UK automotive market under stress, but moving towards return to growth

The UK automotive industry is under severe pressure, with production down 11.9% year-on-year and the worst first-half performance, excluding covid, since 1953. The industry is facing challenges including the shrinking of export volumes, high energy costs, low domestic supply of EV components, and an imbalance in supply and demand for EVs. On top of this, there is confusion spanning from customers to OEMs and logistics planers about which vehicles qualify for EV mandates. However, recent government funding could provide hope for recovery.

Declining vehicle production in an export-heavy UK market

In the first half of this year, new vehicle manufacturing declined by 11.9% to 417,232 units, according to the latest figures from the Society of Motor Manufacturers and Traders (SMMT).

The UK’s output of cars this year to date declined by 7.3% to 385,810, while production of commercial vehicles almost halved, declining by 45.4% to 31,422 units, due in part to restructuring at commercial vehicle production plants.

The overall year-on-year decline was softened slightly by a 6.6% increase in car production in June compared to the same month last year. In June 2024, model changeovers and supply chain issues held back output, accounting for the YoY increase.

EV production not only saw a rise of 1.8% in the first six months of the year, but it also took on a record share of overall production, with EVs and hybrids accounting for more than two in five cars produced in the UK, at 160,107 units.

However, there is a mismatch between EV production intent and logistics capability. The domestic EV supply chain is running short on components including e-axles, wiring and battery casings. Local production of EV batteries is still scaling, with assurances made for AESC’s second gigafactory in Sunderland, but is not yet widely operational. On top of this, reverse logistics for defective battery modules, or for end-of-life batteries to be recycled, is still an afterthought.

While the forecast for the full year has been revised from 818,000 units to 755,000, the SMMT does expect a recovery, albeit a slow one, over the next few years. In a press briefing, Mike Hawes, chief executive of SMMT, said: “We do not expect to get back to a million [units produced annually] before the end of the decade under current conditions and current participants.” 

For this to happen, there would need to be new entrants in the market, he said. However, the SMMT does expect to see production rise to more than 800,000 units produced next year, and 850,000 by 2030.

As a result, those involved in the FVL sector, including vehicle holding yards and ro-ro terminals, must prepare for volatile flows.

Export growth shrinks, despite being dominant over domestic sales

When it comes to passenger vehicle flows, the UK leans heavily towards exports rather than domestic sales, with 76.9% of output headed overseas. Of this, the UK moves vehicles mostly to the EU (54.4%) and the US (15.9%), with the latter being the UK’s biggest single export market. In light of this, the UK’s recent trade deal with the US is vital for the region’s automotive industry. 

Having tariffs for vehicles exported to the US reduced from 27.5% down to 10% at the end of June means the US market can become “a basis for future growth,” according to the SMMT. Other important export markets for the UK include China (7.5%), Turkey (4.1%) and Japan (2.7%).

“Global economic uncertainty and trade protectionism have taken their toll on automotive production across the globe, with the UK no exception,” said Hawes. He added that while the UK’s production figures are not unexpected, they remain “very disappointing”.

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Export volumes for vehicles are shrinking, down 4.3% in the first six months of 2024 YoY, which Hawes said “you would expect, given the disruption, especially in exports to the US”. This led to manufacturers having to reprioritise market destinations and forecast routes dynamically, which affected lead times, mode choice and inventory planning.

Now the disruption has “largely resolved” following the UK-US deal, according to Hawes, which “keeps the wolf from the door” and provides some relief to the UK industry. But the possibility of new, more competitive Chinese entrants to the market means that FVL flows need to be redesigned to support flows likely destined for the EU or the Middle East, rather than the US.

EV government grant sparks industry confusion

While the UK government has injected cash to boost incentives for domestic EV production, it has caused confusion among OEMs and logistics providers as to which models can qualify for the government funding – particularly since it was devised, developed and announced without consultation to the industry.

The grant, which is a £650m ($880m) consumer subsidy, separate from the government’s recent £2.5bn DRIVE35 industrial initative, offers a reduction of up to £3,750 off a new EV priced under £37,000, or a second band reduction of £1,500 for models with slightly lower environmental performance. 

Chinese-made vehicles will not be eligible for the discount as they do not pass the government’s rules on environmentally sustainable manufacturing. Tesla will also not be eligible, as its prices are above the first band cap.

While the SMMT welcomed support in the EV market, Hawes said it is a “complex” grant. He said: “I think the industry is still trying to get clarity behind its application. It is eligible for all, including fleets, businesses, private grants, but what we were clearly asking for, for a number of months, is support focused on the private consumer because that’s where the big shortfall is in demand." 

The government has not disclosed which brands or models will be eligible, but the department for transport (DfT) said 33 EV models will be available for less than £30,000. 

It has committed to publish the list of vehicles that qualify for the grant by 11 August, just one month out from the second biggest registration month in the year. This makes it difficult for OEMs to plan ahead, as many will have their volume forecast in place already, without knowing if they, or their competitors, will qualify for a price reduction.

Hawes added: “Right now, your local car dealer can’t tell you for sure whether the car you’re looking at thinking of buying will qualify.”

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The uncertainty adds another visibility gap in forecasting ability, putting the sector in “pre-positioning limbo” and making order assumptions made months ago potentially invalid. It also means that the FVL sector cannot adequately forecast demand and capacity, risking storage bottlenecks, or, on the flip side, underused pre-delivery inspection (PDI) centres.

“It undermines your ability to forecast for the biggest month and beyond for the rest of the year,” Hawes said. “So, for some manufacturers, the impact of that is their route to mandate compliance now looks worse.”

The government's separate investment of £2.5bn does provide hope, however, as does Nissan's recent opening of its £1.4m shared eHGV charging infrastructure in Sunderland, the first of its kind in the UK.

Reducing energy costs remains key to unlocking UK competitiveness

For the UK market to see a return to growth and competitiveness, reducing energy costs must be the number one priority, according to the SMMT.

UK-based OEMs and parts manufacturers are paying up to double what their EU peers do for energy. Because of this, the SMMT said, Chinese manufacturers are investing instead in the likes of Hungary, Turkey and Spain, where energy costs less. It also means that domestic plants that could potentially expand are instead looking to reshore in less cost-intensive countries and divert product allocation there. This is forcing the supply chain to reshape flows, consolidating inbound logistics hubs closer to UK hubs for buffers and cost controls.

“That is something that remains a focus to improve our competitiveness,” Hawes said.

However, the foundations for growth are strong. “The industry is moving to the technologies that will be the future of mobility, our engineering excellence, highly-skilled workforce and global reputation are strengths, and we have an industrial strategy with advanced manufacturing and automotive at its core,” Hawes said. “With rapid delivery and the right conditions, UK automotive can reverse the current decline and deliver the jobs, economic growth and decarbonisation that Britain needs.”