|Report on the Economic Prospects for the Automotive Industry in the UK and Europe
and its Impact on Ford of Dagenham.
Professor Garel Rhys
Director, Centre for Automotive Industry Research
Cardiff University Business School
General Principles 3
Size is Beautiful 4
Lean Production 6
Consolidation in the Automotive Industry 6
Emerging Markets – Promise or Delusion? 10
The Economic Dynamics of the Motor Industry 13
Supply Characteristics 16
Subsidy and the Automotive Sector: "Buddy Can You Spare a Dime?" 22
Round-up of the Economics 25
The Industry 26
The Modern Motor Industry: The Challenge of Change 27
Vehicle Branding: Or "Can we exploit the consumer?" 32
Global Economic Patterns 35
New Manufacturing Centres 36
The Competitive Challenge: Who Survives 37
British Car Prices: A Case to Answer 52
The Economic Impact 56
Industry's Impact: The "Averaged" Position 57
The Economic Significance of the Motor Industry: An Overview of the Past 62
The Job and Wealth Impact 63
The Job and Wealth Impact in Detail 64
Ford and Rover Effect 69
Impact of Other Vehicle Manufacture 71
Other Components 72
Value of Motor Industry Impact: Summary 73
An Investment Dynamo 75
(i) Overall 75
(ii) The Automotive Industry and the UK Regions 76
Qualitative Impact (i): The Role of the Workforce 78
Training and Technology 78
Qualitative Impact (ii): Technology, Research and Development 82
Qualitative Impact (iii): Efficiency Improvements 85
Ford in the Scheme of Things: Its Position 92
Why Dagenham? 99
The Impact Effect 101
The Job Input 103
"Average" and "Marginal" Correction 105
Local Content Again 106
Regional Impact 106
Competitiveness of Suppliers 107
Pointers from the Rover Saga 107
Dagenham's Future 108
Report on the Economic Prospects for the Automotive Industry in the UK
and Europe and its Impact on Ford of Dagenham.
The motor industry is becoming increasingly integrated on a global basis leave alone in Europe. In Western Europe in particular the operating environment is the European one even though car companies are located in individual European nation states. Although it is still possible to talk about German, French and Italian motor industries, there is no longer a "British" motor industry, but a motor industry in Britain. Apart from a number of tiny producers and the newly autonomous Rover, the car manufacturing industry in the UK is in the hands of companies whose headquarters are elsewhere in the world. This is also true for commercial vehicles and increasingly for the top thirty producers of components. Hence, the future of car making in the UK is inexorably bound up with the prosperity of companies over which we have no effective control. To attract and maintain investment, employment and production in these circumstances the UK vehicle industry must be efficient and competitive. The investment decisions will be based upon an evaluation of the position in the UK and a comparison with the results of expanding or maintaining activities elsewhere.
This means that the economic prospects of the UK and European automobile manufacturing industries are not only important in themselves but have a bearing on the Ford Motor Company's strategy in Europe, the UK and in particular, Dagenham.
In the modern motor industry the necessary conditions for survival include the best use of resources at any scale of operation (lean production) and equally importantly the size to unlock most if not all economies of scale. In addition a company must also make products the market wants and are willing to pay a profit generating price for. The Japanese in particular are having to learn the latter lesson. However, scale or size is crucial.
Size is Beautiful
The world automotive industry is going through one of its periods of accelerated consolidation. Throughout its history the automotive industry has been characterised by mergers, acquisitions and it must be said liquidations. In other words consolidation and re-structuring has been a regular occurrence where the automotive sector is concerned. However there are occasions when the degree of consolidation reaches new heights of intensity. This was so in the 1930s, 1960s, and now in the years either side of the millennium. The basic cause of this phenomenon is the attempt to achieve most of the available scale economies to produce a cost base such that an enterprise can be profitable in the most competitive and demanding environment. In short 'lean production' is not enough, a survival strategy depends on achieving world class volumes of output for vehicles and components alike. The firms that will survive the hurricane of competition to which the automotive markets will be exposed in the years ahead will be the lean mass producers. This combines maximum economic efficiency at any given scale of operations with the size of scale needed to minimise the unit costs of production.
