In 1885, Karl Benz built his first car: the Benz Patent-Motorwagen. It had three wheels, seating for two, and just one cylinder (which could power it to the heady heights of 10mph). Cars today – after over 130 years of development – enjoy a significant number of revisions to Benz’s creation: more wheels, more cylinders, and many more horsepower. Perhaps most significant, however, is that many are also connected and increasingly moving towards autonomy, with features such as semi-autonomous driving, and real-time sharing of vehicle maintenance and diagnostic data. The important (and relatively recent) advance in connected and autonomous vehicles (CAVs) looks set to transform both the economic and social role that cars play in the UK and the world. Here, we briefly analyse two benefits.
The economic benefits of CAVs could be hugely significant. Strategy&’s 2017 Digital Auto Report: Fast and Furious portrays a worldwide digital mobility services market of $65 billion today, experiencing 31% annual growth, and reaching $2.2 trillion by 2030. Within the UK, the industry body, the Society of Motor Manufacturers and Traders (SMMT) predicts that CAVs could represent a £51bn opportunity by 2030. This is a combination of the value of time that people gain from being able to use drive-time more efficiently, coupled with increased efficiency in the wider economy.
CAVs also bring significant non-economic benefits. Connected and Autonomous Vehicles: Revolutionising Mobility in Society, a recent joint SMMT/Strategy& study, highlighted the societal benefits of CAVs, finding that new CAV technology will offer freedom to some of society’s most disadvantaged in terms of mobility (those with disabilities, the elderly, and the young). Over 70% of young (aged 17-24) people surveyed believe that CAV technology will improve their quality of life, and nearly 60% of respondents believe that CAVs will bring benefits, with the biggest attraction being automatic braking and a vehicle’s ability to self-diagnose faults. CAVs also bring improved safety: it is predicted that CAVs could prevent 25,000 annual road accidents in the UK, and through this save around 2,500 lives.
The outlook for CAVs (both economically and socially) is positive, and the UK is positioning itself well to benefit from this (for example, by recently pushing through a ‘Vehicle Technology and Aviation Bill’ to clarify and detail autonomous vehicle liability and insurance issues). Whilst the UK’s CAV future will undoubtedly play a big part in any future auto success, this will depend on far-reaching and targeted government and industry investment, and that the UK remains an attractive place for automotive companies in a post-Brexit environment.
Our most recent scan of the industry, the “AutoIndex” (which covers events to Q3 2017) paints a positive picture for the UK’s automotive market as a whole, although warnings signs are appearing, with the index dropping 5% Q2-Q3 2017. Read on to find out more.
We at Strategy&, PwC’s strategy consulting business, created this AutoIndex to provide a comprehensive view of the health of the UK automotive sector. We look at (1) the total value of the UK production of suppliers and original equipment manufacturers (OEMs), (2) the total value of sales, and (3) the valuation of automotive companies listed on the London Stock Exchange. This is detailed further in the ‘Challenge and Change’ section of this AutoIndex. Together, these three measures provide a comprehensive and balanced view of the sector.
UK automotive industry health is, according to our AutoIndex, still at near-record levels, having enjoyed sustained improvement for several years. However, warning signs are beginning to appear, with the AutoIndex now below its Q2 2017 level. All index components (sales, production, and market capitalisation) have turned downwards.
Sales are under pressure from the general Brexit-related economic uncertainty and the uptick in interest rates, which is beginning to put pressure on the price of PCP/PCH contracts. Moreover, the overall levels of personal credit are generating concern that borrowers may be over-stretched. We cover this in more detail in our forthcoming “UK Used Car Market” viewpoint, to be released in June 2018.
Only around 20% of UK car production is destined for sale in the UK1), such that the market slowdown in only part of the story. Output is also under threat due to the broader Brexit uncertainty as OEMs hedge their bets on UK production (e.g., the recent reduction in the number of shifts at Vauxhall’s Ellesmere port plant following its joining the PSA Group.
