UK automotive: down but not out

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UK automotive: down but not out

These are challenging times for the automotive sector. Britain is a very significant player in automotive, even if almost all the industry is under foreign ownership. Production is falling but there are still reasons to be cheerful, writes Victor Hill.

Capacity reductions – but new horizons

Despite the prospect of plant closures, there is still all in play for in the UK automotive industry at the dawn of the new era of electrification and self-driving vehicles (about which I shall be writing in the September edition of the MI magazine). Here is a brief tour d’horizon of what’s been happening in the UK automotive sector this year.

Honda (TYO:7267) has said that it will close its giant site in Swindon in 2021. This plant produced 160,000 cars in 2018. The company made a point of not blaming Brexit for the closure of the plant which first opened in 1985. Demand for the Civic, which is the principal model manufactured in Swindon has been feeble across Europe of late. Furthermore, the conclusion of a trade deal between the EU and Japan in January has eroded the advantage of the UK as an offshore manufacturing platform.

Vauxhall, owned by French car giant Peugeot SA (EPA:UG) is also facing the end of the product life cycle for the Astra model which is currently manufactured at its Ellesmere Port plant. 77,000 of these cars were manufactured there in 2018. PSA boss Carlos Tavares has indicated that unless a satisfactory trade deal is arranged between the UK and the EU then production at Ellesmere Port will most likely cease in 2022. In that case it would probably move to Germany.

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Vauxhall’s other UK plant is at Luton where it manufactures the popular Vivaro van of which 62,000 rolled off the line last year. Vans have a longer product life-cycle than cars (roughly 10-12 years – longer in the case of classics like the Ford Transit) and a decision on Luton’s fate is not likely to be made until the middle of the next decade. The good news is that PSA recently decided to build Peugeot and Citroen branded cars there.

Last February Nissan (TYO:7201) announced that it will not build its new model, the X-Trail (a diesel-powered SUV) at its Sunderland plant, as originally planned. Instead, the X-Trail will be manufactured in Japan. Many commentators blamed Brexit for Nissan’s decision. But given the EU-Japan trade deal, Nissan does not need to produce its vehicles within the EU to avoid the EU’s external tariffs any more. There is now no benefit for Nissan to manufacture the same vehicle (which is already in production in Japan) at two different sites, entailing duplication of machinery and personnel. Moreover, the X-Trail will be largely pitched at the US and Chinese markets. Geographically, Japan is better situated to export to the world’s two largest car markets. The company stated that “Brexit does not help” but even if Brexit were not happening the decision would have been the same.

Nissan also announced the end of production of its high-end Infiniti brand in Sunderland – but that was down to disappointing sales in Europe. Sales at Nissan’s UK business fell by £93 million last year to £6.3 billion and Nissan’s car production fell by 6.2 percent to 487,000 units.

Nissan’s plant in Sunderland, where it manufactures the Qashqai (450,000 last year) and the Juke, is considered by industry experts to be one of the most efficient in Europe. The second version of the electric-powered Nissan Leaf is due to start there soon. Recent investment in an on-site lithium battery plant would make relocation of the Leaf’s manufacture complicated. Therefore, Nissan’s 6,500 employees in Sunderland are thought to be secure for now.

Questions still surround the reported £61 million “sweetener” promised by HMG to Nissan in 2016. Supposedly, that was contingent on Nissan continuing production of the Qashqai in Sunderland – and not on manufacturing the X-Trail there. Nissan’s future strategy is complicated by its strategic partnership and cross-shareholding with the French car giant, Renault.

Renault (EPA:RNO) has owned 43.4 percent of Nissan since the carmakers formed an alliance in 1999. But Nissan’s stake in Renault currently carries no voting rights on strategic decisions. That is probably why the Japanese company is thought likely to split from their French partners. Charges brought in Japan against Carlos Ghosn, former CEO of both companies, are considered by many to be driven by this strategic rift. (Monsieur Ghosn is now out of jail but may not leave Japan pending his trial.)


When Emmanuel Macron was French Economy Minister in December 2015, the French government increased its stake in Renault to 19.7 percent and introduced laws that strengthened the voting rights of long-term investors in the company. So the French government has controlled more than 30 percent of the voting rights in Renault, making its voice the loudest. In June Renault announced that it would block Nissan’s governance shake-up – something that Nissan described as “most regrettable”.

