Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum submitted by the Department of Trade and Industry


  Vehicle manufacturing is one of the major UK success stories of recent years. After a serious decline in the 1970s and early 1980s, vehicle manufacture is again a major part of the UK's economy. Car production in 1999 was the highest since 1972, and exports, at 1.1 million, were the highest ever. Despite events surrounding Rover and the intended changes at Ford's Dagenham plant a total of more than £2.6 billion of new investment has been committed since 1997. Several recent announcements have confirmed that global manufacturers still see the UK as an excellent location for their investments:

    —  Last month, GM announced £189 million of investment in its three main UK assembly plants, including the production line at Luton for the new X83 van.

    —  Ford is to consolidate all European production of Zetec engines at Bridgend: this £18 million investment comes on top of £216 million invested in the plant over the last three years.

    —  Bentley plans to increase its production six fold over the next five years.

    —  Jaguar is continuing to increase production due to its success in the USA, with the Halewood plant switching to produce the new X400 model.

    —  Honda have announced £130 million of investment in Swindon to prepare for the production of two new models.

    —  BMW is investing £400 million in its new engine factory at Hams Hall.


  The industry in the UK has a number of strengths which mean that the automotive sector will continue to play an important role in employment and wealth generation for the foreseeable future. The Government's overall policy is to build on these strengths. There are some areas of vehicle manufacture in which the UK can add significant value, and where we are developing centres of excellence which can compete with the best in the world. Developments in these areas, as well as our success with manufacturing process improvements, can then benefit the rest of the sector, and the rest of the economy. The UK also has significant ability in research and technology in the automotive sector.

  The Government seeks to: develop and sustain relationships with vehicle and component manufacturers; to maintain the UK's attractiveness as a location for investment; to facilitate the spread of technology, know how and best practice across the supply chain and the wider economy; to bring together often competing players for the overall benefit of the industry; and to maintain its competitiveness as a market for vehicles. Section 3 below sets out the current situation in the sector, including the challenges it faces. Section 4 describes the government's specific responses.



  In 1998, the automotive sector employed over 220,000 people and had an estimated turnover of over £40 billion. The sector contributed over 11 per cent of total UK exports. The UK has attracted the major share of inward investment in Europe, with Japanese automotive companies alone planning total inward investment of over £3 billion. Seven of the world's major vehicle manufacturers have operations in the UK, more than in any other country in Europe. These major manufacturing enterprises provide a large amount of employment directly, but also have other beneficial effects in the economy. They provide a significant market for UK component manufacturers. They also have an important role to play in improving the competitiveness of the supply chain, for example through the spread of lean manufacturing techniques, and in providing training.

  As well as the vehicle manufacturers, 17 of the world's top 20 automotive component companies also have investments here. Components Business Europe has estimated that in 1997 the UK had the third largest components industry in Europe, after France and Germany, with 5.8 per cent of the world total supplier sales. There are over 2,000 enterprises engaged principally in the manufacture of parts and accessories for motor vehicles.

  This high level of activity and inward investment is a reflection of the positive competitive environment which exists for vehicle manufacturing in the UK. As well as this general attractiveness to investors, there are a number of more specific activities and areas in which the UK has a global reputation for outstanding excellence:

(a)  Manufacturing Process Improvement

  The advent of Japanese vehicle manufacturing transplants in the UK, starting with the arrival of Nissan in 1986, had an important impact on the UK component sector and has provided the opportunity for a whole generation of UK managers to understand the principles and practice of lean manufacture. A number of UK component companies are now acknowledged best practitioners in lean techniques and continuous improvement. Unipart is a particularly strong example of this. Indeed the UK is recognised, after the US, as the leading practitioner of lean manufacturing in automotive.

