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 Teami (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 BRICii 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 CO2 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 ...................................................................................................