1.
Challenges and
opportunities in UK auto

2.
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

3.
New car registrations

4.
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

5.
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% of
sales 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?

6.
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 to
look to the black clouds,” – John Leech, KPMG
But second hand market still expected to grow…

7.
European Market

8.
European registrations
The 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 UGLY
Big 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)

9.
Europe
This 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 looking
more positive:
• Economic tensions eased
• Credit availability improved
• Energy costs subdued
• Unemployment down
• Confidence up (highest since 2007)
• BUT end of incentive schemes in countries like
Spain, and other markets like UK nr peak.

10.
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

11.
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.

12.
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)

13.
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

14.
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

15.
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…

16.
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 component
suppliers
 But barriers for supply chain (skills, energy costs, land availability, access
to 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.

17.
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?...

18.
What type of IP?
• Not ‘picking winners’ – rather sees Industrial
Policy as a process of discovery (Rodrick) +
linked to ‘smart specialisation’

19.
• Following strengths, weaknesses,
opportunities, threats taken largely from Ian
Henry analysis for SMMT, with my points
added in light blue…

20.
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

21.
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?

22.
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 and
sourcing taken outside the UK
• Skills
• Supply chain

23.
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

24.
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

25.
Thanks for listening.
Comments, Questions welcome.