How the UK’s New Industrial Strategy could reshape the automotive sector

Last week the Society of Motor Manufacturers and Traders (SMMT) International Automotive Summit convened industry leaders, policymakers, and innovators to chart the course for the UK automotive sector in a rapidly evolving global landscape.

With the unveiling of the UK’s new Industrial Strategy just the day before, the Summit served as a timely platform to explore how this policy shift could reshape the future of British automotive manufacturing.

A strategic reset

The UK government’s newly unveiled 10-year Industrial Strategy has been broadly welcomed by the automotive industry as a long-awaited framework to restore the nation’s global competitiveness. With a £2.5 billion capital and R&D fund for automotive under the “Drive35” initiative, the strategy positions the sector as a cornerstone of the UK’s advanced manufacturing future. But while the vision is bold, its success will hinge on swift and sustained implementation.

The strategy promises to make it “cheaper, easier and quicker” to do business in the UK, with a focus on:

• eight priority sectors, with eight subsectors including automotive under manufacturing
• regulatory reform, skills development, and R&D investment
• reskilling initiatives, targeting roles in AI, chemistry, and trade compliance

“This industrial strategy is different,” said Sam Lister, Director General for Industrial Strategy speaking at the Summit. “For the first time, its aims will shape policy and decisions across government and regulators.”

The UK automotive industry is currently valued at £100 billion, with new car sales rising 6.4% in Q1 2025 compared to the same period in 2024.

However, production is forecast to fall 7% this year, reaching just 839,000 units—the lowest level since 1954. Chris Giles, Economics Editor, Financial Times also highlighted that consumption levels across the country are showing that people are not spending as they have in previous years which has resulted in a struggling economy. This underscores the urgency of implementing the strategy effectively.

A foundation for growth

The strategy identifies automotive as one of eight “IS-8” high-growth sectors, with a goal to nearly double annual investment in advanced manufacturing from £21 billion to £39 billion by 2035. The automotive sector alone is projected to contribute up to £50 billion in economic value over the next decade, with the potential to return the UK to the top 15 global vehicle manufacturing nations by 2030.

Key commitments include:

• Energy cost relief: A new British Industrial Competitiveness Scheme will reduce electricity costs by £35–40/MWh for energy-intensive manufacturers, addressing a long-standing disadvantage where UK businesses pay more than double the European average. Energy costs remain a critical barrier to competitiveness. Despite Scotland generating 90% of its electricity from renewables, it faces some of the highest energy prices in the UK. Nationally, UK manufacturers pay up to four times more for energy than their US counterparts, according to Andrew Griffith MP, Shadow Secretary of State for Business and Trade, speaking at the Summit.
  
  This disparity is particularly damaging for battery production and gigafactory operations. While Tata’s decision to build a gigafactory in Somerset over Spain was a win, panellists warned that without a national energy plan, future investments may be diverted elsewhere.

• Skills and workforce development: Expanded apprenticeship flexibility and targeted upskilling programmes aim to address acute shortages in engineering, digital, and AI-related roles. Many existing workforces are made up of long standing employees and the aim is to support automotive employers in transitioning their teams through industry changes – such as the shift from combustion engines to electrification. An additional £1.2 billion will be invested annually in skills development by 2028–29, complemented by further support through measures outlined in the recent Immigration White Paper. The constraints, particularly around Skilled Worker visas, set out in the White Paper are expected to include specific carve-outs for the eight priority sectors.

• Regulatory reform: The full implementation of the Automated Vehicles Act by 2027 and a refreshed Zero Emission Vehicle (ZEV) mandate are intended to streamline innovation and compliance.

• Export and trade support: The strategy aligns with new trade deals, including a UK-US agreement that removes tariffs on key automotive exports, and a forthcoming automotive technology strategy in 2026.

Industry optimism

The SMMT has praised the strategy as a “long-term commitment to automotive manufacturing” and a “foundation on which we can build our future”. However, it also issued a clear warning: implementation must be rapid and decisive to keep pace with global competitors.

SMMT’s own report, The Competitive Edge, outlines 10 key recommendations to complement the strategy, including:

• a major EV purchase incentive scheme to stimulate demand
• reform of the Vehicle Excise Duty Expensive Car Supplement, which currently imposes a £360 million burden on EV buyers
• VAT cuts on EVs and public charging to make electric mobility more affordable
• a clear roadmap for decarbonising heavy-duty vehicles and public charging infrastructure

Challenges and concerns

Despite the optimism, several challenges remain:

• high production costs with UK manufacturers still facing some of the world’s highest energy and compliance costs. Without swift relief, these could deter investment
• lagging EV demand where OEMs have spent £6.5 billion on incentives over the past 18 months to meet ZEV targets, yet more than half of industry leaders believe the UK is behind schedule for the 2030 ICE phase-out
• policy consistency where the industry has long called for stability. Past policy reversals have undermined confidence, and the success of this strategy depends on cross-departmental alignment and long-term political commitment

Navigating global trade

The first panel discussion of the day, moderated by Jonathan Smart, Partner and Head of Mobility Sector at Shoosmiths featured Sir Sherard Cowper-Coles KCMG LVO (Chair, China-Britain Business Council), Anand Menon (Director, UK in a Changing Europe) Sally Jones (Deputy Director, Trade Strategy, Department for Business and Trade) and Justin Webb (Presenter, BBC Americast).

The panel outlined that the UK’s trade landscape is increasingly complex. With new deals signed with the US and India, and ongoing tensions with the EU, the automotive sector must remain agile. Key insights included:

• the US trade agreement, signed by presidential decree, goes live on 30 June 2025
• India is now the third-largest automotive market globally, behind China and the US
• the EU remains the UK’s largest trading partner, but customs delays and regulatory divergence continue to hinder progress

China, now producing over 26 million vehicles annually (31% of global output), is the world’s largest vehicle market and a dominant EV exporter. The panel urged UK manufacturers to adapt, to remain competitive in this shifting global order.

Building a sustainable value chain that’s also tech driven

The Summit also highlighted how sustainability and technology are converging to reshape the automotive industry. Manufacturers are under increasing pressure to address the full environmental impact of vehicle production, including Scope 2 and 3 emissions, circularity, and energy sourcing - especially as EV sales have dropped 12.8% despite a 28% ZEV sales target for 2025.

At the same time, rapid technological innovation is transforming the customer journey, with a 517% surge in interest for automotive tech and the V2X market projected to hit $9.5 billion by 2030. Speakers stressed the importance of transparent supply chains, cross-sector collaboration, and attracting new talent—from gamers to AI specialists - to drive both sustainability and digital transformation.

Accelerating the ZEV transition

Despite policy targets, the UK EV market is contracting, with sales down 12.8% so far in 2025. Contributing factors include:

• introduction of Vehicle Excise Duty for EVs
• relaxation of the ZEV mandate, creating policy uncertainty
• consumer hesitancy and generational differences in EV adoption

Panellists called for clearer policy signals, stronger incentives, and better alignment between government and industry to ensure a smooth transition.

A Sector ready for reinvention

The Summit, sponsored by Shoosmiths, showcased a sector brimming with potential but facing real challenges. The Strategy marks a significant shift in tone and ambition. It offers a comprehensive framework to support the automotive sector through the energy transition, technological disruption, and global trade realignment. But as SMMT Chief Executive Mike Hawes cautioned, “our window of opportunity will not remain open for long”.

If implemented with urgency and consistency, the new Industrial Strategy could catalyse a new era of green growth, innovation, and global leadership for UK automotive. If not, the sector risks falling further behind in an increasingly competitive global race.