Outside the EU, Britain's Car Industry Is Struggling

British car manufacturing is in crisis. In 2025, vehicle production fell to its lowest level since 1952. The Society of Motor Manufacturers and Traders (SMMT) described it as "the toughest year in a generation," with output dropping 15.5% to just 764,715 vehicles. A major cyberattack at Jaguar Land Rover, the closure of Vauxhall's Luton plant, and deep uncertainty over US trade policy all contributed to the collapse.

While the situation is expected to improve modestly this year, the structural challenges facing the industry are profound. High energy costs, a burdensome regulatory environment, intensifying competition from Chinese electric vehicle makers, and the looming threat of EU protectionism are combining to create what MPs have called an "existential risk" to UK automotive manufacturing.

The Energy Cost Disadvantage

One of the most persistent issues is the UK's high electricity prices. The SMMT has repeatedly called on the government to address what it describes as the UK's stubbornly high cost of energy. According to Allianz Trade, UK OEMs are paying up to double the electricity prices of their EU peers, which is shaping investment and production allocation decisions. The Middle East conflict has only exacerbated this problem, driving energy costs even higher.

The cost disadvantage is not just a competitive issue; it directly impacts the viability of UK-based manufacturing. Energy costs, combined with labour shortages, component sourcing challenges, and the cost of complying with the Zero Emission Vehicle (ZEV) mandate, continue to weigh on competitiveness.

The ZEV Mandate: An "Impossible Burden"

The ZEV mandate, introduced in January 2024, requires car and van manufacturers to sell a rising minimum percentage of zero-emission vehicles each year. For 2026, the target for cars is 33%, rising to 80% by 2030 and 100% by 2035. Van targets are even more challenging: 24% in 2026, 46% by 2028, and 70% by 2035.

The problem is that demand is not keeping up. Fully electric vans made up just 11.1% of registrations in April 2026 and only 9.4% for the year to date, less than half the 2026 target. Manufacturers are now spending billions discounting electric vehicles to stimulate demand, while UK-based firms are effectively paying overseas competitors for compliance credits. As the Business and Trade Committee put it, British manufacturers are being asked to carry "a burden that is becoming impossible to sustain".

The committee has called for an urgent review of the ZEV mandate, warning that without adjustment, the policy risks doing lasting damage to the very industry it is meant to decarbonise.

The EU Threat: "Made in Europe" and Rules of Origin

The most significant threat, however, may come from Europe. The EU remains Britain's largest export market for vehicles, accounting for more than half of all UK car exports. But Brussels is considering a series of protectionist measures that could severely restrict UK-built vehicles' access to the bloc.

The proposed "Made in EU" framework would restrict government subsidies for low-emission vehicles to those built in Europe and would force corporate fleets to favour European-made cars. As SMMT Chief Executive Mike Hawes warned: "Unless the UK can be seen as part of that, these proposals could have the effect of delivering what Brexit didn't deliver, and that's making it much harder for UK-produced vehicles to access the European market".

At the same time, stricter rules of origin under the post-Brexit trade agreement are due to take effect in January 2027. These will significantly increase the number of parts and components that must be produced in the EU or the UK for electric vehicles to qualify for tariff-free export. Many EVs being transported across the channel still do not meet these requirements, largely because battery-building capacity in the UK and Europe has not grown as quickly as expected.

If the issues remain unresolved, the resulting disruption could jeopardise a trading relationship worth 80 billion euros annually and pose a significant threat to both the British and European automotive industries.

Chinese Competition

Intensifying competition from lower-cost Chinese electric vehicles adds further pressure. Chinese manufacturers are rapidly expanding their global production capacity, and the UK industry is struggling to compete on cost. Some industry observers believe the only way the UK can meet its ambitious production targets is by attracting a Chinese manufacturer to set up a factory in Britain.

However, Chinese competition is not just about imports. The aggressive pricing policy of Chinese suppliers is already squeezing the margins of UK-based component makers. As Allianz Trade notes, Chinese suppliers are exporting their capacity surplus to Europe, putting UK suppliers under significant strain.

Britain's car industry is caught between high domestic costs, a demanding regulatory environment, growing competition from China, and the threat of EU protectionism. The government's Modern Industrial Strategy could help, but as the SMMT has warned, action is needed now. The transition to electric vehicles is essential, but it must be grounded in commercial reality and backed by a serious industrial strategy. Without that, Britain risks becoming a nation that imports vehicles rather than a country that makes them.