INDUSTRY ISSUES
THE CHALLENGING ENVIRONMENT FOR A POST-COVID-19 RECOVERY FOR THE UK MOTOR INDUSTRY
With new vehicle registrations continuing to struggle in the wake of the on-going Covid-19 pandemic and the interruptions to supply brought on by the global shortage of semi-conductors, the UK motor industry faces further challenges in making a strong recovery. In this environment, it is essential that the industry stands at the forefront in UK trade policy thinking to ensure that a vibrant automotive industry remains a keystone of British manufacturing.
Recent data for new vehicle production and registrations shows that recovery from the effects of the Covid-19 pandemic for the UK motor industry, coupled with the impact of additional factors including the adjustment to regulations governing post-EU goods trade and the emergence of a global shortage of semi-conductors, is slow and uncertain.
The impact of the pandemic on the motor vehicle industry has been dramatic. New car registrations in the UK fell from 2.31 million vehicles in 2019 to just 1.63 million in 2020 – a decline of 29.4 per cent. This was the lowest number of new registrations since 1992, and came on top of falls in new car registrations in each of the previous three years. New car registrations in 2020 were 39.4 per cent below the peak level of 2016.
Source: SMMT, 2021
Of course, the UK was not alone in facing a massive fall in car sales as the effects of the pandemic worked across the world. Globally, new car sales fell by 15 per cent in 2020, with the US facing a fall of 15 per cent, Japan seeing a fall of more than 11 per cent and Europe experiencing a fall in new car sales of more than 23 per cent[1]. But with UK car manufacturing so dependent on its export markets, especially the EU, these global declines were guaranteed to have an impact on UK production.
The effect of Covid-19 on the demand for UK-built cars was dramatic. In 2020, the UK exported 749,038 new cars, compared to 1,055,997 the previous year – a fall of 29.1 per cent. Production was down by a similar amount, from 1,303,135 in 2019 to 920,928 last year – a decline of 29.3 per cent. This was the first time that annual car production had fallen below 1 million since 2009 and the first time that exports had failed to top 1 million vehicles since 2010.
Source: SMMT
The scale of the fall in car production and exports in 2020 is similar to that experienced in the 2008-2009 recession; in 2020, these declines were closely matched by the percentage fall in domestic sales, whereas during the recession, much of the fall in sales occurred in 2008. However, the data suggests that the declines in local production and exports aren’t just a result of the pandemic. The 2020 falls in UK car production and exports follow two years of significant falls in both measures – 9.1 per cent in 2018 and 14.2 per cent in 2019 for production, and 7.3 per cent and 14.7 per cent for exports.
HOW IS THE INDUSTRY RECOVERING FROM COVID-19?
As 2020 was drawing to a close, many forecasters were anticipating a strong rebound in the new car market. Germany’s VDA was forecasting that the European new car market would grow by around 12 per cent in 2021, while IHS Markit was looking to growth in light vehicle sales in the Western European market of just under 10 per cent and global growth of a little over 10 per cent[2].
Figures for new registrations so far in 2021 show initial growth in the early months of the year with new registrations in the first six months of 2021 being 39 per cent above 2020 levels for the same period. However this has fallen away since June, with new registrations in the period July to October being almost 30 per cent lower than for the same period in 2020.
Source: SMMT
As a result, new registration numbers this year are only barely above those for the first ten months of 2020 – 1.42 million compared to 1.38 million. This year’s new registrations for January-October are well below the results for the period 2014 to 2019, when there were more than 2 million new car registrations in the first ten months of each of those six years. New registrations have not been this low since 2011 when the industry was still working its way out of the 2008-2009 global recession.
Much of the most recent downturn in new registrations can be traced to the unavailability of new cars due to the global shortage in computer chips. This shortage is partly due to reduced production due to Covid, combined with an increase in the demand for IT products and other electronic goods driven to some extent by the shift to more work from home. Analysts believe that the semiconductor shortage is likely to continue well into 2022 and possibly extend into 2023[3]. The result is that forecasters have lowered their projections for car registrations for this year, as well as for 2022.