In January this year Toyota (TYO:7203) began production of its Corolla range at its Burnaston (Derbyshire) plant. That means production will almost certainly continue until the middle of the next decade. The 2,600-strong workforce at Burnaston was further encouraged when Toyota announced a tie-up with Suzuki (TYO:7269) by terms of which the Japanese small car manufacturer will be able to use spare capacity at Burnaston. Toyota also has an engine plant at Deeside, Wales where 600 workers built 350,000 engines last year. Most of that plant’s future production is likely to be hybrid engines for the Corolla.

Ford (NYSE:F) has not built a car in the UK since 2002 when its Dagenham car plant closed; and it has not built a commercial vehicle here since 2013. But the veteran US giant is still active in the UK. Earlier this year Ford announced the closure of its engine factory in Bridgend, Wales, which has been operational for 40 years – but engine production at Dagenham is likely to continue. Dagenham’s 1,800 Ford workers produced nearly 750,000 engines last year, many of which went to Ford’s Turkish plant where the Transit van is manufactured.

Ford also has an engineering and design facility at Dunton, Essex with 3,000 staff. Ford is likely to base its new commercial vehicle unit at Dunton. The giant also has a transmission plant in Halewood, Merseyside (a joint venture with Magna(private, formerly Getrag)) which employs about 300 people. Ford currently employs 13,000 at its Bridgend and Dagenham engine plants in the UK.

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In late June the company announced a restructuring of its European business further to its $1 billion loss on its European operations last year. 12,000 jobs are to go across Europe, with factories closing in France and Russia.

Jaguar Land Rover(JLR, owned by India’s Tata Motors (BOM:500570)) announced 4,800 job losses in early January, mostly in the UK where it employs about 40,000 people. This followed the announcement of a £354 million half-year loss. Production of the Land Rover Defender is being relocated to Nitra, Slovakia with the help of a €130 million subsidy from Brussels. This plant has the capacity to produce 150,000 cars a year. The company also has plants in China and Brazil.

But the company is still the UK’s number one car producer. JLR’s Halewood plant produces the Evoque and Delivery Sport models; Range Rover, Velar and F-Pace models are built at the company’s Solihull plant. Its main engine plant is in Wolverhampton. Moreover, JLR has confirmed that it will build a range of electric cars at Castle Bromwich further to a £1 billion investment in an electric drive unit (EDU – electric motor) plant rather than buying them in.

JLR has secured a loan facility of £625 million – underwritten by the British government – to finance expansion of the Castle Bromwich plant which employs 2,000 workers who are currently mostly building poorly-selling Jaguar saloons. The Midlands plant will manufacture electric versions of the Jaguar XE saloon and a large SUV provisionally named the J-Pace. JLR is in talks with BMW to develop new EDUs.

JLR CEO Ralf Speth has always said that JLR’s models will remain “British engineered brands” as they all trade on their distinctively British heritage.

In early July BMW (ETR:BMW) unveiled its new all-electric Mini at Cowley (Oxford) where the iconic model has been manufactured for 60 years. Production will start later this year and the model is expected to retail at £24,400. The production line will be integrated with that of the conventional Mini. 210,000 Minis were manufactured last year. About 10 percent of all Minis manufactured next year will be electric. On the other hand, BMW plans to stop building engines for the Jaguar X3 (which is assembled in Pretoria, South Africa) at its Hams Hill plant near Birmingham. This is because of the so-called EU “rules of origin” whereby products must contain a certain level of EU-manufactured components in order to be imported into the EU without tariffs.

BMW also owns perhaps the UK’s most iconic car brand – Rolls Royce. These majestic cars are produced at the firm’s Goodwood (West Sussex) plant. Its 2,000-strong workforce manufactures just 4,000 cars a year. BMW has described relocation of the plant outside the UK as “unthinkable”.

Volkswagen (ETR:VOW) owns the other heritage luxury British motor brand – Bentley, which has its factory in Crewe. It bought the brand from Vickers in 1999. The price of these sleek beasts starts at around £130,000 (and, customised, can reach much more) and the brand produced about 10,000 of these luxury cars last year. Bentley has stated that all its models will have a plug-in hybrid option by 2023 and fully-electric vehicles by 2025.

