The latest SMMT data on car production show that in July, UK manufacturers assembled less than 54,000 new cars. This is the worst July figure since 1956 and a 37.4% year-on-year decline . Up until March this year, car production had seen reasonable month-on-month growth rates and seemed to be recovering from its 2020 woes but an array of factors including the effects of the ‘pingdemic’ and semi-conductor shortage have troubled the sector since.
Despite this month’s weak data, the industry is still just about on the path to surpass last year’s production output with 1.2 million cars targeted to be assembled over the course of 2021. Still, this is an extremely low figure by historical standards.
Taking a longer-term view, it is clear that the problems of the UK car industry go back well beyond the start of the pandemic.
In the second half of the last century, the revival of the UK car industry was based on Japanese investors setting up plants in the UK for export to the EU. This worked well as a model – the UK Japanese car plants are generally seen as a success with some of the highest productivity figures in the world. UK production is heavily export-oriented: in 2020 more than 80% of new vehicles were sent abroad, with the most common destination being the EU, where 53.5% of the exported cars are delivered.
Over the past two decades, however, car producers have come under pressure on multiple fronts. On the demand side, the market saturation led to lower sales figures in the domestic market with sales hovering around 1.5 million in 2017 and 2018. In 2019, sales dropped further, and the UK lost its position as the Europe’s second largest car market to France. Vehicles produced at lower cost in Korea and increasingly China added to the woes of the domestic industry.
Add to this the longer-term challenges of Brexit and the net zero agenda and its implications for the transport sector are vast. The threat of a no-deal Brexit was one of the main concerns of the car industry following the 2016 referendum and although a deal was finally struck at the 11th hour last year, some damage had already been done. Moreover, the impact of Brexit heavily overlapped with the Japan – EU trade deal which removed much of the need to manufacture in the UK (where the domestic market could largely be supplied from production for the Japanese domestic market which, along with India, is the only other major market to drive on the left).
Consequences of Brexit and the move to net zero are reflected in business’ investment decisions: while Honda is planning to close its Swindon factory in 2022, Nissan recently announced plans to invest £1bn in a new battery plant in Britain, supported by £180m of Government funding for its „gigafactory”.
So, in effect, the pandemic as well as the current chip shortage hit the UK’s car industry when it was already on a downward trend. In the short-term, we might be optimistic to expect a bounce-back from the low base of 2020, although all depends on how quickly supply chain bottlenecks can be resolved.
In the long term, the decline in car usage is the more pressing issue for UK car manufacturers. Remote working has led to a decrease in the number of commuters over the past 18 months. Moreover, part of government policy will aim to reduce private car ownership in a bid to limit emission from transport sector.
For more information please contact:
Miklós Kállay, Economist Email: firstname.lastname@example.org Phone: 020 7324 2850