As lockdown comes to an end, how can the government help the British auto industry? And are they doing enough?
This month saw the announcement of Rishi Sunak’s “mini-budget” to stimulate the economy as the COVID-19 lockdown is lifted. But while the budget offered boosts to the hospitality and tourism sectors, it was extremely quiet on issues relating to the motor sector.
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As Mike Hawes, chief executive of Society of Motor Manufacturers and Traders said: “Today’s announcements to safeguard jobs and encourage consumer spending in some parts of the economy are welcome – but it’s bitterly disappointing the Chancellor has stopped short of supporting the restart of one of the UK’s most important employers and a driver of growth.”
The UK’s automotive sector is worth £18.6bn. There is no denying the vital and irreplaceable role it plays in the British economy. However, the COVID-19 pandemic has hit the sector hard. In June the Society of Motor Manufacturers and Traders released a new members survey that revealed one in six jobs in the industry sector were at risk of redundancy. A third of automotive workers are still furloughed and the Government’s job retention scheme is due to come to an end in November. Many in the automotive sector believe there is a critical need for a dedicated restart support package to safeguard these jobs.
“While the latest new car figures show a smaller monthly decline than in the previous two months, it’s clear there is still a long road to recovery for the industry,” says Karen Hilton, chief commercial officer at heycar.
Indeed, over 6,000 automotive job cuts were announced nationwide in June, stepping from the closed markets, shuttered plants and global lockdown. Even as showrooms in England and Wales begin to re-open and restart their production lines, reduced demand and social distancing are slowing productivity.
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By GlobalDataThe Society of Motor Manufacturers and Traders has called on the Government to address this by providing a support package for the entire sector. SMMT argue the package is needed to drive demand and ease cash flow. Their proposals include unfettered access to emergency funding, permanent short-time working, business rate holidays, VAT cuts and policies that will boost consumer confidence.
The argument is that these would accelerate a sustainable restart for the market and manufacturing to usher in the necessary recovery phase. These measures would also, SMMT argues, help unlock the investment needed to drive a green future for the UK.
Speaking at the industry’s annual summit, Hawes said: “UK Automotive is fundamentally strong. However, the prolonged shutdown has squeezed liquidity and the pressures are becoming more acute as expenditure resumes before invoices are paid. A third of our workforce remains furloughed, and we want those staff coming back to work, not into redundancy.
“Government’s intervention has been unprecedented. But the job isn’t done yet. Just as we have seen in other countries, we need a package of support to restart; to build demand, volumes and growth, and keep the UK at the forefront of the global automotive industry to drive long-term investment, innovation and economic growth. Support delivered now is an investment in the future of one of Britain’s most valuable assets… investment that we will repay many times over.”
One solution that has been suggested from several corners is the concept of a car scrappage scheme that could potentially help the industry, although many aren’t optimistic about seeing it become a reality.
“There has been much discussion around the reintroduction of a car scrappage scheme which at the moment is being considered by the Transport Secretary although they appear to not be keen,” says Rupert Pontin Director of Insight at Cazana.
“One other alternative that would help the industry and the economy as a whole would be a reduction in VAT, although a decision on this needs to be quick as otherwise it could actually delay sales whilst people wait for its introduction. There should also be modifications to the Governments Term Funding scheme to further help lenders and specifically non-bank lenders who currently have no access to this scheme.”
While the Government’s efforts have provided essential support in places, it is clear there is a great deal more to do to help preserve the British automotive sector.
“The Government should be congratulated for the vital role that the Job Retention Scheme has played in supporting businesses and households up and down the country. Car finance providers acted quickly and decisively to support motorists who encountered financial difficulties due to the public health emergency, and the FCA then mandated a three-month payment
freeze for consumers in need,” acknowledges Paul Harrison, Head of Strategic Partnerships at Leasing.com. “The forbearance support given by car finance providers to consumers has come at a cost, impacting their ability to underwrite new business. It is essential that funders continue to lend if we are to kick-start the economy and decarbonise transport through the leasing of the latest, green vehicles. We support the FLA and BVRLA’s plea to Government to introduce targeted funding schemes to ensure the continued availability of new credit.”
The Brexit Question
A global pandemic would naturally not be good news at any time, by the problems presented by COVID-19 have been exacerbated by the continuing uncertainty around Brexit. The prospect of a ‘bare bones’ or no-deal Brexit may amplify the looming jobs crisis, and any COVID-related support plan for the industry must be accompanied by an injection of fresh momentum into free-trade agreement talks.
Hawes said, “Covid has consumed every inch of capability and capacity and the industry has not the resource, the time nor the clarity to prepare for a further shock of a hard Brexit. That’s why we do need to ‘turbo charge’ the negotiations to secure a comprehensive Free Trade Agreement with the EU that maintains tariff and quota free trade. With such a deal, a strong recovery is possible, we can safeguard the industry and our reputation as an attractive destination for foreign investment and a major trade player.”
