UK Auto Industry Is Reshaped by Euro Policy,
New Study Finds
Volume Manufacturing Sector Will Decline, Premium Sector Could Prosper
LONDON, May 24 Global management consulting firm A.T.
Kearney, a division of global services leader EDS , today released
the results of a new study that shows the United Kingdom auto industry will
continue to undergo major change. Key findings of the report, which was based
on economic modeling and interviews with leading industry experts, include:
-- manufacturing of high sales-volume models in the U.K. 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;
-- premium car manufacturers, such as Jaguar, Land Rover and BMW, may
take up some of the slack, benefiting from different economics,
growing demand and broader markets;
-- 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;
-- remaining U.K. suppliers must focus on the premium sector and achieve
the quality and technology levels that are a prerequisite of serving
those customers.
High Volume Manufacturing Will Continue to Decline
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
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."
Premium Manufacturers Face a Brighter Future
Different economics and global markets reduce the exposure of premium
manufacturers to the Euro issue. 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. 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 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.
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."
Suppliers Have Gone and Will Not Return
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. 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, 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."
Remaining UK Suppliers Must Raise Their Game
Remaining U.K. suppliers must adapt their operations to suit the emerging
shape of the U.K. and European industry. An increased focus on higher
technology and quality levels will allow them to fully leverage the growth of
premium manufacturers in the U.K. To maintain a significant presence in
volume, manufacturers will require suppliers to have manufacturing facilities
located closer to the major high volume production centers in the Euro zone
and in Central and Eastern Europe.
The report also points out the U.K. is well positioned to grow its role as
provider of specialist technical knowledge to the world's auto manufacturers.
U.K. auto suppliers have the advantage of being able to leverage a highly
developed, world class, automotive engineering consultancy sector, represented
by companies such as Ricardo plc. Companies in this sector serve
manufacturers as third-party product engineers and are in a position to
exploit the trend toward niche products and become the design and build
partners for global volume producers. The U.K. motor sport sector is another
area of U.K. leadership. It is the most influential in the world for motor
sport racing development and management and 75 percent of its revenue comes
from outside the U.K.
The Research
The report is based on a combination of interviews with industry leaders
and economic modeling of different business and exchange rate scenarios. The
research was supported by Rob Golding, former leading auto industry analyst at
SBC Warburg, and now an independent commentator.
Only the Sterling/Euro exchange rate was modeled, as this is the only
factor that a U.K. Government realistically can influence through decisions on
membership or management of the economy. Key results from the economic model
were:
-- A volume manufacturer in the U.K. would see profitability change by
six percentage points as a result of a 20 percent movement in the
Sterling/Euro rate. This would plunge any such manufacturer into
significant losses. Japanese transplants are less exposed due to
continued sourcing from Japan in Yen of some major systems.
-- In response, a volume manufacturer can increase the proportion of
purchases in Euro, instead of Sterling. Doubling the Euro content
from 30 percent to 60 percent dramatically improves profitability from
less than three percent to around nine percent.
-- For a premium manufacturer, profitability fluctuates by only four
percentage points for a 20 percent Euro exchange rate movement,
assuming the same sales distribution as a volume player. However,
this is from a higher base level of profitability, and with higher
sales outside of the Euro zone, e.g. to the U.S., the influence of
Sterling/Euro rates becomes negligible.
A copy of the report is available at http://www.atkearney.com .
About A.T. Kearney
A.T. Kearney ( http://www.atkearney.com ) is one of the world's largest and
fastest-growing management consulting firms. With a global presence that
includes offices in 59 cities throughout 34 countries, spanning major and
emerging markets, A.T. Kearney provides strategic, operational, organizational
and technology consulting and executive search services to the world's leading
companies. A.T. Kearney is the high-value management consulting subsidiary of
global services leader EDS.
About EDS
EDS, the leading global services company, provides strategy,
implementation and hosting for clients managing the business and technology
complexities of the digital economy. EDS brings together the world's best
technologies to address critical client business imperatives. It helps
clients eliminate boundaries, collaborate in new ways, establish their
customers' trust and continuously seek improvement. EDS, with its management
consulting subsidiary, A.T. Kearney, serves the world's leading companies and
governments in 55 countries. EDS reported revenues of $19.2 billion in 2000.
The company's stock is traded on the New York Stock Exchange and
the London Stock Exchange. Learn more at http://www.eds.com.
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