UK automotive faces challenges, but should not fear them

It is becoming clear that the UK's automotive sector is facing a challenging year - on both the demand- and supply-side.

Top of the list of concerns are worries over the impact of the COVID-19 public health crisis and its considerable economic effects. The UK's annual new car market fell by almost a third to 1.63m in 2020, the lowest annual total since 1992, with much of the damage done in the second quarter. Hopes are high for a recovery in 2021. Lockdown measures introduced in the first quarter kept non-essential retail (including car dealers) shut until April, with automotive retail relying on online sales and 'click and collect' - although aftersales activity could continue.

Dealers have adapted to the crisis, offering video viewings and free delivery as well as enabling more people to complete more of their buying journey from home. That will help, but a drop-off in vehicle sales is inevitable, especially from private buyers and small businesses who will be nervous about the economic outlook. And it is going to be a slow return to something like normality, geared to the second half as the positive impact of vaccine rollouts is felt.

Economic consultancies are warning that the UK now faces a serious 'double dip' recession as result of the lockdowns. Britain is climbing out of the deepest recession in well over a century and the Office for Budget Responsibility (OBR) forecast late last year that UK GDP would grow by 5.5% in 2021, but not return to pre-pandemic output level until 2022. Bloomberg Economics says the double dip recession pencilled in before Christmas is now 'almost certain to be deeper than we previously envisaged'. It also says that while the damage from the latest lockdown in early 2021 is not predicted to be as severe as the record 18.8% contraction in the second quarter of last year, it 'continues a torrid period for the UK and may boost the long-term scarring effects of the virus'.

The UK's economic picture sounds like a pretty unfavourable backdrop for vehicle sales, but it is maybe not as bad as it sounds. Thus far, the worst impacted by the economic crisis have been the young and those working in relatively low-paid jobs (typically in the hospitality sector). These demographic groups are not the mainstay of the new car market - which tends to be drawn from an older and more affluent demographic. Those who have stayed in work through the pandemic have also accumulated savings as they have been unwilling and unable to spend the way they would in normal times. UK household savings rates are at record levels.

As the crisis unwinds, these groups may be in a position to ramp-up their spending. Two questions will be key though. 1. How confident will they be feeling and are they in the mood to spend? 2. A related question: How far has the economic fallout spread to broader and permanent effects beyond 2020's pervasive sense of being a 'one-off special' that impacted some groups much more heavily than others?

It's pretty difficult to meaningfully forecast the 2021 UK new car market right now, beyond saying that it is likely to fall within a fairly wide range (1.5-1.9m would be my best estimate, if pushed). At the lower end of that range, it's a very difficult first half of the year, with the public health crisis disappointingly slow to ease (eg 'R' number and infections high because of more virulent Covid virus mutations) alongside associated dire economic effects (for example, higher than expected redundancies as firms across the economy come under even greater pressure).

At the top end of the above outcomes range, the virus behaves broadly as expected and vaccines rollout is smooth so that by the middle of the year, life has returned to something near normal. Maybe you can even book your holiday abroad (well, to a number of countries at least), employment seems much more secure and the daily news bulletins abound with good news stories of society opening up. There's a real feel-good factor as pent-up demand surges. A new 'roaring 20s' is ushered in on the back of a new found propensity to spend, while price inflation and interest rates stay conveniently low for a few more years yet.

Where the UK car market goes is clearly going to be highly sensitive to the path of the pandemic, the wider economic impacts (and especially the more permanent effects) and the precise recovery trajectory over the next eighteen months. Multiply that uncertainty again for what happens elsewhere in the world - also a key factor in the performance of the UK economy, but also of direct significance for the health of the UK's export-oriented automotive industry.

Which brings us to a major supply-side issue - Brexit. It would be nice to say all is well and fully resolved after the UK-EU free trade agreement struck at the end of last year, but the truth is there is still much to be worked out, in terms of the application of new rules governing trade and filling in some gaps (the financial services sector, for example). The deal struck governs trade in goods, not services. A big positive is that there are no new tariffs (a scary 10% tariff was in prospect for UK shipments of new cars to the EU if there had been no deal) or quotas. That's great, but there's still some new admin to take care of in areas such as product standards recognition and rules of origin (zero tariffs can only apply to goods recognised under any FTA as eligible and therefore meeting certain value added content thresholds).

Under the agreement bilateral accumulation was agreed so that EU-sourced parts and UK-sourced parts both count in the 'local content' percentage. Big box ticked for all. However, so-called 'diagonal accumulation' wasn't agreed - it was a step too far for the EU side. That means components imported to the UK for OE assembly from say, China or Japan - such as lithium-ion battery cells - would not count as eligible in the local content calculation. That could be a problem for certain UK factories (Toyota and Nissan) in the future, we shall see.

The two sides can continue to talk of course - and they will; dialogue is in both parties' interests. Many will hope that relations between the UK and its biggest trading partner next door can improve in the coming years. The EU has put protecting the integrity of its trade bloc (customs union and single market) as a priority above all else. The UK government - in respecting the result of the 2016 referendum - wanted to be outside the jurisdictions of EU institutions and to 'go its own way'. In five years' time, the world will look different and the UK-EU relationship will have evolved.

