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Suddenly, British Carmaking Is Burning Rubber (Int'l Edition)


Business Week International International Business: BRITAIN

SUDDENLY, BRITISH CARMAKING IS BURNING RUBBER (int'l edition)

They're all doing it: Ford, Honda, Toyota, BMW--even South Korea's Daewoo. Each of these global giants is either expanding or establishing auto production in Britain. The surge of investment is likely to make Britain's auto industry the fastest-growing in Europe.

It all adds up to a boon for Britain's wobbly manufacturing base--and a threat to higher-cost European auto makers, especially since some 75% of the British-made cars are exported to the Continent. The Japanese led the way, first setting up shop in Britain in the mid-1980s as a way to enter the European market. Now, there's a second, broader wave of expansion under way, including a $550 million Daewoo plant to produce 100,000 cars a year.

POUNDED STERLING. In an era of vicious competition, Britain is looking even better as a place to build cars. British carmaking is expected to grow nearly twice as fast as European production as a whole. Analysts expect light-vehicle production in Britain to leap 45% in five years, to 2.4 million cars (chart). That expansion is a tribute to its lower labor costs, more flexible labor rules, probusiness policies, and government subsidies.

The new push is partly driven by the plunge in sterling. That boosts Britain's competitiveness, particularly compared with Germany. A year after acquiring Rover Group Holdings PLC for $1.2 billion, BMW CEO Bernd Pischetsrieder says he expects "Rover's volume to grow more than BMW's." BMW plans to increase Rover output by 60%, to 750,000 units by the end of the decade.

Meanwhile, Ford Motor Co. announced on Mar. 15 that its Dagenham plant in Britain beat out Ford plants in Spain and Germany to build a version of the Ford Fiesta for Mazda Motor Corp. "The decision was a mark of faith in how Dagenham has improved its efficiency and quality in recent years," says Ian G. McAllister, Ford of Britain's chairman. Depending on British government subsidies, Ford may also pick Britain as a site for its Jaguar Ltd. unit to build a new sedan to rival BMW's 5-Series car.

For the Japanese, the strong yen makes Britain even more attractive. Last year, Honda Motor Co. decided to invest $520 million in its plant in Swindon, near London. Toyota Motor Corp. is also moving ahead with its plan to add a new assembly line to its Burnaston plant in Derbyshire and produce a second car in Britain by 1997. "The high yen is very helpful for our U.K. operation," says Yukihisa Hirano, managing director of Toyota Motor Manufacturing (U.K.) Ltd.

Already, Continental producers are howling about the growing stream of lower-cost Japanese imports from Britain. They want the boost in Japanese transplant production--most of it in Britain--figured into Japan's 1995 quotas. "The more local production, the less need for exports," says one European Union official. The Japanese, who hotly oppose this stance, hope to increase their exports to more than 1 million, while the Europeans want to freeze them at the 1994 level of 993,000.

The resurgence of Britain's auto industry is a challenge to its Continental rivals. "With British labor costs and Japanese levels of productivity, companies like Volkswagen must be concerned," says Ernest Thompson, CEO of the Society of Motor Manufacturers & Traders Ltd. and a longtime Ford executive. Industry experts expect Japanese cars, mostly made in Britain, to grab 15% of the European market by 2000, up from 10.3% last year.

DRAWBACKS. As the auto plants crank up, some analysts note that Britain still has some weaknesses. Although the country boasts low wages and has a weak currency, the productivity of many of its factories remains below the best U.S., Japanese, and German plants. And the productivity of Britain's auto-components makers is the lowest in Europe, according to a recent Andersen Consulting study.

But that may be changing. The influx of Japanese, American, and German producers, with their state-of-the-art manufacturing practices, is helping British suppliers improve. Lucas Industries PLC's experience supplying parts to Japanese carmakers is one reason Volkswagen recently awarded it a huge contract worth more than $235 million annually over 6 to 10 years. Still, if the resurgence of Britain's auto industry is to have staying power, there will have to be even more improvement on the shop floor.By Julia Flynn, with Heidi Dawley, in London, John Templeman in Bonn, and Linda Bernier in Brussels


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