Resplendent in a gold suit and armed with a brush, Margaret Thatcher carefully painted an eye on a big red doll in a ceremony that, according to Japanese tradition, would produce good luck. The date was September 1986 and Thatcher’s handiwork marked the opening of Nissan’s car plant in Sunderland.
The Japanese company’s arrival was a vote of confidence in a sector that for years had been bedevilled by a lack of investment, poor industrial relations and bad management. It was also a coup for the Thatcher government which had wooed carmakers not just with tax breaks but the promise of Britain as a springboard to what was then the European common market.
The plant, said the UK prime minister, was “confirmation . . . that within the whole of Europe, the United Kingdom was the most attractive country — politically and economically — for large scale investment and offered the greatest potential”.
Nissan was not the first — Honda had arrived in Swindon some years earlier — and Toyota followed with a plant in Burnaston, Derbyshire. The arrival of the Japanese triggered a renaissance for Britain’s car industry. Investment in factories, modern production techniques, supply chains and training all followed. That revival has endured for the past three decades and survived major political disruptions such as Britain’s decision not to adopt the euro and the financial crisis in 2008.
But there is now a shadow hanging over an industry threatened by both a global reshaping of the sector and the UK’s impending departure from the EU.
Honda announced on Tuesday that it will close its plant in Swindon in 2021 while Nissan earlier this month cancelled plans to produce a diesel SUV model in Sunderland. Ford, the US group, has said it could make more cuts at its British operations if the UK crashes out of the EU with no-deal. Industry experts say other plants are also under threat.
Even before Honda’s decision inward investment in the UK industry had stalled. From a peak of £5.8bn in 2013, last year’s level was down by almost 50 per cent on 2017 to £588m, according to the Society of Motor Manufacturers and Traders, the industry body. At the same time, production has dropped to its lowest level in five years, with 1.52m cars produced in UK factories in 2018.
While the loss of car plants is a body blow to workers and the manufacturing sector it could also undermine the future health of the wider British economy. The UK has struggled to boost productivity, lagging behind competitors such as France, Germany and the US.
The car industry has been, in the words of John Neill, chairman of logistics group Unipart and a former executive at British Leyland, the company that once dominated the UK industry, “an absolute beacon for productivity”.
He points to remarks made by Sir Jon Cunliffe, deputy governor of the Bank of England for financial stability, in 2015. Productivity in car manufacturing had increased by 30 per cent since the financial crisis, according to Sir Jon.
“If we lose the auto industry,” says Mr Neill, “we lose one of the most powerful drivers of productivity and a powerful source for industrial innovation.”
Britain’s homegrown car industry flourished, then died in the years before the Japanese influx. Car production peaked in 1972 at 1.92m units. While there were successes like the Mini and the E-Type Jaguar, quality was poor and production was plagued by strikes.
Sir John Egan, former chairman of Jaguar Cars, pinpoints two factors that played a role in the decline of Britain’s car industry in the 1970s. “In 1970 if we had had capable managers in British car companies, we could have survived,” he says. Not only that, he adds, but “the industrial relations were anarchic . . . It wasn’t the unions who were in charge, it was the shop stewards”.
The transformation began with the arrival of Honda in 1979 and its partnership with Rover. Over the years the Japanese companies brought modern production techniques with an emphasis on kaizen — continuous improvement — and new ways of managing. Joe Greenwell, former chairman of Ford UK, says this period “marked the start of a long-term recovery in the industry”.
German carmakers followed soon after. In 1994 BMW bought the Rover Group, but its bid to revive what by then had become known as “the English patient” foundered and Rover was eventually sold in 2000 for just £10. The beginnings may not have been auspicious but BMW stayed and has gone on to successfully build the Mini at its plant in Cowley, Oxford. It also bought Rolls-Royce Motor Cars.
Then in 2008 Ford sold Jaguar and Land Rover to India’s Tata Motors. The company ploughed billions into rejuvenating the company’s operations across the West Midlands.
