EEF blog

This week the focus for Sector Friday is motor vehicles. The sector is made up of manufacturers of motor vehicles for transporting passengers or freight, this includes passenger cars, buses, street sweepers, vans and makes up 69% of the sector.  The manufacture of various parts and accessories, e.g. engines, brakes, gearboxes, catalytic convertors, and the manufacture of trailers and semi-trailers and caravans is also included and is the remaining 31% of the sector.

About the sector  

• The sector employs 129,000 people across 2,703 firms.
• It’s estimated that every job in UK vehicle assembly supports 7.5 elsewhere in the economy.
• Nearly £30bn worth of output was exported in 2011, accounting for nearly 12% of total manufacturing exports.
• R&D spend grew by 23% in the sector between 2010 and 2011 and the accounted for a third of the increase in overall R&D spend in manufacturing.
• The sector accounts for 5% of total manufacturing output.

Production

In 2012, the UK produced 1.58m vehicles (cars and commercial vehicles), up 7.7% on 2011, as well as 2.5m engines (-0.3% on 2011). In comparison, vehicle production in 1998 stood at 1.98m. The UK accounted for 1.8% of worldwide vehicle volume in 2011; in 1998 this was 3.7%.

Production levels placed the UK at 14th (out of 40 International Organization of Motor Vehicle Manufacturers country members) for total vehicle volumes, 13th for car production and 21st for commercial vehicle production in 2011.

There are:

7 volume manufacturers,

8 commercial vehicle manufacturers,

11 bus and coach manufacturers,

10+ niche and specialist manufacturers,

2000+ suppliers, and

8 F1 teams in the UK.

A lot of the industry is centred around the West Midlands and NE but there are also significant production facilities in the NW and SE.

Foreign ownership

Foreign ownership has long been a feature of automotive companies based in the UK – in 1952 Ford and GM had a share of nearly a third of the British market. The volume car manufacturers producing in the UK are all foreign-owned, but have chosen to produce in the UK because of high productivity levels, a skilled workforce and availability of high quality suppliers.  2012 saw numerous and considerable investment announcements from these OEMs, despite a weak and uncertain European outlook, further boosting the UK automotive industry as a whole and providing opportunities and confidence for supply chains.

Export focused

83% of UK produced cars, 57% of CVs and 62% of engines, are exported.  The largest 5 export destinations by value in 2011 were the US, Germany, China, Belgium, France. The exposure of the sector to markets outside of Europe are holding it in good stead, around 45% of UK exports are to EU countries, compared with 70-90% for Italy, France and Spain. Growth in exports of motor vehicles has been strong, and non-EU exports have risen by nearly 90% in the ten years to 2012 and exports of cars have increased from 65%-80%+ in the same period.

Future of the sector

Vehicle production in the UK is estimated to increase by 9% p.a. to 2.2m in 2016 and PwC estimate that supplier opportunity in UK market set to increase to £21.5bn in 2016 from £11bn in 2012.

Emerging economies, especially China, India and Mexico, will provide the main growth area for manufacturers, with limited growth in Europe. Overcapacity in the European market remains as a risk, but hopefully the mix of export destinations will continue to serve the UK sector well.

OEMs will be looking towards the needs and wants of these emerging economies as they will be providing demand, and will produce and adapt models to suit. The move to low carbon vehicles is also a big area, the UK government has committed over £450 million towards putting the UK at the forefront of the development, demonstration, manufacture and use of ultra-low carbon vehicles. Producers must also adapt to regulatory pressures such as lowering emissions and reducing engine noise.

The UK economy has stuttered along since the end of 2010.

2011q1 growth was weaker than many expected, including the OBR and the Bank of England, at 0.5%. Taking into account the 2010q4 contraction, the economy has been flat for six months.

Prospects for the second quarter look moderate, with modest growth set to continue.

Consumer spending weakness in the UK in 2011 so far, received a boost in April from the bank holidays and warm weather. This impact however is likely to be temporary. UK households are continuing to feel the squeeze on their disposable incomes from the VAT rise in January and strong food price inflation.

Investment intentions continue to be clouded by uncertainties. Demand uncertainties have been further complicated by volatile and (until very recently) increasing commodity prices - for many firms this makes sitting on cash the smart option right now.

While 2011q1 overall showed an improvement in the UK trade position relative to 2010q4, this appeared to have weakened at the end with ONS stats showing the deficit widening in March compared with February.

This was driven by a contraction in goods exports to countries outside the EU, with falls notably heavy in intermediate and capital goods exports. Some analysts fear that recent softness in commodity prices might indicate weaker activity in emerging markets.

This is particularly important for manufacturers as emerging markets are where they have seen strength in the recovery.

But on the flipside, more traditional UK markets in Europe, notably France and Germany, are powering ahead, with the Germans in particular showing strengthening domestic demand (and in impressive 1.5% q/q growth figure for 2011q1).

However, there are reasons to think the recovery in trade will revert to type in 2011q2. EU countries, with the possible exception of Germany, are unlikely to be able to sustain strong domestic demand recorded in q1.

And strength still remains in emerging markets. China beat expectations for retail sales growth in 2011q1 and with inflation also beating forecasts, pressure continues to build for an appreciation of the renminbi – a benefit to UK exporters.

For Asia more generally, BBVA (for example), sees continued strong growth in 2011, albeit moderated by high oil prices and supply disruption from Japan’s earthquake and tsunami.

In fact this supply disruption made it to the UK too, with UK outlets of Japanese-owned carmakers having some production restrictions.

