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 October 2000 Contents Page Introduction....................................................................................................................... 1 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 Capacity ............................................................................................................................ 20 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 Trucks .............................................................................................................................. 39 Conclusion ........................................................................................................................ 40 Summary........................................................................................................................... 49 Assessment ....................................................................................................................... 52 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 Products............................................................................................................. 87 i Contents (continued) Page Ford .............................................................................................................................. 91 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 Conclusion ......................................................................................................... 109 ii Report on the Economic Prospects for the Automotive Industry in the UK and Europe and its Impact on Ford of Dagenham. Introduction 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 1 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. 2 General Principles 3 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