  Japanese vehicle manufacturers in the UK have told the DTI that quality levels in their UK supply base generally match those found elsewhere in Western Europe and one leading company has said that it has found UK suppliers' management more open and receptive to the need for change than some other European countries. However there remains considerable room for improvement. The UK has been able to make a good start on improving the competitiveness of the automotive supply chain by developing the opportunity to accelerate the spread of lean manufacturing and modern approaches to manufacturing process improvement.

(b)  Design Engineering

  The modern automotive market requires a high rate of model change and is fragmented into an increasing number of different niches. By identifying a new niche early and developing products to match it, vehicle manufacturers can, at least initially, boost their returns. Major manufacturers have to offer a number of different variants to exploit the full sales potential of their product base eg sports utility variants, cabriolets, roadsters, MPVs etc. As a result, even the most comprehensively resourced vehicle manufacture is not sufficiently staffed to meet all its design requirements and has to outsource.

  The UK's Design Engineering sector has prospered in these circumstances on the basis of a global reputation for excellence. Sales almost doubled in the five years to 1999. It has a wide range of capabilities covering the initial product concept, vehicle design, design analysis, powertrain design and development, prototype manufacture, safety analysis, the use of materials and composite technologies, electronic system design, testing and simulation and production. To this portfolio is added the proven ability to integrate effectively with vehicle manufacturers and first tier design and production teams.

  The UK design engineering sector contains a number of acknowledged world leaders in particular areas of vehicle technology including power units and drivelines, chassis design and vehicle dynamics, advanced materials and manufacturing methods. The sector is also heavily engaged in seeking to improve the environmental performance of its products. The Government seeks to encourage this activity and to ensure that the UK maintains its global reputation (see section 4).

(c)  Technology and Skills

  Within the UK there at least 37 university centres of excellence covering every relevant automotive technology and skill. Several have developed world class capabilities in technologies including sound and vibration research, composites, vehicle and pedestrian safety, aerodynamics, ergonomics, advanced electronics materials science and lubricant research. There is a strong focus on internal combustion engine research and 30 of these centres collaborate with 30 companies in the Universities Internal Combustion Engine Group. The UK is also the world leader in the education of aesthetic and industrial design for vehicles, particularly with the world-wide diaspora of students from the Royal College of Art's unique course in this field. The majority of these centres of excellence operate internationally and together they do work for all the major international vehicle manufacturers. Our centres of excellence in technology and skills, together with the Design Engineering sector, are important elements in the synergy with the UK's overall strength in high performance automotive engineering.

(d)  Motorsport

  British drivers, designers and engineers are at the forefront of the international scene. For example, the majority of Formula 1 cars are designed and built in Britain. They use British gearboxes and transmissions all of which are equipped with specialist components designed, developed and manufactured in the UK. Our thriving high performance automotive engineering network is a major UK asset in global automotive competition, and is a sector where we excel in knowledge-based manufacturing. It is estimated that the motorsports industry has an annual turnover of £1.5 billion, of which 60 per cent is exports. It is also a good example of how the principles of the "knowledge based economy" can apply in a manufacturing sector. The developments used to gain an advantage at this cutting edge of vehicle manufacture often become standard in a few years for the mass-produced vehicles driven on the roads.


  Despite the many strengths which the UK has as a location for vehicle and component manufacture, there are inevitably some areas where the country faces challenges in maintaining and enhancing the current level of activity:

(a)  Overall Productivity

  Despite the improvements in productivity made in recent years by vehicle manufacturers and by many component suppliers, the UK's overall productivity (measured by Gross Value Added per person) is lower than that of our main competitors in the EU. This is a situation similar to that in some other sectors of manufacturing. The reasons are complex but include issues such as the macroeconomic instability of the past, which discouraged long-term planning and investment (including in training); the relative value of the products manufactured; capital intensity; and labour productivity. However, productivity growth remains steady and productivity in the UK is in general increasing more rapidly than our competitors. Figures show that output per job in automotive components was higher than manufacturing in general each year from 1988-99.

