How factory overcapacity threatens the car industry

In 2016, the UK built 1.7 million cars. Last year, we built just 850,575. This slump in production means the UK has spare factory capacity to build another 750,000 cars at least, even despite losing Honda Swindon last year. The entire automotive industry has had a rough couple of years, as the Covid pandemic was followed by a semiconductor shortage, and car makers will be hoping to put more cars down production lines - if not in 2022 then definitely in 2023. If that doesn’t happen, though, the costs associated with overcapacity will make manufacturing cars in the UK uncompetitive for those remaining. It’s not just the UK struggling with overcapacity. According to research from analyst company Inovev, Europe has enough assembly plants to build around 22 million cars, but last year production fell below 15 million. It estimated the total capacity utilisation rate at just 60%, the lowest in 20 years. For Autocar Business webinars and podcasts, visit Autocar Business Live “Given that the production forecasts are not very optimistic for the decade, manufacturers will have every interest in reducing the capacity of their factories or closing several of their factories,” Inovev said in a March report. That view was echoed by Stellantis CEO Carlos Tavares at a recent strategy event. Stellantis last year had a plant utilisation rate of less than 60%, Inovev calculated – far too low for a company that's trying to find cost-savings to run 14 brands under the same banner, including Citroën, Fiat, Peugeot and Vauxhall. Tavares believes the ideal size for Europe’s car market is between 18m and 20m. “If we continue to remain at about 15m, actions on capacity [ie shutting plants] will be required, because I have to assure the sustainability of this company,” he said at the event. In the UK, the prognosis isn’t good. Gone is the optimism of 2015, when the SMMT predicted that we would be breaking our 1972 record of 1.92m by 2018. Since then we’ve had Brexit, the pandemic, supply-chain shortages and a fundamental shift in the approach to manufacturing brought about by electrification. Inovev predicts that by 2030, UK car manufacturing still won’t have climbed past 1m. “The departure of another manufacturer from the country can't be excluded,” it wrote in its March report. The most underutilised plants are generally in the highest-cost countries, which means their owners are reducing those costs by transferring more production to cheaper countries in eastern or southern Europe. It’s no coincidence that utilisation there is much, much higher. France, Italy, the UK, Germany, Italy and Poland have the worst utilisation rates, at between 50-54%, according to Inovev, while the highest are Portugal, Hungary, Romania and Sweden (the latter an outlier boosted by Volvo demand). It's hard to ignore the differences in labour costs. Figures from the European Union’s Eurostat statistics service for 2021 hourly labour rates put France at €37.90 (£31.90) and Germany at €37.20, compared with €16 for Portugal, €15.30 for the Czech Republic and €11.20 for Croatia. The UK stood at €28.50 per hour in 2019 (the last figure available). Governments will fight to stop the flow of production out of their countries. We saw last year the UK government’s determination to keep the Ellesmere Port near Liverpool open with a promise to pay 30% of the £100m that owner Stellantis eventually pledged to pay to transition it from making the Vauxhall Astra to electric vans. Ellesmere Port has been unpopular with its owners for a while now. In 2012, the UK business minister at the time, Vince Cable, made a special trip to the Geneva motor show to persuade then-owner General Motors not to shut the plant as planned. Car makers have had to come up with different ways to close plants to reduce the political fallout. One method is ‘repurposing’ the plant – a strategy used by Jaguar Land Rover for its Jaguar plant in Castle Bromwich. Production will stop at an unspecified time, but it will still be used for other activities, JLR said last year, without going into detail. Renault, meanwhile, will turn its Flins plant just outside Paris into a ‘Refactory’ that will refurbish used cars when it stops making new cars in 2024. Could we lose more plants in the UK? The question for vehicle makers is this: do you have faith you can switch to making EVs and still build them at a profit in the UK? For a company like JLR with a higher average purchase price, the answer is probably yes. For the likes of Toyota and BMW with Mini, it's a tricky one. Nissan has already committed to making an SUV replacement for the electric Leaf at Sunderland at far higher volumes – up to 100,000 a year. Mini, on the other hand, has said the next Mini EV will be made in China, not Oxford. Toyota also has a key decision to make about its Burnaston plant in Derbyshire as to whether that can switch from making the hybrid Toyota Corolla to EVs. The danger is that the pressing need to drive down costs of mainstream EVs could also drive out a big chunk of UK’s automotive manufacturing. Protecting it is going to require more than installing a couple of battery factories. The rise and fall of UK car production 1972 1,920,000 (record) 2003 1,657,558 2004 1,646,750 2005 1,595,697 2006 1,442,085 2007 1,534,567 2008 1,446,610 2009 999,460 2010 1,270,444 2011 1,343,810 2012 1,464,906 2013 na 2014 1,528,148 2015 1,587,677 2016 1,722,698 2017 1,671,166 2018 1,519,440 2019 1,303,135 2021 850,575 2020 920,928 Figures from the SMMT