The Government is right, automotive investment is at risk but tactical deals are not the answer.

The UK Government is supporting the automotive sector…

The news that Nissan has committed to further investment at its plant in Sunderland is very welcome. It does appear that the UK Government has provided some form of assurance to the company to help secure the commitment to future investment in the UK.

…but why is the UK Government so focused on this sector?

The appeal of the sector is clear. Automotive has been one of the UK’s most successful manufacturing sectors in recent years. After a decline in the sector in the 1980s, recent years have seen a significant revival. Car production is at levels last seen in 2000, around 800,000 are employed in the sector and it accounts for 12% of the UK’s exports.

However, the sector’s strength also helps explain its vulnerability. According to the Society of Motor Manufacturers and Traders, 77% of cars built in the UK in 2015 were exported and 58% of these went to the EU. The supply chain to produce these cars for exports is international and the UK imports a significant amount of components to enable it to export. Although partly reflecting the import of cars, the UK’s trade deficit with the EU for the sector illustrates the importance of the European supply chain. UK based automotive manufacturers are concerned that if the UK changes its trading relationship with the EU, UK production could face import and export tariffs as well as more complex customs procedures.



Access to the European market is important for automotive operations but it has also been vital in helping the UK attract automotive Foreign Direct Investment (FDI). This investment has been critical in driving the revival of the sector. As shown below, Automotive has been the leading UK manufacturing sector for FDI in the last five years.

UK Manufacturing plant FDI 2011-2015
Sector Projects
Automotive 152
Food 92
Machinery & Equipment 92
Plastic & rubber 59
Chemicals 46
Transport 42
Metals 41
Paper 33
Pharmaceutical 25
Other 102
Total 684

Source: EY Global Investment Monitor

What investment is at risk?

Foreign investment in the UK automotive sector is dominated by four countries, the USA, Japan, Germany and India. The Indian investment is primarily concentrated around the Jaguar Land Rover investment by the Tata Group, while a significant share of the German investment is in UK established operations such as Bentley, Rolls Royce and Mini and hence is in part driven by the opportunity in the UK market. Investment from these two countries looks to be less immediately mobile.

It seems that it is Japanese and North American investment that is most at risk should Brexit lead to a deterioration in the UK’s terms of trade in goods with the European Union. Further analysis of the nature of the investment from these countries confirms this hypothesis.

UK Automotive 2011-15 Project origin country
Germany 31 NAFTA 35
France 6 Japan 31
Spain 6 India 16
Other 12 Other 15
Total 55 Total 97
Overall 152

Japanese companies have invested in 31 manufacturing projects in the UK in the last five years, almost half of which were made by Nissan, Honda and Toyota with the rest primarily from suppliers to these three companies. Nissan was the largest source of projects with seven.

These companies clearly adopt a strategic approach to investment – Toyota has made six plant investments in France in the last five years and Nissan has done the same in Catalunya in Spain. The companies spread their investment to give themselves alternatives for future investment and hence they could choose to reduce their UK commitment over time.

EY’s latest survey of global corporates, EY’s 15th Capital Confidence Barometer, provides further evidence of the risk to FDI in the automotive sector and especially that from Japan and the USA. When asked how the possibility of Brexit would impact their attitude to investment in the UK, a balance (positive minus negative responses) of 72% of Japanese investors and 16% of US investors said it would negatively impact their intention to invest in the UK. By contrast the results for Indian investors were overwhelmingly positive and moderately so for European investors.


Strategy not tactics is required

The Government has made it clear it is proposing to develop an industrial strategy for the UK. Cutting deals with automotive manufacturers is a tactical move not an industrial strategy. The major manufacturers are internationally mobile and have options for other investments that will allow them to leave the UK over time if they perceive this to be in their interests. The UK has to develop a proposition that will be attractive over time and that is based on the future of the industry not the current situation – this is a strategic approach.

The first task is for the UK to analyse the evolving landscape and to decide if automotive is a priority. Given the UK’s recent success and the dynamic nature of the sector, innovations such as electric and autonomous cars are creating disruption and hence a chance to build market position, it does seem as though automotive is a sector worthy of serious consideration.

If automotive is chosen as a priority sector, then Government will have to play a role to give UK based manufacturers the opportunity to compete effectively. Hamid Mughal, Director of Global Manufacturing at Rolls Royce, said that countries are:

” investing huge amounts of political and economic resources”

to attract manufacturers to open new plants. The UK will need to recognise this but the support offered cannot just be financial incentives to invest, this approach will just lead to ongoing financial commitments. An industrial strategy must be end to end, from education and skills, through to R&D and infrastructure, driven by the needs of the sectors identified.

As an example of potential strategic inconsistencies, consider transport. Manufacturers in the UK consistently tell us that their priority is for better roads to help move parts and goods around the country. Yet likely infrastructure spend looks to be dominated by air and rail transport. There appears to be a mismatch. It will be very important to resist the temptation for tactical tinkering and to take the time to develop an integrated strategy.


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