Sean O'Grady: Good marques: The car makers show us how to speed out of a slump

Economic view
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The Independent Online

Blessed be the car makers, for they shall inherit the earth.

Well, they ought to, at any rate. Everyone's been talking about rebalancing the economy towards manufacturing and exports: The British motor industry has just been getting on with it. It is an illuminating case study.

A few decades ago, the British industry, such as it was, was largely a matter of declining production of flawed products for the home market. That has changed radically; now only one in four cars that stream from our factories is sold here. So it is natural that one of the big drivers of the improvement in our export performance in recent months has come from the automotive sector, long written off but still a crucial part of the economy, about 1 or 2 per cent of GDP. It is doing more than its bit to help Britain pay her way in the world. Manufacturing is one eighth of the economy but accounts for half of exports. Enough said.

This year has seen a remarkable turnaround, both in production and exports, from the dire state of affairs last year. At that time it looked as if Vauxhall might close. And Honda, Toyota and Nissan variously put their staff on short time or halted production. As with the economy as a whole, things are not quite back to pre-crisis levels of output, but times have changed, and nowhere more dramatically than on the external account.

Between the first and the second quarters, auto imports were down by £183m and exports were up £464m, an overall contribution from the car industry of £647m to the national income. The fall in imports was partly due to the phasing out of the disastrous and costly scrappage scheme (which we now know Treasury civil servants opposed). That scheme, it is worth stressing, did plenty to support the retail motor trade, but given that 85 per cent of cars sold in the UK are imported, it did little for those who make cars here. As you can see from the chart, it did help boost production, but only temporarily.

Anyway, we have a more permanent basis for optimism these days. For what we appear to be witnessing is a product-led as much as an export-led recovery. Put at its simplest, the Americans and Chinese seem to like our new model Jaguars, Land Rovers, Bentleys and Rolls-Royces. A new Vauxhall Astra and competitive products from BMW/ Mini, Nissan (especially the runaway successful Qashqai) and Toyota (including a new hybrid version of the Auris) are also selling well here and in Europe.

Jaguar Land Rover's excellent results last week also confirm that recovery story. Ford may yet come to regret selling this potentially hugely successful business to Tata; latest earnings were pretty impressive, but future growth, especially in Asia, will be in the prestige brands. Ford may also regret allowing Volvo to slip into the hands of the Chinese-based Geely.

Cars are an example that the rest of British industry would do well to follow. As the former trade minister Lord (Digby) Jones argued on the Today programme on the Thursday, relying on price competitiveness alone is a mug's game, as China and India will always be cheaper places to make generic, low-value stuff. Quality, design, image – these all matter too. Besides, you can't rely on the pound drifting lower for ever. Indeed, this year it has been quietly creeping up against the dollar and the euro, undoing a little of the price competitiveness gained between 2007 and 2009. Overall, sterling is down by about 21 per cent from its 2007 peaks, rather than the 25 per cent advantage it gained by last year.

Which leaves the important question of just why the British motor industry has done as well as it has in exceptionally bleak circumstances.

Three factors suggest themselves. First, there has been a gradual shift from the volume end of the business towards the more specialised, high-value end of the market, where brand and craftsmanship are as highly prized as high technology and performance. True, plenty of that hi-tech technology comes in boxes from Japan and Germany, but at least it's there. Given the scale of new capacity coming on-stream in volume car production in China, Russia, India, Brazil and other emerging centres, staying at the luxury end of the business is probably a bit safer, though the Mini shows that some products can be premium in their own little corners of the volume market.

Secondly, the quality of British models has been transformed over the years, and this has been largely due to foreign investment of capital and management techniques. With the benefit of a long perspective we have to admit it must have been the top managers and the engineers who were to blame for the death of a domestically owned industry; the workers are much the same folk they ever were, though they go on strike less than they used to.

At the back of the mind of everyone who examines the car industry is the thought that, had BMW had more time, patience, and funds to put into that business, MG Rover at Longbridge might still be churning out cars, even if they wore BMW badges. A healthy MG Rover, never a likely prospect, would certainly have helped the West Midlands get through the recession better, rather than suffering unemployment rates of 10 per cent plus – the worst region in the country. It would also be playing its part in the export drive. Maybe the tiny operation now run from Longbridge by Shanghai Automotive (generating a trickle of MG TF sports cars) may develop into something more significant. Here's hoping.

So – third point – we were foolish, as a nation, to persuade ourselves that all that mattered was the City and financial services. That was certainly the attitude when MG Rover was allowed to go bust by the government in April 2005. Then there was ministerial neglect; last year there were subsidies and a big push for the UK to be a centre for electric vehicles. If only that support had been forthcoming five years ago.

In other advanced European economies, manufacturing has been a source of strength. The obvious example is Germany, whose growth figures last week were astonishingly impressive. A few years ago it was fashionable in Britain to deride the Germans as sticking to the outdated business of making things while we were concentrating on financial engineering. That argument is not heard so much these days. German exporting companies, in fact, are among the few winners from the recent sovereign-debt crises in the eurozone. The plummeting value of the single currency has given German firms a huge boost; and they have been better than their European competitors at containing costs and reforming labour markets. With the revival in Chinese demand for capital goods in particular, Germany is comparatively booming, and with the nice bonus of healthy public finances. You might have noticed that they're pretty good at making cars too. Just a thought.

Gordon's global ambitions. Our old PM would so love to reform the IMF

What next for Gordon Brown? Why, the IMF of course. The circumstantial evidence is compelling. Despite Brown's undoubted desire to spend more time with his wife and two little sons, he is still not quite 60 years old, and quite young enough to do a useful job. Like Tony Blair, Brown's reputation abroad ranks far higher than at home, and he is, rightly, given much credit for co-ordinating the G20 response to the financial meltdown in 2008. It is perfectly possible that the world could have been tipped into a deep depression had the simultaneous boosting of national economies around the world not taken place. Few would challenge his claim on the job of IMF managing director. Indeed, he was talked of as a potential candidate a few years ago, when Blair would have liked to have packed him off to Washington, but Brown had other plans then.

Brown is also writing a book on the crisis that seems little more than an expanded job application for the IMF. The blurb, for example, reads: "Our economies are connected as never before, and I believe that global economic problems require global solutions and global institutions. In writing my analysis of the financial crisis, I wanted to help explain how we got here, but more importantly to offer some recommendations as to how the next stage of globalisation can be managed so that the economy works for people and not the other way around."

I think we get the drift of his global ambitions. Brown is well known for his long advocacy of reform at the IMF, so he would have plenty to do there and perhaps the clout to get it done. It does need more funds, a bigger voice for new powers such as China, and to act as an "early warning" system for developing bubbles.

Finally, and crucially, the current incumbent, Dominique Strauss-Kahn, may soon depart to fight Nicolas Sarkozy for the French presidency. So it all seems set. I just wonder what an IMF under Brown's leadership will say about the UK's economic record...

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