Wednesday, 20 January 2010

Industry Structure – UK Autos – 'Fiscal Consolidation' vs Need for a 'UK Auto Manifesto'.

The 2007/8 financial crisis expectantly led to sizable government stimulus spending. The UK's costly vehicle scrappage scheme perhaps the most visible in answering the distress calls by industry bodies such as the SMMT.

Consequentially car sales were indeed buoyed, with perhaps the major beneficiary being the retail motor trade itself, for the most part assisting the sales of affordable B-segment import vehicles made by Ford, PSA, FIAT, VW Group brands & Hyundai-Kia. GM's own Vauxhall Astra (though a C segment car) should have been a prime sales candidate were it not for the model's production run-out in Ellesmere Port, whilst Nissan's Sunderland-made Micra, also an aging product, gained relatively little uplift. As for the likes of JLR (Jaguar Land-Rover), Bentley or Rolls Royce, they of course were never really part of the mass-market scrappage scheme equation that sought not only sales but positive political impact.

As a consequence the direct financial 'multiplier-effect' through the retail-base, into home manufacturers and thence into home Tier 1 & 2 companies was realistically limited. The dealers were given cold comfort and redundancies post-poned (to the present-day). But importantly, the core of the UK auto-industry per se appears not to have been fundamentally assisted.

In short the political reaction, as part of its QE exercise, appeares well-intended, though perhaps naive of economic reality and level of direct domestic influence.

Fundamental, targeted assistance is what is required if the UK industry is to prosper. Such assistance not necessarily in financial terms or hand-outs - though such calls always come – but more so relative to proper understanding and creation of a relevant and strong industrial-commercial framework that allows UK Autos plc to successfully compete both at home, and critically throughout the world.

Today, as a somewhat stabalised nation, the UK now faces the resultant massive fiscal deficit outcomes and must both address the repayment of the gaping deficit and simultaneously review the future for its industrial base and national commercial competences.

With the former of these issues presently under the spotlight as a general election draws ever closer, the Conservative PR machine wishes to demonstrate its governance capability and policy direction by utilising the 'lessons leaned' from the parallel case study of Sweden's economic turnaround of the early 1990s. To this end Anders Borg (Sweden's current Finance Minister) was invited to give a lecture summary of the Swedish recovery model, prior to reflective words by George Osborne, the Shadow Chancellor of the Exchequer.

[NB. Understandably the centre-right keen to practice the very essence of prudent micro-economics set within reformist macro-economic policy, which looks in greater part, to the true utility and leverage of private investment as an objective national driver. This thankfully instead of the public (pseudo) 'investment' we've witnessed over the last decade by the centre-left which basically espoused a policy of publicly-funded 'bought' 'wooden-dollar' public-sector job expansion, the beneficiaries of which in turn arguably fueled the credit bubble].

To summarise the Swedish recovery formulae, it was a return to archetypical neo-classical econometrics for balancing a budget:

1.All options available for application should be reviewed and used.
2.Taxation should be biased away from prime motivators (ie personal income & corporate) and set toward a broader-base plethora of tertiary sources.
3.Expenditure decrease to be achieved via cost-restructuring whilst safe-guarding essential human (future labour capital) development criteria (ie education & welfare)
4.Improve the 'base-line' scenario through productivity expansion via R&D & reform.
5.Creation of a credible budget 'base-line' so as not to alienate capital markets (re: Government Guilts , Bonds, Note issuance prices & spreads) or households (ie gross vs net disposable spending).
6.'Front-load' the consolidation, demonstrating “pain equals gain” improvement thus providing “openness to build credibility”
7.Calculate the political cost vis a vis SIGs (Special Interest Groups) and public perspectives.
8.Safeguard labour force participation to create value-adding society
9.Strengthen fiscal institutions via greater independent target-data advisory & examination
10.Maintain social cohesion so as not to experience a destructive splintering pattern

Given the dire circumstances of EU members, ranging from a false appearance of stability in France (re: cost-structures vs RoW) to the real concerns over Greece's economic credibility, such actions will be required across the EU and even Triad region; thus intra and inter-nationally. This will bring substantial ramifications for the European auto-industry in terms of continued need for re-structuring, something which is seemingly being led by London's capital market demands (ie seeking restructuring, value-creation opportunities) and Italy's recognition of the need for change (ie FIAT's vanguard as EU cost-harmoniser with RoW regions as part of its own growth strategy). Thus we view the apparent paradox of a once heavily socialist state leading the race for regional cost-down in a global context that with revive both the European auto-industry and member state economies.

