The car industry - still worthwhile in mature economies?

Today Jaguar Land Rover, the British sports and offroad car manufacturer (which is actually owned by the Indian company Tata) announced that it plans to close one of its three UK factories in the next ten years, to consolidate production onto one site. Meanwhile the UK's Business Secretary Lord Mandelson has claimed that the Canadian car parts firm Magna's plans for the Vauxhall and Opel divisions of General Motors, which it is purchasing, are not commercially viable. Mandelson's reasoning for this is unclear, except that it is claimed that 1,100 jobs will be lost in the long term.

Historically the car industry, as a second industrial revolution industry, has been at home in mature economies where it produced linkages with other parts of the second industrial revolution economy, backwards into the steel, tyre and electronics industries, and forwards into the distribution and retail sectors. Indeed David Landes suggested that these linkages made the car industry "the industry of industries", perhaps the most vital to a modern industrialised economy.

However, the position of the car industry in many western countries has been one of decline for many years; the decline of the US big 3, General Motors, Ford and Chrysler in recent years being one sign of this. In the UK the position has been similar, with the UK's motor industry gradually consolidating through the 1950s and 1960s, then being forced into the super-consortium British Leyland (BL) by the government in 1968. Government believed that the failing British Motor Holdings could be saved by merging it with the successful truck and bus manufacturer Leyland, thus preserving employment. BL was unable to carry out the necessary rationalisaton of ranges, and its competitive position faltered to the extent that the government nationalised it in 1975 to preserve employment in the industry, and that of related industries. The Thatcher government was able to slim down and privatise BL as Rover in 1986, but even this has passed through a number of (government supported) owners and gradually withered away.

Given this history of unsuccessful government intervention in the industry, and history of gradual decline, its all the more amazing that Mandelson still believes that the motor industry in the UK has a viable future. While its clear that there is still potential for the industry in the UK as cars are expensive to transport, they are becoming increasingly cheap to make as Asian manufacturers find new scale economies in car production, seeking to boost the mass market in their home countries. Jaguar Land Rover's owners Tata, for instance are already making a basic car with a price to the consumer of less than US$2,000. It seems unlikely that British manufacturers could match these sort of economies in the long term, which must eventually make importing worthwhile, for the volume market at least. Surely governments in developed countries would be better to allow car manufacturers to make the savings required to remain competitive rather than forcing them to produce cars that they won't be able to sell to consumers. Such a strategy will mean that the present state interventions won't be the last.