Government Assistance to Industry

Memorandum submitted by SMMT

About SMMT and contact

1. The Society of Motor Manufacturers and Traders (SMMT) is the leading trade association for the UK motor industry, providing expert advice and information to its members as well as to external organisations. It represents companies throughout the automotive sector ranging from vehicle manufacturers, component and material suppliers to power train providers and design engineers. The motor industry is a crucial sector of the UK economy, generating a manufacturing turnover of £51 billion, contributing over 10% of the UK’s total exports and supporting around 800,000 jobs.

2. SMMT welcomes the opportunity to respond to this inquiry and should further information be needed on any of the comments included in this written evidence please don’t hesitate to contact Jonathan Hawkings, Senior Policy Officer, SMMT

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Introduction

3. In May 2009, SMMT responded to a previous Business, Innovation and Skills select committee inquiry on the previous government’s assistance package for the automotive industry. The inquiry was held in the middle of the financial and economic downturn. As the economy recovers and industry is on the road to growth, it is vital that government assistance and support to businesses is sustained.

4. In November 2008, SMMT wrote to the then chancellor and business secretary to outline an automotive industry support package to reinforce consumer confidence and support the UK’s manufacturing base. Particular emphasis was given to access to finance and practical business support measures government could implement to mitigate the impact of the economic crisis. A previous letter to the chancellor, outlining SMMT’s submission ahead of the Pre-Budget Report in 2008 called for the introduction of a scrappage incentive scheme to stimulate the new car market and support business confidence.

5. The impact of the recession on the UK automotive industry has been severe. The new vehicle market over the course of the recession was badly hit, with the effects of downward market trends still being felt today. Following 12 successive monthly rises in new car registrations, the July 2010 market fell 13.2%. The 2010 new car market is expected to total 2.018 million units, 1.2% above the 2009 market. The availability of finance, consumer confidence and sustaining demand post-scrappage, is key to performance in the second half of 2010.

6. The new van market is slowly recovering, with registrations just 0.1% up for the rolling year in July. Whilst the forecast for 2011 is more positive, the prospects for the rest of the year are gloomy and SMMT expects a near record low for trucks. Fragile consumer and business confidence make the outlook for the next 18 months challenging. The bus market continues to be depressed. Public spending cuts may further weaken demand, leaving the outlook for big buses depressed. The very long lead times between sale and registration across the bus and coach sector mean that it hit the recession late and so will be slow to recover.

7. There is steady improvement for UK automotive production across the UK car, commercial vehicles and engine sectors against a weak 2009. Car production rose by 28.6% in June and was up 55% over the year-to-date, with commercial vehicles up 24.9% year-on-year.

Scrappage Incentive Scheme

8. The most prominent and publically visible form of government assistance to the UK automotive industry was the Scrappage Incentive Scheme (SIS), which was introduced on 18 May 2009. This gave a £2,000 incentive to anyone scrapping a ten or more year old car or van and buying a new one. The scheme was unlike others introduced across Europe in that in the UK the automotive sector contributed half of the incentive. The scheme was far more influential than most imagined, delivering a major increase in vehicle demand. It has also helped reduce CO2 emissions.

9. SMMT data, collected from scheme participants from the start of the scheme to July 2010, shows that some 392,500 new cars and some 7,300 new light commercial vehicles were registered through the scheme. The SIS helped support the economy, played a vital role in providing a much-needed boost to the UK automotive industry, while retaining skills and jobs, in turn making the industry better placed for the upturn. Vehicles built or using an engine produced in the UK accounted for around a fifth of UK SIS sales. UK vehicle and engine production figures began to grow in November 2009 and into 2010 have recovered sharply, due in part to the success of the UK and other member state schemes across the European Union.

10. Whilst not a primary objective of the SIS, the scheme did help ensure a significant fall in average new car CO2 emissions. New cars through the scheme emitted on average 132.3g/km of CO2, almost 10% below the overall new car market average and 27% below the emissions of the old vehicle being replaced. Based on average mileage calculations, the replacement of old with new cars will reduce CO2 emissions by some ½ million tonnes per year. Improved Euro standard engine ratings will also mean modern cars have 50% lower harmful emissions of nitrogen oxide and particulate emissions.

