Car production fell by nearly a third in August, despite vehickle sales stabilising thanks to the Government's "cash-for-bangers" scheme.
Although the rate of decline in sales has slowed since the £2,000 scrappage subsidy was introduced in May, production is still struggling, with 26,000 fewer cars made last month than in the same month of 2008.
Although the total number of cars produced fell sharply, British manufacturers' share of the domestic retail market reached a 56-month high, the Society of Motor Manufacturers and Traders (SMMT) reported yesterday. It urged the Treasury to extend the scrappage fund, which is expected to run out within weeks.
Paul Everitt, the SMMT chief executive, said: "Scrappage has had a positive impact on car production.
"However, underlying demand remains weak and the recovery is still extremely fragile."
The incentive scheme has had a significant effect on the retail car trade, with sales rising in July and August, for the first time in more than a year. But critics have argued that any positive impact on UK car-makers is marginal, because only about 30 per cent of the vehicles built in Britain are for domestic sale.
Mike Steventon, an automotive analyst at KPMG, said: "In the UK we predominantly make high-value, prestige cars for export, whereas scrappage is stimulating demand for imported vehicles."
While production may take more time to recover than sales, manufacturing has a better long-term prognosis as demand for top-end models picks up in developing economies.
Despite relatively healthy sales in recent months, they are still down by 44 per cent over the year to date, leaving a massive amount of excess capacity. "The numbers reflect the new market reality that volumes will never return to the artificially stimulated 2007 levels," Mr Steventon added. "Car manufacturers, on the other hand, have the opportunity to grow as developing markets grow."
In the short term, the industry must rebalance supply with demand. Cuts are expected at Opel and Vauxhall after the Magna takeover, and Jaguar Land Rover is merging two factories.