Signs of growth in UK automotive industry offset plant closures

Whilst the first quarter of 2002 saw the closure of Ford's Dagenham plant and Vauxhall's Luton plant, with the loss of 3,000 jobs, there appear to be signs of growth in the UK automotive sector, including significant recent investment by Peugeot, BMW, Nissan and Honda. Flexible working continues to be the focus of collective bargaining.

This feature highlights the main restructuring and industrial relations developments in the UK automotive sector over the last 12 months.

Closure of Dagenham and Luton plants

The first quarter of 2002 saw production of vehicles end at both Ford's Dagenham plant (UK0005174F), where 1,100 assembly jobs were lost, and Vauxhall's plant at Luton (UK0012104F) where 1,900 assembly jobs were lost. These plant closures form the latest phase of Ford's and General Motors' restructuring plans within Europe. In the case of Ford, this has seen the closure or cut-back of five plants and a 20% reduction in capacity.

The closures were achieved without compulsory redundancies, with 1,000 jobs at Vauxhall being transferred to IBC Vehicles, whilst at Dagenham up to 400 assembly workers have been redeployed to Ford's 'centre of excellence' for diesel engine production. The remaining employees took enhanced voluntary redundancy or early retirement packages.

Dagenham will now concentrate on diesel engine production, with Ford planning to invest up to USD 500 million in production facilities with the aim of employing up to 5,000 by 2004 and with production set to rise from 650,000 to 900,000 engines per year. These projected production figures, combined with the expansion plans announced for the Bridgend petrol engine plant, will mean that around 2 million engines, or one quarter of Ford's yearly engine requirements, will be produced in the UK.

New investment announced and new models enter production

Contrary to expectations, the UK automotive sector has proved to be more resilient than predicted at the end of 2000 (UK0012104F). Retail sales remain healthy and UK car production shows signs of growth with the introduction of new models such as BMW's Mini and Jaguar's Halewood-built X-Type, and additional investment made by Land Rover, Nissan, Honda, MG Rover and PSA Peugeot Citroën in their new generation of models.

Early May 2002 saw the announcement by PSA Peugeot Citroën that it is to create 700 jobs at its Ryton plant in Coventry. The move will result in Ryton working almost continuously, seven days a week, in an effort to raise production by 40,000 units to 230,000 vehicles with the introduction of the 206 SW estate model. Ryton currently works two shifts from Monday to Thursday, with a third shift working Friday to Sunday. Unions welcomed the announcement and discussions on the timing of the fourth shift will now take place. The number of jobs at the plant will increase by 23% to about 3,700.

BMW has announced further investments to be made at its facilities throughout the UK. The successful launch of the new Mini means that BMW is to create 700 new jobs and invest another GBP 50 million at Cowley in Oxford. The outgoing BMW chair, Joachim Milberg, is likely to confirm that production of the Mini will increase by a quarter to at least 125,000 vehicles in 2002. Around 15,000 vehicles will further boost production, once Toyota begins to supply diesel engines as part of an alliance with BMW. Since the start of production at the Cowley plant, the number of jobs has increased from 2,400 to 4,500. A further 300 jobs are to be created at BMW's pressing facility in Swindon and 150 jobs in powertrain production at its plants in the Midlands.

Both Nissan and Honda, which continue to struggle with profitability in the UK, have invested in new facilities and launched new models. Nissan has invested USD 305 million in developing the new Primera model for production in Sunderland, whilst Honda has opened its second plant at Swindon to build CR-Vs for the North American and European markets. In 2001, Toyota announced that it is to take on a further 300 employees at Burnaston with the transfer of the Japanese-built three-door Corolla to the plant in an attempt to utilise its capacity more effectively. Production at Burnaston will rise to around 240,000 vehicles per year.

A structural shift is occurring in the composition of UK vehicle production. Between 1992 and 1999 the proportion of UK vehicle production accounted for by 'niche' and 'premium' car production increased from 4.9% to 13.2% and is forecast to increase to 27% by 2004. Whilst Ford has ceased production of Ford-badged vehicles within the UK, its premium brands continue to develop. In 2001, Jaguar sold more than 100,000 vehicles for the first time and the new X-Type, built at Ford's Halewood factory, will raise output further. An investment of GBP 240 million will be made at Ford's South Wales engine plant to supply the new generation of Jaguar V6 engines and it is hoped that this will lead to another 500 jobs. Land Rover's expansion plans continue with the launch of the new Range Rover in the first quarter of 2002 and the introduction of the Freelander into the US market.

MG Rover signs joint venture deal with China Brilliance

At the Geneva Motor Show in March 2002, MG Rover unveiled its futuristic TCV concept vehicle, a pointer towards its medium-car replacement model, and confirmed that an agreement with China Brilliance, the Chinese automotive group, had been signed. The partnership between MG Rover and Brilliance will cover the design, development and manufacture of the long-awaited medium-sized car as well as a new family of small cars, the introduction of a joint purchasing strategy, and a joint research and development centre. Welcoming the deal, Tony Woodley of the Transport and General Workers' Union (TGWU) said: 'Whilst no one should underestimate the challenges facing the car industry, this tremendous news is the last piece in the jigsaw for MG Rover who have confounded the critics by surviving and thriving.'

