The lemon tart served at Bertorelli Italian restaurant in London’s fashionable Soho district is good, very good. On another occasion it could quite plausibly have stopped everyone in their tracks and stymied thought processes beyond a simple ‘hmm’. But yesterday lunchtime the lemon tart was taking a deserved second place to the musings of a sage who has been around the automotive industry block quite a few times.
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Professor Garel Rhys was addressing the board of London-based PR agency, Automotive PR, along with a few selected guests.
The semi-retired Cardiff Business School man (he told me he’s now stopped lecturing, but still retains an office and keeps his hand in) knows his automotive industry history very well – and he should, he has been right in the thick of some of the well-documented turmoil in Britain. And he knows his commercial vehicles very well, too (there’s genuine sadness over some of the old names that are no more).
A deep knowledge of the industry is also informed by his training as an economist. He understands the fundamentals: that the industry is governed by high investment costs (like tooling, building car factories), he knows what competitive advantage in trade means, about taking waste out of the value chain to remove ‘X-inefficiency’ and the overriding importance of output scale and profit margins. Where is ‘minimum efficient scale’ (or the notional output breakeven point)? Rhys understands why some companies can find that financial sweet spot and others cannot.
Over the years, governments, industrialists, companies, trade bodies and bankers have sought his opinions. He’s seen the mistakes made in Britain at times, but is also able to see the broader, global context and quickly home in on the key points in language that anyone can understand.
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By GlobalDataHow’s Britain doing?
So, what about the state of Britain’s auto industry? It’s a favourite subject and one that Rhys is frequently quizzed about.
Rhys is acutely aware of the strategic errors and mistakes that litter the UK’s industrial past. It’s a sorry story and has the best of us shaking our heads near to despair at times. And he has great sympathy for those who ultimately fell victim to a self-defeating combination of militant shop stewards, inept managements and standoffish or at times downright antagonistic governmental attitude.
But in spite of that, he’s surprisingly upbeat about Britain’s position in the automotive industry today.
In Rhys’ analysis of the situation there are cultural differences at work, but it’s not all bad news for Britain by any means. If Jaguar was German, German ownership would almost certainly be retained, he says. But that’s a cultural thing and to do with broader issues of macroeconomic management and the underlying German approach – different to how things work in Britain where the workings of markets are all. In Germany, there’s often a ready consensus that a ‘German solution’ is in everyone’s best interests; foreign companies can find themselves frozen out in some situations.
In Britain, the auto industry has seen much more industrial conflict and that’s helped to create the current situation – the consolidation/demise of the British-owned volume makers (BMC, BL, Rover Group and lastly, MG Rover).
Tata is huge in commercial vehicles, Rhys points out. It’s now getting more into cars – not just potentially with JLR, but also with the Nano (to add to Indica) – and could be the ideal partner for JLR. Tata will be on a learning curve, of course, but Rhys is hopeful that it could turn out to be a good partner for JLR.
And Britain’s auto industry looks altogether better when you consider its value.
Rhys points out that the 17,000-unit combined annual output of Aston Martin (7,000- units) and Bentley (10,000-units) is a money-spinner that amounts to more revenue than the equivalent of a plant making 250,000 superminis.
The importance of ‘anchorage’
Was PSA’s decision to close its Ryton (Coventry) car assembly plant a blow for Britain? Yes, but Rhys points out that Ryton had very little of what he terms ‘anchorage’. By that he means that PSA wasn’t tied in to Ryton; there was nothing that it uniquely relied on Ryton for. The UK-content in the vehicles made there was low and exports were high.
By that simple analysis, Ellesmere Port (GM’s assembly plant near Liverpool – under threat but reprieved with the next Astra) is next on the list, he says.
But the Japanese manufacturers in Britain need their UK plants, he maintains. Whatever they may say, they’re effectively ‘anchored’ here, with alternatives limited or not viable in terms of cost and timescale. Local content (UK) is high and their manufacturing investments in Britain are at the centre of their European strategies.
The UK industry had its biggest year ever in export value terms just a few years ago, according to Rhys. The unit numbers may not have been a record, but the UK content in what is being exported is now much higher. Rhys also points to the engineering companies based in Britain – international firms like GKN and Stadco – to reinforce the underlying strength of the industry.
“The UK has an industry that makes everything,” says Rhys. “There are volume car makers, luxury cars, commercial vehicles, component firms of every size and there are also motorsport firms, engineering firms and so on.”
“We are like Germany in the sense that we do both volume and luxury.”
Let’s hold that thought.
