SMMT summit: UK automotives focus on trade policy and sustainability

Below, I offer my reflections from an annual event that continues to showcase the strength of the UK automotive industry, including what we gleaned about where manufacturers and suppliers want to see greater support and action, to help them tackle today’s challenges and embrace the opportunities of the future.

Trade policy

The view from the conference floor is that the UK government has done a good job of enhancing relations with the US, China and EU – which, from the perspective of UK automotive companies, are all vitally important trading partners. There is recognition that keeping healthy trading relationships with all three partners is challenging for the UK government, given complexities with geopolitics.

The UK automotive industry wants the government to continue maintaining a neutral approach whilst being alive to the opportunities to secure further investment in, or export opportunities for, the sector. In practice, this means the UK not committing to a single trade partner but instead selecting different partners based on specific issues and trade agreements.

With the recent news that parts of the US-UK trade deal announced in May have now been finalised, there was welcome confirmation at the SMMT summit that, from Monday 30 June, UK car manufacturers will face just a 10% tariff – rather than a 27.5% tariff – when exporting vehicles to the US, up to a limit of 100,000 vehicles. That puts UK car manufacturers, which have been holding back sales to the US pending the agreement being completed, at a relative advantage to other non-US car manufacturers, such as those in China, the EU or Japan.

That said, there remains some wariness of the potential for the deal to be unwound at any time by US president Donald Trump and his unpredictable and unconventional approach to trade.

A particular concern within the UK automotive industry is if the US comes to view new technologies developed in other countries – especially China – as a threat to US businesses and jobs. That scenario, they fear, could have an indirect impact on the ability of the UK government to help UK automotives secure access to those technologies on favourable terms.

In relation to China, the prevailing view from the SMMT summit was that the UK automotive industry has a huge opportunity to capitalise on China’s love of British brands and its desire to grow its European market share particularly in EVs. The industry wants the UK government to be open to working with China promoting both inbound and outbound investment and trading, but it is also conscious that, whilst it may currently seem unlikely, Trump may wish to broker a US-China trade deal, which could impact any UK-China relations.

It was also recognised at the SMMT summit that Chinese technological development is surpassing that of the West in some areas. While there is concern about the threat this poses to the UK automotive industry’s ability to compete in the global marketplace, many believe it can act as a trigger for greater collaboration between European original equipment manufacturers (OEMs) and suppliers to develop technology faster and more efficiently, in partnership with one another.

In terms of the UK-EU relationship, there is disappointment that the recently agreed “strategic partnership” didn’t move the dial significantly for the automotive industry, and concern that the EU will be focused on improving trade ties with other countries – notably, the US – before pursuing further UK-EU cooperation.

The industry is eager to see what the government’s updated trade strategy brings. Publication of that is due on Friday, with the strategy expected to be data-driven and recognise the negative impact of Brexit on UK advanced manufacturing. SMMT summit delegates were also told that the new trade strategy puts emphasis on the importance of mid-sized, like-minded global partners such as Canada, Japan and Australia, which a government representative said are expected to account for 40% of trade by 2040.

For the UK, reducing market access barriers is crucial. The government representative said research shows that every £1 spent on achieving this goal results in many multiple times greater returns in terms of exports.

Reactions to the UK industrial strategy

Tuesday’s SMMT summit followed on from publication of the UK government’s new modern industrial strategy on Monday. Delegates heard from business secretary Jonathan Reynolds as well as Sam Lister, the director general for industrial strategy at the Department for Business and Trade.

The general view was that the industrial strategy – which identifies eight sectors of the UK economy to be given priority support to help grow, including advanced manufacturing within which the automotive industry sits – reflects concerns that industry had shared with government.

The action promised to address the high energy costs that UK automotive companies face was particularly welcomed, though the view among delegates is that more needs to be done – such as decoupling the wholesale price of gas from the price of electricity, similar to the approach taken in Nordic countries – to further address what is still seen as a major competitive disadvantage.

