Foreign-owned UK car industry offers economic lesson

Duncan Weldon reports on the revival of the car industry

Pfizer's bid for AstraZeneca has created a political storm around the foreign ownership of British business.

The attempted takeover of the UK drugs company by the US firm has been portrayed by some as a threat to Britain's science base, to jobs and to long-term research and development spending.

Opponents of the deal are quick to point to Kraft Foods 2010 takeover of Cadbury.

In that case, the merger was soon followed, despite previous assurances, by the closure of a large factory with several hundred job losses.

But there is one part of the British economy that shows the potential of foreign ownership in a very different light.

Economic failure

The collapse of MG Rover in 2005 left the British car manufacturing sector dominated by foreign-owned firms.

These firms have turned around an industry once regarded as the classic example of Britain's status as an economic failure.

Car production was hit hard by the global recession. In 2009, UK car production fell below one million for the first time in decades.

Car driving past AstraZeneca site Could lessons from the car industry alleviate fears over AstraZeneca deal?

But since then, production has grown by more than 50% and the Society of Motor Manufacturers and Traders has forecast it will hit a record high of more than two million in 2017.

The British car industry employs nearly 130,000 people and generates more than £10bn a year for the economy.

Its current growth is exactly the sort that policymakers are trying to encourage in the wider economy.

It is creating jobs outside of London and the South East, is investment heavy and is driven by exports, with around four in five cars made in Britain being for overseas markets.

Troubled 70s

Mike Wright, executive director at Indian-owned Jaguar Land Rover, notes three reasons for the industry's revival: a high-quality workforce, the adoption of global manufacturing systems and supportive UK government policy through the Automotive Council.

Back in the 1970s, the car industry was still mainly British-owned. It was characterised by difficult trade unions, under-investment and often weak management.

Many of the cars that rolled off the production line were notorious for being of low quality.

Car factory The UK car industry has been transformed since the 1970s

The industry began to change in the 1980s as Japanese car firms, starting with Nissan at Sunderland, began to produce vehicles in the UK.

Foreign ownership in the car sector has been associated with improved management techniques, a higher level of efficiency and the sharing of global best practice.

Overseas ownership can often also open up new sources of funds for investment.

Lee Hopley, chief economist of the EEF, the manufacturing trade body, said: "Foreign ownership has benefited some parts of manufacturing in terms of bringing in investments and a focus on internationalising the business - so improving its export performance and therefore its overall productivity and efficiency."

Productivity in the car industry has improved markedly since the 1970s.

Woman pushing a broken-down car Cars in the 1970s were often noted for their unreliability

However, foreign ownership may have had an under-appreciated downside for the industry.

Whilst car output figures are heading back to early 1970s' levels, the wider supply chain is much smaller than it was 40 years ago.

According to a 2012 study, about 40% of the components (by value) in a British-made car are sourced domestically.

High import content

By contrast, in Germany and France about 60% of parts come from the domestic supply chain.

The high import content of British-made cars has had a large impact on the sector's trade balance.

In 2012, the UK ran a trade surplus on finished cars for the first time since 1976. The value of British-built cars sold abroad outstripped the value of foreign-built cars bought in.

But taking into account components, the automotive sector as a whole is still a large net importer.

Workers on strike in 1970s

Professor Karel Williams, of Manchester Business School, argues the weakness of the domestic supply chain has been driven by the pattern of foreign ownership.

In some cases, the supply chains of the big UK operating firms are plugged into global logistics chains based in their "home" nations.

So whilst car output and exports may be rising, this sucks in more imported components.

'Components under bonnet'

Prof Williams said: "It's not simply about the number of shiny cars off the line, it's about the amount of British componentry under the bonnet.

"And the problem there is the cars in the 1970s were basically 100% British. And the percentage is now much lower.

"If you correct for the imported content, we will still only be producing something around two-thirds the value of output that we produced in the 1970s, and indeed probably significantly less than we produced in the late 1990s."

Fourteen of the world's largest 15 auto parts firms are based in Germany, Japan, the USA and France - all countries that still have a large domestically owned producer.

Prof Williams argues that the fragmented nature of the British car sector has made it harder for a large auto supplier to develop.

New cars at a Kent compound Sales of new cars have had a good start to 2014

Some people express concern that foreign firms might be quick to "cut and run" in a downturn.

In the UK car sector this has certainly not been the case.

Commitment to UK

The big firms all invested heavily in research and development, physical plant and process throughout the downturn.

They are now reaping the rewards of that investment.

The real lesson of the car industry is not so much that foreign ownership is necessarily a good thing for a sector or company, but that it certainly doesn't have to be seen as a threat.

The real difference is not between foreign and domestic ownership but between firms that are prepared to invest for the long run and those interested in only short-term gain.

In the car sector, the large manufacturers might all be owned overseas, but they have demonstrated a commitment to British industry.

You can see Duncan's film on Newsnight on Thursday 15 May at 22:30 on BBC Two or later via the BBC iPlayer.

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