Answering the wrong question

Perhaps those of us who are Brits have the best perspective on the progressive decline of the European motor industry.  To my surprise when I checked through the 1970s, there were only 12 UK car assembly plants operated by the volume and premium manufacturers at that time (i.e. excluding Aston Martin, Lotus, Rolls-Royce etc.)  That compares to five today – two JLR, and one each from BMW Mini, Nissan and Toyota.  The collapse feels much greater because those assembly plants were surrounded by a network of smaller plants producing powertrains, bodyshells, chassis components and more, and then there was an extensive local supply base.  Automation levels were low and staffing levels high, so almost a million people were directly employed in the motor vehicle industry, around 4% of the total workforce.  Today in the UK, employment in all forms of manufacturing is only 8% – it feels like you’re more likely to meet someone who works in a warehouse than a factory.

There are a number of drivers of this decline – mismanagement and appalling labour relations (for which management must also take a share of the blame) sitting at the top of my list.  However, taking customers for granted and launching products that fell short of those emerging from German and Japanese factories in terms of performance and reliability also played an important part.  When new investors arrived in the form of the Japanese, they demonstrated that UK workers could produce cars that were of a globally competitive quality and cost standard when you started without the legacy of decades of under-investment in plants, product and people.

Why is this important or relevant today?  Because Europe (meaning the EU seeing as the UK committed economic hari-kari through Brexit) seems to believe that they can protect the remaining domestic industry through a series of measures that are primarily focused on keeping the Chinese at bay.  The starting point was to dictate a move to BEVs in order to meet emissions targets – the only region in the world (including China) that chose to do this.  The flood of highly competitive Chinese BEVs led to the EU introducing  tariffs on Chinese-built BEVs last year, which is a flawed approach in a number of ways.  Firstly it relates to source, so certain BMWs, Dacias and Volvos are affected as much as BYDs, MGs and XPengs.  Secondly, tariffs are applied to the landed price, so as this is already highly competitive, a tariff on top removes the icing from the Chinese profit cake, rather than touching the cake itself.  However, the main thing is that tariffs are normally intended to be for a fixed period (five years in this case) to buy time for your domestic industry to catch up and then be able to compete on a level playing field, but it took over a decade for the Chinese to establish their competitive advantage and it has left them holding many of the cards that carmakers elsewhere need access to in order to produce a competitive BEV.  But during this period, the more successful Chinese manufacturers will establish manufacturing bases within the EU Customs Union area – BYD already ramping up in Turkey and Hungary, with others to follow.  This is potentially a repeat of the UK story – Honda (for a time), Nissan and Toyota replaced domestic champions.

Now as the EU and the industry try to find a mutually acceptable solution to the challenges faced by a 2035 deadline that consumers don’t want, another policy comes along that is in my view equally flawed.  It seems that we are going to get a European equivalent of the Japanese kei cars, which again will need to meet some carefully drafted sourcing rules to favour the big European players and keep out the Chinese.  Given the well-known challenges of making a profit on small cars and the likelihood that customers will be able to buy cars from the next class up for only a modest additional monthly payment, it defeats me trying to think why this measure is seen to be helpful.  It will distract the European manufacturers away from investing in the core products that will continue to make up the largest part of the sales, and if the Chinese want to compete, they will produce a competitive car earlier than the Europeans and drop it into their new European assembly plants, with battery supply coming from their traditional suppliers who will invest alongside them.  Given the origins of the EU rooted in the Treaty of Rome, it may indeed be a case of the EU fiddling whilst Rome burns (with apologies to Emperor Nero.)

A bit like my fellow countrymen who thought they could put the ‘Great’ back in ‘Great Britain’ by winding the clock back with Brexit, there seems to be some assumption that you can restore the health of the European car industry by taking defensive measures.  The reality is that – like the UK – a lot of the damage is self-inflicted, and it is difficult to see how there can be a way back without fundamental changes in social attitudes towards things like employment protection, working hours, retirement ages and holiday entitlement.  I don’t see that happening – if it came down to a vote, most workers would rather have a job for life in a warehouse, retire at 60, work 35 hours a week and enjoy 30 days holiday a year – than compete with their counterparts in other parts of the world (which may not always be China).  We have probably lost the war on current generation electric powertrains, so any efforts in that direction will be like the Chinese trying to catch up on combustion engines a decade ago.

I believe that if Europe is going to regain a competitive edge globally in automotive, then it has to be by changing the game, not writing more rules that try to defend lost territory in the current game.  Whilst I am focused mainly on the current EU debate, the same is true of the UK or indeed the US.  I don’t claim to have the answer, but I’m certain that we’re collectively asking the wrong questions.

 Image: Chat GPT