Downsizing and productivity: The case of UK motor vehicle manufacturing 1974–1994

MANAGERIAL AND DECISION ECONOMICS

Manage. Decis. Econ. 20: 281–290 (1999)

Downsizing and Productivity: The Case ofUK Motor Vehicle Manufacturing

1974–1994Alan Collins* and Richard I.D. Harris

Department of Economics, Uni6ersity of Portsmouth, Hampshire, UK

An empirical investigation of the downsizing–productivity relationship has emerged from theUSA. This paper presents further evidence drawn from another country’s experience.Detailed commentary on key trends in the UK motor vehicle industry informs an analysisapplying the Baily et al. [Baily, Bartelsman and Haltiwanger (1994) Downsizing andproductivity growth: myth or reality? National Bureau of Economic Research WorkingPaper No. 4741; (1996a) Downsizing and productivity growth: myth or reality? In Sourcesof Producti7ity Growth (edited by D.G. Mayes), New York: Cambridge University Press;(1996b) Downsizing and productivity growth: myth or reality? Small Business Economics, 8,259–278] taxonomic model, yielding insights into the varieties of downsizing–productivitylinkages therein. Evidence presented shows productivity growth was indeed higher in thoseplants that successfully downsized, but that those plants that were unsuccessful at downsizingtended to have among the worst productivity growth rates. Unsuccessful downsizers ac-counted for a significant part of the overall decline in productivity after 1989. Copyright© 1999 John Wiley & Sons, Ltd.

INTRODUCTION

The tactic of downsizing has been widely applied,particularly in the USA and UK (Cascio, 1993;Freeman, 1994; Keasey et al., 1997); and increas-ingly from the 1990s, in mainland Europe too(Sparrow and Hiltrop, 1994). One of the keythemes within research into downsizing relates tothe reasoning advanced by management for actu-ally engaging in downsizing exercises (Palmer etal., 1997). Some of these exercises have beenconsidered to form part of essentially short-termbusiness strategies, intended to raise the probabil-ity of corporate survival in the face of (pre-sumably unanticipated) market stagnation andrecession. They have also been shown to formpart of longer-term strategies, seeking to system-atically reconfigure productive capacity and orga-

nizational culture. This thinking is premised onthe expectation that such a strategy would deliver,in the longer term, more efficient operation in aglobalized industrial sector, while also minimizing‘survivor problems’ (Vollman and Brazas, 1993).However, views as to the likely effects of downsiz-ing on the long-term performance of firms aremixed (Sparrow and Hiltrop, 1994; Layard, 1997),especially with a view to post-downsizing (surviv-ing) employee morale (Brockner, 1988; Capelli etal., 1997), and managerial (downsizing implemen-tor) morale and welfare (Kets de Vries and Bal-azs, 1997). The UK motor vehicle manufacturingindustry has, until recently, been considered to bea key representative indicator of manufacturingsector performance, and even macroeconomicperformance (Lewchuk, 1986; Law, 1991). Since1974, the industry has been characterized bywaves of upsizing and downsizing activity, as ithas advanced into an era of globalized production(Law, 1991; Dor, 1993; Jurgens, 1993; van Tulderand Ruigrok, 1993; Schuman, 1998). Though

* Correspondence to: Department of Economics, University ofPortsmouth, Locksway Road, Milton Campus, Southsea,Hampshire, PO4 8JF, UK. E-mail: [email protected]

CCC 0143–6570/99/050281-10$17.50Copyright © 1999 John Wiley & Sons, Ltd.

282 A. COLLINS AND R.I.D. HARRIS

much of this activity was directly prompted byanticipation of the creation of the European singleinternal market in 1992, Rhys (1993) points to theexisting proactive stance of key players in themarket. For example, he suggests that a transna-tional company like Ford had achieved its own‘1992’ when it created ‘Ford of Europe’ in 1967.Accordingly, the industry provides an appropriatefocus to explore hypotheses concerning the rela-tionship between downsizing and firm perfor-mance in an evolving, leading edge (at least incorporate strategy terms) manufacturing sector.

