The UK Innovation Report 2022

The automotive manufacturing sector

Key UK automotive manufacturing trends in the last decade

The value added and productivity of the UK automotive sector grew steadily between 2008 and 2018

• In 2018 the UK automotive industry was the eighth largest in the world in value-added terms, growing at around 2.3% annually from 2008 to 2018.
• The UK belongs to a group of nations where productivity was high and rising over the 2008–18 period, together with Germany, Korea and the US.

Despite being the ninth largest exporter of vehicles in 2020, the UK maintains a significant deficit in automotive product trade

• Since 2010 the UK has recorded a persistent trade deficit in automotive products, standing at $21.8 billion in 2020.
• Industry reports suggest that, given the ownership structure of the tier-1 supply base in 2017, 50% local content by value was regarded as a plausible target for the overall UK car industry. However, as the sector transitions to electrification, new opportunities and challenges will arise for UK auto-makers.

UK business expenditure on automotive R&D grew rapidly between 2009 and 2018 but has declined in recent years.

• UK business enterprise expenditure on R&D (BERD) for automotive grew by 11.7% (CAGR) between 2009 and 2018, with a slight decline in 2019 and 2020.
• Overall, total UK business enterprise expenditure on R&D in automotive remains an order of magnitude lower than in competitor countries.

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Drivers identified in literature review and sector expert consultations

• Increased specialisation of the UK’s automotive sector in premium product segments;
• Future sector growth dependent on the UK’s ability to produce electric and hydrogen vehicles and components;
• High levels of automation influencing growth in employment in recent years;
• Skills’ shortages, particularly in higher technical education reported by industry;
• Decisions by foreign original equipment manufacturers (OEM) favouring other locations;
• Increased competitive pressures from both established and upcoming nations;
• Increased uncertainty around trade and investment due to the 2016 EU membership referendum; and
• R&D investment decisions mostly driven by foreign OEMs

Automotive - value added and employment

Note: Data refers to ISIC 34 Motor vehicles, trailers, semi-trailers. CAGR = Compound Annual Growth Rate. Source: UNIDO, INDSTAT 2 2021, ISIC Revision 3.

• In 2018 the UK automotive industry was ranked eighth in the world in value-added terms.
• This was supported by value added growing at around 2.3% annually from 2008 to 2018.
• Employment levels reduced at an annual rate of 0.6% between 2008 and 2018.
• From 2008 to 2018 UK automotive productivity grew at comparable rates to other world leaders (2.9% annually).
• With value added per employee of $135 in 2018, the UK had higher productivity than France but lower productivity than comparable high-income nations, including the USA, Japan, Korea and Germany.

Automotive - productivity growth

Note: Data refers to ISIC 34 Motor vehicles, trailers, semitrailers. CAGR: Compound annual growth rate. Source: UNIDO, INDSTAT 2 2021, ISIC Revision 3.

• The UK belongs to a group of nations where productivity was high and rising over the 2008–18 period. Other nations with top-performing automotive sectors in this group include Germany, Korea and the US.
• Some countries are experiencing similar levels of productivity growth in the automotive sector, but from lower initial levels of productivity, including China and Indonesia.
• Japan’s productivity was high and stable, while Mexico’s was low and declining over the 2008–18 period.

Automotive - trade balance (a)

Note: Trade balance is based on gross exports and gross imports of goods at HS 1992 2-Digit level, for HS 87: Vehicles, other than railway or tram rolling stock, and parts and accessories thereof. *Global ranking excludes countries for whom data for the year in question is not available. Source: UN Comtrade.

• The UK was the ninth largest exporter of vehicles by value in 2020, with around 81% of cars made in the UK being exported.^[1]
• It was also the fifth largest importer of vehicles by value in 2020.^[1]
• However, when considering broader trade in automotive components, the country has consistently recorded trade deficits in recent years.
• There was very little change in the automotive trade balance between 2010 and 2020. Its deficit in automotive products trade reduced from ~$22.2 billion in 2010 to ~$21.8 billion in 2020.

^[1] World’s Top Exports https://www.worldstopexports.com/cars-imports-by-country/.