UK stock markets had a positive year in 2017; the FTSE 100 grew at nearly 11.9%, and the FTSE 250 at 17.8%. Automotive companies performed poorly by comparison, with a reduction of 0.5% in their market capitalisation. This was driven by insurance companies (whose market capitalisation decreased by 5%, hit, by part, through government legislation changes such as the calculation methodology for personal injury compensation pay-outs).
The aggregate value of the UK automotive sales has been falling since Q1 2017 (see Exhibit 2).
This negative trajectory has been driven by the value of new vehicle sales, which is down by 6% compared to Q2 2016. Looking forward, we expect new vehicle sales to further decrease once the BoE’s base rate rise fully filters into the automotive loans market.
The value of UK automotive production enjoyed 5% compound growth Q3 2014-Q3 2017, but is now beginning to level off, with a minor dip Q2-Q3 2017 (see Exhibit 3.2).
Cars (excluding ultra-premium and niche) made in the UK include those by Mini (Oxford), Honda (Swindon), Toyota (Burnaston), Nissan (Sunderland), Jaguar Land Rover (Coventry), and Vauxhall (Ellesmere Port/Luton). Whilst there are high absolute production values, there are relatively few car models assembled in the UK.
This means that the annual change in product value is significantly driven by the specific stage in the product lifecycle of UK-produced vehicles. For example, part of the drop throughout 2017 is accounted for by declining demand for the Vauxhall Astra due to its product lifecycle phase. PSA Group has recently announced that it is cutting 650 jobs at its Ellesmere Port plant because of this. Moreover, none of the vehicles produced in the UK were newly launched.
2016 saw vehicle manufacturing reach its highest level for a decade, with over 1.7m vehicles produced. This was a significant increase of 8.5% over 2015’s high, itself a previous UK record (see Exhibit 4). However, this now appears to be tailing off – the index shows Q3 2017’s vehicle production value dropping slightly (around £49bn). November 2017 car production volumes (161.5K) are below those from November 2016 (169.3k). This potential slowdown is backed up by the Q3 2017 dip in the overall AutoIndex.
Off the back of significant demand for premium British-made cars, a record number of cars were exported in 2016. As long as potential disruption from the UK’s referendum vote to leave the European Union is minimised, this increased demand, supported by Brexit-induced sterling depreciation should continue to boost UK automotive manufacturing – November 2017 saw 137.2K vehicle exports, compared to 135.5K in November 2017.
The market capitalisation of automotive companies active in the UK (component manufacturers, insurance companies, downstream retail companies and breakdown companies) has increased by 265% since 2009, and is at near record-high levels (see Exhibit 5). Over the past 12 months, it has increased by 3%, with a minor drop Q2-Q3 2017.
The make-up of companies in the UK differs from other countries. Much of the market capitalisation in the UK comes from insurance companies, whereas in Germany the majority comes from manufacturers.
The UK automotive sector, one of the country’s undoubted success stories, has enjoyed sustained and strong growth for several years. However, the Q2-Q3 2017 dip in the Strategy& AutoIndex is a warning sign. Despite 2016’s record high vehicle production and export levels, the uncertainty surrounding Brexit appears to be filtering through to the automotive sector. November 2017’s car production levels were lower than those in November 2016, and 2016’s total UK automotive investment – £1.66bn – is significantly below the £2.5bn seen in 2015. One further example of this is Vauxhall, whose Ellesmere Port (producing the current Astra) recently announced that a total of 650 jobs are being cut, and proposed that the site moves to a single shift pattern from 2018, roughly halving the number of cars produced there. Vauxhall has cited high costs in comparison to French manufacturing sites as a reason, and its nervousness is perhaps indicative of a wider worry among British car manufacturers of high tariffs or trade barriers resulting from Brexit.
The Brexit negotiations will be the key determinant of future short-term trajectory. Stay tuned to future AutoIndex editions to read how this plays out.