LONDON - British manufacturers have been waving red flags for two years, warning that the strong currency was a threat. Now white flags of surrender are appearing.
Last month, BMW's Rover Group announced that it was cutting back production, eliminating 1,500 jobs, and buying more parts outside the UK.
Other recent retreats:
GM's Vauxhall will reduce purchases of UK-produced components from 25 percent to below 20 percent.
Nissan will assemble the Almera replacement, due in 2000, in the UK, but it will source few components there.
Rover Group spokesman Bernard Carey said Rover would be moving about $1.6 billion a year in purchases away from the UK as it begins a deliberate policy of sourcing elsewhere. Rover Group's annual parts bill is $6.5 billion.
The first effect is to source 25-30 percent of the parts for its coming luxury R40 sedan outside the UK. Currently only 15 percent of Rover Group's parts come from outside the UK, compared to 57 percent of sales.
Rover Group is now selling cars worth about £2.8 billion a year in Europe, or DM8.26 billion at the current exchange rate of DM2.95 per £1. That same DM8.26 billion would have represented £3.6 billion if the exchange rate was still at its May 1996 level of DM2.30.
'We've been protected from the effects of the strong pound by forward buying of currency, but this cannot last forever,' said Rover Group Chairman Walter Hasselkus. 'The time has come for action.'
Rover's job cuts affect all operations except research, design and engineering. They are expected to come through attrition and voluntary buyouts. At the same time, to reduce inventory, production is being cut by about 25,000 units in the second half.
Carey said the Rover and Land Rover factories would work just four days a week from mid-August to the end of the year. The only exception is the hot-selling Freelander sport-utility. Rover Group is trying to negotiate a plan with its unions to have workers make up the downtime in 1999.
Rover Group is preparing to introduce a new Land Rover Discovery and Rover luxury replacement for the 600 and 800.
The cuts do not affect Rover's £600 million capital spending projects and £300 million product development plans, said Carey.
'Although our productivity has improved significantly in the last few years, it cannot compensate for the distortion caused by the 30 percent decrease in sterling competitiveness since 1996,' said Hasselkus. 'At a time when Rover Group's exports are increasing, the negative effect of currency on our business is considerable.'
This year, 80 percent of Rover Group exports will be to other European countries. British government officials, 'have a view that a strong pound is a good thing and that manufacturers will just have to learn to lump it,' said Carey. 'There seem to be no steps in the direction of reducing the strength of the pound.'
Suppliers are being hit hard. Garel Rhys, automotive professor at Cardiff University Business School in the UK, said up to 100,000 jobs in the UK supply industry - 40 percent of the total - are threatened.
The currency problem exaggerates other weaknesses in supplier firms. 'Britain's top supplier tier is excellent,' said Rhys. 'But many small firms supplying secondary parts are lagging behind European productivity levels.'
The UK decided not to join the European common currency on 1 January 1999, when 11 countries including France, Germany and Italy begin the switch from their traditional money to the new euro. It may never join. Prime Minister Tony Blair has said he favors the euro, but only when the benefits to Britain were 'clear and unambiguous,' and only after a referendum.
Uncertainty is a problem, said Nicholas Hirth, an analyst with Morgan Stanley. 'The main thing the government could do,' he said, 'would be to spell out their plans.' Carey said that a commitment to the euro would immediately bring down the value of the pound.
European manufacturers strongly favor the euro because it eliminates uncertainty and the cost of hedging against currency changes. UK manufacturers have the extra fear that if the UK joins the euro at its current high level, they will not be able to compete.
'The service and financial sectors of the UK economy give a false impression of what is happening in the real world of manufacturing,' said Hasselkus. 'The current value of the pound means our revenue from vehicles sold abroad is reduced, while cheap imports are sucked into our home market.'
Rover has forecast it will break even in 2000 after many years of losses. To reach that target, 'they cannot be complacent,' said Hirth.