Using US data, Baily et al. (1994, 1996a,b)show the frailty of the conventional wisdom thatproductivity growth is induced by downsizing.Further, they proceed to demonstrate the limits ofits application. Their work indicates that in the1980s, US manufacturing plants that raised em-ployment (upsized) contributed almost as much tooverall productivity growth as those that down-sized. Accordingly, the notion that productivityimprovements and downsizing necessarily gohand in hand is firmly rebutted in their study. Theanalysis presented here offers an alternative bodyof evidence drawn from another country. Thepaper also employs a significant and rich Britishdata source, hitherto unused as a basis for de-tailed plant-level analysis of the motor vehiclemanufacturing sector, namely the UK AnnualCensus of Production (ACOP).1 The nature of thedata, and the data assembly procedures under-taken, are briefly described in Appendix A. Thenext section draws upon the assembled databaseto unfold the most comprehensive analysis so farpossible, of trends in output, employment, capitalstock and gross value added in UK vehicle manu-facturing plants. This work serves to provide thenecessary preface for further economic analysis inthe third section, which highlights the nature ofthe downsizing–productivity relationship. Thissection features the first non-US application ofthe taxonomic model devised by Baily et al. (1994,1996a,b), with a view to making some assessmentof the extent of the success of downsizing exer-cises in a key UK manufacturing sector.

TRENDS IN THE UK VEHICLEMANUFACTURING SECTOR

Over the period 1974–1994, this sector has beencharacterized by waves of merger and takeover

activity involving UK firms. The de facto oligo-poly of two domestic firms was broken downfollowing the elimination of product tariffs, andheavy advertising expenditures by new overseasbased entrants, who emphasized quality differ-ences in their car models (Geroski and Murfin,1991a,b). This merger/takeover activity helpedtrigger the acceleration of downsizing implemen-tation. Further, from the mid-1980s, substantialforeign direct investment in volume car manufac-turing plant acutely heightened competition in thesector, prompting further downsizing amongstUK owned plants. That said, foreign-owned firmshave not been immune from a perceived need toengage in downsizing exercises, particularly as theUK and indeed western European new car mar-kets were said to approach saturation; and whenexcess capacity was anticipated, or considered evi-dent. In the 1990s, firms in all ownership cate-gories have perceived the necessity for somemeasure of downsizing. To a large extent, thisrelates to the view that a downsized plant wouldenhance long-term operation in a more globalizedproduction environment. Rhys (1993) provides auseful discussion of the West European new carmarket in this context, describing how it hasadjusted to address the challenge posed by theJapanese motor industry, which has dominatedworld trade in cars. The statistical evidence asso-ciated with some of these key issues is discussedbelow.

Turning to Figure 1, this shows the movementsin real gross output, real gross value added(GVA), plant and machinery capital stock (sum ofthe capital stock for each individual plant remain-ing open), and numbers employed. The key fea-tures that may be discerned relate to a substantialdecline in employment between 1978 and 1983(this reflects the impact of recession and the tur-moil in one of the then major UK firms, BritishLeyland (BL)). Turning now to GVA, there is ageneral stepped-down decline following each peakin the economic cycle. The 1990–1992 recessionwas much more severe in terms of output 6is-a-6isthe 1980–83 recession, whereas employmentdownsizing was very severe in the earlier period.2

A substantial gap opened up between GVA andgross output (GO) after 1981, indicating thatwhile sales grew very substantially during 1982–1989, the volume of intermediate inputs wasgrowing even faster with little increase in GVA(and thus profitability).