Automotive Assistance Programme

11. In the previous submission to the select committee in September 2009, SMMT noted that it was too early to present a full assessment of the Automotive Assistance Programme (AAP). Since then, the Automotive Assistance Programme has overseen a number of decisions and outputs in terms of loans and loan guarantees to vehicle manufacturers in the UK.

12. SMMT welcomes the recent confirmation and signing off of the loan guarantee for Ford to invest in the development of more fuel efficient engines. Separately from the AAP, SMMT also welcomes government’s confirmation of a grant made to Nissan, supporting Nissan’s development of batteries and electric vehicles in Sunderland. The investment by Ford and Nissan are strident examples of the UK automotive industry taking a lead in low carbon manufacturing.

13. Government had made further decisions regarding projects under the AAP. A number of offers for assistance were made to vehicle manufacturers that were not taken up. While SMMT welcomes that companies were able to secure financing through private channels, concerns remain that the application process and subsequent approval procedures were lengthy, complicated and may have impacted negatively on timely support needed.

14. SMMT views the projects which have received support under the Automotive Assistance Programme as value for money. The existence of the scheme signalled that government was serious about supporting the automotive industry as a future focused and key sector of the economy. Stipulating that projects under the scheme were to be linked to the low carbon agenda signifies the important role that the UK automotive industry is playing in rebalancing the economy and driving low carbon growth. Government support is crucial in providing a sound industrial base in the UK for the industry to take advantage of the opportunities low carbon manufacturing presents. A positive government approach to the industry has helped secure key investment decisions in the UK by global automotive companies.

15. The change of government and resulting implications has meant that the Department for Business, Innovation and Skills is no longer accepting new applications under the scheme. SMMT understands that projects under consideration remain in the ‘pipeline’. Government has communicated that it considers the scheme to be no longer appropriate as the economy enters a new phase, and that new initiatives such as the Green Investment Bank and a consolidation of various schemes could provide a strategic form of assistance to companies from all sectors. Government should clarify its position on the Automotive Assistance Programme and seek to process any outstanding applications in a timely manner.

16. The EU’s temporary framework for state aid expires at the end of 2010 and SMMT expects the programme to finish at that point. Once the scheme is closed, government should undertake a comprehensive review of the effectiveness of the programme to ensure that future government policy and assistance to the sector can be as effective as possible.

Access to credit and finance

17. As mentioned above, a major issue that has faced the industry and one which continues to persist is availability of credit and access to finance. While there has been some easing of bank lending to the automotive sector, automotive companies remain exposed to a negative assessment of the sector from financial services providers. Where perceptions of the automotive sector are negative within the banking community, government should facilitate dialogue to promote the future prospects of industry.

18. Under the previous government, a number of schemes were instituted to provide loan guarantees for SMEs and financial support in other areas. The Enterprise Finance Guarantee (EFG) scheme was intended to provide loan guarantees to small companies. SMMT members’ experience with this scheme suggested that the scheme would only operate with willing bank support. Due to the hesitancy of many banks towards the automotive sector, the scheme’s impact was reduced. SMMT members also felt there was a significant gap in support for medium sized companies who were not eligible for the EFG scheme, i.e. too large, and too small to benefit from the Automotive Assistance Programme. The previous government recognised this discrepancy and altered the AAP’s eligibility criteria, however this was a late change and no announcement from government on providing assistance to smaller automotive companies has been forthcoming.

Other support

19. A trade credit insurance top-up scheme was introduced but did little to benefit the UK automotive sector. Specific targeted support was needed at a much earlier stage following the onset of the financial crisis reflecting the early withdrawal of such products to the automotive sector. In addition, the top up cover was only available for UK businesses – the vast majority of automotive products are exported to the EU and our members’ needs required the scheme to cover export credit insurance.

20. Time to pay was a welcome scheme for small businesses throughout the automotive sector. Flexibility to deal with short-term cash flow problems caused by a drying up of credit gave temporary relief to many companies.

