Automotive Sector Report - Parliament
Automotive Sector Report1. This is a report for the House of Commons Committee on Exiting the EuropeanUnion following the motion passed at the Opposition Day debate on 1 November,which called on the Government to provide the Committee with impact assessmentsarising from the sectoral analysis it has conducted with regards to the list of 58sectors referred to in the answer of 26 June 2017 to Question 239.2. As the Government has already made clear, it is not the case that 58 sectoral impactassessments exist. The Government’s sectoral analysis is a wide mix of qualitativeand quantitative analysis contained in a range of documents developed at differenttimes since the referendum. This report brings together information about the sectorin a way that is accessible and informative. Some reports aggregate some sectors inorder to either avoid repetition of information or because of the strong interlinkagesbetween some of these sectors.3. This report covers: a description of the sector, the current EU regulatory regime,existing frameworks for how trade is facilitated between countries in this sector, andsector views. It does not contain commercially-, market- or negotiation-sensitiveinformation.Description of Sector4. All major global vehicle manufacturers with plants in the UK are foreign owned. Ingeneral, the business model for volume vehicle producers is to use UK sites tosupply the European market (with alternative sites in Asia and the Americassupplying those markets).5. Investment decisions and sourcing choices are often made from European or Globalheadquarters. Investment decisions are made against a wide range of keyperformance indicators (set out in the Automotive Council InternationalCompetitiveness report, 2015).6. The UK automotive industry performs well on: labour productivity, the flexible labourmarket, and university industry collaboration. The dialogue and cooperation throughthe Automotive Council, coupled with the end-to end research and development, andinnovation ecosystem are viewed positively by the industry. There are also areaswhere the UK is viewed as being less competitive, for example: labour costs, skills(particularly the availability of engineers), strength-in-depth of the supply chain, andgovernment investment in research and development.1
Automotive sector key statistics7. The UK automotive sector is central to the UK economy and a key part of ourindustrial strategy. It created 14.5 billion in Gross Value Added (GVA) in 2016 (0.8per cent of total UK GVA).18. The UK automotive sector is diverse. This includes: volume car production, niche andluxury vehicles, construction equipment, motorsport, commercial vehicles, andmotorcycles.9. In 2016, the sector directly employed 159,000 people2 with a further 238,000 in thewider supply chain.3 There are regional concentrations in the West Midlands, NorthWest, & North East.10. The sector is extremely export intensive; it generated 40.1 billion in exports in 2016( 18.3 billion to the EU).411. In 2016, UK automotive industry productivity was 40 per cent higher than othermanufacturing sectors and 80 per cent higher than the economy as a whole.512. In 2016, business investment stood at 3.6 billion, or 1.1 per cent of the UK total.6 In2016, the sector carried out 3.4 billion of research and development.7Automotive sector key components13. Car and Engine production: The UK automotive sector is diverse. Volume vehicleproduction in the UK starts at the mid-range section (e.g. Nissan Qashqai, VauxhallAstra), expands through the burgeoning premium section (e.g. Jaguar Land Rover),and includes low volume luxury vehicle makers (e.g. Aston Martin, Bentley, and RollsRoyce). There are over 40 specialist and niche vehicle makers, including well-knownnames such as Lotus and Morgan. The UK is a global centre of excellence in enginedesign (e.g. Ford), with 2.5 million engines produced in 2016.8 The UK is also amajor producer of heavy and off-road vehicles.14. Motorsport: The UK is the global home to Formula 1; six out of the ten teams havetheir headquarters here, and a further two have a base here. The UK is also theglobal base for the fast-growing Formula E (electric) race series. Figures for 2013from the Motorsport Industry Association (MIA) report that the sector had a turnoverof 9 (4quarteraverageofemployeejobs&self- Grossfixedcapitalformation- 17.22