Copyright © 1999 John Wiley & Sons, Ltd. Manage. Decis. Econ. 20: 281–290 (1999)

283DOWNSIZING AND PRODUCTIVITY

Delving more deeply into this GVA/GO diver-gence, Figure 2 shows that the cost/volume ofintermediate goods clearly increases for foreign-owned plants and slightly narrows for UK-owned.That is, in UK-owned plants, the gap betweenGO and GVA was narrowing, but substantiallyincreasing for foreign-owned plants as (in salesterms) they captured a much larger portion of themarket. There are a number of reasons for thesecompletely different patterns. These include, interalia, (i) sourcing issues (including the cost ofintermediate goods and whether they are sourcedmore from overseas); (ii) the export-orientation ofsome UK producers 6is-a-6is foreign producers;and (iii) that foreign-owned plants were (as isgenerally accepted) actually producing a betterquality good (but requiring a higher volume ofintermediate inputs to meet their quality objec-tives). While we do not have any direct evidenceon the relative importance of the impact of (i)–(iii), the overall picture is of foreign-owned plantsfollowing a quality enhancing strategy while UK-owned plants seem to have been more intent onmaximizing shorter-term profits. This accordswith the product life-cycle idea that UK-ownedplants concentrated on the manufacture of moremature products 6is-a-6is their foreigncompetitors.

Figure 3 confirms that downsizing was substan-tially greater in UK-owned plants. The dynamicsof employment change are considered in Figure 4,where some background information on job cre-ation and destruction in motor vehicles for the1974–1994 period are presented. The salientpoints are that employment is disproportionatelyconcentrated in those plants that employ 100+employees (in fact, this size band completely dom-inates the industry), and that a large proportionof job losses are concentrated in these largerplants. The figure shows that much of the earlierperiod witnessed substantial year-on-year joblosses (132000 between 1979–1983), but that mostof the employment loss occurs through downsiz-ing rather than through plant closures. In fact,employment loss resulting from closing plants wasrelatively more likely during the late 1980s and1990s irrespective of the overall state of the econ-omy, when compared with the 1970s and early1980s.

Evidence concerning the issue of whether pro-ductivity rose as a direct result of plant closures ispresented in Figure 5. This shows information onlabour productivity levels for plants that opened,closed or remained in situ during the period1974–1994 (note, due to a certain amount ofvolatility in the opening and closure figures, a

Figure 1. Output, employment and capital stock in UK motor vehicle industry, 1973–1994.



Figure 2. Gross output and gross value-added in UK motor vehicle industry, 1973–1994.

3-year centred moving average representation ofthe data is used). Throughout the period until thelate 1980s, there was a tendency to shutdownplants with lower productivity levels. However,during the 1990–1993 recession, some high pro-ductivity plants were closed compared with thosethat remained open. In part, this may reflect thesignificant fall in productivity levels post-1989,suggesting that labour was hoarded to a muchgreater extent in the 1990–1993 recession (com-pared with 1980–1983), and/or that the negativedemand shock in the later recession was greater(especially for foreign-owned plants). A last impli-cation of Figure 5 is that most of the ‘productivitymiracle’ of the 1980–1989 period is associatedwith what was happening in (the larger) plantsthat did not close. That is, plants that remainedopen, and new plants, both experienced signifi-cant increases in productivity, which confirmsthat strategies other than closure were more im-portant. On a year-by-year basis, the majority ofworkers were employed in plants that neitheropened nor closed. Thus, manufacturing produc-tivity gains are more closely associated withdownsizing (and other strategies) than withchanging plant numbers.

DECOMPOSITION OF UK MOTORVEHICLES PRODUCTIVITY GROWTH

1979–1993

To support this phase of the analysis, plants inthe sector were assigned to the four categoriesdevised by Baily et al. (1994, 1996a,b). Thesecategories describe those plants that increasedboth employment and productivity (successful up-sizers); those that increased productivity throughdownsizing jobs (successful downsizers); plantsthat downsized employment but where productiv-ity declined (unsuccessful downsizers); and finallyplants that increased employment in expectationof sales growth, but in the event where productiv-ity levels fell (unsuccessful upsizers). Figure 6presents the outcome for the 1979–1985, 1985–1989 and 1989–1993 periods. Focusing on thedownsizers in the respective panels it may beobserved that in 1979, successful downsizers ac-counted for 64.4% of employment, while unsuc-cessful downsizers made up a further 34.1% ofmanufacturing employment. The comparable fig-ures for 1985 are 46.4% and 20.9%;3 and for 1989,25.6% and 51.8%. Panel (a) shows that during the1979–1985 period (dominated by the recession),



the successful downsizers were able to shed asignificant proportion of their labour force inorder to obtain substantial productivity gains perannum (even though the depth of the recessionmeant that real value-added growth was actuallyaround −11.6% per annum). This provided themeans for achieving the beginning of the so-called‘productivity miracle’ shown in Figures 5 and 6(cf. the post-1980 figures). For the unsuccessfuldownsizers (accounting for just over half as manyemployees as the successful downsizer group), thenegative demand shock due to the recession wastoo large to achieve positive gains in productivity(and/or these plants were not able to shed work-ers in sufficient quantities).

