- The Observer,
- Sunday May 11, 2003
Could the weakening of the pound against the euro turn the tide for UK manufacturing? And if Britain joins, will its troubles be over?
There was deep disappointment last week that interest rates were not cut after the CBI's Quarterly Industrial Trends survey showed total manufacturing orders falling at their fastest rate for four years, while the employers' organisation warned that 86,000 jobs were expected to go in the first half of the year.
That comes on top of the 626,000 lost since 1996, a period throughout which manufacturers have often pointed to the strength of sterling against the Eurozone currencies as the key to their misfortune.
But while the euro has been the common thread, it has not necessarily been the cause of manufacturing's plight.
CBI economist Doug Godden points to three factors: increasing competition from low-wage economies undercutting UK producers and encouraging them to shift production overseas, the downturn in the global economy since 2000, and the exchange rate.
'The pound/euro exchange rate has had a fairly dramatic effect,' he adds. 'But in the past 18 months the most important factor has been the slowdown in world demand,'
With the effect of the depreciation not likely to be felt for another year at least, manufacturers are predicting the exodus will continue: the Engineering Employers' Federation's most recent Euro Survey showed a third of companies, and fully half of those with more than 500 employees, already had production outside the UK, and a third expected to move some overseas in the next five years.
While the exchange rate may be blamed for some of these moves, many businesses have - painfully - learnt to live with sterling's strength. In other words, some businesses see the euro as less vital than it was.
So, as convergence - the criteria which most concerns companies - appears to have come to within the realms of acceptability, businesses are not screaming to join.
Stephen Radley of the EEF says: 'The current level of the pound/euro [roughly 1.43, with the pound hitting new lows last week] is pretty close to a level members think is competitive.'
As the EEF also notes, joining the euro may not have the major impact that has been forecast, for example on investment, and therefore employment, in the UK. 'Some companies say it would have an impact on investment and location decisions, but the numbers are small,' says Radley.
But that depends on what the company does. Generally speaking, as one might expect, those which operate in the UK and sell most of their product to the Eurozone are most concerned.
However, those that sell higher value, more specialised goods - aerospace manufacturers and electronics and healthcare companies - are presumed less likely to be so. Aerospace companies, for example, have historically faced little problem with the euro rate because products are sold in dollars. However, as Professor Keith Hayward of the Society of British Aerospace Companies says, UK component suppliers selling, for example, to Airbus, which invoices both in euros and dollars, have found they can be undercut by European competitors.
'Anyone bidding within the Eurozone potentially has a competitive advantage from those outside - although that is changing with depreciation,' he says. 'However, there is a quality factor in aerospace which limits the pure currency effect. The key question will be whether the euro comes to rival the dollar as a reserve trading currency.
Firms that sell more commoditised products are more exposed. Radley says: 'You get a bit bigger proportion if you look, for example, at motor manufacturers.'
Even within this sector there are differences according to the strategies of individual companies. Some component manufacturers say they want entry because they are losing contracts as they are sourced overseas, or because they are forced to invoice vehicle makers in euros and bear currency risk themselves.
As for major league vehicle producers, Honda, for example, professes indifference. The company, which opened a second, £450m plant in the UK in 2001 despite five years of currency difficulties, says this proves its commitment.
Honda exports 150,000 of the 184,000 vehicles it makes at its Swindon factories. It built its second plant with maximum flexibility in mind, and, with the exchange rate working against European exports, decided to build its CRV four-wheel drive there for the US. Nissan's chairman Carlos Ghosn has been more aggressive on the issue (see below).
For Ford the situation is different again. While, for example, it closed its Dagenham plant and shifted Fiesta production to Germany, it still sources 30 per cent of parts in the UK, and this doubles for some of its UK upmarket brands, such as Jaguar and Land-Rover. Across Europe 34.5 per cent of its $22bn components bill was in sterling.
It is not surprising that the group's operating chief Sir Nick Scheele said last week: 'Any unnecessary delay in adopting the euro is detrimental to UK manufacturing and the many companies that need a stable and competitive landscape. If the Government decides to delay and review the economic tests at a later date, then we hope that can be as soon as the economic conditions are met.'
However, at the base of the supply chain, there is yet another view. Corus provides steel to manufacturing industry, including car makers. The company has announced the loss of more than 11,000 jobs since it merged with Dutch company Hoogovens in 1999 - a move partly driven by a wish to create a presence in the Eurozone - and 10,000 of them have been in the UK.
Partly this is due to the lack of competitiveness of UK steel. But, as a spokesman added: 'Household names - Ford, Vauxhall, Caterpillar, Black & Decker, Dyson - were moving production outside the UK. Those were our customers.'
Not any more. Manufacturers say companies such as Corus are too expensive. Corus welcomes the depreciation of the currency, but it feels like too little, too late. It is not clear whether the euro will now be able to unwind this vicious spiral.
