As the automotive sector awaits a decision from the government on how and if it will offer financial support during the economic downturn, Professor David Bailey, Post blogger and director of the Birmingham Business School, argues that time is running out to avert a disaster
A number of arguments have been put forward over the past few weeks by those opposed to the government intervening to support Jaguar Land Rover.
The Financial Times’s Lex column pithily summed up the case against intervention; “it is hard to imagine a less deserving candidate. The luxury carmaker fails the public interest test on two key grounds. First, its products are of questionable social utility... The second reason... Mandelson should refuse to bail out JLR is that Tata Motors, the Indian company that paid $2.3bn for it, is capable of doing so itself, if it wishes”.
The Times similarly dismisses the case for support, as does The Telegraph, which argued that “Jaguar must be allowed to fail”.
In an attempt to set the record straight, I would like to point out a few inadequacies in this line of argument:
Debunking the Bail-out Myth
This isn’t a ‘bail-out’ as many, including the FT, Telegraph and The Times, suggest. The $14 billion lifeline thrown to GM and Chrysler by President Bush is a bail-out, reflecting the fact that the Big Three in the US have deep-seated structural and strategic problems as well as having to face the double-whammy of credit crunch and recession (and the US auto industry has already had $25billion in loans in order to re-tool to produce environmentally-friendly cars).
In stark contrast, the underlying state of the British car industry is much better than in the US. After a wave of plant closures and the end of MG Rover in 2005, what is left of the industry here is both efficient and high quality. An otherwise efficient car industry in the UK is now suffering collateral damage from the financial crisis which is increasingly engulfing the real economy. Credit, both for firms and customers, is hard to find. If you cannot find the credit, you cannot buy the car. Access to credit is necessary throughout the industry, and is needed by the supply chain and dealers as well as the manufacturers.
JLR itself made a £327million operating profit in 2007 and £310million operating profit in the first half of 2008. Since then conditions have deteriorated sharply and the firm has enacted 600 voluntary redundancies, cut back 850 agency positions and brought in special sabbaticals on 80 per cent pay for more than 300 staff. This is hardly an over-blown inefficient firm in need of a ‘bail-out’. Jaguar has also just reclaimed the global top-spot in the JD Power customer satisfaction survey.
Indeed, JLR and other manufacturers are not anyway asking for hand-outs, but rather loans or loan guarantees at commercial rates to enable them to get on with developing and making high-quality cars. The argument is about access to finance and guarantees at commercial rates, given that the (heavily state-backed) banking system now seems unable to do the job properly. And the cast-list of people lining up to argue in favour of intervention on commercial terms includes very respected figures such as Lord Bhattacharyya, head of the Warwick Manufacturing Group, and CBI Director-General Richard Lambert.
Tata is already investingheavily in JLR
Tata is itself affected by the global down-turn which has had an impact on many of the sectors in which it operates (cars, steel, tourism...) and is also struggling to access credit itself given that wholesale markets have effectively dried up. Tata Motors has had to issue bonds aimed directly at the Indian public, paying 10-11 per cent, in part to repay the $3billion bridging loan that it took out to buy JLR.
Tata is a socially responsible owner and has invested heavily in JLR since acquiring it earlier this year. The ‘tens of millions’ it is now putting in will help ease JLR’s immediate cash problems (about £40 million in bills were reportedly due for payment yesterday, necessitating the Tata cash injection) but this does not get the government off the hook; intervention will still be needed in the new year.
The Green Agenda
While I disagree with the FT’s generally anti-interventionist case, it was right at least in suggesting that the government should harness public funds to green the industry and to develop the green technologies of the future. Yet this is, in fact, exactly what JLR is doing in developing hybrid engines and lightweight composite materials, especially for the LRX concept car.
Indeed, JLR accounts for as much as 50 per cent of all R&D (about £400million a year) expenditure in the UK auto industry, so if you really want to green the industry, the place to do it is by supporting JLR which is working with suppliers and universities to cut carbon emissions. It has an investment programme of about £800million in environmental technologies that will provide key green technology jobs, and has recruited about 400 engineers this year to work on green technologies.
More generally, the UK auto industry is well positioned, with the potential to develop many of the key technologies that the industry will need in the future, such as electric fuel cells, hydrogen fuel (see the hydrogen cars whizzing around the University of Birmingham’s campus), hybrid engines and lightweight composite materials. JLR is central in this, and needs support to speed things up so that Britain can be Tata’s environmental R&D base globally.
With both Tata (Indian) and Shanghai Auto (Chinese) now major investors in the West Midlands, there is a great potential for the UK to be the home for these and other firms’ environmental R&D effort. But this will need a more pro-active industry policy targeting support to help develop such new technologies; this isn’t ‘picking winners’ in the form of 1970s national champions but rather backing winners in the form of the new technologies of the future.
The Crown Jewels of theUK’s car industry
JLR plays a strategic role in the UK car industry in the UK, supporting up to 15,000 jobs in its own business as well as at suppliers and dealers (60,000). It spends about £3billion a year on R&D and purchasing in the UK. Its R&D spend is ranked as the seventh largest in the UK in any industry. Each year JLR also spends an additional £2.5billion a year with suppliers and exports more than £4billion in products.
The Costs of Inaction could be huge
Leaving aside the potential loss of the UK’s green technological lead, the possibility of a complete JLR shut-down would anyway cost the government dearly. Remember that up to 75,000 workers depend directly or indirectly on the firm.
In a worse-case scenario, factor in lost income for the Exchequer (income tax, VAT, employer’s and employees’ national insurance contributions, corporation tax) and expenditures resulting from closure (unemployment benefits) and the total taxpayer ‘hit’ from a closure would be of the order of 30-40 per cent of JLR’s turnover. At a rough estimate, the latter was around £4.8 to £ 5billion in 2007-2008. Follow, then, the logic of “allowing the firm to fail” could involve a net cost to the taxpayer of £1.4billion to £2billion. (And this ignores the costs of intervention to pick up the pieces – as much as £150million was put aside for the Rover Task Force back in 2005, and MG Rover was a much smaller firm).
The alternative, a loan or loan guarantee, would in contrast be in the range of £500million to £1billion and would anyway be repaid at commercial rates within a year to 18 months. That seems like quite a good deal to the taxpayer and would have the added benefit of helping us to keep key green skills and jobs here in the UK.
Lord Mandelson is, of course, right to state that the government does not have an open cheque book, that Tata has first responsibility to invest in JLR, and that any assistance must meet strict tests. These are all critical points but do not obscure the simple fact that government intervention is both necessary and right. Temporary and targeted interventions will be needed to get strategically important firms and industries through this unprecedented situation.
It is not a bail-out, JLR is an efficient and successful firm developing many of the key green technologies of the future, Tata has and is investing heavily, and the costs of inaction could be huge. Lord Mandelson has said that the government is considering which strategic firms should be helped through the downturn. In the auto industry, JLR is about as strategic as it gets. Action will be needed early in the New Year.