Automotive - trade balance (b)

• Between 2010 and 2020 UK imports of automotive products shrank by 0.4%, while exports shrank by 0.3% per year on average (CAGR).
• Of the comparator countries, the UK is the only country where imports were smaller in 2020 than they were in 2010.
• Although the US had an even bigger trade deficit in automotive products in 2020 (~$149 billion), all other comparator countries in the top 10 global ranking by trade balance in automotive products presented positive trade balances in 2020.

Note: Trade balance is based on gross exports and gross imports of goods at HS 1992 2-Digit level, for HS 87: Vehicles, other than railway or tram rolling stock, and parts and accessories thereof.

Automotive - local content

Source: Automotive Council UK (2015, 2017) Growing the Automotive Supply Chain – Local Vehicle Content Analysis

• As explained by the UK Automotive Council, the amount of locally sourced parts is a key measure of success for the UK automotive industry, as the majority of the sector’s value added is created in the upstream supply chain.^[1]
• In value terms, the parts sourced by UK car manufacturers from UK first-tier suppliers increased from 36% in 2011 to 44% in 2017.^[1]
• There are no reliable sources available to establish valid benchmarks, as the actual sourcing patterns of local manufacturing firms can only be established through surveys.^[1]
• The UK Automotive Council suggests that, given the ownership structure of the tier-1 supply base in 2017, 50% local content by value was regarded as a plausible target for the overall UK car industry.
• However, as the sector transitions to electrification, new opportunities and challenges will arise for UK auto-makers. Deeper analysis is needed to understand which UK supply chain segments might be at risk during this transition, and what opportunities exist for capturing value in new areas.

^[1] Automotive Council UK (2017). Growing the Automotive Supply Chain – Local Vehicle Content Analysis.

Automotive - business spending on R&D (a)

Note: Current prices adjusted using GDP deflator to 2020 prices. Source: ONS BERD Statistics, 2021

• Developed by the ONS, the term “product group” refers to business R&D expenditure allocated to the product group that best describes the subject type of R&D activities carried out by firms.
• This is in contrast to the “industry classification”, where SIC codes are allocated based on the main activity of the business – in this instance, companies whose main activity is automotive manufacturing. These are more often used for international comparisons.
• The small difference between these two measures indicates that most R&D in the automotive industry is conducted by businesses whose main activity is manufacturing. Companies that may account for the difference include contract R&D organisations and pre-commercial SMEs.
• The peak in BERD spending in the UK appears to have occurred between 2016 and 2018.
• In 2020 BERD in motor vehicles and parts was at just 70% of its 2018 peak value.

Automotive - business spending on R&D (b)

Note: Compound annual growth rates for countries are based on data for the first and last available years within the 2008–2018 range. UK CAGR is based on the period 2009-2018. For BERD expenditure growth, the base year for the US is 2008. Source: OECD Research and Development Statistics.

• In 2018 the automotive industry accounted for almost 15% of overall business R&D expenditure in the UK, second only to the pharmaceutical industry.^[1]
• In 2018 the UK automotive sector had an R&D intensity (as measured by the sector expenditure on R&D as a percentage of sales) of 6.6%, behind sectors such as pharmaceuticals, electronics and communication equipment, and computers.^[2]
• UK business enterprise expenditure on R&D (BERD) for automotive grew by 11.7% (CAGR) between 2009 and 2018.
• Although UK BERD showed a high growth rate between 2009 and 2016, growth became stagnant after 2016.
• Despite its high growth, total UK business enterprise expenditure on R&D in automotive remains an order of magnitude lower than in competitor countries.

^[1] OECD (2020). Business enterprise R&D expenditure by industry database.

^[2] ONS (2020). Research and Development in UK Businesses, 2018 Datasets.

