Time for an update: what is happening in the automotive sector?

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In January 2017, we published our first Sector Bulletin in partnership with Santander providing inside into the automotive sector. It’s time to check what has changed in these (almost) two years. You can find the complete update here.

The new figures

In 2017, the sector represented 8.9% of total manufacturing and its share has sharply risen since the trough of 4.4% in the aftermath of the Great Recession. Since 2009, the sector grew by an annual average of 8.3% and it is now more than twice the size it was in 2007.

Last year the sector continued its expansion, but at a slower pace at 1.2% year-on-year.

 

Blog_GDP 

In terms of turnover, in 2017 the sector accounted for a massive £78 billion up from the £67 billion of 2015 – the latest data available when we published the original report.

 

Trade

Trade remains a major source of revenue for the automotive sector. Currently 29% of final demand comes from abroad and in 2017, UK car manufacturers exported goods equal to a value of £40 billion accounting for 15% of total export of goods.

The top five export chart is almost unchanged since our last report (where 2015 data were used). The major UK market remains the EU with 45% of exports going to the bloc.

When looking to single countries, the US remains on top with a whopping £7.3 billion followed by China (£4.5 bil) and Germany (£3.8 bil). The only change in the top five chart is represented by Italy replacing Spain in the fifth place.

 

trade-image 

 

New things we discovered

Our aim in this bulletin is giving an update on the sector since time has passed. However, we are also keen to add new things about automotive which we did not include in our first report.

Since we spent a lot of time in 2018 to talk about productivity, we will start there.

 

Productivity

The sector was one of the top UK performers in the last 20 years with a consistent performance also after the financial crisis when a lot of manufacturing sub-sectors were instead not able to increase their efficiency.

It is important to point out that the performance after 2008 is extremely skewed and biased by the large recovery in productivity happened in the first two years after the huge drop in the height of the financial storm of 2008.

Overall productivity grew by 90% between 1995 and 2015, but the sector still has an important productivity gap to fill against international competitors such as Germany.

 

An important source of FDI

The second addition to the update is about the high level of foreign ownership. Over 6% of the motor vehicles UK companies are foreign owned compared to only 3% of the manufacturing average. As the infographic shows, US is clearly the biggest investor with twice the share of the countries in second and third position - namely Japan and Germany.

 

foreign-ownership-image 

The sector is facing several big risks

Despite the automotive sector deal (our third new item) announced in January which aims to boost investment and create an even more competitive supply chain, the sector is facing several risks at the moment.

Brexit is not the only one, but it’s clearly a big one.

As we have noticed in the previous point, several international firms have chosen the UK as their basis to enter not only the UK market, but also the EU market Even if direct investments are usually “sticky” and not easy to revert, a big change from the current status, which guarantees free trade with the bloc, may create a very dangerous situation denting future investment and pushing companies to change their production plans.

Big production plants base their entire production on systems allowing them to maximise efficiency and minimising inventory. As an example, the Nissan factory in Sunderland, which is considered the most productive factory in Europe, receives five million parts every day and their inventory stock is only worth half a day of production. A minimum delay at customs will create huge disruptions.

Related to the supply chain extreme integration, companies, such as BMW in Oxford, announced that their schedule August maintenance shut down is going to happen in the month following 29thMarch to avoid any possible Brexit cliff-hedge disruptions.

 

It’s not all about the B-word

Brexit is the “elephant in the room”, however it is not the only concern.

UK car registrations dropped sharply in the UK since the beginning of 2017 and, as a consequence, production suffered, in particular the domestic component with the export one still doing well enough.

Despite the pick-up seen in the third quarter of 2018, the automotive index of production is set to contract this year and the prospect for next year are not rosy.

Car_reg 

The big slowdown in car registrations is related to a few factors.

The first is consumer confidence which has been in negative territory for a long time with consumers not ready to spend big money on durable goods.

 The second is due to a long period of car registration expansion (as the graph reports) and an expected slowdown (even if the current one is sharper than normal).

The last one is related to “dieselgate”. After the shocking revelations of tampered emission tests, and the more and more frequent legislations against diesel engines which cause high level of NOx pollution, costumers have massively moved away from diesel cars. The drop on this side was not offset by a high enough increase in sales in the other categories such as petrol cars or electric vehicles.

 

Some of these risks are not a UK exclusive. However, it currently appears that they are more pronounced here and they should be dealt with clear answers. Automotive is a crucial sector which employs almost 160,000 people, ,accounts for more than 20% of R&D spending in manufacturing, and it is vital for the economy of several local areas such as the one in the West Midlands where 50% of UK automotive output is generated.

 

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