15. There is cooperation between the motorsport sector and mainstream automotivesector, in part managed by the Automotive Council (Industrial Strategy sectorcouncil). Technology developed in F1, such as flywheels that harvest energy frombraking that is then used to accelerate a vehicle, thus reducing energy consumptionand emissions, is now in buses on the streets of London. The motorsport sector alsoco-operates with companies and organisations across the defence, aerospace, andmedical sectors.16. Construction Equipment: The UK is the largest producer of construction equipment inEurope and the fifth largest globally. Construction equipment is intended for heavywork such as: earthmoving, lifting containers or materials, drilling holes in earth orrock, or concrete and paving application. The UK is home to JCB (UK owned), withmajor foreign owned manufacturers Caterpillar, Komatsu, Mecalac and Volvo havingUK operations. Figures for 2014 provided by the CEA (industry trade body) state that50,000 units were produced, of which 60 per cent were exported and rising to 95 percent for certain niche products. Turnover of 11 billion was reported, creating 2billion GVA9.17. Supply Chain: UK based vehicle makers operate a sophisticated, globally integratedsupply chain, to support their “just in time” production models.Figure 1: Example of automotive supply chain18. There are nearly 3,000 businesses operating in the UK automotive manufacturingsector with the vast majority being small and medium sized enterprises at the auto.com,2014.3
and Tier-3 level.10 They are predominantly focused on meeting demand from UKplants.Table 1: Numbers of registered businesses by size, in the UK, operating in the automotivemanufacturing 8019. In addition to overall vehicle production, the quantity of domestic sourcing is a keymeasure of success, with the majority of the automotive sector’s key profit marginsrelating to the efficiency of the supply chain. In 2017, UK vehicle makers sourced 44per cent of the value of their parts from domestic suppliers, rising from 36 per cent in2011.12 The aim is to raise local content levels in the medium term to 50 per cent andabove, which are the levels reported in France and Germany.20. UK content in parts produced by suppliers below Tier 1 is considerably lower: Tier 1assemblies rely heavily on imported inputs. Building UK automotive supply chaincapacity, principally by increasing the UK Tier 1 footprint (which increasesopportunities for lower tier suppliers) and building the capability of existing suppliers,is a key priority for the sector.21. Suppliers need to build deeper collaboration with vehicle makers and othercomponent makers if they are to win contracts for new models. The requirement forgreater collaboration is driven by the introduction of increasingly complex modelswhose subsystems demand the input of many parties. The increasing personalisationof vehicles and shorter lifecycles are also intensifying the need for closercooperation.22. Vehicle Engineering Consultancies: The UK has global leading consultancy andproduct testing facilities, which are an integral part of the UK’s attractiveness as aninvestment location for research and development, and manufacturing. This includesRicardo, Millbrook Proving Ground, and Horiba Mira Council,June2017.114
Figure 2: Key UK manufacturing sites13:13SMMTMotorIndustryFacts2017.5
23. Sector’s contribution to GVA: The UK Automotive Manufacturing sector generated 14.5 billion of GVA in 2016 which is 8 per cent of UK manufacturing GVA.14Turnover in 2016 was 74.3 billion.15 Automotive sector GVA has grown 85 per centbetween 2009 and 2016.Investment in research and development, and innovation\24. The sector is also increasingly investing in research and development (R&D) to keepthe UK at the forefront of innovation. In 2016 the automotive sector invested 3.4bn,almost 15 per cent of the total UK R&D. In real terms R&D spending in theautomotive industry increased by 20 per cent since 2015.1625. The government has strengthened the research and development framework. 500million has been committed over 10 years (first competitions in fiscal year 2014/15) tothe Advanced Propulsion Centre (APC) to accelerate the development of affordablelow-carbon, clean-air vehicle technologies, with a further 200 million through theOffice for Low Emissions Vehicles. 200 million has been provided to support theUK’s objective of being a global leader in the development and testing of connectedand automotive vehicles (CAV). Industry is providing matching funding in all cases.26. Most recently, 246 million of funding from the Industrial Strategy Challenge Fund17has been committed to the “Faraday Challenge” to develop world leading batteries,designed and manufactured in the UK, to fully exploit the industrial opportunity ofvehicle electrification.Sector employment27. In 2016, the sector directly employed 159,00018 people with a further 238,000 in thewider supply chain.19 The 159,000 direct jobs are based on the ONS classification(Standard Industrial Classification: 29) which is internationally agreed. It covers allautomotive related manufacturing including engines. Employment is distributedacross the UK, with high regional concentrations in the West Midlands and the .17https://www.gov.uk/government/news/business- ‐secretary- ‐announces- ‐industrial- ‐strategy- ‐challenge- ‐fund- loyeejobs&self- 2010AnalyticalSupplyUseTableMultipliers2013.156
