The UK and the global car industry
Car manufacture is a major global industry. Most MEDCs produce cars and a growing
number of LEDCs (mostly NICs) have become car manufacturers in recent decades. In
addition, more than 100 countries make parts and components. This is a globalised
industry that is in a significant period of change.
The major global car manufacturers
Figure 1 shows the world’s top ten car manufacturers in 2003. All are large transnational
corporations. The American giant General Motors (GM) heads the list with over 8.5 million vehicles
sold. Ford and Daimler Chrysler add to the significant American presence in large-scale motor
manufacture. Japan is represented by Toyota, Nissan and Honda; Germany by Volkswagan and
Daimler; France by PSA/Peugeot Citroen; and South Korea by Hyundai. In terms of overall national
production, Japan replaced the USA as the top car manufacturer between 1980 and 1983. It regained
first place from the USA in 1987 and still holds that position today. Some industry experts expect Toyota
to take over from GM as the world’s largest car producer before the end of the present decade.
Figure 1. The World’s top ten car manufacturers in 2003.
Global vehicle Sales Market cap $bn,
units sold, m
$bn
latest
General Motors
8.59
185.5
23.3
Toyota
6.78
153.1*
136.4
Ford
6.54
164.2
24.8
Volkswagen
5.02
98.4
12.2
DaimlerChrysler
4.36
171.9
41.8
PSA/Peugeot Citroen
3.29
61.2
14.3
Hyundai Automotive
3.05
38.9
9.0
Nissan
2.97
65.8*
47.1
Honda
2.91
77.2*
46.4
Renault
2.39
42.4
22.1
*Year ending March 2004
Source: The Economist, 4th September 2004.
Britain is unrepresented in the top car league, but this was not always the case. In 1972, British Leyland
was the third-biggest car firm in the world. However, it was not long before poor management and
uncooperative unions brought about the demise of British-owned car manufacturing. MG Rover, the last
British-owned car company, collapsed in April 2005.
Although Toyoto is second to GM in terms of vehicles sold, its market capitation (stock market value) is
by far the highest of all the major producers (Figure 1). The relatively strong stock market position of
Japanese producers is because they are more profitable than their American counterparts. In 2003,
Chrysler was losing $496 on every car it sold, compared with Ford’s $48. In contrast, GM made a profit
of $178 per car. However, Japanese profits were far greater – Honda $1,488, Toyota $1,742, and
Nissan $2,402.
The large American manufacturers, particularly GM and Ford, have been going through a very difficult
time recently. According to The Economist, ‘For the past two years the threat of collapse has hung in the
Detroit air as American car firms have wrestled with falling sales, unprecedented competition at home
and soaring retirement and health-care costs for current and former employees’. GM now has 2.5
pensioners for every current employee. Costs associated with retired employees are known as legacy
costs. Figure 2 shows the effect legacy costs have had on profits in recent years. The company has
reacted to increasing competition, and it now employs only 324,000 workers compared to 877,000
twenty years ago, having laid off workers, closed factories and outsourced parts supplies. Under similar
circumstances, Ford closed five American factories between 2002 and 2005. In the cities affected by
plant closures, a negative process of cumulative causation has often ensued as sacked workers have
found it hard to find new jobs.
Figure 2. The effect of legacy costs on profit margins.
Year Profit margin % Profit margin without legacy costs %
1999 9
11
2000 8
10
2001 5
8
2002 7
10
2003 6
11
2004 6
10
2005 4
9
Source: The Economist 23/04/05, Article: Ford and General Motors: How much worse can it get?
However, as Figure 3 shows, the original equipment manufacturers (Ford, Toyota etc.) are only one part
of the automotive-industry value chain. Aftersales account for by far the largest share of annual profits
when looking at the industry as a whole.
Figure 3. Annual profits in the automotive-industry value chain in 2003.
Area
Percentage of pre-tax profits
Aftersales
43
Retailers
5
Suppliers
28
Original equipment manufacturers
24
Total revenue
$210 billion
Source: The Economist 04/09/04.
