Sunday, 30 April 2017

UK car manufacturing, imports and exports puzzle - a possible explanation.

From the European Automobile Manufacturers Association, shortly before GBP fell with a corresponding boost to exports/fall in imports:

80% of the UK’s automobile production is exported, of which 52.8% (worth €14.6 billion) goes to EU member states. The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion.

In very round numbers and to exaggerate a bit, all cars manufactured in the UK are exported and all the cars we drive are imported. There is a huge amount of churn involved. This has been bugging me since Mrs W bought a new Ford Kuga last year which was shipped in from Spain, not made in Dagenham (any more).

A possible explanation occurred to me recently.

1. Different people want different kinds of car.

2. In olden times, there were lots of smaller manufacturers in each country, making lots of different models, so the chances were you could find something you liked made in your home country.*

3. There has been a lot of consolidation in the car industry, there are just a few very big manufacturers left.

4. Big manufacturers like big factories. Instead of having small factories dotted around Europe, they prefer making all their cars in the same place. So each country ends up with a handful of huge factories, each making a narrow range of cars. (We all know that Germany punches above its weight here, but even their manufacturers have shifted a lot of production to Spain or their eastern neighbours to keep costs down.)

5. So nowadays, wherever you are in Europe, if you want a Fiat, it will be made in Italy; if you want a Nissan or a Honda, it will be made in the UK; if you want a Ford, it will be made in Spain; if you need a car to bully people on the motorway, it will be made in Germany, and so on.

In other words, more specialisation leads to more trade (obviously) and vice versa.

This is thus also a distant cousin of comparative advantage, I suppose. The effect works on a national, continental and global level. The UK (like most EU Member States) exports far more cars to places outside the EU than it imports from outside the EU.

Or to put it another way, European countries are the best at car manufacturing, that's the Premier League, but within that Premier League, the UK is in mid-table and all the teams above it are German.

* The old rules still seem to apply to really low volume niche cars, like Noble, McLaren, Spyker, Pagani, Koenigsegg etc. Those are still dotted around across the continent, and if you have more money than sense, you'd probably go patriotic and buy one made in your own country, I know I would.


john b said...

This is all true, but I think if anything your "big factories" point understates the level of specialisation.

Production lines *for individual models* are now so capital-intensive that the economies of scale generally exceed shipping costs - so Ford will make all its Kugas in Valencia and all its Mondeos in Cologne.

This is why Nissan in Sunderland would be at risk if the eventual UK/EU settlement led to supply chain disruption [*]: not because they'd close the current production lines, but because the decision of where to invest $1bn in capital equipment for the next new model, and the one after that, and the one after than, gets skewed.

[*] customs and certification delays here are a far more significant risk than tariffs

Lola said...

john b
...customs and certification delays here are a far more significant risk than tariffs...
The well known 'non-tariff barriers'. Always deployed as protectionism. The French are the World Champions at that.

Lola said...

MW Now explain why most Formula 1 teams are based in the UK...

DBC Reed said...

You sometimes wonder when you look at competitive car production whether King C Gillette wasn't right when he declared business competition to be wasteful and destructive and offered Theodore Roosevelt $1 million to head up a corporation based on co-operative principles.
The fate of Toshiba is a notable case in point.Starting off selling rice cookers , mobile phones etc (see "From summit to plummet" Economist 2012?) it headed off the intense competition from up to ten rivals by loopy diversification into unrelated fields like nuclear power which has left it struggling to survive.Other Japanese electronic firms have embarked on programmes of turning factories into high tech farms!
Perhaps the Germans have benefitted from their protection of firms from predatory takeovers :the concept of Mittelshaft; BMW is controlled by one family.
In this country Conservative airheads and sexual indeterminates have wrecked the economy by wishing to appear masculine at all times ,taking up challenges only they can see and ramping up competition self destructively. (Do you ever wonder why Resale Price Maintenance has been re-legalised in the US?)
Now the Conservatives are standing on the cliffs of Dover waving their tiny fists at an enormous free trade zone.Brilliant!

Mark Wadsworth said...

JB. Agreed. Savings from economies of scale beat costs of shipping all the parts to one large factory. Import barriers would add to shipping costs and reduce benefit of having large factories.

We know that the EU are constantly threatening to impose barriers on imports from the UK, but it's up to our own UK government whether they want to f--- over UK car manufacturers by imposing barriers on all the stuff they import, so let's hope they don't.

L, not the UK, but south east England. I don't really know, historic reasons, because we invented it, specialisation, agglomeration benefits?

DBC, it's "MIttelstand", not "Mittelshaft", did you just make that word up?

Mark Wadsworth said...

L, this seems to be a good summary

Rich Tee said...

DBCReed: "You sometimes wonder when you look at competitive car production whether King C Gillette wasn't right when he declared business competition to be wasteful and destructive and offered Theodore Roosevelt $1 million to head up a corporation based on co-operative principles."

Ha ha, like I'm going to trust the man who perfected the "sell the product at a loss and make your profit on over-priced refills" model. Bought an ink jet printer refill cartridge lately?

Mark Wadsworth said...

RT, good example.

Lola said...

DBCR The EU is not a 'free trade zone'. It's a protectionist customs union with all sorts of special privileges for all sorts of pressure groups and vested interests. It's a crony corporatist bankrupt bureaucratic racket.

Graeme said...

DBCR RPM has not been re-legalised in the USA. Read the judgment like any proper student would. It is still the case that a RPM agreement has to pass the "rule of reason". The Leegin judgement was passed 5-4 by the Supreme Court, which suggests to me that the debate is still open

DBC Reed said...

As a student ,you have made the mistake of skim reading the judgement, without looking at its many implications. The "rule of reason" supersedes the previous judgement that RPM is per se wrong (as remains the case in Europe). By approving Leegin who didn't want a retail outlet fixing the price of its quality leather goods, the American Supreme Court upheld the right of manufacturers to fix their own price levels and to cease trading with retailers who set their own discounts which made it impossible for the manufacturer to spend extra on quality and after-sales,in a rush to rock bottom retailing.
The ban on RPM in Europe was one reason Heath wanted us to join the EEC: he thought pre Leegin that rpm was per se uncompetitive and was the reason British industry had productivity issues.Clearly knocking on the head all high street shops that were registered agents of reputable manufacturers and letting the supermarkets set retail prices
instead hasn't addressed this issue either. It has just ruined the geography of British towns with people scattered all over the place linked to the supermarket by cars ,often a plural number per household which eats up any savings on shopping.(One of the pleasures of holidays is returning to places where shopping can be done in specialist shops reachable on foot with cafes and bars on the way).
A beginners guide to the larger issues is the paper on RPM by Helen Mercer for the LSE.
I might support Brexit if it meant we could have a Leegin rule of reason in the UK.But this country is doomed by structural economic insanity.