Automotive at a crossroads

Following Brexit upheaval, pandemic shutdowns and supply chain chaos, automotive bosses had hoped for a smoother road ahead. It wasn’t to be. Vehicle output has fallen to near seven-decade lows, global trade tensions are rattling boardrooms, and the transition to electric vehicles is testing the readiness of both industry and consumers. The result is a sector caught between long-standing strengths and mounting structural pressures.

“There’s no denying the current situation is extremely challenging,” said Mike Hawes, Chief Executive of the Society of Motor Manufacturers and Traders (SMMT). “Our production data shows demand for British built cars rose in March, up for the first time in 12 months and driven by robust export demand that increased by 30%. But this couldn’t overcome an overall decline in first quarter performance.”

The reasons, he explained, are well understood: investments in new models and technologies, structural changes and subdued demand globally are all constraining output. “With almost three quarters of car output shipped overseas last month, the importance of global markets, and free and fair trade, is critically important to our recovery and growth.”

A clear and present danger

No assessment of UK automotive can ignore Donald Trump – a man who, as some business owners have expressed, puts the ‘FFS’ in tariffs. In classic British style, the flippant remark hides serious concerns. Nearly eight out of ten UK-built cars are exported. While the EU accounts for 55% of that, the US makes up around 17%, but for low-volume, high-value marques like Aston Martin, Bentley and Rolls-Royce, it can represent between a third and half of their total output.

That’s why the recent trade agreement between the UK and US was broadly welcomed, offering much needed – if partial – relief. Under the new deal, US import tariffs on UK-built cars were slashed from 27.5% to 10%, much closer to the 2.5% before Trump took office, but only for the first 100,000 vehicles.

Any above that threshold will still face the punitive 27.5% rate. “The agreement to reduce tariffs on UK car exports into the US is great news for the industry and consumers,” Mike said.

“The application of these tariffs was a severe and immediate threat to UK automotive exporters, so this deal will provide much-needed relief, allowing both the industry and those that work in it to approach the future more positively.”

The government said the deal will save hundreds of millions a year for Jaguar Land Rover alone. However, given the UK exported 102,000 cars to the US last year, critics argue the quota may stifle efforts to expand in a crucial market.

Mike agrees that the deal should be seen as a stepping stone not the finish line, and hopes it will lead to “broader and deeper cooperation that reduces trade barriers still further, charting a path to economic growth for both nations.”

What’s the government’s strategy?

While many world leaders, emboldened by Trump’s example, might double down on protectionist measures, the UK’s future success rests on doing the opposite – being more open and cooperative, not less.

“The UK is, and has long been, a global trading nation,” Mike said. “So, when the IMF warned the UK would be hit harder than most by the US tariffs, it was no surprise. Manufacturing alone accounts for almost half of our exports.”

“We believe in free and fair trade, and the two go hand-in-hand,” he continued. “Protectionism might offer short-term political wins, but it harms industries, economies and consumers. Tariffs raise costs, and those costs are invariably passed on. Lowering the cost of doing business benefits everyone.

“We believe in free and fair trade, and the two go hand-in-hand,” he continued. “Protectionism might offer short-term political wins, but it harms industries, economies and consumers. Tariffs raise costs, and those costs are invariably passed on. Lowering the cost of doing business benefits everyone.”

The new UK-US agreement may mark a shift in tone, but the UK still imposes a 10% levy on US car imports. The US has been vocal about wanting that reduced to 2.5%, a proposal the Chancellor has indicated she’s open to, suggesting this could form the basis of a broader future deal. If agreed, the result could see US passenger car imports to the UK surge past the 18,000 units recorded in 2024.

While that may boost consumer choice, it could add yet further pressure on UK manufacturers. What’s needed is a joined-up, long-term Industrial Strategy to strengthen domestic capabilities and support investment.

“We’ve long called for one,” Mike said. “There was a credible strategy in 2017 under then-Business Secretary Greg Clark, which we supported. And it’s encouraging that he now sits on the advisory council shaping the new one. But time is not on our side. The government needs to act quickly and decisively.”

Making UK industry more competitive

To better compete globally, UK manufacturing must be on a stronger footing domestically. Top of the automotive industry’s wish list is energy cost relief. UK manufacturers pay the highest electricity prices in the OECD – three times what firms in France pay, 60% more than Germany and four times those in the US.

