Volume Manufacturing Sector Will Decline, Premium Sector Could Prosper
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LONDON (May 24, 2001) – Global management consulting firm A.T. Kearney, a division of global services leader EDS (NYSE: EDS), today released the results of a new study that shows the U.K. auto industry will continue to undergo major change. Key findings of the report, which was based on economic modelling 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 the U.K. remaining outside the Euro zone, excess capacity and a shift in the center of market demand eastward in Europe,
- 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 recognise 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 modelling 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 modelled, 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.
About A.T. Kearney
A.T. Kearney (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 (NYSE: EDS) and the London Stock Exchange. Learn more at www.eds.com.
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