Challenges and opportunities in UK auto

UK car registrations

• 2.63m new vehicles registered in 2015; up 6%• 4th consecutive year of growth; strong end to the year• Rapid growth: superminis, crossovers, premium end.• Sales of alternatively fuelled cars such as pure electric

and hybrid up 70% – but sales mainly hybrids.• Longest-ever period of sales growth of new cars to

Sept 2015 (43rd consecutive monthly increase). October decrease not a surprise. Picked up again.

• Business sales up sharply• Jan 2016: up 3% year-on-year, 11yr high• Motorbikes: 114,000, highest since 2008

New car registrations

Drivers of growth?• confidence• employment• good deals (impact from Eurozone market weakness)• exchange rate• cheap financing – low interest rates• financial innovation (PCPs)• consumer desire to replace with cars having lower

running costs, new technologies)• (Pressure from manufacturers)• Other factors – PPI payouts

2016 registrations?• Many expect a cooling off, but not all. Some suggest could

hit 2.8m; 2.6m last year, 2.5m only in 2002-3-4• Recent low oil prices: low inflation and hence real

earnings growth disposable income, interest rates low (financing), segment choice

• Big growth in pre-registrations; signs of pressure? (10% ofsales in first half of 2015, 15% by end of yr?)

• BUT average discounts negotiated by buyers?• State of Eurozone markets: UK a ‘regional honeypot’ –

strength of sterling• How long will oil prices remain low? ‘Lagged supply

industry’. When pick up, inflation and interest rates will. When?

But, market issues looming?…

Volume of ‘young’ used cars (under 3 year old), will rise almost 20% by 2017 compared with 2013 (KPMG)PCP residuals? Impact of PCP returns on residual values. Depends on overall economic growth. “We are now in a period when we’re starting tolook to the black clouds,” – John Leech, KPMGBut second hand market still expected to grow…

European Market

European registrationsThe GOOD• Up 9% in 2015; 13.7m units (2014: 12.5m units). However…• 2007: 15.6m 2013: 11.5m ‘carmageddon’ - a 20 year low• Growth in 2014 and 2015 mainly driven by rebound in

periphery (eg Spain, UK, Italy) plus decent performance in Germany, France

The BAD• Greece, Russia…

The UGLYBig discounting (Fiat 16%, Ford 14%)“While the headline figures look encouraging, we must remember that European 'sales' are actually just 'registrations' – and [manufacturers] can put number plates on cars without having found buyers”(Max Warburton, Bernstein Research)

EuropeThis year? 4% sales growth? 14.25m?January 2016: registrations up 6%, 27th straight month of new-car sales growth in Europe.OK, not exactly a gold mine, but things are lookingmore positive:• Economic tensions eased• Credit availability improved• Energy costs subdued• Unemployment down• Confidence up (highest since 2007)• BUT end of incentive schemes in countries

likeSpain, and other markets like UK nr peak.

Further afield…• China slowed in 2015. Summer: fall in auto sales,

and premium sector affected for first time• Stock market crash. Devaluation.• JLR? 20% sales – profits? Sales down by almost

30% in June and July. Likely negative cash flow for mid 2015.

• Danger: capacity grows more quickly than sales – discounts, exports back to Europe; shifts pricing pressure

• Growth of second hand car market?• But still best premium prospect

UK Output 2015: up 4% to c1.6m (2014: >1.5m, up 1.2%) Growth since 2009 largely dependent on the

‘Big Two’ (JLR & Nissan), but changing as European market rebounds? (MINI +12% last year, Toyota +10%, Vauxhall +9%). Nissan, Honda down.

2016 Output?• Output up 8% in January ’16 year-on-year• >50% of auto exports to Europe – what happens

there is critical• Global headwinds – China, Brazil, Russia• BUT low oil price, QE in Europe• AND full production runs of MINI and Qashqai,

plus Jaguar XE, XF, LR Discovery Sport on line + F Pace

• SMMT: 2m by 2020 (but have postponed date)

Other ‘success’ indicators 1 Over £8bn invested in UK auto sector in last 3-4 years Some plants have gone to 24/7 working with 3 shifts

(Halewood, Sunderland) – others (JLR) working very flexibly

• value of car exports doubled between 2005 and 2014.

