in the short?run price
elasticity of gasoline demand.’ Energy Journal 29:1, p113?134.
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