The story is similar throughout Europe. In Germany, despite some rebound in the market in the second half of the year, new car registrations in 2020 were 19 per cent below the 2019 numbers. On the strength of the late-2020 rebound, the market was initially forecasting a strong recovery during 2021, with initial growth forecasts for the year of around 20 per cent. As with the UK, the early months of 2021 were encouraging, but the combination of a second wave of Covid-19 and the growing semiconductor shortage saw this early growth stall. Registrations have been falling significantly since the middle of the year, compared to 2020 results, with registrations for the January-October 2021 period now 5 per cent below the same period in 2020[4].
BREXIT – IS THERE AN ELEPHANT IN THE ROOM?
In addition to these global factors is the impact of the UK having left the European Union. The UK autos industry is hugely dependent on trade – around 80 per cent of cars manufactured in the UK are exported, while a similar proportion of new cars registered in the UK are imported. While the numbers of imports and exports fell dramatically in 2020, exports as a proportion of total production and imports as a proportion of registrations hardly changed. And the EU remains the major source of this trade, accounting for 53.5 per cent of the UK’s car exports and 78.1 per cent of imported cars.
The post-Brexit trade agreement with the EU means that trade in motor vehicles and parts have remained tariff-free between the UK and EU, provided that they meet the rules of origin for those products. However, most UK car producers have reported increased administrative costs for trade with the EU as a result of Brexit[5].
The effect of these non-tariff issues should be a real concern for the motor vehicle industry. For much of the manufacturing sector, tariffs have ceased to be a major factor, especially in trade between developed countries. Average applied tariffs for non-agricultural goods for the EU sit at 4.1 per cent, and average just 3.1 per cent for the United States, 2.5 per cent for Japan and 2.1 per cent for Canada[6]. These averages can hide tariff peaks in certain sectors – and automotive trade frequently falls into this group. However, the conclusion of the trade deal with the EU and the rollover of many of the EU’s existing deals for trade between the UK and the EU’s trade agreement partners reduced the risk of a major hit to the UK’s car production and trade directly from the imposition of high tariffs.
However, shifting out of a customs union into a more “normal” trading environment with the UK’s largest trading partner has come at a significant administrative cost. And the change in the basis of the UK’s FTAs from agreements which cover 29 countries to purely bilateral affairs have in many cases brought into question whether goods traded between the UK and those FTA partners will continue to meet the relevant rules of origin.
Non-tariff measures are recognised as a major cost for production and trade. A 2019 UN Conference on Trade and Development report estimated that non-tariff measures imposed a trade cost around double that of direct import tariffs themselves[7]. The trade world recognises this - much of the World Trade Organisation’s attention over the past decade has been focussed on addressing non-tariff measures, with one of its major negotiated achievements of the last twenty years being the Trade Facilitation Agreement. Similarly, regional trade agreements increasingly place emphasis on provisions designed to improve trade facilitation.
The impact of non-tariff measures therefore needs to be at the heart of the UK’s trade policy. The UK was always going to face an increased administrative burden in trading outside the EU’s custom union, and any preferential trade under free trade agreements will always be predicated upon the goods in question meeting the rules of origin for that agreement.
The extent to which the time and cost of moving goods across borders has increased has become very apparent to UK traders since post-Brexit arrangements came into force. Quantifying this cost and separating the Brexit effect out from the Covid-related effects is difficult. But the Brexit effect is real and industry needs to ensure that governments address it as a trade policy priority.
THE OUTLOOK FOR RECOVERY – LESSONS FROM THE 2008-2009 RECESSION
The likelihood of a rapid recovery from this downturn is low. Evidence from the previous major downturn shows how slow the recovery in car demand and production can be. During the 2008-2009 recession, new car registrations fell 20.5 per cent in the two years from their peak in 2007 to to low of 2009. Registrations initially recovered in 2010 thanks to policies aimed at stimulating sales, but fell back again and didn’t return to their 2007 levels until 2014.
Analysis of the recovery from the 2008-2009 recession has found that there was a lag in the return of discretionary expenditure generally as potential buyers paid down debt, made decisions based on reduced income streams and displayed less confidence about future income security. New car sales fit into this type of expenditure – they are less commonly essential purchases that need to be made immediately and can be delayed until financial circumstances improve.