(b)  Position of UK Component Suppliers

  Component companies face a particularly tough agenda in competitiveness terms because of a number of industry trends:

    —  vehicle manufacturer mergers and joint development projects

    —  mergers within the supply base

    —  the move towards major module and system sourcing

    —  the spread of global platforms

    —  the opportunities and threats of e-commerce

  One effect of these trends is to displace smaller firms from the first tier of the supply chain to the second and third tiers, where they need to develop a wider range of skills to operate effectively and to be able to respond to new supply chain relationships.

(c)  Maintaining Levels of UK Content

  It is becoming increasingly difficult in this globalised sector to define exactly what counts as home country production: very often a product will include components made in the UK by a foreign-owned firm and components made abroad by a UK owned firm. UK based manufacturers have traditionally had a high level of UK content (60-70 per cent+), and they have often built up very strong relationships with first tier suppliers, which have had significant beneficial effects on productivity. However, this benign state of affairs is now under unprecedented pressure (as in other sectors) because of the ineluctable globalisation of the automotive industry.

(d)  Exchange Rate Pressures

  The Government understands the concerns of vehicle and component manufacturers over the weakness of the Euro. But it is determined to take a long-term view: it would be wrong to let short-term pressures lead back to the policies that produced boom and bust in the past. Short-term fixes would be the biggest threat of all to industry, with the illusion of temporary relief followed by the reality of long-term damage.

  The Government believes that its emphasis on long-term macroeconomic stability will ensure the UK remains an attractive location for investment. In the shorter term, the Government's role is to encourage the spread of best practice to improve the competitiveness of the UK supply chain so that it can survive the current situation and be ready to respond when the exchange rate improves. The long-term future of the sector will not be secured by short-term manipulations of the exchange rate, but by maintaining and building on the improvements in productivity and competitiveness which the sector has already made.

(e)  Provision of State Aids by Competitors for Investment Projects

  Companies facing major investment decisions in the competitive global market place necessarily take into account the potential availability of state aid in competing locations. There are specific rules governing State aid for motor vehicles in the EU, set out in the Community Framework for State aid in the Motor Vehicle Industry (OJEC c 279 15.9.1997). Their purpose and effect is to impose tighter limits on the amount of aid to support investment. There are no aid schemes in the Community specific to this sector. Aid that is granted comes from regional, R&D, training and rescue and restructuring budgets. In comparing figures over time, the European Commission uses a rolling three year period, as this gives a more accurate indication of trends. The most recent figures published by the Commission on aid to this sector showed an 18 per cent decrease in the total amount provided between the period 1994-96 and 1995-98. However this figure reflects only a small number of cases. The annual figures by country published by the European Commission for approved state aid to the motor vehicle sector are:



  Sources:  Commission. Seventh Survey on State aid in the European Union May 1999, page 14. Eighth Survey on State aid in the European Union May 2000, p 26.

  (Note:  Figures cited for particular years may include offers made by member state governments in previous years.)


  The Government's first priority on coming to office was to secure long-term economic stability and put an end to the damaging cycle of boom and bust, which in the late 1980s and early 1990s saw interest rates rise to 15 per cent for a whole year. As a result of the Government's efforts we now have a sound and credible platform of stability: the economy is expected to expand 2¾ to 3¼ per cent this year, and to grow on trend in later years. These developments will benefit the automotive sector as well as the economy generally.

Relationships with UK-based manufacturers

  As mentioned above, there is a significant number of vehicle and component manufacturers located in the UK. The Government is keen to encourage other manufacturers to locate in the UK, as part of its general inward investment work, but it also has a very important ongoing role in maintaining and deepening relationships with the manufacturers already here. Government officials have regular contacts at many levels with the companies. These contacts enable the companies to make known any concerns they may have with the UK as a base for manufacture, but also allow companies and officials to explore ways in which Government can help improve the situation, both overall, and for individual companies. The Government sees these relationships as important in encouraging the manufacturers to see the UK as a suitable location for on-going investment. The Government also uses these relationships to help achieve its aim of improving productivity in the sector and spreading best practice down the supply chain. This has a particularly important knock-on effect for supply companies which do not only supply to the automotive sector: the improvements which vehicle manufacturers are pioneering can thus improve productivity in other sectors.