Car manufacturing is considered to be of strategic importance in many countries. However, with
increasing maturity, it has stagnated in its core bases of the USA, Western Europe and Japan, with
average profit margins down to below five per cent in 2004. This compares to twenty per cent or more in
the 1920s and around ten per cent in the 1960s. Today, the car industry accounts for 0.6 per cent of
stock market capitalisation in the USA and 1.6 per cent in Europe. Two decades ago the corresponding
figures were 4.0 per cent and 3.6 per cent. In MEDCs, the car industry is viewed as a sunset or mature
industry.
Unlike Japan and Europe, the US car industry does not rely significantly on foreign exports. US car
manufacturers focus predominantly on the domestic market and to some degree on the Canadian
market. The ‘Big Three’ US car manufacturers have invested heavily in the Canadian market, which has
resulted in Canada becoming a global leader in automotive engineering.
Figure 4 shows how the geographical location of car production has changed since 1997, while Figure 5
shows the world regional breakdown of production for all motor vehicles.
Figure 4. Passenger vehicle production since 1997 by region.
1997
1998
1999
2000
2001
2002
North America
8,122
8,027
8,256
8,372
7,155
7,346
South America
1,890
1,493
1,345
1,650
1,722
1,671
European Union
13,451 14,522 14,835 14,779 14,939 14,815
Other Europe
2,329
2,410
2,479
2,628
2,435
2,497
Japan
8,494
8,056
8,102
8,359
8,118
8,619
South Korea
2,133
1,625
2,362
2,602
2,471
2,651
Other Asia & Oceania 2,034
1,793
2,086
2,825
2,899
3,413
Total
38,453 37,926 39,465 41,215 39,739 41,012
Figures are in thousands.
Source: OICA.net.
Figure 5. All motor vehicle production since 1997 by region.
1997
1998
1999
2000
2001
2002
North America
16,017 16,009 17,603 17,697 15,626 16,724
South America
2,326
European Union
15,403 16,612 16,913 17,105 17,310 16,948
Other Europe
2,727
Japan
10,817 10,050 9,908 10,140 9,777 10,258
South Korea
2,818
1,954
2,843
3,115
2,947
3,147
Other Asia & Oceania 4,325
3,631
4,192
5,145
5,624
6,674
Total
1,893
2,839
1,651
2,902
2,087
3,085
2,114
2,850
2,000
2,951
54,433 52,988 56,012 58,374 56,248 58,702
Figures are in thousands.
Source: OICA.net.
Globally, the motor vehicle industry is a major resource user requiring:



Nearly half the world’s annual production of rubber.
Twenty-five per cent of global glass production.
Fifteen per cent of annual steel production.
The continuing process of consolidation
The industry has been consolidating since the early part of the twentieth century. In the late 1920s, there
were 270 car companies in the world, with most located in the USA. From these the global giants of GM,
Ford and Chrysler emerged. Consolidation has tended to occur in phases, with the past decade
witnessing significant activity. Today the global car industry is dominated by seven large groups and
three smaller ones. The six groups of GM, Toyota, Ford, Renault/Nissan, Volkswagen and Daimler
Chrysler account for about 70 per cent of global sales. Figure 6 shows the decline in the number of big
independent manufacturers since 1980.
Perhaps the most successful of the recent alliances has been between Renault and Nissan. In 1999,
Renault took a 37 per cent stake in Nissan. The two companies decided to keep their separate identities
to retain brand loyalty. The two companies are now pushing ahead with plans to share car platforms,
aiming to reduce the number across the two companies from 40 in 2,000 to ten in 2010. This will open
the way to common purchasing, which should save more than 500 million euros a year.
Figure 6.
Decline in number of big independent manufacturers
With intense competition, factories have to be large to benefit from the biggest economies of scale.
This means around 250,000 units a year for assembly plants and 1–2 million units for making body
panels.