A key factor in the capacity of UK car manufacturers to recover from the 2008-2009 recession was the strength of its export markets. As noted earlier, the UK motor industry is around 80 per cent dependent on export markets. Data shows that, while production and exports declined dramatically in 2009, they rebounded quite strongly in 2010, although to levels that were still around 20 per cent below pre-recession levels. While new UK registrations initially rebounded in 2010, thanks in part to the introduction of the vehicle scrappage scheme, they fell back again in 2011. Strong growth didn’t return to domestic registration numbers until 2013. During this period, domestic production continued to climb back towards pre-recession levels, and exports surged to more than 83 per cent of local production in 2011-12.
Europe was key to the recovery in the industry following the recession. The EU provides a large proportion of the components going into UK production and accounts for more than half of exported UK-manufactured cars. The seamless borders operating between the UK and EU member states facilitated the just-in-time production that boosted UK manufacturing and the tariff free movement of cars into EU destinations made British cars more competitive in EU markets. Additional hurdles at the border now puts this degree of certainty at risk.
OUTLOOK FOR RECOVERY FROM COVID-19
Data released over recent months shows that the impact of the Covid-19 pandemic has been greater on GDP, employment levels and disposable income levels than the 2008-2009 recession. The IMF reported a fall in GDP across advanced economies in 2020 of 4.5 per cent compared to 3.3 per cent in the earlier recession. For the UK, the IMF reported a decline in GDP of 9.8 per cent in 2020, compared to 4.5 per cent in 2009[8]. With the timeframe for emergence from the direct impact of Covid-19 still uncertain and a number of other factors stifling any recovery, it is not clear how this deep and unprecedented event will impact on individual countries and spending and production patterns within them. Most forecasters have been revising their projections for growth in 2021 downwards as the persistence of the pandemic and supply chain issues have dampened the expected recovery.
The challenges for the UK automotive industry are significant. The local market for new cars has been savaged and may be weak for some years. The same is true for the UK manufacturers’ biggest export markets in Europe. For a strongly export-oriented industry which relies on smooth global supply chains, on-going trade policy uncertainty is an added concern.
The outlook facing the domestic car market and UK vehicle manufacturers is fundamentally different to that facing the industry in 2009. The fluid operation of supply chains with EU suppliers that were a hallmark of manufacturing over recent decades cannot be guaranteed; nor can tariff-free entry of UK cars into the EU now that the UK has left the single market.
The automotive industry must be a key component of the manufacturing outcomes for Britain’s emerging independent trade policy. In this environment, it is essential that the British automotive industry takes a leading hand in shaping UK trade policy which continues to evolve while attention is more heavily focused on the pandemic.
The automotive industry must ensure that the UK government gives the most careful consideration to the sectoral impact of policy options as it seeks to refine its post-Brexit relationship with the European Union. The outcomes of the post-Brexit relationship with the EU need to include minimal hurdles for the trade in vehicles and components so that the real competitiveness of British-made cars is not diminished, rules of origin that allow British cars to access tariff-free trade, and regulatory and administrative arrangements that do not slow down the movement of goods across the Channel.
The industry will also need to be equally as involved in setting priorities for the negotiations with future FTA partners to ensure that any outcomes provide real opportunities for industry growth. Without this involvement, the industry risks a longer, muted recovery from the Covid-19 emergency.
Footnotes:
[1] Source: German Association of the Automotive Industry (VDA)
[2] IHS Markit, Global Light Vehicle Sales Summary (July 2021)
[3] https://www.cnbc.com/2021/11/19/jpmorgan-on-semiconductor-shortage-and-outlook-for-2022-2023.html
[4] See https://en.vda.de/en/press/press-releases/211103_New-car-registrations_new-record-for-electric-share.html
[5] See “UK car industry says Brexit rules are denting competitiveness”, The Guardian, 12 October 2021
[6] World Trade Organisation, World Tariff Profiles 2021
[7] UNCTAD, Asia-Pacific Trade and Investment Report 2019: Navigating Non-Tariff Measures Towards Sustainable Development, pp 40-44
[8] https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/WEOWORLD/GBR/ADVEC