In conversation with Mike Hawes, chief executive of the SMMT

 In the last few days of September, just as the UK became embroiled in a constitutional crisis over Brexit, industry bodies representing national automotive industries all over the EU issued a statement that insisted the security of their industry rests on the UK reaching a Brexit deal with the EU.

Alarmingly, the government maintains that in the event of no deal, even if there is less than 100% free flow of goods at the border the automotive industry would not be too badly affected.

In a statement to the House of Commons, the No Deal Minister Michael Gove even claimed that the SMMT – the Society of Motor Manufacturers and Traders that represents the UK automotive industry – had agreed they were ‘ready’ for that.

Mike Hawes, chief executive of the SMMT swiftly rebutted that statement, as did retail industry leaders who were equally shocked by what Gove had said.

Mike Hawes: We need a deal. No deal would be a disaster. The challenge that would befall, especially the UK industry in terms of tariff impacts, in terms of potential delays at borders, in terms of regulatory change, additional cost, collectively would seriously undermine the viability of the UK automotive industry.

What you saw already this week was a joint communication which we’d been pushing for with our sister organisations across different automotive countries in Europe and it basically showed the alignment between the UK and those countries that they recognise the importance of getting a deal.

That is our message. It has been since the referendum, so that’s why it’s important that politicians on both sides of the Channel recognise that for our sector, we desperately need a deal.

Is there a danger the UK could lose a major OEM manufacturer?

Hopefully not. The fundamentals of the UK industry are still strong. We have a flexible, highly skilled workforce, engineering excellence, global brands in our sector: Aston Martin, McLaren, Bentley, Rolls Royce to name just a handful.

We are competitive, we are highly productive, we are a good place to make cars, to make other automotive business.

If our trading conditions, however, are uncertain and ultimately more negative than they are now, then there’d be a real challenge to maintain that competitiveness. I don’t think we’re going to lose a plant overnight but what we always fear is death by a thousand cuts.

Automotive investment is not linear, it comes in lumps when you get a new model. If you’ve got a plant where you’re producing three models, and one model is up for renewal – and you miss out on that one – then you’re down to two.

Your productivity is immediately undermined. Then when the next model comes up again, and you were to lose that to a low-cost country with free and frictionless trade….

The government says there is an 80% positive chance of goods moving freely at the border, but even if we get 95% of goods flowing freely into the country, if that other 5% contains automotive components, we can’t make cars because you can’t make a car with 95% of the parts.

BMW says MINI Plant Oxford will shut for days, and possibly weeks, in the event of a No Deal Brexit, and that 4,500 will not be paid during that time. JLR is also saying it would shut down for a period in November.

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What about contingency plans?

Well, the industry has been trying to prepare for no deal for some months. They’re looking at, where possible, additional warehousing, not easy given the scale and the volumes that we’re talking about.

You’re definitely talking additional administrative costs, legal costs – we’ve estimated car manufacturers have probably spent over half a billion pounds in preparation thus far. We’re doing all we can, but you can’t prepare for all contingencies.

Moving on to post-Brexit, whatever it looks like, how do rules of origin come into play if we’re going to be outside the EU? Will that affect how and where cars are made?

Potentially. It depends on how things pan out. We are an export-led industry: 80% of what we produce goes abroad. Over half of that goes to the rest of the EU and a further 15-17% goes to markets with which we have preferential trading arrangements by virtue of being part of the EU.

Now, most of those are going to cease the day we leave. The ones that have been guaranteed to roll over are with South Korea, Switzerland, Chile, but some of the big ones – Japan, Canada I think – won’t.

The government has said it wants free trade agreements. Free trade agreements are based upon agreement between two countries that you will trade freely in each other’s goods, but you need a way of ensuring that those goods are actually from those respective originating countries, hence rules of origin.

Most free trade agreements contain an automotive chapter which generally mean that the threshold to determine a product is British would be 55-60% local originating content.

