Unit 2 Macro: Ford announces the closure of UK assembly plants

The headline news from the Financial Times could not be starker. Ford Motors has announced the closure of its last two remaining assembly plants in the UK with the probably loss of thousands of jobs. The Ford Transit plant in Southampton will close in early 2013 and a tooling factory will close in Dagenham, east London. Workers in these two factories are paying a heavy price for the sustained fall in new vehicle orders and production since the credit crunch came in 2007. Since then there has been a more than 20 per cent decline in total demand for vehicles. New passenger car registrations in Europe are expected to be just over 9 million in 2012 compared to 13 million in 2011 and 15 million in 2007. Demand for commercial vehicles has also suffered as businesses have cut back on their capital investment.Ford is not alone in making difficult decisions to restructure their European business as a way of stemming losses and maintaining competitiveness in a hugely difficult market. Many other leading car manufacturers are taking steps to lower their production costs and survive this turbulent period:

1. Many vehicle makers are engaging in joint ventures as a way of cutting research and development costs and improving their buying power (monopsony power) in purchasing components and in-vehicle technologies - for example Peugeot and GM's new global alliance
2. Car manufacturers are continuing to shift design, testing and production towards smaller and more fuel efficient cars
3. Some relocation of production is occurring, For Motor is closing a major plant in Belgium and re-locating to Spain

The fundamental difficulty is that demand is weak and most producers are operating well below their capacity. With high overhead costs, lower than expected production drives up the unit cost and makes many plants uneconomic.

The direct loss of jobs from the closure of a vehicle assembly plant is amplified by the negative local and regional multiplier effects . Production cut backs and shut-downs causes falling revenues and profits for supply-chain businesses together with service sector businesses in the locality of the factories. A local trade union leader was quoted on television saying ""The planned closures will really hurt the local economies and the supply chain will be badly hit - up to 10,000 jobs could be at risk."

This BBC news report looks at some of the fallout from the news of job losses at Ford in the UK. The big danger is a steep short term rise in cyclical unemployment brought about by falling demand for vehicles will turn into a deeper structural jobless problem in east London and on the South Coast. Unemployment has a huge human, economic and social cost.