Manufacturing Sector Will Decline, Premium Sector Could Prosper

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

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

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Profile Of The UK Motor Industry