Honda’s decision to quit Swindon — the first closure of an overseas vehicle factory in its 71-year history and the first in the UK since Peugeot shut its Coventry plant in 2007 — has stoked fears of long-term decline in the industry.
External factors have assailed carmakers in recent years. A drop in demand for diesel, trade tariffs and Brexit uncertainty have all compounded the operational challenges. But with less than 40 days to go before the UK leaves the EU, many have asked why did Honda pull the plug now?
The company says Swindon lacked the scale to warrant the necessary investments as the industry shifts towards electric and autonomous vehicles. It insists the UK’s departure from the EU was not a factor. But others are not so sure pointing out that Japanese carmakers have been vocal about the impact of Brexit on their operations since the 2016 vote dented their confidence in the UK.
“A place they thought was very stable and predictable,” says Vince Cable, the Liberal Democrat leader and former UK business secretary, “that place suddenly went Awol.”
But industry observers say Honda’s foray into Europe was always fraught. It never fully recovered from the collapse of its alliance with Rover. Swindon never lived up to Honda’s aspirations to help it expand into Europe. The Japanese group struggled against German rivals and because of its small volume, the plant never became as operationally efficient as Nissan’s Sunderland plant.
“Honda’s plant in the UK is one of the world’s most fragile manufacturing entities so it only took a little bit of poisoning in the air to kill it,” says CLSA analyst Christopher Richter.
Swindon accounted for just 161,000 of the 5.3m cars the group produced worldwide in its previous financial year. Industry watchers believe a car plant needs to make at least 250,000 vehicles annually to achieve the economies of scale to be competitive. Before the global financial crisis Swindon was not far off this level, at around 230,000 units.
“You could say [Honda] has stuck it out a very long time,” says David Bailey, professor of industrial relations at Aston University in Birmingham. “They went down to one production line. That means costs will be significantly higher than when they’ve got maximum throughput.”
The seismic shift gripping the industry should not be underestimated. Decades-old ways of manufacturing are being upended. Companies, says Ian Robertson, former board member at BMW and an adviser to the UK government on its “Future Mobility” plan, are having to “invest billions of dollars”.
“The financial and human resources to do the things coming down the pipeline now are enormous,” he adds.
Young companies led by Tesla and a series of Chinese start-ups are designing electric cars from the ground up, threatening to kill off petrol and diesel engine vehicles already under attack for the pollution they produce. Tech-savvy giants with deep pockets, led by Waymo, the Alphabet self-driving unit, aim to replace human drivers with complex algorithms connected to camera and radar systems. Ride-hailing groups, led by Uber, are upending the notion of individual car ownership.
Each of these pioneers — Tesla, Waymo and Uber — are awarded sky-high valuations on par or greater than giants such as Volkswagen or General Motors, even though none has reported an annual profit. Carmaker stocks, by contrast, sit at recessionary valuations, as investors worry that assets — car plants, supplier relationships and engineering expertise — will actually be liabilities as the combustion engine is displaced by batteries made in Asia.
These threats have been forming for years but the pain has only recently become more acute, with global car sales declining last year for the first time since 2009 and analysts predicting that demand has peaked.
For Britain’s car industry Honda’s decision to close Swindon — which has put at risk at least 7,000 jobs — is a major setback. Having recovered over the past 30 years thanks to inward investment, strong luxury brands and a roster of international players, the UK industry stands at a crossroads. Its global players are on the move and looking hard where best to place new investment.
Greg Clark, Britain’s business secretary, concedes Honda’s news is “a real blow” but insists the UK remains attractive, despite the Brexit uncertainties, as evidenced by several car companies deciding to build new models here.
“I’ve been asking people not to make a hasty decision against us,” he says. “Don’t assume that we will leave [the EU] without the ability to continue to trade in much the same way that we have. I can’t guarantee that but that is what we want.”
Additional reporting by Kana Inagaki in Tokyo