UK automotive needs cross-party consensus on industrial strategy

Continued growth in new car sales suggest that the sector is in rude health, but the latest data published by the Society of Motor Manufacturers and Traders (SMMT) belies the need for stable, long-term policy to enable the sector to flourish in the long term.

The SMMT, together with other industry representatives, were clear about this need at the recent SMMT International Automotive Summit we attended and its ‘manifesto 2030’ (21-page / 4.9MB PDF) goes to the heart of the challenges facing the sector today.

Three core challenges dominated discussion at the summit: the forthcoming deadline for new ‘rules of origin’; supply chain difficulties, though the position appears to be improving; and concerns over the speed and level of support available to the sector in the UK in comparison with support packages on offer in the US and EU.

Those challenges arise in the context of a myriad of ongoing risk the industry is facing – from the rise in consumer claims as manufacturers move to sell direct to consumers, to the proliferation of mass actions, growing climate- and other ESG-related pressure from policymakers, regulators, investors and activists, and the ongoing competition for talent automotive companies face from the tech industry.

The ‘rules of origin’ issue

Some of the issues that worry the industry are immediately fixable.

For example, UK automotive companies are concerned about the knock-on impact on the price of their electric vehicles should changes to the post-Brexit rules of origin take effect as scheduled from next year.

From 1 January 2024, at least 45% of electric vehicles parts by value must originate from either the UK or EU if manufacturers of those vehicles are to avoid a 10% tariff when exporting the vehicles from the UK to the EU, or vice-versa. The current threshold, provided for under the EU-UK Trade and Cooperation Agreement (TCA), is 40%. It is due to rise to 55% in 2027.

The industry is concerned about its ability to source enough components locally to avoid tariffs being applied on their exports, but the impact of the Covid-19 pandemic and the war in Ukraine has impacted on investment in supply chains. The recent announcement by Tata Group of its plans to build a new multibillion-pound electric car battery factory in the UK is welcome news in this regard, but its development will not come soon enough to assist manufacturers in meeting the tightened rules of origin planned next year.

The rule change will not just impact on UK automotive companies – bodies like the European Car Makers Association have also expressed concern about their impact on EU-based car makers. While recent reports suggest that EU policymakers are not willing to budge on the timing of the rule change, improving relations between senior EU negotiators and UK government officials in recent months suggest a deal can be done. With businesses – and consumers – on both the UK and EU side set to lose out, agreement on delaying the new rules taking effect would be a common-sense political decision in everyone’s interests and avoid UK and EU-based manufacturers being put at a competitive disadvantage when compared to US and Chinese rivals.

Supplier issues

In reporting the eleventh consecutive month of growth in new car registrations recently, the SMMT highlighted how supply chain shortages that have constrained production since the Covid-19 pandemic struck continue to ease. Despite this, some manufacturers continue to experience issues.

At the SMMT conference, some manufacturers said they continue to have problems sourcing particular parts in sufficient volume, claiming that where supply was limited, suppliers are focusing on serving larger manufacturers.

One particular component that is in short supply continues to be semiconductors. With cars becoming ‘computers on wheels’, semiconductors are in increased demand by automotive companies. Like with batteries for electric vehicles, however, most semiconductors are currently produced in Asia, notwithstanding measures being pursued by policymakers in Europe and the US in particular to scale-up local production.

As well as managing the risk associated with global supply chains, automotive companies face stiff competition from major technology and consumer electronics companies to source semiconductors. Those rivals operate in higher-margin industries enabling them to pay higher prices than car companies can often afford. This gives those companies priority access to available supply and has a knock-on impact on the lead times for their supply to car companies – a major issue for the industry to manage given its ‘just-in-time’ approach to stock control and production.

Government support

UK automotive companies are also calling on the UK government to provide it with greater support at the sort of scale and speed seen elsewhere in the world, such as industry has seen via the EU Green Deal and the US Inflation Reduction Act.

Some figures within the UK sector look at the UK’s semiconductor strategy and compare it to similar initiatives in the EU and US and think the UK missed an opportunity to attract significant investment into local semiconductor production in the country.

As their companies face critical investment decisions in the years ahead amidst the drive to decarbonise and keep pace with technological developments, the same individuals are looking to the government to provide an ambitious vision for the future and a stable policy, regulatory, tax and incentives framework to underpin that.

In its manifesto 2030, the SMMT called for all UK political parties to align behind its vision for development for “a UK automotive ecosystem fit to deliver a zero emission future”. This, it said, would be “an ecosystem which delivers a healthy market and vibrant domestic production footprint, founded on a resilient supply chain successfully evolved to meet current and future technological needs for a zero emission future”, and that further “delivers the affordability, mobility and charging solutions for everyone”.

A core action the SMMT has called for is publication of a new green automotive transformation strategy – a strategy which “enables innovation, attracts investment and secures manufacturing of clean technologies in the UK to deliver economic growth and zero emission mobility”, it said.

Targeted action is needed

The UK does not have the level of finance that the US or the EU can commit, but there are other things that can be done to make the UK an attractive place to produce the vehicles of the future.

A mix of targeted financial incentives and an agile, flexible, attractive regulatory environment would be welcomed by industry.

For example, in relation to connected and autonomous vehicles, the UK is well-placed to deliver a regulatory system that enables the advanced trials of those technologies on public roads and a longer-term plan for tapping into that connected and automated mobility market.

Amidst the net zero agenda, industry would also benefit if policymakers can provide greater certainty on the role they see for new fuels like hydrogen in a market that is currently shifting towards electric vehicles ahead of the UK’s 2030 ban on the sale of new cars powered by petrol or diesel.

In relation to skills, the industry in the UK faces similar challenges to automotive companies all over the world in terms of attracting and retaining people with the right skills. However, it is no accident that the UK is home to a number of Formula One teams and luxury car makers given the quality of the workforce and the track record of engineering innovation through research and development. These are advantages to build on, but further help in helping industry attract new talent – through, for example, facilitating cluster arrangements with universities – or with support for retraining existing employees to upskill them for the future of mobility, would also be welcome features of any new strategy.

If the major political parties can coalesce behind a long-term strategy it would minimise the risk to businesses that there will be a drastic change in policy direction after next year’s general election and provide the sort of stable environment that promotes investment.