During the period from 1960 to 1990 a firm capable of making two million cars and light trucks would enjoy most of the available economies of scale. New evidence is beginning to appear that the minimum efficient scale exceeds three million units. This is because the pursuit of true globalisation requires such a range of models with the attendant research and development, marketing and financial resources that systems and technologies capable of saving unit costs beyond three million units have appeared. In such a world the required level of 'bigness' enters a new dimension.
The result is a fresh impetus to comparative growth. The most rapid way of achieving this is through consolidation but at the same time the output leaders can engage in unitary growth to maintain their primacy. Hence the move by General Motors into Eastern Europe, the purchase of Rover by BMW and Volvo by Ford, the "merger" or takeover of Chrysler by Daimler-Benz, the alliance between Renault and Nissan and even the purchase of Bentley by Volkswagen, were all motivated by the need to gain extra market or demand on the one hand and volume on the other.
Companies like Daimler, BMW and Volvo have survived by producing products of sufficient differentiation that premium prices could be successfully imposed. However, as the volume producers continuously improve the nature of their products they gradually invade the territory of the specialist producers. This limits the ability of the latter to charge premium prices. Their only solution is to gain size. In the case of Daimler and BMW they took steps to consolidate their position as global specialists and thereby gain more economies of scale. However, BMW's strategy is largely in ruins following its exit from Rover. In the case of Renault and Nissan the need was to match the size of larger mass producers, whilst like so many firms before them Volvo needed the protection of a larger enterprise. This illustrates that although joint ventures are theoretically useful, in reality they are a 'second best' way of increasing size.
The expansion plans of companies be it via the consolidation of output in fewer hands or the development of new markets are all the result of market forces which have now spread to the global level. These forces are setting prices. That is, more than ever prices are being determined purely by the market. The ability of firms to insulate themselves from this and charge premium prices is fast diminishing. To be profitable in such a world requires a very large scale of operations in a single enterprise.
Lean production simply means economic efficiency: minimum cost of input for maximum value of output. This ensures strict cost control within a company irrespective of the scale of operation. So whereas size takes a firm to the lowest point on a final cost curve, lean production generates the lowest possible cost curve. The successful firm will be the lean mass producer making acceptable products, perhaps on a global scale. However, scale is still crucial.
Consolidation in the Automotive Industry
Consolidation is the pursuit of ever larger scale, and as already indicated, during the twentieth century every thirty years or so the motor industry experienced periods of particularly rapid change and consolidation. The most recent began in the 1990s and still continues. The last two years particularly has seen consolidation amongst car, commercial vehicle and component makers reach manic proportions.
Although there is still room for further mergers and alliances, already the world motor industry is dominated by six companies. The super league consists of General Motors plus its various alliances with other firms; Ford, including Mazda, Jaguar and Volvo, Daimler-Chrysler including Mitsubishi and Hyundai, Volkswagen, Toyota and Renault-Nissan including Samsung. There are other significant manufacturers but they are much smaller than the super league members.
Fiat, Subaru, Suzuki, Isuzu together with Saab are allied to General Motors like planets around a sun, and Daewoo is up for sale. This leaves Peugeot-Citroen, BMW and Honda, together with Lada, Proton of Malaysia and Maruti of India as companies of any size. Of course there is a long list of other firms such as Porsche and various Russian, Indian and Chinese enterprises but currently they are either very small or confined to mainly serving their own domestic markets.
So the consolidation process has gone a long way with the six leading groups selling and making over 85% of the world's cars. So whilst Peugeot, BMW and Honda show a determination to remain independent history is against them. This is not to say that they are on the verge of selling out, but the extra efficiency and resource that truly large scale brings will eventually find them lacking. The difference between the size of firms in the Super League and Division Two is dramatic (Tables 1 and 2).