Skills and training support

21. SMMT had called on the previous government to institute support for short time working. ProAct, the scheme initiated in Wales by the Welsh Assembly government was a model that had been implemented in other European countries such as Germany and France to retain highly-skilled employees within the automotive sector. While such a scheme was not implemented wider than in Wales, support for training and skills development was welcomed by industry. The Train to Gain programme and subsequent increases in the scheme’s budget was a positive step in enabling automotive companies to provide training courses to employees during downtime. Increasing the level of training within the sector and closing the skills gap is a top priority for SMMT.

22. Further targeted support for training in the sector will ensure the UK remains a key player in the competitive global automotive industry. Spending to support training and skills should be focused on priority areas that will drive business growth and productivity, such as increasing support for apprenticeships and applied learning. Investment in STEM (science, technology, engineering and maths) subjects is key in opening up employment opportunities at every level within the sector. Linking skills to low carbon jobs is essential if the UK is to play a leading role in the low carbon economy. SMMT looks forward to government’s response to its consultation on the future direction of skills policy and skills for sustainable growth.

Rebalancing the UK Economy

23. SMMT welcomes the coalition government’s white paper outlining a ‘Strategy for Sustainable Growth’. SMMT is particularly encouraged by government’s approach to rebalance the economy, with focus on the UK’s sectoral strengths and low carbon growth. Through the development of this strategy, SMMT calls on government to implement this approach by supporting practical policies across government departments that will leverage sustainable growth in the UK automotive sector.

24. The coalition government has a responsibility to ensure that economic recovery and the prospects of growth are sustained through continued support for UK industry. For the automotive sector, low carbon technologies, R&D and investment in skills and training will be key to future success. Government should support industry’s aspirations to make the UK a leading location for R&D investment and collaboration.

25. SMMT recently published a report [1] carried out by the Centre for Economic and Business Research which concludes that government support is vital for R&D investment, where the UK lags behind international competitors, and says that improving access to finance and credit is crucial for the UK to achieve sustained economic recovery. Government has a clearly defined role ahead of the forthcoming Comprehensive Spending Review to prioritise its spending and financial commitments. SMMT and its members believe that government assistance that is strategically targeted will not only benefit automotive and raise the prospects for future growth in the sector, but will also have a positive impact on the wider economy, supporting employment and creating new business opportunities.

26. SMMT agrees with government’s assessment for the need to support R&D and innovation. This is particularly crucial for the automotive sector. At €20 billion the automotive sector is Europe’s largest investor in R&D, driving industry forward and helping deliver more sustainable forms of motoring. Targeting support for high-value R&D through the Technology Strategy Board is a priority for SMMT members. SMMT awaits government’s response to Sir James Dyson’s report ‘Ingenious Britain - Making the UK the leading hi-tech exporter in Europe’ to demonstrate tangible policies that will support the crucial R&D base in the UK. Maintenance of the principle of R&D tax credits – an essential driver for investment and technology development, is crucial for the automotive industry. Retention of such credits and ensuring that companies of all sizes are able to benefit is a key call from SMMT.

27. SMMT looks forward to the publication of the National Infrastructure Plan in the autumn where the future of transport infrastructure, particularly in light of commitment to increase the level of low and ultra-low carbon vehicles, should be a priority for government.

28. A focus on skills as outlined in the white paper is essential in ensuring the UK is well placed in a competitive global economy, ready to take advantage of the opportunities that a rebalanced economy will bring, particularly within productive sectors. The commitment to increase support for apprenticeships and refocusing learning around technical level skills is particularly welcome.

29. Government singles out the Automotive Council as a positive example of government and industry collaboration in improving growth prospects. SMMT welcomes the coalition government’s commitment to the Council. A high-level focus on the automotive sector from government, working closely with companies and organisations across the industry, will ensure that the most is made of opportunities for the sector to lead in low carbon and sustainable growth. Government’s Manufacturing Framework due to be published in the autumn will be a key focus for SMMT. A horizontal policy approach looking at areas such as access to finance, skills, international trade, and the perception of the sector will provide a firm basis for future collaboration between industry and government on a wider manufacturing agenda.