SMMT’s second Annual Trade Report for 2020, UK Automotive Trade in a post-Covid World, published in June, provides new figures that highlight the risk a no-deal Brexit would pose to the UK’s position as the world’s tenth largest exporter of goods. Already the manufacturing of annual car and light commercial vehicles are expected to see a cut in production volumes of a third to only 920,000 units this year, as a result of the pandemic. If a tariff-free Free Trade Agreement is put in place a full recover is predicted to take five years, with the industry finally reaching pre-crisis production levels of 1.35 million units by 2025.
But as serious an impact as that is, it is still a best case scenario compared to the potential fallout of a “no deal”, which SMMT says will severely damage these prospects and potentially see volumes falling as low as 850,000 by 2025, meaning the UK would be producing less vehicles than it was since 1953. In monetary terms that would be a £40 billion hit to revenues, side from the £3.5 billion the COVID-19 production losses will already have cost the industry over that period.
From a Post-COVID to a Post-Carbon Future
The prospect of a full, zero-tariff deal being in place by the end of the transition period will give businesses in the UK and Europe a chance to prepare, and help drive investment into the new skills, facilities and technologies that will be integral to the automotive industry’s other big challenge, delivering a zero-carbon future for the UK.
There has been discussion about the ways Government could strike two birds with one stone by gearing their relief in a way to promote sustainable practices, but so far the outlook isn’t optimistic. Some in the industry are taking this as a cue that the industry itself must lead the way.
“Despite increasing calls for the introduction of a scrappage scheme to boost sales, the government has recently insisted they have no plans to change the current incentives. And with the SMMT pushing for the government to set out a plan to support the future of the industry, it’s time to look at alternative stimulus to drive spend in the market,” Hilton says.
“There is an opportunity to be more ambitious with these plans and take the customer incentives beyond electric and hybrid model scrappage to encourage more emission friendly vehicles onto the road – and help customers with older models trade in with confidence. However, these plans and proposals typically take some time to reach customers and in the meantime, those who need to buy a car are turning to their local dealerships.”
One of the unforeseen side effects of COVID has been better air quality and lower emissions as everyone stays home, and the appetite for greener and more sustainable solutions is greater than ever.
“We’ve all noticed the improvements in air quality and noise pollution during lockdown, so it seems eminently sensible to link any industry support to environmental objectives and help speed up the transition to zero-emission motoring,” says Harrison. “A ‘green scrappage scheme’ has been mentioned by some. The choice of electric vehicles offered by manufacturers has grown significantly and delivery times to the UK continue to improve all the time.”
Moving Forward
Whatever support the government provides to the automotive industry, and whatever its priorities are, it will face a number of serious challenges.
“For the scrappage scheme the challenge is to identify the level of support and also to decide whether this scheme could/should be used to boost sales of EV’s. The reduction in VAT will be a short-term measure and is not specifically aimed at the automotive industry and as mentioned speculation on this measure could actually be counter-productive prior to announcement,” Pontin says. “The modifications to the Term Funding scheme need to be swift. The danger is that without this lending will become more difficult and the cost of borrowing may actually increase which would be counter-productive in the current economic climate.”
At the same time, any solution must take into account that the automotive industry doesn’t exist as an island.
“There is an immediate pressure to kick-start the economy, particularly ahead of any further regional lockdowns or second-wave of COVID-19,” Harrison insists. “While the pent-up demand from lockdown is clear in the new car leasing market, that momentum could be jeopardised by an increase in unemployment after October when the Job Retention Scheme concludes. Other industries such as the leisure and tourism sector will take longer to recover and so tailored support may be needed for several industries.”
While the government may not be offering the support the sector needs, the motor finance sector will have a key role to play in working with the rest of the automotive sector.
“The best way to ensure that finance providers can make the most of government support is to ensure they are engaged with the industry associations such as the FLA who offer guidance and support on new initiatives and ideas as they become available,” says Pontin.
“There are a range of Funding Support Schemes available to eligible businesses,” Harrison says.
“And the industry itself continues to innovate through the introduction of payment holidays, warranties and insurance products designed to give consumers greater confidence in these uncertain times.”
The automotive is one of the UK’s most valuable economic assets, exporting more goods than any other sector, generating billions for the economy and supporting some 168,000 high-skilled and high-paid manufacturing jobs in communities across every nation and region of the UK. And while those across the automotive sector are doing all they can to support themselves and each other, the lack of support from the government has come as a blow.
“We urgently need government to expand its strategy and introduce sector-specific measures for UK auto to support cash flow such as business rate holidays, tax cuts, and policies that provide broader support for consumer confidence and boost the big ticket spending that drives manufacturing,” Hawes says. “Until critical industries such as automotive recover, the UK economic recovery will be stuck in low gear.”
