Impact of the Decline in the Car Industry on the State of UK - Research Paper Example

Research Paper Impact of the Decline in Car Industry on the State of UK Economy TABLE OF CONTENT Introduction 03 Background 04 Current situation and Facts 05 ASTIN MARTIN 06 FORD 07 Factors behind Dramatic Fall of Automotive industry 08 Multiplier Process 10 Joblessness in Car Industry 12 Measurement of unemployment 12 Measurement of inflation 13 Measurement of Economic Growth 13 Conclusion 15 References 16 INTRODUCTION UK is 12th largest automotive manufacturer and it also is one of the most important sectors in UK economy. So it won’t be wrong if we say that automotive industry is the pillar of economy. In the year 2005, there were 210,000 people in the workforce which were directly engaged in auto and car manufacturing in the UK car industry. This makes up a total proportion 6.5 percent of the entire UK manufacturing in that year. The crisis in the auto industry is indicative of the general precipitous decline in UK manufacturing that is now under way. In the beginning of the year 2009, the Office for National Statistics (ONS) revealed the output of the UK car manufacturing and it was discovered that the total output of the car manufacturing had fallen with the fastest pace ever from the year 1981. BACKGROUND Jaguar has its plants in Birmingham and Coventry and is the big success story posting four years of strong sales. In 2001 the company sales 100,000 cars for the first time ever. In 2000, the Rover Cars went into bankruptcy due to the fact that the former BMW owner was not successful in recovering the company from the huge losses that it had accumulated. A number of new cars produces in UK fell by 59% which is record and the UK car industry has to suffer because of weak demand. Many manufacturers have to cut down the production because of the falling sales. Current situation and facts: Following are some of the facts about deteriorating automotive industry: The Society of Motor Manufacturers and Traders (SMMT) said just 59,777 cars were made in the UK last month. The 59% fall was the largest drop in a single month according to SMMT records which date back to 1970, and the fifth straight month of decline. The SMMT (Society of Motor Manufacturers and Traders Ltd) is involved in asking the government to take measures in order to get help for their finance divisions whose major task is to make loans available to purchase cars. Now have a look at graph of automobiles sales history in order to judge the intensity of decline. Loans and assistance totaling around £1.5bn from Government and European Investment Bank sources are being lined up for Jaguar Land Rover, Nissan and Vauxhall largely for the development of more environmentally friendly 'green' models and technology. CURRENT SITUATION OF CAR ROLLING IN UK Now let us have a look at situation of two biggies of industry individually that are: 1. Aston Martin 2. FORD ASTON MARTIN: Aston Martin was the brand made famous by James Bond movies. While giving an interview to a news channel CEO of the company BEZ said that will produce between 4,500 and 5,000 cars this year compared with nearly 6,000 it made in 2008. Aston Martin now aims to sell 10 per cent of its cars in the Middle East as part of its efforts to expand beyond the main Europe and US markets. According to Gulf news: Aston Martin sells 90 per cent of its cars in the UK, US and Western Europe, but has been trying to diversify its sales with greater focus on China. Current Situation of Aston: The 59% fall was the largest drop in a single month according to SMMT records which date back to 1970, and the fifth straight month of decline. In the entire UK, the automotive makers are now bound to stop producing more cars as they are holding huge amount of inventories. They are forced to cut salaries of their staff and also a number of layoffs are taking place in the industry as the sales for cars are going down at an increasing rate. Due to this decline car parts group have also been struck by the downturn. FORD According to BBC world, Ford’s financial losses grew to $5.8 billion in the third quarter of 2006, Tough competition was one of the reasons behind the decline of ford. The only positive aspect is that the Ford’s sales for trucks are still not down but the increase in the gas prices which is continuously rising is expected to leave a bad effect on the truck sales also. The sales are however increasing in the growing countries like China, South America, and Europe.  Since the truck sales are still up, Ford is capitalizing on these sales and its major profits are being derived from them as most of the range of cars that it offers is not generating enough profits for the company to survive. Current Situation: Ford IKON was launched in 2008 which get good response from Indian consumers and helped ford to boost its sales graph. According to JCR report, on the backdrop of increasingly competitive situation in the North American auto market, Ford suffered from substantial erosion in market shares and deteriorating sales mix. The sales and revenue figures for the company have seen extreme ups and down since the year 2005; as the sales in 2005 were 176.8 billion and these started decreasing in the year 2006 and were 160.1 billion next year. In 2007, the sales saw an upward surge and went to a high of 172.5 billion. But after this 2008 and the current year, the sales are continuously decreasing. The return on investment in year 2007 for Ford was -10.4. Factors behind the Decline of Automotive Industry: 1. High Competition: High competition from foreign car imports is causing US manufacturers to seek low cost deals with overseas companies and in order to reduce costs of domestic automobiles, manufacturers of component parts are moving to countries like Canada, Mexico, India, china and Philippines. 2. Rising Fuel costs: Rising fuel price is another important factor which is very influential to the automotive industry.. On the other hand with the gas price increasing the demand for high efficient vehicles is increasing which means manufacturers can raise price due to high demands 3. War, Global Economic Growth and Oil: As foreign economies like china are expanding demand of oil is also increasing, and as tensions and costs in Iraq continue to increase, OPEC will continue to squeeze oil supply in order to generate high revenues. Both of these trends point out to the increased energy efficiency, yet the automakers have continued to produce SUVs in higher proportion than foreign car makers. Due of this reason, their profit margins have decreased sharply over the last few years. 