The automotive world
Is relatively high-cost Western Europe inevitably doomed to lose out to low-cost producers in Asia and elsewhere? Rhys is quick to point out that countries and companies adapt. Great strides in productivity are being made to overcome divergences in raw labour costs. And there will always be the issue of transportation costs and wanting to stay close to the customer, as well as other factors that may work against wholesale outsourcing of operations. It’s much more complex than is sometimes presented. And as developing economies develop, competition for increasingly scarce resources – whether labour or raw materials – can drive costs up. Look at wage rates in Central Europe; they’re not as low as they were a few years ago and firms looking to outsource close to Europe are heading further east.
Rhys takes us on a whiz-bang-wallop tour around the automotive world.
Look around Europe, he implores. Now that Fiat is fixed there’s no obvious weakling. Quality is not a serious differentiator any longer and consumers are less brand-loyal than ever before. The competitive landscape is unremittingly tough for carmakers based in Europe.
We cross the Atlantic, lemon tarts untouched. Ford and GM? They might want to consider setting up holding companies that look after all the profitable operations outside of North America, he says. And the scale of their task in reinventing themselves at home to reverse the trend to lower share is not to be underestimated. Once share is lost, it tends not to be won back. Further, it is quite conceivable that either could find itself as part of another group in the future, he believes.
Chrysler LLC? The new firm lacks scale and needs the synergies to be gained from a credible partner – it simply can’t get those synergies from a private equity owner, Rhys maintained.
And we’re off to the Pacific-Rim. The Japanese? The smaller Japanese makers have been found wanting, he says, and are very much in the shadow of Toyota. In Japan, Toyota – including Daihatsu and now Lexus – has a 41% share of the car market, according to Rhys. It’s a very powerful position and anyone who seriously challenges the sheer market power of Toyota faces dangers. He cites the example of Honda when its Fit made it to the top spot as the biggest selling model in Japan a few years ago, ousting the Corolla. The message to Toyota’s sales force went out: go for Honda’s jugular. Next year, Honda’s share of the car market fell back and the lesson was there for all to see: ‘Don’t step on the rattlesnake’s tail.’
What does Mr Rhys make of China’s auto industry? He compares it to the US’s one hundred years ago and expects numerous low-volume manufacturers to disappear over the next few years. And there will be restructuring among some of the bigger firms too, to enable the better exploitation of economies of scale in an increasingly competitive market. Rhys acknowledges that there is considerable uncertainty on how the shakeout will go, but doesn’t subscribe to the view that foreign JVs are inevitably going to be forced out soon. He sees a mix of domestic and JVs going forward, China’s manufacturers not wanting to eject the foreign partner while they can still learn and also make cars that are in demand in China.
Low-cost cars
This brings us on to the subject of low-cost cars. Rhys neatly cuts to the quick by posing a central question: what exactly is a low-cost car? Is it a car based on existing platforms/technology that has been stripped down and decontented as far as possible (Renault/Dacia Logan)? Is it an ‘obsolete’ car with a low price point because its costs were amortised a long time ago and its low price appeals (Lada)? Or is it something like the Tata Nano, specifically engineered and developed for purpose from a blank piece of paper?
With respect to Tata’s Nano, Rhys points out that the amortisation period on the investment for such a vehicle will be very long and speculates that it is very unlikely that such a project would exist without an understanding at governmental level that any downward movement on import tariffs on built-up cars will be minimal for the foreseeable future.
Will a version of Nano go on sale in Europe? Rhys is sceptical: “To add anti-lock braking and airbags doubles the price. Double it again if the car has to meet stringent European safety tests.”
Rhys believes that low-cost cars may also face stiff competition from the used car market. To take the example of Tata’s Nano, he notes that in Britain the same money buys a 1998 top-of-the-range Ford Mondeo or a seven-year-old Ford Focus. What would you rather have, he asks?
Rhys turns his attention to the Renault/Dacia Logan and is clearly impressed with Renault’s strategy. “That’s not a bad product at all. How did they get the cost down? Of course, there was a development programme based on using existing technology and systems and stripping down as far as possible.
“But there was more to it than that. Machine tools for the project were procured very, very cheaply – second- or third-hand. And they cut their cloth accordingly for the project. It was really quite clever.”
Coffee is poured and our timeslot for the function room is being severely pushed. The irrepressible warbler from Wales has to stop talking. He’s most reluctant to do so. ‘Let me just add this…’.
He finally relents and we’ve had more than our money’s worth. Deep knowledge of this industry and an unwavering enthusiasm for the subject (I first heard him speak more than twenty years ago and the enthusiasm is undimmed) isn’t a bad combination at all.
The lemon tart was worth the wait, too.
Dave Leggett
