Automotive insights

Is the key to transforming UK steel the auto industry?

Neil Barrell Neil Barrell

The UK steel industry is laying the foundations for sustainable growth over the next 10 years. And the the automotive industry is well positioned to be a part of the journey.

To ensure success, it will need to make itself an attractive, reliable and integrated partner to UK steel in the coming years.

By addressing some significant challenges around innovation, capacity and investment the UK steel industry could reverse years of decline and take advantage of demand opportunity within the automotive sector.

The UK steel industry has recently been defined by fragmentation, complexity and contraction. Since 1996, the industry has shrunk by just over a third1 as it faced increased international competition and integration into global supply chains. Decreasing investment at home compounded a gloomy picture of an industry in decline.

This is not a certainty. In fact, we think that UK steel is facing a potentially transformative moment that represents a £3.8 billion per year revenue opportunity in 20302. After speaking to government, industry players and end users as well as crunching the data, it is clear to us that the automotive industry has a central role to play in this change. To realise this opportunity, however, all parties need to come together to collectively address the problems currently holding the industry back.

The importance of automotive to UK steel

While construction represents the largest sector opportunity over the next decade, in many ways automotive represents a larger opportunity for the UK steel industry. Automotive currently needs around 2,015kt of steel but as it stands, only 35% is processed in the UK3. Currently, 8% of demand for the UK steel industry comes from automotive, which is practically the definition of an under-penetrated sector4.

The UK has seen a rise in vehicle production in the last five years, but the majority of the steel being used is imported. There are a number of factors contributing to this, principally the fact that it is often cheaper to import than to buy from UK producers. Sourcing decisions made around British production are now often made outside the UK by global OEMs. Typically, these companies have headquarters and purchasing teams located elsewhere so they don’t prioritise UK steel.

This, plus the dominance of just-in-time production means that lots of the products and parts that go into a finished car produced in the UK are made elsewhere and imported. The supply chain is so fragmented that the UK often doesn’t have the kind of smaller suppliers needed to produce these components. For example, a car seat manufacturer may be based in the UK, but it imports the steel for its springs because it’s proven to be most cost effective.

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Capability challenges

Another important hurdle for the industry is capability. One of, if not, the biggest trends affecting the use of steel in the automotive industry is lightweighting in response to emission targets. An increasing share of value-added grades like advanced high strength steel and ultra-high strength steel are being used in the production of newer vehicle models. The issue for UK steel, and it is a big one, is that it does not currently produce any of these value-added grades. The market could be fundamentally shifting from volume to value, which is not a development that suits UK steel in its current state.

The question of how to address this lack of capability or whether the UK should be looking to produce value-added grades at all, is a contentious one. Some believe that the government should be supporting suppliers by lowering fixed costs such as energy and business rates, while others believe it is the responsibility of the industry to make strategic investments. Either way, it is a certainty that significant capital investment will be needed if the UK wants to be competitive in this regard.

The lightweighting trend is being driven in large part by European emissions targets. This raises the question of whether the UK’s departure from the EU will affect the UK’s commitment to emission targets in their current form. The consensus among industry players is that it is unlikely that the UK will implement a vastly different emissions regime than its European neighbours.

Firstly, consumers are increasingly environmentally conscious and secondly, companies like JLR will continue to do a significant amount of their business outside the UK. The majority of manufacturers have committed themselves to emissions targets up until 2030, and many are actively aiming to come in well under them anyway. Changing course in such a big way is unlikely at this stage. The big Brexit-related issue is likely to be tariffs. A situation where OEMs have to pay tariffs to import parts and materials and then pay them again to export the finished vehicle would not only add huge additional costs, but jeopardise the entire just-in-time model itself.

What needs to be done?

There is no denying these are big challenges. Overcoming them, though, is not only possible but hugely beneficial to the UK steel industry and the automotive companies that make use of it. So, what needs to be done in order to best take advantage of this huge opportunity?

The industry has to evolve. It is impossible to expect UK steel to be able to do everything so choosing an area of focus to direct innovation towards is important. R&D should be a high priority and with world-class universities and government-backed institutes, creative forward thinking should be able to extend across the whole supply chain.

The role of capital investment cannot be understated either. Key investment areas are increasing capability (which in turn potentially make UK producers more attractive to automotive companies), product development, innovation and increasing linkages to the automotive supply chain.

The automotive companies we interviewed said that steel is currently lagging behind the aluminium industry in both these areas. Government can also do its bit through the use of legislation to reduce fixed costs such as business rates to help the industry stay competitive.

Substantial changes can be made in the supply chain too. Situated in the midst of sophisticated globally integrated supply chains, UK steel should be looking to streamline and get more involved. The protective, siloed approach that has prevailed so far needs to be replaced by one in which contact and customer service are prioritised. The lack of engagement throughout the supply chain was highlighted as a major block to innovation by the automotive companies we spoke to.

The next decade could see the UK steel industry laying the foundations for a period of large and sustained growth. For this to happen, the automotive industry is going to have to be right in the middle. Making itself an attractive, reliable and integrated partner to automotive is, in our opinion, an absolute must for UK steel in the coming years.

The Future Capacities and Capabilities of the UK Steel Industry study was commissioned by the Department for Business, Energy and Industrial Strategy and the UK Steel Council. This study was conducted by a Grant Thornton UK LLP-led consortium including Hatch Consulting and the Materials Processing Institute.

References

  1. Future Capacities and Capabilities of the UK Steel Industry’ GOV.UK. 2017