4. Weak demand: Weak demand of cars is also one of the big reasons behind falling sales of cars in UK. 4. NEW VS USED CARS: Under these circumstances people prefer to purchase used cars instead of new ones. another reason is that price of used cars has decreased noticeably and on the other hand new cars are slightly getting expensive year by year. The graph of consumer price index is shown below. So the major issue is of demand management which leads toward the multiplier process. In order to understand the multiplier process it is important to understand the circular flow diagram. Definition: The 'multiplier process' is simply a positive feedback to an initial increase (or decrease) in spending. If you measure income in a year, an initial increase in spending goes through many people's hands. Formula to find out increase in national income: Multiplier = 1/1-MPC=1/MPS Total increase in national income=initial injection*multiplier MULTIPLIER PROCESS: Following is the circular diagram of multiplier process. The marginal propensity to tax (MPT) is assumed to be 0.4 or 40% which means that an individual pays on an average 40% tax which is very high. The marginal propensity to import (MPM) is assumed to be 0.2.The amount of money that subsequently flows around the economy after the initial injection is much smaller. The higher the withdrawals, the lower will be the value of the multiplier. In the 2-sector formula, we divided one by the MPS. If we see it logically, MPs shows the marginal propensity to withdraw (MPW), for the reason that saving is the withdrawal that takes place. Thus, through the example just discussed, if we add MPT, MPM and MPW, we will get 0.2 + 0.4 + 0.2 = 0.8. This means that the multiplier will be 1/0.8 which will be equivalent to 1.25. Finally, the total increase in national income is £125 million (£100 million times 1.25). The value that we derived was 1.25 this value is in most of the cases less than 2 in the real world scenarios. Even though the savings ratio is quite low in the UK (less than 10%), the tax burden is about 38%, and around 30% of GDP is spent on imports. This shows that the MPW is in most cases above 50% or 0.5; if it’s less than 50%, it will give give a value of multiplier which will be greater than 2. JOBLESNESS IN CAR INDUSTRY: According to BBC 100,000 worldwide job losses directly linked to the industry's demise, with carmakers poised to cut even more jobs in the months ahead. The uncertain situation in the economy and auto motive industry of the country has also made people conscious about their job security. According to” Armed Force Journal:” the manufacturing sector has lost an average of 50,000 jobs every month for eight straight years” Indicators of macro economics indicators: Unemployment: In order to measure unemployment the average number of unemployed citizens over 18 years of age relative to the total labor force. Here, the population includes only those people who are registered as unemployed. If the rate of unemployment is lower, it is a good sign for the country as it shows that most of the country residents are employed and are a part of the goods and services industry and are also contributing to the GP growth of the country. An increase in unemployment results in lower GDP Inflation: Inflation is basically increased in general level of prices or we can say that it is decrease in the value of money. There are different methods to measure inflation but usually two indexes are used: CPI (consumer production index); it measures price changes from consumer’s perspective. PPI (producer production index): PPI measures price changes from seller’s perspective Economic Growth: According to Simon Kuznets “we measure economic growth by valuing past production at today's prices--the equivalent of stuffing output in the past into a time machine, bringing it forward to the present, and then selling it” .He made certain rules of measuring economic growth which include: The present is the measure of the past We are interested in how we would value what they produced long ago Hence real income comparisons are always done using current dollars (or recent dollars) According to Financial forecast center” INDICATOR VALUE Inflation% = -0.45 Unemployment % = 8.50 GDP growth % = -6.50 Conclusion Automotive industry is facing serious trouble nowadays; if we look at the factors behind this decline we came to know that all this basically happened because of tough competition in market, mismanagement by automotive owners, high fuel prices and resulted in inflation, unemployment and poor economy. Due to this decline in industry ratio of unemployment and inflation is increasing day by day. The government is active in dealing with this downtown lets see what will happen in future whether this sinking industry will again come up with boom or it has to face more decline….. REFERANCES 1. BBC News 2009, “Special Reports | G20| G20: Economic Summit Snapshot”, BBC News, viewed 25 April 2009, 2. Britannica Online Encyclopedia 2009,” Automobile Industry”, viewed 25 April 2009, 3. Church, Roy A. 1995, The Rise and Decline of the British Motor Industry, Cambridge University Press. 4. Whisler, Timothy R. 1999, The British Motor Industry, 1945-1994: A Case Study in Industrial Decline, Oxford University Press. 5. Steil, Benn, Victor, David G. & Nelson, Richard R. 2002, Technological Innovation and Economic Performance, Princeton University Press. 6. Werner, Jacques 1990, World Competition, University of California. 7. BBC News 2002, “What's Left of the UK Car Industry”, BBC News, viewed 25 April 2009, 8. Auto Industry 2009, UK New Vehicle Production - January 2009, viewed 25 April 2009, 9. SMMT 2009, UK New Vehicle Production - January 2009, viewed 25 April 2009, 10. Channel 4 News 2009, The State of the UK Car Industry, viewed 25 April 2009, 11. BBC News 2009, “UK Car Sales Fall to 12-year-low”, BBC News, viewed 25 April 2009, 12. Car Insurance News 2009, UK Car Industry Affected By Attack Of Credit Crunch, viewed 25 April 2009, 13. Luff, Peter 2007, Success and Failure in the UK Car Manufacturing Industry, The Stationery Office. 14. Milmo, Dan & Webb 2009, Budget 2009: Car Industry Welcomes Scrappage Scheme, www.guardian.co.uk | UK News, viewed 25 April 2009, 15. Auto Express News 2009, Auto Express New Archive, viewed 25 April 2009, Read More