This was perhaps part of the picture in April’s manufacturing PMI, which declined to a seventh month low, following January’s peak (though still very much in expansion territory).

How serious the Japanese impacts are remains to be seen, with some tentative indications that it may not be as serious as initially thought. What impacts we do see may be confined to the automotive sector in 2011q2.

The orders reading for the PMI underlined the contrast in strength between domestic and export markets. While this was already the case previously the difference, export market strength v domestic market weakness is becoming much more stark.

Export orders continue to be strong, particularly from emerging markets but also the U.S. and EU. But the domestic market appears to be weak and getting weaker.

Manufacturing powered through another strong quarter in 2011q1 and as my colleague Jeegar has noted is responsible for a larger share of the UK’s recovery than its share of the overall economy i.e. manufacturing punches above its weight.

We’ll be having a further think over the next few weeks about conditions for 2011q2 and coming to a view as to whether export strength will continue to deliver positive results for manufacturing and the wider economy.

Keep an eye out for our views early next month in the next edition of EEF’s Manufacturing Outlook.

GM announced yesterday that it would offer a “lifetime guarantee” on all of its Opel and Vauxhall cars in Europe (the offer extends up to 100,000 miles – which for my Dad wouldn’t be a lifetime – but perhaps that’s best kept for another blog) . This is part of a trend in the car industry to offer ever more generous guarantees or add-ons rather than compete on price.

Non-price competition is nothing new, but it’s likely that we will see more of it. Coming out of recession and with consumer demand still weak, companies will be looking to ways to distinguish themselves from competitors. However, with margins being squeezed by exchange rate fluctuations; supply chain weaknesses; and high commodity prices, companies will not want to have to compete on price.

It’s an interesting question as to whether these add-ons are a good idea in the long-term. Yes, a lifetime guarantee will help establish trust with consumers and provides a unique marketing opportunity, but there are potentially significant long-term costs. In addition this could lead to some kind of non-price arms race: the industry norm for a guarantee used to be three years, with five, and even seven year guarantees having been offered of late. Then again, if these kind of offers can spur on ailing consumer demand, perhaps they’re just what the doctor ordered.

We’ve been saying quite a lot about the risk of policy errors at this point in the economic cycle recently.  There is still a wide range of views on whether the UK is or isn’t yet out of recession. But there does appear to be more agreement on a long and bumpy road to recovery and the need to ensure that stimulus measures remain in place until the economy can stand on its own two feet. 

So first up is the car scrappage scheme – announced in the Budget and came into effect in Mid-May.  At the current rate the cash should run out in the next month or so.  Over the summer new car registrations have picked up and manufacturing output in motor vehicles and other sectors supplying to car manufacturers has also turned a corner.  But can this trend continue in the rest of the year and into next without incentives provided jointly by government and industry. 

EEF and other manufacturing bodies reckon not.  So we’ve written to the Chancellor calling for the scheme to be extended until February next year.  Our argument – as outlined in the letter goes like this;

‘Although the current climate has stabilised, output levels are still below pre-recession levels. Wary about the prospect of a sustained recovery and ongoing concerns about access to credit and cashflow means investment intentions remain low.  Consequently any relapse in auto industry output, coupled with the expected deterioration of the UK aerospace and defence industry in 2010, could pull manufacturing and the economy back into recession in the New Year’  

Rumours suggest that we might have won this argument.

This is the questioned being asked in the UK and the EU about the Magna deal for Opel.

Lord Mandelson has been asking some difficult questions about the competitiveness and costs of Magna's plans for Opel. But now the EU competition chief Nellie Kroes has warned EU countries against bailouts and subsidies that:

"We cannot accept one government bribing companies in order to steal or end the jobs of another"

The problem stems from details of Magna's plan for job cuts. While German factories take the hit in absolute terms, the cuts hit the more efficient plants in Belgium, Spain and the UK relatively harder.

As the Economist puts it:

"Not even the German government’s two nominees to the Opel trust board, set up to run the company until it is sold, could bring themselves to support the plan. One of them, Manfred Wennemer, declared: 'We don’t have a solution that will eventually turn Opel into a competitive company.'"

The deal might be good short-term politics in the run up to the German general election, but the consensus view appears to be that over the long run it is bad business and bad economics.

The EU competition commission will consider the case against the deal. Don't be surprised if Magna gets cut out of the picture in favour of a restructured GM in the US.  

By way of Russia, Canada and Germany, the two Vauxhall plants in Luton and Ellesmere Port have new owners: Magna International and Sberbank.

With the German elections at the end of the month, the decision to sell GM Europe/Opel was always a potent mix of politics and business.

The deal leaves the Luton plant - a joint venture with Renault - still vulnerable to job losses or cuts when the current model production ends 2013. 

For the now, the jobs are apparently safe as Magna consider the 'economics' of the two UK plants.

But Vauxhall and its workers - and the UK auto industry as a whole - would sleep better if government decided to set out and implement a long-term strategy to grow a sustainably competitive low-carbon vehicles industry in this country.

It couldn't do much better than simply adopting the 20 year vision by the New Automotive Innovation and Growth Team. Some of their short-term ideas have already been adopted. Companies making long-term investment decisions would probably like to see the entire blueprint become government policy as well. 

After some negative headlines following the launch of the Car Scrappage Scheme earlier in the week, there is some good news for the UK automotive sector today as Rolls-Royce Motor Cars have announced plans to create 150 new manufacturing jobs at its factory in Goodwood.  This will raise the total workforce to 900.