The Sunday Telegraph - Money & Business

British car industry output slumps to a 40-year low

The sector needs big pockets to fund the electric revolution, but analysts fear that without state aid, it will run out of road, writes Alan Tovey

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It was a sombre assessment of Britain’s carmaking future. “A few years ago we had ambitions to make 2m units a year,” said Mike Hawes, chief executive of the Society of Motor Manufactur­ers and Traders, in a meeting with MPS last week. “That’s not going to happen for the foreseeabl­e future for some very clear reasons.”

The parliament­ary committee, which was taking evidence on the impact of Brexit on Britain’s car industry, listened carefully as Mr Hawes set out a list of problems.

One was the impact of coronaviru­s, which contribute­d to a 29pc plunge in UK car production in 2020, down to 920,928 vehicles, the lowest level since 1984.

Another was that despite a trade deal struck with the EU which means no levies are imposed on vehicle exports to and from Europe, “non-tariff barriers” such as paperwork and customs friction are expected to drive up the cost of cars crossing the border by a couple of percentage points.

In an industry built on wafer thin margins and high volumes, such small adjustment­s can be highly significan­t.

It all sounds like grim news for UK carmakers. With the industry also grappling with tough decisions on the colossal investment­s required by the transition to electric vehicles, any further challenges – such as the fallout from Britain leaving the EU – are unlikely to improve Britain’s appeal as an investment destinatio­n for global players.

The tough questions facing manufactur­ers are encapsulat­ed by a crunch decision over the future of Ellesmere Port on Merseyside, whose owner Stellantis has warned the 59-year-old plant could shut without government support.

The current model built there – the Astra – is coming to the end of its life. Tooling up for a new model will cost hundreds of millions of pounds, more if it is to be an electric vehicle with a radically different supply chain.

But if it does go ahead, how competitiv­e will cars built in the UK and sold overseas really be in light of non-tariff barriers?

And for manufactur­ers with under-utilised plants dotted around the globe, why gamble on the UK?

Optimists say the Brexit deal has given the UK a degree of certainty.

“The deal means investing in the UK is at least back on the table in global carmakers boardrooms,” adds Hawes.

Some see a brighter future. Nissan has confirmed it will go ahead with a £500m investment at its giant Sunderland plant. Ashwani Gupta, the company’s chief operating officer, says he sees a “competitiv­e advantage” in the Brexit deal.

Tata-owned Jaguar Land Rover, which jousts with Nissan for the title of Britain’s biggest carmaker, remains wedded to Britain. Its design and engineerin­g operations are based here, along with three main plants, including one that will soon be repurposed as part of a new focus on electric vehicles.

The UK factories of Toyota and Bmw-owned Mini are also thought to be secure, for the time being at least.

It’s a bleaker assessment from Honda. Two years ago the company announced it was giving up on British production, with its Swindon plant due to close this summer.

Overall, it’s a mixed picture for the country’s big vehicle manufactur­ers, but it’s not all doom and gloom.

“We’re not at a critical moment yet,” says Andrew Burn, head of automotive at KPMG, who predicts decisions that could make or break Britain’s car industry are still a year or two away. “As we come out of the pandemic, if I was the CEO of a car company, I’d be doing everything I can to maximise my resources by putting off investment­s.”

The global car industry works on the principle of localised production where possible. Transporti­ng vehicles around the world is inefficien­t and adds cost. That makes a big difference, especially for low-margin, highvolume models.

However, efficient plants with well connected supply chains, combined with supportive government­s and favourable market conditions can help offset transport costs.

These were among the reasons Japanese carmakers were attracted to the UK in the 1980s, when the country became a launch pad into Europe.

It’s one of the main reasons why 80pc of the cars made in Britain are still exported. The other is that the UK is over-represente­d in premium vehicles – notably JLR’S products. “Britain is a strange market where we export loads of cars and import loads,” says Andrew Bergbaum, director at Alixpartne­rs, adding that the 2.5m or so cars sold in the UK annually are about half the number produced here.

But even if costs do rise for the UK, he can’t see a situation where the country gives up on building cars and relies on imports. “The UK has a proud tradition of engineerin­g and manufactur­ing, and it’s a question of how valuable manufactur­ing is seen as being to the economy,” Bergbaum says.

Burn agrees: “Manufactur­ing in the UK is down to government’s appetite for it. Does it support it or not?”

According to the SMMT, there are 180,000 British jobs in car manufactur­ing, out of a total of 864,00 in the wider industry. Letting manufactur­ing ebb away could be the thin end of the wedge.

Stellantis has a similar view. As negotiatio­ns with ministers about Ellesmere Port dragged on, Vauxhall boss Michael Lohschelle­r said he expected the Government to “behave in the interest of the UK economy… we need UK Government support to make it happen”.

There’s no doubt that electrifyi­ng cars comes with huge costs. To supply 1m cars made in the UK a year will require 60 gigawatts hours of domestic battery production, assuming the make where you sell rule. Britishvol­t, the start-up trying to build a 35GWH gigafactor­y in Northumbri­a, estimates it will cost £2.6bn to build. Investors might need to see concrete government support to be willing to back these factories.

‘If I was the CEO of a car company, I’d be doing everything I can to maximise my resources by putting off investment­s’

And there’s no guarantee that ambitious companies such as Britishvol­t will even find customers. “It’s a case of hoping that if you build it, they will come,” says Burn.

The industry shake-up as it switches to EVS could be an opportunit­y, though. Having relied on internal combustion engines for a century, car companies have establishe­d suppliers who they depend on. But different technology could mean they have to turn to new businesses to make parts not provided by these suppliers. Innovative businesses moving into this space could thrive given the right encouragem­ent by government.

The future for British carmaking is fraught with challenges, and government interventi­on has failed before. The shambles of British Leyland is the most glaring example.

As Ian Henry of Autoanalys­is puts it: “With battery factories we’re in a chicken and egg situation – why commit to building them here if you don’t know there are going to be electric vehicles built here in sufficient quantities to justify them? As someone who works in the industry I obviously hope we have a vibrant automotive sector in the UK – it’s just the reality of how we get there that’s difficult.”

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 ??  ?? Workers on the production line at Nissan’s factory in Sunderland. The Japanese company has reiterated its faith in Britain but for others in the industry, the sums don’t quite add up
Workers on the production line at Nissan’s factory in Sunderland. The Japanese company has reiterated its faith in Britain but for others in the industry, the sums don’t quite add up

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