We’re probably at the moment somewhere around 40%, so with regard to free trade agreements, we won’t necessarily qualify so we will have to trade under normal WTO trading conditions, which means tariffs of 20%, could be 10%, depends who we’re trading with.

Now, there are potentially some ways around this. What you have to do is get that third country to agree that for UK content we can count European content. It’s called cumulation.

We have talked about a potential free trade deal with the US post-Brexit. One of the issues would be rules of origin under the USMCA (US Mexico Canada Agreement), which has yet to be ratified by Congress. They’re setting the rules of origin threshold at around 75%. We’re a million miles away from that.

We would have to cumulate with European products, but whether or not America accepts that is a matter of negotiation. One thing you know about trade negotiations is that negotiators are vicious in defending their countries interest!

There may be a silver lining in that it would make UK suppliers of parts more attractive to OEMs.

We’d hope so. But you still have to be competitive in what you were doing and what you were making. Yes, we may increase demand potentially for UK components but it’s still got to be good quality at the right cost, reliability, and innovation.

All the things that drive the supply chain have to be there in the first instance and not least the fact we still need to make sure we retain the car production to ensure that we have a healthy supply chain.

The volume car makers in the UK are foreign-owned, and at a time of real global uncertainty, that’s a real disadvantage for the UK, isn’t it?

Well the nature of the industry is it’s global. You need that scale to be able to invest in new technologies, so we are part of that global environment. Yes, the majority is foreign owned, especially the volume manufacturers.

Decisions by global manufacturers are based on a number of factors. Primary among them is where is it most competitive to make? Where is my market? Do I feel welcome in that market?

So, we need to make sure that we recover our reputation for political stability, that we are not just an attractive place to invest commercially, but that we retain all the assets that we are world famous for, and which led to such a successful rebounding of the industry coming out of global financial crisis.

And we must still make that pitch because global boardrooms can be pretty hard-headed. They will go where it is right for the company to do so.

Going back to the EU, next year their limits on the amount of CO2 new cars can produce comes into force – 95g per km – and carmakers are scrambling to achieve that or risk swingeing fines. Does leaving the EU let us off the hook?

No. The government is transposing European law into UK law lock, stock and barrel, so on day one of our leaving we are totally aligned. That means the requirement to average 95 grams per kilometre as an industry, as a fleet, transposes those into UK law.

However, it means we have to achieve that just in the UK, which is actually something of more of a challenge for manufacturers because at the moment you can average that over the European market.

So, you sell small cars in Italy, larger cars in Germany for instance. In the UK we’ve got a fairly homogeneous market so we don’t have that flexibility. There’s no part of the UK that generally drive small cars versus large cars. So meeting that target will be a challenge and has to be made just on UK sales.

Effectively it dictates that you must accelerate your shift into electric vehicles, but it’s not exclusively electric – it is ostensibly technology neutral – you could get there via hydrogen fuel cell, as long as you get to that level of emission. So that’s the challenge for the industry.

We’ve already got 40 plug-in models on the market in the UK. You’ll see that multiply over the next 12 months. The choice will be ever greater.

At the Frankfurt Motor Show recently, every single manufacturer was showing their electric vehicle offerings. It won’t be one particular manufacturer dominating – if it is, it’s likely to be the existing players.

JLR’s i-Pace, one of the many new electric vehicles being produced by carmakers in response to the electric revolution. This race model will take part in the FIA Formula E world championship

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Do you foresee a day – probably decades hence – when cars will be electric and autonomous and that people will fall out of love with driving?

Consumers still want a particular type of experience. They want a premium experience. At other times they just want something that is functional

The other dynamic that is taking place is this shift, predominantly in urban areas to mobility on demand that will change the nature of intra-urban transport. Being able to summon vehicles which will take you from point to point wherever you want to go, when you want to go.

And ownership models might change?

Absolutely, as we’re seeing in a number of different areas in terms of shared ownership of things. In terms of the automotive industry, most people who buy new cars tend to actively lease them because they’re buying through PCP or PCH, so they own them for three years, then they either pass them back, own them outright or flip them for new models, so that is becoming an increasing mindset.