Regional Selective Assistance (RSA)

  In certain cases, the Government considers it appropriate to offer RSA to secure investment for disadvantaged areas of Great Britain. The amount of RSA offered to the vehicle sector in the past five financial years is set out below. It should be pointed out that the majority of the investment in the automotive sector in the UK is not supported by any direct Government financial assistance. There are strict EU rules governing offers of RSA to those sectors defined by the EU as the motor vehicle industry and in these sectors RSA may only be used to tip the balance in Great Britain's favour where an area eligible for assistance (as defined by the EU's assisted areas map) is in direct competition with an overseas location for the investment, and where the jobs involved, and overall benefit to the economy, are sufficient to justify Government intervention. All projects must also meet the criteria of the scheme. In the automotive sector, the Government also uses RSA as part of its efforts to encourage consolidation by manufacturers, and to improve productivity and to spread these improvements down the supply chain.


Number of
RSA Grant
Estimated Jobs
Project costs
East Midlands
North East
North West
South East
South West
West Midlands
Yorkshire & Humberside

Research and Technology

  The automotive sector is under increasing pressure to improve the environmental performance of its products. There is considerable R&D activity in this area, as companies see there is competitive advantage to be gained from this aspect of their products. However, there is also a role for Government in supporting this activity. This role includes accelerating the pace of development and of commercial exploitation of new technologies; co-ordinating work, particularly by encouraging links between industry and academia; and focusing activity on areas where the UK can make real technological advances. This work is mainly carried out under the banner of the Foresight Vehicle programme.

  Foresight Vehicle, the UK's national automotive R&D programme, aims to realise new technology options which will underpin the UK's future transport policy and our need for sustainable development. It aims to stimulate suppliers to develop and demonstrate market driven enabling technologies for future motor vehicles. Under the Foresight Vehicle LINK programme over £12 million of Government funding is being made available for research partnerships that bring together UK resources and expertise to create components and systems for vehicles of the future. The focus will be on developing technologies for use in mass-market vehicles of 2020. To date the Foresight Vehicle research portfolio is worth over £75 million.

  The programme brings together representatives from UK, academia, research and technology organisations, user groups, public sector bodies and government departments in a network of over 400 organisations. It aims to support the development and exploitation of innovative technologies for mass market vehicles. It aims to focus resources on areas where the UK can make real technological advances, and to attract deep-rooted automotive R&D investment into the UK.

SMMT-Industry Forum

  The Industry Forum is the Society of Motor Manufacturers and Trader's initiative, backed by the Government, to give the UK a more competitive automotive industry for the 21st century. Through the Industry Forum, the major vehicle manufacturers and first tier suppliers are working together to improve the UK automotive component supplier base—a world-unique collaboration amongst competitors. One of its aims is to help UK suppliers come to terms with the New supply chain relationships which are forming due to the trends outlined in Section 3.

  EU and WTO rules prohibit any agreements between governments and OEMs regarding the level of home country content which there should be in the final product. However, the Government aims to maintain and where possible increase the level of UK content in UK manufactured vehicles by helping British component manufacturers to increase productivity and become more competitive. Of course, any improvements will also increase the ability of UK companies to export their products. The Industry Forum is one important method for achieving this objective. The Industry Forum is industry-led but works closely in partnership with the DTI. The work of the Forum contains a number of strands.

