Cutting capacity to weather the slump

Two excellent examples in recent days of businesses moving quickly to combat a slump in demand and sales. Both Land Rover and Toyota have decided to scale back on production at their manufacturing plants in the UK. Toyota has a huge plant at Burnaston in Derbyshire second only to Nissan in Sunderland for the annual output of vehicles. The Times reports that Toyota plans to reduce the number of daily shifts on the plant’s Auris production line from two to one this year. Over at Land Rover, some of the assembly workers will have longer weekends after a decision to make Land Rover and Discovery vehicles on four days a week, from Monday to Thursday.

These decisions are pro-active in the sense that businesses cannot afford to build up too high a stock of unsold cars - and with the credit crunch continuing to bite, demand for cars from consumers and from the fleet sector is weakening rapidly. The lower pound ought to make UK manufactured cars more competitive in western European markets - but with the Euro Area teetering on the brink of recession, the negative income effect on demand for new vehicles is offsetting the competitive boost from a lower currency.