Set against this context the UK sector itself stands distinctly separate to its EU neighbours at micro & macro levels, in as much that:

A. the sector is of different 'shape' -
(ie no national mass manufacture 'champions', instead a broad scattering of 'upstream' enterprises)

B. the UK holds relative administrative independence -
(eg relative autonomy providing flexible monetary and labour policy-setting)


In contrast to EU peers, the UK's auto-sector has progressed beyond 'domestically owned' low-value mass manufacturing, by refocusing core productivity towards spheres of activity, which albeit far smaller in size & turnover figures, sit higher-up the commercial value-chain and so enable improved margins and profitability. These include:

1.Strategic Consulting
2.Systems & Whole Vehicle R&D (partially in association with academia)
3.Project Engineering
4.Test & Development
5.Associated Software & Hardware Development
6.Professional & Amateur Motorsport(s)
7.Premium (Luxury & Sports) Niche Vehicle Production

[NB. Such 'up-stream' activities are partially mirrored within the normative schema of matured mass-manufacturer operations, but under such in-house circumstances are arguably constrained by conflicting political & financial/capital allocation company demands. The process of 'unbundling' appears to be a prime strategic aim of Toyota Motors (sic Japanese industry) as it faces stiffer global competition].

[NB. The UK must also review how it can evolve the auto-sector's 'downstream' activities -
the retail base & process, through-life ownership interaction, and vehicle disposal network].

[NB. With the structural re-formation of Volvo & SAAB under Chinese &/or other interest – which will alter the very core of Sweden's auto-sector - it appears that Sweden may wish to learn from the UK auto-sector's industrial evolution model, just as the UK seeks to utilise the Swedish Fiscal consolidation model. Thus there may be an opportunity to strengthen Scandinavian ties, as part of what investment-auto-motives conjects as a Northern European Auto-Sector 'Rainbow'].

Moving on to item B in lesser detail...

Although presently in a deeper economic hole than its EU counterparts, yet has the (hard-defended) fortune of relative independence and so greater flexibility regards monetary/fiscal and labour-force policy-setting. Such flexibility is critical to meet the challenges of a present-day heavily mired government budget, and the ability to re-set & re-orientate the nation's industrial and commercial template.

It is with regard to creating a 21st century template that the highly visible UK auto-industry could possibly play a leading role, but before such ambitions, it is indubitably important that the 'Fiscal Consolidation' process itself does not to 'de-rail' its constituent parts whether 'on-shore', nor 'off-shore' in its role as a 'quiet voice' global leader. Examples such as assisting China to create its own NPD capabilities or answering the US call for electric vehicle alliances demonstrate the UK sector's importance as a commensurate foreign-trade , income generator.

To this end the UK sector should be viewed as de-coupled from the typical perception that all EU auto-activity is automatically 'value-destructive', even if the over-capacity problem does pose a profitability threat to incumbent large manufacturers – delineated as 'winners' & 'losers' and much of the cross-border retail trade (inc UK).

The business of 'UK-Auto' is to serve domestic personal mobility needs, and by setting that bar high via consumer acceptable regulation so demanding new technical solutions, able to in turn serve the R&D and development needs of 'follower' nations and global-reach foreign auto-companies. This then accompanies Britain's already proven ability to guide Emerging Market auto-players relative to today's established vehicle systems solutions and relative modifications, within the fields of conventional ICE (internal combustion engine) technology, the traditional 'Budd Manufacturing' pressed steel vehicle body production, the development of intelligent electro-mechanical architectures etc etc.

investment-auto-motives simplistically depicts the UK picture using a created (copyrighted) graphic (see above) that overlays the endemic value-curve over a 4x4 matrix, the axis of which demonstrate theoretical marginal profitability versus relative geographic requirements. The model titled “4x4 Policy Traction” introduces the aforementioned Northern European 'Rainbow' industrial model as part of a 4 tier 'trickle-down' system which affords the UK to seize the opportunity to act as a global auto-industry policy originator and consulting destination and technology service provider.

The finite detail of this broad overview regards what is effectively a 'UK Automotive Manifesto' must be understood and act as agenda reference criteria relative to the execution of the aforementioned governmental 10 point plan for fiscal consolidation, so as to not only negate possible negative implications and outcomes of both models' inter-operative meshing, but in actuality properly guide and promote the UK sector at national and international levels.

Thus, to conclude, whilst the UK can undoubtedly learn much from Sweden relative to fiscal turnaround, so in turn may Sweden learn from the UK in developing its own and a UK-Sweden synergistic automotive industrial planning thesis. This in turn engenders the UK potential ambition as an even greater influence and player on the global industrial stage.