Automotive - foreign R&D in the UK

Note: Current prices adjusted using GDP deflator to 2020 prices. 2014 & 2016 values for ‘UK Govt’ and ‘Other’ extrapolated from 2016 and 2020 values. Source: ONS BERD Statistics, 2021

• Most automotive R&D conducted by businesses in the UK is funded by the companies themselves (~76% in 2020).
• Around 20% of automotive R&D performed by businesses in the UK in 2020 was funded by overseas organisations and was relatively constant between 2014 and 2020.
• Only a small fraction of the R&D performed by business is funded by the government (~£64 million in 2020, or 2%).
• The graph on the right shows that 78% of the automotive R&D performed in the UK in 2020 was conducted in businesses owned overseas.

What is driving value added, productivity and trade trends in pharmaceutical manufacturing?

• The value added and productivity of the UK pharmaceutical manufacturing sector have declined significantly in the last decade 
• The UK trade balance in pharmaceuticals has deteriorated significantly since 2014

Potential drivers identified from literature review and consultations with sector experts (see Appendix 3.1 for details):

Company restructuring and site closures, including those by major sector employers

• Some top companies (e.g. Pfizer, GSK), who are major employers in the industry, completed reorganisations over the last decade, resulting in site closures [Bioscience and Health Technology Sector Statistics, 2019].

Increased offshoring of pharmaceutical manufacturing

• The consulted stakeholders highlighted that the last decade saw a move by UK pharmaceutical manufacturers towards the outsourcing of some manufacturing activities.
• There seems to be a greater degree of firm mobility in the pharmaceutical sector than in other industries as a result of shorter factory life cycles, lower-scale operations and lower capital embedded in facilities and the supply chain.
• Together with superior incentives from overseas markets, these traits may help to explain the closure and/or migration of some key operations outside the UK.
• Both the literature and interviewees suggest that a large share of advanced pharmaceutical ingredient (API) chemicals and materials production has moved offshore over the last 10–15 years, mostly driven by cost considerations [Medicines Manufacturing Industry Partnership, 2017].
• The stakeholders consulted also highlighted that contract development and manufacturing companies (CDMOs) owned and located abroad, taking on tasks such as drug development and manufacturing, have become more common.

The UK’s inability to capture the “second wave” of manufacturing investments

• The second wave of manufacturing investments on new plant and equipment for the manufacture of biologics and other novel medicines has largely gone to Ireland, Singapore, Germany and the US, which together have attracted the bulk of US$ 125 billion investment between 2011 and 2017 [LSIS, 2017].
• The 2017 Life Sciences Industrial Strategy therefore suggested that the UK should not miss the next wave of manufacturing opportunities in the sector in order to close the export gap and boost productivity [LSIS, 2017].
• The 2021 Life Sciences Vision identifies areas in which the UK has, or could develop, a meaningful competitive advantage, including: cell and gene therapies, oligonucleotides, viral vectors, advanced diagnostics or wound care [HMG, 2021].

Other countries provide greater incentives – particularly tax – to attract manufacturing investment

• The 2021 Life Sciences Vision recognises that it is essential to provide incentives to support company growth, innovation and investment and to help new companies develop products and sales based in the UK [HMG, 2021].
• Key competitors such as Germany, the US, Switzerland, Ireland and Singapore have all prioritised life sciences manufacturing, with Ireland landing manufacturing investments from 9 out of 10 top pharmaceutical companies and Singapore having 30 of the world’s leading biopharmaceutical companies’ HQs [LSIS, 2017].
• The consulted stakeholders highlighted that lower business tax rates, including incentives for companies to locate headquarters and R&D facilities within countries, may out-compete the UK offering regarding international investment. This is seen particularly in the cases of Ireland and Singapore, which have highly attractive business tax structures, better rates of return of investment, access to capital and other financial incentives.
• There was a perception among the consulted experts that, although the UK has started to offer R&D grants and other innovation incentives, the total UK budget for R&D grants remains lower than that of competitor countries.
• There is also a concern that, although the UK has traditionally offered some advantages for R&D-intensive pharmaceutical companies to operate in the country, such as good access to skills and the presence of a vibrant innovation ecosystem, these might have eroded over time.
• Both the literature and interviewees identified difficulties in recruiting highly qualified workers in categories such as the core scientific disciplines of biological and chemical sciences; a wide range of computational disciplines; and clinical pharmacology [ABPI, 2019]. The consultees also mentioned that the UK has lower proportions of skilled technicians with specific knowledge of the sector than other competitor countries.