30. Government proposals to establish a Green Investment Bank will be studied closely by SMMT members. The principle of enabling businesses simpler access to finance and credit to support low carbon investment is welcomed by SMMT. Government should also consult with industry to ascertain how current funding and financing facilities are being utilised to ensure that more effective structures are put in place and those structures that are proving effective support are maintained. As highlighted above, this is of particular importance when looking at the provision of support for R&D, where competitions through the Technology Strategy Board play a critical role in bringing together global companies, academia and SMEs to work on projects that have are of significant added-value to industry.

Regional support and structures

31. Throughout the recession, regional support played a significant role for automotive companies across the UK. Regional Development Agencies (RDAs) offered support such as transition and bridging loans, finance for small capital projects, R&D support, and initiatives to encourage business collaboration. This support was highly valued by industry and experience with regional bodies was generally positive, due to particular regional knowledge of the economic and business landscape. Looking forward, where RDAs are to be replaced with Local Enterprise Partnerships (LEPs), it is imperative that business support and the benefits of a strategic understanding of major industry are not lost. Where recovery is still needed to be sustained, it is important that support at a local or regional level is not lost in the transition to new partnership mechanisms. SMMT has highlighted these concerns in its written evidence to the Committee’s inquiry on this subject.

European assistance and international comparisons

32. A coordinated European Economic Recovery Plan was instituted at EU level, which was a wider response to the effects of the global downturn in Europe. Particular initiatives were launched through the recovery plan, including the Green Cars Initiative, as well as the increased support available through the European Investment Bank’s European Clean Transport Facility. The Green Cars Initiative provided support through public-private partnership bids for low carbon projects. The European Clean Transport Facility aimed to provide credit for investments targeting R&D projects in the areas of emissions reduction and energy efficiency. In particular regions of the EU, structural funds were allocated when particular companies experienced extreme financial difficulties, SMMT notes that this support can be of benefit when allocated in a manner that does not distort competitiveness.

33. The Committee should also consider assistance given to industry in other European member states and globally. Many member states instituted scrappage incentive schemes, and as highlighted above, a coordinated approach lifted Europe-wide registrations and production.

The role of the Department for Business, Innovation and Skills

34. SMMT has an established working relationship with the Department for Business, Innovation and Skills. SMMT views the Department’s central role during the recession as a focal point for business support and industry assistance as key in formulating policy that has assisted businesses across sectors, with a particular focus on the needs of the UK automotive industry.

35. During the recession, SMMT forged closer links to the Department and was consulted on many policy decisions in relation to automotive assistance and business support. SMMT met with the Secretary of State on a number of occasions to discuss the impact of the recession on the sector. SMMT also engaged in frequent dialogue with civil servants within the Automotive Unit, Automotive Assistance Programme Unit and the Automotive Scrappage Scheme Team. Officials from the Department visited SMMT committee meetings to inform members of support schemes available.

36. Collaboration with the Automotive Scrappage Scheme Team ensured that SMMT and its members were involved in policy formation from an early stage through to implementation and delivery. SMMT met with officials from the Automotive Assistance Programme Unit to discuss uptake of the scheme and issues related to accessing the scheme.

UKTI, the promotion of inward investment and supporting exports

37. SMMT has a close working relationship with UKTI and is a key delivery arm for the UKTI Automotive Sector Group as an Accredited Trade Organisation (ATO), providing contract delivery, project management and matched funding for inward and outward trade missions, overseas seminars, trade shows and exhibitions. SMMT supports UKTI activities that support SMEs, and develop market opportunities, particularly though the Overseas Market Introduction Service (OMIS), Export Market Research Study (EMRS), and Tradeshow Access Program (TAP).

38. Inward investment decisions by global automotive companies are crucial to the future of the automotive industry in the UK. Government policy that promotes a positive business environment within the UK is a key aspect of attracting such investment. The New Automotive Innovation and Growth Team report, published in May 2009, called on government to improve the UK investment offer [2] . Government assistance and programmes that are tailored to promote low carbon growth within the sector, such as consumer incentives for ultra-low carbon cars and the electric vehicle infrastructure programme, help boost the UK in the eyes of international investors.

39. Government has said that an export-led recovery is central to economic growth. Support in the area of export promotion is vital for the UK automotive industry. The value of UK automotive exports is £26.6 billion, just under 11% of total UK exports. UKTI is best placed to assist companies from all economic sectors to take advantage of international market opportunities.

23 September 2010