British Automotive Components Industry at the Crossroads

Being part of the developed world, the British auto industry, one would think, dances to a different tune. But it is interesting to note how the questions and issues facing the industry, especially auto components, are similar to those faced by the industry in India.

The British auto industry is quite significant by world standards -- both in size and diversity. With a turnover of 40 billion, the industry accounts for 8-10 per cent of total world automobile output. It is one of the biggest employers in the UK, employing 850,000 people, including 150,000 in the components industry. The auto industry accounts for 5 per cent of the gross domestic product (GDP) of the UK. Last year the industry produced 2.2 million vehicles, including 1.8 million passenger cars. There are about 40 vehicle manufacturers, but seven of them -- Ford Motors, Vauxhall, Toyota, Nissan, Honda, Peugeot and Rover -- account for a disproportionately major share of the total output. There are also seven commercial vehicle manufacturers who are all foreign-owned.

The components segment of the industry is rather fragmented with about 7,000 manufacturers, 500 of whom are primary manufacturers accounting for 80 per cent of the total output. About 90 per cent of the component manufacturers are small- and medium-scale enterprises accounting for about 20 per cent of the total turnover. These are basically the Tier II and Tier III manufacturers who produce components for the Tier I suppliers. It is this segment that now faces a major challenge to both its existence and growth. There is little doubt that the Tier II and III companies need to restructure and re-orient themselves in the emerging new environment.

It is a triple whammy for component manufacturers. On the one hand is the changing strategies of global vehicle manufacturers who are increasingly shutting down plants and cutting jobs globally. The UK seems to be bearing the brunt for the moment.

The sharp appreciation in the value of the pound sterling vis-à-vis the euro and the dollar, is posing tremendous problems for component manufacturers. There are two angles to this issue. First, vehicle manufacturers find that manufacturing cars for export in the UK is no more a viable proposition. The second is that the MNC car manufacturers with plants in the UK, for e.g., Toyota, Honda, Peugeot and Nissan, are increasingly looking at sourcing components from the Continent, Japan or other parts of Asia.

According to Mr. Barry Cole, Director, International Automotive Components, Automotive Directorate, Department of Trade and Industry (DTI), Europe is the main market for about 70 per cent of the small and medium component manufacturers. These are the ones most compromised by the power of the pound now. The Automotive Directorate in the DTI has been actively encouraging them to look at newer export markets, especially in high-growth regions such as Asia.

Vehicle manufacturers in UK are gradually diverting component-sourcing to either the Continent or to suppliers in their home countries. Honda, for example, which sources a major part of its components from UK suppliers, is now reducing its UK vendor base. Typically, Japanese car manufacturers in the UK source about 80 per cent of their components from within the country. But this is now estimated to fall consequent to the strengthening of the pound sterling and the greater globalization of the auto industry. Mr. Cole estimates that this could fall to as low as 50-60 per cent in the next two years. This means trouble for the British components industry.

Besides, sharing of design and development costs by allying with other manufacturers has become a common strategy now. Globally, vehicle manufacturers are increasingly working together with their alliance partners to develop vehicle platforms jointly. This way, not only do they reduce development costs but they also manage to cut down the number of component suppliers. The commonality of parts across models and vehicle manufacturers helps them in winnowing out the supplier base. Collective bargaining for large volumes of components helps vehicle manufacturers cut down on raw material costs.

Faced with a flat growth rate of 2-5 per cent per annum, vehicle manufacturers are applying increased pressure on vendors for price reductions to control their costs. Demanding vendors for annual price reductions ranging from 3-5 per cent is common now. This is a major challenge to component manufacturers in the UK who do not appear to be prepared to take it on.

The Society of Motor Manufacturers and Traders (SMMT), the apex industry body for automobiles, has set up a separate unit called the Industry Forum. The job of this unit is to help component manufacturers become lean and efficient with a view to competing in the emerging global market place.

The overall message from the SMMT and DTI to component manufacturers is clear: If you want to survive and grow, start looking outside the UK at growing markets as possible export destinations. As globalization gathers pace in the auto industry, vehicle manufacturers are bound to source components from the best possible suppliers, wherever they may be. It is up to British component manufacturers to measure up to these standards and look at worldwide opportunities.