“High energy costs are the biggest barrier to investment,” Mike said. “Most companies picked the low-hanging fruit around energy savings years ago. Now, they’re looking to make significant investments in on-site power generation. But, with the grid connection queue growing tenfold since 2020, some face waits of up to 15 years to plug in. That makes planning reform essential.”

Skills are another pressing concern. The shift to electrification requires a fundamental retooling of the workforce. “Yes, we need new talent, but 80% of the 2030 workforce is already employed or actively seeking work. That makes reskilling and upskilling existing employees an absolute priority. And companies need far more support to do that,” Mike stressed. Above all, the strategy must have staying power. Automotive is recognised as a key pillar within the government’s Advanced Manufacturing Plan, but short termism kills investor confidence.

“Automotive investments are made for 25 years or more, not the next three. Cross-government support is also essential. Yes, it will be led by the Department for Business and Trade, but the issues cut across energy, education, transport and the treasury. All must be aligned behind a shared goal of driving economic growth. That’s how we give investors the confidence to back UK manufacturing for the long-term.”

The pivot to electric

The shift to electrification is where long-term commitment is needed most. In April, the government adjusted the Zero Emission Vehicle (ZEV) mandate to give carmakers more leeway. While the core 2030 target remains – ending the sale of new petrol and diesel cars – manufacturers now have greater flexibility in how and when they meet emissions targets in the run-up.

Key revisions include extended allowances for hybrid vehicle sales, now permitted until 2035. But the pressure to invest and adapt hasn’t gone away. That urgency is visible in production trends. Electrified vehicles now account for almost half of all UK car output. EV sales hit a record high in March, with growth across all categories – hybrid electric vehicles (HEVs), plug-in hybrids (PHEVs) and battery electric vehicles (BEVs).

It’s a welcome sign, but one driven more by looming tax deadlines than true consumer confidence. From April, electric cars became subject to the ‘luxury car tax’ – the Vehicle Excise Duty (VED) supplement applied to cars costing more than £40,000 new. The change has drivers paying several thousand pounds over the first six years of ownership, compared with zero previously. Combined with ambitious targets, like 28% of new car sales and 16% of vans needing to be zero emission this year, it’s hard to ignore that government policy and industry investment seem to be moving in different directions.

“There’s little to no fiscal incentive for private buyers right now,” Mike said. “If anything, recent policy changes have made it harder.” “Manufacturers are doing their part,” he continued. “They spent an estimated £4.5bn on EV discounting last year alone. They’ve also invested in product development, with more than 130 models now available across every size category.

And pushed the average driving range to 290 miles, more than double the typical weekly mileage. But relying on industry discounting isn’t sustainable. We need long-term growth, not short-term bubbles.” While fewer than one in four new car buyers plan to go electric by 2028, two in five EV sceptics say the right incentives and infrastructure development could change their mind. A clear opportunity if government and industry can align.

Suppliers, meanwhile, are feeling the squeeze. Many are grappling with high interest rates, volatile demand and rising employment costs. Mike suggests simple, short-term relief measures, such as flexible payment terms from HMRC, could provide vital breathing room. “It’s not about avoiding tax,” he said. “It’s about helping small businesses manage cash flow during a turbulent time.”

The road ahead

Despite the headwinds, there’s no shortage of ambition within UK automotive. It has the highly skilled workforce, dense network of globally regarded brands and proven capacity for innovation needed to 21 thrive. But realising that potential depends on clarity from government, confidence from investors and closer collaboration across the supply chain.

Above all, the Industrial Strategy must be delivered as promised this summer. That strategy must go beyond broad ambition and include clear, accountable delivery plans that give businesses the certainty to invest. “There’s a tremendous prize to be won if we can navigate the choppy waters,” Mike concluded.

“The UK has the capability, the reputation and the global standing to lead, but we can’t take it for granted. We need to build on it. New brands are entering the market here and in Europe, and are looking to manufacture locally. That’s just one example of the huge opportunities available to drive value in the UK supply chain.”

Through its Vision 2035 report, SMMT outlines a three-pronged plan to secure the future of UK automotive: shore up exports through urgent trade diplomacy, accelerate domestic EV production with clear industrial policy, and support the supply chain and workforce through long overdue investment. Whether this proves enough to reverse the slide may depend on the speed and clarity of government action in the weeks ahead.

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