Home Leadership Government Support For UK Auto Really Is Needed – It Won’t Be A ‘Bailout’.

Government Support For UK Auto Really Is Needed – It Won’t Be A ‘Bailout’.

by The Business Influencer

Even before Covid-19 hit, the UK auto industry was experiencing a ‘perfect storm’ in terms of the shift away from diesels, a downturn in the Chinese market and Brexit uncertainty slowing the economy, impacting in turn on sales and production.

 

Covid-19 has brought ‘Perfect Storm Part 2’, with supply chains disrupted, assembly closed down and car dealers shut. The economic damage from the virus will likely mean a 20% hit to car sales globally this year. That’s pretty devastating for an auto industry already beset by challenges and having to invest heavily in new technologies. The SMMT had originally forecast a 200,000 unit hit to UK car output as a result of the virus, but the actual impact could easily be double that.

 

This would be hugely damaging to a strategically important industry. On the manufacturing side, the auto ndustry employs some 168,000 people directly and that number again in sectors linked to it. The industry’s annual turnover is valued at £82bn a year, and the sector accounts for 14% of the total value of all exported goods from the UK each year, at £44bn.

 

 

On the retail side, the National Franchised Dealers Association (NFDA) estimated that before Covid some 590,000 people work in auto retail, with a turnover of £200bn a year and £2.4 billion in net capital expenditure.

 

“So in total we’re talking almost 900,000 people in jobs thanks to an industry that also brings in around £49bn in tax receipts every year. The industry is as ‘strategic’ as it gets.”

 

It was thought that the top end of the industry would be pretty much insulated from the unfolding ‘carmageddon’ but the decisions by the likes of McLaren Group (Formula 1 team owner, technology specialist and maker of expensive, sleek supercars) and Bentley to make significant job cuts show how awful the situation really is.

 

McLaren had reportedly applied to the government for a £150m emergency loan but was turned down. That government rejection seemed especially odd as the firm is much more than just a fancy car firm. McLaren Applied Technologies is at the cutting edge of Industry 4.0 and has applied the firm’s technology to other areas, through its development of smart products, smart data systems, virtual test and development environments, and control systems. It’s the sort of ‘smart manufacturing’ the UK is meant to excel at.

 

 

In total, some 6000 jobs have been lost in the sector in recent weeks, and Jaguar Land Rover, the jewel in the crown of UK auto, is in talks with the government over support worth over £1bn.

 

JLR employs 38,000 workers in the UK with four times that number in its supply chain, and invests some £4bn a year in research and product development. An attempt to issue bonds earlier in the year was pulled because of costs. At the end of March the firm had £3.6bh in cash and access to £1.9b in credit lines, but will have burned through at least £2bn of that since and is now looking increasingly cash strapped.

 

Some sort of government support via ‘Project Birch’ looks increasingly inevitable. When that happens the government may need to consider not only loans and loan guarantees but also an equity stake of some form.

 

Taking equity stakes in key firms, or granting loans that convert into equity, is radical in the UK and one that the last Labour government baulked at in the case of JLR in the Global Financial Crisis (the then business secretary Lord Mandelson was supportive but the Treasury hostile).

 

But such intervention is not unusual in other countries. The French government has a 15% stake in Renault and the State of Lower Saxony a 12% stake in VW, for example. What’s more, the French government has embarked on a Euro8bn support package for the auto industry and a Euro5bn loan guarantee for Renault, in return for the latter ‘relocalising’ some car production back to France. Germany has also intervened heavily to support its auto sector with a £4.4bn support package.

 

Furthermore, the crisis today is far worse than the Financial Crisis a decade ago and a looming issue is how the major carmakers will respond to the crisis, as they will face a big cash squeeze as consumers postpone purchasing cars.

 

 

The crisis comes at a time when international auto markets had anyway been slowing or stagnating, while at the same time car firms are having to invest huge amounts on a raft of new technologies, especially electric vehicles (EVs). A big squeeze is effectively playing out, and scale is seen as increasingly important for car firms.

 

So the auto shut downs will weaken firms and push them further to merge and consolidate. Auto firms will review investments and what models they produce, and where.

 

That poses further big questions over the position of some UK plants which anyway face uncertainty over the nature of the UK’s trading relationship with Europe at the end of 2020.

 

The Chancellor Rishi Sunak will have to consider all options in supporting otherwise viable, strategic manufacturers. And in the auto sector some form of ‘incentives’ may still be needed – as in France – to attract customers back into now reopened showrooms, ideally linked to greening the industry by encouraging buyers to trade in older cars and switch to electric and hybrid models.

 

This could help accelerate the shift to EVs that is anyway coming and help to both reduce emissions and improve urban air quality.

 

The Covid-19 crisis has forced the government to rethink the role of the state and what industrial policy looks like. Last year Boris Johnson had argued for a rethinking of State Aid after the Brexit transition period was over. That rethink has had to come a lot sooner than planned as Covid-19 has hit the economy, and there is much more work to do as further huge manufacturing job losses loom once the government’s job retention scheme is wound down.

 

David Bailey is Professor of Business Economics at the Birmingham Business School and Senior Fellow at The UK in a Changing Europe.

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