Struggling UK automotive sector gradually inching towards growth revival

The UK government has unveiled a new £650m consumer subsidy for electric vehicles (EVs), separate from the £2.5bn DRIVE35 industrial initiative. This move comes as the UK's vehicle production has seen a significant decline, with a 11.9% year-on-year drop in the first half of 2024, resulting in 417,232 units manufactured.

The subsidy, however, is not available for all EV models. Chinese-made vehicles and Tesla models have been excluded due to not meeting the government's rules on environmentally sustainable manufacturing. This exclusion, along with a mismatch between EV production intent and logistics capability due to component shortages, has added to the industry's woes.

The decline in production has been most noticeable in commercial vehicles, which almost halved during the same period. Export volumes for vehicles have also shrunk by 4.3% year-on-year in the first six months of 2024. However, tariffs for vehicles exported to the US were reduced from 27.5% down to 10% at the end of June, making the US a potential market for future growth.

The UK-US deal has largely resolved the disruption in exports to the US, but the possibility of new, more competitive Chinese entrants to the market means that future vehicle logistics flows need to be redesigned. The uncertainty around the EV grant is causing difficulties in forecasting demand and capacity in the industry, potentially leading to storage bottlenecks or underused pre-delivery inspection (PDI) centres.

The SMMT (Society of Motor Manufacturers and Traders) has emphasized the importance of reducing energy costs to improve the UK's competitiveness. Companies in the UK automotive industry that are energy-intensive can receive government financial support through a mechanism allowing up to a 50% reduction in wholesale electricity prices for up to half of their annual electricity consumption. This aid is available provided they invest at least half of the aid received in new or modernized plants for decarbonization purposes.

Despite the challenges, there are signs of hope. EV production saw a rise of 1.8% in the first six months of the year, accounting for more than two in five cars produced in the UK. Nissan has recently opened a £1.4m shared eHGV charging infrastructure in Sunderland, the first of its kind in the UK. The SMMT forecasts a recovery in production over the next few years, with a predicted full-year output of 755,000 units.

Mike Hawes, chief executive of the SMMT, has stated that with rapid delivery and the right conditions, the UK automotive industry can reverse its current decline and deliver jobs, economic growth, and decarbonisation. The government's commitment to publishing the list of vehicles that qualify for the grant by 11 August is a step in the right direction. However, clarity regarding which brands or models will be eligible is crucial to alleviate industry concerns and ensure a smoother transition towards a more sustainable future.