George Pitcher: Will Japanese car makers last in a euro-isolated UK?

Toyota’s decision to increase its output brings some much-needed good news for the UK car industry – but it is likely to be shortlived

Post-recessionary Japan has generated some very weird behaviour among its multinationals. While its domestic economy has bucketed along the bottom of a protracted recession for much of the Nineties like a recidivist in a poverty trap, some of its global corporates have been behaving like a shoplifter under surveillance who daren’t go home.

I’m thinking particularly of the car industry. Toyota Motor, Japan’s largest car maker, last week announced its intention to increase output at its Derbyshire plant by some 30 per cent. That is undoubtedly good news at the start of a year in which we can expect world economies to put increasing pressure on UK manufacturing. And, while some 300 jobs won’t unduly influence a general election that looks increasingly like a slam-dunk for Labour, it’s just the kind of ambient economic noise that the Government needs to boost confidence a bit.

But why Toyota should have done it is something of a mystery. I’m tempted to call the decision inscrutable, but I shouldn’t. We must welcome our Japanese brethren in the motor industry, since we no longer have one of our own. Nevertheless, I wouldn’t mind one of them telling me what they’re up to.

I know we’re told that Toyota’s decision is about soaking up excess capacity and improving production costs. Apparently, capacity utilisation can be improved by transferring production of its three-door Corolla model from Japan. If ever there was a paradigm of how the relative attractiveness of motor-industry labour has shifted from Japan to the UK, there’s a cracker.

The existing Corolla production line, which also produces the Avensis, operates at about 50 per cent of capacity, so if Toyota can increase production and spread fixed costs over more vehicles, it should alleviate some of its problems.

But don’t let anyone run away with the idea that Toyota’s challenges are confined to excess capacity and production efficiencies aimed at meeting demand most cost-effectively. Toyota’s UK car making arm lost £52m in 1999. It’s highly unlikely that the economic circumstances that caused that loss will have done anything other than worsened. Toyota is well out of pocket on its UK industry, just as it piles in with further productivity commitment.

This increased productivity does not require extra investment in its UK plant, which must come as some relief in Tokyo. But investment hasn’t been the problem – at least, it’s not the return on capital invested in the UK that’s been causing the headaches. The European nightmare for the Japanese has been caused by the weakness of the euro.

None of the Japanese car makers assembling motors in the UK has been doing so profitably, despite enviable production levels. Toyota is joined by Nissan and Honda in complaining of the dire effect that an intolerably weak euro has had on their competitiveness. Only on Monday, Honda filed accounts that showed that operating losses had deepened by 20 per cent to £51.4m. Accumulated losses for Honda at its Swindon plant amount to some £130m.

I’m told that Japanese assemblers in the UK have tended in the past to take an eccentrically contrarian view with regard to the significance of the euro-zone, from which in varying degrees they will not only be sourcing parts but to which they are selling cars from the UK. Historically, they held that the UK’s resistance to monetary union is of little consequence to them. I wonder how much that view has been revised.

Little wonder, meanwhile, that euro-zone motor manufacturers are making hay. Europe’s second-largest motor manufacturer PSA Peugeot-Citroën last week reported an 11.7 per cent rise in sales last year, which is almost three times the global growth rate. And Italian conglomerate Fiat is predicting that it will be taking a ten per cent share of the European car and truck market, up from 9.5 per cent in 1999.

The Japanese in the UK can comfort themselves that they are not alone. Look no further than the Anglo-American economic alliance that our euro-isolationists are so keen on. The incoming president of Chrysler, the US subsidiary of DaimlerChrysler, warned – concurrently with the Honda news over here – that worsening market conditions will delay the turnaround of the loss-making US motor giant, perhaps by as much as two years. Chrysler’s production in the first quarter of this year could be down by as much as 26 per cent.

The Detroit Motor Show, traditionally the inaugural event of the global motor show season, will have been a sombre event this week. But that’s scant comfort for a Japanese assembler in Britain. After all, the number of motors built in the UK for export to the US can be counted on the fingers of one knee.

The best hope for the Japanese must be that a weakening dollar this year precipitates a strengthening euro. That is one scenario in which a US recession could assist Japanese motor production in the UK. But it had better come soon – Nissan has indicated that it is considering the continent for the assembly of its new-generation Micra.

Ford has already and Vauxhall intends to pull their production out of the UK. What ultimately can persuade the Japanese to stay? Some £40m in state aid to Nissan in Sunderland might help. Joining the euro fairly sharpish after the next election would be even better.

George Pitcher is a partner of issue management consultancy Luther Pendragon

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