In this regard, it was highlighted that even after some green levies are lifted, as is planned under the industrial strategy, UK automotive manufacturers will still lag significantly behind competitors in many other countries in terms of the energy costs they face. Many believe the government must further adjust its approach to decarbonisation so that it does not lead to deindustrialisation – which industry representatives fear would continue to dampen appetite for investment. For the government, this means that the Department for Transport and the Department for Energy Security and Net Zero must follow the lead of the Department for Business and Trade in listening more to the concerns of UK industry.

Another significant focus of discussion was the skills gap that hampers the ability of the UK automotive industry to innovate and grow. The industrial strategy and separate advanced manufacturing sector plan acknowledge the problem and contain measures designed to address it. The view from industry is that while a drive for more apprenticeships has helped to address the skills gap, the issue needs tackling at all stages of the system – from very early on in the education system, through the graduate market and into the current workforce.  

Automotive factories and their workforce now need to be super flexible to cater for the product and technology variables – from traditional ICE-powered vehicles to electric- or hydrogen-powered vehicles, as well as in relation to the technologies used in connected and autonomous vehicles. However, there is also some optimism that technology itself can be a solution to skills gaps – such as in logistics where autonomous trucks will address the current shortage of drivers the sector is facing.

Fears over demand for ZEVs

Current growth in the zero emissions vehicle (ZEV) market is driven by businesses updating their company fleet and company car schemes. There is concern within the UK automotive industry that, without further government measures and incentives, once the fleet market is saturated, growth in the sales of ZEVs will plateau or even decline, because consumers will not fill the gap.

Under the ZEV mandate, UK automotive manufacturers have a legal obligation to ensure that a certain percentage of vehicles they make each year are ZEVs, with that percentage expected to grow on a yearly basis. While the government is in the process of making changes to the ZEV mandate, the uncertainty and confusion is only serving to dampen customer appetite for ZEVs.

Consumer anxiety, industry believes, is being exacerbated by several factors – including a lack of understanding of the technology they are being asked to adopt, as well as concerns over the accessibility – and speed of – charging infrastructure. Shortages in the availability of expert aftermarket support, and the impact of cautious insurer attitudes on the value of ZEVs and cost of premiums, are also factors.

As well as grappling with potential stagnant demand, the industry recognises the challenge of fresh competition in the UK ZEVs market from new Chinese entrants. Chinese manufacturers have found ways to produce ZEVs more cheaply than in Europe and, while starting from a small existing market share, their sales have been doubling year on year.

Sustainability

At the SMMT summit, my Pinsent Masons colleague Laura Ayre, who advises clients on delivering sustainable supply chains, moderated a panel session that focused on sustainability issues.

In Europe, an important driver of the sustainability agenda to-date has been regulation. In the EU, for example, there are rules on sustainability due diligence and reporting that put an emphasis on the sustainability of business operations and those in business’ supply chains. While significant alterations to the substance, scope and timings of those rules have been pursued, in the name of addressing concerns over EU competitiveness, some OEMs shared how sustainability continues to be a core focus for their business.

During the panel session, for example, Jaguar Land Rover (JLR) said it is positioning itself as a luxury brand with sustainability at its core, offering electric options across its entire range, while Volvo said it is continuing with its plans to go fully electric, and highlighted positive sales. Volvo is also using the ‘battery passport’ QR code included in its vehicles to involve customers in the sustainability journey and track how they interact with this information to ensure they provide the most relevant data.

Suppliers are equally investing in sustainability and the circular economy. The potential for sustainable solutions to be found through partnerships across the supply chain was highlighted with the example of the partnerships between Adient, JLR and Dow on seat foam recycling.

Some suppliers see sustainability as a route to sales. For example, some tyre manufacturers see scope to differentiate themselves from competitors if they can develop tyres that offer OEMs the opportunity to deliver improved sustainability performance of their vehicles overall.

Despite positive sentiments among the panellists, however, it was unanimously agreed that regulatory certainty regarding sustainability obligations is important moving forward – something that regulators need to be aware of.

Co-written by Ioana Chiva of Pinsent Masons.