Toyota Motor Corp.'s decision last week to ask its UK suppliers to tender in euros could be the start of a trend that will threaten tens of thousands of jobs at small British suppliers, analysts are warning.
But suppliers in mainland Europe are well placed to win new contracts with Toyota, Nissan and Honda - all of which have major UK plants, and all of which are looking to buy fewer parts in pounds sterling.
'This business has always been very competitive, now it's getting even more competitive,' said UK analyst Peter Schmidt of Auto Industry Data.
'With automakers consolidating and forming huge purchasing organizations on the Internet, only the very largest British suppliers are going to be able to compete. The others will disappear.'
Forcing suppliers to tender in euros was effectively 'holding a gun to their heads,' said Schmidt.
'They are saying that they are going to have to compete with suppliers in Europe and the rest of the world at a time when Toyota is starting up its new plant (to build the Yaris supermini) in France.
'British suppliers will have to take the full force of currency fluctuations caused by the strength of the pound against the euro. It's a no-win situation because if the pound weakens then there will still be pressure to keep prices down.'
Karl Ludvigsen, chairman of Ludvigsen and Associates industry consultants, said the effect will cascade down the supply chain in the UK as direct suppliers of Toyota and other manufacturers ask their sub-suppliers to transact business in euros.
'UK suppliers are in a difficult position. They could be hollowed out. This is a big long-term concern for the UK supply base,' said Ludvigsen.
'The effect could be that businesses start sourcing abroad and the suppliers will be looking to sub-suppliers abroad,' he said. 'All of the trends have been calculated to put pressure on the indigenous British supply industry.'
Last year BMW AG told its British suppliers to start billing in euros to avoid currency exposure risks. Following the Toyota announcement, analysts now believe other automakers with plants in the UK will have to follow.
Toyota builds 180,000 Corolla and Avensis models at its plant at Burnaston in the English midlands. Almost half of that total is exported to mainland Europe.
Volatile currency movements between the strong British pound and the falling euro have drastically hit profits, according to Toyota.
Yoshio Ishizaka, senior managing director responsible for Toyota's international sales, said in an interview in Tokyo that business with continental European suppliers was not a problem. To cut costs and improve competitiveness, Toyota could source more components outside the UK, Ishizaka said.
The strong pound has been hurting British manufacturers by making their exports more expensive. The euro has fallen 16 percent against the pound since its launch in 1999.
A spokeswoman at Toyota's Burnaston plant confirmed that some suppliers would be asked to tender in euros in future.
She said: 'The suppliers will find that removing the risks of currency fluctuations is good for their business planning. As we have said before, Toyota UK seeks opportunities to achieve cost reductions wherever possible and appropriate.'
The spokeswoman said there was no active program of transferring Toyota's supplier base to 'Euroland.'
Of all the UK manufacturers Toyota, until now, has had little to say about the strength of the pound. Nissan, BMW and General Motors subsidiary Vauxhall have all warned the British government that jobs in the supplier sector could be lost abroad.
Toyota suppliers in the UK were keeping quiet on the subject although larger Tier 1 suppliers were expected to pass on Toyota's demands to their own supply bases.
One managing director of a smaller company said: 'That only solves part of the problem. While we can pass on the currency problem to our raw materials suppliers, our labor force - which is our other major cost - still wants to be paid in pounds.'
A spokesman for London-based Tier 1 engineering firm GKN plc said: 'We purchase from all over the world, so the effect on us will be minimal.'
Nissan Motor Manufacturing UK has already warned the British government it could shift Micra production to Europe from its plant in Sunderland, northeast England, because of the strength of the pound.
Nissan is hoping to receive help from the British government to help it keep the Micra at Sunderland, although the car could also be built at Renault plants in France or Spain.