Globalisation and market orientation
The car industry is a good example of a market-oriented industry. The impetus to manufacture in major
markets is due to a number of factors. Arguably the most important is that tastes or fashions in car size
and design can vary significantly around the world. In a world where fashion can change very quickly
indeed, manufacturers need to produce exactly what customers want if they are to make a profit.
However, new markets for cars are also invariably lower-cost countries (for labour, land and other
important cost factors), which make opening new plants an attractive proposition. In addition, other
factors, such as getting around tariff barriers and reducing transport costs, also have an impact on
location decisions.
The globalisation of the car industry accelerated in the latter half of the 1990s due to:



The construction of major overseas facilities, a process known in the industry as ‘global market
dynamics’ (as explained in the previous paragraph).
The establishment of mergers between major manufacturers. For example, the Chrysler
Daimler-Benz merger was initiated by the European manufacturer in an attempt to strengthen
its position in the US market.
The considerable development of joint ventures between the global giants and smaller
manufacturers in newly industrialised countries.
An increasing number of cars are manufactured by joint ventures in China, India and other NICs.
Governments in NICs see joint ventures as an important means by which their own domestic companies
and their labour force can acquire expertise from major transnational corporations. For the latter, a joint
venture may be the only initial way into an emerging market because the laws of the host country may
not allow 100 per cent foreign ownership.
The product lifecycle
Figure 7 is very useful in understanding the product lifecycle in relation to the changing location of the
car industry. The market has reached maturity in North America, Japan and Western Europe where car
ownership is widespread and near saturation. In these markets, most car sales are to replace older
vehicles that are being sold second-hand or scrapped by their owners. However, in LEDCs, particularly
the NICs where incomes are rising rapidly, the scope for selling to first-time buyers is much greater.
Developing countries can be placed in either the early or growth stages of the model. If the potential
market in a developing country is very large, major manufacturers will be likely to locate there to take
advantage of manufacturing in a growing market for cars and also to benefit from lower wages and other
costs. Brazil, China and India are good examples of this process. China is already the world’s fourthlargest car market (after the USA, Japan and Germany), with sales of 2.3 million in 2004.
Figure 7.
The product lifecycle.
Figure 8 illustrates the stages of development in the Brazilian car industry. Virtually every major car
manufacturer has facilities in Brazil, the largest market in Latin America. The rapid growth of the middle
class in Brazil has resulted in a considerable increase in the demand for new cars, and car workers'
wages are significantly lower than in North America, Europe and Japan.
Figure 8. The Brazilian car industry: stages of development.
1. Foreign transnationals assembling components mainly produced in developed
countries for the Brazilian market.
2. Foreign transnationals assembling components mainly produced in Brazil for the
Brazilian market.
3. Foreign transnationals assembling components mainly produced in Brazil for the
South American market in general.
4. Foreign transnationals exporting parts and some cars to developed countries.
Future
5. Foreign transnationals exporting cars to developed countries in significant volumes.
6. Brazilian car manufacturer(s) compete for the domestic market with foreign
transnationals.
Slovakia: a growth location in the new EU
The car industry is also expanding fast in Eastern Europe, particularly in some countries that joined the
EU in May 2004. Slovakia, with a population of just over five million, has been dubbed ‘the Detroit of
Europe’ by at least one writer. Prior to EU membership, Slovakia already boasted a Volkswagen plant
with an output of 250,000 cars a year. The Bratislava plant is one of the top three Volkswagen factories
in the world, producing the Polo, the Touareg and the SEAT Ibiza. The Touareg is almost totally
produced in Slovakia. In 2004, Volkswagen produced almost a quarter of all Slovakia’s exports.
Although Volkswagen did not receive a subsidy from the Slovak government, the company is benefiting
from a ten-year tax concession. A VW spokesperson has been quoted as saying ‘Volkswagen voted for
Bratislava because of the good infrastructure of this region – highway, railway, airport and river
transport’. Slovakia enjoys a strategic location on the border with Austria.