MG Rover's hopes of breaking even in 2002 are being made more difficult by the strength of sterling, according to its chief executive, Kevin Howe. The 2001 shareholder's statement recorded that MG Rover began its first full year of independence with net cash of GBP 329 million, including GBP 200 million drawn down from BMW's legacy. It is estimated that MG Rover will record a loss of around GBP 200 million for the last year - a huge improvement on the GBP 500 million recorded in the last year of BMW's ownership - when the shareholders' statement is published in June. Breakeven is expected towards the end of 2002 and Mr Howe insists that net cash has increased further without using more BMW funds, despite MG Rover's expenditure of GBP 130 million on new models.

Supply chain cost-cutting initiatives

Pressure on the UK's component industry continues to increase. March 2002 saw the formalisation of MG Rover's supply chain cost-cutting initiative, known as 'Drive'. In line with Ford and General Motors in Europe, MG Rover is looking to reduce purchasing and supply chain costs by an estimated 20%. The UK group spends over GBP 1 billion a year with UK suppliers of parts and services. Over a three-year period, 200 engineers have been given the task of reviewing the design and engineering of all components and systems supplied for both current and future models. The company has assured suppliers that the aim is to 'design cost out', not to cut supplier margins - however, pressure on suppliers to cut costs will undoubtedly be increased through the agreement signed with Brilliance.

Future models introduced at Nissan will see a dramatic reduction in the proportion of UK-sourced components, due to Nissan's drive to cut costs by 30%. The new Micra will be introduced with only a 35% UK-sourced content.

Bargaining over productivity and flexibility

Heightened competitive pressure within the UK automotive sector is one of the factors leading to a renewed focus on flexible working arrangements. The plight of Nissan in Sunderland illustrates the pressures of being located outside the euro single currency zone. Recognised as the most productive plant in Europe, Sunderland is judged to be at a 30% cost disadvantage compared with Renault's French facilities. Equally, manufacturers are seeking to align production schedules more accurately with consumer demand. Eight UK manufacturers now operate flexible working time arrangements (BMW, Land Rover, MG Rover, LDV, Nissan, Peugeot, Swindon Pressings and Vauxhall) and the fourth quarter of 2001 saw revised agreements announced by BMW (Oxford), Land Rover and Nissan. All three deals shared the common principle of the exchange of extra hours worked for time off later, thereby aligning employees' hours closer to variations in production demand.

The Land Rover 'operating time flexibility' agreement took effect from 1 November 2001. Under this deal, employees continue to be contracted to work a basic 37-hour week, with actual working time varying according to production schedules. Employees will still be required to work up to 200 hours above or below their basic contractual hours. Additional hours will now be paid for or can be banked. Nissan's 'volume flexibility' agreement will also tailor shift attendances to fit production schedules. Provisions in the deal at BMW (Oxford) build the foundations for shift patterns which will allow for 24-hour, seven-day production, including special weekend arrangements. Peugeot has such levels of flexibility, including the recruitment of temporary staff for holiday cover, that the summer shut-down period is to be abolished (UK0204102N).

Negotiations on amendments to MG Rover's flexible working time arrangements, introduced under BMW's ownership, proved to be controversial. However, in March 2002, 3,000 of the 4,000-strong combined membership of the TGWU and Amicus unions voted overwhelmingly to reject strike action. MG Rover's deal offers a 2.5% pay rise and concessions on flexible working time including the exemption of nightshifts.

Recent pay rises in the industry have included increases at Land Rover and Vauxhall of 4.75% and 3.5% respectively. Jaguar and Ford workers also received 3.5%, while BMW's sites at Oxford and Hams Hall saw an increase of 3%. Elsewhere, employees at Honda voted in favour of representation by Amicus for collective bargaining over pay and conditions (UK0201171F). Aston Martin Lagonda, which is owned by Ford and currently employs 570 staff at four sites throughout the Midlands, has signed a recognition agreement with the TGWU.

Commentary

The UK automotive manufacturers appear to be riding out the current competitive pressures, but the long-term competitiveness of the UK automotive sector remains in question. In the short term, the rapid adoption of flexible working practices has done much to boost the competitive position of manufacturers exporting to the euro zone. Flexibility, however, is a double-edged sword. Whilst the majority of UK factories operate some form of flexible working practices, many of the plants remain either single-model plants or operate single-model assembly lines as opposed to multiple-model lines. The trend within Europe towards the adoption of 'flex plants', as a consequence of increased 'platform-sharing', raises questions about the future and whether further plant consolidations will occur, across Europe as well as the UK.

The use of the 'flex plant' concept is one that BMW, for example, uses effectively through the substitution of production between those models with rising demand and those with falling demand, thereby balancing total production across its plants by being able to switch models quickly between its plants and assembly lines. Ford's Belgian plant at Genk, which saw the announcement of 1,400 job losses in February, is being prepared for the production of four different model lines. When Ford has completed restructuring, it will have three fully flexible manufacturing plants within Europe: Valencia in Spain, Cologne in Germany and Genk. In the long term, these plants may compete, not only for Ford branded products, but also for other models within the Ford-owned brands which share common platforms.

A fully flexible workforce on its own may not guarantee a plant's future viability if it is in competition for new models with plants that can support multiple-model lines simultaneously or make quick and cost-effective model changeovers. Notably, five plants within the UK remain single-model plants: Ryton, BMW (Oxford), Halewood, Ellesmere Port (Vauxhall) and Castle Bromwich (Jaguar). Both Honda and Toyota have demonstrated their capacity to switch production in the face of difficult market conditions. Even with the latest round of plant closures, production capacity within Europe still outweighs demand and further consolidations cannot be ruled out. (Joy Batchelor, Supply Strategy Research Unit, Warwick Business School)