New UK sector entrants focused on early-stage drug discovery and other activities outside manufacturing

• While the sector has historically been dominated by a small number of large players (e.g. AstraZeneca and GSK), ONS data suggests that 65% of 610 companies registered as pharmaceutical manufacturing enterprises at the start of 2018 were micro-firms with fewer than 5 employees [Make UK, 2018].
• The interviewees suggested that the UK has developed a strong presence of start-ups in the last decade, many of which focus on new discoveries and operate on loss-making models while these developments get to market.
• From the perspective of some interviewees, trade deficits could be a symptom of the UK focus on basic R&D but not commercialisation in recent years, which could be leading to UK innovation being exploited abroad and therefore lower exports.

Inability to commercialise and scale up the manufacture of technologies and products developed in the UK

• Technologies and products that were originally developed in the UK have not been commercialised or manufactured in the UK, and globally mobile inward investments have tended to go to competitor countries [HMG, 2021].
• For example, there is concern that, despite the discovery of monoclonal antibodies in the UK, the country has failed to capitalise on this by securing commercial manufacturing of these products [LSIS, 2017].
• The UK government’s recognition that the high costs of developing a drug and getting it to market are prohibitive factors for many manufacturers has resulted in attempts to develop a streamlined pathway to bring products to market through programmes such as the Accelerated Access Collaborative [Make UK, 2018].

Caps on drug spending may have an impact on the perception of the UK by investors

• An opinion found in the literature and expressed by various interviewees is that, although drug spending decisions do not directly influence investments because companies operate in a global market, they might affect the perception that global companies have of the UK’s commitment to the sector [Make UK, 2018].
• In this regard, the Association of the British Pharmaceutical Industry [ABPI, 2020] suggests that the drive by the NHS to purchase the lowest-price product and single-supplier contracts has resulted in manufacturing being driven to low-cost labour markets, thereby weakening the resilience of UK supply.

Increased use of generics could be pushing prices downwards and driving imports upwards

• The UK pharmaceutical industry has seen increased price pressures, both nationally and globally, from generics [Enterprise Ireland, 2020].
• The consulted stakeholders highlighted that, in terms of generics manufacturing, other countries such as India and China are the preferred options to manufacture basic chemistry at a lower price. Increased generic use by the NHS may be driving imports upwards.

The 2016 EU membership referendum added uncertainty to investment decisions in the sector

• There was a common perception among the stakeholders consulted that the 2016 EU membership referendum resulted in pharmaceutical companies becoming more cautious in their spending and putting larger capex on hold.
• In the view of some interviewees, the referendum decision created a perception that the UK could become a smaller domestic market, which reduced some of its attractiveness. IP protection considerations added to these concerns, as it became unclear whether the UK would remain part of the EU Unitary Patent Initiative and the European Patent with Unitary Effect (EPUE) scheme.
• There is also a perception that the UK’s new trade relationship with the EU has reduced the attractiveness of producing final products in the country, as these would need to be re-released and approved in other markets.
• Both interviewees and literature sources suggest that longer lead times and increased paperwork caused by border and custom checks affect profit margins, particularly for products with a short shelf life, leading to companies transferring specific production lines outside the UK [Make UK, 2018].

What is driving business R&D expenditure trends in pharmaceutical manufacturing?

• UK business expenditure on automotive R&D grew rapidly between 2009 and 2016 but has declined in recent years

Potential drivers identified from literature review and consultations with sector experts (see Appendix 3.1 for details):

Although the UK has strong R&D and innovation capabilities, investment decisions are mostly driven by foreign OEMs

• When asked about the potential reasons for the low level of business enterprise expenditure on R&D in the automotive sector compared to other leading nations, the consulted stakeholders highlighted two potential factors: the size of the sector as a whole; and the ownership structure of UK-based OEMs.
• It is believed that R&D investment decisions by foreign-owned OEMs are often made from European or global headquarters against a wide range of criteria that may not favour the UK (e.g. tax incentives for R&D lag behind global leaders), with new developments taking years before being deployed across their international operations (e.g. Nissan, Ford).

