UK automotive SME suppliers absorb trade policy and regulatory risk

The UK automotive sector is navigating a flux of competing pressures – from consumer demand shifts to rising cost pressures and more complex trade rules. For SME suppliers, the cumulative impact is tighter margins, demand volatility, and more challenging financing conditions. Lenders also need to recalibrate appetite around new risk factors to analyse borrower resilience.

Competitiveness bottlenecks

For the UK’s automotive supply chain, energy costs create a structural competitiveness challenge. Industrial electricity prices for medium users are almost 90% higher than the EU average and remain the highest across all 27 member states, according to UK government data. This reflects the UK’s reliance on volatile natural gas for electricity generation, leaving prices highly exposed to renewed shocks.

As a result, UK SMEs face a structural disadvantage that weighs on margins and undermines competitiveness against European peers serving global original equipment manufacturers (OEMs). Automotive SMEs are also exposed to energy price volatility through long-term contracts with OEMs, which limit their ability to pass on shocks. For firms on thin margins, sudden spikes can trigger covenant pressure and test viability.

Automotive suppliers face pressure from regulators, OEM demands for greener inputs, and an increasing number of lenders to invest in cleaner energy and ESG upgrades. For smaller SMEs, the upfront capital investment required to transition to clean energy, along with compliance reporting, creates an immediate strain against a long-term and uncertain return. For example, banks now scrutinise ESG compliance more closely, often pricing debt higher for carbon-intensive SMEs. It creates a trade-off between compliance today and competitiveness tomorrow and raises risk considerations for lenders.

The bumpy EV transition

Uncertainty over the speed of the EV transition is unsettling the market. In the year to August, the UK new car market grew 2.1% to a five-year peak of 1.3 million sales, according to the Society of Motor Manufacturers and Traders (SMMT). EVs accounted for 21.9% of the total, but still short of the government’s 2025 target of 28% for each manufacturer. The downturn reflects retooling for future EV demand as well as wider trade, supply chain and geopolitical disruptions.

Infrastructure is not keeping pace with the EV transition. The UK has only a fraction of the battery recycling capacity it needs, leaving a stockpile of tens of thousands of used EV and energy-storage batteries in storage rather than being reused or recycled, reported the Financial Times. Recycling economics remain weak, but without new domestic capacity this bottleneck threatens to undermine the UK’s long-term EV transition.

Supply chain fragility also extends to cybersecurity. In mid-September, Jaguar Land Rover, Britain’s largest car manufacturer, was forced to suspend production after a cyber-attack, shutting down its UK plants for more than three weeks and halting around 1,000 vehicles a day. The disruption affected 33,000 staff and raises concerns for the wider UK automotive supply chain, which supports over 100,000 jobs. The episode shows how a single OEM shock rapidly cascades to impact SME suppliers, compounding sales uncertainty

Exports have also suffered. UK-built car exports were worth £30 billion in the 12 months to June 2025 – down £4.5 billion from 2023’s peak, SMMT data shows. With more than half of exports going to the EU, tariff-free EV trade is vital, making practical rules of origin and simpler cross-border processes essential to safeguard market access.

Policy risks

The UK-US Economic Prosperity Deal introduced a reduced 10% tariff on UK cars exports, a significant reduction on the initial 27.5% tariff imposed by the Trump administration on so-called ‘Liberation Day’. The reduced tariff is only for a 100,000-unit annual quota, aligned to the level of annual UK car exports in 2024. Exports exceeding this quota are subject to the full 27.5% rate, which makes every additional car beyond 100,000 units sold to the US uncompetitive. Consequently, the annual quota is a single, national pool, and represents a significant source of uncertainty among UK manufacturers, and their suppliers. It puts smaller, lower-volume manufacturers at a disadvantage, including high-value, built-to-order brands, introducing significant planning uncertainty and limiting their ability to capitalise on growing US demand.

In late August, sports car manufacturer Lotus announced planned cuts of around 550 jobs across its 1,300-strong UK operations, following a review of business objectives and in line with current market conditions. Employees at the Norwich headquarters of Lotus’ UK operations in Hethel are expected to bear the brunt of losses. The cuts reflect realigned incentives for US companies to reshore overseas production domestically. Lotus is also reportedly exploring third-party manufacturing as a more flexible model, but it is unclear whether this will also be reshored back to the US.

The EU remains the UK’s largest trading partner, receiving more than half of all UK exported passenger cars, with EV and hybrid vehicle trade growing. Tariff-free EV trade with the EU is vital, making practical rules of origin and simpler processes essential.

Lender perspective

Taken together, these market dynamics are currently making lenders cautious, viewing automotive SMEs as structurally higher risk due to thin margins, energy volatility, EV demand softness, and regulatory uncertainty. Banks now price capital through an ESG lens, while asset-based lenders are more pragmatic but are alert to business model risks. Assessing company-level resilience and cash flow headroom is critical to underwriting risk.

BTG Advisory helps automotive suppliers tackle rising costs, liquidity pressures and regulatory change through refinancing, restructuring and operational support. We also work with lenders, providing independent assessments and pragmatic solutions to manage risk. Our experience supports both companies and funders in navigating volatility and safeguarding long-term value.