This document summarizes the state of the UK automotive industry. It notes that UK car registrations grew 6% in 2015, with continued growth expected in 2016. Key drivers of growth include consumer confidence, employment, financing options, and exchange rates. Challenges include rising used car volumes and uncertainty around residuals from personal contract purchase agreements. European registrations also grew in 2015 but discounts remain high, and growth depends on economic conditions. UK auto output and exports are increasing, driven by investments from brands like Jaguar Land Rover and Nissan. The industry employs around 800,000 people in the UK and supports the supply chain. Recent UK policy has supported the industry but opportunities remain around skills, supply chain development, innovation,

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.