UK: Déjà Vu All Over Again? Shanghai Auto Pulls The Plug On MG Assembly At Longbridge

Last Updated: 30 September 2016
Article by Gowling WLG

This article was originally published in The Birmingham Post on 26 September 2016.

MG car production at Longbridge will come to an end - again - after its Chinese owner, Shanghai Automotive (SAIC) said that it would "no longer be required." SAIC said that centralising production would "create a leaner business model and ensure global market competitiveness". That means cutting costs.

The move came despite a 130% increase in sales as compared with last year. Local Northfield MP Richard Burden described the decision as "hugely disappointing" and "premature".

I share his disappointment. SAIC could have done much more to explore what could be done to make local assembly more feasible. The firm had a flawed business model - importing semi-finished cars from China with only limited local assembly on site at Longbridge involving around 40 workers, which left the firm vulnerable to exchange rate swings.

Both MG6 and later MG3 cars were imported from China virtually complete, requiring just the fitting of engine and front suspension, front end and wheels at Longbridge. The latter no longer has full assembly facilities or a paint shop after mass production ended in 2005 and the 'lift and shift' of full assembly facilities to China.

The cars themselves - both the initial MG6 and the recent MG3 - were actually well designed (at Longbridge in fact) and drove well enough but were let down by old fashioned and thirsty engines that didn't fit the British market, or local petrol prices.

The firm made a key strategic mistake early on not to use General Motors engines in Europe (with whom it has a significant joint venture in China) but rather to develop its own engines. It later had to call GM in to help and has been playing catch up ever since.

Despite budget prices, car sales were well below expectations - although they had grown over the last year with the launch of the MG3. Last year it sold just over 3,000 cars in the UK, its only European market, but had predicted that this will increase that to 5,000 after the launch of the new GS SUV. The GS is assembled at SAIC's Lingang factory in China rather than at Longbridge.

The decision to quit the UK (in assembly terms at least) badly dents the brand here which still had a British feel about it. That's now gone. The cars will still be designed here, but will all be imported from China.

The Brexit vote and its aftermath have not helped the firm, and in many ways have pushed it over the edge. The 10% depreciation in the value of sterling post Brexit vote has pushed up the cost of imported components for Shanghai.

The firm scrapped its planned assault on the European market in the wake of the Brexit vote. The firm was planning to use its (limited) UK production base at Longbridge to serve the Single Market. With uncertainty over whether the UK will actually be in the Single Market in the future, SAIC decided to pull the plug rather than invest further at Longbridge.

But as Richard Burden noted last week, it was a shame that SAIC didn't explore with the UK government whether more could be done to help the firm get costs down - perhaps by sourcing more components locally or through launch aid if GS production came to the UK.

He noted that "having spoken to the Government, I know they are willing to meet MG to discuss and explore options and help that may be available and I am sure the same will be true for the local authority and the Local Enterprise Partnership. That is why I have appealed to MG to delay this decision pending such detailed meetings."

While redundancies will be limited to 15-25, Burden's comments reflect a disappointment as to what could have been. When MG6 production got going in 2011, some six years after the ending of mass production at Longbridge, the hope was that eventually production of a range of cars could get into the tens of thousands, perhaps featuring a two-seater open-top sports car in the tradition of MG.

The hope was that higher volumes might bring more jobs in assembly, and - perhaps - some scope for more sourcing of components locally. The latter might in turn bring some benefits for the wider economy. That hope has now gone.

SAIC has said that it will continue to employ - for now at least - more than 400 skilled design engineers at Longbridge as well as sales, marketing and aftersales operations. The real success story for SAIC at Longbridge has been its design operation, where cars are designed for Shanghai Auto and MG brands.

Earlier this year the company announced it would invest £1.2m to install a fifth engine test facility among other improvements to the development centre.

Once UK production stops MG will have to pay a 10 percent import tax on fully assembled cars that arrive from China, in accordance with WTO rules, as opposed to the 4 percent tax imposed on cars on imported components (which is what the semi-finished cars classify as now).

SAIC will, however, save money on renting the 105-acre property, which still takes up a fair chunk of the old Longbridge site. It has leased the Longbridge site from St.Modwen at an annual cost of £1.8m.

The exit by the firm will mean a large part of the land currently occupied by SAIC will no longer be needed, and will mean more land being freed up for development at Longbridge. Whether SAIC keeps its technical centre at Longbridge or moves it to another location is an open question.

While the flawed nature of SAIC's business model was the key driver of the Longbridge pull out, it should be noted that the Brexit vote and its aftermath contributed to the decision (as it did in the decision of Cummins Turbo Technologies not to build a new plant in Calderdale this summer, and I'd argue in Ford's decision to cut invetsment at Bridgend).

The key point is that the Brexit vote leaves considerable uncertainty over the nature of the UK's trading relationship with the EU. That uncertainty has the potential to impact on foreign investment in the UK auto sector, especially when auto firms are looking to replace models. Plants and jobs could be at risk if that uncertainty isn't 'nailed down' as quickly in the form of clear parameters for a trade deal - and preferably one that is as close as possible to existing Single Market arrangements.

So far the government has failed to commit to prioritising Single Market access when Article 50 negotiations get started. That needs to change.

Professor David Bailey works at the Aston Business School

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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