Insights

Mission Zero and what it means for UK Automotive

Name: MHA
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· Posted on: February 6th 2023 · read

In recent weeks the Net Zero Tsar, Chris Skidmore released the report into the UK Government's Net Zero Strategy - we read it (all 300 pages!) and summarise what it might mean for the sector.

It's a detailed and fairly damning critique of progress made since the Government announced its Net Zero Strategy, three and a half years ago and extends to 330 pages. We've picked out the salient parts for the Auto industry and offer some thoughts on what it might mean.

Mission Zero is an “independent review “of the UK government's Net Zero: Build Back Greener policy which was fronted when Boris Johnson was Prime Minister and Kwasi Kwarteng the Secretary of State for BEIS (Business, Energy & Industrial Strategy). It was published in 2021 and set out the roadmap for reducing the UK’s Greenhouse Gas emissions to zero by 2050. Of course, neither of the two politicians named above are still in government and the pollsters indicate that we may have a change in 2024 but the opposition have already made investment in the green economy a key tenet of their policies therefore it’s unlikely that we will see any watering down of policy.

For transport, Skidmore's report suggests that government has left us in somewhat of a mess. The sector contributes 50% of the UK's emissions and therefore is critical to realising the 2050 ambition. In recent weeks, we've witnessed lobbying and comment around the achievability of the 2030 deadline for all passenger cars to be ZEV (Zero Emissions Vehicles).

We are out of the easiest phase for the EV revolution and naturally with an increasing number of EVs on the road we are seeing the impact of low infrastructure investment and poorly maintained assets. This is the point for more joined up thinking or we risk the public losing confidence in the prospect of EV ownership (or usership).

The report recommends

"Swift delivery of the ZEV mandate to apply from 2024 while maintaining regulations and funding to support EV/ZEV uptake and continuing to drive emission reduction from ICE vehicles.".

The ZEV mandate was first mentioned in April 2022 when Government undertook a technical consultation to explore ensuring the cadence to the 2030 target was sufficient. The key statement from would be.

"Our current proposition is to set out legally binding annual targets that manufacturers must meet out to 2035. This will provide certainty to the sector (including vehicle manufacturers, energy providers and chargepoint operators). However, as with any legislation we will keep under review and reserve the right to amend it to respond to any significant changes in market conditions. This would not be done without reasonable notice and engagement with industry."

The mandate suggested that all OEMs would have to follow an EV sales share along the following lines.

2024	2025	2026	2027	2028
22%	285	33%	38%	52%

Given that SMMT forecast for EV penetration in 2023 is 18% then this is a daunting task and for some OEMs it will force some tough decisions on how to allocate product to the UK. Major brands like Ford, Toyota, Honda, and Nissan have been slow to introduce EV models and will face a much bigger challenge than the others who are already achieving c20% of sales as EVs

The key point here is that a consequence of the above becoming law could result in the following.

OEMs reducing overall sales volumes in order to comply with the mandate which is not good news for dealers/agents of those brands as their new car business will shrink.
Fines and therefore margin reduction for OEMs not complying with the targets.
A reduction in the TIV which could mean that passenger car markets settle closer to 1.6m as they have been since 2020.

Neither of these scenarios is palatable but political and public pressure looks certain ensure that the ZEV Mandate will become law and will force the next tranche of adoption. The potential outcomes would surely serve to sustain margins in new cars but also prevent any depression in Used car values as supply lags demand for at least half a decade.

Cutting Congestion

Another aspect of the Mission Zero report mentions the requirement to cut congestion through reducing journeys. And the Scottish government is singled out for praise for its ambition to reduce car journeys and grow Active travel. The report calls for "more honesty from Government about the need to reduce private car use". There is also mention of "Road Pricing" to tackle these issues.

EV Charging

The report is critical of the Government's effort so far to provide adequate infrastructure for charging EVs. It details how charge point creation is lagging sales, with only 1 public charger being installed for every 50 EV sales. It also highlights the geographical imbalances between regions when it comes to EV charging infrastructure and call on Government not to rely on private sector activity to solve the problem. In addition, the report recommends the equalisation of VAT on Public and Private charging.

Summary

In summary, there is not a lot of new, news in this document but it heaps pressure on a government which is failing to deliver on the strategy it set out with its Net Zero Strategy despite all the hyperbole. That is consequential for the Automotive sector because it leaves little scope to re-negotiate the commitments to reduce transport emissions significantly in the next decade. That means that the sector, which is still recovering from the pandemic impact faces more uncertainty and margin pressure for the coming years.

OEMs are facing pressure to comply with new legislation, reduce costs and carbon emissions on production against a backdrop of inflationary costs and competition from lower cost EV only producers. Tesla’s recent flexing of its margin power illustrates what a tough environment the UK market will be over the next few years. It could see the withdrawal of more OEMs from the market at least until their product portfolio is fully EV and their costs under control.

For dealers/agents/leasing companies this brings more uncertainty but a high likelihood that they will distribute a lower volume of vehicles than was the historic average. That means more requirement to pivot business models into new areas and prepare contingency plans should an OEM partner look exposed to the consequences of the drive to Net Zero.

For all those naysayers who are dismissive of the 2030 ambition or don't believe in climate change and the need to reduce emissions. For those who describe EVs as the betamax of personal transportation, I fear you may be disappointed by Mr Skidmore's report.

Net Zero is only going to increase in its relevance and stakeholders would be advised to start thinking about their own Net Zero journey. If this is something you would like to have a further discussion about, we at MHA would be delighted to meet with you.