Even before September 11, events in the UK automotive sector looked bad. First, BMW walked away from its Rover subsidiary. That was followed by Ford's decision to end car production at Dagenham next year. Then Vauxhall chipped in with a similar proposal for its Luton factory. These contractions were in part shaped by the damage done to exports by the strength of sterling, as all but one of the country's main car producers - Peugeot - dropped into deficit.

Despite this unpromising scenario, though, the mood at the Welsh Development Agency's automotive conference in Newport in November - organised to promote investment in the principality - had a surprisingly upbeat perspective on the longer term prospects for the UK motor industry and its role in Europe and the rest of the world. Well over 300 people from the sharp end of the sector signed on. Most of them were still in their seats at the end of a very long day after hearing that, in spite of recent setbacks and an uncertain short term outlook, the industry is moving inexorably towards record levels of output.

"You are the Praetorian Guard,... you are going over the top. Some of you will come back with VCs"
"You are the Praetorian Guard," Professor Garel Rhys, the conference chairman, told delegates. "You are going over the top. Some of you will come back with VCs. Unfortunately, some of them will have to be awarded posthumously." It did not matter that the ebullient economics guru from Cardiff Business School was prepared to mix his military references. The Praetorian Guard - mainly from suppliers to the vehicle industry - knew full well the challenges facing their companies.

They continue to include exchange rates and euro membership. Dr Bryan Jackson, a member of the board of Toyota Motor Manufacturing (UK), spoke for most in the country's vehicle and supplier industry - though not perhaps for the public at large - when he said: "From a long term perspective, we should be in the euro. Its currently almost impossible to invest in the UK and expect to make a profit if you're an exporter." The facts bear him out. No one ever accused Toyota of a sloppy approach to manufacturing, yet its industrial presence in the UK is deep in the red because the group exports 80 per cent of all it makes. It is the same for Nissan and Honda, and it is probably similar for older established firms like Jaguar and Land Rover, whose finances are hidden from public scrutiny inside Ford Motor Company accounts.

There was also an underlying concern at the conference about the quality of job applicants emerging from the country's education system. Dr Manfred Mueller, managing director of the Robert Bosch subsidiary in the UK, appealed for more emphasis on education from central government when he said: "It cannot be left to companies alone to train people." Dr Mueller added: "It costs us £50,000 to £60,000 to train a person for the first three or four years. These diamonds are then poached by other companies. We need to have a larger pool of apprentices." Graham Broome, chief executive of the SMMT Industry Forum, agreed. "We need far more artisan apprentices. People are the most important asset. They are also the most expensive. The challenge is to attract good youngsters into the industry - and to retain them in competition with other sectors." Broome added: "Do we know which buttons to press to get young people to enter this exciting industry? No we don't. The average attention span of a 15-year-old is five minutes."

Kevin Howe, chief executive of MG RoverKevin Howe, chief executive of MG Rover, highlighted the problem of relying on the services sector for national economic growth at the expense of industry. "The whole signal is that manufacturing is a bad place to be and that services are the future," he reflected.

However, having a glamorous brand name helps to attract the right people, as Dr Nick Barter, Jaguar's director of development, acknowledged. "Jaguar began an apprenticeship scheme two years ago. We have no trouble recruiting," he said.

"In fact, we have twice as many people in product development as we did four years ago." The fact that car output in the UK is well into a second year of contraction is another worry, as Bosch's Dr Mueller noted: "The break-even level among suppliers is fairly high, so there is a problem if there is a reduction in car output of 10 per cent." Significantly, car output in the first 10 months of this year was down 11 per cent. However, Prof Rhys's longer term view was notably more optimistic. "This industry is not going the way of the gas lamp," he insisted.

Annual output in the UK peaked at 1.9 million in 1972. It then fell back sharply as British Leyland contracted and multinationals moved production to other parts of Europe, but annual volumes had returned to nearly 1.8 million by 1999 thanks mainly to inward investments by Japanese producers. Now that production record of three decades ago will soon be broken. With the expansion plans already announced by producers in the UK, Prof Rhys is confident output will pass the 2 million mark over the next few years. Nissan is lifting capacity at its Sunderland factory to half a million cars a year. Toyota and Nissan are heading towards a quarter of a million at their respective factories at Burnaston and Swindon.

Neither is this just a Japanese-led trend. BMW will soon be making at least 125,000 Minis a year at Oxford, and Ford's Jaguar and Land Rover subsidiaries will be capable of making half a million units between them - double the level of even last year. Peugeot, too, continues to push up car assembly at Coventry, working round the clock in the process.

The transformation in engine production will be even more dramatic, according to statistics prepared by the Cardiff Business School. Annual engine output in the UK by 2003 will be close to 4.4 million - double the 1990 number - thanks in large measure to projects by Ford at Dagenham, by Jaguar at Bridgend, by Toyota at Deeside and by BMW at Hams Hall.

The impact on suppliers can only be positive. But while the potential looks good over the longer term, supplier concerns are focused on the more immediate future. Post-September 11, the business outlook in western Europe is characterised by decreasing demand and production volumes, lower GDP levels and increasing consumer uncertainty, according to Chris Rhodes, general manager and vice president of Johnson Controls. These are offset by low oil prices, a rapid recovery in financial markets and decreasing interest rates. "Most of us were running around in short pants when interest rates were this low," he said.

Expert Analysis

The PwC European Supplier Report
The PwC European Supplier Report provides the most comprehensive and detailed overview of the European automotive supply base available

UK Automotive Industry Guide
Industry report includes; Market Overview, Competitive Landscape, Leading Companies, Market Value, Market Sectors, Market Forecast


But Prof Rhys warned of real trouble lurking in the component sector. In parallel with the consolidation in the vehicle industry, component makers have gone through a similar period of mergers and acquisitions. The effect is to create a super-league of Tier 1 suppliers. This, though, is where the corporate disasters of this decade are waiting to happen, according to Prof Rhys. "By the laws of big numbers, there are problems waiting to emerge," he said. "BL was one undigested merger after another - and what became of that?"Already, he pointed out, Federal Mogul is in Chapter 11 (the US definition of administration).

Toyota's Dr Jackson also hinted at what could be a shaky future for some suppliers in Europe. "Most of our suppliers (in Europe) are good, but we have a tail of under-performers," he said. "The doors are closing for inefficient suppliers."

The Newport conference, then, amounted to a health check on the state of the country's motor industry. The notes at the foot of the bed might indicate considerable discomfort at the moment, but the patient is comforted by the doctor's assurances that a full return to health can be expected over time. •

Car production in the UK
COMPANY          1997           2002
                 OUTPUT CAPACITY
MG Rover         392,000        200,000
Ford group*      439,000        570,000
GM               285,000        200,000
Peugeot           85,000        180,000
Nissan           272,000        350,000
Toyota           105,000        250,000
Honda            108,000        250,000
BMW Mini            -           125,000
Others            12,000         15,000
Total          1,689,000      2,140,000

*Includes Jaguar and Land Rover
Engine production in the UK
(petrol and diesel)

COMPANY           1990         2003
                  OUTPUT FORECAST
Ford/Jaguar       650,000      1,950,000
Land Rover        200,000        250,000
MG Rover          290,000        200,000
GM                120,000        120,000
Nissan            280,000        450,000
Honda              80,000        250,000
Toyota            120,000        400,000
Perkins           300,000        300,000
Cummins            30,000         30,000
BMW                  -           400,000
Others             45,000         55,000
Total           2,115,000      4,405,000

Source: Centre for Automotive Research, Cardiff
Business School, and Toyota