Table 2: Estimated Employment (% of total industry employment)20UKNorth East9%North West12%Yorkshire and The Humber8%East Midlands6%West Midlands34%East of England4%London3%South East9%South West5%Wales6%Scotland2%Northern Ireland3%28. Nearly 7 per cent of the total workforce in automotive manufacturing comprisesEuropean Free Trade Association (EFTA) nationals, higher than the economyaverage of 5 per cent.21 EU nationals are employed across all levels from productionstaff, to skilled engineers, and into senior management.29. The sector is also leading the way on developing a talent pipeline. The Departmentfor Education is reforming the post-16 education system to ensure that it can meetthe needs of the labour market, both now and in the future. A key principle of thereform agenda is to put employers in the driving seat of the skills system, asemployers are best placed to determine the skills businesses need, and this shoulddrive the skills offer.30. Under the direction of the Automotive Council and with some initial governmentfunding, the industry has established the Automotive Industrial Partnership for Skills(AIP). A skills roadmap was collectively developed by the sector and is beingimplemented to tackle critical workforce skills shortages as the sector grows andevolves. The automotive sector has been at the forefront of apprenticeship reforms,leading the development and piloting of the new Trailblazer standards, and setting upthe Apprenticeship Matching 14.AnnualPopulationSurvey,ONS.217
Table 3: Pattern of trade22Total ( bn)EU (bn)Rest of World (bn)40.118.3 (46%)21.8 (54%)56.647.7 (84%)8.8 (16%)ExportsSIC 29: motorvehicles, trailersand semi-trailersImportsSIC 29: motorvehicles, trailersand semi-trailers31. In volume terms, approximately 80 per cent of the total number of cars produced inthe UK is exported, where the EU accounts for 56 per cent of the UK’s car exports.2332. In 2016, the sector generated 40.1 billion in exports.24 The EU is the UK’s largestexport market, accounting for 46 per cent of automotive export value.33. Just over half of the total value added embodied in the gross exports of the UKautomotive industry reflects value added generated in the UK (either by the exportingindustry itself or by upstream domestic suppliers or re-imports).25 The other halfreflects the value added generated abroad, of which 24 per cent is from within the EUand 21 per cent is Non-EU. This is contrary to almost all other UK exportingindustries that appeared more dependent on sourcing inputs from non-EU countries.34. 9.7 per cent of total UK imports ( 56.6 billion) was linked to the automotive industrywith 85 per cent, by value, ( 47.7 billion) imported from the EU. Around six out of ten(59 per cent) of industry imports are from three EU countries: Germany, Belgium, and26Spain.35. The global market for vehicles (other than rail) imports, excluding the UK, was wortharound 812 billion in 2016. Countries besides the 27 other EU member statesaccounted for 543 billion, or 67 per cent, of this global sandTraders(SMMT)May2017.24ONSInput- railcompriseHSchapter87.238
Historical trends and future prospects36. Mass vehicle production in the 1950s was dominated by US (Ford and GeneralMotors) and European vehicle makers. The UK (Austin Morris, Jaguar, Rover, andTriumph, which were later joined together to form British Leyland) was second only tothe USA in vehicle production, making twice the number of vehicles of Germany.Japanese vehicle makers became globally competitive in the 1960s and 70s, gainingsubstantial market share in both established and emerging markets.37. Ownership of UK vehicle makers has changed considerably. The Rover Group,formerly British Leyland, was sold by its owner British Aerospace to BMW in 1994(which retained production of the Mini at Cowley). MG Rover at Longbridge was soldto Pheonix Venture Holdings in the Midlands but ultimately went bankrupt in 2005,and was bought by Nanjing Automobile Group (later SAIC). Jaguar was bought byFord in 1990, followed by Land Rover in 2000. Ford subsequently sold Jaguar andLand Rover to Tata. This period was characterised by multi-billion-pound inwardinvestment, in particular from Japan, with Honda, Nissan, and Toyota establishingvehicle