In late 2004, Slovakia fended off fierce competition from Poland and Hungary to seal a deal with the
Korean company, Hyundai, to build its first European car factory in the country. The factory, which
should open in 2006, will produce up to 200,000 vehicles a year under Hyundai’s Kia brand. The
location of the factory is near Zilina, 200 kilometres northeast of Bratislava. Some of Slovakia’s East
European competitors have criticised the amount of the Slovak subsidy to Kia – 228 million euros. In
addition, the state is paying 1,750 euros for each of the 3,000 workers. The total cost of Kia’s investment
will be $870 million. As with other large car plants, Kia is attracting some of its main suppliers to locate
nearby. With its seven suppliers, the total investment is estimated to be $1.4 billion.
In January 2006, Peugeot will open a large new car plant in Trnava, 50 kilometres from Bratislava.
When it reaches maximum production, this state-of-the-art plant will export 300,000 cars a year to
Western Europe and to other parts of the world. This greenfield investment will cost around 700 million
euros. Apart from low wage costs, a major attraction of this location to Peugeot was the promise of free
land. The new Peugeot factory is attracting many of its suppliers to the same location. In total, it is
estimated that 10,000 new jobs will be created. The Slovak Investment and Trade Development Agency
(SARIO), established in 2001, played an important role in attracting Peugeot Citroen to the country.
SARIO offered a range of potential sites for the new factory.
The far-off sourcing of parts
The large car manufacturers are looking more closely into sourcing parts from countries such as India
and China, which could reduce autoparts bills by 25 per cent. Traditionally most parts have been
supplied from the same or neighbouring countries. Very often, parts suppliers have clustered around
large assembly plants. However, this geographical bond is weakening.
There are some difficulties with sourcing parts from further away, such as the need to enter into longterm relationships with new suppliers, as well as changing factors such as exchange rates and wage
levels. This prospective change in the car industry will not occur overnight, but the potential cost savings
make it likely.
The UK car industry
While the record of British manufacturers in the UK has been a tale of woe, foreign car producers have
been doing well in Britain. As a result of high foreign direct investment, Britain has a wider range of
car manufacturers than anywhere else in Europe. Eight volume brands are made in Britain along with
Rolls-Royce, Bentley and niche producers such as Morgan and Lotus. Figure 9 shows production
figures for major manufacturers in the UK between 1995 and 2004. In 2003, the motor vehicle industry
(vehicles and parts) accounted for just over ten per cent by value of all UK manufacturing, up from 7.8
per cent in 1995. As large employers, the big car companies are of great economic importance in the
regions in which they are located.
Figure 9. Top manufacturers in the UK.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004e
Nissan
215
232
272
289
271
327
296
297
332
325
Toyota
88
117
105
172
179
171
155
212
211
240
Peugeot
78
85
85
71
162
186
186
198
207
180
Honda
91
106
108
112
114
75
112
177
185
199
BMW
0
0
0
0
0
0
42
160
174
183
Land Rover
100
97
107
149
154
160
139
155
148
155
MG Rover
374
376
395
329
226
175
163
147
133
100
Jaguar Daimler
41
39
44
50
86
89
122
123
126
132
General Motors
262
297
284
277
339
290
193
125
124
130
Ford
274
328
302
298
255
155
72
13
0
0
0
0
0
0
0
0
12
23
18
18
Others
Total
1,523 1,667 1,702 1,747 1,786 1,628 1,492 1,630 1,658 1,663
Figures are in thousands.
Source: The Auto Industry website, http://www.autoindustry.co.uk/.
In 2004, Toyota reported its first back-to-back annual profit in the UK for eight years. Toyota’s car plant
is at Burnaston in Derbyshire and it manufactures engines in Deeside, North Wales. Its 2004 profits of
more than £30 million are expected to rise to £50 million in 2005. However, the picture has not always
been as good. Since both factories opened in 1992, Toyota has lost £780 million over the thirteen-year
period.