During the 1985–1989 period of significantgross output growth in UK motor vehicles, thesuccessful downsizers continued to be the largestsubgroup (covering some 46.4% of employees).The joint effect of significant growth in value-added and redundancies resulted in a very stronggrowth in labour productivity at nearly 11% perannum. Despite the favourable domestic and in-ternational economic conditions, the unsuccessfuldownsizers continued to lose markets and shed aninsufficient number of jobs that would havehelped to achieve productivity gains. Lastly, panel(c) shows that during the 1989–1993 recession,successful downsizers (accounting for 25.6% of all

employment in 1989) continued to downsize theworkforce sufficiently to achieve strong produc-tivity gains and (possibly as a result) minimize theimpact of the economic downturn on outputgrowth. However, the successful downsizers werea smaller group when compared with those plantsthat were unsuccessful in terms of reducing em-ployment and heading off the impact of whatamounted to a very large negative downturn indemand.

In terms of the other consequences of downsiz-ing, Figure 7 uses the same categories as depictedin Figure 6 to consider what happened to real(producer) wage rates,4 profits5 and the ratio ofnon-manual to manual workers. Plants that up-sized successfully secured significant increases inprofits, and in the first period under scrutiny(1979–1985) this is also a feature of the unsuc-cessful upsizer category. Yet unsurprisingly, in thesubsequent time periods, profit growth for thelatter declines markedly. Successful downsizersendured negative profits (though not to the extentof the unsuccessful downsizers) in this first subpe-riod but significant profit growth thereafter. Inthese subsequent subperiods, the effects of labourmarket deregulation and anti-union legislationseems to have taken real effect in the industry, asthey procured greater powers for employers (com-pare the growth in wage rates for successful

Figure 3. Employment in UK motor vehicle industry, 1973–1994.



Figure 4. Employment change in UK motor vehicle industry, 1974–1994.

Figure 5. Labour productivity in UK motor vehicle industry (3 year centred moving average) 1974–1994.

downsizers after 1979–1985 with the growth inprofits). Unsuccessful downsizers experienced sig-nificant declines in profitability after 1985.

Interestingly, even in successful downsizingfirms in this sector, rewards to ‘insider’ workerswho managed to keep their jobs seem absent, as

the overall growth in wages is negative. Turningnow to the mix of job categories, growth in thenon-manual/manual job ratio could be expectedto be a factor in reducing the extent to whichplants were able to shed labour and thus in-crease their productivity levels, especially during



Figure 6. Decomposition of UK motor vehicles productivity growth, 1979–1993.



Figure 7. Growth of profits, wages and non-manual employment in UK motor vehicles, 1979–1993.



downturns in the economic cycle. Thus, asidefrom the 1985–1989 subperiod, unsuccessfuldownsizers feature higher growth in the non-manual/manual job ratio than successful downsiz-ers. Clearly, this is an area requiring further de-tailed work in order to understand the detailedlinkages between the various strategies pursued byfirms in this industry, and changes in job mix.

SUMMARY AND CONCLUDING REMARKS

An empirical investigation of the relationship be-tween downsizing and productivity growth hastaken place in the US. This has helped movedebate beyond mere anecdote, corporate strategymantras and ideologically driven gut feelings. Theresults presented in this paper offer further evi-dence on the relationship between downsizing andproductivity, but drawn from another country’sexperience. A detailed commentary on trends inoutput, employment, capital stock and gross valueadded in the UK motor vehicle industry till 1994,informs and prefaces an examination of some ofthe effects of downsizing and upsizing activity inthe sector. Decomposing the plant level data inaccordance with the Baily et al. (1994, 1996a,b)taxonomic model offers revealing insights into thevarieties of downsizing–productivity linkages thatmay be found in UK motor vehicle manufactur-ing.

