The Wheels of the Car Industry

1972 was a significant year for the UK car industry, for it was the high water mark year. In 1972, UK car production peaked at 1.92 million cars. This feat was led by the largest producer, British Leyland, a sprawling automotive conglomerate formed in 1968 through the merger of Leyland Motors and British Motor Holdings. 

However, British Leyland's success was short lived, as the company soon faced financial and production difficulties, leading to its nationalisation in 1975. 

But that didn’t save British Leyland, which eventually saw its demise in 1986, with the remnants renamed and reformed as Rover Group. However, Rover had a troubled history and in 2005, as MG Rover Group, its key assets were purchased by Nanjing Automobile Group, a state owned Chinese manufacturer. The once sprawling industrial behemoth was dead.

Discussions about the UK car industry are usually followed by the phrase “the UK doesn’t make anything anymore”, which isn’t entirely true. However, in 1970, manufacturing contributed about 27% to the UK’s GDP. This figure has steadily decreased, falling to about 9.3% by 2023.​ This happened in part due to the rise of the services sector. The change in the economic composition of the UK has increased the belief that the UK doesn’t make anything any more. It’s very easy to see the physical infrastructure of industrial manufacturing. For the service sector, there is less physical infrastructure, and that which exists is both far more concentrated and less visible (offices and software). 

But even so, manufacturing in the UK has declined. The UK was, and is, unable to compete in labour intensive manufacturing in a global market. Less developed nations can produce labour intensive mass market products, at a lower cost than the UK. In addition, a strong pound has made UK exports less competitive. 

Modern UK manufacturing is now focused on deep tech and precision manufacturing. I’m not arguing against revitalising the UK manufacturing sector at all. On the contrary, a bit of British dynamism in manufacturing wouldn’t go amiss, but we’ll never compete on labour intensive products. Instead, the UK should compete on high R&D, capital intensive, precision engineering during the production of economically complex products.

Back to cars: for most of the 21st century, up until 2019, UK car output hovered around 1.5 million to 1.8 million units a year, and although it never reached the 1972 peak, car production was high (though it has fallen significantly to below 1 million since then). Of course, global car production has increased, so whilst the absolute numbers are stable, this represents a proportional decline. So the UK continues to make cars, but not like it once did. And the difference between the 20th century and now is that car manufacturing is located in the UK, but for non-UK companies.

This is a sign that, over the years, the car industry has seen massive consolidation. 

The car is one of the most consequential technologies of all time, but it’s a tough business to be in. It’s capital intensive industry with relentless competition; the cost of developing a new vehicle is prohibitive, and demand is sensitive to macroeconomic conditions. A recession is a death knell for many a car company. It is economics 101: when an economy begins to downturn, the sales of new cars are one of the first things to fall. The car industry is a business where the demand side will change far more quickly than the supply side. The complexities of the supply chain, from mining for raw materials to building engine and transmission components, producing electrical components like battery packs and wiring, the sourcing of tyres and the building of highly automated factories, all take time. When a recession hits, car companies are left with excess supply.

The car industry is an industry in which it is mightily hard to survive: in the UK the remnants of British Leyland survive with the successful and highly regarded Jaguar Land Rover company. But that’s about it. In the US, only Tesla and Ford have never gone bankrupt. Chrysler and General Motors (GM), the big automotive companies that are central to the culture of the United States, both required government support to stay alive. In 2009, during the Great Financial Crisis and subsequent recession, Chrysler and GM filed for Chapter 11 bankruptcy protection, and they received approximately $80 billion from the Troubled Asset Relief Program (TARP). Ford successfully navigated the 2008 recession. Tesla, as told by Elon Musk, survived, but only just. According to Musk, Tesla secured financing on Christmas Eve 2008. Whilst the size of these bailouts was unprecedented, the car industry has often been a key part of a nation’s industrial strategy, and often protectionism.

As Warren Buffett said about the car industry: “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” In other words, even though the car has enabled billions in economic output, changed the face of the world and culture, created large industrial conglomerates so important that they are deemed too big to fail, employed hundreds of thousands of people and are at the centre of a highly globalised and complex supply chain, it’s hard to make a successful investment in a car company because it doesn’t generate predictable and defendable income. 

So, the car business is a hard one to be in. Or is it? German and Japanese car manufacturers have been much more successful. Let’s take a look: in 2023, the largest car manufacturers are:

The car industry was once the preserve of Western European nations and the United States as the technology diffused outwards from its innovation focal point. The Asian tiger economies of Japan and South Korea began making significant inroads in the final quarter of the 20th century. Then, in the 2000s and 2010s, China began to dominate global car production, and production increasingly shifted to lower cost manufacturing countries such as India, Mexico and Brazil. 

Why have German and Japanese car manufacturers been more successful than their US and UK counterparts? 

German and Japanese brands are a byword for quality, which now helps their sales through a reinforcing loop. Still, the reputation for quality is the result of something else. It’s a result of engineering excellence, combining precision technology, technological innovation and operational innovation (such as Lean Manufacturing and the Toyota Production System).

The US and UK relied on labour intensive production lines, which soon meant that German and Japanese manufacturers could produce better quality cars at a lower cost than the likes of GM and British Leyland. The car production lines for Japanese and German car manufacturers, and soon copied by Korean and Chinese manufacturers, embraced robotics, electronics and software.

In the UK, instead of embracing this innovation, management and labour unions engaged in a never ending series of strikes and corporate warfare while their future burned around them. The endpoint of that is what we see in the car industry today.

The next stage of innovation in the car industry is well underway, with EVs increasingly accounting for a larger portion of car sales (Chinese car manufacturers now account for over 7% of EV sales in Europe); and the endless drive towards Level 5 automation. On the production line, robots are no longer hard programmed but use AI to learn how to complete tasks, reducing the time and cost of repurposing a robot as the slow march of general purpose robots continues. Whereas once UK and US car makers were surpassed by German, Japanese and Korean car makers, it is now Chinese manufacturers leading the way with EVs, driverless cars and automated production lines. The endpoint of the next phase of innovation in the car industry is still to be written.