Gloomy carmakers hark back to golden era

Motor industry: Sales are struggling, yet output this year is heading for its best for 20 years

Nostalgia will be a big theme of this week's London motor show, with classics like a 1937 Rolls-Royce Phantom III and Rover's re-launched MGF among the usual array of Toyotas and Fords. Car executives must sometimes pine for when the UK industry was the envy of the world.

International competition and domestic economic problems have caused havoc for the nation's motor manufacturers, and this week's gathering of the industry's great and good comes at a time of gloom.

There are conflicting signals in the marketplace. Manufacturers have put up prices, but retailers are offering a wealth of cut-price deals. Car production is rising, but the latest trade figures say exports are tailing off.

It is certainly not UK buyers who are soaking up excess output, as sales are struggling to maintain even last year's disappointing levels. But carmakers say they are not stockpiling. It has, as one retailer said recently, "all got out of kilter".

Car prices have consistently risen above the rate of inflation over the last couple of years. In August the annual rate of car inflation was 4.4 per cent, the highest since the end of 1993, against an inflation rate of 3.6 per cent. August is a month when some manufacturers, including market leader Ford, traditionally lift prices in order to pull sales forward. But it was also the month when the Society of Motor Manufacturers and Traders pleaded with the Chancellor for a "scrappage" subsidy to boost new car sales.

Of course, few customers pay the real price for the volume models that manufacturers are trying to shift. Instead there are deals such as cheap credit or free insurance, which mean the firms' finance arms are cross- subsidising the ticket price.

These days, more manufacturers are avoiding the high street dealers and selling directly to the fleets at substantial discounts, and then trying to recoup the lost revenue from the private buyer.

Retailers are running their own incentive schemes. With dealerships also losing lucrative service and repair work because the private buyer cannot afford the costs, the only recourse is distress selling, and a drastic cut in margins.

Neil Marshall, director of the Retail Motor Industry Federation, says he wants many of the schemes translated into a "real" cut in price: "People who do not take the incentive - such as the credit deals - do not get the benefit and are subsidising those who do."

Given such circumstances, Ian Shepherdson, economist at HSBC Greenwell, can think of few sectors of the economy less deserving of special treatment from the Government than the motor industry. Carmakers have, he argues, been given tax breaks before and simply squandered them.

Despite worries about sales, output this year is still headed towards its best for 20 years. Car production rose by a seasonally adjusted 3.5 per cent in the three months to August, against the previous three months.

July's trade figures pointed to a slowdown in car exports but British manufacturers say stocks are not unusually large, and only Ford's Halewood plant is running on short time. Mr Marshall believes one explanation may be the sophistication of the UK supply chain, in which the flexibility of central stocking is replacing the system of holding large numbers of cars in compounds.

Nevertheless, many analysts believe other UK carmakers will have to follow Ford and introduce some down-time.

Most European and US carmakers admit to carrying high stocks. And more and more models are being churned out all the time. The motor show will unveil 50 models never before shown in the UK. Indeed, European carmakers are launching 20 new cars this year, a rate that Robert Lutz, the president of Chrysler, said leaves the market "cluttered".

If the industry thought existing conditions were tough, Mr Lutz believes there is worse to come. "This business is going to be only for the brave from here on out," he says.

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