Blog
A Collapse in UK Vehicle Production
19th December 2008
Car manufacturing and commercial vehicle production in the UK slumped to its lowest level for over 21 years last month as the sector suffers from the squeeze on credit and the broader economic recession.
The Guardian covers the latest news on the collapse in output and the wider issue of whether the government should provide a financial bail out for UK based car and light vehicle producers. The monthly output data will get even worse in the new year with many assembly plants closing down for an extended period over December and the New Year.
76% of UK car output is exported but the industry has yet to benefit in any significant way from the depreciation of the pound.
This quote from the Guardian article captures the essence of the problem facing agents at every stage of the supply chain:
“At the moment, the manufacturers can’t get credit, the suppliers can’t get credit, the dealers can’t get credit and the customers can’t get credit. It’s a very tight circle,” said one industry source. “What we want is for the government to get liquidity back into the market.”
The Society of Motor Manufacturers and Traders issued this statement:
“The UK motor industry is facing unprecedented challenges and urgent action is now required. The sector has seen falls in demand, extended plant closures and the first signs of redundancies in the supply chain. Without swift action and the ability to access credit and finance, significant damage will be done to the nation’s industrial capability – leaving the UK poorly equipped to take advantage of any global growth when it returns.”
The statement hints at what economists term a ‘hysteresis effect’ - where an economic recession can create long-standing damage to the capacity of the industry through plant closures and business failures (which reduces the size of the capital stock) and where structural unemployment within the industry and related supply-chain businesses can lead to a depreciation in the employable skills of affected workers and the possibility of a permanent reduction in the available labour supply.
Around 190,000 people are employed in car making in Britain - hundreds of thousands of other jobs are linked directly to the fortunes of the motor vehicle industry. Over supply of vehicles is not just a UK experience - American car giant Chrysler has just announced it is stopping production for a whole month.
The Today programme analysed the inter-connections between car producers and supply-chain industries in their programme today - here is the background article
Some questions to consider:
Identify three factors that might explain the fall in demand for new vehicles
Explain why many car manufacturers are shutting down their plants for an extended period
Is the car industry one where government financial intervention is justified?
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.