What’s driving the UK car industry ‘crisis’?

On Tuesday morning (February 19), Honda announced its decision to close its Swindon plant in 2021. This follows several high profile announcements from car manufacturers promising plant closures or capacity reductions in the UK, including Nissan’s decision to produce its new X-Trail in Japan not Sunderland.

This Insight provides an overview of UK car manufacturing and examines the factors behind announcements from major players in the sector.

Sources: Production figures: SMMT manufacturing data; Employment: Jaguar Land Rover, Nissan, Mini, Honda, Toyota, Vauxhall.

“A UK success story”

In 2017 Rachel Reeves, Chair of the Business, Energy and Industrial Strategy Committee, described the automotive sector as “a UK success story.” In 2018, the Government stated: “automotive firms from around the world choose to set up shop here, citing our history of excellence, skilled workforce and world-leading supply chains.” These sentiments are supported by production and trade data.

The UK is the fourth largest manufacturer of cars in the EU, and the 13th largest in the world, according to the Society of Motor Manufacturers and Technicians (SMMT), which represent car manufacturers in the UK. But car production fell by 9% in 2018 compared to the previous year.

UK car exports and imports have increased strongly since the recession of 2008 and 2009, mainly driven by trade with other EU countries. In 2017, 54% of assembled car exports in the UK went to other EU countries, and 79% of car imports to the UK came from the EU.

The UK automotive sector is also an important part of the international automotive parts supply chain. In 2017, the industry imported parts worth £12.8 billion, and exported parts worth £5.1 billion. SMMT estimates that the wider automotive supply chain employs 856,000 people in the UK (153,000 are directly employed in car manufacturing).

What’s behind the ‘crisis’?

What has provoked these announcements from the major players in a successful sector?

Brexit is seen as a major issue by the automotive sector. SMMT describes the UK’s exit from the EU as a “clear and present danger” to the sector. It argues that uncertainty around the nature of the future relationship between the UK and EU “has already done enormous damage to output, investment and jobs,” and that loosing frictionless trade links with the EU could cause “devastation”.

The trade agreement between the EU and Japan, which entered into force on the 1 February 2019, is another issue for Japanese car firms with plants in the UK, such as Nissan, Honda and Toyota. The trade deal reduces the economic barriers to manufacturing cars in Japan and importing them to the EU, including import tariffs. This means there is less of an incentive to base manufacturing plants in the UK or EU in order to access EU markets.

‘Prestige’ UK car manufacturing brands such as Jaguar Land Rover have also suffered recently due to an “industry wide decline” in car sales in China, the largest market for UK-built luxury cars.

Many of the manufacturers mentioned above are facing company-specific issues. For example, Jaguar Land Rover is addressing over-supply issues and Nissan’s management and strategy has been radically overhauled following the arrest of CEO Carlos Ghosn in 2018.  Vauxhall is part of the PSA Group which also owns Peugeot and Citroen.  It is currently undergoing restructuring to reduce overlap between the many similar cars the group manufactures.

The whole industry is also facing structural challenges that are causing disruption to all car manufacturers:

• The dramatic fall in the popularity of diesel cars caused by the ‘emissions scandal’ of 2015 and the wave of diesel bans around the world have provoked rapid changes in factory configuration, requiring significant capital investment
• The fast growing popularity of electric cars, and interest in autonomous vehicles, has generated new investment challenges for the industry. Consumer preference for new kinds of vehicles has taken many manufacturers by surprise.
• The rise in popularity of ride-sharing (through apps like Uber and Lyft) is forecast to limit demand for cars of any kind in the coming decades.

What is the Government’s response?

The UK Government’s automotive sector deal sets out a framework of policies in an attempt to mitigate many of these challenges, and the industry has weathered headwinds in the past, most recently after the global financial crisis of 2008 and 2009. But the combination of factors at play now is unique and could more be more damaging to the sector.

Chris Rhodes is a Senior Library Clerk at the House of Commons Library, specialising in industries, business and infrastructure.