(a)  Process Improvement: Master Class

  The Forum's main current activity is the "Process Improvement; Master Class' project. This is targeted at improving single companies within the supply chain, and brings to the SMMT expert engineers skilled in shop floor improvement activities, two from each of Nissan, Toyota and Honda in Japan, and one from each of VW and GM in the UK. Together they have been developing a "common approach" to shop-floor process improvement activities, based on the best from each company. They are currently training over 30 young British engineers recruited by the SMMT, together with secondees from the industry, in these techniques. At the same time they are undertaking process improvement activities in mainly second and third tier component companies. The DTI is giving financial support (£6.5 million over five years). So far over 260 companies have been involved in the Master Class activity, with often dramatic results. (For example, value added per person increasing by up to 100 per cent, people productivity increasing by an average of 40 per cent).

(b)  Supply Chain Improvement Activity

  Besides the Master Class, this is Industry forum's other main improvement activity. The aim is to eliminate "interface waste" between the companies by improving communication and working relationships along a supply chain. This is shop-floor activity in which different companies in a supply chain provide members of the work-shop team. The team-work is designed to improve working relationships and communication, and give members an insight into the shop-floor operations of suppliers and customers. The results are measured using the same hard quantitative manufacturing process measures of quality, cost and delivery performance as for the Master Class, together with a more subjective set of measures of partnership.

(c)  New Products

  One of the new products recently introduced by Industry Forum, Team Leader Training takes a group of employees, usually from one company, through three week long modules, mixing "hands-on" and learning by doing with theoretical and classroom activities. After each module the course members are left with a project to complete, based around their work, relating to the teaching points covered during the module. By the end of the third week course members should be equipped with the skills necessary to develop, implement and sustain the continuous improvement process.

  New activities, such as Value Stream Mapping and Continuous Improvement for very small companies are currently being developed to add to Industry Forum's range of offerings to the industry.


  The vehicle and component manufacturing sector has re-established itself as an important part of the UK economy, and it looks set to maintain this role. However, this is not a static sector, and Government has a role to play in helping UK based manufacturers and suppliers to adapt to future changes.

  The trend amongst OEMs to reorganise their global and European operations is creating another form of centre of excellence, which will become increasingly important in the future. OEMs are now looking to create centres of excellence for specific activities to rationalise production. The UK is proving successful is securing these, such as Ford's recent decision to move some of its engineering from the USA to the UK, and to establish Dagenham as a global centre of excellence for diesel engines. Activities such as these tend to be in the higher-value added, knowledge based side of the work. The UK's current strength in this side of the work, and our attractiveness as a location for inward investment, should prove to be assets in securing more of these centres.

  Many observers report that the scale of the challenge facing traditional SMEs in the UK automotive sector is not sufficiently appreciated by the management of these firms. Raising awareness and acting as a change agent must remain a key priority and to do this DTI must continue to work with a wide range of national and regional partners. The success of Industry Forum at helping a wide range of companies to establish some elements of the modernisation agenda for the components sector is a major asset. Consideration is currently being given to how the forum might extend its range of services to tackle more of the items on that agenda.

  As the technological base to support the vehicle of the future is expanded, then the focus of the Government's R&D support, particularly as provided through the Foresight Vehicle programme, will need to shift to issues of exploitation. This is likely to involve a change of emphasis within the programme, further developing the already extensive Foresight Vehicle network and collaboration with a range of other programmes, policy instruments and partners. A start has already been made on this by using the Foresight Vehicle analysis to provide the Invest in Britain Bureau with knowledge based inward investment priorities as part of its new strategy.

  The advances in the automotive sector in manufacturing processes are now setting a benchmark for other engineering sectors. For example, the Industry Forum is now being duplicated in the aerospace sector, which is a symptom of how that sector has started to take advantage of the expertise in modern manufacturing processes which the UK automotive sector has acquired. Encouraging this spread of best practice within and between sectors is an important role for the Government. The vehicle manufacturing sector has been the pioneer for many modern advances in knowledge-based manufacturing, which will become increasingly widespread in the future. The UK has developed significant strengths in these modern techniques, and these can provide the foundation for a flourishing manufacturing sector in the future.

July 2000

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