• c10% increase in export production volumes in 2015

• 80% of UK produced cars exported. now c12% value of all UK exports. c50% of exports go beyond eurozone. (trade deficit in 2007 of £7.5bn).

• Emerging markets now account for 12% of UK auto exports

Other ‘success’ indicators 2• UK engine production c2.5 million in recent years

and rising (JLR)• Plant utilisation rate in UK > 70%• UK’s auto sector: lowest labour cost of any west

European country (c.€23 an hour)… while having the second highest productivity in Europe after Germany (KPMG)

• Industry employs c800,000 people• Strong productivity growth, unlike much of UK

economy

What underpins this recent success? what’s left is genuinely world class The shift ‘up market’ (2020: 54% premium, 27%

mid market SUVs/crossovers, 19% mid market) exchange rate depreciation over 2008-9 really

helped re exports. But being unwound? Emerging economy success –middle class + skilled and flexible workforce – unions key part

of the solution NOT a problem Industrial policy has actually helped, up to a

point…

What about the supply chain? Average local content now over 40% (Germany: 60%): £4bn opportunity

Could see 28,000 jobs created in supply chain by 2020 (SMMT)

Big Reshoring opportunity (exchange rate, overseas costs, quality, supply chain ‘resilience’, shorter lead times…) make it possible to repatriate some components sourcing to UK…

Automotive Council, + Work of SMMT in ‘matching’ OEMs and componentsuppliers

But barriers for supply chain (skills, energy costs, land availability, accessto finance, …) Advanced Manufacturing Supply Chain Initiative

Key question: how to make most of OEM investments for supply chain in UK? help with winning orders, access to finance, skills, support for exporters.

Recent UK Industrial Policy for Auto

• Automotive Council e.g. sourcing road maps, technology road maps• APC and Catapults• Skills• Loan Guarantees ( access EIB funds)• RGF support JLR, Nissan, GM, supply chain,• AMSCI (£245m)• TSB + EPSRC investment into research• OLEV• MAS• Automotive Research Campus at WMG• AIO• Plugging funding gaps?...

What type of IP?

• Not ‘picking winners’ – rather sees Industrial Policy as a process of discovery (Rodrick) + linked to ‘smart specialisation’

• Following strengths, weaknesses, opportunities, threats taken largely from Ian Henry analysis for SMMT, with my points added in light blue…

Key strengths• Stable economic and political system• Relatively low tax regime• Unions positively engaged• Supportive industrial policy• Premium, luxury and crossover expertise• Materials and lightweighting technology• Automotive design• Motorsport engineering: potential for rapid tech

transfer• Full vehicle and engine development capability (JLR,

Bentley, Ford)• Industry – university collaboration

Opportunities going forward…• Advances at APC & other technology catapults• Proving ground for autonomous vehicles?• Further tech transfer from motor sport• ‘Phoenix industry’ – open innovation model in

auto?

Weaknesses

• Over-dependence on a few firms for full vehicle and engine development capability

• Lack of Tier-1 R&D capability• Key decisions regarding investment, R&D

andsourcing taken outside the UK

• Skills• Supply chain

Threats• Takeovers of UK suppliers; risk re R&D, decision making

and potential returns in UK• Failure to benefit from advances made by the APC and

affiliates if funding cut• Brexit?• Restrictions on work permits for highly skilled workers

from outside the EU; limit R&D & job creation in UK?• continued automation, factories of future?• Exchange rate appreciation/volatility• Energy prices

What more can be done?

• Maintain supportive industrial policy and funding• More to rebuild supply chain?• Skills• Support for exporters• Attracting tier 1s? – scope? Segments of supply

chain.• Innovation• Energy costs?• Remaining in Europe

Thanks for listening.Comments, Questions welcome.