The results of this work present substantialevidence that productivity growth was higher inthose plants that successfully downsized (on aver-age only the successful upsizers did better), butthat those plants that were unsuccessful at down-sizing tended to have among the worst rates ofproductivity growth. Indeed, the unsuccessfuldownsizers account for a significant part of theoverall decline in productivity after 1989 (cf. Fig-ure 6), i.e. there were too many unsuccessfuldownsizing plants 6is-a-6is those plants that man-aged to follow a successful competitive strategy.

More detailed research is needed to unravel thecomplex, dynamic forces that determined produc-tivity growth and the perceived need to downsize.This will require both further analysis of this richpanel of data, but will also require a number ofsubstantial case studies that will allow researchersto look more precisely at what has been happen-ing in this sector in the last 20–25 years.

Acknowledgements

Support from the Economic and Social Research Council(Reference No. R000222602) is gratefully acknowledged. Theauthors would also like to thank the Office for NationalStatistics at Newport, Wales, for permission to use the AnnualBusiness Inquiry Respondents database.

APPENDIX A: DATA

The individual records of the Annual Census ofProduction (ACOP) are available from the UKOffice for National Statistics (ONS) branch lo-cated in Newport, South Wales. For each yearthere are two files that can be merged to produceplant-level data. One file covers the sample ofestablishments,6 known as the ‘selected’ file, whowere asked questions about financial matters (e.g.amounts spent on capital expenditure, includingany pre-production expenditure). The other filecontains information (such as employment andownership structure) on ‘non-selected’ establish-ments (the remainder of the population). Estab-lishment level data can be ‘spread back’ to plantsusing employment shares and the unique referencenumber allocated to each plant.

Using plant-level estimates of capital expendi-ture (on plant and machinery) based on acquisi-tions less disposals and including pre-productionexpenditure, it is possible to estimate the capitalstock for each plant. Further, it is possible to dothis using the same methods (and length-of-lifeassumptions) as those used by the ONS when theycalculate the ‘official’ estimates for the UK. Plantand machinery price deflators, supplied by theONS were applied to the data, to produce realgross investment in plant and machinery by indus-try (see Harris and Drinkwater, 1998, for adiscussion).

Estimates of gross value-added, were convertedto real prices using 4-digit indices of producerprices (inputs and outputs) provided by the ONS(i.e. we double-deflated using gross output andintermediate outputs to obtain real gross value-added).

Regarding employment data, this was extractedfrom the individual records of the ACOP. Theseestimates (together with the estimates for capitalexpenditure and output) were aggregated to theindustry level and compared to the publishedestimates in the various annual reports of the



ACOP. Typically, the margin of difference be-tween the two estimates for ALL manufacturingindustry was in the region of 1%. Where differ-ences did occur, this is likely to be due to the factthat the individual returns database can haveadditional records added after the ACOP sum-mary tables are compiled. We used a more de-tailed procedure to obtain population weights(based on industries at the 4-digit level subdividedinto size bands where this was possible) and inaddition some errors (such as duplicate cases)were discovered in the ACOP database.

NOTES

1. Currently known as the Annual Business Inquiry.2. After 1979, there was large-scale shedding of labour

to redress over-manning that typically occurred inUK manufacturing (partly as a result of the indus-trial relations situation).

3. The next largest subgroup in 1985 was successfulupsizers, accounting for 22% of total employment atthe start of the 1985–89 period.

4. This is simply the total wage bill for each plantdeflated by producer prices; hence, it can vary overtime as the ‘mix’ of employees changes (and this ismore likely than through reductions in real wagerates for any particular category of worker).

5. Defined as gross-value added less total labour costs(both deflated by producer prices to obtain realvalues.

6. Establishments are either single plants or they makea return that covers several plants–details and defi-nitions are provided in the introductory notes foreach annual census.

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Downsizing and productivity: The case of UK motor vehicle manufacturing 1974–1994

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