UK AutoIndex Quarterly report Q3 2017

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Stephen Fletcher
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1 UK AutoIndex Quarterly report 0

2 Looking to the future: Connected cars in the UK Connected cars in the UK In 5, 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 mph). Cars today after over 0 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 0 Digital Auto Report: Fast and Furious portrays a worldwide digital mobility services market of $65 billion today, experiencing % annual growth, and reaching $. trillion by 00. Within the UK, the industry body, the Society of Motor Manufacturers and Traders (SMMT) predicts that CAVs could represent a 5bn opportunity by 00. 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 0% of young (aged -4) 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 5,000 annual road accidents in the UK, and through this save around,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 0) paints a positive picture for the UK s automotive market as a whole, although warnings signs are appearing, with the index dropping 5% - 0. Read on to find out more.

3 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 () the total value of the UK production of suppliers and original equipment manufacturers (OEMs), () the total value of sales, and () 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 0 level. All index components (sales, production, and market capitalisation) have turned downwards. Sales are under pressure from the general Brexitrelated economic uncertainty and the uptick in interest rates, which is beginning to put pressure Exhibit Aggregate UK automotive industry index (AutoIndex) Base 0 = average 00-0, rolling month period* 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 0. Only around 0% of UK car production is destined for sale in the UK ), 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 0; the FTSE 0 grew at nearly.%, and the FTSE 50 at.%. 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). +64.% +.% +.4% Automotive sales Automotive production Market capitalisation of automotive activities ) SMMT car production data, YTD September 0 *Numbers may not sum due to rounding Sources: ONS, SMMT, Driven Data, Datastream, Strategy& analysis

4 AutoIndex components # Value of total UK automotive sales The aggregate value of the UK automotive sales has been falling since 0 (see Exhibit ). This negative trajectory has been driven by the value of new vehicle sales, which is down by 6% compared to 06. Looking forward, we expect new vehicle sales to further decrease once the BoE s base rate rise fully filters into the automotive loans market. Exhibit UK automotive market value billion rolling month period (non-consolidated)* +5.% +5.0% -5.% Value of new vehicle sales Margin on used vehicles Pricing for maintenance and repair Interest on loans *Numbers may not sum due to rounding Sources: ONS, SMMT, Driven Data, Strategy& analysis #. Value of UK automotive manufacturing The value of UK automotive production enjoyed 5% compound growth 04-0, but is now beginning to level off, with a minor dip - 0 (see Exhibit., next page). 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/

5 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 0 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. Exhibit. Top models manufactured in UK January 0 manufacturing figures 6.5%.%.%.0% 5.% 5.0% 4.% 4.% 4.% 4.% Nissan Qashqai Honda Civic Toyota Auris Range Rover Sport Range Rover Velar Nissan Juke Jaguar F Pace Range Rover Range Rover Evoque Other Source: SMMT Exhibit. UK automotive production value billion rolling month period (non-consolidated)* +.% +.% +4.4% Vehicle production value Parts production value *Numbers may not sum due to rounding Sources: ONS, SMMT, Driven Data, Strategy& analysis #. Value of UK automotive manufacturing 06 saw vehicle manufacturing reach its highest level for a decade, with over.m vehicles produced. This was a significant increase of.5% over 05 s high, itself a previous UK record (see Exhibit 4). However, this now appears to be tailing off the index shows 0 s vehicle production value dropping slightly (around 4bn). November 0 car production volumes (6.5K) are below those from November 06 (6.k). This potential slowdown is backed up by the 0 dip in the overall AutoIndex. 4

6 Off the back of significant demand for premium British-made cars, a record number of cars were exported in 06. 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 0 saw.k vehicle exports, compared to 5.5K in November 0. Exhibit 4 UK automotive market production Thousands of vehicles 4,64,44,6,000-4.% +.%,556,54,5,,65,5,6,44 ) This has been estimated based on the difference between September 06 and 0 production figures Sources : ONS, SMMT, Driven Data, Strategy& analysis E #. Market capitalisation of automotive companies active in the UK The market capitalisation of automotive companies active in the UK (component manufacturers, insurance companies, downstream retail companies and breakdown companies) has increased by 65% since 00, and is at near record-high levels (see Exhibit 5). Over the past months, it has increased by %, with a minor drop - 0. 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. Exhibit 5 Market capitalisation of automotive activities* bn, end of each quarter/year** 4 +6.% +.5% +5.% Manufacturers Insurance Retailers *Companies in index: Aviva, GKN, Inchcape, Lookers, Ricardo, Lucas (from -), Pendragon (from ), Admiral Group (from 00), Vertu Motors (from 00), Direct Line (from 0), Auto Trader Group (from 05), Marshall Motor Holdings (from 05) **Numbers may not sum due to rounding Sources: Datastream, Strategy& analysis 5

7 Summary The UK automotive sector, one of the country s undoubted success stories, has enjoyed sustained and strong growth for several years. However, the - 0 dip in the Strategy& AutoIndex is a warning sign. Despite 06 s record high vehicle production and export levels, the uncertainty surrounding Brexit appears to be filtering through to the automotive sector. November 0 s car production levels were lower than those in November 06, and 06 s total UK automotive investment.66bn is significantly below the.5bn seen in 05. 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 0, 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. Challenge Change UK AutoIndex Automotive sales 4 Automotive production 50 Market capitalisation UK automotive market value Turnover new vehicles 4 Margin used vehicles Parts, maintenance, and repair Value added in financing and used sales UK automotive production value 5 Vehicle production 4 Parts production UK Automotive production, Market capitalisation of activities Manufacturers Insurance Retailers 6

8 Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. These are complex and high-stakes undertakings often game-changing transformations. We bring 0 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you re charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we ll help you create the value you re looking for with speed, confidence, and impact. We are part of the PwC network of firms in 5 countries with more than 6,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at strategyand.pwc.com. Contact us London Mark Couttie Partner, PwC UK mark.couttie@pwc.com Rich Parkin Partner, PwC UK rich.parkin@pwc.com Akshara Kothari Senior Manager, PwC UK akshara.kothari@pwc.com Jago McKenzie Senior Associate, PwC UK mckenzie.jago@pwc.com 0 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. Mentions of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of firms. For more about Strategy&, see No reproduction is permitted in whole or part without written permission of PwC. Disclaimer: This content is for general purposes only, and should not be used as a substitute for consultation with professional advisors.

Opportunities and attractiveness of UK Automotive Sector. John Kell Specialist Automotive Sector Team

Opportunities and attractiveness of UK Automotive Sector John Kell Specialist Automotive Sector Team UK Automotive Industry - Overview 2.7m engines produced in 2017 814,000 people employed across UK automotive