And I think this is one of the real challenges for futurologists, for planners especially in urban areas. You’re going to think, okay, how is this going to change? How is it going to affect the nature of the city?

You may have different types of modes of transport throughout your journey that could not involve a car. It could involve a train and underground and bus. It could involve an electric scooter for the last mile, which at the moment is illegal on both roads and pavements in the UK but go to Paris and they were everywhere.

And what does this mean for the industry? Potentially some would say we’ve reached ‘peak car’. I don’t believe that at all. First of all, global demand for vehicles is not sated. And in the future, you want that mobility on demand, so that means you need vehicles on the road.

Electric vehicles have many fewer moving parts than internal combustion engines, so that must have an impact on how the UK automotive supply chain prepares for the future.

Internal combustion engines will be around for many years yet. Look at commercial vehicles, especially heavy goods vehicles. We still haven’t got technology that is the match of the energy density of a diesel engine. So, there is a certain degree of breathing space for the supply chain.

Without a doubt we are shifting towards electrification, so the supply chain that currently supports the internal combustion engine does need to make that shift and get into some alternative jobs. But there are other technologies around.

We’re very good at power control technologies. Increasingly the value of the vehicle is in the battery, in the telematics. There are massive growth opportunities within automotive alone. And let’s go back to the original premise. We want to make sure those opportunities are grasped by the UK.

The government is channelling significant funds into the sector through programmes such as the Faraday Challenge that explores how to make more efficient batteries. Are you satisfied with that support?

You can always do more. There is this plethora of technological change that’s befalling the industry, probably more in this sector than any other. Like the rest of manufacturing, we’re looking at digitalisation, manufacturing, as well as environmental issues.

These are fundamental. This affects the value of the vehicle right from internal combustion engines to electrification. We’re talking about connected vehicles, autonomous vehicles, changing ownership models. Then we’re talking about mobility on demand, and then you’ve got the global geopolitical issues with trade tension.

So, there are seven or eight mega trends affecting this industry. Whatever money we’ve got for R&D is going to be spread thin, and that’s why you’re seeing a lot of manufacturers entering into joint ventures, manufacturers who are on the forecourt competing for sales, but they collaborate when it comes to technological development.

You need that collaboration between the industry and public sector in terms of university research institutes, oiled by things like Innovate UK and so forth, and the UK isn’t bad at that – but it could still be better.

One of the big challenges is if we’re going to shift towards battery powered vehicles, we need a gigafactory. We need to make the batteries in the UK: at the moment just about all of them are made in Asia.

There’ a lot of investment going on in mainland Europe, and we’ve already got two gigawatt power plants up in Sunderland. We need to grow that capacity in the UK.

A rendering of the first complete gigafactory in Nevada – image courtesy of Tesla.

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And charging units…

…the infrastructure, absolutely and that’s about take-up of these vehicles. Because the industry can put the vehicles on the market, but how quickly we shift towards 100% electric utilisation depends on factors outside of our control.

These are costly products. New technologies are always costly because you don’t have economies of scale.

The industry has bet the farm on these sorts of technologies. It wants to recoup the investment, it wants to increase take-up, but you need incentives to encourage people.

You need to reassure people about range, which technology increasingly allows but also you need to reassure them that there is the infrastructure there to support their refuelling, with hydrogen, and recharging in terms of batteries.

We have about 18,000 – 19,000 charge points in the UK at the moment. Two separate studies, by KPMG and by the Committee on Climate Change, both said we need about 200,000.

Angela Merkel’s committed to a million charge points in Germany. It shows the scale that we need to go.

There’s a lot of talk about there are as many public charge points in the UK as there are petrol/diesel service stations. That’s fine but every gas station has at least eight to ten pumps on it, and that’s the sort of multiplier we need.

For more on SMMT’s policies and priorities visit: www.smmt.co.uk

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*All un-captioned images courtesy of Depositphotos.