However, strong R&D capabilities remain a key instrument to attract high value-added manufacturing into the UK

• Despite OEMs driving R&D investment, there was a view among the consulted stakeholders that the UK has a strong record in design engineering and university collaboration, supported by its premium product manufacturers and its motorsports industry.
• This, in addition to innovation capabilities in industries that can diversify into new electric and hydrogen automotive supply chains, could offer powerful instruments to support the UK’s attempt to capture high value-added segments of the automotive supply chain.
• In 2017 the UK government launched a new Industrial Strategy aiming to boost productivity and earning power throughout the UK, including an automotive sector deal at the start of 2018, to improve supply chain competitiveness, reduce the sector’s environmental impact and boost investment in emerging technology to ensure that the sector remains competitive during the transition to low-carbon vehicles [Make UK, 2019].
• The Industrial Strategy Challenge Fund (ISCF) was developed to support this aim, with three waves launched between 2017 and 2019, committing funding to the “Faraday Challenge” to develop world-leading batteries, designed and manufactured in the UK, leading to the establishment of the Faraday Institution and the UK Battery Industrialisation Centre [UKRI, 2021].

References - sectoral analyses

Pharmaceutical manufacturing sector analysis

• ABPI (2019). Bridging the Skills Gap in the Biopharmaceutical Industry: Maintaining the UK’s Leading Position in Life Sciences. Association of the British Pharmaceutical Industry.
• ABPI (2020). Life Sciences Recovery Roadmap. Association of the British Pharmaceutical Industry.
• BIA (2022). BIA submission: RDI Landscape Review. UK BioIndustry Association.
• Enterprise Ireland (2020). The UK Pharmaceutical Sector: An Overview.
• HMG (2021). Life Sciences Vision. Building Back Better: our plan for growth.  HM Government.
• Make UK (2018). Sector Bulletin: Pharmaceuticals.
• Medicines Manufacturing Industry Partnership (2017). Manufacturing Vision for UK Pharma: Future Proofing the UK Through An Aligned Technology and Innovation Road Map. LSIS, 2017].
• OLS (2020). Bioscience and Health Technology Sector Statistics 2019. Office for Life Sciences.

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Automotive sector analysis

• International Federation of Robotics (2021). Robot Density nearly Doubled globally. Available at [https://ifr.org/ifr-press-releases/news/robot-density-nearly-doubled-globally].
• OECD (2021). Education at a Glance database.
• Make UK (2019). Automotive Sector Bulletin: 2018 Update.
• SMMT (2019). 2019 UK Automotive Trade Report. Society of Motor Manufacturers and Traders.
• SMMT (2021). Full Throttle: Driving UK Automotive Competitiveness. Society of Motor Manufacturers and Traders.
• UK Research and Innovation (2021). What Is the Industrial Strategy Challenge Fund.

Appendix 3.1

In an attempt to understand the reality behind the data, Theme 3 was informed by a reduced number of interviews with key UK stakeholders from industry and government – including R&I funding programme management agencies, innovation centres, industry associations and key private-sector organisations. The consultation included representatives from the following organisations:

Pharmaceutical manufacturing sector analysis

• Office for Life Sciences (OLS)
• Innovate UK
• Confederation of British Industry (CBI)
• UK Bioindustry Association (BIA)
• CPI (High Value Manufacturing Catapult)
• National Physical Laboratory (NPL)
• Medicines Manufacturing Innovation Centre (MMIC)
• Medicines Manufacturing Research Centre (University of Strathclyde)
• Alnylam Pharmaceuticals
• Siemens
• AstraZeneca

Automotive sector analysis

• BEIS automotive team
• BEIS advanced manufacturing team
• North East Automotive Alliance
• Advanced Propulsion Centre (APC)
• Innovate UK (Faraday Battery Challenge)
• Society of Motor Manufacturers and Traders (SMMT)
• Ford
• Autocraft