and engine production plants in the UK.38. The economic downturn in 2008 had a severe effect on sales and production in theUK, but there has been a strong bounce back for UK built vehicles, largely due to thegrowth of Jaguar Land Rover, the continued success of the Nissan Qashqai, and UKengine manufacturing strength.39. There is broad consensus that the next ten years will witness greater changes in theautomotive industry than in the last 100 years. Developments in digital technologywill radically change driving, as new connected and autonomous vehicles replacetheir analogue predecessors.40. Manufacturing will be transformed by digitalisation, machine-to-machinecommunication, and the increasing use of data to improve processes and products.Old business models will have to be adapted and modernised as the telecoms,technology, and automotive sectors converge, and as new disruptive challengerbusinesses enter the market. All this will come in parallel with the technologicaladvances necessary to counter climate change through the development of the nextgeneration of low and ultra-low emission vehicles.The current EU regulatory regime41. The arrangements described in this section are examples of existing arrangementsbetween countries. They should not be taken to represent the options beingconsidered by the Government for the future economic relationship between the UKand the EU. The Government has been clear that it is seeking pragmatic andinnovative solutions to issues related to the future deep and special partnership thatwe want with the European Union.9
EU Customs Union and Single Market42. Articles 28-37 of the Treaty on the Functioning of the European Union (TFEU) set outthe Treaty provisions on the free movement of goods, including the establishment ofthe Customs Union. This has been achieved by establishing the Customs Unionwithin the EU and by preventing Member States imposing customs duties orformalities on goods imported from other Member States. In addition, these rulesprevent Member States imposing restrictions on the quantity of imports and exportsof a particular item (e.g. quotas or an import or export ban).43. This legal framework also prevents non-tariff barriers that may restrict imports andexports in less direct ways, for example, by applying product standards andregulations that make it harder in practice for goods coming from one Member Stateto be sold within another. The exception is where those restrictions can be justifiedon certain grounds. The legal framework has been achieved by establishing acommon set of product rules, underpinned in many cases by voluntary standards.For goods not covered by those rules and standards, the principle of mutualrecognition has been developed (whereby once goods have been lawfullymanufactured and marketed in one Member State, another Member State cannotthen require it to comply with additional product rules). Finally, goods imported fromother Member States must be treated in the same way as goods produced nationally.Regulatory standards44. Regulatory standards play a crucial role in determining the design and productioncosts of a vehicle affecting vehicle design, components and manufacturingprocesses. The harmonised regulations of the United Nations Economic Commissionfor Europe (UN-ECE), accepted in more than 50 markets (but not the USA), help tominimise these costs. UN-ECE standards relate predominantly to safety.45. The UK Government implements EU legislation on harmonised vehicle standards forrelating to all road vehicle manufacturing. This legislation applies across the UK butthe national governments in Scotland, Wales and Northern Ireland can makeseparate provisions for the use of vehicles in certain circumstances.46. Regulatory barriers are one of the industry’s most significant concerns, in relation tointernational trade with non-EU markets. These include differences in local testingand certification requirements, and application of technical regulations different tothose agreed globally through UN-ECE. Alongside efforts to address regulatorybarriers through bilateral and plurilateral agreements, the UK will continue toparticipate and influence UN-ECE Regulations28 at the multilateral level.28TheGlobalTechnicalRegulations
Automotive Sector Report 1. This is a report for the House of Commons Committee on Exiting the European Union following the motion passed at the Opposition Day debate on 1 November, which called on the Government to provide the Committee with impact assessments arising from the sectoral analysis it has conducted with regards to the list of 58 sectors referred to in the answer of 26 June 2017 .
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