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Flint advises international businesses and investors on policy, politics, regulation and competition.
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2024 will be a critical year for the auto sector, with political choices shaping the direction of travel on trade, decarbonisation and supply chain security.
The UK auto sector bounced back in 2023. Production rose by 17% to 905,000 (80% exported), with equally strong growth in engines and commercial vehicle production. New car registrations also rose by nearly 18% to 1.9m (90% imported).1
Chart 1: Chinese auto imports stagnate - exports explode
Source: Chinese customs data
Although ZEV sales continued to grow in absolute terms – overwhelmingly in the form of electric vehicles (EVs) – for the first time their market share fell (marginally) to 16.5%. New sales are predominantly driven by subsidised fleet sales – demonstrating the importance of continued government tax incentives.
Failure to actively grow ZEV market share could be expensive for carmakers. The UK’s ZEV mandate entered into force in 2024 – requiring 22% of each manufacturer’s sales to be ZEVs in 2024 – with targets increasing year on year.2 Companies that fall short will either have to ‘trade’ certificates with other carmakers who have exceeded their targets or will be fined £15k per car (though they will initially be able to ‘borrow’ against expected future ZEV output).
Internationally, China’s shift from a major net importer to the world's number one auto exporter is significant. As Chart 1 shows – this growth has been in both internal combustion engine (ICE) and EV vehicles. Western policymakers are particularly concerned that China has a major price advantage in lower-cost EV sales.
Chart 2: Average EV retail price
Source: Jato Dynamics
Chinese producers are now making electric cars with an average cost of around 50% of those in the US or EU and produce EVs at low and midrange price points. The cheapest EVs on the Chinese market cost less than the cheapest ICE cars. Prices should drop further as key input costs (e.g. lithium) fell over 2023 – battery prices have since fallen by around 50%.3
In Western markets, up-front cost remains a key barrier to mass EV adoption, due to domestic producers focusing on more profitable higher-end EVs. Some UK MPs have suggested that the UK should not incentivize EV production because EVs cannot, and will not, compete with ICE on price.4
However, the Chinese example – and rapidly falling costs – suggests EVs, which are less complex to produce,5 will soon become cheaper than ICE cars in Western markets. In the longer term, countries that fail to develop a competitive EV industry may find they have missed the window to scale down costs and develop an internationally competitive auto industry – even if they roll back Zero emission regulations. The development and application of new technologies such as solid-state batteries could accelerate this process – while making vehicles even more attractive to consumers.
The EV transition is also paving the way to other types of new auto-sector technology. In-car software is generating ever-increasing quantities of valuable data, leading to European regulators proposing new data-sharing regulations. The shape of these regulations will have important implications not just for producers – but also for servicing/maintenance component supply, charging, and other activities. They will also set a precedent for other markets.
Jato Dynamics, an automotive market research provider, estimates that China has provided $57 billion in subsidies for its EV industry between 2016 and 20226 - more than the rest of the world combined in the same period. The Chinese Vice Minister of Industry and Technology has acknowledged that China’s 15-year push to encourage EV production has now led to overcapacity. The resultant price war means most major Chinese firms are loss-making even as domestic demand is at record levels. Despite this, market leader BYD is achieving record profits – indicating that innovative manufacturing practices, low labour costs and increased quality of vehicles should not be ignored. Just as Western nations ramp up subsidies – Chinese firms may start to move beyond them.
Many of the largest auto markets already apply significant protective tariffs or non-tariff barriers to Chinese EVs. Unprotected Western markets such as Australia (where there is no domestic auto industry to protect) have seen rapid growth in Chinese sales from under 1% in 2017 to 16% (and rising) today – a signal that policymakers in larger markets will pay close attention to.
To protect against a possible influx, the EU is conducting an anti-subsidy investigation that could add an additional tariff, probably in the range of 10-15% on top of the existing 10%. The decision is expected soon - and the tariff could be applied retrospectively to any car imported after 7th March 2024. As Chart 3 shows, with Japan largely protected by cultural preferences and non-tariff barriers, the UK would be left as the largest relatively accessible auto market in the world - exposed to trade diversion from the estimated 5-10 million vehicles per year of Chinese excess capacity. Additionally, these Chinese EV producers are likely to benefit when manufacturers who are unable to meet the UK’s 22% ZEV target in 2024 are required to purchase certificates from them.
The UK will probably follow the EU’s lead. An investigation by the UK’s Trade Remedies Authority can be instigated by the Secretary of State or requested by a UK manufacturer – both of whom will be aware that new tariffs could spark retaliatory measures, which would not be limited to the auto sector. While some in HMG will be concerned about low-cost imports costing jobs, others will point to the benefits for consumers and the UK’s ability to meet net-zero targets – especially when nine out of ten cars sold in the UK are already imported.
Policymakers have also sought to disentangle supply chains from China, which dominates battery and critical mineral manufacturing – for example through the US Inflation Reduction Act’s local content rules, and the EU’s Battery Regulation. Progress has been slow and uneven; China’s battery manufacturing market share is forecast to fall from 79% (2021) to 65.2% of global capacity by 2025.7 Meanwhile, Chinese firms have taken advantage of lower lithium prices (and company valuations) to increase stakes in lithium projects across the globe – increasing the country's stranglehold on the market.8
Chart 4: Chinese Investment
Source: Upply, Chinese automotive investment for the European market
Supply chain legal requirements and related sanctions are another potential market access barrier – in the US, thousands of vehicles were recently impounded after Volkswagen self-reported that a component may have been produced by a sanctioned firm. In the EU, a volte-face from Germany - citing the cost of additional requirements for companies during a downturn - has delayed a vote that would have implemented the Corporate Sustainability Due Diligence Directive, but this will probably return in some form after the European Parliament elections in June. Chinese firms are increasingly investing in the EU, US and their allies and trade partners, partly to mitigate against these current or future barriers. These investments are already coming under scrutiny – which will increase as they scale, with the potential for a political response. Whether firms are operating in China, accepting Chinese investment, or utilising Chinese inputs or raw materials – identifying and understanding policy, trade, and regulatory risk is essential.
