Strategic Responses to Environmental Regulation in the U.K. Automotive Sector: The European Union End-of-Life Vehicle Directive and the Porter Hypothesis

Abstract

As of 1 January 2006 all automotive OEMs (original equipment manufacturers) and component manufacturers operating within the European Union will need to comply with the End-of-Life Vehicle Directive (referred to hereafter as the EU ELV Directive). The EU ELV Directive compels all OEMs to take back and dismantle all motor vehicles for domestic use at the end of their useful lives. Each component part will then be either reused or recycled. To this end, the ultimate goal of the EU ELV Directive is that all motor vehicles for domestic use will have a reuse or recyclable content of 85% at the end of their useful lives, moving toward 95% by 2015. The burden of the EU ELV Directive falls on both the OEMs and their component manufacturers, forcing them to innovate and “design for disassembly.” This being the case, it offers a unique real world example with which to test the Porter Hypothesis. Porter asserts that strict, correctly formulated environmental regulation can offer a firm secondary benefits through improved product design and the reduction of waste. This in turn allows the firm to offset the cost of compliance. Because the EU ELV Directive has been fashioned to force firms into a process of innovation and redesign, the magnitude of these so-called offsets can be judged. This article employs Rugman and Verbeke's 1998 strategic matrix of firm response to environmental regulation to examine qualitative details of the strategic response of automotive component manufacturers and OEMs in the United Kingdom to the demands of the directive to judge the volume of offsets generated. This analysis shows no support for the Porter Hypothesis and challenges the assumptions of Rugman and Verbeke's model.