Hamish McRae: We need UK talent in the driving seat for car industry to get back on track

Economic View

It does not look good. The sale of Vauxhall – and the much larger Opel – by General Motors coincided with the publication of the report into the circumstances of Rover's demise under the tutelage of the "Phoenix Four".

It sounds from the published statements that Germany's Chancellor, Angela Merkel, has managed to do a deal over the main Opel plants in Germany, and the fact that she welcomed the takeover so warmly, shooting straight on to television, suggests that if the axe is going to fall on any plants, it will be the UK ones that get the chop. Neither Lord Mandelson nor our Prime Minister was quite so eager to crow. Ellesmere Port is apparently secure for the time being but the Luton van plant is clearly not. This is not an obvious disaster in the way that the Rover deal was from the start. Vauxhall employs far fewer people than Rover and the Luton area at least will have other job opportunities. But, well, as I say, it does not look good.

There is light, though, and I will come to that in a moment. Meanwhile there are lessons from both Vauxhall/Opel and Rover.

Start with Rover. At the time of the Phoenix bid it was clear to anyone who knew anything about the industry that it would not work. I recall mentioning the names of the people to an industry expert and the response was a sucking of the teeth. But the union leaders were too stupid to see that. So they orchestrated a vicious campaign against the alternative bid by Jon Moulton's Alchemy Partners on the grounds that he would cut more jobs. The alternative might not have worked but it was in with a chance, whereas the Phoenix plan was not.

I do feel the union leaders should be held to account on this. They were very destructive. Google back to the stories at the time and you will see what I mean. And if you do so, note that the Government did not distinguish itself either.

So the first lesson from Rover is that there is no room for sentiment in the motor business. It is a really tough one and one that in the developed world will continue to be in slow decline. The world's largest car producer now is China and that is the way the world will continue to go. There is room for a country like the UK in niches – of which the Mini is perhaps the best example and MG might have been – at the top end of the market where craft and design outweigh the cost of manufacturing in the developed world, and as a sterling base supplying the UK market.

That last point needs expansion because it is relevant to Vauxhall/Opel. The big-three Japanese manufacturers, Toyota, Honda and Nissan, can make a go of producing mid-market cars in the UK despite relatively high labour and other costs because the UK is also a good market to sell cars. That protects against swings in sterling. If the pound is relatively high, as it has been until this year, the fact that margins are slim on cars exported to Europe is compensated for by the profitability of shipping eurozone-built cars into the UK. When sterling falls, profits on UK exports are higher but profits on imports are obviously lower. As a general rule that is why cars tend to be built in the places where they are sold – and why the Japanese started US and European production rather than sourcing everything out of Japan.

Apply that to General Motors' European business and it was worth having some UK production facilities beside the larger plants in Germany. By all accounts, it has run the Ellesmere Port plant pretty well. Its weakness in Europe (as opposed to its catastrophe in North America) has been one of producing perfectly good cars rather than really outstanding ones. There are no prizes for being merely pretty good. The question now is whether the new owners can perform the extremely difficult task of lifting the company's products to a different level. If they can, then UK production will be secure; if not, expect more pain both here and in Germany five or 10 years down the line.

If all this appears dispiriting, there are two positive stories to tell.

The first is shown in the graph, taken from the detailed balance-of-payments statistics released just over a month ago. As you can see, we have a deficit in trade in cars and have had throughout the past decade.

The figures only go up to the end of last year and it is not clear what has happened since then, for the entire motor industry has been hammered by recession. But the long-term trend in the deficit has certainly not been getting any bigger, and, if anything, has actually been falling. Further, this modest success story has happened during the period when Rover collapsed and when sterling was squeezing UK competitiveness. It is a wild guess, but in another 10 years I could see our trade in cars back to break- even, with us exporting as much in value terms as we import.

The other positive story is in UK design and engineering skills. That shows up in racing-car production and there are some spin-offs (in the figurative sense as opposed to the track sense of the word) there. McLaren hopes to build 1,000 a year of its new road car, the MP4-1C, unveiled just last week. It also shows up more generally in terms of the UK's influence on global motor design.

Most people in this country don't realise quite how important this is. The former Ford vice-president, Richard Parry-Jones, has called for a new industry-cum-government Auto Council to try to develop this further, his view being that the UK's edge in engineering puts it in a great position to lead the world in auto technology.

Obviously, nothing much is going to happen until there is a change of government, but I do think that the next government needs to pick up good ideas from industry about how we can exploit the talent we self-evidently have available.

The big task is how to manage change. At the moment, some 180,000 people are employed in motor manufacture and another 106,000 in making components. There are a further half-a-million in garages, showrooms and so on, but that will go on come what may. So the issues are (a) how do we best protect the 200,000-odd in actual production? And (b) how do we expand the jobs in the design and development areas?

Actual production will tend to employ fewer people in the years ahead overall, but there will be new niche producers, including McLaren, which are likely to create more jobs at every level – for this new car is supposed to be the first of a whole line of different vehicles.

As for design jobs, while there is no magic wand whereby the Government and industry can expand the sector, the general principle that you put resources behind success and get out of sectors that are in long-term decline is not a bad one.

At last, our political parties square up to the public-finance monster

The tone of the debate about public spending has suddenly changed, which is a relief. Instead of the PM droning on about Tory cuts and Labour investment, and the Tories giving the impression that eliminating waste could save most of the money necessary to bring the deficit under control, the main parties are squaring up to the problem.

This is not the place to re-examine the fiscal catastrophe. The only small observation I would make is that, if anything, public finances seem to be deteriorating even faster than the pessimists feared. I am worried not so much at the timing of the withdrawal of the "fiscal stimulus"; I am worried that even when growth returns, tax revenues will not rise with it. Set against that possibility, the new things coming out over the past couple of weeks take on even more significance.

One is that the Chancellor has been courageous in acknowledging that public spending will have to be cut. No 11 is being much more realistic than No 10. Another is that Treasury officials are working on how spending might be cut, with everything on the table. Another is that the Tories are just beginning to flesh out their still unformed plans. And still another is the Tory idea that national government should look to local government to see how to improve its performance. And then there was David Cameron's plan to freeze MPs' salaries; it won't change the big numbers but will have a demonstration effect.

But the most interesting thing is the evident change of mood in the country. Most people have experienced belt-tightening and accordingly would like to see the pain shared. When they see what this will mean they may be somewhat startled but as long as public spending cuts are seen as fair, it should be possible to sell them to the electorate – hence the MPs' salary freeze.

As a result of this apparent willingness to get things back under control, it looks as if the UK will not lose its prized triple-A credit rating. But that may have more to do with the line taken by the Opposition than the one taken by Gordon Brown.