Last updated: January 27, 2013 7:17 pm

Strong car exports to slash trade deficit

Land Rover Jaguar Plant

Workers at a Jaguar Land Rover plant

By 2015, something unusual will happen at the large car plant in Ellesmere Port, near Liverpool: the factory will begin making vehicles for which British drivers are the target market.

Operated by General Motors of the US under its Vauxhall brand, it is one of eight large car plants in the UK, all of which are owned by six non-British companies including three from Japan and one each from India and Germany.

As part of a £125m development project, the Ellesmere Port factory is due to manufacture a new version of the company’s bestselling Astra car for which there is a big demand in the UK but where most of this is met by bringing in vehicles made in GM sites in Poland or Germany.

According to GM officials, the new car could increase the proportion of vehicles made at Ellesmere Port that are sold to UK-based customers to 50-60 per cent, from the current 20 per cent.

This shift in emphasis goes against the trend in much of the rest of the UK car industry where exports as a proportion of total production have been rising for some time.

Last year, according to data from the Society of Motor Manufacturers and Traders, 82 per cent of all cars made in Britain ended up being shipped overseas – with the export total of 1.2m vehicles being the highest ever.

The strong export performance has been one factor behind the UK’s improving trade balance on cars. Next month, government data are expected to show that the trade deficit on cars narrowed from £1bn in 2011 to about £150m last year – which would make the deficit the smallest since 1975. The last time the UK turned in a trade surplus on cars was in 1972.

The good performance of the UK car industry is in contrast to the lacklustre state of much of the rest of the economy. It also stands out against the difficulties of many car producers based in continental Europe where demand has fallen heavily since the financial crisis.

Ruth Lea, economic adviser at the Arbuthnot Banking Group, says the UK’s emphasis on car exports is “highly encouraging” for the economy as a whole. “It is a combination of sophisticated manufacturing supported by impressive design – and if this is something the UK can use to sell products on a global basis, then it’s something we should applaud,” she says.

According to the SMMT’s projections, Britain is set to produce 2m cars in 2017, more than a third up on last year, on the back of £6bn of investments ploughed into the UK industry in recent years.

However, not everyone shares this rosy view. Philippe Houchois, an analyst at UBS bank, says the projections look “optimistic” in the light of both the problems of the eurozone and potential weakening of demand in other regions.

Last year, 73 per cent of the UK’s production of cars and light trucks was exported; about the same level as in Germany, and compared with just 62 per cent for France and 52 per cent for Japan. Only Spain is higher, with an export ratio of 90 per cent.

At the same time, most car purchases in the UK are met through imports. Last year, just 17 per cent of all cars and light trucks sold to UK individuals and businesses came from domestic plants – about half the comparable figure for Germany, and a quarter of the level in Brazil.

The UK’s emphasis on exports is linked to heavy investment in the past 10 years by foreign-owned carmakers – led by the Japanese trio of Nissan, Toyota and Honda – on strengthening their plants’ position as hubs for selling into the rest of Europe.

Another factor is the high proportion of UK carmaking geared at producing relatively expensive vehicles for export.

Last year, the average value of each car exported from a UK plant was £18,000, a third more than the average price of each imported vehicle.

Jaguar Land Rover, part of India’s Tata industrial group, has enjoyed success in the past two years in selling vehicles such as the new Range Rover Evoque in countries including the US and China.

Also fitting into this part of the automotive sector is the upmarket Mini brand made by Germany’s BMW. Following a £700m investment to revitalise the brand, it has been turned into a global top-seller. The global production hub is the company’s plant in Cowley, near Oxford, with other Minis coming from a BMW factory in Austria.

Mike Wright, director at JLR, says his company’s focus on selling “premium” vehicles with global customers makes sense in a more competitive world. “All the signs are that this end of the vehicle business is set to become more important,” he says.

Even so, JLR was last week forced to admit that its recent heady profits growth was flattening, partly a result of heavy investment spending eating into earnings, but also a possible indication of weakening demand.

Coming two weeks after Honda announced that it was cutting 800 jobs at its plant in Swindon which is particularly exposed to selling to the eurozone, the JLR profits announcement was a sign that the UK’s relatively good performance in car production cannot be taken for granted.

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