Other luxury British bands include Aston Martin (LON:AML) in Gaydon (Warwickshire) and the racing car specialist McLaren in Woking (Surrey). Aston Martin’s share price has bombed since its flotation last October. The company makes highly desirable cars but unfortunately loses money.

Under pressure

Car production in the UK plunged by 20 percent in the first six months of 2019 with 666,521 vehicles produced – down from 834,573 in the first half of 2018. The number of new cars registered in the UK fell for the fifth consecutive month in in July, down 4.1 percent on July last year with 157,000 new cars sold. Yet British car buyers purchased almost three times as many electric cars as they did one year ago. Just over 14,000 battery electric cars were sold (up over 70 percent) while electric hybrid sales plunged by almost one third to 16,687.


More than 80 percent of British cars are exported. About 1.7 million cars were manufactured in the UK last year with an estimated 60 percent of their components coming from abroad, making the industry’s supply chains uniquely vulnerable to a no-deal Brexit. This year it is expected that 1.4 million cars will be built in the UK – with lower estimates at 1.1 million if the no-deal Brexit results in production stoppages. The fear of that outcome is one reason why investment in the UK automotive sector sunk to near zero in the first half of 2019. The total of £23 million invested was described as “pitiful” by the Society of Motor Manufacturers and Traders (SMMT) which compiled the data.

Some analysts suggest that for every one job that goes on the production line another five jobs are lost in the supply chain. That probably does not reflect the effects of robotisation; but it is of note that Michelin warned at the end of last year that almost 900 jobs would go at its Dundee plant.

The impact of a no-deal Brexit

At the luxury end, sales are not likely to be impacted materially by a no-deal or “disorderly” Brexit. If Rolls Royces and Bentleys face a 10 percent import levy, that will not make too much difference to well-healed European buyers – and most of their exports go further afield anyway, for example to the Gulf states.

Cowley, where the Mini is made by BMW, has a sister plant in Born in the Netherlands. It is quite possible that BMW might manufacture Minis for the European market there while continuing to manufacture Minis at the Cowley plant for the UK market and for the rest of the world. As well as Cowley, BMW has a plant in Swindon which produces parts – mainly for the Mini, but also components used in its German factories. In the event of a no-deal Brexit, this plant would come under threat.

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A no-deal Brexit will be hugely unwelcome in the UK automotive sector, especially given its globalist ownership. But all the major manufacturers are effectively committed to the UK for years to come by virtue of long-term contracts and investments.

The UK will remain an automotive hub. Prospective tariffs imposed on British-built cars heading towards the EU are much less than the depreciation of the pound since the Brexit referendum of June 2016. The UK has the huge advantage of a dynamic labour market, plentiful engineering skills and liberal access to investment capital. We are constantly being reminded by the mainstream media about how abysmal our productivity is as compared to our European neighbours, but our cars plants rank amongst the most productive in the world.

That said, the longer the Brexit nightmare is perpetuated the more likely that future critical investment decisions will be postponed. I cannot think of anything more likely to spook the automotive giants than a so-called National Government under Ken Clarke stroke Harriet Harman stroke Uncle Tom Cobley. My sensible German friends appear to understand this very well.

***

I was gratified that my piece on carbon capture in these pages last week attracted wide interest. Readers who care about these matters will know that the issue burst into the tabloids when a distinctly miffed Sir Elton John declaimed on Twitter about the emissions from Their Royal Wokenesses Harry, Meghan and Baby Archie’s trip by private jet to Antibes. He declared those emissions had been “entirely offset” by a £185 donation to some carbon offsets cheme based who-knows-where.

Today, barefoot celebrity billionaires often climb into private jets on route to solemn congresses where they lecture ordinary people on how they must stay at home, go vegan and go to the lavatory less often. And then they jet back to their multi-bathroomed homes and pay a charity in Bangladesh to plant more bamboo with their platinum cards.

If you were ever sceptical about the carbon offset caper, please do read Rupert Darwall’s article on The Spectator website. Rupert explains brilliantly why carbon offset. by airlines and others is entirely fraudulent.

Enjoy!

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