U.K.'s Euro Policy To Impact Auto Industry, New Study Finds.(Brief Article)

The United Kingdom auto industry will continue to undergo major change and will continue to decline in the long term, as a result of excess capacity, a shift in the center of market demand eastward in Europe and the U.K. remaining outside the Euro zone, according to the conclusion of a new study.

A.T. Kearney, a division of global services leader EDS, author of the study, said U.K. suppliers will continue their flight to the Euro zone and low cost economies such as Poland and Hungary, as a way of meeting manufacturers' demands for lower costs and Euro pricing. The remaining UK suppliers must focus on the premium sector and achieve the quality and technology levels that are a prerequisite of serving those customers, the study states.

By remaining outside the Euro zone, the U.K. has become an unattractive location to assemble high sales volume cars that are sold predominantly in the Euro zone. Manufacturers can only protect their profitability from exchange rate fluctuations by sourcing the majority of the purchased parts from Euro zone suppliers. As a result, high-volume plants will increasingly become "screwdriver" operations with low local added value and will remain in the U.K. only because of the historical investment in facilities and people, the study found.

The U.K. will not see any new high-volume assembly plants and will see a long-term decline as plants are closed or their roles changed, according to the study. "We have passed the point of no return in terms of volume manufacturing," said Phil Dunne, a principal with the Automotive Practice of A.T. Kearney who led the research team. "Although the remaining manufacturers will not shut down operations tomorrow, every new major investment will trigger a review of the overall attractiveness of U.K. operations. Governments must recognize that they are in constant competition with governments elsewhere in Europe to retain and grow their share of the volume manufacturing business."

Different economics and global markets reduce the exposure of premium manufacturers to the Euro issue, the study concludes. With the sector showing growth and the U.K. geographically positioned between Europe and the major center of demand in the U.S., the future is brighter, according to the study. This is best demonstrated by the decision of Ford to transform the former Escort plant at Halewood to a Jaguar plant for the new X-Type, the study said.

The U.K. can expect to see further manufacturing investment by Jaguar and Land Rover, but also potentially from BMW as it seeks to improve the economics of its Mini plant at Cowley, according to the study.

But risks remain, says Steve Young, vice president of A.T. Kearney's Automotive Practice. "The success of the BMW Z3 sports car and Mercedes ML sport utility -- both produced in the U.S. -- shows that consumers generally are not sensitive to where a car is produced, even at the premium end of the market. Premium manufacturers therefore also have choices on production location and will be courted heavily by countries outside the U.K. There must be a compelling business case for why future models are produced in the U.K. and not elsewhere in Europe or in the U.S."

The switch in sourcing from the U.K. to Euro or low-cost economies reduces U.K.-sourced volume, making supplier operations in the U.K. uneconomic and resulting in the continued erosion of the supplier base, the study said. Even if the new U.K. government made an immediate decision to enter the Euro, the pressures still would be immense.

"The component sector will dwindle," according to Sir Ian Gibson, who led the successful launch and growth of the Nissan plant in Sunderland, U.K. and who now acts as head of the U.K. Government Motor Industry Task Force. "I can see the bleak situation of being back in 1982. The Government must get hold of the Euro issue," Gibson said in the A.T. Kearney report. "The investment decision is not reversible," added Christopher MacGowan, chief executive of the Society of Motor Manufacturers and Traders. "Those jobs are gone."

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