A recent £50 million investment completed in April 2005 allows the Burnaston plant to produce cars at
the rate of one every 45 seconds, compared with 57 seconds previously. Toyota can now also move
from ‘raw steel to completed car’ in just 19.5 hours. Eighty per cent of production is exported. One factor
that can affect profits is the level of the euro against the pound. If the euro strengthens against the
pound, it makes British-made cars cheaper for people in other countries to buy, leading to an increase in
exports. However, because the two currencies can fluctuate considerably over time, Toyota has reduced
the impact of the pound/euro relationship by cutting the ‘UK content’ of each car from 67 per cent to 47
per cent since 1992. Production at Toyota topped 200,000 in 2004. Toyota claims it is on course to sell
1.2 million cars in Europe by 2010. A quarter of these cars will be made in the UK.
Nissan’s Sunderland factory remains the most efficient in Europe. It is the largest plant in the UK. The
production of two new models in the next couple of years will increase production to 300,000 cars a
year.
Honda is also represented in Britain with its location in Swindon, having more than doubled its
production since 2000. The company is on course to produce 250,000 units a year. All three Japanese
companies use the UK as their main production base for European sales.
Figure 10.
Imported cars at the port of Southampton.
The considerable level of foreign direct investment in car manufacturing in the UK means that Britain
has a wider range of car manufacturers than anywhere else in Europe. As a result, Britain remains one
of the world’s biggest car exporters and is poised to overtake Germany as Europe’s biggest car
exporter.
The collapse of Birmingham car manufacturer MG Rover in April 2005 has had indirect as well as direct
consequences. When the Longbridge car plant collapsed, its 6,100 workers were making 150,000 cars a
year. There is now no British-owned mass manufacturer left in the UK. Previous to this, BMW had
bought Rover from British Aerospace in 1994. However, six years later, after encountering serious
difficulties, it gave the company away to a consortium of businessmen and employees. BMW retained
the successful Mini brand manufactured in Oxford. One significant concern is the long-term effect on the
UK supply base. Once suppliers are forced to close because of a lack of current demand, it is very
difficult to get them back.
Industry experts estimate that by the end of this decade the UK will be making more cars than at any
time since the 1970s, when a record 1.9 million cars a year were produced. This is good for Britain’s
balance of payments because the car industry is currently a net exporter. About 70 per cent of the 1.7
million cars made in the UK are exported. There was concern that being outside the ‘Eurozone’ might
weaken the UK’s position in the global car industry. However, these worries seem to have receded.
Nissan, a major initial critic of Britain’s decision to keep the pound, now says that the issue is no longer
important to its strategic planning.
Although the position with regard to car production is healthy in the UK, the same is not true for car
components, with a significant number of closures over the last decade. It is the most labour-intensive
component manufacturers that have been worst hit. For example, for Nissan’s new Micra, 80 per cent of
the components come from elsewhere in the EU, with only twenty per cent from the UK. For the
previous version of the Micra, 80 per cent of parts came from Britain. The reasons for this trend are:



Increasing competition from lower-cost producers abroad.
The strength of the pound.
Lack of investment in research and development.
Jaguar’s XJ saloon illustrates the complexity of car manufacturing. The components come from a wide
range of companies, many of which are multinationals. Jaguar is unable to say what proportion of the
car is made in Britain, although it pays for 55 per cent of components in pounds, 30 per cent in euros
and fifteen per cent in dollars.
Conclusion
The car industry is a classic example of mass production and mass consumption. It has responded to
the emergence of new markets by major changes in location. In terms of production techniques, the
huge success of Japanese manufacturers has led to other major car companies adopting similar
methods. However, further changes will undoubtedly occur in the future. According to a recent article in
The Economist (2/9/04), these are likely to be:




Fragmentation of the market leading to lower production runs.
Building cars to order rather than for stock.
Innovative modular construction in which more of the car is put together by parts suppliers.
A switch to electric cars with electronic and electrical rather than mechanical controls.