The consolidation process of the last decade has also affected the truck and bus industry and above all the component making sector. Whilst Western Europe is locked in battle with North America and Japan for survival in the car industry, the heavy bus and truck market is dominated by Daimler-Chrysler, Volvo, VW-Scania and Iveco. Indeed the latter may push the consolidation process further by absorbing MAN of Germany and Navistar of the USA. If Western Europe has a comparative advantage in vehicle making then it is in trucks and buses it is to be found. The growing demand for ways to carry goods and the mass transit of people offers an excellent opportunity for this now highly consolidated industry.
Unlike other periods of consolidation in the automotive sector, this one has seen the emergence of massive mergers between component makers. The drive is: to increase economies of scale in an increasingly competitive market, to be able to meet the vehicle firms' every need for product support and; to follow the vehicle firms into the global markets. It is anticipated that from there being over 5,000 significant component suppliers within a decade most of the business will be in the hands of the top 300 companies operating on a global basis.
The process of consolidation is not conducted for its own sake but represents the need to obtain as many of the available economies of scale as possible. In a world where car prices are increasingly market determined a firm, if it is to be viable, must have the cost structure to allow it to make profits whatever market forces throws at it. So whilst the optimum scale for an assembly plant may be a relatively modest 250,000 cars a year, a state of the art engine plant is optimum at 750,000 units, a press line to stamp out body parts is most efficient at values in excess of one million units whilst marketing, research and development enjoys unit cost reductions at even higher volumes in excess of two million units a year (see below). It is no wonder that even the largest firms still attempt to increase model and part specific volumes through common platform strategies and the like. However this globalisation and consolidation pursues the same objective – the pursuit of ever lower unit costs of production. In short this demonstrates that whilst lean production where costs are minimised at any given scale is a necessary condition for survival it is not sufficient. The latter needs large scale production and of products that people want.
If consolidation is to cut costs by economies of scale then whilst some benefits come from combining processes and volumes others are only obtained when tough action is taken. In short, firms have to rationalise activities via plant closures and redundancies. In addition despite some attempts to minimise the problem the world automotive industry has excess capacity even when demand booms. This must be tackled at some time. If the massive combines are to make sense and unlock their potential then output and capacity rationalisation is needed notwithstanding the political and public relations backlash involved. In a world of giant players operating in markets unprotected by tariffs, quotas and other barriers there will be nowhere for the inefficient to hide.
The process of consolidation will continue as the super league firms are still convinced that further cost savings and market penetration is possible. The Volkswagen Group despite its size is still too dependent on Western Europe and Latin America and needs to become a global player like Ford, GM and Toyota and now Daimler-Chrysler and Renault-Nissan. For its part Toyota might find customer resistance as they are confronted by increasing numbers of Toyota-badged vehicles. So both VW and Toyota may find the need for other partners. GM may wish to add BMW to its portfolio of alliances if it is to contest the onward march of Ford's Premier Automotive Group. Globally, GM and Ford have used the consolidation of the last decade to re-establish their primacy on a world basis. However, this does not mean success everywhere. As indicated below, Ford in particular is in trouble in Europe as well as South America.
Next, changes in the vehicle retail world, not least because of the internet, could lead to an accelerated trend to consolidation and perhaps over national frontiers.
Consolidation in the automotive industry has created companies of gigantic size and reach. The anti-monopoly agencies of the world may well ask where does co-operation and consolidation end and unacceptable market power begin. The European Commission's veto of the Scania-Volvo truck merger was a shot across the bows. So in future whilst economic forces will continue to drive further consolidation the vehicle firms may find it more difficult to put desire into practice. On the other hand there will be new entrants from India, China and Russia. Either way the motor industry will long remain a source of interest and surprise. However, moves into the emerging markets are not without their dangers.