What will the medium-term impact of newly introduced 'friction' on UK-EU flows be? We won't know for a while yet and there are many other factors at work determining net competitive positions - for companies and industries, wherever they are. The real choices for the UK are perhaps less binary and less winner-loser than some of the political debate over Brexit has at times suggested. The reality will be more nuanced. Global trade continues, as do the investments that companies make to take advantage of dynamic market trends across the world.

Historically, industries adapt to changing economic and regulatory circumstances - they do what they must, and some parts successively adapt and survive, some don't. The long-term health of the UK's auto industry and its competitiveness will hinge on sector-wide and corporate strategic responses to the huge long-term challenges presented by rapidly advancing technologies, rising environmental policy pressures and disruptive business models - all impacting the transport space globally in a very big way.

There are challenges ahead for all. The pandemic has undoubtedly upset the picture, big time. There has been considerable resilience shown, though. Economies continue to function and will adapt. Perspective is what we need, even through these most difficult of times.

Main image: Nissan’s Leaf-making Sunderland facility is the UK’s largest vehicle manufacturing plant and ships most of its cars to EU markets

When looking at the new Muster 2.0 drill process in the context of Royal Caribbean’s digital transformation, it is a natural development for a company striving to reduce passenger friction on board.

“The innovative programme is the first of its kind and reimagines a process originally designed for larger groups of people into a faster, more personal approach that encourages higher levels of safety,” says Royal Caribbean’s vice president of sales Ben Bouldin for Europe Middle East and Africa.

Over the last few years reducing friction has been the focus of Royal Caribbean’s digital department and the goal of the Royal app, which, among other features, allows guests to avoid queues by finding out information and booking dinner tables, activities, excursions and shows online.

In 2018, at the launch of Symphony of the Seas, Royal Caribbean’s senior vice president of digital Jay Schneider explained to Future Cruise that building guest products that “get people out of lines and let people enjoy their vacation first and foremost” has been one of his main missions.

Recently he said that: “Muster 2.0 represents a natural extension of our mission to improve our guests’ vacation experiences by removing points of friction.”

Schneider and Nick Weir, the senior vice president of entertainment at Royal Caribbean were instrumental to the development of Muster 2.0. Weir is behind some of the most original and innovative entertainment experiences guests can have at sea and has successfully mixed and transitioned formats and blended technology into traditional structures, such as turning an on-board ice rink into laser tag, back again into an ice show with synchronised drones and moving image effects such as those that transform the ice into an emotive Arctic whale scene.

“The safety drill has always put a pause on the cruise experience, and I felt like it could be more efficient,” explains Nick. When he was a cruise director he explains how he was responsible for the welcome party as well as drill announcements which always brought a halt to the fun as guests were starting to enjoy themselves.

“I happened to be outside on one hot, sweaty day during the drill, and I thought why not put it all on a device so it can be done individually and monitored? Technology naturally played a big part, location services on smartphones is essential, and a big team at Royal Caribbean came together to make it happen.”

When looking at the new Muster 2.0 drill process in the context of Royal Caribbean’s digital transformation, it is a natural development for a company striving to reduce passenger friction on board.

“The innovative programme is the first of its kind and reimagines a process originally designed for larger groups of people into a faster, more personal approach that encourages higher levels of safety,” says Royal Caribbean’s vice president of sales Ben Bouldin for Europe Middle East and Africa.

Over the last few years reducing friction has been the focus of Royal Caribbean’s digital department and the goal of the Royal app, which, among other features, allows guests to avoid queues by finding out information and booking dinner tables, activities, excursions and shows online.

In 2018, at the launch of Symphony of the Seas, Royal Caribbean’s senior vice president of digital Jay Schneider explained to Future Cruise that building guest products that “get people out of lines and let people enjoy their vacation first and foremost” has been one of his main missions.

Recently he said that: “Muster 2.0 represents a natural extension of our mission to improve our guests’ vacation experiences by removing points of friction.”

Schneider and Nick Weir, the senior vice president of entertainment at Royal Caribbean were instrumental to the development of Muster 2.0. Weir is behind some of the most original and innovative entertainment experiences guests can have at sea and has successfully mixed and transitioned formats and blended technology into traditional structures, such as turning an on-board ice rink into laser tag, back again into an ice show with synchronised drones and moving image effects such as those that transform the ice into an emotive Arctic whale scene.

“The safety drill has always put a pause on the cruise experience, and I felt like it could be more efficient,” explains Nick. When he was a cruise director he explains how he was responsible for the welcome party as well as drill announcements which always brought a halt to the fun as guests were starting to enjoy themselves.

“I happened to be outside on one hot, sweaty day during the drill, and I thought why not put it all on a device so it can be done individually and monitored? Technology naturally played a big part, location services on smartphones is essential, and a big team at Royal Caribbean came together to make it happen.”