Vauxhall’s Luton Closure: What It Means for the Economy and the Race to Net Zero

The rumble of engines at Vauxhall’s historic Luton van factory will soon fall silent. Stellantis, its parent company, has announced plans to close the site in April 2025, putting 1,100 jobs at risk. This move, driven by the UK's strict electric vehicle (EV) mandates and shifting production strategies, has sent shockwaves through the automotive industry and beyond. But beyond the headlines, this decision reveals a complex economic story. From the negative multiplier effect to the challenges of geographical mobility of labour, the closure embodies the tensions between economic realities and environmental ambitions.

The Bigger Picture: Net Zero and Economic Realities

The UK government’s zero-emission vehicles (ZEV) mandate aims to speed up the transition to EVs by requiring manufacturers to meet specific sales targets. In 2024, EVs must account for 22% of car sales and 10% of van sales, escalating to 80% by 2030. Falling short means facing fines of £15,000 per vehicle or purchasing credits from competitors.

While the ZEV mandate is crucial to achieving net zero by 2050, Stellantis and other manufacturers argue it creates immense pressure without sufficient consumer demand. Despite EVs accounting for nearly 25% of new car registrations in October, much of this growth depends on unsustainable discounts rather than organic market demand.

The Economics of Factory Closures

1. Negative Multiplier Effect: The closure will ripple beyond the 1,100 employees at Luton. Local businesses—from suppliers to sandwich shops—depend on the factory’s workforce. When such a significant employer shuts down, regional spending decreases, amplifying job losses and slowing economic activity. This is the negative multiplier effect in action: a single factory closure can destabilize an entire local economy.
2. Geographical Mobility of Labour: Stellantis has promised hundreds of new jobs at Ellesmere Port, supported by a £50 million investment. However, relocating from Luton to Cheshire isn't straightforward. Workers face significant hurdles, including housing costs, family commitments, and the social challenge of starting afresh. Low geographical mobility of labour often leads to underutilised workforce potential, exacerbating unemployment.
3. Government Subsidies and Industry Survival: To cushion the EV transition, the UK government has pledged over £300 million in support. Yet industry leaders call for more incentives to encourage EV adoption. Subsidies could lower the upfront cost of EVs, addressing consumer hesitation and stabilizing demand—essential for manufacturers to thrive under the ZEV mandate.

A Century-Old Factory Faces Modern Challenges

The Luton plant, established in 1905, once employed 37,000 people. Now, with only 1,100 remaining, its closure marks the end of an era. Stellantis cited "greater production efficiency" as a key reason for shifting operations to Ellesmere Port. However, production of traditional petrol and diesel vans will move to France—a stark reminder of how global competition influences local decisions.

The industry’s woes aren’t confined to Stellantis. Ford recently announced 800 job cuts in the UK, and competition from Chinese EV manufacturers looms large. The Society of Motor Manufacturers and Traders (SMMT) calls the UK’s EV targets "arguably the toughest in the world," warning of insufficient consumer incentives and infrastructure.

Glossary of Key Economics Terms

• Negative Multiplier Effect: When a decrease in spending (e.g., job losses) leads to a larger overall reduction in economic activity.
• Geographical Mobility of Labour: The ability of workers to relocate for employment opportunities.
• Net Zero: Achieving a balance between the greenhouse gases emitted into and removed from the atmosphere.
• Government Subsidy: Financial aid provided by the government to reduce costs for businesses or consumers, encouraging specific activities (e.g., EV purchases).
• Zero-Emission Vehicles (ZEV) Mandate: Rules requiring a specific percentage of vehicle sales to be emission-free.

Graham Watson's insight:

Is the government on the point of altering electric car sales targets as demand for electric vehicles appears to be lower than was initially forecast? Certainly there's a suggestion that this might be the case, with car manufacturers looking to encourage this because they are being fined for failing to hit their targets.

Currently, the target is that "EVs must make up 22% of a firm's car sales and 10% of their van sales this year. For every car sale that pushes it outside of that mandate, they must pay a £15,000 fine."

So are the targets effective? Or would other measures prove to be more effective in encouraging quicker adoption of electric cars? It also highlights an instance of Goodhart's law: that when a measure becomes a target it ceases to be a good measure.