China worries hang over UK automotive sector

Posted on 7 Dec 2015 by Callum Bentley

Increasing global instability and the slowing Chinese economy are the biggest threats to the automotive sector’s ongoing success story, according to major new research released today from Lloyds Bank Commercial banking.

Driving Innovation, the second report on the English and Welsh automotive manufacturing sector, analyses the state of the industry today, and the opportunities and challenges it faces in the future.

Part of a series that analyses the role of key manufacturing sectors in Britain’s economy, the report gathered views from across the automotive supply chain, and found that firms believe the global economy is the prevailing challenge to the industry, with 43% of respondents citing it as their top worry for the second year running.

This challenge is underlined by a significant drop in the number of firms expecting to achieve business growth by entering new markets, falling from 68% last year to 48% this year.

Report key findings:

  • Global economic instability is biggest threat to Britain’s automotive industry
  • Businesses revise down growth forecasts amid international markets volatility
  • Significant drop in number of manufacturing firms expecting to achieve business growth through exports
  • Despite challenges, businesses planning to create thousands of jobs over next two years

Given that 78% of all vehicles made in the UK last year were exported, the results have heightened fears that the global slowdown will drag on the future performance of an industry that has substantially outperformed the broader manufacturing sector since the recession.

China and the international slowdown

This year’s research findings revealed a particularly big fall in the level of expected exports to the east, where China is a significant market. In 2014, two fifths (41%) of UK automotive manufacturers said they were planning to trade with new customers in Asia and the Far East. This year, that has fallen by more than a third to 27%.

Manufacturers have also revised down their growth forecasts for the next two years since last year’s survey, from 18% in 2014 to 14% in 2015.

Reshoring and jobs

Despite the challenge of the global economic slowdown, the overwhelming majority (86%) of respondents plan to create new jobs over the next two years. If their plans are replicated across the UK’s 2,994 automotive manufacturing firms, it would generate almost 85,000 new jobs.

These job creation plans are underpinned by manufacturers’ reshoring activity. While three fifths (58%) plan to bring some part of their manufacturing operations back to the UK in the next two years, half have already done so, up from 45% last year.

Anecdotal evidence of their motivation for this shift included wanting to support the UK economy and create jobs, seeking better control over production, and rising labour costs overseas.

Innovation and the cars of the future

UK manufacturers’ commitment to innovation has weakened slightly with firms planning to invest an average of 17% of current turnover into R&D over the next two years, down from 21% last year.

Survey feedback suggests that this is because many businesses are waiting for breakthroughs in the fields of lightweight, electric and driverless vehicles by bigger players with greater resources, before committing further spend to these areas. However, once this technology starts to become more widespread, the supply chain looks set to benefit.

Almost three fifths (58%) of businesses now say they plan to grow by developing new products, although this is down slightly from 62% last year, again demonstrating some level of caution over global instability, despite innovation being a tried-and-tested route for UK car makers.

Exports/export stock image
This year’s research findings revealed a particularly big fall in the level of expected exports to the east, where China is a significant market.

Manufacturers are keeping a close eye on developments in this area. Half (52%) are planning to upskill their workforce or change their business model to develop low carbon or electric vehicle technology; while one third (36%) plan to upskill or change their business model to develop driverless vehicle technology.

Report co-author, James Walton, manufacturing director, mid-markets, Lloyds Bank commented: “While the automotive industry is forecasting healthy growth, it’s clear that global instability and uncertainty threatens manufacturers’ confidence.

“In particular, the slowdown in China is a concern given that it is the biggest market for British-made cars outside the EU.

“However the sector is resilient and one of the most dynamic, innovative and exciting industries in the world, with British firms at its forefront. The increase in reshoring activity to the UK is creating more jobs and Lloyds Bank is committed to supporting its growth and success.”

Mike Hawes, chief executive, SMMT.
Mike Hawes, chief executive, SMMT.

Mike Hawes, chief executive, Society of Motor Manufacturers and Traders (SMMT), added: “Lloyds Bank’s second survey of the UK automotive manufacturing industry highlights some of the significant opportunities ahead – not only in terms of economic prosperity, technological innovation and employment potential in Britain, but the prospect for growth across the globe.

“The UK is seen internationally as a centre of innovation. It is home to 13 R&D centres, seven of the worlds 10 Formula One teams and 16 of the top 20 global automotive suppliers. We also have a unique opportunity to lead the development of connected and autonomous vehicles.

“To maintain this position of innovative excellence, industry must grasp the opportunities presented by these breakthrough technologies and secure the benefits for the UK economy and society.”

David Atkinson, head of Manufacturing - SME, Lloyds Bank Commercial Banking.
David Atkinson, head of Manufacturing – SME, Lloyds Bank Commercial Banking.

David Atkinson, head of SME manufacturing, Lloyds Bank and report co-author, said: “This report shines a light on the industry that has dominated the global news agenda in 2015, from controversy over emissions tests to futuristic innovations in the field of driverless cars.

“The industry is going through a period of intense innovation and we need to ensure that the UK has the right level of skills, and is adept at using the latest technologies, to keep our automotive industry competitive.

“To help tackle the skills agenda we are contributing £5m over five years to the Lloyds Bank Advanced Manufacturing Technology Centre in Coventry, which will support the next generation of engineers.”