The SMMT estimates that almost £20 billion of UK auto investment was announced in 2023.9 This tacitly acknowledges the continued advantages the UK has as a manufacturing location (e.g. well-educated workforce, tariff-free access to the EU market) as well as firm financial support from the government.
However, for these investments – especially in EV production - to be fully realized, UK industry needs three things: stable and supportive policy including for delivery of manufacturing investments and access to low carbon industrial energy, minimal barriers to key overseas markets, and the development of domestic charging infrastructure that generates confidence needed for demand to rise.
Chart 5: UK Public Charger Installations by kW
Source: ZapMap
While there is more to do, the UK has made progress on all three of these. HMG has committed an additional £2bn for Auto Sector electrification up to 2030 in the Advanced Manufacturing Plan, as well as energy price support through the British Industry Supercharger – a response to substantial subsidies under the US Inflation Reduction Act (the IRA) and EU Green Deal Industrial Plan. The UK has also secured two gigafactories – though lags behind competitors and distant from industry estimates that 5 will be needed by 2027.10 It also negotiated a delayed introduction of UK-EU EV Rules of Origin that would otherwise have led to 10% tariffs on EVs traded with the EU.
Though charger installation has outpaced growth in the number of EVs, the Government has missed a key target for at least six fast chargers at every motorway service station by the end of 2023 (only 2 in 5 have achieved this). The £950m Rapid Charging Fund (announced 2021) is still to be disbursed, and negative headlines about charger availability and increases in electricity costs at public chargers are impacting consumer decision-making. The Government should aim to accelerate the rollout, stabilize prices, and avoid mixed messaging that would damage confidence in the market in the lead-up to the election.
The US has shown that announced investments will be scaled back if market conditions and confidence change – with some high-profile EV investments cancelled or delayed in 202311 – though the IRA-inspired investment boost is still currently over $100 billion. 12
In a year where more than 2 billion people go to the polls across the globe, three elections will have particularly significant ramifications for the auto sector in 2024.
In the US, Donald Trump, who is now the favourite, has threatened to dismantle parts of the IRA, impose a blanket 10% tariff on all imports, and increase tariffs on Chinese goods to 60%. What would happen in practice is highly uncertain. Dismantling the IRA would require an act of Congress (Senate/House of Representatives majorities), and there would be political pushback against major new tariff impositions that would be bound to drive inflation higher and inspire a wave of retaliatory tariffs on US exports.
For insight into how a new US tariff regime could ripple through global supply chains — including retaliation risks and sector-wide commercial impacts — read our analysis here
Either way, Trump has increased the salience of trade and the possibility of new measures from a Democratic camp needing to burnish anti-China or “Buy America” credentials. Companies must carry out scenario assessments and have contingencies in place for major disruption - particularly in the event of a Trump victory.
In the UK, Labour is currently the favourite to form the next Government. While it has previously promised significant support for electrification (including £2 billion for eight gigafactories) Keir Starmer and Rachel Reeves have become increasingly cautious on fiscal policy – scaling back the flagship £28bn green investment pledge. Industry can still expect Labour not to abandon existing support mechanisms – and shadow ministers are actively seeking advice on how to reduce market access barriers, enable investment, and ensure charging infrastructure rollout is carried out effectively.
In the EU, the key question is whether a bigger bloc of nationalists/Eurosceptics will be elected to the European Parliament – and what bearing that will have on automotive policy (or indeed individual member state policies). A new European Commission could change course on key policies – particularly in terms of support for EV manufacturing through the Green Deal Industrial Plan.
Understanding and disentangling the linkages between geopolitical forces and domestic policy has rarely been more important for the sector. Chinese relations with Russia, Taiwan, Iran, and other actors could lead to sanctions and countermeasures that restrict both EVs and their components and inputs – with unpredictable economic and commercial consequences. Conversely, a warming of relations (e.g. because of de-escalation of conflict hotspots) could result in reduced barriers and increased bi-directional investment and technology transfer. The Red Sea crisis demonstrated the ongoing potential for unpredictable events to disrupt production – as Covid-related supply chain issues did in previous years. Strong preparation and geopolitical risk management are as critical as ever for supporting commercial outcomes.
This blog was written by Director Rhys Davies and Partners Jon Sell and Sam Lowe. Rhys was formerly of HMT and the Department for International Trade. Jon was previously in charge of industrial policy at HMT, and Sam was a former member of HMG’s Strategic Trade Advisory Group.
Footnotes
1 https://www.smmt.co.uk/vehicle-data/car-registrations/
2 Increasing each year – 22% in 2024, 28% in 2025, 52% 2028, 80% 2030.
3 https://www.goldmansachs.com/intelligence/pages/electric-vehicle-battery-prices-falling.html
6 https://info.jato.com/ev-price-gap-report
11 https://www.cnbc.com/2023/10/26/ford-will-postpone-about-12-billion-in-ev-investment.html