Tomorrow's Economy

How can UK manufacturing capitalise on the drive towards autonomous cars?

30 November 2016

The UK government’s new industrial strategy may create a propitious climate for the development of self-driving vehicles, but there could also be pitfalls ahead

Patrick Diamond

The automotive industry has been one of the success stories of the UK economy, and a solid contributor to the country’s sometimes troubled manufacturing sector. Whereas manufacturing as a share of GDP declined by 8.4 per cent between 1995 and 2015 according to a study by the Centre for Progressive Capitalism, the motor vehicle industry has been one of top five enablers of the productive sector.

The most striking factor about UK industry is its export orientation. As the original ‘British’ car manufacturers declined in the 1980s, the then government embarked on an explicit policy of attracting international investment. When the last UK volume marque, Rover, finally closed in the early noughties, it left a thriving, globally focused sector – often serving as the European base for international brands to export throughout the EU and beyond. In 2014, 142,000 employees worked directly in the vehicle manufacturing industry, making up one-in-20 workers in the manufacturing sector overall.

Although a success story in the UK context, globally the sector has lost ground – between 1995 and 2008 the UK share of global vehicle production share fell by 25 per cent to 2.43 per cent, dropping more rapidly than either Germany or France. Most recently, the car industry has bounced back, reaching a 10-year high in production figures, growing by 3.9 per cent to more than 1.58m vehicles in 2015, with increased demand at home and across the continent.

However, the UK industry remains heavily dependent on overseas markets and open trade; 77.3 per cent of vehicles manufactured in the UK are exported and conversely more than 80 per cent of vehicles bought in the UK are imported, mainly from the EU. As Britain departs from the EU, uncertainty about the future shape of trade relations is naturally concerning for both UK manufacturers and trading partners on the continent.

Despite the popular image of the UK as a ‘post-manufacturing’, service-led economy, the importance and diversity of the British car manufacturing sector is increasingly widely recognised. It is striking that almost one third of all the EU-28’s motor vehicle manufacturers are located in Britain, which together account for just under 10 per cent of the collective EU turnover, ranking the UK third only behind the dominant Germany, and then France.

The next phase of advance for motor manufacturing in Britain is likely to be developing autonomous vehicle (AV) technology. The UK has tried to enthusiastically embrace the development and implementation of connected and autonomous vehicles in its regulatory framework for the automotive sector. There is governmental support for research and testing of autonomous cars, facilitated by continued, targeted investment and, as technology is rolled out, through the publication of regulations for the testing of self-driving cars based on dialogue with industry.

The UK has recently witnessed a change of government. Although the Conservatives have remained the governing party, Theresa May’s administration has announced a major policy shift from a broadly laissez-faire approach towards an interventionist industrial policy. The new approach views the state as able to play a constructive role in fostering greater innovation and productivity in key growth sectors. May’s decision to review the construction of a new power station at Hinckley Point using Chinese investment was symptomatic of this change in the policy landscape; she is determined to put ‘British interests’ first.

As a consequence, there is likely to be greater emphasis from the new government on safeguarding the strategic position of manufacturing in the UK economy, a message which is particularly appealing to the ‘left behind’ regions of Britain that are perceived to have been negatively affected by globalisation since the 1980s (and perhaps consequently the areas that tended to vote most heavily for Brexit). The falling value of the pound is expected to help manufacturing businesses, but government will want to use all of the levers at its disposal to strengthen the UK manufacturing sector. The argument is that Britain has more to do to ‘re-balance the economy’ away from its historic dependence on financial services and the City of London.

This does not mean a return to the industrial policy of the 1970s in which the state sought to ‘pick winners’ and ‘bail out’ failing businesses to protect jobs and living standards, but it does mean government channelling investment and capital towards fledgling enterprises and innovations with long-term growth potential. It also means tackling long-standing issues such as rising energy costs by investing in infrastructure while UK borrowing rates remain historically low. The chancellor, Philip Hammond, has abandoned the previous target of achieving a fiscal surplus by the end of the decade in order to prioritise investment in physical infrastructure. According to Professor David Bailey, of the University of Coventry, “The OECD sees the UK economy as one of the most deregulated in the world. But UK energy prices are far higher than continental Europe partly because of lack of investment in generation capacity and partly because of extra taxes piled on to energy costs. We lack a proper energy compensation scheme for manufacturing. This has been talked about by government but we’ve so far seen no real action”.

The emphasis of the UK government’s industrial strategy is likely to be ‘partnership’ and ‘collaboration’ between the public and private sectors. There will be an effort to direct funding towards innovation and to share risks on new ventures: this may well create a propitious climate for the development of AV technology, with more active support from the British government than the £19m for research and development announced by Hammond’s predecessor in the 2015 budget. The emphasis on devolution is likely to continue channelling investment and strategic support to those regions where the economy has been historically underperforming the rest of the country.

The new industrial policy agenda relates to the most significant issue in the current prime ministerial ‘in-tray’: the terms of Britain’s departure from the European Union (EU). In a climate of political uncertainty, the government wants to reassure and support successful businesses located in the UK. In a post-Brexit Britain, manufacturers are chiefly concerned about access to the single market and the imposition of tariff barriers. For the transport sector and AV manufacturers in particular, it will be important as far as possible to maintain common regulatory standards with the EU so as to access European markets swiftly, while preserving the freedoms (such as ‘light touch’ border controls) that make it easier to preserve a European-wide transport infrastructure which includes the UK, despite Britain potentially no longer being in the EU.

Photo credit: supparsorn / Shutterstock.com